FNB Connect Voice Revenue 30% to 40% of Total: What Next?

Voice accounts for about 30 percent to 40 percent of FNB Connect total revenue, the firm says. FNB launched its own mobile service in 2015. That points out a salient fact for the telecom industry: voice once generated the bulk of revenues, but now is an essential function, but less a revenue generator. 

In 2016, for South Africa as a whole, mobile operators made about 53 percent of total revenue from voice services. Mobile data services contributed 38 percent of total revenue, text messaging about seven percent of total revenue. 

But voice revenue is declining fast, globally. Using 2008 as a baseline, by 2013, five years later, a number of tier-one service providers had lost between 20 percent and 55 percent of legacy voice revenues. 

source: Juniper Research

Looking back over a longer time frame, in the U.S. market, one can see that 2000 was the year of “peak voice” for long distance revenue earned by local telcos. The usage drop over about a decade from 2000 was more than 50 percent. The revenue drop tracked usage decline. 

source: FCC

source: FCC

Mobile service providers in Asia might face similar pressures on revenue. My general rule on revenue earned by service providers is that telcos must expect to lose about half their legacy revenue every decade. The U.S. experience with revenue loss provides one example, but each nation and market should be able to find similar changes. 

That of course creates the necessity of developing big new revenue sources to replace those lost revenues, and in turn reflects the product life cycle in general. Intel, for example, seems to exhibit that same general pattern. 

Im 2012, for example, Intel earned nearly 70 percent of revenue from “PC and mobile” platforms. By 2018, PC/mobile had dropped to about half of total revenue. By 2023 or so, Intel should generate 60 percent or more of total revenue from sources other than PC/mobile.

The point is that any service provider that intends to make a living “sticking to its knitting” and selling connectivity products has to account for the shrinking demand curve. To be sure, new connectivity products are being created. Software-defined wide area networks provide one example. 

But that will not be nearly enough. The challenge is to replace half of total revenues from legacy sources. SD-WAN revenues available to service providers presently do not exceed a couple billion dollars a year. Total global revenue is about $1.5 trillion. That implies a need to discover or create as much as $750 billion worth of new revenue over the next decade, globally.

South Korea has 10% FTTH Take Rates. Is that a Problem?

Take rates (percentage of customers who actually buy a service) are not the same thing as availability (the percentage of consumers who actually can buy a product). That is worth keeping in mind when evaluating the relevance of take rates for fiber to home services. It is doubtful many people actually believe South Korea has an internet access problem, even if buy rates for FTTH might be as low as 10 percent.

source: IDC

Internet access reaches about 99 percent of South Korean households, and South Korea has the fastest average internet access speeds globally, in some studies, or ranks among the top three, in other studies. 

FTTH is the Network of the Future; the Issue is How Far Off is "the Future?"

“Fiber is the future of networking, and always will be,” one wag from the cable TV industry said several decades ago, as the hybrid fiber coax architecture began to be installed. What he meant was essentially that what is good enough for present business purposes often is better than some other “perfect” alternative. 

The point is that business models matter. A networking platform that delivers market-leading bandwidth now, at lower cost than the other options--even the “perfect” long-term alternatives, arguably is a better choice in a competitive market. 

That does not mean the future perfect alternative will never make sense, only that alternatives offering sufficient bandwidth for the present, and near future, with higher profit margins, are a reasonable choice, especially if the platform is extensible. 

In other words, a platform with a roadmap to 10 gigabit per second speeds (hybrid fiber coax or 5G) might often be a reasonable networking choice now and for the near future, even if not perfect. 

That in no way means optical fiber to the customer premises is not “the future,” at least for many locations where fixed networks are feasible. We might all agree that, eventually, it is. 

Between now and then, though, service providers must operate businesses that face constrained revenue upside, putting a premium on platforms that can deliver market-standard bandwidth now, at lower cost than a full and complete upgrade to fiber to the home, if that is feasible. 

In a strategic sense, one might agree that “the debate over the best infrastructure to deliver fixed last-mile broadband service in the 21st century is settled, and fiber is the undisputed winner,” without agreeing that this is the best networking choice today, not later in the century, for all suppliers of internet access. 

To use an obvious example, 5G fixed wireless--not optical fiber--is a feasible way for some mobile operators to take market share in the fixed networks internet access market, at far lower cost than would otherwise be feasible for them. In an era where access revenue potential is sharply limited, and might actually be falling, lower platform costs matter. 

Likewise, cable TV operators, who have perhaps 66 percent share of U.S. consumer fixed network internet access market share, are far from the point where it makes sense, as a general rule, to replace HFC with FTTH. 

