Tuesday, January 31, 2012

Global Telco "Meltdown" Coming? Or Just Normal Product Substitution?

BSkyB has been a major player in the United Kingdom subscription TV market for decades. But BSkyB faces a maturation of its base business, as do all other video entertainment and communications providers in Europe, North America and elsewhere.

 “The company made a number of announcements which confirm that, beyond the near term slowdown, structural issues are looming,” Bernstein analyst Claudio Aspesi argues.

“While we believe the pay TV business is inherently more defensive than advertising-funded ones, the depth and length of the downturn in the U.K. economy are still unknown: any significant changes to our forecasts for the UK TV ad market could be large enough to change the outlook for the stock.”

Structural change is another way of saying that saturated markets and greater amounts of competition are eroding the growth potential for virtually all big communications or entertainment businesses.

According to analysts at Ovum, global service provider revenues grew seven percent in 2011. On a global basis, service provider revenues will grow at a compound annual growth rate of 2.9 percent over the 2010-2017 period, down from the historic CAGR of 6.3 percent achieved in 2004 to 2010, according to analysts at Ovum.

The Ovum forecast shows the deceleration of revenue, even despite newer products such as mobile broadband.

A key strategic issue is whether service providers can grow new lines of business fast enough to offset lost revenues from their legacy businesses.

Most executives are familiar with the notion of a “product life cycle.” What might be a more provocative idea is the notion that collectively, the global communications industry might be entering a period where communications  itself hits something of a industry life cycle peak.

“The telco voice and messaging business is on the verge of going into meltdown,” muses industry consultant Martin Geddes. By that line of thinking, so much revenue and profit is about to be drained away that the replacement revenue streams (based largely on broadband access for the near term) cannot prevent some significant shrinkage of the overall business.

One doesn’t have to agree with all elements of the analysis to sense the danger. In some markets where the leading edge of the trend seems to be emerging (Europe), there is a palpable sense that voice and messaging revenues are about to become over the top apps, with an implied hit to the dominant provider revenue streams.

“I strongly believe the business model for voice and messaging is about to go into reverse,” says Geddes. “The value is going to drain out of minutes and messages charged to users.”

Many would agree with the fundamental challenges, without necessarily agreeing on the timing and magnitude of the revenue changes. In the near term, most also would agree that commercial services are the important new revenue driver for cable companies, while mobile broadband drives telco growth.

At some point, even those growth drivers will slow, which is why telco executives are working on new initiatives in cloud computing, machine-to-machine services and mobile commerce. The key issue is whether those, or other services not yet on the horizon, are big enough to offset the huge potential telco losses in voice and messaging and video losses for cable operators.

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