In Business Terms, Platforms Make Money on Transactions, Not Retailing

Platform business models typically involve a few essential roles, according to Angus Ward, Beyond Now CEO. A platform owner orchestrates the “exchange of value” operations. There are “producers” who supply capabilities, “providers”  who own customer relationships,  and “customers” who buy capabilities. 

In many cases, buyers can be sellers and sellers can also be buyers. In some cases the platform might also be a producer of its own branded products. 

source: BeyondNow 

The key point is that the business model is based on facilitating transactions, and acting as a market maker or facilitator, rather than a retailer.

Conglomerate Valuations Always are Tougher than Pure Plays

Fluid ecosystems, where some participants supply multiple types of value, are hard to evaluate, from a financial perspective, especially when some categories of activity have one set of valuation multiples while others have differing multiples. 

That is the reason many observers prefer “pure play” assets rather than conglomerate business models where assets of distinct types are co-mingled. Consider the way some products are sold by multiple entities with different valuation multiples. 

In such cases one often has to develop “sum of the parts” estimates that attempt to account for the different revenue, profit margin and valuation metrics different types of products feature. 

Software-defined interconnection, for example, suggests the changing roles of connectivity and data center providers. In recent years, SDI has been a capability featured by firms such as Equinix for connecting servers that are not colocated within a single data center. 

The idea is to enable network-to-network connections without the need to deploy network appliances at each site, as is required by SD-WAN or MPLS solutions also pitched as “software defined” networking approaches.

But many would argue that software-defined interconnection is about connecting locations, data centers, clouds or apps; colocation facilities; internet exchanges or service providers in a more granular and on-demand way than is possible with SD-WAN. 

Ideally, think about the matter as eliminating the difference between north-south traffic within any single data center and east-west traffic across the globe. 

That essentially means that some managed service providers; some connectivity networks; some data centers and some infrastructure providers also are in the SDI business, even if the specific revenue contributions might be hard to untangle. 

In the meantime, SDI might be considered an emerging business category with contestants in formerly-distinct realms, the most significant perhaps being a function both data centers and connectivity providers supply. 

And leaves analysts with the difficult job of assessing the relative contributions of different product categories--possibly with distinct profit margin and valuation metrics--as drivers of overall valuation.

Business Context Shapes Access Network Strategy

As often happens in any industry, service providers have different opinions about fixed wireless access versus fiber-to-premises versus hybrid fiber coax versus satellite platforms for access services. 

As always, different firms have different views on strategy because of their business circumstances. Perhaps in principle, all former telcos would say fiber-to-premises is the ideal long-term solution where the economics exist. But the economics are daunting in many cases, leading to a “yes, but” strategy that uses other platforms as the economics dictate. 

Verizon has a relatively small “in region” footprint of U.S. homes and businesses--perhaps no more than about 20 percent--and cannot afford to “fiberize” another 80 percent of U.S. homes. So fixed wireless, which piggybacks on the 5G network, makes sense. 

T-Mobile, with close to zero fixed network coverage of U.S. homes and businesses, benefits even more from 5G fixed wireless. 

AT&T, on the other hand, has the biggest footprint of U.S. homes and businesses, so out-of-region coverage magnitudes are correspondingly reduced. 

Comcast and Charter have “homes passed” totals close to AT&T’s footprint and already have HFC networks they believe will be marketplace competitive for quite some time, as multi-gigabit speeds are coming next on the HFC platform. 

Of a total of 140 million U.S.  homes, AT&T’s landline network passes 62 million. Comcast has (can actually sell service to) about 57 million homes passed.

The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 27 million. Lumen Technologies never reports its homes passed figures, but likely has 20-million or so consumer locations. 

Assuming no further significant consolidation, AT&T only “needs” to fiberize within its footprint to reach 44 percent of U.S. homes (and virtually all the homes regulators are likely to allow it to pass). 

Assuming Verizon has no appetite to significantly expand its fixed network footprint, that leaves about 81 percent of U.S. homes that could be passed by the 5G network, and would be impossible to significantly serve using FTTH. 

Comcast already has HFC offering gigabit speeds reaching about 41 percent of U.S. homes. Charter already passes about 29 percent of U.S. homes. Again, regulators are unlikely to allow either firm to get significantly bigger, in terms of homes passed. 

Lumen has a largely-rural territory that includes perhaps 14 percent of U.S. homes, but Lumen has no mobile network assets it can use to offer fixed wireless on a facilities basis. 

The point is that each firm’s view of strategy is shaped by its existing legacy assets. Cable operators, though not denying FTTH makes sense in the future for a growing percentage of customers, also believe HFC is a viable platform, without major reliance on FWA or FTTH to serve mass market customers. 

Verizon and T-Mobile have good reasons for using FWA that piggybacks on their nationwide 5G networks. 

AT&T believes FTTH is the best solution, but also has the largest in-region fixed network footprint of any major ISP, and therefore has the most to lose if copper access facilities are not upgraded to fiber access.

There is no universal answer for “which access platform” makes most sense. Each major ISP has key business model constraints and opportunities that shape the access network choices.

Headline Home Broadband Speeds and Real-World Buying Patterns

It always is instructive to compare advertised headline speeds with the services customers actually buy, as the mismatch is often striking. Despite all the talk of “gigabit per second” and “multi-gigabit per second services, most customers do not buy them. 

This analysis by Ofcom of the actual speed plans U.K. customers were buying between 2018 and 2022 shows that most customers were purchasing speeds in the range of 30 Mbps to 100 Mbps for the whole period. 

