Research Notes

The Telco industry is increasingly experiencing competition over cloud-based services being distorted by companies like Google, Facebook and online music services

There is currently a great deal of focus on the cloud-based services market and how it is developing. But there is not a great deal of focus on the market conditions that mobile operators have when trying to compete against market players like Google, Amazon and other companies that are marketing and selling their products as global cloud solutions.

Today many Telco operators are offering their customers various types of cloud-based services. These services are often being created locally, marketed locally and when they are sold, are subject to local taxes and fees. The result is that mobile operators are financially contributing to the society they are a part of and are selling services to, by paying national taxes and fees.

Now let us take a look at some of the many competitors that Telcos are up against. Companies like Google, Amazon and a number of music services are marketing and selling their services globally and invoicing their services from a country that financially and tax-wise is the most lucrative for the company and which often has no connection at all to the country their end-user lives in. In practice there is nothing illegal about Google using Ireland to invoice most of their European revenue. But the advantages Google is thereby gaining are advantages that the national Telco operators do not have – they are selling their products locally and abiding by the local rules, regulations and taxes.

On the one hand, Telco market players like Vodafone, Orange, T-Mobile, Telefonica and many others could simply start using Google’s business model. On the other hand Strand Consult has no doubt that politicians would view those Telcos very differently if they used the same business model that Google is using.

For many years there has been much discussion around the world about the significance of globalisation. Many countries have been discussing whether to try to impose special taxes on market players like Google that consequently choose the most inexpensive global business model when billing their customers.

There can be no discussion about the fact that this is a problem and that Telco operators around the world are being discriminated when selling services to national customers. The question is simply what the long-term consequences will be for national economies – especially when Telco operators plan their long-term national and global Telecom infrastructure investments?

Strand Consult is worried about these challenges and the long-term effects they will have if they are not handled correctly. We are living in a time where cloud-based services are becoming increasingly important to end users. But we also living in a time where an increasing number of services are moving away from being services that we purchase locally, to online services that are easy to pay for, but where we have little idea of where in the world the money is ending.

There is an increasing number of this type of services. In this newsletter we will focus on two types of services that are already very popular and will increase in popularity in the near future; streaming music via services like Spotify and social networks like e.g. Facebook.

Not many years ago, customers would purchase a music CD in their local record store. When they purchased music most of the distribution and sales revenue and the VAT and taxes from the profit of the sale remained within their country’s borders.

Today an increasing number of people are purchasing their music online. Some companies that offer these services have placed their companies in the most lucrative location where they pay the least possible tax and VAT within a geographical region.

The increasing use of Facebook is resulting in a significant reduction of traditional SMS traffic, which again is cutting into mobile operators revenues and thereby of course reducing the national taxes and fees on SMS revenue. An increasing number of mobile operators in many countries around the world will experience their SMS revenue decrease over the coming years, resulting in a significant global decrease in taxes and fees being paid by national mobile operators to their respective governments.

Strand Consult believes these challenges are far greater than any current public debate realises. Furthermore we believe that these challenges that countries around the world are facing can be divided into short, medium and long-term challenges.

In the short term the trends we are seeing on sales of cloud-based services will result in Telco operators experiencing a competition distortion. This distortion will result in governments seeing decreasing taxes and fees from sales of mobile services in the longer term. Even more serious is the fact that the Telco industry will not have the same finances available to invest in upgrading and expanding their national Telco infrastructure.

Strand Consult has discussed this dilemma at a number of workshops we have held at executive level for both national and international mobile operators around the world. Up to now we believe there has been far too little focus from both politicians and the Telco industry on these challenges. We believe that it is necessary to initiate a serious debate about how to fairly tax companies that offer global cloud-based services, but do not have any financial connection to the national markets – or mobile operators on that market – where they are actually selling their services.

If you would like to learn more about Strand Consult’s thoughts and information about this business area, please do not hesitate to contact us and learn more about how this development will influence your market and company.: Contact Us
More information:
Strand Consults Strategic Workshops

Successful Strategies for the Mobile Broadband Market

OneAPI – Next Generation Value Added Services in the Mobile industry

Show me the money – The future Business models for mobile Broadband Services

How MVNO´s can get success in the Mobile Broadband market

How media companies can get success on the mobile broadband market

How to get success with Value added services on the Mobile Broadband market

How can a Wimax operator survive in a world full of WCDMA

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