Valuation Issues an Obstacle to Moving Up the Stack

The connectivity business, once regulated as a monopoly, has been a slow-growth industry with valuation multiples reflecting slow growth. That poses a problem. If telecom companies decide to grow by acquisition, and they acquire software, technology or content assets, they face the impact of higher valuation assets.

In 2021, for example, enterprise value multiples compared to cash flow multiples (EV/EBITDA)--the value of all stock and debt divided by free cash flow--were 44 times in the internet software business and just 6.8 times for the telecom industry, according to Statista. 

source: Statista 

Information services had a 32 multiple while software had a multiple of 31. 

Essentially, telcos will be buying pricey assets with depreciated currency when acquiring assets “up the stack.” The alternative is an organic, “grow your own” strategy. That limits investment, but also tends to limit scale. 

source: Arthur D. Little 

That valuation gap exists even within some related infrastructure areas, as data center assets, or infrastructure suppliers directly supporting data centers, have valuation multiples in the 21 range, where mobile operators are valued at about 5.8 times EV/EBITDA.  

source: Bain 

The obvious issue is that acquiring assets “up the stack” at the application layer is costly. If one assumes that connectivity providers eventually will have to make such moves, the challenge is how to amass enough free cash flow to do so. 

Smaller connectivity providers will have scant chances to pursue such strategies, though. As small independent providers in any industry are squeezed out as scale providers emerge, smaller connectivity providers will have few choices but to manage costs as best they can until an exit event.

How Might B2B Sales Change, Post Pandemic?

With the caveat that we do not yet know how patterns will change in a few years, business-to-business sales practices during the Covid-19 pandemic have been forced to change. The big issue is whether the changes are permanent, and if so, at what level. 

While not all B2B sales situations are the same--varying by size of transaction, importance of transactions and degree of routineness or uniqueness--many professionals have said they have confidence in socially-distanced modes. 

At least early in the pandemic, sales professionals were fairly optimistic about socially-distanced sales practices, and most believed the practices would stay in effect for at least a year after the pandemic ends. 

source: McKinsey 

Like it or not, most B2B sales activities had to shift to virtual formats during the pandemic. Very few professionals reported the older model of sales teams visiting customers was still in place. 

source: McKinsey 

Many professionals also believe that remote sales have worked as well--or better--than the older face-to-face model. 

source: McKinsey 

Video and chat seem to have been widely adopted as the channels to replace in-person visits. 

source: McKinsey

Perhaps surprisingly, 70 percent to 80 percent of B2B decision makers said they prefer the remote interactions, or digital self service, where that is appropriate and possible, to visits from sales personnel. 

source: McKinsey 

One might suppose those findings are true when suppliers and buyers already have established relationships. Indeed, only 25 percent of sales professionals reported that the remote modes were “much less effective” or “someless less effective” with current customers. 

What might surprise you is that the same percentages were reported for prospecting for new customers. Just five percent of respondents suggested remote selling with prospects was “much less effective” than in-person approaches, with 20 percent saying remote prospecting was “somewhat less effective.”

source: McKinsey 

If sales professionals continue to hold those views after the pandemic is over, it is reasonable to expect rather wholesale change in many sales practices on a permanent basis, with less reliance on business travel for sales presentations or after-sales consultations. It is unclear whether there might be a shift to greater reliance on inside sales, but that seems a possibility.

It is conceivable that in some industries, there also will be less demand for attendance at business conventions and trade shows. On the other hand, it also is possible that the traditional value of trade shows--ability to meet with lots of potential customers in one location, with one sales trip--will remain highly valuable. 

It also is likely that attitudes could change over a few years, especially for support and prospecting with large accounts. While remote sales might be kept in place for “tactical” functions, “strategic” functions might still call for face-to-face sales calls.

The FTTH Sustainability Issue, as AT&T Faces It

This slide from AT&T’s analyst and investor day presentation March 12, 2021 illustrates the practical issues new fiber-to-home investments present. Average revenue per customer is about $58 a month. 

Take rates are about 34 percent. In other words, where FTTH is available, about a third of customers buy it. In many competitive markets, that is about as low market share can be and still provide any financial return at all. 

source: AT&T 

If we assume the existing locations are the most favorable, in terms of potential return, we might also assume that the business case could well be worse as less-desirable areas are added. That suggests a rather controlled expansion of FTTH by AT&T, as it must expect to build a network that strands two thirds of the access network investment.

Verizon and T-Mobile Have High Hopes for Fixed Wireless

Both Verizon and T-Mobile expect fixed wireless fixed wireless to be key revenue growth drivers over the next several years, and largely for similar reasons. T-Mobile has zero market share in the home broadband business while Verizon has a small geographic footprint and therefore believes it can take out-of-region market share. 

“We expect to cover nearly 15 million homes by the end of this year and expect to reach 30 million homes by the end of 2023, using both 4G and 5G,” said Kyle Malady, Verizon Communications CTO. 

“By the end of 2021, we will have between one million and two million millimeter wave 5G home open for sale and some 15 million in total with the arrival of the first tranche of C-band,” said Ronan Dunne, Group CEO of Verizon Consumer Group. “By the end of 2023, this will have risen to more than 30 million households we can serve.”

T-Mobile also expects to garner seven million to eight million home broadband accounts by 2025. The only issue is which current providers lose that share. 

Assuming $50 monthly revenue, and an annual total of $600, that implies T-Mobile could generate $4.2 billion to $4.8 billion annually from home broadband services within four years. It might be challenging to create that much revenue from new sources any other way, within four years. 

