Business Model Choices Can be Subtle

In real life it often is hard to tell which firms in the connectivity business might use platform business models and which do not. 

Flexiroam sells roaming mobile service in some 200 countries, supplied by the networks of about 520 mobile operators. Specializing in services for business travelers, Flexiroam builds on e-SIM capabilities, as does Truphone. 

But Truphone says it is one provider to light up over 190 countries. Flexiroam allows customers to create white label solutions, for example. Flexiroam uses the term ecosystem to describe its approach. Granted, any firm can say anything about itself, but there is a difference here. 

Truphone says it is a “provider.” Flexiroam emphasizes “ecosystem.” Truphone is itself a branded service provider. Flexiroam is more of an app that allows suppliers to match their offerings with potential customers. 

There are lots of subtleties. Both firms might use an “asset light” model that is true of both MVNOs and marketplaces. Both rely on e-SIM capabilities to simplify operating costs and fulfillment. 

But Flexiroam is more accurately uses a platform business model, while Truphone does not.

MVNO Platform and Pipeline Models Can be Subtle

The difference between a mobile operator platform business model and a wholesale-based pipeline model often is not easy to decipher. We might agree that tier-one mobile operators do not operate using a platform business model, that hinges on the creation of marketplaces or ecosystems that connect participants. 

Instead, tier-one mobile operators generally create their own branded services and sell them to customers. Mobile virtual network operators, on the other hand, might or might not use a platform model. Most source capacity wholesale and then sell at retail, which makes them traditional product suppliers rather than platforms. 

Truphone, for example, is an MVNO that operates as a classic “pipeline” company: it creates its own product and sells to customers, sourcing wholesale capacity from scores of mobile operators globally. 

GigSky, on the other hand, which offers mobile internet access roaming, might appear to operate similarly. It enables mobile roaming service in some 190 countries, hosting a platform that allows travelers to purchase temporary internet access service when outside their home countries. 

But GigSky’s app essentially maps traveler demand with mobile operator supply. It acts as a marketplace for internet access roaming. 

Some might view that as similar to the way any mobile virtual network operator conducts business: buying wholesale capacity from a facilities-based wholesaler and then retailing service under the MVNO’s own brand name. 

TruConnect is another MVNO that might appear to use a platform business model. TruConnect buys wholesale from T-Mobile, then sells its branded service to customers, with a focus on the value market.

But TruConnect does not use a platform business model. It creates its own service using wholesale mechanisms, then brands its offer and sells service to customers. It does not connect potential buyers with many sellers as a marketplace does.

For the Moment, Consumer Mobility Drives the Whole Global Connectivity Business

Revenue growth drivers in the connectivity business evolve over time, which is why ancillary and new revenue sources are important in most businesses and industries. Profit drivers over the last 50 years have progressed from international business customer voice to mobile subscriptions, to text messaging, to mobile internet access. In the smaller fixed networks business, profit drivers have shifted from voice to bundles to home broadband.

In other industries, profit drivers are distinct from revenue drivers. That is true for Amazon, where Amazon Web Services represents virtually all the profit, despite representing less than 16 percent of total revenue.  

source: Grand View Research 

So gross revenue is one matter; profitability often another matter. Mobile data is likely to remain the industry revenue driver for some time, with contributions from mobile voice, fixed network voice, mobile messaging and entertainment video set to decline.

Whether any service emerges as the profit driver--despite not driving gross revenue--is unclear.

Overall net profit margins or cash flow margins are one thing; specific product category margins are something else. In other words, product lines can vary in their profit potential. Business products might have higher revenue-per-account than consumer accounts, but lower actual profit margins. 

Gross margins for at least some connectivity products can be substantial. Cash flow margins after costs also can be attractive. 

source: Three Horizon Advisors 

EBITDA margins, as a proxy for cash flow, might hit 40 percent or so in some product lines. 

As a general rule, net mobile service profit margins overall might range between 20 percent and 30 percent.

Internet access (home broadband) supplied by “telcos” might have net margins in the 10-percent to 20-percent net margin range. 

Most of us would argue that cable operator net profit margins for home broadband are higher, perhaps in the 20 percent to 30-percent range. 

