Last Mile Considerations: Cable, Fiber and 5G

As 5G gets closer to reality and is expected to pay a major role in home broadband, it is interesting to compare it to the current home broadband options, particularly with respect to the user experience and cost of servicing the customer in the last mile.

While 5G promises low latency (10's of milli seconds) and high throughput (excess of 1Gbps), current cable and fiber offerings already offer the same benefits to the customer. 5G's improvements are really relative to the 4G mobility performance and provide similar capabilities as home broadband has had, but, in the context of mobile devices. For mobile devices, this is indeed a quantum improvement. But, for home broadband, it is not. So, 5G fixed wireless will have to innovate in cost and user experience to win over customers from their current alternatives. Hence, this comparison is topical and interesting.

Current Economics of Broadband Market

Comcast, the US broadband market leader, has close to 26M broadband subscribers while Charter has close to 23M subscribers. Both operate at EBITDA margins of roughly 40% each. The alternative service providers, AT&T and Verizon have close to 14M and 6M broadband subscribers respectively and operate at EBITDA margins of roughly 20% each.

Some of the difference in the EBITDA margin can be attributed to the scale advantage of the industry leaders. The overhead cost and higher negotiating power definitely provide an explanation. Another advantage the cable industry has over the rest of the competition is the fact that they routinely share development costs, either through Cable Labs standards or directly with each other. Since none of them compete with each other, there's little friction in this cooperative model. While Comcast and Charter together have almost 50M subscribers, their power (and cost advantage) is multiplied by the fact that the same infrastructural architecture and customer equipment is used by cable operators world wide.

I suspect that these advantages do not explain everything. Some of the difference is likely explained by the custom customer equipment that AT&T and Verizon launched, trying to keep up with the industry leaders. As a side effects, ease of installation and upgrade has been lost. What do I mean? Let me explain by first detailing the last mile in cable and then, comparing it to that of fiber, as an example. I will then explain the implications for 5G.

Cable Last Mile

Figure 1: Cable connection

In a typical broadband household, cable connection comes from a piece of neighborhood cable equipment, called the cable head-end unit. The bandwidth of the coax cable connection is shared by the customers in the neighborhood. For the broadband connection, once the coax gets into the house, a cable modem translates that coax (DOCSIS) connection to the Ethernet and WiFi devices connected to the router. The connection to the modem is via the standards-based coax connector.

Consider what happens when a customer needs a modem upgrade. When the DOCSIS standard that determines the speed of the connection is upgraded in the infrastructure along with the cable head-end, customers can simply be shipped a new modem. Unscrew the old modem, screw  the coax connector into the new modem and the customer is done upgrading to the latest technology.

Missed Opportunity in Fiber

Figure 2: Fiber connection

Contrasting this to the fiber connection, we will quickly see how the fiber upgrade experience results in much higher costs. A typical fiber broadband to the home starts with the optical splitter that splits the optical signal from the Optical Line Terminal (OLT). Optical Network Terminal (ONT) is the device at the customer's premises. ONT converts the optical signal into an electrical signal, either coax or Ethernet. A modem and/or a router takes in the electrical signal and connects the devices in the house using WiFi or Ethernet.

Unfortunately, the way ONT has been designed does not lend itself to an easy upgrade. Optical lines are directly inserted into the ONT during the installation. It is understandable that optical cables with a standard optical connector can not be shipped, given the uncertainty of the length of the cable required. But, if the cables were installed with the optical connector as a part of the installation, the ONT could potentially be user replaceable. Instead, a technician needs to visit the customer to replace it. Given the customer's disdain for the wait involved with an installation and the proprietary hardware, these design choices are difficult to fathom. Not only does this add cost, but, it also results in much worse customer experience.

Implications for 5G

Figure 3: 5G connection

Why does this matter for 5G? As you will see, 5G is, in some ways, similar to the fiber connection above. 5G fixed wireless connection will come to the customer's premises from a 5G base station mounted on a pole in the neighborhood. Fixed wireless 5G will use high band RF in the 20 and 30 GHz range. This signal needs line of sight to the 5G customer premises equipment (5G CPE) and hence, the installation will be critical. The 5G CPE needs to be mounted to account for the altitude, the location and the angle of its mount with respect to the 5G base station. Like other implementations, this 5G CPE, then, needs to communicate in some form to the router that connects to the customer's devices.

If an upgrade were to be painless, what needs to be true? It should be easy to unmount the 5G CPE which means that the mount has to be standardized and be foolproof. Also, the connection to the router needs to be standardized so that the customer could potentially replace the equipment themselves.

