How Far Can "Asset Light" Model Go?

In addition to network virtualization, private equity and institutional investor interest in communications infrastructure might be part of a reconceptualization of where value lies in the connectivity business, from the standpoint of service providers. 

For investors, fiber assets, for example, represent an alternative asset similar to airports, seaports or other physical infrastructure. For service providers, there are new ways to conceive of where sustainable business advantage can be gained. 

As the competitive era of telecommunications dawned, service providers gradually moved away from developing and creating their own platforms, from switches and access media to applications. They almost universally now rely on third parties for infrastructure. 

So the issue is how far the trend can extend. 

As mobile operators have concluded that owning tower assets does not provide as much value as other uses for cash, if such assets are sold, so there could be new thinking about the value of copper access assets and access networks generally.

Specifically, service providers might decide that, though still valuable, access assets need not be 100-percent owned. Partial ownership might still provide the required business value, but at less overall capital investment. Freed up capital from asset sales might then be applied to other more-strategic growth initiatives. 

That is not to say there is a general rethinking of operating solely on the basis of wholesale access. “Owner’s economics” and the ability to differentiate still flow from network ownership and control. 

Also, mobile operators increasingly are comfortable outsourcing their core network information platforms to public cloud providers, showing yet another way that service providers are rethinking the ownership versus leasing of platforms and capabilities. 

All of this should lead to a rethinking of where sustainable advantage lies, for service providers. How much of the core infrastructure they once developed and owned becomes less strategic over time. How far can the “asset light” approach be carried?

U.S. FTTH Seems Poised to Accelerate

GlobalData expects the number of U.S. fiber-to-home subscriptions will grow at a compound annual growth rate of 10.8 percent and reach 28.2 million accounts by year-end 2026.

If total U.S. home broadband accounts number 112 million at that point, as GlobatData predicts, then FTTH would represent about 25 percent of total subscriptions. 

source: S&P Global Intelligence 

As other forecasters estimate, cable operators will gradually lose installed base share to other internet service providers between now and 2026. 

Cable’s share of total US fixed-broadband subscriptions will decline to 67.1 percent  by year-end 2026, down from 68 percent in 2021, Global Data estimates. A different enumeration, including mobile-only households, suggests cable has 65 percent of the installed base, while telcos have 27 percent. 

Total U..S fixed-broadband lines, including fiber, fixed wireless and cable, will increase from 103.1 million in 2021 to 112.3 million by 2026, the firm predicts. 

Unclear at this point is how faster FTTH deployment could change those scenarios. Most observers believe faster FTTH is coming, paced by ISP competitive concerns and more government subsidies for faster home broadband. 

Many of us would now bet that the FTTH deployment rate will exceed 10 percent per year to the end of the decade. Some forecasts already call for 14 percent annual growth, for example. 

Singtel Financial Return Shows Potential Value of a Portfolio

Singtel’s latest quarterly results illustrate one connectivity provider  growth strategy: a portfolio of assets without majority ownership or control. 

To be sure, the core connectivity business continues to produce most of the revenue and free cash flow. But growth largely is driven by businesses in adjacencies: business services, data centers, advertising and minority stakes in other connectivity providers, where  revenue grew 21 percent.  

The point is that organic growth in the core connectivity business is tough. Connectivity business operating revenue was up about 0.4 percent on an annual basis, the company reported in November 2021. Mobile operating revenue in Singapore declined 1.3 percent on an annual basis. 

Enterprise revenues were flat while voice revenue fell 16 percent. 

Growth is faster in adjacencies. Data center and security services revenue rose 9.6 percent while technology services related to cloud and digital climbed 9.3 percent. 

Also key: profits from ownership stakes in other entities grew 18 percent, especially from its minority interests in Africa and India and the share of profits from those investments. 

