Are Access Networks Still a Source of Competitive Advantage?

Just how far might tier-one telcos be willing to go with dispositions of their home market access network assets? Lumen Technologies in the United States sold off about half of its access network assets, to deepen its focus on enterprise, wholesale and global connectivity services. 

That move is a classic asset disposition driven by a repositioning of capital from a declining business to others with higher expected growth. What is not so clear is the appetite for selling assets in a business still considered “core.” 

In some other markets, tier-one service providers including SingTel, BT, Telstra and Telecom New Zealand have voluntarily surrendered ownership or control of their access networks, often in exchange for rights to pursue perceived higher-growth lines of business. 

Telefonica might now be considering how to monetize at least part of its Spain home network, at least in part because there is high private equity interest in acquisitions of such infrastructure assets, and in part because Telefonica has been monetizing other assets to reduce debt. 

It might be worth noting that the private equity model is based on acquiring what are perceived as underperforming assets, repositioning those assets for higher returns, and then selling the assets, often with target holding times of six to seven years. 

All those moves do raise a question. 

Where does sustainable business advantage lie in the connectivity business? In other words, where are the potential sources of long-term advantage that competitors find hard to copy?

Widespread sales of tower assets suggests many mobile operators no longer consider tower ownership a source of competitive advantage. Fixed line operators have a possibly wider range of views. 

In out of home markets, the ability to lease capacity on a wholesale basis from a third party is routinely viewed as a reasonable alternative  to building and owning assets. 

In their home markets, ownership of access networks has typically been viewed as a key source of advantage, absolutely in the monopoly and relatively in the competitive era. 

But in markets where optical fiber access is supplied on a wholesale basis by one provider, with retailers able to rent access, ownership is not necessarily seen as vital. 

The point is that ownership of scarce access network assets traditionally has been viewed as a source of competitive advantage in the fixed networks business. In at least some cases, that view has changed.

Will Any Telco Eventually Become a True Platform?

One often hears advice that firms should try to become platforms. Whether that is possible, in almost all cases, is the issue. Platform as a business model varies from the use of the term in the computing industry. 

As a business model, a platform is a marketplace or exchange. It means revenue is earned by a fee or commission on a sale of a third party good or service, not the direct ownership and supply of that product. 

That is quite different from the typical business model for most businesses, for centuries. Most businesses create a product and then sell those products to customers. All connectivity providers do the same. 

To become a platform would mean, at the very least, shifting from creating and selling connectivity services to creating a marketplace for others to sell and buy connectivity services. No firm in the communications industry has done that, ever. 

Some data center operators have created ecosystems of colocated firms. But the revenue model still is real estate. Data center operators do not actually earn revenue (commissions or fees) for purchases by tenants of the data centers. The business model remains “real estate.”

The advantages of a platform business model, assuming one can be created, are the ability to scale, lower transaction costs for buyers and sellers, as well as the creation of new distribution channels for sellers and buyers. Most platforms must create ecosystems of suppliers as well.  

source: Platform Business Model 

Some note that asset ownership patterns are different for platforms: they are said to be asset light. 

Platforms also might help to make resources and participants more accessible to each other on an as-needed basis. In that sense Amazon Web Services is a platform. Social media companies also are thought of as platforms, aggregating people and interests and then building revenue models based on advertising and commerce. 

Indeed there are conceptually many forms a platform can take. Marketplaces for services or products are one set of forms. 

But payment or investment platforms also are possible. Any peer-to-peer payment service or app might be viewed as a platform. A stock exchange also is an investment platform. 

source: Applico. 

Social or possibly communication networks can be platforms, especially when communications occur in the context of a social network. 

Software development platforms also can be created, whether based on operating systems, application program interfaces or open source.

Content platforms might include gaming, other forms of content or overlap with social platforms. 

The big hurdle for a connectivity provider is that it must essentially get out of its current business--selling connectivity services--and become something else. If it is possible, that new model would involve creating a marketplace for others to sell and buy services from each other. 

That would be among the most-difficult of all business strategy transitions, as it changes the answer to the question “what business am I in?”

Are App Stores Distributors or Platforms?

Are a few dominant mobile app stores better understood as being distributors or platforms? And if either case, what are the implications for antitrust or competition policy, if any?

Regulators care about such things, as monopoly or oligopoly power can exist in any supply chain. Perhaps few distributors tend to have market power over a whole supply chain, though it is conceivable. Almost every platform that operates at scale has power. 

A distributor traditionally moves products or services between a supplier and an end user or customer; part of the supply chain. 

A platform is a marketplace or exchange, when used as a business model. In another sense, as traditionally used within the computing industry, a platform is software or hardware upon which other software or hardware can be built. 

