How Much has the Internet Harmed the Telecom Business?

Has the Internet harmed the telecom business as much as it apparently has reshaped many other retail and consumer businesses?

You might think the answer is fairly simple. It would, after all, be possible to argue that the Internet has affected virtually every business in a way that reduces friction (and hence distribution cost), provides price transparency (driving prices towards the lowest cost producers) and creates new alternatives to existing services and apps that reduce demand for the legacy apps.

To use the most obvious example, over the top mobile messaging and over the top voice apps have displaced some amount of calling and text messaging, while arguably having the more important impact of reducing or capping prices for legacy services.

Of course, matters are more complicated. The Internet also creates the need for fixed and mobile network data services, which add revenue. So any assessment would have to include actual lost revenue from reduced legacy services, abandonment of services, the effect of stranded investments in legacy infrastructure, higher investment in IP infrastructure and then incremental new revenue based on Internet access.

Even the apparently clearest signs of cannibalization--abandonment of fixed voice lines--are not necessarily the result of Internet substitution, but rather preference for mobile calling. And though it also is possible that some amount of mobile carrier voice will be displaced by Internet calling, the magnitude of the eventual shift is not clear.

And some might argue that even when over the top calling services displace some carrier voice revenue, there are other forms of value that actually increase revenue for service providers.

Based on interviews with executives from 3 in the UK and customer analytics data from 3 and Skype, CCS Insight  concluded that use of Skype provided unexpected benefits for mobile service provider 3 in the United Kingdom.

“While 3 initially aimed to use Skype as a means of differentiation and as an acquisition tool, one of the most significant impacts was to drive up margins, especially through an increase in voice revenue, but also by reducing churn,” CCS Insight argues.

Mobile Skype users generated almost 60 percent more voice revenue than non-users and spent
almost a third more on text messaging than non-users of Skype.

Skype users provided margin uplift of more than 20 percent and regular Skype users churned 14 percent less churn than non-users, CCS Insight argued.

To be sure, it also is possible that heavy or regular users of Skype also use more communication services in general, so whether there is causation or only correlation is tough to say.

For example, in the U.S. market, though telco revenue from fixed voice lines is down, broadband and video entertainment revenues are up. For U.S. cable providers, the loss of video customers has been compensated with growth in Internet access and voice services.

For Verizon, whose third quarter 2013 mass markets revenue was up slightly over the third quarter of 2012, the obvious implication is that video and broadband are driving revenue growth at rates that compensate for losses of traditional voice accounts.

Likewise, AT&T reported third quarter 2013 fixed network consumer revenue growth of 2.4 percent versus the year-earlier period.

Those performances occur against a backdrop of declining demand for fixed voice lines.
Perhaps 39 percent of U.S. households no longer buy fixed voice service, according to the Centers for Disease Control.

The point is that the Internet has had a complex impact on telecommunications revenue. On one hand, it has put pressure on profit margins for legacy voice. At the same time, it has created a brand new market for Internet access in the fixed line business.

In the mobile services business, a similar trend is occurring. Revenue growth in saturated mobile markets now is lead by Internet access revenues.

In other words, the Internet arguably has had both positive and negative revenue implications for service providers.
Post a Comment

Popular posts from this blog

Spectrum Fees, High Incremental Capex, Lower Value in Ecosystem Mean Historic Changes Might be Necessary

For Ting, Operating Costs are Key to Business Model

Lower FTTH Costs Improve the Business Model, But How Much?