Unless Cost Structures are Revolutionized, Sustainable Mobile Markets Will Feature Just 2 Providers

Sprint added 58,000 net accounts in the first quarter of 2016, including 22,000 postpaid phone accounts, part of a total net gain of 56,000 postpaid accounts. On a year-over-year basis, Sprint dramatically improved its account metrics, up about 1.5 million net accounts, year over year.

Sprint still faces issues in terms of gross revenue and operating profit. Operating revenues still are dropping, though Sprint reached positive operating income for the first time in nine years, the company says.

Taking nothing away from Sprint’s improving performance, and that of T-Mobile US, some might argue that all analysis of mobile markets globally tends to suggest that national regulator efforts to sustain four-supplier markets ultimately will prove untenable.

source: Sprint

Simply, it has not yet been conclusively demonstrated that any mobile market can sustain more than two operators,  long term, with current industry cost structures. In other words, all debate about whether “three or four” mobile operators is the minimum essential to support competition might ultimately prove moot.

Globally, as well as In the Middle East and Africa region, profitability of operations for individual players correlates strongly with in-market scale measured by achieved revenue market share, McKinsey notes.

Sustaining an EBITDA margin of 30 percent can be considered a minimum proxy value for achieving capital returns above the weighted cost of capital, McKinsey says.

Entrants unable to capture a significant revenue share of their market--more than 25 percent-- will be unlikely to achieve EBITDA margins above 30 percent.

That implies a sustainable long-term structure featuring just two providers.

source: McKinsey

There is an important caveat, however. If, somehow, the average cost of creating a mobile business should change in an important way, reducing especially infrastructure capital investment and operating costs, then it is possible sustainable market structures could change.

It might be possible, long term, for more than two major suppliers to be profitable. But that might hinge on major changes in capital requirements and operating cost. That is why all developments in network virtualization, access to shared and unlicensed spectrum, and networks based on use of unlicensed and shared spectrum, are important.

Such developments can change the industry cost profile.

Between 2008 and 2015, Developed Market Telecom Markets Shrank

source: McKinsey

The years 2008 to 2015 were troubling for telecom service providers in developed markets.

And though there was growth in developing markets, average voice revenue per mobile account dropped substantially.

Despite forecasts from most market research firms that prediced growing revenue on a global basis, consultants at McKinsey say telecom industry revenue actually shrank in developed markets.

At the same time, fixed network voice accounts and average revenue per user dropped in all regions. 

Mobile voice subscriptions climbed in all regions, but mobile voice ARPU dropped dramatically in all regions.

Mobile voice average revenue per user fell in all regions: down 97 percent in the Middle East and Africa region; dipping 12 percent in developed markets while declining 37 percent in “emerging markets,” according to McKinsey consultants.

Data revenue average revenue per user, on the other hand, grew in all regions: up seven percent in MEA; climbing 11 percent in developed markets and rising 12 percent in emerging markets.

Fixed network accounts fell in all regions: down three percent in developed nations and off two percent in emerging markets while dropping one percent in MEA.

Fixed network voice ARPU dropped much more: down five percent in developed markets; lower by 10 percent in emerging markets and dipping by seven percent in MEA. While fixed network data subscriber numbers grew in all regions, data ARPU dropped in all regions.

High, Low, Medium: South and Southeast Asian Have All 3 Types of Markets

If India represents one sort of Internet access market (big, underserved, rural access issues), and Singapore, Hong Kong and Taiwan represent others (small, well served, urban), then Colombia represents a country with characteristics more akin to Malaysia and Thailand (mix of urban and rural, underserved area but rapidly improving, and moving up on information and communiations technology sophistication.

Colombia was the fourth nation to support the Facebook “Free Basics” program, for example, and in 2016 won the GSMA “Spectrum for Mobile Broadband” award, for example.

And since 2013, Colombia has been in the process of joining the Organization for Economic Cooperation and Development, the 34-nation group founded by nations with advanced economies, but also including “emerging” countries.  

source: ITU

Ecosystem Value of "Access" is Declining

One hard reality of the access provider (we used to call this “telecom” ) business is that ecosystem value in the “access networks” portion of the business is going to be under increasing and persistent pressure over the next couple of decades, at least in developed nations.

Google Fiber, other independent Internet service providers, municipal Wi-Fi and mobile Internet access to an extent are going to reduce demand for traditional Internet access provided by fixed line providers.

So lower revenues and lower profit margins are almost certainly going to be on-going pressures within the access business.

Not only are new providers having lots of success in the market, notably cable TV providers and more recently perhaps Google Fiber, independent ISPs and a growing number of municipal networks, but we are far from exhausting what could happen in the future with new or rival platforms.

Mobile 5G is noteworthy, as it might well offer gigabit speeds, especially in a fixed wireless configuration. And it is difficult to say whether other retail suppliers or lower-cost platforms could emerge.

In contrast, there are at least some other markets where fixed network operators are, at least for the moment, increasing subscriber accounts. 

As is the case in many mobile markets, subscriber account are growing as additional subscribers are added and ass mobile Internet access revenues begin to scale up.

America Movil, for example, arguably performed better in the first quarter of 2016 in its fixed networks segment, compared to the mobile segment.

Who Can Most Easily Build a Platform?

All discussion of “platforms” revolves around business strategy, and the ability to create advantage in the ecosystem.

In some cases, platforms have been built on operating systems, devices or applications. Almost never--if ever--have big platforms been built on “functions.” Microsoft, Apple iOS and Android; iPhones and Facebook are examples of the former.

