U.S. Telcos Halt Broadband Account Erosion

It might not seem like much that the biggest U.S. telcos added 50,000 net new internet access accounts in the second quarter of 2021. Not when the biggest cable companies added 840,000 net accounts in the same period. 

But the telco performance is important as it halts a 20-year period when cable dominated internet access growth. For most of the last two decades, telcos had either lost accounts overall or lost market share to cable operators. 

So far this year, telcos have had positive net net additions. 

Still, with cable companies adding new customers an order of magnitude faster than telcos, there is a long ways to go before telcos can hope to reverse the installed base trend, which has cable with about a 70 percent share, compared to about 30 percent share for telcos.

Change "What" More than "How"

Business advantage is the purpose of digital mastery. Otherwise, investments in digital processes are a waste of money. 

Some--because of their role in the business ecosystem and their own revenue models, emphasize customer experience almost to the exclusion of all else. That makes “customer experience” into “digital transformation.” That is fine as far as it goes, but is incomplete. 

source: MIT Sloan Review 

New business models are hard, complicated, complex and often time-consuming, so it is understandable that much DX thinking and action occurs at a more discrete process level. 

Of course firms are going to look for ways to sell online, to leverage newer sales channels. Some sellers of products will look for ways to create service businesses built on “rentals” of those same products. That is an example of a “product line extension” and does not require getting into a whole new adjacency in the value chain. 

In other cases DX allows new products to be created within the core business. Selling “outcomes” rather than products ranging from tires to aircraft engines. So the product is so many kilometers of safe driving or so many hours of propulsion: a service rather than a product purchase. 

The point is to focus on “transformation” rather than “digital.” “What needs to change” is the question, not so much “how it can change.”

Why "Winner Takes All?"

Digital markets often are characterized by a winner take all market share, led by oligopolies. One might argue that always is the case, which is why antitrust law exists. Power laws and Pareto outcomes seem quite prevalent in nature and economics.  

“Winner take all” outcomes arguably also happens for incomes of sports stars or other celebrities as well. The issue is why. Many cite the shift to intellectual capital as a reason for the rise of winner-take-all outcomes.

Other drivers are said to include economies of scale, scope and learning. Digital products and services have high fixed costs and low-to-zero marginal costs. That is scale. Scope is different. Such economies result when the production of one good makes production of another easier.

There also are economies of learning. You might call that the experience curve, or Henderson's Law. There is an inverse correlation between a product’s value added and the manufacturer’s experience in its production and marketing. 

In other words, as a company’s understanding and knowledge increases, the cost per unit tends to decrease. That is going to apply for artificial intelligence as it gains knowledge of particular tasks. 

Network effects can exist, where each additional node on a network increases the value of the whole network. One can consider fads and fashion an example of network effect. 

Platform business models also seem to encourage oligopolies. Platform businesses create value and earn revenue by matching complementary sets of people. Platforms make their money by extracting a transaction fee of some sort for connecting buyers and sellers, once they reach critical mass. 

Platform business models also are“multi-sided” and facilitate transactions between many types of users. That is why the notion of “ecosystems” is so prevalent. Also, a multi-sided market allows users to switch roles. A renter can become a housing supplier. A rider can become a ridesharing driver. A message sender is normally also a message recipient. Content producers are content consumers.

Some might credit sophisticated analytics, allowing mining of huge data sets, as also contributing to winner-take-all outcomes. As some colloquially note, “he wins who has the most data.”

Brand value also will tend to reinforce winner-take-all outcomes. Sometimes that happens because brands create ecosystems of goods, services and suppliers that “lock customers into a platform” by creating higher switching costs. 

Ironically, lower barriers to scale and competition might be among the reasons the “rule of three” (for example) seems so prevalent in digital markets. But some would note that most markets are oligopolies, digital or not. 

Others might mention the prevalence of leverage, luck or feedback loops as causes of the outcomes. Whatever the reason, relative performance, rather than absolute performance, is key. 

