The Lead Product Sold by Access Providers in 10 Years Might Not be Invented Yet

Some might think it is mere hyperbole to argue that connectivity service providers literallly must replace half their current revenue every decade. But that has historically been the norm in the competitive era of connectivity. To use the most-obvious examples, nearly all revenue and profit in the period before 1980 was earned selling voice. Does anybody think that is the case today?

Instead, globally, mobile service is what drives both revenue and revenue growth. On the fixed networks, internet access (home broadband) drives revenue, not voice. In developing markets, mobile subscriptions still drive growth. But in developed markets internet access is the revenue growth driver.

In the enterprise wide area networks market, X.25 once drove revenue, followed by frame relay. ISDN and ATM nver caught on. Now it is dedicated internet access, Ethernet transport or MPLS that are key revenue generators. And MPLS is being replaced by SD-WAN.

The colloquial way of expressing this is to say "my top revenue-producing product in 10 years has not been invented yet." Again, that might seem hyperbolde. But think about 4G, 5G and 6G. Each successive next generation network was introduced 10 years after the prior generation. And each successive generation displaced prior generation customer accounts,

Part of the reason for revenue change of that magnitude is product obsolesence. The other issue is declining average selling prices.

This graph of mobile termination rates--the fee a mobile network charges another network for completing an inbound call--illustrates a couple of principles relevant to the connectivity and computing industries. To the extent that computing costs are driven by chip-level capabilities that double about every 18 months, cost-per-operation drops over time. 

source: iconnectiv 

In other words, the cost of executing a single instruction or operation will fall rather sharply every decade, as they essentially fall by half every two years. In this example of mobile termination rates, costs fell from seven cents per minute to less than two cents per minute over a decade, or more than half--and close to three times--in 10 years. 

All other things being equal--such as holding traffic volumes steady--that means termination revenue would have fallen by close to three times, and clearly more than half, over that decade. In practice, since call volumes rose, the decline was likely less, in absolute terms. 

For example, the global number of mobile subscriptions grew about 52 percent between 2010 and 2019, so there were more people making mobile phone calls. But per-minute charges dropped faster, close to 100 percent lower in some countries. 

Other charges also declined. Between 1997 and 2022, for example, the cost of U.S. mobile 41phone subscriptions dropped by 50 percent. So the actual rate of decline for recurring service was not as fast as the decline of calling costs per minute. 

The actual change in revenue sources was complicated. Revenue was boosted by additional subscribers, replacement services (mobile internet access in place of voice and messaging) and higher possible usage in some cases. But revenue was diminished by lower average unit rates for subscriptions, calls and text messaging. 

That illustrates a second point about revenues in the connectivity business: about half of all current revenue earned by a service provider will be gone, every decade. That might sound like an exaggeration. It is not. How many service providers sell ISDN, X.25, frame relay or ATM anymore? At one time, each of those services was, or was supposed to be, a key driver of wide area network data revenues. 

How many access providers sell dial-up internet access anymore? And, over time, what is the typical downstream package purchased by half of all customers? At one point it might have been 1 Mbps or less. At some point that changed to perhaps 10 Mbps, then 100 Mbps, then higher. The point is that in each generation, the “product” changed. 

International and national  long distance calling rates show the same pattern. 

source: FCC 

source: U.S. Department of Justice 

The general point is that revenue sources changed over that decade, as they tend to do every decade. 

In fact, calling revenues now are minor enough that it is difficult to find statistics on calling volume or revenue, as internet access now drives revenue models. 

Is Connectivity Business Ultimately Doomed?

Among the obvious changes in connectivity provider business models over the past 30 years is the diminished role of variable revenue, compared to fixed components. The companion change is a switch from usage-based charging to flat-rate pricing, independent of usage. 

Both those changes have huge consequences. The big change is that variable usage no longer can be matched to comparable revenue upside. In other words, higher usage of network resources does not automatically result in higher revenue, as once was the case. 

And that is why provisioned data capacity of networks keeps growing, even if revenue per account remains relatively flat. That also is why network capital investment has begun to creep up. 

So consider what happens when markets saturate: when every household and person already buys internet access, mobility service and mobile broadband. When every consumer who wants landline voice and linear video already buys it, where will growth come from?

The strategic answer has to be “new services and products.” Tactically, it might not matter whether revenue from such services is based on variable (consumption based) or fixed value (flat rate charge to use). Eventually, it will matter whether usage can be matched to variable charges for usage. 

Consider that most cloud computing services (infrastructure, services or platform) feature variable charges based on usage, even if some features are flat rated. For the most part, data center revenue models are driven by usage and variable revenue models. 

Connectivity providers have no such luxury. 

