Will IoT Revenues Move the Needle for Telcos or Mobile Operators?

It likely still is too early to know whether explosive revenue growth for mobile and telco connectivity providers will be produced by internet of things use cases. 

A large part of the issue is that even exponential growth of IoT devices is not the same thing as direct connectivity using mobile or fixed networks. Perhaps most of the connections will use wireless networks such as Wi-Fi, Bluetooth or other alternatives. 

source: IoT Analytics 

So “devices” in use does not necessarily tell us very much about how markets for IoT connectivity provided by mobile operators or telcos could develop. 

source: IoT Analytics 

All that noted, it is possible that IoT revenues earned by mobile and fixed network operators could be significant by 2030, “significant” using a benchmark of at least $1 billion in annual revenue for any single supplier. 

“Connectivity” will continue to be the big revenue contributor, though some amount of system integration or bundled device sales also will be part of the overall revenue stream. 

Year	Connectivity Revenue ($billion)	System Integration Revenue ($billion)	Device Sales Revenue ($billion)
2022	10.8	2.5	1.5
2023	12.0	3.0	1.7
2024	13.5	3.5	2.0
2025	15.0	4.0	2.2
2026	16.5	4.5	2.5
2027	18.0	5.0	2.7
2028	19.5	5.5	3.0
2029	21.0	6.0	3.2
2030	22.5	6.5	3.5

By way of comparison, if global service provider revenue is at least $1.5 trillion, then IoT revenues might represent about one percent of total revenues in 2022. If global revenue grows about two percent per year to 2030, then 2030 global revenue will be $1.76 trillion. 

Then IoT might represent nearly two percent of total revenue. That of course is based on a far-higher expected growth rate for IoT revenues, compared to total industry revenue growth. 

Global Region	2021 Revenue	2022 Revenue	22/21 Growth
Americas	$572	$580	1.4%
Asia/Pacific	$467	$481	3.0%
EMEA	$438	$449	2.4%
Grand Total	$1,478	$1,510	2.2%

Of course, skeptics or realists might note that, by 2030, mobile operator and telco revenue sources will still rely mostly on mobile subscriptions (60 percent of total revenue) and home broadband (20 percent of total revenue), with all voice services driving about 15 percent of revenue and everything else at about five percent.

Revenue Source	Percent of Total Revenue
Consumer mobile revenues	35%
Business mobile revenues	25%
Home broadband	20%
Voice services	15%
Other revenue sources (IoT, cloud, and enterprise services)	5%

The point, of course, is that even if IoT revenues grow as many expect, they are not likely to drive mobile or telco financial performance. Market share or average revenue per account changes are going to have the greatest impact for individual firms, in nearly all cases.

Watch Out for Irrational Exuberance

Veterans of the telecom industry have lived through financial bubbles before. That is what happens when greed overcomes rational fears about over-investment.

As much as internet service, data transport providers and, in some cases, data center operators, must grapple with ever-increasing demand, those industries also have seen bouts of over-investment in capacity. Think about long-haul fiber transport in the late 1990s or excessive prices paid to acquire 3G spectrum in Europe. 

Excessive optimism led to mispricing of assets, over-investment, questionable growth metrics and outright fraud. Not to mention use of leverage. 

Asset-backed bonds played a role in the telecom collapse of 2001. During the late 1990s, there was a frenzy of investment in the telecommunications industry. Many telecom companies borrowed heavily to finance their expansion, and they often used asset-backed bonds to do so. These bonds were backed by the future revenue streams of the telecom companies, but when the telecom bubble burst in 2000, the value of these bonds plummeted. This led to a number of telecom companies defaulting on their debt, which in turn caused the collapse of the industry.

Merchant banking and excessive use of “junk bonds” also played a role. Telecom companies used merchant banking to finance their expansion by issuing high-yield debt securities, also known as junk bonds. These bonds were often sold to unsophisticated investors who were attracted by the high yields.

Synthetic securitization also increased risk., Synthetic securitization is a type of securitization that involves creating a security that is linked to the performance of another security. Telecom companies used synthetic securitization to transfer their debt to other investors. This allowed them to reduce their debt burden, but it also made them more vulnerable to default if the underlying assets declined in value, which they did. 

Off-balance sheet financing also minimized the actual amount of debt firms were taking on. 

Even debt-equity swaps increased risk. Telecom companies used debt-equity swaps to reduce their debt burden, but it also made them more vulnerable to default if their stock price declined.

Aggressive accounting practices also used aggressive accounting practices to inflate their profits. In some cases, such practices drifted into fraud. Think Worldcom and Enron. 