“Top performers might be only slightly more skilled than the people one level below them, yet they receive an exponential payoff,” says Farnam Street. “A small difference in relative performance—an athlete who can run 100 meters a few microseconds faster, a leader who can make better decisions, an opera singer who can go a little higher—can mean the difference between a lucrative career and relative obscurity.”

Were value deemed absolute, then a product or service with 90 percent of the performance of the “best” option would sell for 90 percent of the price of the “best” option. 

But what we often see in digital markets is that the “best” product gets 50 percent to 80 percent market share. The 10th-best product, with 90 percent of the best product’s utility, gets almost no share. 

That “winner take all” pattern arguably is true of digital goods in part because marginal costs are close to zero and because network effects often are generated. The former means the cost of supplying very-high demand is not onerous. The latter means utility grows exponentially with scale. 

Connectivity services tend not to exhibit that pattern as well, sometimes because high capital investment requirements discourage competitors. 

Back in 1981 economist Sherwin Rosen wrote about the phenomenon. Convexity is the principle that small differences in talent become magnified in larger earnings differences. 

source: Medium

 

source: Medium

Imperfect substitution is another concept that explains why “winner take all” markets develop. That can be driven by the value of an ecosystem of goods and services, brand preferences, switching costs or any other combination of values that create product differentiation. 

“Winner take all” might always have been an issue, but it is magnified in an era where digital economics operate.  

U.S. Gigabit Take Rates Surpass Typical Inflection Point

Openvault says 10.5 percent of U.S. customers now buy home broadband service operating at one Gbps or faster.  Openvault says gigabit take rates have doubled since the second quarter of 2021, when 4.8 percent of households bought gigabit service. 

That is important because 10-percent adoption often is the inflection point for adoption of consumer products.

source: Openvault 

Perhaps more important, the “typical” speed plan purchased by consumers has continued to shift upwards as well. 

Openvault says 80 percent of subscribers have chosen a speed tier of 100 Mbps or faster, with more than half of them (47.5 percent) subscribing to a 100-to-200 Mbps tier.

In the first quarter, using a slightly different reporting method, Openvault said 80 percent of U.S. households were buying internet access at 100 Mbps or faster. 

The percentage of subscribers provisioned for speeds of 100 Mbps or less fell by half, from 39.9 percent in 2Q20 to 20.1 percent through the same period, says Openvault. 

The first quarter 2021 report showed 9.8 percent of U.S. households were buying gigabit or faster connections.

source: Openvault

At Least for the Moment, B2B Sales Professionals See No Return to Old "In-Person" Sales

By the start of 2022, only 15 percent of business-to-business sales executives expect in-person sales meetings to be the norm, a McKinsey survey suggests. About 83 percent of the time, it appears B2B marketing and sales personnel believe digital and remote channels are as effective, if not more effective, than before the Covid pandemic, for reaching new customers. That is the same figure professionals claim for sales to existing customers. 

The obvious issue is whether this becomes the new normal for B2B sales and marketing. Currently, about 70 percent of sales interactions are remote or digital, only about 30 percent in person. 

There are lots of implications for spending priorities, skill sets and channels. 

source: McKinsey 

source: McKinsey

What if Connectivity Providers Have Done About as Well as AWS, Azure, Apple in Innovating?

“How to increase the value of connectivity services” has been a top concern of most telecom executives for a couple of decades. It can be argued that not so much as changed, for all the attention and effort. Nor should that come as a surprise.

Looking at all manner of revenue and market share growth winners, very few firms actually have managed to change their fundamental position in the value chain, or their revenue growth drivers. Google and Facebook still rely mostly on advertising. Microsoft still relies mostly on software sales. Apple still relies mostly on device sales. 

