Are Telcos Headed Back to Monopoly?

As telco strategies continue to diverge, a return to monopoly might be inevitable, some now speculate. In a sense, infrastructure monopoly has been a reality for some time, in fixed network services. Mobile competition has tended to be facilities based.

But retail competition based on wholesale or owned facilities poses some clear dangers.

In some mobile and fixed markets with high numbers of retail contestants, profit has been wrung out of the business to a degree that sustainable competition--at present levels--is unlikely.

In fact, some now speculate that life as a “utility,” as in the monopoly days, might be inevitable, in some markets, at the retail level. That would be a profound change.

Will monopolies emerge again, at the retail level? Many would point out that infrastructure monopolies never really went away. Instead, retail competition in the fixed networks arena has relied on a single wholesale infrastructure.

And that, in turn, means some forms of innovation cannot happen, as all wholesale customers can offer only the same products.

So what is the impact on innovation if retail communications again becomes a monopoly? Less innovation seems almost inevitable, precisely at a time when massive innovation seems to be required.

That is the big danger if retail monopoly again emerges. “In places where you had cable and fixed, you saw much more innovation,” said Philipp Nattermann, McKinsey senior partner. In large part, that is because cable and telco use different supply chains and rely on different access network technologies.

In Europe, at least some speculate that some sort of “utility regulation” might not be an entirely bad thing, bringing regulatory protection that would allow higher prices. Across the core seven large European markets, the industry not only does not meet its cost of capital, the return on capital is lower than its cost of capital, said Nettermann.

European regulators have been very good at keeping end-customer prices low. They have been less good at creating an environment where the return on capital is sufficient to cover the cost of capital.

“The number of players has a very clear inverse correlation to profitability,” said Nettermann. “European operators are significantly less profitable than their North American, their Korean, or their Japanese counterparts,” said Nettermann.

“And then you really get to a model that begins to look more like a utility, don't you?” Nettermann added.

Telcos Will Have to Make Hard Choices, Risky Bets

A reasonable argument can be made that telcos no longer can do everything they might like to do, and must make hard choices.

Most telcos will have to pick one to five areas where they can be viable platforms and then partner for everything else, Dean Bubley of Disruptive Analysis argues.

“Telcos have been in a weird place for 10 years, between pipes and platforms, and they have to decide which they want to be,” says Benoit Felten, Diffraction Analysis owner. “You can't be everything to everybody .”

Just what that really means for strategy and business focus is harder to describe. Felten says it could mean service providers do not own their infrastructure, everywhere. Bubley argues it could mean that service providers pick a few internet of things lines of businesses to pursue and basically ignore the rest.

And some service providers will have an easier task than others. Profit margins now are diverging, globally. “On a regional level, if you look at free cash flow as a proxy for that, it increased by about 100 percent in North America between 2007 and 2017 and at a similar rate in Korea and in Japan,” said  Philipp Nattermann, McKinsey senior partner.

But “there are some markets, like Europe, that are shrinking.”

Such differentiation is not especially new, in the competitive era. Many firms sell only to business customers. Some sell mobile and fixed services; others one or the other. Some sell locally; others regionally; some nationally; other regionally; some globally.

Products range from consumer and business voice to internet access to video; data center or cloud services to various forms of wide area network services. Some firms rely heavily on application revenue, many cannot.

The hardest choices of all arguably involve efforts to “move up the stack” into applications, perhaps mostly in the internet of things area.

“If you try to compete with global players without the R&D, without the developers, and without the ten-year horizon, profitability is very difficult,” said Ferry Grijpink, McKinsey senior partner.

“If I'm a well-financed operator, maybe even the incumbent, I have a fixed infrastructure in place, that's one thing,” said Nettermann. “If I'm a relatively small mobile-only player with significantly fewer resources, this challenge becomes significantly more daunting.”

“We could very well see that 5G might lead to changes in industry structure,” he said. Bubley expects a more heterogeneous mix of large and specialized providers. Others expect tier-one service providers to consolidate, massively.

Of course, that is what we already see, in many ways. Tier-one telcos long ago decided that some markets and products were simply too small, in terms of revenue potential, and too resource intensive to provide a sustainable business case.

That is why most avoid the business phone system and even hosted business voice lines of business. Most stay out of the system integration and business premises networking business. There are viable specialists in the wide area network connectivity business, the data center business, the metro fiber network business.

