Will Fixed Network Revenues Grow as Mobile Revenues Slow?

Over the last decade, mobile revenues have driven global telecom earnings. But could that change?

Some might argue that fixed networks are poised for a period where investments in that segment have less risk, and faster revenue growth, than the mobile segment.

That might not necessarily mean that fixed networks grow faster than mobile, but that fixed network revenues decline less than mobile revenues, in many markets.

Oddly enough, if mobile revenue growth slows enough, improved fixed network revenue growth would at least change the composition of revenues in the direction of fixed networks.

Though some might disagree, at least some service providers might now believe building and operating gigabit networks represents a revenue growth opportunity, beyond Google Fiber and the handful of municipal or other gigabit networks in operations or trying to get off the ground in the United States.

In some Western European markets, there might also be some new thinking that faster revenue growth is possible in the fixed network high speed access market, than in the mobile segment.

In some ways, those prospects are relative. Recent tier one service provider results in Western Europe show faster decline in mobile retail revenue than in fixed.

Researchers at Analysys Mason argue that, at the very least, fixed network revenue will hold up better than mobile revenue, and also that the share of total revenue generated by fixed networks will grow over the coming five years.

That might require a nuanced assessment, as a change in revenue contribution represents, in large part, a deceleration of mobile revenue.

The unanswered question is the relative value users now place on fixed access and mobile access services. It might be assumed that the value of mobility “always” is higher. But churn rates in the recent recession since 2008 show that at least in some countries, such as Spain, users abandoned mobile services and kept fixed services.

And one key change in the market is the relative value of Internet access and voice services. You might argue that the value of mobile voice is marginally challenged by the growing importance of Internet access as the key value for any access network.

In other words, the single most crucial service is Internet access, and fixed line services in most markets represent a better value proposition than mobile Internet access. And one might argue the value of mobile voice also changes under such conditions.

According to Analysys Mason analysts, mobile revenue in most Western European countries has decoupled from changes in gross domestic product, and is now performing significantly worse than the economy is, as a whole. That, one might suggest, also indicates that, in some instances, mobility has less value to end users than Internet access.

Also, fixed networks also are less dependent on voice revenue than are mobile networks, exposing the mobile segment to greater potential losses.

Service revenue from services other than IP data accounted for 76 percent of the total for mobile in 2012 in Western Europe.

Mobile retail revenue by type, Western Europe, 2010–2012 [Source: Analysys Mason]

Fixed operators' exposure to voice is substantially lower. About 67 percent of fixed operator revenue (excluding content) in Western Europe comes from data services in 2012.

Fixed retail revenue by type, Western Europe, 2010–2012 [Source: Analysys Mason)

Also, mobile voice appears to be the most discounted service in quadruple-play packages, leading to “a swift erosion of the value of mobile voice in the market as a whole,” Analysys Mason says.

For example, almost all of the revenue and earnings erosion caused by Free Mobile's entry to the French market was attributed to mobile services, whereas revenue attributable to fixed-line services did not shift from its long-term trajectory.

Fixed service revenue arguably might be less exposed to economic downturns than mobile, as well. Again, it is a bit of a nuance, but fixed network revenue might be more stable than mobile revenue, over the next five years, in many markets.

But there is a wild card. As most mobile devices are equipped for Wi-Fi access, and as those devices become content consumption platforms, with most usage at indoor or at least stationary locations, it is more feasible for Wi-Fi access to provide the Internet access.  

And that potentially means fixed-only networks could disrupt much of the “mobile” Internet access value proposition.

Short, Shallow Dip in Service Provider Revenue Because of Covid-19?

Though it might seem counter-intuitive, connectivity service provider revenue might not change all that much because of the Covid-19 pandemic, and a revenue rebound might be quite swift, in some markets.Some product lines and some geographies might not fare that well, but there are historical reasons to believe any dip will be shallow and short lived.

By way of comparison, that is what happened to telecom service provider revenue in the wake of the global Great Recession of 2008.

To be sure, some believe global telecom revenue will fall by 3.4 percent in 2020 compared to 2019, before returning to growth (0.8 percent) in 2021, according to Analysys Mason. Analysys Mason had previously forecast growth of 0.7 percent in 2020 and 0.8 percent in 2021. 

International Data Corp., on the other hand, predicts that global telecommunications and subscription TV services revenue will dip less than one percent in 2020. Most observers might agree that a dip of some size will happen. What is likely more contentious is the size of such a dip, or its duration. 

With all the talk about a new normal caused by the Covid-19 pandemic, where life in many ways will be permanently altered, it is worth keeping in mind that past traumatic events such as the Great Recession of 2008 can be very hard to detect in time series data where it is possible to track trends over time. 

