Stable, Competitive Markets Have a 4:2:1 Structure

Bruce Henderson, founder of the Boston Consulting Group is credited with a couple of foundational ideas about business, including the notion of the experience curve, which explains how the cost of products decreases with volume.

“Costs characteristically decline by 20 percent to 30 percent in real terms each time accumulated experience doubles," Henderson posited in 1968.

Among the ideas some may deem most important relates to market structure under conditions of competition.

"A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” Henderson argued.

Sometimes known as “the rule of three,”  he argued that stable and competitive industries will have no more than three significant competitors, with market share ratios around 4:2:1.

There are important implications. We may decry “bigness.” We may prefer that a plethora of firms exist. But the rule of three suggests a robustly competitive market will, over time, assume a stable form where three firms dominate, with market shares have a specific structure.

To wit, the leader will have market share double that of company number two, while company number two has twice the market share of the third firm. Empirical studies tend to confirm the pattern.

In most markets, argue Bain consultants, two firms have 80 percent of the profit. In other words, market share also 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.

That virtually perfectly corresponds to a market share pattern of 4:2:1, as the number-three provider tends to have less than 10 percent share, in that pattern.  

One sees this pattern in some telecom markets. Looking at market share and return on invested capital for the three largest telecom providers in Thailand, China, and Indonesia since 2015, you can see that financial return and market share tend to be directly related.

The real-world structure does not precisely match the rule of three prediction, of course, with Thailand having the almost-perfect correspondence between predicted results and actual results.

In many other markets, two observations are apt: where the 4:2:1 pattern does not exist, markets either are not competitive, or not stable, or both. And though we might be tempted to think such patterns exist mostly for capital-intensive industries, the pattern seems to hold in most industries.  

Source: Reperio Capital

My rule of thumb incorporating the “rule of three” is that the leader has twice the share of number two, which in turn has twice the share of provider number three. In Thailand, China and Indonesia, the general pattern holds.

In Thailand the pattern holds well. The leader has 53 percent share, number two has 31 percent and number three has 17 percent share.

Applying the rule of three in consumer telecom markets is complicated, however, since the “markets” include segments such as video entertainment, internet access, voice and mobility where specific players have distinct market share profiles.

The broad conclusion is that telecom markets are not yet stable.  

Writing and Thinking Go Hand in Hand in Business Communications

Writing and thinking go hand in hand, it often is said, and said again. Fuzzy writing often indicates fuzzy thinking.

“In fact, clear thinking is the most important (and most often overlooked) aspect of good writing,” which in addition is something most managers find they must master, since communication with superiors, peers and direct reports becomes more important.

When one is good, the other is likely to be good as well.  

“Think like a journalist” is another bit of advice for business people when writing for other colleagues.

Journalists are trained to use an inverted pyramid when constructing stories, putting the most important “so what?” information first, then adding detail later, with word economy always important.

source: Pressbooks

Busy executives will always want you to get to the point quickly. It likely cannot be said too often: clear writing is the result of clear thinking.

Still Little to No Evidence Broadband Actually Improves Productivity

You would be hard pressed to find any evidence for the thesis that broadband clearly boosts firm productivity, even if we all seem to believe that is the case. Some studies that find some small benefit cannot separate broadband from the other information technology introduced at the same time. But most of the time, it is hard to identify a clear correlation, much less causality.

As a practical matter, governments and others will continue to argue that broadband service has to be improved, because, you know, productivity will improve and economic growth will be aided. And, as a practical matter, firms will continue to deploy, and customers will buy, better broadband.

Still, it is worth noting that there is scant proof that broadband improves productivity.

“We find that the average effect of UFB (ultra-fast broadband) adoption on employment and... productivity is insignificantly different from zero, even for firms in industries where we might expect the returns to UFB to be relatively high,” say researchers Richard Fabling and Arthur Grimes,

One study found no correlation between broadband and productivity, when looking at digital subscriber line deployments. Another study also found no causal link between broadband use and productivity.

Yet other studies suggest that firm using more information technology, including broadband, do raise productivity, though it is not clear whether it was the broadband or the other innovations that contributed.  

Some studies note that it is difficult to tell which came first: a firm’s ability to wring value out of information technology, or broadband enabling that for a firm.

“One view is that good firms with good managers do most things in a better way, including use new practices at the right time,” note researchers from Stockholm University. “This makes studies of the impact of innovation, new management practices, work organisation and ICT use meaningless, since the good firms are much better in many other ways which are and can not be measured.”

Broadband and productivity seem to link together in a positive way, the researchers found. “If the company has broadband it is more likely that it will have higher productivity,” they say.

The study found that more productive firms use more technology. The problem is that researchers cannot conclusively say the correlation is causal. Maybe firms that use more technology are better at running their businesses. In any case, the researchers do conclude that “ICT use improves firm productivity.”

To be sure, virtually everyone assumes that broadband is good, and that faster broadband is better, even when studies do not suggest (whatever the social or educational value) there is a clear and quantifiable link between broadband and business productivity.

How AI Gets Used in Telecom

A survey of chief information officers by Gartner finds that 52 percent of telcos now use artificial intelligence in the form of chatbots.

IDC says 64 percent of telecom service providers are investing in AI systems to improve their infrastructure operations as well.

ZeroStack’s ZBrain Cloud Management, which analyzes private cloud telemetry storage and use for improved capacity planning, upgrades and general management.

Aria Networks, an AI-based network optimization solution that counts a growing number of tier-one telecom companies as customers.

Sedona Systems’ NetFusion, which optimizes the routing of traffic and speed delivery of 5G-enabled services like AR/VR. Nokia launched its own machine learning-based AVA platform, a cloud-based network management solution to better manage capacity planning, and to predict service degradations on cell sites up to seven days in advance.

