Telco Cloud Deployment Tracker: 5G core deep dive

Deep dive: 5G core deployments 

In this July 2022 update to STL Partners’ Telco Cloud Deployment Tracker, we present granular information on 5G core launches. They fall into three categories:

  • 5G Non-standalone core (5G NSA core) deployments: The 5G NSA core (agreed as part of 3GPP Release in December 2017), involves using a virtualised and upgraded version of the existing 4G core (or EPC) to support 5G New Radio (NR) wireless transmission in tandem with existing LTE services. This was the first form of 5G to be launched and still accounts for 75% of all 5G core network deployments in our Tracker.
  • 5G Standalone core (5G SA core) deployments: The SA core is a completely new and 5G-only core. It has a simplified, cloud-native and distributed architecture, and is designed to support services and functions such as network slicing, Ultra-Reliable Low-Latency Communications (URLLC) and enhanced Machine-Type Communications (eMTC, i.e. massive IoT). Our Tracker indicates that the upcoming wave of 5G core deployments in 2022 and 2023 will be mostly 5G SA core.
  • Converged 5G NSA/SA core deployments: this is when a dual-mode NSA and SA platform is deployed; in most cases, the NSA core results from the upgrade of an existing LTE core (EPC) to support 5G signalling and radio. The principle behind a converged NSA/SA core is the ability to orchestrate different combinations of containerised network functions, and automatically and dynamically flip over from an NSA to an SA configuration, in tandem – for example – with other features and services such as Dynamic Spectrum Sharing and the needs of different network slices. For this reason, launching a converged NSA/SA platform is a marker of a more cloud-native approach in comparison with a simple 5G NSA launch. Ericsson is the most commonly found vendor for this type of platform with a handful coming from Huawei, Samsung and WorkingGroupTwo. Albeit interesting, converged 5G NSA/SA core deployments remain a minority (7% of all 5G core deployments over the 2018-2023 period) and most of our commentary will therefore focus on 5G NSA and 5G SA core launches.

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75% of 5G cores are still Non-standalone (NSA)

Global 5G core deployments by type, 2018–23

  • There is renewed activity this year in 5G core launches since the total number of 5G core deployments so far in 2022 (effective and in progress) stands at 49, above the 47 logged in the whole of 2021. At the very least, total 5G deployments in 2022 will settle between the level of 2021 and the peak of 2020 (97).
  • 5G in whichever form now exists in most places where it was both in demand and affordable; but there remain large economies where it is yet to be launched: Turkey, Russia and most notably India. It also remains to be launched in most of Africa.
  • In countries with 5G, the next phase of launches, which will see the migration of NSA to SA cores, has yet to take place on a significant scale.
  • To date, 75% of all 5G cores are NSA. However, 5G SA will outstrip NSA in terms of deployments in 2022 and represent 24 of the 49 launches this year, or 34 if one includes converged NSA/SA cores as part of the total.
  • All but one of the 5G launches announced for 2023 are standalone; they all involve Tier-1 MNOs including Orange (in its European footprint involving Ericsson and Nokia), NTT Docomo in Japan and Verizon in the US.

The upcoming wave of SA core (and open / vRAN) represents an evolution towards cloud-native

  • Cloud-native functions or CNFs are software designed from the ground up for deployment and operation in the cloud with:​
  • Portability across any hardware infrastructure or virtualisation platform​
  • Modularity and openness, with components from multiple vendors able to be flexibly swapped in and out based on a shared set of compute and OS resources, and open APIs (in particular, via software ‘containers’)​
  • Automated orchestration and lifecycle management, with individual micro-services (software sub-components) able to be independently modified / upgraded, and automatically re-orchestrated and service-chained based on a persistent, API-based, ‘declarative’ framework (one which states the desired outcome, with the service chain organising itself to deliver the outcome in the most efficient way)​
  • Compute, resource, and software efficiency: as a concomitant of the automated, lean and logically optimal characteristics described above, CNFs are more efficient (both functionally and in terms of operating costs) and consume fewer compute and energy resources.​
  • Scalability and flexibility, as individual functions (for example, distributed user plane functions in 5G networks) can be scaled up or down instantly and dynamically in response to overall traffic flows or the needs of individual services​
  • Programmability, as network functions are now entirely based on software components that can be programmed and combined in a highly flexible manner in accordance with the needs of individual services and use contexts, via open APIs.​

Previous telco cloud tracker releases and related research

Each new release of the tracker is global, but is accompanied by an analytical report which focusses on trends in given regions from time to time:

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Lessons from AT&T’s bruising entertainment experience

How AT&T entered and exited the media business

AT&T enters the satellite market at its peak

In 2014, AT&T announced it was buying DirecTV. By that time, AT&T was already bundling DirecTV with its phone and internet service and had approximately 5.9 million linear pay-TV (U-Verse) video subscribers. However, this pay-TV business was already experiencing decline, to the extent that when the DirecTV merger completed in mid-2015, U-Verse subscribers had fallen to 5.6 million by the end of that year.

With the acquisition of DirecTV, AT&T went from a small player in the media and entertainment industry to one of the largest media players in the world adding 39.1 million (US and Latin American) subscribers and paying $48.5bn ($67bn including debt) to acquire the business. The rationale for this acquisition (the satellite business) was to compete with cable operators by being able to offer broadband, increasing AT&T’s addressable market beyond its fibre-based U-Verse proposition which was only available in certain locations/states.

AT&T and DirecTV enjoyed an initial honeymoon, period recording growth up until the end of 2016 when DirecTV subscribers peaked at just over 21 million in the US.

From this point onwards however, AT&T’s satellite subscribers went into decline as customers switched to cheaper competitor offers as well as online streaming services. The popularity of streaming services was reflected by moves among traditional media players to develop their own streaming services such as Time Warner’s HBO GO and HBO NOW. In 2015, DirectTV’s satellite competitor Dish TV likewise launched its own streaming service Sling TV.

Even though it was one of the largest TV distributors on a satellite platform, AT&T also believed online streaming was its ultimate destination. Prior to the launch of its streaming service in late 2016, Bloomberg reported that AT&T envisioned DirecTV NOW as its primary video platform by 2020.

A softwarised platform delivered lowered costs as the service could be self-installed by customers and didn’t rely on expensive truck roll installation or launching satellites. The improved margins would enable AT&T to promote TV packages at attractive price points which would balance inflation demands from broadcasters for the cost of TV programming. AT&T could also more easily bundle the softwarised TV service with its broadband, fibre and wireless propositions and earn more lucrative advertising revenue based on its own network and viewer insights.

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The beginnings of a bumpy journey in TV

AT&T’s foray into satellite and streaming TV can be characterised by a series of confusing service propositions for both consumers and AT&T staff, expensive promotional activity and overall pricing/product design misjudgements as well as troubled relations with TV broadcasters resulting in channel blackouts and ultimately churn.

Promotion, pull back and decline of DirecTV NOW

DirectTV NOW launched in November 2016, as AT&T’s first over the top (OTT) low cost online streaming service. Starting at $35 per month for 60+ channels with no contract period, analysts called the skinny TV package as a loss leader given the cost of programming rights and high subscriber acquisition costs (SACs). The loss leader strategy was aimed at acquiring wireless and broadband customers and included initiatives such as:

  • Promotional discounts to its monthly $60 mid-tier 100+ channel package reduced to $35 per month for life (subject to programming costs).
  • Device promotions and monthly waivers. The service eventually became available on popular streaming devices (Roku, Xbox and PlayStation) and included promotions such as an Apple TV 4K with a four month subscription waiver, a Roku Streaming Stick with a one month waiver or a $25 discount on the first month.
  • Customers could also add HBO or Cinemax for an additional $5 per month, which again was seen as a costly subsidy for AT&T to offer.

The service didn’t include DirecTV satellite’s popular NFL Sunday Ticket programming as Verizon held the smartphone rights to live NFL games, nor did it come with other popular shows from programme channels such as CBS. Features such as cloud DVR (digital video recording) functionality were also initially missing, but would follow as AT&T’s TV propositions and functionalities iterated and improved over time.

The DirecTV NOW streaming service enjoyed continuous quarterly growth through 2017 but peaked in Q3 2018 with net additions turning immediately negative in the final quarter of 2018 as management pulled back on costly promotions and discounted pricing.

The proposition became unsustainable financially in terms of its ability to cover rising programming costs and was positioned comparatively as a much less expensive service to its larger DirecTV satellite pay-TV propositions.

The DirecTV satellite service sold some of the most expensive TV propositions on the market and reported higher pay-TV ARPU ($131) than peers such as Dish ($89) and Comcast ($86) in Q4 2019.

  • The launch of a $35 DirecTV NOW streaming service with no contract and with a similar sounding name to the full linear service confused both new and existing DirecTV satellite customers and some would have viewed their satellite package as expensive compared to the cheaper steaming option.

Rising programming costs

AT&T’s low-cost skinny TV packages brought them into direct confrontation with TV programmers in terms of negotiating fees for content. When the streaming service launched, analysts highlighted the channels within AT&T’s base package were expected to rise in price annually by around 10% each year and this would eventually require AT&T to eventually balance programming costs with rising monthly package pricing.

Confrontations with programmers included a three-week dispute with CBS and an eight week dispute with Nexstar in 2019, which resulted in a blackout of both CBS and Nexstar channels across AT&T’s TV platforms such as Direct TV, U-Verse, DirectTV NOW. Commenting on the blackouts in Q3 2019, Randall Stephenson noted there were “a couple of significant blackouts in terms of content, and those blackouts drove some sizable subscriber losses”.

AT&T’s confrontation with content owners may have been a contributory reason to consider acquiring a content creation platform of its own in the form of Time Warner.

In mid-2018, as AT&T withdrew promotions and discounts for DirecTV NOW (later rebranded it to AT&T TV NOW), customers began to drop the OTT TV service.

  • AT&T TV NOW went from a peak of 1.86 million subscribers in Q3 2018 to 656,000 at the end of 2020.

DirecTV NOW subscriptions

DirecTV-subs-AT-T-stlpartners

Source: STL Partners, AT&T Q2 Earnings 2021

Name changes and new propositions create more confusion

In 2019, DirecTV NOW was re-branded to AT&T TV NOW , and continued to be promoted as a skinny bundle operating alongside AT&T TV, a new full fat live TV streaming version of the DirecTV satellite TV proposition. AT&T TV  was first piloted in August 2019 and soft launched in November 2019. The AT&T TV service included an Android set-top box with cloud DVR functionality and supported other apps such as Netflix.
AT&T TV required a contract period and offered pricing (once promotional discount periods ended) resembling a linear pay-TV service, i.e. $90+. This was, in effect, the very type of pay-TV proposition customers were abandoning.
AT&T TV was seen as an ultimate replacement for the satellite business based on the advantages a softwarised platform provided and the ability to bundle it with AT&T broadband, fibre and wireless services.

Confusion amongst staff and customers

The new AT&T TV proposition confused not only customers but also AT&T staff, as they were found mixing up the AT&T TV proposition with the skinny AT&T TV NOW proposition. By 2019 the company diverted its attention away from AT&T TV NOW  pulling back on promotional activity in order to focus on its core AT&T TV live TV service.

According to Cord Cutters News, both services used the same app but remained separate services. AT&T’s app store marketing incorrectly communicated the DirectTV NOW service was now AT&T TV when in fact it was AT&T TV NOW. Similarly, technical support was also incorrectly labelled with online navigation sending customers to the wrong support channels.

AT&T’s own customer facing teams misunderstood the new propositions

DirecTV-Cordcutter-news

Source: Cord Cutters News

Withdrawal of AT&T TV NOW

By January 2021, AT&T TV NOW was no longer available to new customers but continued to be available to existing customers. The AT&T TV proposition, which was supposed to offer “more value and simplicity” was updated to include some features of the skinny bundle such as the option to go without an annual contract requirement. Customers were also not required to own the set-top box but could instead stream over Amazon Fire TV or Apple TV.  In terms of pricing, AT&T TV was twice the price of the originally launched DirecTV NOW proposition costing $70 to $95 per month.

The short life of AT&T Watch TV

In April 2018, while giving testimony for AT&T’s merger with Time Warner, AT&T’s then CEO Randall Stephenson positioned AT&T Watch TV as a potential new low-cost service that would benefit consumers if the merger was successful. Days following AT&T’s merger approval in the courts, the low cost $15 per month, ultra-skinny bundle launched as a suitable low-cost cord-cutter/cord-never option for cable, broadband and mobile customers from any network. The service was also free to select AT&T Unlimited mobile customers.

