Monday, June 11, 2018

Growth by Acquisition or Organic Means: What Options, What Impact?

If approved, the AT&T acquisition of Time Warner might generate $31 billion in incremental revenue for AT&T. If Verizon is successful using its 5G network to attack a fixed wireless opportunity worth about $7.5 billion, and then add internet of things connectivity revenues of about $5.4 billion, that implies something like $13 billion annually.

Though debt levels are an issue, one might argue AT&T’s decision makes sense, despite the debt load issue, compared to a rival decision by Verizon to focus on 5G connectivity services.

That is, of course, assuming Verizon does not have other plans in mind, and even if AT&T cannot produce additional revenue, cost savings, reduced churn or other advantages from Time Warner assets.

And one wonders. If the AT&T acquisition of Time Warner is not approved, what other assets or investments could AT&T make to generate $31 billion in incremental revenue, immediately. Perhaps somebody else has an idea. My cursory check at other assets and revenue streams suggests it would not be easy to boost revenue $31 billion any other way, at any price AT&T could afford to pay.

The apparent strategic choices being made--or attempted--by AT&T and Verizon might be positioned as practical, near-term choices, even if there are strategic implications.

Still dealing with the debt load from acquiring all of its mobility business, where it comes to Verizon, additional acquisitions arguably are necessary, eventually. The reason is simply that both Verizon and AT&T have gotten most of their revenue growth from acquisitions, not internal and organic growth.


Since 2013, AT&T has dramatically changed its revenue profile by acquiring DirecTV, immediately becoming the largest U.S provider of linear video.  International acquisitions, though smallish, also indicate where AT&T could go next, beyond content.

Verizon’s biggest deal since 2013 was acquiring Vodafone's stake in Verizon's mobile business for about $130 billion in 2014. But debt load from that deal also limit Verizon’s ability to make other big asset purchases.

The appointment of Hans Vestberg as the new CEO of Verizon has been interpreted as a focus by Verizon on “5G,” as opposed to some other strategy, such as getting into content ownership in a bigger way, beyond the Oath brands.

That might not necessarily mean Verizon has in mind a strategy something like “doubling down” on connectivity services as a driver of growth, which is one way the strategy might be interpreted.

To be sure, Verizon does have a bigger opportunity than AT&T, for example, in using 5G-based fixed wireless to attack other carriers in the consumer internet access business. Verizon believes it can address about 30 percent of  U.S. homes, mostly out of territory, that way.

If there are some 130 million U.S. homes, that implies access to about 39 million potential new accounts, a significant new opportunity if one assumes each new account could generate $80 a month in recurring revenue.

Were Verizon to get 20 percent of potential customers as new accounts, 5G-based fixed wireless could generate $960 per account, per year, on a base of 7.8 million locations, it could realize $7.5 billion a year in additional annual revenue.

That is about 5.5 percent incremental revenue lift for Verizon. That is interesting, but not transformational in any way.

So some might argue that something else must be at work. And that likely is a move into other parts of the value chain built on 5G, including internet of things apps, as the amount of new connectivity revenue from IoT likewise will be interesting, but not transformational. Indeed, GSMA has predicted that connectivity revenue will be about five percent of the total IoT revenue opportunity.

That might work out to as much as $50 billion in annual global revenue. Verizon’s opportunity is a fraction of that. If U.S. revenues are a third of total, that implies $16.5 billion in connectivity revenue. If Verizon gets a third of that, it might realize $5.4 billion in annual incremental revenues.

Again, that is nice, but hardly transformational. Verizon might believe it will do much better than that, longer term.

Still, the nagging question has to be asked. If Verizon cannot do much more than add those incremental revenues, is it a sustainable strategy to focus on “5G” connectivity services? I doubt that is what Verizon has in mind, frankly.

Friday, June 8, 2018

Pay Attention to Product Life Cycles

The demise of long distance was the first indication that product life cycles operate in the telecom industry, as they do in all other industries. Decades ago, profits from the lucrative long distance calling business (driven by the business segment) were used to support money-losing consumer operations.

Once that ceased to be the case, service providers had to turn elsewhere for revenue and growth, notably to mobile services, which has been the global growth driver for decades.

Skype and other over the top alternatives have made the decline sharper.  

“Unintended consequences” might represent the more-significant of outcomes from the last two major transformations of U.S. telecom law.

The breakup of the AT&T system--a historical anomaly, as it turned out--was designed to “solve” the problem of high long distance prices. The Telecommunications Act of 1996 was intended to “solve” the problem of high prices for local telecommunications services.

The 1984 divestiture completely missed the coming role of mobile services. In fact, mobile arguably had more to do with falling long distance prices than did competition among fixed network service providers.

The U.S. Department of Justice concluded in 2007 that divestiture did not work as expected, and that similar outcomes (much lower prices and much higher usage) would have been produced by less-complicated measures.

The 1996 Telecommunications Act, likewise, was supposed to introduce local telecom competition, in the same way the the 1983 breakup of the Bell system was intended to spur competition in long distance voice.

The Act opened competition in the “local” telecom business, initially driven by mandatory wholesale policies that allowed new competitors wholesale access to existing facilities, and then on a reliance on facilities-based supply.

