"Telco as a Platform" Will be Tough

Telco as a platform is a buzz phrase that is equally hard to understand.  Analysts at Appledore Research, for example, urge telcos to become platforms. What they mean is that telcos need to disaggregate functions and value, 

In one sense, the notion is that business models can diverge. “We identify five new types of telco business that will result from embracing Telecom as a Platform: The Utility Telco, the Network Sharer, the Neutral Host, the Innovation Telco and the Hyperscale Platform,” Appledore says. 

Generally speaking, the idea is that telco platforms are “open rather than closed,” with roles that can range from simple “bit pipe” operated at low cost to wholesale models to strategies that require creating or owning applications and services of many types. 

Typically, the advice is to use the open approach to build ecosystems of value, as Rakuten is doing. The key observation, however, is that the Rakuten approach involves using the telecom network to support applications and services that Rakuten itself owns, as well as third party apps and services. 

source: STL Partners   

Still, disaggregating the functions necessarily builds on the idea that the transport and access networks themselves are going to become a commodity, as the telco ecosystem mimics the internet itself: any lawful app accessible by any customer or user irrespective of the transmission network. 

By definition, transport becomes a simple “bit pipe” function, largely undifferentiated and no longer providing any gatekeeper role. That does not preclude a telco owning and operating other assets also able to use the bit pipe. Rakuten might be a good present example of that. 

On the other hand, it must also be noted that this requires that telco efforts move beyond the traditional core skill set of building and operating communication networks. Anybody with long roots in the industry knows that is both difficult and rarely successful at scale. 

In fact, virtually all equity analysts consistently recommend against such an approach. Business analysts, on the other hand, routinely argue there is almost no other long-term growth strategy. 

 

source: Appledore Research 

Of course, there are several ways the term “platform” is used. It sometimes is a business model. 

About “40 percent of the world’s top 30 brands are now platform businesses ,” BearingPoint consultants have argued. Platform business models involve making money from transactions that happen on the platform. 

In that sense, eBay is a platform; Amazon is a platform; Apple is a platform; YouTube is a platform. 

But “platform” sometimes is used in the computing industry sense, where the telco network is a foundation for other apps to use. Think of the roles played by Intel, Microsoft Windows, Linux or computers themselves. 

In the computing business, a platform is a set of hardware or software upon which other third-party apps can run. So Windows has always been seen as a platform, as have the Intel line of processors. 

In that sense, the internet is a platform for both communications and applications. But there is a new sense of the term that refers strictly to business model, not computing or communications infrastructure. 

In the internet era a new meaning has emerged. A platform is a business model based on an entity that acts as an exchange, connecting buyers and sellers. 

source: Simon Torrence 

A platform business model essentially involves becoming an exchange or marketplace. A pipe model requires a firm to be a direct supplier of some essential input in the value chain.

A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. A pipe business creates and then sells a product directly to customers. Amazon is a platform; telcos and infrastructure suppliers are pipes. 

Amazon is a platform. Etsy is a platform. Uber and Lyft are platforms. Airbnb is a platform. All connect buyers with sellers; sellers with sellers or buyers with buyers. None of those platforms “owns” the assets traded on the exchange. 

It all boils down to “who makes the money” and “how” the money is made. Even when understood as a business-to-business marketplace, a bandwidth exchange, for example, a key principle is that buyer and seller transactions volume is how the platform makes money. 

A true platform in the digital commerce  sense does not own the actual products purchased using the platform, and makes money by a commission or fee for using the platform to complete a transaction. A ridesharing platform does not own the vehicles used by drivers. A short-term lodging platform does not own the rooms and properties available for rental. An e-commerce site does not own the products bought and sold using the platform. 

In that sense, no telco I can think of actually operates as a full platform, yet. Service providers always make money directly from selling services (access and transport). Sometimes they also own apps that run on the network. But few actually operate as actual exchanges, making money from transaction fees. 

If by “platform” one means a business model based on transactions, few telcos will be able to manage the transition. A platform business model essentially involves becoming an exchange or marketplace. A pipe model requires a firm to be a direct supplier of some essential input in the value chain.

