Will the 80/20 Rule Apply in Telecom?

Most of us are familiar with the 80/20 rule, which suggests that roughly 80 percent of value or outcomes are generated by about 20 percent of actions. Formally, it is the Pareto theorem. 

Pareto applies to most aspects of the connectivity, data center or computing businesses. It even applies to revenue generated by mobile cell sites. Half of mobile revenue is driven from traffic on about 10 percent of sites. Fully 80 percent of revenue is driven by activity on just 30 percent of cell sites. 

source: Medium 

 

Pareto also seems to apply broadly to global connectivity provider revenue and profits as well. Annual global connectivity provider revenue has been estimated at about $1.5 trillion for 2021 and 2022 (including video entertainment subscriptions). 

source: IDC

But as much as $820 billion to $1.1 trillion in revenue is earned from mobile services. Being conservative, assume mobile revenue globally is $820 billion, while total revenue is $1.5 trillion. That implies mobile represents 55 percent of total revenue. 

At the same time, one can note that fixed network data revenues were about $400 billiion in 2020, while voice contributed about $170 billion, for a total of about $570 billion, or 38 percent of total revenue. 

source: N-IX 

Globally, most people using the internet do so using the mobile network. Most people in developed regions have access to both fixed and mobile modes. The percentage of people using fixed internet access alone is almost too small to measure. 

.source: Omdia 

The “mobile-only” pattern of internet access has been in place for close to a decade, as mobile internet usage began to spike upwards since 2010, to the point that half of all the world’s people were using mobile internet by the end of 2019, according to GSMA figures. 

The shift of subscriptions from fixed to mobile happened about 2002. 

source: ITU 

source: ITU

At the same time, one can note that fixed network data revenues were about $400 billiion in 2020, while voice contributed about $170 billion, for a total of about $570 billion. 

On the other hand, capital investment for the fixed network was about 68 percent of total in 2021. So you see the pattern: nearly 70 percent of capex to generate 38 percent of revenue. Conversely, 30 percent of capex spent on the mobile networks generates 55 percent of total revenue. 

 

.source: Omdia 

Though not an idealized Pareto distribution, the distribution of revenues and capital investment is beginning to approach the Pareto distribution. .

Revenue, Profit, Investment Issues Dominate Service Provider Strategy in 2022

Much service provider strategy in mobile and fixed network domains is fueled by revenue and profit issues: slow revenue growth; declining legacy revenues; low returns on invested capital with high demands for investment in 5G and home broadband  and constrained free cash flow. 

Probably nobody will be surprised that S&P Global Market Intelligence expects faster connectivity service provider revenue growth in Asia and Latin America and low-single-digit growth in the United States  and Europe in 2022. That has been the trend for a decade or so. 

There are some clear implications, including a shift to non-traditional funding of access networks. 

“We believe telcos worldwide will continue considering alternate means to fund their capex, including network and spectrum sharing (some of which are arguably regulatory driven). A new trend is the possible  trend to create joint ventures to fund access networks, as Virgin Media O2 is considering. 

Investment capital also will be raised by the  sale of non-core legacy, or lower-scaled telecom operations and media assets; and monetization of tower and fiber networks, S&P says. That trend has been underway for a decade. 

In large part, such asset sales are intended to raise capital either for debt reduction or deployment of capital elsewhere in the business. They are advantageous because high capital investment for both fixed network broadband and 5G, plus shareholder payouts will likely constrain discretionary free cash flow available for debt repayment in 2022, S&P says. 

Globally, secular industry declines from legacy products, coupled with significant competition from cable broadband and lost subsidy revenue, will likely constrain fixed network topline revenue growth and profitability. In fact, S&P Global Market Intelligence expects a high-single-digit revenue decline in 2022.

Shrinking and low returns on invested capital remain an issue as well. “The low return on capital across rated telcos has generally been declining, to less than six percent in 2021 from a bit more than seven percent  in 2011, S&P notes. 

