Mobile Execs Say OTT Competition is Greatest Challenge

Mobile operator executives continue to believe that “disruptive competition” from over-the-top app providers is the single greatest business challenge they face, followed by uncertainty of the regulatory environment, lack of organizational agility and return on investment.  

Given the shrinking sales volume and revenue from legacy revenue sources (voice, messaging) challenged profit margins on newer services (internet access, enterprise data) and difficulty of competing in some new areas (data centers), such concerns are understandable. 

source: EY

Optimists continue to believe that connectivity revenues can benefit from “supporting” OTT app providers. And, of course, there is truth in that belief. The internet access revenue stream would not exist were it not for the value of internet-based apps. 

Connectivity providers that own content services, enterprise unified communications services or other OTT services also benefit. 

On the other hand, the internet also enables several types of competition for connectivity provider services, in the form of product substitutes. 

It remains unclear how the “edge computing as a service” develops. It likewise remains unclear what roles connectivity providers might play. AWS Local Zone, for example, is an edge computing service directly available to enterprises. Likewise, AWS Outposts puts AWS servers directly into an enterprise data center, creating yet another way AWS becomes a supplier of edge computing services.

Global Telco Share Prices Flat, Margins Dropping, But Not a Bad Outcome, Really

We should not be too surprised to learn that tier-one telco equity prices have not changed very much over the past few years. Companies in an industry with relatively slow incremental revenue growth, facing significant profit challenges, should find those trends reflected in their share prices. 

source: EY

Over a longer period of time, revenue has grown from the global recession of 2008 levels, but profit margins have declined. Some might predict a further dip as capital investment in 5G networks is made. Some of us think mobile operators have new tools and incentive to control such investments, in many cases even achieving 5G upgrades within the scope of existing capex budgets.

source: EY

The bottom line is that the telecom business, in monopoly or present competitive conditions, has never been a “growth” business, so we should never be surprised about relatively muted revenue growth or share price performance. 

The real battles are about maintaining modest growth, profit margins and cash flow as changes in the product mix and competitive challenges remain. It is not precisely “running in place,” more like “slow, steady ascent,” but that is a fairly reasonable way to describe a positive outcome. 

If outcomes are a bit boring, the execution challenges will be anything but.

5G Will Not Affect Consumer Mobile Revenues Much

There is a simple reason why it is unrealistic to expect 5G to alter retail connectivity provider revenue prospects very much: consumer ability to spend on communications is limited. In developed countries, for example, consumer spending on telecommunications services is about 1.5 percent to two percent of gross domestic product, and arguably is decreasing. 

source: ETNO

To be sure, spending can grow as GDP grows, but GDP growth is generally slow in developed markets, though faster in developing markets.

Also, while some other markets can grow because they become substitutes for existing products, communications actually faces the opposite problem: its products face substitution by lower-cost or free products. 

Yes, 5G will displace 4G accounts, but that is precisely the point: nearly every consumer 5G account simply replaces an existing 4G subscription. 

Some might therefore question the value of 5G. That misses a key point: the key immediate value is “more bandwidth at lower costs.” So 5G is important initially for service providers.

The eventual advantage is new enterprise applications enabled by 5G, in conjunction with edge computing, artificial intelligence and the internet of things. 

But on the consumer front, 5G is unlikely to move the revenue too much.

AWS Makes Bid for the Edge

It never has been clear how the edge computing market--particularly the "edge computing as a service" portion of that market, would develop. Plausible suppliers include cell tower companies, mobile operators, the hyperscale data center providers, data center providers or new specialists in the market.

But AWS is making big moves.

Amazon Web Services Inc. (AWS) has announced AWS Wavelength,  which provides developers the ability to build applications that serve end-users with single-digit millisecond latencies over a 5G network. 

Wavelength embeds AWS compute and storage services at the edge of telecommunications providers’ 5G networks, enabling developers to serve use-cases that require ultra-low latency like machine learning inference at the edge, autonomous industrial equipment, smart cars and cities, Internet of Things (IoT), and Augmented and Virtual Reality. 

AWS customers can now use the same familiar AWS APIs, tools, and functionality they use today, to deliver-low latency applications at the edge of the 5G network, around the world, AWS says. 

AWS is partnering with Verizon, Vodafone, SK Telecom, and KDDI) to launch AWS Wavelength across Europe, South Korea, and Japan in 2020, with more global partners “coming soon,” AWS says. 

