Zero-Sum Games in Mature Markets

Mature connectivity services markets are very nearly zero-sum games. What one contestant gains is almost directly offset by losses incurred by some rival. Until recently, suppliers could count on rapid account and usage growth in core markets in much of the developing world. 

At some point, with slowing growth rates, growth strategies must switch from gaining new accounts to selling additional products for the same accounts, expanding out of region or taking market share from other contestants. 

One revenue component distinguishes mobile from fixed network revenue streams in the U.S. market: video entertainment. In 2017, voice communications was 11.8 percent of fixed segment industry revenues. Internet access services contributed 28 percent. Video entertainment  revenues represented 27 percent.

That same year, video entertainment represented zero percent of mobile segment revenues. 

Bureau of Labor Statistics 

Note also that 33 percent of fixed network segment  revenues consisted of private network services, customer premises equipment, internet telephony and all other services.

U.S. Telecom Revenue 2017, $ Billions
Industry	Telephony, all distances	Internet access	Television	Other services
Wired	37.3	88.7	85.5	104.9
Wireless	86.3	96.1	0	75.1
Source: U.S. Census Bureau

In the mobility segment, telephony represented 33.5 percent of revenues. Internet access accounted for another 37 percent of segment revenue. Other revenue sources contributed 29 percent, perhaps largely fueled by phone sales. 

The bigger problem for service providers is the collapse of revenue per consumer account. Between 2003 and 2013 alone, ARPA declined 69 percent, according to Rob Van Den Dam, 

IBM Institute for Business Value global telecommunications industry leader.

source: IBM 

Other studies confirm the trend of lower average revenue per user. Of course, lower revenue per account is equally important, which is what the IBM figures likely point to. 

source: GreyB 

But slow revenue growth in most global markets is another key issue, compounded in many markets by saturated customer upside. At some point, every prospect who wants to buy and use services has done so. 

Battles for market share then are characteristic of mature markets. 

Is "Digital Transformation" Really About "New Revenue Sources?"

 One issue perhaps many of us have is the fuzziness of the term “digital transformation.” It is never clear what precisely that means. One definition used by the Economist Intelligence Unit is that DX “is the process of using digital technologies to support capabilities to create new business models.”

Some might note that this still is rather vague, as a “business model” includes everything required to “make a profit.” That includes the value proposition, products, infrastructure, customers, competitors, marketing and distribution. In other words, the business model is more than the revenue model. The business model includes all the other elements and decisions required to identify a customer need and fill it. 

source: Harvard Business Review

Unfortunately, DX therefore includes all applications of technology to any part of the business model, which might be useful in some ways, but frustratingly imprecise in other ways. And emphasis can shift very quickly, that being the case.

According to the EIU, prior to the Covid pandemic, enterprise priorities focused on applied technology to improve efficiency, among other objectives. During the pandemic, emphasis shifted to supporting remote work. Post pandemic, cloud computing is seen as the top priority, among others. 

source: Economist Information Unit 

Digital transformation is the stated rationale for almost any applied technology these days. It helps modestly to refine the definition to emphasize “new business models.” We might operationalize that further by arguing DX is about “new revenue models.”

How Far will Virtualization Go?

It is no secret that profit margin pressures and little revenue growth in the telecom business have forced operators to reduce costs, turning to open source, outsourcing, leasing instead of owning infrastructure, headcount reductions and more reliance on online sales.  

source: Innosight

Some might go further and suggest that there are going to be fewer tier-one operators in the future, as additional scale and continual margin pressure will force smaller operators to sell themselves. 

Some also suggest that, in many countries, the experiment with connectivity provider competition could fail, leading regulators back to monopoly frameworks for connectivity services. 

The emergence of the internet and choice of internet protocol (TCP/IP) as the telco next generation network platform also has led to wide scale virtualization. Apps are now separated from access; network ownership from service ownership; computing devices from app operation. 

