Mobile Industry is Highly Concentrated, and Unlikely to Change

With a few exceptions, the mobile service provider business tends to feature three providers in any single country. With the caveat that nationwide telecom systems always tend to be few in number, virtually every mobile market is highly concentrated, using the Herfindahl-Hirschman Index (HHI), a widely-used measure of market concentration. 

A market with an HHI of less than 1,500 is considered to be a competitive marketplace, an HHI of 1,500 to 2,500 to be a moderately concentrated marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace.

No mobile market actually can be deemed “competitive” using the HHI test. On the contrary, every mobile market is highly concentrated. 

source: Alliance for Affordable Internet

Some might argue that relative lack of competition explains the price of mobile data, which because of less than robust competition costs users an estimated $3.42 per gigabyte, according to the Alliance for Affordable Internet. 

In cases where only a single facilities-based supplier operates, breaking up a broadband monopoly can create a savings of up to $7.33 per GB for users, the Alliance for Affordable Internet argues. 

Across Africa, for example, a continent with generally less robust competition, the average cost for 1GB data is 7.12 percent of the average monthly salary. In some countries, 1GB costs as much as 20 percent of the average salary, says the Alliance. 

If the average U.S. earner paid 7.12 percent of their income for access, 1GB data would cost $373 per month.

source: Alliance for Affordable Internet

Though many would note that the existence of mobile virtual network operators will increase competition, it also is an industry fact of life that capital-intensive connectivity networks will always be relatively few in number. It is an oligopolistic industry. 

source: IP Carrier

How Much Market Share Does 5G Fixed Wireless Have to Take to be Meaningful?

How much market share does 5G fixed wireless have to gain to be meaningful? For some new potential suppliers, even a few percentage points of market share could be significant. A million accounts represents about one percent of the total U.S. fixed network internet access market. 

For a new provider, that could represent incremental recurring revenue of perhaps $720 to $960 in annual account revenue, assuming monthly recurring revenue of either $60 a month to $80 a month. 

At just one percent market share, that represents $720 million to $960 million in recurring annual revenue. If the functional definition of the minimum revenue opportunity large enough to be considered by a tier-one service provider is $1 billion, then 5G fixed wireless fits the bill. 

If any single internet service provider is able to get five percent market share, that represents about $5 billion in incremental recurring annual gross revenue. For a firm such as AT&T, with debt service payments about $6.8 billion (though set to decline), that is an important revenue contribution. 

Another answer might be that,  in the U.S. market, 5G fixed wireless will be meaningful for fixed network ISPs if it brings the rate of cable TV net additions close to zero. For cable, that would choke off the most-important driver of subscription revenue. For telcos, that also could mean a halt to share losses in the internet access category that have been on-going for at least a decade. 

Consider that in any particular quarter, cable tends to gain about half a percent market share, or about 532,000 net accounts. With internet access now driving subscription revenue growth, that matters. 

If all suppliers of 5G fixed wireless collectively manage to gain 532,000 accounts per quarter, or about 2.1 million net accounts a year, cable’s subscriber business grinds to a halt, all other things being equal. 

Some predict 5G fixed wireless accounts could, over the next four years, garner about 4.5 million accounts. That would not cause cable gains to go to zero, but would cut internet access gains--all other things being equal--in about half. 

Though many doubt fixed wireless can reach 15 percent to 20 percent share of the U.S. fixed network internet access market, that implies gains of between 15 million and 20 million accounts. 

Some of us might argue that 5G fixed wireless would be significant for the market at even 10 percent share gains, as that could represent a key reversal of market share trends of some years standing, between cable and telcos. Gains might also be important for some other providers not presently in the fixed network internet access business.

Cable Operators Plan Lots More FTTH Deployments

Hybrid fiber coax will remain a viable cable TV network platform for some time, as a Light Reading survey of cable operators globally found that executives expect 46 percent of their residential and business customer connections to be coaxial-based in 2024.

But it also is noteworthy that fiber to the home or premises for business customers are expected by 29 percent of respondents, as well as 22 percent who said they would deploy 10-gigabit EPON passive optical networks, while 13 percent said they would use XGS-PON. 

source: LIght Reading

The results among North American respondents are nearly identical to the global results, according to Light Reading. The percentage for Docsis 3.1-enabled HFC is two points higher among North American respondents (26.8 percent total), than among other respondents.

Among smaller North American cable providers (those with annual revenue of less than $1 billion), 55 percent of connections are expected to use coaxial cable drops, compared to 41 percent for larger North American providers (those making $5 billion or more annually). 

