Tag Archives: internet of things

Telecoms’ troubles

The telecom industry is in a funk. S&P recently said that their “global 2017 base-case forecast is for flat revenues” and other analysts are predicting little growth in traditional telecom’s top line over the coming years across most developed markets. This recent post shows that wireless revenue by the largest US firms has basically flatlined with growth of only 1% from 2015 to 2016. Cord cutting in favour of wireless has long been a feature of incumbent wireline firms but now wireless carrier’s lunch is increasingly being eaten by disruptive new players such as Facebook’s messenger, Apple’s FaceTime, Googles’ Hangouts, Skype, Tencent’s QQ or WeChat, and WhatsApp. These competitors are called over the top (OTT) providers and they use IP networks to provide communications (e.g. voice & SMS), content (e.g. video) and cloud-based (e.g. compute and storage) offerings. The telecom industry is walking a fine line between enabling these competitors whilst protecting their traditional businesses.

The graph below from a recent TeleGeography report provides an illustration of what has happened in the international long-distance business.

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A recent McKinsey article predicts that in an aggressive scenario the share of messaging, fixed voice, and mobile voice revenue provided by OTT players could be within the ranges as per the graph below by 2018.

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Before the rapid rise of the OTT player, it was expected that telecoms could recover the loss of revenue from traditional services through increased data traffic over IP networks. Global IP traffic has exploded from 26 exabytes per annum in 2005 to 1.2 zettabytes in 2016 and is projected to grow, by the latest Cisco estimates here, at a CAGR of 24% to 2012. See this previous post on the ever-expanding metrics used for IP traffic (for reference, gigabyte/terabyte/petabyte/exabyte/zettabyte/yottabyte is a kilobyte to the power of 3, 4, 5, 6, 7 and 8 respectively).

According to the 2017 OTT Video Services Study conducted by Level 3 Communications, viewership of OTT video services, including Netflix, Hulu and Amazon Prime, will overtake traditional broadcast TV within the next five years, impacting cable firms and traditional telecom’s TV services alike. With OTT players eating telecom’s lunch, Ovum estimate a drop in spending on traditional communication services by a third over the next ten years.

Telecom and cable operators have long complained of unfair treatment given their investments in upgrading networks to handle the vast increase in data created by the very OTT players that are cannibalizing their revenue. For example, Netflix is estimated to consume as much as a third of total network bandwidth in the U.S. during peak times. Notwithstanding their growth, it’s important to see these OTT players as customers of the traditional telecoms as well as competitors and increasingly telecoms are coming to understand that they need to change and digitalise their business models to embrace new opportunities. The graphic below, not to scale, on changing usage trends illustrates the changing demands for telecoms as we enter the so called “digital lifestyle era”.

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The hype around the internet of things (IoT) is getting deafening. Just last week, IDC predicted that “by 2021, global IoT spending is expected to total nearly $1.4 trillion as organizations continue to invest in the hardware, software, services, and connectivity that enable the IoT”.

Bain & Co argue strongly in this article in February that telecoms, particularly those who have taken digital transformation seriously in their own operating models, are “uniquely qualified to facilitate the delivery of IoT solutions”. The reasons cited include their experience of delivering scale connectivity solutions, of managing extensive directories and the life cycles of millions of devices, and their strong position developing and managing analytics at the edge of the network across a range of industries and uses.

Upgrading network to 5G is seen as being necessary to enable the IoT age and the hype around 5G has increased along with the IoT hype and the growth in the smartphone ecosystem. But 5G is in a development stage and technological standards need to be finalised. S&P commented that “we don’t expect large scale commercial 5G rollout until 2020”.

So what can telecoms do in the interim about declining fundamentals? The answer is for telecoms to rationalise and digitalize their business. A recent McKinsey IT benchmarking study of 80 telecom companies worldwide found that top performers had removed redundant platforms, automated core processes, and consolidated overlapping capabilities. New technologies such as software-defined networks (SDN) and network-function virtualization (NFV) mean telecoms can radically reshape their operating models. Analytics can be used to determine smarter capital spending, machine learning can be used to increase efficiency and avoid overloads, back offices can be automated, and customer support can be digitalized. This McKinsey article claims that mobile operators could double their operating cashflow through digital transformation.

However, not all telecoms are made the same and some do not have a culture that readily embraces transformation. McKinsey say that “experience shows that telcoms have historically only found success in transversal products (for example, security, IoT, and cloud services for regional small and medium-size segments)” and that in other areas, “telcoms have developed great ideas but have failed to successfully execute them”.

Another article from Bain & Co argues that only “one out of eight providers could be considered capital effective, meaning that they have gained at least 1 percentage point of market share each year over the past five years without having spent significantly more than their fair share of capital to do so”. As can be seen below, the rest of the sector is either caught in an efficiency trap (e.g. spent less capital than competitors but not gaining market share) or are just wasteful wit their capex spend.

