Telcos Now Hope "Metaverse" can be a Platform

What are the odds connectivity providers can create sophisticated 3D gaming platforms including virtual and augmented reality features that provide immersive experiences? 

Now called a metaverse, such platforms provide a shared virtual 3D world, or worlds, that are interactive, immersive, and collaborative, says Nvidia. Others might note that such a potential platform also includes e-commerce and social media features. 

What are the odds that the same technology also can be the foundation for hologram-based and three-dimensional digital twin experiences for communications or learning?

Telcos want to find out. 

SK Telecom has launched “ifland”, a new metaverse platform.  SKT’s ifland is a communication-focused platform that supports audio communication and file sharing (pdf and mp4) with up to 130 participants. 

China Mobile and Verizon also have initiatives in the metaverse area. 

DoubleMe’s Holoverse, a proof of concept project, is supported by Telefónica, Deutsche Telekom, TIM, and MobiledgeX.

As with any effort to create a “platform,” success will happen not only because the technology works, but because many business partners find the platform useful. 

source: Bloomberg

As always, there are issues about which participants in which parts of the ecosystem end up driving most of the value. Will such telco or mobile metaverse platforms become commercial successes? 

Or will others, such as  Epic Games and other gaming content suppliers, emerge as the driving forces? It is possible Nvidia or other chip suppliers emerge as leaders, though less likely perhaps than Facebook and other hyperscale app giants emerging as the eventual platform winners. 

To be sure, these telcos will be hailed as major innovators if they succeed, criticized as once again wasting effort in areas where they have no natural advantages, if they fail. 

If the pattern with edge computing holds, success will come when telcos partner with platform suppliers, accepting some incremental role but without trying to create their own brands. Already there are too many other logical suppliers in the value chain staking a claim to becoming the platform of choice. 

You might liken the metaverse to an even more immersive experience than telepresence, itself defined as the experience of “being there.” It is a work in progress. 

Actually, AT&T Did Quite Well in Content and Video Subscription Businesses

Many will criticize telco failures to "innovate." Many will pan diversification efforts such as that made by AT&T into content ownership and entertainment video services. By one reckoning, AT&T actually did quite well.

Many will criticize telco failures to "innovate." Many will pan diversification efforts such as that made by AT&T into content ownership and entertainment video services. By one reckoning, AT&T actually did quite well.

It actually took only a handful of attempts before AT&T was able to emerge as a significant provider of video content, video subscriptions and internet access. In fact, it did not actually take many tries before AT&T and Verizon actually created roles for themselves in content and video. 

On June 24, 1998, AT&T acquired Tele-Communications Inc. for $48 billion, marking a reentry by AT&T into the local access business it had been barred from since 1984. 

Having spent about two years amassing a position in local access using resold local Bell Telephone Company lines, AT&T wanted a facilities-based approach, and believed it could transform the largely one-way cable TV lines into full telecom platforms. 

That move was but one among many made by large U.S. telcos since 1994 to diversify into cable TV, digital TV, satellite TV and fixed wireless, mostly with an eye to gaining share in broadband services of a few different types. 

By some accounts, TCI was at the time the second-largest U.S. cable TV provider by subscriber count, trailing only Time Warner. TCI had 33 million subscribers at the time of the AT&T acquisition. As I recall, TCI was the largest cable TV company by subscribers. 

For example, in 2004, six years after the AT&T deal, Time Warner Cable had just 10.6 million subscribers. In 2000, by some estimates, Time Warner had about 13 million subscribers. That undoubtedly is an enumeration of “product units” rather than “accounts.” Time Warner reached the 13 million account figure by about 2013, according to the NCTA. 

Since 1994, major telcos had been discussing--and making--acquisitions of cable TV assets. In 1992 TCI came close to selling itself to Bell Atlantic, a forerunner of Verizon. Cox Cable in 1994 discussed merging with Southwestern Bell, though the deal was not consummated. 

US West made its first cable TV acquisitions in 1994 as well. In 1995 several major U.S. telcos made acquisitions of fixed wireless companies, hoping to leverage that platform to enter the video entertainment business. Bell Atlantic Corp. and NYNEX Corp. invested $100 million in CAI Wireless Systems.

Pacific Telesis paid $175 million for Cross Country Wireless Cable in Riverside, Calif.; and another $160 to $175 million for MMDS channels owned by Transworld Holdings and Videotron in California and other locations. 

