Telecoms & Broadband Business Newsletter - October 2013

Editorial - The rapidly shrinking traditional telecoms market

Back as early as 2011 we were reporting about the shrinking Vodafone – at the time when they sold their stakes in French and Chinese mobile operations. Over the years the company has shrunk considerably, and with the sale of its stake in Verizon in the USA this is set to continue. It looks as though the company is maximising its short-term shareholders interests rather than building a long-term large-scale business.

One can argue that, from an industry perspective, this is a sad story, as it leads to a continuing decrease in competition; but on the other hand one can argue that this is the reality of an industry that has become a utility, with commoditised products. Around the developed economies we see declining ARPUs, and in the developing markets the ARPUs are often a fraction of those in the developed economies. In other words, Vodafone is questioning its long-term profitability in this market and is quitting in time to maximise shareholders value.

The high prize that Verizon is prepared to pay for Vodafone’s stake also tells us something about the American market. Obviously Verizon believes that the highly concentrated telecoms market in the USA will enable them to extract relatively high prices from their American subscribers, and with little competition they expect that ARPUs will hold up. With copper cable services increasingly being decommissioned customers will be forced to move to the higher-cost mobile networks. The government fully supports the incumbent telcos in this, as long as the few big players continue to pay the government handsomely for spectrum and other licences.  Under this cosy plutocratic arrangement the FCC will not address the anti-competitive nature of the US market.

The removal of Nokia from the mobile handset market is another sign of the rapidly shrinking telecoms market. Like its buyer Microsoft the company missed the digital boat and became road-kill on the digital superhighway. The question will be if two ‘weak’ digital economy companies can make one stronger one. At this stage we are sceptical about this, but we certainly do not want to underestimate what Microsoft is capable of. However it is unlikely that Microsoft with a different platform can become a player in the smartphone market of similar size to Google/Samsung and Apple. For it to be successful would mean making the next quantum leap to come out with the next innovation in this field, whatever that might be.

But back to the focus of the story ….. the overall (traditional) telecoms market keeps shrinking. And the story is the same on the telecoms operators’ side. The telcos are facing an ongoing decrease in revenue income, and competition from outside their own comfort zone. This trend is set to continue and can only lead to more mergers and acquisitions.

This situation is rather remarkable, as we are talking about one of the fastest-growing sectors in the global economy. The real values within this industry are shifting and other players such as Google, Apple, Samsung, Facebook and Amazon – as well as the thousands of smaller players – are creating new products and services. These are not seen by their customers as commodity products and so buyers are prepared to pay higher prices for them, which, in turn, delivers higher margins for the players involved in these new companies.

So while the story for the traditional players in the telecoms market is all about shrinkage, on the other hand we see significant growth in many of the new subsectors of the broader ICT market, which includes cloud computing, data centres and M2M.

Paul Budde