In fact, the minority interests drove higher cash flow than did the fully-owned operations. Where cash flow from Singtel’s fully-owned assets produced S$572 million in cash flow, the minority interests produced S$954 million in cash flow, though representing about 13 percent the volume of revenues produced by the fully-owned asserts. 

source: Singtel 

The point is that a portfolio of minority-owned assets can produce significant revenue, cash flow and profit, providing most of the actual revenue growth at the margin. Picking the right assets, in the right markets, matters. 

But the traditional, monolithic “branded” approach to assets is not the only way to attain growth. In fact, that approach is yielding slow to negative growth. 

Telcos long have believed they had to own and control, brand and manage, all their assets. That is not the only model. Looking at growth as including a portfolio of complementary assets not fully consolidated, controlled and managed, can work. 

The trick is to make the right acquisitions, while avoiding the temptation to own and control 100 percent of every asset. It sometimes is not needed, and not helpful.

5G is Being Adopted Faster than 4G

It is easy enough to find stories expressing worry about the “slow” pace of 5G adoption or even the business model. To be sure, there have been business model concerns since 3G, based in large part on the cost of acquiring spectrum. 

Like it or not, data bandwidth--and lots of it--is the driver of the modern mobile business. And that means additional spectrum has to be acquired, like it or not. Fundamentally, it is the same business model issue as fiber to the home represents: service providers would rather not invest the huge amounts of new capex, but it is a necessity to stay in business. 

5G also is an example of the adoption curve for virtually all new innovations, which are adopted in a “S curve” fashion. As far as new use cases, those will take some time to develop, as well, in part because Martec's Law operates. Technology changes faster than organizations change.  

In many cases, the issue is less “where is the new incremental revenue” and more “we get to stay in business.” The investment is fundamentally strategic rather than driven by a simple analysis of the cost versus financial return. 

So slow early adoption should not come as a surprise. 

Ultimately, without the FTTH upgrade, a fixed network services provider will be driven out of business by competitors able to supply gigabit per second speeds and large usage allowances. 

In the early days of any next-generation mobile network coverage always will be uneven, and taht means customer uptake will be uneven.  It always takes time--especially in bigger countries--to deploy the network nationally. 

In the case of 5G, the use of low band, mid band and high band spectrum is a new wrinkle, as potential speed boosts vary dramatically depending on which bands are available. Low band bandwidth is not going to vary much from 4G. Mid band will be faster and high band will be comparable to fixed network performance in some cases. 

In the U.S. market, mid band spectrum has been limited for all but one of the leading providers, while high band deployments also have been limited. So speed increases have been correspondingly low, compared to 4G. 

Also, very next-generation mobile network requires new devices. So it is not surprising at all that consumers say they have not yet already “bought 5G.” They need to buy new phones. In fact, it would be surprising if only 35 percent of U.S. customers actually own phones that are only capable of 4G network access, at this point, as reported in a survey by Speedcheck.org. 

Other surveys might suggest more than 60 percent of U.S. consumers to 75 percent of customers do not yet own 5G-capable devices. But that will change over time, as people replace existing devices.  

Other obvious barriers to adoption are “no 5G service in my area.”

source: Speedcheck.org

None of those issues are terribly worrisome or even new. We are early in the deployment of full national 5G networks by all the leading service providers and the device replacement cycle takes about three years, on average (half earlier, half later). 

For many of us, battery life drives the replacement cycle, and that is closer to two years. At least one survey found that battery life is more important than 5G, for example.  

Every next-generation mobile network requires new devices. So it is not surprising at all that consumers say they have not yet already “bought 5G.” They need to buy new phones. In fact, it would be surprising if only 35 percent of U.S. customers actually own phones that are only capable of 4G network access, at this point, as reported in a survey by Speedcheck.org. 

Other surveys might suggest more than 60 percent of U.S. consumers to 75 percent of customers do not yet own 5G-capable devices. But that will change over time, as people replace existing devices.  

None of those issues are terribly worrisome or even new. We are early in the deployment of full national 5G networks by all the leading service providers and the device replacement cycle takes about three years, on average (half earlier, half later). 

