Ecosystems and Growth

"Orchestration" as the Connectivity Provider Platform of the Future

As far as analyses go, this positioning of the communications business, by consultants at Accenture, is somewhat reassuring. Unlike some other industries, including the postal service, energy and transportation, the communications business is less volatile.

On the other hand, communications also is more durable and less vulnerable. On the other hand, communications is not among the more viable, most durable of industries either, such as the software and high tech industries.

source: Accenture

The point, Accenture argues, is that connectivity providers need to move beyond connectivity towards orchestration (up the stack).

source: Accenture

Supply and Demand for Internet Access

Demand matters when we discuss and evaluate the state of consumer broadband access. A recent survey of U.K. consumers found that 15 percent rely solely on their smartphone for internet connectivity. That is not to say better fixed network service and lower prices are unimportant.

But we always are looking at two different things: supply and demand. In the supply area, regulators want fast access, with ubiquitous coverage. But supply is not demand. Even where gigabit access is available, most customers actually buy some some other--and slower--speed access.

What ultimately matters is not simply that quality broadband is available, but what services people actually value and buy. Since there are virtually no applications in the consumer realm that require gigabit access, consumers often freely choose to buy services in the middle of the range of available choices.

Sometimes they choose to rely exclusively on mobile access. Most often they use both fixed and mobile access.

In the U.S. market, though internet use is perhaps 89 percent, fixed network internet access is reported in some studies at only about 65 percent, somewhere in the 70-percent range in other studies, and over 80 percent in other studies.

source: Pew Research Center

Some 19 percent of U.S .households are mobile only for at-home internet access. Add the fixed and mobile-only households together and perhaps 84 percent to 99 percent of U.S. households buy some form of internet access service.

The point is that that nearly 20-percent mobile-only demand suggests fixed network demand is close to saturation.

Beyond that is something more important: the ability to wring value out of broadband internet access. In principle, and likely in fact, different users, populations and countries are able to produce more value from internet access than others. In other words, they are able to turn internet access into productivity gains.

In the final analysis, value is what matters, not speeds, not even always coverage. What humans and firms are able to do with internet access is what matters.

5G is Like "Fourth Industrial Revolution"

You know 5G "is a thing" now that the phrase pops up so much in the consumer media. But much of the characterization is like our understanding of fourth industrial revolution: a high level complex of many changes beyond the narrow understanding of the term.

Among the reasons 5G sometimes is hard to understand is that it has become a verbal shorthand for several relatively independent changes in the computing, applications, infrastructure, private and public networks areas. The changes are linked and often dependent upon each other.

At one level, 5G is the next generation mobile platform.

At another level it is a part of a complex of changes including edge computing, internet of things, commercialized millimeter wave spectrum, access methods and business model changes.

source: Gemalto

When observers or supporters talk about the advantages of 5G, they sometimes actually are referring to the advantages of edge computing or internet of things. If one looks at the specifications for 5G, one sees quickly that it is application-focused in a few key ways.

The network is optimized to support devices with extremely long battery life, a characteristic of many internet of things use cases. The network is far more dense, supporting orders of magnitude more devices per local area, again an anticipation that many more devices (not phones) are going to be connected.

The ultra-low latency design means some new use cases requiring such performance will be supported in the network for the first time. But ultra-low latency also implies local computing, within a device, on the premises or very close to it. The 5G network latency only helps so much if intensive data operations must be performed at remote cloud data centers.

Ultra-low latency applications sometimes will require both edge computing and 5G. Connected vehicles might require extensive new vision and sensing systems; robust edge computing and ultra-low-latency communications.

Edge computing might involve devices, local area networks, enterprise mainframes, off-premises but local computing and cloud computing as well, with a mix of wide area network connections.

Nor are all the use cases necessarily built on 5G access. Sometimes the local connections will use Wi-Fi or some other short-range wireless technology. Local access can be by optical fiber, cable modem, fixed wireless, mobile network, satellite, low power wireless networks, TV white spaces or other platforms.

New ways of using spectrum (sharing, aggregating), license modes (unlicensed, shared, licensed) and commercial use of previously-uneconomic spectrum (millimeter wave) also are part of the broader changes colloquially called “5G.”

And while 5G will enable some new consumer apps, it might be most distinctive for enabling new enterprise use cases.

So welcome to the somewhat-confusing world of 5G, where much of what is talked about is not just 5G, or sometimes not 5G, but something else.

In other words, 5G as a popular concept is more than the next generation mobile network. It often includes edge computing, internet of things, applied artificial intelligence; different or new roles in the infrastructure ecosystem; commercialization of previously-unusable spectrum; new ways to access and use spectrum and new business models.

Just remember that not everything that happens is 5G, even if that seems to be the easy catch phrase to describe a whole bunch of changes.

The fourth industrial revolution, of which 5G is, by design is a high-level concept describing a range of technology changes that is blurring the lines between the physical, digital, and biological spheres.

Such a characterization calls the First Industrial Revolution the time when water and steam were applied. The Second revolution used used electric power. The Third used electronics and information technology.

The fourth industrial revolution is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres, some say.

source: Principa

Such a characterization calls the First Industrial Revolution the time when water and steam were applied. The Second revolution used used electric power. The Third used electronics and information technology.

The main point is that we are moving beyond "information technology" and "mobility" and even the "internet" to some new phase where artificial intelligence, sensors and augmented reality play key roles underpinning the economic system and life.

The analogy is that 5G is used in a broad sense (5G mobile, IoT, applied AI, edge computing, virtualized networks, millimeter wave spectrum, new ways of using spectrum, new use cases and business models) as well. Many who speak of the 5G "revolution" actually refer to one of the other linked changes, more than 5G the access platform.

It is big, complicated, hard to quantify. 

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.