Given that the equipment is just a means of delivering the service, standardization will also enable lower costs by allowing others to build it. If standardization can be achieved, it will also erase the scale power of the cable giants and allow the 5G fixed wireless operators to compete on an even keel. The key question is how does one go about this!

Fallacy of Current Cost Accounting Of Data Service at Wireless Carriers

Service pricing at all major carriers betrays the underlying cost accounting method. Even in Unlimited plans, for example the T-Mobile footnote for Unlimited plan says that “…the small fraction of customers using >50GB/mo. may notice reduced speeds until next bill cycle due to data prioritization.” Essentially, the carrier is using GB of data usage as a means of assessing the long term value (LTV) of the customer and ergo, what is economical and what is not. But, GB of data usage based cost accounting isn’t accurate and has consequences going forward.

Why isn’t it Accurate?

It’s isn’t accurate because the underlying assumption is that GB of data usage represent a close approximation of the cost involved in delivering those bits. Cost of carrying the bits can be split into cost of carrying the bits from the customers’ device to the cell tower and from the cell tower to the internet. Cost of carrying the bits from the cell tower to the internet is the same irrespective of the type of device used by the customer. The cost of the backbone data transport pales in comparison to the billions of dollars spent in acquiring the spectrum and constructing the cell towers. So, let’s ignore it for the moment.

Given that spectrum is a scarce resource, cost of carrying bits to the cell tower is based on the amount of spectrum used and the amount of time that the spectrum is used. This isn’t the same across all the devices. The amount of spectrum used is a function of the available spectrum at the cell tower and the quality of the chipset on the device – typically, the more expensive (and premium) the device is, the better the chipset is and the more spectrum it can use at the same time – technically called carrier aggregation. The amount of time spectrum is used is a function of the distance of the customer to the cell tower and also, the quality of the antenna on the device. The less signal the device receives (whether the device is far away from the cell tower or the antenna is bad), the more time the device spends occupying the channel in the spectrum.

Why Wasn’t the Cost Accounting a Problem Before?

Ok, the cost accounting might be inaccurate. Why wasn’t it a problem before?

Pre-2006 when voice was king, there was no carrier aggregation. Mostly, all devices used the same limited spectrum available. The amount of time the spectrum was used was a direct function of the number of minutes a customer used that month. If customer had a crappy antenna or was too far away from cell tower, due to the real time nature of the voice packets, the call quality would degrade. But, the amount of time spectrum is used closely mirrored the number of minutes a customer used that month. So, cost accounting based on minutes of voice calls matched the actual costs very well.

Why is it a Problem Now?

When smartphones took over and data started to be billed by GB, the device subsidy model masked the inaccuracy of the data usage based cost accounting. Subsidy enabled the customers to buy the best phones at an affordable price, which meant most customers had similar and good phones. Also, the better the phone was, typically, the higher the subsidy. So, subsidy amortization and more homogeneous device capabilities masked the cost-price matching problems of the data usage based cost accounting.

What is the Impact?

With the correct cost accounting, network planning teams at carriers will be able to allocate capital for cell tower construction better. The network planning teams can trade-off between capital cost allocation vs. lower operating costs for those customers helped by the new cell towers.

Also, without the correct cost accounting, carriers cannot expect to compete in the hyper segmented world that wireless carrier market soon will be. If the costs are wrong, how can the price be right?

With BYOD coming in a big way and consumers conscious of the cost of the devices, not all devices will be of the same quality. A customer consuming the same amount of data on a device with low quality antenna will have dramatically higher cost than a customer consuming the same amount of data on a much better device. This is why, in the hyper segmented world, the price will be a function of the device as well. A customer using a high amount of data with the latest phone (say, an iPhone X or a Samsung Galaxy S9) might be paying the same as someone with a Moto G. That's similar to the guy with a Ferrari paying the same insurance rate as the guy with Honda Civic! It's still fair because of the different costs they put on the network. In the car world, the vendors wiped that difference by improving reliability. The device vendors can similarly wipe the difference off by ensuring that the antenna is not compromised due to cost.

Unlimited - What Comes Next for the US Wireless Carriers?

The more things changes, the more they remain the same! The wireless market play till now was similar to the dial-ups of old days with data limits and multiple competitors. Could that offer a window into the future of wireless carriers?

