For Fixed Network Operators, Competition Really Has Changed Everything

In the telecom business, competition changes everything, a realization that has grown over the decades as increasing portions of the market are exposed to robust competition.

You might think competition matters primarily because market leaders face rival providers who often use the “same product, less cost” marketing platform. That is an issue, but not the biggest issue.

Instead, what really matters is a change in fundamental cost structure for any facilities-based service provider--especially fixed network operators.

In a monopoly environment, the provider of a highly-popular service (voice or video entertainment) might reasonably expect that 85 percent to 95 percent of locations actually will be customers.

In other words, most locations generate revenue. In a duopoly market, assuming two competent providers, each contestant can reasonably expect to split the available market. That might mean a theoretical limit of about 43 percent to 47 percent of locations will generate revenue, for each contestant.

Add a third competent provider and the numbers shrink further. In that scenario, maximum customer locations might be 28 percent to 31 percent.

In other words, a fixed network could well find that fewer than one in three locations passed by its network will generate revenue. That obviously affects and shapes the business model. The reason there is so much emphasis on triple play services is that the strategy helps contestants compensate for the tougher business model of a two-provider or three-provider market.

Internet Protocol makes matters worse for facilities-based providers, since the separation of apps from access means any potential customer can, in principle, buy any key service from any lawful third party service, once a suitable Internet access connection is in place.

At least in principle, widespread availability of over-the-top services further stresses the business model for any facilities-based access provider.

If you want to know why incentives for investment are so important, that is the reason. Even if it is the responsibility of each discrete operator to manage and “right size” costs, it has gotten progressively harder to earn a sustainable return from an effectively-dwindling number of potential customers.

Consider AT&T, which now reports revenue in four buckets: business solutions, consumer mobility, entertainment and Internet services and international.

Business solutions represents 54 percent of total revenue. Consumer mobility represents 27 percent. Entertainment and Internet Services generates about 18 percent of revenue, while International produces only about one percent of revenue.

In other words, 81 percent of revenue is generated by business solutions and consumer mobility. That also is the case for some other fixed network providers that formerly earned most of their revenue from the consumer segment, but now rely on business customers for half or more of revenue.  

The operating income story is more skewed. Business solutions represents 66 percent of total operating income. Consumer mobility represents 38 percent of operating income. Entertainment and Internet Services has negative operating income, as does the International segment.

In terms of operating income, it all comes from business solutions and consumer mobility.

One suspects that will change when AT&T starts reporting results that reflect DirecTV operations, with the entertainment and Internet operations segment assuming both a higher role in revenue, but also contributing operating income.

But that noted, consider the implications. AT&T generates 81 percent of revenue from business customers and its mobility network. By definition, comparatively little revenue is earned from consumers using the fixed network.

The other problem for AT&T is that cable TV companies are the leading providers of high speed access in the U.S. market, especially at 25 Mbps and higher speeds.In fact, by some estimates, fiber to the home is feasible in less than half of all locations globally.  

Fully 54 percent of total AT&T revenue is generated by business customers, on the mobile and fixed network. Stranded assets are not really a problem for the mobile network. But low-earning or stranded assets are a big and growing issue for the fixed network.