The point is that net profit margins vary by product line. For mobile internet access, gross margins can be as high as 60 percent; cash flow margins as high as 25 percent to 29 percent; net margins perhaps in the 10-percent range. 

Mobile operators can report higher voice service gross margin and cash flow margin, but also typically lower net margins, compared to internet access. Voice net margins are typically in single digits. 

Margins also can vary by customer segment. These days, few connectivity providers might argue that products for enterprise customers actually have higher profit margins than consumer mobility services. That is a complete inversion of past experience. 

The point is that some products matter more than others, even when all are significant. Connectivity providers do not today seem to resemble Amazon, where AWS produces just 16 percent of revenue but virtually 100 percent of profit. 

In the past, that has largely been the case, with business customers using international voice producing nearly all the profits. These days, it is consumer mobile accounts that come closest to matching that former role in revenue generation.

But consumer mobility also drives gross revenue.

A2P Market Now Dwarfs SMS

This chart of leading “mobile messaging vendors” shows us much about how the core communications business has changed over 25 years. Back then, any such chart would have been expected to show text messaging leaders such as NTT, or AT&T or China Mobile. 

And, to be sure, this analysis also does not focus on social media messaging platforms such as Meta’s Messenger or iMessage by Apple that are aimed at consumer communications. 

source: Juniper Research 

This analysis focuses on enabling platforms for business-to-consumer or application-to-person use cases. 

In a consumer communications context, messaging turns out to be an important feature but less a direct revenue generator. 

Ovum, for example, estimates that mobile messaging revenues for mobile operators will keep declining, as will mobile and fixed voice. 

source: Ovum, netimperative 

If nothing else, product and revenue trends in the fixed and mobile business over the last 25 years illustrate the fact that product life cycles operate in the communications business just as they do in any other business. 

source: Idea Genius

International and other long distance calling once drove global industry profits. That is no longer true. Today, global connectivity profits are driven by mobile phone services. In emerging markets, revenue growth is driven by subscriptions. In mature markets growth is driven by mobile internet, in particular shifts to higher-priced plans. 

In the fixed networks business, home broadband now drives growth, not voice or video entertainment. 

But shifts in messaging and voice have created new industry segments. The global application to person business now seems to be bigger than the consumer text messaging market, for example.

Good Reasons for Cell Tower Addition to Infra Portfolios

Digital infrastructure including cell towers, data centers and terrestrial optical fiber networks have become more interesting for infrastructure investors as reliance on internet, computing and application assets seems to keep growing. 

Revenues generated by cell tower leases are no exception. Just as important, cash flows from cell tower leases are viewed as predictable and protected from competition. Those are attributes that drive interest in other categories of infrastructure as well. 

https://www.schroders.com/en-us/us/institutional/insights/five-reasons-why-digital-infrastructure-is-among-the-most-exciting-investment-themes/ 

How Valuable is ISP User Data?

Many of us have heard for decades that telcos and ISPs have loads of data that can be monetized in some way, provided they have the right tools to do so, sometimes on an aggregated basis and sometimes using personally-identifiable information. 

Perhaps the most-logical source of possible value is customer usage and behavior, both in an aggregated and “not personally identifiable” sense as well as in an identifiable way if customers grant permission for use of their data in that way. 

And most of that data, in turn, is directly generated by customer browsing and use of social or communication apps, more than calling, texting or location. 

That presumably includes a mix of structured and unstructured data including location, device types, browsing history, usage patterns and payment information.  Some or much or all of that information also can be sourced from third parties as well, so that sort of data is not unique. 

Proponents sometimes claim that ISPs and telcos have “demographic” data. Some of us would argue they do not. They know household or subscriber addresses, and might infer something about demographics from the number of accounts in use. But some of us would argue telcos have little actual demographic information on their customers. 

ISPs, on the other hand, do have data on browsing history that might be monetized at an aggregate level. Again, though, similar or the same data can be supplied by other entities (search engines, for example). 

ISPs do have data related to operation of their networks, with monetization indirectly related to mining of that data (reduce operating costs or capital investment). 

Some will argue that ISP-owned internet of things sensors will create additional monetization possibilities, and that is true. The bigger questions concern the amount of potential revenue upside if the services and devices are not owned by the ISP. 

