I doubt that there are many who believe things are coming up roses for the network operators globally. The challenges with declining profit per bit have been recounted by just about everyone, including operators themselves. Wall Street is getting antsy regarding the sector, and a growing number of analysts are expecting some major changes.
Like many others, I’ve been saying that the basic problem operators face is that their connection services set is inherently a featureless commodity that users will take for granted unless there’s something to complain about. Operators have no pricing power, no differentiation at the service level, and every initiative aimed at somehow rehabilitating basic connection services with things like “bandwidth on demand” have failed. It seems inescapable that they need to climb the value chain…and yet….
…here’s Orange, who has in fact done that with things like content creation (OCS) and business services (OBS), and is now being criticized for the very moves people like me have promoted. A French publication characterized those units as “burdens” on the business, and past executives who are seen as being instrumental in the creation of these above-the-network units have been defending their decisions. Next month, Orange is expected to announce plans to either stimulate the units they believe are underperforming or cut them back, even out. I noted earlier this month that Orange has already decided to sell off its content business.
The article I cite notes that Orange is expected to take a “back to basics” position, focusing more on connection services rather than on something higher-layer and potentially with greater profit potential. The big question will be less what they say than how they expect to make what’s almost a “recover past glory” theme actually recover it. Like all EU operators, Orange has some fundamental plusses and minuses.
I’ve noted before that what I call “demand density”, the economic potential of a market to produce communications revenue, is a critical factor in wireline ROI. France has a demand density that’s roughly the same as Spain’s or that of the US overall, which is far lower than that of Germany or the UK. That means that unlike more dense markets, infrastructure in France isn’t naturally profitable. Another measure is “access efficiency”, which is a measure of how efficient broadband modernization would be based on density maps, rights of way, and other factors. France is again lagging Germany and the UK there, and roughly matching the US overall (or AT&T in particular). This means that broadband improvements would be harder there than in more dense nearby markets.
Mobile services in the EU are very competitive, and of course operators started shifting their profit-production focus to mobile decades ago. Today, mobile services have had no better chance to sustain pricing power and profit potential than wireline, for France and for the balance of the EU and UK. Again, the situation is comparable to that of the US. As is the case with wireline, there is no likely service kicker at the connection or basic services level that could change that.
That raises the key point, and the key question, Orange raises. You either have to make basic services more profitable or you have to make a go of services that because they are profitable necessarily extend beyond the basic. That’s all the choices there are. Orange tried the latter choice, and now it may be retreating to the first. But did they really try that second choice, and is there a first choice to retreat to?
We have content production, business services, and banking today. Is it smart for an operator to enter one of those spaces and face incumbents who know the space well? There’s a part of speech called the “synecdoche”, which in an expression substitutes an example of the whole, a member of the class, for the whole. Could Orange have inadvertently employed synecdoche here, thinking that a small (and sub-optimal) higher-level service example was a proxy for the whole space of higher-level services? Did they need to broaden their thinking, to go after spaces that were above connectivity but different from content or business services or banking?
I have to wonder whether there exists, in all the world, a more unlikely combination of service goal and goal-seeker than the goal of content production for a telco. Content is all about imagination, something that few would accuse telcos of possessing in any quantity. I think Orange had the right idea but the wrong service target set.
So can they go back to basics? Here my modeling suggests that they cannot do so easily. Telcos whose service area has a demand density and access efficiency at least three or four times that of the US can make connection services profitable with no special measures. Infrastructure passes enough opportunity dollars to make it work. Where demand densities are at least twice that of the US overall, and access efficiencies are likewise, I think that a rethinking of how networks are built, a shift to focus on creating capacity rather than on managing it, could also make basic services profitable. But France doesn’t have a demand density or access efficiency twice that of the US.
In the US, Verizon has a regional demand density that’s five or more times that of rival AT&T. AT&T’s density isn’t too far off that of France. That’s important because AT&T is working really hard to improve network costs and to define “facilitating services” that they could wholesale to OTTs to become a part of a higher-layer service. Verizon has been fairly quiet in both spaces, which I think is due to the fact that its territory is inherently more profitable.
Orange is one of the four operators who formed the “facilitating services” JV I described in yesterday’s blog. Obviously, they’re not just betting on a return to the past, but as I noted yesterday, their target service set is far from ideal, and any facilitating service option is going to take some time to socialize with the OTTs. In that time, there’s no meaningful revenue from the initiative, and Orange may hope that if improved basic services aren’t the whole, longer-term, answer to their profit needs, they’ll at least hold off the wolves till they figure out one.
Orange may not have the option to go back to basic connection services, and if it’s going to attempt that, it will have to do a fairly radical transformation of infrastructure and not just try to needle a few percent off capital cost of equipment. Opex transformation, once you’ve picked the low apples, necessarily relies on significant automation, and capex transformation has to look at the overall network model and not just at point-for-point substitution of cheaper gear for legacy boxes. It’s going to be interesting to watch Orange navigate all of this, because their situation is fairly typical. Other telcos need to pay particular attention, because most who aren’t in Orange’s shoes already will step into them before long.