A Brief History of Landline Business

The customer access and economics were similar. Service providers had to invest in bandwidth locally, similar to wireless carriers today that have cell towers and spectrum. Customers weren't typically mobile, but, could connect from anywhere. So, service providers like AOL, could service customers anywhere as long as the customers had a local service number the carrier had invested in. Otherwise, it was too expensive for the customers due to the long distance charges. Customers were able to self select initially based on which service provider was cheaper overall. Over time, service providers built capacity across all local service areas.

Two key things that made this a competitive market were regulations that allowed any business to have a local service number and sufficient peer to peer bandwidth (that telephone carriers built) for anyone to provide service. This made the connection commodity. Internet service was the differentiation and the service providers were able to segment their customers based on usage. The more you used, the more you paid. This was the world of wireless carriers till Unlimited came around.

Then came the shorter range technologies such as DSL, cable and fiber that were no longer peer to peer. No regulation was enacted to ensure that local connection was universally accessible. So, anyone other than the service provider that built it couldn't provide an alternate service. Internet was commodity, but, the local connection wasn't any more. Something else had changed. For the service provider, it really didn't make sense to segment the customer based on usage any more. The real costs were based on speed rather than the usage as the cost of carrying bits over long distance became extremely low. Higher speeds required higher investment in the local access infrastructure. So, speed, instead of, usage became the segmentation parameter. This also had parallels to wireless as I will explain later.

Economics of Unlimited

Coming back to wireless, unlimited is tough on the carriers. With spectrum still the primary cost driver and revenue limited to the line access charge, revenues from customers don't match up with the costs of customers that consume disproportionately. With every carrier now offering unlimited, US customers are likely to "super size" on data. Of course, every carriers has come up with a band-aid patch for this with network prioritization over a certain level of usage. That only regulates perhaps the top users of data. Affecting a significant portion of the customers with a low threshold for network prioritization would likely risk customer dissatisfaction and backlash. You can create speed and usage tiers, but, pricing can become quickly complicated. So, what's a carrier to do to match pricing to the costs?

A New Model for Wireless?

Let's now look a little farther away to another retail market. Consider that the service plan revenue is a given and the carriers don't know how much risk a prospective customer presents in terms of network cost. If we consider the service plan revenue as premium and the data usage cost as risk cost, the wireless market looks a lot like a huge market we know very well - the consumer auto insurance market.

Consumer auto insurance companies are able to assess the risk posed by different segments of the population and present a personalized quote to individual customers. The costs are matched to the price, thanks to hyper-segmentation and data analytics on each potential customer.

In a market such as this, it's important for the company to know which customers to bring on and how to get them off the insurance, if the risk profile changes. This is why Progressive has an insurance comparison site - it helps convert prospective customers that fit a risk profile become current customers and later encourage current customers to go away, if they no longer fit the risk profile that Progressive wants to insure. Segment purity might be a key differentiating factor in keeping the churn low - an important factor for investors.

Segmentation and Future of Retail Wireless

Taking a leaf out of the auto insurance market, wireless carriers need to be able to segment the customers based on usage and speed needs and offer the pricing that caters to them. A customer that consumes lot of video presents a different risk profile from a voracious reader of news and e-mail. To be successful, the wireless companies need to be able to hyper segment the customer base, just like the insurance market. This will avoid the morass of ever complicated price offerings.

In a world of such hyper segmentation, each brand might mean different things to customers. One that is known for its customer service will not likely be the cheapest. You might argue that it's true today too. But, retaining segment purity will require the right combination of the channel, customer service, network service and of course, pricing along with the means of identifying the customers that belong to the segment. A carrier going after the urban millenials might have a purely online/ mobile presence, might advertise on social media, might make it easy for the customers to BYOD, focus on WiFi offloading and will look very different from a carrier that is going after baby boomers that might use TV and radio ads, provide phone and store support and provide low cost phones. This is no different from how Esurance or AARP Auto Insurance target their customers. Identifying the customers in the segment requires not just demographics, but, also, data usage and data type behaviors, device ownership etc. This ensures that the discover, evaluate, buy, use, support and exit phases of a customer journey are properly matched to the customer segment.

Unlike auto insurance market that depends on the reinsurance companies to insure the insurance companies, wireless carriers, today, are their own re-insurers. So, that's where the similarity might end. But, the interesting thing about the auto insurance market is that it is a whole lot more competitive than the wireless carrier market. To compete effectively and maintain segment purity, would a carrier need more than one brand - perhaps as many as three or four to ensure a match between customer journey and the segment? Or, a carrier could spin off its retail operation, become a pure network operator (the re-insurer of the wireless market) and let the others duke it out!

