"Profound" Industry Changes Ahead

Broadband lines, both wired and wireless, are being added at a dizzying pace: a compound annual growth rate of 23 percent, in fact, driving broadband connections to nearly two billion of the 4.9 billion total consumer lines in 2012, forecast Yankee Group analyst Carl Howe.

“Those billions of lines are driving a monster business globally, comprising more than 3.9 billion lines worldwide that will generate $795 billion in revenue this year for network operators,” says Howe. “And that revenue will grow another 21 percent to nearly $1 trillion dollars by 2012.”

Underpinning this growth, however, is profound change, Howe argues. Yankee Group predicts that what consumers really want is “anywhere access” that combines the quality of wired broadband with the ubiquity of wireless.

One would think large incumbent operators would have advantages on that score, as some own both wireless and wired assets. Howe doesn’t seem to

think so. He agrees that operators will try to deliver those seamless experiences, but largely fail in the process, simply because taking the risks and making the investments required aren’t in their DNA.”

Howe is optimistic about prospects for new challengers, including, perhaps for the first time, device manufacturers as well as upstart challengers.

“The introduction of this ubiquitous connectivity poses the largest technological revolution of our lifetime, affecting more people than personal computers or the Internet,” Howe says.

Mobility is the key, though. Some 55 million people today already work more than 20 percent of their time away from their office, he says. Some 59 percent of U.S. consumers with postpaid mobile phones already buy family plans to ensure they can remain in touch at all times.

More than 90 percent of the 1,500 U.S. respondents recently surveyed by the Yankee Group already have some form of broadband access at home today, and 76 percent of respondents access the Internet multiple times a day.

And penetration is similar in mobile phones: 98 percent of those 1,500 U.S. respondents use one or more mobile phones.

Connectivity also is a global phenomenon. Today, there are 3.9 billion network access connections around the globe, ranging from first-generation mobile phones to fiber connections to the home.

“Those numbers represent more than one network connection for every two people on earth,” Howe says. Of these, the majority of connections are the 2.45 billion 2.5G/3G wireless mobile phones worldwide.

And more than one-fifth of the 3.9 billion connections are broadband connections, either wired connections of speeds more than 500 kbps or 3G mobile connections.

With nearly 1.7 billion access lines, the Asia-Pacific region is responsible for almost half of the lines worldwide. Some 91 percent, or more than 1.5 billion, of those lines are wireless lines, and about half of those are 2.5G or 3G lines.

And while only nine percent of the access lines in the Asia-Pacific region are wired, the region boasts the most fiber-to-the-home connections in the world, with 100 Mbps consumer access service available in both Japan and South Korea.

The second-largest number of access lines is in Europe, the Middle East and Africa. With this region spanning the northern part of the globe from Iceland to Russia to South Africa, its nearly 1.4 billion access lines put it just behind Asia-Pacific.

Wireless again dominates the region with 1.3 billion lines, or 87 percent of the total. Western Europe boasts the vast majority of the wired connectivity in the region, with three-quarters of all the 129 million wired broadband lines.

Latin America may be developing, but its wireless lines already outnumber North America’s. Despite its relatively more modest economies, Latin America now has 427 million access lines, of which 403 million are wireless. In fact, Latin America overall gets only six percent of its access through wired connections, making it the more wireless region of our four.

North America ranks a distant fourth, but has a decidedly wired bent. Canada and the United States account for 367 million access lines overall, but fully 20 percent of those are wired broadband lines, the largest percentage of our four regions. Mobile lines tip the scales at nearly 295 million with 90 percent of those being 3G.

Yankee Group projects that by 2011, the average consumer will be consuming 20 gigabytes per month or about 400 times the 500 megabytes per month the average consumer uses today. That poses an obvious business model issue.

Broadband substitution, not a big issue today, might be at some point in the future, as fourth-generation networks become commonplace.

The Yankee Group forecasts that today’s four billion wired and wireless lines around the world will balloon to more than 4.9 billion lines by 2012.

Focusing only on services running at 3G rates or faster, Howe projects even faster growth from today’s 800 million broadband lines to nearly two billion broadband lines worldwide by 2012.

Wireless economics also remain compelling, Howe says. Wireless can span inhospitable terrain. Furthermore, while wireless spectrum rights may take time to negotiate and acquire, they avoid the complexities of real estate easements and environmental impact statements that cable and fiber installations require.

Wireless also costs less to install. Once permits are in place, wireless systems don’t require nearly as much digging up roads, diverting traffic and stringing cables as wired systems do.

The cost to add a wireless customer averages just less than $400 in the United States, while the cost to add a fiber customer in the same market is roughly $2,000.

Wireless networks also can convert prospective buyers into customers faster as well. Compare U.S. wireless companies such as AT&T and T-Mobile that add more than a million mobile customers per month with Verizon, which required more than three years to acquire a million customers with its fiber-based FiOS service, Howe says.

Although the rising acceptance and deployment of wireless networks might convince some that wireless is the future of everything, Howe disagrees. The future of consumer broadband isn’t a matter of choosing wired or wireless broadband; it’s the union of wired experience and wireless ubiquity into seamless experience.

That might not be immediately obvious. “Fewer than one out of five of our U.S. respondents access the mobile Internet on their phones more than once per year,” Howe notes.

Nor will it be easy to wean consumers away from tethered network video. High-definition TV streams and low-latency gaming experiences that would grind to a halt on today’s wireless networks flow effortlessly down today’s cable or fiber access lines.

“No matter how much we may wish for liberation from being tied down to our wired locations, consumers will still depend on wired networks for years and decades to come,” says Howe.

The other issue is that identities and experiences do not flow across access networks, to say nothing of across applications. To create a seamless experience, we need to exploit the best of both types of access networks, Howe says.

So network access has to evolve. “The one-device-per-network connection model is so 1990s,” Howe says. Needed are access platforms and plans that allow consumers to connect all capable devices to all capable networks.

Along the way, other parts of the ecosystem must evolve as well, including use of copyrighted material lawfully obtained, on other lawful devices used by a lawful purchaser.

Where today “family plans” are reasonable and affordable access plans for today, tomorrow users will need “all-you-can-connect plans for entire households.”

“Most carriers and managed services operators won’t lead this transformation,” says Howe. “Operators like Verizon have built entire business models around driving subscribers to walled garden content.”

But consumers with Anywhere access will flock to other providers they already know and trust ranging from Apple’s iTunes to Amazon.com, in spite of Verizon’s walled garden.

The new business also “requires making big bets,” Howe says. With the financial markets keeping pressure on incumbents, operators “just don’t have the stomach for playing Russian roulette with their customer bases.”

“It will be up to smaller companies with a greater tolerance for risk and innovation to make it happen,” Howe argues.

“Fortunately, consumer electronics and device manufacturers are stepping up to this leadership challenge,” he adds. Howe has in mind providers of femtocells, Wi-Fi routers and other bridging devices that span fixed and wireless networks.

There might be large strategy implications as well. Wireless-only or wireline-only operators might find themselves hard pressed to keep up. That suggests yet another major round of industry restructuring as wireline-only and mobile-only providers find they are better off as merged entities.

In some ways that might be comforting to historically wired-only companies: they still have a central role to play. But the shift to wireless and the central role device manufacturers are playing will not provide additional assurance.

If “telecom” is becoming more like “computing,” the analogies suggest a clear and distinct role in the ecosystem for “independent application providers” in much the same way that “independent software vendors” now supply the computing ecosystem.

But that model also suggests less reliance on the older vertically-integrated telecom industry structure as well. Telecom executives won’t like the implication that they become Dell, while others supply operating systems and applications. IP