How Deep a Revenue Dip; How Swift a Rebound for Telecom Revenues?

In April 2020, early in the Covid-19 pandemic, Analysys Mason forecast telecom revenue in developed markets would fall by about 3.4 percent in 2020, with less than one percent growth in 2021. 

Global revenue might not reach 2019 levels until 2023, Analysys said in December 2020. 

International Data Corp., on the other hand, predicted that global telecommunications and subscription TV services revenue would dip less than one percent in 2020.

Note that these forecasts were made in May 2020, and might well change. Here is Analysys Mason’s May 2020 forecast, with a range of cases from mild to severe impact. Also note that the "moderate" scenario tracks the "mild" scenario closely. Some might argue that means the "moderate" recovery case is almost the same as the "best case" forecast.

In the moderate case, we return to 2019 revenue levels by perhaps 2023. The "worst case" is almost impossible to anticipate, in terms of time of recovery.

source: Analysys Mason 

In the first quarter of 2020, revenue declined about 2.2 percent globally, according to ResearchandMarkets. Some service providers saw revenue “growth rate” declines as high as 12 percent in the first quarter alone, including telcos in the U.S. market. 

Even if it seems too optimistic, the IDC prediction is well within historical expectations. The Great Recession of 2008 caused a momentary flattening of revenue growth, with the prior pattern asserting itself quickly afterwards. A modest dip would not be without precedent, even if we fear greater damage. 

And though it is reasonable to expect a dip in business customer spending (with economies shut down and significant bankruptcies expected), consumer spending on telecom services might well increase, as it did in the United States in the aftermath of the 2008 Great Recession. 

source: Statista

IDC estimated global service provider revenue at nearly $1.6 trillion in 2020, a decrease of 0.8 percent compared to 2019. IDC expects the decline to continue in 2021, but at a somewhat lower degree. 

The mobile segment, the largest segment of the market, will post a slight decline in 2020 due to lower revenues from roaming charges, less mobile data overages due to the stay-at-home situation, and slower net additions, especially in the consumer segment, IDC argues.

Fixed data services spending was forecast to increase by 2.9 percent in 2020, however. In the U.S. market, that appeared to have happened. In the United States, in the third quarter of 2020, for example, net broadband additions in the first quarter were the highest since 2015, while in the second quarter, net additions were about triple the rate for the same quarter of 2019, according to Leichtman Research Group figures. 

Subscription video services were expected by IDC to be boosted by the lockdown, but also affected by the economic downturn, so the spending in this category is expected to decline slightly in 2020, IDC said.

The Americas market was forecast to see a tiny decline of 0.04 percent. Europe, the Middle East, and Africa (EMEA) and Asia/Pacific (including Japan) will dip more. Growth is not expected in EMEA or Asia/Pacific before 2022 as the users in emerging markets are expected to remain cautious about spending for some time, IDC estimates. 

source: IDC

It remains to be seen who is correct about the extent of the revenue dip in 2020. It also remains to be seen whether a historically-seen pattern of relatively-swift rebound happens once the pandemic is over.

How Long Before Telecom Revenue Returns to 2019 Levels?

How long will it take for global telecom revenue to return to 2019 pre-pandemic levels?

Perhaps the good news is that, right now, based on development of vaccines, it seems as though the second quarter of 2021 might see an end to most economy-affecting prohibitions and impediments to normal levels of commerce. 

The bad news?

If so, we might not see a return to early 2019 levels of revenue until perhaps 2023, according to Analysys Mason. A worst-case scenario delays recovery to 2019 levels until some time after 2024.

Note that these forecasts were made in May 2020, and might well change. Here is Analysys Mason’s May 2020 forecast, with a range of cases from mild to severe impact. Also note that the "moderate" scenario tracks the "mild" scenario closely. Some might argue that means the "moderate" recovery case is almost the same as the "best case" forecast.

In the moderate case, we return to 2019 revenue levels by perhaps 2023. The "worst case" is almost impossible to anticipate, in terms of time of recovery.

source: Analysys Mason 

The bright spots are residential broadband (assuming strength in internet access but weakness in linear video and voice), business unified communications and internet of things.

source: Analysys Mason 

Many seemingly believe that all the past year’s emphasis on remote work and remote learning “must” be good for connectivity providers, and to be sure, some evidence can be cited, such as an increase in broadband  subscription rates in the United States, in the third quarter of 2020, for example. Net additions in the first quarter were the highest since 2015, while in the second quarter, net additions were about triple the rate for the same quarter of 2019. 

