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

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

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

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.

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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Private networks: Lessons so far and what next

The private networks market is rapidly developing

Businesses across a range of sectors are exploring the benefits of private networks in supporting their connected operations. However, there are considerable variations between national markets, reflecting spectrum and other regulatory actions, as well as industrial structure and other local factors. US, Germany, UK, Japan and the Nordics are among the leading markets.

Enterprises’ adoption of digitalisation and automation programmes is growing across various industries. The demand from enterprises stems from their need for customised networks to meet their vertical-specific connectivity requirements – as well as more basic considerations of coverage and cost of public networks, or alternative wireless technologies.

On the supply side, the development in cellular standards, including the virtualisation of the RAN and core elements, the availability of edge computing, and cloud management solutions, as well as the changing spectrum regulations are making private networks more accessible for enterprises. That said, many recently deployed private cellular networks still use “traditional” integrated small cells, or major vendors’ bundled solutions – especially in conservative sectors such as utilities and public safety.

Many new players are entering the market through different vertical and horizontal approaches and either competing or collaborating with traditional telcos. Traditional telcos, new telcos (mainly building private networks or offering network services), and other stakeholders are all exploring strategies to engage with the market and assessing the opportunities across the value chain as private network adoption increases.

Following up on our 2019 report Private and vertical cellular networks: Threats and opportunities, we explore the recent developments in the private network market, regulatory activities and policy around local and shared spectrum, and the different deployment approaches and business cases. In this report we address several interdependent elements of the private networks landscape

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What is a private network?

A private network leverages dedicated resources such as infrastructure and spectrum to provide precise coverage and capacity to specific devices and user groups. The network can be as small as a single radio cell covering a single campus or a location such as a manufacturing site (or even a single airplane), or it can span across a wider geographical area such as a nationwide railway network or regional utility grids.

Private networks is an umbrella term that can includes different LAN (or WAN) connectivity options such as Wi-Fi and LPWAN. However, more commonly, the term is being associated with private cellular networks based on 3GPP mobile technologies, i.e. LTE or 5G New Radio (NR).

Private networks are also different from in-building densification solutions like small cells and DAS which extend the coverage of public network or strengthen its capacity indoors or in highly dense locations. These solutions are still part of the public network and do not support customised control over the local network access or other characteristics. In future, some may support local private networks as well as public MNOs’ services.

Besides dedicated coverage and capacity, private networks can be customised in other aspects such as security, latency and integration with the enterprise internal systems to meet business specific requirements in ways that best effort public networks cannot.

Unlike public networks, private networks are not available to the public through commercially available devices and SIM cards. The network owner or operator controls the authorisation and the access to the network for permissioned devices and users. These definitions blur somewhat if the network is run by a “community” such as a municipality.

Typically, devices will not work outside the boundaries of their private network. That is a requirement in many use cases, such as manufacturing, where devices are not expected to continue functioning outside the premise. However, in a few areas, such as logistics, solutions can include the use of dual-SIM devices for both public and private networks or the use of other wide area technologies such as TETRA for voice. Moreover, agreements with public networks to enable roaming can be activated to support certain service continuity outside the private network boundaries.

While the technology and market are still developing, several terms are being used interchangeably to describe 3GPP private networks such dedicated networks, standalone networks, campus networks, local networks, vertical mobile network and non-public networks (NPN) as defined by the 3GPP.

The emergence of new telcos

Many telcos are not ready to support private networks demands from enterprises on large scale because they lack sufficient resources and expertise. Also, some enterprises might be reluctant to work with telcos for different reasons including their concerns over the traditional telcos’ abilities in vertical markets and a desire to control costs. This gap is already catalysing the emergence of new types of mobile network service providers, as opposed to traditional MNOs that operate national or regional public mobile networks.

These players essentially carry out the same roles as traditional MNOs in configuring the network, provisioning the service, and maintaining the private network infrastructure. Some of them may also have access to spectrum and buy network equipment and technologies directly from network equipment vendors. In addition to “new telcos” or “new operators”, other terms have been used to describe these players such as specialist operators and alternative operators. Throughout this report, we will use new telcos or specialist operators when describing these players collectively and traditional/public operators when referring to typical wide area national mobile network provider. New players can be divided into the following categories:

Possible private networks service providers

Source: STL Partners

Table of content

Executive Summary
- What next
- Trends and recommendations for telcos, vendors, enterprises and policymakers
Introduction
Types of private network operators
- What is a private network?
- The emergence of new telcos
How various stakeholders are approaching the market
- Technology development: Choosing between LTE and 5G
- Private network technology vendors
- Regional overview
- Vertical overview
- Mergers and acquisitions activities
The development of spectrum regulations
- Unlicensed spectrum for LTE and 5G is an attractive option, but it remains limited
- The rise of local spectrum licensing threatens some telcos
- …but there is no one-size fits all in local spectrum licensing
- How local spectrum licensing shapes the market and enterprise adoption
- Recommendations for different stakeholders
Assessing the approaches to network implementation
- Private network deployment models
- Business models and roles for telcos
Conclusion and recommendations
Index
Appendix 1: Examples of private networks deployments in 2020 – 2021

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Why the consumer IoT is stuck in the slow lane

A slow start for NB-IoT and LTE-M

For telcos around the world, the Internet of Things (IoT) has long represented one of the most promising growth opportunities. Yet for most telcos, the IoT still only accounts for a low single digit percentage of their overall revenue. One of the stumbling blocks has been relatively low demand for IoT solutions in the consumer market. This report considers why that is and whether low cost connectivity technologies specifically-designed for the IoT (such as NB-IoT and LTE-M) will ultimately change this dynamic.

NB-IoT and LTE-M are often referred to as Massive IoT technologies because they are designed to support large numbers of connections, which periodically transmit small amounts of data. They can be distinguished from broadband IoT connections, which carry more demanding applications, such as video content, and critical IoT connections that need to be always available and ultra-reliable.

The initial standards for both technologies were completed by 3GPP in 2016, but adoption has been relatively modest. This report considers the key B2C and B2B2C use cases for Massive IoT technologies and the prospects for widespread adoption. It also outlines how NB-IoT and LTE-M are evolving and the implications for telcos’ strategies.

This builds on previous STL Partners’ research, including LPWA: Which way to go for IoT? and Can telcos create a compelling smart home?. The LPWA report explained why IoT networks need to be considered across multiple generations, including coverage, reliability, power consumption, range and bandwidth. Cellular technologies tend to be best suited to wide area applications for which very reliable connectivity is required (see Figure below).

IoT networks should be considered across multiple dimensions

IoT-networks-disruptive-analysis-stl-2021

Source: Disruptive Analysis

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The smart home report outlined how consumers could use both cellular and short-range connectivity to bolster security, improve energy efficiency, charge electric cars and increasingly automate appliances. One of the biggest underlying drivers in the smart home sector is peace of mind – householders want to protect their properties and their assets, as rising population growth and inequality fuels fear of crime.

That report contended that householders might be prepared to pay for a simple and integrated way to monitor and remotely control all their assets, from door locks and televisions to solar panels and vehicles. Ideally, a dashboard would show the status and location of everything an individual cares about. Such a dashboard could show the energy usage and running cost of each appliance in real-time, giving householders fingertip control over their possessions. They could use the resulting information to help them source appropriate insurance and utility supply.

Indeed, 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 is a key enabler of the emerging sharing economy in which people use digital technologies to easily rent the use of assets, such as properties and vehicles, to others. The data collected by connected appliances and sensors could be used to help safeguard a property against misuse and source appropriate insurance covering third party rentals.

Do consumers need Massive IoT?

Whereas some IoT applications, such as connected security cameras and drones, require high-speed and very responsive connectivity, most do not. Connected devices that are designed to collect and relay small amounts of data, such as location, temperature, power consumption or movement, don’t need a high-speed connection.

To support these devices, the cellular industry has developed two key technologies – LTE-M (LTE for Machines, sometimes referred to as Cat M) and NB-IoT (Narrowband IoT). In theory, they can be deployed through a straightforward upgrade to existing LTE base stations. Although these technologies don’t offer the capacity, throughput or responsiveness of conventional LTE, they do support the low power wide area connectivity required for what is known as Massive IoT – the deployment of large numbers of low cost sensors and actuators.

For mobile operators, the deployment of NB-IoT and LTE-M can be quite straightforward. If they have relatively modern LTE base stations, then NB-IoT can be enabled via a software upgrade. If their existing LTE network is reasonably dense, there is no need to deploy additional sites – NB-IoT, and to a lesser extent LTE-M, are designed to penetrate deep inside buildings. Still, individual base stations may need to be optimised on a site-by-site basis to ensure that they get the full benefit of NB-IoT’s low power levels, according to a report by The Mobile Network, which notes that operators also need to invest in systems that can provide third parties with visibility and control of IoT devices, usage and costs.

