"Will 5G Boost ARPU?" is the Wrong Question

Asking whether mobile operators can earn more from 5G than 4G, though a logical question, turns out to be the wrong question. The question logically gets asked for a few reasons, but still misses the point. 

The real question is whether mobile operators can grow revenues faster than they have been in recent years, raise the perceived value of their services, sell at higher profit margins, while investing in new service capabilities with capital investment no higher than it has been, on average, with lower unit costs and operating costs overall. 

5G, by itself, does not have to be the sole driver--and probably cannot be--for those desired business goals. 

The global evidence so far is a bit mixed. Some service providers do not charge a price premium for 5G, over 4G, as such. Any revenue differences would come from subscriber volume, higher usage overall or other details of service plans. Others may try to do so.

But history suggests the period of premium pricing will last only in the early days of 5G availability.

Still, Verizon in the U.S. market does seem to see revenue lift in recent days, though not directly because of 5G. Instead, Verizon is driving revenue growth by switching customers from lower-priced metered usage plans to higher-priced unlimited usage plans. 

“We are monetizing the move to unlimited” usage plans, said Ronan Dunne, Verizon Wireless president. There are several angles here. First, the unlimited plan, which offers 5G access as a feature, costs more than the metered plans. 

By the end of the second quarter of 2021, about 69 percent of Verizon’s mobile account base was on unlimited plans, according to Matt Ellis, Verizon CFO. Nearly 27 percent of the account base bought premium unlimited plans, Ellis noted. 

Also, some 60 percent of new accounts sign up for the unlimited usage plan, according to reports.  

But there are other ways to enhance yields. The unlimited plans provide incentives for accounts to add additional devices.  “In an unlimited world, what we see is the propensity of people to add an additional connection, whether that be a smart device, whether that be a tablet is significantly higher,” says Dunne. 

In other words, unlimited plans drive device connection growth. 

The point is that 5G--in and of itself--does not necessarily have to drive higher average revenue per user. In Verizon’s case, the revenue gains come from shifting customers to higher-priced unlimited usage plans. In T-Mobile’s case the revenue gains come from adding new accounts and taking market share, not from any 5G price premium. 

The point is that 5G era mobile revenue, profit margins or revenue growth might well be higher, for a variety of other reasons than the cost of 5G access. 

Parenthetically, we might note that core pricing strategies change over time in the connectivity industry.  

One of the key differences between mobile and fixed segment pricing practices is that the former is based on usage (consumption of network resources) while the latter has been differentiated on speed of the connection, aside from any flat-rate charges for “access” (the right to use) to the network. 

In other words, mobile users are charged more for using more data; fixed network users are charged differently based on the top potential speed of their internet connections. 

In the past, when the only network was fixed, and the only service was voice, charges were based on usage or distance or both. “Long distance calls” were rated based on how far the calls had to be transported, a concept that has no meaning in the internet era. 

These days, connections in the core network are priced based on bandwidth of the connection, not distance. 

In retail markets, a variety of other values can contribute to end user price: bundling of content; volume purchasing; multi-user plans; equipment fees and regulatory fees and taxes. 

The point is that average revenue per account might grow in the 5G era for any number of reasons not directly related to better 5G speed or latency performance. Verizon’s strategy shows one example of that.

Digitalization in the U.K.

“Digitalization” and “digital transformation” are terms often used interchangeably, which complicates our understanding of what “digital transformation” can mean--and does mean--for any particular industry or firm. For many, the terms “digitization,” “digitalization” and digital transformation” are interchangeable concepts. 

For some, DX is mostly about customer experience. For others it is about process transformation, new products, new revenue models or sales and marketing channels and practices. 

And different industries might have different priorities. Deloitte says a recent survey of Thai firms finds financial firms most interests in changing customer experience. Media, technology or telecom firms are more interested in new product development, while health-related firms are most interested in better business processes. 

source: Deloitte

For the U.K. Department for Business, Energy and Industrial Strategy, a digitalized energy system is primarily about collecting, protecting and understanding data, not a change of products sold, customers served or revenue models.

To be sure, DX can be a way of affecting and changing every business process. But some might argue “digitizing” is different from “digitalizing” which is, in turn, different from DX. 

Deloitte sees DX as different from “mere” use of additional technology. “Digitization” is the use of digital tools in place of analog. That might be seen as the substitution of digital technology for existing analog tools, but without a change of “what” gets done. 

 “Digitalization” is the change in any working process made possible by technology, and ideally allows reshaping processes to produce different outcomes. 

