Connectivity is "in the Middle" of Industries Where It Comes to Growth, Management Challenges

It sometimes might feel as though the connectivity business is tough, and it is. But it might not be uniquely tough. Since all public companies are evaluated financially on revenue, profitability and other growth-related metrics, revenue growth potential is directly related to asset value. 

But not every industry grows at the same rate, and therefore different industries have asset valuations that reflect those differences. In fact, the connectivity service provider business (mobile, fixed services, wireless services) might be considered to rank somewhere in the middle of all industries in terms of growth prospects. 

With the caveat that forecasts and ratios can vary widely between firms in the same industry but different geographies or market segments, connectivity service providers operate somewhat in the middle of growth rates, and have price/earnings ratios perhaps in the middle or lower-half of all industries. 

The point is that the connectivity service provider tends to be a low-revenue-growth type of industry. Since faster-growing firms and industries tend to have higher valuation ratios, it would not be surprising if connectivity service provider firms sported P/E ratios reflective of slower-growing industries and firms. 

Industry	CAGR	P/E Ratio
Natural Gas	1%	10
Auto Sales	1%	15
Electrical Power	2%	15
Retailing	2%	15
Railroad Transportation	2%	10
Agriculture	2%	15
Telecommunications	3%	15
Wastewater and Fresh Water Utilities	3.00%	15
Passenger Airlines	3%	10
Hotels and Lodging	3%	15
Higher Education	4%	20
Health Care	5%	25
Internet Commerce	8%	20
Data Centers	10%	30
Internet Content	10%	25
Internet Applications	12%	30
Cloud Computing	15%	40

Internet service providers routinely complain about their inability to benefit from the value of internet ecosystem products and services, especially compared to the value internet app providers seem to reap, for example. 

And it might sometimes “feel” as though connectivity is an inherently “more difficult” business to manage. It is more difficult than some; but not uniquely difficult. 

Who Needs to Know What?

It can be a humbling experience to realize how few people in any industry actually need to know the actual business dynamics that drive results in that industry. Even fewer need any serious knowledge of what drives outcomes in other industry segments than their own.

For example, multi-site enterprises are essential for providers of SD-WAN products and services, but irrelevant for internet service providers who only sell to consumers and businesses in local markets.

Likewise retail mobility revenues are mostly irrelevant (in a direct sense) for sellers of wide area network services. For channel partners, business customers matter, generally not consumers.

Hyperscalers do not need to bother with "local access." What matters is connectivity between data centers and points of presence. 

The point is that what drives the whole market can be quite different from what drives each submarket.

In today’s world, up to 85 percent (by some estimates) of total connectivity service provider revenues are generated by mobile services. In most markets, consumers provide up to 60 percent of revenue while business customers supply perhaps 40 percent of total revenue. 

Product	Revenue Percentage	Comments
Consumer Mobile Subscriptions	40%	Subscriptions are the key product. According to a 2022 report by the GSMA, mobile subscriptions generated 40% of global telecom revenue.
Business Mobile Subscriptions	20%	Subscriptions are the key product
Home Broadband	15%	Consumer internet access now is the core product for a fixed network
Voice Services	10%	Declining legacy service on both fixed and mobile networks
Mobile Internet Access	5%	Mobile internet access drives the next wave of mobile segment growth, once subscriptions saturate
Data Transport Services	5%	Data transport services including SD-WAN, MPLS, dedicated internet access are an important niche contributor

Looking only at business customer revenues, mobile services also are the biggest single revenue source, with local data access (internet access, private network access) being the second biggest contributor. 

Product	Revenue %
Wide Area Network Data Transport Services	15
Mobile Services	40
Fixed Network Voice Services	20
Local Network Access Services	25

None to little of that matters, in a functional sense, for suppliers of non-mobile services, ranging from home broadband (with the exception of mobile substitution) to SD-WAN or capacity services. 

The point is that very few people in the broader connectivity business actually care very much about top-line industry revenue trends, nor perhaps do they need to do so. CxOs, equity analysts and market analysts almost always need to have some knowledge of those trends. 

Why Fixed Network Internet Access Features Consumer Speed Tiers, While Mobile Networks Do Not

While it might be difficult to describe the average revenue per account impact of 5G accounts, compared to 4G, it seems far easier to show revenue lift provided by fiber-to-home accounts, compared to copper-based accounts.

Company	FTTH ARPU	Copper ARPU	ARPU Difference
AT&T	$65	$45	$20
Verizon	$70	$50	$20
Lumen	$55	$40	$15
TDS	$60	$45	$15
Brightspeed	$65	$45	$20

In large part, that is likely because FTTH allows sale of higher-priced access plans, which naturally generates higher revenue. Also, unlike the case for mobile account figures, home broadband is “service to a place,” so there is no effect of “multiple users” on recurring price.

In mobile scenarios, multiple users and devices might be supported on a single account, in the form of multi-user accounts, with “lines” or “numbers” ranging from two to some higher number. 

For example, Ericsson suggests 5G boosts average revenue per user by less than five percent, even if many observers suggest ARPA drives significantly higher impact. 

Company	5G ARPA	4G ARPA
AT&T	$100	$80
Verizon	$120	$90
T-Mobile	$90	$70
NTT	$110	$80
Telefonica	$100	$80
Vodafone	$90	$70

It remains unclear whether mobile operators might eventually shift to differentiated access speed plans for their mobile customers, as do home broadband providers. 

There are clear business imperatives underlying each charging principle. The cost of supplying capacity on a fixed network is far lower than on a mobile network, traditionally, largely because fixed networks generally have more ability to add capacity (optical fiber bandwidth is almost infinite; mobile capacity is based on radio frequency resources that are inherently limited). 

Traditionally, fixed networks have huge advantages where it comes to capacity and therefore cost per gigabit of consumption. While we might argue about the precise absolute retail cost of supplying capacity, mobile bandwidth has generally been about two orders of magnitude more expensive than fixed network bandwidth. 

Year	Fixed network (USD/GB)	Mobile network (USD/GB)
2000	100	10,000
2005	10	1,000
2010	1	100
2015	0.1	10
2020	0.01	1
2025	0.001	0.1

Under such circumstances, it makes sense that mobile operators “need” to manage consumption expectations, where fixed network operators can more easily consider “tiers of service” where higher-speed access is sold at higher prices. 

Rarely will mobile operators, with their higher cost to supply capacity, have high incentives to encourage higher customer data consumption by offering higher-speed (and higher-priced) consumption tiers.