International Capacity Prices Fall 30% Annually Since 2014

It might be overstating matters to argue that capacity prices are in “free fall.” That is the case on some routes that traditionally have had less supply, such as North to South America, but price declines on well-supplied routes (transAtlantic or TransPacific) decline rather predictably.

source: TeleGeography

“Bandwidth prices remain on the descent, driven downward by increasing competition and new transmission technologies and network topologies that lower unit costs,” TeleGeography correctly notes.

Median monthly lease prices across a selection of critical routes declined an average of 26 percent from 2016 to 2017, and 30 percent compounded annually from 2014 to 2017.

"Cutting Out the Middleman" Will Shrink the Telecom Industry

“Cutting out the middle man” (telcos) now has emerged as a key constraint on global telecom service provider revenues and profits, and will be a huge force dictating when and how the public networks industry actually will shrink.

Some forecasters already believe the global industry is going to shrink in 2018. Peak telecom, in other words, might be at hand, the point at which the global industry, after generally growing for 150 years, starts to shrink.  

“Telecommunications firms are no longer the primary interests driving submarine cable construction,” says Jim Poole, Equinix VP. “Now, it’s hyperscale cloud companies and large content providers.”

“The telecom companies are losing importance as operators of the worldwide communication infrastructure ,” is the way one publication describes the impact.  

That shift by enterprises--who now own and operate their own private networks--is an example of disintermediation. So are all “over the top” apps. And you therefore see the stunning implications of the concept.

Telecommunications has been a necessary function, and it also has fueled the growth of a global industry. In the new world, communications remains an essential function, but it is not always the driver of the public networks industry.

There are some parts of the telecom ecosystem for which this shift is not a problem. If you build subsea networks, cable and optoelectronics and do construction, you do not really care who the buyer is, so long as there are lots of them.

If you operate global data centers, and your customers are enterprises and private firms, you probably do not worry about the dwindling of the public communication networks business.

But if your business is selling communication services to businesses and consumers, disintermediation means your business is shrinking.

Disintermediation means the “reduction in the use of intermediaries between producers and consumers.” In other words, cutting out the middleman, and going direct to one’s customers, without the use of other distribution channels.

So one big impact of huge content and app firms building and operating their own networks is that the size of the public communications market is reduced. In other words, a growing percentage of international bandwidth no longer moves over public networks, supplied by public carriers (telcos or capacity specialists).

Depending on the route, private bandwidth supply represents as much as 30 percent to 70 percent of total traffic on those routes.

The other impact is falling prices. With some exceptions, bandwidth prices on undersea routes have fallen steadily, but not precipitously, over the last decade or so.

One issue, as noted, is that traffic now is shifting to private networks owned and operated directly by content companies, app companies and other enterprises, who no longer need to buy such long-haul capacity from commercial providers. That means fewer potential customers, and therefore more competition to secure what remains of demand for public network services.

Moore’s Law is another issue, as ever-cheaper bandwidth is possible, and therefore reflected in retail prices (more supply means lower prices).

Annual global operator-billed revenues from voice and data services will fall by over $50 billion (about six percent) over the next five years, from $837 billion in 2017 to $785 billion in 2022, according to Juniper Research.

Other analysts think a global peak revenue might not be reached until perhaps 2021. Predictions for 2018 revenue range from flat to negative two percent.

On a global basis, the dollar value of operator-billed monthly average revenue per user fell by 62 percent between 2005 and 2017, to $9.20, Juniper Research estimates.

That decline is structural, and not caused by temporary issues such as economic slowdown.

source: Juniper Research

That really should come as no surprise. Every telecom product has a product life cycle. Eventually, every potential prospect already has become a customer. Product substitution is happening, there is substantial new competition and mobile adoption in developing countries, which has driven global growth for more than a decade, is slowing.

In 2013, the dollar value of global operator-billed revenues fell for the first time.

In both West Europe and Central & East Europe, the dollar value of revenues peaked in 2008.

In 2017, three regions (Latin America, Central & East Europe and rest of Asia Pacific) saw year-over-year growth, but revenues were below peak levels, Juniper Research argues.

