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

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

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

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

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

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

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

source: Gartner 

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

source: Gartner 

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

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

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

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

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

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

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

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

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

Source: Analysys Mason, 2020

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

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

Is IoT "Digital Transformation" for Most SMBs?

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

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

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

source: CompTIA 

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

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

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

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

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

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

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

source: Delta Partners Group 

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

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

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

source: Delta Partners Group

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

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

Source: TeleGeography

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

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

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

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

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

Source: TeleGeography

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

Source: TeleGeography

Workers Like WFH, Their Bosses, Maybe Not So Much

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

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

Source: Asian Century Equity

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

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

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

Source: Asian Century Equity 

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

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

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

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

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

Source: Asian Century Equity 

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

Bouygues Telecom Tries to Disrupt the French Market

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

That is quite different from today's structure.

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

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

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

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

source: Seeking Alpha 

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

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

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

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

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

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

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

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

Telecom Firms Have to Take What the Market Gives Them

Business strategy for leading and specialist firms in any full-service, multi-product business always is constrained, especially when markets have reached a stable configuration. The leading two firms by market share actually have disincentives to launch attacks aimed at gaining share, though the temptation for the number-three provider to launch attacks is higher, if risky. 

Smaller firms simply have to find sustainable niches, and cannot contemplate broad market leadership. 

“The financial performance of the three large players improves with increased market share-up to a point, typically 40 percent,” said professor Jagdesh Sheth. “Beyond that point, diseconomies of scale set in, along with the potential for regulatory problems related to heightened anti-monopoly scrutiny.”

That perhaps explains the stability of market share once the pattern is established. Once reached, it is no longer advantageous to push for additional market share: the leader because diseconomies set in; for the number-two provider because it does not have the resources to dislodge the leader. 

When the market leader has share of 70 percent or greater, there might not even be room for a second full-line generalist provider. “When IBM dominated the mainframe business many years ago, all of its competitors had to become niche players to survive,” Sheth said. 

When the market leader has a share of between 50 percent and 70 percent, there is often only room for two full-line generalists. When the market leader enjoys considerably less than a 40 percent share, there may--temporarily--be room for a fourth generalist player.

The minimum market share for a company to be viable as a full-line generalist is 10 percent. 

“A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” BCG founder Bruce Henderson said in 1976. Professor Jagdesh Sheth likewise has written about the Rule of Three. 

Notably, Sheth’s analysis parallels competitive market outcomes predicted by Henderson in 1976, though few telecom markets yet seem to have the idealized pattern, suggesting the markets are unstable, and will continue to change. 

Still, Sheth’s rule of three observations do seem to apply fairly well to changes in the telecom markets in the competitive era, allowing for the existence of big original monopolists that were disrupted by the switch from monopoly to competitive frameworks. 

Sheth’s analysis suggests that a “typical competitive market starts out in an unorganized way, with only small players serving it.” Consolidation happens, resulting in the emergence of a handful of “full-line generalists” surrounded by a number of “product specialists” and “market specialists.” 

In other words, a small handful of market share leaders is augmented by many specialist firms of smaller size that do not serve the full range of market segments. You might say that mimics the long tail structure many markets--including the connectivity business--assume as well. 

“With uncanny regularity, the number of full-line generalists that survive this transition is three,” Sheth said. “Typically, the market shares of the three eventually hover around 40, 20 and 10 per cent, respectively.”

“We have found that the extent of market share concentration among the big three depends on the extent to which fixed costs dominate the cost structure,” according to Sheth. 

There are implications for specialist providers, as well.

Given that specialists can only survive in niches, the performance of specialist companies deteriorates as they grow market share within the overall market, but improves as they grow their share of a specialty niche. In other words, “lead in a segment” works, while trying to compete with the giants fails. 

However, specialists sometimes can make the transition to successful full-line generalists when there are two or fewer incumbent generalists in the market. There the strategy is to try and become a new number three in the generalist market. 

Specialists thrive especially when markets are fragmented, as by geography. Many smaller firms avoid competing with others in the same market segments because they operate locally. 

Successful “super-niche” firms might be functional monopolists in their small niches.

Firms sometimes try to grow by acquiring many smaller firms in a segment. That “roll up” strategy of amalgamating assets can lead to leadership of a niche, emergence in a broader or different category, especially if there is no viable third-ranked supplier to block them.

The general rule is that, for most firms, sustainability in a settled market hinges on clear adherence to a niche or super-niche.

