Game of Phones — Winter is Coming
Written in collaboration with Matt Coakley
As we look ahead to Barcelona for this year’s Mobile World Congress, the wireless industry’s annual showcase event, the theme for 2017 is ‘Elemental’. The theme is appropriate this year, the GSMA declares, because wireless has become fundamental to our everyday lives, in other words, it’s one of the building blocks from the essential table of elements that we use to create our digital lives. ‘Elemental’ is perhaps an even more appropriate theme for this year’s event than the GSMA, and many of its members, may realize — and for reasons that are slightly less uplifting than considering your industry essential to life.
Today’s global wireless industry is caught in a dangerous swirl of atmospheric elements, which are making its outlook darker, cloudier, and colder than ever before. Competitive pressure is rising, as new competitors from the cable, technology and advertising sectors look covetously at the value pools the current wireless incumbents have developed. It’s also being driven by the carriers themselves, as they turn to increasingly-aggressive customer acquisition tactics to fight for plateauing subscriber counts in oversaturated markets. The forecast: stagnant growth, and a slow but seemingly inevitable march towards commoditization of the industry’s primary services.
Simply put — winter is coming. And carriers need to be ready.
Race to the bottom?
In the early years of wireless telephony — customers flocked to operators to sign up for mobile phones, leading to strong revenue growth and seemingly stable earnings more than sufficient to meet the capital requirements to keep building out networks. Once that rush ended however, wireless operators turned to different growth strategies — selling handsets, developing so-called “walled gardens” of applications, ringtones, and other gimmicks, and offering content to subscribers. But tech companies like Apple and Google and content providers like Netflix and YouTube were able to capture share here.
In the midst of this came the smartphone — another innovation the operators missed. Demand for data exploded, and the operators’ efforts to capture some of the value created via these powerful ecosystems didn’t work and disappeared into a new ecosystem of ‘over-the-top’ (OTT) service providers. With traditional revenue streams declining, more and more operators gave up, choosing to focus on metered data offerings, and throwing in voice and text essentially for free.
Operators’ services became easy to compare and harder to differentiate. As a result, markets are maturing, competition over a finite number of subscribers is intensifying, and price cuts and promotions (which are, essentially, price cuts) are the only weapon available. Consequently, as our research shows, ARPU is falling in market around the globe, and intense competition is pushing markets towards an equilibrium where operators essentially are left with very similar market shares, and little room to grow in a meaningful way. Their products and services are essentially interchangeable. In response, many operators have tried to reduce expenses by shoring up their margins, but that has made it difficult to continue to upgrade networks and to create services that might attract new customers.
Measuring commoditization
Wireless commoditization is at varying stages around the world, depending to some degree on the stage of development of the markets’ underlying economies — but commoditization is a pervasive trend, as our latest research shows:
· Of 59 major markets we analyzed across geographical regions, a total of 55, or 93%, can already be considered commoditized or on the edge of commoditization.
· From 2006 to 2016, the global population-weighted average ARPU in these markets fell by 35%, or 4% annually — which becomes a problem especially if volume growth has hit a ceiling, which it has in many markets.
· In Europe and Latin America, annual decline has been as high as 6%.
· The majority of these markets also saw a reduction in market share spread within the same period, in some cases as high as 11–13%, as observed in France and Germany — indicating ‘more equal’ (or interchangeable?) competitors.
Of course, each market has its own dynamics, which are heavily dependent on relative consumer purchasing power, market maturity, number of players, speed of consolidation, and regulatory schemes. Less mature wireless markets for example tend to be in much greater flux and the competitive environment changes more rapidly, thanks largely to regulators’ efforts to boost competition.
What does it mean for carriers?
The great risk for wireless operators, especially those in mature markets, is that the trend toward commoditization may lead eventually to a point where they become little more than utilities — the “dumb airwaves” of the telecom industry. Once that occurs, their pricing options will narrow until they are just generating the revenue needed to cover their cost of capital and maintain and upgrade their networks.
As we look ahead to Barcelona — which carriers will present a vision for a value added future? If recent analyst reports are any indication, many wireless operators (especially those in the most highly developed markets) will point to their investments in new technologies such as 5G and network function virtualization (NFV), along with software-defined networking (SDN), as the enablers of a new wave of differentiated growth. But the transformation into a software-defined carrier looks long and rocky, and many are already asking the affordability question and re-evaluating their level and pace of financial commitment.
The research and investments being made in these technologies will undoubtedly be significant, and the promise of what customer services and use cases they might empower will be exciting. But are these investments just raising the overall cost to provide wireless access? As Wi-Fi networks continue to proliferate across urban and suburban areas, with more venues deploying greater numbers of hotspots (with ‘free’ consumer access), will the wireless network even be as relevant in three to five years, when the capital associated with these new operator technologies will be fully-deployed and new operator capabilities such as 5G finally become operational?
Between this technology arms race, and the global price wars that continue to rage, something will have to give. If not, the fortunes facing the houses of the incumbents have the potential to look frighteningly cold indeed. The Lannisters and Starks of the wireless world may yet rule on — but was all that bloodshed really the only path?
