Fixed Network Revenue Already Walks on Two Legs: Will Mobile Follow?

One need not agree that the cable TV industry is imploding to agree that the industry’s revenue sources are changing in fundamental ways. 

In fact, the cable industry and the rival telephone industry seem to be converging on a similar revenue foundation, at least in the fixed networks business, in the consumer segment.

Consider Google Fiber, which offers two services, namely Internet access and video entertainment. And look at total subscribers in the U.S. video and fixed network business.

Already, the number of high-speed Internet access customers is closing on parity with the number of people buying video subscription services, in the U.S. fixed networks business.

It will take some time for the mobile business to reach the same revenue source pattern we are seeing in the fixed networks business in developed markets. The contribution of voice services to total EMEA service revenue, for example,  will decline from 47 percent to 39 percent through 2017, according to Analysys Mason.

Likewise, a disproportionate share of global revenue growth will be driven by the Asia Pacific region, where non-messaging mobile data will contribute almost 82 percent of the overall increase in worldwide service revenue, according to Analysys Mason.

APAC telecom revenue will grow at a four percent CAGR, with mobile data revenue equaling mobile voice revenue in the APAC region by 2017.

The reasons are quite simple: voice revenue is plunging, while Internet spending is growing, as is video entertainment.

Tablets Top Long Forrm Viewing on Connected Devices

It once was the accepted wisdom in the television industry that people really would not want to watch video on small screens. For the most part, most video still gets watched on PCs and TVs, rather than tablets and smart phones.

But the amount of video consumed on small screens keeps growing. One indication of changing preferences is the amount of long-form video viewed on mobile phones and tablets, compared to PCs and connected TVs.

Global Telecom Revenue Will Grow 2.7% Annually, Through 2017

Worldwide telecom revenue will grow at a 2.7 percent compound annual growth rate between 2012 and 2017, according to Analysys Mason, representing movement from US$1.9 trillion in

2012 to US$2.1 trillion in 2017.

In developed markets, growth will come from mobile non-messaging data services and new services, since mobile voice and mobile messaging services will become commoditized.

In emerging markets, service providers will grow by adding significant numbers of new customers, Analysys Mason argues.

Total telecom revenue in the Europe, Middle East and Africa  region is forecast to grow at a 1.2 percent CAGR from 2012 to 2017, driven largely by revenue growth in the Middle East and Africa.

The contribution of voice services to total EMEA service revenue will decline from 47 percent to 39 percent through 2017.

Non-mobile video services will see a 5.8 percent CAGR, while region capital investment grows

at a 0.5 percent CAGR.

A disproportionate share of global revenue growth will be driven by the Asia Pacific region, where

non-messaging mobile data will contribute almost 82 percent of the overall increase in worldwide service revenue.

Telecom capital investment will grow at a CAGR of 1.7 percent globally between 2012 to

2017, Analysys Mason says.

Capex growth will be strongest in the Asia-Pacific and Latin American regions, but Asia-Pacific and EMEA will account for 66 percent of the total spending through 2017.

APAC telecom revenue will grow at a four percent CAGR, with mobile data revenue equaling mobile voice revenue in the APAC region by 2017.

Capex will grow at a 2.5 percent CAGR in APAC, mainly driven by mobile network deployments.

Revenue in North America will grow at a 2.3 percent CAGR between 2012 and 2017, with growth driven by the mobile segment.

Capex in North America will grow at a 1.8 percent  CAGR.

Telecom revenue in the LATAM region will grow at a 4.9 percent CAGR, lead by mobile service revenue. The number of subscribers in the LATAM region will grow at a 4.6 percent CAGR.

Carrier Voice and Messaging: Should Service Providers Harvest or Invest?

What strategy should fixed line telcos and mobile service providers take towards their legacy voice and messaging revenues? Should they invest more and add features to revamp the products, or essentially harvest them?

In fact, some might say the problem is stark: can anything be done to arrest the decline of voice and messaging revenues?

The question is far from academic, and far from new.

