How Much can Meta Compress its Hierarchy?

Meta’s effort to flatten management does raise logical questions about effective span of control in technology organizations. The span of control refers to the number of direct reports any single manager can effectively handle.  

In this simple illustration, a larger organization has multiple layers of direct reports, while a simple organization might have only one layer of direct reports. Any large organization is going to have a “tall” structure. 

source: OrgChart 

But the span of control is always limited to a small number of direct reports, usually described as topping out around seven people. Any large organization, therefore, is going to have lots of people who are essentially "managing managers." 

To be sure, spans might differ from firm to firm, based on the functional activities each engages in. The military span of control, for example, might be different from that of technology organizations.

The actual span of control arguably varies by the type of tasks to be managed. Highly unstructured work might have a limit of three to five direct reports. 

Highly-structured work, such as in call centers, might allow spans as large as 15 or more. The point is that the span of control is always sharply limited. So any large organization is going to have many people who are essentially managing other managers.

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How Much Can Tech Firms Flatten Span of Control?

Meta’s effort to flatten management does raise logical questions about effective span of control in technology organizations. The span of control refers to the number of direct reports any single manager can effectively work with.

To be sure, spans might differ from firm to firm, based on the functional activities each engages in. The military span of control, for example, might be different from that of technology organizations.

But span of control always is limited to a small number of direct reports, usually described as topping out around seven people. Any large organization, therefore, is going to have lots of people who are essentially "managing managers." 

The actual span of control arguably varies by the type of tasks to be managed. Highly unstructured work might have a limit of three to five direct reports. 

Highly-structured work, such as in call centers, might allow spans as large as 15 or more. The point is that spabn of control is always sharply limited. So any large organization is going to have many people who are essentially managing other managers.

Classic Platform Business Model Revenue Still a Science Project for Most Big Connectivity and Cloud Computing Firms

Network as a service, computing, storage or infrastructure as a service might easily be confused with a platform business model. After all, platform business models tend to involve use of remote or cloud computing, an application for ordering, provisioning, payments and customer service. So do many XaaS offerings. 

XaaS can provide value including reduced cost; greater agility and security that is maintained at industry leading levels. Sometimes XaaS also can provide advantages in terms of innovation or potential customer scale. 

But the difference in business models is not “buy versus build” or “virtualized” access, scale or innovation but the mechanism by which revenue is earned. A virtualized service offered by a “pipeline” business model provider is still an example of a traditional pipeline model: the seller creates the service and sells it to the customer. 

Amazon Web Services computing and storage functions, for example, are “sold as a service,” but that does not make those AWS products part of a platform business model. The Amazon Web Services Marketplace, on the other hand, is an example of a platform business model.

The marketplace supports transactions between third-party sellers to Amazon customers where Amazon earns a commission on each sale.

The general observation is that, at this point, though many firms are trying to add platform business model operations, those operations remain at a low level, compared to traditional pipeline operations. 

Classically, a platform earns revenue by earning a commission for arranging a match between buyer and seller. AT&T’s online marketplace, for example, allows third parties to offer internet of things products available for purchase from AT&T customers. 

AT&T also once hosted its own advertising platform Xander, which was sold to Microsoft. It allowed firms to place advertising on AT&T’s websites and apps. 

So far, revenue contributions have been small enough not to identify as distinct revenue streams. 

Likewise, Verizon once operated Verizon Media that placed ads on Verizon content assets, but that business was sold to Apollo Funds.

Some might consider the use of application programming interfaces evidence that a platform business model is in operation, but that is incorrect. APIs might be used to support a platform business model, but use of APIs, in and of itself, does not change the business model. 

APIs, though, are often a capability exploited by business model platforms, to connect users of the platform; to allow third-party developers to contribute value; to collect user data or to create revenue by charging fees for use of the APIs.

The GSMA Open Gateway initiative supporting APIs usable across networks supports a traditional pipeline model, where the firms create, support and sell their products directly to customers. 

So at least so far, few tier-one connectivity providers have shifted a significant portion of their operations to platform business models, or made it the key strategic direction. Recent asset dispositions by AT&T and Verizon suggest that approach remains experimental and non-core. 

Pulse FTTH in Loveland, Colo. Has Unusual Revenue and Cost Drivers

Loveland, Colo. fiber to home network Pulse--owned by the city’s water and power utility--began marketing in early 2022. The municipal-owned network projected first year revenues of $10 million and seems to have hit that milestone. The network expects to hit breakeven in its third year, which would be fast, compared to most other FTTH payback models. 

As always, there are caveats. Pulse early marketing has been aimed at business customers, with expected monthly charges ranging from $110 to $450 per month, substantially above the range of $50 to $70 a month typically charged for consumer accounts. 

Pulse also sells voice services to business customers, representing perhaps $50 a month in revenue per line. For consumers, Pulse sells video entertainment for prices ranging from about $38 a month up to $108 a month.  

Compared to most independent internet service providers, Pulse therefore has the ability to earn revenue from multiple services, not simply internet access. That has potential to boost per-account revenue, but also adds additional cost elements. 

Still, the Pulse revenue model has more drivers than home broadband. And ownership by the local power and water utility could, in principle, also mean lower costs.

The business plan is based on a 42 percent terminal take rate and a 32 percent business take rate. In practice, higher than expected build rates, lower than expected interest income and higher than expected infrastructure and equipment costs have caused some deviations from plan.    

The network should be fully built by the end of 2023, Pulse says.

Rogers Has about 60% Home Broadband Share, Leading 30% Share in Mobility

The completed merger of Rogers and Shaw does not really change the home broadband market share held by cable operators in Canada, but does create one new leader. The new firm likewise does not change the relative share of home broadband accounts held by cable operators in Canada, but does create a new industry leader, with about 60 percent share. 

source: Our Commons

That would be a dominating amount of share in any market. 

