Concentration of Power is Ubiquitous in the Internet Ecosystem

One need not attribute especially “greedy” motives to the behavior of firms, organizations or people to recognize that competition creates restraints on any such impulses, whether the actors are people, firms or industries. 

In that regard, we might argue that the assumptions about concentration of power and inability to use markets to discipline firm behavior have changed over the past two decades. 

source: Oberlo 

It might once have been somewhat reasonable to assume that access provider unchecked power was most dangerous in the internet ecosystem. It might now be considered more important to address application provider and platform power, as competition seems less developed there than in the access business.

source: Digital Information World 

These days, market power might be seen in browser share, app store share, platform share, social media, e-commerce, cloud computing, search and just about anywhere else one wishes to look within the internet ecosystem. 

The point is that potential or actual monopolists or oligopolists can be found everywhere within the internet ecosystem. Furthermore, the power arguably is concentrated most significantly at the higher levels of the value or protocol stack: applications and platforms more than devices; devices more than operating systems; operating systems more than access providers.

Are App Store Revenue Splits Really Unfair? Maybe Not

Developers always complain about the revenue share they must make with distribution partners such as Apple and Google. But another way to look at the cost is to consider what it might cost developers, especially the small developers that dominate app supply, to create their own marketing and sales channels.

Keep in mind that is the real issue here: what does it cost a small developer to create its own sustainable marketing and sales programs--which also cost money--if developers chose not to use either Apple or Google for marketing and sales fulfillment. 

Perhaps you believe 30 percent of sales or 15 percent of sales is oppressive. But that must be evaluated against the cost of creating other channels. 

Market intelligence firm Sensor Tower estimates that global end-user spending from the Apple App Store and Google Play totalled US$111 billion in 2020, with the App Store accounting for 65 percent of the total and Google Play 35 percent, says Greg Sigel, Docomo Digital VP. 

In other words, Apple and Google accounted for virtually all sales of mobile apps globally. Apple and Google are the growth engines for the entire mobile app industry, and its primary sales channel.

So whether 30 percent or 15 percent is considered a fair compensation for a firm’s total marketing, distribution and sales strategies is not the issue. The issue is whether, and at what cost, one’s own direct distribution, marketing and sales infrastructure could be created and operated. 

By established rules of thumb, new firms should spend between 12 percent and 20 percent of gross revenue on marketing alone. Established firms might budget for marketing spend at six percent to 12 percent of gross revenue.

source: Cyclone Interactive  

But that is just marketing. Sales costs must include some combination of additional cost, especially sales wages and benefits and sales commissions. minimum of 15 percent to 30 percent and perhaps a maximum of up to 50 percent in some industries. 

So marketing plus sales could represent between 30 percent to 50 percent of gross revenue for younger firms. 

That is the context within which app store revenue shares need to be evaluated. “Build your own” is one way to evaluate sales and marketing cost, no matter which channel is preferred.

But to the extent that Apple and Google operate as efficient and effective marketing and sales channels, a revenue share between 30 percent and 15 percent is not out of line with other ways of building and maintaining marketing effort and sales results. 

The argument can be made that the app store revenue shares at 30 percent are less expensive for developers, especially small developers, than attempting to create their own marketing and sales channels. 

Too Much or Too Little Competition Can Depress Investment in Next-Generation Networks

Communications policy makers often face tough choices: policies that promote competition often decrease appetite for investment in new facilities. On the other hand, policies to incentivize investment often require or produce less competition. 

Maximum feasible competition, but also maximum feasible investment in next generation facilities often are preferred. But the two objectives lie in a state of tension. Too much competition dampens investment. But too little competition also dampens investment.

The trick is finding the balance between one monopoly supplier and some number greater than one, that produces a stable competitive outcome and sustained investment in next-generation facilities. Excessive competition drives companies out of the market because profits are not attainable. Too little competition reduces incentives for robust investment. 

As Federal Communications Commission staffers have argued, “private capital will only be available to fund investments in broadband networks where it is possible to earn returns in excess of the cost of capital. In short, only profitable networks will attract the investment required. 

A good example of this is the impact of competition on profit margins, average revenue per account and customer market share in facilities-based competitive markets.  

The first new facilities-based competitor in a market with a single provider reduces average revenue per user by four percent, but market share by 50 percent, FCC analysts calculated. 

source: FCC 

In markets with four competitors, potential market share is reduced 75 percent and ARPU falls 28 percent, according to FCC analysts.

Even in many wholesale-based markets, where retail competitors all use a single physical network, market share and ARPU reductions might mirror those of facilities competition markets. 

The point is that communications policy now also now is created under very different market circumstances than in the pre-1990s monopoly environment. Regulators want competition, but they also want investment. 

The problem is that too much competition tends to depress investment, as does too little competition.

Channel Conflict in Wholesale: Dish T-Mobile is an Old Story

T-Mobile agreed to provide major support for Dish Network’s emergence as a new “fourth provider” as a condition of gaining regulatory approval for its merger with Sprint. But no incumbent is especially keen on enabling its own competition. So friction between Dish and T-Mobile was inevitable. 

