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Zero Billion Dollar Markets are Key for Telecom’s Future

At a high level, every fundamental revenue issue and opportunity in the tier-one part of the telecom business is related to the notion of  “zero billion dollar markets.”

The term can refer to any market potential less than $1 billion; a market that does not yet exist, but which can be created; or an existing market a disruptor can enter, capturing leadership of a much-smaller market.

One use of the term is negative for tier-one telecom service providers; one understanding is potentially exceedingly valuable and one sense of the term is neutral, in terms of revenue impact.

Neutral Understanding

The sense of the term that is neutral for tier-one service providers is the notion of any revenue opportunity smaller than perhaps $1 billion worth of annual revenue, the simple reason being that such markets typically are too small for a tier-one service provider to bother with.

You can think of any number of products large telcos have chosen not to create or sell as examples.

The traditional business telephone market (PBX, key system) provides one example. Sales of information technology products to small businesses provide another example.

The content delivery business and Internet access in its early dial-up days provide additional examples.

When products are sold through channel partners, those are examples of “zero billion dollar markets.” Service providers use channel partners because they cannot afford to sell direct, as the markets are not big enough to support the costs of selling direct.

Of course, those dynamics also create opportunities for specialized providers.

Negative Understanding

The obviously dangerous sense is what can happen when a big market is disrupted by an attacker, leading to a much-smaller market overall. You might argue that VoIP, over the top messaging and now perhaps over the top video entertainment are examples of markets that were once far larger, and now are far smaller, because of disruptive attacks.

Understand the attacker logic: by destroying the legacy business, the attacker hopes to create a new business that it dominates, even if the aggregate market size is much smaller.

That often makes sense for other reasons, including the notion that the attacker makes most of its money someplace else, in some other manner, and the “destroyed market” is an input to that other business model.

During the 11-year period between 2002 and 2013, U.S. fixed network provider gross and net revenue both had fallen by more than 50 percent compared to 2002.

In 2002, U.S. telecommunications industry gross revenues were $385 billion (including cable and satellite TV), and its net revenues (after interconnection costs, program content, and handset subsidies) were $315 billion.

In 2013, gross revenues were $455 billion and net revenue was about $333 billion. Mobility accounts for most of the growth.

But revenue generated by the fixed segment was cut in half.

Figure 2. 2002 and 2013 US telecommunications and content distribution revenue

Deloitte University Press

Any disruptive attacks that shrink the size of the market likewise are unhelpful for traditional service providers.

Skype, or any other major voice over Internet Protocol app or service that is a direct or indirect substitute for carrier voice, provide examples of that.

Messaging apps such as WhatsApp provide other clear examples.

In most competitive markets, contestants try and gain or hold  more market share, to build scale and thus obtain higher profit margins.

But many practitioners of the zero billion dollar market strategy are not playing that game. Instead, the objective is to essentially destroy the economics of the present business model.

Skype and messaging services give away for free what telcos try to sell. They hope to create a new business selling new or complementary products. The new revenue streams do not have to be as big as the former revenue streams. They simply have to be quite attractive for the new providers.

Skype, Netflix and WhatsApp therefore raise uncomfortable questions for access providers and incumbent Internet service providers. Those services are not trying to take market share in the legacy business. Instead, they literally destroy the existing business, allowing them to create a new one that is far smaller than the older business, but dominated by the attacker.

Likewise, use of over the top messaging apps is shrinking demand for text messaging services sold by carriers.

source: Portio Research, Fierce Wireless

Potentially Positive Understanding

But there is one clear sense–”zero billion markets that do not yet exist”–that is profoundly important for service provider. For service providers, that is what the Internet of Things is all about: creating huge new markets where access is a component, but where it might be possible for service providers to create and own the actual apps.

Aside from that, consider the volume of connections. Fixed networks connected places. Mobile connected people. IoT will connect objects. Each new segment represents a market an order of magnitude larger than the former.

So connected places might represent a universe of about a half billion places. Connecting people represents a potential market of five billion. Internet of Things might represent 50 billion objects.

For example, services related to the connected car market will generate as much as $152 billion by 2020, including the value of hardware and software, according to Business Insider Intelligence.

Relatively little of the total revenue is likely to be generated by the “access” function (the equivalent of a mobile or fixed network Internet access subscription).

Most of the revenue will be reaped by providers of services or apps, which suggests the direction mobile service providers are likely to continue taking in the connected car markets.

One reasonable hypothesis is that auto industry related firms are in position to win most of the app revenue, as the biggest categories are vehicle management and safety. In those market segments, mobile service providers are likely to be supplies of access, more than the actual application or service providers.

Mobile providers logically should do best in the mobility management area, and could be significant providers in the driver assistance, entertainment or well being apps categories, to mention a few possible segments.

