Capital efficiency wins every time: it’s just the numbers

Ian Scales
By Ian Scales

Aug 19, 2019

via Flickr © 401(K) 2012 (CC BY-SA 2.0)

via Flickr © 401(K) 2012 (CC BY-SA 2.0)

  • Francis McInerney on Cloud inflation 
  • And the inevitability of the edgeless ‘flatnet’
  • How can today’s carriers adapt?

The industry consensus is that the telco business model is in trouble as changes in data consumption and applications along with steady increases in competition and  technology (and spectrum) costs, work together to attach a boat anchor to telco revenues. Being in thrawl to technology as they are, telcos’ first impulse is to reach for the ‘next big thing’ as a way out. So IoT, AI, Automation, NFV and, of course, 5G are all interviewed for the job of saviour. 

But it’s becoming increasingly clear that new technologies attached to the old telco business model probably won’t work, no matter how much management speak is applied to them. Last week we looked at the classic stock market analysis and its likely prescriptions. For the next few installments in this series, we’ll look at structural changes. Industrial drivers that are conjured up and projected into the future, and which in turn are calculated to force change on the industry, in many cases whether it wants them or not. 

First to the virtual podium is a US consultant, Francis McInerney, Managing Director of North River Ventures. Francis has been an occasional contributor to our TelecomTV output for many years. Back in the 1990s he was one of the few industry observers who, as I remember it, not only predicted the bursting of the famous ‘dot com bubble’ (there’s always several people grumpily predicting doom and gloom at any particular point in industry history) but more importantly, was able to explain exactly why the ‘popping’ was going to take place.

Francis’ diagnosis is blunt and his prognosis is not exactly what the telco industry wants to hear - but there it is. Ignore it at your peril. 

Francis’ approach starts and ends with “the numbers” and he sets great store in what he calls ‘velocity’. If you can’t or haven’t grasped how important various sorts of velocity are - capital velocity, technological velocity. cloud velocity - then you won’t be able to gauge the  changes that are about to strike, seems to be his overriding message. 

It used to be the huge expansion of bandwidth that was being deployed on the Moore curve that dominated his thinking. That has progressed to ‘cloud’ velocity which he predicts will completely upend what we now think of as the telecom industry. 

As for the ‘Edge’, Frances believes that the pace of ‘cloud inflation’ means that the cloud, and cloud infrastructure and applications, will completely envelop our telco categories (core/middle mile/access). What we will have is the cloud extending right out into the premises and onto the device to the point where our conceptual understanding of the network and its place will become fogged out (as it were). 

Here are his thoughts as exchanged with me via a few emails. 

“My thinking is governed by the topology of the Cloud going edgeless.  At my suggestion, the shared asset tower company, Crown Castle, put together a deal to locate servers in its towers (Vapor IO) and partner with a FAANG (AWS in this case).  It connected these to its shared fiber backhaul (FAANG is Facebook, Apple, Amazon, Netflix, and Google). 

 On the front end from the tower to the consumer, we are adding Omnimesh nodes. These are essentially massively distributed CDNs, meshed together wirelessly and fired by blockchain, which makes them self-financing. Imagine Wi-Fi on steroids.”

“Omnimesh can take the CCI+Vapor+AWS platform and scale it fast in almost any application, something the FAANGs are desperate to have. Like Apple in content, they can’t wait for balance sheet constrained carriers to figure this out.

 “End-to-end, our structure (I call it a FlatNet because it is topologically flat) is extremely capital-efficient, as the Cloud demands of anything that touches it (Uber, AirBnB, AWS etc).  It's as if the Wi-fi capital-efficiency cancer, already 20 years old, gobbling down 85% of wireless IP and killing cellular, ripped out from your house and mine and gobbled up the rest of the network. They key is that in telecom, capital-efficiency, not technology, wins every time.  Nothing can withstand it: it’s just the numbers.

 “The big challenge for carriers is that there are no carriers in the FlatNet structure. Revenue flows are reversed:  you no longer pay for access; you make money from your in-home, in-office CDN via blockchain. So, when I think about restructuring, I start with a massive wave of capital-efficiency, add the Uber-like revenue flow reversals that come with it and ask what will happen to all the carriers?” 

I suggested one obvious way through for the carriers might be  to sell off the non core bits and use the cash to pay down debt. The sort of thing that many people (and even he) has been recommending for many years. 

“But is it enough? He replies.  “If you were Goldman Sachs, how would you see this?  What about the debt load? Where does it go? With the service sell off?  Service revenues are already declining. What is the debt management model?  Who will buy? Massive write-downs? Hit to pension funds? Shareholders? Layoffs?  Ugh.

“FlatNets are the first end-to-end restructuring of the net since Bell founded AT&T in 1877.  One way or another, the entire carrier model worldwide must be restructured to tolerate its capital-efficiency.  This will be a revolution.”

For information on Francis McInerney's Furture Creators, click here

Email Newsletters

Sign up to receive TelecomTV's top news and videos, plus exclusive subscriber-only content direct to your inbox.