Next Era of Telecom Might be Quite Different

The next era of telecommunications might be a stretch for most firms, in the sense that revenue growth might have to come from application creation and development that never have been core competencies. 

To be sure, edge computing, internet of things use cases and a few consumer use cases involving artificial reality or virtual reality seem promising. The larger point is that revenues in any of those new growth areas will not likely be enough to offset stagnating revenues in the core connectivity business. They will help, but the magnitude of new revenue growth will be staggering. 

If we assume that past patterns hold, and that most telcos will have to replace half of current revenue each decade, then any new revenue sources have to be big. And that is the issue. 

Edge computing, internet of things or private networks will help. But are they big enough new revenue sources to replace literally half of current revenue? Some might argue that is unlikely. 

Incremental gains are not going to be enough. Telcos are looking at generating new revenues to the tune of $400 billion in the next 10 years. If IoT or edge computing generate $10 billion to $20 billion in incremental new revenues, that helps. But it does not come close to solving the bigger revenue problem.

As in the past, acquisitions are the path forward, as there likely is no feasible way to organically grow that big a revenue stream so fast. 

The pattern is entertainment video and content, where firms have acquired assets, customer bases and revenue streams, rather than building them. 

That strategy will be dictated in part by the scant success telcos have had in the past with innovation. Voice communication might be considered the singular example of a sustainable application created by the industry, though no longer an application that the industry monopolizes. 

source: STL Partners 

Text messaging was almost an accidental discovery and a byproduct of Signaling System 7 adoption. Internet access is an application, but a relatively trivial app whose value is really provided by the pipes that allow the access to happen. Linear and streaming video were invented by others. 

But scale and speed are the other issues. The industry cannot wait for organic growth to grow incrementally over time, if it really needs to create $400 billion of new revenue within 10 years. So scale, within a decade, is the challenge. And that means acquisitions. 

The industry’s efforts to create business data transport were important, but often failed to achieve scale. ISDN was important for a time, and ATM enjoyed some success. But true global scale came from the developers of Ethernet and Internet Protocol, both created by the computing industry, and the derivative internet and World Wide Web. 

The contest between ATM--the telco next-generation network proposal--and IP, the computing industry proposal, was settled in favor of the computing industry’s preference. The observation simply is that telcos have not been notably successful with innovation outside the core network functions. 

But skills in those areas might well be necessary in the next era, as the connectivity industry (with the exception of Africa) might already have passed the peak of its life cycle. 

STL Partners forecasts that, apart from Africa, all regions will see a compound annual growth rate (CAGR) below three percent for both fixed and mobile services for the next three years. 

Global CAGR of less than one percent per year is the forecast, which is a negative rate of growth assuming any rate of inflation above one percent.