How Will Telco Strategy Change Next?

Business strategies in the global telecom business have changed over the past four to five decades. Five decades ago, profits were driven by long distance calling and the base business was selling monopoly voice to everyone. 

Sometime in the 1980s the revenue and profit growth shifted from fixed network long distance to mobility. Fixed network operators facing stiff competition switched to a multi-product consumer services strategy. 

By the 2000s subscription growth drove mobile revenues. By the 2010s internet access began to be the revenue driver for fixed and mobile operators, not voice or subscriptions. 

It might be a matter of debate how much internal industry decisions and external forces have shaped strategy. 

As we enter the 5G era, it is possible to say that the fortunes of some mobile operators were determined early in the 3G era. Though it is reasonable to suggest that issues ranging from addressable internal market to regulatory policy have mattered, some argue that excessive spending on spectrum licenses for 3G created debt problems that hobbled mobile operator ability to foster growth.

But business strategy might also have played a role. When organic growth is quite slow, one obvious solution is to expand geographically, buying market share out of region, in other words. Many European firms, for example, went on a huge global expansion spree in the 3G and 4G eras. 

It also is impossible to ignore the impact of the internet and IP generally. Those trends essentially opened up the communications networks, ending the walled gardens that historically characterized telecom business models.

At the same time, the end of walled gardens, and the ease of competing “over the top” also mean that any telco-owned apps often must compete with third-party apps. And telcos never have been known for their prowess at creating big and popular new apps. 

Historically, there has been a simple solution for telcos wanting to enter new lines of business: acquisition. 

The new problem is that app provider market valuations and multiples make acquisitions of such firms expensive for telcos. In other words, telcos contemplating big app asset acquisitions encounter the price of expensive-currency assets to be bought with cheap currency. 

That has restricted the historically-important acquisition method telcos have used to enter new markets. In the past, most telcos have gotten entry into new and faster-growing markets by acquiring, rather than building, the new businesses. 

That is much harder when the would-be acquisitions are of high-multiple application suppliers, using low-multiple telco stock or borrowed money. Most telco free cash flow typically must be deployed to pay dividends and reduce past borrowings. 

Taken together, all those trends now suggest that decades-old geographic expansion plans conducted by some mobile operators now are unwinding, as the contribution to revenue growth has not often been matched by increases in profits. 

And that poses new strategy issues: where is revenue growth to be found if geographic expansion, once a logical path to growing revenue, is unavailable? The other logical answer--acquisitions of fast-growing firms in new markets--often is impossible because the market multiples of such firms are high, while telco valuations are low. 

In other words, acquisitions big enough to move the revenue needle cannot be made. Smaller acquisitions are possible, but often, because of small size, cannot move the revenue needle. And, in any market where scale matters, organic growth might never be fast enough to gain leadership. 

Most telcos, in most markets, have learned from their experiences with overpriced spectrum bids. Seldom, anymore, do spectrum prices seem unreasonable. On the other hand, the core telecom business is in slow growth mode in most markets, if still relatively higher in some emerging markets. 

Among the big new questions--if geographic expansion is not generally feasible--is how to reignite growth, especially in promising new markets. 

Compounding those questions is the growing need to look at revenue growth from outside the legacy domains based on connectivity services. Almost everyone assumes that will be quite difficult.

The traditional fear is that telcos really are not good at running businesses outside their core. And there are good reasons for that opinion. But with growth so slow in the core business, and competition not abating, while geographic expansion often is unpromising, telcos may ultimately have no choice. 

Of course, there are other paths. It might well be that most telcos will be unable to sustain themselves over the next few decades, as they are unable or unwilling to expand beyond connectivity. In that case, bankruptcy lies ahead, with potential restructuring of much of the business. 

Precisely how advanced connectivity still can be provided, if today’s business models fail, is not clear. It long has been the conventional wisdom that, in any competitive market, the low cost provider wins. Who those low-cost providers might be then is the issue. 

The other path, which only the biggest telcos might contemplate, aer risky, expensive acquisitions--exposing themselves to harsh criticism--to create new business models not so exclusively dependent on connectivity revenues. 

We already can see some illustrations of the stark choices. When big and small cable operators alike start to say their future is internet access, not video or voice, one must ask whether such a single product strategy will work, long term. The major reason why telcos and cable operators in the U.S. market have survived competition is a switch from single-product to multi-product strategies.

