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Where Should the Telcos Jump Next?

With declining revenues now across all of the major revenue segments—something in the order of $25 billion worldwide—it is 2 minutes to 12 and the industry needs to act. Unlike previous situations, this time there is no large money-spinner around the corner for the telcos, such as we saw in previous situations when broadband and mobile came to the rescue.

So, what is next and what to do with all the cash that these telcos are still generating? The fear is that they will not use these revenues strategically and that, as has so often been the case in the past, they will waste a great deal of money on ill-fated adventures—mainly because of structural misfits between the vertically-integrated nature of the incumbent and the highly sophisticated strategies needed, especially for investments in the digital economy.

There are three growth scenarios for the incumbent telcos that we will discuss:

  • International consolidation
  • Structural separation
  • Digital economy and OTT opportunities

International consolidation

National consolidation between telcos and ISPs is one of the areas that is currently seeing the most activity, but once that avenue reaches its commercial and regulatory end other options need to be explored.

One obvious development after this will be to continue this, but on an international level. If growth is no longer occurring companies will need to address cost, as their digital media competitors are able to deliver most of the traditional telcos’ services for 80% less, and some are simply offered free.

When we looked at previous international telco consolidation attempts in the fixed telco market—in particular the ones in the late 1990s and early 2000s—we couldn’t find many success stories. At that time hundreds of billions were lost by US telcos, which, tellingly, were at that time more numerous than currently is the case—the US market has since contracted to only three major telcos, each operating mainly within geographically exclusive areas.

Since that time more successful consolidation has taken place—especially between mobile operators—but the models that are used by these operators are also still based on a vertically-integrated industry structure. While the vertically-integrated nature of the mobile market still has a few years to go, here also we will see the limits of consolidation between vertically-integrated companies.

Back to the fixed operators… they tried to acquire and then merge with other international vertically-integrated telcos but failed miserably. So lessons need to be learned from those attempts, basically looking at mergers and acquisitions more along structural lines. Telco activities can be split into three categories:

  • Infrastructure
  • ICT
  • Services

Each of these segments have very distinct investment and business model structures and simply merging vertically-integrated structures is probably not the way to address consolidation at this point in time. They will need to look more at the various individual elements of their organisations before deciding where they want to go.

Structural separation

Telcos are really effective in operating in markets where they are the dominant force; however technology and regulations are diminishing the opportunities in these markets. The only market that will remain dominant is national infrastructure, but without the other two elements (ICT and services) attached to it, this will rapidly become a utility industry, similar to electricity, gas and water. For those focussing on this market there will still be significant money to be made, and this could possibly be the end result for most of the national telcos.

Once structural changes have been made it will also become easier to embark further on international consolidation. The (national) telcos leading these structural changes might well become the major consolidators in the international market, mopping up failing and stranded telcos and their infrastructure assets.

Digital media and OTT

And then there are the opportunities in newly emerging digital economy markets.

So far investment made by the telcos in areas such as ICT, e-health, smart grids, smart cities and so on has been piecemeal, and often those investments have been smothered by the internal bureaucracy of the organisations, the new acquisition ending up either integrated in the old existing silos within the company or tucked away in an insignificant corner of the organisation.

As mentioned, the telcos are still among the most cash-rich organisations in the world, and they could, if they wanted to, easily make far more substantial investments in the new areas of the digital economy that are emerging. Of course this is risky, and risk is something the telcos are not accustomed to. And it has to be said that in the past investments of this kind made by the telcos largely failed, again mainly because of the mismatch between vertically-integrated models and highly specialised new services.

Those who dare to embark on these markets need to look at lessons that can be learned from the digital media companies. They went for the low-hanging fruit across areas in the market, looking for industries that were ready for disruption—and this included the telcos, but also the music and broader entertainment industry, retail, publishing and so on. The ones that are now heavily under attack are utilities, healthcare, education and government agencies and these are the sectors that will next have to bear the brunt of digital disruption.

However the telcos are not alone in pursuing these markets. Each one of these sectors is attracting a range of companies that want to participate in the disruption and it is unlikely that telcos can dominate a particular sector. So they will need to be involved in many of them and establish horizontal lines of product and services that they can share on their infrastructure across these sectors, so as to create attractive points of differentiation and cost savings.

Collaboration and partnering would also be key elements in areas where the telcos can no longer be the dominant players. But cooperation is not really the strongest element of their culture and it will be interesting to see which of the telcos are going to make it in these sectors.

Despite all of the difficulties and failures of the past there are no longer many other options open to the telcos. In one way or another they do need to open up more revenue streams and it is up to them to select the model that best suits their market and their organisation.

By Paul Budde, Managing Director of Paul Budde Communication

Paul is also a contributor of the Paul Budde Communication blog located here.

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