More Evidence that Telcos Have to Replace Half Their Revenue Every 10 Years

Trends in global text messaging revenue nicely illustrate my contention that service providers have to replace about half their current revenue about every decade.

In the messaging area, over the top apps have displaced as much as half of the former mobile messaging revenue stream, and as much as 81 percent reduction in text message revenue in a little more than a decade, in some countries.

Between 2017 and 2022, global SMS revenue (person to person) is likely to drop about 42 percent, according to researchers at Ovum. “Unfortunately for most telcos, P2P SMS has become essentially value-less, since they have had to bundle unlimited SMS into mobile tariffs to remain relevant to their customers, an increasing number of whom use chat apps such as WhatsApp, WeChat and Facebook Messenger,” Ovum argues.

source: Informa  

The same sort of trend can be seen in fixed voice revenues. From 1984 to 1994, for example, the cost of a fixed network call dropped from more than 30 cents per minute to perhaps 10 cents. The cost of a mobile call dropped from more than 60 cents in 1994 to about seven cents in 2004, a decade.

source: Telco 2.0

The decline of fixed network voice is a direct result of mobile substitution, as consumers globally have chosen mobile phones as their method of choice for using voice services.

So it is not hard to make the argument that even mobile internet access, the big drivers of mobile revenue in recent years, will suffer the same fate. And as hard as it might be to fathom, fixed network internet access will likewise mature.

Wireless substitution remains a controversial prospect, as some argue that  5G is a substitute for the National Broadband Network, while others doubt that will happen, as fixed network access “is always better” than mobile.

But it is likely dangerous to make predictions based on past expectations. It is not at all clear to some observers that fixed network internet access speeds always and everywhere, to say nothing of speeds in many markets, will “always be better than mobile.”

In fact, some already say 5G will be faster than copper-based networks supporting the Australian National Broadband Network. If that proves true, then assuming 5G tariffs are set competitively, the mobile 5G network could well be faster than all but fiber to home networks.

And if history provides any guide, it is that, for some current use cases, mobile substitution for internet access already is a reality. Once 5G launches, the amount of substitution could skyrocket.

"I truly believe that 5G will be enough bandwidth for the average consumer, and you won't need a fixed line broadband service," said Boost Mobile CEO Peter Adderton . "You talk to some of the carriers in the U.S., they agree with that."

"You'll still need fibre to run offices and that kind of thing, but for the next generation, they're going to be entirely happy on 5G,” Akkerton argues.

Millimeter wave and small cells are the enablers. In fact, millimeter wave use to support mobile operations is the obvious rebuttal to the argument that mobile can replace fixed line.

Simply put, millimeter wave, used in small cells,  increases capacity so much that mobile operators actually can entertain retail tariffs competitive with fixed line alternatives.

At the same time, millimeter wave and small cells allows access speeds to climb easily within the range of fixed network alternatives (hundreds of megabits per second up to perhaps gigabits per second, eventually).

But many 5G observers also suggest that speed will not be the decisive change, where it comes to use cases. In fact, that might be a change that comes from 5G ultra-low latency, which might will be the killer feature for 5G, compared to other access networks.  

Source: The Australian

5G Skeptics are Not Wrong, Tactically

Dire warnings about 5G cost, and therefore the 5G business model, are not hard to find. Though it is easy to find broad suggestions of how new revenue streams will develop, there is no certainty, beyond the fact that, in the consumer market, 5G will displace 4G for current phone access use cases.

The stock answer for 5G use cases includes “enhanced” consumer mobile broadband, internet of things and mission-critical, ultra-low-latency applications.

Enhanced mobile broadband is mostly a matter of product substitution--5G in place of 4G--and might provide some momentary revenue lift.

The problem is that will boost revenues only for a short time, if 4G provides any guidance. But any potential revenue benefit (higher average revenue per user) is likely to be short-lived, if arguably still meaningful. Whether that is because of unique 5G capabilities, or mostly higher usage (on usage-based plans) or higher fees for unlimited or high-usage plans is unclear.