In fact, core network virtualization is a requirement for full standards-based 5G. In recent days telcos have begun to move in the direction of sourcing computing support from the hyperscale computing as a service suppliers. 

Sales of tower assets have been going on for years, telcos concluding there are other places to deploy capital. Some suggest wholesale sourcing of active radio elements will be next on the agenda. 

There are at least two strategic lines of thought conceivable here. The first is that virtualizing and outsourcing are simply the latest versions of the “build versus buy” decisions all firms make. The second is that competitive dynamics and participant roles could shift.

The former interpretation has few strategic consequences: firms simply spend their capital and operational budgets differently, while shifting employee responsibilities. The latter possibility could see tower asset owners emerging as wholesale suppliers to much of the industry.

If so, the additional possibility could arise of potential future emergence in retail roles as well. Few wholesale business models in telecom ever remain completely that way. Over time, some creep into retail tends to happen. 

To be sure, channel conflict is a real barrier to such migration. As the saying goes, “do not compete with your customers.” 

Still, unless huge new revenue sources are discovered, declining profit margins and flat revenue growth will eventually force more margin-supporting actions. Virtualization, consolidation and retrenchment are among the logical business choices for consumer-facing and business-customer-facing telcos.

Terabits Per Second by 2050?

Broadband deployment is more a process than an end state, more a picture of a river than a finished product. 

Even if 77 percent of Americans now have access to a low-priced wired broadband plan, compared to just 50 percent one year ago, that can change in an instant when we change the definitions, and we do that.

A “low-priced broadband plan” is defined as a service that costs $60 per month or less (excluding promotional pricing), and has minimum speeds of 25 Mbps download with 3 Mbps upload.

As always, top speeds are another matter. While few consumers buy the budget tier of service, relatively few buy the fastest available tier, either. About 31 percent of U.S. residents have access to a low-priced plan that supports 100 Mbps download with 25 Mbps upload. 

About half of all U.S. customers buy services operating between 100 Mbps and 200 Mbps. In the United Kingdom  , about half of customers buy services operating between 30 Mbps and 100 Mbps. 

Back before the internet existed, “broadband” was defined as any data rate faster than 1.544 Mbps. So a T-1 line was broadband. My first internet access service faster than dial-up was a 756 kbps service costing something like $300 a month. 

Fiber to the home systems of the mid-1990s supported speeds of 10 Mbps. These days definitions vary. But the definitions will change; they always do.  

source: BroadbandNow 

In 2050, access speeds should be in the terabit per second range.  How fast will the headline speed be in most countries by 2050? Terabits per second is the logical conclusion, even if the present pace of speed increases is not sustained. Though the average or typical consumer does not buy the “fastest possible” tier of service, the steady growth of headline tier speed since the time of dial-up access is quite linear. 

And the growth trend--50 percent per year speed increases--known as Nielsen’s Law--has operated since the days of dial-up internet access. Even if the “typical” consumer buys speeds an order of magnitude less than the headline speed, that still suggests the typical consumer--at a time when the fastest-possible speed is 100 Gbps to 1,000 Gbps--still will be buying service operating at speeds not less than 1 Gbps to 10 Gbps. 

Though typical internet access speeds in Europe and other regions at the moment are not yet routinely in the 300-Mbps range, gigabit per second speeds eventually will be the norm, globally, as crazy as that might seem, by perhaps 2050. 

The reason is simply that the historical growth of retail internet bandwidth suggests that will happen. Over any decade period, internet speeds have grown 57 times. Since 2050 is three decades off, headline speeds of tens to hundreds of terabits per second are easy to predict. 

source: FuturistSpeaker 

Some will argue that Nielsen’s Law cannot continue indefinitely, as most would agree Moore’s Law cannot continue unchanged, either. Even with some significant tapering of the rate of progress, the point is that headline speeds in the hundreds of gigabits per second still are feasible by 2050. And if the typical buyer still prefers services an order of magnitude less fast, that still indicates typical speeds of 10 Gbps 30 Gbps or so. 