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So, although there are many challenges for this sector, there is also many opportunities. As with every enterprise in this digital age, it will be those firms who can execute at scale that will likely to be the big winners. Pure telecommunications companies could become extinct or so radically altered in focus and diversity of operations that telecoms as a term may be redundant. Content production could be mixed with delivery to make joint content communication giants. Or IT services such as security, cloud services, analytics, automation and machine learning could be combined with next generation intelligent networks. Who knows! One thing is for sure though, the successful firms will be the ones with management teams that can execute a clear strategy profitably in a fast changing competitive sector.

The Next Wave

As part of my summer reading, I finished Paul Mason’s book “PostCapitalism: A Guide To Our Future” and although it’s an engaging read with many thoughtful insights, the concluding chapters on the future and policy implications were disappointing.

Mason points to many of the same issues as Martin Wolf did in his book (see post) as reasons for our current situation, namely the inherent instability in allowing private profit seeking banks to create fiat money, ineffective regulation (and the impossibility of effective regulation), increased financialization, global flow imbalances, aging populations, climate change and the disruptive impact of new information technologies. This 2005 paper from Gretta Krippner on the financialization of the US economy and reports from S&P (here and here) on the policy implementations of aging demographics are interesting sources cited in the book.

It is on the impact of the information technology and networks that Mason has the most interesting things to say. Mason uses Nikolai Kondratieff’s long wave theory on structural cycles of 50-60 years to frame the information technological age as the 5th wave. The graphic below tries to summarise one view of Kondratieff waves (and there are so many variations!) as per the book.

click to enlargeHistory Rhyming in Kondratieff Waves

The existence of such historical cycles are dismissed by many economists and historians, although this 2010 paper concludes there is a statistical justification in GDP data for the existence of such waves.

Mason shows his left wing disposition in arguing that a little known theory from Karl Marx’s 1858 notebook called the Fragment on Machines gives an insight into the future. The driving force of production is knowledge, Marx theorises, which is social and therefore the future system will have to develop the intellectual power of the worker, enhancing what Marx referred to as the general intellect. Mason contends that the intelligent network we are seeing unfold today fits into Marx’s theory as a proxy for the general intellect.

Mason also promotes the labour theory of value, as espoused by Marx and others, where automation is predicted to reduce the necessary labour in production and make work optional for many in a post-capitalist world. To highlight the relevance of this possibility, a 2013 study asserted that 47% of existing jobs in the US would be replaced by automation. References to Alexander Bogdanov’s sci-fi novel Red Star in 1909 may push the socialist utopia concept driven by the information age too far although Mason does give realistically harsh assessments of Soviet communism and other such misguided socialist experiments.

The network effect was first discussed by Theodore Vail of Bell Telephone 100 years ago with Robert Metcalfe, the inventor of the Ethernet switch, claiming in 1980 that a network’s value is the number of users squared. Mason argues that the intelligent network, whereby every person and thing (through the internet of things) is wired to the network, could even reduce the marginal cost of energy and physical goods in the same way the internet has for digital products. Many of these ideas are also present in Jeremy Rifken’s 2014 book “Zero Marginal Cost Society”. Mason further argues that the network makes it possible to organise production in a decentralized and collaborative way, utilizing neither the market nor management hierarchy, and that info-capitalism has created a new agent of change in history: the educated and connected person.

The weakest part of the book are the final chapters on possible policy responses which Mason calls Project Zero with the following aims: a zero carbon energy system, the production of products and services with near zero marginal costs, and the goal of pushing the necessary labour time close to zero for workers. Mason proposes a trial and error process using agent based modelling to be adopted by policy makers to test post-capitalism concepts. He refers to a Wiki-State, a state that acts like the business model of Wikipedia nurturing new economic forms without burdensome bureaucracies. Such a state should promote collaborative business models, suppress or socialize info-monopolies, end fractional banking (as per the Chicago Plan), and follow policies such as a minimum basic wage for all to accommodate the move to new ways of working. All very laudable but a bit too Red Star-ish for me!

Nonetheless, Mason’s book has some interesting arguments that make his book worth the read.

 

An aside – As highlighted above, there are many variations on the Kondratieff long wave out there. An interesting one is that included in a 2010 Allianz report which, using the 10 year average yield on the S&P500 as the determinant, asserts that we are actually entering the 6th Kondratieff wave (I have updated it to Q3 2015)!

click to enlarge6th Kondratieff Wave

Looking through some of the mountain of theories on long waves reminds me of a 2004 quote from Benoit Mandelbrot that “Human nature yearns to see order and hierarchy in the world. It will invent it if it cannot find it.