The Telco Market: A New Constellation?

By Mika Skarp

This past month has proved both an interesting and telling one in the mobile market; At the very top of the “interesting” column was the $85 billion proposed acquisition of Time Warner by AT&T. On the “telling” side were the abysmal Q3 results posted by Ericsson and the thoroughly gloomy announcement from Nokia that the future indeed doesn’t look so bright. It leaves us all, and especially partners, wondering what the mood is like these days at Huawei’s headquarters.

It’s always a fun and worthwhile exercise to put our market forecaster hats (it is Halloween after all!) and try to put these seemingly disconnected occurrences into some thematic context. And the best place to start is just a few steps back to take in the full view of how the stock market has seen the game and its players.

Radio network providers, namely Ericsson and Nokia are valued together around $50 billion, while fiber network gear manufacturers (i.e. Cisco) treble that at around $150 billion. Dwarfing them both by a factor of five are the Cloud players namely Microsoft (Azure), Amazon Web Services and Google together weighing in at an astounding $1 trillion.  Add in legions of global cloud operators and that figure becomes even bigger.  On the Telco side, AT&T and Verizon together cap out at $400 billion. These are important data points, but more important are where they sit on the graph of time, where only the Cloud players are actually increasing in value.

Additional tea leaf reading would suggest that while the stock markets are betting that Telcos will remain major players, they don’t put much stock (pardon the pun) in access technology focused around cellular. But perhaps that's well mixed with a belief in Google and Facebook’s two legged race toward access that will certainly include it.

What saves the Telcos in this analysis is precisely AT&T CEO, Randall L. Stephenson's bold and well-plotted move to acquire Time Warner. Whether the posturing throng of opposition in Washington lets the deal through or not, the significant bounce to AT&T’s stock and significant non-bounce of Time Warner’s would indicate that vertical integration around content is the market’s view precisely the future of Telcos. Put another way, pure play access companies without significant brands in the content space are not valued or seen as important players going in to the future. And no, the Time Warner purchase is not another AOL.

On the infrastructure side, Ericsson and Nokia have delivered four generations of mobile networks to date on a steady 10-year per G cycle. Of course, some of the intervening years were much more profitable than others for these two dominant, though at times rickety, companies. But at the outset of the building of the 5th generation, the tide has changed dramatically. We’re now inheriting 10 years of declining revenueson the operator side, where the only profit spikes have come of streamlining processes and trimming the cost base. Lets remember as well that over 60% of Internet traffic is generated by WiFi networks – a startling figure that the market knows as well as we do. Certainly Ericsson and Nokia have their hopes pinned on 5G reversing this trend and actually returning growth for mobile operators. AT&T's Stephenson is one of them, stating recently in the Wall Street Journal.

“We will be a new competitor nationwide with 5G. And so the intent is to bring Time Warner and AT&T together and create a very new and a very different kind of competitor nationwide in the cable ecosystem.”

While he does have a better case than most operators in the space, he is not alone in avoiding stating precisely how growth will actually return and what exactly will be changed. As he must play the edge here between the strategic significance of the acquisition and the contention that it won’t fundamentally change the industries they operate within. So despite the fanfare, the stock market (although kind to AT&T) has not exactly been throwing roses at the deal and seems skeptical at the industry’s actual ability to do things differently. Still, they say if you keep doing the same things, it’s madness to expect different results and Stephenson is a known risk taker.

To return to growth, mobile operators need to start selling solutions to business verticals. Here we can make the case that the operator should own the vertical itself, as with the proposed AT&T / Time Warner acquisition, or double down on focusing exclusively only on the capacity business and letting services like Netflix take care of the rest.  While I’m more of a fan of the latter due to potentially sticky Net Neutrality issues, (and that certainly will be front and center for Washington regulators), I also understand the reasons behind AT&T’s decision to 'go vertical'.

The point is that in both scenarios the Telco needs to move from a SIM-based business to solution business, and this is difficult, especially when all available resources have been streamlined. The fact is that 5G can make a difference for the cellular ecosystem if and only if Telcos change their strategy dramatically. Stephenson’s contention that AT&Ts big customer data married with Time Warner’s exceptional video content brands including CNN, Warner Brothers, HBO and DC Comics (to name a few), will usher in a new, smarter and much more competitive advertising landscape. Perhaps that’s the right answer, but as no journalist worth his salt ever says, "only time will tell".

But as we continue to focus on the all important peak of 5G, the strategic changes will have to focus on seeing more traffic growth on the cellular side and less on LAN. And there again Stephensen seems to be with the program.

“This is 100-plus premium channels, purely over the top, a mobile-centric platform, for $35 a month. It has all of Jeff’s content. It has all the premium content that you know and love. And that includes your mobile-streaming cost. It’s a game changer.”

And with this spirit and in this environment Ericsson and Nokia’s prospects begin to brighten markedly. And OTT video will soon prove to be the tip of the iceberg for them in the development of easy-to-sell vertical solutions including those for eHealth, IoT, M2M and AR/VR classes of capacity handling. Providing assured Quality of Experience for end users opens up an array of new revenue line opportunities based on real value. And of course, In these business verticals price reference is a completely different animal than in the SIM business. The only tricky part is betting on the right verticals to go after. But there's no doubt that a change from thinking about SIM-based ARPU to IPTV-style service pricing is essential for this fly and that’s a big philosophical shift.

And of course this will all take time and won’t deliver and that means yet another less than stellar year for mobile operators and equipment manufacturers through 2017. But the change will come and the business of access and capacity will change whether today’s reluctant stewards of it want it to or not.