That has fueled a search for new revenue sources. Many operators (in Europe) are diversifying from voice and connectivity services to value-added digital services covering a wide range of IT-related, cyber security, IoT, or cloud-based services, S&P notes. 

That move “up the stack” or “across the value chain” is driven by a search for new growth drivers as legacy services become lower-margin products with little--if any--growth potential. 

Also, many operators are seeking to bolster revenue by investing more heavily in fiber-to-home facilities. But monetization of fixed broadband upgrades has been unequal between regions. 

There has been higher revenue growth in the United States than Europe or Latin America, for example. 

5G monetization is uneven between regions as well. Service providers in Asia-Pacific have seen a lift in average revenue per unit (ARPU) from 5G, largely from moving consumers to higher-priced service plans. 

U.S. mobile service provider revenue also grew in 2021, largely by moving customers to higher-priced plans. 

“We expect U.S. wireless service revenue to have increased 3.5 percent to four percent  in 2021, and slowing to around 2% in 2022,” S&P says. 

source: S&P Global Market Intelligence 

Gains are more muted in other regions such as Europe, S&P says. 

In the U.S. market, a key trend is higher investment in fiber-to-home by telcos, which will limit cable operator subscriber growth and market share gains. 

“We expect U.S. telco capital spending to increase to 13 percent to 15 percent in 2022 as carriers deploy spectrum licenses acquired in recent auctions and for FTTH builds,” says S&P. “We expect increased spending to remain elevated over the next couple of years,” largely to support the 5G mid-band networks. 

source: S&P Global Market Intelligence

“We estimate that U.S. telco FTTH coverage will be around 35 percent  in 2022, up from 31 percent in 2021,” the firm says. “We expect FTTH to cover 50 percent to 55 percent of U.S. households by 2028.

“For 2022 and 2023, we expect wireline capex to increase to 10 percent to 15 percent annually, reflecting the accelerated investments in fiber,” S&P says. 

Still, says S&P, “we forecast total U.S. wireline revenue will decline five percent to seven percent in 2022.”

S&P does not believe 5G will drive high revenue growth. “The wireless industry is mature with limited growth opportunities in the traditional retail market.” Though internet of things offers upside, those “IoT opportunities are likely several years away.”

In Europe, the firm  expects revenue growth will be modest, although up from 2021 levels as roaming and equipment sales continue to recover and because of the gradual benefit of accretive fixed-line broadband upgrades. 

Most telecom operators in the Asia-Pacific region  will maintain steady operating performance in 2022, fueled largely by customer data plan spending.

In Latin America, higher growth will be fueled by data demand and 4G, the firm says. 

Many operators are therefore diversifying--mainly through partnership or mergers and acquisitions--from more traditional voice and connectivity services to value-added digital services covering a wide range of IT-related, cyber security, IoT, or cloud-based services. This strategy also seeks to find alternative paths for growth while traditional services are becoming more and more utility-like. 

Replacing TCP is Becoming More Common

Transport protocols such as TCP/IP are the foundation of computing and communications. But transport protocols change from time to time. So Quic is viewed as a replacement for TCP that also provides reduced latency performance. 

source: NetApp 

The “layers” design of data communications ensures that TCP functions and IP functions can be updated or changed without upsetting the whole transport system. IP obtains and defines the address of the application or device the data must be sent to. 

TCP is responsible for transporting and routing data through the network architecture and ensuring it gets delivered to the destination application or device that IP has defined. But other protocols can be used in place of TCP, such as UDP. 

It might be quite fanciful at this point to speculate on a replacement for TCP/IP as the global standard for communications. It is not speculation that QUIC can replace TCP. 

Other proposals have been floated, but have not gotten traction. Most such proposals involve modifying TCP, though at least one proposal suggests replacing IP.  

Technology Value is What the User or Customer Says it Is

Customer value might be defined as “the perception of what a product or service is worth to a customer versus the possible alternatives.” When new technologies are created, developments have some idea of why they believe an innovation will provide value. 

