Where Can $400 Billion in New Telecom Revenue Be Found?

For more than a century, telco executives easily could identify who their customers were; what the main customer needs were; how telco products solved those problems and how those products created value.

Telcos also knew what they needed to do to create those values; their main tasks and partnerships. They knew how the business model generated profit. All those building blocks of their business model are going to be challenged in the next phase of industry evolution beyond core connectivity services.  

The next wave of problems concerns not only the creation of new connectivity service demand, but moves beyond the connectivity role, at least by the larger tier-one telcos. Small-firm strategy likely will remain focused on efficiency, acquisitions or market exit. 

Of course, the new business challenges necessarily include identifying who the new customers might be; how value can be created and delivered to them and how telcos can solve their problems. For the most part, none of those were huge challenges over the past century. 

source: BMI Lab 

Some might think much of that is a response to a world where demand is changed by the pandemic, but telecom executives have been dealing with issues far greater than Covid-19 for a few decades at least.

The ongoing problem is the exhaustion of successive waves of products and revenue, caused in part by market maturity and complicated by product substitution enabled by the internet. For two decades, as fixed network revenue has dwindled, global growth has been driven by mobility services.

Mobility services, in turn, have been driven by subscription growth, then text messaging, then internet access. Though some markets have matured sooner than others, the basic pattern is universal: connectivity service revenue has moved through several product lifecycles over the past few decades.

Fixed network voice peaked about 2000, after growing for a century. Mobile service then became the revenue driver. Fixed network broadband access has helped, but most people globally rely on mobile internet, and that seems unlikely to change too much in the future. 

What comes next is not so clear. If we assume that past patterns hold, and that most telcos will have to replace half of current revenue each decade, then any new revenue sources have to be big. And that is the issue. 

Edge computing, internet of things or private networks will help. But are they big enough new revenue sources to replace literally half of current revenue? Some might argue that is unlikely. 

Incremental gains are not going to be enough. Telcos are looking at generating new revenues to the tune of $400 billion in the next 10 years. If IoT or edge computing generate $10 billion to $20 billion in incremental new revenues, that helps. But it does not come close to solving the bigger revenue problem.

Perhaps some believe a combination of IoT, edge computing and virtual private networks will produce something resembling $400 billion in extra revenue within a decade or so. That seems quite fanciful. 

Which simply means there are other big new revenue streams to be discovered and created.

Telco Business Model Largely Unchanged after Covid-19

Business models in a post-pandemic environment might well require a rethink or at least re-examination of a few business fundamentals by many businesses.

It is not so clear that connectivity providers will face as much change from the pandemic, since the underlying industry dynamics were going to force major business model changes in any event, as a long-term matter.

The short-term impact, though, is likely what executives will be watching. 

Some might argue the pandemic created new demand for connectivity services. Others might argue that trend already was in place, and the pandemic simply shifted demand into a one-time, higher-growth posture. The typical way of expressing this is that service providers saw a year’s increase in demand in a couple of months. 

On the other hand, while subscription revenue might climb, other revenue sources will decline enough that overall revenue will drop because of the pandemic shutdowns.  

Few expected the advent of 5G to change consumer revenue upside very much. The potential for business customer value is viewed as much more significant, but up to this point, it seems unclear whether the pandemic has changed the demand for 5G by either consumers or businesses. 

The long-term view always has been considered more important, particularly as 5G becomes valuable in conjunction with edge computing, internet of things or virtualized network features. So far, it is unclear whether the pandemic has made any qualitative changes in those views. 

In the case of demand for broadband internet access, it is possible to argue that the business model remains intact. 

Telcos and cable operators arguably added new accounts at a faster clip than had been the case prior to the required work from home rules. But some also believe part of those gains was simply shifted forward in time. 

Broadband adoption also grew, but that is an on-going trend. In 2020, 86 percent of U.S. households buy an Internet service at home, compared to 84 percent in 2015 and 82 percent in 2010, according to Leichtman Research Group.

Broadband (minimum 25 Mbps downstream) accounts for 97 percent of households with an Internet service at home, and 83 percent of all households get a broadband Internet service – an increase from 81 percent in 2015 and 74 percent in 2010, LRG also says. 

