Covid Impact Overstated?

An obvious storyline since March 2020 has been “impact of Covid-19 on X.” The problem with that story is that it might not be accurate. Looking at telecom service provider and infrastructure revenue growth trends, for example, and knowing nothing else, one would not necessarily conclude that anything unusual had happened. 

The reason is simply that, between 2019 and 2020, revenue growth already had been slipping. 

source: TBR

And that trend preexisted 2019. Looking only at telecom service providers in Western Europe between 2008 and 2014, revenue has dipped since about 2011. Covid-19 had nothing to do with those trends. 

source: STL Partners

Similar trends are seen elsewhere, showing low telecom service provider revenue growth rates. STL Partners believes global service provider revenue growth will average less than one percent per year through 2022, for example. 

source: IDATE

The point is that we might attribute too much influence to Covid-19 as a driver of near term trends. The long term influence might be even less meaningful, though that is not the conventional wisdom.

Why U.S. 5G "Lags," and Why it Will Not Matter

One of the most-recurring stories about U.S. communications infrastructure deployment, app use or performance is that it “lags” what other countries achieve, especially in the early days of deployment. But even long-term indices show “lagging” U.S. performance. There’s a good reason for those trends. 

The bottom line is that it is quite typical for U.S. performance for almost any important new infrastructure-related technology to lag other nations. It never matters, in the end. 

Eventually, the U.S. ranks somewhere between 10th and 20th on any given measure of technology adoption. That has been the pattern since the time of analog voice. 

We often forget that six percent of the U.S. landmass is where most people live. About 94 percent of the land mass is unpopulated or lightly populated. And rural areas present the greatest challenge for deployment of communications facilities, or use of apps that require such facilities. 

For example, a recent study of 5G speeds by Opensignal found U.S. and U.K. speeds lagging those of several other countries that have deployed 5G. Some of the disparity in the U.S. market is based on the spectrum assets used to deploy 5G (low band and millimeter wave) rather than mid-band spectrum. 

source: Opensignal

But the “U.S. lags” story is quite typical. In fact, the “U.S. is behind” meme never goes away, where it comes to communications. The latest assertion in some quarters is that the United States is falling behind in 5G. That claim has been made many times about other key technologies and always has proven wrong.

In the past, it has been argued that the United States was behind, or falling behind, for use of mobile phones, smartphones, text messaging, broadband coverage, fiber to home, broadband speed or broadband price.

Consider voice adoption, where the best the United States ever ranked was about 15th globally, for teledensity (people provided with phone service). A couple of thoughts are worth keeping in mind. First, large countries always move slower than small countries or city-states, simply because construction of networks takes time and lots of capital. 

With the caveat that some rural and isolated locations never got fixed network phone service, not many would seriously argue that the supply or use of fixed network voice was an issue of any serious importance for the nation as a whole, though it is an issue for rural residents who cannot buy it.

Some even have argued the United States was falling behind in spectrum auctions. That seems almost silly given the amount of spectrum not being released for use in the U.S. market, roughly an order of magnitude more spectrum than previously available for mobile services. 

What such observations often miss is a highly dynamic environment, where apparently lagging metrics quickly are closed.

To be sure, adoption rates have sometimes lagged other regions. 

Some assertions are repeated so often they seem true. Among such statements are beliefs that U.S. internet access is slow and expensive, or that internet service providers have not managed to make gigabit speeds available on a widespread basis. In fact, gigabit coverage is about 80 percent, but take rates might be as low as two percent. 

Other statements, such as the claim that U.S. internet access prices or mobile prices are high, are not made in context, or qualified and adjusted for currency, local prices and incomes or other relevant inputs, including the comparison methodology itself. 

Both U.S. fixed network internet prices and U.S. mobile costs have dropped since 2000, for example. 

The point is that the United States never leads in infrastructure adoption or performance, especially in the early days of deployment. But even at full deployment, U.S. metrics tend to place the country somewhere between 10th and 20th globally. That has been true since the days when the only thing we measured was use of analog phone lines.

Did Covid-19 Change Martec's Law?

