Showing posts from 2017

How Important is Network Effect in Telecom? Not Very, at Industry Level

It is a truism that network effects are key to many businesses and industries, ranging from social media networks to access networks. The network effect describes a situation where the value of a product or service is dependent on the number of others using it.
But there are other “scale” effects that shape the profitability of business models, ranging from “economies of scale” (lower unit costs possible because of customer mass or volume) to “economies of scope” (efficiencies created by product variety, not single-product volume).
Ideally, if one had a choice to operate in any industry, the “best” pick would be an industry with low scale requirements and high barriers to consumer switching behavior. Such industries are hard to find, as many consumer-facing  businesses require scale.
In that respect, internet access is in a difficult environment. It requires lots of capital, tends to earn lower profit margins than many other industries, requires some amount of sc…

New 2-Sided Markets?

Two-sided markets have existed in the content business for quite some time, even if new versions have appeared in the form of ride-sharing and room-sharing services. Such two-sided markets, with one salient exception, might be hard to create, in the mobile industry.
In the older version, a market maker makes money from both “buyers” and “sellers” of some product, even as the market maker primarily connects buyers (content consumers) with sellers (content owners).
Video subscription providers have earned revenue by selling consumers subscriptions (access) to desired content, but also have earned revenue from advertisers and content owners (local advertising the former; carriage fees in the latter case). More recently, content owners have turned the tables and now generally extract carriage fees (affiliate fees) from distributors.
But distributors still earn subscriber fees from consumers and local advertising revenues from third parties.
The strategic issue for at least some tier-one c…

Google Fiber Getting Out of Linear Video: No Surprise

The developing storyline around Google Fiber is that it is getting out of the linear video subscription  business because that business is dying. One need not look so hard for other conventional explanations. As every small telco and cable operator has known for decades, without scale, it is impossible to actual make a direct profit from linear video.

That was true even at the height of demand for linear video subscriptions. A couple of decades ago, as part of a due diligence review by a telco looking to buy cable TV assets, I asked the CEO what would happen to his business model if the subscription rate dropped from the then-current 90 percent rate to 70 percent. He immediately blurted out “then we’re dead.”

Keep in mind that this was before internet access or voice services were part of the bundle. The point is that even for a cable company with hundreds of thousands of subscribers, there was very little room in the business model for a dip in subscribers from 90 percent to a lower f…

Peak Mobile? Data is Mounting

It is too early to tell whether one sign of a peak product life cycle has been reached in the U.S. mobile market. It is possible a current bout of price competition will ameliorate and reverse as the U.S. market consolidates.
Also, mobile operator data data revenue growthwas negative, for the first time ever, in the first quarter of 2017. That matters because such growth has driven overall revenue growth for 17 consecutive years.
Altogether, about $3 billion worth of quarterly revenue has disappeared from the U.S. mobile service provider market in the second quarter of 2017, representing a $12 billion annual loss, if the trend continues.
Verizon suffered its first ever decline in service revenues, year over year, according to analyst Chetan Sharma. 
Also, for the first time, net adds for connected (cellular) tablets were negative as well. For the first time, while postpaid net-adds were negative as well. 
To be sure, T-Mobile US has taken market share and revenue. But the bigger story i…

How Much Market Share Can Independent ISPs Take from Incumbents?

How much market share can independent internet service providers take from cable companies, telcos and mobile operators? In the market as a whole, not so much. The business remains a matter of scale, and scale is expensive.
On a local level, the impact can be quite significant, in principle. In the mobile market, about two percent share is held by all firms other than the four national leaders.
Ting Internet has a rather dramatic set of assumptions for deciding where it enters a new internet access market: it assumes it will get 20 percent market share at launch, growing to 50 percent market share within five years, in markets where a telco and a cable operator already operate.
Aggressive? Yes. Even Verizon, where it has built and marketed fiber to the home services for years, typically gets market share only in the 40-percent range.
To be sure, the U.S. internet access market represents perhaps $160 billion in annual revenue, of which fixed access generates nearly $60 billion annuall…

Vertical Integration is Risky, But Might be Imperative

Vertical integration now is becoming an important strategic issue in the applications and communications industries, welcome trend or not.
Whether or not most mobile and fixed communications operators are able to move up the stack,  Google is clearly moving down the stack into devices, retail internet access, undersea capacity and new access platforms. It is not alone.
Amazon’s purchase of Whole Foods, the grocery store, moves Amazon elsewhere in the distribution chain.
Amazon’s creation of its own air freight operation, and now its moves into retail package delivery provide other examples of app layer integrating backwards into the value chain. source:
And Amazon long ago got into the devices business (KIndles, Echos, phones, tablets).
In the video entertainment business, content networks and owners are moving to integrate content distribution platforms to go direct to consumers as well.
Apple designs its own integrated circuits.
As always, the point of such vertical inte…

