Telecom Long Ago Left "Regulated Monopoly" Behind, Only to Encounter a Possibly Worse Regime

There have been brief periods over the past couple of decades when it might have seemed possible some parts of the telecom business might escape the utility characterization (slow growth dividend stocks). In some part, the burgeoning growth of the mobility business in developing parts of the world produced revenue growth fast enough to fuel that belief.

Some specialized providers might claim to have done so (they grow faster and do not pay dividends), and innovation in new technologies and services will continue.

But many tier-one service providers--most clearly in the developed countries--have not escaped their slow-growth roots. The changes have largely been for the worse.

While some providers might have chafed at their regulated roles, and a few considered themselves lucky enough to operate as unregulated monopolies, the main service providers in developed nations continue to operate in tough markets that produce flattish to negative revenue growth rates.

source: STL Partners

The four largest European markets--United Kingdom, Italy, France and Germany--are shrinking, as are the U.S. market and India. China continues to show higher growth rates, according to STL Partners.  

Keep in mind that telecom revenue tends to grow at about the rate of growth for the economy. So we should never be too surprised when industry revenue growth anywhere hovers at or just below the overall rate of economic growth.

source: STL Partners

In fact, it must be noted that the telecom industry now faces an arguably-worse environment than it did in the highly-regulated markets it once faced. Rate of return regulation produced slow innovation and slow growth, but highly-predictable revenue and profit. 

Exposure to competition produces none of those advantages, but also increases risk and uncertainty. The unexpected rise of the internet, in addition to service provider competition, has not helped, either. But it is what it is. 

Spectrum Prices are Dropping Because Business Model Requires Lower Prices

Some regulators are going to be shocked to find out that the historically high value of spectrum used for mobile communications is unsustainable. Bidders now have many reasons to value even needed spectrum at lower rates than in the past.

And the reasons have everything to do with supply and demand. End user and customer demand for use of internet data keeps climbing. So one might think spectrum prices also must keep climbing. Not so, because supply and demand is changing.

It is increasingly possible to use spectrum more efficiently. Small cell architectures, for example, allow more intensive spectrum reuse.

Also, an order of magnitude more spectrum is going to be commercialized, and that spectrum will feature wider channels that are more spectrally efficient. Coding also is more efficient. It is easier to aggregate unlicensed spectrum, which becomes a functional substitute for licensed spectrum.

Mergers will mean that specific companies will find they have more available spectrum to use. And new spectrum sharing techniques mean previously unusable spectrum becomes available.

Also, the characteristics of millimeter wave spectrum mean that more effective bandwidth is possible for every megaHertz of available spectrum

In other words, if ways to use fair amounts of spectrum without a license become possible; if the physical supply of spectrum grows substantially and the cost of using small cell architectures grows, we should expect lower spectrum prices.

To make an analogy, spectrum is beachfront property, but we are making more beach. Over the past few years, some have worried about the cost of 5G spectrum, although spectrum prices are dropping, generally speaking, in part because there is a huge increase in supply, and because mobile operators must now more carefully weigh the cost of new spectrum against expected financial return.  

Also, firm strategies now vary. Some firms believe use of unlicensed spectrum will be more important. Others substitute small cells for additional spectrum. Some need additional spectrum more urgently than others, based on present holdings.

On the demand front, if it becomes clear that revenue per bit continues to decrease, then the ability to wring revenue out of any fixed amount of spectrum decreases as well. That means mobile operators simply cannot afford to pay higher prices for spectrum, as the expected return on those assets is effectively lower.

If average revenue per account keeps dropping, then average cost to supply bandwidth also has to decrease. Architecture can help. But spectrum prices also must drop.

Demand also is affected by the fact that early adopters tend to spend more than later adopters. That applies to whole regions and countries as well as between regions and countries. Later adopters are lighter users, either for behavioral reasons (they use the internet less) or for cost reasons (they have less money to spend on internet access).

The big takeaway is that we should expect spectrum prices to fall, as demand increases dramatically. 

T-Mobile US Becomes a Bank

T-Mobile US is getting into the mobile banking business. More important, perhaps, it is becoming a bank. That move, as much as anything beyond its earlier move into the video subscription business, illustrates the moves T-Mobile US and other connectivity providers feel they must make to generate revenue growth as the mobile business reaches saturation.

