Summary: an introduction to the four strategy scenarios we see playing out in the market - 'Telco 2.0 Player', 'Happy Piper', 'Device Specialist', and 'Government Department' – part of a major new report looking at innovation in mobile and fixed broadband business models. (March 2010, Foundation 2.0, Executive Briefing Service, Future of the Networks Stream).
Overview of the three macroscopic broadband market trends
The five recurrent themes
Defining Telcos and Broadband Service Providers (BSPs) in the future
Market adoption of broadband
An Introduction to the four scenarios
A PDF version of this page can be downloaded here.
This section of the report provides a backdrop to the rest of the study. It highlights the key trends and developments in the evolution of broadband, which fundamentally underpin the other aspects of business model innovation discussed in the subsequent chapters. It also introduces Telco 2.0's main ‘end-game scenarios' for broadband service providers (BSPs), and gives a round-up of some of the key background statistics.
There are three main macroscopic trends in the broadband market:
1. A focus on improving the reach and profitability of existing low/mid-speed broadband in developed countries, especially with the advent of inexpensive mobile data, and new methods of monetising the network through wholesale options, value-added services and better segmentation;
2. Deployment of next-generation very high-speed broadband, and the building of business models and services to support this investment, typically involving video services and/or state backing for nationally-critical infrastructure projects;
3. Continued steady rollout of broadband in developing markets, balancing theoretical gains in social and economic utility against the practical constraints of affordability, PC/device penetration and the need for substantial investment.
Cutting across all three trends are five recurrent themes:
Maturing products and business models
The global broadband market is maturing fast. In developed countries, baseline penetration rates are starting to level off as saturation approaches. Coupled with price erosion and increasing capacity demands, this deceleration is pressuring margins, especially in the recession;
The pivotal role of video in driving both costs and revenues, given its huge requirement for bandwidth, especially in high-definition (HD) format.
An awareness of the need for retail and wholesale business model evolution, as revenue growth plateaus and current attempts at bundling voice and/or IPTV (fixed) or content (mobile) show only patchy success.
Convergence of fixed and mobile technology and product offerings
The impact of mobile broadband, either as a substitute or a complement to fixed broadband. This goes hand-in-hand with the advent of more powerful personal devices such as smartphones and netbooks.
Greater state intervention in deploying and controlling broadband access
Intensifying regulation, focusing on areas such as facilities and service-based competition, unbundling and structural separation, Net Neutrality, spectrum policy and consumer advocacy;
Increasing government intervention in areas, such as broadband roll-out and strategy, outside the (traditional) scope of the regulatory authorities. This is conducted either through subsidy and stimulus programmes, or broader initiatives relating to national efforts on energy, health, education and the like;
A growing belief that broadband networks should also support ‘infrastructure' services which may not be delivered by the public Internet - for example, remote metering and ‘smart grid' connectivity, support for healthcare or e-government, or education services. A major battle over the next 10 years will be whether these are delivered as ‘Telco services', ‘Internet services' or as distinct and separately-managed network services by providers using wholesale access to a Telco network.
A more complex broadband ecosystem
The increasing role of major equipment vendors in facilitating new business models, either through managed services / outsourcing / transformation, direct engagement with governments on strategic architecture issues, or supply of key ‘platform' components. However, many vendors are torn between protecting the legacy heavily-centralised models of their existing Telco customers, and exploring new targets within public-sector or Internet domains.
New consumer behaviour and higher expectations
Changing user behaviour as broadband becomes a basic expectation (or a government-mandated right) rather than a premium service, with the mass uptake of new applications and the added benefits of mobility.
Defining Telcos and BSPs in the future
One of the largest challenges in identifying Telco business models for the forthcoming era of next-generation access is the question of what actually defines a Telco, or a Broadband Service Provider (BSP).
In fixed networks, especially with new fibre deployment, the situation is becoming ever more complex because of the number of levels at which wholesaling can take place. If an incumbent ADSL operator buys, packages and rebrands wholesale dark fibre capacity from a municipally-owned fibre network, which one is the BSP? Or are they both BSPs?
The situation is a lot easier in mobile, where there still remains a fairly clear definition of a mobile operator, or a mobile virtual network operator (MVNO) - although in future network-sharing and outsourcing may also blur the boundaries in this market.
It is possible that there isn't an appropriate strict definition, so a range of proxy definitions will start to apply - membership of bodies like the GSMA, possession of a ‘mobile network code', access to certain number ranges, ownership of spectrum and so forth. In an era where Google buys dark fibre leases, Ericsson manages cellular networks, investment consortia contract to run a government-sponsored infrastructure and mobile operators offer ‘over the top' applications - it all becomes much less clear.
In this report, BSPs are taken as a broad class to include:
Owners of physical broadband access network infrastructure - taken as either physical cabling or fibre (wireline) or spectrum and radio cells (mobile). Telco 2.0 does not include rights-of-way owners or third-party cell-tower operators in this definition;
Owners of broadband access networks built using wholesale capacity on another provider's wires or fibres, but with their own active electronics, E.g. basing a network on unbundled loops or dark fibre;
Providers of retail broadband access, perhaps bundled with other services, using bitstream, ethernet access or MVNO models based on wholesale from another network operator.
