The Downside of Multi-Purpose IP Networks

By now, virtually all observers agree that direct revenue generated by fixed networks will shift to supplying broadband access, while some of the strategic value of the fixed network shifts to support of mobile and fixed wireless networks. 

That raises a fairly big question. The whole rationale behind multi-purpose internet protocol networks is that they can carry any type of information or media and support any service. But the growing reliance on broadband revenue functionally pushed the networks back to “single purpose” mode, at least in terms of what drives revenue. 

To be sure, the hope about tomorrow’s networks is that new use cases and revenue streams will develop. But those new sources will have to exhibit scale as the lead legacy revenue streams decay. For a big tier-one service provider, one might characterize the scale problem as “if any new service does not generate at least $1 billion annually in new revenue, it is too small to bother with.”

In some markets, broadband might already represent half of total revenue. Some predict that internet access will represent 64 percent of total revenue by about 2024, for example, lead by mobile data. 

 source: Omdia 

Fixed network revenue, though, arguably has been dropping for two decades. 

And the bottom line for some tier-one service providers is that the consumer fixed networks business is fairly small, as a contributor to revenues or cash flow. In recent years, AT&T, for example, has generated about 15 percent of total cash flow from all consumer services on the fixed network. 

Half of total cash flow came from mobility services and 17 percent was earned from the Warner Media content business. About 17 percent of cash flow was generated from services supplied to business customers on the fixed network. 

Altogether, the fixed network generates about 32 percent of total cash flow for AT&T. So the bottom line is that any investment in FTTH could affect 32 percent of total revenue, where 5G affects at least half of total revenue. 

Likewise, in recent years Verizon earned 87 percent of its profits from mobility services, just 13 percent from all fixed network services. 

That raises other questions. How much upside does fiber to the home or fixed wireless have for tier-one service providers, mobile or fixed? How much does the financial return justify investing in broadband access, compared to other alternative investments?

Consider mobile services. Most revenue in the global telecom business now is generated by mobile services and nearly all the net revenue growth. So it makes sense to prioritize investment in mobile infrastructure, compared to fixed infrastructure, for retail customers. 

In the fixed networks business, though, what investment provides the biggest financial and revenue return? “Broadband” is the easy answer, and often the correct answer. But even there, the cost-benefit analysis must be conducted, as return on capital always matters. 

And it is not always clear that investment in gigabit fiber networks has a positive return on invested capital.  For that matter, it has not been so clear that fixed network investments in general have an adequate return on capital. 

This is the sort of big problem service providers have faced before, and successfully. More than two decades ago, the anticipated withering of the core voice business (long distance and access lines) might have seemed an existential crisis. But internet access, video subscriptions and mobility provided substitute new revenues. 

Now that consumer broadband is becoming saturated and voice and video subscriptions are declining, another big shift has to be made. 

The shift to multi-purpose IP networks enables access to apps and services using every media type. Ironically, that very capability is pushing revenue generation on fixed networks and mobile networks alike to “dumb pipe internet access.” 

Another way of putting matters is that although multi-purpose networks increasingly are valuable for application providers who can get to customers on those networks, the new networks might actually reduce addressable revenue for connectivity providers.