If Connectivity is Not the Answer, What Is?

Though internet of things connectivity and fixed broadband services will be important revenue drivers for the large enterprise and small and medium-sized enterprise (SME) segments over the next five years, information (software, apps, computing) products “will be the main driver of business revenue growth”  for telcos serving enterprise and SMB customers, according to analysts at Analysys Mason.  “Connectivity alone is unlikely to be enough to sustain a B2B operator.”

One might expect prices to increase in line with inflation, but that has not happened. Though inflation rates  peaked at between 12 percent and 15 percent in many Western European countries and at between seven percent and nine percent  in North America in 2022, in many cases average revenue per user has declined for business mobile services and business fixed data services, Analysys Mason argues. 

Part of the reason is long-term contracts signed with enterprise customers, which limit the ability to raise prices. 

The advice to “increase value” is to be expected. Precisely how that might be accomplished is always the issue. It might be noted that some revenue increases have been captured by others in the value chain, not connectivity providers. And some revenue sources, such as “private cloud,” might include large contributions from “connectivity” rather than “cloud computing” operations and services. 

Product	Providers	Revenue contribution (as a percentage of total firm revenue)
Private cloud computing	Verizon, AT&T, Deutsche Telekom	5-10%
Data center services	AT&T, Equinix, Digital Realty	3-5%
Unified communications and collaboration (UCC) solutions	Verizon, AT&T, Cisco	2-3%
Managed security services	Telefónica Tech, Verizon, AT&T	1-2%

If, as the Analysys Mason analysts argue “connectivity alone” is unlikely to be enough to sustain a B2B operator, the issue is how much value add can be created, and if that is not sufficient, how connectivity providers can add other lines of business. 

That has historically proven to be an extreme challenge, with a few exceptions. In fact, one might point out that mobile service itself, now driving 60 percent to 80 percent of global connectivity revenues, was itself driven by the search for new revenue sources. 

Aside from mobility services, internet access and home broadband have proven to be the most-significant revenue drivers in the consumer space, along with video subscriptions. 

Successful information technology initiatives have been very rare, if they can be said to exist at all. Mobile operators failed at becoming major mobile app stores. Most telcos have not had robust success at operating data centers, or becoming cloud computing suppliers. 

Mobile operators have hopes of creating a role in edge computing. A few mobile operators have been able to build substantial mobile money businesses. 

Decade	Initiatives	Example
1980s	Pagers, cellular service, data communications	AT&T, BellSouth, MCI
1990s	Internet access, long-distance service	America Online, Prodigy, AT&T WorldNet
2000s	Broadband internet, VoIP, video on demand	Verizon, Comcast, Time Warner Cable
2010s	Cloud computing, data centers, mobile apps	Amazon Web Services, Microsoft Azure, Google Cloud Platform
2020s	5G, Internet of Things	AT&T, Verizon, T-Mobile

It probably is one thing to recommend “creating more value.” It is likely quite another matter to suggest connectivity providers can do so by entering new lines of business, even if that has been of huge importance with respect to connectivity products, mobility and internet access being the huge examples of transformative products. 

Mobile money and entertainment video have helped, especially in consumer customer segments. But some would say it remains to be seen how well telcos might fare as suppliers of other information technology products to business customers. 

SMB Marketing Remains Difficult

By some estimates, small and midsize businesses represent around 90 percent of all firms globally, represent 70 percent of employment and contribute to up to 90 percent of global gross domestic product. 

At first glance, the small and mid-sized business segment is lucrative. But most of those organizations cannot be efficiently targeted by business sales organizations. 

Consider that definitions and behavior matter. If you have ever worked for a firm selling to SMBs, you know that segmentation really matters. As a simple “cost of sales” matter, “medium” is easier to target than “small.”

In fact, the vast majority of “small” businesses can only be profitably marketed using the same channels and programs aimed at consumers. Programs aimed at “smaller” businesses start to make sense someplace beyond organizations with 10 to perhaps 50 employees, depending on the industry vertical. 

Firm classifications also vary by country. In most countries, firms with more than a dozen to a few dozen employees are quite rare. 

In many parts of Australia, for example, 97 percent of all firms have fewer than 19 employees. The International Data Corp. definition of “SMB” is a firm with “fewer than 500 employees,” but more than 20 employees. 

source" Small Business Development Corporation 

In many Organization for Economic Cooperation and Development countries, there are not so many firms in the size range of “at least 250 employees.”

