Can Three Fixed Network Suppliers All Survive?

In most parts of the world, ubiquitous competition in the fixed network business is not considered viable. In a smaller number of cases, a duopoly exists, but some observers believe telcos cannot long compete successfully against cable operators.

The reasons for that belief are several. Cable hybrid fiber coax networks cost less than fiber-to-home networks to upgrade and build. That especially is true when stranded assets are considered. Stranded assets are facilities that generate no revenue. And that is a major business model issue in a competitive market.

Assuming two equally-skilled competitors, competition roughly doubles the cost-per-customer of the network. Under conditions where demand is high (95 percent) and one contestant has 65 percent market share, all remaining competitors must fight for perhaps 33 percent of remaining locations. For a new FTTH network, that means customers might be found on only about one home out of every three passed.

Keep in mind that, in most markets, 80 percent of profit is earned by two firms.

source: Bain and Company

That poses daunting financial return issues. So, sure, many fixed network telcos are reluctant to invest robustly in FTTH networks. But there are huge barriers to doing so, not the least of which is the paucity of revenue that could be gleaned.

Some do not believe that argument, and instead think telcos could earn a return if they invested more heavily. And some analysis of potential upside is therefore required. The numbers are daunting. Challengers often attack niches--parts of metro markets or smaller and rural markets where it is easier to grab market share.

Incumbents have other problems, as they most often are required to serve all parts of a city, and cannot simply choose not to serve some parts of the city. Beyond that, revenue from legacy revenues is challenged, and the revenue upside from consumer fiber to the home is mostly internet access.

The business case for full-city overbuilds can be made. But it probably cannot be made universally.

In Most Markets, 2 Suppliers Have 80% of the Profit

Market share often is a proxy for profitability. “On average, 80 percent of the economic profit pool was concentrated in the hands of just one or two players in each market,” say Bain and Company consultants. In other words, it really matters if a firm is number three in any market.

A recent Bain & Company analysis of 315 companies across 45 markets worldwide shows that the scale leader is also the economic leader in 60 percent of cases. But not always.

source: Bain and Company

Still, scale no longer is enough, and often must be augmented by other attributes. Proprietary assets, unique capabilities, the most-profitable customer base or scope economies can be important, Bain consultants argue.  

Alos, the dynamics of scale are changing. It now is possible for small firms to obtain scale benefits without owning assets or capabilities. Think about rented cloud computing versus information technology asset ownership.

So speed now matters perhaps more than scale. What matters is the ability to react quickly to changes in customer demand and preference.

Consultants at Bain and Company also argue it is “better to be a leader in a bad market than a follower in a good one.” But that is only because it is better to be a market leader, no matter what the market.

One rule I always have believed correct is that market share translates to profit margin. As with most such rules, there are qualifications. All other things being equal, market share matters.

But all things often are not equal.  “In about 60 percent of industries, we define leadership by scale—the company with the most market share (measured by revenue or volume) wins.”

However, in about 40 percent of industries, the company with the highest share of industry economics is not the scale leader. They have the most loyal and profitable customers, Bain consultants say.

They have the most differentiated products, brands or manufacturing process. They dominate an industry “control point”—they are positioned to control far more profit than one would expect, from revenue or a differentiated niche game.

But it also is better to be a leader in any market than number two or number three.

source: Bain and Company

Moving into New Ecosystem Roles is Difficult, if Necessary

One of the surest ways for any contestant in the internet ecosystem to broaden its portfolio is to move into an adjacency. It is, nevertheless quite difficult. Some obvious examples are app providers becoming device suppliers; telcos moving into entertainment video or cable companies moving into voice.

Moves into adjacencies might also include hardware suppliers moving into new product areas; software suppliers moving into new roles outside their present core.

Consultants at Bain and Company, for example, argue that the odds of success are perhaps 35 percent when moving to an immediate adjacency, but drop to about 15 percent when two steps from the present position are required and to perhaps eight percent when a move of three steps is required.

source: Bain and Company

And those are the easy ways to diversify. That is why one often hears it suggested that service providers “stick to their knitting” and focus on their existing core business. That might work for some. It will not likely work for many when the core business is shrinking, and shrinking rather fast.

Business Eras Last 40-50 Years. A new Era is Dawning

Business eras typically last about 40 to 50 years, consultants at Bain and Company say, and we are on the cusp of the next era. Speed is among the new requirements, as more value is delivered by services and digital products that can be created rapidly.

So disruptors such as Google, Facebook, Tencent, Tesla, Alibaba and Amazon provide profiles of tomorrow’s market leaders, some would argue. It long has been argued that a firm can be big and low cost, or can be focused and differentiated, but not both.

The digital disruptors have broken those rules.

source: Bain and Company

Capital access is important, but less so than in prior eras, Bain consultants say.