For many of us, battery life drives the replacement cycle, and that is closer to two years. At least one survey found that battery life is more important than 5G, for example. 

Still, 5G is inevitable. Most consumers will switch.

source: YouGov

5G arguably is being adopted faster than was 4G. It just seems “slow” because the networks still are being built.

What Will Permanent Remote Work Mean?

It is not exactly clear what employee  preferences for remote work say about the quality of office life (most people able to work remotely work in offices). Less clear is the environment people actually will have to encounter when they return to the office.  

But McKinsey has estimated that “more than 20 percent of the workforce could work remotely three to five days a week as effectively as they could if working from an office.” 

 source: McKinsey 

Different in-office work patterns that mean fewer workers in the office overall will have other repercussions than worker happiness, company culture, collaboration and productivity, though. 

In pre-Covid days, of  the workforce in advanced economies, between five percent and seven percent of workers regularly worked from home. A shift to 15 to 20 percent of workers spending more time at home and less in the office could have profound impacts on urban economies and even demand for mobile device services. 

In the U.S. market, for example, mobile service providers are pushing customers towards higher-priced unlimited usage plans, precisely at a time when more of us are spending less time “out and about,” and therefore connected to our home broadband and Wi-Fi, reducing the value of such unlimited usage plans. 

More sustainable remote work is going to reduce the value of such plans, as people will be consuming less data from the mobile network. 

More people working remotely means fewer people commuting between home and work every day or traveling to different locations for work. This could have significant economic consequences for  transportation, gasoline and auto sales, restaurants and retail in urban centers, demand for office real estate, and other consumption patterns, McKinsey notes. 

It is conceivable that network demand patterns could shift, with less growth in urban areas, less “commute time” demand and perhaps a bit more demand on suburban cell towers. But overall mobile data demand could grow less fast than previously expected, unless consumers change behavior and simply rely on mobile data all the time, without offloading to Wi-Fi. 

The degree of shift hinges on the percentage of workers, and the percentage of work time, that shifts to remote sites. Lots of people appear to want to work remotely on a permanent basis. Of the people polled by Reed.co.uk, a recruitment website, 35 percent said that they were willing to take a pay cut in exchange for permanent remote working. 

The poll of 2,002 working adults probably is not structured to represent a sample replicating the entire population of workers who could work remotely on a permanent basis, but is in line with virtually all other surveys I have seen on that question. 

Work-life balance probably explains some of the sentiment. Some people, in some jobs, might find they prefer the flexibility of working from home. Others might be the sort of workers most bosses fear: unmotivated and less productive when not seen. 

 source: McKinsey 

The point is that our forecasts of mobile data demand might have to be revised if lots of remote work becomes permanent. Mobile service providers might even find their profit margins improving--in addition to average revenue per account--if customers are on higher-priced plans but usage does not require such plans. 

Then the issue becomes how valuable price certainty is, compared to the ability to buy lower-priced plans with a bit more uncertainty. It is too early to tell how demand might shift if robust remote work on a permanent basis were to develop.

Perceptions of Network Asset Value are Evolving

As more private equity and institutional investment funds ponder taking stakes in digital infrastructure assets--including access networks, data centers and fiber backbone assets--we will have to see where the operator comfort level lies. Few have fundamental qualms about divesting tower assets. 

The issue is how much broader involvement in entire core or access assets could occur. Traditionally, private equity investments  have been concentrated elsewhere, especially in real estate, energy assets, business services and software. But telecom infrastructure investments have been growing. 

source: Toptal 

Telecom transactions accounted for 35 percent of total private equity infrastructure deal value in 2020, up from 15 percent a year earlier, Preqin data shows.