DX is the use of technology to change business strategy, which might include selling to new customers, with new products, in new ways. 

source: Deloitte

“By the mid-2020s, the strategy aims to have “established standards and regulatory frameworks in place that ensure best practice is met for energy data collection, accessibility, privacy and security.”

Ideally, there will be “significantly stepped-up visibility of assets across the system and new digital services such that stakeholders can understand what data exists and how they can gain access to it.” 

The process also hopefully will identify the next steps for digitalizing the energy system in the areas of data governance, market frameworks, data privacy and cyber security, while increasing market access and services.”

Note that all those goals are related primarily to the management of data and customer access to data. Less clear is whether--and how--different services might be provided. 

Beyond 2020, the goal is “system operators will have visibility of all energy assets enabling more accurate, efficient and cheaper planning, forecasting and management of assets, the department says. 

By then, it is hoped that new business models and entrants participating in the energy sector will emerge. It also is hoped the digital energy system will be a platform. 

So digital transformation actually comes last, after “digitalization” has allowed reshaping of business processes and capabilities. That is probably about right.

Digital Transformation in Thailand: Heavy on Sales/Marketing

Digital transformation in Thailand is taking a number of paths, a survey of 77 Thai organizations by Deloitte finds. On a more-physical layer, executives at these firms point to greater use of  web technology, mobile applications and cloud computing as examples of DX. 

Use of data analytics, robotics, internet of things, artificial intelligence, blockchain and augmented reality or virtual reality are other capabilities cited as included in their DX efforts. 

source: Deloitte

When asked, it appears most organizations intend--or hope--their efforts lead to outcomes including end user experience changes; business process changes; better use of data and accelerating new product development. 

Deloitte found that different industries had distinct priorities. Financial services firms were most interested in improving customer experience, while technology, media and telecom firms were most interested in product development. 

Life sciences and health care organizations were most interested in bolstering business processes, seen as “saving lives,” for example. 

source: Deloitte

Still, as you might have expected, sales and marketing was the top area for DX projects, followed by production functions. 

 source: Deloitte

It is worth noting that the concrete emphasis often is “digital” technology application rather than business process transformation. That is not too surprising, as DX in most cases is the new term people use to describe their investments in information technology. 

Perhaps significantly, DX barriers have more to do with human factors than mastery of technology, as generally is true with any IT change effort. Perceived talent or expertise gaps, company culture and other organizational issues are ranked as bigger problems than technology as such.

 source: Deloitte

All of which have almost nothing to do with technology but revolve around recruiting people with the right skills to get the job done. 

To be sure, Deloitte itself sees DX as different from “mere” use of additional technology. “Digitization” is the use of digital tools in place of analog. “Digitalization” is the change in working process made possible by technology. 

DX is the use of technology to change business strategy. 

source: Deloitte

Industrial AR Return on Investment

Augmented reality is a touted potential benefit of edge computing, 5G public and private networks. In fact, many enterprises had been using AR since at least 2018 for training applications. That suggests we could see many more such use cases in broader settings.

But AR also is easier for some use cases when IoT sensing also is available. That might be true for organizations in industrial settings conducting remote diagnostics and adjustment. One study by Forrester Research of PTC’s “Vuforia” industrial AR system found return on investment in the form of 50-percent-reduced training time; 60-percent-faster document creation time and a reduction in overtime payments between 10 percent and 12 percent. 

source: Forrester Research  

As early as 2018, surveys of enterprises made by Aberdeen Group had found 72 percent  of “best-in-class” organizations already use internet of things sensors and systems to capture and share diagnostics data with off-site stakeholders.

Specifically, 67 percent of users of augmented reality technology use IoT specifically as a means to conduct remote repairs.

Those firms also used augmented reality. Researchers at Aberdeen Group found that AR-powered knowledge sharing is being employed by 25 percent of “best-in-class” firms.

AR-powered on-site guides were used by 31 percent of best-in-class organizations.

 source: Aberdeen Group, PTC

Aberdeen argues that AR is a tool to improve the quality and consistency of customer support, as well as reduce service technician turnover.

On average, organizations are seeing technician turnover of 31.5 percent, Aberdeen Group has found. To add to this problem, an increasing number of service technicians are contracted (an average of 26.4 percent), meaning less consistency in service delivery, and more short-term labor that needs to be quickly on-boarded and trained.

Organizations with higher-than-average turnover see a 14 percent lower first-time fix rate compared to firms with lower turnover (52 percent compared to 66 percent). 

High-turnover companies also see customer Organizations with higher-than-average turnover see a 14 percent lower first-time fix rate compared to firms with lower turnover. v3 3 retention at a mere 60 percent, compared to 72 percent for those with lower than-average turnover, Aberdeen Group researchers say. 

