Will Carrier Cost Reduction Efforts Boost Channel Sales?

Historically, the reason telecom and information technology providers have used indirect distribution (channel partners) is because they cannot afford to sell direct, using internal sales forces.

The reason major service providers use mass media and retail channels to reach consumers has the same business drivers. Service providers cannot afford to sell direct to the mass market, and cannot actually rely on channel partners, either, as there is not enough revenue per account.

Retail stores, on the other hand, which generally are a form of direct sales--and more importantly a fulfillment mechanism--are necessary because few customers are completely comfortable buying devices “sight unseen.”

But as tier-one service providers continue to face a need to reduce costs, it is possible that reliance on channel partners for an increasing portion of overall sales efforts is possible.

The reason is drop-dead simple: as profitability becomes tougher, and aggregate sales volumes decline, “cost of sales” also must drop. Reliance on channel partners is one way to do so.

Consider recent developments at CenturyLink, which plans to lay off seven percent to eight percent of its fixed network workforce by the end of 2016.

CenturyLink revenue fell 0.7 percent in 2015 to $17.9 billion. Analysts project revenue will decline two percent in 2016, according to Bloomberg. So revenue is shrinking.

So CenturyLink--like any other business--has to match costs to expected revenue. “We all understand the pressure caused by the decline in our legacy revenues; it creates a $600 million negative impact on our business each year,” said Glen Post, CenturyLink CEO.

“While we continue to see positive growth in our strategic products, the profit margins of these strategic products and services are considerably lower than those associated with the legacy revenue we are losing,” Post added.

source: Seeking Alpha

CenturyLink faces some of the same issues Frontier Communications an Windstream face. All are former rural fixed network telcos that grew and repositioned, in major ways, as business specialists.

But all three firms are fixed network only operators, in a market where mobile drives revenue growth in the broader market. None of the three firms own mobile revenue streams.

AT&T has become one of the biggest linear video providers in the U.S. market by virtue of its acquisition of DirecTV, and many believe the company will deemphasize fixed network linear video services in favor of satellite delivery.

So the big challenges include how to restructure their businesses for potentially-smaller gross revenues and lower profit margins in the mass market portions of their businesses.

Stranded asset issues are going to grow, as well, as fewer customers deliver revenue to support fixed costs.

So it is not a surprise that CenturyLink is trying to reduce its operating costs. It has to do so. A shift to greater reliance on channel partners would not be surprising, eventually.

Productivity is a Devilish Thing

Will automated trucking create more jobs than it destroys? Nobody knows yet. What is easier to say is that some jobs will be destroyed, and others created elsewhere. That tends to be the pattern for major waves of technology-driven change.

Driverless vehicles might directly affect millions of people.

In the United States, there were in 2014 about 1.8 million heavy-truck and tractor-trailer long-haul drivers, with employment growing about four percent a year, according to Bureau of Labor Statistics.

So there might be nearly two million long-haul truck drivers working, in 2016.

There might also be 1.44 million delivery truck drivers.

There might also be some 233,700 taxi drivers and chauffeurs, not including ride hailing drivers associated with firms such as Uber and Lyft, which could number as much as half a million.

Commercially-available autonomous vehicles should eliminate many of those jobs, while potentially creating new jobs in new areas. The issue is where the new jobs are created, and in what quantities.

It is almost certain that there will be no one-to-one correspondence between the specific jobs lost by specific people and the new jobs created elsewhere.

Productivity might be a good thing, but it also is a disruptive--and hurtful--thing for specific industries, firms and workers. Hence the need for adjustment mechanisms.

That is never easy.

One reason it often is “so hard to get things done” in politics is that it often is easier to identify “losers,” who are quite aware of their losses, than “winners” throughout the economy who cannot specifically identify the gains they make.

That means opposition to change is highly organized, while support for changes that benefit everyone, or most people, can be diffuse.

That has analogies in other areas. Productivity is good for nations and government revenues generally, but nearly always has negative consequences for highly-specific groups.

Ability to “do more with less” might be green, nearly always boosts general consumer economic well-being, but often is harmful for specific groups of workers or industries.

Lower prices for all manner of computing-assisted products benefits consumers and enables many new industries such as e-commerce, digital and social media. Conversely, suppliers of computing products and platforms find that prices always decline.

