It is by no no secret that connectivity service provider profit margins are dropping almost everywhere, perhaps most obviously in voice, text messaging, mobile data or long-haul data transport areas.
A rational management response to declining profit margins, in the near term, is to increase scale, hopefully leading to declining unit costs, which helps counteract falling unit profits. “Make it up in volume,” in other words, is one strategy.
Supplier consolidation is normally part of that effort to bulk up and achieve scale. Regulators who want competition, lack of capital to make big acquisitions and rival investment choices tend to limit strategies based simply on gaining additional scale, however.
As difficult as it always seems to be, diversification--getting into other parts of the value chain--seems the only long-term solution, assuming greater scale opportunities cannot support growth.
A study by the Telergee Alliance conducted nearly a decade ago found rural and small telco profit margins dropping, part of a three-year trend that saw an overall five percent drop over the last year. That would not be a surprising trend today, for tier-one service providers, either.
Profit margin on new or non-regulated services were up by about that amount, but margins on voice services dropped more than 15 percent.
Most--if not all--small telco video operations lose money, while mobile operations likewise face declining average revenue per user. Average revenue per user was $35.51 a month, down from $37.12 in 2009 and $40.93 in 2008.
Internet access revenues and margins for out-of-territory business-focused operations rose significantly. The issue is how many small telcos can conduct such operations.
With the caveat that some firms are much-better positioned than others, the typical mobile service provider in Asia risks losing 40 percent of its present revenue over a roughly three-year period, according to equity analysts at DBS Group Research.
A decline in voice and text messaging revenues, plus new competition, are the key challenges, DBS Group Research notes.
That arguably also is true for U.S. service providers, with an added twist: the substitution of mobile services for fixed network voice alternatives.
That has crucial and important business strategy implications. A possible loss of 40 percent of legacy revenue in three years would be catastrophic for almost any firm, in any industry. My own rule of thumb is less dire: a loss of 50 percent of legacy revenue every decade.
In the U.S. market, since 1994, you can see this process at work, as use of mobile services and internet climb, but at the expense of landline voice. That seems to be the case everywhere, these days.
It might be fair to note that rarely have we seen legacy revenues fall as fast as a loss of 40 percent in three years. But a loss of 50 percent over 10 years is to be expected. Some of us would say that from now on, it would be reasonable to expect such attrition of legacy revenues every coming decade, as well.
That, in a nutshell, is why some of us believe there is no alternative for connectivity service providers but to find new revenue sources. We have seen the diversification moves Singtel connectivity revenues has made. To be sure, connectivity revenues are key. But the range of revenue sources is much broader than mobile or fixed access services.
These days, former cable TV provider Comcast gets as little as 20 percent of total revenue from subscription TV services. AT&T likewise has begun a diversification into content ownership, on the Comcast model.
The big question is whether any surviving tier-one service provider (there will continue to be many niches) can lead if it continues to rely nearly exclusively on connectivity revenues.
That is why one so often hears the argument that connectivity providers must “move up the stack” into content, applications, advertising, marketplaces or platforms.
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