The world’s largest telecommunication companies are losing their core value proposition to technologically agile new entrants, but their strategies to mitigate the risk of new competition may be as threatening as the competition itself.
The global telecom market is characterized by a high concentration of incumbent firms. In the US, 98.8% of the wireless subscription market is owned by only four firms. The youngest of these, Verizon, was founded in 2000, but all have their origins in companies that have provided telecom services for over 100 years.
Traditionally, the market required large, dominant firms to manage the infrastructure and rest upon the security of economies of scale. This is changing.
Leading firms bend under the pressure of new entrants
A barrage of new companies and technologies in the Technology, Media and Telecommunications (TMT) industry are creating solutions that disrupt traditional service providers on all sides of the product portfolio.
Internet streaming services such as Netflix, Amazon’s Prime Video, Hulu, and the nascent Apple TV+ and YouTube Premium, are stripping traditional TMT companies of their subscription television services. According to an annual survey by PwC, the number of pay-TV subscribers in the United States declined from 79% in 2015 to 68% in 2019. Some telecom companies reacted by offering membership to streaming services as part of their mobile package, but this made them vulnerable to suppliers’ pricing. T-Mobile took a knock to its profit margin on a mobile contract promotion when Netflix raised its subscription fee midway through the contract’s two-year validity period.
eSIMs (embedded SIM cards) threaten to eliminate the need for roaming. An eSIM is a reprogrammable chip embedded in the mobile device that allows users to add a new number while traveling and still retain access to their existing number. Even domestically, it will reduce the barriers to switching networks and increase churn. The greatest disruption would be if an intermediary with a strong customer brand, such as Apple, aggregates all carrier offers and allows customers to rapidly switch between plans.
Executives of international TMT companies interviewed by 10EQS expressed that the core infrastructure, upon which over-the-top services such as texting and video streaming take place, will remain the domain of incumbents. But even here, new entrants are starting to rattle the cage.
Facebook’s Terragraph is developing high-speed internet connectivity for dense urban populations. SpaceX’s Starlink is deploying thousands of satellites to provide universal connectivity to remote areas. Alphabet’s Loon tackles the same challenge with balloons. While these technologies have yet to reach maturity, traditional telecom companies cannot be complacent that their competitiveness in infrastructure will remain stable.
How are TMT companies preparing to ride the turbulence of disruption?
- In June 2018, AT&T completed its acquisition of Time Warner, bringing Warner Bros., Turner, and HBO into its business portfolio. AT&T’s goal behind the $85 billion investment is to combine its advantage in direct-to-consumer media distribution with the content creation expertise of Time Warner and differentiate themselves from competitors based on an entertainment experience specifically targeted at mobile devices. The acquisition allows AT&T to compete directly with content providers such as Netflix and Amazon and to not lose value or the direct relationship with customers to over-the-top service providers.
- Canadian-based, Telus, chose to expand its core competencies into healthcare when it bought Emergis and founded Telus Health. Telus Health leverages the connectivity expertise of its parent company to provide an advanced set of health information management systems that, among other things, automate and integrate health records and health claims.
- In France, Orange moved into banking through its acquisition of Groupama Banque. The renamed, Orange Bank, launched in 2017 and expanded quickly upon Orange’s customer base and network of stores across France, Belgium, and Spain. In October 2019, it had 344,000 account holders. The bank is an entirely digital mobile service offering a current account, savings account, bank card, overdraft, SMS money transfer, and personal loans. A virtual advisor, run off IBM Watson, answers clients’ enquiries 24/7 or, should customers prefer human contact, they can visit any of the existing Orange stores to open an account or ask for advice.
Recognizing that the barriers to entry are lower than they have ever been, incumbent TMT companies are smart to expand their core competencies – a large customer base, business-to-business and business-to-government relationships, mobile technology, expertise in connectivity, and data analytics – into other sectors. But it is a high-risk game. AT&T’s purchase of Time Warner cost it the equivalent of 30% of its market cap.
Should such strategies fail, industry leaders will find themselves scrambling to recover at a time when a loosened grip on any segment of the market will see it quickly swept away by new competition. Successful companies will diversify sufficiently to evolve with the changing landscape, as well as retain cutting-edge value in their core competencies. The rest are likely to give way to a new wave of TMT brands.
About 10EQS: We help our clients to identify risks and opportunities in future market developments and to better understand the business challenges impacting their strategic decision-making process. The above article is a cross-summary of various projects in the field of telecommunications and macroeconomic risk. Insights are generated by interviewing leading experts and executives with significant industry, technology, and market knowledge, synthesized by our consultant teams.
Pierre Heistein has 11 years’ experience in macroeconomic and market analysis. He has completed 25+ projects for 10EQS and is concurrently the Subject Matter Expert on Macroeconomics for the MIT Sloan School of Business where he facilitates its online course on Economics for Business. Prior to 10EQS he spent five years writing for Oxford Analytica on its Sub-Saharan Africa desk and six years as a weekly columnist for South Africa’s largest business publication.
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