These risky financing schemes allowed telecom companies to borrow more money than they could afford.

It is the sort of “irrational exuberance” one often has to watch out for.

Streaming Actually Has Higher Costs than Did Linear, Fewer Revenue Sources

The video streaming business, going direct to consumer, has higher costs than the older linear video subscription model for the same reason other retail distribution models come with higher costs than wholesale models. 

Wholesale is a business-to-business transaction with a few customers. Retail is a business-to-consumer transaction with many to millions of customers. Wholesale avoids the costs associated with selling to actual end users, including marketing, stocking, point-of-sale operations and handling of returns, plus lots more customer service and billing and payments processes. 

Cost element	Video streaming	Linear video
Content	Higher	Lower
Marketing	Higher	Lower
Technology	Higher	Lower
Operations	Lower	Higher
Total costs	Higher	Lower
Revenue	Subscriptions	Advertising

Beyond that, revenue sources generally change. Where linear TV has dual revenue streams (advertising and subscription fees), video streaming has generally featured a reliance on subscriptions mostly, though in recent days we have seen a proliferation of ad-supported services as well. 

In addition, linear TV subscription revenue models have included affiliate fee payments to content owners from distributors. Streaming generally has not featured that revenue stream. 

Also, streaming--like any other internet-based business--hinges on scale. For streaming services, that means “going global” rather than remaining a “national” service. 

Still, operating as a “direct to consumer” provider means supporting retail costs in the marketing area that did not exist in the linear format. 

Cost	Linear	DTC
Acquisition marketing	$5-$10 per subscriber	$10-$15 per subscriber
Retention marketing	$1-$2 per subscriber	$2-$3 per subscriber
Avoided expenses	$2-$3 per subscriber	$0
Total marketing costs	$8-$13 per subscriber	$12-$18 per subscriber

Will Hyperscaler Antitrust Really Enable Rise of New Dominant Competitors?

Some observers believe breaking up Google, Meta, Amazon would spur a new wave of upstart competitors. Others believe innovation might not be so robust, as the necessity of hyperscale app provider acquisitions of startups might be reduced. 

On the one hand, antitrust actions could break up the dominant technology leaders, possibly allowing space for smaller companies to develop new products and services. 

On the other hand, antitrust actions could also have negative effects on innovation. Additionally, antitrust actions could discourage investment in new technologies by both today’s giants and venture-backed firms. 

Hyperscalers might be less willing to invest if they expect further antitrust actions. Also, venture capital firms might be less willing to invest in startups if the “exit” formerly available--selling to one of the hyperscalers--is essentially foreclosed. 

The analogy of Google's emergence during the Microsoft antitrust case is considered a relevant precedent by some. In that view, the Microsoft antitrust case helped Google, as the case forced Microsoft to focus on its core businesses, which opened up opportunities for Google to enter the market.

Some might argue other possibilities exist. Antitrust action against IBM does not seem to have produced a big new wave of new competitors. The breakup of the AT&T system also arguably did not produce all that much innovation. 

Some might argue it was the creation of the internet, with its permissionless development model and “death of distance” impact, that enabled the rise of today’s hyperscalers. Antitrust action might have hobbled the targets, it is true. But the opportunities created by the internet to craft new products and business models would have developed in any case. 

Would Microsoft have created the search engine, social media, e-commerce or streaming video services? Would IBM have done so? 

The internet created a new platform for innovation by creating new opportunities for scale, revenue models, enabled by the “permissionless” entry model and dramatically different ways of generating revenue. Would Microsoft or IBM have conceived of advertising as the revenue model for technology services and products?

Would either firm have pioneered e-commerce as the revenue model for technology products?

Would either have invested in consumer services rather than business customers? Would either firm have moved so aggressively to monetize user-generated content? Would retailing have seemed a function ripe for disruption? Would either have created cloud computing? 

We might ask similar questions about whether the Telecommunications Act of 1996, which enabled full competition for local access services, “succeeded or failed.” Some might argue it was the emergence of the internet that disrupted markets and created new avenues for growth, not so much the shift to competitive local access. 

In fact, one might argue that antitrust actions had no impact on other developments that spurred innovation. 

The cost of information technology has been a major barrier to entry for startup software companies. But cloud computing sharply reduced those barriers. A study by McKinsey & Company found that the average startup software company can save an order of magnitude on capex for computing support by using cloud computing. 

The lower costs of cloud computing have made it possible for more startup software companies to enter the market, and had virtually nothing to do with the impact of antitrust action. 

