The Future of Telco Business
Part 1: Why Size doesn’t matter in the Telco Industry
Several major telco operators have mastered their multinational being over the last decades. Yet, the former frontrunners of the digital world struggle to compete with new digital leaders like Google, Facebook and Co. What is the biggest difference between an Over The Top player (OTT) and a telecom operator? Why have many global OTTs like Facebook, WhatsApp or Netflix been so successful in the last decade and telecoms not? Regular answers are the innovation power, the mindset and genius of the entrepreneur or young and highly motivated staff. However, there is one answer that is not so much recognized in the public domain but plays a crucial role: OTTs work and produce international and use big scales and size to their advantage while telecoms don´t.
This is the first article of a series of four, examining the future of telecommunication business. In the course of this series, we start by looking at the current situation and will elaborate why size doesn’t matter in the telco industry. The next article will examine the reasons for this (see second article here: Part 2: Change of Status Quo - How current pressure turns into opportunities). What led to the current market situation and how can the current pressure on the industry turn into opportunities? The third article will take a look at solutions to elaborate how new technology allows for cross-border production and what telco groups can do today. Eventually, the last article will look into what is needed to rethink the telco business. An approach will be discussed of how to put the presented solutions into practice.
Size doesn’t matter in the telecommunication industry
Ever since Henry Ford introduced mass production, companies around the world started to take advantage of economies of scale and scope. Today, most internationally operating companies produce their goods or services centrally and then sell it to the whole world. In contrast, large telecom groups such as Deutsche Telekom, Vodafone and Telefonica work “multinationally”. That means they produce and operate networks and services locally in the individual countries with very limited scale effects across countries. Executives in the industry say that biggest synergies still come from supporting processes like joint procurement, consolidated HR operations, or simply through knowledge sharing.
Our research provided some interesting results:
Scale clearly provides benefits for national markets. National champions on average feature a 35% higher EBITDA profitability than the third placed player. Surprisingly, profitability is decreasing with increased international footprint. While operators with a presence in only 1-2 countries enjoy an average profitability of 36%, this is reduced to 32% for operators with more than four subsidiaries.
The numbers show it clearly: Looking at profitability on an international scale - size doesn’t matter! Size only matters within national markets. Comparing this example to the automotive industry, it would mean a national car manufacture only producing for its local market is on average more profitable than a big, global automotive giant. Sounds very strange.
Failing to create cross-border synergies
For many years now, telco operators have tried to create “group effects” by entering new markets through shared service centers or knowledge centers. But so far, creating synergies out of internationalization was not very successful. The benefits created through operating in several countries do not compensate for the increased organizational complexity of a multinational telco operator. Many telecoms are using group effects in supporting areas such as procurement and billing, but synergies of the core of a telecom such as the network and service production, products, sales and customer service are not yet taken advantage of. Currently big means less profitable in the telco industry.
A major reason for the immense effort of centralizing network and service production is the historically rooted national setup of telecoms. In Europe, 25 years ago telecoms where still run as governmental infrastructure agencies. The “national roots” are not only still inherent in the culture of the operators, but also in the technology, processes and products. This results in huge differences of how services are produced in the different countries although belonging to one and the same telco group. Even if a service, such as a SMS, looks the same for every end-customer, it’s features, production platforms, and processes are quite different in each country. While for a car manufacturer it is relatively simple to produce centrally, for a telecom the different technical conditions, processes and systems, as well as legal requirements create a complex challenge.
Other markets in the value chain are much more consolidated
In contrast, looking at the telco value chain, the situation below and above the service providers looks different. Our research shows, the markets of the suppliers as well as the over-the-top player (OTTs) and content provider are significantly more consolidated. Using the scale effects of producing for a global client base these players can use their market power to increase their share in the value chain.
Upstream, equipment and service providers such as Cisco, Ericsson or Huawei actively drive consolidation and globalization. They develop, produce and sell their products on a global scale, which allows them to effectively leverage their market power to create global entry barriers. Currently ongoing mergers and acquisitions will intensify market concentration across all segments. A prominent example is the recent discussion of two of the most dominant players in the market – namely Cisco & Ericsson – to form a strategic partnership that is supposed to generate an incremental revenue of $1 billion. The ability to spread costs on a global scale has become indispensable for the success of a company.
Downstream, OTTs have always worked with the goal to reach global scale quickly. When rating investment opportunities in the Silicon Valley, the scalability of the business model always plays a crucial role. Companies such as Facebook, Google, Whatsapp, or Netflix offer their services across the globe and beyond local requirements with almost no customization apart from language.
Light at the end of the tunnel
The situation of the industry is clear: Currently scaling across countries comes with a disadvantage. If telco groups do not want to lose a large part of their business, they have to become international players eventually. Many disadvantages including the historically rooted complexity, the different technologies used across countries, and the diverse national regulatory requirements that only telecoms have to comply with, make it a hard journey. But the pressure also creates opportunities. Technological possibilities allow for different setups while regulations are slowly loosened around the world.
Read more about the reasons for the current situation and how the pressure on the industry can turn into opportunities in part 2 of this series. Part 3 will then discuss solutions of what telcos need to do while in part 4 the approach to do so will be elaborated.
About the authors
Patric Linssen is a Management Consultant within Strategy and Innovation at Detecon International. As an advisor for large scale telecommunication transformation projects he gained international project management experience.
Nicolas Mendoza is a Management Consultant at Detecon International with a strong focus on digital transformation and strategy. He has been the topic lead for Public Safety compliance for cross country telecommunication production.
This article was first published on Linkedin Pulse.