How Do Markets Get to Stable Rule of Three, Rule of Four Shape?

“A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” BCG founder Bruce Henderson said in 1976. 

Assuming the rule holds for connectivity businesses, it is the structure we should eventually see in the global telecom business, which was, until the latter 1980s, not subject to the rules. Formal monopoly businesses--by definition--have no competition.

But if asked to predict the eventual structure of the industry, at least for the tier-one suppliers selling at retail to consumers and businesses, the rule of three and rule of four would have made sense. 

In my own work, I have found the rule of four more important than the rule of three, though both rules are related. The reason is that the rule of four essentially provided guidance about questions many had around 1995 when the U.S. fixed telecom market, for example, was being nearly fully deregulated, in terms of telecom competition. 

In addition to questions about “who” would enter the market, “what” they would do, “how” they would compete, “when” the market would stabilize and “why” some attack vectors would be tried, many contestants would have wondered about the level of eventual success. 

How well would attackers fare? What would be the eventual fate of the incumbents? 

Business strategy in competitive markets largely free of regulatory constraints and major entry barriers tend to evolve towards a specific and stable market structure including the “rule of three” and the “rule of four,” Henderson argued. 

The rule of three states that a stable market is led by three firms. The rule of four refers to the expected market share in a stable market, where leader market share is twice that of provider number two, and where the number-two supplier has share double that of the number-three provider. 

That creates a stable market share structure of 4:2:1. It arguably is stable because there is little incentive for either number one or number two to disrupt the market by attacking to gain share. 

The number two supplier--with half the share and revenue of the leader--never has the ability to beat the leader in a long price war. The leader, on the other hand, generally is the most profitable of the top-three firms and risks that level of profitability if it provokes a market share battle that reduces profit margins. 

The leader might also trigger antitrust action were it to become significantly bigger. 

There are both strategy and tactical implications flowing from the rule of three and rule of four. 

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If telecom deregulation produced large numbers of new competitors, a contestant shakeout would be nearly inevitable. Surviving firms would need to produce revenue and customer growth rates above market averages, as the number of suppliers shrinks. 

The eventual losers would have increasingly large negative cash flows if they try to grow at all. Think about the experience of most competitive local exchange careers in the immediate aftermath of the Telecom Act of 1996 deregulation, the upstart digital subscriber line specialists of the same era, the legacy long distance providers, the bandwidth barons of international capacity, the fate of most independent mobile service providers from the earlier days of the mobile business or most independent cable TV providers. 

In all those cases, growth proved too difficult--in large part--because it was too capital intensive for firms that were not making profits. Sustainable profitability would be difficult for any firms aside from the leading and number-two firms. 

In competitive markets, share less than 30 percent of the relevant market--or at least half the share of the leader--would prove highly risky and likely unsustainable. 

In most deregulating markets, and especially when technology enables new ways to create and deliver products, at different price points and production costs, moats or defensive boundaries separating industries and roles become porous. It no longer is so easy to determine “who are our competitors?” 

The change in retail prices matters. Prices tend to fall in deregulating markets, and especially in those segments of the market where demand shifts rapidly. Voice, messaging and bandwidth costs are prime examples. 

Though arguably not the case in competitive telecom environments, if prices do not change,   competitor willingness to invest at rates higher than the sum of both physical market growth and the inflation rate will shift market share. That arguably has not been the case in the competitive telecom markets, as prices have continually fallen. 

Over-investment then becomes a hazard. If everyone is willing to invest at rates higher than revenue growth, then prices and margins will be forced down by overcapacity until firms stop investing.

In a competitive market, the low-cost provider tends to win. But if the low-cost leader holds prices too high, that provider will lose market share until the firm is no longer the market share leader. In markets where the top two providers have nearly the same share, all the other contestants tend to lose share over time. 

When the two top providers instead maintain higher prices, they both lose share to the other competitors. Market leaders can protect price at the risk of losing share. Paradoxically, when leaders cut prices, they hasten their dominance by creating the rule of three and rule of four market structures. 

The faster the industry growth, the faster consolidation occurs.

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Still, few mobile markets have the stable 4:2:1 market structure. Until recently, many observers would have argued that the U.S. mobile market was a structural duopoly. It is possible that will change in the wake of the T-Mobile merger with Sprint.

