Short, Shallow Dip in Service Provider Revenue Because of Covid-19?

Though it might seem counter-intuitive, connectivity service provider revenue might not change all that much because of the Covid-19 pandemic, and a revenue rebound might be quite swift, in some markets.Some product lines and some geographies might not fare that well, but there are historical reasons to believe any dip will be shallow and short lived.

By way of comparison, that is what happened to telecom service provider revenue in the wake of the global Great Recession of 2008.

To be sure, some believe global telecom revenue will fall by 3.4 percent in 2020 compared to 2019, before returning to growth (0.8 percent) in 2021, according to Analysys Mason. Analysys Mason had previously forecast growth of 0.7 percent in 2020 and 0.8 percent in 2021. 

International Data Corp., on the other hand, predicts that global telecommunications and subscription TV services revenue will dip less than one percent in 2020. Most observers might agree that a dip of some size will happen. What is likely more contentious is the size of such a dip, or its duration. 

With all the talk about a new normal caused by the Covid-19 pandemic, where life in many ways will be permanently altered, it is worth keeping in mind that past traumatic events such as the Great Recession of 2008 can be very hard to detect in time series data where it is possible to track trends over time. 

So even if it seems too optimistic, the IDC prediction is well within historical expectations. The Great Recession of 2008 caused a momentary flattening of revenue growth, with the prior pattern asserting itself quickly afterwards. A modest dip would not be without precedent, even if we fear greater damage. 

And though it is reasonable to expect a dip in business customer spending (with economies shut down and significant bankruptcies expected), consumer spending on telecom services might well increase, as it did in the United States in the aftermath of the 2008 Great Recession. 

source: Statista

IDC estimates global service provider revenue at nearly $1.6 trillion in 2020, a decrease of 0.8 percent compared to 2019. IDC expects the decline to continue in 2021, but at a somewhat lower degree. 

The mobile segment, the largest segment of the market, will post a slight decline in 2020 due to lower revenues from roaming charges, less mobile data overages due to the stay-at-home situation, and slower net additions, especially in the consumer segment, IDC argues.

Fixed data services spending will increase by 2.9 percent in 2020. Spending on fixed voice services will continue to decline.

Subscription video services will be boosted by the lockdown, but also affected by the economic downturn, so the spending in this category is expected to decline slightly, says IDC.

The Americas market will see a tiny decline of 0.04 percent. Europe, the Middle East, and Africa (EMEA) and Asia/Pacific (including Japan) will dip more. Growth is not expected in EMEA or Asia/Pacific before 2022 as the users in emerging markets are expected to remain cautious about spending for some time, IDC estimates. 

source: IDC

Travel Restriction Impact on Telecom Revenue

Economic shutdowns and travel restrictions have been widely used during the Covid-19 pandemic to control the rate of infection. Sometimes it helps; sometimes it does not. Health policies should, when possible, disrupt economic activity as little as possible, a team of researchers says.

Though primarily affected travel-related industries, such travel bans also negatively affect mobile industry revenues by reducing the amount of roaming revenue. People who are not traveling also are not using their phones out of their home regions. Early March 2020 forecasts were that mobile operators globally could lose $25 billion in roaming revenue. 

In September 2020, research from roaming experts Kaleido Intelligence suggested a 53 percent fall in retail roaming revenues would happen in 2020. According to GSMA, that could represent a revenue hit of as much as four percent to eight percent. 

Combined with other revenue deceleration from reduced new customer acquisitions and upgrades, TBR estimates average revenue growth could dip about six percent in the first half of 2020 alone. Some estimates suggest revenue losses could be far greater, approaching 20 percent in some cases.  

source: TBR 

The issue, some might say, is striking a balance between public health and economic health, especially unemployment and recession, with economic contraction between five percent and eight percent in 2020, compared to 2019. 

The expected 2021 rate of recovery might also depend on how rapidly consumers are willing to resume “normal” life activities. 

