Network operators have faced challenges in profit per bit for over a decade. The major concern has been with the “wireline” segment of their business, the segment that provides business access and VPNs, and consumer home broadband. Some of them have fared better than others, and since those challenges are surely expanding with the work-from-home, entertain-in-home shift that COVID has created, we’ll see differences in how operators face the future, even in the current quarter.
Wireline broadband, or wireline services in general, pose the greatest risk for change, both in terms of technology choices and in terms of basic demand. Business broadband and VPN services are under considerable price pressure as enterprises cope with their own profit challenges. WFH has increased those problems by dispersing workers and expanding the use of the Internet to reach customers, prospects, and partners. Consumer broadband is obviously under pressure from the same WFH source, but remote classrooms and stuck-at-home entertainment have added to the stress.
Let’s start with businesses and WFH. Enterprises have two essential models for WFH; one where users “home-run” into the data center via an Internet VPN or SD-WAN, and the other where they attach to their normal local office via one of these mechanisms, and are then linked to the data center through the branch VPN. Two different traffic types are involved, either way. One is access to applications, the same general stuff that the worker would use if they were in the office, and the other is the “collaborative” applications, usually centering on video (Teams, Zoom, etc.) but also involving screen sharing and so forth.
Businesses are also seeing a transformation in the way that information users and information resources interact. Almost every enterprise has increased their use of “portals” that provide information directly to their customers, prospects, and partners. Many have been moving toward a portal-based approach to supporting their own workers, whether at home, traveling, or in their usual seat in the office. Portals are often cloud front-ends to legacy applications and analytics, and they’re increasingly seen as providing a “role-based” means of controlling access of people based on what they’re allowed to do.
So far, enterprises aren’t reporting major changes in their access needs, though some are expanding their links to the Internet to support information extension outside their own facilities, including collaboration via video. However, they do say that as they transform the way they work, they’re likely to do more over the Internet, and likely reconsider traditional VPNs in favor of SD-WAN VPNs. This is particularly true where it’s important to link sites in areas where VPNs aren’t economical, which is of course the original SD-WAN value proposition.
Forecasts on network spending, both equipment and services, are also showing an expected (if small) reduction for this year. I hear that enterprises believe they had to do something quickly for WFH, but that they don’t believe they did the optimum thing. There may be more focus this year on cost management and reduction. The net, then, is that operators can expect that they’re not going to see a lot of incremental business revenue, if any.
On the consumer side, things are really complicated. Consumer networking means Internet access, which has always been under price pressure. In fact, consumer broadband in the past was often carried on infrastructure whose costs were largely subsidized by linear TV to the home. That’s been under pressure from streaming services, and COVID has added a pair of challenges relating to at-home behavior.
The first challenge is a greater use of streaming, created because many content sources have been unable to produce new episodes of popular shows. Streaming not only tends to reduce consumer appetite for channel bundles, it also consumes a lot of bandwidth. Streaming video is the largest consumer of bandwidth for nearly all operators, mobile and wireline.
The second challenge is video chatting and meetings, the latter including WFH. People who can’t see friends and family in the real world want to “see” them in a virtual sense, which means video upstream and not just flowing downstream. That upstream load creates an issue, and also a sharp divide among operators.
Whatever the medium used for “wireline” broadband, there are two different models of service, symmetrical and asymmetrical. The former offers the same speed in both directions, and the latter will offer higher downstream speed than upstream speed. Even operators who offer symmetrical access will often not traffic engineer for a higher upstream load, and so video chatting creates a major risk for them. Where access is asymmetrical, the upstream speed is often insufficient to support, for example, one or two parents doing WFH and several children doing remote learning, at one time.
According to operators, consumers have been fairly open to paying more for better broadband services (though not necessarily for the top tier; consumers seem to think that 50 or 75 Mbps is sufficient for most of their needs), but they’re not always available. Globally, DSL is still a widely used broadband technology, and it’s not only asymmetrical, it’s often unable to deliver the downstream bandwidth a large family would need. Cable companies seem to have benefitted from COVID in that they saw a slight boost in TV revenues and a number of new customers, drawn often from DSL users who hit the bandwidth wall during the pandemic.
