Consumer Mobility Will Not be Tomorrow's Revenue Driver

As hard as it might be to envision, mobile services that now drive revenue growth in the global telecom business will not always do so. Something--and we cannot say for certain what it is--will emerge as the revenue leader within a decade. For the past 30 years, that replacement process has happened with regularity.

Voice services once represented as much as 82 percent of total communications service provider revenues, as recently as 2004, according to International Telecommunications Union data. 

Mobile represented about half of voice revenues by that point. In 1990, mobile voice was in single digits as a percentage of total service provider revenue. 

By 2021, fixed network voice will represent only about 7.7 percent of total global telecom revenues, compared to mobile subscriptions at 59 percent of total, according to researchers at Ovum. 

The point is that connectivity provider service revenue sources have changed fairly fast since 2000, illustrating the strategic importance of developing new revenue sources in the connectivity business. 

Some 30 years ago, about 1990, mobile service accounts were in single digits, globally, as a percentage of total revenue. About 20 years ago--around 2000--mobile service revenues had leaped to more than 21 percent of total. 

By 2010, mobile service revenue had grown to a majority of total revenue, and also was providing as much as 80 percent of the revenue growth. 

About 2000, voice services represented as much as 89 percent of total global service provider revenues. By 2010, the revenue driver had changed to mobility services, with growing contributions from internet access. 

source: ITU 

According to researchers at IDATE, mobility represented about 80 percent of revenue growth, with 64 billion Euros generated by mobile services; 15.6 billion by all fixed network services. 

source: Idate 

Before 2020, mobile services revenue had become the revenue driver in every market regionally. 

source: Idate 

But mobility itself will be challenged as subscriptions and use of mobile internet access reach saturation. 

Those patterns illustrate a principle: telecom service providers have had to replace about half of total existing revenue every decade, since about 1990 at the very least. 

As a rule, I expect that any given communications service provider will have to replace half of current revenue about every decade. Among the best examples (because we have the data) is the change in composition of U.S. telecom revenues between 1997 and 2007.

Back in 1997, nearly half of total revenue was earned from “toll” services (long distance, including international and domestic long distance voice. Profits also were disproportionately driven by long distance services.

A decade later, toll service had dropped to 18 percent of total revenue, while mobile services had risen to about half of total revenues, up from about 16 percent of total.

In addition to mobility revenues displacing long distance, internet access began to build around 2000. Between 2000 and 2010, internet access had grown to represent 24 percent of total revenues.  

Voice is an essential feature of a mobile account, of course. But voice usage--as such--does not drive revenue. The reason is the low--and declining--prices of carrier voice services and substitution by over-the-top messaging. 

By 2021, fixed network voice will represent only about 7.7 percent of total global telecom revenues, according to researchers at Ovum. 

Fixed network broadband will represent 18 percent of total revenues, while subscription TV represents about 15 percent of total revenues.

Global Telecom Revenue Will Grow 2.7% Annually, Through 2017

Worldwide telecom revenue will grow at a 2.7 percent compound annual growth rate between 2012 and 2017, according to Analysys Mason, representing movement from US$1.9 trillion in

2012 to US$2.1 trillion in 2017.

In developed markets, growth will come from mobile non-messaging data services and new services, since mobile voice and mobile messaging services will become commoditized.

In emerging markets, service providers will grow by adding significant numbers of new customers, Analysys Mason argues.

Total telecom revenue in the Europe, Middle East and Africa  region is forecast to grow at a 1.2 percent CAGR from 2012 to 2017, driven largely by revenue growth in the Middle East and Africa.

The contribution of voice services to total EMEA service revenue will decline from 47 percent to 39 percent through 2017.

Non-mobile video services will see a 5.8 percent CAGR, while region capital investment grows

at a 0.5 percent CAGR.

A disproportionate share of global revenue growth will be driven by the Asia Pacific region, where

non-messaging mobile data will contribute almost 82 percent of the overall increase in worldwide service revenue.

Telecom capital investment will grow at a CAGR of 1.7 percent globally between 2012 to

2017, Analysys Mason says.

Capex growth will be strongest in the Asia-Pacific and Latin American regions, but Asia-Pacific and EMEA will account for 66 percent of the total spending through 2017.

