Execution Risk or Mssing a Transition: Which is Worse?

Which would you rather face: execution risk or execution? Not to overplay the thesis, but the former is what telcos face in trying to move up the stack or into new parts of the value chain; the latter is the danger connectivity providers face in a world where dumb pipe (low margin) operations increasingly are the norm and legacy services are shrinking.

With the caveat that smaller specialty firms have different constraints and opportunities, tier-one telcos face big choices. 

Much hinges on one’s assessment of the ability to sustain a business on connectivity services alone (voice, messaging, internet access, internet of things), or whether sustainability eventually requires new revenue sources beyond connectivity. 

The matter is more confused than is typical at the moment because, though all connectivity providers face some risk in economies that have been largely shut down, connectivity providers with content production,  linear video, theme park and cruise operations also face the revenue -disruption from those lines of business. 

In other words, it can seem safer, at the moment, to have only connectivity lines of business. We will only know the outcome--stick to connectivity or diversify-- after a decade or more. There will be substantial execution risk. Telcos have not proven especially adept at seizing leading roles in new lines of business. 

And even early approaches by telcos towards edge computing arguably have been more “dumb pipe” than “new roles in value chain.” For most tier-one telcos, that is rational. We are early in the shift to edge computing, so opportunity and risk really have to be balanced. And, for most tier-one telcos, the upside from edge computing might not extend too far beyond the possibility of new connection revenue. 

source: PwC

Some would argue that the firms that diversified into content ownership (Comcast and AT&T, for example) have not fared as well, in the context of the Covid-19 pandemic, as did firms that are not in those parts of the business, and still make nearly all their revenue from connectivity services. 

Whether that remains the pattern after the pandemic is among the key questions. Perhaps edge computing or the internet of things will allow some telcos to create big new connectivity businesses substantial enough to replace lost legacy revenues. 

But it could also happen that, in the core connectivity business; subscription growth remains muted; average revenue per user continues to drop; profit margins remain slender or drop and product substitution continues. 

In that case, firms with more-diversified portfolios, elsewhere in the internet ecosystem, could well do better than firms limited to connectivity roles.