Peak Telecom is Coming

Most observers of global telecom revenue will note that, with a couple of possible exceptions, industry revenue has grown continuously, for as long as we have kept records.

On the other hand, one has to wonder whether telecom revenue will reach a peak at some point in the relatively-near future, as mobile adoption reaches saturation in every country and as every customer buys as much internet access as they prefer.

Looking only at the country of Malaysia, the trends are clear enough: Mobile growth is reaching an absolute peak, as is mobile broadband. Fixed line voice is declining, and has been dropping since about 2000, while fixed network internet access has grown to replace the lost fixed network revenue, but itself is nearly saturated.

source: Researchgate.net/

source: FCC

That does not mean service providers will stop innovating--or trying to do so--or seeking to add big new revenue sources. But that new revenue will mostly balance lost revenues in the core business, as voice, messaging and eventually, even internet access revenues fall.

Indeed, replacing lost revenue now is a major industry challenge. The global telecom industry is about a $1.5 trillion annual revenues industry. To move the needle, any new sources have to be large, simply to replace lost revenues from legacy sources.

This trend is seen in many developed markets, but now also can be predicted for fast-growing Asia Pacific markets as well.

http://slideplayer.com/slide/11399351/

Roughly speaking, to sustain three percent annual revenue growth, and assuming zero losses in all legacy sources, some $45 billion has to be added every year. But that is not realistic. With actual declines in voice and messaging revenue, and coming shrinkage and margin compression in newer sources such as internet access or video entertainment, service providers might have to replace as much as half of all current revenue in about a decade.

Revenue erosion big enough to remove half of revenue within a decade is roughly equivalent to a seven percent a year decline. So even if new sources grow three percent a year, losses still will happen.

To sustain revenues at their current level might therefore require annual growth of seven percent. That is not going to happen, in most markets. As James Sullivan, J.P. Morgan head of Asia equity research (all of Asia except Japan) telecom revenue growth is now less than GDP growth.

68 major telecoms groups – aggregate revenue, 2009-2016

source: Telco 2.0 Research  

Other analysts make the same argument, namely that revenue growth, at a global level, now is less than one percent.

Peak telecom is coming.

Bernie Ebbers Dies. For the Last 50 Years, Much of the Telecom Industry Also Died

Bernie Ebbers, WorldCom founder, has died. In some ways, WorldCom was emblematic of a frenzy of super-heated growth efforts in many parts of the telecom business around the turn of the century. 

The year 2000 also was notable as it represented the absolute peak of the traditional voice business in the U.S. market. After 2000, every part of the U.S. voice business began a long, steady revenue and subscriber decline. 

Though the company was marred by a major accounting scandal that sent him to prison,  Ebbers began building WorldCom by selling long distance voice services in 1983. Through a string of acquisitions, WorldCom even purchased the former MCI in 1998. In 2000 Worldcom tried to buy Sprint as well, though that deal was scuttled by regulators.

For some of us, the $35 billion acquisition of MCI was a landmark, as MCI is the firm that first brought competition to the U.S. communications services market, challenging then-monopolist AT&T with a private line running between St. Louis and Chicago in 1969. 

Think about it: until 1972, AT&T did not even have a marketing department. What would have been the point for a monopoly communications supplier whose profits were a guaranteed rate of return on its investments? 

Until 1968 AT&T was the sole supplier of U.S. telephones, transmission cables, switches, software and services for most of the United States. No other firms were allowed to attach devices to the AT&T network until after 1968. 

But the 1969 Carterphone Carterphone decision allowed use of third-party acoustic modems on the AT&T network. 

MCI also launched legal efforts that most would agree lead to the 1982 Modified Final Judgment that ended the AT&T monopoly, and the 1984 birth of legally separate Bell Operating Companies and AT&T, launching the era of competitive telecommunications in the United States and elsewhere. 

As with the later Telecommunications Act of 1996, is the first major overhaul of telecommunications law in almost 62 years, competition was the key objection. But something funny happened. Everyone thought the point was introducing competition into the voice business. 

By about 2000, the whole voice business began declining, with the internet emerging as the key feature of the next era of telecommunications and applications. Since 1968, the whole presumed point of competition was lower prices for long distance calling, local telephone service and third party supply of phones. 

In his 1986 book The Deal of the Century, author Steve Coll predicted that “AT&T will find itself along in the basic long distance market by the end of the century.” 

In truth, none of the former giants of the long distance business survived. 

By 2005, AT&T had been acquired by SBC Corp., one of the former Baby Bells. MCI was acquired in 1998. And Sprint, whose long distance business became a revenue footnote, was acquired by Softbank in 2012, primarily for its mobile business. 

