How Can Telcos Create New Value as OTT Cannibalizes Industry?

It will come as no surprise to anybody who follows the industry that value in the communications (internet) ecosystem is shifting from access to apps.

Access provider share of the ecosystem profit pool has declined from 58 percent in 2010 to 47 percent in 2015 and is forecast to fall further, to 45 percent in 2018, the World Economic Forum (WEF) says. Among the beneficiaries are digital content creation, distribution and aggregation companies such as Google, Netflix and Facebook.

Together with device manufacturers, the combined share of industry profits of these segments (apps and devices) is expected to increase to 40 percent in 2018, up from 29 percent in 2010.

“Telecom players, already lacking OTT businesses in this respect, face a real threat of being left to compete on two inherently contradictory fronts – price and throughput – that could put margins under further pressure,” says the WEF. “Telcos could be left to compete as IP-connectivity pure plays.”

“In the extreme scenario, increasing commoditization of the core offering could see margins drop to the levels of utility companies,” WEF says.

source: WEF

“Over-the-top (OTT) applications generate 50 percent to 90 percent less revenue for communications service providers,” the World Economic Forum says. “While the exponential rise in data consumption has provided some relief, this has not been enough to overcome the consistent decline in mobile voice average revenue per user (ARPU).”

Web-scale players such as Google, Microsoft and Facebook are moving quickly to fill key gaps in core telecom services and connectivity, as well. Google Fiber, Project Loon and Project Fi are examples of what Google has been doing.

Amazon and Apple have been making investments to make access from any available netrwork possible, moves that further reduce access provider account control.

Facebook is developing open source public network standards, in addition to the open source data center standards it already has developed, and is using.

All that is driving a search for new business models and revenue streams. The World Economic Forum believes that search will require strong collaboration with vertical industries and internet platforms.

In large part, competitive advantage in digital services and IoT will be driven by the capability to collect and analyse large pools of data specific to vertical-market use cases and to target value opportunities through customization of services and offerings, WEF says.

source: World Economic Forum

The biggest revenue opportunities for the global telecom industry will come from deploying next-generation networks and creating services beyond access, the World Economic Forum believes. The next generation of networks could be worth $440 billion, while apps and services beyond access could represent $650 billion worth of value.

WEF believes Internet of Things (IoT) solutions, consumer and enterprise digital services and communication leveraging natural human interfaces and augmented reality / virtual reality are the areas where new apps will develop.

WEF believes virtualization and an abstraction of the physical hardware layer, to create self-optimizing and secure zero-touch networks will represent the value from next-generation networks.

source: World Economic Forum

IoT, Virtualization Will Drive $1.3 Trillion in Industry Value Over 10 Years, WEF Says

The biggest revenue opportunities for the global telecom industry will come from deploying next-generation networks and creating services beyond access, the World Economic Forum believes. The next generation of networks could be worth $440 billion, while apps and services beyond access could represent $650 billion worth of value.

WEF believes Internet of Things (IoT) solutions, consumer and enterprise digital services and communication leveraging natural human interfaces and augmented reality or virtual reality are the areas where new apps will develop.

WEF believes virtualization and an abstraction of the physical hardware layer, to create self-optimizing and secure zero-touch networks will represent the value from next-generation networks.

source: World Economic Forum

Is Verizon Seriously Considering Sale of its Whole Fixed Network?

Is Verizon contemplating selling its whole fixed network infrastructure? Can it do so, and who are the potential buyers? That would have to be among the potential outcomes if Verizon really is contemplating a purchase of Charter Communications.

The rumored Time Warner merger with Charter Communications likely would be viewed as a horizontal merger, not a vertical merger, as AT&T proposes with its acquisition of Time Warner. That is going to be a tougher sell, to regulatory and antitrust authorities, without huge asset dispositions.

Charter passes 48 million homes. Verizon passes some 27 million homes, with significant overlap in New York, Maine, Massachusetts, New Jersey, Virginia, Pennsylvania, Rhode Island, Connecticut and Delaware. In other words, asset dispositions across most of the Verizon footprint would be expected.

Assume there are a total of about 135.7 million total U.S. homes. Charter passes about 35 percent of U.S. homes, arguably at the limit of traditional antitrust thinking (roughly 30 percent has been a rule of thumb for any single provider). Assuming only half the Verizon homes overlap, that still leads to a Verizon-Charter homes passed count somewhere in the neighborhood of 61.5 million homes, or about 45 percent of total.

It is hard to see antitrust authorities approving that large a footprint. Or, of course, Verizon might contemplate spinning off its entire telco footprint, relying on the hybrid fiber coax network for fixed network access. That would be a huge change for Verizon, but is possible, in principle.

So does Verizon sell its telco assets, and keep the Charter assets, or sell the cable assets, which are said to be the reason Verizon wants Charter in the first place?

In other words, does Verizon contemplate (and who would buy) divestitures of most of its fixed network?

AT&T, Verizon Quarter Revenue Slips

Both AT&T and Verizon reported lower revenue in their most-recent quarterly reports, but that might not be the bigger story. AT&T arguably has done a better job than Verizon at entering big new businesses that move away from the legacy “communications” business. And even if both firms remain largely U.S.-based businesses, future growth almost has to involve more international expansion, something AT&T has begun and Verizon has yet to embrace.

That also assumes that new domestic internet of things and machine-to-machine services also emerge in significant fashion.

But there are many wild cards. At least in principle, 5G-enabled fixed wireless might allow telcos to compete more effectively against cable companies in the internet access and video businesses, out of region as well as in region. While that would not change the strategic situation, it could help marginally in terms of bolstering the legacy businesses.

