Where are the Enduring Business Moats for Fixed, Mobile Operators?

As more digital infrastructure assets shift into private equity or institutional investor hands, a logical question is whether there is a change in the perceived business value of network and facilities ownership, or simply a change in network costs and business models. 

In the past, ownership of scarce network access assets was considered to provide value because the cost of such facilities was so high that a business moat was created for the owner of the assets. 

Of course, 50 years ago such business moats also were complemented by government  monopolies as well. These days, under competitive frameworks, only the business moat matters. 

With the caveat that business strategies can change over time, there has been some movement towards layered, disaggregated facilities models in both fixed and mobile realms. In the mobility business, open radio access networks, virtualized functions, tower asset sales and the whole mobile virtual network operator model provide examples of a shift away from vertically-integrated formats.

In the fixed networks business, some countries have moved to “single wholesale network” approaches, which can, in some cases, eliminate the business value of facilities ownership nearly entirely, as all retailers use the same network, with the same features and underlying network cost structures. 

In markets where a range of options are possible, more instances of joint ventures are visible, in large part a means of reducing the risk and cost of new fiber-to-location facilities while arguably also speeding deployment timetables. 

In such cases, it is not yet possible to say the perceived value of an access network (scarcity value) is diminished. In fact, the need to deploy first or early, before other contestants can deploy their own facilities, might tacitly support the notion that the network remains a scarce asset with moat value. 

In other words, if deploying the first FTTH network leads to 40 percent take rates, while following networks only manage to gain about 20 percent each, then the scarcity value remains, even if not as robustly as in the monopoly era. 

That noted, in some cases, fixed network operators have traded a local monopoly in exchange for government permission to expand on a wider geographic basis. Few remember it now, but Rochester Telephone in 1993 opened its network to competitors in exchange for the right to enter the long distance business. 

Singtel essentially did the same thing later, giving up its Singapore monopoly for freedom to expand elsewhere in South and Southeast Asia. 

Those are examples of strategic decisions that do not directly bear on the issue of the business value of access networks produced by their scarcity. 

At least so far, mobile operators have been able to shed tower assets without harming their franchises. They should be able to virtualize their networks--assuming no business or technology missteps--without marketplace damage. 

It is not so clear yet how value could change in the fixed networks business. So far, most joint ventures to build FTTH infrastructure arguably are driven by a need to build faster than the competition, so the value of the joint venture is lower cost and time to market, and not a change in the perception of value. 

In the data center market, changes in ownership have not necessarily signaled a change in belief about scarcity value, either. Whether an owner is one commercial entity or another, or even if ownership changes from private to public, or public back to private, does not intrinsically change the scarcity value of the assets. 

Indeed, the surrounding issues of water scarcity; energy consumption; location and scale all suggest scarcity value remains key. First movers in any geography often have advantages. Environmental and social constraints are starting to limit unbridled expansion as well. 

Still, in the data center market, facilities ownership does not seem to have lost any luster, with the obvious caveat that even the largest hyperscale data center operators lease facilities all the time, rather than building and owning their own assets. 

That pattern appears more open to change in the fixed networks and mobile businesses, where facilities scarcity value has essentially been eliminated, in some markets where a wholesale-only model prevails and a neutral third party provides the network facilities. 

In other markets where a former incumbent also owns the wholesale facilities, some additional scarcity value is retained by the former incumbent. In markets with no restrictions on facilities-based competition, scarcity value remains, but perhaps at a lower level than in the past. 

A typical pattern is ownership in core geographies and sharing or leasing in out-of-region markets. Again, that speaks more to conservation of capital than scarcity value. 

Still, questions about scarcity value seem destined to grow as formerly-vertically-integrated firms adapt to the possibility of a layered approach to their operations. The debates access providers now have about outsourcing operations support to public cloud services providers is an example of that deepening debate. 

At its heart, all such debates are about value, and where value lies.