Huge Market Share Loss for Incumbents is the Actual Intent of Deregulation

Of all changes--large and small--that have occurred in the telecom business since deregulation and the emergence of the internet, none are perhaps more striking than the lost market share incumbents have experienced. And, to be sure, that is the expected outcome of telecom deregulation.

Looking only at internet access, and only at the U.S. market, consider that incumbent telcos have fractional market share in the fixed network segment of the business. For 20 years, incumbent telcos have steadily lost market share to cable companies. AT&T and Verizon, for example, have only about 23 percent share, according to Mobile Experts. 

source: Mobile Experts

According to Leichtman Research, cable companies have 67 percent of the installed base, telcos about 33 percent share. And, paradoxically perhaps, the business case for telcos to deploy additional fiber to the home gets more challenging, even as the cost of building FTTH arguably has fallen. 

The reason is that where FTTH builds by telcos could rely on substantial potential from a combination of voice, video entertainment and internet access, the dwindling demand for fixed network voice and linear video entertainment means the revenue case increasingly is built on internet access share gains. 

Fixed network voice lines, for example, fell by half between 2000 and 2020, even as households grew 24 percent and employee counts grew 22 percent, both of which represent increased demand for communication services, if not wired voice in particular. 

source: US Telecom

Demand for linear video services also is diminishing, though slowly. The bigger issue arguably is profit on such services, rather than gross revenue. Where video cost of goods once was on the order of 48 percent to 50 percent for the largest service providers, cost of goods in 2019 is probably closer to 60 percent of gross revenue. 

If all other direct costs (marketing, operations) are only 10 percent of revenue, that implies gross margins of up to 40 percent in the past, now perhaps 30 percent or lower. 

Small telcos and cable TV companies might have next to zero or negative margins on linear video in 2020. 

In the mobile segment of the business, incumbents still rule the day. But the cable companies, Dish Network and other potential competitors are coming.