These definitions exclude 2G-only (non-broadband) mobile operators and MVNOs, PSTN or cable TV access provided without broadband connectivity and non-retail access providers, such as microwave backhaul operators and content delivery networks (CDNs) Etc.
Market adoption of broadband
The global broadband access market has grown from fewer than 10 million lines in 1999, to more than half a billion at the end of 2009, predominantly through the growth of DSL-based solutions, as well as cable and other technologies. Although growth has started to slow in percentage terms, there remains significant scope for more homes and businesses to connect, especially in developing economies, such as China. Older fixed broadband services in more industrialised economies will gradually be replaced with fibre.
The other major area of change is in wireless. Since 2007, there has been rapid growth, with the uptake of mobile broadband for ‘personal' use with either smartphones or laptops, often in addition to users' existing fixed lines. This category of access will grow faster than fixed connections, reaching more than one billion active individual users and almost two billion devices by 2020 (see Figure 1). Although a strong fixed/mobile overlap will remain, there will also be a growing group of users whose only broadband access is via 3G, 4G or similar technologies.
There are a number of complexities in the data:
Almost all fixed broadband connections are ‘actively used'. The statistics do not count copper lines capable of supporting broadband, but where the service is not provisioned;
Conversely, many notional ‘mobile broadband' connections (E.g. 3G SIMs in HSPA-capable devices) are, in fact, not used actively for high-speed data access. The data in this report attempts to estimate ‘real' users or subscribers, rather than those that are theoretically-capable, but dormant;
At present, most broadband usage is based on subscriptions, either through monthly contracts or regular pre-paid plans (mostly on mobile). Going forward, Telco 2.0 expects to see may non-subscription access customers who have either temporary accounts (similar to the WiFi single-use model) or have other forms of subsidised or bundled access as described later in the report;
Lastly, the general assumption is that fixed broadband can be shared by multiple people or devices in a home or office, but mobile broadband tends to be personal. This is starting to change with the advent of ‘shared mobile access' on devices like Novatel's MiFi, as well as the use of WiMAX and, sometimes, 3G broadband for fixed wireless access.
Figure 1. Global broadband access lines, 2000-2020
Source: Telco 2.0 analysis
Breaking the data out further shows the recent growth trends by access type (see Figure 2). Mobile use has exploded with the growth of consumer-oriented 3G modems (dongles) and popular smartphones, such as the Apple iPhone and various other manufacturers' recent devices. DSL growth has continued in some markets, such as Eastern Europe and China. Conversely, cable modem growth, entrenched in North America, has been slow as there has been limited roll out of new cable TV networks.
Figure 2: Global broadband access lines by technology, 2005-10
Source: Telco 2.0 analysis
It is important to note the importance of Asia in the overall numbers (see Figure 3). Although many examples in this report focus on developed markets in Europe and North America, it is also important to consider the differences elsewhere. Fibre is already well-established in several Asian markets, such as Japan and Singapore, while future growth in markets, such as India, may well turn out to be mobile-driven.
An alternative way of looking at the industry dynamics is through levels of data traffic. This metric is critically important in determining future business models, as often data expands to fill capacity available - but without a direct link between revenue and costs. In future, fixed broadband access will start to become dominated by video traffic. Connecting an HDTV display directly to the Internet could consume 5GB of data per hour, orders of magnitude above even comparatively-intense use of PC-based services, such as YouTube or Facebook.
Figure 3: Global fixed broadband by region, mid-2009
Source: Broadband Forum
The dynamics of mobile traffic growth (see Figure 4) are somewhat different, and likely to be dominated by a sustained rise in the device/user numbers for the next few years, rather than specific applications. Nevertheless, the huge ramp-up in aggregated data consumption will put pressure on networks, especially given probable downward pressure on pricing and the natural constraints of cellular network architectures and spectrum. The report looks in depth at the options for ‘offloading‘ data traffic from cellular devices onto the fixed network.
Given the broad diversity of national markets in terms of economic development, regulation, competition and technology adoption, it is difficult to create simplistic categories for the BSPs of the future. Clearly, there is a big distance between an open access, city-owned local fibre deployment in Europe versus a start-up WiMAX provider in Africa, or a cable provider in North America.
Nevertheless, it is worth attempting to set out a few scenarios, at least for BSPs in developed markets for which market maturity might at least be in sight (see Figure 5 below). While recognising the diversity in the real world, these archetypes help to anchor the discussion throughout the rest of the report. The four we have explored (and which are outlined in summary below) are:
Telco 2.0 Broadband Player
The Happy Piper
There are also a few others categories that could be considered, but which are outside the scope of this report. Most obvious is ‘Marginalised and unprofitable', which clearly is not so much a business model as a route towards acquisition or withdrawal. The other obvious group is ‘Greenfield BSP in emerging market', which is likely to focus on basic retail connectivity offers, although perhaps with some innovative pricing and bundling approaches.
It is also important to recognise that a given operator may be a BSP in either or both mobile and fixed domains, and possibly in multiple geographic markets. Hybrid operators may move towards ‘hybrid end-games' in their various service areas.
Figure 5: Potential scenarios for BSPs
Source: Telco 2.0 Mobile and Fixed Future Broadband Business Models