There are a number of potential use cases for Massive IoT in the consumer market:

Asset tracking: pets, bikes, scooters, vehicles, keys, wallets, passport, phones, laptops, tablets etc.
Vulnerable persontracking: children and the elderly
Health wearables: wristbands, smart watches
Metering and monitoring: power, water, garden,
Alarms and security: smoke alarms, carbon monoxide, intrusion
Digital homes: automation of temperature and lighting in line with occupancy

In the rest of this report we consider the key drivers and barriers to take-up of NB-IoT and LTE-M for these consumer use cases.

Executive Summary
Introduction
Do consumers need Massive IoT?
- The role of eSIMs
- Takeaways
Market trends
- IoT revenues: Small, but growing
Consumer use cases for cellular IoT
- Amazon’s consumer IoT play
- Asset tracking: Demand is growing
- Connecting e-bikes and scooters
- Slow progress in healthcare
- Smart metering gains momentum
- Supporting micro-generation and storage
- Digital buildings: A regulatory play?
- Managing household appliances
Technological advances
- Network coverage
Conclusions: Strategic implications for telcos

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A3 for enterprise: Where should telcos focus?

A3 capabilities operators can offer enterprise customers

In this research we explore the potential enterprise solutions leveraging analytics, AI and automation (A3) that telcos can offer their enterprise customers. Our research builds on a previous STL Partners report Telco data monetisation: What’s it worth? which modelled the financial opportunity for telco data monetisation – i.e. purely the machine learning (ML) and analytics component of A3 – for 200+ use cases across 13 verticals.

In this report, we expand our analysis to include the importance of different types of AI and automation in implementing the 200+ use cases for enterprises and assess the feasibility for telcos to acquire and integrate those capabilities into their enterprise services.

We identified eight different types of A3 capabilities required to implement our 200+ use cases.

These capability types are organised below roughly in order of the number of use cases for which they are relevant (i.e. people analytics is required in the most use cases, and human learning is needed in the fewest).

The ninth category, Data provision, does not actually require any AI or automation skills beyond ML for data management, so we include it in the list primarily because it remains an opportunity for telcos that do not develop additional A3 capabilities for enterprise.

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Most relevant A3 capabilities across 200+ use cases

Most relevant A3 capabilities for leveraging enterprise solutions

People analytics: This is the strongest opportunity for telcos as it uses their comprehensive customer data. Analytics and machine learning are required for segmentation and personalisation of messaging or action. Any telco with a statistically-relevant market share can create products – although specialist sales capabilities are still essential.

IoT analytics: Although telcos offering IoT products do not immediately have access to the payload data from devices, the largest telcos are offering a range of products which use analytics/ML to detect patterns or spot anomalies from connected sensors and other devices.

Other analytics: Similar to IoT, the majority of other analytics A3 use cases are around pattern or anomaly detection, where integration of telco data can increase the accuracy and success of A3 solutions. Many of the use cases here are very specific to the vertical. For example, risk management in financial services or tracking of electronic prescriptions in healthcare – which means that a telco will need to have existing products and sales capability in these verticals to make it worthwhile adding in new analytics or ML capabilities.

Real time: These use cases mainly need A3 to understand and act on triggers coming from customer behaviour and have mixed appeal to telcos. Telcos already play a significant role in a small number of uses cases, such as mobile marketing. Some telcos are also active in less mature use cases such as patient messaging in healthcare settings (e.g. real-time reminders to take medication or remote monitoring of vulnerable adults). Of the rest of the use cases that require real time automation, a subset could be enhanced with messaging. This would primarily be attractive to mobile operators, especially if they offer broader relevant enterprise solutions – for example, if a telco was involved in a connected public transport solution, then it could also offer passenger messaging.

Remote monitoring/control: Solutions track both things and people and use A3 to spot issues, do diagnostic analysis and prescribe solutions to the problems identified. The larger telcos already have solutions in some verticals, and 5G may bring more opportunities, such as monitoring of remote sites or traffic congestion monitoring.

Video analytics: Where telcos have CCTV implementations or video, there is opportunity to add in analytics solutions (potentially at the edge).

Human interactions: The majority of telco opportunities here relate to the provision of chatbots into enterprise contact centres.

Human learning: A group of low feasibility use cases around training (for example, an engineer on a manufacturing floor who uses a heads-up augmented/virtual reality (AR/VR) display to understand the resolution to a problem in front of them) or information provision (for example, providing retail customers with information via AR applications).

Executive Summary
- Which A3 capabilities should telcos prioritise?
- What makes an investment worthwhile?
- Next steps
Introduction
Vertical opportunities
- Key takeaways
A3 technology: Where should telcos focus?
- Key takeaways
- Assessing the telco opportunity for nine A3 capabilities
Verizon case study
Details of vertical opportunities
Conclusion
Appendix 1 – full list of 200 use cases

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Verizon’s journey in commercialising 5G

Verizon: Payback for the 5G pioneer?

SK Telecom (SKT), Verizon and Telstra were among the first in the world to commence the commercialisation of 5G networks. SK Telecom and Verizon launched broadband-based propositions in 2018, but it was only in 2019, when 5G smartphones became available, that consumer, business and enterprise customers were really able to experience the networks.
Part 2 of our 3-part series looks at Verizon’s 5G experience and how its propositions have developed from when 5G was launched to the current time. It includes an analysis of both consumer and business offerings promoted on Verizon’s website to identify the revenue streams that 5G is supporting now – as opposed to revenues that new 5G use cases might deliver in future. (We have covered this extensively for a number of verticals, including healthcare, manufacturing, energy, and transport and logistics.)

Initially, Verizon had hoped to charge a $10 monthly fee for existing 4G subscribers to access its millimetre Wave (mmWave) 5G Ultra Wideband (UWB) service, however it waived this fee due to a lack of devices and limited coverage at launch in April 2019. 5G access was offered as a benefit for customers on its top two Unlimited data plans, which promised unlimited 5G UWB data, unlimited 4K HD streaming and unlimited 5G UWB hotspot. It emphasized capacity advantages of 5G as well as its ability to offer an improved video experience.

Verizon’s choice of 5G spectrum (mmWave) was guided by its intention to offer customers a differentiating 5G experience, but it has added complexity to its 5G propositions and initial limited coverage has impacted its competitive position in the market.

This report examines the market factors that have enabled and constrained Verizon’s 5G monetisation efforts, as it moves to extend 5G access beyond early device adopters to a wider audience. It identifies lessons in the commercialisation of 5G for those operators that are on their own 5G journeys and those that have yet to start.

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5G performance to date

This analysis is based on the latest data available as we went to press in May 2021.

An early benefit of moving to 5G for Verizon was to reduce costs and increase efficiency. On this score, Verizon reports that it is on track to achieving its $10 billion cost reduction target, ahead of the scheduled end-2021 timeframe (as set out in September 2017).

On the fourth quarter 2020 earnings call, CEO Hans Vestberg claimed there had been a “great migration of our customers [consumer] to Unlimited and to the premium Unlimited” plans, resulting in over 60% (57 million subscribers) of Verizon’s base being on an Unlimited plan and over 20% (19 million) being on premium plans (5G Ultra Wideband – UWB – inclusive). The appeal of 5G is not thought to be the primary driver of this trend (only 9% of the postpay base had a 5G device in December 2020 ):

Verizon is bundling generous content services (non-5G specific) with these high-end plans.
The arrival of the iPhone 12 in the fourth quarter was at least partly responsible for 90% of new net additions in the quarter taking Unlimited plans (with 55% being premium Unlimited plans) – probably more so than the introduction of a low-band 5G nationwide (NW) service in the same time period.

Quarter one 2021 results indicate that the migration to premium plans has continued. Matt Ellis, Verizon EVP and CFO announced that “At quarter end, over 65% of our base was on an Unlimited plan with more than 23% of our base taking a premium plan” . The “5G adoption rate” was reported to be 14% of the consumer postpay subscriber base (12.6 million subscribers). 5G access (5G UWB in particular) may become a more important driver of upgrades to higher value plans in future, particularly as it becomes more widely available (mid-band inclusive) and there are more obvious benefits to consumers (services).

Upgrades have succeeded in driving average revenue per account (ARPA), which reportedly grew by 1.7% for the first quarter year-on-year (despite COVID impacts) – Verizon attributed this to its tiered approach to Unlimited plans.

There were negative net postpay additions in the March quarter, partly ascribed to seasonality, however this followed fourth quarter criticism of Verizon by investors for failing to attract expected numbers of new customers, particularly in comparison to competitors.

