Product substitution, often propelled by the emergence of new competition within a market, is a big, and growing problem in the global telecom business. Sometimes both processes are related.
It is hard to separate the emergence of new competitors, such as Skype and Whats App, from a shift in demand for particular products, offered by particular suppliers. Ovum, for example, forecasts that by 2016 mobile operators will have lost $54 billion in text messaging (short message service, or SMS) revenues from over the top social messaging services on smart phones.
That would be more than double the $23 billion mobile service providers are expected to have lost by the end of 2012. Is over the top messaging a “different product,” or just “lost market share?” In truth, it is both.
Consider the market for business broadband access. One supplier now says the opportunity to supply T1 connections to business customers now essentially is “dead,” because no telecom company can afford to sell T1s when cable operators are able to supply 50 Mbps to 100 Mbps connections to those same customers.
So is that an example of “product substitution” or “just” severe levels of competition? From a supplier’s perspective, it hardly matters.
Researchers at Analysys Mason say Western Europe’s fixed network and mobile service providers now see declining revenue. Consumers also are allocating a smaller percentage of their incomes to communications services.
In practice, it hardly matters that the revenue shifts come both from “more competition” and the ability to shift demand to different products that satisfy similar needs. What matters is that the legacy business is under severe pressure.
The mobile industry’s combined revenues from voice, messaging and data services in the United Kingdom, France, Germany, Spain and Italy will drop by nearly 20 billion Euros, or four percent per year, in the next five years, and by 30 billion Euros by 2020, says STL Partners.
At that rate, those mobile service providers will lose half their current revenue within a decade.
All of that points out why the search for replacement revenues in most of the global communications business is so crucial. In many instances, there is “potential” revenue loss. Mobile operators in the U.S. market, for example, have not seen significant amounts of messaging product substitution, unlike mobile operators in Western Europe and parts of Asia.
In Western Europe, the losses are real and significant. Ovum analysts believe that collaboration with handset manufacturers is imperative if operators are to remain relevant and competitive in the messaging industry. Some might question whether even that will be effective.
Service providers hope new protocols will help. Rich Communication Suite (RCS), for example, is supposed to allow mobile service providers to create services and features that are at least equivalent to what over the top providers can do.
That will have a greater chance of success if pricing of carrier messaging and over the top messaging are comparable. And that might be a bigger challenge. To be sure, WhatsApp does charge for use of its application. But the fees still are less than what users would pay if using carrier messaging, especially for cross-border communications.
About 75 percent of Dutch smart phone owners have WhatsApp installed on their device, with more than 80 percent of these using the app at least once per day, Ovum notes.
This translates into a presence of more than 5.5 million smart phones in the Netherlands. Among iPhone users, WhatsApp has about 90 percent penetration.
The point, some might argue, is that it makes sense to try and match over the top competition. But it also makes eminent sense not to rely on such success, but to take other steps as well.
Historically, one way any product supplier can grow, in a relatively static market, is to acquire other providers, amassing more volume and revenue in one category, or adding new product lines. One might confidently predict, for that reason, a continued wave of mergers and acquisitions to extend service footprint, or build customer mass, at the very least.
Other acquisitions will aim to acquire capabilities, customer bases or intellectual property that build revenue, add strategic capabilities or gain market share. Sometimes, those moves also will aim to reposition specific suppliers in additional parts of the value chain or ecosystem.
That is why one hears so much about cloud computing, machine-to-machine (M2M) communications, mobile banking, mobile payments, mobile advertising and a variety of ways to integrate communications value in the context of business process software and systems.
All of those initiatives potentially are big enough to “move the revenue needle” for a tier-one service provider, and virtually all also aim to reposition service providers in additional parts of the ecosystem.
And keep in mind the dimensions of the challenge. Faced with the challenge of replacing perhaps $30 billion in just five markets, you can do the math. Assuming five competitors in each market, that means each competitor (roughly speaking, since service provider revenue share is not equal), has to replace perhaps $1.25 billion in lost revenue, over roughly a decade.
Some will need to replace more, some less. But that’s why the search for opportunities has to focus on “large” targets. Cisco has the same problem. There is a reason Cisco looks for, and wants to chase, new markets worth at least $1 billion a year in revenue.
When you run a big company, new revenue sources have to be big, as well.
By Gary Kim
Gary Kim is an active industry writer and analyst, editor of Mobile Marketing & Technology, Content Marketing News and Carrier Evolution. He is a frequent contributor to IP Carrier and TMCnet, and a good friend of Razorsight. Keep up with all his industry insight — follow him on Twitter @garykim.