Rule of Three, At Least, For Most Consumer Apps

The consumer app business has a “winner take all” character, many would rightly note. Depending on the product, market share ranges from a near-monopoly to duopoly to rule of three. But, as a rule, no more than three firms dominate market share.

This is browser market share since 2009. Firefox and Internet Explorer are the big losers. Safari has gained. And then there is “everybody else.”

source: Statcounter 

Operating systems arguably are a duopoly.

source: Dazeinfo

Messaging is lead by three to four suppliers. 

source: Statista  

Social media is lead by three firms. 

source: Hootsuite 

Marketing Shifted to "Pure Digital" During Pandemic: How Permanent a Change?

 “Customer journey disruptions brought about by the pandemic have prompted CMOs across industries to question long-held beliefs on the relative value of their channel investments,” say Gartner analysts. The biggest trend has been that--unable to rely on in-person channels--spending shifted to digital channels. 

Some 72 percent of the marketing budget of surveyed enterprises is “pure digital,” says Gartner. 

source: Gartner 

What remains unclear is whether marketing tactics and practices will remain permanently shifted in that way.

Some may well conclude that their sales  results have not suffered. Simply put, most enterprises have somehow managed to keep sales and marketing going, if in different ways, and some have even reported revenue gains, even when unable to visit customers directly, or have customers visit them. 

So the big question is whether there have been changes in belief and practices that are permanent, and not simply transitory. 

At a high level, the issue can be neatly summarized: enterprises have had to find some way to keep revenues flowing despite the substantial inability to have in-person contact with business partners or customers. 

The longer term issue is whether executives will conclude they do not need to spend money, time and effort in the old ways, at the same levels. That, in turn, will have repercussions for many in marketing and sales ecosystems.  

source: Gartner 

“CFOs have become comfortable with the lower cost base that spending cuts  in marketing, alongside savings on real estate and travel costs, have yielded,” Gartner says in a new report. “CMOs proved that they could do more with less, curbing spending on events, agencies and ad budgets in the face of a crisis.”

Among the areas most affected are items such as business “travel and hospitality,” which fell nearly 50 percent from 2020 to 2021. Investments in digital processes to support business operations are taking priority over marketing, Gartner says. 

“CEOs state the top focus points for their Chief Digital Officers (CDOs) in 2021 include customer experience and e-commerce.” Marketing execs have reprioritized the spending commitments across their channels and programs to favor pure-play digital channels, accounting for 72.2 percent of the total marketing budget.

source: Gartner

Typically, budget priorities reflect business priorities. So less spending is typically interpreted as “lower value” or priority. That might not necessarily be true for marketing budgets. 

Marketing budgets have always been the first of the enterprise budgets to be cut in any recession and the last to be restored once growth returns, Gartner notes, and rightly so. 

And marketing budgets are falling to their lowest levels in recent history, say analysts at Gartner. 

source: Gartner

So one might conclude that marketing--perhaps always to some extent a “more is better” category--is less important at the moment. That is almost certainly untrue. Unable to conduct face-to-face operations, marketing arguably has been more important. 

But perhaps higher value is perceived even when spending levels are lower. In other words, the ability to “do more with less” might be the conclusion many have reached after their experience with virtual sales and marketing imposed on them. 

“Social distancing rules transformed buying journeys for B2B and B2C customers alike throughout 2020,” Gartner notes. Also, “the majority of customers who used a digital channel for the first time in the first wave of the COVID-19 crisis state that they will continue to use them when the crisis passes.”

That suggests an “inevitable shift to online channels.”

The still-unknown issue is how much permanent change could occur in enterprise marketing practices. As always, there will be repercussions in the rest of the business ecosystem.

Starlink Internet Access Performance Approaches or Exceeds Fixed Network Median Speeds

The promise of constellations of low earth orbit satellites is a combination of higher access speeds and lower latency. According to second quarter 2021 tests by Ookla, Starlink is demonstrating those values. 

Starlink was the only U.S. satellite internet provider with a median latency that was anywhere near that seen on fixed broadband in the second quarter of  2021 (45 ms and 14 ms, respectively). 

Starlink was the only satellite internet provider in the United States with fixed-broadband-like latency figures, and median download speeds fast enough to handle most of the needs of modern online life at 97.23 Mbps during Q2 2021 (up from 65.72 Mbps in Q1 2021). 

HughesNet averaged 19.73 Mbps (15.07 Mbps in Q1 2021) and Viasat managed 18.13 Mbps (17.67 Mbps in Q1 2021). 