Both small and large North American providers expect FTTH/FTTP to be a significant part of their mix. Smaller North American providers actually anticipate a larger percentage of their customer base will be served through direct fiber connections than large providers, 30 percent versus 24 percent, respectively.

Close to one-half of cable respondents (46 percent) said their company will carry out FTTP network upgrades with 10G-EPON over the next two years, making that the lead choice. 

source: LIght Reading

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.

South Korea has 10% FTTH Take Rates. Is that a Problem?

Take rates (percentage of customers who actually buy a service) are not the same thing as availability (the percentage of consumers who actually can buy a product). That is worth keeping in mind when evaluating the relevance of take rates for fiber to home services. It is doubtful many people actually believe South Korea has an internet access problem, even if buy rates for FTTH might be as low as 10 percent.

source: IDC

Internet access reaches about 99 percent of South Korean households, and South Korea has the fastest average internet access speeds globally, in some studies, or ranks among the top three, in other studies. 

FTTH is the Network of the Future; the Issue is How Far Off is "the Future?"

“Fiber is the future of networking, and always will be,” one wag from the cable TV industry said several decades ago, as the hybrid fiber coax architecture began to be installed. What he meant was essentially that what is good enough for present business purposes often is better than some other “perfect” alternative. 

The point is that business models matter. A networking platform that delivers market-leading bandwidth now, at lower cost than the other options--even the “perfect” long-term alternatives, arguably is a better choice in a competitive market. 

That does not mean the future perfect alternative will never make sense, only that alternatives offering sufficient bandwidth for the present, and near future, with higher profit margins, are a reasonable choice, especially if the platform is extensible. 

In other words, a platform with a roadmap to 10 gigabit per second speeds (hybrid fiber coax or 5G) might often be a reasonable networking choice now and for the near future, even if not perfect. 

That in no way means optical fiber to the customer premises is not “the future,” at least for many locations where fixed networks are feasible. We might all agree that, eventually, it is. 

Between now and then, though, service providers must operate businesses that face constrained revenue upside, putting a premium on platforms that can deliver market-standard bandwidth now, at lower cost than a full and complete upgrade to fiber to the home, if that is feasible. 

In a strategic sense, one might agree that “the debate over the best infrastructure to deliver fixed last-mile broadband service in the 21st century is settled, and fiber is the undisputed winner,” without agreeing that this is the best networking choice today, not later in the century, for all suppliers of internet access. 

To use an obvious example, 5G fixed wireless--not optical fiber--is a feasible way for some mobile operators to take market share in the fixed networks internet access market, at far lower cost than would otherwise be feasible for them. In an era where access revenue potential is sharply limited, and might actually be falling, lower platform costs matter. 

Likewise, cable TV operators, who have perhaps 66 percent share of U.S. consumer fixed network internet access market share, are far from the point where it makes sense, as a general rule, to replace HFC with FTTH. 

In other words, one can agree that “fiber is the superior medium for carrying fixed broadband by almost every metric: available bandwidth, SNR, theoretical capacity, real-world throughput, latency, and jitter,” without agreeing that it is the “best” platform for all contestants in competitive markets, where stranded assets stranded assets represent more than 50 percent of all consumer locations, and possibly no more than 33 percent. 

Though optical fiber to the premises networks are “the best” in a technological sense, they might not be best in terms of business model. That is especially true in competitive fixed network markets, where multiple facilities compete and financial return hinges, in part, on the percentage of revenue-generating accounts any network can hope to attract.

5G Fixed Wireless Adoption Depends in Part on Pricing Strategy

Consumers in the United States and United Kingdom might have significant appetite for fixed wireless internet access, according to a survey conducted on behalf of CCS Insight. 

Respondents listed price, performance and quick installation as the leading factors that might encourage them to sign up to 5G home broadband.

source: CCS Insight

We should be cautious about 5G fixed wireless forecasts in part because so many early estimates seem to include both infrastructure products to enable 5G fixed wireless as well as service subscriptions. That noted, it is possible that fixed wireless service revenues might approach 10 percent of total 5G service revenues, by perhaps 2029. 

source: IDTechex

Other forecasts suggest there could be about 13 million 5G fixed wireless accounts in service by about 2024. 

DIY SD-WAN?

“Do it yourself” has been a viable sourcing strategy for many types of enterprise services that might otherwise be provided by a connectivity service provider, including private wide area networks and business voice. 

In addition, there are services such as software-defined wide area networks (SD-WAN) that are enterprise created and operated, or are put together by managed service providers who create private networks incorporating some basic forms of service provider products.