The point is that “zero billion dollar markets are really important for tier-one service providers. Service providers are being disrupted by attackers who essentially will destroy existing markets for all the core legacy products.

On the other hand, tier-one service providers therefore are compelled to look for huge new businesses that will be created in the Internet of Things areas. One way or the other, zero billion dollar markets will define the future of the tier one service provider business.

Leadership in U.S. Telecom Market Could be Reshaped Over Next Decade

Something quite interesting is shaping up in the next generation networks business. For a number of reasons, leadership in the U.S. telecom industry could be reshaped over the next decade, displacing traditional leaders in a growing number of industry segments.

Consider only a few of the trends that could lead to a big shakeup in market structure, ranging from the new leading role of cable TV companies, the demise of satellite video providers, emergence of independent Internet service providers including, but not limited to, Google Fiber, the increasing integration of fixed and mobile access, fifth generation network standards and emergence of cloud computing and virtualized networks.

Each plays a part in creating the conditions for a reshaping of industry leadership. Cable TV firms already are the leading providers of Internet access services and are the low cost providers, as well.

Cable companies have emerged among the top ranks of “telecommunications service providers” and will eventually enter the mobile business, likely establishing themselves in that segment as among the leaders as well.

Many of the large legacy telecom companies increasingly get their revenue from mobile or business customers as well, raising the possibility that legacy telcos ultimately will be mobile and enterprise specialists, while other firms (cable TV, Google Fiber, independent ISPs) lead the consumer services market.

Other segments are essentially disappearing. DirecTV already is simply part of AT&T and Dish Network has made no secret of its view that it cannot continue on as a satellite TV provider, and must become a mobile service provider.

Google Fiber and scores of independent ISPS, many with local government sponsorship, meanwhile are springing up all over the United States, challenging both telcos and cable TV as the market share leaders in Internet access services.

Cable TV and some independent firms, meanwhile, are preparing to test the notion that a mobile business can be built using a mix of leased capacity and Wi-Fi assets. Aside from enabling new competition, at lower costs, the ability to mix fixed and mobile assets widens the range of business niches competitors can exploit.

Google Fi, meanwhile, is starting to test the notion of “access independent” mobile services, basing its mobile service on a “use the best access” approach (Wi-Fi, Sprint or T-Mobile US networks).

That will become a common capability of fifth generation mobile networks sometime after 2020, and could allow many new contestants to enter the “mobile” business with different business models and underlying costs.

Even the emergence of cloud computing will have an impact. Over time, Internet-based apps and services are becoming the dominant products used by consumers and businesses.

Voice and messaging still are essential features, but do not drive the revenue models.

So as devices and apps become platforms for voice, messaging and services, new combinations of device-app-access-computing become possible.

Google and Facebook already have become Internet access providers, while device suppliers might also eventually bundle access functions more tightly. In other words, device or app suppliers might become “access providers” as well.

Once access becomes a more virtualized capability, it is likely new providers are going to bundle access with some other core product.

All of that is made possible because the architecture of modern computing relies on cloud processes and Internet Protocol. Under those conditions, value shifts to the data centers that house the apps people want to use, as “any access” generally will suffice.

Much the same argument might be made about the edge devices that source functionality using cloud mechanisms.

Content companies are prime candidates for such reliance on cloud computing, and Netflix provides a good example.

Netflix is shutting down its last owned data center, making it a leader among large enterprises relying fully on public cloud computing.

Netflix has been 100 percent cloud-based for customer facing systems for some time.

About 12 percent of companies run information technology operations entirely in the cloud, according to a recent survey of 1,500 IT professionals by BetterCloud.

In five years almost 50 percent of respondents said they will be moving their IT entirely to the cloud; in 10 years, that number will climb to nearly 70 percent.

Nearly all of those companies are small or medium-sized businesses. By 2022, just slightly more than 20 percent of large enterprise companies are expected to operate entirely in the cloud.

source: BetterCloud

Not every business can run as Netflix can. But Netflix illustrates the importance of the shift to cloud computing as the fundamental architecture of most services. What matters are the capabilities of the edge device and the ability to reach the content servers.

But if that is so, the intermediary networks will struggle to define a role other than that of “dumb pipe,” especially as new competitors enter with the goal of providing that connectivity at lower retail prices.

In many ways, that is why the fifth generation mobile network standards are important for traditional service providers. The 5G standards are expected to rely on virtualized, programmable network cores that can tune features and capabilities to specific application scenarios.

That could mean not only more optimized transmission service, but lower-cost feature support as well.

Taken all together, the underlying trends create at least an opportunity for market share leadership to change in fundamental ways.

It’s a big deal.

