How Big is UCaaS Going to Be?

I realize I am a skeptic about claims that unified communications “as a service”  is a “young” or especially fast-growing segment of the industry.

I do not see UCaaS as especially young. Keep in mind that suppliers have been touting and selling hosted communications solutions for two decades, and UCaaS still is purchased by less than 18 percent of U.S. businesses, for example, even using generous definitions.

By most estimates, actual UCaaS revenue is growing rather slowly. In its historically fastest-growing market (North America), UCaaS is growing about four percent annually, according to Transparency Market Research, although some forecasters believe license growth will be higher.

UCaaS growth rates of 10 percent are seen as realistic, some forecasters believe, a growth rate with some historical precedent.

That is not to deny the possibility of a step change in adoption; an inflection point where growth accelerates. If you consider UCaaS an information technology innovation similar to personal computing, you are open to the idea that rather significant time can elapse between investment and realization of quantifiable business value. That productivity paradox is an old story in information technology.

Nor is the size of the revenue opportunity so large. Had business phone systems been a big business, service providers would not have allowed third parties to dominate the business. Roughly the same thing can be said about UCaaS.

As important as UCaaS is to some segments of the ecosystem (some business users, all suppliers and their sales partners), it remains my contention that UCaaS--as well as the broader UC category--in the context of overall service provider revenues, remains a smallish niche.

In part, that is because premises solutions continue to make sense for larger entities and enterprises. So long as UCaaS remains a “by the seat license” model, at some point, a larger organization saves money by buying and operating its own servers and switches.

The other strategic issue is that, as important as voice communications remains, it is not viewed as driving higher value in the business, in the same way that other software-based initiatives do (e-commerce, artificial intelligence, machine learning, mobility, internet of things, robotics). And that means UCaaS remains a “cost of doing business” issue, not a “transform and grow the business” issue.

Consider that the global fixed wireless revenue stream now is about the same size as the global unified communications revenue stream (both UCaaS and premises-based solutions), if one excludes internet access and other business data access revenue that supports UCaaS. Some estimate as much as $10 billion of the total $28 billion of UCaaS revenues actually are data access pipes, not UC services and solutions. That suggests data access services represent as much as 36 percent of total UCaaS revenues.

In other words, actual USaaS revenue (excluding business data access services) probably amounts to about $18 billion globally, about the same size as the present fixed wireless revenue stream, and nobody considers fixed wireless anything but a small niche, in terms of global revenue and solution set, in an industry that books $1.2 trillion annually in total revenues.

Perhaps more to the point, it is not likely that UCaaS or UC, for that matter, can grow too much, even if it displaces all of the present business demand for phone service, conferencing and other “unified” communications capabilities.

Among the other nuances is the fact that the “UCaaS” and unified communications markets generally include a variety of services that used to be separate, including

business phone service, conferencing, international long distance calling and business internet access, UC servers and software and phone systems. So what most observers mean by UCaaS includes several services we used to track quite separately.

And it must be noted that although some of those constituent services and products continue to grow (internet access the best example), others are in long-term decline (phone systems), while retail price pressures in others (conferencing) are pushing down unit prices even when volume grows.

As important as voice and related communications are for businesses and other organizations, those costs of doing business are dropping, because there are a growing number of alternatives. In a real sense, mobile voice has supplanted much business need, even as UC costs have declined (or, more correctly, as the value-price relationship has shifted) as well.

The point is that UCaaS can only get so big, since business voice and communication solutions are a relatively small part of overall service provider revenues, and a smallish component of business spending on information technology.

Also, voice communications now are a cost of doing business, and less a perceived driver of revenues, facing rival (and often cheaper) communication alternatives. The cost per interaction using messaging or chat for customer service is far less than using voice.

source: Spark Central

Use of Facebook to Get News is Falling

Use of Facebook for news has been falling since 2016 in many countries, according to the latest Reuters Digital News Report.

At the same time, more people have been using messaging apps such as WhatsApp to get news content, more than doubling to  in four years.

The point is that leadership in the internet ecosystem is not permanent.

Build or Buy Content Assets?

Netflix likely has proven that a streaming service does need to create original content to achieve market leadership, but also suggests such a firm does not need to own a separate content creation company to do so. Apple’s recent decision to acquire the services of Oprah Winfrey might also validate the principle.

Does that mean that Comcast, Verizon and AT&T (or other connectivity services providers) could do the same? That cannot be determined, as each has acquired content creation firms.