Stringent travel restrictions might have little impact on epidemic dynamics except in countries with low Covid-19 incidence and large numbers of arrivals from other countries, or where epidemics are close to tipping points for exponential growth, a team of researchers reports.

“In May, 2020, imported cases are likely to have accounted for a high proportion of total incidence in many countries, contributing more than 10 percent of total incidence in 102 (95 percent credible interval 63–129) of 136 countries when assuming no reduction in travel volumes (ie, with 2019 travel volumes) and in 74 countries (33–114) when assuming estimated 2020 travel volumes. Imported cases in September, 2020, would have accounted for no more than 10 percent of total incidence in 106 (50–140) of 162 countries and less than 1 percent in 21 countries (4–71) when assuming no reductions in travel volumes,” say researchers Timothy Russell, Sam Clifford, W. John Edmunds, Adam J Kucharski and Mark Jit, working on behalf of the Center for the Mathematical Modelling of Infectious Diseases Covid-19 working group and published in the Lancet. 

“Countries should consider local Covid-19 incidence, local epidemic growth, and travel volumes before implementing such restrictions,” they note. “Although such restrictions probably contribute to epidemic control in many countries, in others, imported cases are likely to contribute little to local Covid-19 epidemics.”

As a matter of science, travel bans might or might not have much material impact on rates of new Covid-19 infections. And the benefit has to be weighed against the costs of movement bans on economic performance, as any other public policy should be evaluated, one might argue.

Which is the Bigger Cloud Opportunity, Business Process or Software "As a Service?"

It isn't clear whether software as a service or "business process as a service" is the biggest cloud computing opportunity. Gartner has in the past argued that SaaS is the biggest opportunity. But Gartner now seems to believe BPaaS is the single biggest opportunity.

"Major trends in client computing have shifted the market away from a focus on personal computers to a broader device perspective that includes smart phones, tablets and other consumer devices," says Steve Kleynhans, Gartner VP. "Emerging cloud services will become the glue that connects the web of devices that users choose to access during the different aspects of their daily life."

To be sure, there also are ramifications for enterprise users as well as consumers. And that explains the huge interest in cloud computing, on the part of service and application providers.

Still, most of the revenue upside appears likely to accrue to hardware and software suppliers, according to a Morgan Stanley analysis. In the telecom space, the analysts expect key winners to include Rackspace, Equinix and competitive local exchange carriers and metro bandwidth suppliers.

Also, pubic cloud computing is likely to reduce traditional telco enterprise service revenues. Morgan Stanley further suggests that among IT decision makers, the large telcos remain behind Amazon and others in terms of “cloud mindshare.”

How much overlap there is between hosting and cloud computing services is an important issue for service providers. At one level, hosting is about server real estate and amenities. But cloud computing is about some other things, namely rental of computing cycles and storage, rental of operating systems and platforms, and rental of actual business apps.

Though service providers have embraced the hosting business and content delivery networks as “valued added parts of the transport and business,” it remains unclear how far they might ultimately go in the core cloud computing business.

The increasing number of devices used by any single consumer to access and use cloud computing resources means more access revenue, to be sure.

Gartner predicts that, by 2014, the personal cloud will replace the personal computer at the center of users' digital lives. That implies heavy and growing need for broadband access.

What also is clear is that service providers now see content delivery networks and cloud computing as new business opportunities, with ramifications for enterprise users as well as consumers. And that explains the huge interest in cloud computing, on the part of service and application providers.

Still, most of the revenue upside appears likely to accrue to hardware and software suppliers, according to a Morgan Stanley analysis, even as enterprises start to shift workloads to cloud approaches.

According to the Morgan Stanley survey, 79 percent of information technology workloads are running at on-premise data centers today, but over the next few  years, respondents expect that only 64 percent of workloads will run at in-house data centers.

What’s more, 51 percent of respondents are running their entire infrastructure on premises today, but in three years some 70 percent of companies will have moved at least some workloads to managed hosting or public cloud environments, including infrastructure as a service, (IaaS), platform as a service, (Paas) or software as a service (SaaS).

