TIM Structural Separation Will Not Change Revenue Much, in the Near Term

TIM’s plan for structural separation of its wholesale network and retail services businesses is not expected to dramatically affect revenues or earnings of either the new wholesale network services unit or the retail company. 

TIM will not be the only wholesale platform, either, as Fastweb will continue to offer a facilities-based alternative. 

Globally, the deal is part of a trend of merger, acquisition or restructuring activity led by in-market consolidation and a shift of infrastructure ownership towards institutional investment. 

source: Bain 

As it turns out, not only are the functions of wholesale network or infrastructure provider and retail services provider separable, those roles often appeal to different sets of investors. 

Can the Leopard Change Its Spots?

Competition has changed just about everything in the connectivity business except that connectivity services drive the revenue model. And that conditions most of everything else about the business: growth rates; profitability; valuation of public firms; even ability to retain and attract human capital. 

But after nearly 40 years (in lead markets) of life after monopoly regulation, some things still have not changed. Despite the best efforts of leaders and firms to change cultures; tempos; revenue models and sources; roles in the ecosystem and value in the eyes of customers, connectivity remains utility-like.

There is no other way to explain valuation metrics, growth rates, profits or even the interest of institutional investors in owning access networks. To the extent that fixed access networks serving mass markets have value, it is as “alternative assets” producing steady or at least predictable cash flow, with at least some elements of a business moat that keeps competitors away and non-correlated with stocks and bonds. 

That is often why assets in wholesale-oriented markets, where a single network owner provides services to any and all retail providers, are preferred to ownership of the retail providers. 

The retail end of the business often has limited moats. In Brazil, Oi, the former incumbent, has about 23 percent to 30 percent take rates of homes passed by fiber. Some of that might be attributed to demand side issues, but over the long term, results will be dictated by the ability of competitors to use a single wholesale network, rather than building their own networks. 

source: Oi 

Looking at market shares of fixed network internet access, Oi has about 13 percent share, trailing Claro and Vivo. 

source: Anatel 

In the total market, including fixed and mobile services, Oi has about 23 percent share. In part, facilities-based competition shapes results. Traditionally, mobile competition has been facilities-based, and mobility drives overall revenue. 

In most fixed network settings, only one network exists, and competition largely comes from wholesale mechanisms. In relatively few markets is fixed network competition substantially based on diverse facilities ownership. 

source: Researchgate 

Owners’ economics are the upside; stranded assets the downside in such markets. 

Far better, institutional investors believe, to own the scarce access networks rather than the retail service providers. 

That leaves retail service providers with difficult challenges. As profit margins in the core business shrink while capital investment demands rise, there is only so much any competent management team can do to optimize the core business by cutting costs, modernizing processes and platforms and improving customer experience. 

source: AD Little 

Historically, growth has come from acquisitions and mergers. Product sets have changed, but growth in new areas basically has only offset losses in legacy lines of business. Mobility now is the global driver of revenue, for example, not fixed network services. Within the fixed network segment, home broadband now drives revenue, not voice. 

And leaders still search for ways to create growth opportunities in adjacent parts of the ecosystem, as difficult a task as that has proven to be, over time. As one veteran of the connectivity business quipped recently after bolting for the data center business, “it’s nice to be in a business where prices do not continually drop.”

It remains unclear if there is one common model for the “telco of the future,” beyond the supply of retail connectivity services to businesses and consumers. Some will likely be more utility-like while others are more diversified in additional ecosystem roles. 

Some will be retailers; others more wholesalers. But the anchor of “connectivity services” will keep most from fundamental changes. That role cannot be avoided without leaving the business altogether. 

Despite all the “evolve and change” advice of four decades, it still appears the leopard cannot change its spots.

Multi-Gigabit Internet Access is Inevitable; So is Terabit per Second

Omdia's Jaimie Lenderman on the rise of global gigabit offerings. It's inevitable; always was. Gigabit speeds already are available at scale in some markets, driven by Nielsen's Law. Which is why we will someday be talking about 10-Gbps access as the baseline, and why terabits per second will happen by 2050. 

Chaos or Structure? Which Do You Prefer?

"As you get older, if you're lucky, you realize two things: what you like, but also what you're good at," Netflix co-founder Marc Randolph told Forbes in 2019 on why he left Netflix. "The answer to both of them [for me] is early-stage companies. I like the chaos. I like the fact that you're working on hundreds of things at once."

Some of you who have done startups will disagree. Some who flee corporate life find they did not like the challenges or gain satisfaction from doing a startup. Failure is common, for one thing. Resources are limited, for another. 

And actual benefits will be lower than in a larger corporate setting. One has to gamble that success will outweigh those disadvantages. In some ways, corporate life is a grind, but less personally risky. 

Startups represent the opposite. There are no guarantees. Founders might win big; they might lose all. Employees might not win as big, but won’t lose as much, either, in case of failure. 

source: Business2Community

Larger organizations are more bureaucratic: they have formalized rules for all sorts of things. We most often think that is a bad thing, but it has good aspects: it is one way of assuring equal treatment of people and a constraint on arbitrary processes. 

And as much as we tend to criticize large organization behavior as too slow; too political; with too many meetings and unproductive activities and people, scale sometimes is necessary to support the business mission. 

And scale means more bureaucracy. Uniform processes and repeatable practices are arguably essential for large-scale businesses and organizations, to ensure that customer requirements are met. 

