For over a century, telecommunication was dominated by local, regional and national companies. They were heavily regulated utilities, often government-owned, and only spent $1 on upgrades after getting guarantees at least $2 would come back.
In just one decade, this economic order has been upended. Capital spending among the five companies I call “Cloud Czars is now approaching that of the five largest telcos, according to Synergy Research
Spending on “hyperscale” data centers came to almost $120 billion in 2018 — and most of that spending came from just five companies. Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), Amazon.Com (NASDAQ:AMZN) and Facebook (NASDAQ:FB) are now investing capital at rates similiar to China Mobile (NYSE:CHL), AT&T (NYSE:T), Verizon Communications (NYSE:VZ), Deutsche Telekom (OTCMKTS:DTGEY) and Japan’s Nippon Telephone & Telegram (OTCMKTS:NTTYY).
Global clouds, in other words, are now replacing national phone networks at the heart of the world economy.
Metered vs. Unmetered
Phone services are based on the idea of metering. Each call you make is logged, and each carries a price.
Internet services are unmetered. You pay one monthly bill for access to the network.
In practice, it means people use internet services for long-distance calling. Most of the cloud czars have voice services, such as Skype from Microsoft. These also include video.
Our family got a taste of the difference recently when my wife held a conference call with some Canadian co-workers over Google Hangouts, accessing a Canadian number. It came in the form of a warning from our wireless provider, AT&T, that our “international charges” for the month were now over $100. They’re usually zero.
The economic impact of free, as opposed to metered, long-distance calling has been enormous. African villages are no longer isolated from the global economy, and growth in sub-Saharan Africa has taken off in this decade. So has growth in India and in other areas previously deemed inaccessible.
The Last Mile Is Wireless
The “last mile” for voice service is now wireless, as well as data-driven.
Synergy expects an explosion of investment in so-called “5G” wireless services over the next few years, as the telcos — all of which have wireless components — gear up for this latest last-mile technology. But this will come at the expense of other investments, particularly wired infrastructure. Total capital spending is expected to remain flat.
A decade ago, Verizon sold many of its wired operations, including fiber-based customers, to Frontier Communications (NYSE:FTR). Frontier has been trying to make those operations profitable by cutting expenses. It is now seeking to sell those customers because so many of them are cord-cutting, dropping both phone and wired television service.
The cost of running wires has also frustrated Cloud Czars like Alphabet’s Google. After trying to lay cables directly in streets, the company has retreated from Louisville. Some customers elsewhere are being signed up, but the company ran fiber cable behind my house two years ago and is still not taking customers.
The future was in my front yard, where Comcast (NASDAQ:CMCSA) ran a fiber cable under the sidewalk. I was told it shares that capacity with Verizon Wireless, which uses it for backhaul.
The Bottom Line
The bottom line is that everything today is data, everything is becoming wireless and unmetered services based in the cloud are replacing telecommunication services around the world.
Telcos that were built on selling metered services are losing their place to companies that invested in cloud infrastructure. China has its own czars in Alibaba Group Holding (NASDAQ:BABA), Baidu (NASDAQ:BIDU) and Tencent Holding (OTCMKTS:TCEHY). The Czars are also tightening their grip here. International Business Machines (NYSE:IBM), the largest non-czar in the U.S., is now focusing on “multi-cloud” customers after its purchase of Red Hat (NYSE:RHT). Its capital spending hit a four-year low last year.
This is the Cloud Czars’ world. Everyone else just lives in it.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, MSFT and AMZN.
