How Bundle Behavior Distorts Price Comparisons

 One often sees comparisons of internet speeds or prices across countries. Such efforts always involved methodological choices that obscure or inflate differences. 

The researcher has to choose one type of plan that is common in all the evaluated countries; convert currencies; adjust for differences in general price levels to determine “cost,” not just nominal price; ignore any discounts or promotional plans customers actually might use and then ignore the actual buying behavior (studying only the retail plans themselves). 

For example, a recent survey of Malta consumers found that 94 percent purchased product bundles. About 36 percent purchased a quadruple play package including fixed network voice, entertainment video, internet access and mobility services. Some 39 percent bought a triple play package including fixed network voice, internet access and entertainment video. 

source: Malta Communications Authority 

That illustrates the potential misunderstandings possible when comparing international prices, adjusted for purchasing power parity or not. What matters is the actual behavior of consumers, not posted retail prices. 

The simple fact is that very few customers in Malta actually buy a stand-alone internet access service. 

If, as in Malta, most people buy bundles, then the stand-alone price for any single service has little meaning, since few people actually buy those products. 

To determine what people actually pay for their services, when multiple products are purchased in a bundle, is guesswork based on allocated costs. One has to attribute costs to each product in the bundle, and each service provider might have different objectives, in that regard. 

It is rational to protect gross revenue for the product or products generating the most revenue. It is rational to protect profit margins for the product or products that generate the most profit.  The bundle itself is a primary way of doing so, especially when the bundle reduces customer churn. 

Bundle purchases also complicate, for such reasons, efforts to compare prices of products across the planet. It is misleading to compare stand-alone prices for a product when most customers do not pay the posted retail prices when promotional plans are in force and widely purchased.

Ecosystem, Platform, Pipe: What's the Difference?

Ecosystem might be the term that is replacing platform as a broad description of business strategy for would-be market leaders. And it is likely to be even harder to achieve, for most firms, in most industries. 

One study found that attempted platform failure rates were about 80 percent, about the same failure rate we see in information technology projects, firm startups and most change initiatives. 

The difference goes beyond nomenclature, even if many use the terms essentially interchangeably. 

Ecosystems can be thought of as “networks of networks.” Think of the internet. Does it have a single active organizer? Is it under any single entity’s control? Closer to home, think of the global telecom network, which is a network of networks. 

Travel is an industry that might be thought of as an ecosystem, but it is not centrally managed. A platform, on the other hand, always has an organizer or orchestrator. 

Platforms, on the other hand, can be created by a single entity, though not without the participation of many other full-ecosystem participants. Uber and Lyft can create platforms for ridesharing, but not lodging, which can be organized by firms such as Airbnb. 

Some might argue that the platform is the tool or foundation other products, supplied by third parties, build upon. In that taxonomy, the ecosystem would refer to the totality of products and relationships built on the platform. 

That makes less sense to me than than a taxonomy based on whether there is an active orchestrator or aggregator. A biological ecosystem has no human or mechanical organizer. It develops, but is not “planned” or “managed.” A platform always is managed, with admission and operating protocols. 

Network effects are key, in either case. A network effect essentially means that value grows as the number of users grows. It is different from mere scaling. More scale leads to lower unit costs, but no increase in value. 

source: Linkedstarsblog 

A network effect increases value as the number of users increases. 

One might generalize and argue that ecosystems are about increased end user value, while platforms are more directly about firm value and revenue. The total value of the Apple iPhone ecosystem for end users exceeds the value reaped by any single supplier participant. 

That noted, even when most of the ecosystem revenue is earned by third party participants, the orchestrator of the platform still gains value, if not always huge amounts of direct revenue, as when the orchestrator profits by transaction fees, commissions, licenses, support services, advertising, referrals or some other revenue model. 

An ecosystem is unitary; a platform can exist as one of many. Amazon or Alibaba can create platforms for some retail products, but arguably not all, while existing within the broad “retail” ecosystem. 

An ecosystem is a community of interacting entities, some say. The members of the ecosystem can be organizations, businesses and individuals, all creating value for one another in some way; mostly by producing or consuming goods and services.

A platform is the way a particular community or ecosystem is organized to interact with one another and to create value. A platform typically is focused on bringing part of the “ecosystem” together and reducing friction for interactions to take place. 

source: Kilian Veer 

Uber, Lyft, Airbnb, Google, Apple, Amazon and Facebook might be considered platforms that organize some of the value created by the internet. But the internet ecosystem is too big to be anything but a collection of value created by various platforms. 