Though there always has been a mix: fixed charges for “lines and features” but variable charges for long distance usage in the voice era, in the internet era the balance has shifted.

Consider what has happened with long distance voice, which is mostly variable, mobile service, which is partly variable, partly fixed, or internet access or video. 

Globally, mobile subscriptions, largely a “fixed” revenue stream--with flat rate recurring charges-- are a key driver of retail revenue growth. And though mobile internet access is mostly a flat rate service (X gigabytes for a flat fee), uptake is variable in markets where most consumers do not routinely use it.

source: Ericsson 

And make no mistake, mobile subscriptions, followed by uptake of mobile broadband, drive retail revenue in the global communications market. Fixed network broadband, the key service now provided by any fixed network, lags far behind. 

As early as 2007, in the U.S. market, long distance voice, which once drove half of total revenue and most of the profit, had begun its decline, with mobility subscriptions rising to replace that revenue source. 

source: FCC  

At a high level, that is mostly a replacement of variable revenue, based on usage, with fixed revenue, insensitive to usage.

As a practical matter, internet access providers cannot price usage of applications consumed as they once charged for international voice minutes of use. For starters, “distance” no longer matters, and distance was the rationale for differentiated pricing. 

Network neutrality rules in many markets prohibit differential pricing based on quality of service, so quality of connections or sessions is not possible, either. Those same rules likely also make any sort of sponsored access illegal, such as when an app provider might subsidize the cost of internet access used to access its own services. 

Off-peak pricing is conceivable, but the charging mechanisms are probably not available. 

It likely also is the case that the cost of metering is higher than the incremental revenue lift that might be possible, even if consumers would tolerate it. 

The competitive situation likely precludes any single ISP from moving to any such differential charging mechanisms, as well.

In other words, the cost of supporting third party or owned services, while quite differentiated in terms of network capacity required, cannot actually be matched by revenue mechanisms that could vary based on anything other the total amount of data consumption. 

Equally important, most ISPs do not own any of the actual apps used by their access customers, so there is no ability to participate in recurring revenues for app subscriptions, advertising or commerce revenues. 

All of that is part of the drive to raise revenues by having governments allow taxation of a few hyperscale app providers that drive the majority of data consumption, with the proceeds being given to ISPs to fund infrastructure upgrades.   

Ignore for the moment the different revenue per bit profiles of messaging, voice, web browsing, social media, streaming music or video subscriptions. Text messaging has in the past had the highest revenue per bit, followed by voice services. 

Subscription video always has had low revenue per bit, in large part because, as a media type, it requires so much bandwidth, while revenue is capped by consumer willingness to pay. Assume the average TV viewer has the screen turned on for five hours a day.

That works out to 150 hours a month. Assume an hour of standard definition video streaming (or broadcasting, in the analog world) consumes about one gigabyte per hour. That represents, for one person, consumption of perhaps 150 Gbytes. Assume overall household consumption of 200 Gbytes, and a monthly data cost of $50 per month.

Bump quality levels up to high definition and one easily can double the bandwidth consumption, up to perhaps 300 GB.  

That suggests a “cost”--to watch 150 hours of video--of about 33 cents per gigabyte, with retail price in the dollars per gigabyte range. 

Voice is something else. Assume a mobile or fixed line account represents about 350 minutes a month of usage. Assume the monthly recurring cost of having voice features on a mobile phone is about $20.

Assume data consumption for 350 minutes (5.8 hours a month) is about 21 MB per hour, or roughly 122 MB per month. That implies revenue of about $164 per consumed gigabyte. 

The point is that there are dramatic differences in revenue per bit to support both owned and third party apps and services. 

source: TechTarget 

In fact, the disparity between text messaging and voice and 4K video is so vast it is hard to get them all on the same scale. 

Sample Service and Application Bandwidth Comparisons
Segment	Application or Service Name	Mbps
Consumer mobile	SMS	0.13
Consumer mobile	MMS with video	100
Business	IP telephony (1-hour call)	28,800
Residential	Social networking (1 hour)	90,000
Residential	Online music streaming (1 hour)	72,000
Consumer mobile	Video and TV (1 hour)	120,000
Residential	Online video streaming (1 hour)	247,500
Business	Web conferencing with webcam (1 hour)	310,500
Residential	HD TV programming (1 hour, MPEG 4)	2,475,000
Business	Room-based videoconferencing (1 hour, multi codec telepresence)	5,850,000

source: Cisco

At a high level, as always is the case, one would prefer to operate a business with the ability to price according to usage. Retail access providers face the worst of all possible worlds: ever-growing usage and essentially fixed charges for that usage. 

