Our taste for broadband is changing, or to be more precise, our taste for what we use it for is changing. This is particularly true when you broaden the topic to our consumption of “wireline” services. Things like channelized TV, once the mainstay of wireline services, are being dropped by customers. Operators are looking at Internet broadband, for perhaps the first time, as the true digital dialtone of the future. But what does this mean, both for the companies and for their customers, and how do things like COVID-19 impact the situation?
The biggest factor in the shift in consumer broadband is the widespread availability of streaming video services with large libraries of material. Amazon, Hulu, and Netflix offer tens of thousands of programs, movies, and specials, and these services have offered users an opportunity to do something other than “watch what’s on.”
This streaming alternative has become more attractive for many because of rising discontent over broadcast/real-time TV. Online advertising and the shift of viewers away to streaming video have combined to reduce the revenue of networks, and the logical way to compensate is to sell more commercial time. Reduced revenue has also encouraged content producers to cut back on the number of new shows, which of course means there’s often nothing “new” on at all. Every winter, every summer, there’s a period in which new episodes of shows aren’t aired, so viewers have to find something else. When they do, the question is whether that something else is better, and some don’t go back to the scheduled programming.
The obvious impact of this is to reduce the incentive to include linear RF delivery to the home in a bundle. Most fiber systems deployed by telcos have included linear RF in parallel with broadband data. CATV cable was designed initially to deliver only linear RF, and the latest DOCSIS specifications (4.0) support 10GB downstream and 6Gbps upstream. Linear RF is still supported, but it seems pretty clear that a big reason is customer compatibility. Many of the cableco technology planners I’ve talked with say that they’d love to move to a pure broadband digital plant even now.
A lot of telco planners have already gotten to the “pure digital” model, from the supply side. The 5G millimeter wave hybrid with FTTN would eliminate linear RF delivery, forcing those who adopt it to stream video exclusively. That’s not seen as a major hardship by many, but what it does is encourage the content producers (the networks) to play streaming video suppliers against one another, or even to (as CBS has done in the US) go to streaming their own material. In short, the comfortable linear model is being displaced by a new delivery model, where we don’t yet have the experience needed to predict winners and losers.
You can see the signs of this in the Verizon quarterly call. Verizon in particular added 59 thousand broadband customers, but lost 84,000 TV customers and 94,000 digital voice customers in the quarter. Because broadband and streaming are increasingly the only option customers need, and because streaming fulfills more and more of their content needs, they’re shifting to a cheaper plan from Verizon, a plan that provides only that digital dialtone.
Over time, what seems likely to happen is that more and more video will shift to streaming on-demand form. Sports and news are the only two forms of television that almost demand real-time delivery. With all the streaming giants doing their own series production and releasing the material a full season at a time rather than in a specific time slot, series TV seems destined to move to the same model. That would almost guarantee nobody would want to deploy linear RF infrastructure, and we could expect everything to move to broadband streaming.
Some are saying that broadband streaming would create explosive growth in “the Internet”, but of course the majority of the impact would be on the access/metro infrastructure, as far back as the content delivery networks. We could, if everything watched today were to be delivered via broadband access, see access/metro traffic levels more than double.
One of the benefits of this for the operators is the simplification of the customer demarcation, and the boosting of self-install potential. COVID-19 has demonstrated that having installers enter the home is a big potential issue, and a complex plant requiring in-home CATV cable almost guarantees that professional installation would be required. On the other hand, it might be possible to set up an external termination for a broadband data connection, to which a homeowner could attach local wiring and a wireless router. Some operators think it might even be possible to externally mount the wireless router, and provide homeowners with in-home repeaters they could simply place and plug in.
The impact of all these things on wireline broadband and 5G depends on the operator, and in particular on the demand density of the operator’s territory. Again, presuming that the average demand density of the US is 1.0, demand densities of roughly 5 or more could support consumer wireline broadband profitably with no additional revenue kickers. Where demand density is less than 2, it will be challenging to make traditional wireline broadband profitable, and since that’s the situation AT&T finds themselves in, you can understand their challenges.
When an operator can’t make broadband profitable on its own, the traditional revenue kicker of television has (as I’ve already noted above) lost its luster. AT&T, in my view, is spending too much time and management cycles trying to make a TV offering work, but buying a content producer may have been their smart move. Similarly, Comcast’s earlier move in the same direction has certainly provided them some revenue upside to buffer them against negative trends in the TV delivery space.
The reason this TV-or-no-TV-kicker stuff is important is that for the lucky (Verizon, with a demand density of 11), you can accept TV losses as long as you can figure out a way of deploying competitive broadband to your base. FiOS probably can’t expand its footprint much further, so Verizon’s future depends (quite literally) on the 5G/FTTN hybrid that they’ve already been pushing.
For the unlucky, which includes AT&T, the question is whether 5G in some form can save them. All operators’ wireline territories are a mixture of good-demand-density and low-density areas. For many, including AT&T, there will be wireline competition already active in some of the good areas, with more likely to come. Imagine AT&T if it finds itself non-competitive in the areas of high demand density, and with no opportunity elsewhere. That’s the risk that Stankey will have to address in some way. Cost cutting will buy him some time, but it’s not a long-term strategy.
To return to the point of competition, if TV delivery isn’t the automatic win it used to be, and if broadband fixed wireless is the future solution to home broadband, then there’s little to prevent any player from entering a market with strong demand density. We’re already seeing small ISPs springing up to deliver fixed wireless broadband. Any big operator could surely jump into another territory and cherry-pick, and if content companies can be bought by operators, would it be possible for content companies to instead become operators? Remember Google Fiber; why not Google 5G/FTTN. I wouldn’t bet against it. Same for Amazon, or Apple, or even Facebook.
Where this leaves those service areas with low demand densities remains to be seen. We don’t know for sure how broadly “mobile-oriented” 5G can project what’s intended to be a wireline replacement. How many low-density areas are high-density enough to be served profitably with 5G in some form can be calculated only with difficulty; real experience in the field is needed. But nobody should believe that all areas can be served that way, and if that’s the case, then we may be unable to close the digital divide.
Even for higher-density areas and operators, the impact of losing kicker revenue from video content and voice services may be a big blow. I believe that the most critical space in the market will be the zone between densities of about 2 (twice the average of the US) and about 4, the point where broadband Internet is profitable enough to sustain a business. There’s a lot of global geography in that space, and if it can’t be made to support profitable “wireline” home service, a lot of countries are going to have to think hard about policy changes.