04. Reaching the next 4.2 billion

Posted 2016-11-21

Howdy folks. It’s definitely been a while since I’ve written here. The last months have been intense as I started my dual MBA/MA degree at Wharton-Lauder and have been swept into the crazy graduate school life... But I’ve managed to sneak in some time to take down some thoughts today!

A quick aside from the totally Mexico-related posts for a moment, though I’ll definitely hit on some important Mexico developments in a bit. I want to take a minute to talk about connectivity, something you may have heard a lot about recently.

Surprisingly, lots of people aren’t on the internet yet

Facebook, Google, and a number of other companies you have and haven’t heard of are focusing a lot of time and effort right now on connecting more people around the world to the internet.

And for good reason. The United Nations Broadband Commission estimates that 4.2 billion people lack access to the internet around the world – that’s nearly 60% of the world’s population. That’s… insane. To me, and a few others, at least.

A Facebook/Deloitte report estimates that connecting these people could generate $2.2 trillion in additional global GDP. And for platforms like Facebook, that’s 8.2 billion new eyeballs to deliver advertising to. For device manufacturers like Apple and ecosystem providers like Google, that’s an additional 4.2 billion people buying phones and then apps and content. For wireless network providers like AT&T, China Mobile, and Telefónica – yep, you guessed it – it’s a potential 4.2 billion more monthly subscribers on the books. Those numbers are even more tempting as internet penetration and subscription growth rates are plateauing in developed markets.

These aren’t the only organizations who want to reach more people (governments care a lot too, and we’ll get to that in a minute), but they’re the ones who have the biggest incentives and the deepest pockets to make this happen right now.

Yet the financial value of this new market might be the less important aspect about it. It’s clear that non-traditional actors like Facebook and Google are investing heavily in these new markets since it represents for them a chance to “own their own pipes” rather than continue to be beholden to wireless network providers. In other words, the traditional telco sector, one of the world’s stodgier sectors, is about to get rocked. Even some private investors and VC funds and start-ups are potentially staking claims to

Suffice to say the opportunity – not only for financial success, but for industry overhaul – is massive.

And suffice to say that it won’t happen cheaply, or easily, or really, very soon.

More than one way to reach billions of people

There are lot of ways to reach these people, and if you look at the industry, those actors I mentioned before are taking vastly different approaches to achieve this connectivity goal. Obviously it’s a multifaceted and hairy feat that requires coordination and investment beyond any single organization and industry, and with different problems that will require different solutions, so there’s clearly room for maneuver among different approaches.

It’s valuable to uncover these different solutions since it can (1) give a sense of how these might, or might not, work together, (2) give a sense of what solutions might come out on top, and (3) start to outline what opportunities this all will generate. Currently it seems there are five main kinds of approaches being taken to connect the next 4.2 billion.

Moonshot tech

The most unique approach – and probably the one that gets most press – are those moonshot projects at big tech companies that are attempting to redefine and completely bypass the existing communications infrastructure.

You’ve probably read about Google’s Loon, Facebook’s Connectivity Lab, its acquisition of dronemakers Titan Aerospace, or Elon Musk’s fleet of internet-propagating satellites. They’re all similar in that they’re essentially creating a new infrastructure solution unique for remote parts of the world, that aren’t based on traditional terrestrial core – backhaul – tower – device models.

Incremental tech

While there’s a lot of moonshot tech that’s focusing on overhauling a lot traditional telecom networks, some traditional actors are also looking to reach new customers. For instance, take Orange’s solution to extend service to Niger’s rural regions using Intelsat satellite services for wireless backhaul.

Now this still rides on existing infrastructure, but it’s at least rethinking fundamental aspects of what the traditional network looks like to meet new ends. (That makes sense; traditional actors have huge assets that are incredibly useful, so why not use them in new ways.)

Infrastructure redefinition

Using that existing infrastructure is super useful, and great – if you happen to have a ton of existing infrastructure. If you’re a company like Facebook who’s trying to muscle in and grab a share of those pipes you increasingly use... You might be out of luck. That is, unless you overhaul that infrastructure and define a new standard for it.