But there are other reasons why Comcast, AT&T and Verizon have done so. Ownership of content assets, at scale, creates the foundation for advertising revenue streams, wholesale content revenue streams and some retail bundling opportunities as well.

That matters as content creation and aggregation might represent as much as 70 percent of the total value of the TV content ecosystem, with distribution representing about 30 percent.

In other emerging ecosystems requiring distribution and connectivity, the percentage of value earned by connectivity providers might be as low as five percent to 15 percent.   

source: Liberty Global

In other words, connectivity providers have reasons for buying content creation assets that are related to new roles in the ecosystem and additional revenue sources, not simply the cost of acquiring content and creating original content assets.  

Except for Asia, Africa, Mobile Phone Business has Saturated

If you want to know why mobile service providers are so interested in internet of things, this graph suggests a key reason: sales of services and products to human beings using mobile phones is near saturation, and actually went to negative growth rates on two continents in the first quarter of 2018.

On other continents, growth rates were in low single digits. Africa and Asia are the two continents where double-digit growth continues to happen.

source: Ericsson

Projections of potential IoT connectivity revenue also suggest why many tier-one service providers will be looking beyond connectivity, at other parts of the ecosystem, for new revenue and roles. Simply put, most IoT connections will not use the mobile networks.

Though mobile internet of things connectivity will grow fast, most of the connections will use some other form of connectivity, a couple of new forecasts suggest. However, by about 2023, mobile connections might take leadership, in terms of new sales.

That should provide a major warning for service providers who see a huge bonanza from internet of things connectivity revenue.

In 2017, almost three-quarters of all low power wide area network connections used non-cellular LPWA network technologies. By “2023, non-cellular LPWA will cede its market share dominance to NB-IoT and LTE-M, as cellular LPWA moves to capture over 55 percent of LPWA connections,” say researchers at ABI Research.

The Ericsson Mobility Report has about doubled its forecast for mobile network IoT connections, mostly due to ongoing large-scale deployments in China. Of the 3.5 billion cellular IoT connections forecast for 2023, North East Asia is anticipated to account for 2.2 billion, Ericsson says.

That noted, in 2023, Ericsson estimates that mobile IoT connections will represent 15 percent of IoT connections, with short-range networks handling as much as 67 percent of links.

source: Ericsson

Asset tracking, which includes tracking stationary or slow-moving assets, will have the largest share of LPWA connections in 2023, accounting for over 45 percent worldwide, ABI Research predicts.

Smart meters deployed by energy and water utilities will be the second largest vertical IoT application in 2023 contributing over one-third of the global LPWA device connections.

In 2017, SIGFOX had the largest share of public LPWA connections worldwide benefiting from its first mover advantage in Europe.

Is Verizon Strategy Built on 5G Connectivity Revenues?

With the exception of its buying Vodafone’s interest in Verizon Wireless for $130 billion, most of Verizon’s acquisitions have been far smaller. The overall pattern might indicate that Verizon spends most of its acquisition funds on network assets.

So it probably is not surprising that the choice of Hans Vestberg as the next Verizon CEO suggests to most observers an investment priority on 5G assets, not content or other “up the stack” assets, or even operating efficiencies.

Some of us would not necessarily agree with that view. It is true that Verizon sees itself as the leader in network quality and a first mover where it comes to each next generation network. Iin its acquisition strategies, Verizon has emphasized connectivity assets.

The issue is whether the choice of Vestberg suggests Verizon will focus its revenue growth plans on connectivity services, or has something else in mind. Some of us would argue that Verizon has something else in mind.

Verizon has for some time been acquiring “up the stack” assets. Verizon sees its solution and platform assets as being built on top of the network platform, so the Vestberg pick likely indicates Verizon retains that view. But Vestberg also is considered a merger and acquisitions expert, so it is possible to suggest that Verizon believes it has to pair its 5G leadership with clever picks of firms and assets that can supply value “up the stack.”

There is another way to look at what might otherwise be called a ”5G first” strategy, and that is to look at the revenue lift that strategy might provide, compared to alternative investments of capital.

And the essential reality is that incremental 5G revenue is unlikely to provide all that much revenue lift.

If Verizon is successful using its 5G network to attack a fixed wireless opportunity worth about $7.5 billion, and  internet of things connectivity revenues of about $5.4 billion, that implies something like $13 billion annually in incremental revenues, in perhaps five years time.

