Who Are the Key Telco Competitors?

Industry competitors normally pay money to track their market share versus their "real" competitors. The problem is that, in rapidly-changing and porous new markets, the legacy competitors--even when they are the most benchmarked firms--are not the strategic competitors.

These days, many service providers would say that "Google" or other app providers are their key competitors, even as they continue to benchmark against others in their "narrow" markets (mobile market share, or fixed network video or internet access).

The biggest single change in the internet value chain between 2005 and 2010, for example, was the shift of revenue from telcos to Apple, Microsoft and Google. Telecom providers lost 12 percent of profit, while Apple, Microsoft and Google gained 11 percent.

source: McKinsey

Nevertheless, the strategic issue is diminishing relevance. The "access to the internet" and associated service provider functions simply represent less value in the internet ecosystem, compared to apps, devices and platforms.

But sometimes, the traditional "narrow market definition" competitors really contribute to value loss.

In any ecosystem, one segment’s revenue is another segment’s cost. So when Reliance Jio says it saved consumers $10 billion in a single year, that also means the mobile and telecom industry lost $10 billion in annual revenue.

You would be hard pressed to name any single other competitor that has had that immediate impact and value destruction, in a single year.

You might say that is an example of Reliance Jio literally destroying the older telecom model and recreating it with new leadership and price points.

Tactically, Reliance Jio (a traditional competitor in the mobile or telecom market) has had the greatest impact. Strategically, app, device or platform providers will erode the most value, longer term.

source: GSMA

That impact on the Indian telecom market illustrates a key trend of competition and markets in the internet age: disruptors can emerge as leaders in older markets by literally destroying the existing markets. If you look at the impact of voice over internet protocols and over-the-top messaging, that impact is clear.

The legacy markets are shrinking, in terms of revenue, as usage skyrockets, with new leaders displace former providers. In many cases, the new leaders have business models other than service revenue, so use of the apps is provided for free.

Reliance Jio’s disruptive attack has destroyed $10 billion worth of annual service provider revenue, with consumers being the beneficiaries. That is a now-familiar pattern in the internet era. Consumers benefit, but most suppliers do not, as profit gets ripped out of most value chains and rearranged.

The range of threats are both tactical (narrowly-defined competition from other service providers) and strategic (shift of value and revenue from access to apps, devices, platforms).

New Communications Services Index Highlights Big Industry Changes

In September 2018, the  Standard and Poors Dow Jones Indices will broaden and reconfigure the “Telecommunication Services” sector to include some media and tech stocks, creating a new sector called Communications Services.

In some sense, the reorganization reflects the fact that consolidation has collapsed the former telecom index to overweighting to just three firms, too few, in other words, to constitute an index.

The change also reflects the mashup of the formerly-separate access services business with the content business. In addition to AT&T, Verizon and CenturyLink, the new index will include advertisers, broadcasters, cable and satellite providers, publishers, movie and entertainment companies and interactive home entertainment services.

In a broad sense, the change also shows the sweeping impact of new technology, deregulation and competition. Media, advertising, content and telecom have become so intertwined that Verizon and AT&T are both “communications” and “advertising and media” firms.

For the first time, firms such as Google and Facebook will be in the same index as AT&T and Verizon. So will the cable TV companies and Netflix.

Netflix, on the other hand, is both a content creator, packager and service provider. Amazon is a device manufacturer, video services provider, retailer and technology services provider.

In a narrower sense, the new index potentially will change price-earnings ratios, blending the low-P/E media firms with the average P/E telcos and the high P/E digital content firms.

In fact, some believe the Communications Services index will jump from the prior 10.4 P/E formerly held by AT&T, Verizon and CenturyLink (plus other smaller telcos), to perhaps 17.5 as digital content companies including Netflix, TripAdvisor Inc. Alphabet and Facebook.

source: Business Insider

On a broader philosophical level, the new index suggests the danger of regulating the formerly-distinct industries of media, advertising, applications, information technology and communications providers too narrowly.

The new Communications Services index suggests they now are interrelated, competing segments of a single new industry. Many practical questions will have to be addressed, as a result.

