Nº 1 2015 > The great telco conundrum
Contributed by Chris Lewis of Lewis Insight Consulting
Death of the cash cow?
This article summarizes the key takeaways from “The Great Telco Debate” workshop, held in London on 7 November 2014, and attended by a range of telecom and IT experts and consultants. Discussions focused on how “telcos” will evolve in the future, and the key factors driving the industry. Telecommunications and connectivity are fast becoming the basis for the delivery of many different types of services, while driving massive disruption in how the market delivers services — for example, Skype is disintermediating voice, while Netflix is disintermediating Sky. The global telecom market is currently estimated at a total of USD 1.67 trillion (the breakdown of which is shown in Figure 1), growing at 1–2% overall per year, driven mainly by expansion in China and emerging markets.
However, all is not rosy in telecommunications. Revenues for fixed-line and mobile operators are falling in Europe, largely due to regulation and competition. Average revenue per user (ARPU) is falling across the board (including in China) due to discounting, with some headline statistics suggesting that the telecommunication sector was set to lose USD 14 billion revenue in 2014 due to competition from over-the-top (OTT) players such as WhatsApp and Skype. Traffic volumes are sky-rocketing: according to Diametric Analysis, around 1.3 billion people watch online video worldwide per month, and 450 million people watch online video every day on average, and capital expenditure (capex) bills are increasing. Keith Willetts (co-founder and Chairman of the Board of Directors of the TeleManagement Forum) and Tony Poulos (Editor of Disruptive Views) suggested in their presentation that, although rates of return on aggregate investment are still positive overall, returns on new investment may be negative. This is creating a conundrum for the industry to address, which is especially severe for incumbent telcos and mobile operators (cable operators and “altnets” still enjoying a positive relationship between revenue and investment, for the time being). Ernst & Young have stated that “failing to shift business models is the biggest risk currently facing telcos”.
The broadband ecosystem now comprises very different types of players competing to offer the same — or similar — services. Market capitalizations vary widely for these different types of players (see Figure 2). Market valuations for OTTs are only loosely connected to revenues (see left chart, Figure 2) and operative profit (see right chart, Figure 2), reflecting a shift in value from telcos to digital content providers and OTT players within the telecommunication value chain. Telcos have traditionally been valued at 6 x EBITDA and 12 x earnings and generally paid dividends of around 5%. In contrast, social networks are evaluated at 12 x revenues. Keith Willetts pointed out that telcos are still stuck in the you-buy–you-pay model of business. In contrast, OTT players have decoupled who buys from who pays through their indirect business models and partnering. According to Philip Carse, Lead ICT Analyst for Megabuyte.com, the Internet revolution is now happening, but this is not reflected in telco valuations — the last time valuations became so detached from earnings or revenues was just before the dot.com boom!
For consumers, video (including audio streaming, as well as listening to music via YouTube) represents a major driver of both customer demand and high traffic levels. However, video comes from its own ecosystem, with its own value and supply chain, including the sharing of video over social networks — which telcos are struggling to control, let alone, exploit.
Some telecommunication players are increasingly moving into content delivery to defend their broadband revenue streams. EE described the launch of their EETV service over their very successful 4G network. EE’s business model is based mainly on meeting consumers’ desire to multiscreen within their own homes, as well as on improving customer loyalty and reducing churn. Customers now engage in parallel dispersed viewing on demand — consumers now timeshift (usually previous day) while interacting over a range of devices via Facebook, Twitter and Google. Youngsters consume content today in a fundamentally different way from older generations — people now consume content in bites, not buckets (i.e. by individual music songs, not by albums). And in future, according to a quote by Ben Verwaayen, former CEO of Alcatel-Lucent, consumers may not even buy services, they will buy transactions.
Telcos — Evolving roles and competencies
Various roles were suggested for telcos throughout the day (see Figure 3). Graham Wilde, co-founder and CEO of BWCS, noted that telcos’ core competencies have evolved from managing a (copper) pipe to a wraparound of expansion services, including television (TV). One third of BT’s revenues now derive from IT services, bringing BT into competition with players such as IBM. Chris Lewis, Telecommunications Industry Analyst at Lewis Insight, suggested that telcos can extend into new services and build converged infrastructure, but they need to stay focused on customers. Telcos need to develop different core competencies that include: maintaining their network; marketing and managing their brand with customers; and keeping up with technological change.
Participants agreed that telcos need to defend their broadband services. According to Philip Carse, telcos have little option but to invest in next-generation networks (NGNs) — if they don’t, their competitors will. Some can aim to provide a platform for a multiscreen, multi-device hub, (the strategy being followed by EE). Telcos can also engage in becoming business bundlers and aggregating content, i.e. by pulling together multiple providers into a single package as with pay TV services. Pim Bilderbeek, Partner and Principal Analyst at METISfiles, noted that it is unclear as to whether telcos will become brokers or exchangers of services. Telcos should also explore new market segments — Teresa Cottam, founder and Chief Strategist of Telesperience, noted that there is a large business opportunity of around 20 million small and medium-sized enterprises (SMEs) in Europe. However, SMEs’ needs are varied, so a “menu” of more personalized services is required rather than any single specific service, including functions of an IT help desk. Network function virtualization (NFV) could significantly reduce capex and operational expenditure (opex), as it is cheaper to buy software than rack-and-stack hardware.
Telcos need to be flexible around other peoples’ business models and allow customers to choose with whom they want to do business, and scale the organization accordingly. New business models and new attitudes to partners and channels are needed, along with regulatory frameworks to drive investment and innovation. There is still a lot of potential for agile providers of service and technology into the telecommunication sector. Ultimately, telcos should follow the money — try to anticipate where future revenues lie, and use today’s revenues to follow tomorrow’s money.