Sometimes Access Speed Does Not Differentiate in a Positive Way

Though U.S. industries get varying scores on the American Customer Satisfaction Index, there sometimes is more divergence within each category than between categories. Consider internet access service. 

In the ISP space, for example, Frontier Communications gets unusually low scores, compared to Verizon’s fiber to home service, likely because Frontier connections use slow digital subscriber line platforms, much of the time. 

It is harder to explain relatively poorer satisfaction with Altice or Mediacom services, as both seem to offer high broadband speeds. Presumably customer operations or prices are the issue there. 

Consider also that CenturyLink (now Lumen Technologies) scores the same as Charter Communications, though Lumen access speeds are decidedly lower than Charter’s speeds. Where Charter customers get an average of 95 Mbps, Lumen customers get about 35 Mbps. 

Access speed alone does not seem to explain very much. Something else in the experience seems to be operating. 

source: ACSI   

Customer satisfaction ratings for the linear video subscription business and internet service provider businesses historically have ranked at the very bottom of all industries measured by the American Customer Satisfaction Index. Mobile service has ranked higher in recent years, indeed scoring the highest of all telecommunications services. 

Since 1995, fixed network phone service has dropped significantly from fairly high levels of satisfaction. That might require some interpretation. Most U.S. consumers do not buy the product anymore, so the remaining customers seem to be showing modest satisfaction. Presumably the non-buyers consider the product to be unsatisfying. 

Video streaming services rank higher than linear video services, which might make sense given the growth of streaming services and the slow decline of linear services.

AI Will Mediate between IoT Devices and 5G Networks

In his talk at PTC’21 on Monday Jan. 18, 2021 (1 p.m. Honolulu time, 6 p.m. EST), Jefferson Wang, Accenture managing director for network and connected solutions, will explain how 5G, artificial intelligence and the internet of things are directly related. (register here)

Viewing all three technologies--5G, IoT and AI--are building a platform for enterprise digital transformation, Wang sees artificial intelligence and edge computing mediating the interactions between the connectivity network and the sensing devices. 

Basically, AI and edge computing orchestrate the interactions between networks, devices and analytics that provide the business value. 

source: Accenture

Perhaps more to the point, it is AI used by the controlling applications supervising the sensor networks and analytics that will do the mediation. As always, “value” is going to be differential. 

The highest value arguably will come when the analytics are able to adjust devices and processes in real time based on the analytics. The role of 5G and other communication networks will vary. When ultra-low latency is necessary, communications between sensors and analytic functions might take place directly on the premises. 

That might involve a private 5G network of some sort, without backhauling traffic to the public network. In such cases, the value produced by the public 5G network is lower. In other cases the edge computing functions will happen off premises someplace, in which case the 5G public network is more important. 

The 5G public network arguably has greatest value when a network slice is invoked, allowing all end points and processors on the private network to operate with the lowest possible latency and with some guaranteed level of throughput and performance.  

C-Band Spectrum Arguably is a Strategic Investment, Hurdle Rates be Damned

Typical investment hurdle rates exist in every business, but 5G might represent a challenging hurdle for most mobile operators. The hurdle rate is the rate of return above which an investment makes sense. 

In that regard, some argue that many telcos have failed to earn that rate of return on investments in fiber-to-home networks. Mobile operators arguably have done better than fixed network operators, as a rule.  

Some say telcos generally have failed to recover the cost of capital for perhaps a couple of decades. 

Still, there occasionally are big investment decisions that are not directly bound by that logic. Sometimes strategic investments are made, even when the normal payback models are stretched. Whatever the typical investment hurdle rate, strategic considerations sometimes compel investment even below the hurdle rate. 

Some of us remember roughly similar questions and answers asked about fiber to the home investments as well, back before the turn of the 21st century. 

One CEO, asked privately and off the record about the magnitude of FTTH investments, said the upside was “we get to keep our business.” Note: the argument was not “we will make more top-line revenue.” The justification was existential: “we get to stay in business.”

Similarly, one might argue that traditional rate of return considerations are not necessarily and directly driving the effort by mobile operators to acquire C-band spectrum to support 5G. As FTTH was viewed as a “do it or lose your business” investment, so might mid-band spectrum be viewed as the necessary price of competing in the U.S. 5G business. 

Strict hurdle rate considerations might be secondary to the necessity of acquiring mid-band spectrum, and lots of it, to remain competitive in the 5G era. There is risk in overbidding, but also risk in underbidding. 

It reminds me very much of the justification for FTTH deployment.