Rapid Technology Cycles in Mobile Business Will Lead to Consolidation

It would not be unusual for any executive in a capital-intensive and highly-competitive industry to worry about rapid market changes that drive technology obsolescence, necessitating additional rounds of investment.

So some might point to the Indian mobile market, where the standard has been 2G, with relatively-slight investments in 3G, disrupted by a huge shift to 4G that essentially meant a leapfrogging of 3G.

Now operators confront coming 5G platforms just over the horizon, as well. Even before the capital investment hurdles become ruinous because of intensifying technology requirements, competition is driving smaller operators out of the market.

To support higher levels of investment, operators will need more scale, especially if payback periods are shorter than desired.

The other issue is a possible change in formerly-linear relationships between investment and revenue. You might argue that, in the voice era, additional usage brought incremental revenue at levels which were roughly in balance with the additional investment.

Some might argue that formula breaks down in the internet era, where investments in additional capacity do not produce anywhere near linear increases in incremental revenue. The net result is a process of consolidation that has multiple drivers (competition, capital intensity related to spectrum and network platform, faster pace of required investment).

All those trends tend to increase needs for scale, which is driving operator consolidation. More markets, aside from India, might face similar pressures, if not because competition is especially intense, then because the 5G upgrade cycle might be coming so soon after the 4G deployment.

Also, there is the nagging issue of wringing revenue out of mobile data services where increased usage does not grow revenue as fast as the consumption is boosted. That, simply stated, is why internet of things is so important. Such new services might well be the only way to sustain revenue growth.

source: Alcatel-Lucent (Nokia)

Need for Scale is Reshaping India Mobile Market

It would not be unusual for any executive in a capital-intensive and highly-competitive industry to worry about rapid market changes that drive technology obsolescence, necessitating additional rounds of investment.

So some might point to the Indian mobile market, where the standard has been 2G, with relatively-slight investments in 3G, disrupted by a huge shift to 4G that essentially meant a leapfrogging of 3G.

Now operators confront coming 5G platforms just over the horizon, as well. Even before the capital investment hurdles become ruinous because of intensifying technology requirements, competition is driving smaller operators out of the market.

To support higher levels of investment, operators will need more scale, especially if payback periods are shorter than desired.

The other problems include plunging profit margins, caused by Reliance Jio's market entry, which is leading to sharply lower retail prices. [\

The other issue is a possible change in formerly-linear relationships between investment and revenue. You might argue that, in the voice era, additional usage brought incremental revenue at levels which were roughly in balance with the additional investment.

Some might argue that formula breaks down in the internet era, where investments in additional capacity do not produce anywhere near linear increases in incremental revenue. The net result is a process of consolidation that has multiple drivers (competition, capital intensity related to spectrum and network platform, faster pace of required investment).

All increase needs for scale, which is driving operator consolidation.

Leading India Mobile Operators Could See 40-50% Drop in Revenues from Best Customers

With Reliance Jio saying it will meet and beat any other mobile data offers from its competitors, the Indian mobile market is in at least a momentary race to the bottom, in terms of mobile data pricing. Acting as the market disruptor, Reliance Jio has said it will beat any new public competitor offers, in terms of usage allowances, by 20 percent.

Some predict that  Bharti Airtel, Vodafone India and Idea Cellular revenues  from its best customers might plummet 40 percent to 50 percent as a result. That 30 percent of the customer base typically generates 70 percent of an incumbent’s total revenue, according to Kotak Institutional Equities.

Two decades ago, some observers of the Internet argued that was exactly what should happen, and would happen. “Information wants to be free,” many argued, a development with clear implications for media companies and content providers.

These days, zero rating of video and other content is a live issue. Other related activities, including Wi-Fi access, free use of software, retailing and transactions, open source computing and software, as well as much internet content show the trend is rather extensive.

Some have argued that mobile wants to be free, technology  wants to be free, For communications service providers, “communications wants to be free” is the fear.

That is a rational fear, as it turns out. Skype and WhatsApp provide examples of “free” (no incremental cost) substitutes for carrier voice and messaging. In many other areas--long distance calling, international calling, under-ocean capacity--prices have plummeted, on a cost-per-bit basis, and often also in absolute terms.

To be sure, many trends globally have driven down prices, ranging from deregulation and competition to technology improvements (Moore’s Law and its application) to the emergence of the internet.

source: Strategy &

To this point, retail telecommunications service prices have not plummeted, despite all those trends. But as the mobile marketing wars in India illustrate, margin compression is the rule, not the exception.

Half of U.S Mobile Consumer Time is Spent with "Communitainment" Apps

About half the time U.S. consumers spend with mobile apps is spent  with social, messaging, media and entertainment applications, according to researchers at Flurry. In fact, a goodly portion of “communications” now is communitainment: communication for the sole purpose of entertainment.