APAC telecom revenue will grow at a four percent CAGR, with mobile data revenue equaling mobile voice revenue in the APAC region by 2017.

Capex will grow at a 2.5 percent CAGR in APAC, mainly driven by mobile network deployments.

Revenue in North America will grow at a 2.3 percent CAGR between 2012 and 2017, with growth driven by the mobile segment.

Capex in North America will grow at a 1.8 percent  CAGR.

Telecom revenue in the LATAM region will grow at a 4.9 percent CAGR, lead by mobile service revenue. The number of subscribers in the LATAM region will grow at a 4.6 percent CAGR.

Profits are the Key Issue, Even as Telecom Revenues Grow

It is no secret that nearly all of the telecom industry’s global revenue growth has come from emerging market mobile. So anything that affects emerging market mobile necessarily affects the global industry as a whole.

That will be a challenge, as the ability to grow revenue is lagging the ability to make profits on that revenue.

In other words, “top line” revenue growth conceals a clear danger: profits are not growing as fast as top line revenue or account growth.

And though both “new revenues” and “lower costs” are key issues for telecom suppliers, revenue is the bigger challenge.

In any business, if the top line revenue cannot--for any combination of reasons--be increased, then cost basis has to be adjusted downward, to maintain a sustainable bottom line. If, after doing so, the business model remains challenged, market exit is the only other option.

And that is what is likely to drive the whole global business for the next decade.

Does the emerging market mobile business face a “new era?” And if it does, given that global telecom industry growth has been driven by emerging market mobile, does that portend a change in global telecom growth as well?

In brief, here is the thesis laid out by James Sullivan, J.P. Morgan head of Asia equity research (all of Asia except Japan): emerging market mobile now is revenue challenged, unable to generate new revenues at rates that justify current investments.

Since revenue cannot be increased, “asset restructuring” is necessary, to adjust the cost base. In emerging markets, that means surviving competitors will not be able to own their own facilities.

Emerging market mobile has faced several challenges, all based around limited revenue growth and higher capital investment that have grown faster than incremental revenue.

As mobile data revenues have grown, they have cannibalized voice revenues. Rapidly-increasing capital investment and operating expense have lead to declining earnings.

Source: J.P. Morgan

“Profitless growth” is perhaps one way to characterize the trend.

Sullivan will flesh out the thesis as one instructor among many appearing at the Industry Transformation Boot Camp, 18 September to 22 September, 2017 in Bangkok,  including Spectrum Futures and PTC Academy components.

Sullivan sees signs that the restructuring has begun. You might look at India’s mobile market, where a huge consolidation of suppliers is underway.

The core thesis is that emerging markets have “no choice but to fundamentally change the structure of industry assets through the unification of networks via nationalization, centralization under a regulated return utility, or more aggressive commercial network sharing,” Sullivan argues.

For policymakers, there are a few fundamental options. In addition to nationalizing the networks, regulators could return to “regulated common carrier” models or oversee a reduction in capex by promoting network sharing.

That would presage a “new era,” indeed. Nationalization or a return to regulated rate of return would certainly lead to a reduction of physically-separate networks. Assuming no nation anymore can afford to run mobile networks on a permanent loss basis, and if revenue is too low, while costs are too high, then fewer assets is the solution.

That would create, in the mobile segment of the industry, the same pattern that exists for the fixed networks industry in many markets, where an authorized wholesaler supplies access capabilities to multiple retail providers.

In other markets, private actors might agree to share the cost of new investments, to reduce costs for each contender, as has been done for towers and radio infrastructure.

If Sullivan is right, the mobile market will be organized and regulated in very-different ways within a decade or so. For starters, the number of facilities will shrink drastically, which will have ripple effects across the whole ecosystem.

Still, “assets” are only part of the issue. Revenue models still must be addressed, and so far, nobody has sustainably proven how “access services” remains profitable, over time, when average revenue per account continues to drop.

Beyond that, there is the other key issue: whether top-line revenue growth can continue, and if so, what will propel that change.

Has Telecom Revenue Growth Already Begun Decline in Developed Markets?

Worldwide spending on "telecommunications and entertainment TV services" reached $1,662 billion in 2017, an increase of 1.4 percent year over year (in constant dollar terms), according to IDC. Virtually all of that growth came from Asia, Africa and the Middle East.