Which is exactly what Facebook is doing with its Telecom Infra Project (TIP). The initiative is a Facebook-convened group of telecom players whose principal aim is to reduce industry costs by developing an “open source” set of telecom technology and infrastructure designs. The idea is that the high cost of infrastructure really only reflects the cost of designing and licensing proprietary technology, which would be wiped out with open source materials. And it’s already making progress towards opening up that infrastructure. The social network recently launched its OpenCellular open-source wireless access platform to cheaply and easily expand internet access in remote areas, and is donating that hardware to all TIP members.

Of course, this open sourcing strategy takes direct aim at telecom hardware manufacturers like Ericsson, which has a market cap of about $22 billion. Yet the industry seems to appreciate the potential value, and many are on board: TIP already counts among its members Deutsche Telekom, EE, Intel, Nokia, SK Telecom, and Telefónica (not to mention many others).

In other words, Mark Zuckerberg is convinced that the real constraints on connectivity expansion are capital requirements, which is a pretty fair assumption.

Business model shifts

But the connectivity issue isn’t purely technical. A huge part of the issue is that it’s expensive to connect devices in remote areas (the product), and there aren’t enough paying people, or people with high enough incomes, to offset bringing them online (the economics). So what happens if you shift the economics around and offer a slightly cheaper product?

That’s essentially what Facebook’s trying with internet.org, which is a partnership across Facebook, over-the-top content (OTT) providers, and telecom infrastructure manufacturers and service providers. Essentially Facebook provides a “walled garden” of apps and services to subscribers for free, with the assumption that Facebook and the other OTT providers pay the telecom operators to be in that walled garden, presumably to capture valuable eyeballs. Thus, a cheaper, subsidized product.

Of course there’s a huge component of self-interest and potential violations of net neutrality along these lines, as has been very well-documented on the internet.org efforts in India. I won’t get into the right/wrong aspects of it, but I do think that it’s a very unique approach on some of the key aspects of the problem. If part of the issue is the huge upfront capital expenditure to build these networks, then any way to somehow fray those costs might have to be considered.

State-led efforts

Which brings us to the last approach – state-led efforts for connectivity. Though it may seem inefficient to bring in the government for such an initiative, their spending power can’t be denied. And as the cry for “internet as a human right” rises, it only makes sense that a state would step in to intervene.

And here’s where we (finally!) talk a bit about the case of Mexico. The constitutional reform and accompanying Ley de Telecomunicaciones y Radiodifusión passed in 2013 aimed to curb the market power of Carlos Slim’s long-held América Móvil monopoly and make connectivity more affordable and accessible in the country. As part of this, the new law proscribed the state build and operate a new “shared network”, or carrier of carriers that would sell capacity to mobile virtual network operators (MVNOs), the reasoning being that subsidizing and sharing the network cost would drive down end-user cost. The government aims that this new network reach at least 85% of the country’s population – because as part of the reform, internet access is a now a constitutional right – and thankfully, the network will ride on Mexico’s recently-opened 700 MHz band, perfect for long-range LTE connections.

The formal bidding process for a consortium to build and operate this new network is currently underway, is estimated to cost around $10 billion (pending incoming bids), and is scheduled to have a network up-and-running by 2018. Fingers crossed.

It’s a very compelling and inspiring concept, but you have to realize the road is tough. Rwanda recently partnered with Korea Telecom (KT)to reach its rural areas through a similar joint venture, but KT is reassessing its role in the partnership as the investment timeline may be too long for the company. But these efforts shouldn’t be discounted for being led by government. What states lack in efficiency and performance they can sometimes make up for in scale, spending capacity, and convening power – all important things in telecom, and hard projects, like this.

Can you hear me now?

So obviously there’s a lot going on in the space, and it’s an exciting time to be looking at telecommunications, not even considering some of the innovations that are going on in some of the more technical aspects in the industry.

It all begs the question: Who’s going to connect the next 4.2 billion? Facebook is investing a whole lot of time and energy on this, so I’m putting some money on them, but it’s clear that no one company or industry is going to crack this nut. Seeing the amount of collaboration that’s going into these efforts – TIP, internet.org, Loon’s partnerships with various carriers and governments – it starts to become clear that it’s necessary to use existing infrastructure assets, bring new ideas from the Valley, and maybe lean on the state for some help along the way.