So perhaps we can make an analogy. Policymakers wanted the Telecommunications Act of 1996 because it would bring competition to “telecom services.” That happened just as the internet was emerging as the (arguably) key driver of innovation in computing and communications. 

Likewise, antitrust efforts are predicated on the notion that hyperscale firm breakups will spur innovation. Perhaps that misses the point. Perhaps, as was the case around the turn of the century, innovation will be propelled by forces other than antitrust action. 

Perhaps the next generation of leaders in computing and apps will be produced not by regulatory action but by new technological possibilities, whether that is artificial intelligence or blockchain or cryptocurrency or something else we have yet to identify. 

"Doom Loops" and Legacy Product Declines

It is not always easy to explain why some ideas and terms emerge at specific times in history. But some terms, including the “doom loop,” have emerged before. A doom loop is a self-reinforcing cycle of negative events that can lead to a catastrophic outcome. 

For long-time observers of the cable TV business, perhaps that phrase is current because a major cable operator now believes “the video product is no longer a key driver of financial performance.” 

source: Charter Communications 

That is a profound change for an industry known as “cable TV.” 

The “doom loop” is fundamentally caused by what Charter Communications considers an unsustainable video model.

We are familiar with the notion of the “vicious cycle,”  a situation in which one bad event leads to another bad event, which then leads to even more bad events. Then there is the phrase “death spiral,” referring to  a situation in which a company or organization is caught in a negative feedback loop, itself another phrase expressing a similar idea. 

In the environmental area, the 18th century Malthusian trap argued that population growth will eventually outstrip the carrying capacity of the environment, leading to widespread poverty and starvation. 

In recent decades we have heard about “the tragedy of the commons,” where individuals acting in their own self-interest deplete a shared resource. 

These days, we are apt to hear the term applied to the declining linear video subscription business. But we also have seen similar ideas expressed form time to time about specific companies in the telecom or connectivity business. 

source: NextTV, MoffatNathanson

One example of a doom loop is the Greek debt crisis. In 2010, Greece's government debt was too high and the country was unable to pay its debts. This led to a loss of confidence in the Greek economy, which caused the value of the Greek currency to plummet. This, in turn, made it even more difficult for Greece to pay its debts, and the cycle continued.

Another example of a doom loop is the 2008 financial crisis. The crisis began when the housing market in the United States collapsed. This led to a loss of confidence in the financial system, which caused banks to become more cautious about lending money. This, in turn, made it more difficult for businesses to get loans, which led to a decline in economic activity.

In the telecom industry, a doom loop can occur when a company's financial problems lead to service cuts, which in turn lead to customer losses, which further worsen the company's financial problems. This can create a vicious cycle that is difficult to break.

One example of a doom loop in the telecom industry is the case of Sprint. In the early 2000s, Sprint was one of the leading wireless carriers in the United States. However, the company began to struggle financially. 

In an attempt to save money, Sprint began to cut back on its network investment and service offerings. This led to customer losses, which further worsened the company's financial problems. Sprint eventually filed for bankruptcy in 2012.

Other leading firms also have experienced doom loops. MCI once was a leading provider of long distance services in the U.S. market, second only to AT&T. But MCI began to suffer as its shrinking long distance business was not offset by growth in local access services. MCI eventually was absorbed by Worldcom, which itself collapsed. 

AT&T faced the same problem, more than once. Its declining long distance business could not be countered by new revenues in local services. Eventually, after spinning off mobile, equipment manufacturing and Bell Labs assets, AT&T was acquired by SBC, which then rebranded itself as AT&T. 

Of course, a doom loop is not necessarily fatal for the company or industry in the loop. 

AT&T has a history of getting caught in doom loops. In the early 2000s, for example, the company acquired several large cable companies in an attempt to become a one-stop shop for telecommunications services and solving its local access business problem. 

However, the acquisitions were expensive and led to a significant increase in AT&T's debt. As a result, the company was forced to cut costs and lay off employees, which further damaged its reputation. In 2005, AT&T spun off its cable business.

Then AT&T decided to reimagine itself along the lines of Comcast, and acquired DirecTV and Time Warner assets. That required taking on so much debt that eventually AT&T had to sell off those assets to pay down debt. 

It perhaps goes without saying that such terms as “doom loop” only arise in connection with legacy businesses that are declining. 

By definition, growing businesses are in positive feedback loops; virtuous cycles or experiencing scale or network benefits. So you will not hear anyone applying such terms as “doom loops” to artificial intelligence.