Also, higher initial revenue tends to be driven by initial adoption by power users, who are willing to pay more. Over time, with universal adoption by mainstream and lighter users, who tend to be willing to spend less than power users, ARPU might naturally tend to drop.

source: Strategy Analytics

IoT and other now-exotic use cases (VR, AR, ultra-low latency use case) are reasonable new use cases coming with new revenues, but are likely to take some time to develop at scale. Indeed, it is conceivable scale is not reached until near the end of the 5G life cycle, or, in some cases, not until afterwards.

Many new revenue-generating new use cases envisioned for 3G did not develop until 4G, and some 3G possibilities never developed to any significant degree. As the big revenue drivers for 3G might well have been mobile email access, while 4G enabled the mobile internet, 5G could well be driven by somewhat prosaic use cases. Substitution for fixed network internet access and mobile video consumption are likely examples.

Nor is it hard to find arguments that few mobile operators actually will benefit substantially from the new use cases and value created by 5G networks supporting internet of things, smart cities, connected cars, augmented and virtual reality apps and services, as those use cases might well require huge scale.

And most telecom operators will never have the requisite scale to participate elsewhere in the value chain, beyond connectivity.

It is somewhat likely that neutral host indoor connectivity, supplied by third parties or service providers, could emerge as among the bigger near-term trends, much as third parties often supply big venue mobile access or Wi-Fi.

Among the other oft-missed implications is that the ultra-low-latency 5G apps will be enabled by edge computing facilities. In its support of  immersive video apps tested during the Olympics, KT was able to support roundtrip latency of seven to eight milliseconds, required for such apps, but only by using edge computing.  

Edge computing is also likely to required to support autonomous vehicle services.

The point is that big revenue-generating new use cases will have to be discovered and developed. They are not inevitable. Almost nobody believes the 5G business model can be driven mainly by consumer phone use cases.

Small Business Will Buy 33% of Hosted PBX Systems in 2018

In 2018, roughly one-third of all hosted PBX systems will be purchased by businesses with between one and nine employees, according to Eastern Management Group.

Of course, that opportunity has to be qualified. Most supplier of hosted business phone systems likely would say the sweet spot is organizations with 500 or so employees at any single location.

There are reasons for that belief. Sales volumes and profits arguably are highest, and sales channels clearest, in that range. Bigger enterprises almost always find their large sites do better with a premises switch. Small customers often cannot be sold directly, so sales move through channel partners, in lowish volumes.

On the other hand, Eastern Management argues, the low-end market represents three times more sales than the entire market above 500 employees.

Among the advantages of sales to very-small businesses and organizations are closing times. Typically, a very-small organization can make a decision and close a sale inside of two weeks.

Eastern Management also argues that sales prospecting is easier, since “customers pre-qualify themselves.”

There arguably is less competition, as the leading unified communications as a service suppliers are focused on larger account.

At recurring revenue rates between $40 to $50 monthly, gross margins can reach 60 percent.

Though many channel partners in the very-small-business segment might disagree, Eastern Management argues that sales costs in the very-small-business segment are lower than faced by sellers of systems targeting the mid-market.

Also, sales to such small firms are less technical, and arguably easier, since such buyers need few features and unified communications apps. That means a less-complex sale.

Admittedly, I no longer follow this space closely, but sales in this part of the market would seem to lean in the direction of self service, as it is hard to justify any direct sales model, or even a channel partner strategy, when selling into this part of the market.

There is a reason tier-one telcos, to the extent they even try to sell into this segment of the market, are forced to use a “consumer” model (advertising, web sales, channel partners), for the most part.  It is hard to justify much “live sales force” cost, and still earn a profit.

The problem seems always to be that, as big as the potential buyer base might be, it is frightfully difficult to make a profitable sale unless the whole process is web-based and self-directed. Also, since the emergence of lower-cost retailers such as cable TV companies, much of the former market opportunity for some channel partners has diminished.