In Canada, 98 percent of firms have 99 employees or fewer, for example. 

According to  the European Union, a small business employs between 10 and 49 full-time employees. By some classification systems, medium-sized organizations employ 50 to 250 full-time employees. Others might say mid-size is defined as organizations with 100 to 999 employees. 

But there is a wide range of definitions of “small” and “midsize.” Sometimes midsize firms are defined as having up to 4,999 employees. Many would consider that an “enterprise” or a “large enterprise.”

Midsize firms also can be defined by revenue. A midsize firm might have sales not exceeding €1.5 billion ($1.75 billion) or has a balance sheet total that does not exceed €2 billion ($2.3 billion).

source: World Economic Forum 

Complicating matters further, many “small” businesses are run out of the home, or have no employees beyond the sole proprietor. That sort of business often has buying behavior virtually indistinct from that of a consumer. Many classifications use the term “microsized” to describe such very-small businesses. 

In the U.S. market, for example, 83 percent of all businesses are “micro” sized, having no more than nine employees. 

“Small” firms with 10 to 99 employees represent  15 percent of all businesses, while “medium” organizations with 100 to 499 employees represent just two percent of entities. 

If enterprise is targeted directly with field sales, then “micro” (83 percent of business entities) are marketed through the mass market channels. “Small and medium” organizations tend to be marketed to by partner and channel entities. Think of the role played by resellers and system integrators and distributors in the computing hardware business. 

source: CompTIA

SMB IT Priorities are Mostly about Remote Work Support

A survey by Analysys Mason of 1149 of small and mid-sized businesses in Germany, Singapore, the UK and the United States almost predictably suggests those firms will rely more on information technology going forward. In some part, that is because firms expect continued work from home deployments that arguably increase IT support. 

source: Analysys Mason 

Respondents expect roughly 40 percent of employees will work from home for at least some of the time once the Covid-19 crisis is over. This will drive demand for personal computers and mobile devices as well as cloud-based solutions to support remote workers and applications. 

It is probably worth noting that although many use the term “digital infrastructure” to mean connectivity networks, data centers and towers, in the SMB space it is devices and apps that are “digital infrastructure” in a practical sense, as is the case in consumer markets. 

Consumers and SMBs--no less than enterprises--use apps, services and devices. Their “digital infrastructure” is apps and devices. Only on the producer side of the value chain is there a distinction made between devices, apps and “networks and data centers.”

source: Analysys Mason 

From an SMB perspective, IT goals will be to support remote workers and protect apps and devices from hackers or data breaches. 

source: Analysys Mason 

Small firms are defined as having one to 99 employees while mid-sized firms have 100 to 999 employees.

For Whom is 5G an SMB Opportunity?

Very frequently, some mobile or fixed network operators have greater or lesser revenue growth opportunities based on their existing market shares, asset and liability positions. A firm with zero to low exposure to a revenue opportunity often has a much-higher chance of fast growth, compared to legacy suppliers that lead a market.

Since many connectivity markets are essentially zero-sum games, a win by one contestant is a loss for another supplier. And leaders have the most to lose; attackers the most to gain.

In the U.S. market, for example, cable operators with zero exposure to fixed voice, mobility services and business internet access have been able to take market share from the incumbents. Conversely, telcos who historically have led those markets have lost share to the attackers.

T-Mobile and Verizon stand to take share from cable operators (who are the market leaders) using new fixed wireless platforms. T-Mobile historically has had zero share of the home broadband market, while Verizon has been limited by its geographic footprint, covering perhaps 20 percent or so of all U.S. home locations with its fixed network.

So the "SMB" segment is an opportunity for some competitors; less so for the leaders. What might be questionable are assertions that mobile operators are "neglecting" the SMB segment where it comes to 5G.

For as long as I can remember, calls have been issued that connectivity service providers are missing out on revenue opportunities from small and mid-sized businesses. 

Looking at 5G revenues, for example, BearingPoint and Omdia point out that up to 99 percent of all businesses globally are SMEs, though connectivity providers focus on enterprises. 

source: BearingPoint, Omdia 

That is an “untapped” opportunity, they argue. That is misleading. 

Omdia’s own data show that 63 percent of mobile operators believe large enterprises will generate the “most” 5G revenue. 

