Revenue Sluggishness Will Propel Consolidation Wave

Whether telecom revenue is growing, flat or shrinking has enormous consequences for any communications service provider, for obvious reasons. Public companies whose revenues do not grow, do not survive as independent entities.

Privately-owned firms might, or might not, survive if revenues are flat. Few can survive, long term, if revenues are dropping. And there are some signs of trouble, in that regard, though as with virutally anything related to the Internet ecosystem, “averages” can be misleading.

Researchers at Ovum think global telecom revenues will remain roughly flat over the next few years, with a decline in spending on voice services counterbalanced by growth in spending on mobile and fixed (broadband) data services.

Others believe growth will continue. Gartner researchers expect 4.3 percent revenue growth, globally, for 2013. IDC also forecasts low single digits revenue growth.

The total worldwide telecom market grew by 3.2 percent during 2012, and IDC is forecasting growth of 3.4 percent during the 2013 time frame, with the market settling into a steady growth rate of about 3.2 percent," according to Courtney Munroe, IDC VP. But those service provider revenues will be unevenly distributed, growing in most regions, but shrinking in Europe.

Telecom retail revenue in Latin America will grow at a compound annual growth rate (CAGR) of 3.3 percent between 2012 and 2017, according to Analysys Mason.

But the European telecom service market decreased for the third year in a row in 2011, by 1.5 percent, the European Telecommunications Network Operators Association reports.

In the third quarter of 2012, European carrier revenue contracted, though growing in other regions such as China, the United States, India and South America.

Even in the United Kingdom and Germany, the markets with the brightest future, STL Partners forecasts a respective 19 percent and 20 percent revenue decline in mobile core services (voice, messaging and data) revenues by 2020.

Revenue in the French market will decline 34 percent by 2020. In Italy, revenue will drop 47 percent and in Spain revenue will drop 61 percent by 2020.

Overall, STL Partners anticipates a reduction of 36 percent or €30 billion in core mobile service revenues by 2020, a loss of about €50 billion for Europe as a whole.

Flat or lowish growth rates are not an insoluble problem, in the near term, as some firms can grow by making acquisitions. And the growth problems generally are most acute for fixed network service provides, not mobile service providers, for the moment.

What is clear globally s rapid growth of mobile usage and revenues, notably with European weakness. 

In 2001, there were about one billion mobile phone subscribers in total, most of them in developed countries. By about 2012  there were six billion subscribers, and 73 percent of those (4.4 billion) were  in developing countries that account for just 20 percent of the world’s total gross domestic product.

In just 10 years, mobile phones have almost reached saturation point in countries where people earn just a few dollars per day. Smart phone adoption is following a similar sort of trajectory.

In 2009, the Asia-Pacific region had 86 million smart phone users. In 2013, 738.2 million smartphone users. By way of comparison, that means the Asia-Pacific region has more than four times as many smart phone users as the next largest region, , Western Europe, which will have 161.1 million by the end of the year, and North America, which will have 152.2 million.

Furthermore, nearly 2.5 billion of the world’s 4.3 billion mobile phone users in 2013 will be in the Asia-Pacific region, according to eMarketer.

Research firm eMarketer estimates that 2.43 billion people in Asia-Pacific will use a mobile phone at least monthly in 2013, representing 56.3 percent of the world’s mobile phone users.

More than one billion of these mobile users will be in China alone, and about half that number will reside in India. By 2017, eMarketer estimates, Asia-Pacific will have nearly three billion mobile phone users out of a total 5.10 billion across the globe.

So smart phones might be the fastest-adopted technology in human history.

Mobile phone usage is growing exponentially in the Middle East and Africa as well, with Africa expected to become the second-largest mobile phone region, after Asia.

In the Middle East and Africa, 525.8 million people use a mobile phone at least monthly. .

Smart phone use in the region will nearly double  to 112.2 million, up from 67 million in 2012, while penetration of smart phones among the population as a whole in will increase from 5.1 percent to 8.3 percent.

In 2001, there were about one billion mobile phone subscribers in total, most of them in developed countries. By about 2012  there were six billion subscribers, and 73 percent of those (4.4 billion) were  in developing countries that account for just 20 percent of the world’s total gross domestic product.

In just 10 years, mobile phones have almost reached saturation point in countries where people earn just a few dollars per day. Smart phone adoption is following a similar sort of trajectory.