Cable modem service, for example, has largely destroyed the old T1 business access market, for example. That has harmed other sales partners (information technology resellers, telecom channel partners and independent telcos focusing on the business customer).

Opportunity might be substantial, but are sales obstacles.

Why "Digital Transformation" is So Difficult

Clarity of thinking about “all things digital” remains rampant in the telecommunications business, for good reasons. There seems no universal agreement about what “becoming digital” means, and whether that applies mostly to internal processes or products sold to customers, or both, in what proportion.

That is why there is perhaps no more-controversial idea than telecom service provider strategy options over the next couple of decades.

Fundamentally, “strategy” is controversial because it is likely most service providers have few opportunities to move beyond the connectivity services they presently offer, and become “platforms” or providers of services beyond connectivity.

The reason is simply that becoming “platforms” and creating the foundation for partnerships requires scale, and most firms will never have the requisite scale (coverage, customer base, capital, skills).

Still, a handful of service providers now earn 10 percent to 15 percent of total revenue from “non-core” sources, and are making headway towards developing revenue sources beyond connectivity.

source: TM Forum                                                                                                                                                                                                                                                                                                                                                                                            

Others are building potential platforms around advertising (SingTel, AT&T, Verizon); enterprise or small/medium business cloud services (BT, China Mobile); payments (China Telecom, Vodafone; internet of things (DT, SK Telecom, Swisscom, Telefonica, Verizon).

But those are initiatives requiring some amount of scale, and most service providers globally simply will never reach that scale. So, fundamentally, the choice is simply to become a lower-cost supplier of connectivity services.

On the other hand, there are many potential new competitors for connectivity services within most countries. And that is among the key risks. To be sure, connectivity must be provided. But it is something of an open question “who” will be providing such services in two decades.

“The idea that the telecom business will die is preposterous, although it is possible that CSPs could lose control of parts of the retail market,” the The TM Forum report says. In a functional sense, that is true.

But we already have many examples of features and functions that remain vital, even if the business model supporting such operations changes drastically. The reason global voice and messaging revenues are becoming less important revenue drivers for service providers is that those apps are becoming features offered by many suppliers, and are not “for fee” services.

“It is also possible that the telecom industry will experience an inexorable stagnation of revenue and industry consolidation, but this does not necessarily mean that the industry will become less profitable,” since  “greater automation could mean that cost-cutting outpaces revenue decline.”

That might be true, but only if the amount of direct competition does not increase, and also if outside firms do not become major suppliers of connectivity functions, almost certainly with business model drivers to make those functions available without charge, or at very low cost.

source: TM Forum

Broadly, the strategy options are said to include focusing on connectivity almost exclusively; becoming a digital platform or a digital partner. But few service providers will have the scale to attempt the platform or partner strategy. Cloud computing, payments, advertising and IoT are, or will be,  scale businesses.

One issue is that “the term platform is used loosely,” TM Forum says. “In many cases CSPs describe a service as a platform business if they have more than 100 partners but it’s not clear that they have built partner ecosystems.”

The “digital partner” strategy always is equally tough to characterize, as it involves the access provider becoming an enabling platform for services delivered to end users. In the internet era, that generally is tough, as use of internet protocol means any lawful app or service entity can market directly to potential customers.

Also challenging is the tasks of converting internal support processes into actual services that can be sold to third parties, as Amazon Web Services converted an internal function (cloud-based services) into a retail offering for third parties.

Twilio, which provides application programming interfaces for communication features,  is cited as a prime example. Basically, Twilio allows developers to add communication features to any app or service.

But this approach is problematic, the report authors suggest. This approach requires “exposing core retail services”  to firms such as Amazon, Facebook or Google.

That could allow such firms to become competitors in the connectivity business, as Google’s Project Fi already has done.

Even the GSMA eSIM standard reduces the power of mobile operators, by allowing end users to toggle between service providers on demand.

