Spain Telecom Market Shows Classic Pattern

According to the Spanish communications regulator, three firms--Telefonica, Orange and Vodafone-- have 75 percent marke share. That is not at all an unusual market structure for a mature industry. “A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” BCG founder Bruce Henderson said in 1976.  

Codified as the rule of three, the observations explains the stable competitive market structure that develops over time, in many industries. 

The rule of four is related to the rule of three. It refers to the expected market share in a stable market, where leader market share is twice that of provider number two, and where the number-two supplier has share double that of the number-three provider. 

That creates a stable market share structure of 4:2:1. It arguably is stable because there is little incentive for either number one or number two to disrupt the market by attacking to gain share. 

source: CNMC, Financial Times 

The point is that stable competitive markets often have a handful of firms--three, typically--having 70 percent to 80 percent market share or installed base. The Spanish market structure is quirte common for mobile communications.

In most mobile markets, the classic structure is not fully seen, suggesting that some share shifts remain quite possible.

U.S. ISP Rural Business Model Will Change Significantly Because of Infrastructure Subsidies

It remains unclear how $42.5 billion in new subsidy support for consumer broadband will be allocated, as the funds are slated to go directly to states and territories to fund internet improvements.

So there will be potentially 50 or more different sets of rules. At least $100 million is reserved for each of the 50 states, and an additional $100 million is to be split among American territories, such as Guam and the U.S. Virgin Islands.

The intent is to focus on unserved and underserved areas of the country, those that lack any internet access or where consumers can receive only low-bandwidth speeds. 

Among the big questions is how state lawmakers will choose priorities: unserved versus underserved; how many awards in any single geographic area; the balance of fixed versus mobile support; and which platforms might be favored over others. 

At least some believe incumbent internet service providers will be the big beneficiaries. But even there, surprises could await. 

“The $65 billion figure dedicated to broadband is unprecedented and stands to benefit cable operators in particular,” said Chris Mooney, S&P Global Ratings Director for the U.S. Telecom & Cable sector. “Low population density and environmental obstacles previously deterred cable operators” (and telcos) but the subsidies could change business models. 

Since the state-level awarding process will be political, political considerations likely will play a role. A smart elected official will recognize that the widest-possible impact, affecting the greatest number of people, is politically beneficial. 

The greatest spreading of funds among rival industries and internet service providers likewise will be seen as more helpful to elected officials than awards that affect a smaller number of industries and ISPs. 

All of that suggests the rules will be crafted in ways that maximize the total number of voters and ISPs as possible. 

What is clear is that the internet service provider payback model wil lbe improved for the better as the subsidies are factored into the equation.

"More" is Nearly as Fundamental a Law as Moore's Law

Skepticism about prospects for any new technology are common, perhaps even natural, which is why the Gartner emerging technology hype cycle exists. The pattern is overblown expectations, followed by a period of disillusionment, with eventual emergence as a useful tool.

Of course, we all should, by now, be accustomed to the idea that better processors, more memory, faster access speeds and more untethered access all are fundamental parts of technology development. We “need more.”

Within some limits, we do not question the business model for faster computing, faster internet access and new uses for mobility. Digital transformation, no matter how one defines it, now is an underlying process for almost every economic activity. 

More compute-intensive capabilities, including artificial intelligence, virtual reality, augmented reality and internet of things, require faster processors, new computing architectures and faster internet access. The shift of global data traffic to video and remote computing likewise requires huge investments in capacity. 

It appears 5G is no exception, as some observers complain that new use cases and apps are not developing. It is worth noting that such concern was expressed as 3G and 4G as well, and nobody would consider either 3G or 4G “failures” in a commercial sense, even if many predicted new use cases took longer to develop than expected, and some use cases have not yet developed.  

source: Gartner

The larger point is that concern about the business model has been a feature of early deployment of 3G, 4G and now 5G. When 6G comes, we can be certain there will the same concerns expressed as well.

 

Of course, there are many ways to look at 5G value. Every next-generation mobile network has led to new use cases and revenue drivers. But each next-generation network has succeeded for other reasons: they have allowed mobile operators to satisfying growing customer demand for capacity, bandwidth and data usage. 

 

source: American Tower 

In other words, ignoring new use cases that will develop over time, 5G is necessary simply to provide lower cost per bit, as 40 percent to 50 percent more data capacity has to be added every year, while retail consumer prices increase only at about the rate of gross domestic product growth, in low single digits. 

The business model is “you get to keep your business,” not mostly “new use cases.” The former is essential, the latter helpful. To be practical, the business value of 5G is that it replaces 4G, with all the revenues 4G represents, while creating a platform for some new use cases and revenue sources, which might take some time to develop fully. 

