Mega operators: Rise of new walled gardens?

17 Dec 2013

As featured on TM Forum's the Insider blog.

The problem with businesses constantly generating billions of dollars in revenue is down to perception. Their customers think they are being ripped off, governments think they need to be controlled more and the stock market thinks they should be showing more profit.

These are just a few of the dilemmas telco CEOs face each and every day but the list is far greater when you take into account the need for constant investment in networks and ICT, dissatisfied and churning customers, margins under constant pressure, the need to keep lowering costs and still maintain service levels, pressure from labor unions, the constant need to innovate, OTT pressures, etc. The list goes on and on, and one has to ask – is it all worth it?

Apparently, it is, but the game is changing rapidly and today’s communications service provider may be barely recognizable in the years to come, and it is likely a new breed of ‘outsider’ CEOs will be introduced to help make the transition.

We are already seeing the emergence of the international mega-operators, primarily through M&A activity by players from saturated markets looking for continued growth. What started as loosely coupled groups are fast-evolving into tightly integrated entities creating economies of scale benefiting from regional cost savings achieved by shared resources, ICT and cloud services all taking advantage of core-competency centers.

There appears to be a definite trend toward using wholly-owned resources and moving away from fully-outsourced models that became popular for national operators wanting to move from ‘capex’ to ‘opex’ based business models.

SingTel Group and Axiata from Malaysia are leading the way in the Asian market.

Leveraging a group’s capabilities, strengths and experience over a number of markets contributes to cost-efficiency programs that all CSPs are currently going through. However, investment in the local delivery capacity is still necessary and groups are better positioned to offer services each property excels in back to the group. It also means that innovation is not limited to one national team and being able to share ideas across different demographic and cultural boundaries.

This type of group mentality is logical when building an international brand offering global services and being able to guarantee SLA’s that highly profitable, multi-national corporate customers demand. Even regional groups face strong competition from other out of region competitors with similar aims, as well as global service providers with aggressive cloud services plans and established relationships with multinational corporations.

The Axiata Group, QTel Group and the acquisition of Cable & Wireless Wholesale by Vodafone are all great examples of this ‘growing’ trend. Perhaps most importantly, mega-groups will not be easy targets for the much bigger and potentially hungry over-the-top (OTT) players that rely in them for their continued growth and success to deliver their digital and social networking services to their own customers. They are not unlike ancient civilizations building fortresses and banking on the strength of numbers to fend off attacks.

Despite the constant rumors and conjecture, there is no indication today that being a network operator is part of the planning of players such as Google, Facebook, Apple and even Amazon, but it can never be ruled out. Network operators constantly needing to invest in new and expanded infrastructure, yet returning reduced margins, may find it difficult to convince stakeholders or lenders to keep putting up investment capital.

If takeovers of mega-operators are out of the question mutual need may facilitate partnerships in the interest of all parties. Such affiliations may also serve to block out other OTT competitors in a world reliant on secure and stable communications, cloud-based services and that all-important access to social networking sites.

This crystal-ball gazing may be highly presumptuous, but the telecoms world is littered with casualties not willing to accept extraordinary happenings. Who, for example, would ever have predicted the impact the iPhone had on the telecoms industry? Who knows what next great disruptive force will emerge, maybe it will be technology that eliminates the need for conventional wireline or wireless network completely.

Whether the formation of mega-operators is an act of defense or defiance, only time will tell.

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