Broadly, we now see a mashup of former “common carrier” firms that were highly-regulated, with media, content and application and data processing firms that were unregulated, or covered under the U.S. Constitution’s First Amendment protection from government interference and control.

So one practical issue is whether the single new industry has the freedom of media, apps, content and computing, or is more regulated, even going so far as to use common carrier frameworks that are unconstitutional.

My own thinking is that more freedom, not less, for all the contestants, will work better than less freedom for all.

How Much Cost Can Muni Broadband Cut Out of the Business?

Supporters of municipal broadband services always cite the high cost and low quality of telco or cable TV internet access services as the rationale for building competitive networks. Perhaps one key question is how much room big municipal networks might have to actually cut prices.

So far, virtually all of the independent municipal broadband efforts have taken place in smaller markets where one or both of the incumbent providers appear to be capital-starved, or have chosen not to invest more in access speed, as a deliberate business policy.

One can criticize such strategies, but sometimes, in a declining market, all a business leader can do is harvest returns until some disposition of the assets is made. That was the case for telecom giant AT&T, when it faced a long-term decline in long distance revenues that were the core of its business.

Other smaller telcos have tried cutting some costs (small firms typically have little overhead to trim), launching growth initiatives (outside region business-focused services being most common) or selling assets entirely. Sometimes all three happen, in sequence (cut costs, invest in new lines of business, but then when that does not work, sell the asset).

So one big issue for proposed municipal broadband networks in tier-one U.S. cities is whether enough cost can be cut from the business to make the business model work.

In other words, can a large municipal broadband network operate at costs so much lower than a telco or cable TV company that end user prices are far lower?

So far, it does not appear that major savings, if any, are possible on actual construction of a fiber-to-home network.

source: Fiber for San Francisco Initiative

A consultant studying the cost of building a municipal broadband network for San Francisco concluded that the actual network would cost $2,050 per passing. That is arguably typical for a large urban network, so it is hard to see any potential end user savings based on lower network cost.

But that is just the cost of the network. To activate a customer, more than that much is required, per customer.

source: Fiber for San Francisco Initiative

The bottom line is that the proposed San Francisco network would not have lower construction costs than any private operator building a fiber to home network in the city.

The other areas where a cost delta might be obtained are marketing and operating costs. In principle, small ISPs, in selected smaller markets, might be able to operate with lower overhead, lower marketing cost and other fulfillment costs.

In the U.S. market, mobile subscriber acquisition costs might run between $350 and $500 per new account. Some believe a municipal broadband network might spend just $200 per subscriber in marketing costs, for example.

Acquisition costs often are higher in the declining subscription TV business price discounts and promotions frequently are offered.

So if a municipal network in a tier-one city was to offer a price advantage, it would be because its own operating and marketing costs were substantially lower than incurred by telco or cable competitors.

The consultants believe the proposed network would be sustainable at consumer prices of $51 a month (with a range between $26 and $67 a month) and business access costs of about $73 a month (with a range of $38 to $97 a month).

Those figures are roughly in line with what some small ISPs have been offering, but below the level of other municipal networks with less scale. The proposed municipal network for Fort Collins, Colo. projects $70 per month retail fees for gigabit consumer internet access, and $50 a month for access at 50 Mbps.

At least one study suggests such networks do offer lower prices, at least in terms of posted tariffs. It is not clear whether the typical plans chosen by most customers actually mean that the typical buyer in such markets saves money, though that is a logical assumption. There is little incentive for a customer to buy from a municipal provider rather than a commercial provider unless there is a price savings, a value advantage, or both.

Some might argue that another issue is financial risk, in the form of borrowing by entities to build and operate such networks. That might be a substantial issue, for a big network in a major city.

The bottom line is that the business model might hinge on take rates and operating costs, however. History suggests breakeven at about 33 percent take rates, a figure that seems to hold both for municipal and for-profit internet service providers.

One might argue that, in volume, FTTH materials costs have dropped over the last couple of decades, though construction arguably has risen. But even some older estimates have used far-lower materials, construction and connection costs than the proposed San Francisco municipal network consultants have used.