That does not mean each of those ways of “doing cloud computing” represents the same amount of potential revenue for suppliers of the services. In the relatively near term, software as a service probably will represent most of the actual revenue for suppliers of cloud computing apps and services.

In fact, one might ask whether, on a global basis, cloud computing will be a significant revenue driver for anything but software as a service. According to Forrester Research, for example, by 2020 SaaS might represent $133 billion in annual revenue, while the other forms of cloud computing will register only in single-digit billions or low double digits.

In a similar way, some will argue that hosting and CDN services are more of a  “value add” for connectivity services, rather than big new revenue drivers for service providers, in their own right.

The issue is which cloud computing suppliers or even data centers will benefit, particularly since cloud computing services today are more logically provided by Amazon and other suppliers, not “data center” suppliers.

On the other hand, AT&T hopes to capitalize on its position as a “one-stop shop” for IT and connectivity needs. The company has said that it is already number two in hosting globally, with more than 2.5 million square feet of data center space (38 data centers, with 15 outside the US, primarily in Europe and Asia).

Verizon’s  purchase of Terremark likewise is expected to boost Verizon’s connectivity sales, not simply “hosting” revenue, especially with small and mid-sized businesses. Verizon operates 220 data centers in 23 countries, as well.

Metro fiber providers and independent hosting firms also will benefit, it is reasonable to conclude. What isn’t so clear at the moment is how much share telcos might gain in the IaaS, PaaS and SaaS business segments, which are less “real estate” plays and more “computing services” offers.

Cloud computing gets lots of attention these days in the service provider business. But it might be helpful to keep in mind that the actual amount of new revenue data center hosting or cloud computing actually will generate is likely to be modest, from a service provider perspective.

The more important angle is the “value add” for the other core connectivity solutions. Essentially, data center hosting services and content delivery networks "make the bits more valuable." And value is the antidote to commodity pricing.

The point is that although there are good reasons for service providers to see cloud computing as a viable and interesting new revenue stream, it is important to be careful and rational about the huge numbers one tends to see thrown around, related to cloud computing.

Gartner, for example, now expects enterprise spending on public cloud services to grow from $91 billion worldwide in 2011 to $109 billion in 2012, while by 2016, enterprise public cloud services spending will reach $207 billion.

That’s a substantial market, but a market with distinct segments, not all of which are easily adaptable to telco provisioning. So among the issues is the question of which of these markets are most congruent with what telcos already do.

Looking only at the segment names, it might seem as though infrastructure as a service is most congruent, and there is logic to that thought.

The largest segment, though, is “business process as a service.” Gartner says that BPaaS will grow from $84.1 billion in 2012 to $144.7 billion in 2016, generating a global compound annual growth rate of 15 percent.

BPaaS includes cloud-based enterprise processes such as cloud payments, cloud advertising  and “industry operations” such as e-commerce enablement.

In terms of revenue generated, cloud advertising is projected to grow from  $43.1 billion in 2011 to $95 billion in 2016, generating 17.1 percent CAGR in revenue growth through 2016.

Cloud payments are forecast to grow from $4.7 billion in 2011  to $10.6 billion in 2016, generating a CAGR of 17.8 percent worldwide.

E-commerce enablement using BPaaS-based platforms is expected to grow from $4.7 billion in 2011 to $9 billion in 2016, generating a 13.6 percent CAGR in revenue globally.

One might argue that payments, advertising and e-commerce are not necessarily areas where telcos have natural present advantages.

Software as a service will be a $26.5 billion market in 2016. SaaS-based applications include such functions as customer relationship management, enterprise resource planning, web conferencing, teaming platforms and social software suites, for example. SaaS-based CRM will grow from $3.9 billion in 2011 to $7.9 billiion in 2016.

Web conferencing, teaming platforms and social software suites will grow from $2 billion in 2011 to $3.4 billion in 2016. SaaS-based ERP will grow from $1.9 billion  in 2011 to $4.3 billion in 2016.
Supply chain management will grow from  $1.2 billion in 2011 growing to $3.3  billion in 2016.

