Product and Customer "Who, What, Where, When, Why" is Evolving

What you sell matters. How you sell it also often matters. Who you sell it to, and where you sell it, also matters. How much you sell always matters. What it costs you to sell those items also always matters.

The rise of digital infrastructure partly raises the issue of how best to organize the production and sale of internet access and other connectivity products, as cloud computing has changed the way we think about how to procure and supply computing and applications.

To a greater extent than ever, asset owners and analysts evaluate the merits of asset-light or asset-lighter approaches. That changes the answers to the questions of what, who, where, when, why products get sold, as well as how much and how profitably.

Access providers tend to have operating margin valuation multiples as much as three times lower than infrastructure-only providers such as tower companies. 

Several aspects seem to account for the disparities. Tower companies sell to all competitors in a market, and therefore are viewed as representing less risk, as the tower companies can theoretically address nearly 100 percent of the market.

No single retail telco or internet service provider ever can claim to acquire as customers more than a fraction of the total market. Additionally, tower companies sell multi-year contracts, often with price escalator clauses to protect against inflation. 

That offers the sort of cash flow predictability that investors value in utility type businesses ranging from electrical and natural gas retailers to airports and toll roads. Also, cell tower assets offer some protection against unrestrained new competition. 

source: Deloitte 

Data center assets also are viewed as having similar characteristics, though perhaps with less moat protection, as, in principle, additional data centers can be built at the same locations. 

Still, there are but a handful of hyperscalers who are potential data center tenants, so there are some moats in that regard. But the total range of enterprise and business tenants is far broader. 

While additional cell towers can be built at similar locations, the number of potential tenants is more limited, as there might be only a handful of potential tenants. 

For such reasons, data center assets might show a broader range of valuations, but still be much higher than EBITDA valuations for access providers. 

source: Oliver Wyman

AT&T Gigapower Joint Venture Raises Questions

The Gigapower joint venture between AT&T and BlackRock is one more illustration of how the local connectivity business model is evolving. First of all, the venture will operate on a wholesale basis outside AT&T’s core fixed network footprint. AT&T will be an anchor tenant on the network.

The open access network initially will target about 1.5 million locations outside the 21-state AT&T fixed network footprint. AT&T might not traditionally have been a fan of wholesale local access, but the capital requirements to build out networks in 29 states where it has no existing fixed network operations is daunting.  

Cost sharing appears to be the way AT&T has concluded it must operate to expand its own retail operations in those 29 states, as a fixed network services provider. \

T-Mobile also is reportedly looking at some form of joint venture to start building its own fixed network capabilities. Cable One also looks to use joint ventures to fund its own ISP footprint out of its current footprint. In the United Kingdom Virgin Media O2 likewise has chosen to create a joint venture to build new facilities out of its current footprint.  

Other service providers are taking other steps to boost capacity and internet access revenues outside their core region. Verizon is using fixed wireless for that purpose, as is T-Mobile, which historically has had zero fixed network assets able to provider customers with internet access. 

Many independent ISPs are building their own networks as well. The point is that huge amounts of capital are required to expand fiber-to-home networks and it no longer appears ISPs can do so by themselves. 

In the mobile segment of the business, though facilities-based competition has been the norm, there are some moves towards single-network patterns where wholesale access to a common platform is viewed as the only way, or the best way, to ensure rapid uptake of 5G and future mobile platforms. 

Difficult business models for facilities-based competition are part of that analysis. 

The growing joint venture movement in the fixed networks business also suggests a model change. At least where it comes to building out-of-region networks, full network ownership might not be viewed as the best strategy. But if the alternative is full wholesale, which might not be viewed so favorably, either, the alternative of owning some of the infrastructure might be viewed as a reasonable compromise. 

That hybrid approach--own some of what you need or sell--could be an important developing trend, compared to the alternative of “own 100 percent” of what you need or sell. Even if desired, competitive market dynamics might make that solution unobtainable. 

Business strategies that are more asset light have been proposed and considered for some time. In some markets, structural separation creating a wholesale-only model sets the ground rules. In the mobile segment of the business, asset disposals have become common, as mobile operators conclude they can monetize some of their infrastructure without sacrificing competitiveness.  

The broad issue is how far this reevaluation of asset value can go. It is one thing to spin off tower assets. It is another to use joint ventures to expand into new geographies. It might be quite something else to conclude that the actual access network provides so little value that it can be procured using wholesale mechanisms, and that network ownership confers less competitive advantage than it once did. 