Stronger demand for quality broadband at home or on mobile networks; across larger geographies; with faster upstream speeds or capacity seem reasonable enough outcomes. But those trends were already in place.

Consumption geographies could shift. There might be some slower or even reduced demand for capacity at business and urban locations, with more traffic generated in suburban and exurban areas; untethered or even rural areas. But those are subtle shifts which arguably do not change the business model. 

Essential stakeholder behavior change might be a bigger issue for retailers, content providers and travel industry participants.  

And what does not change? Which behaviors will return to former levels, essentially unchanged? Which patterns will return, possibly with equivalent magnitudes, but with at least some major changed behavior patterns? 

Connectivity providers do not seem worried about downside in such areas, since end user demand remained high--or increased--during the pandemic. Longer term changes--such as more remote work or less travel--would simply seem to sustain the new demand patterns. 

Most importantly, which behavioral patterns might disappear? ask Dev Patnaik, Jump Associates CEO, Michelle Loret de Mola, Jump Associates strategy director and Brady Bates, Jump Associates analyst. 

In the telecommunications business, the pandemic might have speeded up the underlying change processes, but not created new and unexpected demand. Use of the fixed network for voice has been falling for at least two decades. Substitution of demand for broadband internet access has been rising. Mobile communications usage has climbed as well. 

The shift from linear video entertainment to over the top streaming was already well in place. 

There is a reasonable argument to be made that video conferencing will displace some amount of business travel. Also, conferences that once were based on audio now seem to have shifted permanently to video formats. 

But how does that affect the connectivity provider business model? Arguably less than one might think, unless connectivity providers wind up owning the apps that most people use for such purposes. 

To the extent that preferences generally become habits, will pandemic behaviors tend to persist? Will product demand shift in some permanent ways, and if so, by how much? For retail connectivity providers, most of the preferences might be fairly subtle extrapolations from underlying trends. 

We might assume that new behavior patterns--and the buying choices that match those patterns--will be most sturdy when the new ways are perceived to be better, and also are easy to adopt and maintain. 

To the extent that employers broadly support increased work-from-home patterns, connectivity services might arguably acquire higher value, but not necessarily as a qualitative change from prior trends already in place, and probably not in quantities that change the existing business model.

What remains unchanged is the need for business model change for other reasons.

To the extent that mobile voice, then mobile broadband have driven global industry revenues for most of the last 20 years, and to the extent those services reach saturation, the question of “what comes next?” must be asked. 

That is why edge computing and the internet of things get talked about and examined so much, or why a growing number of telcos are diversifying into additional and different lines of business. 

Some trends in the global telecommunications business are obvious, even if local patterns can vary substantially. On a global basis, the fixed network voice business peaked around the turn of the century, and has been declining since then, according to International Telecommunications Union data. 

Use of the fixed network has gradually shifted to support for broadband internet access as voice subscriptions have fallen. 

source: World Economic Forum, ITU 

Mobile service now is the primary way human beings use communications and mobile networks increasingly are the way humans access internet apps and services as well. 

But as mobile accounts have exceeded 100 percent (accounts, not persons), and as mobile broadband (internet access) has climbed above 80 percent, the limits to either mobile subscriptions or mobile broadband as the industry revenue driver seem inescapable. 

Irrespective of the pandemic, the global industry still faces a serious search for the next revenue model beyond connectivity.

"Platform" is Overused, Misapplied and Difficult

Almost no word gets tossed around as a business “strategy” as “platform.” Becoming a platform often is touted as the key to success and a way to create brand value and escape commodity pricing. Compounding the problem are the likely different definitions people seem to use. 

In computing, a platform is any combination of hardware and software used as a foundation upon which applications, services, processes, or other technologies are built, hosted or run.

Operating systems are platforms, allowing software and applications to be run. Devices are platforms. Cloud computing might be said to be a platform, as systems are said to be platforms. 

Standards likely are thought of as platforms by some. 

In other cases components such as central processing units, physical or software interfaces (Ethernet, Wi-Fi, 5G, application programming interfaces) are referred to as platforms. Browsers might be termed platforms by some. Social media apps are seen as platforms as well. 

Platforms, in this sense, are a foundation upon which other things are built or created. That is true enough, but arguably too broad an interpretation to be useful when used with reference to business strategy.  

