Diversification is a time-tested way for suppliers, investors or buyers to reduce business risk. Diversification also now is a major growth strategy for most service providers.
Consider the significant ways AT&T is about to change, assuming the acquisitions of DirecTV, Iusacell and Nextel Mexico are approved.
Facing huge competition in the U.S. mobile market, AT&T reduces its reliance on U.S. mobile revenues.
In the face of mounting pressure in the U.S. consumer markets, AT&T would–arguably for the first time ever–become a company whose revenues are lead by business customers and services.
Also, AT&T would reduce exposure to declining voice revenue and increase the scale of its video entertainment business, a product segment where telcos are gaining share, rather than losing share.
Where today U.S. mobile operations are the single biggest revenue generator, after the transactions AT&T consumer mobility will be only the third-biggest revenue contributor.
“Our transactions with DIRECTV and Mexican wireless companies Iusacell and Nextel Mexico will make us a very different company, said AT&T CEO, Randall Stephenson. “After we close DIRECTV, our largest revenue stream will come from business-related accounts , followed by U.S. TV and broadband, U.S. consumer mobility and then international mobility and TV.”
Consider the magnitude of the changes. In 2014, AT&T reported earning nearly 60 percent of total revenue from mobile services. AT&T meanwhile earned about a quarter of its revenue from business customers.
Consumer landline revenue was less than 20 percent of total.
Assuming AT&T’s acquisitions of Iusacell, Nextel Mexico and DirecTV are approved, AT&T will earn about 45 percent of total revenue from business customers and about 20 percent from consumer mobility services.
About 30 percent of revenue would be earned from U.S. consumer high speed access and video entertainment.
All of that has key implications. AT&T will reduce reliance on U.S. market revenues. From this point forward, AT&T growth arguably will come from geographic expansion outside the U.S. market.
At the same time, AT&T will reduce its exposure to highly-volatile U.S. consumer fixed line and mobile markets, while increasing the weight of the higher-margin, higher gross revenue business markets.
Video entertainment becomes a much-bigger portion of total revenue. In fact, high speed access plus TV will the second-biggest revenue contributor.
So think about the possible implications. Where will AT&T be willing to invest more, and where will it make sense to invest less? How hard will AT&T fight to protect particular lines of business?
What products will be easier to “merchandise” because profit margins are low, and which will have higher profit margins?
As one might have argued that AT&T has had less and less incentive to invest in its fixed network, given the growth of its mobile services, so now AT&T might have even less long term incentive to invest in the consumer portions of its U.S. fixed network.
That might create new opportunities for domestic competitors, as AT&T and Verizon see the need to “strategically disinvest” in fixed assets, in favor of mobile assets. In AT&T’s case, there now also is the necessity of investing in assets outside the United States.
In other words, AT&T will have diversified its revenue sources towards business, toward video and towards international segments, and conversely away from consumer and domestic.
So some U.S. Internet service providers and some mobile operators might find AT&T more vulnerable in parts of its consumer services portfolio.
At the same time, AT&T might be more inclined to allow competitors to take consumer market share, especially at the low end, since AT&T will be more focused on global and business revenue sources.
AT&T’s moves are part of a diversification pattern happening elsewhere, and for obvious reasons.
“Overall, growth in telecom revenue continues to slow in every geographic region,” according to Stéphane Téral, Infonetics Research principal analyst. That puts a premium on discovery of brand new revenue sources, geographic expansion and product line expansion.
Europe’s five largest service providers—Deutsche Telekom, Orange, Telecom Italia, Telefónica, and Vodafone—continue to experience declining revenue, though less pronounced than in the past three years, he noted.
Global mobile service revenue barely budged in the first half of 2014, up just 0.5 percent from the same period a year ago, Infonetics says.
But mobile data services (text messaging and mobile broadband) rose in every region in the first half, driven by the increasing usage of smartphones. The obvious corollary is that voice revenues have fallen nearly as much as mobile data revenues have grown.
Mobile broadband services grew 26 percent year-over-year, enough to offset the decline of text message revenue declines, Infonetics reported. On the other hand, that sometimes was not enough to offset losses of voice revenue.
In Latin America, mobile data will not replace lost voice revenues. Orange voice revenue declined 3.3 percent in 2014. In Japan, DoCoMo says a change in voice tariffs might mean NTT does not make money on voice until 2017.
High speed access revenue still drives growth in mobile and fixed line segments, but revenue will “begin to stabilize” between 2015 and 2016, if “our competitors behave, said Ramon Fernandez, Orange CFO.
Vodafone now is focusing on fixed network broadband for revenue growth, as its mobile business is declining.
The larger point is that diversification moves are going to continue, allowing many service providers to recast themselves.
At the same time, that is going to create new space for competitors to enter markets where leaders are less likely to put up as stiff a fight as they might have in the past.
Ironically, as competition grows in US. consumer services, at least some major contestants, including AT&T, are essentially redeploying effort and capital away from the fight.
That means market share shifts are going to accelerate in U.S. consumer markets.