An interesting question is what happens to customers when carriers can hyper segment this way? How do the customers compare the service/price combination with their friends? The consumer auto industry again provides a clue: they can't! If they can't, would that lead to more churn or less?

Potential Disruptors

Who could help upend this happy story? Clearly, carriers need help prospecting new customers and understanding their data usage. Nielsen and other data collectors will be happy to help. Retail carriers that can best use predictive analytics to understand the customers will win.

The interesting players are Google and Apple that have a hold on the OS and the underlying amount and type of data. Could they potentially use that information to either stand their own retail carrier or help others compete? Given my previous prediction about Google, you can guess who I think will jump into the fray!

The biggest disruptor, though, might be technology again, similar to how the landline market unfolded.

5G: A Rewind?

5G, as is currently implemented in the US, is based on shorter range frequencies such as 28GHz and 39GHz with the potential of providing up to 3Gbps. But, the range of 5G cells is much lower than a typical LTE cell tower, closer to 200m, not the 20km of LTE. This means only highly urban areas will have dense deployments necessary to enjoy the high throughput. Coverage will vary wildly across the US. It will take a long time for a country like the US to attain 5G coverage similar to that of LTE. Countries such as Korea and Japan that are highly urbanized would have much better coverage than a country such as the US. As with the shorter range technologies in landline, 5G will have a profound effect on the cost of mobility. Will 5G change how the industry evolves in the short term?

So, What Comes Next?

My bet is that, in the US, 5G adoption will not be fast enough to impact the industry forces discussed before. So, I expect that the US wireless market will evolve into hyper-segmented multiple brands within the next four years before 5G could ever become dominant.

Driverless Cars: End of Road Rage?

A recent BBC article got me thinking about driver etiquette in the presence of driverless cars. Would drivers really be rude to autonomous vehicles (AVs)? I am more optimistic than Matthew Wall from BBC about the prospects of AVs and the behavior of human drivers. Here's why ...

Prospects of AVs

Let us first address the potential skepticism of people towards driverless cars. The demand for driverless cars will be driven (pun intended) by people that don't want to drive - people that either don't already have a car, or don't want to have a car. If you are a skeptic of driverless cars, sorry, you really don't have a choice. Barring a legislative initiative to outlaw driverless cars (for which there's scant evidence), you just have to live with the AVs. Consideration of safety, the huge number of cab rides taken and the right of mobility for the elderly likely will trump the resistance of the skeptics.

Driver Behavior

Clearly, AVs are still learning to deal with human drivers. Yes, it might be frustrating for human drivers to deal with AVs, especially, on local roads with slow and unexpected traffic.

But, I am optimistic that there will not be bullying of the AVs by human drivers for too long. Why? Like most technology products, we should expect that AVs will collect a lot of data, including, the places they were at a particular time, the people, cars and other sights they have seen etc, nicely meta-tagged and searchable. This will be a treasure trove for all manners of governmental agencies.

The transportation departments would want some of this information to predict traffic patterns and to plan for future construction. Welfare departments would want to understand passenger patterns and the improvements in services they can provide.

The most intriguing use in the context of driver behavior is the video footage collected by the AVs. Similar to (private) video recordings of public spaces, the video footage of the AVs can likely be asked to be presented for a police investigation through a subpoena. Even more intriguing is the use of meta--tags. Can the law enforcement agencies be able to search and quickly get through all the AVs' video footage at a certain time and place? I don't see why not! In fact, we shouldn't be surprised if the law enforcement directly submit the subpoena to the manufacturer (or software provider) of the car itself, regardless of who owns the car. I am sure there will be other uses for law enforcement analysis such as improvement in gun shot detection and other major crime detection.

Coming back to driver behavior, if you think you are going to have a bout of rage at the AVs, you might want to think of all the video footage captured. :) You should expect the video of the incident ready and packaged for the police, before you are done with your rage.

I don't know about you, but, once AVs become prevalent, I am going to put my legs up on the dashboard and let the machines do the driving. I love driving, but, it won't be as much fun with big brother watching!

A Point System to Promote Competition in F1 Racing

F1 bosses have been agonizing over the last decade about how to make the field more competitive. Dominant teams have changed, but, the lop-sided results have continued. Recent change in qualifying and the change back have not gone down really well. But, there might be a way to promote competition with just making a change to how the points are awarded. Change the reward system and I think the driver and team behavior will change!

