The thing about “essential” services such as internet access, electricity, roads, water and sanitation services is that one typically does not think about them until they are gone. Then their essential nature becomes instantly obvious.
But “essential” does not always translate into financial valuation reflecting “essential” value. Indeed, that is the whole issue behind service provider angst about “over the top” app providers and “fair share” financing of infrastructure.
Concern about the fundamental financial valuation of the business often is matched by optimistic CxO statements about what a great business mobile phone service happens to be.
Virtually everyone takes such statements in context: it is what a CxO of a public company has to say.
But it is not hard to find examples of service provider thinking that connectivity value is less and less the viable driver of the business long term, despite the obvious fact that connectivity is precisely the part of the value chain access and transport providers are in.
Still, it obviously is better to create new ways of boosting value within that role, including taking on new roles within the value chain.
That is some of the impetus behind internet service provider efforts to manage Wi-Fi performance or user experience, to the extent it can be accomplished.
All local area networks--includingWi-Fi--are traditionally a different part of the value chain from wide area networking. The WAN is the province of telcos and connectivity providers; the LAN is the realm of private networks. The former is public; the latter private. The former has recurring service fees; the latter typically does not.
“Outside the home” data transport uses different revenue generation mechanisms that in-home or other indoors private networks.
But bigger moves into additional value chain roles remains a top issue for many access providers. Aside from supporting revenue growth, such moves also can provide an eventual boost to valuation multiples.
Virtually all observers would agree that valuation multiples for assets such as data centers are different from valuations of connectivity providers, and that valuations for other assets also will differ from either of those types of assets.
sources: Oliver Wyman, Bank of America
Industrial technology, which includes industrial process control, industrial software, vision technology, robots and motion sensing, can feature EV/EBITDA multiples somewhere between “connectivity providers” and data centers.
To be sure, valuation multiples change over time, and already seems to be true in 2023 for public software companies.
Multiple expansion from the robust financial markets of 2020 is obvious in every vertical category.
The point is that even if “essential,” the home broadband, mobile communications, voice and messaging businesses are not necessarily awarded higher valuation multiples, in large part because the industry does not grow fast, from year to year. And since revenue growth is an important driver of valuation, that has consequences.
Ultimately, to create assets with a higher valuation, access providers will have to create new roles in other parts of the value chain, allowing revenue growth to accelerate into higher ranges.
