Wi-Fi Industry Must Tackle 40-Year High Inflation Rates with Clear Value Propositions and New Business Models

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By Andrew Spivey | 3Q 2022 | IN-6609

Record breaking high rates of inflation are having far-reaching effects on the Wi-Fi industry, spanning increased component costs, decreased consumer confidence, and heightened government scrutiny. All industry players should adopt new strategies to overcome these market challenges.

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U.S. Inflation Breaks a New Record

NEWS


A mere 12 months ago, many economists were optimistic about the future economic outlook post-pandemic, but these forecasts have now been shattered by a combination of rampant inflation, rising interest rates, and predictions of a recession in 2023. The 9.1% U.S. inflation rate for June reported last Wednesday is the highest since December 1981, and exceeds the previous 40-year high of 8.6% set in May. Other Western nations are witnessing similar levels, with the May figures for the United Kingdom and the Eurozone at 9.1% and 8.1%, respectively. The repercussions of inflation permeate throughout all aspects of the Wi-Fi industry, from raising the price of components for Original Equipment Manufacturers (OEMs), to dampening the end consumers’ confidence. Understanding the causes and effects of these economic headwinds is key to devising sound strategies to weather the storm.

Inflationary Impact Rippling across the Entire Wi-Fi Industry

IMPACT


The inflationary environment is, in part, a consequence of the protracted supply chain crisis that the world has faced since early 2020, a phenomenon from which no stage of the Wi-Fi industry supply chain has been spared. OEMs have found that components have become more challenging to source, with lead times for one of the most sought-after components, semiconductors, increasing to 60 weeks, double the wait pre-pandemic. These sourcing challenges have led to a backlog of orders for equipment vendors, with Extreme Networks facing a US$425 million backlog, Juniper Networks a record US$1.8 billion, and Cisco reporting close to US$14 billion. This, in turn, has resulted in Internet Service Providers (ISPs) suffering extended lead times for Wi-Fi Customer Premises Equipment (CPE), reaching, in some cases, over 9 months, at which point the ordered product is, in some respects, outdated. At the same time, factors like the shift to home working and the need for enterprises to expand network capacity have resulted in demand for both consumer and enterprise Access Points (APs), as well as services, remaining strong, even as the deteriorating economic environment has negatively impacted orders for other types of Consumer Electronics (CE). Strong demand in an environment of contracted supply, coupled with increasing operating costs for freight and logistics, can only result in higher prices. Unsurprisingly, significant price increases have been enacted by all the major vendors over the past 6 months, with price increases ranging from 7% to 15%. Cisco, the world’s largest enterprise AP vendor by shipments, hiked its prices across its entire portfolio by an average of 10% on January 30, 2022. While the recent loosening of COVID-19 restrictions in China did lead to the country’s June export numbers increasing 16.9% from the previous month, none in the Wi-Fi industry are optimistic that the supply chain will fully return to pre-pandemic norms anytime soon, suggesting that inflation caused by supply disruption is here to stay at least for the near term.

Aside from increasing prices and growing uncertainty, there have been other less obvious impacts of the inflation and cost of living crisis. One of these has been an increased propensity for Western governments to pressure ISPs to collectively offer discounted broadband packages to lower-income customers, which became something of a trend in 2Q 2022. April 2022 saw 14 Canadian ISPs (including key providers Bell Canada, Rogers, Shaw, and Videotron) commit to aligning themselves with the government’s Connecting Families Initiative to offer a US$20 monthly service with 50 Megabits per Second (Mbps) download and a 200 Gigabyte (GB) monthly usage limit to all Canadians receiving some form of income support. May 2022 then saw an agreement between 20 U.S. ISPs (the largest providers, such as Comcast, Charter Communications, AT&T, and Verizon, all participated) and the White House to offer a special discounted service to customers deemed to be receiving low incomes. This US$30 package, which delivers 100 Mbps, matches the maximum subsidy available to low-income households under the Affordable Connectivity Program, effectively meaning that these customers will receive free broadband while the agreement lasts. And during a June meeting at Downing Street between the major British ISPs (such as BT, Virgin Media O2, and Sky), an agreement was reached to collectively introduce measures to support poorer customers. While the target of these schemes are lower-income households who would perhaps otherwise not be customers at all, the introduction of discounted packages will still have a significant impact on the overall business model of ISPs, including acting to force ISPs to further justify the value of their higher-tier packages in contrast to the cheaper alternatives.

Clear Value Propositions and Revised Business Models Are the Order of the Day

RECOMMENDATIONS


“The customer is king,” as the old adage goes, and the mind of the consumer is currently on the cost of living. Thus, equipment vendors should factor in consumer disposable income over the coming years when planning their product roadmap and devising their go-to-market strategies. With a consensus that we will likely experience a recession in 2023, going forward, retail consumers may be less willing to make one-off large purchases for equipment, but instead will be more receptive to installment payments. One manifestation of this business model is to offer consumers Hardware-as-a-Service (HaaS), that is leasing the equipment to the consumer at a monthly cost that is a fraction of the overall equipment’s cost. Another approach, which can be used separately or in conjunction with the HaaS model, is to provide the hardware to the customer at a lower (potentially subsidized) price point, and then upsell them with additional value-added services.