In his fourth quarter address, Mr Vestberg also expressed satisfaction that Verizon was adding new enterprise customers, which it continued to do in quarter one 2021. With regard to 5G mobile edge compute, Mr Vestberg reported that Verizon was building a “funnel of customers” but held that significant revenues were only expected in 2022.

First mover advantage?

The risk of being an early mover (which had worked for Verizon with 4G LTE), may not be paying off in the 5G era. While Verizon has retained its 4G market leadership status, Verizon’s 5G market position is being challenged following the merger of Sprint and T-Mobile, which was approved in April 2020.

Prior to the merger, T-Mobile had been rolling out a low-band 5G network – which performed well on coverage, but less so on performance – where Verizon had a competitive advantage. The Sprint merger has since provided T-Mobile with a mid-band 5G network that delivers faster speeds than its previous low-band 5G network and provides better coverage than Verizon’s premium mmWave offering. T-Mobile’s 5G proposition has become more compelling from a performance perspective, and it has better 5G coverage than Verizon’s 5G UWB and NW.T-Mobile reported that it had greater than 10 million 5G subscribers in March 2021 , compared to Verizon’s 12.6 million, based on the 5G adoption rate announced for the same quarter. On this basis, and the fact that T-Mobile net additions have exceeded those of Verizon, while Verizon currently retains 5G leadership, its lead could be narrowing.

T-Mobile versus Verizon subscriber base comparison, March 2021

Source: STL Partners, based on T-Mobile and Verizon reported data

T-Mobile, Verizon and AT&T continue to compete aggressively on network coverage. In March 2021 , it was reported that:

T-Mobile led Verizon on low-band 5G “Extended Range” network coverage, reaching 287 million versus Verizon’s 230 million;
T-Mobile’s 5G “Ultra Capacity” network (mainly mid-band, with some mmWave) covered 125 million people, while Verizon’s UWB (mmWave) coverage is limited to 67 cities (the 5G service based on Verizon’s recently acquired C-band/mid-band spectrum will also fall under UWB, but it is not yet available).

Executive Summary
Introduction
Performance indicators to date
- First mover advantage?
Details of launch
Consumer propositions
- At launch…
- …And now
- Consumer monetisation summary
Business and enterprise propositions
- At launch…
- …And now
- Business monetisation summary
Analysis of 5G market development
- Consumer perceptions
What next?
- Mid-band
Conclusions
Appendix 1
Index

This report builds on earlier STL Partners research, including:

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Fixed wireless access growth: To 20% homes by 2025

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Fixed wireless access growth forecast

Fixed Wireless Access (FWA) networks use a wireless “last mile” link for the final connection of a broadband service to homes and businesses, rather than a copper, fibre or coaxial cable into the building. Provided mostly by WISPs (Wireless Internet Service Providers) or mobile network operators (MNOs), these services come in a wide range of speeds, prices and technology architectures.

Some FWA services are just a short “drop” from a nearby pole or fibre-fed hub, while others can work over distances of several kilometres or more in rural and remote areas, sometimes with base station sites backhauled by additional wireless links. WISPs can either be independent specialists, or traditional fixed/cable operators extending reach into areas they cannot economically cover with wired broadband.

There is a fair amount of definitional vagueness about FWA. The most expansive definitions include cheap mobile hotspots (“Mi-Fi” devices) used in homes, or various types of enterprise IoT gateway, both of which could easily be classified in other market segments. Most service providers don’t give separate breakouts of deployments, while regulators and other industry bodies report patchy and largely inconsistent data.

Our view is that FWA is firstly about providing permanent broadband access to a specific location or premises. Primarily, this is for residential wireless access to the Internet and sometimes typical telco-provided services such as IPTV and voice telephony. In a business context, there may be a mix of wireless Internet access and connectivity to corporate networks such as VPNs, again provided to a specific location or building.

A subset of FWA relates to M2M usage, for instance private networks run by utility companies for controlling grid assets in the field. These are typically not Internet-connected at all, and so don’t fit most observers’ general definition of “broadband access”.

Usually, FWA will be marketed as a specific service and package by some sort of network provider, usually including the terminal equipment (“CPE” – customer premise equipment), rather than allowing the user to “bring their own” device. That said, lower-end (especially 4G) offers may be SIM-only deals intended to be used with generic (and unmanaged) portable hotspots.
There are some examples of private network FWA, such as a large caravan or trailer park with wireless access provided from a central point, and perhaps in future municipal or enterprise cellular networks giving fixed access to particular tenant structures on-site – for instance to hangars at an airport.

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FWA today

Today, fixed-wireless access (FWA) is used for perhaps 8-9% of broadband connections globally, although this varies significantly by definition, country and region. There are various use cases (see below), but generally FWA is deployed in areas without good fixed broadband options, or by mobile-only operators trying to add an additional fixed revenue stream, where they have spare capacity.

Fixed wireless internet access fits specific sectors and uses, rather than the overall market

Source: STL Partners

FWA has traditionally been used in sparsely populated rural areas, where the economics of fixed broadband are untenable, especially in developing markets without existing fibre transport to towns and villages, or even copper in residential areas. Such networks have typically used unlicensed frequency bands, as there is limited interference – and little financial justification for expensive spectrum purchases. In most cases, such deployments use proprietary variants of Wi-Fi, or its ill-fated 2010-era sibling WiMAX.

Increasingly however, FWA is being used in more urban settings, and in more developed market scenarios – for example during the phase-out of older xDSL broadband, or in places with limited or no competition between fixed-network providers. Some cellular networks primarily intended for mobile broadband (MBB) have been used for fixed usage as well, especially if spare capacity has been available. 4G has already catalysed rapid growth of FWA in numerous markets, such as South Africa, Japan, Sri Lanka, Italy and the Philippines – and 5G is likely to make a further big difference in coming years. These mostly rely on licensed spectrum, typically the national bands owned by major MNOs. In some cases, specific bands are used for FWA use, rather than sharing with normal mobile broadband. This allows appropriate “dimensioning” of network elements, and clearer cost-accounting for management.

Historically, most FWA has required an external antenna and professional installation on each individual house, although it also gets deployed for multi-dwelling units (MDUs, i.e. apartment blocks) as well as some non-residential premises like shops and schools. More recently, self-installed indoor CPE with varying levels of price and sophistication has helped broaden the market, enabling customers to get terminals at retail stores or delivered direct to their home for immediate use.

Looking forward, the arrival of 5G mass-market equipment and larger swathes of mmWave and new mid-band spectrum – both licensed and unlicensed – is changing the landscape again, with the potential for fibre-rivalling speeds, sometimes at gigabit-grade.

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Executive Summary
Introduction
- FWA today
- Universal broadband as a goal
- What’s changed in recent years?
- What’s changed because of the pandemic?
The FWA market and use cases
- Niche or mainstream? National or local?
- Targeting key applications / user groups
FWA technology evolution
- A broad array of options
- Wi-Fi, WiMAX and close relatives
- Using a mobile-primary network for FWA
- 4G and 5G for WISPs
- Other FWA options
- Customer premise equipment: indoor or outdoor?
- Spectrum implications and options
The new FWA value chain
- Can MNOs use FWA to enter the fixed broadband market?
- Reinventing the WISPs
- Other value chain participants
- Is satellite a rival waiting in the wings?
Commercial models and packages
- Typical pricing and packages
- Example FWA operators and plans
STL’s FWA market forecasts
- Quantitative market sizing and forecast
- High level market forecast
Conclusions
- What will 5G deliver – and when and where?
Index

How mobile operators can build winning 5G business models

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STL Partners has long believed that telecoms operators need to and can do more to add value to their consumer and enterprise customers and to society more generally. For the telecoms industry, the need to do more is illustrated by flat or declining revenues and rising capital expenditure and debt levels. The opportunity for telecoms to add more value is also clear. The demands of society now call for greater coordination between all players and new technology – 5G, analytics, AI, automation, cloud – is now spawning the Coordination Age.

Figure 1: The Coordination Age – new paradigm, new telco purpose

Source: STL Partners

Operators have the credibility, skills and relationships to contribute more in the Coordination Age. But the opportunity will not drop into their laps. Improved networks are not, of themselves, the driver of new value: it accrues to the provider of services that run on the network and it is up to operators to develop platforms and services that exploit ubiquitous, high-bandwidth connectivity.

So far, operators have found moving beyond connectivity challenging. There are a handful of success stories; most attempts to develop vertical solutions have failed to move the needle. In this report, we draw on successes and failures from within and outside telecoms to outline 8 core guiding principles for ambitious leaders within the telecoms industry who are determined to help their organisations to deliver more than connectivity.

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5G: A catalyst for change

In some ways, the challenge/opportunity for mobile operators has been present for the last 5-10 years: limited incremental revenue growth in voice, messaging, and data.

