By any measure, the telecommunications industry is huge. According to GSMA Intelligence, total mobile revenues reached $1.05 trillion in 2017 and will break $1.1 trillion in 2020. That summarizes the problem; while the absolute numbers are big the growth rate is small. In fact, the growth rate for mobile revenues is forecast to drop to 1% per year from 2020 to 2025. This is leading to a flattening of revenues for mobile operators.
Revenue has a number of drivers that vary by market. In the US, there are more connections than people, suggesting that the consumer market is saturated. We have become accustomed to unlimited plans and now consume huge amounts of data on our phones. In other markets, 4G is still ramping. For example, China Mobile has 222.7 million subscribers on 3G.
However, there is one two interrelated trends that are driving the future of telecom. We created one handy graphic to show the relationship among price, bandwidth consumption and total revenues for mobile carriers.
First is the price per bit as shown in the blue line in the graphic. Back in 2001, I worked for a company had a T-1 with its massive 1.544 Mbps throughput that cost us about $1100 per month. Today, we can get a 150 Mbps business internet service for $99.90 per month. The price per bit has plummeted. For those of us that sat through all the econ theory classes, it is clear that bandwidth is price constrained. Price elasticity is a measure of the how much consumption changes in response to price changes. Bandwidth price elasticity is essentially unitary. For every decrease in price there is an equivalent corresponding change in consumption.
That bring us to the second trend. The orange line shows the aggregate traffic which is soaring to a projected 412 exabytes by 2020. An exabyte of storage would contain 50,000 years’ worth of DVD-quality video (that’s a lot of Game of Thrones). Given these trends, the flattening of revenue should not be surprising.
There are two big implications from all of this. The combination of market saturation, falling per unit prices and soaring consumption all point to the need for new sources of revenue. We expect that the big shift will be from connecting people on devices to enterprises paying to connect things. Industry 4.0/IoT, Smart Cities, and connected cars are all example of what these things might be. What they have in common is that they are low latency applications which is why providers are fundamental rethinking how build out their networks. That’s why service providers will be spending so much 5G. It is the foundation for these new sources of revenue.
The second implication is for CapEx which we will discuss in our next post.