What is the Long Term Telecom Imperative?

Differences of opinion are what makes markets: for every seller there must be a buyer. And in the case of AT&T and some other tier-one service providers, those differences might tend to center on near-term issues such as debt loads, while longer-term strategic issues center on whether any tier-one service provider can make a sustainable business out of access services, and only access services.

In the former case, acquisitions such as DirecTV and Time Warner are problematic mostly because of the implications for debt load. In the latter case the objection is that investment capital should be spent elsewhere.

My own views are clear enough: surviving tier-one service providers must move up the stack, must take on additional roles in the  value chain, must develop big new revenue sources beyond connectivity.

In large part, that belief flows directly from the marginal cost or near-zero levels of pricing for all connectivity services. Pricing that falls to nearly zero is a problem for the telecom or any other industry selling products.  

But stranded assets also are a growing problem in competitive markets, as competition increases capex per customer and increases business risk.

The big strategic problem is that the global telecom service provider market is likely very close to an absolute peak, the point at which  future revenues are smaller. For that reason, a simple reliance on access revenues is a guarantee of shrinking revenues.

Issues such as debt loads and other typical financial ratios are important. Mistakes can be fatal, in that regard. But beyond proper management, there are larger strategic issues, such as the future role of access services in the internet, app, retail and other parts of every  ecosystem that uses communications.

If you believe telecom access revenue is bound to start a permanent decline, then business leaders must--absolutely must--develop new business models.

Comcast Acquisition of NBCUniversal Did Not Cause Anti-Competitive Behavior; Precedent for AT&T Time Warner?

One objection--perhaps the major objection--to the proposed AT&T acquisition of Time Warner is that the merger would lead to higher prices. That also was alleged when Comcast bought NBCUniversal.

And though Department of Justice officials have said they do not believe in behavioral remedies (essentially, price controls and oversight), the evidence from one study suggests “either that there was no net positive effect on incentives to raise prices above competitive levels following the vertical merger, or else that the behavioral remedies placed on the Comcast-NBCU merger have been effective.”

In other words, the seminal Comcast acquisition of NBCUniversal, which essentially is the model for AT&T, did not lead to higher prices paid by distributors who buy NBCUniversal content.

That might be reason for believing that the proposed acquisition of Time Warner would not inevitably or necessarily lead to higher prices paid by distributors wanting access to key Time Warner content. In fact, some argue AT&T has clear incentive not to take unfair advantage of its programming customers.  

To be sure, DoJ lawyers--aside from opposing the proposed deal--also favor structural remedies (asset divestitures) in place of behavioral remedies that require the agency to continually monitor firm actions. And AT&T has said it will not offer such concessions.

Some argue the government’s case will fail, as federal antitrust officials have not won a vertical integration case in half a century, presumably because vertical mergers do not reduce competition in markets.

That is not to say anticompetitive actions are impossible, even after a merger that does not reduce competition. But such actions are anything but automatic, and Federal Trade Commission enforcement remains present.

Typically, the reasons for a vertical merger have to do with internal operating costs or some other advantage related to reducing input costs. In other cases, the rationale is to reduce reliance on revenue from only one segment of a full value chain, especially if the existing role is under financial or strategic pressure.

The point is that vertical mergers do not eliminate competition, by definition, and are not therefore automatically injurious to consumer welfare. There does not seem evidence that the Comcast acquisition of NBCUniversal, for example, caused problems in that regard.

And that is one reason for believing that an AT&T acquisition of Time Warner might well benefit AT&T, as well as its customers.

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.