What Eventually Takes the Place of Mobile Revenues?

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.

source: The Economist

A similar trend can be noted for European Union mobile revenues between 2010 and 2018, a period of less than a decade, but still a time when voice revenue dropped from about 80 billion euros to about 45 billion euros, while messaging dropped from about 19 billion euros to perhaps 10 billion euros and mobile internet access grew from about 18 billion euros to perhaps 42 billion euros.

source: FCC

There is some good evidence that computing industry suppliers must replace half of current revenues every 10 years. That is true for chip maker revenues as for computing services providers.

That pattern is clear in telecommunications as well. Messaging revenues provide a good example. Voice revenues provided an earlier example.

source: Chetan Sharma    

Mobile services have been the industry driver for most of the past couple of decades, but new sources still must be found.

The cable TV industry likewise has had to replace about half its revenue over a decade.

Similar trends can be seen at AT&T, where mobile revenues replaced fixed revenues as the big driver of overall results.

source: Deloitte

The Lead Product Sold by Access Providers in 10 Years Might Not be Invented Yet

Some might think it is mere hyperbole to argue that connectivity service providers literallly must replace half their current revenue every decade. But that has historically been the norm in the competitive era of connectivity. To use the most-obvious examples, nearly all revenue and profit in the period before 1980 was earned selling voice. Does anybody think that is the case today?

Instead, globally, mobile service is what drives both revenue and revenue growth. On the fixed networks, internet access (home broadband) drives revenue, not voice. In developing markets, mobile subscriptions still drive growth. But in developed markets internet access is the revenue growth driver.

In the enterprise wide area networks market, X.25 once drove revenue, followed by frame relay. ISDN and ATM nver caught on. Now it is dedicated internet access, Ethernet transport or MPLS that are key revenue generators. And MPLS is being replaced by SD-WAN.

The colloquial way of expressing this is to say "my top revenue-producing product in 10 years has not been invented yet." Again, that might seem hyperbolde. But think about 4G, 5G and 6G. Each successive next generation network was introduced 10 years after the prior generation. And each successive generation displaced prior generation customer accounts,

Part of the reason for revenue change of that magnitude is product obsolesence. The other issue is declining average selling prices.

This graph of mobile termination rates--the fee a mobile network charges another network for completing an inbound call--illustrates a couple of principles relevant to the connectivity and computing industries. To the extent that computing costs are driven by chip-level capabilities that double about every 18 months, cost-per-operation drops over time. 

source: iconnectiv 

In other words, the cost of executing a single instruction or operation will fall rather sharply every decade, as they essentially fall by half every two years. In this example of mobile termination rates, costs fell from seven cents per minute to less than two cents per minute over a decade, or more than half--and close to three times--in 10 years. 

All other things being equal--such as holding traffic volumes steady--that means termination revenue would have fallen by close to three times, and clearly more than half, over that decade. In practice, since call volumes rose, the decline was likely less, in absolute terms. 

For example, the global number of mobile subscriptions grew about 52 percent between 2010 and 2019, so there were more people making mobile phone calls. But per-minute charges dropped faster, close to 100 percent lower in some countries. 

Other charges also declined. Between 1997 and 2022, for example, the cost of U.S. mobile 41phone subscriptions dropped by 50 percent. So the actual rate of decline for recurring service was not as fast as the decline of calling costs per minute. 

The actual change in revenue sources was complicated. Revenue was boosted by additional subscribers, replacement services (mobile internet access in place of voice and messaging) and higher possible usage in some cases. But revenue was diminished by lower average unit rates for subscriptions, calls and text messaging. 

That illustrates a second point about revenues in the connectivity business: about half of all current revenue earned by a service provider will be gone, every decade. That might sound like an exaggeration. It is not. How many service providers sell ISDN, X.25, frame relay or ATM anymore? At one time, each of those services was, or was supposed to be, a key driver of wide area network data revenues. 

How many access providers sell dial-up internet access anymore? And, over time, what is the typical downstream package purchased by half of all customers? At one point it might have been 1 Mbps or less. At some point that changed to perhaps 10 Mbps, then 100 Mbps, then higher. The point is that in each generation, the “product” changed. 

International and national  long distance calling rates show the same pattern. 

source: FCC 

source: U.S. Department of Justice 

The general point is that revenue sources changed over that decade, as they tend to do every decade. 

In fact, calling revenues now are minor enough that it is difficult to find statistics on calling volume or revenue, as internet access now drives revenue models. 

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.

Vertical Integration Versus Portfolio of Assets: Which Works Better?

“Vertical integration” can be problematic for any non-connectivity asset held inside a telco entity. Ask AT&T or Singtel. 