It is too early to say a tipping point, in that regard, has been reached. Out of region, capital requirements are large enough that partial ownership might be the only alternative. 

In region, leading access providers still prefer to own their core access infrastructure. But change is happening. How much change is possible is the next question.

Can Telcos Capture New Platform Revenue?

Some observers now believe that about 70 percent of new value created through “digitalization” over the next decade will be based on platform-enabled, ecosystem-based business models, according to the World Economic Forum. 

That should raise questions about how much of that economic activity can be captured by telcos that mostly operate in non-platform markets. Basically, telecom is a “pipe” business, not only related to common parlance about selling connections, but also because of the “direct to customer” sales model. 

Telecom is not the only business or industry where debates about business strategy include the issue of “pipes versus platforms.” In fact, almost all businesses use a “pipe” model: they source and create products sold to customers. Firms create products, push them out through various distribution systems for sale to customers. Value is produced upstream and consumed downstream. 

Virtually all consumer goods use a pipe model, as does manufacturing, media, most software products and education. 

Platforms are different. Unlike pipes, platforms do not just create products and sell them. Platforms allow users to create and consume value as well. When external developers can extend platform functionality using application platform interfaces, that usually suggests a platform model could exist. 

Another way of stating matters is that, on a platform, users (producers) can create value on the platform for other users (consumers) to consume. Think of YouTube, Wikipedia, Amazon, Uber or Lyft. 

The business implications can be profound. Some attribute Apple’s rise to prominence in the phone industry not on its design, its user interface or operating system features but to its creation of an ecosystem and platform. 

In fact, the ability to generate revenue from acting as an intermediary or marketplace for different sets of market participants is the functional definition of whether some entity is a platform, or not. 

That can be glimpsed in service provider video subscription businesses, where revenue is earned directly from subscribers, but also from advertisers and in some cases from content suppliers. It is the sort of thing eBay must do, daily, in a more direct way. 

source: Platform Business Model 

To be sure, there are some differences between the traditional app provider platform and any possible connectivity provider platform. For starters, by definition, app platforms tend to be asset light. No surprise there. Software-based businesses almost always are less asset intensive than most other physical businesses. 

In general, however any “pipe” business that sells a set of products directly to its customers will tend to require more owned assets than a software business that operates in an ecosystem. 

source: Platform Business Model

At a high level, when executives and professionals in the connectivity business talk about dumb pipes, they almost always refer to commodity product business models selling undifferentiated carriage or delivery of bits. But there are other senses in which the “pipe” model also matters. 

If one believes that prices for telecom products are destined to keep declining, or that more for the same price is the trend, then there are a couple of logical ways to “solve” such problems. 

Connectivity providers can create and sell new or different network-based products or shift into other higher-value and different parts of the product ecosystem. That is one way to escape the trap of marginal cost pricing, which might be the industry’s existential problem. 

But it is not clear whether telcos can create platform business models, and if so, where and how. The traditional connectivity business seems destined to remain a pipe (create products sold direct to consumer) model. There are glimmerings, though.

Some service providers who now are video subscription providers can create an advertising venue or marketplace once the base of subscribers grows large enough. So that provides one example. 

Some data centers work on creating marketplaces or exchanges that enable transactions beyond cross connects, even if the revenue model is indirect (marketing potential, lower churn, higher tenancy, greater volume) 

So far, connectivity providers are mostly thinking about what could emerge with edge computing, beyond the pipe revenue model (selling compute cycles or storage). Some might envision a potential role in one or more internet of things use cases such as automobile IoT or unmanned aerial vehicle networks. 

Still, it never is easy for any company, in any industry to create a platform model, even if many would prefer it over a pipe model. 

But the potential path forward seems logical enough. The historic path to create a platform has often involved sale of some initial direct product, sold to one type of customer, before becoming the foundation for creation of the marketplace or platform that creates new value for different sets of customers. 

That strategy might be called stand-alone use, creating a new market by directly satisfying a customer need, before a different two-sided or multi-sided market can be created, where at least two distinct sets of participants must be brought together, at the same time, for the market to exist. Virtually any online marketplace is such a case. 

Others might call it single-player. OpenTable, which today has a marketplace revenue model, originally only provided a reservation system to restaurants, operating in a single-sided market mode, before it then could create a two-sided model where restaurants pay money for the booked reservations made by consumers. 

The first million people who bought VCRs bought them before there were any movies available to watch on them. That might strike you as curious, akin to buying a TV when there are no programs being broadcast. 