By the end of 2018, the operator claimed it had 500,000 AT&T Watch TV“established accounts”. By the end of 2019 the operator had updated its mobile tariffs removing Watch TV for new customers subscribing to its updated Unlimited mobile tariffs. Some believed the company didn’t fully commit to the service, referring to the lack of roll out support for streaming devices such as Roku. The operator was now committed to rolling out its new service HBO Max in 2020. AT&T has informed Watch TV subscribers the service will close 30 November 2021.

Timeline of AT&T entertainment propositions

AT-T-Timeline-Entertainment

Source: STL Partners

The decline of DirecTV

As the graphic belowshows, in June 2021 there were 74.3 million pay-TV households in the US, reflecting continued contraction of the traditional pay-TV market supplied by multichannel video programming distributor (MVPD) players such as cable, satellite, and telco operators. According to nScreenMedia, traditional pay-TV or MVPD market lost 6.3 and 6.2 million customers over 2019 and 2020, but not all were cord-cutters. Cord-shifters dropped their pay-TV but shifted across to virtual MVPD (vMVPD) propositions such as Hulu Live, Sling TV, YouTube TV, AT&T TV NOW, Fubo TV and Philo. Based on current 2021 cord-cutting levels, nScreenMedia predicts 2021 will be the highest year of cord-cutting yet.

Decline in traditional pay-TV households

pay-tv-decline-nscreenmedia

Source: nScreenMedia, STL Partners

Satellite subscribers to Dish and DirecTV 2015-2020

Satellite-pay-tvdish-nscreenmedia

Source: nScreenMedia, STL Partners

When considering AT&T’s management of DirecTV, nScreenMedia research shows the market number of MVPD subscribers declined by over 20 million between 2016 and 2020. In that time, DirecTV lost eight million subscribers. While it represented 20% of the MVPD market in 2016, DirecTV accounted for 40% of the pay-TV losses in the market (40% of 20 million equals ~8 million). AT&T’s satellite rival Dish weathered the decline in pay-TV slightly better over the period.

  • In Q4 2020 the operator wrote down $15.5bn on its premium TV business, which included DirecTV decline, to reflect the cord cutting trend as customers found cheaper streaming alternatives online. The graphic (below) shows a loss of 8.76 million Premium TV subscribers between 2017 and 2020 with large losses of 3.4 million and 2.9 million subscribers in 2019 and 2020.

AT&T’s communications business has also been enduring losses in legacy voice and data (DSL) subscriptions in recent years. AT&T has used a bundling strategy for both products. As customers switched to AT&T fibre or competitor broadband offerings this also impacted the video subscription.

Table of contents

  • Executive Summary
    • What can others learn from AT&T’s experience?
  • How AT&T entered and exited the media business
    • AT&T enters the satellite market at its peak
    • The beginnings of a bumpy journey in TV
    • Vertical integration strategy: The culture clash
    • AT&T’s telco mindset drives its video strategy
    • HBO MAX performance
  • The financial impact of AT&T’s investments
    • Reversing six years of strategic change in three months
  • Lessons from AT&T’s foray into media

Related Reports

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How telcos can provide a tonic for transport

5G can help revolutionise public transport

With the advent of 5G, STL Partners believes telcos have a broad opportunity to help coordinate better use of the world’s resources and assets, as outlined in the report: The Coordination Age: A third age of telecoms. Reliable and ubiquitous connectivity can enable companies and consumers to use digital technologies to efficiently allocate and source assets and resources.

In urban and suburban transport markets, one precious resource is in short supply – space. Trains can be crowded, roads can be congested and there may be nowhere to park. Following the enormous changes in working patterns in the wake of the pandemic, both individuals and policymakers are reviewing their transport choices.

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This report explores how the concept of mobility-as-a-service (MaaS) is evolving, while outlining the challenges facing those companies looking to transform public transport. In particular, it considers how telcos and 5G could support the development and deployment of automated shuttle buses, which are now beginning to appear on the world’s roads. Whereas self-driving cars are taking much longer to develop than their proponents expected, automated shuttle buses look like a more realistic mid-term prospect. Running on relatively short set routes, these vehicles are easier to automate and can be monitored/controlled by dedicated connectivity infrastructure.

This report also examines the role of 5G connectivity in other potentially-disruptive transport propositions, such as remotely controlled hire cars, passenger drones and flying cars, which could emerge over the next decade. It builds on previous STL Partners research including:

Where is transport headed?

Across the world, transport is in a state of flux. Growing congestion, the pandemic, concerns about air quality and climate change, and the emergence of new technologies are taking the transport sector in new directions. Urban planners have long recognised that having large numbers of half-empty cars crawling around at 20km/hour looking for somewhere to park is not a good use of resources.

Experimentation abounds. Many municipalities are building bike lanes and closing roads to try and encourage people to get out of their cars. In response, sales of electric bikes and scooters are rising fast. The past 10 years has also seen a global boom (followed by a partial bust) in micro-mobility services – shared bikes and scooters. Although they haven’t lived up to the initial hype, these sharing economy services have become a key part of the transport mix in many cities (for more on this, see the STL Partners report: Can telcos help cities combat congestion?).

Indeed, these micro-mobility services may be given a shot in the arm by the difficulties faced by the ride hailing business. In many cities, Uber and Lyft are under intense pressure to improve their driver proposition by giving workers more rights, while complying with more stringent safety regulations. That is driving costs upwards. Uber had hoped to ultimately replace human drivers with self-driving vehicles, but that now looks unlikely to happen in the foreseeable future. Tesla, which has always been bullish about the prospects autonomous driving, keeps having to revise its timelines backwards.

Tellingly, the Chinese government has pushed back a target to have more than half of new cars sold to have self-driving capabilities from 2020 to 2025. It blamed technical difficulties, exacerbated by the coronavirus pandemic, in a 2020 statement issued by National Development and Reform Commission and the Ministry of Industry and Information Technology.

Still, self-driving cars will surely arrive eventually. In July, Alphabet (Google’s parent) reported that its experimental self-driving vehicle unit Waymo continues to grow. “People love the fully autonomous ride hailing service in Phoenix,” Sundar Pichai, CEO Alphabet and Google, enthused. “Since first launching its services to the public in October 2020, Waymo has safely served tens of thousands of rides without a human driver in the vehicle, and we look forward to many more.”

In response to analyst questions, Pichai added: “We’ve had very good experience by scaling up rides. These are driverless rides and no one is in the car other than the passengers. And people have had a very positive experience overall. …I expect us to scale up more through the course of 2022.”

More broadly, the immediate priority for many governments will be on greening their transport systems, given the rising public concern about climate change and extreme weather. The latest report from the Intergovernmental Panel on Climate Change calls for “immediate, rapid and large-scale reductions in greenhouse gas emissions” to stabilise the earth’s climate. This pressure will likely increase the pace at which traditional components of the transport system become all-electric – cars, motorbikes, buses, bikes, scooters and even small aircraft are making the transition from relying on fossil fuel or muscle power to relying on batteries.

The rest of this 45-page report explores how public transport is evolving, and the role of 5G connectivity and telcos can play in enabling the shift.

Table of contents

  • Executive Summary
  • Introduction
  • Where is transport headed?
    • Mobility-as-a-service
    • The role of digitisation and data
    • Rethinking the bus
    • Takeaways
  • How telcos are supporting public transport
    • Deutsche Telekom: Trying to digitise transport
    • Telia: Using 5G to support shuttle buses
    • Takeaways
  • The key challenges
    • A complex and multi-faceted value chain
    • Regulatory caution
    • Building viable business models
    • Takeaways
  • Automakers become service providers
    • Volvo to retrieve driving data in real-time
    • Automakers and tech companies team up
    • Takeaways
  • Taxis and buses take to the air
    • The prognosis for passenger drones
    • Takeaways
  • Conclusions: Strategic implications for telcos

 

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5G: Bridging hype, reality and future promises

The 5G situation seems paradoxical

People in China and South Korea are buying 5G phones by the million, far more than initially expected, yet many western telcos are moving cautiously. Will your company also find demand? What’s the smart strategy while uncertainty remains? What actions are needed to lead in the 5G era? What questions must be answered?

New data requires new thinking. STL Partners 5G strategies: Lessons from the early movers presented the situation in late 2019, and in What will make or break 5G growth? we outlined the key drivers and inhibitors for 5G growth. This follow on report addresses what needs to happen next.

The report is informed by talks with executives of over three dozen companies and email contacts with many more, including 21 of the first 24 telcos who have deployed. This report covers considerations for the next three years (2020–2023) based on what we know today.

“Seize the 5G opportunity” says Ke Ruiwen, Chairman, China Telecom, and Chinese reports claimed 14 million sales by the end of 2019. Korea announced two million subscribers in July 2019 and by December 2019 approached five million. By early 2020, The Korean carriers were confident 30% of the market will be using 5G by the end of 2020. In the US, Verizon is selling 5G phones even in areas without 5G services,  With nine phone makers looking for market share, the price in China is US$285–$500 and falling, so the handset price barrier seems to be coming down fast.

Yet in many other markets, operators progress is significantly more tentative. So what is going on, and what should you do about it?

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5G technology works OK

22 of the first 24 operators to deploy are using mid-band radio frequencies.

Vodafone UK claims “5G will work at average speeds of 150–200 Mbps.” Speeds are typically 100 to 500 Mbps, rarely a gigabit. Latency is about 30 milliseconds, only about a third better than decent 4G. Mid-band reach is excellent. Sprint has demonstrated that simply upgrading existing base stations can provide substantial coverage.

5G has a draft business case now: people want to buy 5G phones. New use cases are mostly years away but the prospect of better mobile broadband is winning customers. The costs of radios, backhaul, and core are falling as five system vendors – Ericsson, Huawei, Nokia, Samsung, and ZTE – fight for market share. They’ve shipped over 600,000 radios. Many newcomers are gaining traction, for example Altiostar won a large contract from Rakuten and Mavenir is in trials with DT.

The high cost of 5G networks is an outdated myth. DT, Orange, Verizon, and AT&T are building 5G while cutting or keeping capex flat. Sprint’s results suggest a smart build can quickly reach half the country without a large increase in capital spending. Instead, the issue for operators is that it requires new spending with uncertain returns.

The technology works, mostly. Mid-band is performing as expected, with typical speeds of 100–500Mbps outdoors, though indoor performance is less clear yet. mmWave indoor is badly degraded. Some SDN, NFV, and other tools for automation have reached the field. However, 5G upstream is in limited use. Many carriers are combining 5G downstream with 4G upstream for now. However, each base station currently requires much more power than 4G bases, which leads to high opex. Dynamic spectrum sharing, which allows 5G to share unneeded 4G spectrum, is still in test. Many features of SDN and NFV are not yet ready.

So what should companies do? The next sections review go-to-market lessons, status on forward-looking applications, and technical considerations.

Early go-to-market lessons

Don’t oversell 5G

The continuing publicity for 5G is proving powerful, but variable. Because some customers are already convinced they want 5G, marketing and advertising do not always need to emphasise the value of 5G. For those customers, make clear why your company’s offering is the best compared to rivals’. However, the draw of 5G is not universal. Many remain sceptical, especially if their past experience with 4G has been lacklustre. They – and also a minority swayed by alarmist anti-5G rhetoric – will need far more nuanced and persuasive marketing.

Operators should be wary of overclaiming. 5G speed, although impressive, currently has few practical applications that don’t already work well over decent 4G. Fixed home broadband is a possible exception here. As the objective advantages of 5G in the near future are likely to be limited, operators should not hype features that are unrealistic today, no matter how glamorous. If you don’t have concrete selling propositions, do image advertising or use happy customer testimonials.

Table of Contents

  • Executive Summary
  • Introduction
    • 5G technology works OK
  • Early go-to-market lessons
    • Don’t oversell 5G
    • Price to match the experience
    • Deliver a valuable product
    • Concerns about new competition
    • Prepare for possible demand increases
    • The interdependencies of edge and 5G
  • Potential new applications
    • Large now and likely to grow in the 5G era
    • Near-term applications with possible major impact for 5G
    • Mid- and long-term 5G demand drivers
  • Technology choices, in summary
    • Backhaul and transport networks
    • When will 5G SA cores be needed (or available)?
    • 5G security? Nothing is perfect
    • Telco cloud: NFV, SDN, cloud native cores, and beyond
    • AI and automation in 5G
    • Power and heat

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NFV Deployment Tracker: North American data and trends

Introduction

NFV in North America – how is virtualisation moving forward in telcos against global benchmarks?

