How Big is Unified Communications as a Service Business?

It always is difficult to say with certainty how big a market unified communications represents. It is a mix of enterprise hardware and software (room videoconferencing systems, phone systems, for example) plus software and managed services (unified communications as a service), access services (SIP, for example), consulting and maintenance contracts. By some estimates, the global market in 2020 is about $12 billion. 

source: GM Insights

Others believe the the unified communications as a service (UCaaS) market alone represented about $16 billion in annual revenues in 2019. 

source: Markets and Markets

By other estimates, is $39 billion or $40 billion in annual revenues, or as much as $56 billion. Such forecasts rely on high rates of growth. 

Gartner estimated North America UCaaS spending having growth rates of 20 percent in 2019, for example, representing sales of about $2.1 billion. 

source: Gartner

Such figures explain why unified communications, either premises-based or delivered as a managed service, has been the province of specialists (integrators, interconnect companies, VoIP specialists, PBX suppliers). The market is too small to be of major interest to a tier-one service provider. 

At least in the U.S. market, any opportunity representing less than $1 billion in sales for any single firm is too small to chase.

Telcos and OTT Streaming Partnerships?

Amnesia? Not Really

Sometimes it seems as though we suffer from historical amnesia. We cannot seem to recall the lessons of something we have lived through before. Actually, that might not be the case. As data from Silicon Valley Bank shows, “we” have not actually lived through something before. 

Its latest market report shows that 61 percent of active venture capital firms have never experienced a recession. Just 23 percent of firms have weathered two recessions (the internet bubble and the Great Recession of 2008). About 16 percent experienced the Great Recession only.

In other words, it often is literally the case that industry participants actually have no memory of something because they were not in business at the time or were not in a position to make decisions at the time. 

So it is not actually true that active industry participants today actually have seen or lived through some events that are part of historical memory for others. It is not historical amnesia: it is youth. 

source: Silicon Valley Bank

Where are All the Unserved U.S. Households?

Since the “digital divide” is closing everywhere in the world, it simply stands to reason that the divide ought to be narrowing in the United States as well. That is not to say the divide closes completely, only that clear and steady progress is being made to supply better internet access to citizens who wish to buy it. 

The Federal Communications Commission says “the number of Americans lacking access to fixed terrestrial broadband service at 25/3 Mbps continues to decline, going down by more than 14 percent in 2018 and more than 30 percent between 2016 and 2018.” 

The FCC also notes that the number of Americans without access to 4G Long Term Evolution (LTE) mobile broadband with a median speed of 10/3 Mbps fell approximately 54 percent between 2017 and 2018.

Also, more than 85 percent of U.S. residents now have access (can buy) fixed terrestrial broadband service at 250/25 Mbps, a 47 percent increase since 2017. Over the same period, the number of Americans living in rural areas with access to such service increased by 85 percent, the FCC says. 

 Inevitably, some will lament the existence of differences; decrying a lack of perfection or simply arguing that the numbers are incorrect, arguing that the number of people without broadband access is 42 million or even as high as 162 million. 

It is not clear where those higher figures come from. Looking at connected households is revealing, however. 

The Federal Reserve estimates there are about 140 million housing units., defined as “a house, an apartment, a group of rooms, or a single room occupied or intended for occupancy as separate living quarters.” 

To be more precise, we also would have to account for households that either choose not to buy, or cannot easily buy. Some of those latter cases might be boats that serve as a residence, trailers or rooms rented inside homes where the resident does not buy internet access because the owner or manager of the property supplies the access. 

More than 16 million units are vacant at any particular time, leaving a total of perhaps 124 million units, which accords well with the estimate of 121.6 million households we get if we assume the U.S. population is 304 million persons, with an average household size of 2.5. Then there are 121.6 million households. 

That is the base of total locations fixed networks must reach. But a significant number of households choose not to buy fixed network access. 

Somewhere between 15 percent and 20 percent of U.S. homes are “mobile-only” for internet access, which might represent as much between 18 million and 24 million households. Those customers choose not to buy fixed network internet access, for whatever reason they choose. 

If so, then the number of locations who might buy fixed network internet access is on the order of 97.6 million to 103.6 million sites. 