That “you get to keep your business” value might not seem like such a big deal, but the analogy is the upgrade from copper access media to optical or other broadband platforms. It matters greatly whether an access provider is able to protect its existing business. 

That process has played out in the access business for well over two decades already, as the decision to deploy FTTH or any other higher-performance access platform has been evaluated. Quite often, the business advantage boils down to “staying competitive in the internet access business” more than anything else. 

In that sense, the evolution matches the increase in computing power of our personal devices over the decades. The business model for newer processors is “you get to keep your business.”

Skepticism about 5G is fundamentally misplaced. The slow development of new use cases--some of which might be unforeseen--is normal and typical. 

Will Telecom Italia's Fixed Network be Privatized?

Telecom Italia’s board of directions is said to be meeting Nov. 21, 2021 about a possible fixed network privatization effort by private equity fund KKR, which is already an investor in the Italian phone group's fixed network, Reuters reported. 

At first glance, the proposed deal looks like a standard private equity deal: buy an underperforming asset, make changes and then sell. But the deal might also reflect another private equity focus: buying infrastructure assets to hold longer term, as an alternative asset. 

Telecom Italia, for its part, also fits the scenario: it has high debt and shrinking recurring revenues and profits, arguably impairing its ability to invest in digital infrastructure including fiber to home facilities. 

At the same time, the access network scarcity moat is challenged by the building of a rival Open Fiber wholesale network owned and operated by electrical and gas provider Enel. 

KKR might or might not see value in merging merging TIM's access network merged with that of rival Open Fiber, which would then be able to run as a single national internet and communications access asset supplying retail services to other internet service providers and telcos.

Alternatively, the former Telecom Italia assets might have enough scale to operate independently of Open Fiber. In either case, the value KKR sees is linked to the scarcity value and regulated, stable cash flows the access network would generate.

As the access network is deemed to be a strategic asset by Italy’s government (as is the case in virtually every country), it presumably would benefit from investment to eliminate the digital divide. That changes the business model for FTTH as it introduces subsidies. 

Were the government to sanction a merger of Telecom Italia and Open Fiber assets, to create a single national wholesale provider, KKR’s investment would acquire a business moat. 

Future KKR options would then involve a sale of the assets to a third party or a longer-term holding as an alternative asset. 

Institutional and private equity investor interest in communications infrastructure waxes and wanes. Right now it is waxing, after a precipitous drop in interest in the wake of massive facilities overbuilding around the turn of the century. 

In large part, the interest is driven by returns on other assets, leading investors to desire some exposure to alternative assets, including infrastructure with some market moats, scarcity and dependable demand, plus free cash flow. 

That appetite is matched by connectivity provider capital investment issues, namely low returns on invested capital that have bedeviled connectivity providers in recent years. 

In many cases, service providers have trouble earning back their cost of capital, according to some analysts. 

source: Arthur D. Little

All of that creates a heightened private equity and institutional investor demand for investments in “digital infrastructure” that is similar to demand for the more-traditional interest in real estate and utility investments. 

But the strategies can vary. The easiest and arguably safest choices are core infrastructure operations where most of the return comes in the form of cash dividends. This is most often found in regulated segments of the industry, with low growth but consistent demand. Ownership of electrical utilities provides a good example of this type of asset. 

Most digital infrastructure assets do not offer predictability or moats as high as might be the case for electrical utilities or airports, but arguably is most true for mobile towers. 

In other cases, there are some specific drivers that shift a bit of the story to more growth, if some tweak to the business model is made. That seems to be the case for mass market telecom networks where the upside is the upgrade from copper internet access to fiber to home. 

In other markets, the same thinking underpins buying a regional airport with expectations of creating a higher-value super-regional hub. In the communications assets business, perhaps an example is the “roll up” strategy of amalgamating many diverse and smaller connectivity or data center assets to create scale. 

The point is that a confluence of connectivity provider need and investor want is fueling a resurgence of private equity and institutional investor interest in a growing range of digital infrastructure assets.

Why more Public Network Assets are Going Private

Institutional and private equity investor interest in communications infrastructure waxes and wanes. Right now it is waxing, after a precipitous drop in interest in the wake of massive facilities overbuilding around the turn of the century. 

In large part, the interest is driven by returns on other assets, leading investors to desire some exposure to alternative assets, including infrastructure with some market moats, scarcity and dependable demand, plus free cash flow. 

That appetite is matched by connectivity provider capital investment issues, namely low returns on invested capital that have bedeviled connectivity providers in recent years. 

source: Arthur D. Little

 

Simply put, it has gotten harder for connectivity providers to generate satisfactory returns on their network investments over time. And telecom is hugely capital intensive. 

source: Bain 

In many cases, service providers have trouble earning back their cost of capital, according to analysts. 

source: Arthur D. Little

All of that creates a heightened private equity and institutional investor demand for investments in “digital infrastructure” that is similar to demand for the more-traditional interest in real estate and utility investments. 