So even if it seems too optimistic, the IDC prediction is well within historical expectations. The Great Recession of 2008 caused a momentary flattening of revenue growth, with the prior pattern asserting itself quickly afterwards. A modest dip would not be without precedent, even if we fear greater damage. 

And though it is reasonable to expect a dip in business customer spending (with economies shut down and significant bankruptcies expected), consumer spending on telecom services might well increase, as it did in the United States in the aftermath of the 2008 Great Recession. 

source: Statista

IDC estimates global service provider revenue at nearly $1.6 trillion in 2020, a decrease of 0.8 percent compared to 2019. IDC expects the decline to continue in 2021, but at a somewhat lower degree. 

The mobile segment, the largest segment of the market, will post a slight decline in 2020 due to lower revenues from roaming charges, less mobile data overages due to the stay-at-home situation, and slower net additions, especially in the consumer segment, IDC argues.

Fixed data services spending will increase by 2.9 percent in 2020. Spending on fixed voice services will continue to decline.

Subscription video services will be boosted by the lockdown, but also affected by the economic downturn, so the spending in this category is expected to decline slightly, says IDC.

The Americas market will see a tiny decline of 0.04 percent. Europe, the Middle East, and Africa (EMEA) and Asia/Pacific (including Japan) will dip more. Growth is not expected in EMEA or Asia/Pacific before 2022 as the users in emerging markets are expected to remain cautious about spending for some time, IDC estimates. 

source: IDC

Revenue Role Reversal for Fixed, Mobile Networks?

In many ways, mobile service providers might hope Western Europe does not represent the future of the global business. In some ways, fixed network operators might hope Western Europe is a model for the future.

The reason is that fixed network revenue sources seem to be growing, as a percentage of total industry revenues, compared to mobile revenue sources, which seem to be shrinking, as a percentage of total industry revenues.

That doesn’t necessarily mean fixed network revenue is growing; it simply is shrinking more slowly than mobile revenues.

It appears mobile is poised for more serious revenue declines than fixed services. “A key factor is mobile's dependence on legacy non-data services compared with fixed-line or cable,” Analysys Mason says.

Already, about 67 percent of fixed operator revenue (excluding content) in Western Europe came from data in 2012.

In fact, though it will strike many as odd, the Great Recession and continuing economic sluggishness in Europe has produced evidence that European consumers consider their fixed service more essential than their mobile services, something many would assumed would operate in the reverse--with mobile services deemed more important than fixed.

Fixed service revenue seems to have been more stable than mobile revenues. In fact, fixed-line bundles have the best take-up in some of the more economically challenged countries, Analysys Mason notes.

Perhaps the primary reason for that fixed network preference is the value-price relationship, compared to the value-price relationship for mobile Internet access.

Also, with growing availability of Wi-Fi access in public and outside the home areas, it is easier to use “Wi-Fi only” or “Wi-Fi mostly” as the Internet access medium.

Oddly enough, after a long period where global growth was driven by mobile services, there now appears to be an opportunity for at least some new growth in the fixed network space based on providing services to mobile users.

Mobile data traffic increasingly is used at locations where fixed operators can supply most customer needs at lower cost and price. The reason is that most consumed data occurs when people are not “out and about,” but at stationary locations, most commonly the home or office.

Though a decade ago the notion that Wi-Fi hotspot networks could be a substitute for mobile access proved incorrect, some believer there could well be a different business terrain over the next several years.

Potentially, fixed broadband providers could cooperate with public Wi-Fi providers, or use owned assets, to create Wi-Fi access that is a reasonably useful primary Internet access method for some customers.

To counter that threat, mobile operators are adding their own public Wi-Fi networks, in part to offload traffic from the mobile network and in part to provide data services at lower cost.

The important potential new development is the reversal of “growth” prospects for mobile and fixed networks. Or, as some analysts suggest, which segment will decline less.

Mobile Service Provider Revenue Sources

Fixed Network Service Provider Revenues

Perhaps significantly, mobile spending is viewed as more discretionary than fixed network spending, by analysts at Analysys Mason.

Recent results from larger operators in Europe already show faster decline in mobile retail revenue than in fixed, and Analysys Mason forecasts that mobile will represent a declining share of total operator retail telecoms revenue during the next five years.

Spain might provide an example. Though overall service provider revenue is projected to decline over the next two years, fiber-based services on the fixed side and wholesale services or business-to-business mobile services are where revenue growth will be found, according to a new analysis by Pyramid Research.

The Spanish communications market generated €22.6bn ($29.0bn) in 2012, which represented an eight percent decline year-on-year.

Due to the prolonged economic recession, expected to last another two years in Spain, communications market service revenue will return to growth in 2015, up 2.3 percent a year.

Fiber to the home revenues will grow at a compound annual growth rate of 58 percent between 2013 and 2018, reaching $3.3bn in 2018,” says Pyramid Research Senior Analyst, Stela Bokun.   