If take rates for all homes (including the vacant units) are about 80 percent, then we would expect total fixed network accounts to number about 97.3 million locations.

Leichtman Research Group estimates that the largest U.S. telcos and cable companies have about 101.2 million accounts, but that includes business accounts. That matches fairly well the estimate that total fixed network accounts should be about 97.3 million in number. 

The point is that there are very few U.S. locations that do not already buy some form of internet access--mobile or fixed or both. That is difficult to square with claims that huge numbers of peop;le literally cannot buy service at 25 Mbps. 

Consider also that internet access routinely is available from satellite and other wireless and mobile platforms. 

Satellite broadband and fixed wireless operators traditionally have targeted rural homes and small businesses as their primary market, in the past said to include as many as 35 million locations. But estimates vary widely. Some say 80 million people live in rural areas, others say 46 million do, using the U.S. Census Bureau methodology. 

 Satellite broadband providers seem to have three million subscriptions, though some estimates (wrong, in my opinion) suggest that  6.76 percent of U.S. internet subscriptions are provided by satellite. 

Assume there are 139 million U.S. housing units, the high estimate, without adjusting for vacant units or other locations that cannot be wired. That implies nine million U.S. satellite broadband subscribers. No estimate I have seen--ever--suggests there really are nine million U.S. satellite broadband accounts. 

HughesNet believes 18 million homes are its market opportunity. Rental units alone might represent 6.6 million units, although not locations, as some of those units are in multi-family complexes. 

According to Urban.org, 13 million homes are owned by rural residents. Those figures roughly accord with HughesNet estimates of market opportunity. 

A more conservative estimate is that perhaps two percent to three percent of U.S. homes are the primary target for satellite broadband. That would include the most-isolated areas, where there are no terrestrial fixed networks using cabling. In many rural areas that are slightly more dense, wireless ISPs already operate. And, of course, there are many parts of rural areas served by cable operators or telcos. 

The point is that many homes already can buy 25 Mbps service, albeit from a satellite provider. 

A big issue is the presence of fixed wireless ISPs. According to Broadband Now, some 148.4 million U.S. residents are covered by fixed wireless ISPs. Assume an average household size of 2.5. That implies some 59 million rural locations already are reached by fixed wireless ISPs. 

Add all that up and some of us cannot fathom how 42 million to 162 million people actually are not able to buy 25 Mbps internet access.

Cable Competition Limits FTTH Market Share

According to IDATE and the Fiber to the Home Council Europe, U.K. coverage of fiber to home or building is about 15 percent of locations. Take rates--customers who actually buy service on those connections, is about 18 percent. In other words, it appears that less than one in five locations able to buy a fiber access service actually do so. 

source: IDATE

In France, about 57 percent of locations can buy. About 45 percent do so, IDATE data suggests. Though the percentages change, the same pattern holds elsewhere: offered the ability to buy fiber access service, only about 40 percent of potential customers do so. 

That might seem odd, but competition from cable TV operators helps explain the numbers. Across Europe, at the end of 2017, at least 36 percent of European homes could buy cable TV service, and a substantial number of those likely could buy internet access service from the cable operator as well. In 2017, for example, there were more than 37 million cable TV-supplied internet access accounts in service. 

Many Markets for Enterprise Products are Relatively Small

For all the attention SD-WAN gets in the network element and managed services business, it remains an almost-perilously small contributor to service provider revenues. That is not unusual. Many enterprise products, including unified communications as a service, actually product smallish revenues for service providers. 

Granted, the SD-WAN market features high growth rates. But total revenue remained extremely small as recently as 2018, when managed service revenue was only about $282 million, according to Vertical Systems Group.  

source: Vertical Systems Group

Gartner believes managed SD-WAN services reached possibly $2.5 billion in 2020. The total SD-WAN market is a mix of managed services and network element sales, though. The issue is the balance of sales, going forward. Some predict that managed services eventually will dominate revenue. 

source: Gartner

One way of estimating eventual managed service revenue is to view SD-WAN as the  replacement for MPLS, which might have represented about $20 billion annual revenues at its peak. 

