Are There Big, Permanent Demand Changes Post-Covid?

How much will the new business-to-business environment post-Covid “normal” resemble either the “old” normal or the temporary pandemic normal? And to what degree will the new normal create new trends that affect business models? 

The safest answer--based on history--is that the new normal will accentuate underlying trends in place before Covid, with incremental changes to business models for many businesses and industries. Most of us likely assume that the consumer and business shift to online behaviors--already underway before Covid--will be reinforced at a higher level. 

That includes a shift to remote work and more collaboration at a distance. But that arguably will affect many industries and firms in an incremental way.

The bigger issue is whether some industries--such as airlines, cruise lines and hotels--might see big and permanent drops in demand, which will force big business model changes, including industry exit if markets shrink.

Some believe business travel, for example, will never return to pre-pandemic levels. That will have negative repercussions for hotels, airlines, trade shows, restaurants and associated industries.

If demand shrinks, so must operating costs and investment. Some business models might break altogether. Most trade shows will suffer; some will disappear.

Beyond all that, the question is whether any important new trends with business model implications--unseen before Covid--could be created. “Contact-less” procedures and business processes could be one example of a big new trend affecting many, if not all, place-based businesses.

Big financial and technology disruptions tend to have a big short term impact on business models--revenue and cost; customers and sales; products and services; production and distribution--and operating procedures. 

The long-term impact is harder to gauge. Do disruptions such as recessions (economic cycles or deliberate result of government policies) cause new trends or only accelerate underlying trends. 

Will some industries find demand permanently reduced or enhanced? Which industries might see permanent shrinkage? How will they cope? Beyond big demand changes, what are the more prosaic operational changes?

Will a shift to more “contact-less” retail commerce emerge as a permanent shift? And how much in-person retail shifts permanently to online ordering and fulfillment? How much will remote work and work from home persist? Will business travel be permanently reduced? If so, how do sales and marketing practices change? 

The easy “answer” is that big recessions or pandemics accelerate trends already in place. You would have to search very hard to find a recession that actually reverses a key underlying trend. 

The obvious example is online retail spending, which in the United Kingdom, for example, sharply accelerated during the pandemic. The issue, of course, is how much reversion to the mean will occur once the pandemic is over. 

The conventional wisdom seems to be that a permanent shift could occur. The magnitude of the shift is the issue, as is the timing of the shifts.  

source: A.D. Little

It is easier to show that recessions accelerate technology substitution than to illustrate new trend causation or at least correlation.

The short term effect is obvious: technology investment drops in the wake of a recession, even if firm professionals tend to believe the opposite. 

In line with that expectation, there is some evidence that the Covid pandemic has caused firms hit by massive drops in demand to decrease digital technology investment, while firms able to continue operating have increased investment. 

Retailers, for example, have remained open while cruise lines and theaters have been completely shut down, while other travel-related entities such as hotels and airlines have seen drops in demand above 70 percent. It obviously is easier to maintain investment when revenue has not been devastated. 

source: BDO 

Disparate investment in technology might easily be explained by relative differences in firm and industry revenue during the pandemic. Streaming services gained customers and revenue. Cloud computing sales increased, as did purchasing of broadband internet access services. 

In contrast, it is hard to increase technology spending when a firm’s revenue has been reduced to zero or close to zero. As firms cut operating costs, their investments in technology also tend to be reduced. 

source: A.D. Little

The Next Normal: Digital Business or a Different Business?

McKinsey Digital Senior Partner Kate Smaje argues two apparently contradictory trends: business will need to be "more digital" after Covid, but also that most digital strategies could fail. At least that is what 92 percent of respondents to McKinsey surveys believe. 

source: McKinsey 

U.S. Fixed Networks Business Negative Revenue Trend Continues

U.S. fixed network service providers will face secular pressure (mobile substitution will continue) and strong cable operator competition in broadband access. Fixed network provider revenue growth has been negative in 2019 and 2020, and is not predicted to change much in 2021 and 2022, S&P Global estimates. Cash flow will suffer more than top-line revenue. 

Business revenue will grow more than consumer revenues, S&P Global predicts. 

source: S&P Global

How Many Hours a Day Do Tech Professionals Work When Remote?

With the important caveat that output is what matters, not input, a survey of professional remote workers at firms such as Amazon, Google, Microsoft, Apple, Salesforce, Uber, LinkedIn, Salesforce, Adobe, SAP, Walmart, Capital One and Intel suggests that almost a third of the respondents are working three to four hours a day. 

source: Blind

The survey conducted on website Blind also found a bit over a quarter of respondents reporting they are working five to six hours a day. 