In fact, the cost of the network is higher by two orders of magnitude (100 times), while customer connection costs aer 10 times higher than what some believed was possible in 2003.

source: Corning

The bottom line is that a mature internet access business, with strong competitors (even if some do not believe that), will increasingly be cost-sensitive, as revenue will be challenged.

It is difficult to model precisely what weaker demand does to every ISP business model, but that is a strong possibility, going forward. At the very least, cost containment will be essential. And that, many would argue, is where the risk lies for big municipal networks.

For Small Cell Deployments, Asia Leads

Asia, because of its huge population, tends to lead in many measures of mobile, internet or telecom volume.

source: Ericsson

Asia also will lead global deployments of small cells, according to the Small Cell Forum. The Asia-Pacific region (most of the activity will be on the Asian continent) will represent nearly half of all global small cell deployments by 2025. In 2015, Asia represented about 54 percent of small cell deployments.

North American enterprises, which deployed 30 percent of small cells in 2015, will be a smaller part of the market in percentage terms in the future, as will North America in general, while European small cell deployments will have grown dramatically.

In substantial part, density explains the deployment patterns. Hyper-dense and dense areas represent the highest value for end users and access providers. Rural and less-dense areas will not have the same degree of value, as infrastructure costs will be relatively higher and financial upside more limited as well.

source: Small Cell Forum

Will Fixed Wireless Be a "Deploy at Scale" Choice for Telcos?

Up to this point, in U.S. and Canadian fixed network markets, cable TV providers have had a capex advantage over telcos. Their hybrid fiber coax networks have proven less costly to upgrade to gigabit speeds than telco networks, which often must break with copper-based access to match such speeds.

So, up to this point, the telco business decision has been whether there is a clear payback from ripping out copper access and replacing it with fiber to the home. Although fixed wireless and advanced forms of digital subscriber line are solutions in niche cases, the big choice has been to make the transition to FTTH or not.

The range of choices will change in the 5G era, as fixed wireless becomes a potential "deploy at scale" choice in instances where the FTTH business case is difficult.

The “politically correct” answer to the question of whether 5G fixed wireless competes with fiber to the home access is that “both have their place,” or are complementary. That has been the PC answer to the question of whether FTTH competes with digital subscriber line or cable modems as well.

Always, the answers have to be contextualized. The cost of each particular solution, for particular deployments, must be weighed against expected financial return, especially in competitive markets dominated by facilities-based providers.

One key element is cost per passing. The other key variables include take rates and revenue per account. At a high level, fiber to the homes least (per passing) in urban areas, most in rural areas, and somewhere in between in suburban areas.

source: ITU

The cost of a fixed wireless solution likewise varies by density: lower costs per location when connecting a high-rise apartment building or condominium; higher costs to connect individual homes. But nearly all observers would likely argue that fixed wireless should be less expensive than fiber to the home.

Cost estimates arguably are most developed for use of fixed wireless frequencies long in use, more speculative for 5G-based millimeter wave bands, as volume production and use of small cell base stations is just beginning.

But cost per passing is only one of the key business model drivers. In competitive markets, where there are two or more equally-talented and capitalized providers, the addressable market is never 100 percent of locations. Instead, two strong competitors essentially will split the market.

And that means the cost per customer is roughly double the cost per passing.

source: Siklu

In an era where one or multiple products might be sold, the average revenue per account also matters. And there, generally speaking, average revenue per account trends are clearly in the lower direction.

All of that--facilities-based competition; falling average revenue per account; cost per customer--means the cost of serving customers has to fall, even for next-generation networks that feature higher performance.

In that context, the question of “which platform” always includes a “cost to deploy” constraint. If the total customer base is limited because of competition, and average revenue per account is declining, then network cost (capex and opex) must drop.

That is why, all other things being equal, in competitive markets, the low-cost provider tends to win, when that provider has scale.

source: PwC

Some Consumer IoT Apps Will Generate $1 a Year in Revenue

Hopes for internet of things connectivity revenue face a daunting constraint, namely that per-year revenue can be quite low for some categories of consumer sensors such as home smoke alarms. Some existing retail tariffs work out to about $1.20 a year revenue per sensor.

So volume will be quite important. Moreover, the actual revenue from sensor connectivity alone will be relatively low, compared to the value of IoT platforms and apps.

