“How to increase the value of connectivity services” has been a top concern of most telecom executives for a couple of decades. It can be argued that not so much as changed, for all the attention and effort. Nor should that come as a surprise.
Looking at all manner of revenue and market share growth winners, very few firms actually have managed to change their fundamental position in the value chain, or their revenue growth drivers. Google and Facebook still rely mostly on advertising. Microsoft still relies mostly on software sales. Apple still relies mostly on device sales.
Several of those firms have made strides, however. Apple gets a bit more revenue every year from “services.” In recent quarters “service” revenues have been more than 20 percent of Apple’s total revenues.
Amazon Web Services now represents 11 percent of Amazon total revenue. Microsoft’s cloud computing revenue is growing, but it is hard to say by how much, as those contributions are grouped with Xbox and server revenues. Some estimate Azure revenue at about 17 percent of total Microsoft revenues.
Slideware is not “product” or “service.” “Value” is not its representation on a chart but its role in a customer or user’s life and work. Generally speaking, observers say the highest value comes as one gets closer to the end user in the function stack.
Basically, supplying bandwidth is lower in the value chain than content, advertising or apps. Every app requires connectivity, but differentiation and value tend to be clearest in the “business” layer that links a user or customer’s problem and the application that solves that problem. Google Maps; Amazon or Alibaba; iPhone; Airbnb or a productivity suite rather than internet access, for example.
The “problem” for connectivity providers is slow revenue growth in the core connectivity services business. Under the best of circumstances, revenue grows in line with growth of gross domestic product. But connectivity and computing services also exhibit a trend towards lower prices and profit margins over time.
That implies a constant search for new products and revenue streams with higher value. And, to be sure, argues GSMA, that has happened. Connectivity providers have added significant non-core revenues.
But that remains a challenging task. It is no mistake that some representations of the internet value chain place “connectivity” where it appears to be closer to the end user or customer. Our general notion is that this is where value is highest.
As a practical matter, there are key disagreements about how much emphasis to place on chasing new roles and how much on operational improvements in the core business. Innovation can be quite hard, and very risky.
Mobile operators have more options than fixed network providers. But every connectivity provider faces long-term risk of commoditization. Still, telcos have not done much worse than Microsoft, Apple and Amazon or Google at innovating, looking at the percentage of "new" revenue sources created over the past two decades.
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