Will Mobile Consolidation Really Lead to "More" Competition?

It is unusually difficult to predict how proposed mergers such as Sprint with T-Mobile US in the U.S. mobile market actually will affect innovation, competition, investment or profits, as other significant providers are entering the market, while the market itself is changing.

Sprint and T-Mobile US will argue that combining Sprint with T-Mobile US will make for a stronger competitor more able to press attacks on AT&T and Verizon. Others think less competition (price, features, value) will be the result.

Either could happen. An argument can be made that either Sprint or T-Mobile US, or both, lack the scale to compete effectively in the coming market. If so, sustainable competition by three firms is better than a duopoly. Empirically, some will argue, recent T-Mobile US suggests robust competition might even be sustainable, long term, in the absence of any mergers.

Some might also note that market entry by Comcast and Charter Communications is going to add more competition, no matter what else happens, so any consolidation among the biggest four firms will not eliminate future competition from emerging, though the immediate scale of such market entry is likely to be slight.

Also unknown is how competitor advantages might change, or be harmed, as market growth shifts to non-human users. It is at least conceivable that this shift provides a chance for one or more contestants to reshape the market.

That noted, “too much competition” is the problem that particular merger between Sprint and T-Mobile US  is supposed to help fix. In other words, both those operators, and perhaps most observers, believe that such a merger will reduce price pressure and strengthen profits.

In other words, competition will lessen, not increase. In oligopoly markets there always is pressure to collude as much as compete. In the former scenario, firms really do not try to upset the market by launching price or value attacks to gain significant share, for example.

And oligopoly might be the ultimate fate of all telecom markets, fixed or mobile. That noted, competition still can happen.

Still, the whole point of industry consolidation is to eliminate competitors, gain scale and boost profits, in part because ruinous price wars are avoided.

Though perhaps not the best example of an oligopoly, the U.S. airline industry now has consolidated to the point where profits actually are generated more consistently than in the past. Of course, that also means fewer flights, fewer seats and higher prices.

Firms still compete, but arguably less aggressively than had been the case. Still, even oligopolistic markets can be disrupted if consumer demand changes dramatically, or if sources of value shift dramatically.

source: Harvard Business Review

There already is new evidence that re-emergence of unlimited usage mobile internet plans is affecting supplier profits.

The US mobile data services revenue had seen quarter over quarter growth for 17 straight years until the first quarter of  2017, for example, when growth went negative, notes analyst Chetan Sharma.

Cowen and Company Equity Research analyst Colby Synesael therefore notes that "new avenues of growth such as Mexico, content, media, IoT and 5G...can’t come soon enough."

Mike McCormack, Jefferies analyst, likewise notes that “the resurgence of unlimited plans...diminishes the ability to monetize growing data usage, removing an important lever of growth.”

Similar concerns are reasons why virtually all equity analysts favor mobile market consolidation. It is expected to reduce competitive pressures and allow price increases. The point is that equity analysts do not believe mobile market consolidation will, in fact, lead to more competition.

What Options for Telcos Moving Up the Stack into Connected Car Markets?

To the extent that Comcast’s acquisition of NBCUniversal offers a possible blueprint for how a telco moves up the stack, we are left to apply those lessons in other realms. In principle, telco efforts to get into complementary app or service businesses have taken several forms.

That will be relevant as at least some telcos enter connected car markets.

Perhaps the most common is the acquisition of smaller firms who have capabilities a telco can apply internally, to its own business. That is a vertical approach. Telcos acquiring or launching their own over-the-top IP telephony services or app stores provide other examples.

Some initiatives are quasi-horizontal, and quasi-vertical, intended to serve a broader range of potential customers than “current customers,” but also to add value to the carrier’s connectivity services.

IT consulting, mobile payments, banking, home security or over-the-top content services provide examples.

Bigger initiatives have tended to be of the horizontal type: data center operations, computing equipment.

It is not yet clear how moves into “connected car” or “smart cities” markets will happen. But a few observations from the way Comcast has used NBCUniversal, and how AT&T might use Time Warner, are instructive.

The acquisitions, though partly “vertical” (theme parks) are mostly “horizontal” (the content is sold to competitors, as well as sold internally, to Comcast cable TV operations).

That is akin to a connected car service or platform that can be used by every car manufacturer or fleet operator, smart lighting or parking services that can be deployed by any municipality or system integrator.

What Comcast has not done is acquire NBCUniversal and then make that asset a “captive,” “Comcast-only” asset. In part, that is because the law requires Comcast sell content even to other video distributors.

Though it will likely make sense to acquire some smaller assets that are “captive” and used vertically by by a single firm (provisioning tools, billing platforms, interfaces), the bigger upside will come from horizontal apps or services that can be broadly used by virtually all potential customers.

