BT Outlines Strategic Imperatives: Most Service Providers Face Similar Challenges

BT’s prospectus related to its acquisition of EE assets contains the expected statement of risks.  

The document warns that BT operates in an industry featuring “high levels of change; strong and new competition; declining prices and, in some markets, declining revenues; technology substitution; market and product convergence; customer churn; and regulatory intervention

to promote competition and reduce wholesale prices.”

Those who have read such documents will not read too much into such clauses. A reasonable person might quip that if a company really believed such risks were likely, and that the firm could not cope, that firm would not attempt the acquisition.

On the other hand, it is hard to dispute the general thesis that BT and EE operate in a tough, challenging and possibly worsening business.  

Revenue growth, even in the fast-growing mobile business, has slowed dramatically. Global mobile service revenue in the first half of 2014 grew  just 0.5 percent, compared to the same quarter of 2013, to $385.5 billion, according to Infonetics Research.

“Increased competition has led to a decline in the prices which EE charges for its mobile services and is expected to lead to further declines in pricing in the future,” the document notes.

In addition, BT warns that the rate of adding net new customers could shrink, churn could increase, revenue and market share could fall.

BT obviously believes it can deal with the challenges. But the statement of challenges neatly summarizes industry challenges that mostly are occurring on a global scale. If the global telecom business continues to grow--and many believe it soon will cease to do so--it will not be easy.

We can disagree about how much new revenue some communications service providers will have to create over a decade’s time, to replace lost legacy revenues.

One working hypothesis is that service providers in developed markets, in particular, will have to replace about half of current revenue over about a decade. That prediction is based on past experience, where the leading revenue category--long distance voice--experienced precisely that rate of decay.

Then many service providers found they had to replace lost voice revenues with high speed Internet access, mobility and video entertainment revenues. Many expect the rate of replacement will ultimately work out to a loss of half of voice revenue over 10 years, and its replacement by other sources.

If global telecom revenue is about $1.6 trillion to $2 trillion, and assuming about half the revenue is earned in mature markets, then the revenue subject to disruption ranges from $800 billion to $1 trillion.

Half of that represents $400 billion to $500 billion. That, hypothetically, is the potential amount of global revenue that might be lost, and would have to be replaced.

So BT’s prospectus, though containing much required legalese, still captures the magnitude of coming changes, and the seriousness of the response.