However, 5G is a catalyst for real change. There are internal pressures from the investments being made that mean operators must create new revenue streams. More positive reasons relate to increased demand for telco-driven services and the technological changes that telcos have implemented which will help the commercial side to adapt. Below are some of the main reasons why 5G has created a resurgent need to change business models.

Making returns on network investments: It’s a given that 5G cannot be delivered without significant investment by the operators: be it in spectrum acquisition, upgrading the RAN and core network, managing a more distributed architecture of small cells, etc. Telcos can focus on ensuring that network runs efficiently to maintain margins, however many will need to look to new services. Data usage will surge, but the price customers will pay for each gigabyte will decline at a disproportionate rate.
Building on telco cloud and edge computing platforms: Telcos have started to invest in developing their networks to become more like the cloud platforms that underpin the large cloud providers’ services. In fact, it’s a key part of the 5G core. Part of this has been the move towards SDN, network virtualisation and integrating edge computing. This flexible platform will allow telcos to innovate quickly and create new differentiated services on top if they have the desire to change their financial and operational models.
Unlocking an enterprise business: Before 5G, mobile operators’ enterprise businesses have involved selling SIMs to enterprise customers with some forays into value-added services, such as cloud storage, mobile device management and M2M communications. Enterprises are genuinely interested in 5G and the capabilities it brings. For some, 5G has become an umbrella term for technological innovation. This is a good thing for the mobile industry, as it means enterprises will open doors to telcos and be keen to engage them for new solutions.
Creating business value: 5G’s unique capabilities will enable use cases that solve real problems, particularly in industrial transformation. This last point is exemplified by research STL Partners previously conducted on the business value 5G brings to certain verticals by enhancing productivity, increasing output, creating efficiencies, etc. However, much of this value is extracted by the applications, solutions and services on top of the underlying network.

Figure 2: 5G enabled use cases could increase GDP by $1.5 trillion by 2030

Source: STL Partners

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Apple Glass: An iPhone moment for 5G?

Augmented reality supports many use cases across industries

Revisiting the themes explored in the AR/VR: Won’t move the 5G needle report STL Partners published in January 2018, this report explores whether augmented reality (AR) could become a catalyst for widespread adoption of 5G, as leading chip supplier Qualcomm and some telcos hope.

It considers how this technology is developing, its relationship with virtual reality (VR), and the implications for telcos trying to find compelling reasons for customers to use low latency 5G networks.

This report draws the following distinction between VR and AR

Virtual reality: use of an enclosed headset for total immersion in a digital3D
Augmented reality: superimposition of digital graphics onto images of the real world via a camera viewfinder, a pair of glasses or onto a screen fixed in real world.

In other words, AR is used both indoors and outdoors and on a variety of devices. Whereas Wi-Fi/fibre connectivity will be the preferred connectivity option in many scenarios, 5G will be required in locations lacking high-speed Wi-Fi coverage. Many AR applications rely on responsive connectivity to enable them to interact with the real world. To be compelling, animated images superimposed on those of the real world need to change in a way that is consistent with changes in the real world and changes in the viewing angle.

AR can be used to create innovative games, such as the 2016 phenomena Pokemon Go, and educational and informational tools, such as travel guides that give you information about the monument you are looking at. At live sports events, spectators could use AR software to identify players, see how fast they are running, check their heart rates and call up their career statistics.

Note, an advanced form of AR is sometimes referred to as mixed reality or extended reality (XR). In this case, fully interactive digital 3D objects are superimposed on the real world, effectively mixing virtual objects and people with physical objects and people into a seamless interactive scene. For example, an advanced telepresence service could project a live hologram of the person you are talking to into the same room as you. Note, this could be an avatar representing the person or, where the connectivity allows, an actual 3D video stream of the actual person.

Widespread usage of AR services will be a hallmark of the Coordination Age, in the sense that they will bring valuable information to people as and when they need it. First responders, for example, could use smart glasses to help work their way through smoke inside a building, while police officers could be immediately fed information about the owner of a car registration plate. Office workers may use smart glasses to live stream a hologram of a colleague from the other side of the world or a 3D model of a new product or building.

In the home, both AR and VR could be used to generate new entertainment experiences, ranging from highly immersive games to live holograms of sports events or music concerts. Some people may even use these services as a form of escapism, virtually inhabiting alternative realities for several hours a day.

Given sufficient time to develop, STL Partners believes mixed-reality services will ultimately become widely adopted in the developed world. They will become a valuable aid to everyday living, providing the user with information about whatever they are looking at, either on a transparent screen on a pair of glasses or through a wireless earpiece. If you had a device that could give you notifications, such as an alert about a fast approaching car or a delay to your train, in your ear or eyeline, why wouldn’t you want to use it?

How different AR applications affect mobile networks

One of the key questions for the telecoms industry is how many of these applications will require very low latency, high-speed connectivity. The transmission of high-definition holographic images from one place to another in real time could place enormous demands on telecoms networks, opening up opportunities for telcos to earn additional revenues by providing dedicated/managed connectivity at a premium price. But many AR applications, such as displaying reviews of the restaurant a consumer is looking at, are unlikely to generate much data traffic. the figure below lists some potential AR use cases and indicates how demanding they will be to support.

Examples of AR use cases and the demands they make on connectivity

Source: STL Partners

Although telcos have always struggled to convince people to pay a premium for premium connectivity, some of the most advanced AR applications may be sufficiently compelling to bring about this kind of behavioural shift, just as people are prepared to pay more for a better seat at the theatre or in a sports stadium. This could be on a pay-as-you-go or a subscription basis.

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The pioneers of augmented reality

Augmented reality (AR) is essentially a catch-all term for any application that seeks to overlay digital information and images on the real-world. Applications of AR can range from a simple digital label to a live 3D holographic projection of a person or event.

AR really rose to prominence at the start of the last decade with the launch of smartphone apps, such as Layar, Junaio, and Wikitude, which gave you information about what you were looking at through the smartphone viewfinder. These apps drew on data from the handset’s GPS chip, its compass and, in some cases, image recognition software to try and figure out what was being displayed in the viewfinder. Although they attracted a lot of media attention, these apps were too clunky to break through into the mass-market. However, the underlying concept persists – the reasonably popular Google Lens app enables people to identify a product, plant or animal they are looking at or translate a menu into their own language.

Perhaps the most high profile AR application to date is Niantic’s Pokemon Go, a smartphone game that superimposes cartoon monsters on images of the real world captured by the user’s smartphone camera. Pokemon Go generated $1 billion in revenue globally just seven months after its release in mid 2016, faster than any other mobile game, according to App Annie. It has also shown remarkable staying power. Four years later, in May 2020, Pokemon Go continued to be one of the top 10 grossing games worldwide, according to SensorTower.

In November 2017, Niantic, which has also had another major AR hit with sci-fi game Ingress, raised $200 million to boost its AR efforts. In 2019, it released another AR game based on the Harry Potter franchise.

Niantic is now looking to use its AR expertise to create a new kind of marketing platform. The idea is that brands will be able to post digital adverts and content in real-world locations, essentially creating digital billboards that are viewable to consumers using the Niantic platform. At the online AWE event in May 2020, Niantic executives claimed “AR gamification and location-based context” can help businesses increase their reach, boost user sentiment, and drive foot traffic to bricks-and-mortar stores. Niantic says it is working with major brands, such as AT&T, Simon Malls, Starbucks, Mcdonalds, and Samsung, to develop AR marketing that “is non-intrusive, organic, and engaging.”

The sustained success of Pokemon Go has made an impression on the major Internet platforms. By 2018, the immediate focus of both Apple and Google had clearly shifted from VR to AR. Apple CEO Tim Cook has been particularly vocal about the potential of AR. And he continues to sing the praises of the technology in public.

In January 2020, for example, during a visit to Ireland, Cook described augmented reality as the “next big thing.” In an earnings call later that month, Cook added: “When you look at AR today, you would see that there are consumer applications, there are enterprise applications. … it’s going to pervade your life…, because it’s going to go across both business and your whole life. And I think these things will happen in parallel.”

Both Apple and Google have released AR developer tools, helping AR apps to proliferate in both Apple’s App Store and on Google Play. One of the most popular early use cases for AR is to check how potential new furniture would look inside a living room or a bedroom. Furniture stores and home design companies, such as Ikea, Wayfair and Houzz, have launched their own AR apps using Apple’s ARKit. Once the app is familiar with its surroundings, it allows the user to overlay digital models of furniture anywhere in a room to see how it will fit. The technology can work in outdoor spaces as well.

In a similar vein, there are various AR apps, such as MeasureKit, that allow you to measure any object of your choosing. After the user picks a starting point with a screen tap, a straight line will measure the length until a second tap marks the end. MeasureKit also claims to be able to calculate trajectory distances of moving objects, angle degrees, the square footage of a three-dimensional cube and a person’s height.