By 1996 the telcos backed away from the fixed wireless platforms. In fact, U.S. telcos have quite a history of making big splashy moves into alternative access platforms, video entertainment and other ventures, only to reverse course after only a few years. 

But AT&T in 1996 made a $137 million  investment in satellite TV provider DirecTV. 

Microsoft itself made an investment in Comcast in 1997, as firms in the access and software industries began to position for digital services including internet access, digital TV and voice services. In 1998 Microsoft co-founder Paul Allen acquired Charter Communications and Marcus Cable Partners. 

Those efforts, collectively, are well within the “one success in 10” rule of thumb, for any single firm, and close to it for the entire industry. More significantly, the amount of revenue generated by those efforts come well within the “one in 100” rules of innovative success for “blockbuster” impact. 

AT&T, remember, continues to own 70 percent to 80 percent of its former Time Warner content assets. It continues to benefit from the cash flow of DirecTV and its fixed network video services. It continues to drive cash flow from HBO Max.

And all that was achieved with far fewer than 10 attempts. By standard metrics of innovation, that clearly beats the odds.

What most will miss is the difficulty of making successful change in any organization, on a routine basis. As a rule of thumb, only about one in 10 efforts at change will succeed. Quite often, only about one in 100 successful innovations is truly consequential in terms of organization performance.

source: Organizing4Innovation 

That means we must tolerate a high rate of failure before we can hope for successful change. And we must fail quite a lot before we encounter a successful innovation with the power to change a company's or a whole industry's fortunes.

Of all the innovations connectivity providers have attempted--and been criticized for--how many have had industry-altering implications? Not many. Fixed network voice; mobile phones; internet access and possibly entertainment video subscriptions have been transformative.

Deregulation, privatization and competition have been historically transformative. But one might argue that was something that "happened to" the connectivity business, not necessarily an innovation of the industry itself.

Yes, we have seen many generations of business data networking services and business phone systems and services. But few have revenue magnitudes so great they change the fortunes of the industry or whole firms. In 150 years, only mobility and internet access have had clear industry-altering implications.

We all are familiar (even when we do not know it) with the sigmoid curve, otherwise know as the S curve, which describes the normal adoption curve for any successful product. We are less familiar with the idea that most innovations fail, whether that is new products, new technologies, new information technologies or business strategies. 

S curves apply only to successful innovations.

Most new products simply fail. In such cases there is no S curve.  The “bathtub curve” was developed to illustrate failure rates of equipment, but it applies to new product adoption as well. Only successful products make it to “userful life” (the ascending part of the S curve) and then “wearout” (the maturing top of the S curve before decline occurs). 

source: Reliability Analytics

Though nobody “likes” to fail, there is good reason for the advice one often hears to “speed up the rate of failure.” The advice is quite practical. 

Only about one in 10 innovations actually succeeds. Those of you who follow enterprise information technology projects will recognize the pattern: most efforts at IT change actually fail, in the sense of achieving their objectives. 

source: Organizing4Innovation 

“We tried that” often is the observation made when something new is proposed. What almost always is ignored is the high rate of failure for proposed innovations. About nine out of 10 innovations will probably fail. Most of us are not geared to handle that high rate of failure. 

Unwillingness to make mistakes almost ensures that an entity will fail in its efforts to grow, innovate or even survive. 

Those of you who follow startup success will recognize the pattern as well: of 10 funded companies only one will really be a wild success. Most startups do not survive. 

 

source: Techcrunch 

Connectivity providers are not uniquely free from the low success rate of most innovations. Innovation is hard. Most often efforts at innovation will fail. Even smaller efforts will fail nine times out of 10. An industry-altering innovation might happen only once in 100 attempts.

The more failure, the more the chances for eventual success. Many would consider telco initiatives in content and video subscriptions to have "failed." It is more accurate to call them an innovative success, given the relative handful of attempts to lead that business.

AT&T continues to own 70 percent of its former Time Warner content assets. It continues to benefit from the cash flow of DirecTV (about 71 percent ownership) and its fixed network video services. It continues to drive cash flow from HBO Max.

And all that was achieved with far fewer than 10 attempts. By standard metrics of innovation, that clearly beats the odds.

