Impact of Competition in Telecom on Prices

One example of the impact of competition in a capital-intensive industry can be seen by comparing retail price trends in the European, Japanese and South Korean electricity, natural gas and water industries--still regulated as natural monopolies--and the telecommunications business, which is deregulated and competitive. 

Between 2008 and 2019, for example, communications prices dropped, while prices for the other utility services increased. 

source: ETNO

The other trend we can note in those same markets is relatively inelastic demand for communications. In other words, people will only spend so much for communications. As a percentage of gross domestic product, for example, communications spending by households fell between 2006 and 2019, for example. 

source: ETNO

Basically, households tend to spend between 1.5 percent to 2.25 percent of GDP on communications. Other studies of household spending in developed markets show the same pattern. 

Over time, household spending on connectivity services has fallen. Nor has business spending moved much, either.  

Consumer spending does not change too much from year to year. Nor does the percentage of income spent on various categories change too much. 

source: IDC

In Myanmar, a new mobile market, spending per household might be as high as eight percent of total spending. In Australia, communications spending (devices and services) might be just 1.5 percent of household spending.  

In South Africa, households spend 3.4 percent of income is spent on communications (devices, software and connectivity). In Vietnam, communications spending is about 1.5 percent of total consumer spending.

In the United States, all communications spending (fixed and mobile, devices, software and connectivity, for all household residents) is perhaps 2.7 percent of total household spending. U.S. household spending on communications might be as low as one percent of household spending, for example. 

Deutsche Telekom to Wholesale FTTH for First Time

For the first time, Deutsche Telekom has signed a long-term wholesale agreement for the use of its fiber optic network, including fiber to the home (FTTH).

In a move expected to be extended to all other competitors as well, Deutsche Telekom and Telefónica Deutschland/o2 have a new 10-year contract that grants Telefónica access to DT’s broadband network, including all fiber-to-home facilities, including gigabit facilities supported by FTTH. 

Telefónica had wholesale access to DT’s digital subscriber line network since 2013.

Some might argue that DT and Telefonica are playing catch-up with European cable operators. 

source: Cable Europe 

Deutsche Telekom’s VDSL network currently reaches some 33 million households in Germany. About 1.8 million households (about five percent) are equipped with fiber optic lines. Deutsche Telekom plans to significantly accelerate its FTTH buildout in the coming years.

Telefónica Germany had in 2019 3.9 million DSL customers, or roughly five percent penetration of homes. 

source: FTTH Council Europe 

Deutsche Telekom ended 2019 with 13.7 million retail broadband subscribers, or roughly 42 percent penetration of homes. 

Is Remote Work Really "As Productive as in the Office?"

Microsoft CEO Satya Nadella might be among business leaders who are not so convinced work from home is as productive as in-office work. "Thirty minutes into your first video meeting in the morning, because of the concentration one needs to have in video, you are fatigued."

Granted, knowledge worker or information worker productivity is tough--perhaps nearly impossible-- to measure. But at least some believe mandatory work from home rules have hurt information worker productivity.

Aternity, for example, has aggregated usage details from millions of employee devices from over 500 Global 2000 companies, tracking use of business applications from home. Aternity analysis suggests that the United States has become less productive due to remote work because of the pandemic. 

At the end of March, 77 percent of work had been moved to be performed remotely in North America, the largest amount of any continent. U.S. enterprise worker productivity actually dropped 7.2 percent, Aternity reports, though Canadian productivity increased about 23 percent. 

“Overall productivity (as measured by hours of work computing time) in Europe declined by 8.2 percent,” according to Aternity. 

Those same trends continued through July 2020, Aternity says. “The main takeaway from Aternity’s latest data is that a ‘productivity tax’ is affecting enterprises deploying long-term remote work strategies,” Aternity says. “In countries where the remote work share remains at peak levels, including the United States and parts of Europe, employee productivity continues to fall.”

source: Aternity 

“In comparison, overall productivity is rising in European countries where the share of in-office work is increasing, showing that returns to the office are benefiting companies from an overall productivity standpoint,” Aternity says. 

The early data from the work-from-home change is not encouraging for productivity, say professors  Jonathan Dingel and Brent Neiman of the University of Chicago Booth School of Business. They suggest that the tools we have are not so much the problem as human ability to adjust to remote work environments and use the tools fully.