But the strategies can vary. The easiest and arguably safest choices are core infrastructure operations where most of the return comes in the form of cash dividends. This is most often found in regulated segments of the industry, with low growth but consistent demand. Ownership of electrical utilities provides a good example of this type of asset. 

Most digital infrastructure assets do not offer predictability or moats as high as might be the case for electrical utilities or airports, but arguably is most true for mobile towers. 

In other cases, there are some specific drivers that shift a bit of the story to more growth, if some tweak to the business model is made. That seems to be the case for mass market telecom networks where the upside is the upgrade from copper internet access to fiber to home. 

In other markets, the same thinking underpins buying a regional airport with expectations of creating a higher-value super-regional hub. In the communications assets business, perhaps an example is the “roll up” strategy of amalgamating many diverse and smaller connectivity or data center assets to create scale. 

The point is that a confluence of connectivity provider need and investor want is fueling a resurgence of private equity and institutional investor interest in a growing range of digital infrastructure assets.

The Race to 10 Gbps

The U.S. internet service provider bandwidth race seems to be heating up beyond gigabit-per-second speeds now routinely available to perhaps 80 percent of U.S. households. 

Since only a bit over 10 percent of U.S. households currently buy a 1-Gbps service, that might seem like overkill. But if we know anything about internet access, it is that headline speeds keep increasing up to 50 percent per year, and have been doing so since the early 1980s. 

If so, then 10 Gbps headline speeds should be commercially available within a few years. 

Nielsen Norman Group estimates suggest a headline speed of 10 Gbps will be commercially available by about 2025. 

source: NCTA  

Headline speeds in the 100-Gbps range should be commercial sometime around 2030. 

How fast will the headline speed be in most countries by 2050? Terabits per second is the logical conclusion. Though the average or typical consumer does not buy the “fastest possible” tier of service, the steady growth of headline tier speed since the time of dial-up access is quite linear. 

And the growth trend--50 percent per year speed increases--known as Nielsen’s Law--has operated since the days of dial-up internet access. Even if the “typical” consumer buys speeds an order of magnitude less than the headline speed, that still suggests the typical consumer--at a time when the fastest-possible speed is 100 Gbps to 1,000 Gbps--still will be buying service operating at speeds not less than 1 Gbps to 10 Gbps. 

Though typical internet access speeds in Europe and other regions at the moment are not yet routinely in the 300-Mbps range, gigabit per second speeds eventually will be the norm, globally, as crazy as that might seem, by perhaps 2050. 

The reason is simply that the historical growth of retail internet bandwidth suggests that will happen. Over any decade period, internet speeds have grown 57 times. Since 2050 is three decades off, headline speeds of tens to hundreds of terabits per second are easy to predict. 

source: Nielsen Norman Group, Future Speaker

Often, the driver is a service for business customers. 

CableOne, for example, now sells symmetrical 5 Gbps and 10 Gbps services to business customers. Comcast will soon offer a 3 Gbps service aimed at business users. 

But consumer services are headed that same direction. U.S. cable operators are working on future upgrades of their standard offers to 10 Gbps. 

Frontier Communications, for example, is preparing rollout of a 2-Gbps offer, in addition to its standard 1-Gbps and entry-level 500-Mbps offers. That will likely feature symmetrical bandwidth

All of that is consistent with a market need for headline speeds in the 10 Gbps range by about 2023 to 2025. The issue for ISPs is how much that upgrade will cost, what the time frame is and how much disruption will occur as that upgrade happens. 

In at least some cases, telcos might find their upgrade path is more graceful than for cable operators, though the reverse has been true for two decades.

Big Strategic Shift for FTTH?

The strategic context for U.S. home broadband is evolving. For two decades, cable TV operators have been able to consistently maintain installed base share close to 70 percent, in most years getting the majority to all of the net new account additions. 

That remains the case in 2021, as cable continues to hold its installed base lead and also continues to win the net new additions battle.  

All that now seems set for change, though. The biggest change is an up- tempo pace of fiber to home conversions by telcos. But new 5G high-bandwidth fixed wireless offerings should claim some share as well. 

source: New Street Research 

Also important is the way some telcos are positioning their upgrades. In the past, they might have been content to match cable offers. Now some are aiming to surpass cable offers, with symmetrical upstream bandwidth a weapon.  

Frontier Communications, for example, is preparing rollout of a 2-Gbps offer, in addition to its standard 1-Gbps and entry-level 500-Mbps offers. That will likely feature symmetrical bandwidth. 

