Connectivity service providers might be said to suffer from envy about the valuations earned by application providers compared to mobile operator or telco valuations. After all, a public market valuation creates, or limits, currency that can be used to grow the business.
On the other hand, firms in distinct industries have different valuation ranges, based in part on revenue growth prospects. And that is where practitioners simply must acknowledge that connectivity operations and asset valuations are closer to those of other capital-intensive, relatively slow-growing businesses including energy utilities, airports, seaports, toll roads, gas and oil pipelines.
For the better part of two decades, connectivity providers have struggled to recreate themselves as faster-moving entities with higher growth profiles, with mostly modest success. At the very least, firms have tried to position themselves as more-diversified entities with bigger roles in other parts on the internet ecosystem beyond connectivity.
For the most part, investors harbor few illusions in that regard. Indeed, connectivity assets are valued precisely when they offer the expectation of steady cash flow and some scarcity value. That is the thinking behind private equity and institutional investor interest in “alternative assets” that are relatively uncorrelated with other traditional equity and bond assets.
The logical implication, however, is that connectivity CxOs--and those who advise them-- probably should stop suggesting that connectivity roles and value are something they are not.
Which is to say, high-growth vehicles. That does not mean connectivity providers cannot take on additional roles in the value chain: they can. It does mean that even when successful, those assets will likely earn a higher valuation when eventually separated from the connectivity assets.
In other words, assets often are awarded higher valuations when separated from ownership by entities with lower valuation ratios. Pure plays often are rewarded by higher valuations, compared to the value they bring to owners who have other roles and valuations.
That might have significant implications for business strategy. If and when connectivity providers move to take on different roles within the value chain, it might also be realistic to assume that, at some point, those assets bring the highest and best value to the owners when the assets can be spun out or sold.
In other words, moves to create assets in other parts of the value chain should be viewed as assets in a portfolio that always are available for sale, at some point, and not a core operating holding.
The clear exception is when the new operations are significant enough in magnitude to warrant becoming the foundation of the company’s long-term business.
We rarely see this in the connectivity business, though. Typically, the newer lines of business are sold or spun out. A connectivity firm does not become a content provider; a retail data center business; an application provider; an entity that earns its core revenue from facilitating transactions, rather than selling connectivity services.
Firms might change, over time, the services they sell, or the connectivity roles they play. But we have yet to see major evolution away from “connectivity services” to some other permanent role, as the primary revenue driver, for any tier-one telco.
To be sure, lots of firms might boast significant revenue from services and products other than connectivity. But those always seem to be “nice to have” operations that complement the existing core business.
And even estimates of non-telco revenue can change quickly, as for example when AT&T divested its content, linear video and advertising operations. AT&T's latest quarterly report focuses strictly on connectivity service revenue and operations. In a short year or two period, AT&T can be said to have scaled its “non-telco” revenue back from 19 percent to near zero.
Even the commonly-cited sources of such “non-telco” revenue are suspect. Jio, for example, is said to make such revenue from home broadband on a fixed network. That makes sense only if Jio is narrowly considered to be a “mobile services” provider, with “non-telco” revenue including any sources on a fixed network.
That would not be the definition used for other “integrated” providers with both mobile and fixed operations. The same might hold for Telecom Malaysia, BT or KPN. In other cases, non-telco products might also count revenue earned by service provider internal operations that use e-commerce or mobile payment mechanisms.
Were we to eliminate all other connectivity services, even firms with lots of initiatives in content, apps or devices might show significantly less revenue contribution from non-telco sources.
Still, JioMart, an e-commerce platform, JioSaavn, the music streaming service and JioMoney could represent 11 percent or more of total non-telco Jio revenues.
The point is that common citations of “non-telco” revenue tend to be inflated. Connectivity providers “are who they are.” Diversification moves beyond the connectivity function contribute a non-zero amount of revenue. But even that amount tends to be overstated.
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