“The GSMA’s eSIM specification enables remote SIM provisioning of any mobile device, allowing consumers to store multiple operator profiles on a device simultaneously, and switch between them remotely,” the report notes.

Network slicing might become a means of creating partnership models in a new way, however, the report suggests. Network slicing creates virtual private networks that might offer service differentiated by coverage, capacity, latency, throughput, security or time of day access, for example.

The report suggests one key problem: most service providers not be able to move up the stack.

“The connectivity services delivered by CSPs (communication service providers) have remained largely unchanged for the last 10 to 15 years, except for the type of traffic carried across networks,” say the authors a new report issued by the TM Forum.

Though the report is largely sanguine about prospects, the challenges and threats seem very real.

source: TM Forum    

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

How Soon Will Global Mobile Industry Reach Revenue Peak?

How soon will the global mobile industry reach revenue saturation? As early as 2021, according to Strategy Analytics. So from today’s vantage point, the mobile industry has three years left to grow. After that it reaches a plateau and then likely begins to decline.

In fact, the firm says, mobile service revenue will peak in 2021 at US$881 billion, just three percent above the level forecast for 2018.

source: GSMA

It might not seem obvious that every telecom service has a product life cycle, that is the case. Ignoring for the moment the overall adoption of mobile services, each network platform itself has a life cycle.

From 2G to 5G, the time from launch to peak takes between six to eight years, while the time from peak to end of life takes between seven to nine years.

Once every human that wants to use mobile services already is a customer, where does growth come from? For a while, mobile service providers in developing markets can hope to grow the amount of mobile internet access they sell.

In developing markets, even that revenue source is reaching a peak. The somewhat-obvious conclusion is that new revenue sources--beyond “humans using smartphones, tablets and PCs” will have to be found. That is why the internet of things is viewed as so important.

source: Chetan Sharma

Even as global mobile subscriptions increase from about 7.7 billion in early 2018 to perhaps nine billion by 2023, growing about 17 percent, mobile service revenues will rise about three percent over the same time period, according to Strategy Analytics.

source: Statista

User-linked mobile 5G connections will grow from 5 million in 2019 to 577 million in 2023 (excluding fixed wireless applications and industrial IOT). These will account for 10 percent of connectivity revenue in 2023.

But 5G will not “save” the industry’s business model, as most of the 5G revenue will simply cannibalize declining usage of 2G, 3G and 4G services.

source: Strategy Analytics

Mobile Has Enabled More than a Half Billion People to Use Financial Services and Banking

Financial inclusion is among the better examples of how mobile phones are producing positive outcomes in areas other than simple communications.

Some 66 percent of people globally without a bank account do have a mobile phone. In India and Mexico more than 50 percent of the unbanked have a mobile phone; in China 82 percent do.

That represents about 1.1 billion people who can, in principle, use a mobile phone to conduct banking and financial transactions.

Thanks to mobile banking, 69 percent of adults now have an account, up from 62 percent in 2014 and 51 percent in 2011.

In high-income economies 94 percent of adults have an account; in developing economies 63 percent do.

source: World Bank

The Global Findex database reports that 515 million adults worldwide opened an account at a financial institution or through a mobile money provider between 2014 and 2017.

In Sub-Saharan Africa, 21 percent of adults now have a mobile money account, nearly twice the share in 2014, and easily the highest of any region in the world.

source: World Bank

Globally, 52 percent of adults have sent or received digital payments in the past year, up from 42 percent in 2014, the World Bank reports.

The share of adults with a mobile money account has reached about 20 percent or more in Bangladesh, the Islamic Republic of Iran, Mongolia, and Paraguay.

Globally, about 1.7 billion adults remain unbanked — without an account at a financial institution or through a mobile money provider.

Virtually all these unbanked adults live in the developing world. Indeed, nearly half live in just seven developing economies: Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan. Some 56 percent of all unbanked adults are women.