Most industries also have become more winner-take-all. A Bain study of 315 global corporations found that just one or two players in each market earned (on average) 80% of the economic profit.

Management horizons additionally are shorter.

Some Numbers Just Do Not Make Sense

Some numbers one sees in reports on broadband adoption just do not make sense.

More often than you’d think, you see a headline that X percentage of people, or X millions of people, “lack internet access.” Sometimes that is accurate. Many millions of people live where fixed network internet access networks are not available.

But it is quite another thing when it is claimed that people “lack internet access” because they have chosen not to buy a particular form of internet access, when it is available. Ignore for the moment use of mobile internet access, and look only at fixed network access.

It is something else again to claim that the digital divide is as wide as “five to seven times” less “likelihood to lack adequate access” in a city with at least 95 percent fixed network internet access purchase rates, with the lowest district rates being 93 percent take rates.

So here’s a headline I recently ran across: “Low-income areas five times as likely to lack internet access.” Here is the study that supports the claim.

My problem is that I am having a hard time figuring out, in a city where the lowest reported take rates are 93 percent of homes, where the “five times” to “seven times” gap comes from.

The report states that “95 percent of households report internet access in the place where they live (an increase of 10% since 2014).” That ranges from a high of 97 percent to a low of 93 percent in the city.

source: City of Seattle

It might be correct, at a national and high level, that living in poverty is a risk factor for households not buying fixed internet access, as the study indicates. But the study’s own data shows that 75 percent of Seattle homes defined as “living in poverty” do buy internet access.

It arguably is  true that buy rates tend to be lower for homes with a member of the household living with a disability, or homes where English is not the primary language, or households headed by someone older than 65, households containing only single people or minority households.

But one sees relatively little of differences of that magnitude in Seattle, despite the report’s claims.  

“However, we are also seeing significant gaps in access, particularly in low-income and insecurely-housed populations. People living in these communities are five to seven times more likely to lack adequate access to the internet than the average Seattle resident.”

The report’s data seem not to suggest actual behavior of that level. Ignore for the moment that “adequate access” is in other reports a measure of lack of physical facilities. What we are looking at here is not “access,” but “buy rates.

source: City of Seattle

According to the study, households with a disabled member have 85 percent buy rates. Non-English households have 90 percent buy rates. Households with an older adult have 91 percent buy rates, as do households with single adults living in them. Households of racial or ethnic minorities have 92 percent buy rates.

Yes, there are gaps in buy rates. But it is hard to make the math work for a claim of “five to seven times” greater likelihood to lack adequate access.

Methodologically, the study also assumes that the cost of internet access is the price paid for any service, including an internet access service, or a bundle including other services. That is a novel way of describing internet access cost, akin to the adage of “comparing apples to oranges.”

The study claims “households pay on average $150 per month for internet service.” Uh, not really. The study itself says that figure includes money spent by households to “access the internet and internet-related services.”

That means, if the household buys a bundled service, the $150 includes internet access, entertainment video and possibly fixed network voice, in some cases. Odd is the inclusion of video and voice as part of the fee to use the internet.

source: City of Seattle

Fort Collins, Colo. Municipal ISP Should Launch in August 2019

The city of Fort Collins, Colo. is installing its own municipal internet access network. Connexion  plans to sell gigabit service for $70 a month, 50 megabit service for $50 a month and phone service for $25. An "affordable" tier is still to be determined but has been deemed a priority by the City Council.

The entire network is slated to be finished by May of 2022, but the first neighborhoods are expected to be able to buy service in August 2019.

Comcast, the incumbent cable operator, and CenturyLink, the incumbent telco, already have adjusted their plans to meet the new competitive threat. In 2016, the incumbent rate cards showed a price advantage for Connexion. That might not be so true in 2019.

So Connexion might itself have to consider lower prices than originally forecast, as some of the Comcast packages already feature more bandwidth than 50 Mbps for about $50 a month.

source: New America

Now, CenturyLink sells its 40 Mbps service for about $45, without other promotions. Comcast sells its stand-alone 250 Mbps package for about $60 a month, and less if bought with a bundle of video or voice.

The city issued $143 million in bonds to pay for buildout, and the business plan calls for sustainability at about 28 percent take rates.

More than half of eligible households in Longmont signed up for its municipal broadband service within five years of its initial availability, so Fort Collins officials likely are optimistic they will reach the threshold of sustainability.

OneLife "OnePulse" Medical Smartwatch Works on AT&T LTE-M Network

OneLife Technologies Corp. has developed an LTE-M certified OnePulse smartwatch  operating on the AT&T LTE-M network.

The OnePulse provides data for heart rate, location, movement and sleep.  Using Bluetooth, the device can connect to other devices such as a pressure cuff, glucometer, SPo2 monitor or weight scale.

It is expected to be available for purchase by healthcare providers in March of this year.