And many industry segments, and the people who work in those segments, can find that higher productivity also means lower revenues, fewer jobs and lower wages.

At a high level, it can be argued that major technology innovations eventually create new jobs at higher levels than destroyed jobs. But the gains and losses tend to fall on different industries, firms and people. Again, losses are clear, gains are diffuse.

Zero Rating, Lower Prices Change U.S. Mobile Customer Behavior

source: P3

Zero rating does change user behavior. As Facebook has argued, its Free Basics program, which allows mobile users access to a bundle of apps without the need for a data plan, dramatically increases use of mobile Internet apps and creates demand for mobile Internet access.

It now appears that similar programs such as the T-Mobile US "Binge On' program, which zero rates use of video streaming services, also increases usage of streaming apps.

As economic theory also suggests, lower prices for some product in demand will stimulate usage. And that seems to be happening in the U.S. mobile market, as the return of "unlimited usage" plans and bigger usage buckets at lower prices per gigabyte seem to be spurring customers to use more mobile data.

That can be seen most clearly in new research about the amount of mobile app use happening when connected to mobile networks, compared to Wi-Fi networks. Simply, U.S. mobile users are showing more preference for accessing mobile apps when on the mobile network, than when on the Wi-Fi network.

That could indicate less reluctance to use favor apps on the go, since data consumption now is less an issue than before. For users of data plans with zero-rated video streaming, that likely also means customers are not as concerned about data charges, so see no need to flip to Wi-Fi access to avoid such charges.

That might come as a surprise. Most projections about mobile customer use of Wi-Fi suggest the percentage of Wi-Fi connection time is growing, compared to use of mobile network connection time.

And while that might still be true as a general statement, U.S. users of mobile apps seem to be spending more time using the mobile network than Wi-Fi, according to a study conducted by P3 and commissioned by Fierce Wireless.

In the United States, Wi-Fi's share of mobile app connection time has been declining since the beginning of 2016.

source: P3

In January, some 60 percent of the time Verizon subscribers were using a mobile app, those interactions used a Wi-Fi connection.

By August, mobile app use when connected to Wi-Fi dropped to 52 percent.

In January, Sprint subscribers used Wi-Fi for apps 56 percent of the time. By the end of August, Wi-Fi was used for apps 45 percent of the time.

T-Mobile US customers had the smallest decline in Wi-Fi usage for apps.

In January, Wi-Fi connections supported 40 percent of app usage time. By August, that figure was 39 percent.

Users of all the studied networks consume more data on Wi-Fi compared to the mobile network.
Only T-Mobile US customers spend more time using apps on the mobile network. Analysts at P3 believe that is a direct result of T-Mobile US “Binge On” plans that do not count streaming consumption against a data usage plan.

Verizon users show the fewest app sessions, lowest total data consumption and least amount of usage time among the four top U.S. mobile operators. T-Mobile US subscribers are the heaviest users across these categories.

Some would suggest that is because Verizon generally is considered to have the highest prices of the four carriers, while T-Mobile US has been the most-aggressive on price over the past several years.

Basic economic theory suggests that when a supplier lowers the price of some product in demand, customers buy or use more of that product.

The price war now raging in the U.S. mobile market has meant the return of "unlimited use" and "more for your money" plans. That, in turn, seems to be changing consumer behavior, at least where it comes to use of mobile apps.

The other possible contributor to change in behavior is widespread access to faster 4G networks. Where in a 3G environment Wi-Fi tended to be faster than the mobile network, it now often is the case that 4G is faster than Wi-Fi.

To the extent that users switched to Wi-Fi for reasons of speed, that makes less sense, now.

Also, to the extent that users switched to Wi-Fi to conserve usage, the unlimited features and lower cost of mobile data, with bigger buckets of usage, barriers to use of the mobile network also have fallen.

source: P3

CenturyLink Faces a Key Strategic Problem

In some ways, it should come as no surprise that CenturyLink plans to lay off seven percent to eight percent of its fixed network workforce by the end of 2016. Revenue is falling and new revenue sources are not big enough, nor feature high enough profit margins, to offset the legacy losses.

It is not the only firm to face those problems. Virtually all U.S. fixed network operations face the same fundamental problems.