Platform as a service might be just a $2.9 billion business in 2016. PaaS generally includes development environments, and also generally is the smallest of the opportunities. PaaS includes application development, database management systems, business intelligence platforms and application infrastructure and middleware.

Infrastructure as a service is forecast to grow to $24.4 billion in 2016. Gartner argues, and has the most obvious fit with competencies service providers already possess.

(IaaS) is a highly automated offering where compute resources, complemented by storage and networking capabilities, are offered to the customer on-demand, Gartner says.

With a projected CAGR of 41.7 percent, IaaS is the fastest growing of the public cloud segments. From $4.2 billion in revenue generated in 2011, IaaS is forecast to hit $24.4 billion in 2016. That includes computing services, storage and print server functions.

The computing subsegment is expected to see the greatest revenue growth globally, growing from $3.3 billion in 2011 to $20.2 billion in 2016.

The point is simply that the cloud computing opportunity is large, but also consists of segments that might be harder or easier for service providers to compete within. Very few of the cloud segments, even when using bandwidth, access and data centers, rely at the retail level on expertise in those areas.

Firms Now Must Look for Growth Across the Ecosystem

As it consolidates horizontally, the telecom industry (access service providers of all sorts) also  has no choice but to look elsewhere within the internet ecosystem for growth, as “elsewhere” is where long-term growth is to be found.

That is not to downplay the near-term contributions greater scale will make. In the near term, firms will merge to create greater scale. But consolidation will not be enough, over the long term.

“It is no longer appropriate to develop corporate strategies, or to assess policy situations, with a narrow focus on a single segment of the value chain, A.T. Kearney analysts have argued.

For access providers (telcos, cable TV, satellite access providers and other internet service providers), that means looking beyond access services for growth (“up the stack,” mostly).

The reason is that value within the ecosystem  is shifting, while participants increasingly are moving into adjacent or other parts of the ecosystem, perhaps nowhere as extensively as in the apps space.

“As players such as Apple, Facebook, and Baidu expand into adjacent segments, their rationale is based on leveraging scale and integrating services and features into their core products and platforms to create barriers to entry,” A.T. Kearney analysts note.

By 2020, perhaps 52 percent of value will lie in applications, while just seven percent lies in internet access. In other words, between 2015 and 2020, the value contribution of internet access will drop 50 percent, as a percentage of total, even if gross revenues climb in many developing markets.

Will early deployment of 5G networks produce gains, and if so, for whom? Some argue that “value” ultimately drives results. If so, then it already is clear that about half  of value within the internet ecosystem, as expressed in revenue, lies in applications, about 14 percent in internet access.

source: AT Kearney

source: AT Kearney

So think about 5G. Will early deployment of 5G networks produce gains, and if so, for whom?

Ignoring for the moment broader answers, such as “users, society, the economy were the winners,” and looking only at the “telecom” part of the ecosystem, one might argue 3G was one thing, and 4G another, so 5G might not produce winners where one expects to find them.

The winners might be found disproportionately in the applications or device segments of the  business, and less in the network infrastructure or service provider parts of the business, for example, and for different firms in each era.

Roughly speaking, one can argue that 3G produced the biggest winners in the network infrastructure and handset segments of the business, mixed results in the service provider part of the business, and important new inroads by application providers.

One problem is that it is not clear there has been any single killer app, killer use case or killer capability that clearly defines the 3G and 4G eras.

For example, if you had to name a single “killer app” for 3G, what would that be? Some would say there was no killer app for 3G.

So some would say it was “mobile broadband ” or “mobile internet access” was the key advance beyond 2G. And many hoped-for new applications did not materialize in 3G, and arguably only became common features in the 4G era (think video calling).

In fact, some might say text messaging (first introduced by 2G networks) that became something of a killer capability for 3G, even if the 3G network did not introduce it.