A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. A pipe business creates and then sells a product directly to customers. Amazon is a platform; telcos and infrastructure suppliers are pipes. 

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.”

A bandwidth exchange might be one example of an actual connectivity business platform. The operator of the exchange would federate business access to networks of all sorts, allowing customers to buy and sell use of any of the assets. The exchange could focus on consumers, business-to-business, carrier-to-carrier, app to app; computing as a service or almost any combination of those transactions. 

But the exchange might not actually own any of the underlying networks. By that measure, “becoming a platform” is a tall order.

Prepare for Digital Transformation Disappointment

Prepare for digital transformation disappointment. The investments firms and organizations are rushing to make to “digitally transform” will largely fail, history suggests. For starters, the theory is that whole business processes can be transformed.

But those are the thorniest, toughest problems to solve in the short to medium term, as human organization and habits must change, not simply the computer tools people use. 

Secondly, DX necessarily involves big changes in how things are done, requiring significant application of computing technology. Historically, big information technology projects have  failed about 70 percent of the time.

Finally, understanding how best to use a new technology approach takes some time, as suggested by prior technology paradoxes. 

Many technologists noted the lag of productivity growth in the 1970s and 1980s as computer technology was introduced. In the 1970s and 1980s, business investment in computer technology were increasing by more than 20 percent per year. But productivity growth fell, instead of increasing. 

So the productivity paradox is not new.  Massive investments in technology do not always result in measurable gains. In fact, sometimes negative productivity results. 

Information technology investments did not measurably help improve white collar job productivity for decades in the 1980s and earlier.  In fact, it can be argued that researchers have failed to measure any improvement in productivity. So some might argue nearly all the investment has been wasted.

Some now argue there is a similar lag between the massive introduction of new information technology and measurable productivity results, and that this lag might conceivably take a decade or two decades to emerge. 

The Solow productivity paradox suggests that applied technology can boost--or lower--productivity. Though perhaps shocking, it appears that technology adoption productivity impact can be negative. 

The productivity paradox was what we began to call it. In fact, investing in more information technology has often and consistently failed to boost productivity. Others would argue the gains are there; just hard to measure. Still, it is hard to claim improvement when we cannot measure it. 

Most of us are hopeful about the value of internet of things. But productivity always is hard to measure, and is harder when many inputs change simultaneously. Consider the impact of electricity on agricultural productivity.

“While initial adoption offered direct benefits from 1915 to 1930, productivity grew at a faster rate beginning in 1935, as electricity, along with other inputs in the economy such as the personal automobile, enabled new, more efficient and effective ways of working,” the National Bureau of Economic Research says.  

There are at least two big problems with the “electricity caused productivity   to rise” argument. The first is that other inputs also changed, so we cannot isolate any specific driver. Note that the automobile, also generally considered a general-purpose technology, also was introduced at the same time.

Since 1970, global productivity growth has slowed, despite an increasingly application of technology in the economy overall, starting especially in the 1980s. “From 1978 through 1982 U.S. manufacturing productivity was essentially flat,” said Wickham Skinner, writing in the Harvard Business Review. 

Skinner argues that there is a “40 40 20” rule where it comes to measurable IT investment benefits. Roughly 40 percent of any manufacturing-based competitive advantage derives from long-term changes in manufacturing structure (decisions about the number, size, location, and capacity of facilities) and basic approaches in materials and workforce management.

Another 40 percent of improvement comes from major changes in equipment and process technology.

The final 20 percent of gain is produced by conventional approaches to productivity improvement (substitute capital for labor).

Cloud computing also is viewed as something of a disappointment by C suite executives, as important as it is.  

 

A corollary: has information technology boosted living standards? Not so much,  some say.

By the late 1990s, increased computing power combined with the Internet to create a new period of productivity growth that seemed more durable. By 2004, productivity growth had slowed again to its earlier lethargic pace. 

Today, despite very real advances in processing speed, broadband penetration, artificial intelligence and other things, we seem to be in the midst of a second productivity paradox in which we see digital technology everywhere except in the economic statistics.

