Spain Connectivity Markets Remain Contestable

Spain’s communications regulator, the National Markets and Competition Commission, says consumer spending on bundled connectivity dipped slightly in the first two quarters of 2021. The report notes annualized 2.5 euro declines in quadruple-play and 2.8 euro declines in spending on quintuple-play packages. 

source: CNMC 

As always, any number of reasons could explain such trends. Economic weakness exacerbated by the Covid endemic could cause consumer spending to drop, though not directly explaining price declines for these packages. 

Competition might have led to price declines for existing products. Though three top firms have about 75 percent market share, the market structure does not seem to have the stable “rule of four” structure that inhibits price wars.

In fact, neither Spain’s fixed network broadband nor mobile markets have yet to reach the “rule of four” structure. That suggests the markets still remain unstable in terms of market share. Competitive share gains and losses  remain possible. 

source: CNMC, Financial Times 

Edge Computing Partnerships Reveal Strategic Choices

Partnership is a funny word in the computing and connectivity industries. It typically is spun as a source of competitive advantage, and that arguably is true when a firm tries to add features and functionality outside its historic core business that are complementary to its core. 

Partnerships are often said to be advantageous when a firm wants to move out of its core and into an adjacency where it does not already have domain competence. The strategy often is to build volume and domain expertise to the point where a firm can source product features internally, rather than relying on a partner. 

When a firm partners in any area related to its core business, that is probably an indication of weakness, often the result of  financial limitations that prevent a firm from developing its own resources. 

That arguably is the case for cable operators looking at edge computing. A survey of cable operators by Heavy Reading found 16 percent of respondents planned to build at least some of their own infrastructure. But most respondents indicated their present thinking was to partner with one or more hyperscale computing as a service suppliers to create edge computing businesses.  

source: Light Reading 

At this point, as is true for many telcos as well, edge computing as a service is largely viewed as the domain of the hyperscalers, with some exceptions in regions where hyperscaler presence is undeveloped. The reliance on partnerships seems a realistic recognition that the actual computing as a service is outside the connectivity domain, and that hyperscalers have too many advantages to beat. 

Instead, in most cases, edge computing is seen as a product that can leverage connectivity provider real estate and connectivity assets, providing incremental revenue growth. There seems little belief that edge computing offers hope of a new role for connectivity providers as branded suppliers of computing as a service.

Anti-Trust Rarely Succeeds Permanently

Most mature markets feature a rule of three or a rule of four. “A stable competitive market never has more than three significant competitors,” BCG founder Bruce Henderson said in 1976. That often means the top-three providers have market share in the 70 percent to 90 percent range. 

The rule of four 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 double the share 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.

All of that explains the periodic waves of anti-trust action we see in many markets. Though there seems to be non-existent interest in anti-trust in the cloud computing “as a service” markets, some speculate it could eventually happen. 

The issue is that such regulatory action never lasts. Competitive markets will revert to the rule of three or rule of four structure again. Look at U.S. telecommunications, where a former monopoly by AT&T was ended in 1982, creating eight new contestants instead of one AT&T. 

What do we see some 40 years later? Essentially the rule of three. The rule of four is not yet in place, though. 

There also generally is a direct relationship between market share and profitability.  Some note there is a similar return on sales and market share relationship.

source: Marketing Science Institute

The point is that it is reasonable to expect that profits are directly related to market share, with a pattern where the leading three firms have something like a 40-20-10 share pattern, or perhaps 35-17-8 pattern.

Source: Reperio Capital

That pattern is--contrary to often-made claims--not a result of lack of competition, but instead evidence that competition exists. Competition means buyers gravitate to the perceived better products. That, in turn, leads to market share gains. 

At some point, it is in the self interest of contestants not to wage ruinous price wars. Such wars depress earnings and profit margins for all contestants, but rarely change the relative standings. The more-profitable leader can absorb the losses more easily than the less-profitable attackers in second or third place. 

Anti-trust action rarely, if ever, results in permanent change.

Will Mobile Operators Get 10% of MEC Revenue?

Security services, IoT and edge computing combined will amount to about $50 billion in annual service provider revenues by 2024, according to the IN Forum.  If cumulative growth rate for those services is 17.9 percent, then 2026 revenue might be about $70 billion globally. 

source: IN Forum 

To be sure, much-larger “total market” forecasts are possible if one adds to service revenue the contributions of hardware, software and other infrastructure, application licenses, system integration revenues and private enterprise investments and operations spending on edge computing, IoT, security. 

Looking only at edge computing, and all revenue segments, as much as $250 billion in annual revenue might be possible in 2025. It is possible service provider revenues from edge computing in that year might amount only to $20 billion.

Where Might Telcos Have Advantages in Multi-Access Edge Computing?

If we agree that edge computing brings cloud services and capabilities including computing, storage and networking physically closer to the end-user, then we also might agree that edge computing value will be generated as computing and cloud services can be executed locally. 

A corollary is likely that the suppliers of brand-name cloud apps and computing as a service will have a big role in edge computing, as buyers will be looking for functionality provided by the name-brand apps. 

source: STL Partners 

Mobile and fixed network connectivity suppliers have viewed edge computing as a way to increase the value of their assets and services. Mobile operators see 5G private and public network access as an opportunity to support ultra-low latency use cases, for example. 

