Did Any Telecom Firms Actually Benefit from Covid-19?

The most interesting story that might emerge from the Covid-19 pandemic is whether any telecom or connectivity firms actually benefited financially.

Economic downturns--whatever the cause--are not “good” for connectivity providers, even at a time when reliance on communications, mobility and cloud computing might lead one to think revenues “should” be increasing because of that reliance. The Great Cessation of 2020 is not different. 

Service providers have experienced subscriber losses. A revenue contraction has widely been expected, is expected and earnings reports are starting to show that has happened. 

Customer spending dropped because of the Great Recession of 2008.  And one can infer that from job losses from the internet bubble collapse, the Great Recession and the present Great Cessation. 

source: Nordea, Macrobond

The collapse of the internet bubble in 2001, the Great Recession of 2008 and the Great Cessation of 2020 all lead to a cessation of growth at the very least, temporarily lower revenue for most connectivity providers, and bankruptcy for firms in some hard-hit sectors. 

It is not actually hard to explain why. Excess capacity and insufficient demand doomed many firms in the internet bubble collapse. Simply, when one’s customers go out of business, demand drops. Nor are connectivity providers exempt from the reduced expenditures characteristic of all economic downturns. 

Some might casually think the Great Cessation was different. It happened at a time when reliance on communications and remote computing is higher than ever before, but was intensified by mandatory “stay at home” rules. Businesses and schools were forced to close, instantly changing demand patterns. 

Factories stopped producing. Offices and retail businesses were shuttered. Travel fell off a cliff. Employees who got paid to work at home might not have noticed the harshest effects, but many millions of workers simply lost their jobs. Many millions of small businesses ceased to exist. 

And keep in mind that usage is not revenue. As much as at-home internet usage climbed, revenue did not, as such services often are not directly usage based. In fact, mobility and fixed network services often feature what is essentially “unlimited” usage, given the large size of usage buckets. 

In the U.S. market, most mobile customers have effectively unlimited voice calling and text messaging, while fixed network voice and internet access also is effectively unlimited. Most large internet service providers additionally removed usage limits during the lockdown, so usage limits formally vanished. 

So the business impact was that sharply higher usage did not drive revenue higher. Bouygues Telecom, for example, reported improved financial performance “after the lockdown ended.” Some might be tempted to spin that as a “Covid helps” story, but that is wrong. Revenue did not grow until after the lockdown was ended. 

A similar story is almost certain to play out at other telcos. Recessions simply are not good for business.

Is Network Slicing a Feature or a Service?

Will network slicing, a new feature of virtualized 5G and other network cores, enable mobile operators to move into new parts of the value chain? Put another way, can service quality assurances made possible by network slicing do so? 

Or is network slicing a platform upon which to create such new roles? Some, including Netrounds, believe network slicing, almost by definition, moves mobile operators up the value chain, if not necessarily into new roles within the value chain.

That is the challenge. Is there enough demand for service level agreements to provide significant revenue-generating value? In the absence of other changes--taking on new roles in the ecosystem, for example--is QoS enough? Or is network slicing “necessary but not sufficient” for value creation?

In other words, is network-slicing-enabled QoS so valuable that customers will pay extra for it, and if so, how much? Is that move up the value chain--providing more value--enough? Or, in the end, must that also be coupled with moves into other parts of the ecosystem, such as applications and platforms, for example?

To use the personal computing analogy, are better “speeds and feeds” sufficient to drive revenue growth, or not?

To be sure, network slicing does offer some fundamentally new capabilities compared to previous generations of mobile networks. Up to a point, virtual private networks can be optimized around some relevant performance characteristics, end to end. 

source: Nokia

A mobile broadband network--possibly a business-to-business mobile virtual network operator--could be optimized for bandwidth. An autonomous vehicle network (aerial or terrestrial vehicles) might be optimized for latency. A sensor network might be optimized for low power consumption. 

Perhaps a gaming network is optimized for bandwidth, latency and jitter. Stadium and entertainment venues might be optimized for device density and bandwidth. 

source: SDX Central

In other cases, perhaps it is the billing method that is new: pay per use models, for example. Dynamic or temporary services are another potential use case, with at least some potential for incremental revenue. 

As always, there are challenges, not the least of which is that there always are different ways to meet each of those needs. Edge computing, for example, can provide the ultra-low-latency or bandwidth assurance features. Small cells can provide the device density features. 

Perhaps it is the on-demand, dynamic provisioning and rating that provides the biggest differentiator, if the cost of spinning up and spinning down services is low enough. 

Still, there will be other ways of creating customized networks built to support specific applications. Edge computing, in particular, might be a functional substitute for network slicing, for example.