Specialists already are emerging in the edge computing business, industrial IoT, automotive IoT, smart cities and other IoT verticals.

And one enduring problem is that most of those businesses do not scale as easily as have consumer and business voice, internet access or even video entertainment. Tier-one telcos will need huge new revenue sources to offset declining legacy sources, and the emerging areas might not provide the needed revenue lift.

So making choices necessarily will involve the risk of making the wrong bets.

Mixed Progress Globally in 2018 Connecting the Unconnected

The goal of “everyone connected to the internet” saw mixed progress in 2018, one report suggests.  “We are seeing steady progress in the number and percentage of households connected to the Internet, narrowing the gender gap and improving accessibility for people with disabilities,” the latest Inclusive Internet Index report says.

Some might focus on a digital divide that appears to be widening at the bottom of the income pyramid, according to the latest iteration of the Inclusive Internet Index. Others would point to the progress being made.

On one hand, “growth in Internet connections is slowing, especially among the lowest income countries, and efforts to close the digital divide are stalling, in part due to declining affordability in a number of low-income countries,” the report states.

source: Inclusive Internet Index

On the other hand, mobile data affordability improved globally, thanks largely to improvements in lower-middle-income countries. However, the cost of prepaid data plans increased in 39 out of the 84 countries that were studied.

Also, networks and coverage are better. 4G coverage is better, and the connection quality of fixed broadband and mobile connections, such as download and upload speeds, has improved globally.

For example, the world’s average mobile download speed improved by 36 percent to 21.9 Mbps from 16.1 Mbps, with the biggest gains in South Asia. Lower middle-income countries have had a significant improvement of 66 percent in 4G coverage. However, low-income countries saw more-modest progress with a 22 percent improvement.

Gender gaps in Internet access are narrowing globally, led by low-income and lower-middle-income countries. In some countries, women’s Internet access actually exceeds that of men, with the Philippines, Ireland, China and Argentina having the largest majorities.

Mobile broadband subscriptions per 100 inhabitants grew just 0.3 percent so far in 2019, and in low-income countries subscriptions actually declined, the report says. \

Perhaps ironically, as 4G gets faster in developed countries, and 5G launches, the gap with the bottom of the pyramid will grow.

How Much Connectivity Revenue from IoT?

Forecasts of internet of things spending have been all over the place, but most suggest incremental connectivity revenue directly attributable to IoT will be fairly slight. At present, IoT likely represents one percent to two percent of service provider revenues, best case.  

Some forecasts suggest global IoT spending, across the whole ecosystem, will only reach $745 billion in 2019, up from the $646 billion spent in 2018, according to a new update from IDC. The research agency expects global IoT spend to gallop at double-digit annual growth until 2022, when it crosses the US$1 trillion mark.

sources: IDC, Gartner, others  

Other forecasts are about in that range as well.Bain & Co predicts that by 2020, the global market for IoT (including devices, software, hardware and services) will exceed US$470 billion. Industrial giant General Electric Corp has the biggest number so far. It says investments in the Industrial Internet of Things (IIoT) will reach US$60 trillion in the next 15 years.

And connectivity revenues are a fraction of total ecosystem revenue.  

The New Brandeis Approach to Antitrust Won't Work, Long Term

Traditional antitrust violations that cause identifiable or potential “consumer harm.” The key concept here is “consumer harm,” not “producer harm.” That notion underlies consumer protection policies of all sorts, including actions to break up companies to promote more competition.

And that is where the emergence of “free to use” services and applications raises new questions for some, especially a shift of focus from protecting consumers to protecting producers. In other words, regulatory intervention is justified not because consumers are harmed in the old sense of high prices possible because of monopoly power, but despite the ability to quantify such harm.  

The idea that policy is organized around protecting producers, rather than consumers, is not new. But it is a shift back to acting even when consumer harm, in the form of higher prices, cannot be alleged.

Consider the classic case of antitrust action against Standard Oil, which at one point might have had 90 percent market share.

“Between 1870 and 1885 the  price of refined kerosene dropped from 26 cents to 8 cents per gallon. In the same period, the Standard Oil Company reduced the [refining] costs per gallon from almost 3 cents in 1870 to 0.452 cents in 1885,” observers have noted.

In other words, consumers clearly benefited. But antitrust action was taken despite evidence of consumer harm, to help other competitors, not to protect consumers from high prices.

In essence, many argue for a return to such policies of helping suppliers, not consumers, since consumer harm cannot be clearly demonstrated.