What is more certain is that a business model based on building an ecosystem or platform is not the same as building a traditional pipe business model where a firm creates and sells a product or products that have a specific role in a value chain. 

By “pipe” is meant not just “communications services” but any product created and sold to customers. Most products and most firms historically use a “pipe” business model, in that sense. 

Indeed, there is a key difference between selling in an ecosystem and organizing the ecosystem. Amazon and Alibaba create and organize their platforms and ecosystems, if you believe both are ecosystems. We can say with certainty that both are platforms.

It might be debatable in some quarters whether those firms--or others such as eBay--actually have created ecosystems. 

Every other firm buying or selling on the or to the platform is part of the ecosystem. 

Every successful platform or ecosystem produces value in excess of what is contributed by any single firm. That is generally not true for a pipeline product, where value is fixed: it works, or does not; the specific problem is fixed; a specific capability is gained. 

The value of the entire internet exceeds the specific value contributed by each point solution. 

The role of any business or entity within a value chain is determined when it asks who are our customers? A chip foundry has chip suppliers as customers; chip suppliers have device manufacturers as customers; device suppliers have consumer or business users as customers; applications have users (subscription models) or advertisers as customers. 

Platforms can take aggregator or orchestration roles within an ecosystem. Platforms can create the marketplace or transaction venue (aggregating suppliers and buyers) or orchestrate the creation and operation of platforms. 

Platform business models and ecosystems, broadly speaking, seem destined to play a greater role in digitally-enabled industries. But most firms will never become platforms.

Scale Means Something Different for Platforms

Scale matters for any business, but has outsized returns for platform businesses. Simply, a pipeline business, which produces and sells a product, gains unit cost advantages from scale. 

A platform, on the other hand, gains unit cost advantages from growing scale, but really profits from a non-linear increase in value for end users, which leads to more transactions, typically. To put it another way, a typical firm gains when it sells more of whatever it aims to sell. 

source: Linkedstarsblog 

A platform gains when its members and participants buy and sell more of whatever they desire to sell or buy. 

Platforms use a different business model from typical pipeline businesses, in other words. A pipeline business gains from selling more units. A platform gains by adding more participants, facilitating more transactions, embracing more solutions and satisfactions for users. 

Digital-based applications platform firms scale so fast in part because of the economics of producing software, which has close to zero marginal cost at scale. Producing and distributing the next unit of a software product is quite low. 

Digital marketplaces and platforms also scale fast because they orchestrate the commercial use of assets owned by third parties. Amazon does not manufacture the products it sells. Uber does not own the fleets of autos that its driver partners use. Airbnb does not own the rooms that its users rent from participant suppliers. 

Marketplace platforms can scale as fast as they can add partners, which themselves organize the production of goods sold on the platform. Then the network effects kick in. The more product variety available, the greater the number of buyers have incentives to use the platform. 

Also, the more buyers using the platform, the more valuable the platform becomes for sellers. The platform gains value as the number of nodes (buyers and sellers) grows and transaction volume and speed increase.  

At some point, the large number of buyers also creates advertising value, creating an advertising platform as a byproduct of the marketplace transaction volume and user base. 

Aggregation and orchestration also add value. Amazon and Alibaba create a viable real channel for small firms that would not otherwise be able to reach potential buyers. The marketplaces amass a huge potential audience and prospect base--global or national rather than local--as well as the fulfillment mechanism.  

In a sense, huge marketplaces and platforms also aggregate skill, capital and other resources beyond the direct ability of any single firm to control. No single company can ever employ more than a small fraction of the talented, creative, smart or innovative people. In essence, a huge marketplace or platform makes all those resources available to be monetized. 

Some will argue the shift to orchestration or aggregation will be hard for cultural reasons. Others will simply point out that creating a platform requires the assent of many many other entities. Participating firms must conclude that being part of any specific platform has business advantages. Participating buyers must conclude that the platform has value enough to make it a choice over other buying alternatives. 

Nor is creation of a platform something a small firm can entertain. It takes resources to build platform scale. Firms that succeed in becoming platforms might start small, but they do not stay small very long. 

To be sure, scale matters even for pipeline firms. We see the same general effect of scale when looking at profit and market share for any pipeline firm in any industry.

80/20 Rule for Telecom Revenue Sources

This is a good illustration of both the Pareto theorem, which states that 80 percent of instances or outcomes in business or nature come from 20 percent of the cases or effort. The Pareto theorem is popularly known as the 80/20 rule.