Some 15 percent of professionals say they work seven to eight hours a day, while another 15 percent of professionals say they work nine to 10 hours a day

Some 11 percent of professionals say they work one or two hours a day.

PCCW Global on Becoming a Platform

PCCW Global believes the global connectivity business can become a platform if it focuses on open and universal settlements, for example, creating more liquid transactions and using open interfaces to allow robust partner interactions. That is one way to create more value in the ecosystem. 

The mindset, though, is that of a marketplace or exchange, more than a relationship between a supplier and its customers. Think of it as more a relationship between any partners that are part of the ecosystem. 

Where the core business model for a connectivity provider has been as a "pipe," in the sense of creating a product and then selling that product to a customer, a platform facilities exchanges of value between ecosystem participants. The revenue for a platform then is some form of a commission, a fee or some other monetization method. 

Can Firms Do ESG Without Damaging Profits?

Environmental, social, and governance (ESG) issues have become a staple for a growing number of larger companies, but a reasonable question is what impact any ESG initiatives have on the overall profitability goals of any organization or enterprise. 

Environmental issues include the energy a company uses and the waste it produces. Carbon emissions and possible global warming impact are “E” issues. “S” issues include labor relations, management or employee diversity, and social inclusion efforts.

The “G” is for governance or the procedures and controls that your company uses to meet legal and ethical standards while benefiting your shareholders. A strong and ethical structure is essential for any company that wants to be socially responsible.

The analysis can be complicated as ESG can cover many different goals, ranging from reducing carbon footprint to promoting gender diversity to other hard-to-measure impacts such as reducing corruption, bribery or diversifying board member representation. 

Some of the quantitative progress on many metrics costs almost nothing. Other efforts might involve substantial changes that impose high costs. But most ESG goals have huge elements of discretion in setting targets or goals. As with most other enterprise change efforts, costs are lower when efforts are phased and incremental.  

In more than 2,000 studies on ESG impact on equity returns, 63 percent showed ESG had a positive effect while only eight percent showed a negative one, notes Multiview Corp. 

Other studies suggest there is almost no correlation between firms using ESG criteria and those which do not do so.  

“There is no evidence that ESG funds outperform investment benchmarks (like a passive S&P 500 index fund) over the long-term,” says Wayne Winegarden, Pacific Research Institute senior fellow. The caveat is that determining when a firm is meeting universal ESG goals is a matter of judgment. 

One might conclude that firms should early do what can be done at low cost, and implement the tougher changes that affect supply chains, production, distribution or sales costs over longer periods of time, especially since much ESG value is gleaned from hard-to-quantify efforts that cause customers to view a firm more favorably. 

Making ESG a line-accountable item can “lift what is already a substantial contribution to our stakeholders further without eroding short term financial or operational performance. Over time, you build greater value and greater returns for shareholders,” said Mike Henry, BHP CEO. 

Still, promoters say ESG and positive financial returns can be explained by the following: 

• Prompts top-line growth – Sustainable products attract more B2B and B2C clients. 

• Reduces cost – ESG leads to less water intake and lowers energy use. 

• Minimizes legal and regulatory actions -You’ll see improved government support and earn subsidies. 

• Increases productivity – ESG principles attract more qualified employees and increase employee enthusiasm. 

• Optimizes expenditures – You will see better investment returns from sustainable equipment and manufacturing plants. 

Some argue that ESG companies must practice all three parts. Others might focus on progress in any of the three areas, and to varying degrees. Still, many would argue the total ESG effort should transform virtually all operations of a firm. 

source: Man Institute

Some might say that grand vision is unlikely to happen systematically and quickly. It is more likely to evolve in a few areas where progress can be quantified quickly and where costs are manageable. 

Other efforts might involve changing global supply chains to promote worker rights and wages, and will take much effort and time, also adding costs to the business. By definition, paying workers more will increase costs, and that has to be accounted for in the business model.

The measurement problem will remain difficult, though, partly because some costs are hard to capture, as are the benefits. Some might argue ESG success cannot be measured in terms of its contribution to firm profits. Executives running firms always will counter that financial costs must be taken into account, as ESG cannot be allowed to destroy the firm business model. 

