Cutting the wires
Desperate telecom firms look beyond traditional boundaries
By Ethan Inhyuk Choi
For the last two decades, the telecommunications industry has been at the heart of global economic growth. The spread of broadband internet, along with the explosive growth in demand for mobile
telecommunication services, has made telecom operators the prime beneficiaries of the ``Information Age.'' Yet in the last five years, telecom players have grown anxious about an impending end to the good days as the market for telecom services nears a saturation point. The recent financial crisis has only added to their fears.
The majority of telecom operators, especially those in developed markets such as Korea, have lately seen growth rates in the modest 2 to 5 percent range. New offerings such as the Internet protocol television (IPTV) and internet telephony led to the cannibalization of existing services, such as landlines, rather than creating new markets.
To make matters worse, technological advance is enabling cable television broadcasters to speed up their entry in the telecom market; operators also face ongoing pressure from non-governmental organizations (NGOs) to lower their subscription fees. The question is: how are telecom operators to cope with such internal and external predicaments? The answer can be glimpsed from a number of recent industry trends.
The first notable trend is the accelerating move toward a "lean telco." The way telecom operators are run was established mainly during the high-growth era. Thus they retain a good deal of ``organizational fat,'' according to industry experts. Recently, operators have embarked on intensive programs to improve their efficiency, ranging from such basic measures as reducing headcount and slimming down the organization to outsourcing the bulk of their non-core operations. The Boston Consulting Group estimates that telecom operators can enhance their efficiency by up to 30 percent, based on its project experience with major operators.
A related issue in the industry concerns the timing of new network investments. With the advent of smart phones, ``netbooks,'' or mini-laptops, and tablet computers like the Apple iPad, customers demand still faster data communication services ― made possible by continual advances in technology. It is in this context that prospects for launching LTE (Long Term Evolution) and other fourth-generation (4G) services are being discussed, only two or three years since investments in 3G networks, such as WCDMA and other technologies, have been completed. For telecom operators, however, this is hardly good news. Building a network is a multi-billion dollar investment even in a relatively small country like Korea. And telecom operators have yet to retrieve their previous network investments before moving on to 4G. Few operators, therefore, are expected to invest pre-emptively in 4G networks; rather, in an environment where new investments do not generate new returns, most operators are likely to play a game of wait-and-see for the next two to three years until at some point when competitive pressures force their hands.
A second observable trend is falling operational costs coupled with an increase in the bundling of services enabled by the so-called fixed-mobile convergence. A great many fixed-line and mobile operators across the globe have been merging with each other in the last two to three years. In Korea's case, KT has merged with KTF while SKT acquired Hanaro Telecom. Advantages of fixed-mobile convergence include decreased customer acquisition cost-per-product through bundled offerings, increased customer lock-in effect through extensive cross-selling, and reduced operational costs through the integration of hitherto separate organizations and distribution channels. The cost advantage of bundling together fixed-line and mobile service offerings translates into a discount effect of 20 to 30 percent per product, allowing operators to spend that much more on attracting new subscribers. Consequently, niche players relying on one or two services, without the ability to seize the bundling advantage, will find their niches further imperiled.
Another major trend is the intensifying struggle between telecom operators, handset makers, and internet companies over the ownership of mobile service customers. Ever since the advent of mobile internet, operators have been providing internet services through their proprietary mobile portals such as Nate or SHOW ― also their main sources of profit. However, handset makers such as Apple and internet companies such as Google are invading their turf with increasing speed, raising concerns that telecom operators may soon degenerate into ``dumb pipes'' providing only connectivity. This sense of crisis explains why operators around the world, led by Korea's KT, reached an unprecedented agreement to establish WAC (Wholesale App Community), a globally integrated app store.
The last trend worth noting is the increased push into new business areas including supplementary services. Telecom operators are throwing themselves into developing new value-added services that would take them beyond the increasingly irrelevant role of basic connectivity providers. Such efforts have resulted in the development and spreading of mobile enterprise solutions such as the push email, which target corporate clients rather than individuals. Moreover, operators are actively seeking to move beyond their traditional business areas into adjacent fields ― finance, IT services, retail ― in which they can leverage their communication infrastructures. For example, SK bought a 49 percent stake in Hana Card; Japan's NTT DoCoMo redefined its vision as ``life infrastructure,'' moving into payment, health, and security businesses.
In the midst of such turbulence, the telecommunication industry is continually evolving. In the past, Korean telecom players have served as best-practice models in the field of broadband provision for operators in other mature markets to benchmark. It is hoped that they would serve once again as global benchmarks in this new era of flux.
Choi serves as a Partner and Managing Director for the Boston Consulting Group. Since joining the BCG’s Seoul office in 1998, he has been a core member of the unit’s practice areas in technology, media, telecommunications and strategy.