Despite the promise of big data, industrial enterprises are struggling to maximize its value.  A survey conducted by IDG showed that “extracting business value from that data is the biggest challenge the Industrial IoT presents.”

Why? Abundant data by itself solves nothing, says Jeremiah Stone, GM of Asset Performance Management at GE Digital.

Its unstructured nature, sheer volume, and variety exceed human capacity and traditional tools to organize it efficiently and at a cost which supports return on investment requirements, he argues.

At least so far, firms  "rarely" have had clear success with big data or artificial intelligence projects. "Only 15 percent of surveyed businesses report deploying big data projects to production,” says IDC analyst Merv Adrian.

So we might as well be prepared for a similar wave of disappointment over digital transformation. The payoff might be a decade or more into the future, for firms investing now.

OECD Service Provider Revenue is Flat Through 2018

In a nutshell, here is the business model problem for telecom service providers in the Economic Cooperation and Development countries: flat or declining revenue. 

source: OECD

Internet of Things Devices in OECD Countries

One cannot easily correlate connected sensors with consumer broadband, as connected sensor devices are sometimes used by consumers, but also by enterprises and other organizations. Still, in some Organization for Economic Cooperation and Development countries there are as many as 40 machine-to-machine connections per 100 persons. 

The OECD average is about 27 M2M connections per 100 persons. 

source: OECD

OECD Broadband is Roughly 1/3 Fiber; 1/2 Cable Modem; 1/3 DSL

The correlation between gross domestic product and broadband penetration in Organization for Economic Cooperation and Development countries is about 0.55. In other words, there is a correlation. What we cannot say is that there is a causal relationship. 

source: OECD

Within the OECD, cable modem connections are significant in many markets, which shapes the business case for fiber-to-home deployment. Countries where digital subscriber line is a major platform arguably will have different payback models than countries where significant market share is held by cable operators or fixed wireless. 

source: OECD

Fixed broadband penetration has grown over time, generally reaching levels between 45 percent and 25 percent in various OECD countries. 

source: OECD

Enterprise Business Travel: Contradictory Evidence; Communications Clearly Up

Tradeshift, which provides e-invoicing and accounts payable services has posted some contradictory evidence about the state of global enterprise business travel. 

On one hand, enterprise travel globally--based on transaction volume--has returned to nearly 70 percent of pre-pandemic levels, according to the data published by Tradeshift. That likely is more robust than most of us would have predicted. 

Note that Tradeshift tracks the volume of transactions, not the value of the transactions. 

On the other hand, corporate hospitality spending has not budged from its second quarter 2020 levels, when travel restrictions were widely imposed as a result of Covid, reducing such spending 82 percent. In the second quarter of 2021 the figures still had not shown any improvement.

That suggests “client entertaining and networking events will remain virtual, at least for the time being,” the firm says. 

Communications transaction volumes, on the other hand, seems about 80 percent higher than before the pandemic, Tradeshift notes. Transaction volumes across the sector are 89 percent higher than prior to the pandemic. 

source: Tradeshift 

At least anecdotally, that seems borne out by U.S. connectivity provider revenues. In second quarter 2021 financial reports Comcast reported record internet access net additions while all three big mobile service providers reported growth as well. 

Verizon booked record revenue. AT&T second quarter revenue climbed 7.6 percent.  T-Mobile posted record revenues as well.

B2B Sales Might Never Be the Same

We do not yet know whether Covid business-to-business sales processes have changed permanently or not. But a McKinsey survey suggests at least 30 percent of sales journey operations are conducted entirely on a “self serve” basis, not face to face. About 32 percent of B2B research, evaluation and ordering operations are conducted digitally.

source: McKinsey 

About 34 percent to 36 percent of sales processes are conducted digitally with a sales person. Only about 34 percent to 36 percent of such processes are conducted face to face. 

Altogether, roughly two thirds of B2B transactions are conducted digitally, not face to face, by phone or fax.