Mobile revenue growth will come from the enterprise and wholesale segments.

The key takeaway is that revenue growth will be tough, and that growth might be stronger (or declines less sharp) in the fixed network segment of the business.

What Happens After Covid Pandemic Ends?

Economists do not agree on what will happen to economic growth globally once the Covid-19 pandemic ends. What seems clear is that it matters when it ends.

Though some early on might have believed a recession is not inevitable, that seems a dashed hope.

Almost everyone seems to agree that a couple of quarters of reduced revenue is inevitable, with full-year gross domestic product down 12 percent to 13 percent. 

When asked about the potential impacts on revenue and, or, profit this year, 58 percent of chief financial officers surveyed by PwC in the first week of March 2020 expect a decrease, while 40 percent say it’s too difficult to assess at the moment. 

A majority of respondents (90 percent) believe their business would return to normal within three months if the coronavirus were to end immediately.

Global gross domestic product could shrink from $2 trillion to $9 trillion from the Covid-19 pandemic, roughly one percent to two percent from pre-pandemic levels, depending on the severity of the pandemic, a study by Brookings indicates. Some believe economic growth has a chance to grow in the second half of the year.

Some believe that might be optimistic. Other estimates suggest seven percent drop in U.S. GDP in 2020 alone, representing a recession as bad or worse than that 2007/9 economic contraction. But at least one study of the economic impact of the global influenza pandemic of 1918 suggests growth might not suffer for very long, and could in fact see economic growth accelerate after a couple of years. 

“A recession is now all but certain, according to a Wall Street Journal survey of 34 economists, which projects a downturn that would last months at least, and would in some ways rival—and possibly even surpass—the severity of the 2007-09 slump,” according to the Wall Street Journal. 

Much could eventually hinge on how long “social distancing” is kept in place. A couple of weeks will not be structurally damaging. But months of such policies will cause significant economic distress, high unemployment and many smaller business bankruptcies. 

A study by the United Nations Conference on Trade and Development looking at the impact of the 2008 great recession found that global gross domestic product growth took about four years to return to 2007 levels. 

source: UNCTAD

If the aftermath of the Covid-19 pandemic has economic effects similar to the sharp global recession of 2008, it might well take seven to eight years for jobs, gross domestic product or household net worth to return to 2007 levels. 

Jobs did not recover to the 2007 level until seven years later, in 2014. GDP per person did not recover to 2007 levels until 2013. Household net worth took about eight years to recover to 2007 levels. 

source: Federal Reserve Bank

Looking only at gross domestic product, the 2008 recession caused a dip in gross domestic product that recovered to 2007 levels after two years. 

source: Federal Reserve Bank

U.S. unemployment did not return to 2007 levels for a decade. 

source: Bureau of Labor Statistics

“The Great Recession created an unusually large and long-lasting gap between actual and potential GDP,” says the Congressional Budget Office. The gap did not close until 2017, a decade later, according to CBO’s August 2018 Economic and Budget Outlook.

source: Congressional Budget Office

source: Federal Reserve Bank

Nobody yet can predict whether long-lasting changes in business and consumer behavior will be permanent after the Covid pandemic passes. Supply chains already were changing, in advance of the pandemic, for example, so that trend virtually certainly will remain intact. 

For suppliers in the connectivity business, some speculate there could be longer-term moves by businesses in the direction of remote work that are permanent. It might be easy to predict that more personal and business activities will be conducted virtually, online and remotely, for example. That might be mildly helpful for connectivity providers, though the trend has been in place for many decades. 

Related trends such as use of videoconferencing, telemedicine and cocooning might arguably also remain bigger changes that have connectivity provider implications. More work-from-home might get a boost as well. 

Some believe there will be a permanent reduction in business travel, for example. 

But consumer behavior in a crisis often does not actually become permanent. How many of us actually believe the present shift to buying of “essentials” remains intact after the crisis passes? Who doubts that consumption of “non-essential” or aspirational products will not return to past levels? 

source: Bloomberg

All that happens against a productivity and economic growth background that might explain behavior more than episodic recessions or expansions, though. The U.S. Bureau of Labor Statistics, in 2014, predicted that “the 2007–2009 recession and other factors will have an adverse effect on the U.S. economic outlook through 2022. 

One poll of consumer spending suggests spending levels remained depressed after the 2008 recession for at least seven years, never reaching pre-recession levels during that period. 

In other words, the impact on growth, jobs and spending from 2008 would last 13 years. 

“The aging of the population, lack of business investment during the recession, and high long-term unemployment are expected to place constraints on potential GDP growth, BLS said in 2014. “As such, U.S. GDP is not expected to attain the higher growth rates that are typically seen following recessions.”