That category includes Facebook, Whatsapp, YouTube and Snapchat.

Flurry data suggests that U.S. consumers continue to increase their time-spent on mobile devices,   the average U.S. consumer spending five hours a day on mobile devices.

source: Flurry

The Solution for "Telcos Can't Innovate"

Whether in the business or consumer segments, tier-one telecom providers tend to agree they must “add value” to their connectivity services (“avoid becoming a dumb pipe”) by “moving up the value chain” (“moving up the stack”). It is a fundamental strategy, for simple reasons. In the Internet era, applications and access are formally separated.

The phrase “over the top” literally refers to the way all apps and services now are delivered, no matter which entity owns the particular apps and services.

The way some of us would describe the strategy is that “you have to own at least some of the apps that flow over your pipes.” In the consumer area, that might mean video services. In the business customer segments, that might mean information technology solutions.

NTT Data, for example, has rolled up a number of IT-providing businesses, becoming a bigger system integrator and information technology consultancy. For example, NTT Data has acquired Dell Services, Keane, Carlisle and Gallagher Consulting Group, Optimal, Intelligroup, Centerstance, giving NTT Data accounts, competencies and staff able to provide IT consulting and technology implementation and support (SAP, Oracle and Salesforce implementation, among other things), on a global basis.

NTT DATA arguably is strongest in healthcare, life sciences, financial services, manufacturing, and public sector verticals.

The oft-noted observation that “telcos are not good at innovation” arguably is largely true, but also less important than we often think. So long as managements do not meddle, acquired assets and people who are free to do their jobs will work. Those assets simply must be allowed to function as they must in the spheres where they operate, even if owned by new telco entities.

In other words, Comcast’s ownership of NBCUniversal assets is not a problem so long as content units are free to produce the best content they can, within the constraints of their business models. IT consultancies in various verticals can win, so long as they are allowed to succeed.

That arguably was more a problem in past decades, when acquired assets often failed because they were essentially bent to the needs of the access or transport business units. These days, there is far-wider recognition that the access and transport business units are there to support the applications units.

OTT Video Offers Telcos Better Business Model

Often, there are multiple reasons for deploying a new technology, none of them contradictory. For example, one might argue that fourth generation Long Term Evolution (4G LTE) was deployed to gain bandwidth advantages or higher speeds. One might also argue LTE made sense because it offered lower cost per bit.

Something similar is developing in the over the top video streaming space. OTT streaming most often is touted because it offers lower cost or more choice (on demand rather than linear access). For some service providers, a better business model now seems to be driving thinking.

AT&T, for example, acquired DirecTV for a number of reasons, including the ability to achieve a lower cost structure for cost of goods, a way to supply linear video nationwide without immediate local network upgrades and as a platform for OTT video as well. That lead to DirecTV Now, the streaming video service AT&T has launched.

Now other fixed network telcos, including CenturyLink and Frontier Communications, now are looking at OTT as well, but arguably for a different reason: OTT will boost profit margins, compared to IPTV. Consider the practical implications. Where today the service provider has to supply one or multiple decoders (capital investment), OTT simply uses the customer’s own computing devices.

OTT is provisioned online, using a simple web interface, where linear TV or IPTV require a truck roll (and installation labor), external drop and possibly internal wiring, plus set-up.

So OTT video might actually driven for “cost savings,” as much as end user demand.

AI is Being Used for Practical Reasons in Media, Content and Customer Service. IoT Will Use it Soon

It is hard to envision really-new things before they are available; something that Apple CEO Steve Jobs always insisted was the case with new products consumers had no experience with.  So it is with artificial intelligence, or machine learning. But there already are commonplace uses developing in the content, streaming and communications businesses.

Netflix, for example, plans to use artificial intelligence to improve image quality of its content, on a frame-by-frame basis. That has not been possible, affordably, in the past. Cheetah Mobile uses AI to produce individualized and curated content streams for its users.  Natural language processing obviously is used to support Amazon’s Alexa and Google Home.

In telecom, AI might typically be seen in customer operations, especially customer service apps. Artificial intelligence is implemented in automated online assistants that can be seen as avatars on web pages.

It is possible the widest and most-significant application of artificial intelligence will come in the internet of things areas, and therefore, would become vital for communications entities active in the application and platform parts of those businesses. The easy prediction is that AI will be used to wring meaning out of big data produced by sensors.

The more-interesting applications, if harder to envision, are advanced Iot networks that eventually could develop along the lines of the human internet. Technologist Kevin Ashton believes IoT eventually could feature sensors connected to the Internet and capable of making open, ad hoc connections with other servers,  sharing data freely and allowing unexpected applications, so computers can understand the world around them and become humanity’s nervous system.

In other words, the Internet of Things is not only a new way to gather facts but also a way to gather new facts and use them in new ways. That’s one more way AI will start to become something quite practical.