You might also notice something important: the market is said to be “telecommunications and entertainment TV.” If one backs out TV revenue, core telecom revenue might not have shown any growth at all in developed markets.

That is a "statistical trick" that often happens in the market forecasting business when technology muddles industry boundaries, and when it becomes tough to do anything but predict revenue decline, unless the category is expanded.

The obvious example is the "unified communications and business voice market," which now includes a range of industry segments ranging from business voice systems to services such as hosted voice, unified communications services and even the access used to support business IP telephony.

While it is true that the distinctions between the segments have fused, it also is true that unless the categories are merged, the forecast revenue is tiny, and shrinking, in some cases.

If "entertainment video" revenues were omitted, it is quite possible that revenue in many markets would show rather steady decline for some years.

We also have reached a point where inflation arguably has a greater impact on global telecom revenue than anything service providers can do. With the caveat that inflation rates vary substantially by continent and by country, net changes in global service provider revenue now are less than the impact of underlying inflation.

At a time when inflation is running between two percent and eight percent, with some countries having far-higher rates, it seems clear that actual growth is quite possibly already negative in most regions and countries.

Fixed voice is flat at best, while mobile revenues are dropping, so in the consumer market only internet access and video revenues are still growing.

IDC believes that the growth rate will accelerate to 1.6 percent in 2018, bringing worldwide spending on telecom and pay TV services to $1,689 billion.

For the period 2018 to 2022, the compound annual growth rate (CAGR) is estimated at 1.1 percent, IDC argues.

Global Regional Services 2017 Revenue 2018-2022 (revenues in $US billions)
Global Region	2017 Revenue	CAGR 2018-2022
Americas	$632	0.2%
Asia/Pacific	$537	1.9%
EMEA	$493	1.2%
Grand Total	$1,662	1.1%
source: IDC

Will Global Telecom Revenue in 2019 be Higher or Lower than in 2011?

Historically, global telecom revenue, with a few minor and temporary dips, has gone in just one direction: up. Given growth in developing regions such as India and China, a reasonable person might argue that the trend will remain in place, despite potential stresses in some regions.


Many observers still believe that is the most likely outcome, between now and 2020. Still, 
we are entering a period of unprecedented revenue uncertainty in regulated services, argues Alan Quayle. 


And that uncertainty seems to be causing a divergence of views about overall industry revenue. 


Surveying industry participants about what they expected, in terms of revenue sources and volumes between now and  2019, optimists expected revenue growth between one percent and 1.75 percent, with mobile and fixed data driving the bulk of the growth, while mobile voice remaining flat and fixed voice declining. That easily would pass for today's conventional wisdom. 


Optimists expect total regulated revenue of $1.6 trillion in 2019, a relatively sanguine outcome in a business with lots of challenges. 
                                                            
But there are pessimists who expect a flat revenue environment through about 2014, while others think revenues could decline by 2019 by about two percent, yielding annual global revenue of about $1.4 trillion. 


In either scenario, though, new and unregulated services are critical for future revenue growth. 


Unregulated revenue, in either the optimistic or pessimistic scenario, could be key. Quayle estimates that unregulated businesses will have three percent to six percent annual growth rates over the near term. 


On the other hand, mobile data will grow faster, at a six percent to nine percent range. Fixed network data revenues will grow at three to four percent annual rates in the near term. 


Mobile voice will be flat to up by about two percent annually, while landline voice will continue to contract at negative five percent annually to seven percent annually, over the next couple of years. 

Though the possibility of recessions in some regions is one source of uncertainty, there are structural trends of more importance. Over the top messaging will create revenue pressure for mobile service providers. 

For fixed network providers, mobile broadband increasingly will become a viable alternative to fixed network broadband, especially in market segments such as young singles, Quayle argues.

Long Term Evolution and family data plans are expected to accelerate this trend.

Market saturation and aggressive price competition from non-incumbent service providers will create pressure as well, especially in the mobile segments of the business. For fixed network providers, facing losses of voice accounts, the issue is not so much competition as shrinking demand. 