Winner Take All

Winner take all is major trend in the application business.  In the 2010 to 2014 period, the top 20 percent of companies in the telecom, media and technology industries captured 85 percent of the economic profit in TMT industries.
The top five percent of companies—including tech giants such as Apple, Microsoft, and Alphabet (Google’s parent)—generated 60 percent. You might note that scale plays a role. In most of these businesses, there are network effects: the more users, the more valuable the network; the higher the revenue potential; the greater the profit margin and equity valuation premium.
Telecom providers are not in comparable position to "take all," simply because their ability to reach huge scale is limited: regulatory barriers and capital requirements being the chief obstacles. For that reason, the access services business will remain more fragmented than the applications business.
source: McKinsey

How AI Can Help Telecom

McKinsey analysts believe a range of new technologies, including artificial intelligence (augmented intelligence) can help service providers reduce capital investment up to 40 percent and network-related operating expenses by 30 percent to 40 percent.
“We estimate that just 20 to 30 processes generate 45 percent of the average operator’s operating costs. Using advanced technologies, such as machine learning, to simplify and digitize those processes can cut costs by as much as one-third,” McKinsey consultants estimate.
“Our analysis suggests that a cost reduction of 30 to 40 percent and increasing cash-flow margins from 25 to nearly 40 percent is possible,” they said.
source: McKinsey
“One company we know had 600 IT systems; another had 3,000 prepaid plans,” the consultants said. “Self help” systems also can help.
“A mobile operator we know reduced the number of support calls it fields by 90 percent after it set up sophisticated systems to track and anticipate the problems of its custome…

As Mobile Goes, So Goes Telecom

In the past five years, the telecom business has entered a period of slow decline, with revenue growth down from 4.5 percent to four percent, EBITDA margins down from 25 percent to 17 percent, and cash-flow margins down from 15.6 percent to 8 percent, according to McKinsey consultants.
Competitive boundaries are shifting as core voice and messaging businesses continue to shrink, partly under regulatory pressures, but also because social media is opening up new communications channels.
Among U.S. telecom companies, for instance, landline and mobile voice now account for less than a third of total access, down from 55 percent in 2010, while data revenue has risen from 25 percent of total revenues in 2010 to 65 percent today.
The issue is what to do. In the near term, horizontal mergers to increase scale are the most likely move by most firms.
In at least some cases, service providers will try to move into other segments of the value chain, either “up the stack” in the direction of applica…

What Takes Place of Mobile Revenues Within a Decade?

It might seem fanciful in the extreme to predict that mobile services will not be the industry growth engine, much less the lead revenue driver, in a decade. But history suggests that will happen.
About every decade since 1997,  the U.S. telecom business has had to adjust to a fundamental change in revenue drivers. In 1997, about half of total revenue was driven by long distance services. A decade later, such revenues had shrunk to less than a quarter, and mobile service revenues had grown to about half of total revenues.
After another decade, internet access arguably grew to support half of total revenues. Likewise, over about a two-decade period, Verizon mobile revenues displace fixed network revenues. In 1999, Verizon earned 82 percent of total revenue from the fixed network. By 2013, 68 percent of revenue was generated by the mobile network. The cash flow picture was even more stark.
In 1999, the fixed network produced 82 percent of cash flow. By 2013, mobility was producing 89 pe…

Smart Cities Business Model is the Issue

The business case for most “smart cities” initiatives is likely to be poor to negative, in most cases, one can argue. The reasons are simply that incremental revenues to sustain the services are going to be slim to non-existent in a direct sense, even in cases where a positive societal outcome is possible.
In many cases, sustainable operation will only be possible by supporting the apps with tax or user revenues; and some potential savings in energy use. To the extent there are perceived benefits, most will be hard to quantify, as they create a “more livable” city environment, with indirect value in ability to attract and retain business entities and support economic growth. source: Nokia
On the other hand, some “smart city” use cases, such as connected vehicles, might well be underpinned by sustainable revenue models. Some believe it will be possible to create new subscription services, however, for parking or traffic information and other information services.  
source: ericsson

Coverage "Donuts" Could Connect 99% of Humans

How to connect the unconnected remains a key issue in most markets, for the simple reason that rural areas are difficult places to build infrastructure that can cover its own costs, much less support a sustainable business model.
And the challenge might be more focused than we have thought in the past. In fact, if new research by Facebook continues to follow the present model, it might be possible to connect up to 99 percent of human beings by extending the edge networks around cities just 39 miles (63 kilometers).
In other words, creating a new 39-km coverage "donut" around cities would allow internet access to reach 99 percent of humans.
New “pseudo satellite” platforms should play a role.
According to Stratistics MRC, the Global High-Altitude Pseudo Satellites (HAPS) Market is expected to grow at a CAGR of 15.2 percent between 2017 and 2023. The HAPS market includes unmanned aerial vehicles, balloons or other airships. UAVs will lead the category, though.
HAPS are aircraf…