Saturday, June 2, 2018

Can Any Tier-One Service Provider Survive on Connectivity Revenues Alone?

Virtually all analysis of the telecommunications industry includes key challenges to the business model. Chief among those issues are declining prices and migration of value elsewhere in the ecosystem.

The issue is what can be done about that threat, and for at least some tier-one service providers, the answer is to “move up the stack” into platforms, apps and content.

For smaller providers, that may not be an option. In fact, some service providers might well find themselves acquired by a tier-one content, app or platform provider. In the U.S. market, an example could be Google, Apple or some other firm acquiring Sprint or T-Mobile US.

Some observers would argue that an eventual acquisition of either or both of those firms by a major app, content or platform provider would make better strategic sense than simply creating a bigger mobile service provider operation, as useful as that might be in the near term.

Eventually, all surviving tier-one service providers are likely to have moved “up the stack” in some way, as it will be nearly impossible to survive on the strength of connectivity services alone.

“By 2020, it is likely that one or more major telecom companies will be acquired by a content company,” argues Christopher Surdak, JD, Global Subject Matter Expert, Analytics, Governance, and eDiscovery, HP Software.

“Being connected continues to become cheaper and cheaper, adhering rather slavishly to Moore’s Law of diminishing costs,” says Surdak. “The cost of providing such a service keeps falling, and competition means that the price keeps getting smaller and smaller in a strong, negative feedback loop.”

One aspect of that trend is that average revenue per account or user keeps falling. Another element is the ability to substitute other products for legacy communications.

“Connectivity is capturing an ever-smaller proportion of the information value chain, while content, service, and product deliverers capture ever-more,” Surdak says.

Competition is an issue, but arguably not the principal challenge. The bigger problem is that virtually all legacy telecom products have reached product maturity and are going to decline. In addition, there is great uncertainty about  proposed new revenue sources.  

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