That noted, many believe connectivity provider solutions will continue to build market share. 

source: Juniper

In addition to the DIY approach that was an early feature of SD-WAN networks, a growing number of managed service providers are competing directly with connectivity provider SD-WAN offerings. 

“There is a growing emphasis on managed SD-WAN rather than DIY deployments in both North America and across Europe, the Middle East and Africa (EMEA) and Asia,” according to researchers at Analysys Mason. 

source: Cisco

That trend might be even stronger for offers made by MSPs with roots in other parts of the value chain. Citrix and CloudGenix, for example, tout the integration with apps provided by Ring Central, Salesforce and hyperscale data center suppliers, for example. In other cases it is the security function that is the solution purchased, with SD-WAN being part of that solution. 

In many such cases, the SD-WAN functionality is part of a wider offer based on applications and their performance. Equinix sells SD-WAN services built on Citrix, for example. 

Several SD-WAN vendors, including Aryaka and Cato Networks, operate private backbone networks, with a “cloud-native” marketing platform. 

Opportunities in the SD-WAN Market

Should Telcos Stop Trying to Move Up the Stack, Across the Ecosystem?

Virtually all equity analysts subscribe to a particular view of how tier-one telcos should run their businesses. Basically, they should stick to their connectivity knitting and not attempt to diversify into other areas of the application, computing, content, financial services areas.

In that view, even if the telecom industry has low revenue growth, it should be able to wring cash flow margins (30 percent to 40 percent), with modest capex except when going through episodic technology upgrades about every decade, with recurring revenue sustaining their business models, argues Cestrian Capital Research. 

Pre-tax free cash flow then could remain in the 20-percent range, and the ability to pay dividends in the five percent range. 

The issue is whether that is sustainable long term. 

And there are historical reasons for skepticism about moves into market adjacencies: telcos rarely have succeeded. In 1991, AT&T acquired computing firm NCR, then spun it back out in 1996 after discovering it could not create the expected synergies between computing and communications. In 1998 AT&T acquired Tele-Communications Inc., the largest U.S. cable TV operator, along with other assets intended to transform the legacy long distance voice provider into a broader business. AT&T, struggling with high debt, later sold the TCI assets to Comcast. 

British Telecom BT and Deutsche Telekom have gotten into the content business, as have AT&T and Verizon. Some will point to financial underperformance by many leading telcos that have diversified, and argue the diversification failed. 

Others might argue the issue is that the legacy revenue drivers simply are eroding faster than the new lines of business can be built. Traditionally, enterprise customers drove the bulk of profits for tier-one telcos. That has changed in the competitive era. Much the same trend can be seen even in the mobile data business that has over the past decade driven revenue growth in the mobile business, even as mobility has driven revenue growth for the global telecom business.  

source: Analysys Mason

“We believe that telcos should reduce reliance on communication revenues by extending their reach across the telecom value chain,” say analysts at DBS Group. Nokia Bell Labs also believes the value proposition must shift from connectivity, as well. 

Fundamentally, the telco problem is that prices for its core connectivity products are trending towards zero. And even with scale, near-zero prices will not sustain today’s business model.

Key Telecom Challenge: Prices Only Go Down

Nothing better summarizes the challenges faced by executives and firms in the connectivity business than the quote by Grant Kirkwood, Founder and CTO of Unitas Global, at the PTC Academy Bangkok: Executive Insight for Exceptional Leaders course in Thailand, 23-25 September 2019.

“My advice is do not operate a network,” Kirkwood quipped, referring to a key problem noted by many instructors, that prices and average revenue in the business “only go down, they never go up.”

Margin erosion, product maturity or decline, and competitive threats and opportunities were recurring themes across the program.

Sponsored by CAT Telecom and in collaboration with APTelecom, the course hosted students from Thailand, Brunei Darussalam, Malaysia, Hong Kong, and India.

Nine instructors from six countries came together for a jam-packed educational event featuring content including undersea innovations, 5G, the transition to next-generation technologies, OTT, digital advertising business models, tools for professional development and networking, corporate social responsibility, and capacity procurement.

A tutorial on interconnection dos and don’ts was provided by Eric Green of Cambridge Management Consulting, while Mark van der Maas of AppsFlyer talked about digital advertising issues. Sean Bergin of APTelecom led a team exercise on next-generation opportunities and problems, while Eric Handa, also of APTelecom, discussed social responsibility issues.

Russell Lundberg of Intelefy explained how to use LinkedIn for career advancement. Gary Kim addressed 5G and Ubonpan Chuenchom of CAT Telecom provided an overview of Thailand’s peering environment.

Thank you to CAT Telecom for providing a fantastic venue, audio-visual support, food and beverage, and warm hospitality.