What was missed? The internet. Ironically, to the extent the Telecommunications Act of 19996 has succeeded, it is because of value created by the internet and its apps and services, not new competition for local voice services.

The point is that, however well intentioned, major efforts to revamp communications policy have succeeded (in a generous interpretation)  “despite the new policies,” as much as “because of the new policies,” as maturing product life cycles eviscerated the very markets policymakers tried to make “more competitive.”

It is the two major unintended developments--mobility and internet--that have lead to higher value and lower prices for consumers, not the intended changes (breaking up AT&T, opening local telecom to competition). In the case of the divestiture, policymakers missed mobility; in the case of the Telecom Act, they missed the internet.

The point is a huge dose of humility should be brought to the whole process of shaping policy to promote investment and competition in communications facilities and services. Our track record is not very good.

Thursday, June 7, 2018

What is the Long Term Telecom Imperative?

Differences of opinion are what makes markets: for every seller there must be a buyer. And in the case of AT&T and some other tier-one service providers, those differences might tend to center on near-term issues such as debt loads, while longer-term strategic issues center on whether any tier-one service provider can make a sustainable business out of access services, and only access services.

In the former case, acquisitions such as DirecTV and Time Warner are problematic mostly because of the implications for debt load. In the latter case the objection is that investment capital should be spent elsewhere.

My own views are clear enough: surviving tier-one service providers must move up the stack, must take on additional roles in the  value chain, must develop big new revenue sources beyond connectivity.

In large part, that belief flows directly from the marginal cost or near-zero levels of pricing for all connectivity services. Pricing that falls to nearly zero is a problem for the telecom or any other industry selling products.  

But stranded assets also are a growing problem in competitive markets, as competition increases capex per customer and increases business risk.

The big strategic problem is that the global telecom service provider market is likely very close to an absolute peak, the point at which  future revenues are smaller. For that reason, a simple reliance on access revenues is a guarantee of shrinking revenues.

Issues such as debt loads and other typical financial ratios are important. Mistakes can be fatal, in that regard. But beyond proper management, there are larger strategic issues, such as the future role of access services in the internet, app, retail and other parts of every  ecosystem that uses communications.

If you believe telecom access revenue is bound to start a permanent decline, then business leaders must--absolutely must--develop new business models.

Wednesday, June 6, 2018

Comcast Acquisition of NBCUniversal Did Not Cause Anti-Competitive Behavior; Precedent for AT&T Time Warner?

One objection--perhaps the major objection--to the proposed AT&T acquisition of Time Warner is that the merger would lead to higher prices. That also was alleged when Comcast bought NBCUniversal.

And though Department of Justice officials have said they do not believe in behavioral remedies (essentially, price controls and oversight), the evidence from one study suggests “either that there was no net positive effect on incentives to raise prices above competitive levels following the vertical merger, or else that the behavioral remedies placed on the Comcast-NBCU merger have been effective.”

In other words, the seminal Comcast acquisition of NBCUniversal, which essentially is the model for AT&T, did not lead to higher prices paid by distributors who buy NBCUniversal content.

That might be reason for believing that the proposed acquisition of Time Warner would not inevitably or necessarily lead to higher prices paid by distributors wanting access to key Time Warner content. In fact, some argue AT&T has clear incentive not to take unfair advantage of its programming customers.  

To be sure, DoJ lawyers--aside from opposing the proposed deal--also favor structural remedies (asset divestitures) in place of behavioral remedies that require the agency to continually monitor firm actions. And AT&T has said it will not offer such concessions.

Some argue the government’s case will fail, as federal antitrust officials have not won a vertical integration case in half a century, presumably because vertical mergers do not reduce competition in markets.

That is not to say anticompetitive actions are impossible, even after a merger that does not reduce competition. But such actions are anything but automatic, and Federal Trade Commission enforcement remains present.

Typically, the reasons for a vertical merger have to do with internal operating costs or some other advantage related to reducing input costs. In other cases, the rationale is to reduce reliance on revenue from only one segment of a full value chain, especially if the existing role is under financial or strategic pressure.

The point is that vertical mergers do not eliminate competition, by definition, and are not therefore automatically injurious to consumer welfare. There does not seem evidence that the Comcast acquisition of NBCUniversal, for example, caused problems in that regard.

And that is one reason for believing that an AT&T acquisition of Time Warner might well benefit AT&T, as well as its customers.

International Capacity Prices Fall 30% Annually Since 2014

It might be overstating matters to argue that capacity prices are in “free fall.” That is the case on some routes that traditionally have had less supply, such as North to South America, but price declines on well-supplied routes (transAtlantic or TransPacific) decline rather predictably.


“Bandwidth prices remain on the descent, driven downward by increasing competition and new transmission technologies and network topologies that lower unit costs,” TeleGeography correctly notes.

Median monthly lease prices across a selection of critical routes declined an average of 26 percent from 2016 to 2017, and 30 percent compounded annually from 2014 to 2017.

"Cutting Out the Middleman" Will Shrink the Telecom Industry

“Cutting out the middle man” (telcos) now has emerged as a key constraint on global telecom service provider revenues and profits, and will be a huge force dictating when and how the public networks industry actually will shrink.

