Why Did Deregulation Happen in Telecom?

It is not so easy, even in hindsight, to explain why the world moved from viewing telecommunications as a natural monopoly to the current view that the industry is at least substantially amenable to competition, especially when using mobile and wireless platforms. Facilities-based competition remains a tougher challenge in the fixed networks area, though.

In 1996, U.S. policymakers ratified a huge shift in regulation by passing the Telecommunications Act of 1996, which deregulated local telephone and communications service. 

By doing so, lawmakers decided to test the theory that telecommunications really was not a natural monopoly, challenging more than a century of regulatory thinking and practice. In the subsequent years, regulators globally also moved to deregulate telecom. 

New technology, a desire for higher rates of innovation and higher consumer welfare were among the drivers of the change in thinking. 

It might seem obvious now, but the change from analog to digital signal processing and transmission was seen to have huge implications, such as making possible multi-purpose networks where the current state of the art was application-specific networks. 

But existing telecom law effectively prevented existing firms from exploring changes in their core businesses that technology was making possible. Local telephone service once was a monopoly, as was cable TV service. Radio and TV broadcasters were limited in each market to a few providers. 

Earlier, even attachment of personal equipment to the AT&T networks was forbidden. Users could not attach their own modems, for example, or their own phones. That was the case until 1968, when the Carterphone decision legalized attachment of personal customer premises equipment to the network.  

That change followed on smaller steps taken since the mid-1980s, when small changes in competitive regime were introduced at the edges of the business, allowing some competition to the monopoly provider AT&T in two-way radio services to some customers in a few markets. That then began a slow process of widening the amount of competition, including long-distance signal carriage. 

Electrical, gas and water systems, on the other hand, remain regulated as natural monopolies, with only a single legal supplier. As predicted, consumer benefits have been produced, in both mobile and fixed network realms. 

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

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. 

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.

Common Carrier Industry Prices Rise, Telecom Prices Fall

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.

What is Cloud Native

A "cloud native" network is virtualized, fully based on apps using application program interfaces, self-healing, auto-scaling, using software as a service principles and resources. It is, in essence, no longer a nailed-up telecom network with an embedded operating system but a modern computing network that has fully separated the transport and physical layers from higher layers. 

IoT for Business Continuity During Pandemic?

Fully 84 percent of Internet of Things adopters surveyed by Savanta say IoT was “a key factor in maintaining business continuity” during the Covid-19 pandemic. IoT has helped by improving operational efficiency and creating new connected products and services, the report says. 

Savanta surveyed 1,639 businesses globally about how they’re using IoT now, on behalf of Vodafone. 

One example was use of IoT sensor data to allow semiconductor engineers to work remotely in Singapore, Vodafone says. An energy firm in Ireland was able to continue monitoring outside plant when technicians were unable to visit the sites in person. 

Vodafone also argues that IoT can help office managers manage social distancing as people return to the office. “The V-Space solution allows us to manage occupancy in real-time and understand where people are and whether we are maintaining social distancing,” says Richard Muraszko of Vodafone Group property. 

“V-Space also gathers data about energy use, air quality and desk occupancy, allowing us to manage the use of space and plan our real estate for the future,” he says. The system uses IoT to connect anonymous motion sensors located at each desk, as well as energy and environment management devices. 

The gathered data allows building manager to quickly identify busy areas and ensure social distancing takes place, Vodafone says.

Why Telcos Cannot Innovate

All other things being equal, people and firms who have a choice are better served choosing to work in growing industries rather than declining ones. They arguably are best served choosing new and potentially fast-growing industries. 

Likewise, connectivity providers would prefer to operate as "fast moving" innovators in new developing markets. The problem is that many such markets do not initially represent revenue scale, and for that reason are difficult for big firms to justify chasing.

Small firms have other problems, as they cannot generally compete successfully in any parts of the business that require scale (capital, people, large and extensive networks, lots of customer support). Any large connectivity market that requires scale are the best places for large tier-one providers to succeed.