The story overall is not that bright, as most service providers, in most markets (perhaps nearly every market) have seen a dip in revenues in 2020. Mobile operators, for example, have seen declining revenues for roaming, since people were not traveling as much as usual. With businesses operating in restricted mode, if at all, usage was down there as well. Many small businesses have gone bankrupt, so customer additions were negative in that sense. 

At the same time, costs increased as firms scrambled to support a sudden surge of at-home work patterns. In the first quarter of 2020,revenue declined about 2.2 percent globally, according to ResearchandMarkets. Some service providers saw revenue “growth rate” declines as high as 12 percent in the first quarter alone, including telcos in the U.S. market. 

source: TBR 

Profits might diverge from the revenue declines in some cases, as some firms take steps to restructure. But top-line growth will tend to suffer at most firms. In India, for example, fixed network subscribers dipped nearly seven percent, year over year, in September, while mobile accounts shrunk by about two percent.  

source: TRAI 

We might well be prepared for surprises, though. In past recessions, telecom revenue has rebounded relatively quickly, and revenue dips were shallow. But the pandemic has not been a "typical" recession, leaving open the possibility that recovery could be on a different pattern.

U.S. Cable Upstream Peak Traffic Grows 47% Since March 2020

U.S. cable TV networks, which have 70 percent of the installed base of broadband connections, have seen cumulative downstream peak traffic growth since March 1, 2020 of 27 percent, with peak upstream growth up 47 percent since March 1, 2020, says the NCTA.

Throughout the pandemic, provider backbone networks have shown no signs of congestion, the group also  notes. 

source: NCTA 

Can Overbuilder ISP Market Share Exceed 30 Percent?

One key metric for any internet access overbuilder (any internet service provider competing against both a cable operator and a telco) in a market is take rate: the percentage of addressable homes that sign up for service. 

The reason is that a rule of thumb suggests an ISP competing as an overbuilder has to get about 30 percent share to be sustainable. The corollary is that the business case for other incumbents can get perilous, as that leaves 70 percent share for all the other providers.

It might help if the incumbents have multiple revenue streams to rely on (voice and video entertainment being the most common, plus business services). Still, a viable overbuilder dramatically reshapes both market share and profitability profiles for incumbents. 

Ting Internet seems to have overall take rates of 28 percent. In the past, Ting has estimated it would get about 20 percent take rates  within the first 12 months of active marketing, with a goal of reaching 50 percent over five years. 

In the past, Ting Internet has reported 30 percent take rates, so the latest data suggests that is a reasonable expectation for the markets Ting chooses to address. 

As was the case for overbuilders in the video entertainment business, and now with triple-play and internet access overbuilders, it has proven difficult to reach 20 percent market share after several years of operation.

As even the most-successful overbuilders have discovered, being the market leader is difficult, as the leader’s market share, in a competitive three-way market, might not exceed 30 percent or so of homes (potential accounts).

EPB in Chattanooga, Tenn., for example, is the poster child for overbuilder hopes, having gotten as much as 45 percent of consumer market share in its service area (with share defined as revenue-generating units, not “accounts” or “homes”).

EPB’s internet access share might be about 27 percent, its video share lower than that. An interesting statistic, in that regard, is that about eight percent of EPB’s internet access customers buy the gigabit service.

EPB’s market share is highly unusual in most overbuilder markets, as EPB arguably competes with Comcast, not AT&T, which has negligible video share in Chattanooga.

In a triple-play market, that is important. Comcast might have 61 percent video share, while EPB might have 36 percent share, leaving only three percent video share held by AT&T. Essentially, EPB has become the number-two provider, relegating AT&T to third place, something that is not the case in most other U.S. markets where three mass market fixed network suppliers compete.

Telcos Not Much Closer to Success in Enterprise Solutions Market, ABI Research Says

Telcos might not be much closer in 2021 to a goal of becoming relevant in the cloud-based enterprise solutions market, Don Alusha, ABI Research senior analyst suggests. 

That should surprise almost nobody, as the application value chain now rests on the internet, software platforms, and the cloud. That allows near-zero distribution and near-zero transactional costs, Alusha says. 

Direct competition from hyperscalers is a factor as well. Amazon offers multiple devices for either edge or on-premises deployments: Snowcone, Snowball, Wavelength, Outposts, and Greengrass IoT, for example. 

Hyperscalers also are already deploying enterprise digital solutions, most of which are usage- or subscription-based instead of upfront, capex-based solutions that telco solutions arguably require, says Dimitris Mavrakis, ABI Research senior research director. 

Telco operators will need to adapt to opex models to survive, especially in the small and medium enterprise (SME) segments of the market, he says.

“2020 has seen AWS, Google, and Microsoft all advancing and underlining their telco ambitions to provide enterprise connectivity solutions” says Mavrakis.