There is wide agreement that the Covid-19 pandemic has caused many technology adoption curves to get a temporary bump up in adoption, with growth then continuing on the curve already in place before the pandemic and its organizational response.  That is illustrated by the impact of the “cataclysmic event” on an underlying rate of organizational change. 

source: chiefmartec

In other words, firms and organizations are said to have experienced “a year’s worth of change in a month.” 

Martec’s Law was coined in 2013 by Scott Brinker, Hubspot VP. Martec’s Law states that technology changes linearly, while technological change is non-linear. That observation has parallels in the notion of the productivity paradox. 

The productivity paradox suggests that information technology or communications investments do not always immediately translate into effective productivity results. Many note that measured productivity has declined since 2000, despite all the technology investments firms have made. 

source: Goldman Sachs

This productivity paradox was apparent for much of the 1980s and 1990s, when one might have struggled to identify clear evidence of productivity gains from a rather massive investment in information technology.

Some would say the uncertainty covers a wider span of time, dating back to the 1970s and including even the “Internet” years from 2000 to the present.

The point is that it has in the past taken as long as 15 years for technology investments to produce measurable gains. 

Computing power in the U.S. economy increased by more than two orders of magnitude between 1970 and 1990, for example, yet productivity, especially in the service sector, stagnated).

And though it seems counter-intuitive, even the Internet has not clearly affected economy-wide productivity. Some might argue that is because we are not measuring properly. It is hard to assign a value to activities that have no incremental cost, such as listening to a streamed song instead of buying a compact disc. It might also be argued that benefits accrue, but only over longer periods of time. 

source: Customer Think

Few, if any, buyers of new technology actually believe the claims of benefit advanced by suppliers, for good reason. Virtually all observers of technology adoption note that organizations benefit from new technology at a rate that is vastly less than the rate of adoption. That’s the essence of Martec’s Law, which holds even if the Covid-19 pandemic caused an unusual step change in behavior. 

What was Covid-19 Impact on Networking Services and Computing as a Service?

Two misconceptions sometimes abound about the impact of the Covid-19 pandemic on connectivity and computing suppliers. The first is that Covid disrupted operations and performance. To be sure, average end user experienced speeds dipped, in some countries, at least temporarily. But the big story is the one we did not hear: the networks did not crash. 

The other possible misconception is that the widespread business, school and organization shutdowns “must” have driven more revenue, given the centrality of work from home, entertain from home or learn from home activities. That turns out not to be true, either. 

source: Technology Business Research

Whatever gains might have been made from consumer customers, that was more than offset by the cessation of business activity by businesses large and small.

Can "High Tech" Displace "High Touch," or Does Virtual Drive Face-to-Face?

It should be obvious that what matters for businesses are outcomes, not inputs and activities: the financial bottom line (despite other stakeholder interests). Jobs, highly-desired quality products, sustainable environmental operations, employee benefits, contributions to economic vitality and other desirable outcomes cannot be obtained unless firms are sustainable financially. 

Also, some firms have a business model that benefits from remote work. Cloud services providers, PC manufacturers, connectivity companies generally and software firms whose products enhance remote work provide examples. 

So maybe we should not be surprised that Dell Technologies argues “COVID-19 has made one thing clear to us: work is something you do, an outcome, not a place or a time,” says Jeff Clarke, Dell Technologies COO. 

While the pandemic didn't start the remote work trend--it has been growing for 40 years, Covid-19 has shown its value, and almost certainly accelerates the trend. 

“Here at Dell, we expect, on an ongoing basis, that 60 percent of our workforce will stay remote or have a hybrid schedule where they work from home mostly and come into the office one or two days a week,” says Clarke. 

Such proclamations tend to convince observers that demand for other products, ranging from airline tickets to hotel stays, must inevitably suffer. And, to be sure, some period of lower demand likely will occur. 

But high tech drives high touch. virtual also drives more demand for face-to-face interactions.  That is a 40-year trend. This perhaps matters most for business-to-business sales professionals, who must establish trust with potential new clients. Eventually, when there is no medical bar to doing so, a renewed push for face-to-face contact will reassert itself, even if--and because of--high tech virtual replacements. 

