What Comes Next, After Mobility?

Mass market mobile phone usage and home broadband were so important for connectivity providers because they were the replacement products for fixed network voice service decline. Keep in mind that voice services were the revenue and profit driver for the global telecom industry. So the demise of voice would have been the demise of the industry had new replacement products not developed. 

A person might well wonder what comes next, as mobile service begins to saturate. There are many proposed candidates that represent parts of the solution. Private networks, edge computing and internet of things are among the common answers. Those will help, but nobody really believes any of those sources are big enough to displace mobility services as the core driver of revenue and profit. 

Platform business models might not be a general answer, either. But at least some connectivity or data center interests might emerge in such roles. 

 

Platform business models in the data center and connectivity business hinge on creation of marketplaces or ecosystems that connect participants. That might not apply to the core businesses (connectivity services and server colocation). Those businesses are examples of the traditional “pipeline” where a firm creates a product and then sells it to customers. 

Where the platform revenue comes in is when the data center or connectivity provider creates ways for customers to connect with third parties. In a data center, that might operate by allowing a colocation customer to buy security or other services from third party app providers. 

E-commerce marketplaces are the classic examples of platform business models. 

source: Applico

In a connectivity business the process might involve allowing customers to buy roaming services from any number of providers in hundreds of countries, with revenue paid to the transaction platform by both participating service providers and end user retail customers. 

Some platform business revenues have been earned in the connectivity business in the past. Linear video subscriptions might be examples of pipeline model. But advertising sales to customers of those services are a platform model.

Connectivity providers sell subscriptions to retail customers, and advertising to business partners. In the mobile business, a firm might sell roaming services to retail customers that are sourced from mobile operators in dozens to hundreds of countries. As in the video advertising example, the packager and platform earns money from retail customers and the wholesale service providers. 

Platforms often are referred to as “two-sided marketplaces.” There are any number of key attributes, including payments flow, fragmented suppliers and fragmented buyers. Other attributes, including network effects, might also apply to traditional “pipeline” models as well. 

The simplest, classic test of whether a platform business model operates is when the host makes its money facilitating transactions between third parties. Other classic examples are payment systems that enable transactions between retailers and shoppers. 

source: FourweekMBA 

GigSky provides an example. It enables mobile roaming service in some 190 countries, hosting a platform that allows travelers to purchase temporary internet access service when outside their home countries. 

Some might view that as similar to the way any mobile virtual network operator conducts business: buying wholesale capacity from a facilities-based wholesaler and then retailing service under the MVNO’s own brand name. 

But the resemblance is deceiving. A firm such as TruConnect buys wholesale from T-Mobile, then sells its branded service to customers. But TruConnect does not use a platform business model. It creates its own service and sells that service to customers. It does not connect potential buyers with many sellers. 

Most platforms are exchanges, according to Applico. 

• Services marketplace: a service

• Product marketplace: a physical product

• Payments platform: monetary payment

• Investment platform: an investment/financial instrument (i.e., money exchanged for a financial instrument, be it equity or a loan, etc.)

• Social networking platform: a double-opt-in (friending) mode of social interaction

• Communication platform: 1: 1 direct social communication (messaging)

• Social gaming platform: a gaming interaction involving multiple users, either competing or cooperating

Platform business models are important in the data center and connectivity businesses precisely because that model provides an answer to the question of how growth can be created in a business with commodity pressures. 

"Sum of the Parts" is Going to be More Important in the Future

As much as connectivity providers envy the valuation multiples earned by app providers, so long as data access and transport remains a distinct part of the value chain and ecosystem, it is going to command a valuation set by the market.

For example, mobile operators have an EV/EBITDA multiple of about 8.7, according to an analysis by NYU’s Stern School of ratios in January 2023. That is close to the cable TV multiple of about seven. Telecom ratios are a bit below six. Internet software earns a multiple close to 15. 

As always, firms are evaluated differently even within the same industry. A recent analysis suggests that small ISPs that also are cable operators get a higher multiple than the largest and larger service providers.

source: Cobank, CapitalIQ, Telecompetitor 

According to Equidam, telecom services and mobile service have EV/EBITDA ratios of nearly seven. Online services have a multiple of nearly 16. In other words, online services are valued at more than twice that of integrated telecom providers. 

Likewise, Equidam estimates telecom EV/EBITA at a multiple of 6.4, while information technology carries a 16 multiple. Other analyses by McKinsey suggest a telecom service provider EV/EBITDA median ratio around 10 and a median information technology radio a bit over 15. 

source: McKinsey 

Since “telecom” often is lumped in with “telecom, technology and media” as a category, the aggregate indices often obscure more than they reveal. “Worldwide, the average value of enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA) in the technology and telecommunications sector as of 2022 was a multiple of approximately 20.8 times,” says Statista. But the “software (internet) industry saw the highest valuation multiples with 44.9 times.” So the “telecommunications” ratios were far lower. 

According to Siblis Research, the EV/EBITDA ratio for “communications” firms in the large capitalization category was about 8.6, while the ratio for “information technology” was about 16.  

To be sure, valuation metrics change over time, and specific valuations of any particular firm, at any particular time, geography, revenue magnitude and strategic value, can vary. 

But you get the point: different industries are evaluated differently in financial markets. 

The complication comes when firms in different industries start to “converge,” offering services and products historically offered by other industries. When revenue magnitudes are low, it is likely that a unit of revenue earned by a firm in a high EV/EBITDA industry is valued at that industry’s norms. 