A “new normal” of slower growth was predicted. Those predictions turned out to be wrong on the low side. 

That thinking is predicated on changes in consumer behavior some say remained permanently altered in the wake of the great recession of 2008. Certainly consumer spending appeared more restrained than many expected six years after the recession. 

Some argue that changed consumer buying preferences in the immediate wake of the 2008 global recession would become more-established behavior longer term. One such trend was consumer willingness to experiment with lower-priced brands. 

Still, it is hard to separate other secular trends from the specific changes wrought by the disruption. Customers in 2020 are more likely to buy organic products or  fair-trade goods, for example. But those trends were in place even before the 2008 global recession, and tends to run counter to the “lower-priced goods” trend some say that recession introduced. 

But a decade after 2008, some would note that a search for value remains intact. What is not clear is “why?” A counter argument could be made that the general experience with online shopping has accustomed consumers to lower prices, generally, and that this behavior is not a lasting result of the 2008 recession.

Also, millennials facing job market toughness might have developed receptiveness for value for income-related reasons. 

Some changes might have happened with savings rates, though that also might be explained, in part, by millennial job issues. 

The point is that it is very hazardous to predict how consumer or business behavior might change over a 10-year period, based on reaction to a recession or biological shock. We could well see a several-year period where behavior seemingly has altered, only to see the effects disappear after that. 

It seems safe to say that larger trends such as the application of cloud computing, artificial intelligence, internet of things and edge computing will continue. Some might call that “digital transformation.” 

What remains to be seen is whether shifts to remote work, work from home and some other trends become permanent features of business behavior at much-higher levels than was the base case before the Covid pandemic. 

History suggests we might not know for a half decade or so.

Will Conventional Wisdom About Pandemic Winners Prove Wrong?

Conventional wisdom about the financial impact of Covid-19 stay-at-home policies is that they will devastate small businesses and the self-employed, throw most economies into recession and slam firm earnings for a couple quarters to a couple of years. 

The conventional wisdom also suggests connectivity providers might see a bit of revenue deceleration from firms that go out of business and lower levels of business activity, though possibly balanced by some slight uptake of consumer spending for internet access and streaming video services. Most consumer apps arguably are getting much more use as well. 

Almost everyone would expect revenue lift for suppliers of videoconferencing services, though the long-term impact is harder to predict. 

Conventional wisdom might prove to be wrong, though, especially when temporary behavior is extrapolated into the future in a linear way, to suggest a big permanent change in business and consumer behavior. Underlying and pre-existing trends of all types are likely to get a boost, to be sure. 

But the amount of permanent and on-going change is almost certainly going to disappoint. 

The “problem” with many internet services and apps is that usage does not change in linear fashion with usage, as consumption of voice services once did. A dramatic increase in home internet access usage does not necessarily lead to increased usage charges. So perhaps costs are up marginally, but revenue does not change. 

You might assume newly-popular videoconferencing services such as Zoom would be seeing instant lift in revenue (at least at the margin) as usage explodes. But that would be true only if substantial numbers of new accounts and users are of the for fee type, and that seems quite unclear at the moment.

Every ad-supported consumer app faces cutbacks in advertising. Surely streaming services will be winners, one might think. In a narrow sense, yes. But the owners of many streaming services have other huge revenue components with zero revenue (theme parks, theatrical release of new movies, merchandise sales, cruise operations and so forth). Overall firm revenue will fall, even if some lift in streaming revenue might occur.

There arguably was some initial lift in sales of PCs as people faced the reality of more time and demand on their computing devices. But that is balanced by almost-certain reductions in business spending on all manner of information technology, as projected revenue falls. 

Mobile phone sales are likely to fall, as retail stores have been closed. Cloud computing suppliers will win, as increased usage means more demand for computing and storage services, at least temporarily. But there could be issues unrelated to the increase in cloud computing demand. 

Amazon is selling more, to be sure. But it also is shipping more, which means higher costs. That does not directly affect Amazon Web Services revenue, but does mean total firm results are going to be influenced by other parts of the business. 

Microsoft does not face e-commerce shipping cost impact, but will see lower hardware and possibly software revenues, but if those revenues are reported in a category that also includes servers and server software, the total impact is unclear, with both revenue increases and decreases. 

The point is that usage does not equal revenue in any linear way. Nor can be extrapolate from present trends in a linear way. The touted “new normal” might, in five years, simply be the “old normal” with a temporary spike or dip in underlying trends. 

If you look at remote work trends over a 40-year period or so, growth has been slow and steady, despite periods of boom and bust. No “new normal” has emerged. Of course, one always can argue that the inflection point simply has not been reached, and it will in the wake of the pandemic. 

But 40 years is a long time to wait for an inflection point. Looking at many other services with that lifespan, one might more fruitfully argue that if an inflection has not happened yet, it may never happen.