 

source: Angel.co 

The point is that not everything in business or life can be done by smaller organizations or startups. Some things take scale. Also, every scale business started small at some point. Growth itself produces bureaucracy, because it leads to size. 

Still, some--and not all--will agree with Randolph. The chaotic, unstructured, highly-challenging startup experience is going to appeal to some more than the safer, more structured corporate life. But there are advantages to that choice as well. 

As we have seen with attitudes towards personal safety during and after the peak of the Covid pandemic, people have different risk profiles. Neither choice--more risk or less risk--is inherently normative. 

But such differences tend to be reflected in job choices as well. Me, I’ll take the chaos and uncertainty. There are clear downsides, none of which I especially like. But most of us who have done startups will agree there is much-greater chance to be creative; greater scope of work; more chances to take initiative and always much greater opportunity to innovate. 

Against which one has to balance greater personal financial danger, it has to be said.

Networks Now are a Part of Computing and Application Reliability

As computing architectures become more disaggregated and virtualized, it is almost inevitable that outages caused by the use of many more network elements, platforms, suppliers, operating systems and applications will grow. 

Multi-cloud computing, hybrid computing, edge computing and remote computing all mean that the availability of transport and access fabrics now is part of the availability performance. 

source: Uptime Institute 

Prolonged downtime is becoming more common in publicly-reported outages, Uptime Institute says. Also, outages are lasting longer. 

The gap between the beginning of a major public outage and full recovery has stretched significantly over the last five years, with nearly 30 percent of these outages in 2021 lasted more than 24 hours, according to the Uptime Institute. 

source: Uptime Institute

Human error also drives some downtime, in addition to network element, server, configuration or other  software failures. 

source: Uptime Institute 

Experts Say Metaverse Will Not be Common in Consumer Life in 2040. Why?

Experts surveyed by Pew Research believe that augmented and mixed-reality applications will dominate full virtual reality environments in 2040. But half of the experts also believe the “metaverse” will not be common in the lives of most consumers by that point. 

source: Pew Research 

This will be unwelcome news for many metaverse proponents. But it is historically realistic. 

Major technology transitions typically take much longer than proponents expect. One common facet of new technology adoption is that change often comes with a specific pattern: a sigmoid curve such as the Gompertz model or Bass model. 

S curves explain overall market development, customer adoption, product usage by individual customers, sales productivity, developer productivity and sometimes investor interest. It often is used to describe adoption rates of new services and technologies, including the notion of non-linear change rates and inflection points in the adoption of consumer products and technologies.

In mathematics, the S curve is a sigmoid function. It is the basis for the Gompertz function which can be used to predict new technology adoption and is related to the Bass Model.

Such curves suggest a longish period of low adoption, followed by an inflection point leading to rapid adoption.

That leads supporters to overestimate early adoption and vastly underestimate later adoption. Mobile phone adoption, and smart phone adoption, illustrate the process. You might think adoption is a linear process. In fact, it tends to be non-linear.

Also, the more fundamental the change, the longer to reach mass adoption. Highly-useful “point technologies” such as telephones, electricity, mobile phones, smart phones, the internet and so forth can easily take a decade to reach 10-percent adoption. Adoption by 40 percent of people can take another decade to 15 years. And adoption by more than 40 percent of people can take another decade to 15 years. 

source: MIT Technology Review 

That suggests a 30-year adoption cycle for a specific innovation that has high value to be used by 40 percent to 70 percent of people. Something such as metaverse, which is far more complicated, could easily take 30 years to reach 40 percent of people in ordinary use. 

That might mean at least a decade before metaverse apps are in common use by 10 percent of people. Even then, use cases are likely to be dominated by gaming, business communications and video entertainment. 

source: Robert Patterson 

The sigmoid function arguably is among the most-important mathematical expressions one ever encounters in the telecom, application and device businesses. It applies to business strategy overall, new product development, strategy for legacy businesses, customer adoption rates, marketing messages and  capital deployment, for example. 

The sigmoid function applies to startups as well as incumbents; software and hardware; products and services; new and legacy lines of business. 

source: Innospective

The concept has been applied to technology adoption in the notion of crossing the chasm of value any technology represents for different users. Mainstream users have different values than early adopters, so value propositions must be adjusted as any new technology product exhausts the market of early adopters. Early adopters can tolerate bugs, workarounds or incomplete on-boarding and support experiences. They tend to be price insensitive. 

It always takes longer than one expects for a major new innovation to become ubiquitous. Metaverse, being a complicated development, might take longer than any point innovation.

FiberLight Sold to Institutional Investors

A consortium led by H.R.L. Morrison & Co, the Australian Retirement Trust and a managed client of UBS Asset Management are acquiring FiberLight from energy firm Thermo Companies. 

Headquartered in Atlanta, Georgia, FiberLight is a pure-play, top-ten  fiber infrastructure provider in the U.S. market, featuring 18,000 route miles of fiber infrastructure reaching customers in over 30 metropolitan areas, principally in the major markets of Texas and the Northern Virginia area.

FiberLight’s seasoned management team, led by Chief Executive Officer Christopher Rabii, will continue to lead the business, the new owners say. 

That latest deal is another example of institutional investors snapping up digital infrastructure assets. Generally speaking, the attraction is that the assets are “alternative” holdings in portfolios offering the prospect of predictable cash flows over time. 

source: Asian Infrastructure Investment Bank

The interest in selling on the part of digital infrastructure owners is an exit from a business that is getting more capital intensive at the same time return on invested capital is shrinking. 

As with all trends, there are reasons why buyers and sellers are motivated.