For purposes of business strategy, a platform earns revenue in a different way than most traditional products have done. Traditional products are sold with a “pipeline” business model, where one firm creates a product and then sells it. 

The platform business model requires creation of a marketplace or exchange that connects different participants: users with suppliers; sellers with buyers. A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. 

Perhaps the best models are multi-product e-tail firms such as Amazon, Alibaba or eBay; ride hailing companies such as Uber or Lyft; content exchanges such as YouTube; payment services such as PayPal; lodging exchanges such as airBNB; food delivery services such as GrubHub;  messaging platforms such as WhatsApp or social networks such as Facebook. 

source: Innovation Tactics 

A pipe business creates and then sells a product directly to customers. Amazon is a platform; telcos and infrastructure suppliers are pipes. So you can sell the enormity of the challenge. A connectivity provider would be a platform if it enabled a huge ecosystem of suppliers creating and delivering apps over its platform, in nearly all cases without owning any of those apps, or even earning direct revenue, except in the form of a commission or fee for each transaction. 

Platform creation is not especially easy for a connectivity services provider. If you think about every business as either a “pipe” or a “platform,” then most businesses are “pipes.” They create a specific set of products and sell them to customers. That is a classic “one-sided market.”

This taxonomy illustrates why it is a challenge for any connectivity services provider to become a “platform.” Not only must “connectivity” (the current function) be provided, but also all the other functions that allow third parties to build applications on the platform. Note that the “networking” function is the foundation, but only that. 

source: Adnet 

A platform often creates value because of the scale and scope of the interactions between members of the ecosystem, so the range and depth of interactions might be a better metric for a platform. In other words, the platform is easy to join, easy for participants to use and easy to federate. 

Effective application program interfaces are one aspect. But effective logistics, settlements, data exchange, payments and information on ecosystem participant behavior might be other important aspects for ecosystem transactions and interactions. 

All that suggests any substantial connectivity provider platform would necessarily be built by some entity other than a single telco, no matter how large its operations. Among the reasons: creation of the ecosystem and platform would necessarily require adding roles and functions far beyond connectivity. 

In fact, the obvious paradigm already exists. The internet ecosystem functions with connectivity as an abstraction. It is assumed to exist. In that sense, the internet is the platform. 

What might remain to be created are industry platforms for apps and services with specific communications requirements that possibly are dynamic. Platforms for industrial use cases; healthcare or automated vehicles might provide examples. Or so many hope.

Can Hyperscalers Replace Telcos?

Some predictions have a ring of truth, based in part on history.  One such prediction is that the telecom service provider business could be taken over by hyperscale cloud computing suppliers. 

“I really do believe the hyperscalers are going to become the new telecom providers going forward,” says John Baker, Mavenir SVP.

“Apart from the physical radio that goes on a tower, everything we’re doing now follows the data center model, and these guys know how to manage data centers, software, and applications,” Baker said. “If you look at open RAN essentially as being a collection of applications that run on a server, then it really is falling into their camp.”

One might argue that view is a bit of technological centrism. We sometimes believe the “best technology” always wins." it does not. Sometimes the winner has the better ecosystem. Sometimes the best technology does not offer the highest value. 

Obviously, there are many consumer acceptance issues that shape adoption as well. Brand preferences matter, in that regard. So does customer experience and the complexity of buyer behavior.  

Still, the arenas where hyperscalers and app providers compete has grown over the past couple of decades. The number of roles in the ecosystem where app providers are competing with connectivity providers has grown. Facebook provides its own satellite access services in Africa. 

For example, Google operates one of the world’s biggest collections of undersea networks, sells fiber to the home services, fixed wireless access services, balloon-based internet access and mobile phone service. 

source: GSMA

Facebook, through the Telecom Infra Project, shapes the development of new connectivity platforms and network elements. Though Apple is the biggest supplier of consumer devices, Amazon and Google both have significant roles in tablet or phone markets, or both. And all of those firms are leading providers of smart speaker systems. 

The point is that boundaries between industry segments now are more porous than they used to be. That is the logic behind speculating whether one or more hyperscalers might eventually compete more extensively with connectivity providers. 