The graph shows the percentage of total mobile service revenue generated by cell sites, if one apportions the mobile subscription fee to the sites that actually are used by any customer. 

Pareto accurately describes the actual use of mobile cell sites and radios, as well as the generation of revenue. 

Half of mobile revenue is driven from traffic on about 10 percent of sites. Fully 80 percent of revenue is driven by activity on just 30 percent of cell sites. 

source: Medium 

The theorem also explains why 80 percent of revenue generated by challengers in the telecom business come from about 20 percent of firms. 

In organizational terms, Pareto implies that 80 percent of results are driven by 20 percent of the actions or people. 

A perhaps-obvious question should arise: if 80 percent of results are generated by 30 percent of the instances, sites or actions, why bother with the other 70 percent? In part, the answer is network effect. A mobile operator whose network only covers 30 percent of the land mass where people actually live and work would not be able to compete with a supplier whose network covers nearly all the places people live and work. 

The traditional rule of thumb for a fixed network is that it makes money in urban areas, breaks even in suburban areas and loses money in rural areas. Profit is a Pareto distribution, but what mass market telco could survive if it refused to sell to rural or suburban customers?

What social, voice, messaging or other network would do as well if it connected just 30 percent of people you wanted to reach? In other words, a network often must connect “most” potential nodes to drive value. 

Universal service requirements for public telecom networks exist for that reason.

Pareto also exists because value for any single user depends on the number of other people or entities that specific person might ever wish to connect with. The actual set will be different for each person. But the network has to enable connections in unlimited fashion, so that any specific set can be created.

How fast Will Fixed Networks Be, by 2050?

How fast will the headline speed be in most countries by 2050? Terabits per second is the logical conclusion, even if the present pace of speed increases is not sustained. Though the average or typical consumer does not buy the “fastest possible” tier of service, the steady growth of headline tier speed since the time of dial-up access is quite linear. 

And the growth trend--50 percent per year speed increases--known as Nielsen’s Law--has operated since the days of dial-up internet access. Even if the “typical” consumer buys speeds an order of magnitude less than the headline speed, that still suggests the typical consumer--at a time when the fastest-possible speed is 100 Gbps to 1,000 Gbps--still will be buying service operating at speeds not less than 1 Gbps to 10 Gbps. 

Though typical internet access speeds in Europe and other regions at the moment are not yet routinely in the 300-Mbps range, gigabit per second speeds eventually will be the norm, globally, as crazy as that might seem, by perhaps 2050. 

The reason is simply that the historical growth of retail internet bandwidth suggests that will happen. Over any decade period, internet speeds have grown 57 times. Since 2050 is three decades off, headline speeds of tens to hundreds of terabits per second are easy to predict. 

source: FuturistSpeaker 

Some will argue that Nielsen’s Law cannot continue indefinitely, as most would agree Moore’s Law cannot continue unchanged, either. Even with some significant tapering of the rate of progress, the point is that headline speeds in the hundreds of gigabits per second still are feasible by 2050. And if the typical buyer still prefers services an order of magnitude less fast, that still indicates typical speeds of 10 Gbps 30 Gbps or so. 

Speeds of a gigabit per second might be the “economy” tier as early as 2030, when headline speed might be 100 Gbps and the typical consumer buys a 10-Gbps service. 

source: Nielsen Norman Group 

If consumers on every continent purchased service at equivalent rates, in 2050 one would expect Asia to represent nearly 60 percent of demand, Africa nearly 20 percent. Europe would represent seven percent of demand, South America nine percent, North America four percent. 

source: Chegg 

Most observers would guess Asia will do about that well, while Africa lags. Europe and North America likely will over index, while South America might do about what the population alone would predict. 

Though the correlation might be less than one might expect, fiber to home deployment should correlate with terabit take rates in 2050. The wild card is 8G mobile access. As mobile speeds likewise continue to increase, most consumers might prefer wireless access to any fixed connection. 

In mobility as in the fixed network, the theoretical headline speed is not matched by mass market commercial experience. Still, the pattern has been that each next-generation mobile network features data speeds an order of magnitude higher than the prior generation. 

source: Voyager8 

Assume that in its last release, 5G offers a top speed of 20 Gbps. The last iteration of 6G should support 200 Gbps. The last upgrade of 7G should support 2 Tbps. The last version of 8G should run at a top speed of 20 Tbps.

At that point, the whole rationale of fixed network access will have been challenged, in many use cases, by mobility, as early as 6G. By about that point, average mobile speeds might be so high that most users can easily substitute mobile for fixed access.

