At a recent session of the PTC Academy, APTelecom President Sean Bergin starkly contrasted the choices connectivity providers (telcos and others) now face. As demand for traditional connectivity services continues to decline, service providers face two basic choices: stick to the core business or create a new business.
The former strategy includes options such as reducing operating costs, perhaps making acquisitions to gain scale or taking other steps that lower costs to match declining revenues, thereby sustaining profit margins.
The latter strategy, admittedly riskier, requires creation of new products beyond the current offerings, and almost always involves some degree of movement into different parts of the ecosystem or value chain. Think of the former as “role” (connectivity, device, application). Think of the latter as “function” (semiconductors, devices, connectivity, platform, app, business model) within any single role.
As a practical matter, not every firm in the connectivity business can actually “change roles or functions.” Doing so requires new competencies, capital, different supply chains and often different sales channels as well.
Of course, telcos are not the first firms ever to confront operating in a declining or changing business. There are some strategies that make sense, if they are not pleasing or even easy.
Sometimes firms must withdraw from parts of the market where they are not the present market share leaders and are unlikely to be leaders. They can reduce costs and find other ways to be more efficient about core business processes. They can try to sell greater volumes or complementary products to customers, or acquire rivals to increase scale, which offers a chance to reduce costs. Sometimes, expansion beyond the current service boundaries is possible.
Sometimes a firm can focus on a still-growing part of the portfolio, but only when growing segments are available. Beyond that, specialization in a more-defined portion of the present business might be possible.
Looking at some of the business or consumer opportunities one often hears suggested, you can see immediately that nearly all the proposed opportunities require moving outside the core connectivity competence. Even some of the “core competency” opportunities, such as over the top messaging or voice, have proven quite problematic.
To be sure, telcos have shifted voice operations from analog to digital, using VoIP to support their remaining voice operations. But has that boosted revenues? In virtually all cases, the answer is no. Text messaging, at the same time, has continued to generate less revenue. every year, as customers choose messaging alternatives.
Two decades ago, one frequently heard advice to “partner with OTT providers.” What the means always requires some explanation, but the advice was to partner with the likes of Skype and others as a way of either entering the VoIP market or at least trying to protect some voice revenues.
You can judge for yourself whether that has worked. On a global basis, service revenues from fixed voice services are expected to decline at a compound annual growth rate of -5.64 percent between 2018 and 2023, with service provider revenue dropping from $142 billion in 2018 to $106 billion in 2023, according to Omdia.
Globally, fixed voice subscriptions will fall from 931 million in 2018 to 821 million in 2023, a CAGR of -2.49 percent, driven by fixed-to-mobile substitution.
The big problem is not only that OTT providers take so much of the growth, or that they take so much revenue from mobile or fixed service providers. Rather, the big problem is that OTT messaging and voice essentially destroys the service provider markets for voice and messaging.
Text messaging revenue could decline 40 percent over the next three or four years in the European and Middle East markets, many executives predict. About 84 percent of respondents to a Telco 2.0 survey thought the main reason for such declines was the expected price reductions mobile service providers would adopt to compete with OTT services and apps.
The point is that survival, for many firms, might well hinge on essentially “getting into a new line of business or getting out of the business.” That is one reason why connectivity provider consolidation is expected to be massive.
Either major choice--sticking with the core competency and current services or moving elsewhere--carries great risk. In the former case, your business continues to shrink and you eventually exit the market, through sale or death. In the latter case you run a great risk of failing and likewise exiting the market, through bankruptcy or sale.
But only one of those paths normally leads to sustainability, and that is the “up the stack” or “across the ecosystem” strategy.
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