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What Customers Buy
Beyond the contraction of the fixed market and the im-
portance of mobility, among the more-important changes
market participants clearly recognize are a shift in customer
demand from traditional voice to Internet-based products.
That obviously has affected demand for business phone
systems and new cloud-based alternatives, as well as access
products, data center services and “cloud” apps.
Consider what is happening in Verizon’s fixed network
voice business.
Increases or declines of any quantity at a 10 percent rate
are serious matters. If anything grows at 10 percent annually, it
doubles in 10 years. If something declines at a 10 percent annual
rate, it disappears in 10 years.
It’s something to ponder seriously: Sowmyanarayan
Sampath, Verizon Communications senior vice president of
transformation says Verizon’s copper-based revenue is de-
clining 8 percent to 10 percent a year.
At that rate, the revenue stream disappears in a decade.
That’s simply a directional statement, however. Every fixed
network service (except entertainment video) Verizon delivers
over copper can be delivered over fiber or mobile networks.
So eventually, much of today’s “copper” network revenue
will simply shift. Whether the business shifts to other suppli-
ers or to Verizon’s own fiber network is the real issue.
In other words, “what” business and consumer customers
want to buy has changed.
Mobility and Internet access are the two categories for
which demand has grown the most.
Other categories generally have experienced flat or lower
demand, including traditional forms of data access.
There also has been a shift in market supplier dynamics.
Cable TV suppliers are more important, while traditional
telcos less so. And some services are dominated by non-tradi-
tional suppliers, whether the products are long-haul capacity
products, mobility or cloud computing apps and capabilities.
Profit margin compression also is an issue. International
long distance providers have for decades noted a steady de-
cline in prices per minute. Suppliers of international, national,
regional or metro capacity products have seen the same trend.
But it is the mobile profit contribution that is an im-
portant part of the story, at least for AT&T and Verizon. In
1999, Verizon earned 82 percent of its total revenue from
fixed line operations. By 2013, Verizon was earning just 33
percent of total revenue from fixed network services.
The profit contribution was quite different by 2013.
Where in 1999 85 percent of Verizon’s earnings were driven
by the fixed network, by 2013, just 21 percent of earnings
were generated by the fixed network.
Back out required capital investment and the picture is
even more stark. Where in 1999 Verizon generated 82 per-
cent of earnings from the fixed network, even subtracting ca-
pex, by 2013 mobile drove 89 percent of earnings, after sub-
tracting required capex to support earning those revenues.
AT&T has greater exposure to fixed network revenue,
but even AT&T earned 54 percent of total revenue from
mobile services; got 60 percent of its 2013 earnings from
mobile services. Mobility represented 67 percent of earnings
after subtracting required capex.
All those trends affect supplier and buyer dynamics in
the business market. Business customers are spending more
on mobile, less on fixed services of all types. Of the fixed
network services they do buy, more is of the Ethernet or IP
type, less is of the TDM type.
Competition, which normally leads to lower prices, also
has led to higher consumption of many products.
New Competitors, Changed
Markets?
Perhaps the most-significant fruit of the Telecom Act
of 1996, which legalized competition in the U.S. local
telephone business, was the emergence of cable TV as a
facilities-based supplier of competition for incumbent local
exchange carriers, or “telcos.”
But the emergence of independent providers such as
Google Fiber and others might soon be seen as the second-
biggest change.
Indeed, while the Telecom Act also underpins the ability
of efforts such as Google Fiber and other independent Inter-
net service providers, it is the cable TV industry (especially
Comcast and Charter Communications, which now has
emerged as the Verizon and AT&T of the cable TV seg-
ment) that represents the main challenge to telco providers.
Cable TV’s entry into the top ranks of the mobile business
will complete the transformation. In fact, one might speculate on
what impact cable ultimately will have on the broader business.
Should the Charter Communications bid to acquire Time
Warner Cable pass regulatory muster, and some of us would
bet it will, more light will be shed on the relative roles of cable
TV and telephone companies in the fixed network high-speed
access market, and also of market power generally.
The perhaps surprising result would be that in the fixed
network Internet access segment, Comcast would be number
one, Charter number two, AT&T third.
Think about that: the two largest legacy telcos would
rank no better than third and fourth in the core service pro-
vided by the fixed network.
15)
Source: Deloitte University Press; company reports
Verizon Performance, 1999-2013, $ Billion
$96
$120
$39
$6
$3
$9
$3
$43
$17
$28
1999 2013
Revenues
1999 2013
EBITDA
1999 2013
EBITDA-CAPEX
150
125
100
75
50
25
0
Wireless
Wireline
$79
$17
$81
$39
$33
$34
$14
$25
Source: Trading Economics
U.S. Telecommunications Revenue
1974
1981
1988
1955
2002
400000000000
300000000000
200000000000
100000000000
0
Cable Business Services and Selected
Competitors’ Revenues
$10,000
Source: AT&T
Big Driver for AT&T?
1 million
CUSTOMERS
AT&T’s net adds in connected cars:
AT&T has deals with the
automakers
Audi
BMW
Ford
General Motors
Jaguar Land Rov
Nissan
Subaru
Tesla
Volvo
PARTNERS
.8
.6
.4
.2
0
Q3
2014 2015
Q4 Q1 Q2 Q3
Source: HIS
Spending is up for unified communications
pure and hybrid PBXs, down for TDM PBX
VoIP gateways in 3Q15
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
Global Revenew Growth
Percentage, 2Q15 to 3Q15
VoIP
Gateways TDM PBXs
Hybrid IP
PBXs
Pure IP
PBXs
UC
Percent Saying “Likely to Respond” to Sale
87% 87%
78% 78%
100%
90%
46
Channel
Vision
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January - February 2016