Likewise, the merger does not change the share of mobile phone accounts and share in Canada, either. But Rogers does emerge with slightly more share, roughly 30 percent, which is enough to make it the market leader in mobility share. 

source: Our Commons

Alibaba Breakup Illustrates Sum of Parts Valuation

Alibaba's impending breakup into six different companies sheds light on the valuation of conglomerate firms. The Chinese e-commerce giant is splitting into six distinct firms: Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics Group, Global Digital Commerce Group and Digital Media and Entertainment Group. 

So the result would be firms focused on domestic e-commerce, cloud computing, international e-commerce and media, among others. The smallest unit might be conceptually related to X lab, Alphabet’s development unit. And there would be firms focusing on food delivery and logistics. 

Even as Alibaba carries a single valuation figure, no matter which metric is used, each of the six lines of business has a different set of potential metrics, based on existing market evaluations of media, e-commerce and cloud computing, for example. 

source: Reuters  

A sum of the parts valuation of the broken-up Alibaba, using a price/sales method, might 

Value Alibaba's core e-commerce business at $100 billion, while the cloud computing business is valued at $50 billion. 

The media business might be valued at about $25 billion, while the logistics unit is valued at perhaps $15 billion.

Using an EV/EBITDA method, Alibaba’s e-commerce business might be worth $250 billion, while the cloud computing business is valued at $100 billion. 

The media business might be worth about $50 billion, while the development unit is valued at about the same level. 

One might make the same observation about Amazon, which might be broken out into perhaps six distinct lines of business, each presumably also potentially valued differently from the other components. Growth rates, also a key factor in valuation, also differs wildly, from the online e-commerce growth rate of about two percent to the 20 percent growth of Amazon Web Services, 23 percent growth rate of advertising and 24 percent growth rate of third party fulfillment services. 

source: Deep Tech Insights 

source: Deep Tech Insights 

Some, such as Ben Alaimo of Deep Tech Insights, would value the e-commerce operations at a price/sales ratio of 2.4, while AWS is valued at a six times P/S ratio, for example. 

Other valuation metrics might include free cash flow generation, enterprise value or discounted cash flow. In 2022, for example, AWS might have had an EV/EBITDA ratio in the range of 43, while the rest of Amazon carried a ratio closer to 21. 

In 2022, AWS produced about $53 billion in free cash flow, while the rest of Amazon produced perhaps $14 billion. 

In 2022, AWS produced a bit more than twice the discounted cash flow as did the rest of Amazon. 

Alibaba's cloud computing operations do not produce as much value for that firm as Amazon Web Services does for Amazon. Cloud operations represent about nine percent of total revenue for Alibaba, while AWS constitutes about 16 percent of Amazon total revenue. 

AWS arguably represents all of the profit for Amazon, while cloud computing drives about 24 percent of Alibaba profit.

Cloud computing revenues are perhaps 22 percent of Microsoft revenue. It is unclear to me what percentage of profit cloud computing contributes. Google's cloud operations generate perhaps nine percent of total revenue, and nothing (yet) to Google profits. 

The point is that many firms in the media, software, online services and data center or access businesses are functionally conglomerates, with lines of business with distinct growth profiles, revenue contributions and profit margins. 

Blending all those sources shows the possible value of creating new pure play assets.

As an Asset Class, Infra is Infra: Valuation Envy is Pointless

Many observers would likely agree that a fiber to the home network costing about $1200 per location passed, with initial take rates of 20 percent, terminal take rates of 40 percent, featuring revenue of $60 per account, might reach breakeven in seven years or so, assuming borrowed money carries a four percent interest rate and full principal repayment after five years.

That would be a relatively quick breakeven point for other types of infrastructure investments. A new airport might reach breakeven in 10 to 20 years, some say. A new seaport, a new toll road or could well take that long as well. 

A new electrical generation plant, a natural gas utility or water system also might take that long to reach breakeven. 

The issue is what sort of investor can afford to make such investments? Many businesses simply cannot afford to wait that long for breakeven. Retailers or homebuilders might tolerate only six months to two years to reach breakeven. 

A new software company might need to reach breakeven in one to five years. Fixed or mobile communications networks might reach breakeven in five to 10 years, with seven years being a reasonable expectation, with a useful life of either type of network spanning as much as 20 years. 

Additional maintenance capital might be expected about every three to five years, however, which complicates the breakeven analysis. 

So it is possible, indeed likely, that the breakeven period for a communications network actually is similar to that of many other infrastructure investments, looking only at the mass market home broadband revenue driver. 

Most major ISPs would also say that additional cash flow is contributed by potential services for business customers, and some with mobile assets building small cell facilities would also point there for incremental value, even if not reflected in direct revenue contributions that can be measured. 

At some level, then, FTTH networks might have to be evaluated as most other infrastructure assets are: patient time perspectives, steady cash flow and competitive protections being parts of the valuation matrix. Value, not growth, in other words. Predictable cash flow rather than explosive revenue expansion; long term returns rather than short term. 

In other words, as much as some will hate the characterization, access networks are more like a utility than an application business. Network owners always are envious of the higher valuation multiples software and online assets command. 

But utilities and infrastructure simply are not those sorts of assets. Valuation envy can only be rationally satisfied if infrastructure owners become asset owners in those other businesses. And that is the argument behind “moving up the stack” or acquiring new roles within the value chain. 

The core access business, though, is what it is. Which is why new types of investors have emerged: digital infra is infra, with all that implies.