Speeds of a gigabit per second might be the “economy” tier as early as 2030, when headline speed might be 100 Gbps and the typical consumer buys a 10-Gbps service. 

source: Nielsen Norman Group 

Europe-East Asia Traffic Demand is Different from Other Routes

Europe-East Asia capacity has been growing sharply since about 2018, according to TeleGeography. But there is a significant difference. On intra-Asia, trans-Pacific and trans-Atlantic routes, content drives demand. Not so on the Europe-East Asia routes, where internet capacity supplied by the major internet backbones drives traffic. 

source: TeleGeography 

source: TeleGeography

What to Make of Verizon Selling 90% of Content Assets?

There is a difference between execution risk and strategic risk. In the former instance a firm or person might have had the right idea, but chose the wrong set of actions. In the latter instance a firm or person chooses an incorrect plan. 

In that regard, telecom firms sometimes make mistakes of execution or strategy. Mistakes in the former can obscure the validity of the latter. Consider Verizon’s sale of 90 percent of its  AOL assets. 

Some will argue diversifying into content is not a good strategy for connectivity providers. But in 2017 50 telcos around the globe generated more than $90 billion in content revenues, mostly from video services. 

Organic growth in core connectivity services cannot contribute much, in a growing number of connectivity markets, to revenue. The phrase terminal decline has been applied to legacy connectivity services, for example.  And that leads to a search for new revenue sources.  

source: GSMA Intelligence 

Also, unless one wishes to use an obsolete “what is a telco?” definition, cable TV companies have transformed themselves from video distributors into content owners, mobile service providers, business connectivity providers and leading suppliers of broadband access as well. 

The notion that connectivity providers “cannot” master the content business is incorrect. It can be argued that telcos have had more financial success in content than in their roles as app store providers, equipment manufacturers, computing suppliers or data center suppliers. 

Though legacy telcos do participate to some extent in the enterprise phone system business, system integration, virtual private network and other connectivity lines of business, they often do so as lesser providers in segments dominated by others (either communication specialists or information technology providers). 

The point is that telcos arguably have been more successful in video entertainment than in all other diversification efforts of the past four decades. 

source: GSMA 

In 2018 nearly half of telco executives surveyed by EY cited television and video services as among the top three best ways to grow new revenues. The alternative is failure, if present revenue and profit trends continue. 

Global telco revenue growth rates remain stubbornly close to one percent per year, below the long-term rate of inflation. If one were looking any key component of telecom revenues, one would see a historical curve reminiscent of a standard product life cycle, with declining demand, declining profits or both. 

Product maturation, product substitutes and changes in value are issues telcos have dealt with for a couple of decades already.  So if the core business is under strategic attack, what strategy is called for?

The range of options have not really changed much in four decades. Telcos can run today’s business more efficiently; grow the current business through acquisition or innovation or get into new lines of business. 

All three have worked for various providers; at various times. The biggest single revenue driver was entry into the mobile business. First voice subscriptions for business users; then consumer users; then text messaging and now internet access have provided waves of revenue growth in the mobile segment. 

More recently, internet access has been important for fixed network service providers, but most fixed network providers have grown through acquisition. In fact, they arguably have grown mostly by acquisition. 

To put the Verizon move into content, the argument can be made that the AOL plus Yahoo failure to make a bigger revenue contribution was that Verizon purchased the wrong assets, at too low a scale. Both AOL and Yahoo were “legacy” internet assets, “closed” or “walled garden” in a market moving to “open.”

Both assets were past the peak of their product life cycles. AOL’s subscriber base peaked in 2002, nearly 20 years ago. Yahoo revenue peaked in 2008, more than a decade ago. Both assets were generating less than $10 billion in annual revenue for Verizon, were declining and in no position to lead growth in the content business, having perhaps three percent share of the digital advertising business, for example. 