On the other hand, even in regions such as Western Europe that seem to face more pressure in mobile voice and messaging, much could hinge on service provider moves in the retail packaging area. One should not discount packaging innovations that boost revenue, though it might be reasonable to worry about profit margin on that higher gross revenue.

Is 11% North American Telecom Revenue Growth Possible?

Insight Research predicts that global telecommunications services revenue will grow from $2.1 trillion in 2012 to $2.7 trillion in 2017 at a combined average growth rate of 5.3 percent. For most people, that will seem reasonable, given the growth of wireless services globally.

Wireless subscriber growth, particularly in Asia and other emerging markets, will raise wireless revenues by 64 percent from current levels, while wireline revenues show only modest growth. And what growth occurs in the fixed network realm will happen in broadband services.

Wireless 3G and 4G broadband services are projected to grow at a compounded rate of 24 percent over the forecast period and wireline broadband services projected to grow at a 13 percent compounded rate over the same forecast horizon, the Insight Research predicts.  

The most-surprising prediction, by far, is the forecast that, between 2011 and 2016, North American carrier revenue will  rise from $287 billion to $662 billion, representing 11 percent compound annual revenue growth.


Granted, there is lots of activity in the U.S. and Canadian markets around mobile payments, mobile banking, advertising, commerce and machine-to-machine services. But not many think those initiatives will produce lots of revenue within the next five years. 


So if an 11-percent compound revenue growth rate were to occur, it would have to be driven by the basic services people already buy.
That rapid growth, on a compound basis, would lead to a doubling of industry revenue in five years. Unlike the global forecast, that will raise some eyebrows.

For starters, since U.S. firms represent about 90 percent of North American revenue, that forecast has to be based on U.S. revenue growth. And since just a few U.S. firms control about 80 percent of all revenue, that forecast also assumes a few firms, necessarily including AT&T and Verizon Wireless, will find huge new markets, fast.

That isn’t to discount what Sprint, T-Mobile USA, Comcast, Tme Warner Cable and others might be able to do. It’s just that a doubling of revenue in such a short time would require extraordinary growth, likely requiring an assumption that every North American customer will double the amount they are spending on communications services over the next five years.

That is not “impossible,” but would be extraordinarily rare. Consider that revenue growth in Europe, a similar market in many respects, might grow at far-lower rates of perhaps four percent annually.

Most rational observers would probably agree that North American growth rates of four percent a year for the next five years would be reasonable.

Likewise, global carrier revenue is expected to achieve a nine percent compound annual growth rate  from 2011 to 2016, growing to a total of $5.13 trillion, Insight Research says.

In terms of segment revenue, the latest forecast projects a 45 percent CAGR for global wireless broadband revenue, 14 percent for fixed-line broadband, about six percent growth for narrowband wireless services and negative three percent revenue change for fixed network narrowband services.

One way to look at the structure of the global market is to note that, by 2016, wireless broadband will account for about 28 percent of all communications service revenue. Narrowband wireless services will account for 38 percent of global revenue. Altogether, wireless will represent 66 percent of total industry revenue.

Fixed-line broadband will account for 11 percent of global revenue, while fixed-line narrowband services will represent 23 percent of total revenue. In aggregate, fixed line revenue will account for 34 percent of total service provider revenue, on a global basis.

For some of us, the big surprise is the aggressive forecast for North American growth.

How Will Global Telecom Revenue Sources Change Over the Next Two Years?

Looking at global telecom revenue sources over the next couple of years, some basic trends can be seen (click image for larger view).

Fixed network services other than broadband continue to decline.

Wireless revenues continue to grow, as does broadband access revenue.
Dial-up access revenue continues to decline.

Keep in mind that these are global, aggregate numbers, buoyed by huge broadband and especially wireless growth in developing regions. The patterns can be quite distinct in specific national markets.

In the U.S. market, it is conceivable that video and content revenues could be a somewhat significant factor over a decade-long time frame. Wireless growth will be highly susceptible to broadband and data services growth, balanced by a certain amount of "harvesting" of mobile voice revenue, which will decline, relative to broadband, over the decade.

It is worth noting that voice revenue trends have been through two fundamental cycles, with a third on the way. At one time, international long distance was the highest-margin product, followed by domestic long distance. That changed fundamentally between 1997 and 2007. Over that 10-year period, long distance, which represented nearly half of all revenue, was displaced by mobile voice services.

