If Capex Intensity Increases, How does Thinking About Network Ownership Change?

Infrastructure investors are playing a bigger role in access network capital investment, often for the same reason they invest in airports, seaports and other forms of long-lived infrastructure. They see “moats” and stable, long-term demand with predictable cash flows. 

As did other investors of 30 to 40 years ago, connectivity infrastructure and the cash flows built on it are seen as relatively stable sources of free cash flow bolstered by their relative scarcity. It started with cell towers but increasingly is moving towards optical fiber access networks, small cell network providers and data center infrastructure.  

All of that raises new questions about where value lies in the connectivity business. To use the obvious analogy, money can be made operating a seaport or airport as money is to be made moving goods from manufacturers to end users and retail buyers. 

The best connectivity industry examples are wholesale access platforms, where one entity owns the infrastructure and retail service providers all use the one infrastructure. 

The business choice between facilities-based versus leased network access is an issue in other contexts as well.  At scale, the former tends to offer better economics than the latter. That is why the leading mobile service providers in almost-all markets own their own networks. 

At lower volumes, and especially “outside” the core geography, leased access  typically offers better economics. 

Hybrid models seem to be developing, though, where the access infrastructure is partly owned by a service provider and an infrastructure investor. The advantage is lower capital investment by the service provider, at the cost of shared revenues and profit. 

Monetization opportunities will often depend on the ability to sell infrastructure access to multiple buyers, where traditionally a network has been virtually exclusively for the use of the network owner or its wholesale customers. As data centers arguably do best when they are “carrier neutral,” access assets might in some cases also benefit from multi-customer business models. 

Indoor coverage by small cell networks provides an example. It will make sense for all mobile operators to take advantage of an indoor coverage network, for example. 

It is not yet clear just how far changes in the physical platform could evolve. It might be fair to say that if value tends to migrate elsewhere in the ecosystem or value stack, away from the “access” function, such moves create new possibilities. 

source: Kearney

As networks increasingly are virtualized, it is conceivable that a new division of labor could develop in some markets, with asset owners providing physical facilities and other participants providing the service enablement or services. 

As we presently see with wholesale-only infrastructure, one entity might provide the access functions, while all retail service or app providers pay to use that infrastructure. Though this might always make more sense for fixed networks, even mobile networks might eventually consider such a pattern, if capital intensity were to increase for future very-dense networks. 

As we have already seen, perhaps a consortia of mobile operators might join together to create and own the physical plant. The odds of such developments increase with potential infrastructure intensity and cost.

SMB IT Spending Rebounding to Normal Levels

Small and medium business information technology spending is expected to rebound to pre-Covid levels, says Analysys Mason.

IoT Already a Material Revenue Driver for Some Service Providers

Internet of things already is a potentially-significant revenue driver for connectivity providers, as the number of machine-to-machine devices continues to grow. Not all IoT device connections will require direct mobile or fixed network connectivity. Many devices will use some unlicensed local access technology, with backhaul to the internet provided by a mobile or fixed connection. 

source: OECD 

Still, mobile IoT connections are a material driver of subscriptions in many markets. “Overall, M2M/embedded mobile cellular subscriptions grew by over 30 percent in one year (the Q2 2018-Q2 2019 period) in countries where data were available,” says OECD researchers.

IoT connectivity revenues already are a material  revenue source for many service providers, though estimates might vary. 

Units Sold and ARPU Remain the Mainstay, Even for IoT, Edge Computing Opportunities

There are some unstated maxims for connectivity businesses where it comes to revenue growth. As for many other consumer products, the core revenue model is built on units sold and price per unit. 

When, in a single market, few have subscriptions, the growth strategy is “get more subscribers.”

When subscriber adoption is high in any single market, the growth strategy often is “get new subscribers in other countries.” 

When that is deemed infeasible for any reason, the logical revenue growth strategy is either “take market share from other suppliers” or “change the value proposition so we can charge higher prices.”

Only when none of those strategies seems to work will connectivity businesses ever seriously consider shifting the business model and moving into adjacencies and taking on additional roles in the ecosystem. 

source: OECD 

At some point, as markets saturate,  “get more subscribers” will become a challenging strategy, with more effort shifting to “get higher prices.” Only at some future point, when neither of those strategies is working very well, will connectivity providers willingly and seriously look at ways to leverage additional roles in the ecosystem in meaningful ways. 

