How Feasible is "Orchestration" as a Business Model?

“Rather than continuing down the road of being a connectivity provider, CSPs need to transition to become an intelligent service orchestrator ,” says Bengt Nordström, Northstream managing director. “Taking a connectivity and wholesale approach in 5G, or becoming a reseller to the edge, will put CSPs in danger of seeing revenues dry up.”

“Becoming an orchestrator” is viewed by some as a move up the stack to becoming a “service enabler,” presumably allowing additional value creation and revenue generator possibilities. 

source: Ericsson 

Also, there is a less customer-facing understanding of “orchestration” that involves the internal operations of the access and transport network itself. In that sense, orchestration is about automation more than service creation, the creation of end-to-end service more than occupying a new role in the value chain.   

Orchestration makes sense, no matter which definition is used. But one form is easier than the other. Orchestrating the internal operations of the communications network is one thing, taking on a new role in the value chain, ecosystem or functions stack is a different matter. 

The issue is how feasible it is that the access provider becomes the app orchestration supplier, “positioning themselves as the key to enabling a wide range of services through their ability to connect a complex ecosystem of new digital offerings,” notes Nordström. 

Otherwise, 5G is likely to turn out as did 4G, with much of the new value reaped by over the top app, commerce and content suppliers, not access providers. 

source: Ericsson 

“For many CSPs (communication service providers), the aim of digital transformation programs is to empower them to become service enablers or service creators, which increases their commercial enterprise opportunity,” Ericsson says. 

But it might also be fair to point out that this requires moves akin to becoming system integrators, especially integrators with vertical market domain expertise. Some might note that others in the value chain already have staked out this position, requiring access providers to muscle out other existing competitors. 

Connectivity providers might assemble multi-cloud access capabilities, for example. But most access executives would be happier with a more-developed role as service creators. 

Also, in the internet era, it has proven easier to move down the stack than up the stack. That is to say, it has proven easier for entities with domain knowledge to add lower layer functions to create new offers, than to assemble new offers from below. 

In itself, the advice to “orchestrate” makes operational sense. All virtualized networks require orchestration. Whether the use of the term also extends to business role, and the odds of succeeding in such roles, is a different matter.

"Platform Business Models" Were Proposed 20 Years Ago

Enron attempted to become a bandwidth trading platform two decades ago, but imploded in 2001 for reasons directly related to accounting fraud. Highly controversial at the time, Enron’s notion of creating a platform for buying and selling bandwidth services appears not to be ahead of its time, but very much in line with current thinking about platform business models. 

It is hard to say what could have happened had Enron not gone bankrupt. The basic model of creating an exchange seemed to work in a number of other markets. And there was a logic to the hope of creating a more-liquid marketplace where complex products could actually be traded. 

source: Enron

But there was significant resistance from many other partners, for one obvious reason: the exchange was touted as leading to lower prices, and it was not deemed to be “in our own best interest” for other big carriers to put their assets into such an exchange. 

The offer was real-time contracting and delivery of capacity at network pooling points. It was one example of “on demand bandwidth provisioning,” long an industry hope. Enron promised an “efficient” market. But other potential partners might have heard “commodity pricing.”

About the last thing capacity executives wanted was anything that would turn their core product into a “commodity.”

Two decades later, businesses in many industries are urged to “become platforms,” earning their revenue by facilitating transactions. 

It’s the same idea, twenty years later.

Digital Customer Experience is Way Easier than Recreating a Business

For most people, all-digital customer fulfillment or “all-digital marketing” is an easier concept than “becoming a different kind of business” (customers, products, industries). In the mobile business, the concept is captured by “all-digital customer activation. 

source: Capgemini 

For that reason, much thinking about “digital transformation” focuses on customer-facing marketing and sales. 

source: Capgemini 

The notion of finding, ordering and taking delivery of a product all online is now familiar, and is the preferred activation model used by many upstart mobile service providers. 

Transforming a business model (revenue, customers, products, position in value chains) is far more difficult, and arguably quite a bit riskier. For connectivity providers there is another danger: transformation by rivals who then compete directly with connectivity providers. 

Going direct to customer can be helpful for connectivity providers, but arguably is more useful for other e-commerce, content or application providers. Indeed, one might argue that is precisely what the internet promises: direct access to end users and customers.

Cable Leads U.S. ISP Accounts, Telcos have Most to Gain

AT&T, Comcast and Charter Communications own networks covering the most U.S. residents (and presumably housing units). But it is difficult to directly correlate population covered with “homes passed” or even “locations served.” 

Most locations are served by at least two different terrestrial providers. Subscriber percentages hinge at least partly on marketing strengths (cable operators have at least 70 percent of the installed base). 

U.S. ISP Population Coverage and Subscribers
Firm	Population %	Subscriber %
AT&T	42	15
Comcast	36	29
Charter	34	27
Verizon	17	7
Lumen	9	2
Cox Comm.	7	5
Altice	5	4
sources: FCC, Leichtman Research

Still, the numbers suggest telcos have lower take rates than do cable operators, which corresponds to reality. Also, the telcos arguably have the greatest upside from network upgrades that would match or exceed cable performance metrics. With appropriate pricing, that should allow telcos to eventually close the take rate gap with cable companies, all other things being equal.

Causal Relationship Between Means and Ends Really Does Matter

Political rationality often is not economic rationality, because ends and means relationships are misunderstood or because of opportunity costs. 

