Friday, July 28, 2023

Enterprise Connectivity Spending Grows, Telco Share Declines

When analyzing firm performance in the connectivity business, it always helps to remember that “my firm’s performance” can be quite different from “overall industry performance” or “industry segment performance” or “peer performance.” 


For example, total global spending by enterprises on connectivity service provider products has grown since 2000, by about 300 percent. But shares of that revenue earned by “telcos” have fallen from 80 percent to about 40 percent. 


Meanwhile, shares earned by specialists of various types--including managed service providers and cable TV companies, for example--have grown from about 10 percent share (each) to as much as 25 percent to 35 percent share of market. 


Year

Total Spending

Telco Market Share

MSP Market Share

Cable TV Market Share

2000

$100 billion

80%

10%

10%

2010

$200 billion

60%

25%

15%

2020

$300 billion

40%

35%

25%

2030

$400 billion

30%

40%

30%


Growing enterprise spending does not automatically translate into higher revenues for all providers.


Connectivity Capex Intensity is Sort of in the Middle

If you had a choice, would you rather operate in the connectivity service provider, passenger airline, banking, pharma or retail industries. That actually is a better way of describing possible preferences among industries that require lots of debt, rather than comparing such industries to capital-light industries such as software. 


One might agree that the connectivity business is somewhere in the middle of all industries where it comes to capital intensity.


Connectivity service providers are fond of comparing themselves to app providers, but that is not so instructive. The better comparison is with other industries that require lots of capital. Looked at that way, connectivity service provider businesses do not fare unfavorably. 


Sure, debt is always a key issue for the capital-intensive connectivity industry. But some other industries also face similar capital intensity or borrowing-intensive business models. So telcos are not unique in requiring debt management skill. Nor are telcos and connectivity providers unusually challenged, compared to many other industries that also require lots of debt issuance. 


Company

Debt ($B USD)

Debt to Equity Ratio

Debt to EBITDA Ratio

Debt to Revenue Ratio

Debt to Cash Flow Ratio

AT&T

175.2

1.3

1.7

0.4

0.9

Verizon

156.8

1.2

1.5

0.4

0.8

China Mobile

180.8

1.1

1.4

0.3

0.7

NTT

129.6

1.0

1.2

0.2

0.6

Deutsche Telekom

115.2

0.9

1.1

0.2

0.5

Orange

76.8

0.7

0.9

0.2

0.4

BT Group

67.2

0.6

0.8

0.2

0.3

Singtel

57.6

0.5

0.7

0.1

0.3

SoftBank

56.0

0.5

0.7

0.1

0.2

America Movil

50.4

0.4

0.6

0.1

0.2

Telefonica

48.0

0.4

0.5

0.1

0.2


Granted, connectivity networks are capital intensive. But some other industries also are capital intensive, while some are far less capital intensive (such as software). 


Industry

Debt to Equity Ratio

Debt to EBITDA Ratio

Debt to Revenue Ratio

Debt to Cash Flow Ratio

Telecommunications

0.9

1.1

0.2

0.5

Airlines

2.0

2.5

0.5

1.0

Banks

1.5

1.8

0.4

0.8

Retailers

1.0

1.2

0.2

0.5

Pharma

0.6

0.8

0.1

0.3

Meta

0.5

0.6

0.1

0.3

Apple

0.3

0.4

0.05

0.2

Alphabet

0.2

0.3

0.05

0.1

Microsoft

0.1

0.2

0.03

0.1


Revenue and cash flow, in relation to debt burdens, is what matters.


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