Is "Fair Share" Really Necessary?

Ignoring for a moment the arguments about network interconnection principles and existing policies that have internet domains compensating each other for unequal traffic flows, do telcos really “need” so-called “fair share” payments by a few hyperscale app providers?

Nobody likely disputes the challenge of monetizing continual investments in capacity, on either mobile or fixed networks. In competitive markets, payback is a challenge. But even so, the industry’s own data suggests there is not an urgent business model problem. 

Industry sources might argue that profit margins and revenue growth rates are lower for mobile and fixed network telcos than in the average of all other industries.

According to GSMA Intelligence, the average net profit margin for telcos globally was 14.1 percent in 2022, lower than the average net profit margin for all industries, which was 16.9 percent. Likewise, GSMA Intelligence says the average revenue growth rate for telcos globally was 2.2 percent in 2022, lower than the average revenue growth rate for all industries, which was 4.2 percent.

Critics might simply point out that the telecom service provider business always was a slow-growth, utility-like industry. So low growth rates are not new, nor a surprise. Lower profit margins than “average” also are not a surprise. Each industry has a different growth rate. 

And capital-intensive industries, whether generally considered utilities or not, generally have lower profit margins. 

Industry	Revenue Growth Rate (2022)	Capital Intensity
Telecommunications	2.2%	High
Electrical Power	3.4%	Very High
Natural Gas	3.8%	High
Wastewater	2.9%	Medium
Airlines	2.1%	High
Railroads	1.9%	Very High
Shipping	2.5%	Very High

So yes, connectivity service provider revenue growth rates are low.  But so are growth rates for other capital-intensive industries. Generally speaking, industries with less capital intensity also tend to grow faster. 

Industry	Revenue Growth Rate (2022)
Technology	6.5%
Healthcare	5.2%
Financial Services	4.8%
Consumer Discretionary	4.3%
Consumer Staples	3.9%
Industrials	3.6%
Energy	3.4%
Utilities	3.2%
Materials	3.0%
Real Estate	2.8%
Telecommunications	2.2%

Also, with the caveat that growth rates and profit margins can vary substantially between suppliers in different segments of the market, profit margins are not unusually low for service providers in any region. 

Slow revenue growth, as noted previously, has been--and remains--characteristic of telecom services, as is generally true for many other capital-intensive industries. 

Region	Telco Net Profit Margin	Revenue Growth Rate
North America	12.2%	1.8%
Europe	13.5%	1.9%
Asia	15.6%	2.5%
Latin America	12.8%	2.1%
Africa	9.3%	1.7%

How Big a Problem are Industry Revenue Growth Rates?

In most industries, it is probably safe to argue that under-par performance is the existential problem, not in-line performance. Executives don't get fired unless their outcomes are sub-par, compared to industry averages.

Is low connectivity service provider revenue growth a problem? It might seem obvious that it is a problem, but whether it is an existential problem is probably the better way to frame the question. Different industries have different growth rates, profit margins and roles in the value chain. Noting such differences might be highly useful for firm and industry strategy.

It might simply be unreasonable to expect traditionally-slow-growing industries to alter those patterns, just as we might be skeptical about firms in traditionally fast-growing industries that do not seem to exhibit the “industry standard” growth rates. 

The exception is if a given firm in a given industry is able to deploy or acquire assets in different parts of an industry value chain that have distinctly-different growth characteristics. That is the logic behind the “move up the stack” argument. 

As a management professor once advised us, “if you have a choice, choose a fast-growing industry.” The reason is that similar amounts of effort and skill (the same effort by a single individual in different settings) will produce different outcomes when applied to declining, slow-growing or fast-growing industries and firms. 

source: KPMG 

The point is that annual growth rates are a “problem” in any industry only when the trend worsens and growth slows over time. But that is not necessarily an issue management can fix, in any one company in any single industry. Over time, profit margins or growth rates in many industries have slowed, in part because of market saturation and competition. 

Indeed, one would be hard pressed to find an industry whose revenue growth rates have not declined over time. 