Under the current system, the winner of the race is awarded 25 points regardless of the margin between the first place and the second place drivers. The points are awarded in the following order: 25, 18, 15, 12, 10, 8, 6, 4, 2 and 1. The drivers in the front can't hope to get more than the 25, even if he were very very good. The drivers at the back can't change the difference (of 7 points at least) to the front runner even if they were closely matched to the front runner. This state of affairs can be changed!

The Relative Position based Scoring (RPS) for Multi-player Multi-event Competition

The new point system I propose will still award 1 point to the 10^th placed driver. But, the rest of the drivers are only guaranteed 1 more point than the driver below them. The rest of the points are awarded based on how far the driver's timing is from the 10^th placed driver. The points distance is measured in the difference in the final race times of the drivers, treating the race times of the 10 drivers as a population sample of a normal distribution curve. Over multiple events (21 in 2016), the normal distribution assumption is likely to be true, even though individual races might not adhere to the normal distribution curve since we will have 10 drivers over those events.

If you are a driver in i^th position, your points are

RPS_i=11-i+(101-55)*(Race time_i - Race time₁₀)/Σ_j(Race time_j - Race time₁₀)

This formula attempts to distribute the total number of points (101) among the 10 race drivers, with the 10^th placed driver getting 1 point.

To generalize this to a N-competitors event that awards T total points and the N^th competitor getting 1 point, the i^th competitor points are

RPS_i=N+1-i+(T-N*(N+1)/2)*(Race time_i - Race time_N)/Σ_j(Race time_j - Race time_N)

So, How does this new system change the points?

To illustrate the RPS points, the Australian GP race points will be modified as follows:

	Driver	Team	Grid	Race Time	Points	RPS Points
1	Nico Rosberg	Mercedes	2	1:48:15.565	25	22
2	Lewis Hamilton	Mercedes	1	+0:08.060	18	20
3	Sebastian Vettel	Ferrari	3	+0:09.643	15	19
4	Daniel Ricciardo	Red Bull	8	+0:24.330	12	15
5	Felipe Massa	Williams	6	+0:58.979	10	9
6	Romain Grosjean	Haas F1	19	+1:12.081	8	6
7	Nico Hulkenberg	Force India	10	+1:14.199	6	4
8	Valtteri Bottas	Williams	16	+1:15.153	4	3
9	Carlos Sainz Jnr	Toro Rosso	7	+1:15.680	2	2
10	Max Verstappen	Toro Rosso	5	+1:16.833	1	1

With apriori knowledge of the point system, the race will likely be more competitive and exciting! Why do I say that?

Provides Excitement, Even When a Driver is Really Better than the Rest

The first placed driver can potentially get 56 points if he is much better than the rest of the field because the rest of the driver could end up with 9, 8, 7, 6, 5, 4, 3, 2 and 1 points. I am assuming, of course, that the race winner is way ahead and the rest of the field is bunched up together. This provides huge motivation for the front runner to keep pushing, even when a win is guaranteed. The front runner racing hard till the race end has got to be exciting for the fans!

Rewards Consistency of Car and Driver

Given that a race winner can win big, the cost of inconsistency (of car or driver) can be pretty high. A driver (and car) that is consistently good can win ultimately over a driver that has large ups and downs still.

Low Risk of Race Manipulation

The 10^th placed driver is fighting for his 1 point. So, there is little risk of race manipulation from the bottom.

Makes Team Orders Near Impossible

Even in a team that's heads and shoulders over the rest of the field like Mercedes was last year, the two drivers will constantly be battling each other because there's always the possibility of scoring high (56 points) when your opponent (and teammate) could crash out of the event. If the drivers are evenly matched, the team order can potentially only provide an extra point, instead of 7 points now. So, team orders will be less likely, given all the emotional cost involved (Think Red Bull at its peak with Mark Webber getting the raw end of the deal!)

So, What's the Downside

The biggest downside is that fans won't know the points automatically and immediately after the race winner is known. The 10^th driver needs to finish the race before the math can be completed, even for the race winner. But, that's a minor downside compared to the advantages the change in reward system brings. 

Also, RPS doesn't prevent situations where two drivers from the same team are at the front of the race, but, one of them is just helping the other win the championship. (Think Schumacher and Barrichello in the 2000s!) Especially, in a race like Monaco where overtaking is hard, RPS might exacerbate the situation. But, many things will have to go right for the front runner. Two drivers in a dominant team with one of them having no aspirations to championship at a race event where overtaking is hard and they are in a 1-2 position. And, even in that situation, the driver at the front is pushing hard till the end of the race to maximize his points. That has to be exciting for the fans!