Executive Summary
- More mainstream models from late 2022
- Implications and opportunities for telcos
Introduction
Progress and Immediate Prospects
- The pioneers of augmented reality
- Impact of the pandemic
- Snap – seeing the world differently
- Facebook – the keeper of the VR flame
- Google – the leader in image recognition
- Apple – patiently playing the long game
- Microsoft – expensive offerings for the enterprise
- Amazon – teaming up with telcos to enable AR/VR
- Market forecasts being revised down
Telcos Get Active in AR
- South Korea’s telcos keep trying
- The global picture
What comes next?
- Live 3D holograms of events
- Enhancing live venues with holograms
- 4K HD – Simple, but effective
Technical requirements
- Extreme image processing
- An array of sensors and cameras
- Artificial intelligence plays a role
- Bandwidth and latency
- Costs: energy, weight and financial
Timelines for Better VR and AR
- When might mass-market models become available?
- Implications for telcos
- Opportunities for telcos
Appendix: Societal Challenges
- AR: Is it acceptable in a public place?
- VR: health issues
- VR and AR: moral and ethical challenges
- AR and VR: What do consumers really want?
Index

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Telco edge computing: What’s the operator strategy?

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Edge computing can help telcos to move up the value chain

The edge computing market and the technologies enabling it are rapidly developing and attracting new players, providing new opportunities to enterprises and service providers. Telco operators are eyeing the market and looking to leverage the technology to move up the value chain and generate more revenue from their networks and services. Edge computing also represents an opportunity for telcos to extend their role beyond offering connectivity services and move into the platform and the application space.

However, operators will be faced with tough competition from other market players such as cloud providers, who are moving rapidly to define and own the biggest share of the edge market. Plus, industrial solution providers, such as Bosch and Siemens, are similarly investing in their own edge services. Telcos are also dealing with technical and business challenges as they venture into the new market and trying to position themselves and identifying their strategies accordingly.

Telcos that fail to develop a strategic approach to the edge could risk losing their share of the growing market as non-telco first movers continue to develop the technology and dictate the market dynamics. This report looks into what telcos should consider regarding their edge strategies and what roles they can play in the market.

Following this introduction, we focus on:

Edge terminology and structure, explaining common terms used within the edge computing context, where the edge resides, and the role of edge computing in 5G.
An overview of the edge computing market, describing different types of stakeholders, current telecoms operators’ deployments and plans, competition from hyperscale cloud providers and the current investment and consolidation trends.
Telcos challenges in addressing the edge opportunity: technical, organisational and commercial challenges given the market
Potential use cases and business models for operators, also exploring possible scenarios of how the market is going to develop and operators’ likely positioning.
A set of recommendations for operators that are building their strategy for the edge.

What is edge computing and where exactly is the edge?

Edge computing brings cloud services and capabilities including computing, storage and networking physically closer to the end-user by locating them on more widely distributed compute infrastructure, typically at smaller sites.

One could argue that edge computing has existed for some time – local infrastructure has been used for compute and storage, be it end-devices, gateways or on-premises data centres. However, edge computing, or edge cloud, refers to bringing the flexibility and openness of cloud-native infrastructure to that local infrastructure.

In contrast to hyperscale cloud computing where all the data is sent to central locations to be processed and stored, edge computing local processing aims to reduce time and save bandwidth needed to send and receive data between the applications and cloud, which improves the performance of the network and the applications. This does not mean that edge computing is an alternative to cloud computing. It is rather an evolutionary step that complements the current cloud computing infrastructure and offers more flexibility in executing and delivering applications.

Edge computing offers mobile operators several opportunities such as:

Differentiating service offerings using edge capabilities
Providing new applications and solutions using edge capabilities
Enabling customers and partners to leverage the distributed computing network in application development
Improving networkperformance and achieving efficiencies / cost savings

As edge computing technologies and definitions are still evolving, different terms are sometimes used interchangeably or have been associated with a certain type of stakeholder. For example, mobile edge computing is often used within the mobile network context and has evolved into multi-access edge computing (MEC) – adopted by the European Telecommunications Standards Institute (ETSI) – to include fixed and converged network edge computing scenarios. Fog computing is also often compared to edge computing; the former includes running intelligence on the end-device and is more IoT focused.

These are some of the key terms that need to be identified when discussing edge computing:

Network edge refers to edge compute locations that are at sites or points of presence (PoPs) owned by a telecoms operator, for example at a central office in the mobile network or at an ISP’s node.
Telco edge cloud is mainly defined as distributed compute managed by a telco This includes running workloads on customer premises equipment (CPE) at customers’ sites as well as locations within the operator network such as base stations, central offices and other aggregation points on access and/or core network. One of the reasons for caching and processing data closer to the customer data centres is that it allows both the operators and their customers to enjoy the benefit of reduced backhaul traffic and costs.
On-premise edge computing refers to the computing resources that are residing at the customer side, e.g. in a gateway on-site, an on-premises data centre, etc. As a result, customers retain their sensitive data on-premise and enjoy other flexibility and elasticity benefits brought by edge computing.
Edge cloud is used to describe the virtualised infrastructure available at the edge. It creates a distributed version of the cloud with some flexibility and scalability at the edge. This flexibility allows it to have the capacity to handle sudden surges in workloads from unplanned activities, unlike static on-premise servers. Figure 1 shows the differences between these terms.

Figure 1: Edge computing types

Source: STL Partners

Network infrastructure and how the edge relates to 5G

Discussions on edge computing strategies and market are often linked to 5G. Both technologies have overlapping goals of improving performance and throughput and reducing latency for applications such as AR/VR, autonomous vehicles and IoT. 5G improves speed by increasing spectral efficacy, it offers the potential of much higher speeds than 4G. Edge computing, on the other hand, reduces latency by shortening the time required for data processing by allocating resources closer to the application. When combined, edge and 5G can help to achieve round-trip latency below 10 milliseconds.

While 5G deployment is yet to accelerate and reach ubiquitous coverage, the edge can be utilised in some places to reduce latency where needed. There are two reasons why the edge will be part of 5G:

First, it has been included in the 5Gstandards (3GPP Release 15) to enable ultra-low latency which will not be achieved by only improvements in the radio interface.
Second, operators are in general taking a slow and gradual approach to 5G deployment which means that 5G coverage alone will not provide a big incentive for developers to drive the application market. Edge can be used to fill the network gaps to stimulate the application market growth.

The network edge can be used for applications that need coverage (i.e. accessible anywhere) and can be moved across different edge locations to scale capacity up or down as required. Where an operator decides to establish an edge node depends on:

Application latency needs. Some applications such as streaming virtual reality or mission critical applications will require locations close enough to its users to enable sub-50 milliseconds latency.
Current network topology. Based on the operators’ network topology, there will be selected locations that can meet the edge latency requirements for the specific application under consideration in terms of the number of hops and the part of the network it resides in.
Virtualisation roadmap. The operator needs to consider virtualisation roadmap and where data centre facilities are planned to be built to support future network
Site and maintenance costs. The cloud computing economies of scale may diminish as the number of sites proliferate at the edge, for example there is a significant difference in maintaining 1-2 large data centres to maintaining 100s across the country
Site availability. Some operators’ edge compute deployment plans assume the nodes reside in the same facilities as those which host their NFV infrastructure. However, many telcos are still in the process of renovating these locations to turn them into (mini) data centres so aren’t yet ready.
Site ownership. Sometimes the preferred edge location is within sites that the operators have limited control over, whether that is in the customer premise or within the network. For example, in the US, the cell towers are owned by tower operators such as Crown Castle, American Tower and SBA Communications.

The potential locations for edge nodes can be mapped across the mobile network in four levels as shown in Figure 2.

Figure 2: possible locations for edge computing

Source: STL Partners

Executive Summary
- Recommendations for telco operators at the edge
- Four key use cases for operators
- Edge computing players are tackling market fragmentation with strategic partnerships
- What next?
Table of Figures
Introduction
Definitions of edge computing terms and key components
- What is edge computing and where exactly is the edge?
- Network infrastructure and how the edge relates to 5G
Market overview and opportunities
- The value chain and the types of stakeholders
- Hyperscale cloud provider activities at the edge
- Telco initiatives, pilots and plans
- Investment and merger and acquisition trends in edge computing
Use cases and business models for telcos
- Telco edge computing use cases
- Vertical opportunities
- Roles and business models for telcos
Telcos’ challenges at the edge
Scenarios for network edge infrastructure development
Recommendation
Index

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?

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.

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

5G strategies: Lessons from the early movers

What’s the best 5G strategy?

