Pareto Principle and Telecom Revenues and Profit

The Pareto Principle, often colloquially known as the 80/20 rule, explains many phenomena in nature, science and business, including the connectivity business. 

In the United Kingdom, for example, 70 percent of people live in areas using 20 percent of cell sites. Ericsson estimates that 20 percent of cell sites carry 70 percent of 3G traffic. We also should expect deployment of about 80 percent of small cells in hyper-dense or very-dense areas. 

CenturyLink earns 75 percent of its revenue from enterprise services. 80 percent of telco profits come from 20 percent of the products or customers. AT&T has earned the bulk of its actual profits from business services. 

Typically,  80 percent of any company’s profit is generated by 20 percent of its customers; 80 percent of complaints come from 20 percent of customers; 80 percent of profits come from 20 percent of the company’s effort; 80 percent of sales come from 20 percent of products or services; 80 percent of sales are made by 20 percent of sellers and 80 percent of clients come from 20 percent of marketing activities.

There are many other common Pareto examples:

• 80 percent of car accidents are caused by 20 percent of young people

• 80 percent of lottery tickets are bought by 20 percent of society

• 80 percent of air pollution is caused by 20 percent of the population

• 80 percent of all firearms are used by 20 percent of the population

• 80 percent of all Internet traffic belongs to 20 percent of websites

• 80 percent of car crashes happen within the first 20 percent of the distance covered

• 80 percent of mobile phone calls come from 20 percent of the population

• 80 percent of the time people use 20 percent of the tools at their disposal

It is estimated that 20 percent of Covid-19 cases were responsible for 80 percent of local transmission.  Some 80 percent of users will only use 20 percent of any piece of software's features. Microsoft also observed that 20 percent of software bugs will cause 80 percent of system errors and crashes.

It is estimated that the top 20 percent of players are responsible for 80 percent of a basketball team’s success. 

The issue is how to apply Pareto in the connectivity business, as telecom revenue growth rates are quite low, cash flow is shrinking, returns on invested capital are dropping and consequently equity valuations are under pressure. 

The now-obvious observation is that connectivity provider revenue growth is a fraction of economic growth. To change that situation, something other than “keep doing what you have been doing” will not produce different results. 

source: IDATE

Freedom to maneuver often hinges on the regulatory regime. Tier-one service providers with an obligation to “serve everyone” cannot make the same choices as non-regulated or lightly-regulated firms able to choose their geographies, customers and products. 

Carriers of last resort cannot simply choose not to serve consumer customer segments, or focus only on urban areas. Specialist providers can do so. 

Tier-one service providers have learned to rely on mobility services, though. 

In Western Europe, perhaps 80 percent of revenue growth is driven by mobile services, though mobility revenues overall are about 46 percent of total revenues. 

source: A.D. Little

That is even more true in other regions, where mobility revenue is as much as 82 percent of all connectivity provider revenues, and where mobile infrastructure accounts for most of the new facilities-based competition between service providers. 

source: IDATE

The traditional difference in profit margins between enterprise and consumer accounts also explains why many believe 5G profits will disproportionately be created by enterprise 5G services, not consumer 5G.