The same unit of revenue earned by a firm in lower EV/EBITDA industry then is valued at that industry’s norms. At low revenue magnitudes, that makes sense. But when revenue contribution grows in significance, creating a business model that is similar to a conglomerate, then a “sum of the parts”. analysis might be helpful. 

Looking at products rather than industries. If a certain product has a valuation multiple of X, that product should nearly always be valued at the X multiple, no matter what firm in which industry segment earns that unit of revenue. 

source: Corporate Finance Institute

That sort of process is highly useful for evaluating firms such as Amazon, which is a mixture of e-commerce and computing-as-a-service segments, each with distinct growth profiles and valuation metrics. Sum of the parts historically also has been useful when evaluating conglomerates that operate in multiple lines of business. 

Increasingly, with virtualization, that is going to apply to firms in the cloud computing, data center and connectivity businesses as each segment begins to earn revenue in different “industries.”

How Will Connectivity Providers Escape the Commoditization Trap?

“If you look at what we do on a daily basis as it relates to connectivity, that's increasingly getting commoditized,” says Christopher Stansbury, Lumen Technologies EVP. “So that's not an interesting ending to the story.”

Which is why Lumen and just about everyone in the business always talks about, and strives, for “value add.” Here’s the problem: for at least 25 years, industry leaders have been telling that story and trying to execute on the vision. 

One might conclude that nothing really has worked. 

The answer is not simple. Connectivity providers have successfully added new lead revenue drivers. Mobile subscriptions now drive global revenue. Revenue growth often is driven by getting customers to add mobile internet access services; to shift up to more-expensive plans; or do the same with home broadband. 

In past decades, expansion into new geographies has staved off revenue decline, as has asset acquisitions to bolster scale. 

The key point is that the near evaporation of voice revenue was counteracted by shifting to home broadband, video services, mobility services, then mobile internet access, bundling of multiple services and enticing customers to buy more-pricey service plans. 

It is not so clear we would characterize those as “value add” achievements. They are more on the order of creating new products to replace legacy products. That is arguably a bigger achievement than creating more “value add.”

To the extent there are other successes, they mostly might revolve around connectivity providers getting into new lines of business beyond connectivity. Some connectivity providers generate revenue from advertising, data center operations, content ownership or services, banking or payment services, 

“Success” often depends on how one categorizes the value add or “new” revenue sources. Is mobile internet access a new service, or a value add? How about internet of things connections or cell tower backhaul? What about data center operations or cloud computing as a service? 

IoT connections might be viewed as a value add. Data center operations or cloud computing might be better characterized as a new line of business. Mobile internet is a “new” service, but arguably a core business activity, not necessarily a value add or new line of business. 

If one looks at global revenue figures, that observation might be concealed. After all, global growth these days is largely driven by net additions of mobile service accounts, with some contribution from home broadband account growth. 

Globally, IDC sees perhaps two percent annual revenue growth for the global connectivity services market. 

source: IDC 

Most of that growth will come from more mobile service subscriptions, though average revenue per account is an issue. 

source: Omdia 

Account totals will grow, but the problem is that average revenue per account is dropping, and has been almost the entire period during which competition has been encouraged in the connectivity business, starting in some markets in the 1980s. 

All of that is important. “Commoditization,” or at least a trend of lower per-unit prices, is not likely something the industry can escape. But neither has the industry failed to create whole new product categories to replace lost legacy revenue. 

Some have made a business of mobile payments, cloud computing or operating data centers or offering applications (consumer or business), even if global success is uneven. 

We do not yet know how important internet of things, private networks, edge computing, application programming interface revenues or other products will become. 

Practical Implications of Pareto, Rule of Three, Winner Take All

Any market researcher, studying any particular market, will tend to find something like a Pareto distribution often applies: up to 80 percent of results are produced by 20 percent of actors. Some might call that the rule of three. 

Market share structures in computing, connectivity and software tend to be fairly similar: leadership by three firms, corresponding to the rule of three. 

“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. 

Others might call this winner take all economics.  

Consider market shares and installed base in the U.S. home broadband market (including small business accounts). Of a possible total installed base of 122 million locations, 90 percent of the installed base is held by 15 companies. 

Just two firms have 52 percent of the installed base of accounts. 

Broadband Providers	Subscribers at end of 2022	Net Adds in 2022
Cable Companies
Comcast	32,151,000	250,000
Charter	30,433,000	344,000
Cox*	5,560,000	30,000
Altice	4,282,900	-103,300
Mediacom*	1,468,000	5,000
Cable One**	1,060,400	14,400
Breezeline**	693,781	-22,997
Total Top Cable	75,649,081	517,103
Wireline Phone Companies
AT&T	15,386,000	-118,000
Verizon	7,484,000	119,000
Lumen^	3,037,000	-253,000
Frontier	2,839,000	40,000
Windstream*	1,175,000	10,300
TDS	510,000	19,700
Consolidated	367,458	724
Total Top Wireline Phone	30,798,458	-181,276
Fixed Wireless Services
T-Mobile	2,646,000	2,000,000
Verizon	1,452,000	1,171,000
Total Top Fixed Wireless	4,098,000	3,171,000
Total Top Broadband	110,545,539	3,506,827
source: Leichtman Research Group

The point is that when tracking market developments, the big broad trends are discernible from understanding the actions, strategies and results of a mere handful of firms. And while the full range of “big company” strategies, opportunities and actions can vary substantially from those of perhaps hundreds to thousands of small firms, the trends that move the needle financially typically can be gleaned from following just a relative handful of firms. 

In other words, the business “laws of motion” are dictated by a relative handful of actors, even in markets with thousands of contestants. 

That might seem unimportant. For market analysts, it is a foundational assumption.