In fact, though commercialized about 1977, it was not firmly legally established that sales of VCRs were lawful until 1984, when the U.S. Supreme Court ruled that Sony could sell VCRs without violating copyright law, as Hollywood studios alleged. 

So what were those people doing with their VCRs? Taping shows to watch later. Time shifting, we now call it. Only later, after Blockbuster Video was founded in 1985, did video rentals become a mass market phenomenon. 

So here is the point: quite often, a new market is started one way, and then, after some scale is obtained, can develop into a different business model and use case. 

Once there were millions of VCR owners, and content owners lost their fear of cannibalizing their main revenue stream (movie theater tickets), it became worthwhile for Hollywood to start selling and renting movies to watch on them. 

Eventually watching rented movies became the dominant use of VCRs, and time shifting a relatively niche use. 

So OpenTable, which operates in a two-sided marketplace--connecting restaurants and diners--started out selling reservation systems to restaurants, before creating its new model of  acting as a marketplace for diners and restaurants.

The extent to which that also will be true for some internet of things platforms is unclear, but likely, even for single-sided parts of the ecosystem. 

The value of any IoT deployment will be high when there is a robust supply of sensors, apps, devices and platforms. But without many customers, the supply of those things will be slow to grow, even in the simpler single-player markets. Just as likely, though, is the transformation of at least some of the single-player revenue models to two-sided marketplaces. 

In other words, a chicken-and-egg problem will be solved by launching one way, then transitioning to another, more complicated two-sided model requiring scale and mutual value for at least two different sets of participants. In a broad sense, think of any two-sided market as one that earns revenue by creating value for multiple sets of participants.

Amazon makes money from product sellers and buyers, while at the same time also earning revenue from advertisers and cloud computing customers. 

Telcos have faced this problem before. 

Back in the 1870s and 1880s, when the first telephone networks were created, suppliers faced a severe sales problem. The value of the network depended on how many other people a customer could call, but that number of people was quite small. The communications service has a network effect: it becomes more valuable as the number of users grows. 

These days, that is generally no longer the case. The number of people, accounts and devices connected on the networks is so large that the introduction of a new network platform does not actually face a network issue. The same people, devices and accounts that were connected on the older platform retain connectivity while the new platform is built. 

There are temporary supply issues as the physical facilities are built and activated, but no real chicken and egg problem. 

It remains to be seen whether some connectivity providers also will be able to create multi-sided (platform) markets for  internet of things or other new industries. 

The initial value might simply be edge data center functions. Later, other opportunities could arise around the use of edge computing, the access networks, customer bases and app providers. It would not be easy; it rarely is. But creating new revenue streams for some customers who just want edge computing cycles could create foundation for other revenue streams as well. 

The point is that it is not so clear telcos will reap much of the bounty.

U.S. Mobile Market Share is Unstable, With or Without T-Mobile US Merger with Sprint

Market share in the U.S. mobile market has in many past years depended partly on whether one counted subscribers or revenue. In 2019 AT&T was biggest, measured by accounts. In the past, in some years Verizon was biggest if one measured by revenue. 

By 2018, AT&T arguably was the leader in both revenue and subscribers. 

This look a 2018 revenue shows AT&T leading in revenue and subscribers, overall.

source: Statista

One could make an argument that Verizon lead in postpaid accounts, though. 

source: Cowen and Company

Perhaps ironically, whether the T-Mobile US merger with Sprint is approved or denied, U.S. mobile market structure will remain unsettled and open to share changes of some size. The reason is that, longer term, markets tend to take an unequal share distribution. 

With or without a T-Mobile merger with Sprint, U.S. market structure is unstable, using some classic rules of thumb. Heavily capital intensive industries serving mass markets often take an oligopolistic shape, if not a monopolistic shape. 

At best, only a few firms are sustainable. 

Most stable markets are led by a few firms. In fact, many stable markets take a particular shape. As the PIMS database suggests, a stable industry structure eventually tends to take a shape where the number-two provider has half the share of the leader, while the number-three provider has share half that of number two. 

That tends to produce a market share distribution of something like 4:2:1. So far, that tends to be true for physical industries that are asset heavy as well as internet and applications businesses that are asset light. That might be why it so often seems to be the case that a market follows a rule of three. 

More importantly, in many markets, just two firms have 80 percent of profits. 

So with, or without, a merger of T-Mobile US with Sprint, the U.S. mobile market would have an uncomfortably unusual market structure. The gap between AT&T and Verizon is not wide enough to be stable, for example. 

