No End in Sight for Margin Compression or Revenue Shrinkage?

When observers say the “cost” of supplying telecom services is “too high,” and must be made more affordable, the obvious and direct implication is that somewhere in the supply ecosystem, some participants are going to see a reduction in value and revenue, allowing the final end product--internet access--to be provided to “everyone,” at prices they can afford.

As one example, “open source” network elements already have been developed by the Telecom Infrastructure Project (TIP), a consortium led by Facebook to develop open source transmission products that, in turn, reduce the cost of building and operating transmission networks.

Voyager, a long-haul optical transmission system, already been tested by Facebook and European telecom company Telia over Telia’s thousand-kilometer-telecom network. ADVA Optical Networking is manufacturing the device, which also is being tested by other carriers.

By definition, open source  telecom technology is designed to lower networking costs, which means it will shrink the size of telecom equipment markets. Of course, the buyers of such gear--the communications companies--want lower-cost gear and platforms. And some equipment suppliers see an opportunity to disrupt current market leaders and seize a larger role for themselves.

TIP’s OpenCellular project likewise is working on an open source 4G LTE/LTE base station, the hardware and the software.   

So here’s the point: the global telecom industry now is said to be a $350 billion market, including software, hardware and services.

Ericsson and Huawei, among other leading suppliers, have not joined, though Nokia, Cisco, Juniper and others have joined.

The point is that, whatever you think internet access presently costs, it is going to cost less in the future. Of course, there is a corollary. Some participants in the telecom ecosystem are going to represent less value, and earn less revenue, than before. In most segments of the ecosystem other than the application portions of the business, that has been the case for some decades.

The total value of the internet value chain has almost trebled from $1.2 trillion in 2008 to almost $3.5 trillion in 2015, a compound annual growth rate of 16 percent, according to A.T. Kearney estimates published by the GSMA. About 17 percent of that total value is captured by connectivity providers of all types.

Many would argue it is possible, perhaps likely, that that percentage will shrink over the next decade or two. Margin compression is a problem all too familiar in the service provider and platform supplier parts of the networking value chain. But some problems are worse, especially gross revenue shrinkage. The problem is that margin compression virtually always is a sign of shrinking value and gross revenue contraction.

source: GSMA