The same questions could have been asked about long distance revenues in the decades following 1984, in the U.S. market, when a long and persistent decline in voice revenue began.

One might argue that the same fundamental question was relevant: what can or should be done to enrich and remake long distance service to reverse the revenue decline? Can “long distance” be recreated to produce new products?

In many ways, the problem was even simpler than faced by service providers today. There were no convenient or usable alternative communication modes. There was no way to substitute email or instant messaging, text messaging, Google Hangouts or IP voice for long distance calling.

The challenge service providers face today is far worse. There are viable substitutes, including substitutes that arguably already incorporate multi-mode features (image, voice, text, image, video). Most of those substitutes are available to use for no incremental cost.

Nor, in the two decades following 1984, had mobile communications become a widespread, affordable alternative for voice communications.

Though it provides only one historical point of reference, the lesson is that virtually nothing could be done to halt the decline in long distance gross revenues or profit margin.

“Long distance” as a product simply reached a point of maturity, and began to decline, in part because monopoly supply was replaced by competitive supply, and then affected even more by the emergence of viable product substitutes.

To be sure, suppliers can attempt, and advisors can recommend, that any number of things be done to upgrade and reshape the value proposition for carrier voice and messaging. That is the essence of the “don’t be a dumb pipe” advice.

For example, Telco 2.0 analysts argue that telcos could salvage about $80 billion of potentially lost voice and messaging revenue globally by taking a new approach to retail prices and bundles, service enablement, use of WebRTC and VoLTE, creative approaches to own brand OTT services, and a greater focus on enterprise communications.

Those efforts could slow the decline of voice and messaging revenues and allow telcos to build new communications services for both consumer and enterprise customers, many will argue.

Up to a point, that advice might produce results. But history is a stern taskmaster. Virtually nothing, in a far-easier competitive environment, “saved” long distance. Instead, the business simply was harvested.

That, in fact, is largely what service providers now do for international long distance. In some markets, such as within the boundaries of the United States, “long distance” has disappeared as a product, and is simply a feature of calling.

Some might argue that is, in the end, what will happen with carrier voice and messaging. In fact, some carriers already have moved to price the features that way. Verizon Wireless and AT&T Mobility, as part of their shared data plans, simply make unlimited domestic voice and text messaging a basic, unlimited-use feature of network access.

That doesn’t mean the end of what any service provider might do to create new products or services incorporating voice or messaging, or making those features available to third parties, for a fee.

The issue, strategically, is the balance of harvesting and investing. Some might argue a firm faced with a mature product, in decline, should invest in growing new lines of business and creating new sources of revenue, rather than “overinvesting” in a product whose revenue prospects are challenged.

It’s an eminently practical issue. Globally, telcos could lose up to $172 billion from voice and messaging revenues in five years, according to researchers at Telco 2.0.

“We expect a total decline in voice revenues between -25 percent and -46 percent on a $375 billion base between 2012 and 2018,” Telco 2.0 says.

 

To be sure, mobile voice and messaging remain growth markets in developing countries and regions.

The issue is how much can be done in developed markets, in any of the legacy markets.

Few would argue that product life cycles exist, even in telecommunications, and that new revenue sources have to be developed and created.

The issue is whether “voice and messaging” are mature products to be harvested, or can be changed into new growth products.

We should get some indications of carrier thinking as the composition of capital investment evolves over the coming decade. For the moment, the notable changes are that although service providers will spend more on most equipment segments in 2013, the exceptions are voice, broadband aggregation, and video infrastructure, according to Infonetics Research.

That does not offer definitive proof about service provider strategies, as most efforts to add value to voice and messaging are software matters, not issues of hardware investment.

Global telecom capital investment is set to grow between 2012 and 2017 in absolute terms, though remaining relatively constant in percentage terms, according to the latest forecast by Infonetics Research.

To be sure, the visible changes are at a rather fundamental level, such as decisions to invest more in mobile infrastructure than fixed infrastructure, for example.