When we published the report 5G: The First Three Years in December 2018, we identified that most of the hype – from autonomous cars to surgeons operating from the beach – is at best several years from significant volume. There are no “killer apps” in sight. Telco growth from 5G deployments will be based on greater capacity, lower cost and customer willingness to buy.

If carrier revenue doesn’t rise, the pressure to cut costs will grow

For the last five years, carrier revenue has been almost flat in most countries and we believe this trend is likely to continue.

STL Partners forecasts less than 1% CAGR in telecoms revenues

Source: STL Partners

In our 5G Strategies report series, STL Partners set out to established what 5G actually offers that will enable carriers to make more money in the next few years.

It builds on STL Partners’ previous insights into 5G, including:

The report explores the most recent activities in 5G by operators, vendors, phone makers and chipmakers.

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High-level takeaways from initial 5G deployments

This section provides a high-level overview of the current efforts and activities of select telcos around the world. Broadly, it shows that almost all are pushing ahead on 5G, some much faster than others.

Korea is the world’s most advanced 5G market, with two million Koreans having bought 5G phones by July.
- Korea’s 3.5 GHz networks typically deliver download speeds of 100 – 500 Mbps. SK Telecom and KT are using Samsung equipment. LG Uplus is mostly Huawei. There is little evidence that either vendor has demonstrated superior performance. Korea’s government, supported by the operators, made a decision that speeding ahead on 5G would be valuable prestige and improve the Korean economy. Korea expects to have 200,000 radios in place by the end of 2019, compared with BT which anticipates fewer than 2,500.
China Mobile has confirmed Huawei’s estimate that the price of 5G phones will fall to under US$300 in 2020, which will stimulate a sharp increase in demand.
- The Chinese and the Koreans are investing heavily in augmented and virtual reality and games for 5G. This will take time to mature.
Verizon has taken a radical approach to simplifying its core and transport network, partly in preparation for 5G but more generally to improve its cost of delivery. This simplification has allowed it to maintain and even cut some CAPEX investments while delivering performance improvements.
- 5G mmWave in 28GHz works and often delivers a gigabit. The equipment is of modest size and cost. However, the apparent range of around 200 metres is disappointing (Verizon has not confirmed the range but there is evidence it is short). Verizon expects better range.
Sprint’s 160MHz of spectrum at 2.5GHz gives it remarkably wide coverage at 100 – 500 Mbps download speeds. Massive MIMO (multiple-input, multiple-output with 64 or more antennas) at 2.5 GHz works so well that Sprint is achieving great coverage without adding many small cells.
Etisalat (UAE) shows that any country that can afford it can deliver 5G today. Around the Gulf, Ooredoo (Kuwait, Qatar), Vodaphone (Qatar), du Telecom (UAE) and STC (Saudi Arabia) are speeding construction to avoid falling behind.
BT claims it will “move quickly” and turn on 100 cells per month (which is relatively few in comparison to Korea). BT’s website also claims that 5G has a latency speed of <1 ms, but the first measured latency is 31 ms. At Verizon, latency tests are often a little better than the announced 30 ms. Edge Networks, if deployed, can cut the latency by about half. A faster air interface, Ultra-Reliable Low-Latency Communication (URLLC), expected around 2023, could shave off another 5-7 ms. The business case for URLLC is unproven and it remains to be seen how widely it is deployed. In the rest of the section we look at these and other operators in a little more detail.

Live commercial 5G deployments globally, August 2019

This is the best available information on 5G deployments globally as of August 2019, gathered from both public and private sources. We have excluded operators that have announced 5G launches, but where services are not yet available for consumers to buy, such as AT&T in the US and Deutsche Telekom in Germany.

Executive Summary
Introduction
- If carrier revenue doesn’t rise, the pressure to cut costs will grow
Operators
- High-level takeaways
- European operators
- Asia Pacific and Middle Eastern operators
- North America
Phone makers
5G system vendors
- Datang
- Samsung
- Ericsson
- Huawei
- Nokia
Chip makers
- Qualcomm
- Samsung
- Intel
- MediaTek
- Huawei-HiSilicon
Conclusions: (Almost) all systems go

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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

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

How telcos can get ahead in advertising

Introduction

Why is AT&T doubling down on becoming a new media company, while Verizon Media is retrenching? With divergent strategies at play in the U.S. telecoms market, is there a path or multiple paths to success in the advertising market that other telcos can follow, or is it too soon to tell?

Telcos’ pursuit of the digital advertising market is not a new phenomenon. Early telco-led mobile marketing and advertising initiatives pre-date the mid-2007 launch of the iPhone. The journey began with pre-iPhone primitive text-messaging marketing, moved through display advertising to an increasingly sophisticated data-driven approach. What is new is the flurry of investments the leading U.S. telcos and some others, notably SingTel, have been making over the past few years to compete more holistically and effectively in the advertising/media space.

While their core communications/connectivity services businesses are maturing and being disrupted, U.S. telcos now face the prospect of investing heavily in building out next-generation 5G networks. They are placing bets on new, potentially lucrative and high-growth opportunities in the Internet-of-things (IoT), media/content and fixed wireless, among others. Among these opportunities, brokering digital advertising offers potentially the highest operating margins. AT&T’s Xandr advertising unit reported an operating margin of 68% for the fourth quarter of 2018, compared with 33% in its core communications business.

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Going on the offensive

Telecoms networks have long been the conduits for Google, Facebook, and Amazon, among others, to deliver innovative and disruptive (and mostly free) services, which generate billions in advertising revenues. Many of these same players have also introduced services, such as messaging, voice calls and video-on-demand, which have siphoned off revenues from the telcos that provide the networks they are riding on.

It is against this backdrop that distinct and evolving telco advertising strategies are emerging. And, from a U.S. market perspective, what a difference a year makes. In 2017, it looked like Verizon and AT&T were both doubling down on their advertising/media business strategies, with the aim of growing their piece of the total advertising pie and in turn attempting to siphon off advertising revenues from Google and Facebook, among others. But 2018 proved a watershed year, and now Verizon is pulling back, while AT&T continues full steam ahead.

This report focuses on the U.S. market and specifically how the big two telcos – Verizon and AT&T – have fared in the digital advertising market and what lessons other telcos can take away from their divergent market strategies. The report builds on past STL Partners research including:

The advertising opportunity for telcos

The future of advertising is digital. While spending on traditional advertising may have peaked, investment in digital advertising continues to fuel growth in the overall market. In 2018, global digital advertising revenues reached US$273 billion, and represented 44% of total advertising spend, according to eMarketer. By 2020, the specialist research firm expects digital to represent half of total global advertising spend, and by 2021 to eclipse traditional media spend – reaching US$427 billion globally in 2022. Note, eMarketer’s definition of digital advertising excludes SMS, MMS and P2P messaging-based advertising.

The global advertising opportunity – the future is digital

Source: eMarketer, May 2018

Within digital advertising, the mobile medium is taking over from the desktop as smartphones ship with larger screens and faster connectivity. Advertising agency Zenith, part of the Publicis Media Group, forecasts mobile advertising will account for 30.5% of global advertising expenditure in 2020, up from 19.2% in 2017. It reckons expenditure on mobile advertising will total US$187 billion by 2020, more than twice the US$88 billion spent on desktop advertising, and not far behind the US$192 billion spent on television advertising. At the current rate of growth, mobile advertising will comfortably overtake television in 2021, Zenith believes.

Mobile and cinematic advertising are growing faster than other segments

Source: Zenith

Singtel – a pioneering advertising play

Globally, one of the most advanced telcos in the advertising sector is Singtel, which has made a series of acquisitions to build out its adtech proposition, following its first deal in 2012, which saw it acquire Amobee, an early player in mobile advertising.

By some measures, Singtel is the largest telecoms group in south east Asia. The company and its affiliates serve 700 million mobile customers in 27 countries, including its wholly-owned subsidiary in Australia (Optus) and minority stakes in India, South Asia and Africa (Bharti Airtel, 40% effective stake); Indonesia (Telkomsel, 35% effective stake); Philippines (Globe Telecom, 47% ordinary shares); and mi Thailand (Advanced Info Service, 23% ordinary shares). With that extensive reach, which extends beyond mobile and includes Internet and video/TV customers, Singtel sees advertising as a high-growth opportunity and a way to leverage its customer data assets.

Singtel’s adtech play sits in its Group Digital Life (“GDL”) unit, which focuses on using the latest Internet technologies and assets of the operating companies to develop new revenue and growth engines by entering adjacent businesses where it has a competitive advantage. GDL focuses on three key businesses – digital marketing, regional premium OTT video and advanced analytics and intelligence capabilities, while acting as Singtel’s digital innovation engine through Innov8.