Most Big IT Projects--Including "Digital Transformation"--Fail

Of the $1.3 trillion that was spent on digital transformation--using digital technologies to create new or modify existing business processes--in 2018, it is estimated that $900 billion went to waste, say Ed Lam, Li & Fung CFO, Kirk Girard is former Director of Planning and Development in Santa Clara County and Vernon Irvin Lumen Technologies president of Government, Education, and Mid & Small Business. 

That should not come as a surprise, as historically, most big information technology projects fail. BCG research suggests that 70 percent of digital transformations fall short of their objectives. 

From 2003 to 2012, only 6.4 percent of federal IT projects with $10 million or more in labor costs were successful, according to a study by Standish, noted by Brookings.

source: BCG 

IT project success rates range between 28 percent and 30 percent, Standish also notes. The World Bank has estimated that large-scale information and communication projects (each worth over U.S. $6 million) fail or partially fail at a rate of 71 percent. 

McKinsey says that big IT projects also often run over budget. Roughly half of all large IT projects—defined as those with initial price tags exceeding $15 million—run over budget. On average, large IT projects run 45 percent over budget and seven percent over time, while delivering 56 percent less value than predicted, McKinsey says. 

Significantly, 17 percent of IT projects go so bad that they can threaten the very existence of the company, according to McKinsey . 

Beyond IT, virtually all efforts at organizational change arguably also fail. The rule of thumb is that 70 percent of organizational change programs fail, in part or completely. 

There is a reason for that experience. Assume you propose some change that requires just two approvals to proceed, with the odds of approval at 50 percent for each step. The odds of getting “yes” decisions in a two-step process are about 25 percent (.5x.5=.25). In other words, if only two approvals are required to make any change, and the odds of success are 50-50 for each stage, the odds of success are one in four. 

source: John Troller 

The odds of success get longer for any change process that actually requires multiple approvals. Assume there are five sets of approvals. Assume your odds of success are high--about 66 percent--at each stage. In that case, your odds of success are about one in eight for any change that requires five key approvals (.66x.66x.66x.66x.66=82/243). 

So it is not digital transformation specifically which tends to fail. Most big IT projects fail.

"Digital Transformation" Will be as Hard as Earlier Efforts at Change

New BCG research suggests that 70 percent of digital transformations fall short of their objectives. 

That would not surprise any of you familiar with the general success rate of major enterprise technology projects. From 2003 to 2012, only 6.4 percent of federal IT projects with $10 million or more in labor costs were successful, according to a study by Standish, noted by Brookings.

source: BCG 

IT project success rates range between 28 percent and 30 percent, Standish also notes. The World Bank has estimated that large-scale information and communication projects (each worth over U.S. $6 million) fail or partially fail at a rate of 71 percent. 

McKinsey says that big IT projects also often run over budget. Roughly half of all large IT projects—defined as those with initial price tags exceeding $15 million—run over budget. On average, large IT projects run 45 percent over budget and seven percent over time, while delivering 56 percent less value than predicted, McKinsey says. 

Significantly, 17 percent of IT projects go so bad that they can threaten the very existence of the company, according to McKinsey. 

The same sort of challenge exists whenever telecom firms try to move into adjacent roles within the internet or computing ecosystems. As with any proposed change, the odds of success drop as the number of successful approvals or activities increases.

The rule of thumb is that 70 percent of organizational change programs fail, in part or completely. 

There is a reason for that experience. Assume you propose some change that requires just two approvals to proceed, with the odds of approval at 50 percent for each step. The odds of getting “yes” decisions in a two-step process are about 25 percent (.5x.5=.25). In other words, if only two approvals are required to make any change, and the odds of success are 50-50 for each stage, the odds of success are one in four. 

source: John Troller 

The odds of success get longer for any change process that actually requires multiple approvals. Assume there are five sets of approvals. Assume your odds of success are high--about 66 percent--at each stage. In that case, your odds of success are about one in eight for any change that requires five key approvals (.66x.66x.66x.66x.66=82/243). 

The same sorts of issues occur when any telecom firm tries to move out of its core function within the ecosystem and tries to compete in an adjacent area. 

Consultants at Bain and Company argue that the odds of success are perhaps 35 percent when moving to an immediate adjacency, but drop to about 15 percent when two steps from the present position are required and to perhaps eight percent when a move of three steps is required.

source: Bain and Company

The common thread here is that any big organizational change, whether an IT project or a move into new roles within the ecosystem, is quite risky, even if necessary. The odds of success are low, for any complex change, no matter how vital.