Still, according to a U.S. Federal Trade Commission report, “many ISPs have access to 100 percent of consumers’ unencrypted internet traffic.” Also, “many ISPs can track consumers persistently across websites and geographic locations.”

“A significant number of ISPs have the capability to combine the browsing and viewing history that they obtain from their subscribers with the large amounts of information they obtain from the broad range of vertically integrated products, services, and features that they offer,” the report says. 

It might not be wrong to argue that it is the value of combining their own data with third party information stores that creates much of the value of data mining for ISPs.

Open Gateway Upsides and Downsides?

The new initiative by GSMA and connectivity providers to create Open Gateway intends to  provide universal access to mobile operator networks for developers across connectivity provider networks. It is similar in principle to the concept of “write once, run anywhere.” 

At least conceptually, the advantages include a more-robust mobile app development process that creates additional value for mobile customers and therefore mobile operators. There are possible revenue upsides for mobile operators who will attempt to license the use of the APIs. 

And one might envision new apps that create “value-added” features that also boost operator revenue. 

It also remains possible that the advantages partly accrue to mobile operators and mostly to app developers, in the same way that prior “over the top” apps have prospered without sharing of revenue with mobile operators. 

Mobile operators, in that scenario, become more valuable as user and customer access to those apps becomes more valuable. Perhaps that value translates into higher internet access revenue; perhaps it does not. As with any ecosystem, all the participants add value. 

What never is so clear is the amount of value created, “who” creates it and the ability to monetize that value. 

As internet-accessed apps create the need for home broadband or mobile internet access, so, in principle, will Open Gateway apps. The hoped-for difference is creation of a new API licensing revenue stream. 

Network effects also should be enhanced, as any developer using the common API is supposedly assured that code will execute in the same way on the most-used global networks. Think of it as roaming, but on steroids. 

In part, Open Gateway intends to ensure that applications compliant with the API will run as expected on many global networks, including those operated by America Movil, AT&T, Axiata, Bharti Airtel, China Mobile, Deutsche Telekom, e& Group, KDDI, KT, Liberty Global, MTN, Orange, Singtel, Swisscom, STC, Telefónica, Telenor, Telstra, TIM, Verizon and Vodafone.

The expected business impact remains untested, though, in principle, the speed with which apps can be created should increase, while costs should decrease. That is the whole point of APIs and software primitives in general. 

 

Application programming interfaces are not primitives, but they are related. A primitive is a basic interface or segment of code that can be used to build more sophisticated program elements or interfaces. An API is a set of defined rules that enable different applications to communicate with each other.  

But the concepts and functions are similar to the extent that primitives are simple building blocks from which more-complex applications or functions are created, while APIs similarly allow whole processes to be constructed from different layers of software or disaggregated functions. So APIs, which are arguably more complex than primitives, are used as building blocks. 

Some might use the term API primitives in that regard, as when containers, Kubernetes or objects are used to build apps. 

Where revenue is created, and how, is not as clear. As has happened with open source, for example, monetization comes in many forms: donations; support and consulting; sponsorships; licensing; freemium pricing or merchandizing. 

So APIs can create revenue for the suppliers by charging fees for usage (on demand or subscription based); freemium plans; support charges; revenue sharing or commission payments. 

For mobile operators, the upside is licensing revenue; possible support revenue; faster mobile app development that translates into higher value for mobile subscriptions; higher value because apps run on all major networks (as with voice, text messaging or internet access roaming. 

The possible downside is additional competition or commoditization. By definition, the API means the same app should run the same way, and work the same way, on all major networks. In that sense, the new APIs will have business impact similar to wholesale features: every supplier can use them or offer them, so arguably little business advantage accrues to any of the contenders. 

It isn’t so clear that the APIs necessarily commoditize or enhance network supplier value and revenue. The APIs might have the effect of shifting value creation elsewhere, even as they speed up app development and deployment times or generate licensing revenues. 

Some might cite higher security risks as another possible issue. But the main upside for mobile operators should be licensing revenue potential and additional value from mobile apps that make mobile subscriptions more valuable. 

