Telco Business Models in Competitive, Internet Era are Quite Different

The fundamental economics of any retail (networks serving all consumers and businesses) communications access network are distinctly different in the competitive era. In the monopoly era, a service provider could, in principle, assume take rates close to 95 percent. 

The simple corollary was that the “cost per location” and “cost per customer” were nearly identical. The business model math also is far easier. “Revenue per location” and “revenue per customer” were nearly identical. 

So a payback analysis is fairly straightforward. None of that is true in the competitive era. 

In the competitive era, former incumbents in some cases can assume retail market share between 20 percent to 60 percent. That can mean a “cost per customer” is 40 percent to five times more than the “cost per location” of the network. 

Assume just two competent suppliers, each good enough to possibly capture up to half the market for any service or product, over some reasonable amount of time, with revenue per customer roughly similar to the other competitor. 

It always is possible that “cost per customer” is twice as high as “cost per passing or cost per location.” For such reasons, possible take rates and market share will determine whether a specific network upgrade is viable.

A related assumption is that there will be a significant degree of stranded assets. Only a percentage of potential customers and locations will actually generate revenue. Even assuming a multi-product strategy, few service providers find they are sustainable below 30 percent market share.

Take note: that assumes as much as 70 percent of the access network will not generate revenue. In competitive markets, that is why the FTTH decision typically is so difficult. 

There have been similar changes in the applications area that shape the business model. Monopoly era business models generally were driven by sales of one product: voice on the telco network, video on the cable network, voice on the mobile network, generally because each net work was designed to deliver that one service or application.

The era of multi-purpose networks, plus competition, changes the math extensively. Though no single network can expect to capture 90 percent of demand, each network can, in principle, capture the demand for three or more anchor services. 

And that has been a foundational strategy in the competitive era, even as legacy services have begun their decline, overall. It is far easier to take market share in a mass market product than to create an entirely-new product that appeals to most of the market. “Same product, lower price” is a value proposition consumers easily grasp. 

It is far harder to scale sales of a product consumers are unsure they really need. 

Still, the economics of a multi-purpose network are far easier than that of a single-purpose network. As an advisor to a telco pondering a cable TV acquisition, I once asked a cable executive what would happen to the business if take rates dropped 10 percent. “We’d be out of business” was the immediate response. 

That might be true in a single-product business. It is not true of a multi-product business with three or more services to sell. Getting 33 percent share of three different mass market services--assuming equivalent retail prices and profit margins--is the same as 99 percent share of a single-product market. 

In principle--under those conditions--the cost per location and cost per customer are nearly identical. The revenue per location and revenue per customer also are nearly identical. 

That is a fundamental change in business model for suppliers of retail telecom services.