Is "Fair Share" Really Necessary?

Ignoring for a moment the arguments about network interconnection principles and existing policies that have internet domains compensating each other for unequal traffic flows, do telcos really “need” so-called “fair share” payments by a few hyperscale app providers?

Nobody likely disputes the challenge of monetizing continual investments in capacity, on either mobile or fixed networks. In competitive markets, payback is a challenge. But even so, the industry’s own data suggests there is not an urgent business model problem. 

Industry sources might argue that profit margins and revenue growth rates are lower for mobile and fixed network telcos than in the average of all other industries.

According to GSMA Intelligence, the average net profit margin for telcos globally was 14.1 percent in 2022, lower than the average net profit margin for all industries, which was 16.9 percent. Likewise, GSMA Intelligence says the average revenue growth rate for telcos globally was 2.2 percent in 2022, lower than the average revenue growth rate for all industries, which was 4.2 percent.

Critics might simply point out that the telecom service provider business always was a slow-growth, utility-like industry. So low growth rates are not new, nor a surprise. Lower profit margins than “average” also are not a surprise. Each industry has a different growth rate. 

And capital-intensive industries, whether generally considered utilities or not, generally have lower profit margins. 

Industry	Revenue Growth Rate (2022)	Capital Intensity
Telecommunications	2.2%	High
Electrical Power	3.4%	Very High
Natural Gas	3.8%	High
Wastewater	2.9%	Medium
Airlines	2.1%	High
Railroads	1.9%	Very High
Shipping	2.5%	Very High

So yes, connectivity service provider revenue growth rates are low.  But so are growth rates for other capital-intensive industries. Generally speaking, industries with less capital intensity also tend to grow faster. 

Industry	Revenue Growth Rate (2022)
Technology	6.5%
Healthcare	5.2%
Financial Services	4.8%
Consumer Discretionary	4.3%
Consumer Staples	3.9%
Industrials	3.6%
Energy	3.4%
Utilities	3.2%
Materials	3.0%
Real Estate	2.8%
Telecommunications	2.2%

Also, with the caveat that growth rates and profit margins can vary substantially between suppliers in different segments of the market, profit margins are not unusually low for service providers in any region. 

Slow revenue growth, as noted previously, has been--and remains--characteristic of telecom services, as is generally true for many other capital-intensive industries. 

Region	Telco Net Profit Margin	Revenue Growth Rate
North America	12.2%	1.8%
Europe	13.5%	1.9%
Asia	15.6%	2.5%
Latin America	12.8%	2.1%
Africa	9.3%	1.7%

Will AI Value Driver be Same, or Different, from Internet Impact?

Some of us believe artificial intelligence will have as big an impact as the internet did, which is to say existing industries and whole business models and processes will be disrupted, while at least a few entirely new industries could arise. 

The issue is how that impact will be primarily felt, though. If the internet largely reduced marginal costs and therefore enabled global platforms to emerge, what will AI bring?

Two broadly-different drivers of outcomes might happen: AI reshapes processes in roughly the same way the internet did, or AI reshapes processes in a new way. 

In other words, if the internet primarily recase marginal cost, AI might work the same way. If AI automates processes, it could likewise lower marginal cost of any operation. 

On the other hand, AI, by enabling massive personalization and customization of products and experiences; allowing faster innovation based on better research and development processes; might drive change primarily by allowing new products to be created and discovered. 

The primary change driver would be as a value multiplier more than a marginal-cost reduction mechanism. 

Use of generative AI to support customer contact operations is an example of reducing marginal cost by automation. Use of AI to tailor product recommendations to particular customers is another form of applied automation or lower operations cost value. 

On the other hand, it is conceivable that AI drives value primarily by enabling new product creation. AI already is used to develop new drugs and medical treatments, create new financial products, and design new software applications.

So while it is possible that AI works in both ways--to reduce costs and increase innovation--it seems likely that most of the impact could come in one of those ways, in the same way that almost all the value created by the internet revolves around lower marginal cost. 