App providers will benefit if they are able to use the exposed network capabilities to add value to their experiences, thereby supporting their revenue models. 

NTIA Wants to Repurpose 1500 MHz

The National Telecommunications and Information Administration, as part of a move to create a national spectrum strategy, wants to identify at least 1,500 megahertz of spectrum for “ repurposing.” 

That is sure to set off a huge battle, as incumbent users will argue first that their spectrum should be retained for existing uses, and barring that, suitable protections and compensation need to be made. 

Much of the debate should center on mid-band frequencies especially prized for blending coverage and capacity features, as was the case for 4G.

source: Nokia Bell Labs  

Mobile and other interests will argue just as vociferously that technology leadership requires lots more spectrum for mobility and related uses. 

Spectrum packing, spectrum sharing, spectrum compression or moving to different frequencies all will be considered, NTIA suggests.

What Does "5G Leadership" Actually Mean, if Anything?

One often hears claims that “5G leadership” or “6G leadership” matters. It often is not clear what is meant by the assertion. At one level, it could mean that domestic suppliers are leaders in selling infrastructure. It could be the belief that faster mobile networks directly boost economic competitiveness, in part by enabling new applications or innovation. 

Underlying these and other possible assertions is the link between technology deployment and  economic impact and economic growth.  

Nobody would doubt the existence of correlations between underlying infrastructure, human capital, investment capital, technology deployment, geography, natural resources, education, the rule of law, government policy and many other possible elements that “explain” economic growth. 

But correlation is not necessarily causation, and with so many independent variables one cannot isolate one variable that explains the outcomes. So 5G or gigabit internet access networks “might” or “should” or “could” promote economic growth (beyond the actual spending to create the networks). 

But we cannot say for certain, as we cannot isolate the variables, nor test them. One might as well argue the reverse: wealthy societies can afford, and will pay for, quality 5G and home broadband. In other words, wealth or existing high rates of economic development drive home broadband and 5G usage. 

Population density, high educational attainment, average home values, high incomes and high per-capita income all are correlated with high deployment rates of home broadband, for example. It is more plausible to argue that wealth drives home broadband or 5G as it is to argue that home broadband or 5G drives wealth (beyond the obvious assertion that the home broadband and 5G industries themselves represent investment, jobs and income). 

source: Researchgate 

Economists attempt to measure the correlation between technological advancements and economic growth using “total factor productivity (TFP), a measure of total output compared to input. 

The problem is that TFP is not a measure of technology alone, but also includes  economic, cultural and technology elements. So TFP is pretty much a “measure” of “everything” that could influence economic growth. It is a measure of both capital and labor inputs, and not a direct measure of technology impact.  

source: Federal Reserve 

Nobody doubts that technology can enable or influence economic development. The issue is that technology deployment also happens in a context where other variables exist. And if technology deployment were an independent variable, its application should have an impact everywhere it is applied, and that does not appear to be so clear. 

Then add the role of consumer expectations. If consumers fear recession, they slow spending, which then causes a recession. If consumers believe the economy will be strong, they increase spending, which causes growth. 

In sum, we do not know whether 5G or home broadband necessarily “cause” economic growth. They are correlated with lots of other inputs and variables. So the claim of “leadership” has to be evaluated in that context. 

Generally speaking, economic leaders also tend to be leaders in 5G and home broadband. So claims of leadership value--while clearly in the interests of the industries making such claims--might or might not actually have a direct causal role that can be isolated from all the other independent variables.

5G and home broadband are correlated with economic growth, many will argue. It is hard to argue against the correlation. But we cannot prove causation, either.

Carrier Aggregation Keeps Getting Better

Carrier aggregation--the ability to bond multiple mobile radio channels--is simply a way to create bigger pipes, and hence greater capacity and hence higher speeds on a mobile network. The perhaps-obvious analogy is the ability to use multiple  lanes on a highway instead of just one. 

source: T-Mobile 

It is not a new practice, as 4G networks have been using carrier aggregation as well to boost capacity. 

source: 3GPP 

 And while it is helpful to aggregate carriers and channels within any specific spectrum band, there is more value when aggregation is possible across bands of spectrum.

source: CableFree

Over a period of time, the ability to aggregate channels and carriers across bands might be increasingly important, as low-band spectrum is more limited in terms of capacity than mid-band, and both of those spectrum bands are inferior (in terms of capacity) to millimeter and higher spectrum ranges. 