We typically think of supply chain market power as existing either on the final end consumer or product or service producer sides of any supply chain. The classic exceptions are electricity, natural gas, water supply or sewage suppliers, which tend to be viewed as natural monopolies. 

source: Grupo Hera 

Telecom services once were viewed as natural monopolies globally until the mid-1980s, when a wave of deregulation and privatization began to sweep the industry.  What is salient is that telecom service providers are distributors. 

One might argue that telcos also create some products, such as voice communications, messaging or data transport. 

source: Bharti Airtel 

That is true, though the ability to do so also rests on infrastructure supplied by others in the value chain to the left of the distribution function. 

Telcos also use indirect distribution partners as well as direct sales to customers. 

The point is that market power in a supply chain (monopolies or oligopolies) can exist at many points in a supply chain. And though it is not the first instance that comes to mind, it can be possible for end user consumers to have something like “monopoly” power in a supply chain. The best example is military products, which might essentially have “one” or “just a few” potential buyers. 

source: Cengage Learning 

The issue is, as some argue, that in some cases, supply chains are no longer the central aggregator of business value. “What a company owns matters less than what it can connect,” some might say. 

All that might matter for regulators. Distributors might, or might not, have power in a supply chain. A dominant platform--by definition--typically does have market power.  

Two angles are worth noting. While app providers chafe at the revenue sharing that dominant app stores, for example, have charged (as much as 30 percent, in the past, perhaps 15 percent now), that arguably is a “cost of distribution” expense for any particular app owner. 

In other industries, the cost of distribution might range from five percent to 80 percent of retail sales amounts. The point is that if the dominant app stores represent distribution and retail costs, then there is an argument to be made that 15 percent to 30 percent is not necessarily outrageous at all. 

Average retail margin and distribution cost
Product category	Distributor	Retailer	Total
Fast moving consumer goods	3-%	8-40%	11 to 43%
Clothing and apparel	15-30%	20-50%	35 to 80%
Electronics like mobile phones	3-7%	3-7%	6 to 14%
Cars		5-15%	5-15%
Furniture		30-50%	30-50%
Jewelry		30-60%	30-60%
Electrical equipment and lights	5-7%	15-25%	20 to 32%

source: Alliance Experts 

Whether a product is “digital” or not, there still are sales, marketing and distribution costs. Clothing and apparel products typically have high distribution costs (including sales, marketing and logistics). But online sales are more profitable than other retail-based distribution methods such as “in store” sales. 

source: Transport Geography 

In the case of software distribution, a mobile app store platform adds significant value by slashing distribution and sales costs by as much as two orders of magnitude. The argument that a 30-percent revenue share is inherently unfair does not stand up to reason. The distribution cost is sliced by two orders of magnitude. That is worth a considerable amount. 

source: OECD

The second issue worth noting is that powerful app stores also arguably have market power. That seems a more-serious issue, as the inability to appear in Apple’s or Google’s app stores would force app developers to create their own marketing and distribution channels. 

That is not a problem for enterprise or business-focused app suppliers, who normally create their own distribution and marketing and sales channels. 

It arguably is a huge problem for small developers who create consumer apps. And that is where monopoly danger arguably lies. 

As an aside, the concern expressed over the last decade about internet service provider monopoly dangers seems almost comical, in retrospect. ISPs not only face competition, they play only small roles in the application ecosystem. 

They are not gatekeepers in the same way as Google Play or the Apple app store have become. They cannot block a lawful application. They cannot prevent a lawful app from being distributed. 

To reflect on the original question--whether app stores are distributors or platforms--they seem to be both. App stores are a dominant way app developers market their products. So app stores are distribution. They also are marketing and direct sales channels. 

But app stores resemble platforms in some ways. They connect buyers and sellers. 

Viewed as distributors, a commission or fee of 15 percent to 30 percent has never struck me as unfair, given the percentage of revenue earned by the suppliers of distribution functions in other industries. 

Viewed as platforms, the danger of monopolization and anti-competitive behavior always has seemed much clearer.

How Big is the LAN Market?

It is difficult to pinpoint just how much new spending is directed towards cabled local area networks outside of the data center market these days. 

For smaller organizations Wi-Fi almost always is the default. Some estimate infrastructure sales to amount to about $9.4 billion, growing in excess of 17 percent annually.

The enterprise network infrastructure market represented about $52 billion in sales in 2020 and is growing at about seven percent according to Market Study Report. 

Cisco reported in 2019 that IDC projections for enterprise network equipment would reach $48 billion, including both wide area network and all forms of local area network equipment. 

source: Cisco 

 

Others believe sales may be substantially lower. The enterprise network equipment market was valued at $9.83 billion in 2020 and is expected to reach $15.48 billion by 2026, at a cumulative annual growth rate of 7.85 percent between 2021 to 2026, says Mordor Intelligence. 