That is more than a little troubling for firms and people in connectivity industries, and explains the common observation that "telcos cannot innovate."

Until recently, mobile phone services have been an industry “star,” driving strong revenue growth. But mobile revenue growth rates are stalling, and overall global industry growth rates have dipped to somewhere between one percent and two percent annually (not adjusted for inflation). 

source: GSMA 

Other fixed network services have been “cash cows” at best, “dogs” at worst. For most of the 1990s, international long distance calling was a cash cow, whose revenues were to be harvested. In the second decade of the 21st century, voice services generally are products with shrinking demand, slim revenues and marginal--if any--profits.  

New high growth markets are believed to exist in the internet of things and edge computing, but remain untested, and are “question marks.”

source: John Wiley, BCC

Over the past two decades, many potential lines of business have been proposed as growth engines, including VoIP, data center operations, app stores, entertainment video services, advertising, content ownership and cloud computing (to a smaller extent)/ 

Few of those initiatives have proven viable, with the exceptions, in some cases, of entertainment video and content ownership. There is much truth to the notion that “telcos cannot innovate,” but the broader observation might be the difficulty of carving out sustainable new roles in an ecosystem. 

In a by-now familiar pattern, CSG notes that 79 percent of telecom executives are concerned about becoming commodity providers of “dumb pipe” services in an ecosystem where value and profit migrate elsewhere in the value chain. 

Those beliefs also are clear in an Accenture white paper produced about digital transformation in the telecom industry by the World Economic Forum. To some extent, the industry’s problems are perhaps even deeper. Until recently, mobile subscription growth, and a shift of revenue drivers from voice to texting--then texting to mobile broadband--have been revenue “stars,” offering high rates of growth. 

But the mobile market clearly is maturing, with negative to slow rates of growth in developed markets, and slowing growth rates in developing markets. Note that the present growth driver in developed markets--mobile broadband--has been slowing since 2008. 

source: Researchgate 

Subscriptions still have room to grow in developing markets, but at some point even those markets will saturate. So growth (revenue and accounts) is a key industry challenge. 

Connectivity services firms with small market share have to compete differently from firms with large market share. For starters, small firms do not typically have access to huge amounts of capital, or the ability to hire huge numbers of people. 

That means they always must find niches of one sort or another, specializing and segmenting their customer opportunities. Where tier-one service providers must “think big” when chasing new revenue sources, smaller firms have to “think small.” 

Where a $1 billion opportunity is almost the bottom limit of what a tier-one service provider can try to address, a $1 billion opportunity is too large for many small firms to try and seize. Basically, the small firm strategy is to “go where the big guys will not follow” and will not try and compete. 

Historically, that has been clear in segments such as enterprise phone switches, local area networking, Wi-Fi and specialty mobile segments, for example, where connectivity providers have been content to leave those segments to others. 

The early broadband access market using digital subscriber line as the platform initially was left to independent retailers, for example. Prior to that, the dial-up internet access market similarly was left to third party providers. 

LIkewise, small firms typically lack the resources to diversify into new parts of a value chain, innovate technologically or compete by offering superior credit policies or other financial inducements. They typically cannot be leaders in high-growth, low-share new markets with high investment costs and low sales volumes.

source: Robert Grant  

Where small firms often can try and add value is by providing more intensive or customized support, especially for any market segments or products that are relatively low volume and routinely customized. 

Rule of Three in Kenya Mobile

Stable industries tend to have a market share pattern, as noted by Bruce Henderson, founder of the Boston Consulting Group. "A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” Henderson argued.

Sometimes known as “the rule of three,”  he argued that stable and competitive industries will have no more than three significant competitors, with market share ratios around 4:2:1.