Omdia’s own data also suggest that 54 percent of service providers believe SMEs will generate the “most” revenue. That is hardly neglect, as 32 percent of respondents believe consumers will generate the “most” revenue from 5G. 

Keep in mind that mobility has, since the 2G era, been built on consumer revenues, not revenues from business. 

source: Omdia, BearingPoint 

But there are other reasons why smaller businesses are not specifically targeted. The cost of sales and buying behavior is virtually indistinguishable from the behavior of consumer customers. 

In the U.S. market, for example, 83 percent of all businesses are “micro” sized, having no more than nine employees. 

“Small” firms with 10 to 99 employees represent  15 percent of all businesses, while “medium” organizations with 100 to 499 employees represent just two percent of entities. 

If enterprise is targeted directly with field sales, then “micro” (83 percent of business entities) are marketed through the mass market channels. “Small and medium” organizations tend to be marketed to by partner and channel entities. Think of the role played by resellers and system integrators and distributors in the computing hardware business. 

source: CompTIA

So some of us would argue that mobile operators are not neglecting SMEs. They sell using mass market techniques tot he 83 percent of customers that behave like consumers when evaluating and buying 5G services. 

They use channel partners to sell to the mid-market. And they have dedicated field and inside sales teams to sell to enterprises. 

One can argue that more internal resources should be devoted to direct sales efforts for SMEs. But cost of sales is an issue. In many cases, the financial return from higher sales and marketing cost expended on most “small or medium” customer accounts would generate a zero to negative financial return, compared to using channel partners.

All of us have to define our terms: what is “small;” what is “medium” and what does that mean for marketing, sales and requirements? 

Also, are we talking about “new revenue sources” or “total revenue generated by segment?” It might, for example, prove to be the case that much “new use case” revenue is generated by enterprises, as they will be the entities deploying large internet of things and sensor networks. 

Those are non-phone revenues. But phone revenues might still be led by consumer users, as historically has been the case. 

The issue is “which are we talking about: new use case revenues or total or segment revenues?

Either way, though, it might be hard to make the argument that most of the return is going to come from SMBs, as compared to consumer or enterprise revenues.

Beyond that, some competitors do have an oportunity, especially if they have historically had zero to low exposure to SMB customer revenues. Cable operators have been in that position, as has T-Mobile.

SMB IT Spending Rebounding to Normal Levels

Small and medium business information technology spending is expected to rebound to pre-Covid levels, says Analysys Mason.

Cloud-Related Spending Will Drive SMB Investments in 2021

Cloud-related platform spending will a major driver for small and medium businesses globally in 2021, according to Analysys Mason. Since most major information technology apps and services are supplied using remote computing (cloud) mechanisms, that will come as no surprise. 

source: Analysys Mason 

SMB IT Spending to Return to Pre-Covid Levels in 2022

One legitimate question we all should have is what changes are relatively permanent post Covid and which trends revert to the mean (back to pre-Covid states). Most might agree that various attempts at “digital transformation” have accelerated. The issue is whether we have simply accelerated temporally, but at similar rates, or whether the rate of change has increased. Nobody seems to believe demand has decreased. 

Analysys Mason suggests that on at least one metric--the volume of information technology investment--Covid caused a change in investment. Analysys Mason also believes the rate of investment will return to pre-Covid levels in 2022. 

Many industries will be making bets about the level of demand for all sorts of  products as “normalcy” returns. 

source: Analysys Mason 

Irrespective of investment levels, virtually everyone expects more growth for cloud computing solutions. In some respects, that is a simple reflection of the fact that computing architecture has changed. Cloud or remote computing now is the norm, as apps are nearly universally expected to be consumable using internet networks.

SMBs Boost Managed Service, Cloud Services Use During Pandemic

To nobody's present surprise, small and mid-sized businesses in the United States, United Kingdom, Canada and Australia made significant moves to adopt cloud-based remote work technology and managed services during the Covid-19 pandemic, Analysys Mason says. Many survey respondents suggest they will continue to use those new managed services once the pandemic is over, in large part because many expected higher levels of work from home on a permanent basis.

source: Analysys Mason 

Use of new collaboration solutions is the notable feature of SMB response, though new users of cloud technology of various types or managed services also seemed to grow up to 10 percent. 

source: Analysys Mason 

At least in the first quarter of 2021, most respondents expected they would continue using those new managed services after the pandemic ends, in large part because a greater volume of work from home is expected, compared to pre-pandemic levels. 

source: Analysys Mason

Analysys Mason surveyed 1870 small and medium-sized businesses (SMBs) in Australia, Canada, the UK and the USA between December 2020 and February 2021, about their business and technology responses to the Covid-19 pandemic.

