What to Make of Verizon Selling 90% of Content Assets?

There is a difference between execution risk and strategic risk. In the former instance a firm or person might have had the right idea, but chose the wrong set of actions. In the latter instance a firm or person chooses an incorrect plan. 

In that regard, telecom firms sometimes make mistakes of execution or strategy. Mistakes in the former can obscure the validity of the latter. Consider Verizon’s sale of 90 percent of its  AOL assets. 

Some will argue diversifying into content is not a good strategy for connectivity providers. But in 2017 50 telcos around the globe generated more than $90 billion in content revenues, mostly from video services. 

Organic growth in core connectivity services cannot contribute much, in a growing number of connectivity markets, to revenue. The phrase terminal decline has been applied to legacy connectivity services, for example.  And that leads to a search for new revenue sources.  

source: GSMA Intelligence 

Also, unless one wishes to use an obsolete “what is a telco?” definition, cable TV companies have transformed themselves from video distributors into content owners, mobile service providers, business connectivity providers and leading suppliers of broadband access as well. 

The notion that connectivity providers “cannot” master the content business is incorrect. It can be argued that telcos have had more financial success in content than in their roles as app store providers, equipment manufacturers, computing suppliers or data center suppliers. 

Though legacy telcos do participate to some extent in the enterprise phone system business, system integration, virtual private network and other connectivity lines of business, they often do so as lesser providers in segments dominated by others (either communication specialists or information technology providers). 

The point is that telcos arguably have been more successful in video entertainment than in all other diversification efforts of the past four decades. 

source: GSMA 

In 2018 nearly half of telco executives surveyed by EY cited television and video services as among the top three best ways to grow new revenues. The alternative is failure, if present revenue and profit trends continue. 

Global telco revenue growth rates remain stubbornly close to one percent per year, below the long-term rate of inflation. If one were looking any key component of telecom revenues, one would see a historical curve reminiscent of a standard product life cycle, with declining demand, declining profits or both. 

Product maturation, product substitutes and changes in value are issues telcos have dealt with for a couple of decades already.  So if the core business is under strategic attack, what strategy is called for?

The range of options have not really changed much in four decades. Telcos can run today’s business more efficiently; grow the current business through acquisition or innovation or get into new lines of business. 

All three have worked for various providers; at various times. The biggest single revenue driver was entry into the mobile business. First voice subscriptions for business users; then consumer users; then text messaging and now internet access have provided waves of revenue growth in the mobile segment. 

More recently, internet access has been important for fixed network service providers, but most fixed network providers have grown through acquisition. In fact, they arguably have grown mostly by acquisition. 

To put the Verizon move into content, the argument can be made that the AOL plus Yahoo failure to make a bigger revenue contribution was that Verizon purchased the wrong assets, at too low a scale. Both AOL and Yahoo were “legacy” internet assets, “closed” or “walled garden” in a market moving to “open.”

Both assets were past the peak of their product life cycles. AOL’s subscriber base peaked in 2002, nearly 20 years ago. Yahoo revenue peaked in 2008, more than a decade ago. Both assets were generating less than $10 billion in annual revenue for Verizon, were declining and in no position to lead growth in the content business, having perhaps three percent share of the digital advertising business, for example. 

The point is that Verizon’s experience with Yahoo and AOL is not necessarily evidence of strategic failure. It almost certainly is an execution mistake. The acquisitions were not of high growth properties with a chance to lead their markets. Nor was there sufficient scale to compete effectively with the other leading digital ad platforms. 

There might be company culture issues at work, as well. Compared to AT&T, which grew by acquisition, Verizon has preferred organic growth. Where Verizon has emphasized the quality of its network and a smaller footprint, AT&T has looked for scale, with market-competitive network performance. 

AT&T--like Comcast--committed to content ownership at scale. Verizon--like Charter Communications--preferred a connectivity strategy. 

Still, it is possible to note that, over time, fewer connectivity providers will be able to maintain revenue growth relying solely on connectivity revenues. The only issue is where to look for new lines of business. 

Covid Makes Public Transit Funding More Challenging

About 55 percent of younger professionals who responded to a poll on Blind say they do not feel safe commuting on public transportation. Though 39 percent of respondents say they used to take public transportation to work. Now, just 22 percent say they plan to do so. 

The caveat is that significant numbers expect to continue working remotely, so transportation to the office will not be necessary so often. 

Most public transportation services in the United States are heavily subsidized. Like it or not, if ridership continues to fall, the subsidies will have to grow. By some studies, ridership has fallen 65 percent, compared to pre-Covid levels. 

To be sure, we will have to see what happens a few years from now, but ridership has been falling for some years before Covid. Use of public transit seems to have been falling for at least four years.

 

How Much Will Better Broadband Help?

Public policy advocates often argue that “better broadband is needed” to support economic development, jobs or growth, with support for education or other internet-based services contributing to potential for growth. It is not a panacea. 

A composite map overlaying U.S. median household income, poverty, disability rates, and broadband internet access shows the extent to which the same places in the country struggle with all these issues. Darker colors indicate more severe problems with all those issues. 

source: Business Insider 

In other words, areas with poor broadband also are areas of low population, higher poverty, lower incomes and higher rates of disability. Broadband does not fix those other problems. And those other problems arguably are linked to low economic potential. 

A study conducted by a team of Harvard Business School researchers “confirms that rural regions account for a small and slowly decreasing share of U.S. employment.”

Source: Google

“Rural areas will never match urban infrastructure, services, and amenities,” the study team noted. 

Low population density is almost always associated with weak business environments. How much broadband can help is the issue, social inclusion, education, health or "equity" issues aside.