Welcome to the sixth edition of the ‘NFV Deployment Tracker’

This report is the sixth analytical report in the NFV Deployment Tracker series and is intended as an accompaniment to the updated Tracker Excel spreadsheet.

This extended update covers seven months of deployments worldwide, from October 2018 to April 2019. The update also includes an improved spreadsheet format: a more user-friendly, clearer lay-out and a regional toggle in the ‘Aggregate data by region’ worksheet, which provides much quicker access to the data on each region separately.

The present analytical report provides an update on deployments and trends in the North American market (US, Canada and the Caribbean) since the last report focusing on that region (December 2017).

Scope, definitions and importance of the data

We include in the Tracker only verified, live deployments of NFV or SDN technology powering commercial services. The information is taken mainly from public-domain sources, such as press releases by operators or vendors, or reports in reputable trade media. However, a small portion of the data also derives from confidential conversations we have had with telcos. In these instances, the deployments are included in the aggregate, anonymised worksheets in the spreadsheet, but not in the detailed dataset listing deployments by operator and geography, and by vendor where known.

Our definition of a ‘deployment’, including how we break deployments down into their component parts, is provided in the ‘Explanatory notes’ worksheet, in the accompanying Excel document.

NFV in North America in global context

We have gathered data on 120 live, commercial deployments of NFV and SDN in North America between 2011 and April 2019. These were completed by 33 mainly Tier-One telcos and telco group subsidiaries: 24 based in the US, four in Canada, one Caribbean, three European (Colt, T-Mobile and Vodafone), and one Latin American (América Móvil). The data includes information on 217 known Virtual Network Functions (VNFs), functional sub-components and supporting infrastructure elements that have formed part of these deployments.

This makes North America the third-largest NFV/SDN market worldwide, as is illustrated by the comparison with other regions in the chart below.

Total NFV/SDN deployments by region, 2011 to April 2019

total NFV deployments by region North America Africa Asia-Pacific Europe Middle East

Source: STL Partners

Deployments of NFV in North America account for around 24% of the global total of 486 live deployments (or 492 deployments counting deployments spanning multiple regions as one deployment for each region). Europe is very marginally ahead on 163 deployments versus 161 for Asia-Pacific: both equating to around 33% of the total.

The NFV North America Deployment Tracker contains the following data, to May 2019:

  • Global aggregate data
  • Deployments by primary purpose
  • Leading VNFs and functional components
  • Leading operators
  • Leading vendors
  • Leading vendors by primary purpose
  • Above data points broken down by region
  • North America
  • Asia-Pacific
  • Europe
  • Latin America
  • Middle East
  • Africa
  • Detailed dataset on individual deployments

 

Contents of the accompanying analytical report:

  • Executive Summary
  • Introduction
  • Welcome to the sixth edition of the ‘NFV Deployment Tracker’
  • Scope, definitions and importance of the data
  • Analysis of NFV in North America
  • The North American market in global context
  • SD-WAN and core network functions are the leading categories
  • 5G is driving core network virtualisation
  • Vendor trends: Open source and operator self-builds outpace vendors
  • Operator trends: Verizon and AT&T are the clear leaders
  • Conclusion: Slow-down in enterprise platform deployments while 5G provides new impetus

5G: The first three years

The near future of 5G

Who, among telecoms operators, are 5G leaders? Verizon Wireless is certainly among the most enthusiastic proponents.

On October 1, 2018, Verizon turned on the world’s first major 5G network. It is spending US$20 billion to offer 30 million homes millimetre wave 5G, often at speeds around a gigabit. One of the first homes in Houston “clocked speeds of 1.3 gigabits per second at 2,000 feet.”  CEO Vestberg expects to cover the whole country by 2028, some with 3.5 GHz. 5G: The first three years cuts through the hype and confusion to provide the industry a clear picture of the likely future. A companion report, 5G smart strategies, explores how 5G helps carriers make more money and defeat the competition.

This report was written by Dave Burstein with substantial help from Andrew Collinson and Dean Bubley.

What is 5G?

In one sense, 5G is just a name for all the new technologies now being widely deployed. It’s just better mobile broadband. It will not change the world anytime soon.

There are two very different flavours of 5G:

  • Millimetre wave: offers about 3X the capacity of mid-band or the best 4G. Spectrum used is from 20 GHz to over 60 GHz. Verizon’s mmWave system is designed to deliver 1 gigabit downloads to most customers and 5 gigabits shared. 26 GHz in Europe & 28 GHz in the U.S. are by far the most common.
  • Low and mid-band: uses 4G hardware and “New Radio” software. It is 60-80% less capable on average than millimetre wave and very similar in performance to 4G TD-LTE. 3.3 GHz – 4.2 GHz is by far the most important band.

To begin, a few examples.

5G leaders are deploying millimetre wave

Verizon’s is arguably currently the most advanced 5G network in the world. Perhaps most surprisingly, the “smart build” is keeping costs so low capital spending is coming down. Verizon’s trials found millimetre wave performance much better than expected. In some cases, 5G capacity allowed reducing the number of cells.

Verizon will sell fixed wireless outside its incumbent territory. It has ~80 million customers out of district. Goldman Sachs estimates it will add 8 million fixed wireless by 2023 and more than pay for the buildout.

Verizon CEO Hans Vestberg says he believes mmWave capacity will allow very attractive offerings that will win customers away from the competition.

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What are the other 5G leaders doing?

Telefónica Deutschland has similar plans, hoping to blow open the German market with mmWave to a quarter of the country. Deutsche Telekom and Vodafone are sticking with the much slower mid-band 5G and could be clobbered.

Most 5G will be slower low and mid-band formerly called 4G

80% or more of 5G worldwide the next three years will not be high-speed mmWave. Industry group 3GPP decided early in 2018 to call anything running New Radio software “5G.” In practice, almost any currently shipping 4G radio can add on the software and be called “5G.” The software was initially said to raise capacity between 10% and 52%. That’s 60% to 80% slower than mmWave. However, improved 4G technology has probably cut the difference by more than half. That’s 60% to 80% slower than mmWave. It’s been called “faux 5G” and “5G minus,” but few make the distinction. T-Mobile USA promises 5G to the entire country by 2020 without a large investment. Neville Ray is blanketing the country with 4G in 20 MHz of the new 600 MHz band. That doesn’t require many more towers due to the long reach of low frequencies. T-Mobile will add NR software for a marketing push.

In an FCC presentation, Ray said standalone T-Mobile will have a very wide 5G coverage but at relatively low speeds. Over 85% of users will connect at less than 100 megabits. The median “5G” connection will be 40-70 megabits. Some users will only get 10-20 megabits, compared to a T-Mobile average today of over 30 megabits. Aggregating 600 MHz NR with other T-Mobile bands now running LTE would be much faster but has not been demonstrated.

While attesting to the benefits of the T-Mobile-Sprint deal, Neville claimed that using Sprint spectrum at 2500 MHz and 11,000 Sprint towers will make a far more robust offering by 2024. 10% of this would be mmWave.

In the final section of this report, I discuss 5G smart strategy: “5G” is a magic marketing term. It will probably sell well even if 4G speeds are similar. The improved sales can justify a higher budget.

T-Mobile Germany promises nationwide 5G by 2025. That will be 3.5 GHz mid-band, probably using 100 MHz of spectrum. Germany has just set aside 400 MHz of spectrum at 3.5 GHz. DT, using 100 MHz of 3.5 GHz, will deliver 100–400 megabit downloads to most.

100–400 megabits is faster than much of T-Mobile’s DSL. It soon will add fixed mobile in some rural areas. In addition, T-Mobile is selling a combined wireless and DSL router. The router uses the DSL line preferably but can also draw on the wireless when the user requires more speed.

China has virtually defined itself as a 5G leader by way of its government’s clear intent for the operators. China Mobile plans two million base stations running 2.5 GHz, which has much better reach than radio in the 3.5 GHz spectrum. In addition, the Chinese telcos have been told to build a remarkable edge network. Minister Miao Wei wants “90% of China within 25 ms of a server.” That’s extremely ambitious but the Chinese have delivered miracles before. 344 million Chinese have fibre to the home, most built in four years.

Telus, Canada’s second incumbent, in 2016 carefully studied the coming 5G choices. The decision was to focus capital spending on more fibre in the interim. 2016 was too early to make 5G plans, but a strong fibre network would be crucial. Verizon also invested heavily in fibre in 2016 and 2017, which now is speeding 5G to market. Like Verizon, Telus sees the fibre paying off in many ways. It is doing fibre to the home, wireless backhaul, and service to major corporations. CEO Darren Entwistle in November 2018 spoke at length about its future 5G, including the importance of its large fibre build, although he hasn’t announced anything yet.

There is a general principle that if it’s too early to invest in 5G, it’s a good idea to build as much fibre as you can in the interim.

Benefits of 5G technology

  • More broadband capacity and speed. Most of the improvement in capacity comes from accessing more bandwidth through carrier aggregation, and many antenna MIMO. Massive MIMO has shipped as part of 4G since 2016 and carrier aggregation goes back to 2013. All 5G phones work on 4G as well, connecting as 4G where there is no 5G signal.
  • Millimetre wave roughly triples capacity. Low and mid-band 5G runs on the same hardware as 4G. The only difference to 4G is NR software, which adds only modestly to capacity.
  • Drastically lower cost per bit. Verizon CEO Lowell McAdam said, “5G will deliver a megabit of service for about 1/10th of what 4G does.”
  • Reduced latency. 1 ms systems will mostly only be in the labs for several more years, but Verizon’s and other systems deliver speed from the receiver to the cell of about 10 milliseconds. For practical purposes, latency should be considered 15 ms to 50 ms and more, unless and until large “edge Servers” are installed. Only China is likely to do that in the first three years.

The following will have a modest effect, at most, in the next three years: Autonomous cars, remote surgery, AR/VR, drones, IoT, and just about all the great things promised beyond faster and cheaper broadband. Some are bogus, others not likely to develop in our period. 5G leaders will need to capitalise on near-term benefits.

Contents:

  • Executive Summary
  • Some basic timelines
  • What will 5G deliver?
  • What will 5G be used for?
  • Current plans reviewed in the report
  • Introduction
  • What is 5G?
  • The leaders are deploying millimetre wave
  • Key dates
  • What 5G and advanced 4G deliver
  • Six things to know
  • Six myths
  • 5G “Smart Build” brings cost down to little more than 4G
  • 5G, Edge, Cable and IoT
  • Edge networks in 5G
  • “Cable is going to be humongous” – at least in the U.S.
  • IoT and 5G
  • IoT and 5G: Does anyone need millions of connections?
  • Current plans of selected carriers (5G leaders)
  • Who’s who
  • Phone makers
  • The system vendors
  • Chip makers
  • Spectrum bands in the 5G era
  • Millimetre wave
  • A preview of 5G smart strategies
  • How can carriers use 5G to make more money?
  • The cold equations of growth

Figures:

  • Figure 1: 20 years of NTT DOCOMO capex
  • Figure 2: Verizon 5G network plans
  • Figure 3: Qualcomm’s baseband chip and radio frequency module
  • Figure 4: Intel 5G chip – Very limited 5G production capability until late 2019
  • Figure 5: Overview of 5G spectrum bands
  • Figure 6: 5G experience overview
  • Figure 7: Cisco VNI forecast of wireless traffic growth between 2021–2022

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Sense check: Can data growth save telco revenues?

Introduction

A recent STL Partners report – Which operator growth strategies will remain viable in 2017 and beyond? – looked at the growth strategies of 68 operator groups, and identified eight different growth strategies employed over this sample. The eighth strategy was to expect mobile data growth to start to reverse the decline in revenues once the decline in voice and messaging revenues is complete. In the previous report, we argued that data revenue growth would not rapidly counterbalance the losses of voice and messaging due to the forces outlined in Figure 2 below:

Figure 2: Trust in the increasing value of (and spend in) broadband data 

Source: STL Partners

In that report, we showed a number of examples, including NTT Docomo in Japan, which has been experiencing voice and messaging declines for the longest period of telcos we are aware of, and the UK market, which is competitive with relatively good availability of market data (See Figure 3):

Figure 3: STL Partners can find no evidence of long term revenue growth driven by increased mobile broadband demand in mature markets (outside duopolies)

Source: Company accounts, STL Partners

Despite the clarity of our own convictions on this matter, we are aware that some telcos are growing their revenues, and also that a minority of our clients (perhaps one in ten based on a number of informal surveys we have run in workshops etc.) believe that data could start to regrow the market in certain conditions.

