How Firms Cope When Prices Decline "Nearly to Zero"

The long distance part of the telecom industry was first to encounter pricing trends that first erased formerly healthy profit margins, then got worse and lead to lower gross revenue. Now that seems to be happening for other "local" telecom services, cross-border mobile roaming, mobile voice and mobile messaging. 

Sooner or later, the same could happen to video entertainment services as well, though the barriers are much higher. Looking at the mobile payments space, some of us would argue that the same trend is about to hit the payments business as well. As was the case with long distance pricing, the trend could take decades to play out. But the same set of pressures seem to be building.

Some of the pressure in the payments business is imposed by government edict, such as rules that unilaterally lower the permissible charge to a retail merchant for processing a debit card transaction. Retailers naturally prefer lower charges, so it is logical that new contenders are going to pitch their services by promising lower transaction fees.

Over time, as the revenue and margin from "transaction processing" drops, businesses that make a living from transaction fees will have to find other ways to generate their revenues.

More than 15 years ago, looking at global deregulation, privatization of formerly government-owned firms, Moore’s Law, Internet Protocol, optical fiber and signal compression, it was not too hard to make the argument that the declining “revenue per minute” trend in the telecom business was inevitable, and destined to continue. 

In the payments business, at least one firm, LevelUp, already is promising retailers "zero" interchange fees. The catch is that LevelUp still has to pay those fees to the card associations (Visa, MasterCard, American Express, Discover). So how will LevelUp earn revenue? By providing marketing services, earning revenue on a "pay for performance" basis.
Believe it or not, firms in such businesses--literally facing their per-unit prices under retail pressure--can survive such changes. It isn't fun, but it can be done. 

The question then was "what does a telco do" if its primary revenue stream (cents per minute of use) approaches zero?

Only over time has the “answer” developed. Telcos have not gotten out of the subscription communications services business. But mobile services, fortunately, have replaced fixed network services as the industry revenue driver, aided by the emergence of broadband access and video entertainment services.

It isn’t so clear which particular new revenue models will develop in the payment transaction business. The answer might even take decades to emerge. But it is coming.

Firms in industries whose primary products face pricing pressures so severe that they undercut the primary industry revenue stream can adapt. But not always. Sometimes they fail. Many newspapers and magazines have been unable to find replacement revenue streams and simply have gone out of business.

One might argue that the business of processing retail payments is not something likely to disappear. But how that function is provided, at a profit, might well change quite a lot.