Consider an infrastructure bill passed by the U.S. Congress authorizing $548 billion in public

infrastructure spending. In principle, one might argue that additional spending should create economic growth and benefits. It will not, say Penn Wharton School economists Jon Huntley and John Ricco.

“The additional public capital makes workers more productive, however, this is offset by the decline in private capital, which makes workers less productive,” they say. “Overall, workers’ productivity is unchanged, which is reflected in wages that do not change in 2040 and 2050.”

“Overall, similar hours worked and lower private capital lower GDP, an effect that is offset by the productivity benefits of the infrastructure investment,” they say. “Overall, GDP does not change in 2031, 2040, or 2050.”

The capital on public works “crowds out” (displaces) private investment that otherwise would have been made. 

Economic Effects of the Senate Infrastructure Package

Percent Change from Baseline

 

Year	GDP	Capital Stock	Hourly Wage	Hours Worked	Government Debt
2031	0.0	-0.2	0.0	0.0	1.3
2040	0.0	-0.2	0.0	0.0	0.9
2050	0.0	-0.1	0.0	0.0	0.6

source: Penn Wharton Budget Model

Improvements to roads, bridges or other infrastructure often are necessary. But so are other investments in private productive capacity that are competing uses of capital. Diverting funds to one area necessarily precludes investment in alternative investments.

In this case, what seems politically rational is economically less than fully rational, to a great extent.

Streaming Does Save Many Viewers Money, Says Parks Associates

One of the arguments for video streaming services is that they potentially can save customers money. According to Parks Associates, typical “cord cutters” spend about $80 a month, as they buy four services, compared to linear video which might cost as much as $120 a month. 

And then there are some of us who buy three or four streaming services and still buy linear video. Why? Sports and news. I virtually never watch anything but those two types of content on linear. Eventually that will have to stop. It is hard to justify the value of the whole linear subscription for just those two functions. 

My “mission critical sports” can be viewed for free, over the air. And I only really watch one news channel. That’s pretty thin value. 

source: Parks Associates

Both Action and Inaction Can be "Big Blunders"

One often hears it said that “AT&T blundered badly” in buying DirecTV and Time Warner. Of course, one might also have said that AT&T bet poorly when it became the biggest cable TV operator in the U.S. market, or when it purchased NCR to enter the computing business. 

In almost the same breath, one hears that telcos are “not good at innovation.” That is arguably more correct. 

What such comments overlook is the mature revenue trend of the global communications industry and the toughness of increasing customer spend in the existing categories. 

It is all well and good to urge connectivity providers to “stick to their core business” instead of risking the distractions of new lines of business. But the numbers suggest that is a path to a “no growth” future for many suppliers. 

Though some product lines and regions still see revenue growth in the five percent range, there is flat revenue growth globally, and has been, for some time. Mobility and broadband have driven results over the last couple of decades. But what happens when those two markets saturate?

Some would note the important role the move into video entertainment has been, globally, for fixed network service providers. Yes, internet access and mobile service are the other big stories. But the move into entertainment services has become a hugely important part of the fixed network service provider revenue stream. 

source: Bureau of Labor Statistics 

So did AT&T blunder badly? The firm took on lots of debt, as telcos often do when expanding either geographically or to enter new lines of business. The linear subscription TV business did erode faster than expected. But those businesses generated more immediate free cash flow than AT&T could have generated by expanding its fiber to home footprint, for example. 

Even now, after the DirecTV and Warner Media properties have been spun off, AT&T continues to have a 70-percent stake in the profits and cash flows of both businesses. So AT&T has not actually “exited” those lines of business. 

On a broader level, the risk of entering new lines of business, at scale, will remain. The reason is simple: there are limits to how much any business or household is going to spend on connectivity services and products. 

In 2007, U.S. households spent about three percent of income on communications and information products and services, according to the Bureau of Labor Statistics. That includes devices, software and connectivity. A reasonable assumption is that communications accounts for 66 percent or so of that total, or perhaps two percent of information and communications spending by households.

That does not change much from year to year. U.S. household spending on all forms of communication, for example, is in the 1.5 percent to two percent range of total income. 

source: Visual Capitalist

 

In 2018, households in European Union countries generally spent more than did U.S. households on communications. Generally, spending per household was more than two percent. 

In 2020, U.S. households spent about half of one percent of income on internet access, and about one percent of income on other communications, according to the Federal Reserve Bank. 

Canadian households spent about three percent of income on communications services in 2019, according to the CRTC. 

source: EU

 

On most U.S. government surveys, communications and information spending is small enough that such expenditures always are found in the “other” category. 

The point is that to grow connectivity revenues, service providers must provide value that is beyond the present, if the share of household revenue devoted to communications is to grow. 

Some argue consumers might substitute communications for travel, for example. And though it might seem intuitive that household spending climbed in 2020 because of the pandemic, that might not be true. According to the Brookings Institution, household communications spending actually fell. 

source: Brookings 

That noted, there is some evidence that household communications spending in the Organization for Economic Cooperation and Development countries rose between 1995 and 2005, according to the International Telecommunications Union. 

Basically, to entice consumers to spend more on communications, they will have to increase value enough that consumers will reduce spending in other areas to increase communications spending. That could come from travel, entertainment or recreation categories, for example.