How Much More Legacy Services Revenue Growth Remains?

How much revenue growth is possible in telecom markets across the globe, looking at fixed and mobile connectivity, entertainment video and fixed-mobile convergence?

A.T. Kearney believes that in Western Europe, there is room to grow revenues 25 percent. In  Eastern Europe about 10 percent growth in legacy services remains. In Russia there is about six percent upside remaining.

In the United States there is about eight percent opportunity remaining. In Asian Pacific countries there is about 11 percent more upside. 

Beyond that, much hinges, apparently, on the ability to create video, audio, content or connected device businesses, in most of those markets. Upside in new businesses such as those are most limited in Western Europe and the United States, both mature markets. 

source: A.T. Kearney

Also, the U.S. market also faces the challenge of high spending on connected services, possibly indicating that much of the opportunity already has been seized (not adjusting for purchasing power parity, a way of normalizing spending across countries). 

Most of the potential future growth, in AT. Kearney’s view, will come from other roles in the connected services ecosystem, in such areas as online media, entertain­ment services and connected devices. 

The rub is such moves imply that firms must compete with firms already possessing significant advantages. In a U.S. context, for example, that could mean taking on Netflix, Amazon, Apple, Google and others. In other countries it means taking on media giants. 

And that might be the greatest challenge of all, as most apps or services requiring use of connectivity can be created and delivered without the permission of the internet service provider. 

source: A.T. Kearney

“In every region of the world, video-on-demand services generate the largest chunk of digital services spend,” the firm argues. “Music and online gaming tend to be the next biggest generators of revenue.”

Globally, consumers spend an average of €8 per month on video-on-demand, €4 per month on music, and €4 on gaming, for example. In absolute terms, people in the United States and Western Europe spend the most on video-on-demand services at €14 and €10 per month respectively, well ahead of spending on music, gaming, and other services. In Asia Pacific, spending on digital services is more evenly spread across categories. 

source: A.T. Kearney

But some mobile service providers--including Verizon and T-Mobile, believe 5G gives them an opportunity to take existing market share from incumbent suppliers. Verizon, for example, will offer a 5G fixed wireless home broadband service that competes with Charter Communications and Comcast offers. 

Company	Price per Month	Download Speed in Megabits Per Second	Contract?
Charter Communications	$49.99	100 mbps	1-year contract required
Comcast	$49.99	200 mbps	1-year contract required
Verizon	$50	300 mbps	No contract

source: Motley Fool 

Those posted prices are for Verizon wireless customers. Others will pay $70 a month. There are other subtleties, though. The cable companies require customers to rent home equipment, generally adding about $10 a month in extra fees, and often require contracts as well, so the recurring cost is very close, even for non-Verizon mobile customers. 

Still, if Verizon were able to cross-sell even 10 percent of its mobile customers 5G Home at $50 per month, that would generate $5.6 billion in annual revenue for the company. That is a good example of how a big telco can capture that eight percent growth remaining in the legacy business.

What Verizon does next is the issue, as it seems to be approaching the limits of revenue growth from legacy services.

Why U.S. Ranks 10th to 20th Globally for Fixed Network Performance, and Has Since the Days of Voice

One of the most-recurring stories about U.S. communications infrastructure deployment, app use or performance is that it “lags” what other countries achieve, especially in the early days of deployment, but virtually always even after “full deployment.” That might seem curious, but is well attested, historically. 

A recent set of tests by M-Lab, for example, found the United States ranks in spot 20 of nations or city state access speeds, using the M-Labs methodology, which tests device speeds, not router speeds, typically based on use of a Wi-Fi connection. 

Position Country

1 Liechtenstein

2 Jersey

3 Andorra

4 Gibraltar

5 Luxembourg

6 Iceland

7 Switzerland

8 Hong Kong

9 Monaco

10 Hungary

11 Netherlands

12 Aruba

13 Malta

14 Denmark

15 Aland Islands

16 Sweden

17 Bermuda

18 Singapore

19 Slovak Republic

20 United States

source: Cable.co.uk

That is not an unusual position for U.S. performance. Consider voice adoption, where the best the United States ever ranked was about 15th globally, for teledensity (people provided with phone service). 

A couple of issues are worth keeping in mind. First, large countries always move slower than small countries or city-states, simply because construction of networks takes time and lots of capital. That explains the deployment gap, early on in the life cycle of any next-generation network. 

The other mostly unmentioned issue is geography and density. We often “forget” that six percent of the U.S. landmass is where most people live. About 94 percent of the land mass is unpopulated or lightly populated. 

And rural areas present the greatest challenge for deployment of communications facilities, or use of apps that require such facilities. That large expanse of unpopulated land also means there are constraints on the viability of fixed and mobile network coverage. Up to this point, only satellite coverage has made economic sense for very-large portions of the landmass. 