One major trend is for wide area network data transport to shift from a “service an enterprise buys” to a “capability supplied by our own private network.” Big content and app providers now are the primary drivers of WAN capacity needs, and it is cheaper for such firms to build and own their own WANs than to buy capacity on the open market.

source: TeleGeography

In the 21st century, WAN traffic has moved steadily in the direction of carriage on private networks owned and operated by major application providers, and away from the public networks offering internet backbone carriage. In large part, that is because big app and content providers rely on data centers and cloud computing to support their businesses. 

By 2016, more than 70 percent of all internet traffic across the Atlantic was carried over private networks, not on public WAN networks. Obviously, that also means no revenue was earned directly by public service providers for carrying that traffic.

On intra-Asian routes, private networks in 2016 carried 60 percent of all traffic. On trans-Pacific routes, private networks carried about 58 percent of traffic.

In other words, far less traffic now moves over public networks than once was the case, a development with important revenue and business model implications. To a growing extent, private networks are displacing WAN services.  

The point is that important enterprise services produce revenues for service providers that are smaller than you might think, despite the huge growth in WAN traffic, cloud computing capacity and shift to “everything as a service.”

Such services as SD-WAN and unified communications as a service (UCASS) are vitally important for some suppliers, to be sure. But the size of those markets, in the context of total communications revenues, is fairly limited. And a substantial portion of such revenues are actually earned by suppliers of “do it yourself” network infrastructure. 

Wi-Fi is virtually mission critical, for example, but revenues are mostly earned by equipment, chipset and router suppliers, not service providers. 

On any IP network, it is possible to create network functionality at the edge, using owned customer premises equipment (routers, for example), without buying a turned up service supplying the equivalent functionality. That shifts revenue from service providers to gear suppliers. 

Also, the economics of infrastructure make owning a more-affordable solution than buying service in a growing number of cases, for WAN capacity as well as for UCASS. 

In high volume, owning gear and creating your own services still makes sense for large enterprises. Managed services tend to make more financial sense for smaller users. Larger enterprises also now find they can build their own servers and routers instead of buying them. 

All that illustrates why enterprise spending on connectivity services is not indicative of the value derived from those purchases. Nor are connectivity, UCASS or SD-WAN markets directly correlated with traffic volume. “Do it yourself” has become a material driver of public market services demand. 

Carrier Neutral Interconnection Has Financial Value for Data Centers

It is fairly easy to illustrate the value wide area networks have for data centers. S&P Global, for example, expects carrier-neutral data centers with multiple connections to wide area networks to generate revenue growth about 10 percent higher than data centers without such connections.

S&P Global expects cash flow growth of data centers with carrier-neutral interconnection to grow about three times the rate of sites without such carrier-neutral interconnections. Cash flow margins also are expected to be higher, and financial leverage lower, for carrier-neutral sites. 

“Interconnection provides a key competitive advantage,” S&P Global says. “We expect providers with carrier-neutral interconnection facilities will continue to outperform those that lack interconnection capabilities.”

“We believe that interconnected data center facilities with carrier-neutral ecosystems will continue to have greater demand among cloud and network providers, as well as enterprise customers, enabling greater pricing power than data centers that do not have carrier-neutral hotels,” the firm argues. 

“Operators that lack interconnection are forced to primarily compete on price or upselling their customers with managed services, which tend to have lower margins, shorter contract lengths, and higher churn than colocation,” S&P Global says. 

source: S&P Global

Is Corporate Responsibility Profitable?

Though it is not always easy, big firms that aim to produce outcomes beyond company profit tend to find that profits actually improve after social responsibility goals become part of the core firm mission. 

More than 2,000 academic studies have examined the impact of environmental, social, and governance propositions on equity returns, and 63 percent of them found positive results, versus only eight percent that were negative. 

About 93 percent of U.S. Fortune 500 CEOs believe their companies should not mainly focus on making profits to the exclusion of other social goals. That makes sense. What executive from a Fortune 500 company would say anything but that, in an age when customers and employees say they care about many outcomes from large firms, beyond maximizing profit?

