Wednesday, November 29, 2017

Fixed Networks Becoming Unsustainable

It is becoming clearer that the fixed network telecom business is losing its ability to sustain itself, as it becomes harder to generate core revenue.   

In other words, one might argue, the core business model is failing. That is why firms such as Frontier Communications now are in danger of bankruptcy, and why the Indian mobile business is rapidly consolidating.

A difficult business model is why Verizon and AT&T (and other telcos and internet service providers) are looking to fixed wireless as an alternative to fiber to the home.

Observers now speculate on whether Windstream and its facilities unit Uniti might also face bankruptcy.

The task for regulators therefore is what to do: encouraging investment at a time when that investment is growing difficult, while not placing new and unnecessary barriers on the industry, even while, by traditional antitrust metrics, industry concentration is high.

The problem is that if industry revenue and profitability continues to drop, more concentration is among the necessary steps to reshape the industry for survival.

That will require balancing the principle of maintaining competition with the need to manage industry decline (encouraging investment where that is possible).

To be sure, market share concentration is far from unusual in the U.S. market.

Also, concentration levels seen in the internet industry are far higher than what is seen in the access provider business. Internet search, for example, has an Heffindahl-Hirshman Index (HHI) score in the 7400 range.

The mobile industry, for example, has an HHI score in the neighborhood of 2500.

The HHI is a standard measure of industry concentration used by antitrust officials.

Revenues in nearly all markets are declining and profit margins are going negative. Mobile is faring better, but big risks still lie ahead as the 5G era arrives.

At the same time, revenue per bit is dropping as well, as transport and access providers earn less revenue despite higher capital investment. In some markets, facilities-based competition dramatically raises business risk, as well.  
To the extent that executives question the financial return from robust investment in access facilities, at least part of the challenge is that potential returns are paltry, especially in the fixed networks segment of the business.

That business model challenge can be seen in revenue trends. In 2018, global telecom revenue is expected to fall, especially in the fixed networks business, which will decline nearly 12 percent.  

The point is that in addition to the steps industry executives might take, regulators will have to adjust to creating policies appropriate for an industry about to consolidate, and is growth challenged at best. At worst, the global industry is going to massively consolidate over the next decade or so.  

That poses different challenges than would be the case for an industry that is rapidly growing. “Regulating for decline” perhaps is too strong, but “regulating to allow restructuring” is probably more apt.  

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