In other words, any future moves up the stack will do best when they are like other widely-used apps, offered independently of the owner’s own access platform.

Connectivity will drive some revenues. But most of the upside will likely come from "up the stack" applications and services offered horizontally (all carmakers, all fleet operators, all other access providers).

source: McKinsey

source: PwC

source: PwC

source: Juniper Research

Physical Reality Shapes Digital Business Models

Physical constraints often shape digital markets. That’s an old story for access providers, where infrastructure costs fundamentally shape what is possible. Put simply, access providers need to provide greater capacity at lower costs. That is what fixed wireless is about; what 5G is about; what DOCSIS 3.1 is about (gigabit internet access using a hybrid fiber coax network).

source: Saankhya Labs

It is a problem elsewhere, as well. Consider most forms of consumer online retail purchasing.

J.C. Penney CEO Marvin Ellison said an e-commerce company’s  "biggest challenge" going forward is that  the United States Postal Service, which presently is "the number one deliverer of U.S. e-commerce  today."

In addition to the sheer challenge of delivery, consumer behavior is shaped by costs.

It seems intuitively obvious that same-day delivery of online-purchased goods would increase rates of online buying. And that is what consumers suggested in a recent survey.

Some 52 percent of respondents to a Clouder.co.uk survey  said they would specifically choose a retailer that offered same day delivery over those that didn’t provide same-day delivery.

Some 67 percent  of participants would spend more if it meant they would get same-day delivery.

A caveat is that, though the results seem intuitively correct, one tends to get more-realistic indications of consumer behavior when looking at what consumers have done, not what they claim they will do. One big caveat is that delivery costs were not part of the survey context.

In other words, it is highly likely that consumer preferences would have differed significantly if the same-day delivery also featured higher costs, either for products purchased or for delivery charges.

One example: the survey found 36 percent of respondents said they would pay £10 to £15 “for same-day delivery when in a pinch.” That makes sense. All of us would consider doing so, when time really was of the essence, for a particular purchase. Perhaps few  of us would routinely oat that sort of premium for same-day delivery.

So one way of characterizing the survey results is that, when consumers pay no premium, they will most likely choose retailers offering same-day delivery over retailers not offering that choice.

When a premium is charged, fewer will actually behave in the way their survey responses suggest. At the margin, same-day delivery with extra charges will generate some incremental activity.

source: Clouder

Does 5G "Leadership" Matter?

In some counties, and for some companies, "leadership" in 5G is believed to matter. That arguably is the case for companies and countries that believe 5G creates big markets (internal or export markets). Such leadership might also be believed to matter for firms in markets where 4G opportunities are now saturated, and therefore growth limited.

For yet other firms, marketing leadership is the goal, as claims to "lead in 4G" now are erased.

Whatever the objective merits of such claims, it frequently is claimed in telecommunications that one or another country or region is falling behind, or behind, on some measure of information technology or communications. Sometimes, both “lagging” and  not "falling behind" claims are heard about the very same markets.

Recall that observers in Europe have expressed fears of falling behind since at least 2007. In other words, we have heard expressions of concern for a decade, based largely on perceived performance on 4G adoption metrics.

In some part, such claims represent concerns about private interests, as it always is the case that for every valid public policy, there is a corresponding private interest (financial winners and losers). Lagging adoption means less revenue for hardware, software or service providers, whatever other broad social and economic  benefits are said to be lacking and lagging.

Still, it is fair to note that, having considered themselves generally global leaders in the 3G era, infrastructure, app and service providers in Europe virtually all agree that was not the case for the 4G era, and is shaping up not to be the case for 5G, either, where most observers likely agree that Asia and North America appear poised to “lead.”

Such anxieties, some would argue, must be taken in perspective. It nearly always is possible to hear one group or another point out that the United States is “behind” the best performing countries (often including Singapore, South Korea, Japan, Finland and some others on measures of internet access speed, for example.

Also, over time, such differences become far less pronounced. In other words, “quantity” virtually never, on a long enough period of time, remains highly disparate.

It is more germane to argue that many observers believe measures of “quantity,” while useful, are not the same as the harder to measure issue of “quality.” Consider a now-non-controversial example:  use of voice services.

In the past, the United States has been said to be “behind” in spectrum auctions, behind in use of mobility services overall,

In voice adoption, the best the United States ever ranked was about 15th, among nations of the world, for teledensity. Still, virtually nobody considered that a real big problem. It was a problem for rural users, yes, but a problem “at the margin.”

There are a few good reasons for such rankings It is harder to connect everyone in continent-sized areas, and harder to connect everyone in areas of low population density. For such reasons, the United States has not, and never will, rank at the very top of teledensity  measures for fixed network services.