To be sure, cable is working on its own 10-Gbps capabilities, as well as methods to add more upstream bandwidth. But many of those solutions are not graceful upgrades from the existing hybrid fiber coax platform. The choice is whether to revamp HFC in significant ways or switch to FTTH as the replacement. 

More upstream bandwidth could be provided, to some extent, by pushing fiber deeper into the HFC network. Alternatively, cable operators can swap frequency plans, moving to mid-split or high-split designs. But all those moves require disruption of the physical plant, and cannot be accomplished by swapping out end user gear, as has been the case in the past. 

And any shift to fiber deeper networks, mid-split or high-split architectures (or two of the above) essentially delays an eventual shift to FTTH in any case, many would argue. So the decision comes down to “spend less now, but more in the long term, while undertaking a major network disruption twice” or “spend more now, and be done with it, and only disrupt operations once.” 

The larger point is that upgrading to FTTH comes with other choices that can confer advantage. Bandwidth can be symmetrical, or not. Bandwidth can top out at various levels: higher or relatively lower. And retail pricing, terms and conditions also make a difference. 

Much thinking now seems to be going into how to tweak those parameters to gain advantage over cable operator competitors. Many might assume FTTH means gigabit speeds. It does not. FTTH is physical media. Service providers still must decide how much bandwidth they want those networks to supply. 

Historically, FTTH might have meant speeds in the hundreds of megabits. Some U.S. FTTH networks installed in the mid-1990s to late 1990s offered speeds only up to 10 Mbps. User experience might be an order of magnitude less than advertised, however, even on FTTH platforms.  

What seems to be changing is a willingness to leverage FTTH to gain a speed advantage. 

 

“Our network is already 10-gig capable end-to-end, so we can carry on driving up speed tiers, as demand requires, in a very low-cost, very quick way, again, in a way that cable can't, says Nick Jeffery, Frontier Communications CEO. 

But that only matters if most Frontier customers can buy the service. 

“Our plan (is) to reach a total of five million fiber locations by the end of 2022 and 10 million locations by the end of 2025,” says Nick Jeffery, Frontier Communications CEO. 

Frontier has 15.2 million locations passed, so 10 million total FTTH passings means about 66 percent of the potential customer base would be able to buy FTTH services. 

Of course, a higher installed base does take time. “Our 2020 expansion cohort continues to show strong penetration of 30 percent at the 12-month mark,” says Jeffery, though noting that figure is based on a small sample. 

“For the overall build plan, we continue to expect a 15 percent to 20 percent penetration rate at the 12-month mark, and with penetration continuing to rise in subsequent years toward a terminal penetration of 45 percent,” he added. 

Government subsidies also are expected to improve the business case for FTTH and other high-speed services, as they are increasing substantially. 

George Ford, economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies, argues that about 9.1 million U.S. locations are “unserved” by any fixed network provider. 

Though specifics remain unclear, it is possible that a wide range of locations might see their deployment costs sliced by $2,000 or more. Lower subsidies would enable many more locations to be upgraded to FTTH, for example: not the unserved locations but possibly also many millions of locations that have been deemed “not feasible” for FTTH.

Much hinges on the actual rules that are adopted for disbursement. Simple political logic might dictate that aid for as many locations as possible is desirable, though many will argue for targeting the assistance to “unserved” locations. 

But there also will be logic for increasing FTTH services as widely as possible, which will entail smaller amounts of subsidy but across many millions of connections. The issue is whether to enable 50 million more FTTH locations or nine million to 15 million of the most-rural locations. 

Astute politicians will instinctively prefer subsidies that add 65 million locations (support for the most-rural locations plus many other locations in cities and towns where FTTH has not proven obviously suitable). 

The issue is the level of subsidy in various areas. 

“According to my calculations, if the average subsidy is $2,000 (which is the average of the RDOF auction), then the additional subsidy required to reach unserved households is $18.2 billio,” Ford argues. “If the average subsidy level is $3,000, then $22.8 billion is needed. And at a very high average subsidy of $5,000, getting broadband to every location requires approximately $45.5 billion.”

The point is that, compared to the business case 20 years ago, FTTH is better in a number of ways. Strategically, copper facilities simply are outmoded. Any fixed network operator clinging to that platform is destined for death. 

Financially, the older triple-play model--with its cost structure and complexity--now is out of favor. The new model is based on home broadband: the sole service for an independent ISP, and the growth driver for an incumbent telco. 

Oddly enough, the older justification for FTTH--that it allows telcos to support many services--now is eclipsed by the simple value of internet access. The value of the “do anything” platform still remains. 

Only these days the primary value driver for an incumbent telco or independent ISP is “access.” Voice or video entertainment might contribute additional revenue and value, but where there is a choice, new providers simply build on home broadband, leaving apps to be supplied by others. 

All that is a big potential change.