I want to consider, in this blog, a question that arises naturally from the debate on how operators respond to declining profit per bit. Raise revenues or lower costs; those are the choices. Operators seem to be focusing on cost reduction, which would lower cost per bit to improve profit per bit. That would mean the most logical way to increase revenue would be to either add customers with newly affordable broadband, or upsell current customers to higher speeds. What happens if this is the course operators take? We’ll start with how it impacts the operators, and move to what it might mean to services and users.
It’s important to approach the operator impact step by step. Reduction in cost per bit makes reduction in revenue per bit survivable, but what’s causing reduction in revenue per bit? The answer is that users won’t pay proportionally for capacity or usage, and competition encourages operators to offer faster connections. 5G, for example, is “faster” than 4G despite the fact that there few if any smartphone applications where the extra speed would even be noticed. Once you can stream video at the highest quality level that’s distinguishable on a mobile device, you’re at the end of the road, utility-wise.
The broadband market is competitive, so there’s little chance that a reduction in cost per bit would automatically improve profit per bit. Operators would likely market improved broadband to a wider customer community, increase the capacity available to current users, or both. Given this, we could assume that the result of our cost-to-near-zero hypothesis in broadband would be very high broadband capacity at costs comparable to those of today. What does that do? It enables new higher-bandwidth-demanding applications. If not mobile ones, then what? Obviously, broadband to the home and broadband to the business.
Let’s look at the home applications first, since most operators would agree that widespread consumer broadband applications are the most credible way to use capacity. We couldn’t tell much difference (if any, candidly) between HD and 4K on a smartphone, but stick up a 70-inch OLED TV on your wall and give the two video options a go, and you’ll see the difference for sure. Fill a house with teens who want to watch their own stuff, and you can easily end up with three or four or a half-dozen streams to the same home. In short, entertainment focus shifts to streaming, as it’s already doing, and things like COVID (which makes theaters less popular) is a collateral driver.
Work from home is another obvious answer, one also related to COVID and its aftermath, but video calls are far less bandwidth-intensive than streaming entertainment video, so before this driver would be useful, I think we’d have to wait for applications to develop in the WFH space that were much more bandwidth-intensive. It is possible that higher-quality conference video would develop out of lower unit bandwidth cost, but not certain. It’s also possible that WFH might involve a mobile device, but far more likely it would be truly “from home” and be supported on a local PC.
Gaming is another application to consider. Gaming can benefit from high-quality display, but most gaming generates the majority of the visual field local to the player. Would high-bandwidth connections change that, perhaps encourage the cloud synthesis of a virtual world and from that “project” each player’s view? If that were to happen, would the projection require a lot of bandwidth, or would we end up sending “avatars” and “objects” and have them rendered locally anyway?
The key point here, I think, is that there is no broadly interesting consumer of high-bandwidth services to consumers other than video. An almost-as-key point is that the video driver for higher bandwidth is far more likely to relate to fixed broadband applications. That doesn’t mean 5G doesn’t play in it, only that 5G’s role would most likely be in the delivery of bandwidth to homes rather than mobile devices.
Let’s analyze these points, then. How much video quality can we presume a home user would notice? We know 4K on a large-screen TV is noticeable. I’ve seen examples of 8K, and for professional video applications like a theater they make sense. For the home, it seems to require a very large screen placed fairly close, so I think it’s more likely that faster refresh rates and other video factors that would improve the viewing experience would be more likely to consume extra bits.
Home broadband enhancement based on lower bit costs doesn’t necessarily pull through higher-speed residential broadband. “Cheap broadband bits” doesn’t necessarily mean “available broadband bits”. A bit in the access line, to paraphrase the old saw, is worth two in the core. If we did see a significant drop in cost per bit at the network (core) level, we could assume that the higher capacity could be offered at a small incremental price to those users with access facilities capable of carrying the higher speed. Who has those facilities? Today, it would be mostly cable subscribers and telco FTTH subscribers. Tomorrow, 5G might add additional FTTN/5G hybrid customers.
Network operators could expect to monetize this situation in two ways. First, customers with DSL-based broadband could certainly be induced to upgrade if the incremental cost was modest. But absent a driver application that changes bandwidth needs, there’s less incentive for DSL users to upgrade, and operators would likely have to discount to induce them, which would mean they could actually drive down their own profit per bit further. Second, operators could provide a high-bandwidth application and link it to higher-bandwidth service. The two obvious options would be streaming video and some targeted WFH service.
Where an operator’s service area has high enough demand density (see THIS blog for an explanation), 5G in some form could allow broadband delivery to bypass limited DSL access solutions. It’s difficult to model the impact of this generally without a lot of work, but it appears that a 5G solution could support at least 20 Mbps to most customers that don’t have cable/FTTH already, and 50 Mbps to most urban/suburban locations. However, ROI on basic broadband access would be low (otherwise these users would likely have been connected with something else). You still need a kicker service.
Streaming video is a logical solution. Operators could either do it themselves or partner with a current streaming player. The former could offer potential for a decent ROI, but it would involve a build-out of at least CDN infrastructure, as well as negotiating and maintaining the content licenses. Partnering could provide a quick incremental revenue boost, but only a limited one because the operator is essentially getting just a sales commission.
The WFH target is a good way to transition to the business side of the bandwidth opportunity. To me, it’s always been a mystery why more operators didn’t take up the opportunity to combine premium broadband with SD-WAN to support branch networking and WFH. The beauty of this is that the business could be sold the service as an increment to home broadband. WFH could be supported by an inventory of tools integrated with the basic NaaS/SD-WAN framework. Where there are no regulatory barriers to the move, the QoS on the “business NaaS” could even be guaranteed.
Inevitably, operator desire to increase ARPU leads them to upsell capacity, which only hurts their revenue per bit and encourages OTT disintermediation. It seems to me that to break this cycle, operators have to find something they can sell that uses capacity, not just the capacity itself. While many operators won’t like the NaaS or streaming-video ideas for consumer broadband, I think they’re the only options on the table.
That suggests that the story that AT&T might be selling off a big piece of its video assets could create an issue for the company down the road. To focus entirely on cost reduction to improve profit per bit is to cut your own broadband pricing in the long run, which encourages OTT services if you don’t have your own. Sell your own off in that situation? Seems problematic, unless AT&T has a service vision beyond streaming content. We’ll have to wait and see.