Telecom deals involving towers, fiber and data centers are now viewed as possible holdings in the alternative assets portfolio, which generally focuses on  transport, energy and utilities.

source: S&P Global, Prequin 

The trend has been in place and growing for some time, sometimes driven by the traditional “fix and sell” (leveraged buyout, consolidate assets, flip to strategic buyer) model, but with some increasing longer-term holding as well, where private equity might take a minority stake in an operating company without plans to flip the stake in less than six years.  

source: Columbia Business School 

Recently, some big divestitures of whole networks, accounts and infrastructure have occurred, primarily revolving around rural and less-dense fixed networks. Lumen Technologies recently divested about half its fixed network assets, for example. 

And increasing attention seems to be paid to operating assets more efficiently, a traditional driver of private equity investing strategy. 

source: S&P Global, Prequin 

Asset reshuffling tends to be rather common in the connectivity business, with occasional bouts of merger unwinding. Consider the proposed sale of Lumen fixed network assets to Apollo Global Management.   

Basically, the deal unwinds the merger of CenturyLink and Qwest fixed network assets (more an acquisition by CenturyLink of Qwest) in 2011. What remains for Lumen are the original Qwest local exchange operations, plus networks in Florida and Nevada that were not part of Qwest.

Perhaps more important is the Lumen retention of the former Level 3 Communications assets. The proposed deal still leaves Lumen a bit of a hybrid: operator of large tracts of rural fixed networks, plus a handful of tier-two cities, as well as a global enterprise services network. 

source: Lumen

The larger point is that different financing mechanisms for core telecom infrastructure might be entering a phase where there is more “burden sharing” than in the past with private investors. 

That might be far more successful than regulator-forced sharing.

Home Broadband ARPU is One Thing, Prices Another

Nobody will be surprised that U.S. households are buying fewer service bundles featuring internet access and a linear TV subscription. According to Parks Associates, buyers of such bundles have decreased since 2017. 

It might be more significant that home broadband average revenue per account is rising, up to about $65 per account in the second quarter of 2021. 

source: Parks Associates 

In part, that increase in ARPU is the result of consumers upgrading service plans to faster tiers of service, notably at the fastest tier of service. 

source: Openvault 

In the second quarter of 2021 it also was clear that many fewer customers were buying service at speeds below 50 Mbps. Also, retail prices tend to creep up annually, so that makes a difference as well. 

source: Openvault 

It also can be argued that home broadband costs actually have fallen, adjusting for inflation. That might be especially true for the  plans most people buy. Also, home broadband prices have fallen while other consumer product prices have climbed. 

Reemergence of "Structural Separation?"

Structural separation of retail opeations from network ownership was a bigger idea several decades ago than at present, even if a handful of markets have moved that way in a formal sense in Southeast Asia, Australia, New Zealand and the United Kingdom.

The key idea is to create an independent network faciltiies supplier and allow all retail service providers to use that one platform.

Whether mandated by regulators or as a business choice, wholesale access remains contentious in both fixed and mobile segments of the business. Over the decades, one has heard much criticism of the “I build it, you get to use it” argument from facilities providers selling wholesale capacity and services to retail competitors. 

Such complaints happen in a variety of settings, including mobile and fixed network wholesale; whether featuring mandated pricing set by regulators or market mechanisms; and by business strategy and market share (attacking or smaller facilities-based suppliers often see greater advantages than dominant providers). 

It remains unclear how attitudes of underlying carriers could change in the future, if greater functional separation of mobile or fixed assets were to occur, especially if it is not mandated by government authorities. 

In other words, if the ownership of access or core network  facilities continues to evolve, with greater ownership by private equity, institutional investors and other “patient” investors, how much could attitudes shift?

If “core” network assets are only partially owned or even divested by dominant retail suppliers, do attitudes also shift? If core infrastructure no longer is considered strategic by dominant suppliers--as unlikely as that might seem--do most, if not all retail service providers wind up having similar attitudes about the value of wholesale access and their business models?

As an example, what if BT Openreach is fully separated from BT? How does BT’s valuation of core network assets (access, especially) evolve? Does BT not acquire the same positon as any existing wholesale customer of Openreach?