Canadian telecom firm Rogers has been a bank for some years, though it does not appear to generate appreciable revenue. In structuring its offers, T-Mobile US might not actually believe th move will generate much revenue, either. But the offers could increase new subscribers and contribute to lower account churn.

source: T-Mobile US

T-Mobile MONEY is available nationwide. The no-fee, interest-earning, mobile-first checking account is smartphone based and apparently available to non-T-Mobile US customers.

Under some circumstances, T-Mobile will pay four percent interest on the first $3,000 of deposits, with one percent on every dollar over $3,000, so long as the customer is a current T-Mobile US postpaid mobile user and agrees to deposit at least $200 monthly into the account.

source: KPMG

To be sure, there are many aspects to mobile banking, ranging from using a mobile banking app to mobile payment. T-Mobile has chosen to become an actual banking entity. Verizon and AT&T once tried to become mobile payment platforms, but have abandoned the effort.

T-Mobile US is betting that banking is a very sticky feature, and that its way-above-market interest rates will be doubly attractive.

U.S. Consumers Do Not See Compelling Need for Gigabit Access, Study Suggests

Consumers show interest in gigabit speeds but that interest does not necessarily translate to adoption, a new study by Parks Associates suggests. Consumers fail to see a compelling need for gigabit services, as few households require the performance levels of these services, the firm says.

Some 22 percent of U.S. broadband households buy a service operating with speeds ranging from 100 Mbps and 999 Mbps, the most common service tier cited by survey respondents who say they know their speeds, according to Parks Associates.

Some six percent of respondents say they buy a gigabit service.

About 39 percent of respondents do not know their broadband speed.

But Parks Associates also says interest in upgrading to that speed of service has declined over the past two years.

“Interest in gigabit speeds has declined, due partly to limited availability, but also as households prioritize cost over speed,” said Craig Leslie, Senior Research Analyst, Parks Associates. “Of the US broadband households that switched services in the past year, 50 percent did so to get a better price, while 36 percent switched to get better speeds.

“Households are not seeing the benefits to speed upgrades,” Parks Associates says.

The Pacific Telecommunications Council now is soliciting content for its 42nd Annual Conference, PTC’20: Vision 2020 and Beyond, to be held from 19 to 22 January 2020 in Honolulu, Hawaii.

PTC’20: Vision 2020 and Beyond will look broadly at the  telecommunications sector, technologies, applications, and benefits in 2020, and also explore trends and discontinuities in the years beyond.

PTC’20: Vision 2020 and Beyond will bring into focus what otherwise would be a blur of disruptive technologies, emerging applications, shifting regulatory policies, dynamically-changing cultural norms, and new business models.

PTC invites industry executives, business strategists, financial analysts, technologists, innovators, policy makers, regulatory and legal experts, and consultants to submit proposals on forward-looking views and implications on topics representing the breadth and depth of the industry. Those include applications, technology, and policy issues for network-centric or network-enabled products, services, and uses.

New to the upcoming PTC Annual Conference are the PTC HUB Presentations and Cross-discipline/Cross-sector sessions.

The PTC HUB will be the core of the conference, offering the opportunity to conduct brief and lively 10-minute talks, tutorials, debates, presentations or interactive sessions on a variety of key issues. The sessions will demonstrate how industry functions and developments interact across ecosystems to create value, and how changes contribute to use cases.

The conference program will also incorporate a variety of formats, including presentations, interviews and moderated discussion panels. Proposals for consideration can be submitted for topical sessions, workshops, tutorials or “managed” sessions. The deadline for submission is 12 July 2019.

Academics and Researchers are invited to submit their research paper abstracts by 12 July 2019, either on a topic of interest provided or for one that fits the conference theme. Students may submit full papers by 15 September 2019. Accepted research papers are also eligible for PTC’s Research Awards, the Meheroo Jussawalla Research Award and the Yale M. Braunstein Student Award.

For more information on the PTC’20 Call for Participation and details regarding proposal options and a complete listing of topics, visit www.ptc.org/ptc20/cfp.