While there’s been a lot of talk about fiber replacing copper, that kind of shift in access technology is difficult to undertake with limited profit-per-bit potential. In the US, for example, a bit less than a quarter of states have average demand densities sufficient to make FTTH profitable. Another 22 could justify some FTTN (especially 5G/FTTN millimeter-wave), and the remaining 18 would find it difficult to make even FTTN profitable. In the US, most of the losses DSL has experienced have been gains by FTTH, but cable companies offer more broadband than FTTH, telco FTTN, and DSL combined. Most of them are earning some revenue per user from TV, which has helped them deploy more broadly, and CATV cable has a lower pass cost than fiber.
The question for the consumer space is when COVID subsides. There are some signs that live TV in any form is hurt by the loss of programming, and that if the programming drought continues, customers may try to drop to cheaper (fewer-channel) bundles to focus on local and sports programming. Others may move to pure streaming sources like Netflix and Amazon Prime Video.
Cable companies, in the markets where they operate, may be under the most pressure, because they rely more on live TV and because their delivery system is inherently asymmetrical. The DOCSIS 3.1 and 4.0 specifications define something more competitive, but since users on a single span share capacity, there’s a limit to what upgrading the DOCSIS level can do for them, unless they re-segment to limit customer counts. That would require additional head-end technology and raise costs. The cable model of TV, being based on linear RF, isn’t suitable for streaming, and while some cable operators have developed streaming platforms, this might be a barrier to adopting 5G/FTTN technology.
In the US, cable companies are also stressing over their mobile service capability. Many cablecos have entered into MVNO deals with telcos, to supply mobile services or to supplement their recurrent attempts to build virtual mobile networks from WiFi hotspots. These have been successful in the main in attracting customers, but they’ve been on (or over) the “unprofitable” edge for many. This doesn’t relate directly to the technology issues that this blog targets, but it does create another headache for management to contend with, and it might spawn a capital initiative (like the use of CBRS spectrum) to replace MVNO relationships. That would compete with wireline for budget.
Staying with US cable, Comcast apparently didn’t bid significantly in the recent spectrum auction, and it’s reportedly resuming share buybacks. That means, as the article just referenced says, that Verizon’s deal with them for MVNO services is likely secure, but it also means that replacing MVNO relationships with their own mobile services isn’t something many cablecos are excited about.
For the telcos, a comparison between US operators AT&T and Verizon may be useful. These two operators compete nationally for mobile services, but have their own wireline territories, inherited from the original Regional Bell Operating Company makeup. Verizon has seven times the demand density of AT&T, and has the majority of the states whose demand density is in the FTTH range. All of Verizon’s states are candidates for FTTH or 5G/FTTN. AT&T, besides having a low demand density, has all the states where demand density is critically low (9 in total) and none of the FTTH-suitable states.
Despite this, AT&T seems sour on the 5G/FTTN hybrid and Verizon is embracing it. Verizon’s success with FTTH and its strong interest in mm-wave 5G reflect the demand density differences. For AT&T, while 5G/FTTN hybrids would reach more customers with high-speed broadband, that technology wouldn’t be viable for over three-quarters of their states, and might not be able to generate a viable ROI in those states. For Verizon, that’s not an issue.
This reinforces the importance of demand density in projecting telco behavior, not only in the US but elsewhere. High demand density means many different broadband delivery systems are likely to be profitable, and that incumbents would have a risk of competitive overbuild to drive their own deployments. Low demand density means competitive overbuild is likely impossible and that even the wireline incumbent may struggle to commission any effective consumer broadband delivery model at all.
It’s probably premature to say that all this, in the long term, adds up to a business model transformation for operators. It does seem likely it will create a driver for one, though. That means that network vendors should be exploring how they could benefit from a particular transformation path, and then working that strategy to improve their revenue from the operators. Otherwise, they may find that what was a bright spot in 2020 will dim in 2021, and operator profit per bit will be even more problematic, constraining their spending further. Not a happy combination.