Value or Price Driving Video Cord Cutting?

Customer account losses in the traditional pay TV ecosystem could soon accelerate to around five million a year in the U.S. market, up from about two million a year, RBC analyst Steven Cahall said. A survey conducted by RBC found that only around 55 percent of respondents planned to keep buying services from their video services provider.

The data suggest that “the floor that ultimately will keep the linear bundle” is only at around 68 million homes. SNL Kagan says current U.S. pay-TV homes number 86 million at the moment.

Precisely why consumers are cancelling subscriptions, or refusing to subscribe in the first place, typically is said to be the result either of diminishing interest in the product or high prices.

Do consumers cancel their entertainment video subscriptions because they are deemed too costly? Some say so. Others might argue that disinterest is the issue. So it might seem as though there are conflicting views about why some consumers are abandoning linear video for streaming alternatives.

Maybe not. Perhaps, as always, consumers simply are evaluating products from a value perspective. When consumers say the price of a product is “too high,” what they often mean is that perceived benefits are too low, in relationship to price.

If so, those who argue price is the main issue, and those who say demand for the product is the issue, could both be correct.

Peak Telecom is Coming

Most observers of global telecom revenue will note that, with a couple of possible exceptions, industry revenue has grown continuously, for as long as we have kept records.

On the other hand, one has to wonder whether telecom revenue will reach a peak at some point in the relatively-near future, as mobile adoption reaches saturation in every country and as every customer buys as much internet access as they prefer.

Looking only at the country of Malaysia, the trends are clear enough: Mobile growth is reaching an absolute peak, as is mobile broadband. Fixed line voice is declining, and has been dropping since about 2000, while fixed network internet access has grown to replace the lost fixed network revenue, but itself is nearly saturated.

source: Researchgate.net/

source: FCC

That does not mean service providers will stop innovating--or trying to do so--or seeking to add big new revenue sources. But that new revenue will mostly balance lost revenues in the core business, as voice, messaging and eventually, even internet access revenues fall.

Indeed, replacing lost revenue now is a major industry challenge. The global telecom industry is about a $1.5 trillion annual revenues industry. To move the needle, any new sources have to be large, simply to replace lost revenues from legacy sources.

This trend is seen in many developed markets, but now also can be predicted for fast-growing Asia Pacific markets as well.

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Roughly speaking, to sustain three percent annual revenue growth, and assuming zero losses in all legacy sources, some $45 billion has to be added every year. But that is not realistic. With actual declines in voice and messaging revenue, and coming shrinkage and margin compression in newer sources such as internet access or video entertainment, service providers might have to replace as much as half of all current revenue in about a decade.

Revenue erosion big enough to remove half of revenue within a decade is roughly equivalent to a seven percent a year decline. So even if new sources grow three percent a year, losses still will happen.

To sustain revenues at their current level might therefore require annual growth of seven percent. That is not going to happen, in most markets. As James Sullivan, J.P. Morgan head of Asia equity research (all of Asia except Japan) telecom revenue growth is now less than GDP growth.

68 major telecoms groups – aggregate revenue, 2009-2016

source: Telco 2.0 Research  

Other analysts make the same argument, namely that revenue growth, at a global level, now is less than one percent.

Peak telecom is coming.

Why App-Access Provider Partnerships, Even When Necessary, are so Difficult

One often-cited bit of advice for mobile operators trying to change their value propositions is to wrap more functionality around their core offers. That does not mean "moving up the stack" (occupying new positions in the ecosystem) so much as enhancing existing offers. 

Sometimes mobile operators do want to move into different roles within the ecosystem, though. A common bit of advice is to partner to accomplish such objectives. Such deals can be low-margin gambits, though. 

For starters, profit margins typically are difficult, because there is a cost of goods issue, especially for services that already have low profit margins.  

Any business deal requires that all parties gain value from any transaction. So when any service provider wants to partner with another application provider, value has to exist for both parties.

You might argue that one reason tier-one service providers have not have much success partnering with voice or messaging application providers, to compete with independent providers of over-the-top voice and messaging apps, is that too little value generally exists for the potential app partner.

That is the logical consequence of the way we have decided to build the next-generation telecom network. Those of you with long memories will recall a number of such attempts.

One might argue early business data networks such as X.25 or frame relay were not intended to be universal solutions. But efforts to build general purpose next generation networks have been numerous.

Some will recall ISDN (integrated services digital network) and its successor, “broadband ISDN” (later known as ATM, or asynchronous transfer mode. Some of you also will recall the huge debates about whether sticking with ATM made sense, or whether the industry should shift to Internet Protocol.

Those debates were hot and heavy two decades ago, when many now in the industry were not born, or were youngsters. ATM lost and IP won, in large part for cost reasons. Ethernet connections were widely deemed to be ubiquitous and well down the cos curve, compared to ATM customer premises equipment.

There are some important consequences. Once IP becomes the next generation protocol, all applications essentially become “over the top” apps, no matter who owns the apps. That is worth emphasizing.

In an IP environment, no application provider “needs” a business relationship with an access provider. That, in turn, affects all potential partnerships between access providers and app providers.

Simply put, application providers need no business relationships with access providers to get access to their potential users and customers. Service providers, on the other hand, tend to be the entities that “need” partnerships.

Every successful business deal requires an exchange of value for all parties. In an IP environment, app providers do not “need” such relationships with access providers to reach their customers. That limits the value any access provider brings to any potential deal.

source: ZDnet

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.