Market Cap an Issue When Moving up the Stack

There is one practical reason why many service providers, when looking to gain either scope (moving up the stack) or scale (making horizontal acquisitions) almost always choose to go horizontal.

For starters, the risk if often lower. When adding more scale (accounts, customers, revenue) of the type you already sell, it always is possible to gain economies of scale, and reduce overhead costs to some extent.

When moving into a new part of the ecosystem, there is execution risk. By definition, a service provider is moving into a business that has not been its core competency.

There are other practical issues. When a telco buys an asset in the applications or platform portions of the business, it is buying a high-multiple business with a low-mutliple currency. In other words, a service provider is buying an expensive asset with a relatively low-value currency.

For example, AT&T has a market capitalization that is a 1.4 multiple of revenue. Apple has a market capitalization that is 3.7 times revenue. Google has a capitalization about 7.6 times revenue. Facebook has a multiple about 15.8 times revenue.

Assets “up the stack” simply are expensive for a service provider to buy. Other assets in the same space are much more affordable.

source: Kleiner Perkins

Platforms Win Value Race

Most of the value created in the technology, media and telecom (TMT) space actually is created by the software industry, an analysis by McKinsey clearly shows. That is one more way of describing changes in value (and profit and revenue) in the internet ecosystem.

As the McKinsey analysis of public firms suggests, on a global level, value has grown most for software and consumer electronics suppliers (device suppliers), far less so for telecom and cable TV companies, and a bit less for media firms.

The analysis, of course, is flavored by the fact that growth rates for all these firms vary by region. Relatively ittle of the profit--in any sectors--have been seen in Europe. Service providers have grown fastest in regions such as Asia and Africa. Software growth arguably has been highest in the United States and China. Service providers in many developed markets have seen revenue grown, but in a low single digits range.

source: McKinsey  

There is a clear “winner take all” pattern, as well.

In the 2010 to 2014 period, the top 20 percent of companies captured 85 percent of the economic profit in TMT industries. The top five percent of companies—including Apple, Microsoft, and Alphabet (Google’s parent)—generated 60 percent, McKinsey says.

Increasingly the ranks of top players in TMT are populated by companies that have managed to create and scale successful platforms that benefit from network effects, says McKinsey.

These can be technology platforms (for example, Apple’s iOS), marketplaces (for example, Apple’s app store), or platforms of another type—but in each case these winning platforms increasingly exploit “network effects,” which means the value of the product, service, or the underlying technology increases when more people use it.

That is a familiar reality in the communications business, where the value of any network grows as the number of connections grows.

In the future, one key to success for at least some telecom companies is their ability to create new roles for themselves “up the stack.”

“We believe TMT companies need to build capabilities in four areas, including establishing a strong position in one or more software or services platforms and building ecosystems around platform offering,” McKinsey argues.

No Revenue Source Ever Lasts Forever

No revenue source in the telecom industry has ever powered revenues forever. For more than a hundred years, fixed network voice was the only service, and revenues seemingly grew every year, as more people and businesses connected.

source: ITU

That fixed network growth trend ended in some countries by 2000, globally by 2003 to 2006 or so, even as account growth continues in Asia and Africa.

After that period, accounts began to fall, in many markets, even if growing globally in Asia and Africa.

But that maturation was replaced by a new growth cycle built on mobility. And when mobility account growth slowed, sales of text messaging services emerged as the next revenue driver. Then mobile internet supplanted messaging revenue growth.

source: Analysys Mason

peak telecom

But even internet access, among the newest telecom services, has a product life cycle.

In the U.S. market, for example, even fixed network internet access seems to have peaked, and subscriptions are now declining.

That does not mean use of the internet has decreased, but that people are finding other ways to maintain their connections. Mobile internet access, whatever present failings keep it from being a full product substitute for fixed access, seems to be the reason for the reversal in growth.

And though mobility has been the global revenue driver for a couple of decades, even mobility is moving to the peak of its product life cycle.

A drop in global mobile revenues forecast for 2018 will be the first time in the history of the mobile industry that service revenue contracts year on year, according to Ovum.

That is why many tier-one service providers now are looking to content services for growth. The triple play was the first iteration, when service providers added video subscriptions to their voice and internet access offerings.

Now many are looking to online services and a move up the stack into ownership of content assets.

“Future success remains in the hand of their television content strategy,” some would say of AT&T’s move to buy Time Warner. That move, in turn, mirrors the earlier move by Comcast into ownership of content assets, especially NBCUniversal.