Since about 2000, fixed voice lines and revenue have been steadily declining, at least in the telecom service provider segment, with the cable segment able to grow the role of voice in overall revenue.

In the third change, mobile voice will follow a trend similar to that of long distance.

In each of the shifts already occurring, several things happened. Prices and profit margins steadily were compressed. And new competitors picked up significant share of the remaining business. In each of the three periods, the product has changed.

Between about 1997 and 2007, "long distance" became loosely coupled with local calling and local access. Long distance increasingly could be consumed "over the top," using prepaid calling cards or separate providers for "long distance" on a local line, for example.

Between 2000 and 2009, it became possible to use mobile phones to similarly displace both local and long distance calling, as well as to substitute mobility for fixed voice, while both over-the-top and IP-based calling options became available.

Over the next 10 years, both voice itself and long distance calling in the mobile and fixed realms likewise will be increasingly disaggregated and amenable to "over the top" consumption.

At the same time, the number of settings where voice is used likewise will disaggregate. Voice will be used as an embedded feature of many types of applications and experiences, using many types of terminals and featuring multiple revenue models.

How Much Will Global Telecom Revenue Grow in 2013?

Despite obvious stresses, global telecom revenue has tended to grow, in nearly every year. There tend to be dips when global recesssions occur, as in 2008, or in the wake of major market crashes, such as in the wake of the Internet bubble burst of 2000.

Global trends also are a mix of declining, flat to slow growth in developed regions, with growth in emerging markets.

Looking just at enterprise and government segment spending, 2013 looks like a one percent to two percent growth business in 2013. 

Global information technology spending is projected to total $3.7 trillion in 2013, a two percent increase from 2012 spending of $3.6 trillion, according to the latest forecast by Gartner.

But enterprise and government telecom spending actually declined in 2012, and might grow less than one percent in 2013, according to Gartner.

                      Worldwide IT Spending Forecast (Billions of U.S. Dollars)

	2012 Spending	2012 Growth (%)	2013 Spending	2013 Growth (%)	2014 Spending	2014 Growth (%)
Devices	676	10.9	695	2.8	740	6.5
Data Center Systems	140	1.8	143	2.1	149	4.1
Enterprise Software	285	4.7	304	6.4	324	6.6
IT Services	906	2.0	926	2.2	968	4.6
Telecom Services	1,641	-0.7	1,655	0.9	1,694	2.3
Overall IT	3,648	2.5	3,723	2.0	3,875	4.1

Source: Gartner (July 2013)

Fixed broadband is showing slightly higher than the overall telecom services rate. The impact of voice substitution is mixed as it is moving faster in the consumer sector, but slightly slower in the enterprise market, though, according to Gartner.

Gartner’s latest annual survey of 1,959 CIOs worldwide from all industries was conducted in the fourth quarter of 2012 and represents CIO budget plans reported at that time. It included 398 public-sector CIOs from all tiers of government around the globe.

But there will be significant regional differences. The United States, Eastern Europe, Middle East and Africa will grow much faster than Asia-Pacific or Western Europe as a whole, for example.

To be sure, other forecasts are more optimistic. As recently as two years ago some forecasters actually were suggesting global telecom revenues could double in just about five years. That now seems hopelessly wrong.

The global telecommunications industry was not immune to economic forces in 2012 that slowed growth from earlier predictions, according to Insight Research.

Spending for wireline services contracted in 2012, while spending on wireless services grew modestly.  

According to the new industry market study, telecommunications services revenue worldwide will grow from $2.2 trillion in 2012 to $2.7 trillion in 2018 at a combined average growth rate of 3.8 percent.

So Insight Research continies to be more optimistic than do Gartner or Forrester Research analysts.

Mobile subscriber growth compounded with rising usage  will raise wireless revenues by 31 percent from current levels, yet wireline revenues will remain flat until substantial economic recovery kicks in, Insight Research predicts.

Ethernet, cloud, and mobile solutions revenue will show double-digit annual percentage growth, though.

In North America, mobile revenues will grow by 35 percent and wireline broadband revenues will grow by 19 percent over current levels.