When Will Travel Approach Pre-Covid Levels, and What Does it Mean for Telecom Revenue?

Travel behavior has had a significant impact on mobile revenues globally, primarily in the form of reduced roaming revenues, though some reduced upgrade or new account activity might also be an issue. By definition, a return to pre-pandemic travel is key to restoring roaming revenue volume. 

Some believe recovery will take a few years. 

Global spending on business travel is expected to show a 52 percent decrease for all of 2020 (to $694 billion), down from $1.4 trillion in 2019, according to the Global Business Travel Association, an “unprecedented” decline. 

“The magnitude of these losses and their impact on travel suppliers is unprecedented: the 2020 business travel spending losses are expected to be 10 times larger than the impact of either 9/11 or the Great Recession of 2008,” says GBTA. 

More significantly, GBTA expects a 21-percent increase in business travel spending is projected in 2021, mostly at the end of 2021. A full recovery to pre-pandemic levels is not expected until 2025.

Consumer travel demand also matters. In that regard, one analysis suggests travel tops the list of things U.S. residents want to do after they get vaccinated, a survey by Ipsos finds. And there appears to be significant pent-up demand. 

About 40 percent of respondents say they’re saving more now than they were before the pandemic, and most people who have plans for the money say they’re saving it for travel.

About 19 percent of survey respondents say they’re saving for a domestic trip by plane, while 16 percent say they’re saving for a domestic road trip. About 15 percent say they’re saving for an international trip.

 

source: Ipsos 

So 2021 might still be a challenging year for mobile operators, in terms of revenue growth.

Small Business a "Big" Opportunity?

Some might criticize connectivity service providers for ignoring the "small business opportunity." But that opportunity is smaller than one might think, not because there are few such firms, but because their buying patterns often are not so different than those of consumers.

Also, profit margins are slim enough that not much personalization or customization is possible.

Since perhaps 99 percent of global businesses are “small,” many would note, while the enterprise market is the “less than one percent,” it sounds logical enough that small business effort would pay off. Or not. 

The traditional problem connectivity providers have serving the small and mid-sized business market (depending on which definitions are used) is profitability. No retail service provider serving the mass market can afford to sell using the same channels as dedicated to an enterprise account.

Most U.S. “small” businesses, for example, have zero employees. A small percentage have between 20 and 499 employees. At the high end, many would consider an organization to be “mid size.”

source: Small Business Trends 

In Canada, for example, any organization with 100 to 499 employees is considered a “medium-sized” business. About 70 percent of businesses have one to 99 employees. 

source: Govt. of Canada

Of some 5.7 million U.S. companies in 2012, 90 percent had fewer than 20 employees

 

source: U.S. Census, DB Global Markets 

U.S. firms with at least 500 employees, which we might all agree is the lower end of the enterprise market, represent a fraction of one percent of all firms. Even including firms with 100 to 499 employees, such firms represent just 1.6 percent of U.S. establishments. 

The point is that the enterprise market is highly concentrated and operates at a scale vastly different than the typical firm. 

source: Census Bureau, Advance Iowa 

That is why channel partners--interconnects for enterprise phone systems; system integrators for local area networks; managed service providers for apps; distributors for LAN gear--historically have served the needs of smaller businesses and organizations. 

In the same way, specialized business phone companies have served the needs of business and organization customers who want to “create their own voice services” using phone switches or key systems. 

In other words, connectivity providers are never so good at serving the needs of either enterprise, mid-market or small business customers. That is why all the other channel organizations exist. 

source: U.S. Census Bureau, The Conversation

The phrase “mass  markets” illustrates the issue. As a practical matter, a retail connectivity provider cannot afford to market and sell to a small business in any way too different from the way it markets and sells to consumers, because the gross revenue and profit constraints are quite similar. 

Enterprises are supported by a direct sales force. Other mid-sized organizations are supported indirectly, using channel partners. Consumers are reached using advertising and retail stores. And small business is supported the same way as the consumer segment. 

As service providers have sought on-demand control for decades, so customers will benefit from on-demand provisioning and configuration, if possible. 

Still, most of the value small businesses will seek is provided by apps, not connections. The ability to order, provision and change bandwidth levels on demand, while helpful, is not as helpful as the ability to add, drop and reconfigure apps. 

Yes, there are many small firms, but the cost of marketing, selling and fulfillment does not leave very much room for personalized attention or customization, at least not the traditional way. 

Beyond that, connectivity providers typically do not own the actual business apps customers want to buy. 

The “small business opportunity, in other words, is smaller than many would hope.