AT&T’s purchase of Time Warner was an effort to vertically integrate into content. The goal, says AT&T CEO John Stankey, was to “help our domestic connectivity business.” As AT&T now sees matters, the streaming content business must be built globally, and not restricted to a single country, which is primarily AT&T’s connectivity business base. 

That--at least as AT&T now positions the matter--requires a globally-focused business unencumbered by considerations of the domestic market. So AT&T wants to combine its Warner Media assets with Discovery, creating a larger new entity in which it owns 70 percent of the equity. 

That will remove Warner from AT&T’s consolidated results. Needless to say, valuation of such a standalone business should exceed the valuation if the asset were embedded within a telco organization. 

Among the other possible ways to view such assets is the ability to produce free cash flow, revenue growth and profit margins for the mother company, even if not fully consolidated within the telco itself. 

In fact, valuation might be higher precisely because a “pure play” content or streaming asset is valued as other similar assets are. 

Singtel, Southeast Asia's largest telecoms operator, reported that annual net profit halved to S$554 million ($418 million), the lowest net profit in at least two decades. That performance by a leader in exploring additional lines of business illustrates three related issues.

The first issue is the exhaustion of legacy connectivity services markets. The second issue is the traditional difficulty or entering new markets, either in other parts of the ecosystem or in content or applications. 

The third issue is the valuation penalty any successful “up the stack” asset (content, platform, application) has when buried within the telco organization. 

Singtel has been trying to diversify for years, and has been a leader in exploring growth “up the stack” in the application layer, and beyond connectivity. So the inability to reap profit rewards is troubling. 

But some investments such as those in digital marketer Amobee and cyber-security firm Trustwave yielded weaker-than-expected returns, observers note. That is a recurring story for telcos who have tried for many decades to broaden their revenue bases in adjacent areas such as software or computing services. 

The next moves might pair infrastructure asset sales to fund investments in other growth areas such as financial services or gaming. 

At least part of the problem is valuation of telco infrastructure assets. Singtel notes that its infrastructure assets do not provide a valuation boost, compared to other suppliers that own fewer network assets. 

The other issue is that Singtel executives believe ownership of towers, satellites, subsea cables and data centers has not boosted Singtel’s valuation, compared to peers who own less of such assets. The expectation is that selling some of those infrastructure elements will free up capital to deploy in other growth areas. 

Weakness in mobile services revenue and market share is among the current issues. Mobile service revenue dropped 19 percent; blended average revenue per user fell 18.5 percent and subscriptions fell 3.6 percent over the last year, for example. 

That is not a unique problem. Globally, other service providers face low growth rates and falling ARPU. Saturation of mobile services--the industry growth driver for decades--is part of the problem. 

Beyond that, the typical telco must replace half of existing revenue every decade or so. We have seen that in fixed network voice services, mobile voice, long distance revenue and fixed network services generally. We have seen it in text messaging as well. 

source: IP Carrier

source: FCC  

That might seem hyperbole, but is a demonstrable fact. Globally, that means telcos have to generate about $400 billion in new revenue just to replace what they will lose over the next decade.  

Singtel’s issues really are the same issues every connectivity service provider eventually will face. The issue is how to create huge new revenue streams, outside the connectivity core. Those who argue that amount of growth can happen within the connectivity core, it seems to me, have the burden of proof.

Vertical integration might not be the only way--perhaps not the best way--to do so. Any sufficiently large asset outside the connectivity core will get a higher valuation if outside the telco, operating as a "pure play."

That might not help connectivity business revenue and profit matgin directly, but it arguably is a better way to grow the overall business.

The Vertical Integration Downside: Lower Valuation

Singtel, Southeast Asia's largest telecoms operator, reported that annual net profit halved to S$554 million ($418 million), the lowest net profit in at least two decades. That performance by a leader in exploring additional lines of business illustrates three related strategic issues that eventually will be faced by every connectivity service provider serving the mass market.

The first issue is the exhaustion of legacy connectivity services markets. At some point, every customers that wants service will be buying it.

The second issue is the traditional difficulty or entering new markets, either in other parts of the ecosystem or in content or applications. Telcos have had a very-difficult time sustainably creating new roles for themselves elsewhere in the value system.

The third issue is the valuation penalty any successful “up the stack” asset (content, platform, application) has when buried within the telco organization. The same asset--inside a telco--earns a less robust valuation than that same asset, outside the telco organization.

That raises the issue of "how" a connectivity provider should "own" assets elsewhere in the value chain. Vertical integration actually seems to penalize the value of assets. Which suggests some strategy of ownership "outside" the connectivity organization.

