In light of the Deloitte white paper about the poor state of affairs of 5G in the US and the likelihood of falling farther behind the Chinese it is worthwhile to revisit something we wrote 14 years ago, especially given what transpired with the smartphone, wifi and competition over that period. In our opinion, the US is not so much as falling behind, as there is no "real 5G future" that will become reality under the current industry structure. Something will have to change.
In 2004 we wrote an article in Telephony Online about the "4th and Final Wave of Digitization." Of course this was 1 year before the final Supreme Court ruling on Brand-X which was the death-knell of equal access and 20 years of competition in long-distance, thereby ushering in the final consolidations into 4 major edge-access providers in the US by 2006 (10 years after the ill-fated and farcical Telecom Act of 1996 which was supposed to have resolved all the conflicting regulation across 4 different media--voice, video, data, wireless--but didn't). The article also appeared 3 years before the introduction of the iPhone and Steve Jobs' subsequent single-handed resurrection of equal access, which itself led to "OTT" (over the top) entering the internet and telecoms vernacular in 2010. And this was something we presciently wrote, "the growing wave will develop from the core and crash against the vertically integrated service providers and undo monopoly bandwidth bottlenecks."
Oddly, the core driven wave did not crash over the incumbent monopolies (even if many believe the mobile operators and cable cos have effectively been neutered above layer 2 by the iOS and Android application ecosystems), rather it was a rising tide that lifted all boats. The vertically integrated monopolies at the edge, instead of being subsumed and restructured in a cataclysm like AT&T in 1984, tranquilly and profitably built out 4G networks as a result of enormous demand pull-through from the end users of those OTT applications on the wireless side and played along with the Google inspired marketing hype game of "gigabit" access on the wired side. (This is where one says one offers "gigabit" service, even it is really only 100-500 megabits/second and gets away with it while the FCC does nothing.)
To the eyes of many inside and outside the industry the current state of affairs has become accepted as evidence that "competition works!" And who really is to complain when the reality is 99% of most applications still use less than 1mbs, while video streaming to a handheld smartphone is never more than 2mbs. That's a starting point that dooms the Deloitte WP in our opinion to considering different outcomes around 5G.
Belying this seeming tranquility is the fact that both Moore and Metcalfe (or their laws) have kept working unabated. Today the retail cost per megabit second or per gigabyte consumed is even higher in absolute and relative terms to the economic cost of the underlying technology since before competition began in 1984 with the break-up of AT&T as a result of Bill McGowen's microwave bypass. Somewhere between 90-99%. It's as if the edge access monopolies still operate in "analog mode." They have not digitized themselves (see our definition of being digital) in their actions and business models; and they have not restructured into horizontally scaled platforms that defines "the internet". The real problem is that they are all isolated at the edge and have not figured out how to confederate to deal with the OTT threat. Something Deloitte misses entirely.
And another fact is that video is about to eat the world. If we could say that over the past 20-30 years software and wireless have eaten the world, then it is a safe bet that in 10 years we will look back and say the networks were eaten by 2-way HD and 4K video for tele-medicine, tele-education, tele-work, security and a whole host of video driven applications. It will not be autonomous cars and connected vehicles as the WP claims. The afformentioned applications will all be paid mostly by centralized buyers who can justify the expense through dramatic real-world cost savings and digitization and virtualization of their own charters and institutional organizations. Just think that today one provider's traffic, Netflix, accounts for almost 40% of internet traffic. And that's just 1-way video. The simple fact is that the current edge is about 1/100th of the way in terms of capacity, performance and pricing from supporting ubiquitous 2-way HD video conferencing; be it from an equipment or price perspective.
But no one hyping 5G, including Deloitte, is really pointing that out.
So the tranquil state of affairs for the edge access providers is about to change and the final monopoly bottlenecks will be undone with a final wave coming in the form of price reductions of 90-99% and a complete rethink of last mile access and who pays. We refer to this as the Full Stack Access (FSA) model. In the coming weeks we will be looking at
So enjoy some perspective from 14 years ago taking into account what has happened and ponder what may occur by 2032:
First printed in TelephonyOnline; September 20, 2004
Three enormous digital waves generated by long-distance, datacomms and mobility competition crashed over the info-media landscape in the past 20 years. “Digitization” was a mechanism by which service providers balanced cost, coverage, capacity and clarity/QoS (the 4Cs of supply) with ubiquity, usability and unit cost (the 3Us of marginal demand). Even as per unit costs and prices dropped 99% over the respective decades, demand elasticity caused revenue per user to grow. At the same time competitive service providers and the capital markets rudely learned that getting, keeping and stimulating demand on rapidly obsoleting capital bases were the key drivers for income statements and balance sheets.
In the aftermath of these market-driven waves, the 100 year-old, highly regulated, 2-way PSTN and 80 year-old, moderately regulated, 1-way media and broadcast segments were joined by the entirely new, and relatively unregulated, 2-way datacomm and wireless segments. The result was growing chaos, which the Telecom and Cable Acts were meant, but failed, to resolve.
To rationalize and counter this chaos the markets embraced the concept of convergence, epitomizing the “all in one” approach in vertically integrated CLECs (PSTN) and horizontally oriented ASPs (Internet). Unfortunately, vertically integrated service providers could not scale all layers of their operations and investment effectively across a demand environment where everyone and every organization wanted its converged bundle put together differently. And while ASP’s appeared to scale more effectively along those lines, IP, as a 4-layer protocol, was prone to poor QoS and costs that actually snowballed in a world of distributed processing. In the end $250+ billion of promise and hype got washed out to sea.
Since then, all four segments have continued to follow the immutable laws of Moore and Metcalf in their supply evolution, while demand has continued to evolve at a rapid, and varied, pace. At the same time IP has grown up as a ready-for-prime-time, scalable, 7 layer, protocol stack, and represents the foundation for the 4th and final digital wave.
We see the tidal wave, as many increasingly do, developing rapidly, but perceive it as coming from a different direction. Most expect the wave to start in the migration from TDM to IP at the customer premise and in the MAN Class 5 to softswitch conversion process. In reality, IP and VoIP have scaled in entirely opposite areas over the last 5 years; namely in the WAN and across horizontal layers of the stack. We refer to this as the core-driven, as opposed to edge-driven, VoIP model.
From this perspective, the growing wave will develop from the core and crash against the vertically integrated service providers and undo monopoly bandwidth bottlenecks. The latter are best understood when looking at the level and substance of access charges in the last mile. Today, 1 megabyte of synchronous (high QoS) MAN bandwidth for commercial applications costs about $200/month in developed countries and $500/month in lesser developed, and less competitive, markets. When contrasted with actual hardware, software and provisioning/operating costs in the LAN and WAN today, those numbers should be closer to $10 and $20, respectively. As well, the bulk of the monopoly cash flow actually derives from the terminating, not originating, side of calls or sessions.
Over the next few weeks and months we will break down the sequence of events and likely developments that will lead to a final and precipitous collapse in access pricing, a la the previous 3 digital booms. As well, we will develop the revenue and demand upside, also consistent with those booms. Our crystal ball also says it’s a pretty good outcome, notwithstanding a lot of wrenching change! Gee, didn’t that happen 3 times previously?
Mark Zuckerberg says to Kara Swisher: "You can just see this trajectory from early internet, when the technology and connections were slow, most of the internet was text. Text is great, but it can be sometimes hard to capture what’s going on. Then, we all got phones with cameras on them and the internet got good enough to be primarily images. Now the networks are getting good enough that it’s primarily video."