“Their existing ties with enterprises for cloud storage, as well as their general openness toward service-based offerings, will make them particularly attractive to enterprises,” says Leo Gergs, ABI analyst. 

That might also include hyperscalers supplying access services as well, he says. 

Hyperscalers are leading the market in consumption economics, says Alusha. In a sense, that is a continuation of a trend we saw a decade or two ago, as the enterprise software business became “consumerized,” with many consumer apps adopted first by employees and then supported by enterprise IT. 

Enterprise IT of the past was based on high switching costs, relatively low volume, high price, and a pay-up-front capital investment model. 

The future purchase pattern will instead be based on high volumes, low pricing, and an opex model. 

Telcos and their suppliers are not yet ready to fully embrace consumption economics, says Alusha. 

Telecommunications is an asset-intensive industry with expertise in managing factories and supply chains, developing technologies, and understanding the cost of goods sold, inventory turns, and manufacturing. 

Human-intensive services are entirely different, Alusha says. For example, in services and opex-based models, technology providers do not manufacture a product to then sell it. Instead, they sell a capability or knowledge, created “at the same time they deliver it,” he says. In other words, software is sold as a service, not a product. 

Loon Uses AI to Steer Balloons More Effectively

Loon’s navigation system’s most complex task--steering balloons--now is assisted by artificial intelligence, specifically deep reinforcement learning, a type of machine learning, Loon says. 

Overall, the RL system kept balloons in range of the desired location more often while using less power, according to Loon. 

source: Loon 

Reinforcement learning enables an agent to learn by trial and error in an interactive environment using feedback from its own actions and experiences, Loon says. “As far as we know, this is the world’s first deployment of reinforcement learning in a production aerospace system.”

This contrasts against the conventional approach of the automated system following fixed procedures artisanally crafted by engineers, Loon notes. 

In this case, RL helps optimize flight in the face of time-varying winds, partial visibility of the wind field surrounding the balloon, not always having enough power for the ideal maneuver and frequent decision points. 

Google AI teams hope that beyond Loon, this work on stratospheric navigation can serve as a proof point that RL can be useful to control complicated, real world systems for fundamentally continual and dynamic activity. 

Global Telecom Revenue Will Reach 2019 Levels in 2023

The telecom industry will take until 2023 before its revenue exceeds that for 2019, according to Analysys Mason, with 2021 revenue growth of about one percent. 

The industry will see a US$43 billion fall in 2020 revenue, a 2.7 percent drop, driven by lower mobile roaming revenues, business services and prepaid mobility. 

“One third of this will be recouped in 2021,” said Stephen Sale, Analysys Mason research director for consumer services.

The company sees no significant revenue from 5G in 2021. “It’s not a game changer for consumers,” he said.

Global WAN Services Revenue $76 Billion in 2020

The global enterprise wide area networks business generates about US$75.9 billion, TeleGeography says. 

MPLS represents 43 percent of that revenue; dedicated internet access 16 percent; SD-WAN two percent and local access (leased line and Ethernet connections from customer premise to carrier point of presence) 38 percent.

source: TeleGeography 

Earlier in 2020 I estimated $48 billion in 2020 enterprise WAN (long haul only) spending, which is very close to TeleGeography’s latest estimates. Global public network service revenues are about $1.7 trillion or so. So public network WAN service revenue represents about 4.4 percent of total public network revenues, with the WAN portion (excluding local access) being $46.6 billion or about 2.7 percent of global public network revenues. 

Some estimates put global public network revenue at a higher level around $2 trillion annually, in which case WAN services represent about two percent of total public service revenues. 

Not included in such figures are private WANs operated by hyperscalers and application providers, as they build and own their own networks. Nor would it be surprising if such buyers had a preference for dark fiber purchases or leases, rather than “lit” services. 

Using 2025 as a starting point for carrier SD-WAN services, it has taken five years to reach two percent share of total WAN service provider sales, or about 3.4 percent of total long-haul revenue, excluding local access. 

The expectation is that SD-WAN will cannibalize MPLS. 

Among the trends the latest TeleGeography data cannot show is the global shift to private networks for enterprise WAN traffic. 

By 2016, more than 70 percent of all internet traffic across the Atlantic was carried over private networks, not on public WAN networks. Obviously, that also means no revenue was earned directly by public service providers for carrying that traffic.

On intra-Asian routes, private networks in 2016 carried 60 percent of all traffic. On trans-Pacific routes, private networks carried about 58 percent of traffic.