Others might say the best example of a killer app was  mobile email (think BlackBerry). In fact, it arguably was the rise and fall of that killer app in the 4G era that lead to the demise of Research in Motion (BlackBerry) as a lead force in the devices portion of the ecosystem.

That might lead some to argue it was the “easy to use smartphone” (think Apple iPhone) that suggests the killer feature of 4G networks, or social networking, or multimedia social networking.

Likewise, the killer app for 4G is similarly elusive. Some might argue it was tethering (internet access) that was a killer use case. And it might well turn out that it is entertainment video that ultimately becomes the killer app for 4G.

Right now, we can only guess at whether a 5G killer app, feature, use case, capability or business model might actually emerge. There are two areas where supporters currently believe such developments could occur: internet of things and full substitution for fixed network internet access.

And there is the worrisome 3G precedent: the hoped-for innovation in value and revenue really did not happen until 4G. So it is unfortunately possible that 5G will be more like 3G than 2G or 4G: producing less than hoped for innovation in new services or revenue.

Or, perhaps more accurately, might 5G produce less new revenue than older revenue streams are cannibalized? At a very high level, voice revenue is being cannibalized by mobile data revenue because better mobile internet access means substitute products are available.

The safest bets right now are that internet application providers are going to win, as well as some handset suppliers. Some infrastructure suppliers will benefit, for a while. But it is not so clear that all service providers will win, or will win to the same degree. In fact, there always is the precedent of 3G.

Though the problem with 3G in some markets was operator overpaying for spectrum, and though that is not likely to happen in the 5G era, the business model could still emerge as a big issue.

Consumer Mobility Will Not be Tomorrow's Revenue Driver

As hard as it might be to envision, mobile services that now drive revenue growth in the global telecom business will not always do so. Something--and we cannot say for certain what it is--will emerge as the revenue leader within a decade. For the past 30 years, that replacement process has happened with regularity.

Voice services once represented as much as 82 percent of total communications service provider revenues, as recently as 2004, according to International Telecommunications Union data. 

Mobile represented about half of voice revenues by that point. In 1990, mobile voice was in single digits as a percentage of total service provider revenue. 

By 2021, fixed network voice will represent only about 7.7 percent of total global telecom revenues, compared to mobile subscriptions at 59 percent of total, according to researchers at Ovum. 

The point is that connectivity provider service revenue sources have changed fairly fast since 2000, illustrating the strategic importance of developing new revenue sources in the connectivity business. 

Some 30 years ago, about 1990, mobile service accounts were in single digits, globally, as a percentage of total revenue. About 20 years ago--around 2000--mobile service revenues had leaped to more than 21 percent of total. 

By 2010, mobile service revenue had grown to a majority of total revenue, and also was providing as much as 80 percent of the revenue growth. 

About 2000, voice services represented as much as 89 percent of total global service provider revenues. By 2010, the revenue driver had changed to mobility services, with growing contributions from internet access. 

source: ITU 

According to researchers at IDATE, mobility represented about 80 percent of revenue growth, with 64 billion Euros generated by mobile services; 15.6 billion by all fixed network services. 

source: Idate 

Before 2020, mobile services revenue had become the revenue driver in every market regionally. 

source: Idate 

But mobility itself will be challenged as subscriptions and use of mobile internet access reach saturation. 

Those patterns illustrate a principle: telecom service providers have had to replace about half of total existing revenue every decade, since about 1990 at the very least. 

As a rule, I expect that any given communications service provider will have to replace half of current revenue about every decade. Among the best examples (because we have the data) is the change in composition of U.S. telecom revenues between 1997 and 2007.

Back in 1997, nearly half of total revenue was earned from “toll” services (long distance, including international and domestic long distance voice. Profits also were disproportionately driven by long distance services.

A decade later, toll service had dropped to 18 percent of total revenue, while mobile services had risen to about half of total revenues, up from about 16 percent of total.

In addition to mobility revenues displacing long distance, internet access began to build around 2000. Between 2000 and 2010, internet access had grown to represent 24 percent of total revenues.  