China Telecom, for example, the largest provider of fixed-line broadband access to the Internet in China, is likely to reduce its 2014 capital investment for fixed-line broadband Internet access infrastructure by 50 percent.

The reason is a need to shift investment to new Long Term Evolution 4G networks, to catch competitor China Mobile. China Unicom might have to consider such a shift as well.

Also, investment in developing region networks will make sense, because that is where the revenue growth exists.

Global telecom carrier capex is forecast by Infonetics to grow at a two percent compound annual growth rate from 2012 to 2017, reaching US$355 billion.

Much of the spending will be driven by mobile service providers through 2017, though spending by fixed network providers might shrink, a rather direct reflection of the fact that revenue growth is coming from the mobile segment.

Asia Pacific will remain the region with the highest capex spending through at least 2017.

To be sure, global telecom capital investment generally has risen since 1984, even excluding important mobile service provider spending on spectrum assets. That would not be surprising, given the vast acceleration of telecom services globally, especially since the 1990s.

Generally speaking, overall levels of capital investment will not necessarily offer clues about where service providers are investing to revamp core voice and messaging services. In fact, capital investment might not be the key indicator.

Verizon Wireless and AT&T Mobility, in their domestic U.S. operations, already have moved to make unlimited domestic voice and text messaging an unlimited use feature of access to the mobile network. That’s a “harvest” strategy.

None of that prevents either carrier from working on other growth initiatives involving voice and messaging, though.

But the challenge remains: how much effort and investment should be put into recreating voice and text messaging?

That is a different matter than whether mobile service providers should partner with over the top app providers, work on enterprise verticals, roll out voice that works natively on LTE, or further tweak retail packaging of voice and messaging.

Realistically, it might be quite difficult to recreate carrier voice and messaging in ways that can dramatically arrest the revenue slide. At this point in time, over the top alternatives might work well enough, for their intended purposes, to permanently limit further growth of carrier services.

There still are instances where carrier voice and messaging are superior alternatives, and people will use carrier voice and messaging in those instances. What is not clear is why most people would prefer carrier versions of over the top apps, which in any case would still be “zero incremental revenue” services.

How Long Until "Peak Text Messaging Revenue?"

In 2013, text messaging is  expected to generate in excess of $130 billion worth of service revenue for mobile service providers, with profit margins as much as 90 percent.

But whether 2013 turns out to be the peak year for messaging revenue, or whether that happens in 2014 or 2015, the peak is coming shortly.

The Global Mobile Consumer Survey predicts global text messaging revenues are expected to continue growing until at least 2015, reaching a peak of $159 billion.

Also, the study suggests, the relationship between text messaging and instant or social messaging is a bit subtle. In developed markets, there is a strong inverse correlation between instant messaging penetration and text messaging usage.

In markets where text messaging historically has been lightly used, social messaging usage is high. In Spain, for example, a typical subscriber sends just seven text messages a month, over the top messaging penetration and usage is high.

In France, where over the top messaging penetration is just 15 percent, an average subscriber

sends more than 250 texts per month.  In other countries, there is no clear correlation between

use of text messaging and use of over the top messaging.

In Germany, both text messaging and instant messaging are growing.

So what should carriers do about over the top substitutes for text messaging? As usual, the advice is to “reassess their analysis of and relationship with OTT.”

“Specifically, they should consider how to better monetize the growing popularity of IM, as part of a broad and growing suite of messaging solutions,” Deloitte says. Some mobile carriers have begun exposing network and data assets to OTT apps using application program interfaces,  allowing third parties to integrate their applications and services more closely with the

mobile device, subscriber information module and elements of the network.

That recommendation is fine, so long as the third parties agree to do so, see value and are willing to pay something for the privilege that the mobile carrier finds acceptable.

Some approaches involve supplying in-app advertising or billing services. Deloitte suggests unlimited use of instant messaging also will be popular with many users, and that service packages can be crafted to supply such access.

At the same time, carriers should work to add value to text messaging, which will remain a substantial business for some time.