Given how attractive this idea is to the industry, and how difficult and lengthy the path of transformation and creating digital services is proving for telcos, we decided that it would be useful to revisit our assertions, to dig deeper to see what signs of growth we could find and what might be learned from them. This report contains our findings from this further analysis.

Background: The telco ‘hunger gap’

This decline is not a new story, and STL Partners has been warning about this phenomenon and the need for business model change since 2006.

Back in 2013, STL Partners estimated that digital business would need to represent 25+% of Telco revenue by 2020 to avoid long-term industry decline. However, to date we have not taken the view that data revenues will to grow enough to make up for the decline in traditional services, meaning that “hunger gap” will not be filled this way (see Figure 4).

Figure 4: The telco ‘hunger gap’ between the decline in traditional and data revenues

Source: STL Partners

However, making the transition to new business models is challenging for telcos, who have traditionally relied on an infrastructure-based business model. Digital businesses are very different, and the astronomical growth in demand for mobile data services over the past decade is placing severe strain on networks and resources.

We have argued that telcos now need to make a fundamental shift from their traditional infrastructure-based business model to a complex amalgam of infrastructure, platform, and product innovation businesses.

Alternatively, growing data would be an innately attractive prospect for the telecoms industry. It would not require all the hard work, risk, change and investment of transformation. Hard-pressed executives would love nothing better than the ‘do little’ strategy to work out. It’s an idea that can easily find traction and supporters.

But is it a realistic prospect to grow data revenues faster than voice and messaging are shrinking?

To sense-check our original assertion that data will not grow overall revenues, this report takes a new look at the available evidence. We picked six different telcos appearing to exhibit representative or outlier strategies to see whether there may currently be grounds to change our view that data revenue growth will not grow the overall telecoms market.

Content:

  • Executive Summary
  • Introduction
  • Background: the telco ‘hunger gap’
  • Methodology
  • Review of global trends in data growth
  • The explosion in mobile data growth
  • The link between data consumption and ARPU
  • The rise of 4G
  • Data tariff bundles increase in volume
  • Mobile data offloading
  • Multiplay bundling and the fixed network advantage
  • International data roaming
  • Zero rating and net neutrality
  • Case studies – different data strategies
  • Four data growth strategies
  • The traditional growth model
  • The disruptor/challenger model
  • The innovator model
  • The OTT proposition
  • Case studies comparison: Investment vs risk in summary
  • Case study: Innovator: DNA (Finland)
  • Case study: Disruptor/Innovator: T-Mobile US
  • Case study: Super-disruptor: Reliance Jio (India)
  • Case study: Disruptor: Free (France)
  • Case study: Traditional/Innovator: Vodafone UK
  • Case study: Traditional: Cosmote (Greece)
  • Conclusions
  • Case studies comparison: Investment vs risk in summary
  • Telcos need to seek fresh business models
  • Network investment will need to be even more intelligently targeted than with 3G/4G
  • New growth opportunities are emerging
  • A little thoughtful innovation goes a long way
  • Recommendations

Figures:

  • Figure 1: Trust in the increasing value of (and spend) in broadband data
  • Figure 2: Trust in the increasing value of (and spend) in broadband data
  • Figure 3: STL Partners can find no evidence of long-term revenue growth driven by increased mobile broadband demand in mature markets (outside duopolies)
  • Figure 4: The telco “hunger gap” between the decline in traditional and data revenues
  • Figure 5: Cisco global data growth 2016-2021
  • Figure 6: Total estimated UK mobile retail revenues
  • Figure 7: SMS and MMS sent in the UK, 2007-2015
  • Figure 8: Selected telco data growth strategies
  • Figure 9: Analysis of mobile operator growth strategies
  • Figure 10: DNA revenues and churn 2012-2016
  • Figure 11: DNA mobile data growth 2010-2016
  • Figure 12: DNA mobile data growth forecast
  • Figure 13: USA average monthly data use, 2010-2015
  • Figure 14: Deutsche Telekom non-voice % of ARPU, 2009-2016
  • Figure 15: T-Mobile US total revenues and non-voice ARPU, 2009-2016
  • Figure 16: Reliance Jio subscription growth
  • Figure 17: Free Mobile 4G subscriptions and 4G data, 2015-2016
  • Figure 18: Iliad Free revenue growth 2012-2016
  • Figure 19: France average mobile data use per SIM, 2009-2015
  • Figure 20: France mobile value added service revenues, 2009-2015
  • Figure 21: Vodafone UK data use and total mobile ARPU, 2011-2016
  • Figure 22: UK mobile retail ARPU, 2010-2016
  • Figure 23: UK estimated mobile retail revenues, 2010-2015
  • Figure 24: Vodafone UK total mobile revenue 2013-2016
  • Figure 25: Greece data use and total mobile revenues

MobiNEX: The Mobile Network Experience Index, H1 2016

Executive Summary

In response to customers’ growing usage of mobile data and applications, in April 2016 STL Partners developed MobiNEX: The Mobile Network Experience Index, which ranks mobile network operators by key measures relating to customer experience. To do this, we benchmark mobile operators’ network speed and reliability, allowing individual operators to see how they are performing in relation to the competition in an objective and quantitative manner.

Operators are assigned an individual MobiNEX score out of 100 based on their performance across four measures that STL Partners believes to be core drivers of customer app experience: download speed, average latency, error rate and latency consistency (the proportion of app requests that take longer than 500ms to fulfil).

Our partner Apteligent has provided us with the raw data for three out of the four measures, based on billions of requests made from tens of thousands of applications used by hundreds of millions of users in H1 2016. While our April report focused on the top three or four operators in just seven Western markets, this report covers 80 operators drawn from 25 markets spread across the globe in the first six months of this year.

The top ten operators were from Japan, France, the UK and Canada:

  • Softbank JP scores highest on the MobiNEX for H1 2016, with high scores across all measures and a total score of 85 out of 100.
  • Close behind are Bouygues FR (80) and Free FR (79), which came first and second respectively in the Q4 2015 rankings. Both achieve high scores for error rate, latency consistency and average latency, but are slightly let down by download speed.
  • The top six is completed by NTT DoCoMo JP (78), Orange FR (75) and au (KDDI) JP (71).
  • Slightly behind are Vodafone UK (65), EE UK (64), SFR FR (63), O2 UK (62) and Rogers CA (62). Except in the case of Rogers, who score similarly on all measures, these operators are let down by substantially worse download speeds.

The bottom ten operators all score a total of 16 or lower out of 100, suggesting a materially worse customer app experience.

  • Trailing the pack with scores of 1 or 2 across all four measures were Etisalat EG (4), Vodafone EG (4), Smart PH (5) and Globe PH (5).
  • Beeline RU (11) and Malaysian operators U Mobile MY (9) and Digi MY (9) also fare poorly, but benefit from slightly higher latency consistency scores. Slightly better overall, but still achieving minimum scores of 1 for download speed and average latency, are Maxis MY (14) and MTN ZA (12).

Overall, the extreme difference between the top and bottom of the table highlights a vast inequality in network quality customer experience across the planet. Customer app experience depends to a large degree on where one lives. However, our analysis shows that while economic prosperity does in general lead to a more advanced mobile experience as you might expect, it does not guarantee it. Norway, Sweden, Singapore and the US market are examples of high income countries with lower MobiNEX scores than might be expected against the global picture. STL Partners will do further analysis to uncover more on the drivers of differentiation between markets and players within them.

 

MobiNEX H1 2016 – included markets

MobiNEX H1 2016 – operator scores

 Source: Apteligent, OpenSignal, STL Partners analysis

 

  • About MobiNEX
  • Changes for H1 2016
  • MobiNEX H1 2016: results
  • The winners: top ten operators
  • The losers: bottom ten operators
  • The surprises: operators where you wouldn’t expect them
  • MobiNEX by market
  • MobiNEX H1 2016: segmentation
  • MobiNEX H1 2016: Raw data
  • Error rate
  • Latency consistency
  • Download speed
  • Average latency
  • Appendix 1: Methodology and source data
  • Latency, latency consistency and error rate: Apteligent
  • Download speed: OpenSignal
  • Converting raw data into MobiNEX scores
  • Setting the benchmarks
  • Why measure customer experience through app performance?
  • Appendix 2: Country profiles
  • Country profile: Australia
  • Country profile: Brazil
  • Country profile: Canada
  • Country profile: China
  • Country profile: Colombia
  • Country profile: Egypt
  • Country profile: France
  • Country profile: Germany
  • Country profile: Italy
  • Country profile: Japan
  • Country profile: Malaysia
  • Country profile: Mexico
  • Country profile: New Zealand
  • Country profile: Norway
  • Country profile: Philippines
  • Country profile: Russia
  • Country profile: Saudi Arabia
  • Country profile: Singapore
  • Country profile: South Africa
  • Country profile: Spain
  • Country profile: United Arab Emirates
  • Country profile: United Kingdom
  • Country profile: United States
  • Country profile: Vietnam

 

  • Figure 1: MobiNEX scoring breakdown, benchmarks and raw data used
  • Figure 2: MobiNEX H1 2016 – included markets
  • Figure 3: MobiNEX H1 2016 – operator scores breakdown (top half)
  • Figure 4: MobiNEX H1 2016 – operator scores breakdown (bottom half)
  • Figure 5: MobiNEX H1 2016 – average scores by country
  • Figure 6: MobiNEX segmentation dimensions
  • Figure 7: MobiNEX segmentation – network speed vs reliability
  • Figure 8: MobiNEX segmentation – network speed vs reliability – average by market
  • Figure 9: MobiNEX vs GDP per capita – H1 2016
  • Figure 10: MobiNEX vs smartphone penetration – H1 2016
  • Figure 11: Error rate per 10,000 requests, H1 2016 – average by country
  • Figure 12: Error rate per 10,000 requests, H1 2016 (top half)
  • Figure 13: Error rate per 10,000 requests, H1 2016 (bottom half)
  • Figure 14: Requests with total roundtrip latency > 500ms (%), H1 2016 – average by country
  • Figure 15: Requests with total roundtrip latency > 500ms (%), H1 2016 (top half)
  • Figure 16: Requests with total roundtrip latency > 500ms (%), H1 2016 (bottom half)
  • Figure 17: Average weighted download speed (Mbps), H1 2016 – average by country
  • Figure 18: Average weighted download speed (Mbps), H1 2016 (top half)
  • Figure 19: Average weighted download speed (Mbps), H1 2016 (bottom half)
  • Figure 20: Average total roundtrip latency (ms), H1 2016 – average by country
  • Figure 21: Average total roundtrip latency (ms), H1 2016 (top half)
  • Figure 22: Average total roundtrip latency (ms), H1 2016 (bottom half)
  • Figure 23: Benchmarks and raw data used

US Wireless Market: Early Warning Signs of Change

Introduction

The US national wireless market is currently the most influential of its kind on the planet. Not only is it big, it is also rich, with significantly higher ARPUs than other developed markets. Not only is it big and rich, it is advanced, with much higher 4G penetration than comparable markets. Further, it has frequently acted as a bellwether for the world wireless industry. The iPhone’s success in the US marked the smartphone’s transition from pioneer to early-adopter status worldwide; the much greater success of the iPhone 3GS and the Moto Droid marked the beginning of mass adoption, and the crisis of the mid-market vendors.

On the network side, Verizon Wireless’s early decision to abandon the CDMA2000 development path and choose LTE FDD signalled the end of the standards wars and the beginning of serious 4G deployment, threw Motorola even deeper into crisis, and positioned Alcatel-Lucent as the leading vendor in the first wave of LTE rollouts.

The inclusion of the 1800MHz band in the iPhone 5, meanwhile, transformed the world’s spectrum picture, redefining this legacy GSM/PCS allocation as a key asset for smartphone-focused operators. Today, the combination of US wireless operators and US semiconductor vendors is transforming industry technology strategies again, as Verizon Wireless, AT&T, and Qualcomm lead the charge for a mobile broadband-focused “early” 5G.