A reasonable person might argue that the best way to approach ESG is to look for quick wins in governance or social areas, with longer-term efforts conducted on the environmental areas where basic supply chain, production, distribution and sales processes have to be redesigned. 

In other words, do early what can be done with operating cost elements; do more gradually that which requires changing capital investment elements, long-term contracts and supply chains. 

It arguably is important to do so in a net-zero way on the cost side, hoping for eventual positive returns on the bottom line or revenue top lines, to the extent such benefits can be measured. 

5G Spectrum Purchases Will Drive Up U.S. Mobile Capex

Vital though the new U.S. mid-band spectrum for 5G might be, the cost of acquiring rights to use the spectrum worries financial analysts. S&P Global, for example, says spending on the C-band spectrum is “excessive.” 

To pay for the licenses, U.S. mobile operator capital expenditure will be higher, also likely resulting  in lower levels of free operating cash flow and higher leverage.

source: S&P Global

At the same time, mobile operators will be tempted to promote aggressively to gain 5G share, risking higher levels of customer churn and profit margin compression as well. At least in the near term, new competition from Dish Network and continued gains by cable operators will limit top-line revenue growth. 

On the other hand, if you could choose the segment of the business one were in, most would prefer life as a cable operator. Cable will see revenue growth of about six percent over the next two years, with steady increases in cash flow. 

For legacy telcos, mobility would still be the top choice. Mobile revenue top-line is projected to grow at perhaps 2.5 percent over the next couple of years, according to S&P Global. 

Fixed network revenue growth will be negative over the next couple of years, with business revenue the bright spot, perhaps growing half a percent by 2022, with consumer revenues down four percent per year. 

The satellite industry might face some overcapacity issues once the low earth orbit constellations go fully commercial. And while there are variations, the data center and mobile tower segments should generally fare well, S&P says.

How Much will B2B Sales Processes Change after Covid-19?

Digital channels already are a big part of business-to-business sales processes, and the conventional wisdom has to be that use of digital channels will grow, as part of permanent behavioral changes created by the Covid-19 pandemic. What is yet unclear are the extent and degree of permanent changes. 

Gartner, for example, predicts that by 2025, 80 percent of B2B sales interactions between suppliers and buyers will occur in digital channels.

Depending on how one tabulates, that might be a bit more than presently happens, or might be less. Today, perhaps 17 percent of interactions tend to happen in person, for example. And most might agree that digital commerce channels will increase. 

That might logically happen for smaller purchases routinely, with strategic purchases requiring more sales interaction overall, and arguably more time spent in person-to-person engagements.  

Business customers now routinely use supplier websites, for example,  to identify problems, explore solutions, build requirements, narrow the range of potential suppliers, validate those choices and create firm consensus around choices, Gartner notes. 

Interactions with sales representatives still are part of those tasks. In fact, in 2019 slightly more B2B buyers reported reliance on sales personnel than websites. Followup communications and activities arguably also rely on other channels (email, text messaging, audio and video conferences) to flesh out details. 

source: Gartner 

About 17 percent of time spent conducting research happens in live meetings with potential suppliers. About 67 percent of research time is consumed conducting online research, meeting with buying groups and conducting other research offline, Gartner notes. Still, one can conclude by comparing information channel activities with time spent in each channel that meetings with potential suppliers have an outsized influence. 

source: Gartner 

One might also assume that strategic choices and expenditures will require more face-to-face interactions, as well as more digital research and follow-up, than routine purchases. 

SMBs in Industries with Moats Spend Much More on IT Than SMBs in Risky Sectors

U.S. smaller businesses (defined as “small” when there are up to 99 employees and “medium” with 100 to 499 employees) can be split into four market segments, according to Analysys Mason. 

You likely would not be surprised to find that bigger spenders also are firms that face less competition--and therefore are more profitable--while also being larger firms overall. That has traditionally been the case. 

It would not surprise you that firms in financial distress, or in declining markets, spend less than growing or prosperous firms. You also would not likely be surprised if growing firms were more focused on growth--and investing for growth--while most declining firms are more interested in harvesting revenue for as long as possible and spending as little as possible. 

That is one way to interpret the way SMBs can be characterized in terms of their information technology spending volumes. 

Analysys Mason sees SMBs in four spending groups: super spenders, ahead of the curve, constrained strugglers or disengaged groups. 

What also might catch your attention is that firms that spend more tend to be in well-protected industries with moats of some sort that keep competitors out. They tend to be larger, growing and likely more profitable. 

