Are Application Markets Already Changing?

As Mary Meeker’s latest “Internet Trends” report suggests, search has changed. These days, when consumers use search, they often are searching for products to buy. And those searches start with Amazon, about half the time.

Users start with a search engine 36 percent of the time.

All that should remind us that trends and market advantage change fast in the internet apps and platforms space. For regulators and antitrust authorities, that suggests caution is called for.

It almost never makes sense to apply new regulations to industries that already are declining. We have made that mistake in recent decades, deregulating the voice business just before the voice business entered what some would call terminal decline.

It is possible that changes in demand already are at work to disrupt the leaders of the application market as well.

Internet Trends Report 2018 from Kleiner Perkins Caufield & Byers

source: Kleiner Perkins

Teens Have Abandoned Facebook, as a "Most Often Used" App

Ignoring for the moment issues about privacy and content fairness and accuracy, there already are signs that web giants such as Facebook--facing mounting calls for antitrust action--already are losing favor.

A new study by Pew Research finds Generation Y (the generation after Millennials) already largely has abandoned Facebook. The most-often used app platforms among U.S. teenagers include Snapchat, YouTube and Instagram.

source: Pew Research

Over the last three years, teen social media preferences have changed dramatically.

In the Center’s 2014-2015 survey of teen social media use, 71 percent of teens reported being Facebook users. Some 52 percent of teens said they used Instagram, while 41 percent reported using Snapchat.

That clearly has changed. Facebook usage dropped 20 percentage points. More significantly, Facebook is “most often used” by just 10 percent of teens.

Such rapid changes in app preferences are one reason hasty antitrust action might best be avoided. In fast-changing markets, it arguably does not make sense to apply antitrust to businesses that already are being supplanted by rivals.

Latest Mary Meeker "Internet Trends" Report

Here’s the latest “Internet Trends” report published by Mary Meeker, partner at Kleiner Perkins Caufield & Byers. If you have followed this report for a long time, you will notice that almost all the data now is about use cases, applications, platforms, devices and other parts of the internet ecosystem, not internet access per se.

Let that be a clear signal about where value is seen as being created within the ecosystem.

Internet Trends Report 2018 from Kleiner Perkins Caufield & Byers

As you would expect, U.S. internet users now spend more time interacting on their mobiles than on their desktops, laptops or other connected devices.

source: Kleiner Perkins Caufield & Byers

What is the Relevant "Mobile" Market; What Will it Be in a Few Years?

Regulators and lawmakers always face challenges when markets are fast evolving. When the first major comprehensive reform of U.S. telecommunications law since 1934 lead to the Telecommunications Act of 1996, the changes focused on enabling more competition for fixed network voice services.

With hindsight, we can see that this was just at the point that mobile was about to become the preferred means for consumers to use voice services. In other words, lawmakers decided to open up competition in a market that was about to shrivel.

source: CTIA

According to Federal Communications Commission statistics, fixed network voice reached a peak around 2000, just a few years after the Telecom Act was passed.

https://www.slideshare.net/CommsDay/commsdayunwired2015-bob-james

The Telecom Act also was passed just several years before use of broadband internet access grew from about 15 percent of U.S. homes to perhaps 65 percent a decade later.

source: Pew Research Center

So the point is that it is going to be hard to make rational decisions about competition and market structure in the U.S. mobile business given possible huge new changes in those markets as well.

It is not clear whether other facilities-based providers will want to enter the mobile business. Nor is it clear how such facilities would be sourced. It is reasonable, many believe, to expect possible entry by one or more cable TV companies or app providers

Facebook, Apple, Amazon, Netflix and Google “have to do something at some point,” argues  Bob Paige, Vertical Bridge EVP.

So the issue is market structure. Is the relevant market mobile service providers, facilities-based providers, all local access providers or something broader, including both app and access providers? “

And even if we can only predict that markets will converge, when will that happen on such a scale that applications and access literally are one cohesive market?

Something of the same process arguably applies to application markets, where many call for breaking up firms such as Google, Facebook, Apple and Amazon. But that also assumes the existing markets will not themselves be further disrupted, leading to a new set of leaders.

That always has happened when new eras of computing arrive. The leaders of the legacy era have never been the leaders of the new era of computing.  

Colocation, Data Center Market Still Fragmented

Equinix, Digital Realty and NTT are market share leaders in the colocation market, according to Synergy Research. But the market arguably remains fragmented, globally.

The three now control nearly 28 percent of the worldwide market and all have grown their market share over the last four quarters, both organically and through acquisitions.

Equinix had a 13 percent share in the first quarter of 2018. Equinix had a 17 percent  share of retail colocation, while Digital Realty had a 28 percent share of the wholesale (business to business colocation) segment.

Equinix sells more to enterprises who need private cloud computing facilities.

source: Synergy Research

Will 5G Capex Be Less, the Same, or More than 4G?

Many critics of 5G argue that it will cost mobile operators too much to build the networks or that incremental new revenue will be insufficient to support the networks, or both. The argument often is accompanied by the observation that some other approach (platform, network or business model) would work better.

