Monopoly Versus Wholesale: When Each Happens

Wholesale is a useful option in the communications business. Mobile virtual network operators build their whole businesses on it. Global communications and roaming depend on it. Capacity requirements often use wholesale mechanisms.

But wholesale is not the same thing as "monopoly."

Sanctioned monopolies--public or private--typically exist because there is some market barrier to sustaining multiple suppliers. Roads, airports, seaports, electricity and natural gas supply, water and sewage systems provide obvious examples. In the decades prior to 1980, telecommunications was widely believed to be such a case. 

Virtually all telecom operations globally were official government monopolies, and often also operated directly by the government. All that began to change in the 1980s, gathered force globally in the 1990s and now competition is the common pattern in communications. 

Still, some believe growing capital investment, low growth and challenged profit margins will lead to a lessening of competition, at best, and re-monopolization at worst. And that is the issue in Malaysia, as the Digital Nasional Berhad, a government entity, has been given a monopoly on 5G spectrum, something virtually unprecedented, and also is supposed to become the sole national provider of 5G infrastructure. 

That presumably also means future generations of mobile network, such as 6G, also will supplied as a monopoly by the DNB. 

There is an argument for such intervention when the markets are not working. That was believed to be the case for most of the history of global telecommunications. 

And, to be certain, there are concerns in some quarters about the long-term viability of multiple facilities-based mobile service providers. This is more than the consolidation we already commonly see in the competitive telecom business. 

In some regions, some suggest profitability is so difficult that future markets might only sustain one supplier. So, the industry would return to monopoly supply. Sustainable profits are the issue, in some cases, some argue.  

It does not seem that facilities-based competition in Malaysia is so ruinous that private entities are unable to sustain private 5G, though. 

A study produced by DT Economics and sponsored by the GSMA argues a 5G monopoly owned by the government points out that the mobile market in Malaysia is not broken.

 “Malaysia has already achieved a competitive mobile market,” the report argues. “ It has four major Mobile Network Operators (MNOs), each having a market share of between 18 and 28 percent, with one additional smaller player (with a market share of less than 5 percent).”

“Malaysia also has a small, but a well-established, Mobile Virtual Network Operator (MVNO) market hosted by the largest four MNOs,” the authors say. 

The market arguably has gotten more competitive with each mobile next generation network, to be sure. The issue is the degree to which the private entities are unable to sustain themselves based on competitive access to spectrum and facilities-based networks. 

source: DT Economics

If if one accepts the thesis of higher capital investment in 5G or other future networks, it is not necessary to re-monopolize either spectrum or infrastructure. Mobile firms are capable of creating infrastructure sharing mechanisms that reduce costs, but on a voluntary basis. 

One also can argue that mobile firm mergers accomplish many of the same objectives as infrastructure sharing or monopoly facilities: a reduction of cost, while arguably maintaining a higher rate of innovation. 

Monopoly and wholesale are not synonymous, of course. 

Wholesale is the norm for international communications, as in the case of data access, messaging or voice services. No single company has a network that reaches “everywhere,” so that is obvious. Domestic operations are far more complex.

In most markets, fixed network capacity has been a near-monopoly and wholesale underpins competition. In mobile markets, facilities-based competition is typical, though wholesale access remains important for mobile virtual network operators where MVNOs are lawful. 

As a rule, movements toward wholesale have been gaining ground in the local access markets. Mobile operators divesting their cell tower assets and leasing access provide the best examples, but more recent actions have mobile operators outsourcing their information technology platforms for 5G to hyperscale cloud computing suppliers. 

source: McKinsey

The broader strategic issues concern value: where can service providers create new value most effectively, and how does that drive capital investment decisions? 

Some might argue DNB confuses wholesale with monopoly. The former almost always happens because it makes good business model sense. That latter almost always happens because there is a failure of business models. 

Some would argue there is no evidence of market failure requiring re-monopolization.

Would Malaysia DNB Ever Become a Mobile Retailer?

Malaysia is taking an unusual strategy for licensing 5G spectrum: it has built a government-owned 5G wholesale network and restricts the ability of mobile operators to refarm their licensed 4G spectrum to support 5G. The Digital Nasional Berhad wholesale network will begin commercial operations soon, but the leading Malaysian mobile operators are opposed to the move. 

DNB says renting will cost half or perhaps 40 percent of what the mobile operators would have to spend to build their own networks.  

In Malaysia, mobile device data consumption grew 35 percent in 2021. Nationally, fixed network broadband penetration is about eight percent, where mobile adoption is in excess of total population. In other words, most people rely on mobile devices for internet access in Malaysia. 

source: Khazanah Research Institute 

That is an issue in Malaysia now that the government is building a national 5G wholesale network and placing obstacles in the way of mobile operators who might otherwise wish to refarm 4G spectrum to support 5G. 