In other words, one can agree that “fiber is the superior medium for carrying fixed broadband by almost every metric: available bandwidth, SNR, theoretical capacity, real-world throughput, latency, and jitter,” without agreeing that it is the “best” platform for all contestants in competitive markets, where stranded assets stranded assets represent more than 50 percent of all consumer locations, and possibly no more than 33 percent. 

Though optical fiber to the premises networks are “the best” in a technological sense, they might not be best in terms of business model. That is especially true in competitive fixed network markets, where multiple facilities compete and financial return hinges, in part, on the percentage of revenue-generating accounts any network can hope to attract.

5G Fixed Wireless Adoption Depends in Part on Pricing Strategy

Consumers in the United States and United Kingdom might have significant appetite for fixed wireless internet access, according to a survey conducted on behalf of CCS Insight. 

Respondents listed price, performance and quick installation as the leading factors that might encourage them to sign up to 5G home broadband.

source: CCS Insight

We should be cautious about 5G fixed wireless forecasts in part because so many early estimates seem to include both infrastructure products to enable 5G fixed wireless as well as service subscriptions. That noted, it is possible that fixed wireless service revenues might approach 10 percent of total 5G service revenues, by perhaps 2029. 

source: IDTechex

Other forecasts suggest there could be about 13 million 5G fixed wireless accounts in service by about 2024. 

DIY SD-WAN?

“Do it yourself” has been a viable sourcing strategy for many types of enterprise services that might otherwise be provided by a connectivity service provider, including private wide area networks and business voice. 

In addition, there are services such as software-defined wide area networks (SD-WAN) that are enterprise created and operated, or are put together by managed service providers who create private networks incorporating some basic forms of service provider products.

That noted, many believe connectivity provider solutions will continue to build market share. 

source: Juniper

In addition to the DIY approach that was an early feature of SD-WAN networks, a growing number of managed service providers are competing directly with connectivity provider SD-WAN offerings. 

“There is a growing emphasis on managed SD-WAN rather than DIY deployments in both North America and across Europe, the Middle East and Africa (EMEA) and Asia,” according to researchers at Analysys Mason. 

source: Cisco

That trend might be even stronger for offers made by MSPs with roots in other parts of the value chain. Citrix and CloudGenix, for example, tout the integration with apps provided by Ring Central, Salesforce and hyperscale data center suppliers, for example. In other cases it is the security function that is the solution purchased, with SD-WAN being part of that solution. 

In many such cases, the SD-WAN functionality is part of a wider offer based on applications and their performance. Equinix sells SD-WAN services built on Citrix, for example. 

Several SD-WAN vendors, including Aryaka and Cato Networks, operate private backbone networks, with a “cloud-native” marketing platform. 

Opportunities in the SD-WAN Market

Should Telcos Stop Trying to Move Up the Stack, Across the Ecosystem?

Virtually all equity analysts subscribe to a particular view of how tier-one telcos should run their businesses. Basically, they should stick to their connectivity knitting and not attempt to diversify into other areas of the application, computing, content, financial services areas.

In that view, even if the telecom industry has low revenue growth, it should be able to wring cash flow margins (30 percent to 40 percent), with modest capex except when going through episodic technology upgrades about every decade, with recurring revenue sustaining their business models, argues Cestrian Capital Research. 

Pre-tax free cash flow then could remain in the 20-percent range, and the ability to pay dividends in the five percent range. 

The issue is whether that is sustainable long term. 

And there are historical reasons for skepticism about moves into market adjacencies: telcos rarely have succeeded. In 1991, AT&T acquired computing firm NCR, then spun it back out in 1996 after discovering it could not create the expected synergies between computing and communications. In 1998 AT&T acquired Tele-Communications Inc., the largest U.S. cable TV operator, along with other assets intended to transform the legacy long distance voice provider into a broader business. AT&T, struggling with high debt, later sold the TCI assets to Comcast. 

British Telecom BT and Deutsche Telekom have gotten into the content business, as have AT&T and Verizon. Some will point to financial underperformance by many leading telcos that have diversified, and argue the diversification failed. 

Others might argue the issue is that the legacy revenue drivers simply are eroding faster than the new lines of business can be built. Traditionally, enterprise customers drove the bulk of profits for tier-one telcos. That has changed in the competitive era. Much the same trend can be seen even in the mobile data business that has over the past decade driven revenue growth in the mobile business, even as mobility has driven revenue growth for the global telecom business.  

source: Analysys Mason

“We believe that telcos should reduce reliance on communication revenues by extending their reach across the telecom value chain,” say analysts at DBS Group. Nokia Bell Labs also believes the value proposition must shift from connectivity, as well. 

Fundamentally, the telco problem is that prices for its core connectivity products are trending towards zero. And even with scale, near-zero prices will not sustain today’s business model.