Unless variable usage charges return, to some extent, major market changes will keep happening. New products and services can help. But it will be hard for incrementally small new revenue streams to make a dent if one assumes that connectivity service providers continue to lose about half their legacy revenues every decade, as has been the pattern since deregulation began. 

Consolidation of service providers is already happening. A shift of ownership of digital infrastructure assets is already happening. Stresses on the business model already are happening. 

Will we eventually see a return to some form of regulated communications models? And even if that is desired, how is the model adjusted to account for ever-higher capex? Subsidies have always been important. Will that role grow? 

And how might business models adjust to accommodate more regulation or different subsidies? A delinking of “usage” from “ability to charge for usage” makes answers for those questions inevitable, at some point. 

How many businesses or industries could survive 40-percent annual increases in demand and two-percent annual increases in revenue?

Vertical Integration Versus Portfolio of Assets: Which Works Better?

“Vertical integration” can be problematic for any non-connectivity asset held inside a telco entity. Ask AT&T or Singtel. 

AT&T’s purchase of Time Warner was an effort to vertically integrate into content. The goal, says AT&T CEO John Stankey, was to “help our domestic connectivity business.” As AT&T now sees matters, the streaming content business must be built globally, and not restricted to a single country, which is primarily AT&T’s connectivity business base. 

That--at least as AT&T now positions the matter--requires a globally-focused business unencumbered by considerations of the domestic market. So AT&T wants to combine its Warner Media assets with Discovery, creating a larger new entity in which it owns 70 percent of the equity. 

That will remove Warner from AT&T’s consolidated results. Needless to say, valuation of such a standalone business should exceed the valuation if the asset were embedded within a telco organization. 

Among the other possible ways to view such assets is the ability to produce free cash flow, revenue growth and profit margins for the mother company, even if not fully consolidated within the telco itself. 

In fact, valuation might be higher precisely because a “pure play” content or streaming asset is valued as other similar assets are. 

Singtel, Southeast Asia's largest telecoms operator, reported that annual net profit halved to S$554 million ($418 million), the lowest net profit in at least two decades. That performance by a leader in exploring additional lines of business illustrates three related issues.

The first issue is the exhaustion of legacy connectivity services markets. The second issue is the traditional difficulty or entering new markets, either in other parts of the ecosystem or in content or applications. 

The third issue is the valuation penalty any successful “up the stack” asset (content, platform, application) has when buried within the telco organization. 

Singtel has been trying to diversify for years, and has been a leader in exploring growth “up the stack” in the application layer, and beyond connectivity. So the inability to reap profit rewards is troubling. 

But some investments such as those in digital marketer Amobee and cyber-security firm Trustwave yielded weaker-than-expected returns, observers note. That is a recurring story for telcos who have tried for many decades to broaden their revenue bases in adjacent areas such as software or computing services. 

The next moves might pair infrastructure asset sales to fund investments in other growth areas such as financial services or gaming. 

At least part of the problem is valuation of telco infrastructure assets. Singtel notes that its infrastructure assets do not provide a valuation boost, compared to other suppliers that own fewer network assets. 

The other issue is that Singtel executives believe ownership of towers, satellites, subsea cables and data centers has not boosted Singtel’s valuation, compared to peers who own less of such assets. The expectation is that selling some of those infrastructure elements will free up capital to deploy in other growth areas. 

Weakness in mobile services revenue and market share is among the current issues. Mobile service revenue dropped 19 percent; blended average revenue per user fell 18.5 percent and subscriptions fell 3.6 percent over the last year, for example. 

That is not a unique problem. Globally, other service providers face low growth rates and falling ARPU. Saturation of mobile services--the industry growth driver for decades--is part of the problem. 

Beyond that, the typical telco must replace half of existing revenue every decade or so. We have seen that in fixed network voice services, mobile voice, long distance revenue and fixed network services generally. We have seen it in text messaging as well. 

source: IP Carrier

source: FCC  

That might seem hyperbole, but is a demonstrable fact. Globally, that means telcos have to generate about $400 billion in new revenue just to replace what they will lose over the next decade.  

Singtel’s issues really are the same issues every connectivity service provider eventually will face. The issue is how to create huge new revenue streams, outside the connectivity core. Those who argue that amount of growth can happen within the connectivity core, it seems to me, have the burden of proof.

Vertical integration might not be the only way--perhaps not the best way--to do so. Any sufficiently large asset outside the connectivity core will get a higher valuation if outside the telco, operating as a "pure play."

That might not help connectivity business revenue and profit matgin directly, but it arguably is a better way to grow the overall business.

The Vertical Integration Downside: Lower Valuation

Singtel, Southeast Asia's largest telecoms operator, reported that annual net profit halved to S$554 million ($418 million), the lowest net profit in at least two decades. That performance by a leader in exploring additional lines of business illustrates three related strategic issues that eventually will be faced by every connectivity service provider serving the mass market.