Simply, where facilities cannot be built and recover the investments, those investments are made only when subsidies are sufficient to reach breakeven or slightly better. 

The bottom line is that it is quite typical for U.S. performance for almost any important new infrastructure-related technology to lag other nations. It never matters, in the end. 

Eventually, the U.S. ranks somewhere between 10th and 20th on any given measure of technology adoption. That has been the pattern since the time of analog voice.

Wi-Fi Causes Lower Speed Test Results

Widespread use of Wi-Fi around the world now affects reporting of speed tests, which often are taken by devices that are connected by Wi-Fi. That results in lower measured speeds, compared to tests of the access connection to the router.

Methodology matters. A single speed test “is not a direct measure of the maximum speed available to a household router,” says M-Lab. It typically is the speed obtained by a single device connected using Wi-Fi, which normally means a lower speed than supplied to a device connected by a cable. So M-Lab says its own speed tests are best understood as the speeds end users actually experience on their devices, not the speed obtained by the router. 

Also, speed test data usually has a negativity bias. People are more likely to test when they experience a problem. This also helps to explain why speed test averages are lower than people might expect. 

That noted, speed tests seem to show that a number of smaller countries have been able to upgrade their networks faster than larger countries. That makes sense, as a practical matter. Since new networks have to be constructed, smaller areas can be upgraded faster than continent-sized areas, for example. 

What the M-Lab tests do not show as well are the potential impacts of coming cable TV operator cable modem advances such as DOCSIS 4, which will, in principle, support speeds up to 10 Gbps. Nearly all the tests conducted by M-Labs use traditional telco connections, including fiber to home and other connections. 

The United States shows up in spot 20 of nations or city state access speeds, using the M-Labs methodology.

What Happens to Bandwidth Growth after Pandemic?

Covid-19 traffic growth ”is largely a one-off phenomenon” say researchers at TeleGeography, after interviewing dozens of capacity executives. If capacity suppliers really expected a permanent increase in demand or rates of growth, they would also be changing their capacity-expansion plans. They are not. 

That might come as a surprise, given the 25-percent to 40-percent boost in traffic caused by stay-at-home policies. 

To be clear, what TeleGeography argues is that the temporary change in bandwidth demand caused by stay-at-home policies will not persist. Usage levels will return to prior pre-pandemic patterns. 

Many argue that “Covid caused a year’s worth of change in a month.” But that is not the same as arguing that the rate of change is permanently altered. Instead, consumption patterns suddenly grew to levels not anticipated for a year or so in the future. As shown below, there was a step change, with long-term trends intact. 

source: Chief Martec

But TeleGeography implies that the capacity spike will not persist. It is not a permanent change in growth, but a one-time spike in usage that might well return to prior levels. In other words, even the present higher levels of usage will continue. 

“Initial evidence suggests that the spike in the rate of bandwidth and traffic growth from the pandemic may be a one-time event” and will “return to typical rates of growth,” TeleGeography says. “Operators we spoke to indicated they were not making major upward adjustments to their demand forecasts due to Covid-19.”

To be sure, that could be interpreted as meaning the former rates of growth will reassert themselves. The possibilities include a return to former--and lower--levels of consumption. 

Another possibility is a return to the underlying long-term rate of change, but from a higher point than expected. In either case, prior assumptions about capacity growth seem to be unaffected. Capacity suppliers are not changing their original, pre-pandemic forecasts. 

That implies a belief that the spike in demand is temporary, and will not persist. Once people are able to go back to work and school, the “new” demand drivers will largely dissipate.

Covid Impact Overstated?

An obvious storyline since March 2020 has been “impact of Covid-19 on X.” The problem with that story is that it might not be accurate. Looking at telecom service provider and infrastructure revenue growth trends, for example, and knowing nothing else, one would not necessarily conclude that anything unusual had happened. 

The reason is simply that, between 2019 and 2020, revenue growth already had been slipping. 

source: TBR

And that trend preexisted 2019. Looking only at telecom service providers in Western Europe between 2008 and 2014, revenue has dipped since about 2011. Covid-19 had nothing to do with those trends. 

source: STL Partners

Similar trends are seen elsewhere, showing low telecom service provider revenue growth rates. STL Partners believes global service provider revenue growth will average less than one percent per year through 2022, for example. 

source: IDATE

The point is that we might attribute too much influence to Covid-19 as a driver of near term trends. The long term influence might be even less meaningful, though that is not the conventional wisdom.

Why U.S. 5G "Lags," and Why it Will Not Matter

One of the most-recurring stories about U.S. communications infrastructure deployment, app use or performance is that it “lags” what other countries achieve, especially in the early days of deployment. But even long-term indices show “lagging” U.S. performance. There’s a good reason for those trends. 