Singtel has been trying to diversify for years, and has been a leader in exploring growth “up the stack” in the application layer, and beyond connectivity. So the inability to reap profit rewards is troubling. 

But some investments such as those in digital marketer Amobee and cyber-security firm Trustwave yielded weaker-than-expected returns, observers note. That is a recurring story for telcos who have tried for many decades to broaden their revenue bases in adjacent areas such as software or computing services. 

The next moves might pair infrastructure asset sales to fund investments in other growth areas such as financial services or gaming. 

At least part of the problem is valuation of telco infrastructure assets. Singtel notes that its infrastructure assets do not provide a valuation boost, compared to other suppliers that own fewer network assets. 

The other issue is that Singtel executives believe ownership of towers, satellites, subsea cables and data centers has not boosted Singtel’s valuation, compared to peers who own less of such assets. The expectation is that selling some of those infrastructure elements will free up capital to deploy in other growth areas. 

Weakness in mobile services revenue and market share is among the current issues. Mobile service revenue dropped 19 percent; blended average revenue per user fell 18.5 percent and subscriptions fell 3.6 percent over the last year, for example. 

That is not a unique problem. Globally, other service providers face low growth rates and falling ARPU. Saturation of mobile services--the industry growth driver for decades--is part of the problem. 

Beyond that, the typical telco must replace half of existing revenue every decade or so. We have seen that in fixed network voice services, mobile voice, long distance revenue and fixed network services generally. We have seen it in text messaging as well. 

source: IP Carrier

source: FCC  

That might seem hyperbole, but is a demonstrable fact. Globally, that means telcos have to generate about $400 billion in new revenue just to replace what they will lose over the next decade.  

Singtel’s issues really are the same issues every connectivity service provider eventually will face.

Peak Telecom is Coming

Most observers of global telecom revenue will note that, with a couple of possible exceptions, industry revenue has grown continuously, for as long as we have kept records.

On the other hand, one has to wonder whether telecom revenue will reach a peak at some point in the relatively-near future, as mobile adoption reaches saturation in every country and as every customer buys as much internet access as they prefer.

Looking only at the country of Malaysia, the trends are clear enough: Mobile growth is reaching an absolute peak, as is mobile broadband. Fixed line voice is declining, and has been dropping since about 2000, while fixed network internet access has grown to replace the lost fixed network revenue, but itself is nearly saturated.

source: Researchgate.net/

source: FCC

That does not mean service providers will stop innovating--or trying to do so--or seeking to add big new revenue sources. But that new revenue will mostly balance lost revenues in the core business, as voice, messaging and eventually, even internet access revenues fall.

Indeed, replacing lost revenue now is a major industry challenge. The global telecom industry is about a $1.5 trillion annual revenues industry. To move the needle, any new sources have to be large, simply to replace lost revenues from legacy sources.

This trend is seen in many developed markets, but now also can be predicted for fast-growing Asia Pacific markets as well.

http://slideplayer.com/slide/11399351/

Roughly speaking, to sustain three percent annual revenue growth, and assuming zero losses in all legacy sources, some $45 billion has to be added every year. But that is not realistic. With actual declines in voice and messaging revenue, and coming shrinkage and margin compression in newer sources such as internet access or video entertainment, service providers might have to replace as much as half of all current revenue in about a decade.

Revenue erosion big enough to remove half of revenue within a decade is roughly equivalent to a seven percent a year decline. So even if new sources grow three percent a year, losses still will happen.

To sustain revenues at their current level might therefore require annual growth of seven percent. That is not going to happen, in most markets. As James Sullivan, J.P. Morgan head of Asia equity research (all of Asia except Japan) telecom revenue growth is now less than GDP growth.

68 major telecoms groups – aggregate revenue, 2009-2016

source: Telco 2.0 Research  

Other analysts make the same argument, namely that revenue growth, at a global level, now is less than one percent.

Peak telecom is coming.

What Revenue Sources Drive the Next 50% Growth?

As a rule, I expect that any given communications service provider will have to replace about 50 percent 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.

source: FCC

A similar trend can be noted for European Union mobile revenues between 2010 and 2018, a period of less than a decade, but still a time when voice revenue dropped from about 80 billion euros to about 45 billiion euros, while messaging dropped from about 19 billion euros to perhaps 10 billion euros and mobile internet access grew from about 18 billion euros to perhaps 42 billion euros.

The point is that revenue sources changed at least 50 percent over eight years. So the big question now, in developed markets, is what will replace mobile internet access, voice and messaging revenues over the next decade, when half of current revenues, it must be assumed, will disappear.

That is why--for better or worse--internet of things, video entertainment, application, platform and other ultra-low-latency services are so important. If there are other candidates for revenue replacement, it is hard to say what they might be.