The "5G Race" Storyline is Wrong, As Are So Many Others

The “5G race” story framework seemingly is irresistible: there will be winners and losers, with the winners moving fastest to deploy the networks. The only problem with the storyline is that it likely will prove to be false. 

Does anybody really believe being “first” with analog mobile services, or any of the past digital generations (2G, 3G, 4G) has mattered? Has it changed the economic positions of nations, or industries, beyond what we would expect for other reasons?

In other words, does early or late adoption actually matter? A fair assessment might be that it could matter for industry suppliers, in terms of market share. Some might argue Huawei gained from early supply of some 5G infrastructure, while Nokia suffered. 

On the other hand, the new emphasis on open and virtual networks opens the door for new suppliers, which might make early victories by incumbents irrelevant over the longer term, as new firms enter the supply chain. 

“Early or late” might temporarily provide advantage or disadvantage for particular mobile operators in some markets. But making sense of the advantage also must include the momentum and growth profiles of each firm before 5G. Maybe a firm gains or loses share in 5G because it already had been gaining share in 4G, for reasons unrelated to 5G deployment. 

Among the historical examples of the irrelevance of the early-late paradigm is the development of several technologies in the U.S. market, where adoption always has been “late.” That is said to be true now of U.S. 5G speeds. It is true for the moment, but ultimately the relevant gap will disappear. 

That does not mean U.S. speeds, on average, will be among the top 10 globally, for example. U.S. mobile speeds are slow, and have been relatively slow, for 4G services, compared to many other markets. The point is that it will not matter, in user experience or other expected benefits (for industry, firms, economic growth, innovation). 

But the “U.S. is behind” storyline has been used often over the last several decades. Indeed, where it comes to plain old voice service, the U.S. is falling behind meme never went away.

In the past, it has been argued that the United States was behind, or falling behind, for use of mobile phones, smartphones, text messaging, broadband coverage, fiber to home, broadband speed or broadband price. 

In the case of mobile phone usage, smartphone usage, text message usage, broadband coverage or speed, as well as broadband prices, the “behind” storyline has proven incorrect, over time. 

Some even have argued the United States was falling behind in spectrum auctions. That clearly also has proven wrong. What such observations often miss is a highly dynamic environment, where apparently lagging U.S. metrics quickly are closed.

To be sure, adoption rates have sometimes lagged other regions. Some storylines are repeated so often they seem true, and lagging statistics often are “true,” early on. The story which never seems to be written is that there is a pattern here: early slowness is overcome; performance metrics eventually climb; availability, price and performance gaps are closed over time. 

The early storylines often are correct, as far as they go. That U.S. internet access is slow and expensive, or that internet service providers have not managed to make gigabit speeds available on a widespread basis, can be correct for a time. Those storylines rarely--if ever--hold up long term. U.S. gigabit coverage now is about 80 percent, for example. 

Other statements, such as the claim that U.S. internet access prices or mobile prices are high, are not made in context, or qualified and adjusted for currency, local prices and incomes or other relevant inputs, including the comparison methodology itself. 

Both U.S. fixed network internet prices and U.S. mobile costs have dropped since 2000, for example. 

The point is that the “U.S. is behind” storyline seems irresistible. But it also ultimately is meaningless. All the relevant gaps were eventually overcome. One possible explanation is that U.S. service providers, who earn high profit margins compared to most other countries, upgrade deliberately, to maintain margins, rather than necessarily rushing to “be first.”

Consumer demand also is an issue. It can be argued that U.S. consumers wait to see value before adopting new technology, instead of rushing to buy the latest technology “just to be early adopters.”

The point is that the “5G is a race” is an irresistible storyline. But it arguably will be proven false. Countries, firms and consumers will adopt 5G when it makes sense, when it offers value, or simply as a byproduct of buying some other product, such as a desired phone model. 

That is, in substantial part, related to another problem journalists face, namely the “next big thing” storyline that becomes news because that is why proponents and vendors are pushing. Many journalists would probably agree that they tire of writing stories about the next big thing, or the present big thing, over and over again. It seems to be an occupational hazard. 

But the point is that easy storylines are irresistible for possibly lazy journalists. To be sure, deadlines create the need for story construction tools, including the venerable “two sides” framework (he said, she said). We all use such tools. 

That is why elections are characterized as horse races, or why verification matters. Still, some might argue that a bit of  laziness is why verification is sorely lacking, or why more original stories are not routinely created. It is not easy to do so routinely. It is harder work. But sometimes it leads to “better” storytelling.

Do We Need Global Optical Standards?

Should specific mandated optical fiber standards be imposed globally, as are Wi-Fi and mobile protocols? It’s a good question, but such optical transport standards, beyond what we already do, are less necessary that wireless or mobile protocols, for reasons directly related to different cost drivers for mobile, untethered and fixed networks.