Also, if it is the case that only a third of jobs can be done remotely, forcing everyone to do so will not be universally productive. 

Nadella also notes that fully remote work is harder on new employees, as it is harder to form new work relationships and learn the new company culture when working fully remotely. As others have noted, all the issues about learning from mentors and acquiring new skills is a huge issue as well in a work-from-home environment. 

To be sure, many employees like working from home part of the time, and report that they believe their productivity is higher. Still, significant percentages already report that they believe they are less productive working from home. 

The conventional wisdom is that work patterns will be more flexible after the pandemic. What also seems clear is that the value of being in the office will re-emerge, as it seems clear that mode offers advantages for firms in terms of random and unplanned interactions, new employee onboarding and career development. 

What are Cash Flow Implications of an AT&T Sale of DirecTV?

One question some of us have about any sale by AT&T of its DirecTV asset is the impact on free cash flow, which might have been as much as 13 percent of total cash flow, or possibly more, by some accounts 

In late 2019 DirecTV was said to be spinning off about $4 billion in annual cash flow, which seems low to me, but appears to be about right. In the first full year of ownership, DirecTV likely produced $12 billion of free cash flow.

Some speculate that AT&T could retain a minority interest in the business, and some of the cash flow. The point is that the cash flow implications of selling DirecTV are far less than would have been the case five years ago, when it appears the cash flow was three times higher.

Aside from the need for high cash flow to help pay down debt, the company also requires high cash flow to pay its dividends. Though not a popular position, the DirecTV acquisition made sense to me as the only viable way to add so much cash flow so fast. 

Some had suggested the alternative of investing the capital in fiber to home facilities, but I never understood how cash flow could be boosted fast enough that way. Some might argue a massive diversion of capital to FTTH would not have recovered cost of capital, much less begun generating significant new cash flows within a year. 

When DirecTV was acquired by AT&T, it would have been easy to find detractors arguing that AT&T should have spent that money investing in fiber to home infrastructure. The new story is hat AT&T should not have done so, as the asset is wasting away. 

So what should AT&T have done with $67 billion, assuming a 4.6 percent cost of capital? Cost of capital is the annualized return a borrower or equity issuer (paying a dividend) incurs simply to cover the cost of borrowing.

In AT&T’s case, the breakeven rate is 4.6 percent, which is the cost of borrowing itself. To earn an actual return, AT&T has to generate new revenue above 4.6 percent.

Assume that for logistical reasons, AT&T really can only build about three million locations each year, gets a 25-percent initial take rate, spends $700 to pass a location and then $500 to activate a customer location. Assume account revenue is $80 a month.

AT&T would spend about $2.1 billion to build three million new FTTH locations. At a 25-percent initial take rate, AT&T spends about $525 million to provide service to new accounts. So annual cost is about $2.65 billion, to earn about $720 million in new revenue (not all of which is incremental, as some of the new FTTH customers are upgrading from DSL).

The simple point is that building three million new FTTH locations per year, and selling $80 in services to a quarter of those locations, immediately,  does not recover the cost of capital.

So as controversial as the DirecTV buy might be, it at least had the advantage of throwing off cash flow. It is unclear whether the alternative of a big new FTTH build would have done even that well. At the time AT&T made the acquisition, DirecTV likely was throwing off something like

Enterprise WAN Spending Tougher to Pin Down

Just how much “enterprises” spend on wide area connectivity services no longer is a simple issue with a simple answer. Nor are the ways they choose to spend their money. 

For starters, enterprise demand has shifted dramatically. Decades ago, WAN connectivity was largely a matter of businesses buying private line services from service providers, with some private enterprise WAN services built using a mix of dark fiber and lit services. 

These days, WAN services are a wider mix of private networks owned directly by enterprises (for which no recurring fees are paid) and public services purchased from internet backbone providers, dominated by Ethernet-connected IP. SD-WAN is growing, as a percentage of WAN traffic. 

source: Cisco 

Private networks now carry a huge share of global WAN traffic, for example. And a relative handful of global content providers generate a majority of global traffic, carrying most of that on their own private networks. 