But the cost of building mobile networks is not growing. mobile operator capital investment has been flat as capacity supply has grown as much as seven times over the last four years, argue analysts at Rewheel.

To be sure, the analysis requires careful thinking.

“Our calculations show that the doomsayers will again be proven wrong,” Rewheel says. “Mobile network capex will stay flat the next five years with the help of 3.4-3.8 GHz spectrum and massive MIMO even if data traffic grows another 10-fold (from 20 GB in 2016 to 200 GB per unique user per month in 2021) as forecasted by Finnish operators.”

Rewheel also notes that “the annual cost of expanding a 4G network’s aggregate capacity by a gigabit per second is as low as few hundred thousand euros, which is roughly the equivalent of €0.1 per GB, a near-zero marginal mobile data cost if one considers that consumers are paying few hundred EUR per year for their smartphone or mobile broadband plans,” say analysts at Rewheel.

The key word in that statement is “marginal” cost, however. Once built, a modern mobile network can indeed add a unit of supply affordably. But that does not speak to the cost of recovering the sunk investment in the full network; only the cost of the incremental supply.

The trick is that “flat capex” has to include both marginal increases in capacity and the full recovery of the cost of building the network in the first place.

source: Rewheel

Can Mobile-Only Succeed? If So, Where and Why?

Can a “mobile-only” business strategy succeed when markets reach saturation? In other words, once every potential customer already buys the service, can some combination of higher usage, new products or vertical integration offset pricing and profit pressures in zero-sum markets where market share gains can only come at the expense of other mobile operators?

It is, at present, an open question. Optimists argue that mobile operators will grow revenue from new customers, new applications, new roles in the ecosystem and even cannibalization of fixed network market share.

Pessimists likely will argue that while this is a possibility for the best-capitalized and largest providers in some markets, in most markets opportunities to grow roles, value, revenues and revenue sources are quite limited.

Still, there are some examples of mobile-only financial performance beating the financial performance of converged suppliers who own both mobile and fixed assets. In the quite-mature European markets, for example, Rewheel analysts say mobile-only providers have outperformed converged suppliers.

source: Rewheel

Some caveats are in order. Generally speaking, mobile-only attackers have no legacy to protect, and the converged operators include both the former incumbent fixed operators and some attackers who have chosen to be in both mobile and fixed markets. The point is that attackers have more choices.

Also, there are structural issues. Fixed network suppliers have lost share in voice, while mobile operators have gained share. Mobile operators have been the exclusive providers of messaging. Now something similar is happening in the internet access market, as mobile alternatives are starting to compete with fixed networks.

When utilization of any network drops--when there are fewer paying customers--per-customer costs obviously grow. Conversely, on any network with higher utilization--more paying customers--such costs drop.

In other words, all other things being equal (they are not equal), any network that gets revenue from only a half of locations the network passes (for example), will have per-customer costs that are literally double the per-passing figures.

Selling more products to a smaller number of customers helps. That is why triple play bundles are so popular. Selling more products means revenue is higher, per account.

The point is that we need to be careful when analyzing strategies. There are multiple reasons why particular suppliers, in particular markets, might achieve higher or lower revenue, revenue growth, profitability and cost-per-customer metrics.

Lower-cost platforms, as a rule, will help, and mobile networks are lower cost than fixed networks. Fixed networks, on the other hand, have had strategic advantages where it comes to the types of products that can be sold. Video entertainment is bandwidth-intensive, so in markets where linear or on-demand video is popular, fixed networks have had a price advantage.

That also has been true for internet access charges. Where demand is heavy, fixed networks have a cost of supply advantage. Generally speaking, older mobile networks have featured costs per gigabyte as much as an order of magnitude higher than fixed networks. That explains the widespread use of offload to Wi-Fi.

source: Rewheel

For most fixed networks, the key problem is product substitution. In the past, voice revenues have driven financial results, and customers have fled for mobile alternatives. Fixed internet access and video services have helped compensate for voice losses.

The problem is that growth is tough when network utilization grows increasingly negative. That is why some have called the fixed networks business a matter of terminal decline.

At the same time, fixed network suppliers face not only mobile substitution, but also facilities-based new fixed network competitors in some markets. So revenue growth and profit now are bigger issues in some markets.  

In other words, fixed networks now are in the midst of a key business model change, where customers, products and roles are evolving. It is conceivable that capex and opex profiles have to adjust to lower potential revenues, no matter how customer sets and perceived value changes. Some argue that fixed network backhaul will drive more value in the 5G era.  

It might be tempting to argue that mobile-only business models still make more sense than integrated models combining ownership of both fixed and mobile assets. But many argue that converged business models actually have performed better, financially, than mobile-only operations, across much of Asia, for example.

The issue is the growing cost of supplying incremental bandwidth. To be sure, there are three basic positions on this matter. Some believe costs will grow unmanageably. Others believe costs can be managed to match demand. Yet others believe costs will drop.

The outcome likely will be different in various markets, and by firms within those markets. Low-cost or lower-cost providers will generally win, all other things being equal. Of course, all things rarely are truly equal.