Industry Sector	Historical Average Growth Rate (%)	Projected Long-Term Growth Rate (%)
Technology	8-10%	5-7%
Healthcare	5-7%	4-6%
Consumer Staples	3-4%	2-3%
Consumer Discretionary	5-6%	3-5%
Financials	6-8%	3-5%
Industrials	4-6%	2-4%
Materials	5-7%	3-5%
Energy	4-6%	2-4%
Utilities	3-5%	2-4%
Telecommunications	5-7%	2-4%
Retail (except E-commerce)	2-4%	1-2%
E-commerce	10-15%	7-10%
Education	4-6%	3-5%

And with the caveat that different segments and firms might have different growth rates, industries with utility-like characteristics show the same slower revenue growth rates as seen in most other industries. 

Industry Sector	Historical Average Growth Rate (%)	Long-Term Growth Rate (%)
Telecommunications	5-7%	2-4%
Cable	4-6%	1-3%
ISP (Internet Service Providers)	6-8%	3-5%
Satellite Communications	8-10%	4-6%
Electric Utilities	3-5%	2-4%
Water Utilities	3-4%	2-3%

The point is that slow growth rates, or slower growth rates, are not necessarily an existential problem. Expected growth rates might simply reflect the near-universal slowing of industry growth rates in virtually all industries over time. 

And to the extent that utility-type industries and connectivity businesses traditionally have growth rates in the middle of all industries, continued “slow growth” is not unexpected, nor unusual, nor an imminent threat. 

That is simply the nature of the business. To be sure, not every provider in every segment has the same growth rate. But the reasons for such divergences are hard--if not impossible--to replicate. Younger firms tend to grow faster than older firms. Non-dominant firms sometimes get help from regulators to increase competition with dominant firms. Some segments of an industry grow faster than others. 

Sure, every executive would prefer faster growth rates over slower growth. But there are rational limits to how much that is subject to managerial skill.

How Disruptive is 5G Fixed Wireless?

Many observers have argued fixed wireless would not be a material driver of U.S. home broadband market share change. Just as vehemently, T-Mobile and Verizon have argued for precisely that impact. 

Cable operators say they have not seen material impact, yet. But at least some equity analysts now say fixed wireless will be highly disruptive. Wells Fargo telecom and media analysts Eric Luebchow and Steven Cahall predict fixed wireless access will grow from 7.1 million total subscribers at the end of 2021 to 17.6 million in 2027, growth that largely will come at the expense of cable operators. 

source: Polaris Market Research 

The impact on the installed base will occur more slowly, but the primary impact will be seen in net account additions. Accustomed to getting as much as 94 percent to 100 percent of net account growth, cable might see net new additions drop to perhaps 30 percent to 35 percent in 2023.

If 5G fixed wireless accounts and revenue grow as fast as some envision, $14 billion to $24 billion in fixed wireless home broadband revenue would be created in 2025. 

5G Fixed Wireless Forecast
	2019	2020	2021	2022	2023	2024	2025
Revenue $ M @99% growth rate	389	774	1540	3066	6100	12140	24158
Revenue $ M @ 16% growth rate	1.16	451	898	1787	3556	7077	14082
source: IP Carrier estimate

How important 5G fixed wireless might be depends on which estimates we use for total home broadband revenues, as well as the expected 5G fixed wireless growth rate.

By some estimates, U.S. home broadband generates $60 billion to more than $130 billion in annual revenues. The worse-case scenario for cable operators would be the higher growth rate and the lower revenue base. 

If the market is valued at $60 billion in 2021 and grows at four percent annually, then home broadband revenue could reach $73 billion by 2026. $24 billion would represent about 33 percent of total home broadband revenues. 

		2022	2023	2024	2025	2026
Home Broadband Revenue $B	60	62	65	67	70	73
Growth Rate 4%
Higher Revenue $B	110	114	119	124	129	134
source: IP Carrier estimate

If we use the higher revenue base and the lower growth rate, then 5G fixed wireless might represent about 10 percent of the installed base, which will seem more reasonable to many observers. 

Assuming $50 per month in revenue, with no price increases at all to 2026, 5G fixed wireless still would amount to about $10.6 billion in annual revenue by 2026 or so. That would have 5G fixed wireless representing about 14 percent of home broadband revenue, assuming a total 2026 market of $73 billion.

If the home broadband market were $134 billion in 2026, then 5G fixed wireless would represent about eight percent of home broadband revenue. 

Keep in mind that telcos and independent internet service providers also are expected to take share using fiber-to-home facilities as well. While Verizon expects most of its net additions to come from 5G fixed wireless, T-Mobile expects virtually all of its net additions to come from 5G fixed wireless.