There is just no end to the bad news, or at least the bad stories, regarding the health of the telcos. Light Reading had an interesting piece, one that fairly link the problem to the mobile hype, meaning 5G and 6G. The linkage is fair, but it doesn’t tell the whole story. It also seems to suggest ways the crisis is being mitigated, many of which have IMHO zero chance of working on any scale.
One key point in the story is that while telcos are clearly facing a profit problem, the companies facing a crisis are the equipment vendors. Smaller players with a specific telecom focus have been going bankrupt, and large players have been cutting staff, consolidating, or both. Juniper, arguably the number-two generalized network equipment vendor behind Cisco, recently reported its shareholders had “overwhelmingly” approved its acquisition by HPE.
Telcos tend to relate their problems to a steady decline in “profit per bit”, which some have suggested is an unreasonable metric that distorts the issue. I don’t disagree, but it does illustrate what I believe to be the basic problem, which is that the Internet and consumer broadband have transformed the mission that telecom is expected to serve. This necessitates the transformation of the telecom business model, and so far the industry hasn’t gotten this second transformation right.
We call telcos “CSPs” often, the acronym standing for “communications service provider”, but today telcos aren’t really providing communications services in most cases. Instead they are providing delivery for digital experiences, and the distinction is critical. Older services tended to charge by connection, but modern consumer broadband doesn’t “see” connections, it carries traffic. Given that most consumer broadband is sold based on a monthly fee not usage, the more valuable the Internet is the more traffic is generated, and the lower profit is earned per bit.
The reason why profit per bit may not be a proper way of looking at ISP health is that most of the capital cost of consumer broadband lies in making the connection to users, via spectrum or physical media. Most of opex is related to either access or per-customer (service) issues. Thus, while revenue per bit doesn’t rise with traffic, cost doesn’t rise proportional to traffic. If profits at telcos are under pressure, it’s not entirely due to Internet traffic growth. And telco profits, and their stock price, are under pressure. Over the last five years the two big US operators’ shares are down over 28% where the S&P has doubled.
Another interesting point stock analysis shows is T-Mobile’s success where its traditional telco competitors failed. Their shares had a gain of almost 129% over the same five years, beating the S&P. Could it be that wireline broadband is less an issue? The majority of Internet traffic growth is video, and home video is usually delivered over physical media. Mobile service has long been more profitable than fixed, anyway. Perhaps headcount is important; both AT&T and Verizon have far more employees than T-Mobile, with AT&T having the most.
I have to wonder if my demand density metric is at play here, and if it is just what that means for telcos in the long run. Operators with a low demand density have a greater challenge making infrastructure profitable, and a part of that is surely that outside operations organizations are less efficient because they are spread out.
None of these factors that influence telco profits and capital spending seem susceptible to positive changes, not in the near term and perhaps not in the longer term either, at least not unless the overall service model changes. There are financial analysts (the cited article above quotes one) who believe that an orderly modernization or investment cycle will start shortly, but I don’t believe it.
It’s not that telcos won’t modernize or invest, but that there has to be a validation of such a decision, and a budget for it. If capital investments, like purchase of network equipment, has been suppressed for years (which it has) then obviously this validation hasn’t happened in that period. What starts it now? It can’t be simply a matter of making a decision.
And it isn’t. Two things are proven to be valid activators. The first is a new service opportunity that has revenue generating potential. The second is a standard or regulatory requirement who’s support is necessary to advance the state of the infrastructure even outside of a new service. 5G or 6G are examples of the latter, which is perhaps why these standards have gotten so much attention. But standards without services are a problem, and 5G demonstrated it.
5G got a budget, but it was clear that the required spending would send profits lower unless compensating revenue was generated. People came up with plenty of 5G “use cases”, but what could be done with a technology proved (as it often has) very different from what buyers would actually spend money on. It may well be that networking had, during a long stretch where information delivery lagged information availability, gotten used to be what everyone was waiting for. At about the time of 5G, the situation reversed, which meant that before 5G capabilities could be relevant, a whole application ecosystem would have to emerge, complete with its own justification. 5G couldn’t create all the pieces needed, which will also be the problem with 6G.
5G probably contributed to the vendor profit starvation we’re now seeing, too. If operators found 5G created non-covered costs, they’d almost surely put pressure on other areas of capex to compensate. In fact, of the 33 telcos who offered me comments on capex, 21 said they believed their 2024 budgets would be impacted this way, and all said it was possible.
So what could fix this? I was somewhat surprised to hear 19 of these 21 telcos say that a new and more revenue-focused standard was the answer, even though 14 of that group admitted that telecom standards were flawed, perhaps fatally. Why, to mix metaphors, try to ride a dead horse? They say it’s because there is no other pathway, that a major capital investment in something new simply can’t be made without standards sanction. That’s surely something to think about, because none of the operators believed any such initiative was in the works, and a new one would take years.