When the market structure 4:2:1 or something close to it prevails, competitors two or three do not have incentives to launch price attacks against the market leader, as the leader has the resources and incentive to do whatever is required to beat back a price attack. 

Will Any Telco Eventually Become a True Platform?

One often hears advice that firms should try to become platforms. Whether that is possible, in almost all cases, is the issue. Platform as a business model varies from the use of the term in the computing industry. 

As a business model, a platform is a marketplace or exchange. It means revenue is earned by a fee or commission on a sale of a third party good or service, not the direct ownership and supply of that product. 

That is quite different from the typical business model for most businesses, for centuries. Most businesses create a product and then sell those products to customers. All connectivity providers do the same. 

To become a platform would mean, at the very least, shifting from creating and selling connectivity services to creating a marketplace for others to sell and buy connectivity services. No firm in the communications industry has done that, ever. 

Some data center operators have created ecosystems of colocated firms. But the revenue model still is real estate. Data center operators do not actually earn revenue (commissions or fees) for purchases by tenants of the data centers. The business model remains “real estate.”

The advantages of a platform business model, assuming one can be created, are the ability to scale, lower transaction costs for buyers and sellers, as well as the creation of new distribution channels for sellers and buyers. Most platforms must create ecosystems of suppliers as well.  

source: Platform Business Model 

Some note that asset ownership patterns are different for platforms: they are said to be asset light. 

Platforms also might help to make resources and participants more accessible to each other on an as-needed basis. In that sense Amazon Web Services is a platform. Social media companies also are thought of as platforms, aggregating people and interests and then building revenue models based on advertising and commerce. 

Indeed there are conceptually many forms a platform can take. Marketplaces for services or products are one set of forms. 

But payment or investment platforms also are possible. Any peer-to-peer payment service or app might be viewed as a platform. A stock exchange also is an investment platform. 

source: Applico. 

Social or possibly communication networks can be platforms, especially when communications occur in the context of a social network. 

Software development platforms also can be created, whether based on operating systems, application program interfaces or open source.

Content platforms might include gaming, other forms of content or overlap with social platforms. 

The big hurdle for a connectivity provider is that it must essentially get out of its current business--selling connectivity services--and become something else. If it is possible, that new model would involve creating a marketplace for others to sell and buy services from each other. 

That would be among the most-difficult of all business strategy transitions, as it changes the answer to the question “what business am I in?”

"Pipes to Platforms" is a Generic Problem, Not Just a Telecom Issue

Telecom is not the only business or industry where debates about business strategy include the issue of “pipes versus platforms.” 

In fact, almost all businesses use a “pipe” model: they source and create products sold to customers. Firms create products, push them out through various distribution systems for sale to customers. Value is produced upstream and consumed downstream. 

Virtually all consumer goods use a pipe model, as does manufacturing, media, most software products and education. 

Platforms are different. Unlike pipes, platforms do not just create products and sell them. Platforms allow users to create and consume value as well. When external developers can extend platform functionality using application platform interfaces, that usually suggests a platform model could exist. 

Another way of stating matters is that, on a platform, users (producers) can create value on the platform for other users (consumers) to consume. Think of YouTube, Wikipedia, Amazon, Uber or Lyft. 

The business implications can be profound. Some attribute Apple’s rise to prominence in the phone industry not on its design, its user interface or operating system features but to its creation of an ecosystem and platform. 

In fact, the ability to generate revenue from acting as an intermediary or marketplace for different sets of market participants is the functional definition of whether some entity is a platform, or not. 

That can be glimpsed in service provider video subscription businesses, where revenue is earned directly from subscribers, but also from advertisers and in some cases from content suppliers. It is the sort of thing eBay must do, daily, in a more direct way. 

source: Platform Business Model 

To be sure, there are some differences between the traditional app provider platform and any possible connectivity provider platform. For starters, by definition, app platforms tend to be asset light. No surprise there. Software-based businesses almost always are less asset intensive than most other physical businesses. 

In general, however any “pipe” business that sells a set of products directly to its customers will tend to require more owned assets than a software business that operates in an ecosystem. 

source: Platform Business Model

At a high level, when executives and professionals in the connectivity business talk about dumb pipes, they almost always refer to commodity product business models selling undifferentiated carriage or delivery of bits. But there are other senses in which the “pipe” model also matters. 

If one believes that prices for telecom products are destined to keep declining, or that more for the same price is the trend, then there are a couple of logical ways to “solve” such problems. 