Market Share and Profit Margin Typically are Directly Related

Among the principles that applies to most analyses of market share in connectivity markets, especially for tier-one retail suppliers, is the relationship between market share and profit margin.

In most markets, two suppliers have 80 percent of the profits, researchers note. More pointedly, the market leader can have 60 percent of total profits in the industry. That obviously leaves little share for the other contenders.

This is a nice illustration of the concept.

Looking at market share in the Netherlands mobile market in 2006, one can see that KPN had roughly twice the market share as the second-largest provider, which in turn had share roughly double the number three provider.

source: techneconomyblog

Not every market has a perfect match, but over time, at least historically, the pattern has been quite common.

source: Loraine Logan

Can Cable Win, Long Term, Without Mobility?

Cable execs keep stressing they are communications companies--and arguably leading companies--rather than video entertainment distributors. But it might be hard to do that, long term, without a key position in mobility, which drives the bulk of revenue in the U.S. communications business, unless an alternative international growth strategy is the alternative.

The Sky purchase, though increasing Comcast exposure to video distribution, might suggest the early focus.

source: Infonetics

The issue for Comcast, as for some other firms, is whether a “fixed network only” or “mobile only” strategy is sustainable.

To be sure, cable companies are positioned to take market share in business services and consumer broadband. In fact, the whole growth story for cable companies in communications is “taking market share” from telcos faster than video revenue is lost.

But the bucket is leaking. Cable has to add new revenues simply to replace lost video revenues. Net growth beyond that replacement is the issue.

SNL Kagan forecasts residential cable industry revenues will rise from $108.38 billion in 2016 to $117.7 billion in 2026, a $9.32 billion increase over the 10-year period, even as video revenues shrink.

Commercial services revenues will push total industry revenue from $130.57 billion to $140.99 billion, a $10.42 billion increase, SNL Kagan suggests.

That forecast assumes consumer broadband subscriptions grow by more than eight million over the next 10 years, largely by market share gains at the expense of telcos. That is why fixed wireless and 5G mobile substitution are such a big potential change for telcos. If 5G reduces share losses to cable TV, the consumer revenue growth estimate for cable is too high.

The SNL Kagan forecast also is sensitive to the rate of linear video subscription losses. Basic video subscriptions are projected to drop by an annual compounded growth (CAGR) rate of 1.5 percent to 45.4 million by 2026. Accelerated losses, which most likely expect, will damage the overall growth forecast as well.

SNL Kagan anticipates total revenues generated from residential video services to fall at a CAGR of -0.5 percent over the next 10 years, totalling $55 billion annually in 2026. Again, that could be overly optimistic.

Advertising revenue is expected to grow at a 4.3% CAGR through 2026 to reach $6.3 billion, but is not a big enough contributor to offset bigger losses in the core services areas.

So the strategic issue is whether the cable industry can sustain a position at the top of service provider rankings without serious mobile revenues and profits, even if taking market share in enterprise and business markets will help.

That might be likened to the position CenturyLink finds itself in: it already earns more than 76 percent of total revenues from enterprise customers on its global networks and metro enterprise services.  

Its entire national footprint of mass market customers is essentially a drag on company profitability.

source: Seeking Alpha

Mobile remains the growth engine globally, but the relative scale and importance of the mobile, fixed broadband, and entertainment TV  markets varies hugely by country and region. In 2021, the mobile market will generate 87 percent of total connectivity and video revenues in Africa and 70 percent in the Middle East, compared to 50 percent in North America and 49 percent in Western Europe, according to Informa Ovum. The differences stem largely from revenues generated from fixed networks.

Cable dominates consumer broadband, has a strong, if declining video business and is growing its share of commercial revenues. But the other leading incumbents are fighting for their lives as well, and will not easily yield market share in voice and data, least of all AT&T and Verizon, which appear to be holding their own in consumer internet access share, for example, while most of the telco industry losses come from smaller providers relying mostly on digital subscriber line for internet access.

Almost without exception, such providers also have no mobile exposure. How long such firms can compete against cable, which arguably offers better value for consumers, is an open question.

Conversely, cable can compete against weaker telcos without mobile assets quite well. Whether cable can challenge AT&T and Verizon, though, is a bigger question at the moment, so long as no clear mobile strategy at scale.