The point is that “quantity” is not always the most-relevant measure of “qualitative” impact. It may not matter whether a particular country ranks first, 15th or even 50th on some quantitative measure. The issue is that relevant benefits are obtained.

We tend to believe (without clear knowledge of causation) that widespread, high quality internet access promotes economic development, for example. We all certainly behave as though that were true.

But it actually is not possible to “prove” this is the case. It likely is equally true that high economic growth and high national incomes “produce” high use of internet and internet access, as to prove the case that high internet access “produces” high income or economic output.

The upshot is that however real the concerns about progress towards 5G, much can, and will, change, going forward. Moving early is not a guarantee of “ultimate success,” nor is “lagging” always a problem.

In fact, should big new markets not develop, moving early on 5G might prove financially dangerous.

source: we are social

source: we are social

IoT Spending Growing Fast From Relatively Low Bases

Global spending on internet of things (IoT) is forecast by IDC to grow 16.7 percent year over year in 2017, reaching just over $800 billion in revenue. By 2021, global IoT spending is expected to total nearly $1.4 trillion in spending on hardware, software, services, and connectivity, IDC forecasts.

The IoT use cases that are expected to attract the largest investments in 2017 include manufacturing operations ($105 billion), freight monitoring ($50 billion), and production asset management ($45 billion), according to IDC researchers.

Smart grid technologies for electricity, gas and water and smart building technologies are also forecast to see significant investments this year ($56 billion and $40 billion, respectively).

Smart home technologies are forecast to see 19.8 percent compound annual growth rates  (CAGR) between 2017 and 2021.

The use cases that will see the fastest spending growth are airport facilities automation (33.4 percent CAGR), electric vehicle charging (21.1 percent CAGR), and in-store contextual marketing (20.2 percent CAGR).

The industries making the largest IoT investments in 2017 are manufacturing ($183 billion), transportation ($85 billion) and utilities ($66 billion).

Horizontal investments such as connected vehicles and smart buildings will generate $86 billion in 2017 spending and rank among the top segments throughout the five-year forecast.

Consumer IoT purchases will be the fourth largest market segment in 2017 at $62 billion, but will grow to become the third largest segment in 2021.

Industries that will see the fastest spending growth are Insurance (20.2 percent CAGR), Consumer (19.4 percent), and Cross-Industry (17.6 percent).

From a technology perspective, hardware will be the largest spending category until the last year of the forecast when it will be overtaken by the faster growing services category, IDC argues.

Hardware spending will be dominated by modules and sensors that connect end points to networks, while software spending will be dominated by applications software.

Services spending will be about evenly split between ongoing and content services and IT and installation services.

The fastest growing areas of technology spending are in the software category, where horizontal software and analytics software will have five-year CAGRs of 29.0 percent and 20.5 percent, respectively.

Security hardware and software will also see increased investment, growing at 15.1 percent and 16.6 percent CAGRs, respectively.

At this point, any forecasts of global “smart city” or “connected car” markets out some decades (annual revenue, for example) necessarily are speculative. We simply have no way of making accurate predictions that far out.

Estimates of smart cities spending (as opposed to citizen or societal benefits) likewise are difficult to quantify.

Frost and Sullivan

What is Better for Consumers: Fewer or More Suppliers?

Would mobile operator consolidation produce more--or less--competition, in U.S. and other markets, and is less competition better for consumers? Such questions will, and perhaps must be asked, as market consolidation happens in at least some markets. India’s market already has begun the process, and the U.S. market is on the cusp of possible change of that sort as well.

The empirical record cannot be understood in advance of any changes, but arguments will be made--for and against--regarding consolidation of the number of market suppliers. In other words, some will argue, with some justification, that consolidation will lead to stronger and more robust competition.

The issue is that only a few providers actually can sustain themselves, long term, in mobile or fixed networks facilities business.

source: McKinsey

So the trick is creating a policy environment where enough competition exists to drive lower prices and consumer benefits, but also innovation and investment. You need both competition and investment.

What is Better for Consumers: Fewer or More Suppliers?

Would mobile operator consolidation produce more--or less--competition, in U.S. and other markets, and is less competition better for consumers? Such questions will, and perhaps must be asked, as market consolidation happens in at least some markets. India’s market already has begun the process, and the U.S. market is on the cusp of possible change of that sort as well.

The empirical record cannot be understood in advance of any changes, but arguments will be made--for and against--regarding consolidation of the number of market suppliers. In other words, some will argue, with some justification, that consolidation will lead to stronger and more robust competition.

The issue is that only a few providers actually can sustain themselves, long term, in mobile or fixed networks facilities business.

source: McKinsey

So the trick is creating a policy environment where enough competition exists to drive lower prices and consumer benefits, but also innovation and investment. You need both competition and investment.