Sometimes, customers disagree. They see value, but not where developers believed value would exist. Unintended uses, in other words, happen. Technologies and products are used in ways developers did not foresee. Using Xbox controllers to fly unmanned aerial vehicles provides one example.   

Text messaging was a byproduct of instituting Signaling System 7. TCP/IP became the global telecommunications next-generation protocol when it was originally intended to support military computer communications under conditions of uncertainty. 

Consider multi-access edge computing. The stated value is ultra-low latency performance. But connectivity service provider executives say their own belief is that MEC’s greatest value--as a means of moving workloads to the edge,  will be a reduction of bandwidth use or cost. 

But a recent survey conducted by Heavy Reading--94 percent of whom were connectivity providers--suggests the top motivator for moving workloads to the edge is to “reduce bandwidth use or cost.” “Improved application performance” was fourth on the list, ranked in terms of “top motivators.”

source: Heavy Reading 

To be sure, multiple values exist. But it is worth noting that the intended value as developed by suppliers  is not always the “perceived value” seen by end users or customers. 

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For as long as I can remember, calls have been issued that connectivity service providers are missing out on revenue opportunities from small and mid-sized businesses. 

Looking at 5G revenues, for example, BearingPoint and Omdia point out that up to 99 percent of all businesses globally are SMEs, though connectivity providers focus on enterprises. 

source: BearingPoint, Omdia 

That is an “untapped” opportunity, they argue. That is misleading. 

Omdia’s own data show that 63 percent of mobile operators believe large enterprises will generate the “most” 5G revenue. 

Omdia’s own data also suggest that 54 percent of service providers believe SMEs will generate the “most” revenue. That is hardly neglect, as 32 percent of respondents believe consumers will generate the “most” revenue from 5G. 

Keep in mind that mobility has, since the 2G era, been built on consumer revenues, not revenues from business. 

source: Omdia, BearingPoint 

But there are other reasons why smaller businesses are not specifically targeted. The cost of sales and buying behavior is virtually indistinguishable from the behavior of consumer customers. 

In the U.S. market, for example, 83 percent of all businesses are “micro” sized, having no more than nine employees. 

“Small” firms with 10 to 99 employees represent  15 percent of all businesses, while “medium” organizations with 100 to 499 employees represent just two percent of entities. 

If enterprise is targeted directly with field sales, then “micro” (83 percent of business entities) are marketed through the mass market channels. “Small and medium” organizations tend to be marketed to by partner and channel entities. Think of the role played by resellers and system integrators and distributors in the computing hardware business. 

source: CompTIA

So some of us would argue that mobile operators are not neglecting SMEs. They sell using mass market techniques tot he 83 percent of customers that behave like consumers when evaluating and buying 5G services. 

They use channel partners to sell to the mid-market. And they have dedicated field and inside sales teams to sell to enterprises. 

One can argue that more internal resources should be devoted to direct sales efforts for SMEs. But cost of sales is an issue. In many cases, the financial return from higher sales and marketing cost expended on most “small or medium” customer accounts would generate a zero to negative financial return, compared to using channel partners.

All of us have to define our terms: what is “small;” what is “medium” and what does that mean for marketing, sales and requirements? 

Also, are we talking about “new revenue sources” or “total revenue generated by segment?” It might, for example, prove to be the case that much “new use case” revenue is generated by enterprises, as they will be the entities deploying large internet of things and sensor networks. 

Those are non-phone revenues. But phone revenues might still be led by consumer users, as historically has been the case. 

The issue is “which are we talking about: new use case revenues or total or segment revenues?

Either way, though, it might be hard to make the argument that most of the return is going to come from SMEs, as compared to consumer or enterprise revenues. 

For Whom is 5G an SMB Opportunity?

Very frequently, some mobile or fixed network operators have greater or lesser revenue growth opportunities based on their existing market shares, asset and liability positions. A firm with zero to low exposure to a revenue opportunity often has a much-higher chance of fast growth, compared to legacy suppliers that lead a market.

Since many connectivity markets are essentially zero-sum games, a win by one contestant is a loss for another supplier. And leaders have the most to lose; attackers the most to gain.

