What do telco planners think is going to happen to their service mix, profit margin, overall revenues, in the next couple of years? That’s an important question for telcos themselves, but it’s equally important for their equipment vendors. Everyone knows that 5G spending is ramping down as the initial deployment of infrastructure nears completion. Is there anything that will replace it? To answer that we need to look beyond the questions of business services and harder at the total picture.
The biggest factor in telco revenues and profits, and the 900-pound gorilla in the planning meetings, is consumer services. Consumer broadband represents the largest component of capex, with consumer mobile services second. Business services rank third, according to telco planners. Those planners say that the most significant thing happening in their overall business model is the continued, and even increased, dominance of consumer services.
There’s no disagreement among telco planners that the trend in consumer broadband, driven by streaming content, is gaining ground. You can already buy consumer wireline (really fiber-line in many cases) connections of a gigabit or more for a couple hundred bucks a month, a fraction of that multi-megabit business services would cost. There are still reliability issues in consumer broadband, but the gap between consumer and business broadband QoS is shrinking almost daily. Thus, despite the fact that some telcos are raising prices on business broadband to increase revenues, almost two-thirds of planners think that this will ultimately result in a revenue loss.
These planners are citing SD-WAN services as the big factor here. Telco SD-WAN service is the fastest-growing segment of the market, but the challenge for telcos is that managed service providers (MSPs) have a wider geographic scope, and that enterprises can also just buy the gear themselves and install it without any intermediary supplier. The average savings of SD-WAN over MPLS VPN connections, cited this year, is just over 45%, with some enterprises reporting savings as high as 70%. If the cost of connecting branch/secondary sites directly to MPLS VPNs continues to increase, planners forecast that more and more will be switched to SD-WAN.
Mobile services are also playing into this issue. 5G has failed to generate any significant incremental revenue for telcos, and telco planners now say they’re starting to see the credibility of SD-WAN increased by the use of 5G as a backup service, as well as by 5G mm-wave as a substitute for cable or fiber. In addition, as more broadband cable providers are entering into MVNO deals and using wireless service as a way to sweeten their service bundles, telcos are forced to lower their prices directly or create similar bundles (where regulations permit).
Mobile services are highly competitive, and ironically the only credible application of 5G network slicing turns out to be supporting MVNO relationships, relationships that actually act to lower the strike price for mobile services and thus impact the revenue and profits of the providers. Even without MVNO competition, it’s likely that competition among mobile providers in all the major market areas would keep up pressure on pricing and margins, and so mobile is likely to be less and less the profit center it has been historically.
Overall, planners tell me that traditional network services they provide have nowhere to go but down in terms of pricing and pricing power. That means that somehow they need to be able to boost profits elsewhere, but it also means that they have to impose strict cost controls on their traditional services unless the “elsewhere” telcos go for a profit boost has no non-telco competitors. Any player in an “elsewhere” service area who didn’t have profits dragged down by low ROI on traditional network services would be able to cut their price on the new services and undercut telcos who had to cross-subsidize marginal ROIs in the connection services area.
There’s clearly a lot of planner attention to the question of what those “elsewhere” services might be. While well over 80% of telco planners say that their senior management is fixated on evolution of existing services (somehow) as the solution to ROI problems, well over 90% of planners reject the notion that’s even possible. However, the unanimity of focus at the high level isn’t matched by consistency of targeting below. Only one strategy gets even a third of planners’ support, and most who support it admit that it’s too general to be useful.
That strategy, supported by 79% of planners (multiple choices allowed), is providing some of the high-level services that others currently offer, primarily relating to content delivery. The reasoning here is that it’s content delivery that’s creating the capacity stress on consumer broadband, so it would make sense for operators to offer it. OK, in strict economic terms, that’s true. The challenges are that 1) the space is already crowded, 2) telcos have absolutely no skill set in this area, 3) margins in content delivery services are already declining under competitive pressure, and 4) the strategy doesn’t leverage any infrastructure investments or technologies the telcos have in play so they have no advantage there.
Just about half of these content-delivery-supporting planners agree with all of this, and say that the idea would be to identify places where telcos could extend (modestly, it is hoped) existing infrastructure to offer OTTs a lower cost for supporting some service features than the OTTs’ own infrastructure would present. This is actually a form of telco planers’ second-most-cited strategy, which is the creation of “facilitating services”.
A facilitating service is a feature or feature set that is designed to underpin an OTT service by offloading capex/opex for the feature(s) from the OTT, presumably at a lower cost point than a do-it-yourself approach. Telco planners expressed support for this explicitly at a rate of 61%, and if you add in the 46% of planners who interpret high-level support for content delivery as a “facilitating service”, a net of 92% of planners support this approach. The problem is that the original advocate of facilitating services, AT&T, doesn’t seem to be making much progress on the notion, and EU telcos who have launched something in this area haven’t generated any impressive (and in many cases, even meaningful) results.
Telco planners do believe that there are things that could be done to improve their overall business model. Senior management seems to have rejected these things, or at least haven’t aggressively supported them. But…and this is a big “but”…the truth is that none of the things planners support would be easy to do at this point, and in many cases events have already validated that sad fact. To me, this means that telcos are implicitly committed to a strategy of cost reduction and revenue increases created by raising prices. We’ve not seen price per bit in consumer broadband do anything other than decline, so it’s probably going to be a competitive shock when they turn around and start going up.
Why is the increase in pricing a given? Because cost reduction has already been tried and it’s running out of gas. As I’ve pointed out before, optical transformation could have some impact on costs, and taking it further would mean accepting a lot of displacement of current technology for what’s likely to be only a small gain in profit. Operations costs could be reduced further, but in that area we’re facing the same problem in that the low apples of opex have long been picked. We’ve already seen some pricing hikes in the consumer broadband space, and I think in 2024 we’re going to see the start of a broad trend to increase pricing. The era of every-declining broadband price per bit is likely ending, unless planners figure out a way to implement at least one of the strategies they’re considering.