Broader applications include applied AI for self-optimizing networks, software defined networks, network functions virtualization, marketing (personalized offers, advertisements), public safety use cases, traffic management, local event management, distributed cloud services or low-latency services.

Many of those apps also will support edge computing use cases.

SD-WAN Upends "Cheaper, Faster, Better: Choose 2" Choices

Many networking or computing alternatives offer value in terms of lower cost (capital and operating cost). SD-WAN offers a good example. The classic engineering trade off for all IT or communications alternatives is pretty simple: “You can have it cheaper, faster, or better, pick two.”

SD-WAN promises to demolish that set of choices by allowing improvements on all three dimensions, especially for connecting remote locations and branch offices.

SD-WANs offer better agility (faster and simper deployment), better performance and reliability while also reducing costs.

Software-defined WANs, as the name suggests, abstract edge connectivity and also  virtualize the WAN. In an overlay SD-WAN, new SD-WAN appliances are deployed on an existing routed network, either behind the routers or replacing them as the branch connection to the WAN, analysts at Nemertes Research note.

SD-WAN appliances also can collapse the typical branch stack by replacing other branch WAN appliances such as optimizers and firewalls.

In-network SD-WANs--often tied to Network Functions Virtualization--are more important for managed service approaches, and might be more attractive to enterprises that prefer to offload or outsource WAN management to third parties.

source: Nemertes Research

Lies, Damned Lies and Statistics

Nothing remains unchanged in the modern communications business, so we should not be surprised at how much, and how fast, “average” fixed network internet access speeds increased in the U.S. market in 2018.

To be sure, the actual value or meaning of most cross-country internet access statistics is nuanced and perhaps somewhat questionable.

“Do counties with mostly 25 Mbps broadband connections fare better economically than counties with mostly 10 Mbps broadband connections?” George Ford, Phoenix Center chief economist rhetorically asks. “I find no evidence of such an effect here, at least with respect to the growth in jobs, personal income, or labor earnings between 2013 and 2015.”

“Broadband (and higher speed broadband) is not randomly distributed across geography, but rather is deployed in areas where the ratio of demand to costs is favorable, complicating the task of discovering broadband’s influence on economic outcomes,” Ford notes.

To cite just one example, “population density in counties with predominately 25 Mbps service averages 603 persons per square mile, but only 32 persons-per-square-mile for counties with predominately 10 Mbps broadband service,” Ford notes.

According to measurements by Ookla, fixed network internet access speeds increased by nearly 40 percent in 2018 alone, largely on the speed boosts instituted by cable TV providers.

But that is not the only surprising statistic one might encounter.

A 2014 study of broadband adoption in the United States and European Union contained some surprising comparisons. On several key measures--including faster speeds, 4G service, fiber to home and cable modem service, the United States had a large lead over EU nations as a whole.

By 2017, the take rates for fixed network internet access remained at 75 percent, though coverage (ability to buy) was at 97 percent.

Perhaps significantly, a European Commission report recently said that “although fixed broadband is available to 97 percent of EU homes, 25 percent of homes do not have a subscription.”

One apparent reason is that although subscription growth “was very strong until 2009, but has slowed down in the last few years, partially due to fixed-mobile substitution," according to Techknowledge.

In 2017, about 15 percent of EU homes bought internet access at speeds of at least 100 Mbps. In 2016--a year earlier--about 23 percent of U.S. homes were buying service of at least 100 Mbps.

By the end of 2018 the average U.S. fixed network internet access speed was 95 Mbps, according to Ookla meaning half the customers had speeds faster, while half had lower speeds.  

The EC study also highlighted the importance of taxes when comparing retail prices for services such as linear video subscriptions. The posted retail prices are one thing; the actual costs--including all taxes--are something else.

As the study illustrates, even if posted retail prices for U.S. cable TV video are higher than Denmark’s prices, for example, the net cost of service in Denmark is higher, because of higher taxes.

The larger point is that although most casual observers would assume the EU has higher percentages of internet access connections running at 100 Mbps or faster, that is not true. Nor is it the case that customers actually buy services at such speeds, even when available.

It is good public policy to make quality broadband service available. It is a separate matter whether consumers want such services, how much they are willing to pay for it and--most importantly--what economic and social value can be wrung from such usage.

It is difficult to impossible to confirm that speed increases beyond 100 Mbps (or any other minimum speed) actually produce quantifiable economic or social outcomes.

Global Telecom Growth Less than Rate of Inflation

Telecom never has been classified as a “growth” industry, as equity analysts use the term. In fact, for most of its history, telecom was a “public utility,” viewed much as are electrical and water enterprises are seen.

That is to say, connectivity providers have often been government owned, highly regulated enterprises not expected to grow revenues more than the rate of inflation.

The era of mobile communications has shaped our perceptions in new ways, compounded by the privatization and deregulation waves that began in the 1980s.

As mobility has become the way we supply communications services in those parts of the world that never had robust communications in the past, it has seemed that telcos could become “growth” engines.

Once we reach saturation of facilities and services, the older framework is likely to reassert itself. The most-recent revenue forecast by STL Partners suggests revenue globally will grow less than the rate of inflation through 2022. That might, in fact, be the future and fundamental reality. Essentially, the global telecom business will begin to contract, in real terms, even as nominal revenue grows, albeit less than does inflation.

And even that outcome also hinges on service providers being able to discover and create enough new revenue sources to replace about half their current revenue every decade. Barring such success, revenue will contract faster.

  

source: STL Partners

That will be unsettling. A reasonable observer would safely make a few predictions. No industry that is contracting can avoid major waves of consolidation; some bankruptcies and business model changes for the survivors.

It will not be fun, for most.