Compare that to 115.22 Mbps, the median download speed for all fixed broadband providers in the United States during Q2 2021. 

source: Ookla 

 

Starlink performance in 458 counties in the United States ranged from 168.30 Mbps) to 64.51 Mbps.  

Starlink’s median download speed exceeded that of fixed broadband in Canada (86.92 Mbps compared to 84.24 Mbps, making Starlink a reasonable alternative to fixed broadband in Canada, Ookla notes.

Starlink also showed a much faster median download speed in the United Kingdom during the second quarter of  2021 (108.30 Mbps) than the country’s average for fixed broadband (50.14 Mbps).

Another Reason Why DX Might Fail So Often

Digital transformation is an overused buzzword. So was big data. But there are lots of other candidates: agile, AI, disrupt, synergy, virtual and cloud. Buzzwords are perhaps annoying. What really matters is whether the concepts buzzwords represent actually deliver value.

On that score, digital transformation is going to disappoint, as prior big rounds of computing investment have disappointed.  

In Bullshit Jobs: A Theory, author and anthropology professor David Graeber offered a scathing explanation of why the application of computers to business processes delivered far fewer results than hoped for.  

Simply put, the workplace became riddled with useless work that technology should be handling, including some difficult, labor-intensive jobs. But much of the argument concerns other work that might not be so routine, but might arguably also not be so productive . 

Graeber argued that in large organizations, as much as half of all work was being done by five categories of unproductive jobs:

• Flunkies, who serve to make their superiors feel important (receptionists, administrative assistants, door attendants, makers of websites whose sites neglect ease of use and speed for looks)

• Goons: who act to harm or deceive others on behalf of their employer (lobbyists, corporate lawyers, telemarketers, public relations specialists, community managers)

• Duct tapers: who temporarily fix problems that could be fixed permanently (programmers repairing bloated code, airline desk staff who calm passengers whose bags do not arrive) 

• Box tickers: who create the appearance that something useful is being done, when it is not (survey administrators, in-house magazine journalists, corporate compliance officers, quality service manager)

• Taskmasters: who manage, or create extra work for, those who do not need it (including middle managers (middle management, leadership professionals)

One need not agree about the analysis to agree that automating work that should not be done in the first place would not necessarily improve productivity.

DirecTV Spinout is Complete

One key question some might have had about the spin out of DirecTV assets was the impact on AT&T cash flow. That was the reason DirecTV was purchased in the first place, and cash flow generation matters mightily to AT&T. 

For most observers, the acquisition of DirecTV was about strategy, and that is correct, up to a point. For some of us, the deal also was the fastest way AT&T could make an acquisition that was immediately a boost to free cash flow.

AT&T said as part of its second quarter 2021 results that the company expected lower revenues by $9 billion; cash flow (EBITDA) lower by $1 billion and free cash flow lower by about $1 billion. AT&T also received about $7 billion in cash as part of the transaction. 

The now separated asset still means AT&T gets a 70 percent share of DirecTV cash flow and revenue, plus equity value upside. That answers the question. 

Assuming the primary use of free cash is payouts to the owners, rather than heavy reinvestment in the business, AT&T continues to receive the great bulk of cash flow value.

Lumen Sells Assets to Apollo Global Management

Lumen Technologies has agreed to sell a collection of telephone and broadband infrastructure that covers six million residential and business customers across 20 states, mostly in the U.S. Midwest and Southeast (according to initial reports) to Apollo Global Management. The $7.5 billion deal value includes $1.4 billion of assumed debt. 

What some will find interesting is that the assets seem to represent much of  the original CenturyTel assets. CenturyTel was a rural telco at the time. Some will still argue that AT&T’s spin out of content assets is the bigger move, but the Lumen asset sale is highly significant.

Many would have described the CenturyLink (including Qwest, CenturyTel and Level 3 Communications as an amalgamation of rural telco assets with an enterprise- and whole-focused capacity business. 

It was an odd match. In the third quarter of 2020, for example, 75 percent of Lumen revenue came from business customers, wholesale or international connectivity services. 

The companies have not yet released information about the actual geographic extent of the assets, but the original CenturyTel operated rural assets concentrated across the old BellSouth, Ameritech, SBC Communications and Bell Atlantic (Verizon) areas where US West (Qwest) did not operate fixed local networks. 

US West served customers in Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming. What made US West different from the other RBOCs was the largely-rural character of its service territory. US West served a relative handful of tier-two cities or smaller metro areas and larger swaths of rural density. 

source: FCC 

CenturyTel had holdings across the United States, but did not overlap with US West (Qwest) in the Southeast, much of the Midwest and South Central United States, shown in green on this map, while US West (Qwest) operations are shown in blue. 

source: Denver Business Journal 

The logical disposition would be the former CenturyTel assets in BellSouth, Ameritech, SBC Communications and Verizon areas. It would be relatively easy to keep the former CenturyTel assets in the Lumen (former US West/Qwest) areas. 