Here are the assumptions: Verizon believes it can address about 30 percent of  U.S. homes, mostly out of territory, using 5G fixed wireless.

If there are some 130 million U.S. homes, that implies access to about 39 million potential new accounts, a significant new opportunity if one assumes each new account could generate $80 a month in recurring revenue.

Were Verizon to get 20 percent of potential customers as new accounts, 5G-based fixed wireless could generate $960 per account, per year, on a base of 7.8 million locations, it could realize $7.5 billion a year in additional annual revenue.

That is about 5.5 percent incremental revenue lift for Verizon. That is interesting, but not transformational in any way.

GSMA has predicted that connectivity revenue will be about five percent of the total IoT revenue opportunity.

That might work out to as much as $50 billion in annual global revenue. Verizon’s opportunity is a fraction of that. If U.S. revenues are a third of total, that implies $16.5 billion in connectivity revenue. If Verizon gets a third of that, it might realize $5.4 billion in annual incremental revenues.

Again, that is nice, but hardly transformational. Verizon might believe it will do much better than that, longer term.

So some might argue that something else must be at work. And that likely is a move into other parts of the value chain built on 5G, including internet of things apps, as the amount of new connectivity revenue from IoT likewise will be interesting, but not transformational.

The point is that incremental new revenue Verizon can drive directly on 5G connectivity services is not so large as to constitute a growth strategy.

Consider that, if approved, the AT&T acquisition of Time Warner might generate $31 billion in incremental revenue for AT&T, immediately.

There are “size of debt” issues, but Time Warner is a “book revenue now” gambit, in addition to changing AT&T’s business sources profile.

For Verizon, additional acquisitions arguably are necessary, eventually. The reason is simply that both Verizon and AT&T have gotten most of their revenue growth from acquisitions, not internal and organic growth.

source: Deloitte

Since 2013, AT&T has dramatically changed its revenue profile by acquiring DirecTV, immediately becoming the largest U.S provider of linear video.  International acquisitions, though smallish, also indicate where AT&T could go next, beyond content.

Verizon’s biggest deal since 2013 was acquiring Vodafone's stake in Verizon's mobile business for about $130 billion in 2014. But debt load from that deal also limit Verizon’s ability to make other big asset purchases.

source: AT&T

Although the appointment of Hans Vestberg as the new CEO of Verizon has been interpreted as a focus by Verizon on “5G,” as opposed to some other strategy, such as getting into content ownership in a bigger way, beyond the Oath brands.

That might not necessarily mean Verizon has in mind a strategy something like “doubling down” on connectivity services as a driver of growth, which is one way the strategy might be interpreted.

Instead, 5G investments are “only” the way Verizon keeps its claim to be the quality network leader, where it comes to connectivity services, while actively making acquisitions to build its “up the stack” assets in internet of things areas, for example.

Growth by Acquisition or Organic Means: What Options, What Impact?

If approved, the AT&T acquisition of Time Warner might generate $31 billion in incremental revenue for AT&T. If Verizon is successful using its 5G network to attack a fixed wireless opportunity worth about $7.5 billion, and then add internet of things connectivity revenues of about $5.4 billion, that implies something like $13 billion annually.

Though debt levels are an issue, one might argue AT&T’s decision makes sense, despite the debt load issue, compared to a rival decision by Verizon to focus on 5G connectivity services.

That is, of course, assuming Verizon does not have other plans in mind, and even if AT&T cannot produce additional revenue, cost savings, reduced churn or other advantages from Time Warner assets.

And one wonders. If the AT&T acquisition of Time Warner is not approved, what other assets or investments could AT&T make to generate $31 billion in incremental revenue, immediately. Perhaps somebody else has an idea. My cursory check at other assets and revenue streams suggests it would not be easy to boost revenue $31 billion any other way, at any price AT&T could afford to pay.

The apparent strategic choices being made--or attempted--by AT&T and Verizon might be positioned as practical, near-term choices, even if there are strategic implications.

Still dealing with the debt load from acquiring all of its mobility business, where it comes to Verizon, additional acquisitions arguably are necessary, eventually. The reason is simply that both Verizon and AT&T have gotten most of their revenue growth from acquisitions, not internal and organic growth.

source: Deloitte

Since 2013, AT&T has dramatically changed its revenue profile by acquiring DirecTV, immediately becoming the largest U.S provider of linear video.  International acquisitions, though smallish, also indicate where AT&T could go next, beyond content.