The government has said  5G wholesale rates will be about 40 percent less than the annual cost of operating an owned 4G network.  

source: Khazanah Research Institute, Malaysian Communications and Multimedia Commission 

But the leading mobile operators are not convinced. They say a lack of transparency about future plans is an issue. There is no clear guidance on whether the government might itself decide to become a retail competitor, for example. 

As always, that would not be advantageous to the other wholesale customers of the network.

KKR Bids for Telecom Italia

It is official: private equity firm KKR is making a bid to take Telecom Italia private. Said to be the biggest-ever private equity bid for a public telecom service operator in Europe, the $12 billion deal seems to be opposed by Vivendi, which owns 24 percent of Telecom Italia. 

The KKR playbook would normally involve an effort to streamline, rationalize and reposition the assets. KKR is believed to be interested in separating Telecom Italia’s network assets from the retail operations, turning part of TI into a wholesaler of capacity, likely with a heightened optical fiber position, while retail operations are conducted separately, using the wholesale network. 

At first glance, the proposed deal looks like a standard private equity deal: buy an underperforming asset, make changes and then sell. But the deal might also reflect another private equity focus: buying infrastructure assets to hold longer term, as an alternative asset. 

Perhaps a likely scenario is that KKR hopes to dramatically improve financial performance before selling the asset to an investor that wants the long-term cash flow. 

Telecom Italia, for its part, also fits the “go private” scenario: it has high debt and shrinking recurring revenues and profits, arguably impairing its ability to invest in digital infrastructure including fiber to home facilities. 

Among the key drivers for telecom privatizations is the perception by asset owners that public markets will not positively reward the firms, in terms of equity valuations, commensurate with their revenues, cash flow or potential growth prospects.

Another key driver is private equity firms with lots of private capital to invest, and assets that offer long-term and predictable cash flows to institutional investors such as pension funds and other entities with long time horizons that view infrastructure assets as equivalents to other long-duration fixed-income assets such as bonds.

 

Also, asset diversification is another motivation for investors.

  

There is a good reason why any number of public telecom firms have been taken private, and why others are considering similar moves: high debt, low growth and poor operational performance. And connectivity providers are not the only type of firms facing investment issues.  

That is a fairly-common prescription for any public company to be taken out of the public markets by private equity, and many public telco assets  fit the bill. 

source: Focus Finance

One defining characteristic of infrastructure assets is their monopolistic position. We tend to forget that for most of the history of the industrialized world, much of the funding for large scale public infrastructure such as roads, canals and railroads has come from private sources of capital. And that includes telecommunications in the United States. 

source: Maria Sward 

The function of private equity also has included the rehabilitation of firms that are not performing financially. Private equity buys a public asset, restructures and then sells the asset, often within about a five-year period. 

source: Bain

Control Plane, Data Plane in 5G Networks

Separation of the data plane from the control plane is a fundamental architectural principle of cloud-native communications networks. That, in turn, also applies to the ways connectivity service providers build their 5G networks, where it comes to management and control.

source: Marc's blog 

Separation of data and control planes is the foundation of virtualized networks, and since the 5G network is, by definition, virtualized, underpins all 5G core and access networks. 

The control plane can be thought of as the signaling and routing functions of the network. The data plane is the part of the network that actually delivers and sends user data and content (sometimes known as the user plane, forwarding plane, carrier plane or bearer plane) is the part of a network that carries user traffic).

Separated control and data planes therefore underpin the role of computing resources within the connectivity providers’ network. The data plane physical network must connect every user. The control plane functions can be housed anywhere in the network where it makes sense. 

The virtualization principle also creates the value of edge computing. From a service provider perspective, control plane separation allows less capital investment in firmware and hardware, as control and processing logic and  functions can happen at fewer locations. 

In the mobile access network, that means separating radios from baseband signal processing units, allowing many fewer of the latter to be purchased and used. 

The 5G control plane also requires edge computing, though. Some service provider control logic remains near the physical network edge, but not at the absolute physical edge, or the radio transmission edge. 

In other words, the 5G network requires edge computing, simply to supply control plane functions. 

source: Reply 

Similar considerations apply to the data plane. Some applications will require very-fast processing. So there will be a necessity, not simply an advantage, to having computing take place as close to the end user device as possible (economically and computationally). 

We might debate whether edge computing is an example of “data plane” or the “control plane.” Some of us would say edge computing is “data plane,” since it is a necessary part of processing end user requests and data, in the same way that remote cloud computing requests provide data plane (end user applications) functions. 

source: Accenture 

The bottom line is that 5G networks, and presumably all to follow, will use edge computing as a principle of the control plane and data plane functions.

Spain Telecom Market Shows Classic Pattern

According to the Spanish communications regulator, three firms--Telefonica, Orange and Vodafone-- have 75 percent marke share. That is not at all an unusual market structure for a mature industry. “A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” BCG founder Bruce Henderson said in 1976.  

Codified as the rule of three, the observations explains the stable competitive market structure that develops over time, in many industries. 