Wi-Fi is Primary Way to Connect to Internet in 16 of 20 Countries

Wi-Fi has become an accepted part of the mobile carrier network, and is likely to become more important in the future, as more devices are able to connect both to Wi-Fi and carrier networks.

Nearly 66 percent of consumers in the United States report that they most often connect their smart phones to Wi-Fi networks as opposed to a mobile network when using the Internet, according to Deloitte’s Global Mobile Consumer Survey.

Most people across 20 countries use four to eight devices, most of which have Wi-Fi access, and people rely on Wi-Fi to connect those devices.

Furthermore, in 16 of 20 countries surveyed, Wi-Fi is the primary method of connecting to the Internet.

Those statistics illustrate both the important role Wi-Fi access now plays in the broad “connected device” business, and also indicates the potential for mobile service providers who create attractive connection plans for their customers.

The upside for mobile service providers is the opportunity to convince people to use the mobile network, thus generating more revenue, more of the time. The larger data bundles typically sold to Long Term Evolution subscribers are a major contributing factor to higher usage and also revenue.

In South Korea, for example, some 36 percent of 4G subscribers have a data allowance of 3GB or larger, compared with only nine percent for respondents using 3G. A similar trend is seen in the United States, Japan and Singapore.

At least some consumers say  they are spend more to get faster speeds, with 41 percent of respondents indicating that they would be willing to pay more for substantially faster speeds, with nearly 10 percent willing to pay up to $30 on top of their current rates.

Consumers who use 4G still seek out Wi-Fi alternatives for two reasons, though. There are times when using Wi-Fi means a better experience. Also, Wi-Fi is viewed as a way to save money by allowing use of more-affordable mobile data plans (by an 11 percent margin over their non-4G counterparts).

Although Wi-Fi is likely to remain the dominant form of connectivity, measured both by minutes connected and bits sent and received, consumers are likely to use mobile at least some of the time to connect their devices. They are also more likely to upgrade to a larger data bundle.

The point is that most of the devices people now use are equipped for Wi-Fi access, and people will use Wi-Fi most of the time, for obvious reasons: it sometimes offers a better experience and it also does not count against a user’s data plan.

Consumers in developed markets and urban professionals in developing markets on average own or have access to between four to eight devices.

A growing proportion of those devices are connected to a mobile network; especially smartphones and tablets and to some extent laptops. The GMCS shows that ownership of Internet-connected devices increased in all countries surveyed in 2012 and 2013.

By the end of 2013, more than 2 billion smartphones, 300 million tablets and one billion portable PCs are expected to be in use globally.

One trend likely to be prevalent among smartphone and tablet owners is multiple ownership of the same type of device. Across the countries surveyed, between 12 and 29 percent of smartphone users own or have access to more than one smartphone; similarly across tablet users, between eight and 29 percent own or have access to more than one tablet.

A main driver for multiple smart phone and multi-tablet ownership is likely to be device screen size. Of those that have a medium tablet, between 13 and 38 percent also own or have access to a large size tablet.

Maybe OTT Messaging Hasn't Visibily Cannibalized Mobile SMS Revenues, But Wait Until Next Year

Without much doubt, mobile messaging cannibalizes some amount of mobile end user use of voice services, text messaging or email. 

The issue is how much, and which services are benefiting from the changing behavior.

Itr is hard to prove a negative, in other words, how much slower mobile text messaging revenue has grown because people use social messaging on their mobile devices. 

Some, such as Portio Research, do not think mobile service providers actually have lost much revenue, so far, to social and mobile alternatives. That does not mean it is not happening, or will not happen in the future, only that revenue growth, though perhaps slowed, has not gone into reverse, yet.

That might provide scant comfort, as even Portion predicts revenue will start to decline, globally, in 2014.




Also, in some markets, all the mobile communication methods are used frequently. But network effects still are an inhibitor to wider use of various social messaging apps. 

That's the problem with social mesaging: one cannot always be sure a message recipient is on the same network, a fact that continues to weigh in favor of text messaging, which has ubiquity in the mobile domain.