Clearly, the US market is as critical for global mobile as the European market was in the pre-iPhone era. As a result, Telco 2.0 finds it useful to monitor it closely. We covered the changing 5G ecosystem in MWC: 5G and Wireless Networks  and How 5G is Disrupting Cloud and Network Strategy Today. We covered AT&T’s key role in driving NFV and open-source telco software forwards in Fast Pivot to the NFV Future, and the fate of worldwide 4G deployments in 4G Rollout Analysis: Winning Strategies and 5G Implications. This picked out one US carrier in particular for closer attention. In the adjacent industries, we covered Microsoft in Pivoting to a Communications-Focused Business, Amazon.com in Amazon Web Services: Colossal, but Invincible?, the cable operators in Gigabit Cable Attacks This Year, and the top-brand tech sector generally in Amazon, Apple, Facebook, Google, Netflix: Whose digital content is king?.

In this note, we will review developments in the US national wireless sector, both on a long-term basis since the launch of 4G, and on a tactical basis over the last 12 months, including analysis of the results from our new, unique Mobile Network Experience Index product .

The US Wireless Market, 2011-2016

The last five years in the US cellular market have been characterised by two forces – disruption, and growth. The arrival of smartphones comprehensively disrupted what had been a rather stagnant sector. Later, T-Mobile USA initiated a price disruption which resulted in a wave of consolidation and a significant drop in industrywide ARPU. However, despite the “uncarrier”’s price cuts, the total industry profit pool has nonetheless grown dramatically in that timeframe, from $8.7bn/quarter to $14bn/quarter, as the revenue base has grown by some 20%, or 4% per annum.

Figure 1: The US wireless revenue base, 2011-2016

Source: STL Partners, company filings, themobileworld

Growth was as characteristic of the US market over the last 5 years as price disruption. T-Mobile’s strategy was to a large extent possible because there was a significant degree of “blue-ocean” competition, enlarging the subscriber base and deepening its use of smartphones and high-speed data service, as well as consolidation of minor operators. We show the net impact on operating profits in Figure 2.

Figure 2: Long term shifts in the US national wireless profit pool, 2011-2016

Source: STL Partners, themobileworld.com, company filings

Over the whole timeframe, the total annual pool of operating profit available in the market has grown by 59% or 11.8% per annum, or five times as fast as US GDP. This came in the context of a 20%, or 4% annualised, increase in total wireless revenues. At the same time, three operators have benefited disproportionately from this growth – AT&T, Verizon Wireless, and T-Mobile. In fact, AT&T’s gains have been quite modest compared to the triumphs at VZW and T-Mobile.

On the other hand, Sprint has seen its operating profits halve and halve again, while Leap, MetroPCS, and numerous minor operators have exited the market. Looking at these data in a time-series view, as we do in Figure 3, we see that the duopoly is still a real force, although Verizon, has done distinctly better than AT&T.

Verizon Wireless, which pursued a “premium carrier” strategy based on going first with 4G, using its 700MHz holdings to maximise coverage and densifying with 1800MHz, and holding the line on price as long as possible, has clearly maximised its operating-level profitability. Meanwhile, a vicious struggle for third place was waged between T-Mobile and Sprint. Both parties struggled at times with the cost of spectrum acquisitions and network investments, and the gap between them and the duopoly is unmistakable. However, T-Mobile has managed to keep in the black since 2013 and its profitability is gradually improving, breaking away from the also-rans over the last 12 months.

 

  • Executive Summary
  • Introduction
  • The US Wireless Market, 2011-2016
  • Where Do We Go From Here?
  • Duopolists, challengers, and exits
  • Valuations
  • Challenging the Premium Carrier
  • The Impact of IPv6 deployment
  • Conclusions
  • Disruptive Responses: 5G
  • Disruptive Responses: Content

 

  • Figure 1: The US wireless revenue base, 2011-2016
  • Figure 2: Long term shifts in the US national wireless profit pool, 2011-2016
  • Figure 3: Profits at US wireless carriers, 2011-2016 (time series)
  • Figure 4: The short-run profits pool
  • Figure 5: Five years of Verizon Vs T-Mobile
  • Figure 6: Long term share of connections growth, 2011-2016
  • Figure 7: Short term share of connections growth, 2015
  • Figure 8: Long term retail postpaid users, 2011-2016
  • Figure 9: Short term retail postpaid subscribers, 2015
  • Figure 10: Now, T-Mobile is gaining the right kind of subscribers
  • Figure 11: Retail postpaid connections over time
  • Figure 12: Prepaid subscribers over time
  • Figure 13: Long term change in prepaid users is mostly growth, and MetroPCS’s exit
  • Figure 14: Short term change in retail prepaid users, 2015
  • Figure 15: T-Mobile’s debts are far from zooming out of control
  • Figure 16: Duopolists, challengers, and exit candidates
  • Figure 17: Net income margins over time
  • Figure 18: Device sales surge, margins dive
  • Figure 19: Valuation – EV/EBITDA
  • Figure 20: T-Mobile leads on our MobiNEX score
  • Figure 21: A link between network metrics and customer satisfaction?
  • Figure 22: 3 out of 4 US MNOs are “challenged” in the world context
  • Figure 23: Download speed vs. percentage of LTE requests
  • Figure 24: T-Mobile is the lowest-latency US operator
  • Figure 25: T-Mobile is generating 25% fewer high latency events than AT&T
  • Figure 26: T-Mobile’s error rate catches up on the market leader
  • Figure 27: Quality across the board
  • Figure 28: IPv6 adoption, US wireless operators

MobiNEX: The Mobile Network Experience Index, Q4 2015

Executive Summary

In response to customers’ growing usage of mobile data and applications, STL Partners has developed MobiNEX: The Mobile Network Customer Experience Index, which benchmarks mobile operators’ network speed and reliability by measuring the consumer app experience, and allows individual players to see how they are performing in relation to competition in an objective and quantitative manner.

We assign operators an individual MobiNEX score based on their performance across four measures that are core drivers of customer app experience: download speed; average latency; error rate; latency consistency (the percentage of app requests that take longer than 500ms to fulfil). Apteligent has provided us with the raw data for three out of four of the measures based on billions of requests made from tens of thousands of applications used by hundreds of millions of users in Q4 2015. We plan to expand the index to cover other operators and to track performance over time with twice-yearly updates.

Encouragingly, MobiNEX scores are positively correlated with customer satisfaction in the UK and the US suggesting that a better mobile app experience contributes to customer satisfaction.

The top five performers across twenty-seven operators in seven countries in Europe and North America (Canada, France, Germany, Italy, Spain, UK, US) were all from France and the UK suggesting a high degree of competition in these markets as operators strive to improve relative to peers:

  • Bouygues Telecom in France scores highest on the MobiNEX for Q4 2015 with consistently high scores across all four measures and a total score of 76 out of 100.
  • It is closely followed by two other French operators. Free, the late entrant to the market, which started operations in 2012, scores 73. Orange, the former national incumbent, is slightly let down by the number of app errors experienced by users but achieves a healthy overall score of 70.
  • The top five is completed by two UK operators: EE (65) and O2 (61) with similar scores to the three French operators for everything except download speed which was substantially worse.

The bottom five operators have scores suggesting a materially worse customer app experience and we suggest that management focuses on improvements across all four measures to strengthen their customer relationships and competitive position. This applies particularly to:

  • E-Plus in Germany (now part of Telefónica’s O2 network but identified separately by Apteligent).
  • Wind in Italy, which is particularly let down by latency consistency and download speed.
  • Telefónica’s Movistar, the Spanish market share leader.
  • Sprint in the US with middle-ranking average latency and latency consistency but, like other US operators, poor scores on error rate and download speed.
  • 3 Italy, principally a result of its low latency consistency score.

Surprisingly, given the extensive deployment of 4G networks there, the US operators perform poorly and are providing an underwhelming customer app experience:

  • The best-performing US operator, T-Mobile, scores only 45 – a full 31 points below Bouygues Telecom and 4 points below the median operator.
  • All the US operators perform very poorly on error rate and, although 74% of app requests in the US were made on LTE in Q4 2015, no US player scores highly on download speed.

MobiNEX scores – Q4 2015

 Source: Apteligent, OpenSignal, STL Partners analysis

MobiNEX vs Customer Satisfaction

Source: ACSI, NCSI-UK, STL Partners

 

  • Introduction
  • Mobile app performance is dependent on more than network speed
  • App performance as a measure of customer experience
  • MobiNEX: The Mobile Network Experience Index
  • Methodology and key terms
  • MobiNEX Q4 2015 Results: Top 5, bottom 5, surprises
  • MobiNEX is correlated with customer satisfaction
  • Segmenting operators by network customer experience
  • Error rate
  • Quantitative analysis
  • Key findings
  • Latency consistency: Requests with latency over 500ms
  • Quantitative analysis
  • Key findings
  • Download speed
  • Quantitative analysis
  • Key findings
  • Average latency
  • Quantitative analysis
  • Key findings
  • Appendix: Source data and methodology
  • STL Partners and Telco 2.0: Change the Game
  • About Apteligent

 

  • MobiNEX scores – Q4 2015
  • MobiNEX vs Customer Satisfaction
  • Figure 1: MobiNEX – scoring methodology
  • Figure 2: MobiNEX scores – Q4 2015
  • Figure 3: Customer Satisfaction vs MobiNEX, 2015
  • Figure 4: MobiNEX operator segmentation – network speed vs network reliability
  • Figure 5: MobiNEX operator segmentation – with total scores
  • Figure 6: Major Western markets – error rate per 10,000 requests
  • Figure 7: Major Western markets – average error rate per 10,000 requests
  • Figure 8: Major Western operators – percentage of requests with total roundtrip latency greater than 500ms
  • Figure 9: Major Western markets – average percentage of requests with total roundtrip latency greater than 500ms
  • Figure 10: Major Western operators – average weighted download speed across 3G and 4G networks (Mbps)
  • Figure 11: Major European markets – average weighted download speed (Mbps)
  • Figure 12: Major Western markets – percentage of requests made on 3G and LTE
  • Figure 13: Download speed vs Percentage of LTE requests
  • Figure 14: Major Western operators – average total roundtrip latency (ms)
  • Figure 15: Major Western markets – average total roundtrip latency (ms)
  • Figure 16: MobiNEX benchmarks

Problem: Telecoms technology inhibits operator business model change (Part 1)

Introduction

Everyone loves to moan about telcos

‘I just can’t seem to get anything done, it is like running through treacle.’

‘We gave up trying to partner with operators – they are too slow.’

‘Why are telcos unable to make the most basic improvements in their service offerings?’

‘They are called operators for a reason: they operate networks. But they can’t innovate and don’t know the first thing about marketing or customer service.’

Anyone within the telecoms industry will have heard these or similar expressions of dissatisfaction from colleagues, partners and customers.  It seems that despite providing the connectivity and communications services that have truly changed the world in the last 20 years, operators are unloved.  Everyone, and I think we are all guilty of this, feels that operators could do so much better.  There is a feeling that these huge organisations are almost wilfully seeking to be slow and inflexible – as if there is malice in the way they do business.

But the telecoms industry employs millions of people globally. It pays quite well and so attracts talent. Many, for example, have already enjoyed success in other industries. But nobody has yet, it seems, been able to make a telco, let alone the industry, fast, agile, and innovative.

Why not?

A structural problem

In this report, we argue that nobody is at fault for the perceived woes of telecoms operators.  Indeed, the difficulty the industry is facing in changing its business model is a result of financial and operational processes that have been adopted and refined over years in response to investor requirements and regulation.  In turn, investors and regulators have created such requirements as a result of technological constraints that have applied, even with ongoing improvements, to fixed and mobile telecommunications for decades. In essence, operators are constrained by the very structures that were put in place to ensure their success.

So should we give up?

If the limitations of telecoms operators is structural then it is easy to assume that change and development is impossible.  Certainly sceptics have plenty of empirical evidence for this view.  But as we outline in this report and will cover in more detail in a follow up to be published in early February 2016 (Answer: How 5G + Cloud + NFV can create the ‘agile telco’), changes in technology should have a profound impact on telecoms operators ability to become more flexible and innovative and so thrive in the fast-paced digital world.