The big takeaway from decades of telecom deregulation is simply to note that nearly every major telecommunications regulatory effort since 1968 (about fifty years) aimed in some way to introduce more competition into the voice business. 

Along the way, the business itself shattered. There is at present almost no upside to further efforts to “deregulate voice,” which has ceased to drive industry revenue or consumer demand. Voice is an essential function, but not the key revenue driver. 

Equally crucially, the universal use of internet protocol means we have formally divorced application ownership from network ownership. All telecom networks now are essentially “open.” Any lawful app provider is free to use the networks. 

So while innovation is virtually limitless, network access profitability now is a new issue. Telecom operators used to develop, own and profit from every app on the network. These days, connectivity suppliers profit only from a few owned apps, and they are never the sole suppliers. 

It is not clear what the next 50 years will bring. But the general movement has been towards products, services, revenues and profits shifting to third party users of connectivity networks. 

Along the way, some connectivity providers also have shifted their own revenues in that direction. Over time, it is possible that much of the “connectivity function” is subsumed into “functions that support our business model,” which might be advertising, e-commerce, marketing or some other activity. 

So advertising-driven Google operates its own data centers, subsea networks, fiber to home networks, Wi-Fi networks and mobile networks, and builds its own computing, mobility and content acquisition devices. 

Google develops or experiments with novel internet access platforms using balloons, satellites or unmanned aerial vehicles and creates its own content services. 

Amazon’s e-commerce model requires it to operate its own data centers, subsea networks, a private content delivery network, video and audio services, devices and apps. 

Facebook runs its own data centers, subsea networks and satellite networks to support its advertising business. 

It is hard to see those trends abating. Nor does it seem unreasonable to expect continued pressure on the connectivity provider business model, as revenue growth is slowed by competition and customer saturation. 

Worldcom and MCI were part of a huge change in the telecom business few expected. Functions might remain, but huge entities might continue to find themselves challenged to survive in the old ways.

No Revenue Source Ever Lasts Forever

No revenue source in the telecom industry has ever powered revenues forever. For more than a hundred years, fixed network voice was the only service, and revenues seemingly grew every year, as more people and businesses connected.

source: ITU

That fixed network growth trend ended in some countries by 2000, globally by 2003 to 2006 or so, even as account growth continues in Asia and Africa.

After that period, accounts began to fall, in many markets, even if growing globally in Asia and Africa.

But that maturation was replaced by a new growth cycle built on mobility. And when mobility account growth slowed, sales of text messaging services emerged as the next revenue driver. Then mobile internet supplanted messaging revenue growth.

source: Analysys Mason

peak telecom

But even internet access, among the newest telecom services, has a product life cycle.

In the U.S. market, for example, even fixed network internet access seems to have peaked, and subscriptions are now declining.

That does not mean use of the internet has decreased, but that people are finding other ways to maintain their connections. Mobile internet access, whatever present failings keep it from being a full product substitute for fixed access, seems to be the reason for the reversal in growth.

And though mobility has been the global revenue driver for a couple of decades, even mobility is moving to the peak of its product life cycle.

A drop in global mobile revenues forecast for 2018 will be the first time in the history of the mobile industry that service revenue contracts year on year, according to Ovum.

That is why many tier-one service providers now are looking to content services for growth. The triple play was the first iteration, when service providers added video subscriptions to their voice and internet access offerings.

Now many are looking to online services and a move up the stack into ownership of content assets.

“Future success remains in the hand of their television content strategy,” some would say of AT&T’s move to buy Time Warner. That move, in turn, mirrors the earlier move by Comcast into ownership of content assets, especially NBCUniversal.

Further such moves are almost inevitable, as the 5G era, with its focus on internet of things, emerges. As access revenues were not enough to sustain growth in the video content area, so IoT connectivity will not be enough to drive revenue growth in the IoT era.

Ownership of at least some key applications or platforms likely will be essential, just as ownership of content assets has made sense in the present era.

source: Ali Saghaeian

If Telecom Survives, It Will be Because it Finds a Way to Replace Revenues from Services Sold to People

In many ways, 5G is a confusing and complicated topic. Some question the need for 5G, others its cost. Armand Musey, Summit Ridge Group founder, says the talk about 5G remains him of 2000 and the internet bubble, with all the wild talk about unlimited growth.

Ironically, some of us would argue, those inflated hopes actually were fulfilled. The internet did up being the “next big thing.” So it is possible that some expectations are unrealistic, in the near term.

But if even the shattering history of the internet bubble burst suggests dashed expectations--even huge disappointments--are a possibility, some would argue the direction is correct. Wild spending of course is a danger.

