Research Notes

How the telecom industry will experience disruption – threats and opportunities

Disruption is a both a creative and destructive competitive force. Even though we have experienced convergence for decades, policymakers are reluctant to adapt regulation to the new reality. Rather than embrace a modernized competition framework across markets, regulators double-down on old-fashioned sector specific telecom regulation. Policies such as roam like home, net neutrality, set top box regulation, and aggressive access mandates, hobble telecom providers while giving over the top (OTT) players and resellers an undue advantage. These policies, propagated under the guise of “enhancing competition”, actually distort it.

To be sure, telecom regulators might not have the statutory authority to regulate international/foreign OTT providers, but that is not an excuse not to do the right thing. When telecom markets are competitive, ex ante regulation is supposed to be removed and general competition regulation put in its place. 

Truth be told, there are market power issues across the digital ecosystem, and a modern robust approach to multisided markets would require that competition authorities step up their enforcement (and certainly update their knowledge). Telecom regulators, if they transition their expertise into competition authorities, could be valuable employees, albeit in new roles. With the EU’s poor performance in digital markets and its slow economy for the last decade, it is untenable that regulators continue to trade off the growth that the telecom sector in favor of their entrenched policies, which have not worked to increase investment.

Disruption enables new marketplaces. Consider how Uber and AirBNB disrupt the taxi and hotel industry just as Skype and WhatsApp disrupted telecommunications.  It is estimated that Skype accounts for about one-third of the world’s long distance calling, and WhatsApp and Facebook Messenger deliver about three times as many messages as traditional SMS by operators. Don’t forget that when these services came on the scene, they obliterated the revenue for the services they replaced.  The Dutch KPN lost about 100 million euros in a single quarter when WhatsApp was introduced; WhatsApp is a free messaging service.

And yet, OTT services  would not exist if it were not for ubiquitous mobile networks. Consider Uber. Its users submit a trip request via mobile phone. Using the phone’s geolocation abilities, the driver and user are informed of each other’s location. The app is integrated with a payment system so that when the ride is complete, the payment is automatically added to the user’s account. Both user and driver can rate the experience which is then displayed within the app’s interface. Having a mobile app offers the user flexibility of requesting a ride regardless of location and does not require that the use sit a computer with a fixed line network connection, the earlier paradigm of the Internet.

Consumers suffered for decades under the regulated taxi industry with overpriced fares, unfriendly drivers, and poor service. No taxi regulator proposed a transparent rating of drivers and passengers, but Uber improved the riding experience almost overnight, dragging the outdated taxi industry and its regulators into the future. Mobile networks have enabled business models not conceivable before. And it was certainly not the case that taxi regulation protected consumers and supported competition.

Not only does the telecom industry have to content with general economic disruption, it faces the added burden of regulators who make the opposite and wrong response to disruption. Regulators double down on telecom regulation rather than free up the market forces that could allow telecom providers to compete.  Things are bad enough for operators, but regulators take it even further with roaming regulation, net neutrality, and customer premises equipment requirements.

This falls on top of the challenges that incumbents face with wholesale and access regulation.  We see that MVNOs can attract and retain customers faster and cheaper than the operator whose network they use. Examples include Simyo in Germany; Chess in Norway, Telmore, Onfone, and CBB in Denmark, and Tesco and Virgin Mobile in the United Kingdom, just to name a few examples.

The telecom industry could also disrupt itself, and there is nothing to prevent it from doing so. In the old days, operators sold large and expensive “private branch exchange systems” or PBXs that required a receptionist. Now the same functionality can be downloaded in a solution such as Skype for business.

The impact of smartphones is negligible. The value in devices is not in the hardware or even in the data subscriptions. Instead the value accrues to just a few app makers and to the two app stores that Apple and Google runs.  Consumers will also create disruption by buying cheaper products.

But disruption doesn’t necessarily mean that there will be cash flow in the future. Indeed, cash flow is generally diminished as better, cheaper solutions take hold. Strand Consult does not expect that disruption will bring significant new growth to telecom operators, even with the Internet of Things. The cake is not getting bigger for operators, as there is little to no margin in selling traffic. IoT business models are predicated in micro amounts of data, and it remains to be seen whether they can be scalable for traditional operators. The value of the IOT market will likely is go to specialized devices and software, but not to operators.

Let us put it very simply – many consider disruption as something new, but it is not. When a disruptive player such as Uber comes on the market, policymakers can regulate it, or  deregulate the market in which it operates.  Introducing special regulation for new players is both difficult and damaging.  It is easier to deregulate the market in question rather than introduce special regulation.

One of the biggest challenges in the telecom industry  is the disruptive regulation imposed by governments around the world. This is also experienced when governments attempt to make technology decisions in the name of competition.  Telecom operators compete using different technologies (copper, coax, fiber and wireless etc), and the facilities-based competition helps to drive technological developments that provide customers with better and cheaper products.  But when governments invest public money in a particular technology, this unfairly puts a thumb on the scale of competition and the efficient markets in which regulators purport to want to create.  We see this particularly in the EU where understanding of telecom markets is practically non-existent among politicians.  EU telecom policy has caused investment in the region to dry up over the last decade and unwittingly strengthen the foreign OTT providers, with whom regulators purport they want more competition.

Let us hope that 2017 will be the year of political disruption, when politicians will experience a shake up and will have to get a better understanding of what is needed to stimulate the telecom industry and the investments that are the foundation of modern society.

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