Customer satisfaction is proving elusive in mature markets

Telecoms operators perform materially worst on customer service than other players in the US and UK

Improving customer experience has become something of a mantra within telecoms in the last few years. Many operators use Net Promoter Scores (NPS) as a way of measuring their performance, and the concept of ‘putting the customer first’ has gained in popularity as the industry has matured and new customers have become harder to find. Yet customer satisfaction remains low.

The American Customer Satisfaction Index (ACSI) publishes annual figures for customer satisfaction based on extensive consumer surveys. Telecommunications companies consistently come out towards the bottom of the range (scoring 65-70 out of 100). By contrasts internet and content players such as Amazon, Google, Apple and Netflix have much more satisfied customers and score 80+ – see Figure 1.

Figure 1: Customers are generally dissatisfied with telecoms companies

 

Source: American Customer Satisfaction index (http://www.theacsi.org/the-american-customer-satisfaction-index); STL Partners analysis

The story in the UK is similar.  The UK Customer Satisfaction Index, using a similar methodology to its US counterpart, places the Telecommunications and Media industry as the second-worst performer across 13 industry sectors scoring 71.7 in 2015 compared to a UK average of 76.2 and the best-performing sector, Non-food Retail, on 81.6.

Poor customer services scores are a lead indicator for poor financial performance

Most concerning for the telecoms industry is the work that ACSI has undertaken showing that customer satisfaction is linked to the financial performance of the overall economy and the performance of individual sectors and companies. The organisation states:

  • Customer satisfaction is a leading indicator of company financial performance. Stocks of companies with high ACSI scores tend to do better than those of companies with low scores.
  • Changes in customer satisfaction affect the general willingness of households to buy. As such, price-adjusted ACSI is a leading indicator of consumer spending growth and has accounted for more of the variation in future spending growth than any other single factor.

Source: American Customer Satisfaction index (http://www.theacsi.org/about-acsi/key-acsi-findings)  

In other words, consistently poor performance by all major players in the telecoms industry in the US and UK suggests aspirations of growth may be wildly optimistic. Put simply, why would customers buy more services from companies they don’t like? This bodes ill for the financial performance of telecoms operators going forward.

Senior management within telecoms knows this. They want to improve customer satisfaction by offering new and better services and customer care. But change has proved incredibly difficult and other more agile players always seem to beat operators to the punch. The next section shows why.

 

  • Introduction
  • Everyone loves to moan about telcos
  • A structural problem
  • So should we give up?
  • Customer satisfaction is proving elusive in mature markets
  • Telecoms operators perform materially worst on customer service than other players in the US and UK
  • Poor customer services scores are a lead indicator for poor financial performance
  • ‘One-function’ telecommunications technology stymies innovation and growth
  • Telecoms has always been an ‘infrastructure play’
  • …which means inflexibility and lack of innovation is hard-wired into the operating model
  • Why ‘Telco 2.0’ is so important for operators
  • Telco 2.0 aspirations remain thwarted
  • Technology can truly ‘change the game’ for operators

 

  • Figure 1: Customers are generally dissatisfied with telecoms companies
  • Figure 2: Historically, capital deployment has driven telecoms revenue
  • Figure 3: Financial & operational metrics for Infrastructure player (Vodafone) vs Platform (Google) & Product Innovator (Unilever)

Mobile app latency in Europe: French operators lead; Italian & Spanish lag

Latency as a proxy for customer app experience

Latency is a measure of the time taken for a packet of data to travel from one designated point to another. The complication comes in defining the start and end point. For an operator seeking to measure its network latency, it might measure only the transmission time across its network.

However, to objectively measure customer app experience, it is better to measure the time it takes from the moment the user takes an action, such as pressing a button on a mobile device, to receiving a response – in effect, a packet arriving back and being processed by the application at the device.

This ‘total roundtrip latency’ time is what is measured by our partner, Crittercism, via embedded code within applications themselves on an aggregated and anonymised basis. Put simply, total roundtrip latency is the best measure of customer experience because it encompasses the total ‘wait time’ for a customer, not just a portion of the multi-stage journey

Latency is becoming increasingly important

Broadband speeds tend to attract most attention in the press and in operator advertising, and speed does of course impact downloads and streaming experiences. But total roundtrip latency has a bigger impact on many user digital experiences than speed. This is because of the way that applications are built.

In modern Web applications, the business logic is parcelled-out into independent ‘microservices’ and their responses re-assembled by the client to produce the overall digital user experience. Each HTTP request is often quite small, although an overall onscreen action can be composed of a number of requests of varying sizes so broadband speed is often less of a factor than latency – the time to send and receive each request. See Appendix 2: Why latency is important, for a more detailed explanation of why latency is such an important driver of customer app experience.

The value of using actual application latency data

As we have already explained, STL Partners prefers to use total roundtrip latency as an indicator of customer app experience as it measures the time that a customer waits for a response following an action. STL Partners believes that Crittercism data reflects actual usage in each market because it operates within apps – in hundreds of thousands of apps that people use in the Apple App Store and in Google Play. This is a quite different approach to other players which require users to download a specific app which then ‘pings’ a server and awaits a response. This latter approach has a couple of limitations:

1. Although there have been several million downloads of the OpenSignal and Actual Experience app, this doesn’t get anywhere near the number of people that have downloaded apps containing the Crittercism measurement code.

2. Because the Crittercism code is embedded within apps, it directly measures the latency experienced by users when using those apps1. A dedicated measurement app fails to do this. It could be argued that a dedicated app gives the ‘cleanest’ app reading – it isn’t affected by variations in app design, for example. This is true but STL Partners believes that by aggregating the data for apps such variation is removed and a representative picture of total roundtrip latency revealed. Crittercism data can also show more granular data. For example, although we haven’t shown it in this report, Crittercism data can show latency performance by application type – e.g. Entertainment, Shopping, and so forth – based on the categorisation of apps used by Google and Apple in their app stores.

A key premise of this analysis is that, because operators’ customer bases are similar within and across markets, the profile of app usage (and therefore latency) is similar from one operator to the next. The latency differences between operators are, therefore, down to the performance of the operator.

Why it isn’t enough to measure average latency

It is often said that averages hide disparities in data, and this is particularly true for latency and for customer experience. This is best illustrated with an example. In Figure 2 we show the distribution of latencies for two operators. Operator A has lots of very fast requests and a long tail of requests with high latencies.

Operator B has much fewer fast requests but a much shorter tail of poor-performing latencies. The chart clearly shows that operator B has a much higher percentage of requests with a satisfactory latency even though its average latency performance is lower than operator A (318ms vs 314ms). Essentially operator A is let down by its slowest requests – those that prevent an application from completing a task for a customer.

This is why in this report we focus on average latency AND, critically, on the percentage of requests that are deemed ‘unsatisfactory’ from a customer experience perspective.

Using latency as a measure of performance for customers

500ms as a key performance cut-off

‘Good’ roundtrip latency is somewhat subjective and there is evidence that experience declines in a linear fashion as latency increases – people incrementally drop off the site. However, we have picked 500ms (or half a second) as a measure of unsatisfactory performance as we believe that a delay of more than this is likely to impact mobile users negatively (expectations on the ‘fixed’ internet are higher). User interface research from as far back as 19682 suggests that anything below 100ms is perceived as “instant”, although more recent work3 on gamers suggests that even lower is usually better, and delay starts to become intrusive after 200-300ms. Google experiments from 20094 suggest that a lasting effect – users continued to see the site as “slow” for several weeks – kicked in above 400ms.

Percentage of app requests with total roundtrip latency above 500ms – markets

Five key markets in Europe: France, Germany, Italy, and the UK.

This first report looks at five key markets in Europe: France, Germany, Italy, and the UK. We explore performance overall for Europe by comparing the relative performance of each country and then dive into the performance of operators within each country.

We intend to publish other reports in this series, looking at performance in other regions – North America, the Middle East and Asia, for example. This first report is intended to provider a ‘taster’ to readers, and STL Partners would like feedback on additional insight that readers would welcome, such as latency performance by:

  • Operating system – Android vs Apple
  • Specific device – e.g. Samsung S6 vs iPhone 6
  • App category – e.g. shopping, games, etc.
  • Specific countries
  • Historical trends

Based on this feedback, STL Partners and Crittercism will explore whether it is valuable to provide specific total roundtrip latency measurement products.

Contents

  • Latency as a proxy for customer app experience
  • ‘Total roundtrip latency’ is the best measure for customer ‘app experience’
  • Latency is becoming increasingly important
  • STL Partners’ approach
  • Europe: UK, Germany, France, Italy, Spain
  • Quantitative Analysis
  • Key findings
  • UK: EE, O2, Vodafone, 3
  • Quantitative Analysis
  • Key findings
  • Germany: T-Mobile, Vodafone, e-Plus, O2
  • Quantitative Analysis
  • Key findings
  • France: Orange, SFR, Bouygues Télécom, Free
  • Quantitative Analysis
  • Key findings
  • Italy: TIM, Vodafone, Wind, 3
  • Quantitative Analysis
  • Key findings
  • Spain: Movistar, Vodafone, Orange, Yoigo
  • Quantitative Analysis
  • Key findings
  • About STL Partners and Telco 2.0
  • About Crittercism
  • Appendix 1: Defining latency
  • Appendix 2: Why latency is important

 

  • Figure 1: Total roundtrip latency – reflecting a user’s ‘wait time’
  • Figure 2: Why a worse average latency can result in higher customer satisfaction
  • Figure 3: Major European markets – average total roundtrip latency (ms)
  • Figure 4: Major European markets – percentage of requests above 500ms
  • Figure 5: The location of Google and Amazon’s European data centres favours operators in France, UK and Germany
  • Figure 6: European operators – average total roundtrip latency (ms)
  • Figure 7: European operators – percentage of requests with latency over 500ms
  • Figure 8: Customer app experience is likely to be particularly poor at 3 Italy, Movistar (Spain) and Telecom Italia
  • Figure 9: UK Operators – average latency (ms)
  • Figure 10: UK operators – percentage of requests with latency over 500ms
  • Figure 11: German Operators – average latency (ms)
  • Figure 12: German operators – percentage of requests with latency over 500ms
  • Figure 13: French Operators – average latency (ms)
  • Figure 14: French operators – percentage of requests with latency over 500ms
  • Figure 15: Italian Operators – average latency (ms)
  • Figure 16: Italian operators – percentage of requests with latency over 500ms
  • Figure 17: Spanish Operators – average latency (ms)
  • Figure 18: Spanish operators – percentage of requests with latency over 500ms
  • Figure 19: Breakdown of HTTP requests in facebook.com, by type and size

Disruptive Strategy: ‘Uncarrier’ T-Mobile vs. AT&T, VZW, and Free.fr

Introduction

Ever since the original Softbank bid for Sprint-Nextel, the industry has been awaiting a wave of price disruption in the United States, the world’s biggest and richest mobile market, and one which is still very much dominated by the dynamic duo, Verizon Wireless and AT&T Mobility.

Figure 1: The US, a rich and high-spending market

The US a rich and high-spending market

Source: Onavo, Ofcom, CMT, BNETZA, TIA, KCC, Telco accounts, STL Partners

However, the Sprint-Softbank deal saga delayed any aggressive move by Sprint for some time, and in the meantime T-Mobile USA stole a march, implemented its own very similar ‘uncarrier’ proposition strategy, and achieved a dramatic turnaround of their customer numbers.

As Figure 2 shows, the duopoly marches on, with Verizon in the lead, although the gap with AT&T has closed a little lately. Sprint, meanwhile, looks moribund, while T-Mobile has closed half the gap with the duopolists in an astonishingly short period of time.

Figure 2: The duopolists hold a lead, but a new challenger arises…

The duopolists hold a lead but a new challenger arises
Source: STL Partners

Now, a Sprint-T-Mobile merger is seriously on the cards. Again, Softbank CEO Masayoshi Son is on record as promising to launch a price war. But to what extent is a Free Mobile-like disruption event already happening? And what strategies are carriers adopting?

