Dinosaurs? That is a wrong metaphor
The pace of change in telecom technologies is accelerating, but despite the wealth of opportunities in telecom space, only a few telecom operators have successfully generated long-term shareholder value.
Operators should do more than just tweak yesterday’s strategy in favor of tomorrow’s opportunity. The days of five-year strategic plans have gone the way of the rotary phone. To win in the future, they need the ability to react quickly to new patterns of customer behavior and new technological opportunities.
Three shifts have unleashed waves of both creativity and destruction in the telecom market. First, customer behavior is becoming more varied, as consumers take advantage of new features at their fingertips. A fixed-line telephone has one function; the iPhone, hundreds. Customers expect anywhere, anytime access to content. Second, deregulation continues to exert downward pressure on prices. Finally, open standards and global platforms such as the Web have lowered barriers to entry and fueled an explosion in innovation and new services.
Signs of creativity are everywhere. For example, Foursquare, a location-based social-networking service, has captured the fascination of the mobile youth segment in a little more than a year. Hundreds of other services built on the pillars of communication, content, and community are competing for relevance and revenue. In Europe, Spotify customers can legally stream music to their mobile devices. Nokia is winning rural customers in India with its Life Tools collection of agricultural, educational, and entertainment services.
But destruction looms. Powered by the iPhone and similar products, the rise in mobile data traffic has helped disguise the deterioration in wireless voice traffic. But as the price of mobile data traffic declines ― increasingly only pennies per megabyte, an order of magnitude much less than it was just a few years ago ― carriers will have nowhere to turn. Nor are the challenges limited to the consumer business. In the United States, cable companies are starting to win in the broadband and small- and medium-enterprise markets, too.
At the same time, the world is becoming bipolar. Consumers are trading up and trading down in telecom services, just as they are in consumer goods. Many are satisfied with simple and effective low-cost services. In France, Iliad has captured that market with a popular triple-play offer of video, broadband, and voice. Other consumers, however, are looking for sophisticated bundles of content and functionality that only a well-developed ecosystem can provide. There the iPhone and BlackBerry dominate.
Both high- and low-end businesses can be very successful. The stock market performance of Apple and Google, on the one hand, and Iliad, on the other, have all been in the top quarter of total shareholder return (TSR) over the past five years. In May last year, powered by the success of the iPhone, Apple’s market capitalization exceeded that of Microsoft for the first time ever. Meanwhile, traditional operators are stuck in the middle or the bottom of the TSR pack.
Unfortunately, the no-frills market is attractive only to attackers such as Iliad or to established players outside their home market. Dutch operator KPN, for example, has successfully introduced no-frills mobile offerings in Germany and Belgium. Within their home market, traditional carriers cannot profitably serve the low-cost segment without radically shrinking in size.
But creating an attractive and successful ecosystem is devilishly difficult. Traditional carriers are still in the early days of building such businesses—and can’t place all their bets on duplicating the success of a company like Apple.
It is fashionable to refer to operators as dinosaurs. That is a wrong metaphor. They are more like a collection of animals of various sizes, shapes, intelligence, and maturity. Some of them will fail to adapt to their environment and will perish. But with proper nurturing and oversight, others can thrive. It’s a jungle out there, and it’s time for carriers to adapt to it by making hard choices.