The first issue is the exhaustion of legacy connectivity services markets. At some point, every customers that wants service will be buying it.

The second issue is the traditional difficulty or entering new markets, either in other parts of the ecosystem or in content or applications. Telcos have had a very-difficult time sustainably creating new roles for themselves elsewhere in the value system.

The third issue is the valuation penalty any successful “up the stack” asset (content, platform, application) has when buried within the telco organization. The same asset--inside a telco--earns a less robust valuation than that same asset, outside the telco organization.

That raises the issue of "how" a connectivity provider should "own" assets elsewhere in the value chain. Vertical integration actually seems to penalize the value of assets. Which suggests some strategy of ownership "outside" the connectivity organization.

Singtel has been trying to diversify for years, and has been a leader in exploring growth “up the stack” in the application layer, and beyond connectivity. So the inability to reap profit rewards is troubling. 

But some investments such as those in digital marketer Amobee and cyber-security firm Trustwave yielded weaker-than-expected returns, observers note. That is a recurring story for telcos who have tried for many decades to broaden their revenue bases in adjacent areas such as software or computing services. 

The next moves might pair infrastructure asset sales to fund investments in other growth areas such as financial services or gaming. 

At least part of the problem is valuation of telco infrastructure assets. Singtel notes that its infrastructure assets do not provide a valuation boost, compared to other suppliers that own fewer network assets. 

The other issue is that Singtel executives believe ownership of towers, satellites, subsea cables and data centers has not boosted Singtel’s valuation, compared to peers who own less of such assets. The expectation is that selling some of those infrastructure elements will free up capital to deploy in other growth areas. 

Weakness in mobile services revenue and market share is among the current issues. Mobile service revenue dropped 19 percent; blended average revenue per user fell 18.5 percent and subscriptions fell 3.6 percent over the last year, for example. 

That is not a unique problem. Globally, other service providers face low growth rates and falling ARPU. Saturation of mobile services--the industry growth driver for decades--is part of the problem. 

Beyond that, the typical telco must replace half of existing revenue every decade or so. We have seen that in fixed network voice services, mobile voice, long distance revenue and fixed network services generally. We have seen it in text messaging as well. 

source: IP Carrier

source: FCC  

That might seem hyperbole, but is a demonstrable fact. Globally, that means telcos have to generate about $400 billion in new revenue just to replace what they will lose over the next decade.  

Singtel’s issues really are the same issues every connectivity service provider eventually will face.

FNB Connect Voice Revenue 30% to 40% of Total: What Next?

Voice accounts for about 30 percent to 40 percent of FNB Connect total revenue, the firm says. FNB launched its own mobile service in 2015. That points out a salient fact for the telecom industry: voice once generated the bulk of revenues, but now is an essential function, but less a revenue generator. 

In 2016, for South Africa as a whole, mobile operators made about 53 percent of total revenue from voice services. Mobile data services contributed 38 percent of total revenue, text messaging about seven percent of total revenue. 

But voice revenue is declining fast, globally. Using 2008 as a baseline, by 2013, five years later, a number of tier-one service providers had lost between 20 percent and 55 percent of legacy voice revenues. 

source: Juniper Research

Looking back over a longer time frame, in the U.S. market, one can see that 2000 was the year of “peak voice” for long distance revenue earned by local telcos. The usage drop over about a decade from 2000 was more than 50 percent. The revenue drop tracked usage decline. 

source: FCC

source: FCC

Mobile service providers in Asia might face similar pressures on revenue. My general rule on revenue earned by service providers is that telcos must expect to lose about half their legacy revenue every decade. The U.S. experience with revenue loss provides one example, but each nation and market should be able to find similar changes. 

That of course creates the necessity of developing big new revenue sources to replace those lost revenues, and in turn reflects the product life cycle in general. Intel, for example, seems to exhibit that same general pattern. 

Im 2012, for example, Intel earned nearly 70 percent of revenue from “PC and mobile” platforms. By 2018, PC/mobile had dropped to about half of total revenue. By 2023 or so, Intel should generate 60 percent or more of total revenue from sources other than PC/mobile.

The point is that any service provider that intends to make a living “sticking to its knitting” and selling connectivity products has to account for the shrinking demand curve. To be sure, new connectivity products are being created. Software-defined wide area networks provide one example. 

But that will not be nearly enough. The challenge is to replace half of total revenues from legacy sources. SD-WAN revenues available to service providers presently do not exceed a couple billion dollars a year. Total global revenue is about $1.5 trillion. That implies a need to discover or create as much as $750 billion worth of new revenue over the next decade, globally.