DT Revenue Growth: Scale or Scope?

Deutsche Telekom says it plans to boost revenue growth by increasing economies of scale and using artificial intelligence. The promise of AI to reduce costs is likely understood by all observers. The “economies of scale” might be more complicated, as that term implies wringing cost out of existing operations by selling more, or to more customers, using the same assets. 

Strictly speaking, the latter phrase (“scale”) refers to selling at higher volumes (to more customers). But some of DT’s stated plans might involve selling new or different products to the same customer base, which, strictly speaking, is “economy of scope.” 

In other words, “scale” means selling a product to more customers. “Scope” means selling additional things to existing customers. As a practical matter it might not matter whether what DT intends are examples of scale or scope. It is likely both will be at work.

  

DT expects to sell “additional products and services ranging from payment services for cell phone insurance services and platforms for payment services through to AI solutions for consumers” in its mobile business, which is a clear example of scope economics. 

In the global business markets, DT seems to suggest gains will come from higher sales to more customers, which is a “scale” economy. 

In the telecom industry, “economies of scale” can be operationalized as instances where the average cost per user decreases as the volume of services provided increases. That generally arises from spreading large fixed infrastructure costs over a growing number of subscribers; increasing sales to those customers or otherwise optimizing network usage to reduce cost per unit.

So, compared to some other industries, scale economies are more difficult, as the physical network footprint generally has to be increased to reach more potential customers (acquisitions of other telcos, for example; or building out new networks outside the present geographic footprint). 

Industry	Economies of Scale Potential	Fixed Costs	Marginal Costs	Scalability	Barriers to Scaling
Virtual Products (e.g., SaaS, streaming)	Extremely High	High (development, initial infrastructure)	Near zero (reproducing digital products)	Unlimited (global reach)	Low (mainly infrastructure scaling, user acquisition)
Telecom Networks (e.g., Fiber, Cellular)	Moderate	Very High (infrastructure: cables, towers)	Significant (capacity upgrades, maintenance)	Limited (capacity constraints, physical coverage)	High (geography, regulation, infrastructure costs)
Manufacturing (e.g., Electronics)	High	High (factories, machinery)	Low (once economies of scale are achieved)	High (limited by supply chain and logistics)	Moderate (supply chain constraints, capital investment in machinery)
Automobile Production	Moderate to High	High (factories, R&D, supply chains)	Moderate (labor, raw materials, logistics)	High (dependent on supply chain, market demand)	Moderate (complex supply chain, regulation, capital intensive)
Retail (e.g., E-commerce)	Moderate	Moderate (warehousing, logistics)	Low (online distribution, logistics costs decrease with scale)	High (digital platforms scale easily)	Moderate (logistics, competition, last-mile delivery costs)
Healthcare (e.g., Hospitals)	Low to Moderate	Very High (equipment, staff, real estate)	High (labor, equipment usage, pharmaceuticals)	Limited (physical capacity, staffing limitations)	High (regulation, physical constraints, capital-intensive infrastructure)
Energy (e.g., Renewable energy production)	Moderate	Very High (plant construction, grid integration)	Low to Moderate (depending on energy source)	Moderate (limited by physical infrastructure)	High (regulatory barriers, physical infrastructure expansion)
Education (e.g., Online platforms)	High	Moderate (platform development, content creation)	Near zero (digital content distribution)	Very High (global reach, online scalability)	Low (content development, digital infrastructure scaling)
Logistics (e.g., Delivery services)	Moderate	High (transportation, warehousing)	Moderate (fuel, labor, vehicle maintenance)	Moderate (dependent on infrastructure and efficiency)	Moderate (geography, labor, fleet expansion)
Financial Services (e.g., Banking, FinTech)	High	Moderate (technology, regulatory compliance)	Low (digital transactions, account maintenance)	High (digital services can scale globally)	Moderate (regulation, cybersecurity, trust building)

Still, some might argue that telco potential for economies of scale is less than might be expected. When a new geography is to be served, additional capital investment is required. So, by definition, the additional customers and revenue are not generated by the “same” assets, which would imply lower cost per customer. 

To be sure, there are possible economies in other areas (back office, overhead), but telco geographic expansion on a facilities basis requires additional investment in plant. 

So DT’s possible upside is more likely to come from “scope” in its consumer business, but possibly “scale” in its global business customer segment.