The mobile services market in Kenya illustrates that pattern, where Safaricom, the market leader, has more than twice the share of the number-two provider Airtel, which in turn has twice the share of the number-three provider Telekom Kenya. That same pattern tends to hold for profit margins as well.  

source: Communications Authority of Kenya 

One sees this pattern in some telecom markets. Looking at market share and return on invested capital for the three largest telecom providers in Thailand, China, and Indonesia since 2015, you can see that financial return and market share tend to be directly related.

The real-world structure does not precisely match the rule of three predictions, of course, with Thailand having the almost-perfect correspondence between predicted results and actual results, according to a 2016 analysis by Reperio Capital. 

In many other markets, two observations are apt: where the 4:2:1 pattern does not exist, markets either are not competitive, or not stable, or both. And though we might be tempted to think such patterns exist mostly for capital-intensive industries, the pattern seems to hold in most industries.  

Source: Reperio Capital

My rule of thumb incorporating the “rule of three” is that the leader has twice the share of number two, which in turn has twice the share of provider number three. In Thailand, the general pattern holds.China and Indonesia do not fit the stable pattern so well. 

In Thailand the pattern holds well. The leader has 53 percent share, number two has 31 percent and number three has 17 percent share.

If those markets are actually competitive, some further change in market share would be expected, with the market leader losing share, gained by a clear and stronger number two.

AT&T Halts DSL Sales. It Has To

AT&T says it has stopped selling new digital subscriber line accounts, a move that predictably led to complaints by the Communications Workers of America. In areas where AT&T operates fixed networks, but does not have fiber to home available, that essentially means AT&T is abandoning the effort to compete with cable operators in the fixed network broadband market. 

Like it or not, AT&T was delivering speeds of about 6 Mbps where it was selling DSL on copper access lines. AT&T reported 653,000 total DSL connections at the end of its second quarter, compared to 14.48 million on its fiber optic and hybrid fiber services.

DSL on copper access lines did not qualify as “broadband,” using the Federal Communications Commission definition of 25 Mbps in the downstream. 

More broadly, AT&T earns most of its revenue from mobility, business customer services and content services. In the second quarter of 2020, total revenue was about $33.6 billion. 

Mobility generated more than $17 billion in the quarter; business fixed network services produced $6.4 billion in revenue; while content operations (Warner Media) represented $6.8 billion; and Latin America about $1.2 billion.

In fact, broadband access revenues are such a relatively-small portion of total revenues that all broadband access revenues are almost buried in the “entertainment” segment whose revenues are anchored by video entertainment services, which produced about $10 billion in revenue in the second quarter of 2020. 

Video subscriptions represented more than $7 billion of that total, and most of that was delivered by DirecTV, the satellite service. 

In the second quarter of 2020, AT&T generated about $2 billion in consumer broadband access revenues. All consumer fixed network voice services might have produced less than $1 billion worth of revenue. 

There is some smallish contribution provided by linear video on the fixed network, but all together, fixed network triple play services likely generate no more than $4 billion a quarter. 

Another way of putting matters is that AT&T now generates less than 12 percent of total revenue serving consumers on its fixed network. 

Simply put, consumer fixed network services--despite the cost of the network, do not produce much revenue or profit. All services in the entertainment group create only about $2.3 billion in cash flow (EBITDA). 

So it is possible that consumer fixed network operations now produce zero actual contribution to consumer fixed network cash flow. 

Like it or not, where AT&T has fixed networks, it generates rather slim amounts of revenue, and possibly no profit. Even if AT&T steps up investment in FTTH, cable operators have about 70 percent of the installed base, and all of the net new additions nationwide. AT&T would be playing catchup in broadband, at best. 

It no longer appears that voice or linear video will grow in the future, either. That leaves mobility and fixed wireless as the primary way AT&T can invest in faster broadband, in many areas, as AT&T is unlikely to earn a return on FTTH deployment. 

Competition and technology essentially have destroyed AT&T’s consumer fixed network business, while obvious revenue growth lies elsewhere. Cable broadband, satellite broadband and other alternatives will have to suffice for many customers across some of AT&T’s footprint.