Half of U.S. Households Buy Internet Access Running between 100 Mbps and 200 Mbps

“Average” tends to be misleading for most things related to use of the internet, especially when using the arithmetic average (mean) rather than median approaches. In the fourth quarter of 2020, for example, mean data consumption by U.S. households was about 483 gigabytes, while median consumption was 294 GB (half higher, half lower). 

source: Openvault

The significant difference is “power user” data consumption. About two percent of users consume more than 2 terabytes of data per month, while 15 percent consume at least 1 TB per month. That skews the (mean) average consumption. 

 

source: Openvault

The Covid-19 work from home and stay at home policies caused an immediate spike in consumer fixed network data consumption, which has persisted at new and higher levels. 

source: Openvault

source: Openvault

Perhaps one way to describe consumer behavior is to note that half of U.S. households (51 percent) purchase service plans offering 100 Mbps to 200 Mbps downstream speeds. Less than a quarter buys speeds slower than 75 Mbps, while 30 percent or so buy plans running faster than 200 Mbps.

If Telco Platforms are Created, Acquisition is Likely the Driver

If any telcos are successful at becoming platforms, acquisition is likely to be the path forward. 

Some observers now believe that about 70 percent of new value created through “digitalization” over the next decade will be based on platform-enabled, ecosystem-based business models, according to the World Economic Forum. 

That should raise questions about how much of that economic activity can be captured by telcos that mostly operate in non-platform markets. Basically, telecom is a “pipe” business, not only related to common parlance about selling connections, but also because of the “direct to customer” sales model. 

Telecom is not the only business or industry where debates about business strategy include the issue of “pipes versus platforms.” In fact, almost all businesses use a “pipe” model: they source and create products sold to customers. Firms create products, push them out through various distribution systems for sale to customers. Value is produced upstream and consumed downstream. 

Virtually all consumer goods use a pipe model, as does manufacturing, media, most software products and education. 

Platforms are different. Unlike pipes, platforms do not just create products and sell them. Platforms allow users to create and consume value as well. When external developers can extend platform functionality using application platform interfaces, that usually suggests a platform model could exist. 

Another way of stating matters is that, on a platform, users (producers) can create value on the platform for other users (consumers) to consume. Think of YouTube, Wikipedia, Amazon, Uber or Lyft. 

The business implications can be profound. Some attribute Apple’s rise to prominence in the phone industry not on its design, its user interface or operating system features but to its creation of an ecosystem and platform. 

In fact, the ability to generate revenue from acting as an intermediary or marketplace for different sets of market participants is the functional definition of whether some entity is a platform, or not. 

So any telco aspiring to become a platform must necessarily become an enabler of value creation, not the provider of a “pipe” product. It is almost inconceivable that any firm could do so without making a huge acquisition. 

Failing that, providers might hope to replace some lost revenue with new products, with a goal of harvesting revenue as long as possible. If profits remain elusive, then massive industry consolidation could happen, as connectivity networks become--once again--monopoly providers highly regulated by governments. 

Half of Tech Workers Say Work Hours Increased during WFH, Blind Reports

Nearly half of respondents to a Blind poll of technology industry workers said their work hours had increased during the enforced “work from home” policies put into place because of Covid-19. About 10 percent of respondents say their work hours have decreased.

If you quantify “productivity” as output compared to input, and if the output remains the same, while hours worked increase, productivity arguably has dropped. There is some evidence that productivity has not changed. 

There is some evidence that workers believe they are just as productive, or more productive. A survey of 365 U.S. workers by The Manifest found that 30 percent of respondents think they are more productive working from home. 

Fully 45 percent believe they are more productive working in an office, and 24 percent say they’re equally productive working from home and in an office. Keep in mind those are examples of what people think about their productivity. It is not an actual measure of whether they are, or are not, more productive in home or office settings. 

source: Agility PR 

Some have argued that even if productivity can be sustained for a brief period, it might well not sustain itself over the long term. A survey of the heads of nearly 50 U.S. businesses employing 443,895 people in industries that include technology, legal services, advertising and the finance, insurance and real estate sector found that 40 percent of them have started to see decreases in productivity as staff work remotely. 

J.P. Morgan also seems concerned that WFH productivity is slipping, while others note growing evidence of mental health issues caused by enforced WFH. 

At least, that might be true for the 25 percent of workers who can work from home.  

Also, there is a growing sense among professionals that WFH is hurting their career progression. Others might point out that WFH has positives and negatives, not including burn out or work-life balance, even if WFH once was viewed as a perk. 

One might think less commuting time “has to improve productivity.”

Reviewing time-use diaries of 1,300 U.S.-based knowledge workers, collected in the summers of 2019 and 2020, professors Andrew Kun, Raffaella Sadun, Orit Shaer, and Thomaz Teodorovicz found a reduction in commuting time to work of about 41 minutes, on average, because of extensive work-from-home rules. 

Intuitively, you might guess that has led to an increase of productivity. The study is far more nuanced. 

“Independent employees (i.e., those without managerial responsibilities) reallocated much of it to personal activities, whereas managers just worked longer hours and spent more time in meetings,” the researchers note. 

Independent contractors simply used the extra free time for non-work activities. Managers had to spend more time in meetings. 

“For managers, the increase in work hours more than offset the loss in commuting time: Their work day increased on average by 56 minutes, and the time they spent replying to emails increased by 13 minutes,” the researchers say.