In 2009, the Asia-Pacific region had 86 million smart phone users. In 2013, 738.2 million smartphone users. By way of comparison, that means the Asia-Pacific region has more than four times as many smart phone users as the next largest region, , Western Europe, which will have 161.1 million by the end of the year, and North America, which will have 152.2 million.

Furthermore, nearly 2.5 billion of the world’s 4.3 billion mobile phone users in 2013 will be in the Asia-Pacific region, according to eMarketer.

Research firm eMarketer estimates that 2.43 billion people in Asia-Pacific will use a mobile phone at least monthly in 2013, representing 56.3 percent of the world’s mobile phone users.

More than one billion of these mobile users will be in China alone, and about half that number will reside in India. By 2017, eMarketer estimates, Asia-Pacific will have nearly three billion mobile phone users out of a total 5.10 billion across the globe.

So smart phones might be the fastest-adopted technology in human history.

Mobile phone usage is growing exponentially in the Middle East and Africa as well, with Africa expected to become the second-largest mobile phone region, after Asia.

In the Middle East and Africa, 525.8 million people use a mobile phone at least monthly. .

Smart phone use in the region will nearly double  to 112.2 million, up from 67 million in 2012, while penetration of smart phones among the population as a whole in will increase from 5.1 percent to 8.3 percent.

Virtually no observers seem to think global telecom revenue will shrink in the near term, despite regional weakness in Europe. The only real questions seem to revolve around the rate of growth, especially for mobile services, which are the growth driver in most markets.

Has U.S. Mobile Market Revenue Reached its Peak?

Virtually all products have a life cycle. That implies that even industries have life cycles. In the developed world, the fixed network voice business passed its peak revenue in 2000, even though revenues and users arguably continue to grow in the developing world.

Mobile has been the global growth driver, both in terms of revenue and subscribers, for more than a decade. But that pattern already seems to have cracked in Western Europe, where revenue is expected to decline between 2010 and 2020.

And though the U.S. mobile industry has done nothing but grow (in terms of subscribers and revenues), for decades, one might reasonably assume growth is not infinite.

Growth drivers already have shifted away from voice and text messaging to broadband services.

But competitive dynamics will play a huge role in shaping future industry results. Sprint and T-Mobile US plans to disrupt the U.S. market, one might reasonably conclude, will, as a logical corollary, halt revenue growth, and then lead to a first-ever decline, if French market and EU markets provide any useful guidance.

When a market is highly saturated, competition virtually always takes the form of price competition that tends to lead to lower average revenue per account, and therefore to a smaller market overall, measured in terms of revenue.

So even though the U.S. mobile market has grown steadily for decades, revenue likely will slow, then reverse, if T-Mobile US and a SoftBank-lead Sprint manage to take market share from Verizon Wireless and AT&T Mobility.

As much as executives at Verizon and AT&T will not want comparisons to the French mobile market after the launch of Illiad’s “Free” service, that is among the likely outcomes for the U.S. market.

To wit, the French mobile industry reached peak revenues in 2010, and has been declining since then. To be sure, the French mobile market has “grown,” as measured by subscribers, or at least accounts, as measured by subscriber identity modules.

By the end of March 2012, the mobile penetration rate had reached 106 percent of the population and the number of mobile subscribers had reached 66.8 million. But mobile revenue has declined.

In the third quarter of 2010, revenue was EUR 5 billion. By the fourth quarter of 2012, despite steady subscriber growth from 60.5 million to 66 million, revenue slipped.

In five Western European countries (Spain, Italy, France, Germany, United Kingdom), aggregate mobile revenue will decline will decline between 2010 and 2020.

Global telecom revenue growth has been slowing for some time, in most markets other than emerging countries, it is safe to say. It also is safe to say the worst-hit region globally is Europe, where service providers with significant exposure to Europe reported worse results in 2012 than they did in 2011, according to Ovum analyst Adaora Okeleke.

In fact, “the primary goal of Europe’s telcos is to stabilize their performance,” said Steven Hartley, Ovum telco strategy analyst. As is the case for other service providers facing maturing legacy revenue streams, European service providers face the challenge of growing new revenues in emerging markets faster than revenues decline in their core European markets.

And the problem there is that average revenue per user will be lower in the new markets. So European carriers are losing high gross revenue and higher margin customers while trying to gain lower gross revenue, lower margin customers.

Ovum forecasts that global telco revenue growth will slow to a compound annual growth rate of two percent between 2012 and 2018. Most of the actual growth will happen in emerging markets, while revenue is likely to stay stuck in a declining mode in Europe.