The point is that Verizon’s experience with Yahoo and AOL is not necessarily evidence of strategic failure. It almost certainly is an execution mistake. The acquisitions were not of high growth properties with a chance to lead their markets. Nor was there sufficient scale to compete effectively with the other leading digital ad platforms. 

There might be company culture issues at work, as well. Compared to AT&T, which grew by acquisition, Verizon has preferred organic growth. Where Verizon has emphasized the quality of its network and a smaller footprint, AT&T has looked for scale, with market-competitive network performance. 

AT&T--like Comcast--committed to content ownership at scale. Verizon--like Charter Communications--preferred a connectivity strategy. 

Still, it is possible to note that, over time, fewer connectivity providers will be able to maintain revenue growth relying solely on connectivity revenues. The only issue is where to look for new lines of business. 

Covid Makes Public Transit Funding More Challenging

About 55 percent of younger professionals who responded to a poll on Blind say they do not feel safe commuting on public transportation. Though 39 percent of respondents say they used to take public transportation to work. Now, just 22 percent say they plan to do so. 

The caveat is that significant numbers expect to continue working remotely, so transportation to the office will not be necessary so often. 

Most public transportation services in the United States are heavily subsidized. Like it or not, if ridership continues to fall, the subsidies will have to grow. By some studies, ridership has fallen 65 percent, compared to pre-Covid levels. 

To be sure, we will have to see what happens a few years from now, but ridership has been falling for some years before Covid. Use of public transit seems to have been falling for at least four years.

 

How Much Will Better Broadband Help?

Public policy advocates often argue that “better broadband is needed” to support economic development, jobs or growth, with support for education or other internet-based services contributing to potential for growth. It is not a panacea. 

A composite map overlaying U.S. median household income, poverty, disability rates, and broadband internet access shows the extent to which the same places in the country struggle with all these issues. Darker colors indicate more severe problems with all those issues. 

source: Business Insider 

In other words, areas with poor broadband also are areas of low population, higher poverty, lower incomes and higher rates of disability. Broadband does not fix those other problems. And those other problems arguably are linked to low economic potential. 

A study conducted by a team of Harvard Business School researchers “confirms that rural regions account for a small and slowly decreasing share of U.S. employment.”

Source: Google

“Rural areas will never match urban infrastructure, services, and amenities,” the study team noted. 

Low population density is almost always associated with weak business environments. How much broadband can help is the issue, social inclusion, education, health or "equity" issues aside.

Does More IT Investment Lead to Higher Productivity or Return on Investment?

The conventional wisdom is that investment in information technology is correlated with business outcomes. But correlation is not causation. 

“We’ve found that investing in remote, LAN, and WAN services correlated with collaboration investment success, defined as above-average ROI or productivity gains,” says Metrigy. 

source: Metrigy 

Other studies likely show the same correlation: firms with better outcomes generally invest in more technology. There are other correlations. 

It also is likely that industries with higher profitability; faster growth rates and higher gross revenues invest more heavily in technology. Industries challenged in terms of revenue, growth or profit tend to invest less than average. 

In other words, it is hard to conclude whether “better-performing firms apply technology” or whether “applying technology makes firms perform better.” Perhaps firms that use more technology perform better for all sorts of other reasons. 

Telco Clouds not Your Grandfather's Oldsmobile

Telco computing platforms in the internet age are vastly different from the closed, proprietary platforms of the voice-only era. Less functionality is built internally and custom; more functionality is sourced from third parties. That requires a more-open platform able to run third party apps, using more open source and standardized operating systems. 

That is why one hears so much about virtual network functions, network virtualization and “telco clouds.” It has not been particularly easy to accomplish. But newer efforts in the mobile segment of the business to create Open RAN standards are an edge counterpart to core network virtualization.

source 

That now creates an architecture that might be called “Microsoft Inside” or “Anthos Inside” (Google) or “Amazon Web Services Inside.”

source: Microsoft

Free Speech Law: Are Big Changes Possible?