In 2017, operator-billed revenues had fallen to 86 percent of their 2013 peak levels; in West Europe, revenues are now just 58 percent of their 2008 high point.

New revenue sources such as internet of things apps and connectivity will help, but will not replace the lost voice and internet access revenues. Internet of Things revenues might generate some $8 billion by 2022.

Global Telecom Business Might be Nearing its Absolute Historic Peak

Annual global operator-billed revenues from voice and data services will fall by over $50 billion (about six percent) over the next five years, from $837 billion in 2017 to $785 billion in 2022, according to Juniper Research.

Other analysts think a global peak revenue might not be reached until perhaps 2021. Predictions for 2018 revenue range from flat to negative two percent.

On a global basis, the dollar value of operator-billed monthly average revenue per user fell by 62 percent between 2005 and 2017, to $9.20, Juniper Research estimates.

That decline is structural, and not caused by temporary issues such as economic slowdown.

source: Juniper Research

That really should come as no surprise. Every telecom product has a product life cycle. Eventually, every potential prospect already has become a customer. Product substitution is happening, there is substantial new competition and mobile adoption in developing countries, which has driven global growth for more than a decade, is slowing.

In 2013, the dollar value of global operator-billed revenues fell for the first time.

In both West Europe and Central & East Europe, the dollar value of revenues peaked in 2008.

In 2017, three regions (Latin America, Central & East Europe and rest of Asia Pacific) saw year-over-year growth, but revenues were below peak levels, Juniper Research argues.

In 2017, operator-billed revenues had fallen to 86 percent of their 2013 peak levels; in West Europe, revenues are now just 58 percent of their 2008 high point.

New revenue sources such as internet of things apps and connectivity will help, but will not replace the lost voice and internet access revenues. Internet of Things revenues might generate some $8 billion by 2022.

Why Do Communication Services Always Get Such Low Satisfaction Scores?

It often baffles me why airline travel gets higher customer satisfaction scores than subscription TV, video on demand, internet access or fixed line telecom service.

Some will glibly argue it is because of poor customer service or prices too high in relationship to value. Many of us would argue the former is not much of a problem these days, though the latter is an issue.

But lots of products tracked by the American Customer Satisfaction Index arguably have troublesome customer service issues or price-value issues and yet get higher scores.

I might enjoy my smartphones. I do not enjoy the prices. Hospitals have high value, but also very high prices. Insurance products also score higher than other subscription products, but how many of you do not believe there are huge value-price problems there?

The value-price relationship for streaming should therefore fix that problem. And perhaps that is partly true.

The new video streaming service category rates a “75” score, on par with privately-owned utilities, but above scores for internet access, fixed network voice, linear TV subscriptions or even mobile service. One might have thought streaming would score even better than it did.

I do not personally find customer service provided by almost any communications service provider to be much of an issue these days, though the value-price relationship of linear services is a question.

Internet access service continues to be the absolute lowest-rated industry, in terms of ACSI satisfaction scores, and I cannot explain why that should be the case. Internet access providers score as low as do linear video providers.

source: ACSI

Maybe people attribute Wi-Fi flakiness to be a property of their ISP's service. Maybe, even for a foundational service, internet access is deemed too expensive for the price paid.

Any subscription service has the problem of reminding customers every month how much they are paying. Perhaps unhappiness therefore gets a monthly reminder.

Truth Matters, for B2B Sales, Study Finds

Some 85 percent of business-to-business product vendors believe they are open and honest about their product’s limitations. Only 37 percent of buyers agree, according to a survey conducted by TrustRadius has found.

Vendors focus on providing material that buyers don’t find very useful or trustworthy, the survey indicates.  

According to buyers, the vendor’s website and representatives are less trustworthy and less influential than the other sources.

The typical B2B buyer uses about five sources of information. At least, that is what buyers claim. The top resources used were product demos, user reviews, vendor website, free trial, and vendor representatives.

Buyers don’t trust all vendor claims, nor do they expect to, the survey suggests. Buyers also want hands-on experience with the product and insights from existing customers.