The lower and mid-band ranges will always be better for coverage, but capacity increases will be driven increasingly by use of high-band spectrum.

Bundling and Marketing Fashion

Marketing fashion shifts over time in both fixed and mobile segments of the connectivity business. 

Bundled services were the rage three decades ago, as fixed network operators turned to multi-product bundles in part to create scope economies when scale economies were eroding due to competition. 

These days, more connectivity providers serving retail customers are likely to prefer a “pure play” approach of supplying fiber-to-home internet access as a standalone product, without bundling. That tends to be the favored approach for upstart and competitive ISPs, for example. 

But larger legacy providers tend to be more amenable to product bundling. As analysts at Ovum note, bundles of fixed and mobile services are gaining favor with legacy providers.

source: Ovum 

A decade ago, executives at Verizon would have said they did not see customer demand for service bundles including both fixed and mobile service, though mobile operators in Europe and elsewhere disagreed. 

These days, especially as home broadband now can be supplied to some segment of the market using the same 5G network used to support mobility services, bundling of “mobile” and “home broadband” service now makes more sense for Verizon. 

Growth drivers also shift. After the voice market saturated, fixed network operators shifted to sales of additional lines; then facsimile lines; then dedicated internet dial-up access lines. Then came broadband internet access; video services and most significantly, mobility services that now represent the overwhelming driver of revenue. 

Likewise, mobile operators have shifted from subscription growth to text messaging to internet access as the growth drivers. Now, in saturated markets, they look to higher average revenue per account for gains. 

source: Vektor Research 

Is Fixed Wireless a Temporary Opportunity in Home Broadband?

Fixed wireless has been the salient example of new revenue generated by 5G because of a new use case. For T-Mobile in the U.S. market, the upside is quite tangible. T-Mobile has been touting a customer base of between seven million and eight million accounts by 2025, and Neville Ray, T-Mobile President of Technology, says he is “very comfortable with that projection, with 2.6 million in as of last quarterly results reported.”

It might not be immediately obvious, but with a universe of perhaps 110.5 million locations (small business and home), eight million accounts represents about seven percent market share of the installed base of subscribers. 

And considering that T-Mobile has had zero percent share of that market, a seven-percent share of the installed base acquired over a four-year period would be noteworthy indeed.

Competitors say growth eventually will be capped. In existing markets, spare capacity will be soaked up, limiting the number of new accounts that can be added, for example. Right now, the strategy is to offer fixed wireless in markets where there is plenty of available spectrum. 

Critics say that surplus eventually will be absorbed. But T-Mobile believes it can continue to add spectrum resources to keep pace.  

“We talked in all of those DOJ, FCC pleadings and presenting our case about how over a five-year period, we could create a 14 times, 1-4, 14 times multiplier on the capacity of the T-Mobile network with the spectrum assets and all the capabilities that we would bring,” said Ray.  

Even refarming unused 4G spectrum will bring more efficiency gains when used to support 5G, Ray says. “Mid-band 5G compared to legacy mid-band LTE, that's a two times to three times multiple on efficiency.”

That noted, fixed wireless is not generally believed to be a direct competitor to fiber-to-the-home or advanced hybrid fiber coax capacities. But T-Mobile always notes that a significant percentage of the buyers are content to buy services operating at less than 200 Mbps. 

Over time, as “typical” speeds climb, it might be the case that 1 Gbps is the minimum capacity required for a competitive offering. But that might come in a decade or more, Ray argued. And spectrum assets including millimeter wave will have a role to play in supporting gigabit speeds on fixed wireless networks. 

Some believe rural fiber access could eventually reach 70 percent market share in the home broadband market. But that still leaves a 30-percent share potential for other platforms best suited to low-density areas. In other words, fixed wireless access might be as “temporary” a solution as some critics believe. 

Even at eight percent adoption in 2025, fixed wireless could generate between $14 billion and $24 billion in new revenue for ISPs using the platform. In a market where $1 billion worth of new revenue is a big deal, that is a really big deal.