That is not the point. The point is what happens if such goals become a core part of the company mission, allowing pursuit of profit to remain in place, but also adding other social outcomes as well. 

Reality arguably lags, as you might guess. In the McKinsey survey of 1,000 participants from U.S. companies, 82 percent affirmed the importance of purpose, but only 42 percent reported that their company’s stated “purpose” had much effect. 

source: McKinsey

Contributing to society and creating meaningful work, the top two priorities of employees in the survey, are the focus of just 21 percent and 11 percent of purpose statements, respectively.

To be sure, “there is a frustratingly simple reason why business leaders have struggled to square all these circles with coherent statements and credible actions: it’s difficult to solve, simultaneously, for the interests of employees, communities, suppliers, the environment, customers, and shareholders,” McKinsey says. 

But McKinsey argues it can be done, while not damaging firm profits. Purpose can generate top line revenue growth (or serve as an insurance policy against revenue slippage) by creating more loyal customers, fostering trust, and preserving the customer base.

There is some evidence, McKinsey argues, that 47 percent of consumers disappointed with a brand’s stance on a social issue stop buying its products. Perhaps 17 percent will never return.

Also, purpose-driven environmental stewardship can reduce costs. In some cases, companies gain because energy and water consumption fall as a result of stewardship activities, for example.

Some results can be hard to quantify, but purpose can unleash employee potential, helping firms win the war for talent, retain the best people, and boost employee motivation. 

Perhaps 66 percent of millennials take a company’s social and environmental commitments into account when deciding where to work, for example. 

Purpose also can make management more aware of shifting external expectations, policy directions, and industry standards, helping identify risks management  might otherwise miss.

Some Day, This is How We Will Feel

Facebook Takes 10% Stake In Reliance Jio Platforms

Facebook’s $5.7 billion investment in Reliance Jio has a number of business objectives. Simply, Facebook believes it wins when “everyone” is connected to the internet, and Jio has 388 million internet access accounts. 

The investment gives Facebook a 10-percent stake in Jio Platforms, the umbrella entity for all of Reliance digital and internet businesses, including mobile apps, broadband connectivity, smart devices, cloud computing, big data analytics, artificial intelligence, internet of things, augmented and mixed reality, and blockchain.

source: Facebook

The investment should help Facebook increase usage of WhatsApp, its messaging platform; the Facebook app and create additional opportunities for mining and monetizing all the Reliance firm data. Facebook conceivably also could get a boost for any e-commerce efforts. JioMart is envisioned as  primary beneficiary from integration of WhatsApp messaging, for example. 

Some might also note that the move is consistent with expansion of Facebook’s role in multiple parts of the internet ecosystem, from connectivity to social networking and other apps. 

Not Everything that Occurs Post-Pandemic is Caused by the Pandemic

Some already speculate about the impact of Covid-driven 5G deployment delays in Europe, which both Ericsson and Huawei have noted. Analysys Mason predicts a significant 3.4 percent dip in developed market telecom revenues in the immediate aftermath of the pandemic, resulting from business failures that--at least temporarily--reduce the customer base. 

With the caveat that trends could be quite different from region to region, what is not so clear is how “permanent” the pandemic economic shutdowns will be, longer term, on infrastructure deployment by service providers, business or consumer spending on communications. Correlation is not causation. Not everything we observe, post-pandemic, will be caused by the pandemic. In other words, cyclical changes of a short-term nature and longer-term secular changes should not be confused.

The short-term impact is going to be clear enough, since policy makers created a deliberate recession. Recessions tend to depress growth, and also telecom spending growth by businesses and consumers. What remains to be explained, though, are the long-term effects, if any. 

source: Analysys Mason

And while post-pandemic spending is likely to be depressed, a rebound to the underlying trend is almost certain to happen within two years, as was the case in the wake of the 2008 Great Recession. And some believe flat connectivity revenue growth, not contraction, is in store, even if economic growth falls fairly sharply. 

source: IDC

There is a long term decline or flattening  trend at work for connectivity services that is hard to pin on any single recession, since spending in the aftermath of the Great Recession of 2008 actually recovered by 2010. Looking at global telecom spending, which is relatively flat, despite growth in developing markets, something else--or several trends--seem to be at work. 