Some forecasters already believe the global industry is going to shrink in 2018. Peak telecom, in other words, might be at hand, the point at which the global industry, after generally growing for 150 years, starts to shrink.  

“Telecommunications firms are no longer the primary interests driving submarine cable construction,” says Jim Poole, Equinix VP. “Now, it’s hyperscale cloud companies and large content providers.”

“The telecom companies are losing importance as operators of the worldwide communication infrastructure ,” is the way one publication describes the impact.  

That shift by enterprises--who now own and operate their own private networks--is an example of disintermediation. So are all “over the top” apps. And you therefore see the stunning implications of the concept.

Telecommunications has been a necessary function, and it also has fueled the growth of a global industry. In the new world, communications remains an essential function, but it is not always the driver of the public networks industry.

There are some parts of the telecom ecosystem for which this shift is not a problem. If you build subsea networks, cable and optoelectronics and do construction, you do not really care who the buyer is, so long as there are lots of them.

If you operate global data centers, and your customers are enterprises and private firms, you probably do not worry about the dwindling of the public communication networks business.

But if your business is selling communication services to businesses and consumers, disintermediation means your business is shrinking.

Disintermediation means the “reduction in the use of intermediaries between producers and consumers.” In other words, cutting out the middleman, and going direct to one’s customers, without the use of other distribution channels.

So one big impact of huge content and app firms building and operating their own networks is that the size of the public communications market is reduced. In other words, a growing percentage of international bandwidth no longer moves over public networks, supplied by public carriers (telcos or capacity specialists).

Depending on the route, private bandwidth supply represents as much as 30 percent to 70 percent of total traffic on those routes.

The other impact is falling prices. With some exceptions, bandwidth prices on undersea routes have fallen steadily, but not precipitously, over the last decade or so.

One issue, as noted, is that traffic now is shifting to private networks owned and operated directly by content companies, app companies and other enterprises, who no longer need to buy such long-haul capacity from commercial providers. That means fewer potential customers, and therefore more competition to secure what remains of demand for public network services.

Moore’s Law is another issue, as ever-cheaper bandwidth is possible, and therefore reflected in retail prices (more supply means lower prices).

Annual global operator-billed revenues from voice and data services will fall by over $50 billion (about six percent) over the next five years, from $837 billion in 2017 to $785 billion in 2022, according to Juniper Research.

Other analysts think a global peak revenue might not be reached until perhaps 2021. Predictions for 2018 revenue range from flat to negative two percent.

On a global basis, the dollar value of operator-billed monthly average revenue per user fell by 62 percent between 2005 and 2017, to $9.20, Juniper Research estimates.

That decline is structural, and not caused by temporary issues such as economic slowdown.


That really should come as no surprise. Every telecom product has a product life cycle. Eventually, every potential prospect already has become a customer. Product substitution is happening, there is substantial new competition and mobile adoption in developing countries, which has driven global growth for more than a decade, is slowing.

In 2013, the dollar value of global operator-billed revenues fell for the first time.

In both West Europe and Central & East Europe, the dollar value of revenues peaked in 2008.

In 2017, three regions (Latin America, Central & East Europe and rest of Asia Pacific) saw year-over-year growth, but revenues were below peak levels, Juniper Research argues.

In 2017, operator-billed revenues had fallen to 86 percent of their 2013 peak levels; in West Europe, revenues are now just 58 percent of their 2008 high point.

New revenue sources such as internet of things apps and connectivity will help, but will not replace the lost voice and internet access revenues. Internet of Things revenues might generate some $8 billion by 2022.

Tuesday, June 5, 2018

Global Telecom Business Might be Nearing its Absolute Historic Peak

Annual global operator-billed revenues from voice and data services will fall by over $50 billion (about six percent) over the next five years, from $837 billion in 2017 to $785 billion in 2022, according to Juniper Research.

Other analysts think a global peak revenue might not be reached until perhaps 2021. Predictions for 2018 revenue range from flat to negative two percent.

On a global basis, the dollar value of operator-billed monthly average revenue per user fell by 62 percent between 2005 and 2017, to $9.20, Juniper Research estimates.

That decline is structural, and not caused by temporary issues such as economic slowdown.


That really should come as no surprise. Every telecom product has a product life cycle. Eventually, every potential prospect already has become a customer. Product substitution is happening, there is substantial new competition and mobile adoption in developing countries, which has driven global growth for more than a decade, is slowing.

In 2013, the dollar value of global operator-billed revenues fell for the first time.

In both West Europe and Central & East Europe, the dollar value of revenues peaked in 2008.

In 2017, three regions (Latin America, Central & East Europe and rest of Asia Pacific) saw year-over-year growth, but revenues were below peak levels, Juniper Research argues.

In 2017, operator-billed revenues had fallen to 86 percent of their 2013 peak levels; in West Europe, revenues are now just 58 percent of their 2008 high point.

New revenue sources such as internet of things apps and connectivity will help, but will not replace the lost voice and internet access revenues. Internet of Things revenues might generate some $8 billion by 2022.

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