SpaceX Starlink Has Big Ambitions

The SpaceX Starlink home broadband service illustrates one important fact about new markets for internet service providers, namely that the amount of new revenue is more limited than one might think, at a time when a shift of just a few points of market share arguably has greater financial impact than most new revenue streams put together. 

Assume the U.S. consumer broadband market--mobile and fixed--is close to $200 billion in annual revenue by about the time Starlink is able to sell gigabit service. A shift of just one percent market share is $2 billion. If the market is mostly a zero-sum game, then when one competitor gains a point of share, the market change actually is two percent (plus one for the winner, negative one for the ISP that loses the share). 

For competitors in the U.S. home broadband market, the impact of losing one market share point is arguably greater than all new service revenues put together. In other words, in the short term, it is rational to defend legacy market share as “job one,” since that has the most telling impact on revenues and profits. 

Attackers have a different problem. Taking market share in an existing large market is a time-tested recipe for growth. 

SpaceX expected in 2017 that by 2022, Starlink revenue would account for roughly 75 percent of all SpaceX revenue. By 2023, Starlink satellite internet access was projected to represent more than 80 percent of total SpaceX revenue, reaching 85 percent by 2025.

If Starlink gets anywhere close to those numbers, it likely will be because Starlink has become a significant presence in the U.S. home broadband business, partly by connecting rural customers whose choices are restricted to satellite service, but also many rural customers who have access to cable TV, telco, fixed wireless or mobile internet access. 

Starlink believes it could get as many as five million U.S. households connected if it can put enough satellites into orbit, allowing it to boost speeds up to around a gigabit per second. At $80 per month, that could generate as much as $4.8 billion in annual revenue. 

That implies Starlink takes about 2.5 percent share of the U.S. home broadband business. Of course, revenue is one issue. The cost of launching the full constellation is the other key issue. Ability to deliver gigabit speeds might require something closer to 42,000, compared to the 800 or so satellites Starlink will need to provide commercial service at speeds up to 60 Mbps or so. 

The capital investment for the full constellation is three orders of magnitude larger than the initial constellation. 

Back to legacy providers: most of Starlink’s gains will come at their expense. In other words, mobile and fixed consumer internet providers will lost nearly $5 billion if Starlink gains that much. The global multi-access edge computing market might range between $1.5 billion and $5 billion by about 2025, when Starlink might hope to have increased its fleet closer to 42,000 satellites. 

source: STL Partners

The point is simple: incumbents have more to lose from lost home broadband market share than they have to gain from multi-access edge computing, and that likely is true even adding in all other new revenue streams such as the internet of things and private networks. If the global MEC business ranges between $1 billion and $5 billion, U.S. suppliers could not hope to gain more than $500 million to $2 billion of that revenue, even if the U.S. market represented half the global market. 

To be sure, it is not hard to find estimates of global connectivity revenues approaching $40 billion per year, across all platforms. And there are lots of alternatives for IoT connections. 

source: Markets and Markets

To be sure, a brand new revenue stream generating $1 billion or more is a wonderful thing. But those types of new businesses are hard to create. If attacking firms such as SpaceX and T-Mobile are able to achieve their stated objectives, defending firms looking to edge computing, internet of things and private networks for growth might find the new revenues only replacing what they lose to attackers in the home broadband business. 

Gross revenue from new sources is essential, for attackers and incumbents. Net revenue change might be underwhelming, in the near to medium term. 

"High Tech, High Touch" Patterns Will Return

The prevailing wisdom about business life after Covid-19 often is that “nothing will be the same.” In place of “high touch” face-to-face meetings, businesses are going to substitute “high tech” virtual sales and marketing. That might happen, to a significant and permanent degree. 

At the same time, firms are going to rediscover the value of face-to-face, “high touch” activities, perhaps to the same degree as they shift to virtual “high tech” operations. It has been a 40-year trend. 

Some of us remember a 1982 book called Megatrends by futurist John Naisbitt that popularized the phrase “high tech, high touch” to describe a coming trend: that as we began to use more technology, we would equally appreciate “high touch” human or non-technological interactions. He explored how that had evolved in his follow-on book High Tech, High Touch. 

Here’s the important insight into post-Covid-19 business behavior: High-touch refers to the human and emotional aspects of business interactions, including the establishment of trust. 

Virtual support can be quite effective once a business relationship and trust have been established. But it arguably will be harder to create trust with a new prospect using only “high tech” tools. 

High-touch refers to close relationships with customers, interacting with people, not just machines.  To be sure, that arguably can be done, up to a point, virtually. But high-touch also arguably requires above-average interaction with customers, and that includes face-to-face contact. 