While one might disagree with the extent of competition, we can note that competition in any established market generally begins at the revenue edges and gradually works toward the core revenue base. 

MCI initially competed with AT&T only on a few long haul transport routes, but gradually became a full rival to AT&T in every product segment related to long distance services: wholesale and retail; voice and data. 

Skype originally only was a substitute for community PC-to-PC calling. It gradually became a full substitute for calling between phones. Streaming services originally targeted only non-real-time pre-recorded content. Increasingly, some streaming services are adding live sports and other real-time content. 

Streaming services once offered a menu of movies and older TV series. Now streaming services create original programming, offer first-run movies and increasingly could become a supplier of first-run release content as well. 

Cable TV began life as an importer of distant TV signals. It eventually became a full-fledged supplier of new networks and original programming far beyond traditional broadcast TV. 

Google remains a relatively niche supplier of internet access and mobile phone service. But that is consistent with the traditional attack trajectory, is it not?

PTC'21 Will be Quite Different This Year

Tariff and Price Complexity is a Strategy

There is a reason why consumer internet access or mobile service prices are intentionally complex: complexity makes it difficult to compare, across providers. Complexity often is facilitated by unbundling service into components. 

Unbundled services--by definition--make price comparisons more difficult. But unbundling allows many different value combinations and feature bundles to be created, deemphasizing like-to-like value comparisons.  

That is not to deny consumer welfare gains in the form of cost savings from bundle prices. But service providers arguably do not sell bundles primarily because it benefits consumers. Rather, bundles benefit the suppliers as well.  

In other words, the complexity of consumer communications service billing is intentional, and designed to optimize revenue for service providers. Complexity does so by limiting the ease of comparison shopping by price. 

Consider multi-product bundles, which literally obscure what consumers actually are paying, from the consumers themselves. By definition, a three-product bundle, sold for one price, not only offers a discount over separate retail prices, but also obscures what each component actually costs. 

Sure, one can try and approximate the savings by comparing the total cost of the bundle price against the separate, a la carte prices of the constituent bundle components, and then apply a flat-rate discount against each separate service. 

That probably is not how the service providers see matters. Instead, the bundles are likely designed to optimize overall revenue, with key benefits coming from reduced churn or account longevity. 

If it produces higher overall revenue and higher profit margins, one service might be heavily merchandised to protect higher take rates for another service that produces more revenue or higher profit margin. 

To be sure, component value is changing. Internet access is more important; linear video is less important. Most consumers prefer to use their mobile phones for voice, rather than landline voice service. Streaming is the growing choice for video service, reducing the value and revenue from linear video subscriptions. 

Still, unbundling value also creates many different ways to rebundle value that obscure price comparisons and create value incentives for purchase of more-expensive plans. Mobile internet plans differ on the amount and use of tethering, for example. The cheapest plans might not allow tethering, or restrict its usage. 

“Unlimited data usage” plans tend to be the most expensive offered by a mobile operator, for example. Some service providers require purchase of an unlimited plan to use 5G. 

The point is that complexity and unbundling also create optimized revenue scenarios for service providers that obscure price comparisons. 

Hard to Say What a Typical U.S. Internet Access Service Costs

With the caveat that the results are not generated by a statistically randomized poll, a survey conducted by cabletv.com suggests the difficulty of figuring out what consumers actually pay for internet access. 

The reason is bundles, which effectively obscure what consumers actually are paying, from the consumers themselves. So if asked, consumers buying bundles including internet access have to guess at what they are paying. 

For starters, cable operators have about 70 percent of the installed base of fixed network internet access accounts, so cable customer behavior is disproportionately important. Among cable operators, bundles including internet access range from a high of 73 percent to a low of 45 percent. 

source: cabletv.com. 

Effectively, that means nearly three quarters to half of cable internet access customers do not really know what they pay. So the self report data is, by definition, suspect. 

Third party efforts to estimate those payments generally have to rely on higher published stand-alone retail prices, which most cable customers are not paying. On the other hand, some estimates include promotional plan pricing, which also can skew the results. 

All that noted, the “average” U.S. price for internet access is about $50 a month. Using various methods of comparing global prices, though, U.S. prices seem to be right at the global average, paradoxical though that may seem. “Average” is always a statistical matter for anything related to the internet, and that holds true for consumer access prices as well. 