Feature	Internet	AI
Primary Impact	Reduced marginal cost of production and distribution	Automation, personalization, and new product and service development?
Key Enabler	Connectivity, information access and global reach	Data analytics, machine learning, and predictive capabilities?
Impact on Business Models	Created new business models like ad-supported technology, sharing economy, and crowdfunding	Does AI improve existing models or enable new ones?
Impact on Business Processes	Streamlined processes, reduced costs, and increased efficiency	A mix of efficiency and quality gains
Impact on Industries	Disrupted traditional industries, created new industries	What mix of disruption and creation?

Right now, it seems as though AI will have its greatest impact as a value multiplier or insight generator or cognitive augmentor,  where the internet has the greatest impact as a marginal cost reduction mechanism. 

In other words, AI might be about analytics, insights and cognitive augmentation rather than marginal cost reduction, though it might well have that impact as well.

What is Software Product "Distribution" Cost, and are Google's Fees Paid to Apple Unreasonable?

Some observers are likely shocked that Google pays Apple 36 percent of ad revenues earned by Google search on Apple phones. 

Some of us might be nonplussed. Distribution costs for lots of products routinely amount to 25 percent or more of the total cost of getting a product from factory or source to end user customer. 

Industry	Product Type	Distribution Cost as Percentage of Retail Price
Software	Software Applications, Games	10-20%
Financial Services	Investment Advice, Financial Planning	15-25%
Legal Services	Legal Advice, Representation	15-25%
Professional Services	Consulting, Training	15-25%
Technology	Software, Web-based Services	5-15%
Agriculture	Fresh Produce	15-25%
Apparel	Fashion Apparel	10-15%
Consumer Electronics	Smartphones, Tablets, Laptops	5-10%
Food and Beverage	Packaged Food, Beverages	8-12%
Furniture	Home Furnishings, Appliances	10-15%
General Merchandise	Household Goods, Personal Care Products	12-18%
Pharmaceuticals	Prescription Drugs	20-30%
Retail	General Merchandise, Apparel	10-15%
Sporting Goods	Sports Equipment, Apparel	10-15%
Toys and Games	Children's Toys, Games	12-18%

Distribution costs for intangible products such as advice, consulting, many software products arguably are lower, but there's a difference between price (value) and cost. Actual “distribution” costs are hard to separate from the actual “performance” or “delivery” of the product. 

In some sense, for intangible services, “production” is the same as “delivery” or “distribution.” 

Unlike tangible goods, intangible services are produced, consumed and distributed simultaneously. So “distribution” as a percentage of total cost is a bit of a misnomer. Production cost is hard to separate from “distribution.” 

Advertising placements, like airline seats, are intangible and perishable products in the sense that they cannot be stored or saved for later use. Once an advertising availability is sold--or not sold--it is gone forever. 

Unlike tangible products, such as cars or books, ad avails cannot be stored in a warehouse and sold at a later date.

Additionally, both advertising inventory and airline seats are subject to demand and supply. If there is high demand for advertising placements, the price will go up. 

Also, supply can create demand. In one sense, having Apple smartphone search inventory is a form of demand creation, not simply supply expansion, as default use of Google is believed to create more demand (use of the product) by Apple customers and users. 

As a result of these similarities, advertising inventory and airline seats are often treated similarly in the marketplace. For example, both products are often sold through auctions, where the highest bidder wins the right to use the product. Additionally, both products are often subject to dynamic pricing, where the price of the product fluctuates based on demand.

The point is that “distribution cost” for an intangible product can be quite a bit higher than what we might traditionally believe, since “production cost” is bound up with “sales” and “delivery” cost. 

For a software product, “distribution can represent as much as 50 percent to 70 percent of total cost, in that sense. So a fee of 36 percent to handle “distribution” might not seem worrisome or out of line. 

Intangible Product Category	Estimated Distribution Cost (%)
Software	50-70%
Music	30-40%
Video	20-30%
E-books	15-25%
Online courses	10-20%

AI will Reshape Almost Every Industry, Including Journalism