It is debatable whether policies aimed at protecting suppliers work long term. Still, to the extent new antitrust action might be taken, it will be using non-direct and non-quantifiable measures of harm. Privacy protection seems the most-obvious new culprit.

The Antitrust Case Against Facebook by Dina Srinivasan links Facebook’s privacy policies with monopoly abuses, in keeping with a trend by some to revise traditional tests of market power, as it is difficult, under the existing framework, to find consumer harm when no actual price is charged for use of a product.

So the new tack is to enshrine new tests--privacy protection, mostly--of monopoly power that have no historic justification.

Many call this the New Brandeis school of antitrust, which argues that what matters is market structure, not consumer harm, since Internet era firms including Google, Facebook and Amazon provide consumer benefits at zero prices, or have demonstrably contributed to lower prices.

The subject of antitrust then becomes market structure itself, not consumer harm in the form of higher prices, for example. Some call this a shift to antimonopoly, rather than antitrust, with benefits that are more social and political than economic.

The enemy is “bigness,” not consumer welfare, though some might argue “bigness” is not the problem as much as the ability to exploit bigness. As a practical matter, the real-world test will be bigness itself. How well that will work, if at all, remains to be seen.

Historically, one might note that prior efforts to break up industry power have always resulted in reaccumulation of market share. Market structures do not remain fragmented, but reconcentrate. That is what happens when any competitor creates products that buyers consider superior.

One might note the European telecom regulatory community essentially moved in that direction in mandating wholesale policies for producers in the connectivity business, allowing multiple retailers to use a monopoly network.

That clearly produced more retail competition. It also has reduced profit margins in the industry that limit investment and innovation. It is not clear how much consumers have benefitted. It seems fairly clear that investment has suffered.

Parenthetically, one might also ask what becomes of contestants in global markets, where scale matters, if “bigness” itself becomes grounds for antitrust or anti-monopoly action.  Sometimes, scale is necessary to compete.

How Big is NFV Market?

Investments in telecom service provider network functions virtualization (NFV) and software defined networking (SDN) are expected to grow at a compound annual growth rate of 94.3 percent until 2022 to over $168 billion according to a new report, released by research company Technology Business Research.

Of course, the range of companies involved is prodigious, including products sold by Cisco Systems, Citrix Systems, Dell Technologies, Hewlett Packard Enterprise, Huawei Technologies, Oracle, Nokia, Ericsson, Wind, Allot, Amdocs, Arista, Brocade, F5 Networks, Intel, Juniper, Metaswitch, NEC, Nakina Systems, ConteXtream, Cyan, Openwave, RAD, Opera, Mavenir, Netcracker and many others.

source: TBR

The report indicates that until now, the NFV and SDN market was driven by a small group of 20 to 25 tier-one operators. This group is expected to remain the key investor, with Tier two and tier three operators making their own investments at some point in the future.

source: TBR

NFV is seen by some researchers as encompassing much more than virtualization of communication networks, probably by including all software defined networking functions with network functions virtualization.

source: Global Market Insights

5G Standards Explicity Call for Building on 4G

AT&T has been criticized for “confusing” the U.S. market by labeling its advanced 4G network “5G Evolution.” The complaint is that 5G Evolution is not “real 5G.”That requires a bit of explanation, the most important point being that the 5G standard explicitly builds on 4G.

Many observers note that the existence of dense 4G networks featuring using small cells connected using optical fiber reduces the cost of 5G infrastructure. “Operators with existing 4G footprints will be able to leverage their 4G infrastructure for providing 5G services and hence their investment requirement will be relatively less,” said TRAI.

Network Function Virtualization (NFV) and Software Defined Networking (SDN) enable virtual network slices for different vertical markets, and also is an evolution of the core network to support both 4G and 5G.

Massive Multiple Input Multiple Output radios and advanced antenna systems likewise can be part of the transition from 4G to 5G.

source: TRAI

In fact, according to 3GPP specifications, 5G will be deployed in two different modes, Non-Standalone (NSA) and Standalone (SA).

In NSA, (5G) NR and (4G) LTE are tightly integrated and connect to either the existing evolved packet core or the 5G NG core. In standalone mode, either 5G NR or 4G LTE radios connect to 5G NG Core.

The point, says India’s TRAI, is that “in order to have speedy deployment of the 5G, initially it is going to be deployed in coexistence with LTE.”