The advice to “stick to your knitting” or “concentrate on your core business” often is sage advice for market leaders, for the simple reason that if 80 percent of results are produced by 20 percent of the business, that properly requires one’s attention.
The complication occurs when that core business is in permanent decline. Then the advice might change. Owners might be advised to “get out of that business” by selling the assets. When possible, owners might be told to harvest revenues from the declining business to fund replacements.
When execution issues are not an impediment, the “harvest and reinvest elsewhere” advice can produce results. Many industries, including automobiles, energy production, retailing, music and video entertainment and most content businesses have had to face the challenge.
The telecom business finds itself in that situation. Growth increasingly is slowing even in the fastest-growing regions of the business, while global growth rates in the one percent to two percent annual range.
The great hope of the internet of things, edge computing and 5G itself is that growth can be reignited in the core communications business, without the need to diversify assets.
Since retail service providers must replace about half their existing revenues every decade, diversification and growth within the connectivity sphere are considered far less risky than moves outside the core competency, if it can be done.
In my own experience, both execution risk and faulty strategy have bedeviled retail connectivity providers. When, in 1985, the monopoly AT&T Bell System was broken up, the “valuable pieces” were deemed by AT&T to be the long distance business and ownership of Western Union (later renamed Lucent Technologies). In other words, long distance service and the equipment manufacturing arm.
The local access companies, the Regional Bell Operating Companies, were viewed as stodgy, slow-growth assets. That view was more broadly held, as well. When Rochester Telephone Company proposed deregulating its own monopoly in return for freedom to pursue the long distance business, the explicit reasoning was that long distance was the growth driver, local telephone service a slow-growth business with lower financial returns.
The strategy proved flawed.
Later, AT&T, struggling to find a facilities-based way back into the local access business, became the largest cable TV provider in the United States. The idea was to use the cable TV access lines for delivery of all services. But execution issues stymied that strategy, as AT&T could not support the debt loads the acquisitions imposed, nor could it get the hoped-for performance without major network upgrades.
After that, AT&T gambled on growth from entertainment video, purchasing DirecTV to become the largest linear video supplier in the U.S. market. Now AT&T has pivoted again, moving the DirecTV assets off its books and betting on the streaming service HBO Max to drive consumer revenues.
Many have argued the DirecTV strategy was wrong. Some say the same about the Time Warner content acquisition. Others would argue the strategy was the same as followed far more successfully by Comcast: diversify and then take share from competitors in the new lines of business.
As Comcast sought to use the broadband network to deliver all services (including voice, enterprise connectivity and internet access), while diversifying revenue from connectivity (video subscriptions) to content ownership (networks, studios, theme parks), so AT&T attempted the same strategy.
DirecTV would be a bridge to adding video entertainment revenues to the fixed network voice base, while owning Time Warner would create revenues not fundamentally based on connectivity operations.
To be sure, the linear video business deteriorated faster than expected, to be replaced by streaming alternatives. And linear video underperforms most of the other lines of business in terms of cash flow generation.
source: AT&T
Many will be pleased at what they believe is a turn towards the mobility business, which generates most of AT&T’s free cash flow, with higher profits than the other lines of business.
But the nagging question remains: if the mobile and connectivity businesses are in decline, how is growth to be maintained? Optimists will point to edge computing or IoT or enterprise services.
The issue is whether incremental new revenues will come fast enough, or be big enough, to offset a loss of half of current revenue over the next decade.
Product substitution will not abate. The ability to substitute applications for services--”free replacing fee”--is possible across a growing range of core products, including voice and messaging.
Nor--for AT&T or the other market share leaders--is he most-logical growth path of buying competitors possible. Acquisitions are constrained domestically by governments that want some level of competition.
Expansion internationally was a favored growth strategy over the past several decades, as government policy was either benign in terms of new foreign investment, or encouraged. Prevented from growing domestically, offshore growth made lots of sense.
But as growth has slowed, many are retrenching again, partly to reduce debt burdens.
In the past, usage has been tied to revenue: “use more, pay more” was the rule in the pre-internet and monopoly eras. Today, usage and revenue are uncoupled. As data consumption grows 50 percent a year, prices cannot be raised to match.
As so often is the case in the internet era, higher usage often means higher costs occur faster than incremental revenue.
The point is that growth options are difficult and risky, either concentrating on the core business or trying to move outside it.
That noted, some competitors are able to take market share in the base business and grow that way, at least for a time. T-Mobile can grow by taking share, as cable operators took share in voice, business services and internet access.
But flat industry revenue growth, plus attrition in the core business at a significant level, might tough decisions for the market leaders. If one cannot hope to take significant market share, and in the absence of significant new revenue growth in the core business driven by some combination of 5G, IoT and edge computing, focusing on the core fails as a growth strategy.