In a broader sense, channel conflict is a potential issue whenever wholesale mechanisms occur in the telecommunications business. Nearly two decades ago, as regulators were pondering methods to increase the amount of competition in local access markets, wholesale and facilities-based approaches were considered.

In most cases, because of the paucity of assets, wholesale has been the preferred policy approach. By allowing wholesale access to the dominant incumbent network, retail competition is increased, though often at the expense of facilitating new network investment by rivals. 

The salient exception has been the mobile business, which has been able to produce facilities investment while also spurring competition.  

As Federal Communications Commission staffers have argued, “private capital will only be available to fund investments in broadband networks where it is possible to earn returns in excess of the cost of capital. In short, only profitable networks will attract the investment required. 

A good example of this is the impact of competition on profit margins, average revenue per account and customer market share in facilities-based competitive markets.  

The first new facilities-based competitor in a market with a single provider reduces average revenue per user by four percent, but market share by 50 percent, FCC analysts calculated. 

source: FCC 

In markets with four competitors, potential market share is reduced 75 percent and ARPU falls 28 percent, according to FCC analysts.

Even in many wholesale-based markets, where retail competitors all use a single physical network, market share and ARPU reductions might mirror those of facilities competition markets.

Thailand Makes Big Broadband Jump

Thailand makes a big jump in broadband, both internationally and across Southeast Asia. Of the top 10 countries globally, ranked for typical speeds in December 2020, Singapore was first, Hong Kong was second and Thailand was third, according to Ookla. 

source: Ookla

Power Laws and Bell Curves

The Pareto principle, or 80/20 rule, is an example of a power law, and stands in contrast to a bell curve distribution. The former rule suggests 80 percent of outcomes are produced by 20 percent of actions. The latter rule suggests most outcomes are produced by “average” people or instances. 

The power law can be illustrated using the 80/20 principle. 

source: Visual Capitalist 

source: Visual Capitalist 

Contrast that with the bell curve, where most instances or outcomes cluster. That is why a bell curve is known as a standard distribution.  

source: Cate Bakos 

Which curve you believe applies to any endeavor suggests where to apply additional effort. Large social networks, for example, show a heavy tail distribution rather than a bell curve. 

Your organizational or personal outcomes might be affected by which distribution you believe applies. If most people and organizations can expect most of their results from a bell distribution, then broad measures might be conducive to higher performance. If, on the other hand, a power law holds, then it might be better to focus only on a relative handful of instances, actions or priorities. 

I was recently interviewed by a news outlet about the content of the Pacific Telecommunications Council’s annual conference. “Everything we do is about computing these days,” I said. You might say that is an example of a bell curve. There are a relatively small number of members whose concerns are not primarily digital services, infrastructure or products. 

But if you look at membership growth, a power law emerges. The fastest-growing category of firm members over the past half decade or so has been firms in the data center business. But that is because a bell curve also applies. 

Most member firms are in the global capacity business, either as enterprise end users or suppliers of capacity. And, by volume, global capacity demand is generated by hyperscale applications and data centers. 

And much of the value of data centers now comes from connectivity: within each data center and between data centers; between application providers, networks and ecosystem partners. In other words, the bell distribution installed base enables the power law growth.

Service Provider Revenue Flat, Overall, During 2020

Global telecommunications service provider revenues totaled $1.53 trillion in 2020, representing flat year-over-year growth, according to the International Data Corporation. Asia/Pacific service provider revenue was flat, while revenue grew in the Americas region and declined in Europe and the Middle East region. 

IDC expects worldwide spending to increase by 0.7 percent in 2021 reaching a total of $1.54 trillion. 

IDC had predicted in May 2020 that Covid would wind up having little impact on service provider revenues. In past recessions, even severe recessions, though telecom service provider revenues have dipped a bit,  revenues tend to hold up better than for many other industries. Revenue also tends to bounce back quickly once a recovery begins.

Many will note the big jump in data usage during the pandemic. But usage and revenue do not correlate in a highly-linear fashion. In fact, many service providers essentially switched to “no extra charges” during the pandemic, which broke the possible connection between higher usage and higher revenue. 

Global Regional Services Revenue and Growth (revenues in $B)
Global Region	2020 Revenue	2019 Revenue	20/19 Growth
Americas	$583	$579	0.7%
Asia/Pacific	$482	$482	0.0%
EMEA	$467	$471	-0.8%
WW Total	$1,532	$1,532	0.0%

source: IDC 

Segment trends varied.  Consumer fixed network data services arguably got a boost as workers were forced to stay home and students were kept out of school.

Aggregate business fixed data demand likely was stable in the enterprise segment, but it seems almost inevitable that small business bankruptcies will reduce demand from the small business segment. Enterprise locations likely saw a fall in usage, but multi-year contracts likely preserved revenue generation. 

Fixed voice demand has been falling for a couple of decades and it is unlikely Covid-related changes in demand will change the direction or magnitude of demand. 

Mobile services spending declined slightly, partly because marketing suffered from retail store closing; in part because consumer lockdowns meant less need for out of home communications; and partly because roaming revenues fell. With workers and students at home, more data demand likely was shifted to Wi-Fi, and off the mobile networks. 

 

The more important long-term observation is that global revenue growth now is quite flat.

source: IDC