Get email delivery of the Cadence blog featured here
This is the second of a two part post about the future of mobile, long-term dreams compared to short-term reality. Part 1 was yesterday's post The Future of Mobile: Part 1.
First of the pessimists, was John Stankey, CEO of AT&T entertainment group. He took the consumer's perspective that "It's not about the Gs". To the customer, it is not about 5G or 5Gbps. Mobile needs to deliver an end-to-end experience, and that means it has to be wrapped with software. "It's the customers' world, we're just living in it," he said.
The big challenge is that value chains are compressing. Value, in historical parts of the chain, are being torn out and transferred back to the consumer. The five most valuable companies in the world are digital platforms, whereas just five years ago, there was just one. (In case it's not obvious, they are Apple, Alphabet (Google), Microsoft, Amazon, and Facebook).
Just as Sunil had four messages, John had five principles:
John put a stake in the ground: he can't imagine AT&T being successful if it "does not participate in some of the stuff flowing through our pipes." The big change is that software is the product. The days of just integrating cell-towers, handsets, retail stores, etc. are ending. If you don't own and control the software stack you may not have a product. "Entertainment is the water in our pipes and it must flow to our customers in a differentiated way." It will not be possible to acquire and retain customers through connectivity alone.
I am not convinced. When Comcast acquired NBC, I had the same view. Of course, any particular content company might be a good business. NBC seems to do just fine as part of Comcast, but it's not clear it is different as a result, nor that Comcast is changed through owning a lot of content. Another reason for skepticism is that adding a good business to a bad business might improve the financials, but probably doesn't make bad business better. However, the telcos are stuck with the business---in at least the short and medium term---due to the capital already invested. Just as a DRAM company can't "get out of DRAM" just because there is a glut and prices have fallen below cost. They still have to keep the fab full, since empty fabs are even more expensive. Cash flow is king.
I see two main problems. The first is that I don't see how a company like AT&T can deliver product in a "differentiated" way. If I watch Mr. Robot on my iPhone on AT&T, in what way is the experience going to be different from watching on Verizon? The second problem is that to get to senior management in a telco like AT&T, you need decades of the experience of running a phone network. It is unclear to me that what makes a team do a great job of managing a content company is either producing better content, or monetizing the same content better.
Travis Johnson, the CEO of Ansible, was critical, too. Mobile is so important---and yet it delivers a poor experience. That day, he announced an index called "mdex" that ranks brands' performance and presence in the mobile space. It covers 16 countries, evaluates the mobile assets of over 2,000 brands. The primary criteria were:
Full results are on theMdex.com. Top of the global rankings are Facebook, Amazon, 7-Eleven, Hyundai, Nike, Microsoft, Google, Adidas, Olx, Target.
I won't go over all the results presented, but it is clear that a bad user experience (UX in the jargon) has a huge negative impact---and there is a strong uplift from brands with good mobile UX, such as BofA, Walmart, American Eagle, and Anthropologie.
You might think that the telcos, being in the mobile industry, would have excellent results, sites that are optimized for mobile and...well, they mostly do not. Some are good but most are poor. The best tend to be small telcos. So generally speaking, the mobile industry doesn't do mobile that well.
The final person I'll cover in detail was Alexei Reznikovich. who is managing partners of a private equity firm, and also CEO of Veon. He echoed a little of John's message about it being more than connectivity. He quoted Chekhov, who said, "No matter how much you shorten a play, it is never enough”. In the same way, no matter how much mobile cuts costs and improves efficiencies, it is never enough.
There are three big lies in telecom:
Alexei had a brutal table looking at what the assets are of a telco compared to a digital company (like Google, Microsoft, Apple, Uber, etc.)
One conclusion is that telcos are in a tough competition for talent. The table in the image on the right shows the competition by country. In the US, Google, Microsoft, and Apple are #1, #2 and #3. AT&T comes in at #43 and Verizon at #51. Ouch.
Another bottom line: telcos need to find a way to engage and get customers back. One example is that telcos invented the text message. Young people only use about 15% voice, if that—all the rest is messaging. But telcos are not in that business since nobody uses traditional text messages anymore, we all use WhatsApp, WeChat (WeiXin), Facebook Messenger, Apple iMessage etc. All OTT services that are just a few bytes of data to the telco. Text messages used to be a billion dollar part of their business but they refused to disrupt themselves. As it happens, I wrote about it 5 years ago, too.
The challenge is to build a gateway enabled with software. It needs a new business model, since connectivity revenues are not going to reverse and start growing. In his view, telcos need to stop thinking of their business as charging people for connectivity. It is futile trying to increase ARPU and they are missing big picture. The same consumer that spends $10/month with the telcos spends $500 on other things where they don’t participate. It is essential to find incremental revenue on top of connectivity.
As to his own telco, Veon is building new a biz model (although he didn't really say what it is), and hopefully connectivity revenue will last for some time to fund the transition. He realizes that they need to become relevant to their customers. "There is a bright future for the industry but not in the traditional sense of connectivity." It remains to be seen if this is true, it is by no means a certainty.
So there you have a number of different views. The long-term future is bright and mobile underlies all sorts of things, pretty much everything, in fact. However, the short-term challenges are severe, not financial and regulatory, but the "sexiness" of the industry when it comes to attracting the necessary talent. There are some shades of the EDA industry here, which suffers from some of the same talent issues. The big networks all seem to believe that they have to get into content, although I really don't see how that makes their connectivity business more attractive. Alexei's position is especially interesting since he is in private equity, CEO of a telco, and completely honest about the issues and challenges facing operators.
But there are some patterns too:
We will have to wait and see how it all plays out. There does seem to be a challenge running businesses that have very high capital requirements. The airline business has been basically breakeven since its inception. Mobile risks being in a similar boat: essential to the modern world, thus creating a lot of value, but not able to generate reasonable profits, let alone any sort of premium that reflects its importance to modern life. That said, supermarkets would say that too, since we all need food and yet they operate on razor thin margins. Of course, those of us in EDA all like to point out that the $350B semiconductor industry and the $1T electronics industry depends completely on us, yet we "get no respect."