Verizon’s biggest deal since 2013 was acquiring Vodafone's stake in Verizon's mobile business for about $130 billion in 2014. But debt load from that deal also limit Verizon’s ability to make other big asset purchases.

source: AT&T

The appointment of Hans Vestberg as the new CEO of Verizon has been interpreted as a focus by Verizon on “5G,” as opposed to some other strategy, such as getting into content ownership in a bigger way, beyond the Oath brands.

That might not necessarily mean Verizon has in mind a strategy something like “doubling down” on connectivity services as a driver of growth, which is one way the strategy might be interpreted.

To be sure, Verizon does have a bigger opportunity than AT&T, for example, in using 5G-based fixed wireless to attack other carriers in the consumer internet access business. Verizon believes it can address about 30 percent of  U.S. homes, mostly out of territory, that way.

If there are some 130 million U.S. homes, that implies access to about 39 million potential new accounts, a significant new opportunity if one assumes each new account could generate $80 a month in recurring revenue.

Were Verizon to get 20 percent of potential customers as new accounts, 5G-based fixed wireless could generate $960 per account, per year, on a base of 7.8 million locations, it could realize $7.5 billion a year in additional annual revenue.

That is about 5.5 percent incremental revenue lift for Verizon. That is interesting, but not transformational in any way.

So some might argue that something else must be at work. And that likely is a move into other parts of the value chain built on 5G, including internet of things apps, as the amount of new connectivity revenue from IoT likewise will be interesting, but not transformational. Indeed, GSMA has predicted that connectivity revenue will be about five percent of the total IoT revenue opportunity.

That might work out to as much as $50 billion in annual global revenue. Verizon’s opportunity is a fraction of that. If U.S. revenues are a third of total, that implies $16.5 billion in connectivity revenue. If Verizon gets a third of that, it might realize $5.4 billion in annual incremental revenues.

Again, that is nice, but hardly transformational. Verizon might believe it will do much better than that, longer term.

Still, the nagging question has to be asked. If Verizon cannot do much more than add those incremental revenues, is it a sustainable strategy to focus on “5G” connectivity services? I doubt that is what Verizon has in mind, frankly.

Pay Attention to Product Life Cycles

The demise of long distance was the first indication that product life cycles operate in the telecom industry, as they do in all other industries. Decades ago, profits from the lucrative long distance calling business (driven by the business segment) were used to support money-losing consumer operations.

Once that ceased to be the case, service providers had to turn elsewhere for revenue and growth, notably to mobile services, which has been the global growth driver for decades.

Skype and other over the top alternatives have made the decline sharper.  

“Unintended consequences” might represent the more-significant of outcomes from the last two major transformations of U.S. telecom law.

The breakup of the AT&T system--a historical anomaly, as it turned out--was designed to “solve” the problem of high long distance prices. The Telecommunications Act of 1996 was intended to “solve” the problem of high prices for local telecommunications services.

The 1984 divestiture completely missed the coming role of mobile services. In fact, mobile arguably had more to do with falling long distance prices than did competition among fixed network service providers.

The U.S. Department of Justice concluded in 2007 that divestiture did not work as expected, and that similar outcomes (much lower prices and much higher usage) would have been produced by less-complicated measures.

source: U.S. Department of Justice

The 1996 Telecommunications Act, likewise, was supposed to introduce local telecom competition, in the same way the the 1983 breakup of the Bell system was intended to spur competition in long distance voice.

The Act opened competition in the “local” telecom business, initially driven by mandatory wholesale policies that allowed new competitors wholesale access to existing facilities, and then on a reliance on facilities-based supply.

What was missed? The internet. Ironically, to the extent the Telecommunications Act of 19996 has succeeded, it is because of value created by the internet and its apps and services, not new competition for local voice services.

The point is that, however well intentioned, major efforts to revamp communications policy have succeeded (in a generous interpretation)  “despite the new policies,” as much as “because of the new policies,” as maturing product life cycles eviscerated the very markets policymakers tried to make “more competitive.”

It is the two major unintended developments--mobility and internet--that have lead to higher value and lower prices for consumers, not the intended changes (breaking up AT&T, opening local telecom to competition). In the case of the divestiture, policymakers missed mobility; in the case of the Telecom Act, they missed the internet.

The point is a huge dose of humility should be brought to the whole process of shaping policy to promote investment and competition in communications facilities and services. Our track record is not very good.