The firms that invest less are all in high-risk industries, perhaps declining industries, are smaller and in financially-stressed industries. 

Source: Analysys Mason, 2020

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The super spenders make up roughly one third of the Analysys Mason sample and tend to be found in well-protected industries such as professional services.

The constrained strugglers and disengaged SMBs are mostly small businesses in challenged industries who focus on cost cutting and survival. These businesses tend to be found in high-risk industries such as retail, construction and manufacturing.

Is IoT "Digital Transformation" for Most SMBs?

Where can telcos add value for small or medium business customers beyond connectivity? Start with potential value in edge computing and internet of things. In many cases, value will start with ultra-low-latency application performance based on 5G radio links.

That only helps if the computing function also is capable of ultra-low latency, and that will mean edge computing. So add potential roles as suppliers of real estate: racks, security, power, cooling and cross connections, with the brand names supplying the actual computing function. 

Nobody expects telcos to manufacture the actual sensors and supply sensor software. That will be done by the established device and software firms. But end users, software suppliers and device manufacturers will not want to be in the business of system integrating and supervising devices, related software and analytics processes. 

source: CompTIA 

As with much information technology support in the SMB space, third party system integrators will be called upon to manage the process of designing, installing, testing and maintaining whole systems (devices, software, analytics, hosting) required on the premises to create the digital output supplying business value. 

Sure, telcos can supply all the transport, gateways and interfaces to the wide area network, and also the radio infrastructure and operations support for on-premises private networks. Beyond that, they will have to start acting as system integrators or premises IT specialists. 

That never is easy, given the peculiarities of each industry vertical. But it is hard to see how connectivity providers are going to be in position to reap more of the financial reward from IoT capabilities unless they move beyond their core communications function. 

Broadly speaking, many view IoT as the key to SMB digital transformation, in a practical sense. 

This is the way Singtel segments its cloud computing offers for small and medium business customers. As you can see, Singtel sees IoT as the key to creating SMB value from digital transformation. 

Singtel offers the brand names in computing as a service, rather than trying to recreate such capabilities on its own. 

Singtel also adds a preconfigured solution for internet of things monitoring, the cloud gateway and bulk data transfer. But Singtel focuses on integrating and managing the on-premise devices and software used to collect data, not the actual edge computing function itself. 

source: Delta Partners Group 

You might argue that the value of digital operations is based on three capabilities: intra-company and inter-company communications, enabling better information tracking and extending business reach. All three of those objectives are classic “communications” requirements. 

The new value-add is support for the analytics function. While not supplying the analytical engines or the core processing to conduct analysis, telcos can package the “function” of sensor network management as a key added-value role. Neither computing as a service vendors nor analytics software firms want to manage the on-site networks of sensors. 

Most smaller businesses might not want to have their limited information technology staff doing so, either. In essence, the telco IoT role becomes that of system integrator and operations manager for the IoT sensor network. 

source: Delta Partners Group

Some Things--Such as Bandwidth Price Trends--Do Not Change

Some things do not seem to change much. Generally speaking, global capacity prices have continued to decline in 2020, continuing the general trend we have seen for a few decades. 

Source: TeleGeography

Price changes also vary by capacity. 100-Gbps prices have fallen more than 10-Gbps prices, for example, TeleGeography says. 

As always, there are regional differences. Routes to and from Latin America and North America have fallen significantly since 2018. 

Routes terminating in Sao Paulo have fallen more than 40 percent since 2017, while routes terminating in Jakarta have fallen less than 10 percent, TeleGeography notes. 

IP transit prices tend to reflect changes in pricing of transport prices on most routes, as well, with regional differences. Routes between Europe and Africa; Mumbai and Singapore and Los Angeles to Sydney are higher than on trans-Pacific or trans-Atlantic routes. 

The Covid-19 policies essentially shutting down education and in-office work, though, have not caused colocation prices to drop, TeleGeography says. About 83 percent of survey respondents say prices have not changed. 

Source: TeleGeography

Cross connect pricing likewise have been stable in U.S. markets, though rates are rising in Europe. 

Source: TeleGeography

Workers Like WFH, Their Bosses, Maybe Not So Much

Employees generally report in surveys that they prefer working from home, and often also report they believe they are more productive working from home, than working in the office. Executives might not agree. Remote workers are harder to manage, for example.

The issue is that large remote workforces are very hard to support, train and evaluate, says Bill Barney, Asian Century Equity chairman. 