High touch--helping customers on a human level through various stages of the buying process and lifecycle--involves a much higher participation, and usually relies on one individual or team within the company to maintain direct, personal and frequent contact with accounts, says ESG. 

“Humans crave the kind of interaction that only other humans can provide,” and likely cannot always be provided by conferencing tools. 

It’s one that places the priority on human interaction and human relationships, not on efficiency or speed. That is why travel services emphasize both touch and tech. 

“In a high tech world, people are longing for balance,” notes EHL Insights. As important as technology has become for customer experience and support, “authenticity” and “emotion” also are emphasized. There is an analogy for business-to-business sales as well. 

This “reversion to mean” happens quite often. Right now, professionals now rely on videoconferencing to supplant face-to-face meetings because nothing else is possible. But after the pandemic ends, prior trends will reassert themselves.

That has proven to be true for industries and economies in recoveries from major economic disruptions in the recent past. 

If evidence from three past global recessions--but not the Great Recession of 2008 and the Great Cessation of 2020--provide any useful insight, the recovery might take between three and 4.5 years, perhaps three years for public companies, perhaps 4.5 years for the overall economy. 

Some 17 percent of public  firms will not survive. That is the percentage of public firms that went bankrupt, were acquired, or became private, in the aftermath of the Great Recession. 

About 80 percent of the survivors had not yet regained their pre-recession growth rates for sales and profits three years after a recession. 

About 40 percent of the firms had not returned to their absolute pre-recession sales and profits levels after three years. 

Ranjay Gulati, Harvard Business School professor and Nitin Nohria, Harvard Business School dean, conducted a study in 2010 of corporate performance during three global recessions: the 1980 crisis (which lasted from 1980 to 1982), the 1990 slowdown (1990 to 1991), and the 2000 bust (2000 to 2002). 

Obviously, the two big events missing from the study, because of the timing, were the Great Recession of 2008 and the current “Great Cessation” of 2020. Still, their findings are useful for charting the likely path of recovery after the Covid-19 pandemic recedes into history.

They studied 4,700 public companies, breaking down the data into three periods: the three years before a recession, the three years after, and the recession years themselves. 

At a macroeconomic level, the U.S. economy had not recovered its pre-2008 levels by 2011, three years after the Great Great Recession of 2008. 

source: Bureau of Economic Analysis

U.S. growth rates returned to 2007 levels about 4.5 years after the Great Recession. Latin America and some Asian countries bounced back really fast, in about 1.5 years.

So if the recovery from the Great Cessation follows the Great Recession pattern, it will take about four years for gross national product to return to 2019 levels. 

The impact on household wealth was starker, as median household net worth still had not reached 2007 levels by 2018, 10 years after the Great Recession. Job levels in the United States had returned to 2007 levels by 2014 (about six years after the Great Recession). 

Still, prior trends reasserted themselves. That is likely to happen with face-to-face “high touch” sales in the business-to-business markets as well. It might take some time, but it is almost certainly going to happen. 

Are Satsified Customers More Loyal? Maybe Not.

Are “happy” customers “more loyal?” It might be hard to say. Satisfied customers--it often is believed--lead to loyal customers, which in turn leads to profits. 

Customer satisfaction typically is thought of as a predictor of customer buying intentions and loyalty, propensity to desert one provider in favor of another, account longevity, revenue per relationship and financial performance. That is perhaps one reason so many executives take stock in the net promoter score, a measure of customer satisfaction, in telecom and other industries. 

“Customer satisfaction is a leading indicator of company financial performance,” says the American Customer Satisfaction Index. “Stocks of companies with high ACSI scores tend to do better than those of companies with low scores.” 

But the relationships are not always so clear. 

“What we’ve found is that the relationship between loyalty and profitability is much weaker—and subtler—than the proponents of loyalty programs claim,” say Werner Reinartz, Professor of Marketing at the University of Cologne, and V. Kumar, executive director of the Center for Excellence in Brand and Customer Management at Georgia State University’s J. Mack Robinson College of Business.

source: Harvard Business Review

“Specifically, we discovered little or no evidence to suggest that customers who purchase steadily from a company over time are necessarily cheaper to serve, less price sensitive, or particularly effective at bringing in new business,” they argue. The researchers find “no evidence” to support such claims.

In fact, some would argue, some potential buyers should be actively discouraged. In the colloquial, “there are some customers you do not want.” 

source: Harvard Business Review

I’ve never been completely convinced that satisfaction and loyalty are related in a linear way, though. For starters, satisfaction and loyalty have different reference points. 