The maturation of the legacy communications business--including even mobility and mobile data--is obvious.

AT&T had a slight revenue decline in the final quarter of 2016, while Verizon Communications Inc. posted a 5.6 percent revenue decline in its fourth quarter of 2016, something Verizon executives had several quarters ago suggested would be the case.

Expected organic AT&T results for 2017 (without Time Warner) include consolidated revenue growth in the low-single digits, AT&T says.

Verizon reported $23.4 billion in mobile revenues and $7.8 billion in fixed network revenues. Of that amount, retail consumer revenues were $3.2 billion. Verizon executives expect revenue and profit in 2017 will be little changed from 2016.

It is in the video entertainment area that AT&T has shown the greatest move into big new product segments. In fact, video dwarfs AT&T’s consumer internet access and voice businesses.

Video entertainment now dominates AT&T consumer segment revenue, contributing about

73 percent of consumer segment non-mobile revenues. Internet access represents 14 percent of consumer revenue, while “other” revenues including voice generate nearly 13 percent of entertainment group revenue.

Both Verizon and AT&T have enterprise businesses that are flat to declining.

AT&T’s business segment contributes $18 billion (of which $10 billion is mobility revenue). AT&T’s entertainment group--which includes internet access, video entertainment and fixed network voice services, contributes $$13.2 billion worth of revenue.

Consumer mobility represents about $8.2 billion in quarterly revenue, international services a bit less than $2 billion.

AT&T’s total mobility business (aggregating business and consumer segments) generated nearly $19 billion.

Verizon’s enterprise business represents about $4.6 billion in quarterly fixed network revenue.

source: AT&T

New FCC Chairman Emphasizes Investment to Erase Digital Divide

In one of his first public remarks since being named chairman of the Federal Communications Commission, Chairman Ajit Pai reiterated his commitment to closing the digital divide, a theme he talked about when an FCC commissioner.

“I believe one of our core priorities going forward should be to close that (digital) divide; to do what’s necessary to help the private sector build networks, send signals, and distribute information to American consumers, regardless of race, gender, religion, sexual orientation, or anything else,” said Pai.

In the past, Pai has talked about creating investment zones to promote investment in internet access facilities in urban areas, for example. That is likely to be proposed in the new FCC administration as policy.

Hyperscale App Providers Drive Global Undersea Demand

Some themes never change, in the undersea or long haul transport business: new cables are lightly loaded, but eventually reach capacity, requiring upgrades; prices per unit keep falling and demand is driven by over the top application providers.

But one important change has happened. “Content providers are removing a large portion of the customer base,” says Brianna Boudreau, TeleGeography senior analyst. That “makes the rest of the market extremely competitive.”

In other words, despite huge increases in capacity requirements every year, most of that growth is “private capacity,” used directly by the likes of Google and Facebook, and not part of the “public networks” market (that capacity is not purchased from a public networks supplier).

“Now networks are being built by hyperscalers,” says Tim Stronge, TeleGeography VP. That is a historic change.

On Latin American routes, about 70 percent of total traffic now moves over private networks. In other words, only about 30 percent of undersea, long haul traffic actually is sold to customers who use “public” networks,  according to Erick Contag, Globenet CEO.

On trans-Pacific routes, OTT app providers also are driving demand, accounting for about 33 percent of lit demand on the “public” networks, says Jonathan Kriegel, CEO Docomo Pacific.

In effect, there now are three major business models in the subsea business: resale, presale or organic use, according to Michael Rieger, TE Sub Com VP. Resale is what we used to call the public networks model of selling capacity and services to business or consumer end users, either wholesale or retail.

Presale is another model in the subsea business, where anchor tenants agree to buy capacity in advance, before the network is built. That is a form of long-term wholesale or investment sharing. “Everyone becomes a partner,” says Nigel Bayliff, Acqua Comms CEO.

The newest model is private networks, where an entity (typically an application provider) builds a network entirely for its own organic use.

Most undersea cable systems serving Latin America, for example, presently are running at no more than 20 percent utilization, according to Erick Contag, Globenet CEO, but will run out of capacity by 2023.

Demand for capacity is growing about 40 percent per year, driven largely by capacity demand from  OTT app providers.

Why Subsea Networks Measure Cash Flow, Not Profit

Marginal cost pricing is now, and has been, a huge business model problem for capital-intensive communications infrastructure providers. Marginal cost pricing involves selling incremental units at incremental cost to produce those units, not including the amortization of the actual network build.

The hope is that the seller eventually can recoup sunk costs eventually. Whether that actually works is increasingly the issue for communications infrastructure.

Indeed, some already argue that tier-one telcos do not recover their cost of capital, perhaps an indication that marginal cost pricing is dangerous to the long term health of the industry.

That is an issue, according to Eric Handa APT Telecom CEO.  As a rule, suppliers hope to recover their capital investments in three years. That hardly ever happens, says Handa. In other words, cash flow is the key business requirement, as most subsea--and possibly many other access networks--will never recover capital investment amounts.

Suppliers “need to recognize that loss and sell to cover future opex,” says Handa. That is why, these days, one sees the use of “earnings before interest, taxes, depreciation and amortization,” a measure of cash flow, and not a measure of “profit” in a “generally accepted accounting practices” sense.

That should provide a warning for regulators: modern communications networks are expensive and might no longer be “profitable.” Policies that make harder the task of sustaining cash flow (not even profits) will burden suppliers that already are not “profitable” in the old sense.