Connectivity providers can create and sell new or different network-based products or shift into other higher-value and different parts of the product ecosystem. That is one way to escape the trap of marginal cost pricing, which might be the industry’s existential problem. 

But it is not clear whether telcos can create platform business models, and if so, where and how. The traditional connectivity business seems destined to remain a pipe (create products sold direct to consumer) model. There are glimmerings, though.

Some service providers who now are video subscription providers can create an advertising venue or marketplace once the base of subscribers grows large enough. So that provides one example. 

Some data centers work on creating marketplaces or exchanges that enable transactions beyond cross connects, even if the revenue model is indirect (marketing potential, lower churn, higher tenancy, greater volume) 

So far, connectivity providers are mostly thinking about what could emerge with edge computing, beyond the pipe revenue model (selling compute cycles or storage). Some might envision a potential role in one or more internet of things use cases such as automobile IoT or unmanned aerial vehicle networks. 

Still, it never is easy for any company, in any industry to create a platform model, even if many would prefer it over a pipe model. 

But the potential path forward seems logical enough. The historic path to create a platform has often involved sale of some initial direct product, sold to one type of customer, before becoming the foundation for creation of the marketplace or platform that creates new value for different sets of customers. 

That strategy might be called stand-alone use, creating a new market by directly satisfying a customer need, before a different two-sided or multi-sided market can be created, where at least two distinct sets of participants must be brought together, at the same time, for the market to exist. Virtually any online marketplace is such a case. 

Others might call it single-player. OpenTable, which today has a marketplace revenue model, originally only provided a reservation system to restaurants, operating in a single-sided market mode, before it then could create a two-sided model where restaurants pay money for the booked reservations made by consumers. 

The first million people who bought VCRs bought them before there were any movies available to watch on them. That might strike you as curious, akin to buying a TV when there are no programs being broadcast. 

In fact, though commercialized about 1977, it was not firmly legally established that sales of VCRs were lawful until 1984, when the U.S. Supreme Court ruled that Sony could sell VCRs without violating copyright law, as Hollywood studios alleged. 

So what were those people doing with their VCRs? Taping shows to watch later. Time shifting, we now call it. Only later, after Blockbuster Video was founded in 1985, did video rentals become a mass market phenomenon. 

So here is the point: quite often, a new market is started one way, and then, after some scale is obtained, can develop into a different business model and use case. 

Once there were millions of VCR owners, and content owners lost their fear of cannibalizing their main revenue stream (movie theater tickets), it became worthwhile for Hollywood to start selling and renting movies to watch on them. 

Eventually watching rented movies became the dominant use of VCRs, and time shifting a relatively niche use. 

So OpenTable, which operates in a two-sided marketplace--connecting restaurants and diners--started out selling reservation systems to restaurants, before creating its new model of  acting as a marketplace for diners and restaurants.

The extent to which that also will be true for some internet of things platforms is unclear, but likely, even for single-sided parts of the ecosystem. 

The value of any IoT deployment will be high when there is a robust supply of sensors, apps, devices and platforms. But without many customers, the supply of those things will be slow to grow, even in the simpler single-player markets. Just as likely, though, is the transformation of at least some of the single-player revenue models to two-sided marketplaces. 

In other words, a chicken-and-egg problem will be solved by launching one way, then transitioning to another, more complicated two-sided model requiring scale and mutual value for at least two different sets of participants. In a broad sense, think of any two-sided market as one that earns revenue by creating value for multiple sets of participants.

Amazon makes money from product sellers and buyers, while at the same time also earning revenue from advertisers and cloud computing customers. 

Telcos have faced this problem before. 

Back in the 1870s and 1880s, when the first telephone networks were created, suppliers faced a severe sales problem. The value of the network depended on how many other people a customer could call, but that number of people was quite small. The communications service has a network effect: it becomes more valuable as the number of users grows. 

These days, that is generally no longer the case. The number of people, accounts and devices connected on the networks is so large that the introduction of a new network platform does not actually face a network issue. The same people, devices and accounts that were connected on the older platform retain connectivity while the new platform is built. 

There are temporary supply issues as the physical facilities are built and activated, but no real chicken and egg problem. 

It remains to be seen whether some connectivity providers also will be able to create multi-sided (platform) markets for  internet of things or other new industries. 

The initial value might simply be edge data center functions. Later, other opportunities could arise around the use of edge computing, the access networks, customer bases and app providers. It would not be easy; it rarely is. But creating new revenue streams for some customers who just want edge computing cycles could create foundation for other revenue streams as well.