The reaction of Canadian mobile operators to a rumored entry by Verizon Wireless into the Canadian market likewise suggests mobile operators know precisely what would happen should a powerful new competitor try to shake up an existing market, namely significant market disruption.

The bottom line is the the U.S. mobile market, despite continuous overall revenue growth for decades, is likely to stall, then reverse, to the extent that T-Mobile US and Sprint are able to take market share from Verizon Wireless and AT&T.

Any Revenue Growth for Telecom in 2020?

Before the Covid-19 pandemic, many telecom service providers expected modest revenue growth. In 2020, most are likely to show flat to negative revenue and revenue growth. Many service providers now expect revenue shrinkage instead. 

But the longer-term trend will reassert itself fairly quickly, in all likelihood, as global revenue growth has been pretty close to flat for some years. 

source: IDC

Overall, the global industry might not even hit one percent revenue growth in 2020. 

source: STL Partners 

Will Access Network Disaggregation Increasingly Take the Form of Joint Ventures?

There is one element beyond “consolidation” or “asset shuffling” that is not yet a significant development on this chart of major U.S. telco acquisitions since 1985: deconstruction, deconsolidation or disaggregation of functions. 

The chart, for obvious reasons of showing only formal asset ownership of brands, does not show internal or structural changes across the industry to separate application creation from asset ownership; with revenue flows following. 

source: Wall Street Journal, Seeking Alpha 

The chart does not show shifts in business strategy beyond “gaining scale” and does not show the acquisition of any mobile service provider assets, either. 

source: Quexor Group 

Beyond shifts of asset ownership, connectivity providers have moved on a variety of fronts to disaggregate functions, sometimes retaining asset ownership; sometimes divesting assets and retaining functions in some other way. The adoption of TCP/IP as the “next generation” architecture, for example, necessarily entails separating connectivity functions into layers. 

Fundamentally, that means applications can be created and consumed by customers or users without app owners having formal business relationships with access network providers. 

In other cases, mobile service providers have opted to sell off their cell tower networks, in favor of leasing arrangements. More recently, telcos have shifted their computing networks from internal and owned platforms to use of cloud computing suppliers. 

And while virtualization of network functions, or separated control and data planes, do not intrinsically require ownership disaggregation, it always enables function disaggregation. 

Category	Moves	Examples
Sale of cell towers	Major telecom companies have sold off their cell towers to independent tower companies. This allows the telecom companies to focus on their core network functions, while the tower companies can focus on managing and maintaining the towers.	In 2019, AT&T sold its 8,200 cell towers to Crown Castle for $8.1 billion. In 2020, Verizon sold its 10,000 cell towers to American Tower for $5.1 billion. In 2021, T-Mobile sold its 4,000 cell towers to SBA Communications for $3.4 billion.
Virtualization of network functions	Telecom companies are moving away from traditional, hardware-based network functions and towards virtualized network functions (VNFs). VNFs are software-based network functions that can be run on generic hardware. This allows telecom companies to be more agile and to scale their networks more easily.	In 2017, AT&T announced that it would be moving its network functions to a virtualized architecture. In 2018, Verizon announced that it would be moving its 5G network to a virtualized architecture. In 2019, T-Mobile announced that it would be moving its network functions to a virtualized architecture.
Use of wholesale	Telecom companies are increasingly using wholesale networks to provide services to their customers. Wholesale networks are owned and operated by independent companies, and they sell capacity to telecom companies on a wholesale basis. This allows telecom companies to offer their customers a wider range of services without having to invest in their own network infrastructure.	In 2017, AT&T announced that it would be using the FirstNet wholesale network to provide 5G services to first responders. In 2018, Verizon announced that it would be using the CBRS spectrum to provide wholesale services to its customers. In 2019, T-Mobile announced that it would be using the DISH 5G network to provide wholesale services to its customers.
Adoption of TCP/IP	Telecom companies are increasingly adopting TCP/IP as the underlying protocol for their networks. TCP/IP is a standard protocol that is used for data communication over the internet. This allows telecom companies to interoperate with other networks and to offer their customers a wider range of services.	In 2017, AT&T announced that it would be migrating its network to a TCP/IP-based architecture. In 2018, Verizon announced that it would be migrating its 5G network to a TCP/IP-based architecture. In 2019, T-Mobile announced that it would be migrating its network to a TCP/IP-based architecture.
Architectures using data plane and control plane	Telecom companies are increasingly adopting architectures that use separate data planes and control planes. This allows the data plane to be optimized for performance, while the control plane can be optimized for flexibility.	In 2017, AT&T announced that it would be using a data plane and control plane architecture for its 5G network. In 2018, Verizon announced that it would be using a data plane and control plane architecture for its 5G network. In 2019, T-Mobile announced that it would be using a data plane and control plane architecture for its 5G network.