Further such moves are almost inevitable, as the 5G era, with its focus on internet of things, emerges. As access revenues were not enough to sustain growth in the video content area, so IoT connectivity will not be enough to drive revenue growth in the IoT era.

Ownership of at least some key applications or platforms likely will be essential, just as ownership of content assets has made sense in the present era.

source: Ali Saghaeian

Up the Stack, Down the Stack Or Not?

One recurring and important strategic issue was raised at both the Spectrum Futures event and the following PTC Academy training course held in Bangkok, Thailand the week of Sept. 18, 2017: Can service providers move up the stack, and should they?

Russell Lundberg, Bangkok Beach Telecom CEO and founder, argued that “I’m a plumber; I can’t worry about moving up the stack.” Instead, his view is that service providers must “embrace their dumb pipes.”

Allan Rasmussen, Yozzo Co. managing director, took the other position. “You can move up the stack, but you must partner” to do so.

A third position was offered by Marc Olivier, Sigfox VP, namely that many new business opportunities in the internet of things area--especially for machine-to-machine sensor apps--are best handled by networks optimized for such applications. Olivier leaned towards the “stick to your knitting” approach, pointing out that a new ecosystem has to be built.

John Kjellemo of Yandex also provided his views about the internet of things, and believes that moving up the IoT stack is possible, and desirable.

source: Vermont IT Group

At the PTC Academy training event, session facilitator Chris Wilson, Time Dotcom Bhd. CEO of Asia, suggested that, whatever the merits, “few companies have ever succeeded at doing so.”

My own concluding argument at Spectrum Futures was that as difficult as it is to move up the stack, retail service providers serving business and consumers really do not have much of a choice. If one assumes half of all current revenue will be lost over a decade (every decade, in fact), huge new sources of revenue must be generated, and it is hard to see how that can be done any other way.

To be sure, not every actor, in every industry segment, has equal ability to do so. So the admonition to move up the stack is not useful advice for every firm, in every part of the ecosystem. “Not moving up the stack” makes good business sense for some companies, in some industry segments.

The trick is partly knowing whether such strategies make sense, and knowing where to look for opportunities to move up the stack.

Separately, “moving down the stack” also is a big trend, exemplified by firms such as Google becoming a device manufacturer, undersea network operator, retail mobile operator and internet access provider in the fixed networks realm.

These are asymmetrical challenges. Though one frequently hears the refrain that “telcos cannot innovate,” in truth, large firms often find it hard to innovate.

But there is a structural reason why moves up the stack are so much harder than moving down the stack. A telco has to work very hard to identify what a customer wants and needs, up the stack. Much knowledge of business processes is needed.

When a company at the application layer wants to move down the stack, the problems are simpler. Any company at the top of the stack “is the customer.” That firm knows exactly how it operates, where advantage down the stack might lie, and why business advantage can be gained.

The task then is simpler: identify the capabilities needed in the lower levels of the stack, and buy them. With enough scale, it also is possible to build such capabilities, without buying them on the open market. That is why many content and application firms build and operate their own undersea networks; access networks (fixed and mobile); data centers; create their own chipsets; create their own messaging and voice capabilities and take other steps to vertically integrate their supply chains.

What to Do About Industry Challenges? "Take the Package," One Exec Quips

“Take the package” (early retirement) quipped Tony Mosley, Ocean Specialists director of business development, after a review of major trends in the global telecom business at the latest PTC Academy program in Bangkok, Thailand.

Mosley's playful retort came just before students developed a list of key challenges they would face as new CEOs of their own retail businesses.

The work teams came up with a list of six major issues they would have to confront:

• Margin compression
• Regulation
• Over the top services
• Differentiation
• Spectrum
• Convergence

As part of the three-day program, students (mid-career telecom professionals) are exposed to the business challenges leaders of businesses confront, and how they work to overcome those obstacles.

As always is the case, there was debate about whether it is possible to “move up the stack,” adding value and perhaps occupying new niches in the business ecosystem, to boost revenue and raise margins.

At the concluding session, students were immersed in thinking about whether such moves up the stack are possible, for which firms and industry segments, and where to look for such opportunities.

PTC Academy is an annual training program created by PTC to provide promising mid-career professionals with an introduction to the sorts of business challenges they will face as CEOs.

The event was co-sponsored by APTelecom and Loxley Broadband, and held at the facilities of Loxley, the Thai conglomerate, which also owns Loxley Broadband.

source: GSMA Intelligence

source: techneconomyblog

source: US Telecom

Is the Mobile Business Model Nearing an End? What Replaces It?