Compared go pre-Covid patterns, fewer sales are concluded in person; more are conducted using video conferencing, online, by email or e-commerce methods. 

source: McKinsey 

The survey suggests growing comfort with remote interactions. In April 2020 only 27 percent of respondents thought the remote sales processes were more effective than face-to-face methods. By February 2021 that percentage had grown to 58 percent. 

Fully 87 percent of respondents believed they would continue with remote interactions for at least a year after the pandemic ends. 

source: McKinsey

Digital Transformation Might be Viewed Differently, After Covid

The way entities go about digital transformation might be different now, compared to pre-Covid expectations, according to George Westerman, principal research scientist for workforce learning in MIT’s Abdul Latif Jameel World Education Lab. 

The prior assumption was that customers value the human touch. In some cases, Covid experience suggests a well-architected digital experience can offer an equivalent or even a more personalized transaction than an in-person engagement, at least in some cases, he argues. 

Many entities might have assumed it was prudent to be a “fast follower.” But there was nobody to follow during the instant economic shutdowns Covid policy required. Business closures required immediate action. 

Digital transformation is not an especially new concept, but it also is a term used in several distinct ways. In some ways DX is a deepening of the “data-driven decisions” mantra. 

It can refer to customer experience, operations or business models. In rare cases DX is a combination of all three, though generally beginning in silos. Connecting dynamic operations therefore tends to be a longer-term goal, no matter how the discrete initiatives unfold. 

source: MIT Sloan School 

Customer experience, customer intelligence, sales processes and growth, customer touch points, operations and business models (customers, products, problems solved, revenue generation models, fulfillment) all are parts of the broader DX agenda. 

The key point is that DX is about transformation, not simply “going digital.” That noted, the foundation for digital transformation is a clean, well-structured digital platform.

None of the other digital elements can achieve their full promise without it, MIT Sloan researchers argue. 

Cloud-Related Spending Will Drive SMB Investments in 2021

Cloud-related platform spending will a major driver for small and medium businesses globally in 2021, according to Analysys Mason. Since most major information technology apps and services are supplied using remote computing (cloud) mechanisms, that will come as no surprise. 

source: Analysys Mason 

Marc Halbfinger, PCCW Global CEO Featured on Podcast

Marc Halbfinger, PCCW CEO will be featured on a podcast sponsored by Ridge Innovative. Mark your calendars for July 28, 2021listen in at innovationwithapurpose.

Here is the podcast.

Marc will be talking about federating communications services and suppliers. If I had to guess, I’d bet he’ll talk about how to create ecosystems of buyers and sellers that can function largely autonomously. 

Here’s another talk Marc did that might present the framework.

B2B Sales Might Never be the Same

Moderator

Gary Kim, Consultant, IP Carrier, USA

Panelists

Matt Bramson, Founder & Managing Partner, Cloud Strategy Solutions, USA
Marc Halbfinger, Chief Executive Officer, PCCW Global, Hong Kong SAR China
Nancy Ridge, Founder & President, Ridge Innovative, USA
Elmar Rode, Director Communications Industry Strategy Group, Oracle, Germany

86% of U.S. has Home Density of 15 Homes or Fewer Per Plant Mile

Rural fixed network plant is expensive, on a per-location basis. Most of the land surface of the United States consists of areas where a mile of fixed network plan passes no more than 15 homes, for example. 

In the United States, areas with linear plant density of 15 homes or fewer represent nearly 86 percent of the area of the lower 48 states, yet contain just  12 percent of the locations.

source: CQA 

That is one reason why U.S. fixed networks often take so long to build. Earning a profit from investments in new plant is difficult, most places.

Mobility Still Drives AT&T, Verizon, T-Mobile Revenue, but Growth Options Differ

As is the case for Verizon, AT&T’s financial results hinge on its mobility unit performance. As always, it is helpful if revenue contributions from consumer fixed network and business services hold their own, but marginal improvement is driven by mobility segment performance. 

source: AT&T 

Verizon’s second quarter 2021 results show the same pattern. Revenue growth is driven primarily by consumer mobility services. Business customer revenue was flat sequentially. 

source: Verizon 

T-Mobile has no fixed line business, so all of its growth comes from mobility services. Also, T-Mobile has zero share of fixed network services for consumers, so will seek growth by taking home broadband share from cable operators and others. In its mobility business, T-Mobile has been under-represented in mobility sales to businesses, and will try to wrest share there as well. 