For 5G mobile networks, for example, core transport represents about 10 percent of total network cost. No matter what we do, we cannot leverage as much value from standards in core optical transport, compared to standards at the edge.

That largely applies even for fixed networks. Traditionally, fixed telecom and cable TV network cost has been concentrated in the access network and edge interface. Perhaps 80 percent of fixed network cost is in the access portion of the network, only 20 percent in core transport and “switching.”

source: GSMA 

The point is that optical transport in the core is a relatively small driver of network cost. Access represents much more. But how much cost reduction or scale can we drive in the optical access network? Some, but not as much as you might think.

Could cost be lower if a single global standard were used for optical access (even if distribution and transport were not standardized globally) networks? Perhaps. But not necessarily.

A single standard for optical access would overprovision in some areas. A single standard might create minimum capabilities that are "overkill" for many customers. That possibly raise costs enough at the margin to make some deployments untenable and thereby improve the business case for rival platforms.

The reasons have to do with the very-different end user and edge cost implications of global standards for wireless, mobile and fixed network devices. Among the best reasons for global standards are the ability to drive down costs, in the core and at the edge.

But it is the edge that really matters, as most communications cost is driven by the edge. Core network choices are affected by volume, to be sure. But core network choices are mostly transparent to edge device costs. 

No matter what choices are made about transport technology, the edge interfaces for every optical fiber network are electrical. Light is demodulated and converted to electrical format (Ethernet) at the side of a home or in the basement of a building, and then frequently from Ethernet to Wi-Fi for local premises distribution. Volume for the optical network elements is necessarily limited, compared to electrical interfaces actually used by end user devices and premises distribution devices.

It does not matter to the edge devices what the core network or even access network optical technology happens to be. The device interface is Ethernet or Wi-Fi. Those interfaces enjoy vast scale and therefore are quite affordable.

So wireless and mobile networks are different. It does matter what the access protocols are, as frequencies are specific and access protocols are specific at the device level.

The cost implications of a mandated global optical fiber access technology are limited to the effect on optical-to-Ethernet interfaces. 

The cost implications of mandated wireless or mobile protocols are much much broader, affecting virtually every connected device. Roughly speaking, as much as 80 percent of end-to-end network cost is at the edge and access network, looking only at the transport networks. 

Total cost, including edge devices and local area networks, is far higher, probably in the 95 percent range of total cost to support communications.

Of course, there are different types of connectivity providers. Not all firms are in the retail business. Many, especially providers focusing on enterprise-only or backbone connections between point of presence, might find that core transport is about half the total cost, while access costs--just to support the points of presence--constitute the other half.

That probably supports the overall point about where cost is generated, however. Even WAN transport providers not serving retail consumers, small businesses and organizations find that access costs are about half of total network-related cost, averaging urban, suburban and rural locations that must be reached. 

The Data Shows Why Fixed Network Cost Control is So Important

There is a good reason why connectivity providers in the retail fixed networks business are focused on cost control: it has become harder to sustain the business case. 

As this data from Ericsson shows, consumers globally have switched to use of mobile networks and devices for voice, messaging and internet access. The retail fixed networks business now relies on internet access, but growth is quite measured. Mobile discrete users outnumber fixed users by a better than 5:1 margin and mobile subscriptions outnumber fixed subscriptions by about 6:1. 

source: Ericsson 

Customers Pay for the Full Costs of All Products

One important economics principle is that, ultimately, buyers pay all the costs associated with supplying that product, including taxes, fees, import duties and regulatory compliance costs, in addition to the direct costs of manufacturing, marketing and fulfillment you would expect, as well as allowing enough profit to sustain the business long term, while paying all government taxes and fees.

In telecom, customers pay for all support of universal service or support for high-cost networks, for example. One sees similar examples of this rule at work, all the time, in telecom and outside it. 

Delivery app DoorDash, for example, has raised fees for its diners after the city limited what it could charge restaurants, capping DoorDash revenue. The Denver City Council, presumably in an effort to help restaurants, capped the commission that delivery apps can charge restaurants at 15 percent. 

So now DoorDash has added a new Denver fee of about $2 for each delivery, to compensate. As with all products, supply and demand operate. Raising the price of any desired product reduces demand. So higher prices for restaurant meals delivered to homes will likely translate into lower demand for delivered meals. 

The old saw about “no free lunch” applies: any policy--no matter how well-intentioned--that raises the price of a desired product will reduce demand for that product. 

An effort to help restaurants protect revenue by capping delivery charges leads to higher prices for delivered meals, which means fewer sales.