“Customer satisfaction is a self-reported measure of how much customers ‘likes' a company and how happy they are with goods purchased or services obtained from the company,” says Mark Klein, Loyalty Builders CEO. “Customer loyalty, on the other hand, is a company-calculated metric of likelihood to purchase again or not defect to a competitor.”

Also, customers can “like” a product and yet buy a competitor’s offering, without having any change in a “satisfaction” score. “Just because they’re happy with their current brand doesn’t mean they won’t switch if a lower price is offered elsewhere,” notes Actionable Research. 

Loyalty is what firms want, and satisfaction is seen as a proxy for loyalty. That might not generally be the case. 

But some question net promoter score relevance and predictive power, as popular as NPS is in many firms. “Two 2007 studies analyzing thousands of customer interviews said NPS doesn’t correlate with revenue or predict customer behavior any better than other survey-based metric,” two reporters for the Wall Street Journal report. “A 2015 study examining data on 80,000 customers from hundreds of brands said the score doesn’t explain the way people allocate their money.”

Of all the criticisms, lack of predictive capability might be the most significant, since that is what the NPS purports to do: predict repeat buying behavior. 

“The science behind NPS is bad,” says Timothy Keiningham, a marketing professor at St. John’s University in New York, and one of the co-authors of the three studies. “When people change their net promoter score, that has almost no relationship to how they divide their spending,” he said. 

Others might argue that social media has changed the way consumers “refer” others to companies and products. Some question the methodology. 

As valuable as the “loyalty drives profits” argument might be, it is reasonable to question how well the NPS, or any other metric purporting to demonstrate the causal effect of loyalty or satisfaction on repeat buying, actually can predict such behavior. 

Some argue that “satisfaction” might not predict very much. What might have predictive value is “totally satisfied” customers. Mere “satisfaction” is not predictive of loyalty, in other words. 

Xerox, for example, discovered that Its totally satisfied customers were six times more likely to repurchase Xerox products over the next 18 months than its satisfied customers. Merely satisfying customers is not enough to keep them loyal, in competitive markets. 

In other words, “satisfied customers” can, and will, defect. Totally satisfied customers tend not to churn, and tend to buy more from any supplier. 

source: Harvard Business Review

It might be hard to find anyone who believes there is no relationship between customer satisfaction and business outcomes. But the relationship might well be more complicated than we suppose. 

Vodafone Makes Huge Commitment to Gigabit HFC in Germany

In the fixed networks access business, most of the price competition arguably has come through wholesale access to the network, using various forms of network unbundling or simple resale, and not facilities-based competition. 

Just as arguably, most of the innovation has come from facilities-based competition. Mobility provides the most widespread example, but there is a growing amount of fixed network innovation from firms using hybrid fiber coax instead of traditional telecom industry platforms.

Vodafone, for example, predicts a massive expansion of its gigabit speed fixed network broadband services in Germany by 2022, using the HFC platform, not the more-traditional fiber to home platforms. 

source: Vodafone

Vodafone also notes that HFC gigabit platforms are expanding across Europe as well. One tends to see more innovation from suppliers using different platforms (mobile and HFC) in large part because those platforms offer the ability to differentiate service.

source: Vodafone

Wholesale basically restricts competition to price, with network capabilities essentially the same for all suppliers, who, by definition, are using the same network. Sometimes, using a different platform also allows a supplier to disrupt industry pricing because the cost basis is qualitatively different. 

At scale, a facilities-based approach also allows better “owner’s economics,” compared to a leased facilities approach. The same trade-off occurs for hosted voice versus owned switch business voice or cloud computing as a service versus owned computing facilities. At low volume, leasing often makes more sense.

At scale, owned facilities often offer lower total costs.

PTC Academy Online Training Sept. 14-30, 2020

The PTC Academy now offers an online and virtual training course featuring the same content as our live events, and also now comes with 1.2 Continuing Education Units provided by the International Association for Continuing Education and Training. The IACET is an accredited continuing education provider.

Attendees also receive a PTC Academy Certificate of Completion. 

 

The course will be held between 14 September and 30 September, roughly every other day for about 90 minutes, 0900 SGT (Singapore time zone) Here is the registration information. 

At the completion of this course, participants will understand:

• Key business model changes in the telecom industry since deregulation and privatization

• Business models and revenue drivers in key industry segments

• The ways OTT apps and services shape provider strategy

• How the telecom ecosystem has changed since deregulation and Internet emergence

• How cloud computing and data centers shape the connectivity business

• How C-level executives can satisfy key stakeholders and constituencies while growing revenue

• Thinking like a top executive about revenue, competition, cost, innovation, and social responsibility

• Tips for making the transition from mid-level to C-suite

• How changes in regulation, consumer demand, technology, and the Internet shape the connectivity business