                      Home Broadband Advertised Speeds Take Rates

    Nov '18 Nov '19 Nov '20 Mar '21 Mar '22

10 Mbps or less         2%     1%     1%     0%     0%

<10 Mbps >30 Mbps 33%     24%     15%     15%     9%

<30 >100 Mbps         48%     56%     60%     60%     65%

<100 Mbps >300         16%     16%     20%     19%     19%

300 Mbps or more         1%     3%     4%     5%     8%

source: Ofcom 

As you might expect, there has been a shift towards higher speeds over time. One finds the same general pattern in the U.S. market: about 15 percent of customers buy services operating at 1 Gbps or faster; about seven percent take services offering 500 Mbps to 900 Mbps; while 55 percent buy service at speeds between 200 Mbps and 400 Mbps. 

source: OpenVault  

Global average speeds are lower.

source: Hootsuite 

Many estimate that by 2025, the “average” home broadband user might still require less than 300 Mbps worth of capacity. Nielsen’s law of course predicts that the top available commercial speeds in 2025 will be about 10 Gbps. 

source: NCTA 

But “headline” speed services will not be the products most home broadband consumers buy.

FTTH is Important, But Only So Important

One might be forgiven for overestimating the value of fiber-to-home networks; fixed network revenues in general or profit margins from fixed network business services. After all, the fixed network once drove 100 percent of revenue and all profit. 

Nobody seems to contest the notion that fiber-to-premises networks are the future. And an awful lot of investment activity now goes into building and acquiring access networks that are largely copper-based but could be transformed into fiber access facilities. 

It is undoubtedly the case that optical fiber, deployed quite deep into access networks, is the intermediate requirement for fixed network survival and relevance. Just as arguably, all that has to be kept in perspective.

For all the investment, and for all the value, fixed networks just do not generate all that much revenue in the connectivity business. It might seem that is the case to practitioners, but it is largely an illusion, in the context of the global business. 

The global connectivity business now is driven by mobile operations. 

Consider AT&T. Mobility generated most of the revenue and even more of the actual profits. At AT&T, about 11 percent of total revenues are generated by all consumer fixed network operations. 

Revenue generated from business customers on the fixed network represent about 19 percent of total revenues. So the fixed network contributes about 30 percent of total revenue. 

Mobility accounts for 70 percent of total revenue. 

source: AT&T data, Daniel Jones formatting 

source: AT&T data, Daniel Jones formatting 

Just as significantly, of the roughly $25.8 billion in profit, only about five percent of total profit was generated by all fixed network operations. 

Fully 95 percent of profits are generated by the mobile operations.

source: AT&T data, Daniel Jones formatting 

At Verizon and T-Mobile, mobility plays an even-bigger role. T-Mobile has virtually nil fixed network revenue, while Verizon in 2019 stopped reporting fixed network revenue altogether.

Perhaps that will help put FTTH into perspective. In a real sense, FTTH now is a niche within the global connectivity industry, because fixed network access operations are a niche within the industry. 

That is not to deny that, in any given segment, that segment is close to 100-percent of the importance of the connectivity business for those who are in that part of the business. 

Still, as important as the FTTH investment thesis remains, it might affect less than five percent of consumer service profits. The fixed network represents about 15.5 percent of total profits, with business customers contributing about 11 percent of the profit total. 

The point is that, despite all the important decisions service providers and investors have to make around FTTH, the whole fixed network supplies a smallish portion of total revenue. The fixed network remains important, but pales in comparison to the mobility business as a driver of revenue and profit.

Sometimes an Industry Has to Raise Prices

Home broadband customers do not like price increases anymore than do mobile subscribers or video subscription customers. But, by definition, high inflation rates mean a general rise in virtually all prices. 

On the other hand, U.S. high-speed home broadband prices arguably have declined over the past couple of decades, especially in relation to prices of other products. 

According to BroadbandNow, U.S. home prices “have fallen since 2016, with the highest speed plans falling the most.”

The average price decreased by $8.80 or 14% for 25 – 99 Mbps. The average price decreased by $32.35 or 33% for 100 – 199 Mbps. The average price decreased by $34.39 or 35% for 200 – 499 Mbps. The average price decreased by $59.22 or 42% for 500+ Mbps, according to BroadbandNow analysis. Other studies show the same trend. 

According to the Blandin Foundation, prices dropped between 16 percent and 38 percent between 2015 and 2020, for example. 

source: Blandin Foundation 

Data from the U.S. Bureau of Labor Statistics shows prices for health insurance, for example, rose 43 percent between 2015 and 2021 while home broadband prices dropped 26 percent. 

sources: BLS, High Speed Options formatting 

The same downward trend was seen in Australia home broadband markets. 

sources: BLS data, NCTA formatting

ISPs sometimes argue their business models are unsustainable if capital investment keeps rising and average revenue per account  keeps dropping. 

There is a “simple” if difficult solution: raise prices to cover costs. As difficult as that is in competitive markets, there is no other long-term and sustainable solution. Subsidies can help, but only so much. Revenue has to be greater than cost. 

Consumers will not like it, but retail prices have to rise.

Price's Law and Organizational Incompetence

Price's Law states that half of the literature on a subject will be contributed by the square root of the total number of authors publishing in that area. In principle, it is similar to the Pareto theorem, which states that 80 percent of outcomes are produced by 20 percent of the actions. 

Extrapolated to organizational output, Price’s Law suggests 10 percent of people produce half the outcomes, while 90 percent produce the other half. 

source: Darius Foroux 

And remember it is a square root or power law function: the disparities grow larger with scale. The percentage of people producing half the value actually decreases with scale. The Pareto theorem, for example, is linear. It suggests 20 percent of actions produce 80 percent of value, at any scale. 

source: ANG Traders 

Price’s Law is different. As population size grows, though the number of those contributing half the value grows, they grow at ever-decreasing rates in relation to the total number of associates. 

source: Semantic Scholar 

That is one reason why very-large organizations contain so many people who are apparently not functioning at a high level.