VIDEO TRANSCRIPT:

Hi, I'm Raj Shah. I'm the industry lead for telco, media, and high tech for Publicis Sapient. I'm joined here today by Craig Moffitt, who's the founder of Moffitt Nathanson. It's a research boutique focused on the telecom, media, and tech industries here in the United States. We're here to talk about the state of the telecom industry, some ideas for where growth could occur, some reactions to trends that are happening in the marketplace today, and just to get Craig's general sense of what is the art of the possible here for our clients.

Thank you for having me. It's a pleasure to be here.

You've described the net economics of the telco industry as sort of a P times Q game, where P is price or ARPU or ARPA, you know, as the industry refers to it, and Q is the number of subscribers. With both of those either declining or slowing, where is growth going to come from for this industry?

Yeah, it's a real challenge, right? I mean, let's again think about it in segments. For the wireless industry, P times Q, there might have been some hope that 5G would break the P times Q cycle and there would be a set of new services or private networks and things like that where you weren't quite as much in the service of just chasing subscribers in ARPU. Those aren't here yet, and so we're left in this part of the cycle, which is still competing for traditional units in ARPU. And the challenge now, I think, is as promotionality has crept up in the wireless industry again, it's sort of returned to levels that are similar now to what they were during the days of handset subsidies, although we are supposedly now in a post-subsidy world. The pressure, it's an accounting pressure, but it's a pressure nonetheless, that all of those customer acquisition costs are amortized through ARPU, and so ARPU is negative for all of the carriers. And in a world where inflation was 1% and ARPU was minus 1%, that wasn't a great look. In a world where inflation is 8% or 9% and ARPU is negative 1%, it's a real problem.

It is a real problem.

And at the same time, unit growth does look like it is finally decelerating. There's been a period that started well before the COVID crisis where unit growth was accelerating way beyond population growth rate in what is already a relatively saturated industry. And so while there were lots of possible explanations for how that was happening, a lot of it was related to the promotionality of additional lines for free handsets. The challenge now is that's coming back to earth. And so you're in this world where growth is coming back down to sort of pedestrian levels in units, and there's all this pressure on price, and it's a really, really tough game to try to find incremental growth. So I think hope springs eternal, right? And there is always hope that some of the 5G opportunities like private networks, like mobile edge compute, will become real revenue spinners. But I think some skepticism at this point is appropriate, not only because those markets really don't exist yet, but it's not entirely clear how the carriers are going to really engage in that market and participate and to take a meaningful share of those opportunities because there are going to be a lot of new competitors in them.

On the cable side of the world, the P times Q is also a pretty familiar challenge, right? And the place where P times Q is right now front and center is broadband. There is no ambiguity that unit growth in broadband is decelerating. I said earlier that the real question is whether it's decelerating because of incremental competitive intensity or just decelerating because the market is saturated. Either way, I think the cable operators' answer will be for the time being to try to expand footprints. Some of that comes from new household formation, but some of it comes from edge outs. And some of it also comes from subsidy programs like RDOF at the end of 2019, the Rural Digital Opportunities Fund, and increasingly what will be an enormous pool of money for rural construction under the JOBS Act, and that's just getting started, the BEAD program, as it's called. And you'll see, I think, the cable operators all scrambling to participate because they understand that the capital markets really want to see incremental growth. And, by the way, strategically it makes all the sense in the world to say to the extent that I can control the edges of my network and that I can be the one to build there rather than someone else, that can only be a wise course of action.

So following up on the sort of rural expansions, do you think any of the wireless providers or any of the cable providers are better positioned for that type of expansion?

Well, I think the ones that have more rural footprints naturally have a higher percentage of adjacencies that are unserved. So Charter probably has a little more than Comcast. Altice in its Sunlink footprint probably has a little more than Charter on a percentage basis. CableOne probably has more than any of them. So to some extent it's just a function of how rural is your footprint and what are the adjacencies. For the wireless carriers, I think the way the language in the BEAD program is written actually right down into the footnotes, it makes it hard for non-fiber alternatives to win in the state programs. The states are left to determine the methodology for selection but not so much the technology. The technology is they have definitely put their thumb on the scale relative to past auctions to say we are less inclined to support satellite broadband, say, or WISPs, wireless ISPs, and we really want to see fiber in most of these constructions. And so I suspect it's a lot more of an opportunity for the cable operators and the incumbent telcos on their wireline side than it is for the wireless companies.

Is there a way for, I would say, maybe focusing on the wireless providers to look at P and see beyond a price increase, a way to generate more ARPU? I'm thinking about ancillary services, new services. You've seen T-Mobile and to some extent Verizon move into a little bit of financial services in the past. Is that an option for them?

Look, I think everything's on the table. It was Verizon that really broke ground first with subscriptions and started with its ad, Disney+, and they've expanded that portfolio. And in the consumer market, that's actually been quite successful. T-Mobile with Netflix, AT&T with HBO Max has become a useful differentiator. At some level, that has run its course, I think, in that most families will think of it not as here's a great benefit that I'm getting. I get Netflix because of T-Mobile, say, but instead I get the value of I would have Netflix one way or the other and T-Mobile's paying it for me instead of me, and that's just a discount. And as I say, that matters. It's helped all of the carriers try to upsell their customers to their premium unlimited plans. So for T-Mobile, say, Magenta Max or Verizon's premium unlimited has actually been a real driver of ARPU. That, I think, will continue, but that's already baked into the pie, right? And the fact that you're getting no real ARPU growth today, even though you're seeing a consistent upselling of customers and a larger and larger percentage of the base on these premium plans, is in some ways a little dispiriting, right? You're doing the right thing. You're upselling customers, and it's still not enough to swing your ARPU growth from negative to positive.

If we were to shift the focus from consumer to maybe enterprise or small businesses, again, any thoughts on how to drive either P or Q growth?

I think the answer is the same as it's always been, or at least the dream is always the same as it's been. And I've been doing this longer than I would care to admit, but I started hearing the narrative about moving up the stack for my telco clients, boy, back in as early as the late 1980s. So that vision of moving up the stack in order to avoid being relegated to commodity dump pipe status or just pure connectivity layer status has always been the ambition. 5G probably offers more opportunities for that than it has historically been the case, but it's hard. It's hard. The idea that, and I mentioned before, mobile edge compute and private networks, which look like they're the first two real opportunities made possible by 5G, whether latency is, low latency is part of those or thought of separately. But the competitive set is likely to include systems integrators, software developers, hardware companies, hyperscalers for hosting and web services. And it's not just saying that I need to be the carrier that is part of that, but also wondering whether the carrier will be part of that or whether especially in private networks they will be private with unlicensed spectrum and the carrier will be shut out. But then also what share of the pie do you actually get? If you're a carrier getting participation in a private network, but there is, you guys may be there as an integrator. You may have, as I said, software vendors, hardware vendors, and hyperscalers as part of a constellation of companies providing a service. That I think will continue, but that's already baked into the pie, right? And the fact that you're getting no real ARPU growth today, even though you're seeing a consistent upselling of customers and a larger and larger percentage of the base on these premium plans, is in some ways a little dispiriting, right? You're doing the right thing. You're upselling customers, and it's still not enough to swing your ARPU growth from negative to positive. If we were to shift the focus from consumer to maybe enterprise or small businesses, again, any thoughts on how to drive either P or Q growth? I think the answer is the same