There is a difference between execution risk and strategic risk. In the former instance a firm or person might have had the right idea, but chose the wrong set of actions. In the latter instance a firm or person chooses an incorrect plan.
But telco efforts to diversify into content or media--though panned--actually have been a success, by standard innovation rules of thumb.
Most efforts at innovation of any kind fail. The general rule of thumb is that eight to nine out of 10 efforts will fail. The corollary is that only about one in 100 innovation efforts will create a truly-significant positive change in outcomes.
Telecom firms sometimes make moves that later are viewed as mistakes of execution or strategy. We might be wrong about such conclusions, in substantial part.
Consider Verizon’s sale of 90 percent of its AOL assets, or AT&T spinning out its DirecTV and Warner Media interests into external entities. Both those moves are viewed by many as examples of telco failure. But how many other innovation efforts by either firm, or all other providers, have generated billions of dollars in incremental new revenue, so quickly?
How many generate billions in incremental cash flow for any single firm? Answer: almost none.
Some will argue diversifying into content is not a good strategy for connectivity providers. But in 2017 50 telcos around the globe generated more than $90 billion in content revenues, mostly from video services.
Neither AOL nor Time Warner and DirecTV had the strategic impact Verizon or AT&T hoped for. In the former case lack of scale was an issue; in the latter case the issue was attendant debt burdens. The argument can be made that Verizon simply did not invest enough, or that AT&T invested too much (took on too much debt).
Still, the incremental boost of revenue and cash flow in both instances was arguably much better than any other moves either firm made in new lines of business. Either firm’s investments in internet of things platforms or services, while also strategically important, produce revenues and cash flow that pale in comparison to what each firm was able to accomplish in content and video, in comparable time frames.
Organic growth in core connectivity services cannot contribute much, in a growing number of connectivity markets, to revenue. The phrase terminal decline has been applied to legacy connectivity services, for example. And that leads to a search for new revenue sources.
A few cable TV companies also have transformed themselves from video distributors into content owners, mobile service providers, business connectivity providers and leading suppliers of broadband access as well.
The notion that connectivity providers “cannot” master the content business is incorrect. It can be argued that telcos have had more financial success in content than in their roles as app store providers, equipment manufacturers, computing suppliers or data center suppliers.
Though legacy telcos do participate to some extent in the enterprise phone system business, system integration, virtual private network and other connectivity lines of business, they often do so as lesser providers in segments dominated by others (either communication specialists or information technology providers).
The point is that telcos arguably have been more successful in video entertainment than in all other diversification efforts of the past four decades.
In 2018 nearly half of telco executives surveyed by EY cited television and video services as among the top three best ways to grow new revenues. The alternative is failure, if present revenue and profit trends continue.
Global telco revenue growth rates remain stubbornly close to one percent per year, below the long-term rate of inflation. If one were looking any key component of telecom revenues, one would see a historical curve reminiscent of a standard product life cycle, with declining demand, declining profits or both.
Product maturation, product substitutes and changes in value are issues telcos have dealt with for a couple of decades already. So if the core business is under strategic attack, what strategy is called for?
The range of options have not really changed much in four decades. Telcos can run today’s business more efficiently; grow the current business through acquisition or innovation or get into new lines of business.
All three have worked for various providers; at various times. The biggest single revenue driver was entry into the mobile business. First voice subscriptions for business users; then consumer users; then text messaging and now internet access have provided waves of revenue growth in the mobile segment.
The larger point is that most innovation efforts fail. Content and video services have been among the successes, not the failures.
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