Monday, February 25, 2019

Are Telcos Headed Back to Monopoly?

As telco strategies continue to diverge, a return to monopoly might be inevitable, some now speculate. In a sense, infrastructure monopoly has been a reality for some time, in fixed network services. Mobile competition has tended to be facilities based.

But retail competition based on wholesale or owned facilities poses some clear dangers.

In some mobile and fixed markets with high numbers of retail contestants, profit has been wrung out of the business to a degree that sustainable competition--at present levels--is unlikely.

In fact, some now speculate that life as a “utility,” as in the monopoly days, might be inevitable, in some markets, at the retail level. That would be a profound change.

Will monopolies emerge again, at the retail level? Many would point out that infrastructure monopolies never really went away. Instead, retail competition in the fixed networks arena has relied on a single wholesale infrastructure.

And that, in turn, means some forms of innovation cannot happen, as all wholesale customers can offer only the same products.

So what is the impact on innovation if retail communications again becomes a monopoly? Less innovation seems almost inevitable, precisely at a time when massive innovation seems to be required.

That is the big danger if retail monopoly again emerges. “In places where you had cable and fixed, you saw much more innovation,” said Philipp Nattermann, McKinsey senior partner. In large part, that is because cable and telco use different supply chains and rely on different access network technologies.

In Europe, at least some speculate that some sort of “utility regulation” might not be an entirely bad thing, bringing regulatory protection that would allow higher prices. Across the core seven large European markets, the industry not only does not meet its cost of capital, the return on capital is lower than its cost of capital, said Nettermann.

European regulators have been very good at keeping end-customer prices low. They have been less good at creating an environment where the return on capital is sufficient to cover the cost of capital.

“The number of players has a very clear inverse correlation to profitability,” said Nettermann. “European operators are significantly less profitable than their North American, their Korean, or their Japanese counterparts,” said Nettermann.

“And then you really get to a model that begins to look more like a utility, don't you?” Nettermann added.

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