For more STL analysis of the US cellular market, read the original Sprint-Softbank EB , the Telco 2.0 Transformation Index sections on Verizon  and AT&T , and our Self-Disruption: How Sprint Blew It EB . Additional coverage of the fixed domain can be found in the Triple-Play in the USA: Infrastructure Pays Off EB  and the Telco 2.0 Index sections mentioned above

The US Market is Changing

In our previous analysis Self-Disruption: How Sprint Blew It, we used the following chart, Figure 3, under the title “…And ARPU is Holding Up”. Updating it with the latest data, it becomes clear that ARPU – and in this case pricing – is no longer holding up so well. Rather than across-the-board deflation, though, we are instead seeing increasingly diverse strategies.

Figure 3: US carriers are pursuing diverse pricing strategies, faced with change

US carriers are pursuing diverse pricing strategies, faced with change

Source: STL Partners

AT&T’s ARPU is being very gradually eroded (it’s come down by $5 since Q1 2011), while Sprint’s plunged sharply with the shutdown of Nextel (see report referenced above for more detail). Since then, AT&T and Sprint have been close to parity, a situation AT&T management surely can’t be satisfied with. T-Mobile USA has slashed prices so much that the “uncarrier” has given up $10 of monthly ARPU since the beginning of 2012. And Verizon Wireless has added almost as much monthly ARPU in the same timeframe.

Each carrier has adopted a different approach in this period:

  • T-Mobile has gone hell-for-leather after net adds at any price.
  • AT&T has tried to compete with T-Mobile’s price slashing by offering more hardware and bigger bundles and matching T-Mobile’s eye-catching initiatives, while trying to hold the line on headline pricing, perhaps hoping to limit the damage and wait for Deutsche Telekom to tire of the spending. For example, AT&T recently increased its device activation fee by $4, citing the increased number of smartphone activations under its early-upgrade plan. This does not appear in service-ARPU or in headline pricing, but it most certainly does contribute to revenue, and even more so, to margin.
  • Verizon Wireless has declined to get involved in the price war, and has concentrated on maintaining its status as a premium brand, selling on coverage, speed, and capacity. As the above chart shows, this effort to achieve network differentiation has met with a considerable degree of success.
  • Sprint, meanwhile, is responding tactically with initiatives like its “Framily” tariff, while sorting out the network, but is mostly just suffering. The sharp drop in mid-2012 is a signature of high-value SMB customers fleeing the shutdown of Nextel, as discussed in Self-Disruption: How Sprint Blew It.

Figure 4: Something went wrong at Sprint in mid-2012

Something went wrong at Sprint in mid-2012

Source: STL Partners, Sprint filings

 

  • Executive Summary
  • Contents
  • Introduction
  • The US Market is Changing
  • Where are the Customers Coming From?
  • Free Mobile: A Warning from History?
  • T-Mobile, the Expensive Disruptor
  • Handset subsidy: it’s not going anywhere
  • Summarising change in the US and French cellular markets
  • Conclusions

 

  • Figure 1: The US, a rich and high-spending market
  • Figure 2: The duopolists hold a lead, but a new challenger arises…
  • Figure 3: US carriers are pursuing diverse pricing strategies, faced with change
  • Figure 4: Something went wrong at Sprint in mid-2012
  • Figure 5: US subscriber net-adds by source
  • Figure 6: The impact of disruption – prices fall across the board
  • Figure 7: Free’s spectacular growth in subscribers – but who was losing out?
  • Figure 8: The main force of Free Mobile’s disruption didn’t fall on the carriers
  • Figure 9: Disruption in France primarily manifested itself in subscriber growth, falling ARPU, and the death of the MVNOs
  • Figure 10: T-Mobile has so far extended $3bn of credit to its smartphone customers
  • Figure 11: T-Mobile’s losses on device sales are large and increasing, driven by smartphone volumes
  • Figure 12: Size and profitability still go together in US mobile – although this conceals a lot of change below the surface
  • Figure 13: Fully-developed disruption, in France
  • Figure 14: Quality beats quantity. Sprint repeatedly outspent VZW on its network

Self-Disruption: How Sprint Blew It

Introduction

At the beginning of 2013, we issued an Executive Briefing on the proposed take-over of Sprint-Nextel by Softbank, which we believed to be the starting gun for disruption in the US mobile market.

At the time, not only was 68% of revenue in the US market controlled by the top two operators, AT&T and Verizon, it was also an unusually lucrative market in general, being both rich and high-spending (see Figure 1, taken from the The Future Value of Voice & Messaging strategy report). Further, the great majority of net-adds were concentrated among the top two operators, with T-Mobile USA flat-lining and Sprint beginning to lose subscribers. We expected Sprint to initiate a price war, following a plan similar to Softbank’s in Japan, separating the cost of devices from that of service, making sure to offer the hero smartphone of the day, and offering good value on data bundles.

Figure 1: The US, a rich country that spends heavily on telecoms

The US a rich country that spends heavily on telecoms feb 2014

Source: STL Partners

In the event, the fight for control of Sprint turned out to be more drawn out and complex than anyone expected. Add to this the complexity of Sprint’s major network upgrade, Network Vision, as shown in Figure 2, and the fact that the plans changed in order to take advantage of Softbank’s procurement of devices for the 2.5GHz band, and it is perhaps less surprising that we have yet to see a major strategic initiative from Sprint.

Figure 2: The Softbank deal brought with it major changes to Network Vision
The Softbank deal brought with it major changes to Network Vision feb 2014

Source: Sprint Q3 earnings report

Instead, T-Mobile USA implemented a very similar strategy, having completed the grieving process for the AT&T deal and secured investment from DTAG for their LTE roll-out and spectrum enhancements. So far, their “uncarrier” strategy has delivered impressive subscriber growth at the expense of slashing prices. The tale of 2013 in terms of subscribers can be seen in the following chart, updated from the original Sprint/Softbank note. (Note that AT&T, VZW, and T-Mobile have released data for calendar Q3, but Sprint hasn’t yet – the big question, going by the chart, will be whether T-Mobile has overtaken Sprint for cumulative net-adds.)

Figure 3: The duopoly marches on, T-Mobile recovers, Sprint in trouble

The duopoly marches on, T-Mobile recovers, Sprint in trouble Feb 2014

Source: STL Partners

However, Sprint did have a major strategic initiative in the last two years – and one that went badly wrong. We refer, of course, to the shutdown of the Nextel half of Sprint-Nextel.

Closing Nextel: The Optimistic Case

There is much that is good inside Sprint, which explains both why so much effort went into its “turnaround” and why Masayoshi Son was interested. For example, its performance in terms of ARPU is strong, to say the least. The following chart, Figure 4, illustrates the point. Total ARPU in post-paid, which is most of the business, is both high at just under $65/mo and rising steadily. ARPU in pre-paid is essentially flat around $25/mo. The problem was Nextel and specifically, Nextel post-paid – while pre-paid hovered around $35/mo, post-paid trended steadily down from $45/mo to parity with pre-paid by the end.

Figure 4: Sprint-Nextel ARPU

Sprint-Nextel ARPU feb 2014

Source: STL Partners

The difference between the two halves of Sprint that were doing the work here is fairly obvious. Nextel’s unique iDEN network was basically an orphan, without a development path beyond the equivalent of 2005-era WCDMA speeds, and without smartphones. Sprint CDMA, and later LTE, could offer wireless broadband and could offer the iPhone. Clearly, something had to be done. You can see the importance of smartphone adoption from the following graphic, Figure 5, showing that smartphones drove ARPU on Sprint’s CDMA network.

Figure 5: Sprint CDMA has reached 80% smartphone adoption

Sprint CDMA has reached 80% smartphone adoption feb 2014

Source: STL Partners

It is true that smartphones create opportunities to substitute OTT voice and messaging, but this is less of a problem in the US. As the following chart from the Future Value of Voice and Messaging strategy report shows, voice and messaging are both cheap in the US, and people spend heavily on mobile data.

Figure 6: US mobile key indicators

US mobile key indicators feb 2014

Source: STL Partners

So far, the pull effect of better devices on data usage has helped Sprint grow revenues, while it also drew subscribers away from Nextel. Sprint’s strategy in response to this was to transition Nextel subscribers over to the mainline platform, and then shut down the network, while recycling savings and spectrum from the closure of Nextel into their LTE deployment.

 

  • Closing Nextel: The Scoreboard
  • Recapture
  • The Double Dippers
  • The Competition: AT&T Targets the Double Dippers
  • Developers, Developers, Devices
  • Conclusions

 

  • Figure 1: The US, a rich country that spends heavily on telecoms
  • Figure 2: The Softbank deal brought with it major changes to Network Vision
  • Figure 3: The duopoly marches on, T-Mobile recovers, Sprint in trouble
  • Figure 4: Sprint-Nextel ARPU
  • Figure 5: Sprint mainline has reached 80% smartphone adoption
  • Figure 6: US mobile key indicators
  • Figure 7: Tale of the tape – something goes wrong in early 2012
  • Figure 8: Sprint’s “recapture” rate was falling during 3 out of the 4 biggest quarters for Nextel subscriber losses, when it needed to be at its best
  • Figure 9: Nextel post-paid was 72% business customers in 3Q 2011
  • Figure 10: The loss of high-value SMB customers dragged Sprint’s revenues into negative territory
  • Figure 11: The way mobile applications development used to be

Sprint-Softbank: how it will disrupt the US market

Summary:

The Japanese and French markets have both been disrupted through the entry of low-cost competitors offering substantial price reductions. We think that Softbank’s acquisition of Sprint is a signal that the same is to soon come in the US given Softbank’s experience as a successful disruptor in Japan. (January 2013, Executive Briefing Service)

Digital Commerce Flywheel December 2012
  Read in Full (Members only)  To Subscribe click here

Below is an extract from this 23 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Non-members can subscribe here or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

We’ll also be discussing our findings at the New Digital Economics Brainstorm in Silicon Valley, 19-20 March, 2013.

Overview

Once upon a time…

Japan used to be a mobile market with two serious competitors, high ARPUs and margins, and three laggard players that nobody took too seriously. France’s mobile market had three operators, a highly tolerant regulator, and high margins. And the US mobile market once had a relatively laissez-faire regulator, high ARPUs, two mighty duopolists, and two laggards.

The Japanese and French markets have both been disrupted through the entry of low-cost competitors offering substantial price reductions, and in Japan’s case the disruptor was Softbank. The US now has a regulator seemingly more influenced by voices from Silicon Valley than ‘big telco’ lobbyists, the duopolists have attractive margins, and Softbank now stands behind Sprint. The scene appears set for a disruptive play.

The lessons of history

In Japan, back in 2006, when Vodafone sold its Japanese operation to Masayoshi Son’s Softbank, the mobile market was relatively stable with two large players – NTT Docomo and KDDI – and three much smaller ones including Softbank which were not making money (hence Vodafone’s decision to withdraw from Japan). Softbank spotted the disruptive possibilities of the Apple iPhone, the advantages of being Japan’s only operator on the UMTS world standard, and the fat margins of the duopolists. It became the iPhone exclusive carrier, benefited from world 3G infrastructure competition, and set keen prices on data to cut into the duopoly.  And the results have been spectacular: Operating income has increased 6 times since Softbank acquired the business from Vodafone, and net additions in 2012 were running 127% higher than those of NTT DoCoMo and 51% higher than KDDI.

In France back in 2011, three French operators shared out the market, under the eyes of ARCEP, a regulator much more enthusiastic about planning for infrastructure development than driving competition. That year, Free.fr, a company that had already disrupted the fixed ISP market through mastering software and therefore having the best customer premises devices and the lowest costs, finally got a 3G licence. Using a radical new network design based on small cells and WLAN-cellular integration, Free tore into the oligopolists at staggeringly low prices.

In the United States, between 2005 and 2009, the friendly regulator – FCC Chairman Kevin J. Martin – permitted three great mergers in wireless, creating the new AT&T, the new Verizon, and the new Sprint-Nextel. Out of those, execution was successful in the first two. Sprint-Nextel misjudged the importance of Nextel’s specialism in voice, made a bad bet on WiMAX, leaving itself excluded from the emerging smartphone arena, and anyway had the hardest integration challenge. This is now acknowledged by Daniel R. Hesse, Sprint-Nextel’s CEO.

“Hesse said that the AT&T’s failed attempt to consolidate two of the Big 4 made him realize that there was no longer such a thing as the Big 4. The industry had bifurcated into the Big 2 and everybody else.” … “With 20/20 hindsight, the Nextel merger was a mistake,” Hesse said. “The synergies, if you will, that we had hoped for and planned for didn’t materialize.” 