The Future is Coming Into View: Services for Machines Drive Revenue Growth

Some key trends pointing to the future of the global communications business are coming into view. The most prosaic developments are growing mobile Internet bandwidth capabilities, for the simple reason that mobile is the way most people globally get access to the Internet and its apps and services.

Some 422 operators have commercially launched Long Term Evolution 4G networks in 143 countries, according to data released this week by GSA (Global mobile Suppliers Association).

Also, 106 operators commercially launched LTE service in the past year, bringing the total of LTE operators to 677 across 181 countries.

LTE-Advanced deployments have taken hold in all markets around the world, as well. More than 30 percent of operators are investing in LTE-Advanced system deployments while 88 operators have commercially launched LTE-Advanced service in 45 countries.

Some 15 LTE-Advanced networks support Category 4 devices (above 100 Mbps up to 150 Mbps peak downlink speed) while 73 networks support Category 6 devices (above 150 Mbps up to 300 Mbps).

Several operators are trialling LTE-Advanced technology capable of supporting Category 9 (above 300 Mbps up to 450 Mbps) devices and beyond.

And 5G is coming, promising speeds between 1 Gbps and 10 Gbps per connected deivce.

The more-important developments are illustrated by reports that large enterprises are investing in–and profiting from–Internet of Things apps and services.

Big firms investing in Internet of Things products and services report significant revenue increases as a result of IoT initiatives, with an average increase of 15.6 percent in 2014. Some nine percent of survey respondents saw a rise of at least 30 percent in revenue, says Tata Consultancy Services.

That is important for one key reason: future revenue growth in the global mobile business will be driven by services sold to enterprises operating sensor, monitoring and control networks.

In other words, we will soon be leaving the period when services sold to people were key, and enter the period where services sold to enterprises operating sensor and control networks are key.

Beyond a shift to applications and content, that will be a defining characteristic of the coming market.

Already, of AT&T’s 2.1 million net adds in the second quarter of 2015, 410,000 were postpaid accounts,  331,000 were prepaid and one million were from connected cars.

In other words, in the second quarter, connected cars drove AT&T net account adds.

AT&T also added 1.2 million branded (postpaid and prepaid) smartphones added to its base.

Comcast also now has more Internet access customers than video customers. That shift has long been underway.

But the point is that the long shift to Internet access as the strategic service already is starting to show signs of the next transition, to IoT services as the revenue driver.

The Tata Consultancy Services report shows some 12 percent of respondents at the 795 companies surveyed identifying a planned spend of $100 million in 2015. Some three percent of respondents expected their firms would invest a minimum of $1 billion.

The 795 survey participants mostly hail from very large companies, with an average revenue of $22 billion and a median revenue of $6.4 billion.

Respondents also believe IoT budgets will increase by 20 percent by 2018 to $103 million.

In all, 3,764 executives took some part of the survey. Of this group, 79 percent said their companies had IoT initiatives in place today.

Of the 21 percent of firms that don’t have them, 64 percent plan to launch one by the year 2020, which means 92 percent of the 3,764 survey participants will have an IoT initiative by the end of the decade.

The top eight percent of respondents, based on return on investment from IoT, report a 64 percent average revenue gain in 2014 as a direct result of these investments.

The most frequent use of IoT technologies is tracking customers using mobile apps, used by almost half of all businesses (47 percent).

More than half (50.8 percent) of IoT leaders use IoT to track their products and how these were performing. About 16.1 percent of the respondents with the lowest ROI from IoT report doing so.

The report found that the three biggest factors holding companies back were:

  • Corporate culture: respondents identified the ability to get employees to change the way they think about customers, products and processes was a major barrier;

  • Leadership: having top executives who believe in IoT and are willing to invest time and resources is critical;

  • Technology: Big Data; internal vs. external development; integrating IoT data with enterprise systems; and ensuring security and reliability.

Respondents at healthcare firms indicate their firms plan to spend 0.3 percent of revenue on IoT in 2015, but will increase investment by at least 30 percent by 2018.

Executives in industrial manufacturing report the largest increase in revenue from IoT, with an average of 28.5 percent, followed by financial services (17.7 percent) and media and entertainment (17.4 percent). The automotive industry has the lowest revenue gain, with just a 9.9 percent increase.

 

The report, which looks at trends across 13 key industries, suggests the travel, transportation and hospitality sectors are planning to spend 0.6 percent of revenue in 2015 on IoT, while media and entertainment companies will devote 0.57 percent of their revenue.

 

This is significantly more than the 0.4 percent average and the 0.44 percent spend in banking and financial services, Tata Consulting Services says.

Revenue increases are reported globally, with all regions reporting double-digit growth in 2014.

U.S. firms report the largest gains of 18.8 percent. Europe as a whole is seeing a 12.9 percent increase, while Asia-Pacific reports a 14.1 percent increase and Latin America an impressive 18.3 percent growth.