Singtel has spent about a billion dollars on adtech capabilities

*Purchase price not available. Source: Company reports

In the fourth quarter of 2018, GDL contributed 8% (up from 7% in the previous quarter) to the Singtel group’s operating revenue. GDL’s operating revenue for the quarter grew 17%, lifted by a full quarter’s contribution from Videology and growth in Amobee’s programmatic platform business, partially offset by lower media revenues. At an EBITDA level, GDL lost S$16 million after inclusion of Videology’s losses.

Singtel said that Amobee’s programmatic platform business continues to gain traction, while the integration of Videology will further strengthen Amobee’s capabilities in TV and video advertising. Although its advertising business isn’t yet making a major financial contribution, Singtel’s continued investments in this market suggest the Singapore-based operator remains committed and convinced that there are synergies between the telecoms and advertising sectors.

The rest of this report looks at U.S. telcos’ advertising strategies in depth, drawing conclusions and recommendations for other telcos globally.

Contents:

Executive Summary
Introduction
The advertising opportunity for telcos
Singtel – a pioneering advertising play
U.S. mobile market shift in full swing
Telcos’ strategic fits and starts
Google and Facebook strong, but Amazon makes gains
Amazon pulls commerce levers in advertising
Privacy, identity and security challenges and mandates
GDPR: A harbinger of things to come to the U.S.
U.S. telcos’ advertising assets
AT&T goes all-in on advanced advertising
More inventory, stronger monetisation
Balancing advertising and subscriptions
Takeaways
Verizon cuts its losses
The obstacles in the way of Oath
Takeaways
Conclusions and recommendations
Recommendations
Recommendations for major telcos

Figures:

Recommendations for how AT&T can get ahead in advertising
Why Verizon didn’t get ahead in advertising
The global advertising opportunity – the future is digital
Mobile and cinematic advertising are growing faster than other segments
Singtel has spent about a billion dollars on adtech capabilities
US online advertising spend – shift to mobile has already happened
Examples of telcos’ investments/divestments in adtech and content
Amazon gains, but still significant opportunities for telcos
AT&T, Verizon and Comcast’s content and advertising assets
AT&T’s advertising revenues are rising rapidly
Xandr is growing rapidly, but its high margins are sliding downwards
AT&T reaps rewards from Xandr, WarnerMedia, but pay TV is still a drag
Verizon Media (previously Oath) fails to hit revenue growth targets
As Verizon’s ad business struggles, it doubles down on 5G
SWOT analysis and recommendations for big telcos in advertising

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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.

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

Telcos’ apps: What works?

Introduction

Part of STL Partners’ (Re)connecting with Consumers stream, this report analyses a selection of successful mobile apps run by telcos or their subsidiaries. It explains why mobile apps will continue to play a major in the digital economy for the foreseeable future before considering the factors that have made particular telco apps successful. Most of the apps considered in the report are from Asia, primarily because operators in that world have typically been more aggressive in pursuing the digital services market than their counterparts elsewhere. Note, the list of apps analysed in this report is far from exhaustive – there are other successful telco-run apps on the market.

The ultimate goal of this report is to explain how apps can engage customers and give telcos greater traction with consumers. Although many apps are rarely used and quickly discarded, the most popular apps, such as Instagram, Spotify and YouTube, have become an integral part of the daily lives of hundreds of millions of people. Some apps, such as Uber and Google Maps, regularly provide people with services and/or information that make their lives much easier – getting a taxi or navigating through an unfamiliar city is now much easier than it used to be. Indeed, a well-designed app dedicated to a specific service can deliver both relevance and revenues.

This report builds on previous STL research, notably:

Can Netflix and Spotify make the leap to the top tier?

AI in customer services: It’s not all about chatbots

AI on the Smartphone: What telcos should do

Why apps matter for telcos

Telcos’ most successful digital services, notably SMS, pre-date the smartphone app era. Even more recent triumphs, such as the M-Pesa, the ground breaking mobile money service in Kenya, were originally designed to work on feature phones. Many similar services, such as MTN Money and Orange Money, aimed at the large numbers of people without bank accounts in Africa and developing Asia, continue to be accessed largely through text-based menus via SIM toolkit.

But the widespread adoption of smartphones in developed and developing markets alike mean that telcos everywhere need to ensure all the consumer services they offer can be accessed via well-designed and intuitive apps with graphical user interfaces. By the end of 2017, there were 4.3 billion smartphones in use worldwide, according to Ericsson’s estimates. Moreover, smartphone adoption continues to rise rapidly, particularly in Africa, India and other developing countries. Ericsson reckons the number of smartphone subscriptions will reach 7.2 billion in 2023 (see Figure 3).

Figure 3: The number of smartphones in use is rising steadily across the world

Source: Ericsson Mobility Report, June 2018

Subscriptions associated with smartphones now account for around 60% of all mobile phone subscriptions, according to Ericsson, which says that 85% of all mobile phones sold in the first quarter of 2018 were smartphones.

With smartphones the default handset for people in developed markets and many developing markets, apps have become a major medium for interactions between consumers and service providers across the economy. Now approximately ten years old, the so-called app economy is worth tens of billions of dollars per annum.

Although there has been a backlash, as people’s smartphones get clogged up with apps, the sector still has considerable momentum.

The most popular apps, such as Uber and Amazon Shopping, combine ease of access (straightforward authentication), with ease-of-use and ease-of-payment, enabling them to attract tens of millions of users.

With some justification, proponents contend that apps will continue to be one of the main drivers of the digital economy for the foreseeable future. The broader app economy will be worth $6.3 trillion by 2021, up from $1.3 trillion in 2016, according to App Annie. Note, those figures include in-app ads and mobile commerce, as well as the revenues generated through app stores. In other words, this is the total value of the business conducted via apps, rather than the revenue accrued by app stores and developers. This dramatic forecast assumes the ongoing shift of physical transactions to the mobile medium continues apace: App Annie expects the value of mobile commerce transactions to rise from $344 per user in 2016 to $946 by 2021.

Although most of the leading apps are free, many do generate a subscription fee or one-off sales. Annual consumer spending in app stores is set to rise 18% between 2016 and 2021 to reach $139 billion worldwide, according to specialist app analytics firm App Annie, which also forecasts the total time spent in apps will grow to 3.5 trillion hours in 2021, up from 1.6 trillion in 2016.

In reality, some of these aggressive forecasts may prove to be too bullish, as consumers begin to make greater use of messaging services and voice-activated speakers to interact with local merchants and purchase digital content and services. Even so, it is clear that the leading mobile apps will continue to be a major consumer engagement tool for many brands and merchants well into the next decade. In some cases, such as Spotify or the fitness app Strava, the user has typically put significant effort into creating a personalised experience, helping to cement their loyalty.

In developed countries, some telcos, notably AT&T and Verizon, have belatedly and expensively acquired a major presence in the app economy by buying leading digital content producers and service providers. With the $85.4 billion acquisition of Time Warner, AT&T is now the owner of HBO Now, which was the third highest app by consumer spend in the US in 2017, according to App Annie. HBO Now also ranked fifth in Mexico and eighth in the world on this measure. Having acquired Yahoo! and AOL apps over the past few years, Verizon ranked eighth among companies in terms of downloads in the US in 2017.

The delicate transition from SIM toolkit to app

But expensive acquisitions are not the only way into the app economy. For telcos that have developed consumer services from the ground-up, the rise of the smartphone offers opportunities to provide much richer functionality and a more intuitive interface, as well cross-selling and up-selling. In Kenya, Safaricom has been expanding the mobile money transfer service M-Pesa into a much broader financial services proposition, while prodding users to switch from the SIM toolkit to the app, which can properly highlight M-Pesa’s wider proposition. At the same time, the telco has integrated M-Pesa into its customer service app, mySafaricom, helping it to promote its broader telecoms offering to frequent users of its mobile money services.

However, Safaricom is well aware that it needs to tread cautiously, continuing to cater for those customers who are comfortable with the SIM toolkit experience. Its softly-softly approach is to reassure Kenyans that they can always fall back on the SIM toolkit, if they don’t like the app. In a Safaricom-sponsored article from August 2017, Emmanuel Chenze wrote the following on the online site, Android Kenya:

“For over a year now, Safaricom has had the mySafaricom application available on the Google Play Store for users to be able to better manage the services they receive from the telecommunications company. However, it wasn’t until March this year when the application was updated to include M-PESA.

“With M-PESA finally integrated, the over 1 million smartphone users can now take full advantage and transact even faster thanks to the app. While good ol’ SIM toolkit still works wonders and remains a good backup option when you’re not connected to the internet or when the mySafaricom app is acting up, using the application, which has since been updated to reflect Safaricom’s recent rebranding, is way better than using the otherwise cumbersome SIM toolkit.”