Does More IT Investment Lead to Higher Productivity or Return on Investment?

The conventional wisdom is that investment in information technology is correlated with business outcomes. But correlation is not causation. 

“We’ve found that investing in remote, LAN, and WAN services correlated with collaboration investment success, defined as above-average ROI or productivity gains,” says Metrigy. 

source: Metrigy 

Other studies likely show the same correlation: firms with better outcomes generally invest in more technology. There are other correlations. 

It also is likely that industries with higher profitability; faster growth rates and higher gross revenues invest more heavily in technology. Industries challenged in terms of revenue, growth or profit tend to invest less than average. 

In other words, it is hard to conclude whether “better-performing firms apply technology” or whether “applying technology makes firms perform better.” Perhaps firms that use more technology perform better for all sorts of other reasons. 

Telco Clouds not Your Grandfather's Oldsmobile

Telco computing platforms in the internet age are vastly different from the closed, proprietary platforms of the voice-only era. Less functionality is built internally and custom; more functionality is sourced from third parties. That requires a more-open platform able to run third party apps, using more open source and standardized operating systems. 

That is why one hears so much about virtual network functions, network virtualization and “telco clouds.” It has not been particularly easy to accomplish. But newer efforts in the mobile segment of the business to create Open RAN standards are an edge counterpart to core network virtualization.

source 

That now creates an architecture that might be called “Microsoft Inside” or “Anthos Inside” (Google) or “Amazon Web Services Inside.”

source: Microsoft

Free Speech Law: Are Big Changes Possible?

You might think our understanding of the First Amendment to the U.S. Constitution is unambiguous. It is not. “The outstanding fact about the First Amendment today is that the Supreme Court has never developed any comprehensive theory of what that constitutional guarantee means and how it should be applied in concrete cases,” argued Thomas Emerson. 

What the First Amendment means, in other words, is far from “settled law” (precedent). It tends to develop on an ad hoc basis, rather than flowing from a comprehensive framework, Emerson notes. 

Right now, a growing concern in some quarters is how freedom of expression is protected not from government action but by the actions of platforms. Indeed, some call for greater restriction of free speech on platforms, in the name of so-called hate speech. Others say the restrictions are not equally applied to all speech, and result in the suppression of some political ideas. 

If we assume that the purpose of the First Amendment is to protect freedom of expression in a democratic society, then new media formats and new platforms can raise new issues. And, as is common, the matter is complicated. 

The First Amendment has generally been interpreted to protect the rights of “speakers. But the owners of new platforms (social media, in particular) say their users are the “speakers,” not the platforms. 

That is the basis for Section 230 of the Telecommunications Act of 1996. The act protects platforms from liability for what is said by users of their platforms. “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider,” the Act states. 

In other words, users are the speakers, not the platform. That could have profound implications. 

The owners of platforms do not lose their corporate right of free speech as private entities, but the matter of free speech is complicated when the platforms themselves do not claim to be speakers.

The bigger issue might ultimately be that the First Amendment says “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.”

Traditionally, citizens are to be protected from government restriction of free speech. 

But the places where “speech” occurs also matter. Public forums--such as public parks and sidewalks--have always been viewed as places where citizens have the right of free speech. 

Nonpublic forums are places where the right of free speech can be limited. Examples are airport terminals, a public school’s internal mail system or polling places. 

In between are limited public forums, where similar restrictions on speech are lawful, especially when applied to classes of speakers. However, the government is still prohibited from engaging in viewpoint discrimination, assuming the class is allowed. 

The government may, for example, limit access to public school meeting rooms to school-related activities. The government may not, however, exclude speakers from a religious group simply because they intend to express religious views, so long as they are in a permitted class of users. 

Those protections have been limited to state action, It is government entities (local, state, or federal) that are enjoined from infringing the right of free speech. Protections have not been deemed applicable to private entities.

There has generally been in other words, no First Amendment right of free speech enforceable on private firms or persons, with some exceptions. 

Common carriers--such as telcos--must allow communications between any users who are willing to pay the tariffs. Telcos cannot censor what those users say. Such regulation--including public accommodation, water and electrical utilities or railroads--is not generally regarded as a direct “free speech” issue, but an issue of commerce.

A common carrier is a person or company that transports goods or people for a fee, the principle being non-discrimination. A common carrier must provide its service to anyone willing to pay its fee, unless it has legitimate grounds for refusal.

If state governments decide to create laws protecting free speech from social media or other private firms, that would at the very least raise an issue: Can the federal government, acting under the guise of the First Amendment, move to restrict state action extending the zone of free speech to include dominant private platforms? 

That might involve a novel regulation of social media platforms as common carriers of a sort. That would plow new ground, but First Amendment law has evolved over the years in an ad hoc way, all along.

Lumen Outlines Where it Will Invest, Where it Will Harvest

Lumen Technologies has a clear understanding of where its revenue growth is to be found. Lumen earns most of its revenue--up to 75 percent or so--from business customers, so it makes sense to look for revenue growth in international enterprise operations, IP data services including edge computing, transport and apps supporting transport. 

source: Lumen Technologies 

Consumer and small business revenue growth (mass markets) will come almost exclusively from broadband access services. 

The wholesale, voice and rural operations are not seen as growth vehicles and essentially will be harvested. Note that Lumen is not a supplier of mobility services, so that is not a growth option. 

Every connectivity provider with multiple customer segments and products has to make similar decisions about where growth is to be found and where investments are to be made. 

Conversely, every business has to know which lines of business are declining and have to be managed for decline.