Will Mobile Industry Eventually Resemble the Airline Business?

Eventually, the mobile business might resemble the airline industry, where not every nation has its own “branded” air carrier. Eventually, and perhaps within a decade, the global telecom industry will have consolidated so much that only about half of countries have their own fully-domestically-owned communications providers.

If “winner take all” increasingly is the shape of markets with network effects (where each incremental node or user makes the whole network more valuable), then scale economics also matter. That is clear in the mobile business, but also in many other industries and markets.

“Winner take all” seems to be the case for mobile phones, e-commerce networks, search, social networking, ride-sharing, lodging sharing, video entertainment services, the “telecom” business and arguably many other industries selling intangible products.

Basically, “winner take all” means markets become oligopolistic (two or just a few market share leaders).

That is one of the reasons some of us believe massive consolidation of service provider networks and assets will happen, in the mobile space perhaps especially. Bell Labs, for example, forecasts a reduction of about 810 tier-one service providers to about 105, within a decade.

If there are 195 countries globally, that means some countries will have communications services provided by firms from outside the home nation. That might mean as many as 54 percent of nations might not have a single domestically-owned provider of communications services.

The internet applications and devices market has shown clear “winner take all” patterns for some time. As that has meant it is hard to be “number three or four” in any market, so it likely will prove difficult for new competitors to challenge Amazon or Alibaba in shopping; Google or Facebook in advertising; Apple or Samsung in mobile phones (at the high end, at least until the leading Chinese suppliers make moves at the high end).

Communications service providers also are aware of other major trends, especially the shift in “value” within the internet ecosystem.

While the internet has almost uniformly been positive for consumers--generating new value--while allowing some firms to ride new value propositions to huge business success, the internet has generally been difficult, financially, for nearly all incumbent firms.

“Digital is confounding the best-laid plans to capture surplus by creating—on average—more value for customers than for firms,” McKinsey consultants say.

Telecom service providers know the process well. A shift to over-the-top,  internet-based applications allows consumers to use product substitutes (WhatsApp, Skype, Netflix) instead of buying service provider products.

That both makes telco markets smaller, and reduces revenue and profit potential for the amount of consumer demand that remains. At least where it comes to intangible or software products (voice, messaging, content, apps and features), the cost of incremental usage is close to zero.

Prices become much more transparent, while new alternative suppliers emerge to provide lower-cost or free substitutes.

In other words, as with most other industries, use of direct internet distribution reduces the need for, and value of, intermediaries and distributors.

To the extent that the marginal cost of supplying the next unit of any product is nearly zero, retail prices will trend toward zero. But the problem is not exclusively faced by telcos.

Internet-based competition has “siphoned off 40 percent of incumbents’ revenue growth and 25 percent of their growth in earnings before interest and taxes (EBIT), as they cut prices to defend what they still have or redouble their innovation investment in a scramble to catch up,” McKinsey argues.

source: McKinsey

The point is that telcos and other internet service providers necessarily must replace legacy businesses and products with new business models and products.

That is why some of us believe retail service providers (business-to-consumer) must move up the stack. The incumbent business models are breaking down.

Suppliers in the business-to-business segments of the market might have other constraints or opportunities. It is hard to see how most capacity suppliers, for example, actually can move “up the stack,” though all such firms now have moved from a “voice capacity” to “data capacity” revenue model.

The arguably more-important growth has mostly been “new geographies” or “new and redundant capacity in existing geographies.”