Source: Asian Century Equity

The issue seems to extend beyond cultural issues, such as some executives being uncomfortable with supervising remote workers. Not every employee, in every business function, actually works at a job allowing for effective productivity measurements.

If Telcos Manage for Equity Valuation, Asset Sales, Spinoffs Will Happen

For better or worse, executives running Asian telco businesses are going to have to take a hard look at their asset bases, to maximize equity valuation, says Bill Barney, Asian Century Equity chairman. That might be especially true for assets that do not spin off free cash flow. 

Source: Asian Century Equity 

Telcos are Not Rewarded for Capex at the Same Level as Data Center Operators Making the Same, or Similar Investments

Connectivity service providers typically are not rewarded at the same level as are data center investors, which suggests more retail telcos will have to consider spinning off assets and becoming specialists of various types to be rewarded by financial markets for investing in assets such as data centers or cloud computing assets, according to Bill Barney, Asian Century Equity Chairman. 

In this illustration, where a telco might get a valuation lift of about six to seven times the amount of an investment, a data center operator making the same size investment, in the same sort of asset, might earn a valuation multiple of close to 14 times. 

The highest valuation multiple is earned by a telco for investing in mobile spectrum, at better than 14 times the amount of the investment. 

A data center investment in more capacity or its network gets a valuation multiple of about 13 times, while a cloud computing investment gets a whopping multiple of about 35 times. 

Source: Asian Century Equity 

That suggests a telco would be better served to spin off a data center business unit, for example. On the other hand, telcos get rewarded for optical fiber investments at a bit less than the rate a data center operator gets for making an equivalent networking capital outlay. 

Bouygues Telecom Tries to Disrupt the French Market

We may soon see a test of the rule of three and rule of four in the France telecom service provider market, as Bouygues Telecom tries to move up from the third spot to number two. The rule of three suggests a stable French telecom service provider market would be led by three firms. The rule of four suggests the market share structure will be 4:2:1 (40 percent, 20 percent, 10 percent) in terms of shares held by the top three firms.

That is quite different from today's structure.

According to Bouygues, its mobile market share (excluding M2M accounts) stood at 16.4 percent in 2020. At that point, the firm was in fourth place behind Iliad with 18 percent, SFR with 24 percent and Orange with 30 percent share. Adding the M2M or internet of things accounts, Bouygues already had reached the third position in market share. 

The more important part of the story is that Bouygues has been gaining market share for at least a decade. In 2010 it had about eight percent share. The conglomerate’s mobile business has the highest growth rate of Bouygue’s businesses. Average revenue per account also has been rising. 

The company had 12 million mobile customers (excluding M2M) in September 2020, an increase of 455,000 new customers since the end of 2019, of which 181,000 were in the third quarter.

Bouygues Telecom had 1.4 million fiber to the home customers in September 2020, with 378,000 new adds since the end of 2019. The FTTH penetration rate continued to rise to 34 percent  versus 22 percent a year earlier. 

source: Seeking Alpha 

The company had a total of 4.1 million fixed network customers in September 2020. The roll-out of Bouygues Telecom’s FTTH network is accelerating with 15.8 million FTTH premises marketed at end-September 2020 versus 11.8 million at the end of 2019. 

Bouygues has raised its target to 27 million premises marketed by end of 2022.

After an acquisition adding two million accounts, Bouygue should have reached about two percent, possibly three percent additional share points. So the assault on number two SFR, and supplanting that firm, means an overall shift of about four points: moving from 20 percent to 24 percent, ideally based on taking two points of share from SFR in the process. 

When Bouygues is able to take customers directly from SFR, it gains double: growing its own share and reducing SFR’s at the same time. 

The other issue is that, depending on how one wishes to count market share, fixed network revenue and accounts might prove important. In fact, some might argue that Bouygue’s ambitions are based on gains in fixed network customers and revenues more than mobile accounts and revenues. 

In principle, a jump into second place--by market share--is possible. The French mobile services market is not so stable that movement at the top of the market is largely impossible. It would be quite difficult indeed to make such a move if Orange had 40 percent share rather than 30 percent. 

Were that the case, One could then expect SFR share to be about 20 percent or so, with a third provider having 10 percent or perhaps a bit more. Under such conditions, it is next to impossible for number three to supplant number two, and virtually impossible to overtake the leader. 

So far, though, Bouygues Telecom has been able to steadily grow both mobile and fixed network accounts, gaining market share in the process.