RPS Can be Implemented Now!

No changes needed to teams, drivers or race venues - RPS is simple change in scoring. Change in reward system is always the best way to change competitive behavior. This applies to individuals and teams (and corporations). Drivers and teams will be motivated to keep pushing the hardest they can till the end! So, is F1 is ready for RPS?

Death of Subsidy: Winners and Losers

Friends, Americans, countrymen, lend me your ears; I am here to bury device subsidy, not to praise it!

Alright, burying is probably a little premature, but, clearly, device subsidy (in the form of 2-year contracts) is on its death bed. Ever since T-Mobile pioneered equipment installment plans in the US in 2013, Americans started going the way of the rest of the world. Today, equipment installment plans are the norm for the majority of customers upgrading their phones. So, how does it change the mobile industry landscape and who does it benefit most?

What Was Good about Device Subsidy?

Before we jump to how the landscape has changed, I want to give a little thought to what was good about device subsidy. (Even though it's not dead, I will stick to the principle of not speaking ill of the dead. ;) )

If you agree that supplier competition is good for the consumer, then, more choice in original equipment manufacturers (OEMs such as Samsung, Apple, LG, Motorola etc) and more operating systems (OS) is better for the consumer. Device subsidy allowed the operators to level the playing field somewhat for the smaller OEMs and less adopted OSs by offering more subsidy to the devices offered by the weaker players. Why would operators be interested in doing this? Higher diversity in OEMs and OSs increases operators' leverage and helps them differentiate themselves from others. So, the interests of the consumer and the operators are well aligned in this case.

Obviously, life wasn't perfect even with this benefit of device subsidy. Operators vied with each other to carry the most popular phone brand, ever since it was first released in 2007. Operators were willing to provide more subsidy for devices from Apple that was able to bring in higher value customers. This clearly tilted the playing field against some of the same weaker players that the device subsidy should have helped.

The other benefit of device subsidy was that it sped up the technology adoption cycle for the mobile industry. With subsidy, most customers upgraded like clock work every two years. So, OEMs and other players could plan for the demand for new technology based on this upgrade cycle. This was also good for mobile operators in managing their networks since transition between technologies (2G to 3G to 4G) could be managed smoothly with device technology transition via the upgrade cycle. Unfortunately, this resulted in higher costs for the consumers because the costs of upgrades were ultimately borne by them.

So, How Might Future be Different?

I see three main ways in which future could be different from today - likely lengthening of phone upgrade cycle, a focus on long term value of device and potential play by OEMs to get closer to the customer with their own equipment installment plans.

Lengthening of Upgrade Cycle, Especially in the Premium Segment

With the consumers directly responsible and cognizant of phone pricing, some have theorized and I tend to agree that the consumers are likely to upgrade less frequently. The evidence for this theory till now has been scant. Driven by their sudden ability to upgrade on a whim, consumers have actually pushed up the upgrade rates at most operators since the introduction of the equipment installment plans. But, I would hypothesize that the consumers who want to upgrade more frequently (than every two years) are a small fraction of the total consumers.

With AT&T's completion of two years of its launch of Next (equipment financing plan) program and high installed base of iPhones, a large majority of its customer base will be off their 2-year contracts. If the hypothesis is correct, I would expect to start seeing a slow down in upgrade rate in AT&T's Q2 results.

One possibility is that the upgrade cycle will be different between the premium segment of phones such as iPhone 6 or Samsung Galaxy S6 and lower segment phones driven by the difference in the monthly cost of ownership between the two tiers. At higher monthly costs, consumers might be more sensitive to upgrades than otherwise. This would be contrary to the past where the premium segment upgraded much more frequently.

Focus on the Long Term Value of Device to the Consumer

Reduction in upgrade rates will spur some of the OEMs to provide a device with a better long term value for the money. But, unfortunately, not all OEMs will be able to play this game. Apple, with its tight coupling of software and hardware, is much better placed in this aspect. We can already see this in Apple's plans for iOS 9 which will be compatible all the way back to iPhone 4S. At the time of the likely official release of iOS 9, iPhone 4S will be four years old. Assuming that Apple would want the device to work for at least another year, the life of iPhone 4S will be almost five years.