U.S. Cable Operators Have 70% Share of the Installed Base

U.S. cable TV companies have about 70 percent share of the installed base of fixed network internet access lines, according to Leichtman Research. That might have seemed a shocking development three decades ago, when legacy telecom firms might have been assumed to have the inside track to lead the market. 

Virtually all observers would agree that this market structure exists not because “telcos cannot market” their services but principally because the cost of upgrading telco fixed networks to compete has a next-to-impossible business case. Simply put, the financial return from upgrading to fiber-to-home facilities is not there. 

That accounts for the interest in lower-cost alternatives such as 5G or 4G fixed wireless, 4G or 5G mobile access. 

Even with years of marketing, Verizon’s FiOS fiber to home network seems to get sustained market share of only about 30 percent. Across a base of 16 million homes, some note that Verizon seems essentially stuck at about that level of adoption.

AT&T has about 14 million to 15 million homes able to buy FTTH service. But AT&T seems relatively stable at about 30 percent share. 

CenturyLink fares worse, with FTTH take rates at about 11 percent to 17 percent. 

Those are daunting statistics, as they suggest--even when FTTH is available, most consumers do not buy it. In the United Kingdom, Ofcom estimates that 30 percent of consumers who could buy a fiber to home actually do so. 

AT&T believes it will hit 50 percent take rates for its fiber to home service after about three years of marketing, but so far those hopes seem unrealized. 

In South Korea, FTTH take rates seem to be only about 10 percent, for example, though network coverage is about 99 percent. 

In Japan and New Zealand, take rates have reached the mid-40-percent range, and network coverage might be about 90 percent. But in France and the United Kingdom, FTTH adoption is in the low-20-percent range. 

Perhaps 10 percent of Australians buy the fastest service available, whether that speed is 100 Mbps or a gigabit.

Did Any Telecom Firms Actually Benefit from Covid-19?

The most interesting story that might emerge from the Covid-19 pandemic is whether any telecom or connectivity firms actually benefited financially.

Economic downturns--whatever the cause--are not “good” for connectivity providers, even at a time when reliance on communications, mobility and cloud computing might lead one to think revenues “should” be increasing because of that reliance. The Great Cessation of 2020 is not different. 

Service providers have experienced subscriber losses. A revenue contraction has widely been expected, is expected and earnings reports are starting to show that has happened. 

Customer spending dropped because of the Great Recession of 2008.  And one can infer that from job losses from the internet bubble collapse, the Great Recession and the present Great Cessation. 

source: Nordea, Macrobond

The collapse of the internet bubble in 2001, the Great Recession of 2008 and the Great Cessation of 2020 all lead to a cessation of growth at the very least, temporarily lower revenue for most connectivity providers, and bankruptcy for firms in some hard-hit sectors. 

It is not actually hard to explain why. Excess capacity and insufficient demand doomed many firms in the internet bubble collapse. Simply, when one’s customers go out of business, demand drops. Nor are connectivity providers exempt from the reduced expenditures characteristic of all economic downturns. 

Some might casually think the Great Cessation was different. It happened at a time when reliance on communications and remote computing is higher than ever before, but was intensified by mandatory “stay at home” rules. Businesses and schools were forced to close, instantly changing demand patterns. 

Factories stopped producing. Offices and retail businesses were shuttered. Travel fell off a cliff. Employees who got paid to work at home might not have noticed the harshest effects, but many millions of workers simply lost their jobs. Many millions of small businesses ceased to exist. 

And keep in mind that usage is not revenue. As much as at-home internet usage climbed, revenue did not, as such services often are not directly usage based. In fact, mobility and fixed network services often feature what is essentially “unlimited” usage, given the large size of usage buckets. 

In the U.S. market, most mobile customers have effectively unlimited voice calling and text messaging, while fixed network voice and internet access also is effectively unlimited. Most large internet service providers additionally removed usage limits during the lockdown, so usage limits formally vanished. 

So the business impact was that sharply higher usage did not drive revenue higher. Bouygues Telecom, for example, reported improved financial performance “after the lockdown ended.” Some might be tempted to spin that as a “Covid helps” story, but that is wrong. Revenue did not grow until after the lockdown was ended. 

A similar story is almost certain to play out at other telcos. Recessions simply are not good for business.