The industrial sensor market predates our present notion of “internet of things.” In consumer markets, government mandates have driven much of the water meter or electricity meter demand. Industrial firms, on the other hand, long have used sensors to measure pressure, temperature and flow.

Those have been niche markets in the past. What is new is the expansion of sensors in many consumer-facing and consumer-used applications, as well as some new business markets such as sensors for parking, transportation, medical care and so forth.

source: Silicon Semicondutor

Newer apps, such as smart home apps or wearables, are expected growth areas in the consumer space.

source: IoT Analytics

A survey on ON World of nearly 100 low power wide area network operators found that unlicensed networks such as Sigfox and LoRa support 66 percent of the platforms in use today.

Sigfox and LoRa networks cover much of Europe and many parts of Asia Pacific with IoT services offered by telecom operators such as Arqiva, Bouygues, Orange, KPN, Proximus, Swisscom as well as a growing number of IoT independent operators such as Senet, Thinxtra and UnaBiz.

Licensed LPWA networks such as LTE-M and NB-IoT are growing even faster than unlicensed networks and make up nearly 33 percent of the LPWA operators surveyed.  NB-IoT network operator activity has accelerated over the past year and will grow 1800 percent in 20128.

One important observation is that IoT connections do not create much new connectivity revenue. Licensed IoT network operators such as Deutsche Telekom are selling €10 (USD $12) service plans  that support a single sensor for 10 years, using 500 MB of data. That obviously means incremental annual revenue is about $1.20.

Mobile operators such as Deutsche Telekom, China Telecom and Vodafone are aggressively rolling out their licensed NB-IoT networks in Europe, China and Australia.  In the U.S., all major operators including AT&T, Verizon, Sprint and T-Mobile are building licensed IoT networks and most of these are providing both LTE-M and NB-IoT services.  

By the end of 2018, most of the U.S., Europe and Asia Pacific will be covered with licensed IoT networks, ON World predicts.

U.S. Telcos Have Lost 87% of Voice Accounts in 18 Years

Mobile substitution is about to become a much-bigger commercial and policy issue, in large part because, for the first time, mobile substitutes for fixed network internet access are going to be commercial realities, sold by tier-one service providers with the marketing muscle to drive adoption.

History provides some idea of how much could change.

Once upon a time (in the 1970s and 1980s), it was believed the solution to the problem of universal communications had to be based on supplying connections to fixed networks. The great cost of building such networks in developing nations was therefore a great cause of concern.

Technology saved us. With the advent of mobile networks, we have nearly solved the problem of voice communications, globally. But there always are consequences for legacy products when new products displace them.

Over a span of less than two decades, voice services, the traditional telecom revenue driver, has virtually collapsed, in some markets. In the U.S. market, for example, line loss for telcos has been as much as 87 percent, between 2000 and 2018.

Ironically, the Telecommunications Act of 1996, the first major revision of U.S. telecommunications law since 1934, focused on enabling voice communications and ownership of voice switches. The emergence of the internet, and mobile substitution, seemingly had not occurred to lawmakers.

The point is that commercial business strategy and government regulation, no matter how thoughtfully considered in the moment, can fail to achieve its intended objectives because markets (both supply and demand) now change so rapidly.

source: US Telecom

Beginning with the 5G era, we are likely to find that technology once again solves an qually big challenge, namely supplying internet access to everyone. Nor is 5G the only important platform. We might well see that new constellations of low earth orbit satellites, and perhaps fleets of balloons or orbiting unmanned aerial vehicles, plus use of unlicensed and shared spectrum access platforms.

There are going to be winners and losers. It is not hard to predict that the business value of a fixed network will change. Such networks are going to drive far less revenue than in the past.

And that has implications for the amount of capital that can be invested in the business, where that capital is invested and how much innovation can be expected. Some of us would argue that enterprise revenue sources will become more important, consumer sources less important.

In the 5G era, it is possible that mobile networks and platforms will be able to match fixed network performance. On top of that, low earth orbit satellite constellations, or even Google’s Loon service, based on use of balloons, might be in place to provide rural internet access across the rural United States.

Even if some worry that competition in internet access is endangered, some of us would argue competition is destined to increase.