Saturday, July 29, 2017

Third Telecom Era Approaches

As revolutionary as was the change from telecom monopoly to competition, we appear to be on the cusp of a third era.

For a number of fundamental reasons, “telecommunications” roles are becoming more porous, diffuse and shared. The notion that “anybody can be an internet service provider,” in contrast to “there is only one lawful provider of service,” illustrates the point.

Depending on the use case, an enterprise (public hotspot) or even consumer (cable homespot, mobile tethering) can act as the ISP. For purposes of delivering e-books, Amazon acts as a special purpose ISP. Google and Facebook act as ISPs in a variety of settings and roles. Google Fiber competes directly with telcos and cable companies as a general purpose fixed internet services supplier.

In India, Google and Facebook partner to operate Wi-Fi hotspots in public locations and villages. There may be other roles and platforms in the future.  

Beyond that, as we move towards an era of pervasive computing. Value moves inexorably “up the stack,” to applications and use cases, and away from the simple value of internet access.

And that same process also means that traditional telecom apps (voice, messaging, content delivery) can be supplied by third parties, over the top of any specific internet connection. That further increases the potential amount of competition, and therefore will affect potential profit margins.

All that illustrates the point that industry revenue streams and business models are non-exclusive and open to challenge. Declining average revenue per account is one example of the trend. Declining profit margins are another direct result.

That, in turn, drives firm strategy. More scale helps with gross revenue and profit margins. That is why a major global wave of consolidation is likely--or virtually certain--over the next decade.

The U.S. market, for example, has not yet started to consolidate in the same way that India’s market already has started. In fact, it is likely the Indian mobile market will shrink in half, in terms of facilities-based suppliers, within a year, from eight to four.

It is only a straw man, but assume something similar happens in the U.S. market. That would potentially reduce the number of leading suppliers in half (across the fixed and mobile domains). Where there are perhaps nine leaders (across the fixed and mobile segments, including two cable operators, four mobile suppliers and three big fixed network suppliers), there could, over perhaps a decade, be just four left, with varying global roles, as well.

Any way you look at it Sprint, T-Mobile US, Dish Network are virtually certain to be involved in the next big merger wave in the U.S. telecommunications market. Charter Communications or Comcast are possibly going to be involved, as well as a few content firms.

While it remains possible that a Sprint tie-up with T-Mobile US could be proposed, it is not the only combination that makes sense, and many of those other mergers would likely have a better chance of regulatory approval.

That consolidation would mirror similar big market structure moves in India, which long has been among the mobile markets with the most facilities-based contenders.

So far, all we’ve seen in the U.S. market are talks and rumors. But the action is coming, for obvious strategic reasons. As profit gets wrung out of the business, more scale is the short-term answer, at the very least buying additional time and resources to work on the long-term objectives of changing the value proposition.

A reasonable and workable objective is to achieve a balance of “access” and “application” revenues that might approach 50-50. To be sure, nobody has done that yet. Eventually, it is likely to be necessary for survival.

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