Essentially, they sell more things to a smaller number of customers. That might not work if the new model is one product sold to many customers, especially if the main competitors in those markets are competent. 

Cable operators clearly dominate market share in the U.S. fixed network internet access business. The issue is whether the business model works without other customer segments and products. If the answer is no, then the multi-product strategy will still have to be pursued.

The big shift might be from multi-product consumer bundles to multi-product operations based on consumer fixed network internet access, consumer mobility and business capacity services.

U.S. Mobile Market Share is Unstable, With or Without T-Mobile US Merger with Sprint

Market share in the U.S. mobile market has in many past years depended partly on whether one counted subscribers or revenue. In 2019 AT&T was biggest, measured by accounts. In the past, in some years Verizon was biggest if one measured by revenue. 

By 2018, AT&T arguably was the leader in both revenue and subscribers. 

This look a 2018 revenue shows AT&T leading in revenue and subscribers, overall.

source: Statista

One could make an argument that Verizon lead in postpaid accounts, though. 

source: Cowen and Company

Perhaps ironically, whether the T-Mobile US merger with Sprint is approved or denied, U.S. mobile market structure will remain unsettled and open to share changes of some size. The reason is that, longer term, markets tend to take an unequal share distribution. 

With or without a T-Mobile merger with Sprint, U.S. market structure is unstable, using some classic rules of thumb. Heavily capital intensive industries serving mass markets often take an oligopolistic shape, if not a monopolistic shape. 

At best, only a few firms are sustainable. 

Most stable markets are led by a few firms. In fact, many stable markets take a particular shape. As the PIMS database suggests, a stable industry structure eventually tends to take a shape where the number-two provider has half the share of the leader, while the number-three provider has share half that of number two. 

That tends to produce a market share distribution of something like 4:2:1. So far, that tends to be true for physical industries that are asset heavy as well as internet and applications businesses that are asset light. That might be why it so often seems to be the case that a market follows a rule of three. 

More importantly, in many markets, just two firms have 80 percent of profits. 

So with, or without, a merger of T-Mobile US with Sprint, the U.S. mobile market would have an uncomfortably unusual market structure. The gap between AT&T and Verizon is not wide enough to be stable, for example. 

When the market structure 4:2:1 or something close to it prevails, competitors two or three do not have incentives to launch price attacks against the market leader, as the leader has the resources and incentive to do whatever is required to beat back a price attack. 

Big Changes in Product Strategy Must Come, for Fixed Network Service Providers

Google Fiber will no longer offer a linear TV product to new customers, essentially migrating the business model to a more-typical independent internet service provider model that is based on one product, not a triple play or dual play (video or voice). 

Comcast and Charter Communications, though noting that entertainment video still is a highly-significant revenue source, also say they now focus on core communications--especially internet access, business services and the new mobility segment--as their revenue drivers. 

Some small cable TV operators and small telcos might be moving the same way, essentially letting their video customer base dwindle, as mobile phone and internet access become the ubiquitous services consumers want. 

The big problem for small and rural service providers always has been that the linear TV business model is quite challenged. Few such operators have ever actually claimed they make a profit on entertainment video. 

In rural areas, where there essentially is no business model, subsidies always have made the difference between no service and “some level of service.”

At times, some rural service providers that have taken on too much debt might find themselves unsustainable. 

There are clear business model and strategy implications. In a competitive market, the reasonable assumption must be that two excellent providers will split market share; three excellent providers might expect only 33 percent share. 

There are two really-important implications. Without a lower cost structure, any single firm cannot expect to prosper if it has been built to support two, three or more key products. In the monopoly days, one service could support a full network, whether that service was TV, radio, voice or telegraph. 

In a competitive market featuring skilled competitors, suppliers might have to sustain themselves with customer share of 50 percent, 33 percent or less. That is why the triple play became important. The revenue impact of serving one out of three locations is mitigated if three services are sold to each customer location.

All that changes if we start seeing one key product supplied by most firms in competitive markets. Lower costs are necessary. That is why most independent internet service providers have such low overhead, compared to the larger telcos and cable companies.

But it also is likely that no bigger firm can get by simply by slashing costs. Additional revenue must be generated from other products and roles, to replace the dwindling legacy sources. 