In the meantime, there is some opportunity to do so in the internet of things and edge computing markets, for example, even if the primary revenue upside is likely to be found in the traditional “add more subscribers” area. Higher average revenue per unit sold is unlikely to be higher than mass market ARPU for either IoT or edge opportunities, though. 

Compare What Matters When Assessing Broadband or Mobility Behavior

If one spends a lot of time looking at statistics on global broadband and mobile trends, one sees lots of comparative data about take rates, subscriptions, prices and speeds. One also sees a lot of data comparing various indicators across countries. 

There always are methodological issues when trying to compare broadband or mobile prices across countries, however. Living costs and income vary, so prices vary in ways that reflect those differences. Currency differences also operate. 

There are big distortions created when researchers select particular service plans to compare. Results are different when choosing the lowest-priced plan; the lowest-usage plan; the highest-priced plans; highest-speed or highest-usage plans or some “median” plans (retail price, usage allowance or speed). 

So distortions are inevitable across countries when rate of adoption, typical speeds, typical prices and usage allowances vary widely. Consumer buying patterns also matter.

source: OECD 

Researchers must decide, before comparison, whether the service plans consumers actually purchase are a relevant sorting criteria. In other words, some argue it makes most sense to look at the plans consumers actually purchase, not the plans they could buy. 

That is abundantly clear when looking at buyer behavior in Organization for Economic Cooperation and Development countries, where a high of 100 percent and a low of about 35 percent of customers buy “service bundles” rather than any “single-product” plan. 

That of course distorts results when researchers compare only single-product plans. In other words, where many to most consumers buy bundles, the “single-product” plans tell us close to nothing about the actual prices consumers pay. 

Those plans exist, but do not represent actual buying behavior. 

If researchers insist on using those plans for comparison, they can compensate by using methods such as purchasing power parity to normalize real prices. Done that way, actual prices can vary substantially from what the data appears to show. And that has been true most of the last decade. 

In fact, when adjusting for purchasing power, broadband prices globally are quite uniform, different studies show. 

Comparing single-product plans might be useful when most consumers buy them. The exercise does not tell us very much when relatively-few consumers buy them.

CxOs Shy Away from Risk, as They Often Should, But Sometimes Risks Must be Taken

Many observers of organizational change would agree that if the CxO suite does not support a particular change, it will not happen. There almost always are good reasons for avoiding a risky change in company strategy or tactics, as successful organizations got there by making choices that resonated with customers. 

But industries and firms often also confront changing markets and demand; new competitors and threats to revenue and profit generation. Then the issue of risk becomes more important. 

Few CxOs willingly will support radical changes, even when a firm or industry is obviously flailing against new market realities. The risk fo a bad or suboptimal choice might always be about 70 percent. But there are times when those odds must be compared to near-100-percent chance of firm death if major changes are not made. 

Even then, most CxOs are just going to "take the exit package" (personally or on behalf of the firm), selling assets for the best price to be gotten, and finding some other game to play. 

Big Change in FTTH Business Case in Rural Areas?

Could the business case for U.S.  fiber to the home in historically-challenged settings rather sharply improve for the better because of government action? Certainly. All that matters is the level of subsidies we are willing to make. 

George Ford, economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies, argues that about 9.1 million U.S. locations are “unserved” by any fixed network provider.  

“According to my calculations, if the average subsidy is $2,000 (which is the average of the RDOF auction), then the additional subsidy required to reach unserved households is $18.2 billio,” Ford argues. “If the average subsidy level is $3,000, then $22.8 billion is needed. And at a very high average subsidy of $5,000, getting broadband to every location requires approximately $45.5 billion.”

That amount possibly could be authorized by the U.S. Congress, and would dramatically change the business case for FTTH in rural areas. 

Given a big-enough subsidy, service providers would have a far-easier time justifying FTTH even in quite-rural areas where the present subsidy system has been deemed insufficient to incentivize construction. 

source: Cartesian

Such an extensive subsidy system would change the FTTH business model for all telcos operating in rural areas, might affect cable operators and also could reduce demand for all satellite and fixed-wireless operators. 

All that is just a reminder that for every public policy there are corresponding private interests that are helped or harmed.