Several of those firms have made strides, however. Apple gets a bit more revenue every year from “services.” In recent quarters “service” revenues have been more than 20 percent of Apple’s total revenues. 

source: Statista 

Amazon Web Services now represents 11 percent of Amazon total revenue. Microsoft’s cloud computing revenue is growing, but it is hard to say by how much, as those contributions are grouped with Xbox and server revenues. Some estimate Azure revenue at about 17 percent of total Microsoft revenues.  

Slideware is not “product” or “service.” “Value” is not its representation on a chart but its role in a customer or user’s life and work. Generally speaking, observers say the highest value comes as one gets closer to the end user in the function stack. 

Basically, supplying bandwidth is lower in the value chain than content, advertising or apps. Every app requires connectivity, but differentiation and value tend to be clearest in the “business” layer that links a user or customer’s problem and the application that solves that problem. Google Maps; Amazon or Alibaba; iPhone; Airbnb or a productivity suite rather than internet access, for example. 

source: Cisco 

The “problem” for connectivity providers is slow revenue growth in the core connectivity services business. Under the best of circumstances, revenue grows in line with growth of gross domestic product. But connectivity and computing  services also exhibit a trend towards lower prices and profit margins over time. 

That implies a constant search for new products and revenue streams with higher value. And, to be sure, argues GSMA, that has happened. Connectivity providers have added significant non-core revenues. 

But that remains a challenging task. It is no mistake that some representations of the internet value chain place “connectivity” where it appears to be closer to the end user or customer. Our general notion is that this is where value is highest. 

source: GSMA 

As a practical matter, there are key disagreements about how much emphasis to place on chasing new roles and how much on operational improvements in the core business. Innovation can be quite hard, and very risky. 

Mobile operators have more options than fixed network providers. But every connectivity provider faces long-term risk of commoditization. Still, telcos have not done much worse than Microsoft, Apple and Amazon or Google at innovating, looking at the percentage of "new" revenue sources created over the past two decades.

"Higher Value" Often is the Key to Revenue Growth, in IoT and Elsewhere

Most firms that are leaders in any segment of the computing and communications ecosystems eventually find they must consider moving into new segments of their existing value chains to maintain growth. “Up the stack” or “across the value chain” are typical options. 

For suppliers positioned high in the value stack (application providers, for example) movement down the value chain also makes sense. The older notion of “vertical integration” applies, even when there is no attempt to completely vertically integrate operations. 

For connectivity providers, the movement is almost always going to involve moving up the stack, from physical layer IP connectivity towards application and platform supply roles. It almost never makes much sense to integrate “lower” in the value chain by becoming a manufacturer of radios, cable, fittings, connectors,  servers, chipsets or other infrastructure used to create and support IP connections.

Generally speaking, that also is the route for adding new value to internet of things business operations, argue researchers at Beecham Research, in a paper prepared for Sierra Wireless. That path corresponds to the way greater value can be added to any connectivity-oriented service, others might add.

To the extent that solutions to business problems ultimately drive the value of any information technology or communications investment by enterprises and businesses, the more complete and simple a solution, the higher the value to the customer. 

In other words, people want connections with other people, so they buy iPhones, not chipsets.  People want transportation, so they buy automobiles, not tires, batteries and engines. 

Though all IP communications require access to IP networks, and therefore internet service provider connections, nobody buys broadband except as a means to use higher-value applications for communications, e-commerce, entertainment, discovery or learning. 

Beecham researchers argue that  “as the application becomes more important to the business operations, it is increasingly important to manage all aspects of the connectivity (Connectivity Management) to ensure the application is not disrupted by the connection being broken, not working correctly or being hacked.”

Beecham Research, Sierra Wireless

In other words, a mission-critical function requires mission-critical reliability. And that might extend beyond the physical internet connection to the device and the applications and insight  built on the generated data. 

There is another way to phrase this observation: value is generated at many points in a complete value chain, for IoT or any other solution or product. Entities can generate more value and revenue by supplying greater portions of the value chain.