So we might predict two developments. Single-product fixed networks using cables are only feasible if internet access is the product. Voice and video will not generate enough revenue to support a fixed network. 

So far, it has been possible for a wireless network to support itself on the strength of TV, radio or internet access. 

That changed in the competitive era, when single-product strategies based on high adoption (market share of 80 percent or more) began to fail. Multi-product sales based on selling more things to fewer customers (scope), rather than one product to nearly everyone (scale). 

All that seems to be changing as revenue upside from voice and linear video dwindles. Video arguably is the more-difficult challenge, as cost of goods is quite high. 

It certainly will make more sense, in a growing number of settings, for highly-focused, low overhead firms to try and make a go of things based solely on internet access, abandoning the multi-product strategy. 

But other changes must follow. Either overhead, capital and operating costs must be drastically pared, or new revenue sources found, or both. The decades where product bundles compensated for lower market share seem to be ending.

Something equally challenging now emerges: how to make a profit from a one-product network with lowest take rates.

5G Really is Not the Issue

Much of the upside from “5G” actually is from edge computing or internet of things or artificial intelligence. The term “5G” as popularly understood often is not about 5G as such, but the value to be produced by several related technology trends, all working together. 

"5G itself isn’t a magic bullet; it’s a misunderstanding to assume 5G will immediately make everything fast," says Jake Moskowitz, head of the Ericsson Emodo Institute. "If I get a 5G phone right now, even if I live in a 5G network, I’m unlikely to notice much of a change.”

“That’s because 5G is really an enabling technology, and for 5G to have a big impact, it requires multiple 'complementary technologies to come along with it, and those are not in place yet," he adds.

Bernie Ebbers Dies. For the Last 50 Years, Much of the Telecom Industry Also Died

Bernie Ebbers, WorldCom founder, has died. In some ways, WorldCom was emblematic of a frenzy of super-heated growth efforts in many parts of the telecom business around the turn of the century. 

The year 2000 also was notable as it represented the absolute peak of the traditional voice business in the U.S. market. After 2000, every part of the U.S. voice business began a long, steady revenue and subscriber decline. 

Though the company was marred by a major accounting scandal that sent him to prison,  Ebbers began building WorldCom by selling long distance voice services in 1983. Through a string of acquisitions, WorldCom even purchased the former MCI in 1998. In 2000 Worldcom tried to buy Sprint as well, though that deal was scuttled by regulators.

For some of us, the $35 billion acquisition of MCI was a landmark, as MCI is the firm that first brought competition to the U.S. communications services market, challenging then-monopolist AT&T with a private line running between St. Louis and Chicago in 1969. 

Think about it: until 1972, AT&T did not even have a marketing department. What would have been the point for a monopoly communications supplier whose profits were a guaranteed rate of return on its investments? 

Until 1968 AT&T was the sole supplier of U.S. telephones, transmission cables, switches, software and services for most of the United States. No other firms were allowed to attach devices to the AT&T network until after 1968. 

But the 1969 Carterphone Carterphone decision allowed use of third-party acoustic modems on the AT&T network. 

MCI also launched legal efforts that most would agree lead to the 1982 Modified Final Judgment that ended the AT&T monopoly, and the 1984 birth of legally separate Bell Operating Companies and AT&T, launching the era of competitive telecommunications in the United States and elsewhere. 

As with the later Telecommunications Act of 1996, is the first major overhaul of telecommunications law in almost 62 years, competition was the key objection. But something funny happened. Everyone thought the point was introducing competition into the voice business. 

By about 2000, the whole voice business began declining, with the internet emerging as the key feature of the next era of telecommunications and applications. Since 1968, the whole presumed point of competition was lower prices for long distance calling, local telephone service and third party supply of phones. 

In his 1986 book The Deal of the Century, author Steve Coll predicted that “AT&T will find itself along in the basic long distance market by the end of the century.” 

In truth, none of the former giants of the long distance business survived. 

By 2005, AT&T had been acquired by SBC Corp., one of the former Baby Bells. MCI was acquired in 1998. And Sprint, whose long distance business became a revenue footnote, was acquired by Softbank in 2012, primarily for its mobile business. 

The big takeaway from decades of telecom deregulation is simply to note that nearly every major telecommunications regulatory effort since 1968 (about fifty years) aimed in some way to introduce more competition into the voice business. 