CenturyLink revenue fell 0.7 percent in 2015 to $17.9 billion. Analysts project revenue will decline two percent in 2016, according to Bloomberg. So revenue is shrinking.

“We all understand the pressure caused by the decline in our legacy revenues; it creates a $600 million negative impact on our business each year,” said Glen Post, CenturyLink CEO.

“While we continue to see positive growth in our strategic products, the profit margins of these strategic products and services are considerably lower than those associated with the legacy revenue we are losing,” Post added.

source: Seeking Alpha

CenturyLink faces some of the same issues Frontier Communications an Windstream face. All are former rural fixed network telcos that grew and repositioned, in major ways, as business specialists.

But all three firms are fixed network only operators, in a market where mobile drives revenue growth in the broader market. None of the three firms own mobile revenue streams.

AT&T has become one of the biggest linear video providers in the U.S. market by virtue of its acquisition of DirecTV, and many believe the company will deemphasize fixed network linear video services in favor of satellite delivery.

So the big challenges include how to restructure their businesses for potentially-smaller gross revenues and lower profit margins in the mass market portions of their businesses.

Stranded asset issues are going to grow, as well, as fewer customers deliver revenue to support fixed costs.

So it is not a surprise that CenturyLink is trying to reduce its operating costs. It has to do so.

Sabrina Brady's "My Best Day Ever"

Sabrina Brady's "my best day ever" doogle for Google. Indeed. 

source: Google

Tier-One Telcos Do Not Recover Their Cost of Capital

source: PwC

There is a very good reason why tier-one service providers are working so hard to drive down their capital investment and operating costs: they must do so.

In fact, at least one analysis suggests tier-one service providers have not been recovering their cost of borrowed capital for a decade and a half or more.

Researchers at PwC studied the financial performance of 78 fixed-line, mobile and cable operators with a collective annual capex of some $200 billion, nearly 66 percent of the industry’s total spend.

The research found that, over the past decade, the average long-term return on investment (ROI) has been just six percent.

That is three percentage points less than the cost of the capital itself. In other words, operating revenue is not covering the cost of capital.

Capital investments by telcos globally are growing slightly, according to researchers at Ovum. And that might not be a good thing, as much as investment underpins creation of next-generation networks.

The problem is that service provider revenues are not keeping pace with investment levels. That is one reason why Facebook and Google efforts to create lower-cost access network platforms are important: ISP cost needs to decline. If all facilities-based service providers can use the new platforms, they win.

On a global basis, telecom service provider revenues grew about one percent in the second quarter of 2016, year over year.

That growth is the first for service providers since the third quarter of 2014.

Industry capex over the last 12 months was roughly $340 billion, flat versus the prior two years.

Revenues have been falling, with the result that service capex levels are historically high, at about 20 percent of revenues.

5G Will Create a New "Fiber to Tower" Market

source: SNL Kagan

Among other things, 5G networks should dramatically expand what we have traditionally viewed as the “fiber to tower” backhaul market. There are about 300,000 macro cell sites in the United States and perhaps 200,000 towers.

It remains unclear how many 5G or 4G small cells ultimately will be built. But it is reasonable to assume almost all the growth will come from putting small cells on existing structures, not installing towers.

Looking only at service provider cell sites (not enterprise or consumer), millions of new sites will be added globally by about 2020.

If in some urban areas the density is roughly “fiber to every other light pole,”

If, as expected, millimeter wave small cells have a transmission radius of about 50 meters (165 feet) to 200 meters (perhaps a tenth of a mile), it is easy to predict that an unusually-dense backhaul network will have to be built (by mobile network standards).

In the past, mobile operators have only required backhaul to macrocells to towers spaced many miles apart. All that changes with new small cell networks built using millimeter wave spectrum (either for 5G mobile or fixed use, or for ISP fixed access).

Keep in mind that street lights are spaced at distances from 100 feet (30.5 meters) to 400 feet (122 meters) on local roads.

As a rough approximation, think of a small cell, in a dense deployment area, spaced at roughly every other street light, up to small cells spaced at about every fourth light pole.

That is a lot of new cells, with a low-cost backhaul requirement. That is why dense fiber networks now are seen as a business asset by Verizon and Comcast, for example. Very few other providers will be able to connect “every other light pole” to high-capacity backhaul, affordably.