When you’re in a situation where your revenue per user (ARPU) and total addressable market (TAM) are both static or even falling, and where Wall Street expects you to report higher earnings to sustain your stock price, you surely have challenges to address. Earnings roughly equals revenue minus expenses, so if revenue is static and earnings have to at least stabilize if not gain, then you have to cut costs. The question is only what costs to focus on, and how to cut them.
Light Reading has an interesting story about this, one that concludes that the US telcos are shrinking in terms of head count, laying off employees. That’s true, but the real question is less whether that’s good or bad (it’s inevitable), or even why (we’ll get to that), but what happens when cost management ultimately fails (which it must).
Operators started telling me that they were facing profit compression back in 2008, and started talking with vendors in earnest about it in the following year. The problem they saw was pretty basic; telcos had sold capacity (meaning bits) for decades, and the more bits a buyer needed, the more they paid. Consumer data services, meaning the Internet in general and broadband Internet access in particular, changed the game. Consumers would not and could not pay for bits at the same rate businesses did so if telcos wanted to tap into the increased TAM consumer broadband represented, they had to sell broadband to them at a lower price. As consumer data traffic increased as a proportion of network traffic, this reduced the “profit per bit”, and so declining profit per bit was the telco way of looking at the problem.
As I’ve noted above, if you want to raise earnings/profit, you either have to sell more or create a higher margin on sales by lowering costs. Telco costs are divided into capital and operations expenses, capex and opex. In 2008, when profit-per-bit issues were ramping up, telcos spent roughly 40 cents per revenue dollar on opex and a bit less than 30 cents on capex. They focused first on trying to lower opex, partly through working with vendors to find lower-cost solutions, but increasingly to evaluating new infrastructure models (which gave us Network Functions Virtualization or NFV in 2012). Nothing they did on the capex front was enough, and so by 2016 they were starting to look hard at opex.
Opex is a nice politically neutral way of saying “headcount”, because almost all opex reduction strategies have been aimed at cutting human involvement in services. The Light Reading article offers a nice chart that describes the trends in employee count for some major telcos. The story the chart tells is that everyone is cutting workers, but the chart also tells other stories.
One is that mobile operators have a smaller employee count than wireline operators. This isn’t surprising because mobile services don’t have per-customer wiring and installation costs to deal with. Mobile services are spectrum-intensive, of course, but not worker intensive. This is one reason why mobile has typically been more profitable than wireline.
The second is that telcos with small, densely populated, geographies are able to sustain a larger headcount. All the EU operators on the table have seen less focus on opex/headcount reduction than AT&T, whose opportunity density is low in relation to them and to competitor Verizon. Infrastructure is more effective at turning deployment into revenue where dollars per square mile is higher, and workers are more efficient where infrastructure is more contained.
Back around 2014 I modeled the whole telco opex process to explore just what could be done there, and determined that, on the average, operators could probably reduce their headcounts by a maximum of a bit over 40%. You can see in the article’s table that both AT&T and Verizon have approached that limit at this point. That’s one reason why we’re seeing increased focus on capex again, even though early initiatives to reduce capex significantly were largely unsuccessful. That’s also why the EU operators have been pressing regulators to force “big tech” to subsidize them, or at least their infrastructure investment. If you can’t wring out capex or opex, and your revenue is largely static, your earnings/profits are going to decline, your stock price will fall, you’ll be encouraged to get into other businesses that are more profitable…nothing good will happen.
The real problem here is the customer. You can’t have customers without both customer access to services and customer support. Access costs make up over a third of capex, and customer sales and support account for over a third of headcount today, according to operators. Some report it’s half their headcount, and support costs for wireline services are higher by far than for wireless.
Since you can’t have earnings or revenues without customers, something needs to be done to make customers more efficient to acquire and support. A decent percentage of forward-thinking telcos have been telling me that they believe wireless broadband, meaning fixed wireless access or FWA, is the solution. They point out that not only is it cheaper to provide broadband via FWA than running fiber or cables, customer support for mobile devices is very small in comparison with traditional wireline, and so far FWA offers support costs that are more similar to mobile than to wireline. A futurist for one big telco recently told me “If we had the spectrum, we’d shift everyone to FWA.” Over time, allowing for depreciation, I think that’s likely true for the majority of customers.
From and open/headcount perspective, the big advantage of wireless is that it’s self-install, period. We could see something similar on wireline if there were home connectivity available for broadband providers to link to, but because we have three distinct consumer wireline models out there (fiber, CATV, and DSL/copper) and several more business options, and because these tend to terminate differently, that might be difficult to achieve. A standard termination requirement for home and business, one set by regulators and mandated to be put in whenever any new installations or changes were made, could help. So could a neutral host federation of providers, particularly fiber providers, if they’d standardize a home termination technology.
Standardized termination technology, in my view, would be an Ethernet connection from the media to a suitable on-premises device. Many of the current broadband options terminate that way in any event, so the impact on customers and providers would be minimal for fiber or even DSL. The biggest problem would be CATV, which because its linear RF service framework demands a different internal wiring model.
But FWA would have a truly stunning impact if it were widely deployed. If you ask telco planners/futurists what they think the focus of 6G should be, the overwhelming majority will list better FWA support as the first or second priority. None of them believed it was a current focus for 6G planning, but all the mobile-only operators’ futurists said they were considering the best way to advance FWA as the technology of choice, and all also believed that the key requirement for future wireless networks was the effective support of a mixture of mobile and FWA customers. Hopefully some of the 6G planners are thinking about that.