Most of the Time, Wideband--Not Broadband--Satisfies Consumer Needs

Internet access matters. Wideband internet access also matters. But “broadband” sometimes does--and sometimes does not--really matter to end users. The easiest example is mobile internet access, which often runs at far less than the 25 Mbps U.S. minimum to be called “broadband.”

One rarely hears anybody complain about their mobile internet access preventing them from actually doing something. Sure, there are dead spots. But wideband mobile internet access is sufficient for consumer smartphone use cases.

Think about the ways people use their smartphones. Do most users of 4G networks in the United States routinely get 25 Mbps downstream speeds? No. Does that prevent them from using all the apps they want, with satisfactory experience? In nearly all cases, yes.

For most users, access speed no longer is an issue preventing them from using the apps they want.

That might be less true for fixed connections supporting multiple users, to be sure. And many U.S. connections actually purchased by consumers are wideband, not broadband.

By definition, U.S. satellite internet, many fixed wireless offers and mobile connections are “not broadband.”

But 10 Mbps to 20 Mbps for mobile users seems to work just fine for consumers. And while more speed arguably is needed for any multi-user household, the actual end user experience often hinges on how many users or devices are using the shared connection at any single point in time. Obviously, the types of apps make a difference as well.

People often confuse internet access “availability” with “buying choices.” And there is a lot of nuance to be sorted through.

One hears it said that some number of people do not have access to broadband, using the 25 Mbps definition. Fair enough.

Since the U.S. Federal Communications Commission defines broadband as a “minimum of 25 Mbps downstream, some 24 million U.S. residents (though not that many locations) do not have the ability to buy “broadband” internet access.

That is not the same as claiming those consumers and citizens do not have access to internet access. They do. But it now is defined as wideband (less than 25 Mbps), not broadband.

Over time, as we keep redefining the minimum for “broadband,” some of those consumers will still be disadvantaged, compared to urban dwellers. Still, you get the point. When, in the future, broadband is defined as 50 Mbps, and then 100 Mbps, some of those people might still not be able to buy broadband internet access.

Will it matter? Will wideband be enough? For most people, probably. At some point, for any single user, additional speed does not actually improve experience. For most people, the minimum practical standard is enough bandwidth to watch Netflix. And that only requires wideband speeds.

Can Any Tier-One Service Provider Survive on Connectivity Revenues Alone?

Virtually all analysis of the telecommunications industry includes key challenges to the business model. Chief among those issues are declining prices and migration of value elsewhere in the ecosystem.

The issue is what can be done about that threat, and for at least some tier-one service providers, the answer is to “move up the stack” into platforms, apps and content.

For smaller providers, that may not be an option. In fact, some service providers might well find themselves acquired by a tier-one content, app or platform provider. In the U.S. market, an example could be Google, Apple or some other firm acquiring Sprint or T-Mobile US.

Some observers would argue that an eventual acquisition of either or both of those firms by a major app, content or platform provider would make better strategic sense than simply creating a bigger mobile service provider operation, as useful as that might be in the near term.

Eventually, all surviving tier-one service providers are likely to have moved “up the stack” in some way, as it will be nearly impossible to survive on the strength of connectivity services alone.

“By 2020, it is likely that one or more major telecom companies will be acquired by a content company,” argues Christopher Surdak, JD, Global Subject Matter Expert, Analytics, Governance, and eDiscovery, HP Software.

“Being connected continues to become cheaper and cheaper, adhering rather slavishly to Moore’s Law of diminishing costs,” says Surdak. “The cost of providing such a service keeps falling, and competition means that the price keeps getting smaller and smaller in a strong, negative feedback loop.”

One aspect of that trend is that average revenue per account or user keeps falling. Another element is the ability to substitute other products for legacy communications.

“Connectivity is capturing an ever-smaller proportion of the information value chain, while content, service, and product deliverers capture ever-more,” Surdak says.

Competition is an issue, but arguably not the principal challenge. The bigger problem is that virtually all legacy telecom products have reached product maturity and are going to decline. In addition, there is great uncertainty about  proposed new revenue sources.