What is the best strategy for a telco? In Europe we can now witness how Telefónica is trying to get rid of O2 and related businesses. The regulator stopped the sale of O2. Now the operator plans an IPO and the sale of the infrastructure business, Telxius. It is a good example of how complex it is for a telco to find a sustainable strategy. It is even harder to see what the growth strategy is for a telco.
During the golden age of the telco business, in the 1990s and partly 2000s, big operators focused on making acquisitions. They wanted to cover the whole world. Most recently it has been more the opposite, they want to sell their less important market operations, decrease their debt, like Telefónica has €53 billion, and get their balance sheets into better shape.
Value-added business was once the magic word in the telecoms sector. But operators failed to really implement them and became bit pipes. Especially in mobile, other companies dominate content, services, apps, and now payments. Actually in broadband business it looks little bit more promising for telcos to offer, for example, content like pay TV.
Big global giants, like Amazon, Netflix, Google, Apple and Spotify, dominate global content. The opportunity of broadband carriers has been more to offer local content and channels. And there are still many markets that are probably too small or complex for global actors to cover properly.
But we still have the question, what unique local mobile carriers can offer their customers, and can they find any growth strategy. And actually it is the same question for the big mobile carriers too, especially outside their strong core markets. It is hard to see, how they can differentiate. Of course, they can always develop some fancy marketing themes, brand and loyalty programs, but who is really interested to be a fan of a mobile carrier.
Some mobile carriers try to get to some new businesses, like mobile payments. In practice, it will be difficult, as it was for value-added services, app stores and music. Google and Apple, with global credit card companies, and some retailers too invest heavily in mobile payments and it is hard to see, what special a local player can offer.
So, it is better that the carriers focus to be effective utility companies? Then the typical game plan is consolidations through mergers. We have already seen it in the US, how the market is now dominated by a few carriers. It also happens now e.g. in the UK, although now the regulator stopped the sale of O2 and that’s why Telefónica needs a new plan.
Now carriers can still live with 4G a few more years. It means that the investment level can now be lower, but 5G comes sooner or later. And then they will again need new heavy investments. With the current business it can be a hard business case especially for smaller carriers. Probably there will be more sharing of the infrastructure.
IoT is one potential new business, but how much will it make money for the bit pipes? The main business and margin can be in data, analytics and applications, not to sell components or data transfer. The good side for carriers can be that old networks (2G/3G/4G) can still be utilized for a long time for IoT.
I wrote earlier, if someone could really disrupt the network business e.g. with commodity type components, open interfaces and open software environment. Something like that could also disrupt the carrier business. But until it happens, we can expect the carrier business will be more and more like a utility business, cost cutting, and focus on operational efficiency. For investors it can mean quite predictable business, but it is hard to see significant growth or high returns. And big new investments are a big risk.