Expanding into Adjacencies is Risky, But Risks Must be Taken

When firms look for growth in slow-growth businesses, one obvious option is to seek adjacent roles in the ecosystem. The other common routes to “diversify” are to add new customer segments, new roles for existing products, new products, distribution channels or geographies. 

It never is especially easy, as analysts note that the odds of success decrease as firms move further away from their present “core” competencies and roles. 

source: Harvard Business Review 

The same holds for internal reform of organizations. Consider a study by McKinsey on successful organizational change. That study suggests that about 26 percent of all attempted organizational transformations succeed, whether or not change agents have taken at least 24 discrete actions in support of the change. In that study, the suggested actions are not necessarily the same as approval hurdles. But the principle is likely at work.

source: McKinsey

This should not come as a surprise. All proposed internal changes encounter resistance. Management experts sometimes note that the chances of any successful organizational change are somewhat slim, and more difficult as the number of approvals grows. 

source: Purdue University

If you have ever spent time and effort trying to create something new in the communications business, you know it rarely is easy, simple or uncomplicated to do so, and the larger the organization you work for, the harder it seems to be. That is because all organizational change involves power and politics, and changes will be resisted.  

You might be familiar with the rule of thumb that 70 percent of organizational change programs fail, in part or completely. 

There is a reason for that experience. Assume you propose some change that requires just two approvals to proceed, with the odds of approval at 50 percent for each step. The odds of getting “yes” decisions in a two-step process are about 25 percent (.5x.5=.25). 

source: John Troller 

The odds of success get longer for any change process that actually requires multiple approvals. Assume there are five sets of approvals. Assume your odds of success are high--about 66 percent--at each stage. In that case, your odds of success are about one in eight for any change that requires five key approvals (.66x.66x.66x.66x.66=82/243). 

You might argue the difficulty of change means firms should not try to change. That might work in stable industries, for stable firms, when demand is constant and profit margins are reasonable.

But connectivity firms do not work in that environment. There essentially is no option to “do nothing.” All legacy product lines are shrinking and must be replaced. So the risk of change must be taken.

Why Innovation is So Hard

If you have ever spent time and effort trying to create something new in the communications business, you know it rarely is easy, simple or uncomplicated to do so, and the larger the organization you work for, the harder it seems to be. That is because all organizational change involves power and politics, and changes will be resisted.  

You might be familiar with the rule of thumb that 70 percent of organizational change programs fail, in part or completely. 

There is a reason for that experience. Assume you propose some change that requires just two approvals to proceed, with the odds of approval at 50 percent for each step. The odds of getting “yes” decisions in a two-step process are about 25 percent (.5x.5=.25). 

source: John Troller 

The odds get longer for any change process that actually requires multiple approvals. Assume there are five sets of approvals. Assume your odds of success are high--about 66 percent--at each stage. In that case, your odds of success are about one in eight (.66x.66x.66x.66x.66=82/243). 

Consider a study by McKinsey on successful organizational change. That study suggests that about 26 percent of all attempted organizational transformations succeed, whether or not change agents have taken at least 24 discrete actions in support of the change. In that study, the suggested actions are not necessarily the same as approval hurdles. But the principle is likely at work.

source: McKinsey

The more hurdles (approvals) required for a change to happen, the less likely the change will happen. Even when the odds of approval at any stage are 66 percent, the necessity of just five approvals will lead to seven of eight change efforts failing. 

Moving into New Ecosystem Roles is Difficult, if Necessary

One of the surest ways for any contestant in the internet ecosystem to broaden its portfolio is to move into an adjacency. It is, nevertheless quite difficult. Some obvious examples are app providers becoming device suppliers; telcos moving into entertainment video or cable companies moving into voice.

Moves into adjacencies might also include hardware suppliers moving into new product areas; software suppliers moving into new roles outside their present core.

Consultants at Bain and Company, for example, argue that the odds of success are perhaps 35 percent when moving to an immediate adjacency, but drop to about 15 percent when two steps from the present position are required and to perhaps eight percent when a move of three steps is required.

source: Bain and Company

And those are the easy ways to diversify. That is why one often hears it suggested that service providers “stick to their knitting” and focus on their existing core business. That might work for some. It will not likely work for many when the core business is shrinking, and shrinking rather fast.

Go Horizontal or Vertical in Acquisition Strategy?

Access services are a mature market in developed countries, and eventually will become mature even in developing markets, even as new revenue sources are created to replace declining legacy services. That has business consequences.