The rule of four is related to the rule of three. It refers to the expected market share in a stable market, where leader market share is twice that of provider number two, and where the number-two supplier has share double that of the number-three provider. 

That creates a stable market share structure of 4:2:1. It arguably is stable because there is little incentive for either number one or number two to disrupt the market by attacking to gain share. 

source: CNMC, Financial Times 

The point is that stable competitive markets often have a handful of firms--three, typically--having 70 percent to 80 percent market share or installed base. The Spanish market structure is quirte common for mobile communications.

In most mobile markets, the classic structure is not fully seen, suggesting that some share shifts remain quite possible.

U.S. ISP Rural Business Model Will Change Significantly Because of Infrastructure Subsidies

It remains unclear how $42.5 billion in new subsidy support for consumer broadband will be allocated, as the funds are slated to go directly to states and territories to fund internet improvements.

So there will be potentially 50 or more different sets of rules. At least $100 million is reserved for each of the 50 states, and an additional $100 million is to be split among American territories, such as Guam and the U.S. Virgin Islands.

The intent is to focus on unserved and underserved areas of the country, those that lack any internet access or where consumers can receive only low-bandwidth speeds. 

Among the big questions is how state lawmakers will choose priorities: unserved versus underserved; how many awards in any single geographic area; the balance of fixed versus mobile support; and which platforms might be favored over others. 

At least some believe incumbent internet service providers will be the big beneficiaries. But even there, surprises could await. 

“The $65 billion figure dedicated to broadband is unprecedented and stands to benefit cable operators in particular,” said Chris Mooney, S&P Global Ratings Director for the U.S. Telecom & Cable sector. “Low population density and environmental obstacles previously deterred cable operators” (and telcos) but the subsidies could change business models. 

Since the state-level awarding process will be political, political considerations likely will play a role. A smart elected official will recognize that the widest-possible impact, affecting the greatest number of people, is politically beneficial. 

The greatest spreading of funds among rival industries and internet service providers likewise will be seen as more helpful to elected officials than awards that affect a smaller number of industries and ISPs. 

All of that suggests the rules will be crafted in ways that maximize the total number of voters and ISPs as possible. 

What is clear is that the internet service provider payback model wil lbe improved for the better as the subsidies are factored into the equation.

"More" is Nearly as Fundamental a Law as Moore's Law

Skepticism about prospects for any new technology are common, perhaps even natural, which is why the Gartner emerging technology hype cycle exists. The pattern is overblown expectations, followed by a period of disillusionment, with eventual emergence as a useful tool.

Of course, we all should, by now, be accustomed to the idea that better processors, more memory, faster access speeds and more untethered access all are fundamental parts of technology development. We “need more.”

Within some limits, we do not question the business model for faster computing, faster internet access and new uses for mobility. Digital transformation, no matter how one defines it, now is an underlying process for almost every economic activity. 

More compute-intensive capabilities, including artificial intelligence, virtual reality, augmented reality and internet of things, require faster processors, new computing architectures and faster internet access. The shift of global data traffic to video and remote computing likewise requires huge investments in capacity. 

It appears 5G is no exception, as some observers complain that new use cases and apps are not developing. It is worth noting that such concern was expressed as 3G and 4G as well, and nobody would consider either 3G or 4G “failures” in a commercial sense, even if many predicted new use cases took longer to develop than expected, and some use cases have not yet developed.  

source: Gartner

The larger point is that concern about the business model has been a feature of early deployment of 3G, 4G and now 5G. When 6G comes, we can be certain there will the same concerns expressed as well.

 

Of course, there are many ways to look at 5G value. Every next-generation mobile network has led to new use cases and revenue drivers. But each next-generation network has succeeded for other reasons: they have allowed mobile operators to satisfying growing customer demand for capacity, bandwidth and data usage. 

 

source: American Tower 

In other words, ignoring new use cases that will develop over time, 5G is necessary simply to provide lower cost per bit, as 40 percent to 50 percent more data capacity has to be added every year, while retail consumer prices increase only at about the rate of gross domestic product growth, in low single digits. 

The business model is “you get to keep your business,” not mostly “new use cases.” The former is essential, the latter helpful. To be practical, the business value of 5G is that it replaces 4G, with all the revenues 4G represents, while creating a platform for some new use cases and revenue sources, which might take some time to develop fully. 

That “you get to keep your business” value might not seem like such a big deal, but the analogy is the upgrade from copper access media to optical or other broadband platforms. It matters greatly whether an access provider is able to protect its existing business. 

That process has played out in the access business for well over two decades already, as the decision to deploy FTTH or any other higher-performance access platform has been evaluated. Quite often, the business advantage boils down to “staying competitive in the internet access business” more than anything else. 

In that sense, the evolution matches the increase in computing power of our personal devices over the decades. The business model for newer processors is “you get to keep your business.”

Skepticism about 5G is fundamentally misplaced. The slow development of new use cases--some of which might be unforeseen--is normal and typical.