Some enterprises therefore build, own and operate their own global WANs, and do not buy WAN connectivity across their major routes. Others, including larger video streaming services, use edge caching as a substitute for WAN bandwidth. 

For such reasons, the global capacity services market is perhaps less robust than you might think. In 2020, perhaps $16 billion was earned selling transport services in North America and Western Europe. Triple to estimate global transport revenues for telcos and IP backbone providers and you reach $48 billion. 

MPLS, for example, increasingly is replaced by software-defined WANs. 

source: Ovum (Omdia) 

Though $48 billion is a significant amount, global spending on telecom services tends to run about $1.25 trillion to $1.4 trillion, for end user spending of all sorts, including consumer and enterprise, mobile and fixed, according to IDC.

So WAN connectivity services sold by service providers is perhaps 3,5 percent to four percent of total global service provider revenue. 

source: IDC 

One also has to break enterprise connectivity spending into fixed and mobile recurring services (as opposed to device spending, for example), as well as local access versus wide area network spending. MPLS and SD-WAN, for example, might represent less than a quarter of total networking spend. 

As we once counted local T-1 connections separately from WAN T-1 service, so enterprise broadband spending has to be separated into direct internet access (or other local access services) and then separate WAN spending. 

Much of the revenue in the software-defined wide area network market is garnered by infrastructure providers, in the same way that most of the revenue in the Wi-Fi market likewise is earned by suppliers of networking gear, not recurring connectivity services. 

That noted, many observers have expected a shift towards connectivity services over time. And though most estimates suggest a somewhat smallish market overall, there remains significant room for disagreement about evolution of the market, often perhaps exacerbated about whether one looks only at do-it-yourself infrastructure approaches or only at connectivity services, or both. A few estimates seem to be outliers, more connectivity revenue is possible.  

One way of estimating impact is to assume that SD-WAN replaces other services currently purchased by enterprises, especially MPLS, but also including direct internet access. 

source: Aryaka 

source: Field Engineer 

The reason SD-WAN is a growth area is the increased amount of enterprise cloud computing and multi-cloud computing. That increases the appeal of simple SD-WAN connectivity that does not require nailed up point-to-point connections.

Has Information Worker Productivity Suffered from Work from Home?

Nobody really knows how to measure knowledge or information worker productivity. One method, used by Aternity, is tracking business application use by workers at home. Using that measure alone, productivity in the early days of the pandemic declined in some countries and increased in some countries.

Perhaps more significantly, a “productivity hit” has continued through July 2020. 

“The main takeaway from Aternity’s latest data is that a ‘productivity tax’ is affecting enterprises deploying long-term remote work strategies,” Aternity says. “In countries where the remote work share remains at peak levels, including the United States and parts of Europe, employee productivity continues to fall.”

source: Aternity 

“In comparison, overall productivity is rising in European countries where the share of in-office work is increasing, showing that returns to the office are benefiting companies from an overall productivity standpoint,” Aternity says. 

While North America continues to have the highest share of remote work (85 percent), productivity decreased by 14 percent between March 26 and July 9, 2020 Aternity notes. 

In Europe, in-office work began to increase in early-mid May. Overall productivity increased by two percent between March 26 and July 9, with a sharper rise corresponding to the return to the office, Aternity says. 

Using only the “time spent on work applications” measure, productivity between January and March 2020 decreased in Europe and the United States, but increased in Canada. 

Keep in mind this is an input measure, not an output measure. All Aternity claims is that time spent using work apps either increased or decreased. The decrease in usage is defined as “lower productivity,” while an increase is defined as “higher productivity.” 

More Hybrid Work Patterns, but Good Reasons for Face-to-Face

The conventional wisdom about knowledge work is that it will be more hybrid in the future.  About 80 percent of 3,200 respondents to a Blind survey say they believe work will, in the future, involve some combination of “in the office” and “remote” work. 

That now is conventional wisdom. But note something else: about 45 percent of respondents said that not being able to get together in person with their team negatively affects their work, including 64 percent at Facebook, 63 percent of Google respondents and 56 percent of Uber respondents. 

For that reason, many of us expect that although more WFH will happen, more frequently, workers will continue to value face-to-face time.