Telecom & media: the road to consolidation
Telecommunication and media professionals are sick and tired of hearing that same old pitch that customers are now different, and that they choose where, when and how they consume content. I mean, it’s not only these professionals that get prompted time and time again with these cliches in conferences, executive courses, commercial presentations and so on… we all do. We know this already, we’re customers, right? Even thou I’m sick and tired of hearing this, it’s exactly why I think Telcos and Media (TM) will have to consolidate in the long-run.
The truth here is that TM companies have made insufficient efforts to adapt to a world that is changing dramatically, both in terms of technology and consumer profile. What’s still to change then?
Bertrand long-term disincentive on Telecoms
Telco companies can often be found in an oligopoly market configuration, which means that they compete with few other companies that provide a very similar set of products and services. However, they find themselves in specific market type called Bertrand oligopoly: a market where few companies compete with each other based on price.
On a Bertrand oligopoly companies react to changes in the market by making their price more competitive, which in the long-term leads to the players establishing a price that is equal to their marginal cost. In other words, the price that these companies establish in the long-run is equal to the cost of producing an additional unit. Their profit will come down to zero and will not represent an incentive for anyone else to come into the market and compete in this very though environment. You’re thinking “this sounds really cool, but Telco businesses have 30%+ margins, so how does this model apply to reality?”
The Bertrand oligopoly model dates back to 1889 and does not take into account technological leaps such as the ones we have seen in the last 40 years, it assumes the marginal cost structure stays the same across time. However, as we all know 40 years ago the internet sounded like sorcery, but here we are connected across continents and in the brink of a 5G mobile network standard able to have a downstream speed 100x faster than the current 4G speed.
The key takeaway here is: across time prices keep coming down and the marginal cost keeps going up because of technology updates to the networks, which makes a pretty negative pressure on the Telcos’ bottom-line. However, as sales and number of customers grow marginal costs go down and that is an incentive (1) for supply manipulation (through cartels or partnerships) or (2) for consolidation within the industry. The latter is something that was very recurrent since the global crisis in 2008, as we saw AT&T buy Time Warner, Ono being bought by Vodafone, Altice buying-off companies all across Europe, and so on. This keeps the P&L structure balanced and sustainable, enabling customer base growth and synergies with M&A.
Media running dry
Media companies traditionally make money on advertising, right? They create and distribute great content and depending on the success of it their advertisement slots will be more or less expensive. How have things progressed so far? With the introduction of DVR/PVR technology on set-top boxes advertisement prices fell, since end-customers started skiping commercials and it was harder to measure the return on investment of ads. When non-linear TV was introduced this effect deepened and the percentage of “old-fashion” TV viewers started to diminish.
Also, with the appearance of Netflix, HBO, NPlay, Youtube and other contenders, a new way of consuming contents emerged as multiple devices became enabled to deliver great content with no ads, on a friendly and cheap cancel-when-you-want subscription. With supported devices spanning from phones to PCs, users are not prompted with ads while watching world class shows on the move and can choose how they are shown. On top of the great customer experience, these contenders are putting their chips on producing and distributing their content, which gives them a lot of options from a business standpoint, whether it’s adding it to their catalog or selling it to local media companies.
Finally, digital marketing is going mainstream as a way for companies to get in touch with their leads and customers. When compared to TV ads, digital marketing is able to more efficiently target communication initiatives with measurable results, being also very cheap to scale.
Summing up, Media companies have been running a tight ship and there is no sign of the competition easing down. What new revenue streams can they generate?
Businesses that go together
For a telecommunications company to succeed it is required that great content drives demand. For a media company, networks and infrastructure must be available for costumers to generate content consumption and keep that advertising money going. These industries go together like bread and butter. The thing here is that these industries are getting less profitable by the year, so how do they stay viable and offer alternative business models that reward investors?
In my opinion, these industries must consolidate to survive, since they represent segments of an established customer value chain where contenders are coming in to take their cut. TM players have already realized that this is the way to go as we’ve seen for example Verizon buying AOL. It is absolutely critical that players keep integrating vertically as a way to control their end-to-end customer experience, to establish a solid and differentiated set of products and services and to reduce the exposure of their customer base to new entrants whether via Telco or via Media.
Something that media players must also keep in mind is that their contenders are now global — Netflix, HBO, NPlay, Youtube, Vimeo, etc. — which presents itself as a threat and an opportunity. Obviously these contenders make outstanding world-class content that makes every customer turn their heads, and that is a big threat. But on the other hand, if local media companies play the local content card right they might protect quite fairly their market share in the short-term. Media players should look into (1) exporting their content as well, to try to compete with the contenders and create a new revenue stream or (2) if it’s profitable establish partnerships with new contenders to sell local content or otherwise Telco companies will start bundling the contenders’ services to their mainstream packages.