By way of comparison, IDC projects global revenue attributable to the sales of private 4G and 5G infrastructure will grow from $945 million in 2019 to an estimated $5.7 billion in 2024 with a five-year compound annual growth rate of 43 percent. This includes aggregate spending on radio access networks, core, and transport infrastructure.

Is "Digital Transformation" Simply the Latest Buzzword for Decades Worth of Applied Digital Technology?

Skeptics or cynics might argue that much of what passes for today’s digital transformation is simply the latest buzzword for applying technology to business processes. The buzzword desired outcomes might include agility, personalization, automation, data-driven decision making, improved customer experience or any other set of information technology outcomes. 

source: Fujitsu 

Of course, businesses and organizations and consumers have been adding digital products to their everyday lives for decades. And it would be hard to clearly differentiate any of the desired outcomes of technology deployment since the mid-1980s with the outcomes of digital transformation. 

source: Fujitsu 

Of course, the problem is that all information technology becomes commoditized. Any single firm would gain sustainable advantage if it were the only firm in its industry to adopt a particular technology.

The problem is that never is possible. Eventually, all competitors in any industry have access to, and use, all the relevant technologies. Though efficiency or effectiveness might arguably be improved, it does so for all competitors in the market, eventually negating any first-mover advantage a single firm might have tried to gain. 

The other problem is that applying technology does not often seem to yield tangible advantages in terms of productivity. This productivity paradox has been noted since the 1980s, when enterprises began to apply lots of digital technology to their businesses. 

Many technologists noted the lag of productivity growth in the 1970s and 1980s as computer technology was introduced. In the 1970s and 1980s, business investment in computer technology were increasing by more than 20 percent per year. But productivity growth fell, instead of increasing. 

So the productivity paradox is not new.  Massive investments in technology do not always result in measurable gains. In fact, sometimes negative productivity results. 

Information technology investments did not measurably help improve white collar job productivity for decades in the 1980s and earlier.  In fact, it can be argued that researchers have failed to measure any improvement in productivity. So some might argue nearly all the investment has been wasted.

Some now argue there is a similar lag between the massive introduction of new information technology and measurable productivity results, and that this lag might conceivably take a decade or two decades to emerge. 

The Solow productivity paradox suggests that applied technology can boost--or lower--productivity. Though perhaps shocking, it appears that technology adoption productivity impact can be negative. 

The productivity paradox was what we began to call it. In fact, investing in more information technology has often and consistently failed to boost productivity. Others would argue the gains are there; just hard to measure. Still, it is hard to claim improvement when we cannot measure it. 

Growth is the Paramount Industry Imperative

Projected global communications spending from 2019 to 2025 by Gartner illustrates one key constraint in the telecommunications business: spending is relatively flat, with declining rates of growth forecast from 2021 to 2025.

 

source: Gartner, ZDnet 

Other forecasts predict about one percent annual growth or two percent annual revenue growth globally. If one assumes any amount of inflation in the range of one percent to three percent annually, real revenue growth will most likely be negative. 

India Fixed Network Broadband Problem Might Not be "No Network" as Much as We Think

India’s fixed network broadband penetration remains low and is heavily skewed towards urban areas.  While 65 percent of people live in rural areas, Telecommunications Regulatory Authority of India data shows that they account for a mere 5.6 percent of total fixed broadband connections. 

Paradoxically, that disparity is not as great as the figures suggest, looking at how facilities measure up, in terms of potential speed. 

A comparison of Speedtest Intelligence data against rural and urban locations (based on India’s 2011 census) fails to show a large disparity between the two when looking at TRAI’s new speed categories, with 58.7 percent of connections in urban areas falling within the “Basic” speed category, compared to 61.7 percent in rural areas.

The new definitions of fixed broadband speed are::

• “Basic” (2-50 Mbps),

• “Fast” (50-300 Mbps) and

• “Super-fast” (>300 Mbps)

As always, there is a difference between supply and demand; ability to buy service and the actual buying behavior; network passings and customer take rates. Looking at actual customers across rural and urban locations shows a disparity between urban and rural, but nowhere as great as population alone might suggest. 

 source: Ookla Speedtest 

In fact, rural customers over index and lower speeds and under index at the highest tier of speeds, but even there within a few percentage points of difference. 

 source: Ookla Speedtest 

One conclusion here is that supply is an issue, but demand is the bigger issue. Where networks are available, take rates are driven by conditions other than presence of the network. 

The Ookla data suggests fixed network availability in rural areas is not the main reason take rates are lower than in urban areas.