Introduction
There have been calls over the last few months for a “fair share tax” – an argument that the companies that generate the largest volumes of data such as Google, Apple, Meta and Microsoft, should pay a subsidy to the telecom operators to support network investment. There are many issues with this suggestion, which I will set out in a series of three blogs as follows:
- This blog sets out why telecom operator finances are an issue and that this is not caused by the increase in data consumption.
- The second one will then discuss what to do to improve operator finances.
- The final one will set out how the concerns about data growth can be mitigated through data reduction and off-load techniques.
Setting the scene
Telecom operators both fixed and mobile are selling a service that most of us cannot live without, characterized by nearly guaranteed revenues from almost every person and household in the developed world. And users are unlikely to be price-sensitive since the service is so critical to everyday life although regulators may prevent large rises.
Any businesses would be delighted to be in such a position but many telcos are still unhappy that the returns that they make on their investments are insufficient, so much so that they now claim the companies that provide the most data-intense services, often termed the over-the-top, or ‘OTT’ providers, need to subsidise them. Is this a useful idea?
A few data points will help to set the scene. Some operators do have a rate of return below the cost of capital – for example Ofcom agreed this to be the case for two of the four MNOs in the UK. And the share price of operators, especially mobile operators, has languished over the last decade at a time when overall share prices have grown strongly. To claim that there are financial issues, at least in some countries and with some operators, is not so far-fetched.
During this period data usage has grown hugely: across both mobile and fixed operators, annual rates of growth of 40-60% have been normal, although these seem to be declining somewhat to 20-30% a year. Even this is still much higher growth than almost any other utility service. Operators have invested significantly in fibre networks and in 5G primarily, although whether this is driven by capacity needs or competitive pressure creating a desire to sell the latest technology is less clear.
So, is the increase in data consumption somehow to blame for operator finances?
Fixed telecom operators
It is easy to show that this is not the case for fixed operators. Once an operator has installed a fibre, cable or other high-speed connection to the home, then their costs are almost completely insensitive to data volumes since these connections have near-infinite capacity and the increase in energy caused by higher data usage is small. Only in their backbone and core network will more investment be needed, but this is typically a small faction of the cost of, for example, installing fibre to millions of homes.
It is also worth noting that fixed connections carry most of the data. In the UK a home, with an average of 2.2 inhabitants consumes about 500GByte/month of data while a typical mobile user consumes about 6GByte/month. So mobile data is only about 3% of total data. This percentage can be higher where mobile networks are used to provide fixed wireless access (FWA) – home broadband via mobile – but that is the choice of the operator and it would be assumed only provided because it generates profit. The vast majority of traffic flows over networks where it causes very little cost increase.
Mobile operators
The situation is somewhat different with mobile operators. An increase in data consumption can result in a need to increase network capacity, and that can be expensive, necessitating new technology, additional cells or expansion of equipment at current cells.
But in any normal provision of service, an increase in usage would be matched by an increase in consumer spending – for example as with electricity, gas, water, food and so on. Indeed, increased usage typically results in better economies of scale allowing increased profitability.
Mobile operators ought to be delighted that their networks are in such demand and putting up their prices as a result. But average monthly fees, often termed ARPUs, have been flat or gently falling despite increased usage. Why is this, especially when profitability is challenged for some players?
ARPU declines
There are broadly two parts to the reason for mobile APRUs declining even while data usage grows.
The first is that experience has shown that users do not like to be charged directly according to data consumption. Most prefer unlimited amounts (especially for home broadband) or large monthly buckets that they are unlikely to exceed. This is because it is very hard for individuals to understand what data they are consuming, especially as the largest volumes can often be from software downloads and similar outside of their control. Once someone has an unlimited bundle then they cannot easily be charged more for greater consumption.
The second part is related to competition. In most markets there are three or four mobile operators, and often multiple virtual operators. Competition is less intense for fixed operators but there may be a choice of fibre and cable, or competition generated from multiple ISPs operating over a wholesale network provision. Fixed and mobile broadband is seen as a utility – each provider is selling something identical and so consumers only need select the lowest price. Without any ability to differentiate, and with marginal costs per subscriber decreasing as the number of subscribers increases, operators will tend to compete prices down to the point that only one or two are making viable returns. It is the mix of competition, provision of a utility service and sale of unlimited or huge monthly allowances that is causing the issue, not the volume of data itself.
Competition and mobile markets
In many markets, such utility-based competition drives down profitability until one or more firms decide to exit the market. This reduces competition and prices eventually stabilize at a level where the remaining players make returns in line with market expectations. But exiting a mobile or fixed market is difficult. Regulators typically prevent mergers on competition grounds. Selling existing assets to a new entrant does not resolve the problem since the number of players remains the same. Simply leaving the market results in relinquishing $bns of network assets which is deeply unattractive. The result is that all the players tend to limp along and then look to intervention to boost their flagging returns. Hence the calls that the OTT providers subsidise them.
There are some factors that tend to make matters worse.
The first is an expectation, from politicians and regulators, that operators will invest well beyond the extent that is economic. In the case of fibre there is an expectation of near universal coverage despite rural areas being much more expensive to deliver. In the case of 5G there is an expectation also of much more widespread coverage than is needed for capacity reasons and of rapid delivery of network upgrades such as stand-alone cores to enable new services for which there is not yet clear demand. These expectations, when turned into widespread hyping of the value of these investments, makes it hard for operators to stand aside for risk that consumers will come to believe what they hear or that regulators will treat laggards less favourably. This results in uneconomic investment, as happened for example with some of the 5G deployment where additional cost has not resulted in any additional revenue, further worsening returns on investment.
The second factor is inefficiencies. Those operators making lower returns are almost certainly less efficient. Perhaps they have too many retail outlets, too large an HQ, too many legacy technologies requiring maintenance or insufficient investment in cloud and AI solutions. It is often hard for an operator that 20 years ago was making excellent returns to slim down for a world of falling revenue. And there is little pressure from new entrants, which are rare and generally ineffective, to force change.
The third factor is that operators often suffer from delusions of grandeur. They cannot accept that they are utilities or “dumb pipe providers” and act as if they can grow into new markets and provide new valuable services. History has shown them almost completely incapable of doing so in the face of competition from OTT providers and others who are much better placed to deliver global economies of scale. Yet they continue to invest in ventures such as private networks, hoping that, finally, they will find a service that does provide an incremental revenue stream.
So the issue is not the growth in data volumes. While this does require increased investment, in a sensibly structed industry that should be a recipe for increased revenues and growing profits. It is the way that the market that the operators reside in is structured that is the fundamental issue.
In the next blog I will consider how we can change this structure to deliver a functioning market that does not need subsidies from governments, OTT providers or anyone else.
