According to the song, “To everything turn, turn, turn, there is a season turn, turn, turn….” That’s surely true for network operator service revenue opportunities, and one thing that all 88 of the operators I talked with this year have made that clear. The biggest problem, according to 57 of the operators is the “challenge of TAM”, meaning “total addressable market”, and all the other operators rated TAM one of the top three challenges they face in boosting service revenues. We’ve been in the Season of TAM for a couple decades now, and it’s now time for the “turn, turn” part of the picture.
Why were mobile services a hot-spot for operator revenue growth for so long? Answer: Because a bunch of users still didn’t have mobile phones. Every year, particularly after the advent of smartphones, there were more users who’d been either on the fence with mobile or hunkering down on very basic plans that may not have even offered data, and who now wanted to Go into the Light. Today, there are a far fewer such uncommitted users, so the TAM season has shifted to the ARPU (average revenue per user) season. The transition has been lumpy, and that’s why there’s so much uncertainty among telcos regarding service revenue growth.
The Season of TAM is good because to a degree it’s self-driving. A neat thing comes along, early adopters start to use it, it gets good ink, others see it in use and envy sets in, and so the others get in line, which then generates more seeing and envy and good ink. You don’t have to change things, write new stuff or build new stuff, because the neat thing promotes itself.
The Season of ARPU is a bit more challenging. A smartphone is new, and generalized, and there’s plenty of things that can attract people to it. A new version of one, a new application on one, is harder to promote because it’s more limited than generalized. Only novelty sells itself. But that’s not the only problem. The real problem with ARPU is that it’s been historically constrained in several ways.
For four decades, users in the consumer market have tended to spend a specific percentage of their disposable income on network services. Yes it can go up a bit or down a bit at any given point, but it’s stayed fairly constant within a given national market. If you want to increase ARPU, you have to convince users to spend more on something that they’ve traditionally tried to control spending for. Consumers of business services have a similar constraint on spending, set by the need to present a business case for anything incremental. The dynamic of ARPU is different for consumers and businesses, but in both cases there’s a ceiling level that’s a challenge to cross.
Another constraint that’s specific to service ARPU is the constraint of the consuming device. People don’t have broadband interfaces in their navels, so they rely on some intermediary thing that couples a service to one of their senses. Because the visual sense is the richest and most compelling, it’s the most attractive thing to couple with, so we want devices with screens and something that can be presented in the visual field. And, guess what? You can’t see bits. Consumers in particular value the experience they connect with first, the device a close and rapidly advancing second, and the service last. And businesses, while seeing things a bit differently, still meet their business case with what’s delivered and not what’s doing the delivering. Raising ARPU for the third-place candidate isn’t an enviable task.
You can see this in the way that mobile services are now marketed. There’s little or nothing said about the quality of the service or its features; everything is about the deals on phones. A phone is the visible status symbol, the thing that creates the envy. There is a strong presumption that the phone places limits on the experiences, that a newer phone will deliver something better. Even before 5G failed to deliver anything particularly compelling, consumers and businesses were already getting more phone-obsessed. Now the phone may be taking the lead, and that is going to make things very difficult for operators who want to raise ARPU.
Not in a new way, though. As I’ve noted before, most of the valuable new service opportunities in areas like IoT/metaverse are opportunities that have to be realized primarily through software and hardware devices, and only connected through services. Every new ARPU opportunity is a mandate for partnership, cooperation, ecosystem-building. In fact, the Season of ARPU for operators is all about recognizing and addressing that very basic truth. And so also for the vendors who want to sell to those operators.
The future of services is a partnership in another way as well, a partnership between network devices and features created by software and running on some sort of generalized or specialized platform. Cisco alone of the network vendors has staked out a position on the software/server side, but they’ve not done much (if anything) to expand that position into a framework for creating and sustaining the partnerships operators need. Their guidance in their earnings report this week was disappointing. Juniper has staked out a position with its Cloud Metro story, but again hasn’t expanded it explicitly into the domain of the hosted feature. Nokia’s new digital-twin layer in its Technology 2030 architecture model isn’t yet defined in enough detail to assess. In all, vendors have left the field open.
To cloud providers? To open-source software types, to companies like Broadcom/VMware or NVIDIA? To (gasp!) operators themselves? Who knows.
It’s pretty hard to see why cloud providers would have much interest in defining a future service set that would empower the operators. They’d empower themselves. Open-source software types, I think, would also likely favor cloud provider OTT-type services because the cloud providers participate more in open-source activity. It may be that vendors would have to take the lead on this, and for that to happen the vendor out in front would have to see a major upside for themselves in the effort. That would mean they’d have to be able to increase their sales overall, primarily to the operators but perhaps to a combination of operators and higher-level players.
NVIDIA would favor cloud providers too; they’re a major customer. Broadcom/VMware might be another matter, presuming the merger actually goes off. The two companies, separate, have had a chance to take on a Season of ARPU mission and have not elected to move. Even combined, there’s no assurance they’d see the opportunity, though I think they probably do based on some comments I’ve heard.
All of this is happening with the backdrop news that the EU may be rethinking its support for Big Tech subsidies of operators. If that’s true it would almost certainly kill the concept for the foreseeable future, and that would mean that the pressure on finding a Season of ARPU solution would be all the greater. Interesting times, right?
