One could make an argument that the three fastest-growing revenue streams for fixed network service providers are business focused, not consumer driven.
Machine-to-machine services, business Internet access and business VoIP all have double digit growth rates, according to Douglas Barnett, Atlantic-ACM senior analyst. Between 2011 and 2017, M2M will have a 28 percent compound annual growth rate, small business Internet access will have a 24 percent CAGR and Business VoIP will have an 18 percent CAGR.
Forecasts for “machine to machine” revenue are notoriously difficult, because observers disagree about the products that constitute M2M. For some, the core M2M business is based on sensor applications in many vertical markets, ranging from energy management meters to transportation tracking to security.
Others include mobile data connections for tablets as “M2M” revenue. That leads to important differences in market size.
The Atlantic-ACM forecast seems to include both core M2M and “connected device” revenues.
“Near-term revenue growth to be driven by e-readers and consumer-centric offerings, while long-term growth will be driven by connectivity implemented in business centric devices,” says Barnett.
The small business Internet access business will be driven by small business customers “almost exclusively,” as the small business product is very similar to consumer offerings, says Barnett.
And a couple new developments in the U.S. telecom business will likely put the emphasis on the notion that business customer revenue has become quite important.
The rumored sale of TW Telecom to CenturyLink would, should it come to pass, be only the latest example of a longer running trend in the telecom business, namely that, over time, independent business-focused assets tend to wind up in the hands of larger incumbents.
Such a deal also would illustrate the importance of business customers in the fixed network business. For U.S. cable operators, services sold to business customers are the highest growth part of their business, for example.
Some contest the potential returns, though. While the U.S. cable operators in 2012 may generate over $7 billion in annual revenues providing telecommunications services to businesses, they “will be chasing a declining business telecom services segment” and face fierce competition from entrenched telco providers with very deep pockets ready to staunchly defend their existing base, according to a study from The Insight Research Corporation.
Cable operators will gain some market share, but “they will remain small players in a big industry with low margins and little cash flow,” Insight Research argues.
That the small business market is fragmented is uncontestable. That the market is “declining” is more contestable. An observer would be hard pressed to find a year in the past decade when smaller business spending on communications did not grow.
Likewise, business services are more important for many rural and independent U.S. telcos as well. Firms such as Windstream and Frontier Communications, for example, now earn more than half their revenue from business customers, not consumers, even though both firms have roots as rural communications companies whose key customers were consumers.
A new wave of industry mergers also is expected now that the Federal Communications Commission has lifted its rules on cable operator ownership of competitive local exchange carrier assets. Virtually all of those acquisitions will be of business-focused CLEC assets by cable operators, one might argue.
And that is not a new pattern. When digital subscriber line services first began to be commercialized, it was three independent companies–Northpoint Communications, Rhythms NetConnections and Covad–that lead the business.
Northpoint was bought by AT&T. Rhythms was bought by WorldCom, which was in turn bought by Verizon. The point is that upstart independents gradually were acquired by the incumbents.
The U.S. competitive local exchange carrier business has been marked by a continuous wave of mergers and acquisitions, originally between CLECs, but now likely to feature more acquisitions by cable companies.
Between 2005 and 2011, the number of U.S. CLECs was cut in half, mostly by mergers, but over time more of those assets have been acquired by incumbent telcos such as Windstream, for example.
In fact, the 1996 Telecommunications Act actually set off a bigger round of mergers and acquisitions as virtually all firms scrambled to meet new competition in the market.
Though the initial post-1996 CLEC business did see quite a lot of attention paid to consumer customers, that changed U.S. CLECs virtually always have emphasized business customers since about 2003, when wholesale rates changed.
The point is that business-focused assets now are strategic for cable companies and smaller telcos, as well as larger ILECs.
By Gary Kim
Gary Kim is an active industry writer and analyst, editor of Mobile Marketing & Technology, Content Marketing News and Carrier Evolution. He is a frequent contributor to IP Carrier and TMCnet, and a good friend of Razorsight. Keep up with all his industry insight — follow him on Twitter @garykim.