Why SingTel, Axiata, AT&T, NTT and Verizon are Making Investments Outside Their Core

There is an exceedingly good reason why firms such SingTel, Axiata, AT&T, NTT and Verizon are undertaking growth initiatives many consider risky, such as moving into digital content and advertising.

With the voice model maturing, some markets still are pinning hopes for growth on data revenues. But what is to be done in markets where data adoption already is nearing saturation? That is the reason tier-one service providers are investing in lines of business "outside" their traditional "access revenues" core.

Communications service revenue is a mix of price per unit and volume, which is to say, a function of supply and demand. Up to a point, suppliers can compensate for increased supply, which lowers prices, by increasing sales volume.

If supply continues to increase,  that strategy fails, though. And some might argue that the drivers of supply increase are numerous. New competitors, new spectrum and new technology are expanding supply.

Demand is increasing, as well. But that demand also comes with price sensitivity. Consumers cannot pay “any amount” for communications services. So even if demand growth is exponential, revenue growth tends to be linear.

Source: JP Morgan

Source: JP Morgan

In 2011, researchers at Analysys Mason provided this estimate of future mobile revenue per gigabyte, a basic trend hard to refute.

Figure 2: Revenue per gigabyte of mobile broadband traffic, worldwide, 2011–2016 [Source: Analysys Mason, 2011]

A separate 2011 forecast by Strategy Analytics suggested the same trend would develop. Analysts at McKinsey likewise have pointed out that service providers need to radically reduce costs for data access.
All those trends make clear why mobile and fixed service providers are vigorously looking for big new revenue sources. Volume increases are not going to compensate for price per unit drops, forever.

The telecommunications business is harder than it used to be, but not only because competition now is the rule. The emergence of the Internet means the access and transport functions are only a part of a bigger ecosystem.

As consultants at PwC point out, telcos and access providers operate in the “network” part of the full value chain. But most of the value will come elsewhere, from services and apps able to provide the intelligence and control for processes that modify real-world activities.

That is why moving up the value chain is so important, and why many access providers are investing in Internet of Things, machine-to-machine communications and industrial Internet, if rather cautiously.
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