Telecommunications: seismic shifts ahead

Over the last few weeks, the pace of restructuring of telecommunications operators has accelerated. And it affects not only the declining fixed line business but also the (still) flourishing mobile business. In early March, 2006, AT&T announced that it will merge with BellSouth, a Baby Bell in an euro 60 billion transaction. Few days later, Vodafone sold its Japanese business to Softbank, Japanese Internet conglomerate for close to euros 13 billion.
The consolidation of traditional telcos has long been expected, under the combined impact of deregulation and commoditization of fixed line business. What is new in current manoeuvres is that they are driven by strategic challenges in mobile business.
These challenges include:

1. Technological integration among different mobile standards (GSM, TDMA, CDMA) and the speed of convergence to CDMA (and related technologies such as High Bandwidth (HSDPA))


2. Pricing structure rationalisation in order to increase usage and to prevent


3. Declining ARPU (average revenue per user), which then results in lower AMPU (Average Margin Per User)

Underlying these challenges lurks a spectre of the wireless high-speed Internet. This is the promise and the menace of CDMA and other 3G technologies, which finally are getting ready for prime-time and full-fledged deployment. Much is made of the threat that VOIP (voice over the IP) poses to fixed line telcos business. But the threat is actually as real and economically much more serious to the mobile voice business. And mobile voice is at present both the cash-cow and the growth driver of a great majority of telecommunication operators across the world. It was the acquisition of Cingular Wireless that triggered the AT&T – BellSouth merger.
It does not require much crystal-balling skills to foresee that the VOIP over wireless high-speed internet will cause drastic adjustments in pricing of voice services, similar to the one that broadband Internet imposed on ISPs, forcing them to shift from time-based to fixed-use pricing. To the extent that mobile revenues are much higher and more important to telcos operators than those generated by ISP traffic, the adjustment will be more dramatic and painful.
Telecommunication landscape is likely to experience seismic shifts, similar to the one that shook up the computer industry between 1985 and 1995. By the end of this period, none of the major players has survived in its previous incarnation and the sectoral hierarchy was changed beyond recognition with new players (Microsoft, Intel and Dell) becoming market leaders. We can anticipate similar or even bigger upheavals in the telecom domain. New players are beginning to show their hands. In this respect, the Skype acquisition by eBay and Softbank’s entry into mobile are the first harbingers of a massive invasion. It is difficult to see Google or Yahoo not entering the fray. Existing players, in particular the historical telcos, have between eighteen months and three years to define and put in place their strategic response. This entails further restructuring of their business lines. More fundamentally, it requires a serious look at the core business model. Telcos need to move away from traffic-based and direct-billing revenues and implement new pricing structures, based on service, content and third-party pricing (such as advertising).

Posted as Industry Comment for April 2006 on www.highdeal.com