But Amazon is an example of the latter: a platform built on a function, namely a retail transaction function.

You might also argue that Google Play and the Apple App Store function as platforms,  inseparably from a device.

By extension, suppliers have tried to create platforms built on data center tenancy (Telx), proximity and geography.

The degree to which platforms can be created, to some extent, based on an access provider’s customer base, and knowledge of customer location and device choices is an important question for access providers.

The question is a big one because it is not completely clear whether platforms are most successfully build on apps, devices or access. Most would likely argue that platforms have been  most successfully built on apps, devices or a transaction capability.

And that is the problem access providers face. Consider entertainment video, historically dominated either by application (broadcasters) or access providers (cable TV, telcos).

In the Internet era, app, device and transaction providers have been able to establish franchises as well. Netflix, iTunes and Amazon Prime provide examples.

Now Amazon is making a big push to aggregate all subscription video on demand services in the United States, making Amazon Prime a one stop shop.

And that illustrates how difficult it might remain for access providers to compete, as platforms, with apps, devices and transaction providers.

How Big Can Telco Cloud or Platform Become?

Whenever major new technology transformations begin, it is virtually always the case that leading incumbent suppliers begin to cast their “legacy” or present offerings in terms that mimic or co-opt the concepts of the emerging technology.

So it is that we now hear much more about use of network functions virtualization and related trends, both as a way to reduce cost and create a growth platform. All the terms suggest that a telecommunications network built on NFV not only costs less to build and operate, but also offers flexible service creation and delivery.

The bigger question is whether that service creation capability can used with other assets to create a sort of operating system, digital services enabler, platform or telco cloud, with the emphasis on how assets can be leveraged in the same way as any other platform, attracting developers and services built on that platform.

Whether that is possible, and to what extent, remains the big question. Some already predict that new service revenue could reach 10.5 percent of total by 2021. That is helpful.

But some might note that such amounts are going to be less than service providers stand to lose in legacy revenue by that point. And that's the problem: revenue creation lags service creation.

There's no argument about the need for greater efficiency and virtualization, at the very least as a way to attack operating and capital investment costs.

source: HP Enterprise

The “idea of telco cloud is that CSPs need to embrace and use all the wonderful technologies that have emerged in Enterprise IT--standardization virtualization, standardization--ultimately manifest in cloud as a transformative service delivery and consumption model,” Hewlett Packard Enterprise executives have argued.

That is the least-controversial part of the big idea. Agility, as such, is less the idea.

The stretch is using the software-defined network to create service opportunities built on extending use of the platform to third party developers and service providers.  

As intriguing as the idea of telcos as platforms might be, it remains unclear how big an opportunity that might be.

Analysys Mason, for example, calls for telcos to shift to a platform-based model.

“Platforms are the key to success in the digital economy,” Analysys Mason analysts argue.To be clear, that means creating a role something like that possessed by Apple, AirBnB, Alibaba, Amazon, Facebook, Google, LinkedIn, Rakuten, salesforce.com, Uber, Xbox and others.

Platform providers build ecosystems around their core business. Apple and Google have thousands of developers and hundreds of accessory manufacturers continually creating complementary products for each ecosystem.

So the task to envision how any access provider similarly can create a platform--presumably for managed services of some type-since it seems unlikely an access provider actually can become a platform for Internet OTT apps.

The attractiveness of the idea cannot be denied.

For years, the largest communications service providers have relied on wireless service to offset declines in landline voice while still providing modest revenue growth. “Those days may finally be coming to an end,” said Bala Thekkedath, Hewlett Packard Enterprise marketing director for the Communications Solutions Business unit. “With over-the-top players having jumped into the game, the economics of wireless services will never be the same.”

In other words, the legacy revenue models are going away, and something--or many things--that are very big must be created to replace the lost revenues.

Or, we should be clear, “telcos” and “access provides” will have to become smaller businesses, as measured by provider revenue. That is not to say the function is in any way diminished, only that the revenue and profit margin to be wrung from supplying that function might have to shrink.

Will Internet Access Revenues Grow Fast Enough to Offset Voice Revenue Declines in India?

Bharti Airtel, Idea Cellular and Reliance Communications experienced flat voice revenue and struggled with  data revenue growth in the first quarter of 2016, illustrating the “demand side” of the Internet access supply problem, as well as the ongoing difficulties in the key voice business.

Simply, demand for Internet access, though growing, might not be growing fast enough to offset perhaps-accelerating losses in voice revenue. That fundamental problem is faced by most mobile operators in most markets.

According to a report published by securities firm Kotak, "4G uptake has been slow and is unlikely to help the surprisingly slow momentum of data volume growth."

Kotak analysts expect Bharti Airtel’s  India wireless revenue to grow 3.6 percent sequentially.

Goldman Sachs analysts are more optimistic, expecting Airtel total revenue to grow 6.1 percent year over year.

Credit Suisse expects average revenue per user to dip two percent in 2016, to Rs 194 from Rs 198, year over year.

Idea Cellular is expected to report a  41 percent to 54 percent fall in consolidated net profit for the quarter, at least in part because of spending on spectrum.

Goldman Sachs, however, expects consolidated revenue to grow nearly 12% on-year toRs 9,390 crore, helped by strong subscriber additions and overall growth in wireless business.

Morgan Stanley expects Idea to report 5.2 percent quarter over quarter growth in revenue, as well as 6.6 percent sequential growth in earnings (EBITDA).

Reliance Communications s expected to report a year over year fall of 37 percent to 70 percent in net profit, largely on reduced voice revenue.

source: GSMA