But the fundamental premise of 5G--a network designed from the beginning to support machine-to-machine communications and sensor networks--is a necessary bet on the future of whole telecom business. That is not always so clear, it seems.

A U.K. government report says mobile connectivity now is essential, not a luxury. “Today, 93 percent of adults in the UK own and use a mobile phone,” says the Connected Future report.

“5G means seamless connectivity. Ultra-fast and ultra-reliable, transmitting massive amounts of data at super low latency.” To be sure, the document also says 5G “will support the ever increasing requirements of the existing network and new applications.”

But the main thrust still seems to be on the “faster” angle. The big focus arguably should be on the exhaustion of the existing business model, and the role 5G is supposed to have as the platform for creating new revenue streams at least as big as the entire present industry earns.

When people argue there is “no spectrum shortage,” as does Pierre de Vries, Silicon Flatirons spectrum policy initiative co-director, there are several angles. Except at peak hours, one can argue that collective capacity for all U.S. mobile networks, for example, is sufficient to handle demand.

That is particularly true as as much as 80 percent of total mobile data demand is met by Wi-Fi, as Bob Pepper, Facebook global connectivity and technology policy executive notes.

There is even debate about whether spectrum sharing is a response to immediate scarcity. Spectrum sharing in the 3.5-GHz band, for example, is not necessarily driven by spectrum shortages, but by exploration of  new methods of allocating spectrum, says Tricia Paoletta, Harris, Wiltshire & Grannis partner.

But Kalpak Gude, Dynamic Spectrum Alliance president, argues that there are spectrum shortages, and that dynamic spectrum can help solve such problems.

Even if one believes there is a need for much more spectrum, and that scarcity is a problem we want to replace with abundance, that is not actually the main reason 5G is “required.”

One of the persistent misunderstandings about 5G is that it is primarily about “more bandwidth” or “higher speeds” accessible to consumers. In fact, it is a practical attempt to create the underpinning for a major shift of mobile operator business models.

The coming 5G platform might be the most-radical break we ever have seen in the mobile and broader telecom business since the end of the monopoly era.

Some of us would argue that the telecom business cannot, long term, support itself on revenues earned by selling services to people.

Instead, the industry must find big new services and revenues earned some other way. The importance of 5G is that it sets the stage for a business model built on selling services to enterprises, to support sensor and control networks.

In a simple--but reasonably accurate way--the change is from selling services used by people to selling services used by machines.

There is only so much people are willing to pay for voice, messaging, even internet access or video. And all those markets are mature, or about to become mature. The 5G network will not change that.

So if 5G succeeds, and if the telecom industry survives or thrives, it will be because huge new revenue streams are created or discovered that replace revenues earned by selling services people use. It is just that simple.

Is 2019 the Year of Peak Satellite?

It appears 2019 could be the peak year for satellite TV services globally, as Rethink Technology Research believes subscribers will begin a permanent decline in 2020, with a loss of about 15 million accounts by 2024, on a current base of about 225 million.

Still, that represents a cumulative loss of about six percent to seven percent over five years, a rate of attrition executives in the telecom industry have dealt with before. In other words, the transition away from linear TV services--using fixed or satellite networks--will be a longish, slowish transition reminiscent of the decline of international long distance revenue, fixed line voice or text messaging.

source: Rethink Research

Consider a simple five-year estimate of revenue changes in the U.S. telecom market. Revenue changes less than one percent, but the volume of revenue from growing and declining contributors changes from negative five percent to positive 24 percent.

Basically, voice and messaging revenues drop, while data revenues, business segment and video entertainment revenues climb.

source: Analysys Mason

As former Cisco CEO John Chambers was always fond of saying, transitions are the key to success. “Market transitions wait for no one,” Chambers said. In 2011, perhaps it would have been thought unremarkable to assert that “voice will be free.”

In 2000, at the very peak of U.S. long distance revenue, it might have seemed more outlandish.

source: FCC

Of course, that was only part of his thinking. "It wasn’t just voice that will commoditize and be free. Data transport will commoditize and be free and then video will commoditize and be free,” Chambers has argued, referring to the transmission business, not the content business.

Will 5G Prove to be Another Example of Innovation Despite our Efforts?

Sometimes big changes in communications demand happen almost despite our best efforts. Some might argue the 1996 Telecommunications Act succeeded despite itself, for example. Innovation came not so much from telecom competition but from product substitutions based on mobility and the internet, it can be argued.

If you remember the major revision of U.S. telecommunications law called the Telecommunications Act of 1996, you will remember the practical consequences of deregulating the local telecom access business. 

Revising U.S. law, the Act enabled competition for local telecom services, lawful operation and ownership of Class 5 voice switches, the right to sell customers voice and other services and wholesale access to incumbent networks. 

