Telcos Will Have to Make Hard Choices, Risky Bets

A reasonable argument can be made that telcos no longer can do everything they might like to do, and must make hard choices.

Most telcos will have to pick one to five areas where they can be viable platforms and then partner for everything else, Dean Bubley of Disruptive Analysis argues.

“Telcos have been in a weird place for 10 years, between pipes and platforms, and they have to decide which they want to be,” says Benoit Felten, Diffraction Analysis owner. “You can't be everything to everybody .”

Just what that really means for strategy and business focus is harder to describe. Felten says it could mean service providers do not own their infrastructure, everywhere. Bubley argues it could mean that service providers pick a few internet of things lines of businesses to pursue and basically ignore the rest.

And some service providers will have an easier task than others. Profit margins now are diverging, globally. “On a regional level, if you look at free cash flow as a proxy for that, it increased by about 100 percent in North America between 2007 and 2017 and at a similar rate in Korea and in Japan,” said  Philipp Nattermann, McKinsey senior partner.

But “there are some markets, like Europe, that are shrinking.”

Such differentiation is not especially new, in the competitive era. Many firms sell only to business customers. Some sell mobile and fixed services; others one or the other. Some sell locally; others regionally; some nationally; other regionally; some globally.

Products range from consumer and business voice to internet access to video; data center or cloud services to various forms of wide area network services. Some firms rely heavily on application revenue, many cannot.

The hardest choices of all arguably involve efforts to “move up the stack” into applications, perhaps mostly in the internet of things area.

“If you try to compete with global players without the R&D, without the developers, and without the ten-year horizon, profitability is very difficult,” said Ferry Grijpink, McKinsey senior partner.

“If I'm a well-financed operator, maybe even the incumbent, I have a fixed infrastructure in place, that's one thing,” said Nettermann. “If I'm a relatively small mobile-only player with significantly fewer resources, this challenge becomes significantly more daunting.”

“We could very well see that 5G might lead to changes in industry structure,” he said. Bubley expects a more heterogeneous mix of large and specialized providers. Others expect tier-one service providers to consolidate, massively.

Of course, that is what we already see, in many ways. Tier-one telcos long ago decided that some markets and products were simply too small, in terms of revenue potential, and too resource intensive to provide a sustainable business case.

That is why most avoid the business phone system and even hosted business voice lines of business. Most stay out of the system integration and business premises networking business. There are viable specialists in the wide area network connectivity business, the data center business, the metro fiber network business.

Specialists already are emerging in the edge computing business, industrial IoT, automotive IoT, smart cities and other IoT verticals.

And one enduring problem is that most of those businesses do not scale as easily as have consumer and business voice, internet access or even video entertainment. Tier-one telcos will need huge new revenue sources to offset declining legacy sources, and the emerging areas might not provide the needed revenue lift.

So making choices necessarily will involve the risk of making the wrong bets.