There are many reasons to expect a rather massive consolidation in the global telecom industry over the next decade. The cost of networks keeps rising, with every mobile generation. We soon will reach market saturation, when virtually every person who wants to use mobile phone service, for example, already does so.

Essentially, we are reaching a point where customers are spending about as much as they feel appropriate for the set of services now offered (business or consumer).

There are hopefully major new revenue opportunities coming, but we should also expect most mobile operators and fixed operators to need to replace about half their revenue every decade, from now on.

Those are a few of the big changes to come. There are others.

The 5G era is going to be different from all others in the history of telecom, for several reasons. Traditionally, scarcity has been the paramount business constraint.

Bandwidth was scarce and therefore expensive. Regulatory strategies were designed to keep matters that way, using monopoly or oligopoly market structures; expensive licensed spectrum; franchise or other market entry rules.

In the competitive era, where in most countries mobile competition has been the primary expression of competition overall, scarcity has remained a fundamental assumption. In most markets, less than 500 MHz of total spectrum has been available for all mobile operators to use.

Wi-Fi bandwidth helps, but even including all mobile and Wi-Fi bandwidth, less than a gigaHertz generally has been available for terrestrial applications.

All of that is going to change in the 5G era, which has to have mobile executives in many markets worried about the outcome. The reason is that multiple tools--small cells; new millimeter wave spectrum; spectrum sharing; new unlicensed spectrum; multiple input multiple output radios and spectrum aggregation across licensed and unlicensed bands are going to essentially replace scarcity with abundance.

The difference likely ranges between an order of magnitude to three orders of magnitude more usable spectrum being made available.  

Source: Intel

As always, a fundamental change in supply will affect demand and prices. Not only will the price per gigabyte drop, but we also are likely to see more use of private mobile networks and business models that essentially shrink the size of the addressable mobile market for the first time.

As we already have seen in the undersea capacity markets, significant demand actually is removed from the addressable market as enterprises (Google, Facebook, others) build, own and operate their own global networks. Where in the past they might have been expected to buy capacity from telecom providers, enterprises now increasingly simply operate their own networks, on their own behalf.

Look only at the impact of the shift to small cell architectures, compared to traditional macrocell network designs. Under any circumstances (low or high load), small cells boost total capacity as much as four to six times.

And that is before we start adding capacity implications from an order of magnitude or two orders of magnitude more total spectrum; spectrum sharing and spectrum aggregation of all sorts, that increases the efficiency of use of that spectrum.

Business model and market structure changes are virtually inevitable.

Abundance is Going to be a Scary Thing

The 5G era is going to be different from all others in the history of telecom, for several reasons. Traditionally, scarcity has been the paramount business constraint.

Bandwidth was scarce and therefore expensive. Regulatory strategies were designed to keep matters that way, using monopoly or oligopoly market structures; expensive licensed spectrum; franchise or other market entry rules.

In the competitive era, where in most countries mobile competition has been the primary expression of competition overall, scarcity has remained a fundamental assumption. In most markets, less than 500 MHz of total spectrum has been available for all mobile operators to use.

Wi-Fi bandwidth helps, but even including all mobile and Wi-Fi bandwidth, less than a gigaHertz generally has been available for terrestrial applications.

All of that is going to change in the 5G era, which has to have mobile executives in many markets worried about the outcome. The reason is that multiple tools--small cells; new millimeter wave spectrum; spectrum sharing; new unlicensed spectrum; multiple input multiple output radios and spectrum aggregation across licensed and unlicensed bands are going to essentially replace scarcity with abundance.

The difference likely ranges between an order of magnitude to three orders of magnitude more usable spectrum being made available.  

Source: Intel

As always, a fundamental change in supply will affect demand and prices. Not only will the price per gigabyte drop, but we also are likely to see more use of private mobile networks and business models that essentially shrink the size of the addressable mobile market for the first time.

As we already have seen in the undersea capacity markets, significant demand actually is removed from the addressable market as enterprises (Google, Facebook, others) build, own and operate their own global networks. Where in the past they might have been expected to buy capacity from telecom providers, enterprises now increasingly simply operate their own networks, on their own behalf.

Look only at the impact of the shift to small cell architectures, compared to traditional macrocell network designs. Under any circumstances (low or high load), small cells boost total capacity as much as four to six times.

And that is before we start adding capacity implications from an order of magnitude or two orders of magnitude more total spectrum; spectrum sharing and spectrum aggregation of all sorts, that increases the efficiency of use of that spectrum.

Business model and market structure changes are virtually inevitable.