Source: GigaOm

AT&T and Verizon, however, made it across the merger swamp to found an effective duopoly, a dominating force that controls 68% of revenue in the world’s critical wireless market, and which regularly achieves 30+% margins while its rivals struggle to break even. Verizon’s decision to end the standards wars and go with LTE effectively killed the CDMA development path and left Sprint stuck with WiMAX. Was it strategy or happy accident?

So, what’s next?

Now, things have changed. Sprint has been bought out by none other than Softbank – the original Japanese disruptor. It is a reminder that strategic advantage is temporary and disruption is inevitable.

We expect that the new Sprint will take the pain to push ahead with its transition to LTE. The previous Softbank and Sprint experiences have shown that being outside the world standard is deadly from a devices point of view, which remains critical to success in mobile. We expect that they may make a much bigger effort with carrier WLAN, far better standardised, far more available, and in many ways technically more robust than WiMAX.

We also expect that Sprint/Softbank will aim for the simplest form of disruption, price war. Oligopolies are always either in a state of price stability or of price war. Whether a cartel controls the market, or a tacit balance of fear constrains action, stability reigns, until it doesn’t. Then, price war rages, as no-one can afford to resist. Customers will benefit. T-Mobile, trying to fight its way to the start-line, will suffer most of all.

Another lesson from Softbank, though, is that disruption on price needs a killer product if it is to be more than a race to the bottom. We explore some further strategy options for Sprint in the body of this report.

In addition to its impact on the core US telecoms market, the prospect of forthcoming disruption also raises the stakes on the question of whether the US telcos are transforming to new Telco 2.0 business models fast enough (see our report A Practical Guide to Implementing Telco 2.0). This is a topic that we will explore further in our research and at the next Silicon Valley Executive Brainstorm, March 19-20, 2013.

Orientation: The Softbank Experience

Masayoshi Son’s strategy at Softbank, after acquiring the Vodafone stake, was simple – sharp pricing, especially on data, and hot gadgets.

The iPhone: a disruptive innovation

Softbank was the launch partner for the iPhone in Japan and remained Apple’s exclusive carrier up to the release of the iPhone 4S. Softbank’s annual report shows the impact of the iPhone and repricing very clearly – the partnership with Apple was signed in June, 2008, and the iPhone 4S launch followed in Q3 2011. The disruption was transient, but it had lasting effects on the market, restoring Softbank as a serious competitor, in much the same way as it turbocharged AT&T in the US a year before.

Figure 1: iDisrupt – the June ‘08 iPhone launch reset the market in Japan

Softbank Results, January 2013Source: Softbank

The combination of keen pricing and iPhones had a lasting effect on subscriber growth, too. Throughout the exclusivity era, Softbank beat its rivals for net-adds handsomely.

The impact on price: enduring reduction in margins

However, this came at a price. On a quarterly basis, a steady erosion of operating margin is visible, driven partly by the pricing strategy and partly by the cost of the shiny, shiny gadgets. One way of mitigating this was to carve out the cost of the device from the cost of service. Rather than paying nothing up front, Softbank subscribers paid a monthly device charge, or else either paid cash or brought their own.

Softbank’s annual report says that their subscriber-acquisition cost was falling in their FY 2012 (i.e. 2011-12), but also that the average subscriber upgrade cost had increased – in a smartphone environment, users who were brought on board on a cheaper device will tend to eventually demand something better.

As a result, Softbank has been able to keep its share of net adds over 40%. In a market with four players, this is a major achievement. However, to do so, they have had to accept the erosion of their margins and pricing.

Figure 3: Softbank – keeping ahead of the competition…

Softbank Net Adds and Margins, January 2013Source: STL Partners, Softbank

Clearly, price disruption can work, and it is reasonable to think that something similar might happen in the US, a similar market. In the international context, US mobile operators are pricey: the US is the fourth-highest OECD market by ARPU.

On average, for instance, a triple-play package that bundles Internet, telephone and television sells for $160 a month with taxes. In France the equivalent costs just $38. For that low price the French also get long distance to 70 foreign countries, not merely one; worldwide television, not just domestic; and an Internet that’s 20 times faster uploading data and 10 times faster downloading it.

To read the note in full, including the following additional analysis…

  • Executive Summary
  • Orientation: The Softbank Experience
  • The iPhone: a disruptive innovation
  • The impact on price: enduring reduction in margins
  • The Disruption of EU High Price Markets
  • Target: The Duopoly
  • Context: Sources of the Duo
  • M&A Execution
  • AT&T: A Devil’s Bargain with Apple
  • Verizon – network leadership as a strategy
  • Sprint – post-merger distractions
  • The Future: Limits to the Duo
  • PSTN phaseout and Universal Service Fund transition
  • Very simply…a price war
  • Sprint: The Agenda
  • Recovering from the loss of the Nextel business
  • Future of the network
  • Future of the core
  • The spectrum issue
  • Sprint: the soft-shoe spectrum shuffle
  • Softbank: another 2.5GHz vision
  • Options for disruptive change
  • Happy Pipe
  • Telco 2.0
  • Comms-Focused
  • Conclusions


…and the following figures…

  • Figure 1: iDisrupt – the June ‘08 iPhone launch reset the market in Japan
  • Figure 2: Softbank accepted a drift-down in margins as the price of subscriber acquisition
  • Figure 3: Softbank – keeping ahead of the competition
  • Figure 4: Spain is a high-price market
  • Figure 5: Markets with premium pricing are the first to go
  • Figure 6: AT&T and Verizon Wireless dominate US mobile revenues and margins
  • Figure 7: The duopolists pull away in terms of subscribers
  • Figure 8: The duopolists’ subscriber gain has come without sacrificing ARPU
  • Figure 9: The duopolists dig in through capital investment
  • Figure 10: OneNet sent Vodafone UK powering ahead in the SMB market
  • Figure 11: Softbank Japan’s spectrum plan
  • Figure 12: Softbank and the US Carriers’ Spectrum Holdings
  • Figure 13: Softbank is more than confident on EBIT
  • Figure 14: Softbank ARPU – An “increasing trend” for one player, but only just


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‘Under-The-Floor’ (UTF) Players: threat or opportunity?

Introduction

The ‘smart pipe’ imperative

In some quarters of the telecoms industry, the received wisdom is that the network itself is merely an undifferentiated “pipe”, providing commodity connectivity, especially for data services. The value, many assert, is in providing higher-tier services, content and applications, either to end-users, or as value-added B2B services to other parties. The Telco 2.0 view is subtly different. We maintain that:

  1. Increasingly valuable services will be provided by third-parties but that operators can provide a few end-user services themselves. They will, for example, continue to offer voice and messaging services for the foreseeable future.
  2. Operators still have an opportunity to offer enabling services to ‘upstream’ service providers such as personalisation and targeting (of marketing and services) via use of their customer data, payments, identity and authentication and customer care.
  3. Even if operators fail (or choose not to pursue) options 1 and 2 above, the network must be ‘smart’ and all operators will pursue at least a ‘smart network’ or ‘Happy Pipe’ strategy. This will enable operators to achieve three things.
  • To ensure that data is transported efficiently so that capital and operating costs are minimised and the Internet and other networks remain cheap methods of distribution.
  • To improve user experience by matching the performance of the network to the nature of the application or service being used – or indeed vice versa, adapting the application to the actual constraints of the network. ‘Best efforts’ is fine for asynchronous communication, such as email or text, but unacceptable for traditional voice telephony. A video call or streamed movie could exploit guaranteed bandwidth if possible / available, or else they could self-optimise to conditions of network congestion or poor coverage, if well-understood. Other services have different criteria – for example, real-time gaming demands ultra-low latency, while corporate applications may demand the most secure and reliable path through the network.
  • To charge appropriately for access to and/or use of the network. It is becoming increasingly clear that the Telco 1.0 business model – that of charging the end-user per minute or per Megabyte – is under pressure as new business models for the distribution of content and transportation of data are being developed. Operators will need to be capable of charging different players – end-users, service providers, third-parties (such as advertisers) – on a real-time basis for provision of broadband and maybe various types or tiers of quality of service (QoS). They may also need to offer SLAs (service level agreements), monitor and report actual “as-experienced” quality metrics or expose information about network congestion and availability.

Under the floor players threaten control (and smartness)

Either through deliberate actions such as outsourcing, or through external agency (Government, greenfield competition etc), we see the network-part of the telco universe suffering from a creeping loss of control and ownership. There is a steady move towards outsourced networks, as they are shared, or built around the concept of open-access and wholesale. While this would be fine if the telcos themselves remained in control of this trend (we see significant opportunities in wholesale and infrastructure services), in many cases the opposite is occurring. Telcos are losing control, and in our view losing influence over their core asset – the network. They are worrying so much about competing with so-called OTT providers that they are missing the threat from below.

At the point at which many operators, at least in Europe and North America, are seeing the services opportunity ebb away, and ever-greater dependency on new models of data connectivity provision, they are potentially cutting off (or being cut off from) one of their real differentiators.
Given the uncertainties around both fixed and mobile broadband business models, it is sensible for operators to retain as many business model options as possible. Operators are battling with significant commercial and technical questions such as:

  • Can upstream monetisation really work?
  • Will regulators permit priority services under Net Neutrality regulations?
  • What forms of network policy and traffic management are practical, realistic and responsive?

Answers to these and other questions remain opaque. However, it is clear that many of the potential future business models will require networks to be physically or logically re-engineered, as well as flexible back-office functions, like billing and OSS, to be closely integrated with the network.
Outsourcing networks to third-party vendors, particularly when such a network is shared with other operators is dangerous in these circumstances. Partners that today agree on the principles for network-sharing may have very different strategic views and goals in two years’ time, especially given the unknown use-cases for new technologies like LTE.

This report considers all these issues and gives guidance to operators who may not have considered all the various ways in which network control is being eroded, from Government-run networks through to outsourcing services from the larger equipment providers.

Figure 1 – Competition in the services layer means defending network capabilities is increasingly important for operators Under The Floor Players Fig 1 Defending Network Capabilities

Source: STL Partners

Industry structure is being reshaped

Over the last year, Telco 2.0 has updated its overall map of the telecom industry, to reflect ongoing dynamics seen in both fixed and mobile arenas. In our strategic research reports on Broadband Business Models, and the Roadmap for Telco 2.0 Operators, we have explored the emergence of various new “buckets” of opportunity, such as verticalised service offerings, two-sided opportunities and enhanced variants of traditional retail propositions.
In parallel to this, we’ve also looked again at some changes in the traditional wholesale and infrastructure layers of the telecoms industry. Historically, this has largely comprised basic capacity resale and some “behind the scenes” use of carriers-carrier services (roaming hubs, satellite / sub-oceanic transit etc).

Figure 2 – Telco 1.0 Wholesale & Infrastructure structure

Under The Floor (UTF) Players Fig 2 Telco 1.0 Scenario

Source: STL Partners

Content

  • Revising & extending the industry map
  • ‘Network Infrastructure Services’ or UTF?
  • UTF market drivers
  • Implications of the growing trend in ‘under-the-floor’ network service providers
  • Networks must be smart and controlling them is smart too
  • No such thing as a dumb network
  • Controlling the network will remain a key competitive advantage
  • UTF enablers: LTE, WiFi & carrier ethernet
  • UTF players could reduce network flexibility and control for operators
  • The dangers of ceding control to third-parties
  • No single answer for all operators but ‘outsourcer beware’
  • Network outsourcing & the changing face of major vendors
  • Why become an under-the-floor player?
  • Categorising under-the-floor services
  • Pure under-the-floor: the outsourced network
  • Under-the-floor ‘lite’: bilateral or multilateral network-sharing
  • Selective under-the-floor: Commercial open-access/wholesale networks
  • Mandated under-the-floor: Government networks
  • Summary categorisation of under-the-floor services
  • Next steps for operators
  • Build scale and a more sophisticated partnership approach
  • Final thoughts
  • Index

 

  • Figure 1 – Competition in the services layer means defending network capabilities is increasingly important for operators
  • Figure 2 – Telco 1.0 Wholesale & Infrastructure structure
  • Figure 3 – The battle over infrastructure services is intensifying
  • Figure 4 – Examples of network-sharing arrangements
  • Figure 5 – Examples of Government-run/influenced networks
  • Figure 6 – Four under-the-floor service categories
  • Figure 7: The need for operator collaboration & co-opetition strategies