Now, one might wonder if this would be a good strategy, even for Apple! With a saturating smartphone market, a longer upgrade cycle will decrease the volumes even further. Apple is already preparing for this eventuality by pushing harder into services such as music and news. Even though the customer might keep the device longer, app and subscription sales will provide a steady stream of revenue that, hopefully, will compensate for revenue lost due to lower device sales.

Another way OEMs are likely to demonstrate long term value of the device is by supporting the prices in the secondary markets. We have seen this in the automotive industry for a number of years whereby some of the premium car manufacturers have participated in the secondary market by acquiring customers' vehicles and offering used certified vehicles. Apple, again, has shown early signs of intervening in the secondary markets and we should expect much more of this behavior in the future.

Equipment Installment Plan as a Means to Enhance Customer Relationship

One another advantage due of the proliferation of equipment installment plans and the gradual death of device subsidy is the ability of customers to bring their own devices. Clearly, consumers have been taking advantage of this - AT&T announced in its Q1 results that 313,000 of its gross adds were bring-your-own-devices. This provides an avenue for anyone that desires a closer relationship with the mobile customer to realize it through their own equipment installment plan.

Traditionally, Android OEMs, despite their best attempts, have had tenuous relationship with their customers because the customers identified themselves first and foremost to the App Store with their google ID. Reasons for signing up for an account with the OEMs weren't very strong. Equipment installment plans, if offered by OEMs, might now provide a stronger reason to be truly contract free. Motorola has already gone down this path. Using this financing relationship, OEMs could potentially understand their customer needs better and drive better customer retention. Again, Apple is ahead of its competition, even without offering equipment installment plans of its own because of its App Store and OS relationship with the customer.

So, What Does This All Mean?

Despite potentially being at a higher risk due to lengthening of upgrade cycle, Apple is likely the best prepared and positioned to take advantage of the future with equipment installment plans. While other OEMs might be able to replicate some aspects of Apple's strategy, they would do so without the cushion of services revenues (that Google is likely to claim in the Android ecosystem) and the strong customer relationship Apple has enjoyed. The net result is likely a continued race to the bottom in the Android ecosystem while Apple continues its domination of the higher end. Apple will continue to expand the reach of the higher end by selling its older generation devices to those that can't afford the latest devices and by improving the long term value of the devices with OS support and secondary market intervention. Equipment installment plans are likely to strengthen status quo in favor of Apple!

Project Fi: What Might Google's Long Term Plans be?

Ever since Google announced Project Fi, many have wondered about Google's motivations. Google mentioned wanting to make WiFi to cellular hand-off seamless. But, why does Google want to make the WiFi to cellular hand-off seamless?

Driving the Mobile Data Costs Down

The ultimate goal of almost all projects that Google takes up  is improvement in its ability to target search ads. Project Fi is likely no different. I believe Project Fi is likely trying to achieve that goal by driving the mobile data costs down and thereby, increasing usage of mobile devices and Google's knowledge of the customer where ever they happen to be.

The obvious way Project Fi might be trying to drive the data costs down is by upending the relationship mobile operators have with their customers. With Project Fi, Google has been able to insert itself between the mobile operators and the customers, albeit in the form of a MVNO (Mobile Virtual Network Operator - for example. US Cellular). As a customer, you now buy your phone and service from Google. How Google gets you the service is immaterial to you as long as the network coverage is good where it matters to you and the price is right.

So, how is Google delivering the service with Project Fi? Google intends to keep the consumer device primarily on the open WiFi hotspots or ones that you have access to. It has developed a  database of open WiFi hotspots around the world in the course of its Google Maps efforts. It is now putting that database to work to ensure that the mobile device stays in a WiFi hotspot most of the time. When there's no available WiFi hotspot (or if the available connection doesn't support quality of service necessary to support a voice call), T-Mobile and Sprint networks will serve as backups. With eSIM (embedded SIM that is programmable), Google is able to query the two mobile networks and find the one with the best signal (or probably just the cheaper) network.

Suddenly, T-Mobile and Sprint (the MNOs - Mobile Network Operators) aren't relevant to you, the customer, any more because of this arrangement. While T-Mobile and Sprint are happy now to get the wholesale business from Google, Google has the opportunity to negotiate lower rates, if volume picks up in the future. (Under supposed terms of service, T-Mobile and Sprint also have the power to renegotiate the rates. But, really, are the rates going to go up with higher volumes?!)

So, is this the extent Google can push the game?