In 2015, European firms plan to spend $93.9 million on average, with French firms spending $138 million on average, ahead of Germany ($86.2 million) and the United Kingdom ($80.9 million).

North American companies will spend 0.45 percent of revenue this year on IoT initiatives, while European companies will spend 0.40 percent.

Asia-Pacific companies will invest 0.34 percent of revenue in the IoT, and Latin American firms will spend 0.23 percent of revenue.

Razorsight CEO Charlie Thomas Sees Agile, Innovative CSPs’ Unique Position in Cloud Market

July 20, 2015 — Razorsight CEO Charlie Thomas said communications service providers in the cloud that are agile and innovative could be well positioned to meet their clients’ requirements, ExecutiveBiz reported Friday.

“With mobility and cloud becoming ever more ubiquitous, I see security and protection such as proactive fraud monitoring being the sorts of applications that CSPs will be in a unique position to offer,” Thomas told VanillaPlus magazine in its latest edition.

“CSP’s ownership of the network and access to the data that passes through networks provides a substantial opportunity to benefit from being at the epicenter of all the data.”

Charlie-ThomasLink to Article: http://www.govconwire.com/2015/07/razorsight-ceo-charlie-thomas-sees-agile-innovative-csps-unique-position-in-cloud-market/

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Contact: David Smith
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Will WiredWest Destroy Cable TV, Telco Business Models?

“Disruption” has become an important concept for most businesses in the Internet age–and definitely for cable TV and telecom firms–for profound reasons.

In some ways, vigorous competition itself disrupts legacy markets, and the global telecom business has been deregulating and introducing competition almost continuously for four decades.

And most observers would agree that the advent of the Internet has been a game-changer for any number of industries ranging from media to retail and distribution.

But we might not appreciate how much more disruption could be possible in the telecom business.

To be sure, we already have experienced such disruption early in the long distance calling business, and more recently in the messaging and access businesses, with further disruption of the video entertainment business now coming.

Even when markets have not actually gotten smaller–though many have–profit margins have been slashed.

More than “mere competition” is happening, though. The application business increasingly is driven by marginal cost pricing, which is to say, pricing that is close to zero, if not actually zero.

And “zero” is a tough price against which to compete. In fact, many large companies successfully have used marginal cost pricing or even zero price to redefine whole markets.

The “zero billion dollar business” is an established business strategy for an application-based business. That strategy is simple enough: a challenger based on Internet fulfillment radically attacks legacy pricing.

If successful, the challenger rules over a smaller overall business that still is attractive.

Think about Craigslist. Because it could rely on a fraction of the revenue that newspapers needed to operate profitably, it also was able to change the retail cost of placing “classified” advertising.

Media executives have a saying about the revenue potential of their businesses in an Internet age: revenue is a matter of “analog dollars, digital dimes and mobile pennies.”

In other words, the marginal cost of many Internet-based businesses actually destroys markets, making them smaller.

That accounts for the fortunes of newspapers, magazines, travel agencies, physical forms of recorded music or video, bank branches, the postal service, long distance calling and most other products where digital substitute products are possible.

The thing about zero billion dollar business strategies is that they are highly disruptive.

Firms able to successfully use the strategy can vastly reshape wholesale costs and retail prices; features and benefits; and so capture leadership of new markets that are vastly smaller than the markets they displaced.

Hence “analog dollars, digital dimes, mobile pennies.

So here’s the big question: to what extent can near zero pricing strategies be applied to disrupt the Internet access business, and then, by extension, further disrupt the associated voice and video entertainment businesses?

Almost by definition these days, a fixed network telephone company, cable TV or independent ISP requires two, three or maybe four discrete bundled services to compete effectively.

So what happens if one of those key sources is fundamentally disrupted by a competitor willing to “destroy” market pricing. Can the other contenders remain viable?

In other words, if a new competitor can effectively destroy pricing for at least one of the constituent services in the core bundle, is the broader business model imperiled?

Consider the growing phenomenon of various governmental or third party and “close to non-profit” Internet access ventures in the United States.

WiredWest is a telecommunications cooperative designed to bring broadband to rural communities in Western Massachusetts.

Some 22 WiredWest communities have passed bond authorizations totaling $34.5 million for their towns’ portions of costs to build a fiber-optic network.

So far the WiredWest Coop has received over 6,700 deposits for service, representing a third of potential subscribers, and 15 towns have more than 40 percent of premises presubscribed.

WiredWest hopes to eventually wire a total of 32 towns in the state. If successful in gaining a big share of the Internet access business, does WiredWest also effectively destroy or just impair the business models of cable TV and telco providers in those markets?

Zero billion dollar markets are transforming many other industries. One has to wonder how much of that effect eventually will affect the access business as well.