Can telcos and other connectivity providers really escape their role in the value chain? Pointedly, are access providers unfairly victimized by apps their customers use?
In the monopoly era of closed networks, the case would have made more sense. No app could operate on a public telecom network without the approval of the network owner. And consider video entertainment services that are traditionally the most bandwidth-intensive apps used by people. Were TV broadcast networks or cable operators victimized by customers watching lots of television?
In the open, internet era, that logic does not hold. Any lawful app can operate on the internet, in a permissionless manner. That is a wildly different business model for internet service providers.
Customers are not users. An ISP can set and modify the business relationship with its access customers. No ISP can control or profit directly from any of the non-owned apps any customer chooses to use.
Heavy usage remains an issue for ISPs. Traditional methods of conquering heavy-usage problems rarely work: profiling and capping heavy users; capping applications; quota tiering; unlimited plans; and throwing more money into capacity.
But that is a business problem for an ISP to settle, not others.
Asked another way, consider an analogy: can electricity providers, fresh water and wastewater providers escape their roles in value chains and ecosystems? Are energy providers victimized by their customers? Should appliance manufacturers share in electricity payments because some applicances use more energy than others?
Are transport providers (airlines, shipping lines, road and pipeline owners) unfairly victimized by customers whose reasons for traveling can vary? Or is the issue the fair market price for customers using transport?
Such questions matter because business strategy matters as connectivity providers try to grow revenues, maintain or boost profit margins and obtain higher market valuations.
The stark reality is that if connectivity service providers are “utilities” or “infrastructure” in the same mold as electricity, natural gas, railroads, airlines, shipping companies, sanitation and water firms, with high capital investment requirements and slow growth, then it will be exceedingly difficult to dramatically change industry valuations, revenues or profits.
To boost valuations, connectivity providers might have to grow beyond their present infrastructure roles. And that has proven difficult to impossible, historically.
Connectivity interests such as the GSMA are fond of pointing out value differences between access providers and app providers who use access networks. Over time,GSMA points out, the value of apps and services using the internet has grown as a percentage of total value chain revenues, compared to enabling infrastructure, connectivity or user interface revenues, for example.
Public market valuations of app providers have grown faster than valuations of access providers, some point out.
That is true, but misleading. Industry valuations differ for all sorts of reasons, and utility industry valuations tend to be lower than those of consumer-facing or business-facing industries, for example.
And while it is true that all internet apps, services and business models depend on internet access, so do all other industries rely on transportation networks, wastewater and freshwater networks, as well as electricity and energy networks.
The fact that industry valuations for sectors that use electricity, communications, transport and other energy and sanitation services are different, or higher, than valuations of utilities, reflects something about the financial value of those industries.
The argument that some other industries should be revenue sharing with connectivity service providers is like arguing that appliance manufacturers should be sharing revenue with electricity providers. Some appliances, after all, consume lots of energy, requiring electricity providers to invest more capital.
In EU homes, for example, the most energy is consumed by heating and cooling operations, followed by lighting. But for electricity providers, the customer relationship is with the residents of homes, not the manufacturers of appliances, according to Grist.
Likewise, internet service providers have a customer relationship with the businesses and consumers who want internet access. There is no such relationship with the apps and services consumers or businesses interact with and use.
If global gross domestic product is about $100 trillion, and annual connectivity provider revenues amount to perhaps $1.6 trillion, then connectivity service providers represent about 1.6 percent of global gross domestic product.
The industry would prefer different and bigger roles in the internet ecosystem, to be sure. But it continues to prove difficult for connectivity providers to take on additional value-generating roles.
Doing so by organically growing capabilities is slow and generally unavailing. Growing by acquisition is financially difficult as equity multiples in the connectivity business tend to be lower than multiples in other adjacent parts of the value chain.
Earnings multiples in the telecom industry are far lower than in most other industries, for example. Enterprise value to revenue multiples might appear more comparable to other industries.
Mobility assets are easier to describe than fixed assets these days, but even mobile valuations are lower than many other industries, though higher than oil and gas exploration and airline transport.
Most of the economic activity generated within the internet ecosystem happens elsewhere: components, devices, infrastructure, applications, advertising and commerce.
Connectivity providers must create new roles elsewhere in the ecosystem to significantly alter their revenue, profit and valuation profiles.
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