In the U.S. market, for example, cable operators with zero exposure to fixed voice, mobility services and business internet access have been able to take market share from the incumbents. Conversely, telcos who historically have led those markets have lost share to the attackers.

T-Mobile and Verizon stand to take share from cable operators (who are the market leaders) using new fixed wireless platforms. T-Mobile historically has had zero share of the home broadband market, while Verizon has been limited by its geographic footprint, covering perhaps 20 percent or so of all U.S. home locations with its fixed network.

So the "SMB" segment is an opportunity for some competitors; less so for the leaders. What might be questionable are assertions that mobile operators are "neglecting" the SMB segment where it comes to 5G.

For as long as I can remember, calls have been issued that connectivity service providers are missing out on revenue opportunities from small and mid-sized businesses. 

Looking at 5G revenues, for example, BearingPoint and Omdia point out that up to 99 percent of all businesses globally are SMEs, though connectivity providers focus on enterprises. 

source: BearingPoint, Omdia 

That is an “untapped” opportunity, they argue. That is misleading. 

Omdia’s own data show that 63 percent of mobile operators believe large enterprises will generate the “most” 5G revenue. 

Omdia’s own data also suggest that 54 percent of service providers believe SMEs will generate the “most” revenue. That is hardly neglect, as 32 percent of respondents believe consumers will generate the “most” revenue from 5G. 

Keep in mind that mobility has, since the 2G era, been built on consumer revenues, not revenues from business. 

source: Omdia, BearingPoint 

But there are other reasons why smaller businesses are not specifically targeted. The cost of sales and buying behavior is virtually indistinguishable from the behavior of consumer customers. 

In the U.S. market, for example, 83 percent of all businesses are “micro” sized, having no more than nine employees. 

“Small” firms with 10 to 99 employees represent  15 percent of all businesses, while “medium” organizations with 100 to 499 employees represent just two percent of entities. 

If enterprise is targeted directly with field sales, then “micro” (83 percent of business entities) are marketed through the mass market channels. “Small and medium” organizations tend to be marketed to by partner and channel entities. Think of the role played by resellers and system integrators and distributors in the computing hardware business. 

source: CompTIA

So some of us would argue that mobile operators are not neglecting SMEs. They sell using mass market techniques tot he 83 percent of customers that behave like consumers when evaluating and buying 5G services. 

They use channel partners to sell to the mid-market. And they have dedicated field and inside sales teams to sell to enterprises. 

One can argue that more internal resources should be devoted to direct sales efforts for SMEs. But cost of sales is an issue. In many cases, the financial return from higher sales and marketing cost expended on most “small or medium” customer accounts would generate a zero to negative financial return, compared to using channel partners.

All of us have to define our terms: what is “small;” what is “medium” and what does that mean for marketing, sales and requirements? 

Also, are we talking about “new revenue sources” or “total revenue generated by segment?” It might, for example, prove to be the case that much “new use case” revenue is generated by enterprises, as they will be the entities deploying large internet of things and sensor networks. 

Those are non-phone revenues. But phone revenues might still be led by consumer users, as historically has been the case. 

The issue is “which are we talking about: new use case revenues or total or segment revenues?

Either way, though, it might be hard to make the argument that most of the return is going to come from SMBs, as compared to consumer or enterprise revenues.

Beyond that, some competitors do have an oportunity, especially if they have historically had zero to low exposure to SMB customer revenues. Cable operators have been in that position, as has T-Mobile.

Will Consumers be Buying Home Broadband at 1 Gbps to 4 Gbps in 2025?

How soon will the headline speed for home broadband reach 10 Gbps? And what does that imply for the speeds most consumers will purchase?

There is widespread expectation that the headline speed for home broadband, in many markets, will be 10 Gbps by about 2025. By other rules of thumb, that also suggests the "typical" home broadband customer will be buying service at rates between 1 Gbps and 2 Gbps, with a significant percentage buying service at 4 Gbps.