You might think our understanding of the First Amendment to the U.S. Constitution is unambiguous. It is not. “The outstanding fact about the First Amendment today is that the Supreme Court has never developed any comprehensive theory of what that constitutional guarantee means and how it should be applied in concrete cases,” argued Thomas Emerson. 

What the First Amendment means, in other words, is far from “settled law” (precedent). It tends to develop on an ad hoc basis, rather than flowing from a comprehensive framework, Emerson notes. 

Right now, a growing concern in some quarters is how freedom of expression is protected not from government action but by the actions of platforms. Indeed, some call for greater restriction of free speech on platforms, in the name of so-called hate speech. Others say the restrictions are not equally applied to all speech, and result in the suppression of some political ideas. 

If we assume that the purpose of the First Amendment is to protect freedom of expression in a democratic society, then new media formats and new platforms can raise new issues. And, as is common, the matter is complicated. 

The First Amendment has generally been interpreted to protect the rights of “speakers. But the owners of new platforms (social media, in particular) say their users are the “speakers,” not the platforms. 

That is the basis for Section 230 of the Telecommunications Act of 1996. The act protects platforms from liability for what is said by users of their platforms. “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider,” the Act states. 

In other words, users are the speakers, not the platform. That could have profound implications. 

The owners of platforms do not lose their corporate right of free speech as private entities, but the matter of free speech is complicated when the platforms themselves do not claim to be speakers.

The bigger issue might ultimately be that the First Amendment says “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.”

Traditionally, citizens are to be protected from government restriction of free speech. 

But the places where “speech” occurs also matter. Public forums--such as public parks and sidewalks--have always been viewed as places where citizens have the right of free speech. 

Nonpublic forums are places where the right of free speech can be limited. Examples are airport terminals, a public school’s internal mail system or polling places. 

In between are limited public forums, where similar restrictions on speech are lawful, especially when applied to classes of speakers. However, the government is still prohibited from engaging in viewpoint discrimination, assuming the class is allowed. 

The government may, for example, limit access to public school meeting rooms to school-related activities. The government may not, however, exclude speakers from a religious group simply because they intend to express religious views, so long as they are in a permitted class of users. 

Those protections have been limited to state action, It is government entities (local, state, or federal) that are enjoined from infringing the right of free speech. Protections have not been deemed applicable to private entities.

There has generally been in other words, no First Amendment right of free speech enforceable on private firms or persons, with some exceptions. 

Common carriers--such as telcos--must allow communications between any users who are willing to pay the tariffs. Telcos cannot censor what those users say. Such regulation--including public accommodation, water and electrical utilities or railroads--is not generally regarded as a direct “free speech” issue, but an issue of commerce.

A common carrier is a person or company that transports goods or people for a fee, the principle being non-discrimination. A common carrier must provide its service to anyone willing to pay its fee, unless it has legitimate grounds for refusal.

If state governments decide to create laws protecting free speech from social media or other private firms, that would at the very least raise an issue: Can the federal government, acting under the guise of the First Amendment, move to restrict state action extending the zone of free speech to include dominant private platforms? 

That might involve a novel regulation of social media platforms as common carriers of a sort. That would plow new ground, but First Amendment law has evolved over the years in an ad hoc way, all along.

Lumen Outlines Where it Will Invest, Where it Will Harvest

Lumen Technologies has a clear understanding of where its revenue growth is to be found. Lumen earns most of its revenue--up to 75 percent or so--from business customers, so it makes sense to look for revenue growth in international enterprise operations, IP data services including edge computing, transport and apps supporting transport. 

source: Lumen Technologies 

Consumer and small business revenue growth (mass markets) will come almost exclusively from broadband access services. 

The wholesale, voice and rural operations are not seen as growth vehicles and essentially will be harvested. Note that Lumen is not a supplier of mobility services, so that is not a growth option. 

Every connectivity provider with multiple customer segments and products has to make similar decisions about where growth is to be found and where investments are to be made. 

Conversely, every business has to know which lines of business are declining and have to be managed for decline.