This article originally appeared in the July 2011 issue of NGN.
Years ago Telephony magazine ran a story for which Victor Schnee graced the cover, along with the headline “Is This Man Crazy?”
The article discussed a 1990 Probe Research study Schnee had just written about what would happen in the wake of divestiture, how demand would explode, and why the telcos’ wireline business model was going to implode.
Fast forward 21 years and these predictions don’t seem so crazy after all. But, despite his track record, Schnee’s latest musings are once again likely to rattle some cages.
The analyst now contends that Cisco’s (News - Alert) Visual Networking Index greatly understates future mobile data growth. And this bigger-than-expected mobile boom, he says, could lead to the acquisition of a major wireless provider by an over-the-top company like Apple, Facebook or Google (News - Alert).
Schnee lays out the details behind this thinking in the study "The Mobile Traffic Deluge & Its Implications for the Communications Industry,” which he co-authored with Al Boschulte. Both Boschulte and Schnee are telecom veterans and senior directors with New Paradigm Resources Group, a Chicago-based research and consulting outfit.
The Problem with Cisco’s VNI
The Cisco VNI estimates that data traffic growth will increase 100 percent year over year. But Cisco could be off by whole number multiples, Boschulte says. That’s because Cisco based its assumptions heavily on what was happening in the past, failing to look at a variety of factors that are currently in play, according to Boschulte and Schnee.
NPRG in its report is referring here to the mobile data information provided in the Cisco VNI issued in February. But the firm says that information on mobile in Cisco’s new report, released last month, uses the same forecast as the February report. Table 2 of the newly released Cisco VNI has the same 92 percent growth rate forecast in the earlier report for mobile and 6.2 exabytes per month of worldwide mobile traffic, notes NPRG, which believes this is off by a factor of 10.
Especially troubling to NPRG is the fact that the Cisco VNI bases its assumptions on the time frame from 1997 to 2001, when the Internet was growing up, and said the next several years will be like that, Schnee says. But things are very different now on a number of fronts, he notes.
Back then the PC was the main endpoint, but today new connected devices are emerging all the time – and the prices of such devices are expected to decline rapidly over time, says Schnee. And the new phones are much more powerful and have multiple cores, says Boschulte. He adds that initially forecasts indicated 50 percent of phones would be smartphones by 2015; now, 100 percent are expected to be smartphones because there will be no price difference between smartphones and dumb phones.
“All these phones will be emulating the iPhone (News - Alert), and I think most of the world is not grasping that fact,” Boschulte says.
Additionally, a decade ago there were few personal applications, but now apps are multiplying like crazy. And many of these applications are mashups, which drive even more activity on the network. Schnee adds that smartphones now also allow multitasking, and that’s only going to grow as some new devices come with multiple screens.
Also, during the late-1990s/early 2000s time frame, Schnee continues, there was little video.
“Now video is the rage, and [it’s] growing incredibly rapidly,” he notes.
Analysis and Imagination
To get their numbers, the NPRG analysts looked at where data growth is coming from and where it is most likely to show up going forward. They adopted a bottom-up methodology to forecast where cell sites would grow and where devices would grow. They also tried to model which percentage of users would be using which applications. As Schnee notes, this required some imagination, but then that’s in large part what forecasting is all about, he says.
They also considered video-centric apps, data-centric apps, and they looked at three factors underlying growth and demand for such applications. One of the factors is base load demand, which is the demand on the network even when the user is doing nothing. Another is user-initiated demand, which considers the user numbers and profiles of a cell site at busy hour and the load they would create both upstream and downstream. The third factor is the interdependence of applications, which considers the extent of traffic that can be generated by automatic triggers that happen if a user takes a particular action. For example, if a user changes locations this could trigger the phone to update the user’s social network status.
So NPRG looked at all that and estimated the number of users likely to be on a given cell site at a peak time of day, what they were likely to be doing, and the resulting megabit load on the cell site. And then the analysts modeled the distribution of cell sites to get an estimate as to the total traffic on networks.
This modeling leads NPRG to its conclusion that Cisco’s VNI is way off.
“100% growth year over year looks very low,” says Boschulte, adding that the Cisco numbers would probably be more applicable to forecasts for rural areas.
“Cisco’s numbers are likely to happen at 10x or more,” adds Schnee.
The Value of Connections
But, wait, you might be thinking. What about the fact that some network owners like AT&T are now implementing data caps and other packaging and pricing that could potentially put a lid on bandwidth usage?
Schnee says there’s no way that’s going to stop, or even significantly slow, the mobile data deluge. And he called a recent Wall Street Journal article suggesting that could happen “a howler.”
“The carrier model has always been based on trying to administer demand growth, and it’s been breaking apart in different ways for the last 20 years,” he says.
The traditional telcos frequently have tried to put the brakes on progress in communications. Schnee says service providers resisted getting into the data world as long as they could, and that texting happened despite the wishes of the cellular service providers.
But network operators’ efforts to tamp down demand is not going to work this time, he says, because over-the-top companies like Apple (News - Alert), Facebook and Google aren’t going to stand aside and let that happen. Ample network capacity is necessary for such companies to continue on their paths of success, and these OTT companies will do whatever they must do to ensure the bandwidth their businesses and customers need remains available and affordable, Schnee contends. He goes on to say that OTT types see the network as just a cog in the application-delivery machine. (At another point in the conversation he and Boschulte compared the network to a door on an automotive assembly line.)
Clearly, an intermediary step would be for an Apple or a Google to pursue an MVNO relationship with a wireless operator or operators, says Boschulte. The MVNO world got a bit of a black eye a few years ago when efforts by Disney (News - Alert), among others, to sell branded cell phone services flopped. But the OTT companies are better positioned to be MVNOs, he says, since they have both the brands, and the products and services, to drive usage on mobile networks.
Of course, it’s not out of the realm of possibility that over-the-top players would try to acquire wireless service providers. (In fact, as Schnee notes, Google has been circling around the edges of network ownership for some time. Remember Google’s involvement in the citywide Wi-Fi drive; its alleged interest in the recent spectrum auction; and its current plans to build a fiber-to-the-home network in Kansas City?)
At their current valuations, the OTT A-listers certainly have the resources to pursue such deals.
As the NPRG analysts note, a company with a valuation in the hundreds of billions doesn’t have to think much about buying a company with a $15 billion valuation that will enable it to continue to make things work. And if telcos don’t continue investing in next-generation networks at a pace that will enable customers to continue enjoying existing applications and have a good experience with new ones, that’s just what some of these OTT types might try to do, they say.
Pointing out a recent report indicating that Apple could soon have a $2 trillion valuation (and, according to at least one Wall Street expert, may already be there), Schnee says: “When you’re on a path like that, you just can’t let anything stand in your way.”
Edited by Stefania Viscusi