Along the way, the business itself shattered. There is at present almost no upside to further efforts to “deregulate voice,” which has ceased to drive industry revenue or consumer demand. Voice is an essential function, but not the key revenue driver. 

Equally crucially, the universal use of internet protocol means we have formally divorced application ownership from network ownership. All telecom networks now are essentially “open.” Any lawful app provider is free to use the networks. 

So while innovation is virtually limitless, network access profitability now is a new issue. Telecom operators used to develop, own and profit from every app on the network. These days, connectivity suppliers profit only from a few owned apps, and they are never the sole suppliers. 

It is not clear what the next 50 years will bring. But the general movement has been towards products, services, revenues and profits shifting to third party users of connectivity networks. 

Along the way, some connectivity providers also have shifted their own revenues in that direction. Over time, it is possible that much of the “connectivity function” is subsumed into “functions that support our business model,” which might be advertising, e-commerce, marketing or some other activity. 

So advertising-driven Google operates its own data centers, subsea networks, fiber to home networks, Wi-Fi networks and mobile networks, and builds its own computing, mobility and content acquisition devices. 

Google develops or experiments with novel internet access platforms using balloons, satellites or unmanned aerial vehicles and creates its own content services. 

Amazon’s e-commerce model requires it to operate its own data centers, subsea networks, a private content delivery network, video and audio services, devices and apps. 

Facebook runs its own data centers, subsea networks and satellite networks to support its advertising business. 

It is hard to see those trends abating. Nor does it seem unreasonable to expect continued pressure on the connectivity provider business model, as revenue growth is slowed by competition and customer saturation. 

Worldcom and MCI were part of a huge change in the telecom business few expected. Functions might remain, but huge entities might continue to find themselves challenged to survive in the old ways.

U.S. Internet Access Actually is Not Slow or Expensive

About 91 percent to 92 percent of U.S. residents have access to fixed network internet access at speeds of at least 100 Mbps, according to Broadband Now. 

source: Broadband Now

Some 61 percent of U.S. residents have access on stand-alone plans at $60 a month or less. It is more difficult to tell what prices most consumers pay as so many customers buy service bundles where the cost of internet access is lower than the stand-alone price. 

According to one estimate, 51 percent of customers with internet access between 100 Mbps and 249 Mbps were on discount plans. Of customers with service faster than 250 Mbps, 65 percent of accounts were on discounted rates. Basic rate accounts offering 55 Mbps to 99 Mbps also were on discounted plans about 54 percent of the time. 

source: Wall Street Journal

Some estimate the typical price is about $60 a month. That matches Comcast’s reported cash flow per unit of $63. 

source: Broadband Now

Many will complain that these prices are “too high,” but U.S. internet access prices are part of total telecommunications spending of less than two percent of gross domestic product, less than in Japan and South Korea but more than in Europe. 

source: ETNO

The Whole Point of Deregulation is to Cause Incumbents to Lose Market Share

The global telecommunications industry was for a hundred years a slow-moving utility business that changed very little from year to year. The change from monopoly to competition, starting in the mid 1980s, increased the tempo of change, but the industry still is recognizable from what it was 35 years ago, though its products have changed. 

On the other hand, the whole point of deregulation is to shift market share from incumbents to challengers, and that has happened, virtually everywhere. In many markets, and for some products, incumbents no longer are the market share leaders. 

Think of how much the WAN connectivity business has changed. Three decades ago, wide area networks were built and operated by telecom companies. Today, the primary suppliers are third parties--often big end users--and new entrants, not legacy telcos. 

Traffic demand also now is shaped by app providers and their data centers. 

The drivers of global WAN capacity now are video content and internet applications supported by hyperscale data centers owned by major app providers. Those enterprises also build, own and operate their own global WAN networks, paid for by revenues from their app, content and device businesses. 

source: TeleGeography

source: TeleGeography

The function of the WAN remains, but it is an internal cost of doing business for some major app, commerce or content providers. Just as important, such private WANs no longer represent as much of a WAN services revenue stream. 

source: Cisco

One way of looking at traffic flows is that traffic will flow between the hyperscale data centers operated by a relatively few firms, as well as between those data centers and users of apps hosted at those locations. 

source: Vox.com