If they can make their apps straightforward and easily accessible, Africa’s telcos could still become major players in the app economy – as Figure 4 indicates, the number of smartphones in use in sub-Saharan Africa could double between now and 2023. That gives telcos a major opportunity to promote their apps to first-time smartphone users as they buy their new handsets. Pan-Africa operator MTN is pursuing this strategy with its MTN Game+ , Music+ and video apps (see Figure 4).

Figure 4: MTN is pushing its entertainment apps to new smartphone users

Source: MTN interim results presentation for the six months ended June 2018

In Asia, some telcos have successfully developed widely used apps from scratch, notably in the customer care space, as explained in the next section (continued in full report).

Table of Contents

Executive Summary
Introduction
Why apps matter
The delicate transition from SIM toolkit to app
Telcos can build on customer care
My AIS – a top ten app in Thailand
Takeaways
Information apps have traction
Call management apps prove popular in South Korea
T Map in top ten apps in South Korea
Takeaways
Telcos’ entertainment apps go regional
PCCW’s Viu plays in sixteen markets
Liberty Global
Takeaways
Turkcell: Using apps to up engagement
Competitive in communications
Takeaways

Table of Figures

Figure 1: Alternative routes for telcos to build out their app proposition
Figure 2: Overview of the telco-owned apps covered in this report
Figure 3: The number of smartphones in use is rising steadily across the world
Figure 4: MTN is pushing its entertainment apps to new smartphone users
Figure 5: My AIS supports payments and loyalty points, as well as usage monitoring
Figure 6: The True iService app has a clear and straightforward graphic interface
Figure 7: True Digital’s app portfolio covers everything from coffee to communications
Figure 8: WhoWho helps user manage incoming calls on phones and wearables
Figure 9: SK Telecom’s T map app for public transport covers trains, buses and taxis
Figure 10: KKBOX Claims Strong Customer Base Among iPhone Users
Figure 11: Turkcell’s broad portfolio of apps covers content and communications
Figure 12: Turkcell’s BiP Messenger is designed to be fun
Figure 13: Turkcell is focused on how much time customers spend in its apps
Figure 14: Turkcell’s foreign subsidiaries are much smaller than its domestic operation

Why fibre is on fire again

Introduction

Fibre to the home is growing at a near-explosive rate

Every company faces the problems of mature markets, disappointing revenues and tough decisions on investment. Everyone agrees that fibre delivers the best network experience, but until recently most companies rejected fibre as too costly.

Now, 15 of the world’s largest phone companies have decided fibre to the home is a solution. Why are so many now investing so heavily?

Here are some highlight statistics:

On 26^th July 2018, AT&T announced it will pass 5 million locations with fibre to the home in the next 12 months, after reaching 3 million new locations in the last year.[1] Fibre is now a proven money-maker for the US giant, bringing new customers every quarter.
Telefónica Spain has passed 20 million premises – over 70% of the addressable population – and continues at 2 million a year.
Telefónica Brazil is going from 7 million in 2018 to 10 million in 2020.
China’s three giants have 344 million locations connected.[2]
Worldwide FTTH connections grew 23% between Q1 2017 and Q1 2018.[3]
In June 2018, China Mobile added 4.63 million broadband customers, nearly all FTTH.[4]
European FTTH growth in 2017 was 20%.[5]
In India, Mukesh Ambani intends to connect 50 million homes at Reliance Jio.[6]

Even the most reluctant carriers are now building, including Deutsche Telekom and British Telecom. In 2015, BT Openreach CTO Peter Bell said FTTH was “impossible” for Britain because it was too expensive.[7] Now, BT is hiring 3,500 engineers to connect 3 million premises, with 10 million more homes under consideration.[8]

Credit Suisse believes that for an incumbent, “The cost of building fibre is less than the cost of not building fibre.”

Contents:

Executive Summary
Introduction
Fibre to the home is growing at a near-explosive rate
Why the change?
Strategies of leading companies
Frontrunners
Moving toward rapid growth
Relative newcomer
The newly converted
Alternate carriers
Naysayers
U.S. regionals: CenturyLink, Frontier and Windstream
The Asian pioneers
Two technologies to consider
Ten-gigabit equipment
G.fast
The hard question: How many will decide to go wireless only?

Figures:

Figure 1: Paris area fibre coverage – Orange has covered most of the capital
Figure 2: European fibre growth
Figure 3: Top five European incumbents, stock price July 2016 – July 2018
Figure 4: DT CEO Tim Höttges and Bavarian Prime Minister Dr. Markus Söder announce a deal to fibre nearly all of Bavaria, part financed by the government

[1] https://www.fastnet.news/index.php/11-fib/715-at-t-fiber-run-rate-going-from-3m-to-5m-year

[2] https://www.fastnet.news/index.php/8-fnn/713-china-1-1b-4g-400m-broadband-328m-fibre-home-rapid-growth

[3] http://point-topic.com/free-analysis/world-broadband-statistics-q1-2018/

[4] https://www.chinamobileltd.com/en/ir/operation_m.php

[5] http://www.ftthcouncil.eu/documents/PressReleases/2018/PR%20Market%20Panorama%20-%2015-02-2018-%20FINAL.pdf

[6] https://www.fastnet.news/index.php/11-fib/703-india-unreal-jio-wants-50m-ftth-in-1100-cities

[7] G.fast Summit May 2015

[8] https://www.theguardian.com/business/2018/feb/01/bt-openreach-hire-3000-engineers-drive-to-fill-broadband-not-spots

Telco M&A strategies: Global analysis

Introduction

Business beyond connectivity – this is the mantra of STL Partners’ vision of the future for telecoms operators, outlined in the recent revamp of our Telco 2.0 vision. Telcos are at a crossroads where they must determine where their businesses will fit into a world of disruptive, fast-moving technologies and uncertain futures.

This means that it is more important than ever to re-evaluate the tools available to telcos to generate growth, expand their business competencies and provide new service offerings outside the core.

Traditionally, a key telco growth strategy has been to use mergers and acquisitions, particularly of (and with) other telcos, to build scale geographically and in core communications services. However, as operators strive to become more relevant in a changing business landscape, there has been a growing volume of investment in what might be termed ‘digital’ business – business services that leverage technology to build new capabilities and deliver new customer services, experiences and relationships. We distinguish between these two kinds of telecoms M&A as follows:

Traditional M&A – “Operators buying operators”
- Traditional M&A is focused around traditional telecoms M&A where operators buy other operators to expand in new markets or consolidate existing markets.
Digital M&A – “Operators investing outside core”
- Digital M&A refers to non-operator M&A, or all other purchases that telcos make to expand beyond their core connectivity services. Most often this includes investments in software capabilities or industry verticals.

This report examines the landscape of digital M&A from H2 2017 to H1 2018, highlights trends across previous time periods, and outlines strategies for and case studies of digital M&A to illustrate ways that telcos can utilise it in a focused and strategic manner to create long-term value and growth. It does not cover minority venture digital investments; however, these are tracked in our database and will be the subject of future analysis.

This report is the third iteration of STL Partners’ yearly digital M&A and investment report, which began in 2016 and was updated in 2017. It draws on data from our digital M&A tracker tool, which covers 23 operators over five regions from 2012 to H1 2018. A copy of the database is available with this report.

How AT&T entered and exited the media business

AT&T enters the satellite market at its peak

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The beginnings of a bumpy journey in TV

Promotion, pull back and decline of DirecTV NOW

Rising programming costs

DirecTV NOW subscriptions

Name changes and new propositions create more confusion

Confusion amongst staff and customers

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

Withdrawal of AT&T TV NOW

The short life of AT&T Watch TV

Timeline of AT&T entertainment propositions

The decline of DirecTV

Decline in traditional pay-TV households

Satellite subscribers to Dish and DirecTV 2015-2020

Table of contents

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Possible private networks service providers

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Most relevant A3 capabilities across 200+ use cases

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Verizon: Payback for the 5G pioneer?

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5G performance to date

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Fixed wireless access growth forecast

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FWA today

Fixed wireless internet access fits specific sectors and uses, rather than the overall market

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Figure 1: The Coordination Age – new paradigm, new telco purpose

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5G: A catalyst for change

Figure 2: 5G enabled use cases could increase GDP by $1.5 trillion by 2030

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Augmented reality supports many use cases across industries

How different AR applications affect mobile networks

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The pioneers of augmented reality

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Edge computing can help telcos to move up the value chain

What is edge computing and where exactly is the edge?

Figure 1: Edge computing types

Network infrastructure and how the edge relates to 5G

Figure 2: possible locations for edge computing

Table of Contents

The 5G situation seems paradoxical

5G technology works OK

Early go-to-market lessons

Don’t oversell 5G

Table of Contents

What’s the best 5G strategy?

If carrier revenue doesn’t rise, the pressure to cut costs will grow

STL Partners forecasts less than 1% CAGR in telecoms revenues

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