Whenever a leading service in the telecommunications or video entertainment business begins to suffer margin compression, lower take rates and usage, observers offer the advice that suppliers need to “add more value” or “move up the value chain.”
Such advice normally is given because the compressing profit margins are largely the result of price pressure caused by competitors.
Call me a cynic, but that advice rarely, if ever, has been shown to produce significant and sustained revenue improvements.
Some might argue that is because suppliers have failed to add new value. In that line of thinking, suppliers have failed to transform--or at least significantly enhance--products under pressure, and that is why the “add more value” approach seems not to produce serious gains.
Others might argue the efforts have largely come to naught because buyers do not want to pay more for the enhancements. In that alternative explanation, buyers do not see the value, or, if they see the value, do not wish to pay extra.
In the cable TV business, suppliers have justified rate increases because “we are giving you more channels.” But one can question whether most buyers actually wanted the extra channels, or want to pay more to receive them.
In the voice business, VoIP services priced close to zero seemingly have gained usage and market share compared to other forms of voice with “enhancements” (high definition audio quality).
In fact, the successful adaptation seemingly has been to “cut prices,” the polar opposite of “adding more value.” True, selling at lower prices, and bundling features that formerly could be obtained only at extra cost, might be positioned as moves that add value.
Reasonable people will debate whether that is an example of “adding value” or an instance of cutting price.
No doubt, as streaming video suppliers begin to proliferate, there will be calls for video entertainment suppliers to “embrace the trend,” much as voice suppliers were urged to embrace VoIP.
The “cannibalize yourself” strategy has merit, to be certain. But the greatest merit tends to happen when suppliers cannibalize their legacy revenue streams by replacing them with entirely new revenue sources, not “adding value” to legacy services.
In other words, cable TV did better by getting into the new voice, high speed access and small business communications businesses than it did by “adding more value” to basic cable.
Telcos did better by getting into linear video, high speed access and mobility than by innovating in voice.
Generally speaking, competing on price has helped preserve the declining products, but hasn’t really enabled service providers to innovate themselves out of mature product problems.
In other words, recent history suggests that harvesting a declining business while growing new lines of business is what works. So far, one would be hard pressed to cite many instances where adding more value actually reversed a trend of revenue or subscriber decline.
That does not necessarily mean that adding more value is irrelevant. One might argue that adding more value can slow the rate of business decline. That can be an important business objective, and well worth some amount of investment.
What seems clear is that such efforts have yet to demonstrate they can sustainably reverse a pattern of decline, in a mature business category.
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