As you would expect, given widespread economic lockdowns, revenue declined for 55 percent of “small” businesses (up to 99 employees) and 38 percent of mid-sized businesses (100 to 999 employees).

The finance, insurance and real estate industries; healthcare and professional services sectors fared best in terms of revenue “normalcy.” Firms in retail; wholesale; other business services and hospitality reported the most significant losses, Analysys Mason says. 

source: Analysys Mason 

Will "Most Businesses" Maintain or Increase IT Spending in 2021?

Small and medium businesses in Australia and New Zealand indicate they will maintain technology spending in 2021, according to IDC, with the Bell curve of responses centering on “stay flat” and “increase up to 10 percent.”

So does that mean "most" businesses will behave that way? We cannot say, as few concepts are as wiggly as the definition of "small and medium business."

source: IDC 

The important footnote--as always with the SMB category--is that the IDC definition of SMB is a firm with “fewer than 500 employees.” In most countries, firms with more than a dozen to a few dozen employees are quite rare. 

Keep in mind that in many parts of Australia, 97 percent of all firms have fewer than 19 employees. There are almost no “medium” sized firms (or large firms) in the range identified by IDC, in western Australia, for example. 

source" Small Business Development Corporation 

In many Organization for Economic Cooperation and Development countries, there are not so many firms in the size range of “at least 250 employees.”

In Canada, 98 percent of firms have 99 employees or fewer. 

The point is that IDC data skews towards relatively larger firms, not the “micro” enterprises that represent most “small businesses.”  So the findings about information technology investments will not apply to most businesses, by definition.

Is IoT "Digital Transformation" for Most SMBs?

Where can telcos add value for small or medium business customers beyond connectivity? Start with potential value in edge computing and internet of things. In many cases, value will start with ultra-low-latency application performance based on 5G radio links.

That only helps if the computing function also is capable of ultra-low latency, and that will mean edge computing. So add potential roles as suppliers of real estate: racks, security, power, cooling and cross connections, with the brand names supplying the actual computing function. 

Nobody expects telcos to manufacture the actual sensors and supply sensor software. That will be done by the established device and software firms. But end users, software suppliers and device manufacturers will not want to be in the business of system integrating and supervising devices, related software and analytics processes. 

source: CompTIA 

As with much information technology support in the SMB space, third party system integrators will be called upon to manage the process of designing, installing, testing and maintaining whole systems (devices, software, analytics, hosting) required on the premises to create the digital output supplying business value. 

Sure, telcos can supply all the transport, gateways and interfaces to the wide area network, and also the radio infrastructure and operations support for on-premises private networks. Beyond that, they will have to start acting as system integrators or premises IT specialists. 

That never is easy, given the peculiarities of each industry vertical. But it is hard to see how connectivity providers are going to be in position to reap more of the financial reward from IoT capabilities unless they move beyond their core communications function. 

Broadly speaking, many view IoT as the key to SMB digital transformation, in a practical sense. 

This is the way Singtel segments its cloud computing offers for small and medium business customers. As you can see, Singtel sees IoT as the key to creating SMB value from digital transformation. 

Singtel offers the brand names in computing as a service, rather than trying to recreate such capabilities on its own. 

Singtel also adds a preconfigured solution for internet of things monitoring, the cloud gateway and bulk data transfer. But Singtel focuses on integrating and managing the on-premise devices and software used to collect data, not the actual edge computing function itself. 

source: Delta Partners Group 

You might argue that the value of digital operations is based on three capabilities: intra-company and inter-company communications, enabling better information tracking and extending business reach. All three of those objectives are classic “communications” requirements. 

The new value-add is support for the analytics function. While not supplying the analytical engines or the core processing to conduct analysis, telcos can package the “function” of sensor network management as a key added-value role. Neither computing as a service vendors nor analytics software firms want to manage the on-site networks of sensors. 

Most smaller businesses might not want to have their limited information technology staff doing so, either. In essence, the telco IoT role becomes that of system integrator and operations manager for the IoT sensor network. 

source: Delta Partners Group