New lines of business remain important for all three firms, though opportunities vary. The easiest path for an attacker in any market is market share gains, as one can see with T-Mobile over the last decade. Incumbents have far fewer opportunities, but even so, gaining share is still possible outside the existing geography, which is what Verizon banks on with its fixed wireless services. 

AT&T has other constraints. It is the share leader in fixed network geography. So it has relatively less to gain if it seeks additional fixed network share outside its fixed network footprint (and regulators might not allow it to do so). AT&T plans to take additional mobility share, but 

The company also has fallen to third in mobility account share, so it will try to recapture some share there. The constraints are T-Mobile’s higher rate of growth and the coming impact of competition from Dish Network and cable operators as well. 

The point is that T-Mobile and Verizon are better placed to grow by taking market share in existing markets. AT&T is almost forced to look for growth elsewhere, as its opportunities to grow by taking share in existing markets is more limited. 

Though the strategy has been panned by most observers, AT&T’s forays into video entertainment and content were driven in large part by that set of circumstances. The company simply could not grow revenues and cash flow significantly by taking market share, in any of its major lines of business. 

Despite spinning out its Warner Media and DirecTV assets, AT&T still will capture 71 percent of the revenue and cash flow from both assets, even as those assets are removed from AT&T’s books. 

Most characterize the asset dispositions as a case of AT&T “getting out of” the content business. It might more properly be characterized as moves to reduce debt by monetizing some of the value of those assets, while retaining 71 percent of the cash flow and business upside, while allowing its workforce to concentrate on growing the mobility business.

Why Buy Rural Fixed Network Assets?

There is one good reason why any buyer would look to acquire rural telco copper-based network assets, and that is the assumption the assets can be made to produce higher revenue, higher profits and higher equity value, after reasonable capital investment and acquisition costs.

Perhaps the key assumption is that an upgrade to optical fiber would allow the firm to reach 50-percent market share (installed base, actually) of the home broadband market, with some incremental revenue contribution from voice, cell tower backhaul, business services and possibly other value-added services.

But all business cases will turn on consumer services. Assume consumer revenue of about $50 a month per connection, or about $600 per year per line, for copper facilities. That is a blend of voice service, subsidies and internet access service, with voice market share of perhaps 40 percent and internet access share of perhaps 30 percent. 

The big bet is that an upgrade to fiber-to-home facilities could boost average revenue per account to perhaps $100 per customer, per month, while also creating the means for boosting other revenue sources as well.

Some households conceivably could hit $200 to $250 per month, BCG has argued. That likely would happen in exurban geographies that are less rural than 15 homes per mile of linear plant, and likely also assumes high take rates for triple-play services.

That last assumption is the most questionable, as it has proven uneconomical for most smaller internet service providers to make money on video services, always a scale business but doubly so as demand declines.

source: BCG 

Most potential acquirers will likely focus instead on internet access and a few other incremental revenue sources, without factoring video entertainment into the model.

Potential buyers (private equity or other) might bet they can boost internet access share to 50 percent and boost average revenue per account by as much as 100 percent, the key change being an increase in internet access revenues from perhaps $30 to $80 per account. 

Many estimate that connecting a rural home could cost four to five times as much as connecting a suburban home, so the issue is whether there is a business model, including payback time for investments. 

As a rule of thumb, areas with home density less than 15 per linear plant mile probably represent fiber upgrade costs between $8,000 to $10,000 per home. At 50-percent penetration that implies per-customer costs between $16,000 and $20,000. Without subsidies, that is a daunting, if not impossible business case. 

The sweet spot might therefore be areas where capex requirements are a more-modest two to three times suburban cost, and where it is feasible to boost ARPU 100 percent or more.