The current effort by some “telcos” to become techcos, as with earlier language about becoming “agile” or “virtualized” or “cloud native” “solution providers” has its roots in a simple business problem: business leaders no longer see revenue or profit growth coming from the traditional “connectivity” business.
Competition, a fundamental switch to the internet as the driver of application development, resetting of value creation and consequent commoditization of “connectivity” products all contribute to a search for new value drivers.
All of that is somewhat perplexing. On one hand, the role of “connectivity” in the internet ecosystem is essential. On the other hand, the relative value creation seems challenged. So connectivity firms are valued by the financial markets as “slow growth” businesses, though arguably with more growth potential than most other “utility” type businesses and industries.
But that does raise a recurring question: what can “slow growing” connectivity providers do to enhance their growth profiles and escape commoditization of prices within the industry? If one believes something can be done, how much upside might there be? And can connectivity firms actually escape their roles in the value chain?
Traditionally, efforts to create additional roles have had mixed success. And even when success has been obtained, it often makes more sense to spin out those assets to reap the rewards of higher valuations than are possible when the assets are essentially trapped within a connectivity provider business, with a connectivity provider valuation.
With the caveat that one’s perspective can vary if different metrics are chosen, and with the proviso that there can be nearly as much divergence between firms within a single industry as between them, valuation differences are clear enough.
So it is hard to avoid the conclusion that connectivity providers have to create new roles in the value chain if they wish to grow revenues. But once created, there will be high incentives to spin out or otherwise separate those assets to reap the rewards of higher valuations.
So the ever-present conundrum is the tension between needing to create higher value roles and the pressure to liquify those assets to reap the market value.
Connectivity might always be a slow-growth business, as it has been in the past. It might face growing competition and therefore commoditization in the future, as it has in the past. Though it always will be important to look for capital and operational efficiencies, it is hard to imagine big new “connectivity” revenue sources with sustainable margin profiles.
Most of the more-lucrative opportunities seem always to lie elsewhere in the stack or value chain: devices, apps, computing services and so forth.
So the point is that no matter what new buzzwords are applied, connectivity provider strategic options remain challenged. There is only so much business leverage to be obtained within the connectivity space. Transformative growth almost has to be found elsewhere.
But, in the end, even when successful, those assets realize their value only when parted from the connectivity provider. It’s a conundrum indeed.
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