FTTH has Not Changed U.S. Broadband Market Share

With U.S. telcos and cable TV companies competing in the same lines of business, our traditional nomenclature long ago ceased to reflect reality. “Telcos” are not in the “voice services” business and “cable TV” companies are not in the “video” business.

The anchor service now is internet or mobile access, no matter which type of provider supplies the feature.

source: US Telecom

But the two industry segments remain largely distinct in terms of supply chain, network platform and culture, and we still have no elegant and clear way of describing both types of firms, much less the way to characterize business-focused or specialty providers of connectivity and infrastructure services such as metro fiber providers.

It still is meaningful to speak of the different business dynamics in different key segments. By and large, “cable TV” contestants are moving into lines of business long dominated by “telcos,” while the reverse process applies to traditional communications suppliers. But even some former cable TV firms are moving towards a largely post-video future based on becoming largely providers of communications services.

But it remains a clumsy matter. “Tier one” also remains a relevant way of categorizing firms in the business. And at least for a while, it appears the distinction between mobile-only, fixed line and firms with both kinds of assets will remain relevant. But even those categories are in motion.

Nor can we yet determine how to fit new access platforms into the framework. Low earth orbit satellite constellations, TV white spaces or other more-novel platforms will get some market share. And fixed wireless providers might become more important, though perhaps moving market share statistics mostly in rural areas.

Is a 50-50 Revenue Split for Apple News+ Unreasonable?

Content suppliers for Apple’s news-based subscriptions complain about revenue splits (as did app and game suppliers about similar distribution costs in the App Store). The channel conflict is real enough: unless a content supplier can go direct to consumer, distribution represents  a healthy chunk of total cost to deliver a product.

In principle, distribution costs include direct sales; advertising; packaging; incentives for distribution partners; credit and bad debt costs; market research; warehousing; shipping and delivery; invoice processing; customer service and returns processing, for example.

In some industries, the “cost of goods” can range from 30 percent to 80 percent of total retail cost. That might be likened to the digital content Apple will distribute.

source: McKinsey

Granted, traditional distribution operations have been oriented around physical products, not software, streaming and non-tangible products. One study suggests direct supply chain costs  represent four percent to 10 percent of cost; direct transportation costs a couple of percent to 10 percent of revenue; warehouse or distribution center costs perhaps two percent to 16 percent of revenue. The larger point is that distribution can range from a low of 10 percent to a high of 35 percent of total retail cost.

source: R. Pinon

The point is that any content supplier can go direct or indirect. Apple’s News+ is an indirect distribution or sales channel. What that is worth is a matter of perceived value and market power, played out in contract negotiations.

So much of the disagreement about revenue splits harken back to the older arguments between content owners and distributors generally. In the U.S. linear video business, some argue sports content alone represents half of the retail cost of the service.

It might therefore be the case that distribution (everything required to get the content to the end user) represents 40 percent or so of total end user price.  

source: Pocket Gamer

The point is that a 50-50 split of revenues between Apple and any specific content owner might seem out of whack. The alternative is the cost to sell the product direct versus indirect, using Apple. And that is far from an insignificant cost for any supplier, even of digital goods.

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