In the past five years, the telecom business has entered a period of slow decline, with revenue growth down from 4.5 percent to four percent, EBITDA margins down from 25 percent to 17 percent, and cash-flow margins down from 15.6 percent to 8 percent, according to McKinsey consultants.
Competitive boundaries are shifting as core voice and messaging businesses continue to shrink, partly under regulatory pressures, but also because social media is opening up new communications channels.
Among U.S. telecom companies, for instance, landline and mobile voice now account for less than a third of total access, down from 55 percent in 2010, while data revenue has risen from 25 percent of total revenues in 2010 to 65 percent today.
The issue is what to do. In the near term, horizontal mergers to increase scale are the most likely move by most firms.
In at least some cases, service providers will try to move into other segments of the value chain, either “up the stack” in the direction of applications, in some other cases perhaps “down the stack” (or backwards into the value chain), if one considers devices to be “down the stack” (I would put devices up the stack, but that is a matter of preference).
A third of the 104 respondents to a McKinsey survey were preparing to move into adjacent businesses such as financial services, IT services, media that are “up the stack” moves into parts of the ecosystem other than access and communications services.
To be sure, many of those planned initiatives will fail to be launched, in the end. The point is that one long-term solution to industry revenue shrinkage is to get into adjacent businesses elsewhere in the same value chain.
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