CenturyLink purchased (some would say the firms merged) the Qwest assets in 2011. That deal was valued at $12.2 billion. 

At the time, the firms had combined revenue of $18.6 billion. CenturyLink later also purchased Level 3 Communications and Savvis. 

So the new deal essentially breaks out the former CenturyTel assets, leaving Lumen Technologies with the Qwest, Level 3 and Savvis assets. The new Lumen will derive even more of its total revenue from business services and customers. 

It will likely be a while before we can determine the change in customer mix and revenue sources. Still, Lumen Technologies will become even more focused on enterprise, wholesale and business customers than before, though it still likely serves consumers in 13 states.

Lumen Appears to Sever Former CenturyTel Assets

Lumen Technologies has agreed to sell a collection of telephone and broadband infrastructure that covers six million residential and business customers across 20 states, mostly in the U.S. Midwest and Southeast, to Apollo Global Management. The $7.5 billion deal value includes $1.4 billion of assumed debt. 

What some will find interesting is that the assets seem to represent much of  the original CenturyLink assets, which was a rural telco at the time. 

CenturyLink purchased (some would say the firms merged) the Qwest assets in 2011. That deal was valued at $12.2 billion. 

At the time, the firms had combined revenue of $18.6 billion. CenturyLink later also purchased Level 3 Communications and Savvis. 

So the new deal essentially breaks out the former CenturyTel assets, leaving Lumen Technolgoies with the Qwest, Level 3 and Savvis assets. The new Lumen will derive even more of its total revenue from business services and customers.

AT&T is Still in the Content Business, Just in a Different Way

One key question some might have had about the spin out of DirecTV assets was the impact on AT&T cash flow. That was the reason DirecTV was purchased in the first place, and cash flow generation matters mightily to AT&T.  Also, there were few other major transactions AT&T could have made without regulatory opposition. 

The acquisition, in other words, was the fastest way to add free cash flow, of the alternatives available to AT&T at the time. So what else could AT&T have done with $67 billion--what it spent on DirecTV--assuming a 4.6 percent cost of capital? 

Cost of capital is the annualized return a borrower or equity issuer (paying a dividend) incurs simply to cover the cost of borrowing.

In AT&T’s case, the breakeven rate is 4.6 percent, which is the cost of borrowing itself. To earn an actual return, AT&T has to generate new revenue above 4.6 percent.

First of all, AT&T would not have borrowed $67 billion if it needed to add about three million new fiber to home locations per year. Assume that was all incremental capital, above and beyond what AT&T normally spends for new and rehab access facilities.

Assume that for logistical reasons, AT&T really can only build about three million locations each year, gets a 25-percent initial take rate, spends $700 to pass a location and then $500 to activate a customer location. Assume account revenue is $80 a month.

AT&T would spend about $2.1 billion to build three million new FTTH locations. At a 25-percent initial take rate, AT&T spends about $525 million to provide service to new accounts. So annual cost is about $2.65 billion, to earn about $720 million in new revenue (not all of which is incremental, as some of the new FTTH customers are upgrading from DSL).

The simple point is that building three million new FTTH locations per year, and selling $80 in services to a quarter of those locations, immediately,  does not recover the cost of capital.

The DirecTV acquisition, on the other hand, boosted AT&T cash flow about 40 percent.

 

To be sure, the linear video business deteriorated faster than AT&T expected. Still, to the extent that triple play still made strategic sense at the time, the deal allowed AT&T to claim a major position there without the time and expense of upgrading its copper fixed network to achieve such a position. 

AT&T said as part of its second quarter 2021 results that the company expected lower revenues by $9 billion; cash flow (EBITDA) lower by $1 billion and free cash flow lower by about $1 billion. AT&T also received about $7 billion in cash as part of the transaction. 

The now separated asset still means AT&T gets a 70 percent share of DirecTV cash flow and revenue, plus equity value upside. That answers the question. 

Assuming the primary use of free cash is payouts to the owners, rather than heavy reinvestment in the business, AT&T continues to receive the great bulk of cash flow value. Widely viewed now as a “mistake,” in large part because of the debt burden, the DirecTV acquisition still was a reasonable bet on boosting free cash flow immediately. 

Even now, after spinning out the asset, DirecTV offers AT&T most of the cash flow, though de-consolidating the asset, raising cash to pay down debt, and freeing up management time for other work.