The bottom line is that it is quite typical for U.S. performance for almost any important new infrastructure-related technology to lag other nations. It never matters, in the end. 

Eventually, the U.S. ranks somewhere between 10th and 20th on any given measure of technology adoption. That has been the pattern since the time of analog voice. 

We often forget that six percent of the U.S. landmass is where most people live. About 94 percent of the land mass is unpopulated or lightly populated. And rural areas present the greatest challenge for deployment of communications facilities, or use of apps that require such facilities. 

For example, a recent study of 5G speeds by Opensignal found U.S. and U.K. speeds lagging those of several other countries that have deployed 5G. Some of the disparity in the U.S. market is based on the spectrum assets used to deploy 5G (low band and millimeter wave) rather than mid-band spectrum. 

source: Opensignal

But the “U.S. lags” story is quite typical. In fact, the “U.S. is behind” meme never goes away, where it comes to communications. The latest assertion in some quarters is that the United States is falling behind in 5G. That claim has been made many times about other key technologies and always has proven wrong.

In the past, it has been argued that the United States was behind, or falling behind, for use of mobile phones, smartphones, text messaging, broadband coverage, fiber to home, broadband speed or broadband price.

Consider voice adoption, where the best the United States ever ranked was about 15th globally, for teledensity (people provided with phone service). A couple of thoughts are worth keeping in mind. First, large countries always move slower than small countries or city-states, simply because construction of networks takes time and lots of capital. 

With the caveat that some rural and isolated locations never got fixed network phone service, not many would seriously argue that the supply or use of fixed network voice was an issue of any serious importance for the nation as a whole, though it is an issue for rural residents who cannot buy it.

Some even have argued the United States was falling behind in spectrum auctions. That seems almost silly given the amount of spectrum not being released for use in the U.S. market, roughly an order of magnitude more spectrum than previously available for mobile services. 

What such observations often miss is a highly dynamic environment, where apparently lagging metrics quickly are closed.

To be sure, adoption rates have sometimes lagged other regions. 

Some assertions are repeated so often they seem true. Among such statements are beliefs that U.S. internet access is slow and expensive, or that internet service providers have not managed to make gigabit speeds available on a widespread basis. In fact, gigabit coverage is about 80 percent, but take rates might be as low as two percent. 

Other statements, such as the claim that U.S. internet access prices or mobile prices are high, are not made in context, or qualified and adjusted for currency, local prices and incomes or other relevant inputs, including the comparison methodology itself. 

Both U.S. fixed network internet prices and U.S. mobile costs have dropped since 2000, for example. 

The point is that the United States never leads in infrastructure adoption or performance, especially in the early days of deployment. But even at full deployment, U.S. metrics tend to place the country somewhere between 10th and 20th globally. That has been true since the days when the only thing we measured was use of analog phone lines.

Did Covid-19 Change Martec's Law?

There is wide agreement that the Covid-19 pandemic has caused many technology adoption curves to get a temporary bump up in adoption, with growth then continuing on the curve already in place before the pandemic and its organizational response.  That is illustrated by the impact of the “cataclysmic event” on an underlying rate of organizational change. 

source: chiefmartec

In other words, firms and organizations are said to have experienced “a year’s worth of change in a month.” 

Martec’s Law was coined in 2013 by Scott Brinker, Hubspot VP. Martec’s Law states that technology changes linearly, while technological change is non-linear. That observation has parallels in the notion of the productivity paradox. 

The productivity paradox suggests that information technology or communications investments do not always immediately translate into effective productivity results. Many note that measured productivity has declined since 2000, despite all the technology investments firms have made. 

source: Goldman Sachs

This productivity paradox was apparent for much of the 1980s and 1990s, when one might have struggled to identify clear evidence of productivity gains from a rather massive investment in information technology.

Some would say the uncertainty covers a wider span of time, dating back to the 1970s and including even the “Internet” years from 2000 to the present.

The point is that it has in the past taken as long as 15 years for technology investments to produce measurable gains. 

Computing power in the U.S. economy increased by more than two orders of magnitude between 1970 and 1990, for example, yet productivity, especially in the service sector, stagnated).

And though it seems counter-intuitive, even the Internet has not clearly affected economy-wide productivity. Some might argue that is because we are not measuring properly. It is hard to assign a value to activities that have no incremental cost, such as listening to a streamed song instead of buying a compact disc. It might also be argued that benefits accrue, but only over longer periods of time. 

source: Customer Think

Few, if any, buyers of new technology actually believe the claims of benefit advanced by suppliers, for good reason. Virtually all observers of technology adoption note that organizations benefit from new technology at a rate that is vastly less than the rate of adoption. That’s the essence of Martec’s Law, which holds even if the Covid-19 pandemic caused an unusual step change in behavior.