Some Things Won't Change in 2014

Tactical challenges vary from year to year in the global telecom business. Strategic challenges tend not to vary much. Over the last 30 years, all markets have been transformed from monopoly to competitive businesses. So the key strategic context, in every market, is coping with relentless competition.

The “easy” answer to competitive threats is that service providers will find and develop new products that drive new revenues. So far, service providers have been able to do so. As high-margin international and long distance calling dwindled, mobile revenues have skyrocketed.

As aggregate voice and messaging revenues have begun to decline, Internet access and video entertainment revenue has grown. Virtually everybody believes mobile machine-to-machine (Internet of Things) revenues are the next big wave, though multiple bets on other sources are under active development.

But when revenue upside is tough, hard slogging, and the top line cannot easily be grown, a rational business will look to preserve profit margin by cutting costs.

One might argue there are two fundamental ways that operators can compensate for lower prices caused by competition.

They can get bigger, typically by acquiring other providers, to boost aggregate revenue. The other major operating area under their own control is costs. So in addition to acquisitions, firms try to cut costs, according to Strand Reports.

And those two approaches typically have a major advantage over the effort to develop new revenue sources: acquisitions and cost cutting affect the bottom line now.

“Lessons from the last 15 years of the premium SMS market show that mobile operators have limited ability to develop, market and sell the services demanded by customers,” says John Strang, Strand Research CEO. There are a couple obvious exceptions.

The shift from dial-up Internet access to broadband access clearly was important.

Where service providers essentially made very little incremental revenue offering dial-up services (it was fairly easy for independent competitors to sell the Internet app without providing the physical connection), access providers have tended to earn profit margins of 40 percent or more on broadband services, where independent providers have not been able to compete.

Also, mobile Internet access now is fueling mobile revenue gains, globally. In some markets, Long Term Evolution is boosting mobile Internet access revenues. But not everywhere. In some markets, LTE capital investment is not poised to create an opportunity for higher recurring revenue.

In some markets, LTE is not a premium product, and can be used with no price premium over 3G access.

Nor is it absolutely clear that faster fixed network access speeds necessarily or easily boost access revenues, either.

Some 65 percent of homes in Denmark can buy service at 100 Mbps, but only 0.7 percent do so.
That trend is broadly similar In countries such as Sweden, Belgium, and Netherlands. Even where triple-digit speeds are available, consumers often buy services that are not as fast, but still satisfy consumer needs.

Faster speeds are useful, and over time consumers have historically shown willingness to buy faster speed services. But faster Internet access might not be as popular a product as providers believe, unless the prices are substantially lower, a trend Google Fiber has almost singlehandedly begun in the U.S. market.

That is not to slight bandwidth pioneers or innovators, but only to recognize that big markets lead by big companies often are disrupted only by other big companies. Google, Amazon and Apple are key cases in point.

The point: while efforts to develop new products and revenue sources continue, the immediate impact on earnings will come from acquisitions and cost cutting. That will be true in 2014 as it is, every year.
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