Internet-based product substitutes often allow users to reduce spending even as value increases. Competition is causing price declines for virtually all products. Open source and products that improve with Moore’s Law allow firms to reap value even when total cost is less. Virtualization of most processes also allows value to increase while the cost of solutions often decreases. 

source: Statista

The issue is whether the effects of the Coronavirus pandemic will be transitory or permanent. If gross domestic product grows, that will drive higher IT spending, and presumably also higher enterprise connectivity spending.

Some would note that the longer-term trend for enterprise spending on information technology both tends to track GDP growth, but also has shifted to “newer” technologies, and away from legacy products. 

It can be hard to quantify telecom spending that is buried in wider information technology forecasts, but IT spending tends to grow over time, and often at rates faster than GDP grows. Telecom spending tends to fall, over time, in real terms, though growing (globally) at about one-percent annual rates. 

source: IDC

source: IDC

The impact of the Great Recession of 2008 was sharp, but relatively short, if it had effects at all, on productivity levels, research and development spending or gross domestic product. So the question is whether the same thing will happen in the wake of the pandemic. A return to the underlying trend might well be assumed. 

source: Intereconomics

Some might note revenue trends in the aftermath of the Great Recession of 2008 that they would describe as “permanent.” So some might hypothesize that post-pandemic trends will similarly be long lived. 

BT Global Services saw its revenue from businesses grew between 2005 and 2008 but suffered a long-term decline after 2008,  Analysys Mason notes. Revenue from data services and managed network services increased in both 2009 and 2010, but at a slower rate than in the previous three years.

Orange saw revenue from enterprises become stable between 2005 and 2008 but began to fall steadily after 2008. 

The rate of decline of business services revenue for AT&T and Verizon increased significantly after 2008. Both business services divisions served mainly large enterprises.

The issue, though, is whether those are long-term effects of the recession itself or are simply reflections of wider underlying changes in the business. We can note that consumer spending on connectivity, as a share of household spending, has been dropping for a decade since 2008. Yet few customers would likely argue the value they derive from the lessened spending is lower than it once was. 

source: Scope, OECD

Business spending likewise has been computer-centric rather than telecom-centric for some time, though growth trends can be flattened in the wake of a major bubble burst or recession. Spending growth flattened in the wake of the Internet bubble crash of 2000.  

source: Researchgate

In part, that reflects slower revenue growth, as business budgets set such spending on a “percentage of revenues” basis. Slower revenue growth also means slower IT spending growth. So temporary dips are expected. The issue is whether long-term trends also are created. 

source: IMF

The value to be wrung from better technology also means less information technology spending is required to achieve a desired objective. Also, much spending is shifting from hardware and software to services, which are much harder to quantify, in terms of impact, value and productivity. 

Enterprises might be spending less on connectivity services, long term, because the unit prices of connectivity services are dropping so much. Business customers might be substituting less-costly products for legacy products (IP telephony for traditional long distance calling or conferencing services). 

Business demand for fixed network voice arguably continues to drop, much as consumer demand for such products began to drop about 2000. 

The bottom line is that permanent trends specifically caused by the pandemic are going to be subtle and hard to quantify.

Data Consumption at-Home is Probably Not Up as Much as You Might Think

Stay-at-home rules likely have not increased total data usage as much as you might think. 

This chart showing at-home internet access usage suggests the stay-at-home orders have led to an increase in data consumption, as average at-home usage is up 38 percent overall. 

source: Statista

But Cisco predicted there would be about a 50 percent growth in mobile data consumption between 2019 and 2020 in any case.

source: Cisco

The baseline for fixed network global IP traffic growth tends to run about 24 percent annually. Cisco has estimated global consumption growth rates growth rates of as high as 53 percent. 

The point is that the Covid-19 impact on data consumption is more subtle than one might presuppose. Normal growth over a single year would be expected to boost data consumption between 24 percent and 50 percent, as a base case. 

To be sure, at-home data usage is up. But mobile consumption and consumption at business, office, factory, entertainment venues and schools is down. Total consumption therefore is likely fairly nuanced.