One has to adjust for currency effects, different costs of living  in various countries, choose which plans to compare, adjust for promotions and discounts as well as speed differentials, for example. 

If “average”  purchased speeds are 150 Mbps in one country, but 10 Mbps in another, what does the “same effective price” mean? Is price per megabit-per-second a better metric? And how does one average asymmetrical buying patterns where significant percentages of customers buy service at speeds above 300 Mbps and also at 25 Mbps?

Using the purchasing power parity method of normalizing prices across countries, U.S. fixed network internet access is cheaper than the global average of $73 a month. So average U.S. prices are significantly lower than the global average. 

Even as a "Platform," Telcos Would Not Escape Near Zero Pricing

The reality of very low and declining per-unit prices is well attested in the connectivity business. Many suggest a way out of the conundrum is for at least some connectivity providers to transform themselves as platforms. 

Ignore for the moment whether this is generally possible, and to what extent. 

Life as a platform would ultimately be based on very low per-unit prices. In fact, as many platforms feature zero marginal cost, they also tend towards near zero pricing. 

Virtually all platforms feature lower prices per unit than rival pipe businesses, for a number of reasons. Typically making extensive use of internet and computing resources to radically lower transaction and information discovery costs, etailing platforms inevitably push cost out of retail transactions. Platforms reduce friction. 

In other cases, platforms are able to mobilize and put into commercial use assets that otherwise lie fallow. Uber provides a good example. Personally-owned vehicles tend to sit parked and unused 95 percent of the time. Uber allows those otherwise idle assets to be put to commercial use. 

And though firms often are urged to become platforms, few actually can do so, and not for reasons of technology deployment, skill or type of product. Successful platforms are relatively rare because they require scale, and few businesses can afford to invest to scale. 

Most firms in the connectivity business will not be able to transform as platforms, leaving only other possible options. If one believes that prices for telecom products are destined to keep declining, or that more for the same price is the trend, then there are a couple of logical ways to “solve” such problems. 

Firms might try to gain scale to lower unit costs, change the cost model in other ways to enhance profitability, exit the business or change the game being played. Moving “up the stack,” across the ecosystem or into new or adjacent roles within the value chain can “change the game.” That is the strategy behind Comcast and AT&T moving into the content ownership business, or moves by other tier-one service providers into new lines of business outside the connectivity core. 

That is one way to attempt to escape the trap of marginal cost pricing, which might be the connectivity industry’s existential problem. 

But it also is reasonable to assume that even a successful shift to a platform model will be based on near zero marginal cost, and near zero pricing. The reason is simply that most platforms also feature near zero pricing.

U.S. Broadband Speeds have Improved Faster than Expected

It often is useful to revisit bandwidth or cost predictions periodically, to test the predictive value of algorithms. Back in 2013, for example, Technology Futures, using several standard industry algorithms, predicted that, by 2020, half of U.S. consumers would be buying 100 Mbps internet access connections.

source: Technology Futures

Those same tools suggested that about 10 percent of consumers would be buying 50 Mbps connections, while nearly 24 percent would be buying 24 Mbps service. 

In 2020, according to Openvault, about 62 percent of U.S. consumers were buying internet access at speeds of at least 100 Mbps. 24 percent were purchasing service at speeds of at least 50 Mbps, while 12 percent were buying services running between 20 Mbps and 40 Mbps. 

source: Openvault

So actual behavior exceeded the 2023 predictions made by Technology Futures, using the Fisher-Pry model for technology adoption and Gompertz growth forecasting tools. 

There is no particular reason to believe gigabit speed adoption will not follow the Fisher-Pry suggested growth path, either. It should develop as an “S curve,” as did all prior generations (1.5 Mbps, 6 Mbps, 24 Mbps, 50 Mbps, 100 Mbps, for example). 

Some 154.2 million U.S. residents can buy gigabit internet access service from cable operators,  according to Viavi data. If the U.S. population is 328.2 million, that implies 47 percent of people can buy the product. 

The NCTA claims 80 percent of U.S. households can buy gigabit service from cable operators, however. 

Where it comes to predicting typical U.S. consumer internet access speeds, the industry-standard models might have been too conservative.