Most large tier-one service providers (cable, telco, satellite) eventually grow more by acquisition than organic growth. That is not the pattern for smaller firms, but you get the point. In any “mature” market, where accounts are essentially saturated, any provider tends to get account growth mainly by taking an account away from another existing provider.

So supplier consolidation is a long-term process in the global telecom industry. The only question is how fast, and how intense, that process is at any moment in time.

But what sorts of acquisitions make sense? The easy answer has been to make “horizontal” acquisitions to gain scale in the existing business. In other words, acquire more access assets.

That is the thinking when analysts float trial balloons such as Comcast buying Verizon, or Verizon buying Comcast or Charter, or when smaller telcos do the same sort of thing.

At least in the near term, doing so is a faster, surer way to boost gross revenue, and boost profit margins, than investing in “long game” moves “up the stack.”

To be sure, in the near term, such horizontal acquisitions are likely to be the main trend in the global telecom industry (in terms of revenue accretion). Moving up the stack takes time, and might often contribute less incremental revenue than a simple horizontal acquisition.

But taking the “long game” route to moving up the stack is possible.

Consider Comcast, which is among the U.S. access providers with the best execution “moving up the stack.” In the first quarter of 2017, Comcast booked $20.5 billion in total revenue. The access part of the company booked $12,9 billion in revenue, while the NBCUniversal portion of the company generated $7.9 billion in revenue.

So the “up the stack” (content) part of the company represented about 39 percent of revenue, access about 61 percent of total revenue.

If any other major telco could claim it now earns 39 percent of revenue from “application layer” sources, it would be considered a major strategic success.

In the second quarter of 2017, AT&T earned virtually all its $39.8 billion in quarterly revenue from access services. That will change, assuming AT&T’s acquisition of Time Warner is approved.

In the first quarter of 2017, Time Warner booked $7.7 billion in revenue. In other words, after the acquisition, AT&T would earn just about as much as did Comcast in its most-recent quarter. That would boost content revenue at AT&T to about 16 percent of total.

It might not seem like much, but that would mean AT&T earns significant revenue, for the first time, from “up the stack” sources. AT&T of course will eventually want to do the same in enterprise and business areas related to internet of things, for example. But that will take time, both because the IoT market is nascent, and because the available acquisition targets therefore also are small.

Verizon has made a similar, if smaller move, by acquiring first AOL and then Yahoo, to create a new advertising business. In the first quarter of 2017, Verizon booked $29.8 billion in revenue. Revenue from its telematics unit was negligible as a percent of total, while, revenues from the  “Oath” unit were not disclosed. The point is that Verizon has not yet gotten to a point where “up the stack” revenues are significant.

But you see the point. Moving up the stack is hard, risky and often not able to move the revenue needle quickly. So the an emphasis on horizontal acquisitions is going to be hard to resist. But if you believe the access business is going to be fundamentally challenged, moves to gain scale in businesses “up the stack” is necessary.

The issue is, how to balance horizontal acquisition that boosts revenue and profit now, with investments in “up the stack” growth. Or, in an ideal scenario, can access providers move up the stack now, by acquiring assets that throw off enough significant current cash flow, to move the revenue needle immediately?

Comcast is the model for the U.S. market.

That illustrates an asymmetry for Comcast and Verizon, if you wantt to speculate on where value might lie, even if the odds of such an event are slim.

Comcast might value Verizon’s mobile assets, significantly growing the amount of its access revenues. But if you think a reliance on access revenues, going forward, is problematic, then Verizon gains more in any acquisition of Comcast, as it immediately gains “up the stack” assets, in addition to greater horizontal scale.

That is why some observers might argue that vertical acquisitions, where the synergy is clear, make more sense than horizontal acquisitions that increase scale in the access business.

Some will argue AT&T erred in buying Time Warner. Some of us would argue it is the right move, to move up the stack, when total revenue includes almost no “up the stack” contributions. If Verizon remains a buyer of assets, not a seller, “up the stack” makes more sense than a horizontal acquisition that simply adds more scale in access.

Some would focus on strategic angles, such as a faster path to “fiber deep” or “bandwidth deep” assets.

Others of us might argue that firms such as Verizon and AT&T, if they wish to remain leaders in the future (and not sell themselves), must create much more “up the stack” revenue. It is the only way to reposition their value in the ecosystem and escape a “dumb pipe,” low value, low margin existence.