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.