Likewise, any shift to use of wholesale mechanisms is a form of disaggregation from formerly-vertically-integrated asset ownership. 

To be sure, there are practical reasons for undertaking these moves. At one level, no grand shift of strategy is required, and each single move can be seen as an incremental change to improve operating economics. 

Move	Reason
Sale of cell towers	Allows telecom companies to focus on their core network functions, such as switching and routing, and to outsource the management and maintenance of their cell towers to third-party companies. This can help telecom companies reduce costs and improve their flexibility.
Shifting to wholesale	Allows telecom companies to offer their customers a wider range of services without having to invest in their own network infrastructure. This can help telecom companies reach new customers and compete with larger rivals.
Separating network and business functions	Allows telecom companies to become more agile and to respond more quickly to changes in the market. This can help telecom companies stay ahead of the competition and offer their customers the best possible services.
Taking other steps to separate asset ownership	Allows telecom companies to interoperate with other networks and to offer their customers a wider range of services. This can help telecom companies stay ahead of the competition and meet the growing demand for connectivity.

But all the steps, taken together, in a context where revenue growth remains sluggish, capital investment requirements arguably are rising and competition is growing, might signal continued pressures to disaggregate. 

Indeed, the new involvement of private equity investors in digital infrastructure asset ownership might be part of the shift. To be sure, most such investments involve acquiring both operating and physical assets. To that extent the asset shifts are simply part of the background of asset disposals or acquisitions on an incremental level, and not a “grand strategy.”

But many business plans envision both retail and wholesale operations. And the same is true for the growing number of municipal networks, independent facilities-based internet service provider operations as well. Over time, more fiber-to-home networks are being added that allow wholesale access to other ISPs. 

So far, only cable operator mobile service operations have been based extensively on wholesale mechanisms. And cable operators are moving to shift substantial reliance to their own assets, including both spectrum assets and small cell networks, for example. 

The larger point is that business model drivers might, over time, increase the value or necessity of further disaggregation in the direction of a more-layered organization of the business, especially for non-dominant service providers. 

One clear example, however, is the growing use of joint ventures to build fiber-to-home infrastructure. For some observers, a growing role for app providers such as Google might seem quite noteworthy. 

Year	Location	Partners	Details
2020	United States	Google and Frontier Communications	Google will invest $1 billion in Frontier to help the company build a fiber-optic network to 1 million homes in 25 states.
2020	United Kingdom	Virgin Media O2 and Vodafone	The two companies announced a joint venture to build a fiber-optic network to 1 million homes in the U.K.
2021	United States	Google and AT&T	Google will invest $2 billion in AT&T to help the company build a fiber-optic network to 3 million homes in 10 states.
2022	United Kingdom	CityFibre and Macquarie Infrastructure and Real Assets	The two companies announced a joint venture to build a fiber-optic network to 5 million homes in the U.K.
2023	United Kingdom	Google and Openreach	Google will invest £1 billion in Openreach to help the company build a fiber-optic network to 2 million homes in the U.K.

So far, Google alone has made FTTH investments in firms including Zayo Group, SiFi Networks, Ting, Webpass, Frontier Communications, AT&T and Openreach, in addition to operating its fully-owned Google Fiber business. 

ear	Location	Joint Venture Partners
2020	United States	Zayo Group and Frontier Communications
2021	United Kingdom	CityFibre and Vodafone
2021	Australia	Telstra and TPG Telecom
2021	Canada	Bell Canada and Rogers Communications
2022	Brazil	TIM Brasil and Telefonica
2022	India	Reliance Jio and Google
2022	Japan	NTT Docomo and KDDI
2022	South Korea	SK Telecom and KT
2022	Taiwan	Chunghwa Telecom and Far EasTone

Perhaps one would speculate that facilities disaggregation for FTTH networks will often manifest itself in the form of joint ventures. That is an incremental step that only “shares” asset ownership rather than dispensing with it. 

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