Pressure on finances may also cause enterprises to delay or seek lower-cost network upgrades, so it is crucial that equipment vendors, alongside value-added resellers and systems integrators, are able to effectively convey the value proposition of their products. One approach is to highlight the lower Total Cost of Ownership (TCO) of a product, which is the cost over its entire lifecycle. Key to this is providing equipment requiring low maintenance that can be conducted remotely, with operations enhanced by Artificial Intelligence (AI)-powered analytics, and engineered to be future proof. On this final point, highlighting the future-proof nature of the investment involves positioning equipment as ready to be fully harnessed today, but also designed with compatibility for future technical advancements. Cambium Networks achieves this by equipping all its Wi-Fi 6 APs with software defined radios that can be reconfigured between spectrum bands. This means that the radios can be programmed to the legacy 2.4 Gigahertz (GHz) and 5 GHz bands prior to the proliferation of 6 GHz-enabled devices, and then a certain number of radios can be switched to handle 6 GHz traffic once it is widely adopted in the enterprise.

ISPs should also adapt their business models to the new economic environment. Previously, the bandwidth that a customer could enjoy, regardless of what plan they had signed up for, was limited, to a degree, by the typically low- to mid-range CPE the ISP had deployed in their house. This may not have been an issue in the past when consumers were less focused on value for money, but now that consumer finances are under strain, the ISP will have to truly prove the value of their higher-tiered packages over lower-cost offerings. ISPs should deploy more advanced equipment to fully unlock the higher bandwidths of their more costly plans. Another method to further differentiate packages and justify higher price points is for ISPs to offer the consumer more value-added services. With concerns about money, consumers may respond well to value-added services that claim to help them cut household costs, such as using Wi-Fi motion detection to switch off lights and appliances when people leave the rooms. Finally, to retain and create loyal customers in a competitive environment, ISPs can offer more flexible packages, which allow customers greater freedom to scale back or expand their pre-existing bundles with ease.

In an environment where production and sourcing costs are increasing rapidly, the method by which the price increase is conveyed and enacted can be consequential. It is essential that all organizations involved in the hardware side of the industry, including component suppliers, OEMs and Original Device Manufacturers (ODMs), should be proactive and forthright in communicating with their customers in advance of the planned cost increases of their products. For example, Cisco began informing its customers a month in advance of its intended price increase on January 30, 2022, and in the interim period, it offered price protection to all quotes approved prior to the price increase. Aside from price increases, extended delivery times and product shortages are other topics that suppliers should be upfront about in discussions with their customers. Unplanned delivery delays have thrown countless production schedules off course, and some in the industry have even expressed their frustration at having component suppliers inform them that orders cannot be fulfilled the same week that they were due to be delivered. Unexpected delays irrevocably break the customers’ trust in the supplier; therefore, it is vital that suppliers are frank in discussions with clients about product availability and any potential disruptions on the horizon. If certain products are unavailable, they should work with the customer to identify a substitute from their portfolio, and be prepared to explain to them why it is a viable alternative.

It can be expected that government coercion on ISPs to offer discounted services is likely to persist throughout the challenging economic period ahead, as it is a tactic that allows governments to prove to the public that they are actively tackling a cost-of-living crisis, while not having to pass legislation or reduce the government’s own tax income to do so. As discussed above, 2Q 2022 saw new measures being enacted in the United States, Canada, and the United Kingdom, but there is a high likelihood that governmental pressure to lower the price of entry-level broadband services will also be seen in other high-income Western nations over the coming months. As recorded in a March 2022 study by the United Nations (UN) International Telecommunication Union (ITU), the 2021 cost of entry-level broadband packages in the United States, Canada, and the United Kingdom was relative to 1.01%, 1.18%, and 1.28% of Gross National Income (GNI) per capita, respectively. These rates, which were prior to the introduction of discounted services, were already lower than those seen in France, Ireland, and the Netherlands, and significantly below those seen in Spain and Portugal (which amounted to 1.92% and 1.55% of GNI per capital, respectively). Thus, there is a high probability that ISPs in these nations will experience government pressure to lower the cost of entry-level broadband services over the coming months. Yet, aligning with the government’s programs can be beneficial for ISPs for multiple reasons, as it can enable them to gain access to government grants (as in the case of the Affordable Connectivity Program in the United States), create good Public Relations (PR) for the company, prevent more forceful governmental action, and help retain old and gain new customers, which may later upgrade to higher-tier packages.

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