It was probably inevitable that Verizon is partnering with Amazon Web Services for edge computing after AT&T and Microsoft announced their partnership for 5G-enabled edge computing.

Though each telecom giant is pursuing edge computing, the choice of a different strategic partner is a pattern with a long history, as doing so creates some amount of differentiation in the offers each can create. 

Verizon, says Amazon,  is the first technology company in the world to offer 5G network edge computing, and will use AWS’s new service, AWS Wavelength, to provide developers the ability to deploy applications that require ultra-low latency to mobile devices using 5G. 

The companies say they are currently piloting AWS Wavelength on Verizon’s edge compute platform, 5G Edge, in Chicago for a select group of customers, including video game publisher Bethesda Softworks and the National Football League. 

AWS and Verizon say the partnership brings “processing power and storage physically closer to 5G mobile users and wireless devices, and enable developers to build applications that can deliver enhanced user experiences like near real-time analytics for instant decision-making, immersive game streaming, and automated robotic systems in manufacturing facilities.”

AT&T calls its platform “Network Edge Compute,” which weaves Microsoft Azure cloud services into AT&T network edge locations closer to customers. That means AT&T customers will be able to use Azure services at the edge.

Enterprise Telephony Becomes a Feature of Productivity Suites-

By 2023, 40 percent of new enterprise telephony purchases will be based on a cloud office suite,  either Microsoft Office 365 or Google G Suite, analysts at Gartner predict. In part, that shift is the result of a couple of decades of declining investment in premises solutions and increasing investment in cloud-based solutions.

Some might say this change has voice communications becoming a feature of a productivity suite, in somewhat the same way that voice and messaging are features of a mobile phone's capabilities.

“As vendor investment in UCaaS has ramped up (while premises-based UC investment has been curtailed), UCaaS functionality now exceeds premises-based UC,” Gartner argues.

In fact, the old “private branch exchange” or business phone system market has been subsumed into unified communications, which includes traditional voice and telephony (fixed, mobile, private branch exchange, softphone), meeting solutions such as video conferencing or audio conferencing, voice mail, instant messaging and communications clients.

Much of What Matters in Life is Pretty Simple

How much of what matters in life is simply this?

How Much Share Does 5G Fixed Wireless Have to Shift to be Meaningful?

How much market share does 5G fixed wireless have to shift before it affects the profitability of the fixed network consumer internet access market? Not much. 

In recent quarters, for example, U.S. fixed network internet access net additions have totaled about six tenths of one percent of the installed base, with cable gaining eight tenths of one percent while telcos lost about two tenths of one percent. 

In other words, a shift of about two-tenths of one percent per quarter halts the telco decline. A shift of perhaps six-tenths of one percent--from cable to telco--actually causes cable share to begin a decline. 

That is what the stakes realistically are: a chance for telcos to halt, and perhaps reverse, the long-term decline of their market share in internet access. 

Cable TV executives in the U.S. market naturally express as much skepticism about the dangers 5G fixed wireless services pose for their consumer broadband business as telco execs say they are optimistic. Basically, it will no scale, or will scale too slowly to keep up with cable’s own planned bandwidth plans, cable execs tend to say. 

There is reason for the cable views. The threat of optical fiber to the home has existed for a few decades, but has not dented cable’s emergence as the leading supplier of consumer internet access connections using fixed networks. Cable has about 67 percent of the installed base and has essentially gotten more than 100 percent of the net new account additions for a couple decades. 

In fact, over the last 20 years, it would be hard to find a single year where cable broadband net account gains were not about 60 percent to 70 percent of all net gains. 

source: NTIA 

source: Broadband Trends 

source: Leichtman Research Group

But the impact of 5G fixed wireless is not that it dramatically upsets the market. 5G fixed wireless might be the only way telcos collectively can halt a long-term decline of their market share. 

It might be prudent not to envision any scenario where 5G fixed wireless actually upends the market share structure. Instead, 5G fixed wireless probably is relevant because it might shift just enough share to choke off the cable growth model, reverse the telco share loss trend, and then change profit margins.

It is very subtle stuff. Verizon, for example, only has to gain about 7,000 5G fixed wireless accounts per quarter to halt its customer losses. T-Mobile US and Sprint have virtually zero fixed network market share, so even smallish gains represent new accounts with average revenue possibly double what they get from mobile internet access accounts.