All that happened just prior to voice communications reaching a historic peak about 2000, with a rapid decline. Most incumbent telcos lost 35 percent of their customers for that service in 10 years, as much as 65 to 70 percent over two decades. 

Service providers also lost half their revenue from long distance calling over that same period. 

source: CDC, Statista 

At the same time, other big changes in end user demand were happening: substitution of mobile phone service for fixed service; use of mobiles instead of cameras or music players, GPS devices or video screens. 

source: Wikimedia

There also was increasing use of the internet as a substitute for a wide range of other activities and products. In 1996, for example, it is estimated there were 36 million global users of the internet, representing less than one percent of the world population. A decade later, that had grown to 17 percent. 

About that time, some 14 percent of the U.S. population was using the internet, on dial-up connections. A decade later, that had grown to about 66 percent. 

source: Pew Research 

The point is that disruptive changes in regulatory framework can produce outcomes we did not expect, especially when disruptive enabling technologies happen at the same time, allowing massive product substitution and behavioral changes. 

The same thing might happen with 5G. It arrives in tandem with other key technologies and platforms, including commercial artificial intelligence, edge computing and internet of things. It may, in the end, be hard to separate the various threads from each other. 

In part, that is because computing architectures shift over time, oscillating between centralized and decentralized approaches. That puts computing resources at different places within the architecture, fluctuating between centralized and decentralized designs. 

In the mainframe era, computing resources were centralized at far ends of the network. That shifted in the client-server era to more local processing on devices themselves or on local servers. In the internet era computing switched back to far end hyperscale data centers. 

source: GSMA 

But most observers believe we are now in a stage of shifting more workloads back locally, to take advantage of artificial intelligence, heavy local analysis of sensor data to support the internet of things and compute-intensive applications using virtual or augmented reality. 

“These days lots of companies want to turn bandwidth problems into compute problems because it’s often hard to add more bandwidth and easier to add more compute,” said Andrew Page, NVIDIA media group director of advanced products. 

So maybe 5G will ultimately not be the big story. Maybe other simultaneous changes will provide the most-consequential effects. Put another way, 5G might not be as transformational as edge computing, applied artificial intelligence or IoT.

By the 6G era, network slicing and heterogeneous access might turn on to be more consequential than mobile platform performance. Perhaps value will have migrated further in the direction of orchestration, and away from underlying facilities.

So 5G might be part of a consequential change that we are not deliberately planning.

Common Carrier Regulation Might Have Helped Reduce Telco Capex, Though not Cable Capex

It’s hard to have fruitful discussions when we do not agree on the “facts” of the matter at hand. So it is with the amount of capital investment in access networks in the wake of regulation of such investments under common carrier rules.

According to economist Hal Singer, common carrier regulation has depressed investment, even if many claim the reverse to be true. Singer compares the first six months of 2016 with the same period in 2014, the last year in which ISPs were not subject to Title II regulation, and finds a decline of eight percent.

Still, it is not a simple matter to determine the specific impact of the rules, as distinct from background economic factors or changes in company strategies. Generally speaking, big economic shocks (the popping of the internet bubble in 2000 and the Great Recession of 2008) will drive capex declines.

Also, it is an undeniable fact that most U.S. telcos have shifted capex to mobility, and away from the fixed networks, so that is another factor. Prior to imposition of the rules, fixed network capital investment had dropped very sharply from 2000 peak levels.

Conversely, mobile networks clearly were the drivers of firm revenue growth since 2000, and saw generally higher investments, especially compared to fixed network investment.

http://marketrealist.com/2015/01/key-costs-wireless-wired-telecom/

You can see that telcos generally spent less, while cable companies spent more. In fact, those who argue that common carrier regulation did not depress investment invariably point to higher levels of investment by cable companies.

You might argue that flows form a correct understanding that those investments would generate incremental revenue for cable companies and a similar understanding by telcos that even high investment would not produce favorable financial returns. In fact, those simple understandings largely would account for high cable investment and low telco investment, for basic reasons related to return on investment.

It still remains difficult to say what might have happened, in terms of telco investment, if telcos had seen much higher revenues from doing so.

“Aggregate capital expenditure (capex) declined by nearly $2.7 billion relative to the same period in 2014,” Singer argues.

While Title II can’t be blamed for all of the capex decline, it is reasonable to attribute some portion to the FCC’s rules, he argues.

The rules bar ISPs from creating new revenue streams from content providers, and (needlessly) expose ISPs to price controls, Singer argues. Both measures truncate an ISP’s return on investment, which makes investment less attractive at the margin he argues.

source: Hal Singer