Other participants in the connectivity value chain (tower operators, data centers, system integrators and infrastructure providers) might also see opportunities. 

Local real estate also is an opportunity, in the form of space, cooling, security and power for edge servers. Such real estate can be provided at a cell tower, street cabinet, network aggregation point, a central office or internet exchange point, for example. 

source: STL Partners

More complicated are moves to supply the actual computing as a service function. In fact, recent moves by leading U.S. mobile operators to use hyperscalers as the suppliers of the cloud computing to support the 5G network cores illustrates the advantages of not creating a custom computing function, even to support the internal operations of the 5G virtualized network. 

source: STL Partners 

Most telcos are looking at the brand-name hyperscalers to supply the computing platform, for example. That is not to say all telcos will do so. 

It is possible, in some regions, that connectivity providers will have greater opportunities to create general purpose edge computing infrastructures that have brand-name computing as a service suppliers present as tenants, much as hyperscalers are tenants at third party data centers. 

On the other hand, hyperscalers also will aim to supply on-the-premises edge computing facilities for enterprises, thus avoiding the need for much “in the metro area” real estate. 

It is too early to predict precisely which business models will flourish, as far as telco edge computing involvement.

Study of Kubernetes App Success Shows How Hard New Apps are to Create

A study shows the difficulty of successfully shifting from development to commercial deployment of Kubernetes. That is a better ratio than typically is found in general business transformation or information technology change projects, which tend to have success in the 30-percent range. 

70 percent failure rates are common for IT efforts. That same ratio also tends to hold for organizational change efforts. The rule of thumb is that 70 percent of organizational change programs fail, in part or completely.  

The survey  by D2iQ found 42 percent of Kubernetes applications that work in a pre-production phase were actually deployed commercially. 

Historically, most big information technology projects fail in some major way, failing to produce expected cost savings or revenue enhancements or even expected process improvements. 

Some would argue the digital transformation failure rate is the same. “74 percent of cloud-related transformations fail to capture expected savings or business value, ” say McKinsey consultants  Matthias Kässer, Wolf Richter, Gundbert Scherf, and Christoph Schrey. 

Of the $1.3 trillion that was spent on digital transformation--using digital technologies to create new or modify existing business processes--in 2018, it is estimated that $900 billion went to waste, say Ed Lam, Li & Fung CFO, Kirk Girard is former Director of Planning and Development in Santa Clara County and Vernon Irvin Lumen Technologies president of Government, Education, and Mid & Small Business. 

BCG research, for example, suggests that 70 percent of digital transformations fall short of their objectives. 

From 2003 to 2012, only 6.4 percent of federal IT projects with $10 million or more in labor costs were successful, according to a study by Standish, noted by Brookings.

So perhaps Kubernetes applications succeed at a higher rate than for other IT projects: about four out of 10, where bigger projects succeed about three times out of 10.

Big Change for AT&T FTTH Payback Model?

The economics of fiber to the home infrastructure have never been easy, in the United States or anywhere else. But the business case is quite different now than two decades ago. Consider the metrics AT&T CEO John Stankey mentioned at the UBS Global TMT Conference. 

Talking about the pace of FTTH deployment in the consumer market, Stankey said “we've turned the corner in the consumer space on EBITDA growth,” elaborating that “we're watching those returns improve every quarter.”

And Stankey expects even better payback models as AT&T scales its FTTH deployment and revamps its operating cost structure. 

“When we can get into that space with customers that are paying us $50-plus a month and we're splitting share in that market, that's a good place for us to be over the long haul,” said Stankey. 

There are two key elements there: broadband market share very close to 50 percent and average revenue per location in the $50 a month range. The former would be a historic shift in market share and installed base. The latter is important because it shows the lower payback threshold. 

A couple of decades ago, the payback would have assumed something more on the level of $130 to $150 worth of monthly revenue from a consumer customer location, driven by the triple-play bundle of voice, internet access and linear video. 

The actual penetration rate was complicated, as there were a mix of single product, dual-play and triple-play accounts, each with different ARPUs. For AT&T, the road ahead remains a bit complex, but will be anchored in broadband. 

The FTTH payback decision would seem to be based on at least $50 a month for internet access as the base case, with a mix of customers buying voice, streaming or linear video products that will be non-consolidated items provided by Discovery Warner-Media, with AT&T receiving about 71 percent of the free cash flow. That might represent about $8 billion in annual free cash flow for AT&T, as its share of the proceeds from Discovery Warner-Media. 

The big change is the strategy. Essentially, the FTTH payback is anchored by internet access of perhaps $50 per location, with adoption close to 50 percent, and aided by voice and video entertainment contributions at lower levels. 

That is a huge assumption change from two decades ago, when revenues in the $130 to $150 per month range were assumed to be necessary. To be sure, AT&T also has get close to half the consumer broadband services market, in terms of installed base. 

But AT&T executives seem quite encouraged by trends they have seen in the latest rounds of FTTH builds.