Beyond that, what emerges as the core competency of a dominant retailer once ownership of the scarce access facilities is no longer an issue? The perhaps obvious answers are market share itself, installed name, brand name awareness and value, influence on the regulatory process, other complementary assets and so forth. 

Right now, the mobile virtual network operator business model provides some baselines. 

MVNOs are not legal in every market, but in some markets represent  significant portions of the installed base and market share. That is especially true in Europe. 

source: McKinsey 

Margin potential varies. Simple branded “resellers” who add little additional value also face the least risk, at the cost of expected profit margins. Basically, this business model relies on sales and marketing skill, as the basic “product” is sourced completely from a facilities-based service provider, with no fundamental differentiation. The reseller is not able to set its own retail prices. 

An MVNO operating as a “service provider” assumes more risk, for more potential reward.  A service provider operates its own direct billing and customer care operations and can set its own prices. Revenue is typically earned on outbound traffic. 

The “asset light” MVNO earns revenue on both outbound and inbound traffic, and is obliged to pay the underlying carrier on a pattern similar to the “service provider” MVNO. The main advantage is that this type of MVNO is free to add any sort of additional value and differentiation. 

A “full MVNO” itself supplies all of the infrastructure except the radio access network, which is leased from a facilities-based mobile operator. This model offers perhaps the highest ability to differentiate the user experience, with the highest amount of risk, however. 

As a rule, an MVNO has to have operating costs 30 percent or more lower than the host provider’s cost structure. Perhaps for that reason, the full MVNO model is rarely chosen. The center of gravity is arguably either the service provider or asset light approach. 

Much can hinge on the anticipated gross revenue and  profit margins to the wholesale services supplier. Bulk accounts have their attractions. If some customers want to defect to a lower-cost mobile virtual network operator--and that is the primary attraction for nearly all MVNOs--then supplying access to a retail competitor still makes business sense.

The underlying carrier makes revenue off a “lost” customer account. Some argue that asset-light MVNOs can earn higher profit margins than facilities-based retailers. 

source: Oxio 

If a dominant mobile service provider could achieve margins between 15 percent and 20 percent as do other light MVNOs, but avoid capex and opex, further boosting margins, would that not be a reasonable choice? 

And if so, the historic value of owning scarce access assets decreases substantially, perhaps nearly entirely. So the business model becomes more disaggregated.

Structural separation, in past decades mostly viewed as a regulatory solution, might eventually become a preferred marketplace solution.

What Zoom Fatigue Tells Us About the Present Value of Video Conferencing

For decades we have been told that video conferencing would be a useful replacement for face-to-face meetings or an enhancement of remote communications. That is true, up to a point. 

But, generally speaking, we are a long way from holographic telepresence that replicates the full sensory experience of communicating with a real person in real time, in person. 

The mass “remote work” social experiment caused by Covid has provided an actual test of the value of video conferencing--and its issues and limitations--over most of the past two years. 

And most of us might agree that it is a mixed blessing. 

Zoom fatigue--the feeling of exhaustion many feel after too many video conferences--seems directly related to the amount of time spent videoconferencing every day, a study suggests. The feeling of burn out 

source: Meetric.app 

There are physiological reasons, including the fact that cognitive load during a video conference is higher than would be the case for a face-to-face, in person meeting, scientists at Stanford University say. Other researchers agree that video conferencing requires  higher cognitive load.  

Video conferencing also inhibits the non-verbal clues humans use when communicating in person. So people are working harder to figure out what is going on. 

Another study suggests that 49 percent of videoconference users report feeling “exhausted” after video conferencing. 

source: Virtira.com 

Many surveys show that remote workers participate in more meetings than when they are in the office. And there is some evidence that younger workers experience more fatigue than older workers, according to a survey of 1700 employees and managers surveyed by Virtira. 

source: Virtira.com 

Video conferencing has a way to go before it can hope to avoid Zoom fatigue.