The top home broadband headline speeds matter, even when most mainstream home broadband buyers never buy the fastest tiers of service. The reason, simply, is that mainstream buyers gravitate to the mid-tier packages as the best combination of value and price, not the fastest or budget tiers of service. 

source: Openvault 

In the third quarter of 2021, for example, 66 percent of U.S. households purchased service operating between 100 Mbps and 400 Mbps, according to Openvault, when the top tier of service was 1 Gbps. 

You might say price anchoring is at work. Price anchoring applies for list costs of consumer broadband services no less than for other products.  

"Price anchoring" is the reason most consumers able to buy gigabit internet access do not do so. Price anchoring is the tendency for consumers to evaluate all offers in relation to others. As the saying goes, the best way to sell a $2,000 watch is to put it right next to a $10,000 watch.

 

source: Point Topic 

In the United Kingdom for example, 86 percent of consumers buy service at speeds of 30 Mbps or about 100 Mbps, even when the headline speeds have reached a gigabit per second and are now in the early stages of heading for 10 Gbps and terabits per second by 2050  

As Nielsen’s Law suggests, the headline speeds grow at an average of 50 percent per year, typically in star step fashion as platform upgrades are made. 

Nielsen Norman Group estimates suggest a headline speed of 10 Gbps will be commercially available by about 2025. 

source: NCTA  

By 2030, Nielsen’s Law suggests, the fixed network headline speed will be 85 Gbps. The implication is that typical mobile speeds--which often lag fixed network speeds by an order of magnitude or two orders of magnitude--will by 2030 be looking at speeds up to 8.5 Gbps, but possibly as “low” as 1 Gbps per connection. 

Since most mobile device instances of use are “single user,” mobile speeds do not have to share bandwidth as do home broadband accounts, where multiple devices are supported by a single home broadband connection. 

That also implies that mobile speeds do not have to match fixed network speeds to remain competitive or useful. 

source: IDtechex

Population Density "Predicts" Economic Growth; Quality Broadband Does Not

Though virtually everyone supports ubiquitous, quality broadband services, and even as policymakers and infrastructure interests always claim broadband is a platform for economic development, those claims almost always are unprovable.

At the micro level, “broadly speaking, there are two main sources of economic growth:  growth in the size of the workforce and growth in the productivity (output per hour worked) of that workforce,” economists might say. 

It might be argued that broadband helps with both, in the same way that roads, electricity, education and skill levels, “quality of life” attractions, airports and other transportation hubs, education, health and other social infrastructure also might be viewed as underpinning prospects for growth. 

Population density and geographical remoteness also are underlying issues. Though poverty, health care, educational attainment and other background issues exist in isolated rural areas, one reason economic development is stunted in such areas is low population density and remoteness. 

Most economic activity takes place in proximity to urban population centers, in large part because that is where most consumers and buyers live, and where the logistical costs of creating and delivering products is most favorable. 

In some areas, strength builds on strength, as a large, important economic activity creates an ecosystem that attracts other firms. 

Beyond all that, correlation is not causation. We might well note that quality broadband tends to exist where economic growth and other indices--educational attainment, incomes, wealth, housing prices, quality of schools and quality of life--also are high. 

Though it is widely believed that broadband access leads to economic growth, that cannot be proved, though many studies suggest a correlation. But correlation is not causation. 

“A  positive relationship between broadband expansion and employment growth could arise for other reasons,” says Jed Kolko of the Public Policy Institute of California. “For example, if

broadband providers expand in locations where they anticipate future growth, then the positive relationship would in part or entirely reflect this strategic decision of providers rather than a causal effect of broadband on growth.”

“Alternatively, population growth could cause both broadband expansion and employment

growth: Broadband providers could invest in areas where population (and therefore demand for broadband) is growing, while at the same time population growth could cause employment growth in industries (such as retail, restaurants, and personal services) that serve local populations<” Kolko says. 

We know correlations exist. But that does not mean we can prove that quality broadband actually produces outcomes such as economic growth, as much as we all believe it contributes to social outcomes we prefer.