Voice is an essential feature of a mobile account, of course. But voice usage--as such--does not drive revenue. The reason is the low--and declining--prices of carrier voice services and substitution by over-the-top messaging. 

By 2021, fixed network voice will represent only about 7.7 percent of total global telecom revenues, according to researchers at Ovum. 

Fixed network broadband will represent 18 percent of total revenues, while subscription TV represents about 15 percent of total revenues.

The Next U.S. Recession Will Test Resilience of Video, Communications Businesses

Whenever the next U.S. recession happens, we will see whether the many changes in the telecom, cable TV and video streaming markets will change the historic view of how telecom and video entertainment stocks behave during downturns. 

Traditionally, both telecom and cable TV equities have been viewed as resistant to customer defections in recessions as both are “essential” or “important” recurring services. 

But the markets and consumer tastes have been evolving: reliance on mobile phone services and abandonment of fixed network services; substitution or addition of video streaming services and reduced linear video subscription buying; increased importance of internet access and a decrease in importance of voice and linear video services. 

source: Broadband Search, Seeking Alpha 

All of which raises new questions, including the issue of whether streaming services will prove more resistant to customer churn during recessions, compared to linear video. 

Study Title/Author	Findings
"Do Consumers Cut the Cord in a Recession?" by John Beggs and Patrick/2010	Found a slight decrease in cable TV subscriptions, but not a significant decline.
"Telecom Stocks and Economic Downturns" by JPMorgan Chase (Investment Report) /2020	Indicated telecom stocks generally outperform the broader market during downturns.
"The Recession Resilience of Defensive Sectors" by Fidelity Investments (Market Commentary) /2023	Listed telecom as a sector with potential resilience, but noted the importance of specific company financials.
The Recession and Telecom, Deloitte (2009)	Revenue for telecom service providers remained relatively stable during the 2008 recession, but capital expenditures declined.
The U.S. Telecommunications Industry During Economic Downturns, The Brattle Group (2010)	While telecom revenue growth may slow during recessions, it generally holds up better than the broader economy.
Cord Cutting: What Do Past Recessions Tell Us? MoffettNathanson (2020)	Previous recessions saw limited cord-cutting, suggesting cable TV might retain some stability during downturns. However, the study acknowledges the changing media landscape.
Fama & French (1989)	Defensive sectors like telecom and utilities tend to outperform cyclical sectors.
Ang & Timmermann (1993)	Telecom and utilities exhibit lower volatility and higher risk-adjusted returns during recessions.
Blitz & Reichlin (2001)	Telecom and utility stocks are less affected by credit downgrades compared to cyclical sectors.

A recession might accelerate the secular trend of fixed network voice service abandonment, as consumers prefer mobile phone service. Likewise, a recession might also accelerate linear video abandonment rates, considering the relative expense, compared to streaming alternatives. 

To be sure, live sports will be a key issue for a portion of the buying public. Though most observers see a continuing shift of live sports to streaming services, that trend is not as developed, yet. So sports fans might still conclude they have no choice but to keep their linear video subscriptions. 

And that should continue to prop up demand during recessionary periods. 

On the other hand, perhaps a majority of consumers who are not sports fans can buy multiple streaming subscriptions at lower (or near equivalent) prices than they can buy a linear subscription, suggesting the possibility that streaming services could prove more attractive during a recession. 

Also, streaming arguably still is a growth business, while linear video is in decline. Any recession might accelerate such trends. 

source: Ryan Ang, Seeking Alpha 

The most recent recession, caused by the imposition of Covid shutdowns on the economy, might not provide much insight. With the “in person” economy largely shut down in many countries, demand for work from home or learn from home internet access was quite high. 

Take rates and usage of mobility services arguably rose for the same reason. And the value of streaming and even linear TV services arguably was boosted by the lack of other entertainment options. 

So the most-recent major downturns for which we arguably have data would be the 2008 global financial crisis and the 2000 to 2001 dotcom crash, when video streaming was not a mainstream business at scale.