I think not. There are at least two other ways Google is likely to continue to pursue reducing the mobile data costs. The first avenue Google can pursue is by sharing the WiFi-cellular transition technology with MVNOs to reduce their costs, without itself putting up capital to run a large retail MVNO operation. Large amount of bandwidth available for WiFi could make spectrum a commodity. The second avenue is by using Project Loon to reduce the leverage of MNOs in rural areas where low-band spectrum (600, 700, and 800 MHz) has been essential for coverage.

Driving Down the Costs for Other MVNOs with Call Transition Technology

As I mentioned before, Google's stated objective is to make the call transition from cellular to WiFi and back seamless. While some MVNOs such as Republic Wireless, FreedomPop etc have offered similar service to Project Fi's, the user experience during transition is less than ideal - call drops are frequent.

We can safely assume that Google is better positioned to accomplish this task than Republic Wireless, FreedomPop etc. Ensuring seamless transition likely needs changes to WiFi standard to allow low latency transitions, among other problems that need to be solved for a seamless transition. Google is likely in a much better situation to push the changes needed than a small operator such as FreedomPop.

Once Google is able to perfect the network technology necessary to ensure seamless transitions, Google plans to share the technology with the mobile operators. Thus, all operators (MNOs and MVNOS) will have access to hundreds of MHz of bandwidth with just the current WiFi bands in 2.4GHz and 5GHz. Given that the heaviest current data use typically happens to be at locations where customers send most of their time (homes, offices,coffee shops, malls etc), and for a lot of users, these locations are also likely to have WiFi, MVNOs will be able to offload most of the traffic for which they would otherwise have had to pay the MNOs. This will drive down the costs for the MVNOs which are likely to pass those savings to the customers.

Using MVNOs, Google can scale up the use of call transition technology and WiFi without putting its own capital at risk.

More WiFi Bandwidth Could Weaken the Spectrum Advantage of MNOs

Current allowed bands (2.4GHz and 5GHz) have a total (shared) bandwidth that is comparable to the total spectrum holdings of all the top tier MNOs put together. Proposals under FCC consideration to include 3.6GHz and 4.9GHz bands will increase the available bandwidth for WiFi even more. Armed with WiFi transition technology, MVNOs can hope to stay in WiFi most of the time while ensuring quality of service while the customers are even less likely to encounter bandwidth issues in the future.

In this scenario, bandwidth becomes less of an asset to the MNOs and more of a commodity. (Like land, there is little new spectrum available - so, it can never really become a commodity, but, in urban areas with high WiFi coverage, it will be close to one.) MNVOs will have the opportunity to compete with the MNOs on more even terms and go up the value chain. This has the potential to increase the competition even more today and drive the prices and margins down further.

Project Loon Could Further Reduce MNOs' Leverage

Google has been experimenting with providing internet from hot air balloons aloft in the air. Using solar power and taking advantage of wind variations with altitude, Google has been able to keep its balloons up for 100 days continuously. These balloons are akin to mini-satellites that can provide WiFi/LTE coverage. One very good way to maximize the potential of Project Loon is to use free spectrum (such as WiFi or ISM bands) and high band spectrum (that is abundant at Sprint and DISH) to provide broadband internet service.

Till now, rural cellular coverage required low band (600, 700 and 800 MHz) spectrum because of the high density of cell towers necessary for high band spectrum. With Project Loon, coverage can be provided on demand using free/ high band spectrum. While the coverage still won't rival that of low band spectrum, the quality gap will certainly narrow. This again can lead to commoditization of spectrum.

Other Benefits for Google

Are there other benefits for Google? The short answer is more information on mobile customers. With Project Fi, it will "own" the customer more than ever and understand even more of what they do - call details, apps used and usage details etc. When Google "shares" the call transition with the MVNOs/ MNOs, one has to assume that the obvious barter is for the operators to share the same information that Google now has access to with Project Fi. More customer information, better targeting of ads!

So, What Does This All Mean?

Google's ultimate goal with Project Fi is likely to drive the cost of mobile usage down, not running its own MVNO. Project Fi and Project Loon have the potential to strike at the very base of MNOs' value pyramid and commoditize spectrum, thereby, reducing the cost of mobile usage. The MNOs and regulatory bodies (like FCC) will be faced with choices that are very different from today. MNOs will be challenged to show differentiation in service more than ever before.


Regulatory bodies around the world will be more challenged than ever with balancing revenue goals and providing free spectrum for WiFi. Also, if the WiFi spectrum is meant to allow low cost internet service, should the MNOs be able to charge for unlicensed use of the spectrum for WiFi? If so, what's a reasonable amount?