Research Notes

Within the next 5 to 10 years, state owned telcos could easily develop into the same national catastrophes as state owned owned airlines

countries still have large national airlines and large national telcos. Today many old national telco-monopolies still play a central role and – like the national airlines – are owned by governments that believe that it is important for a nation to have a national airline and a national telco. France is one of these countries.

If you look at how the airline industry has developed, you will see that many governments use a combination of taxpayers money and special privileges in national airports to ensure the survival of their national airline. One could say that despite all the efforts to liberalise the airline industry, customers are not being allowed to decide whether a national airline should survive or go out of business.

When you compare the telco industry and the airline industry you will see they have a great deal in common. They are both capital intensive industries with large cash flows. The primary difference is that the airline industries can move their production setup – telcos can not.

The airline industry is experiencing competition from no frill discount players like Ryanair who are changing the market and causing prices to drop. We are seeing the same development on the telco market.

In countries like Denmark, Norway, Germany, Belgium and Holland we have seen the no frill MVNOs significantly change the telco markets, forcing the national telcos – just like national airlines – to implement large cost-cutting programmes to retain their revenue on markets where prices are continuing to fall drastically. The no frill market players have created a paradigm shift in both the telco and airline industries.

When employees here at Strand Consult follow the airline industry and the current market developments of that industry, it reminds us a great deal of the development we believe the telco industry will experience over the coming years. In other words many of the world’s national telcos will – just like the airlines – experience continued decreasing prices, decreasing profitability and most probably face many of the same challenges currently being experienced by airlines around the world.

The million dollar question that governments who currently own telcos ought to be asking themselves, is whether there is any risk of their investments in national telcos developing into the same type of investments they currently have in national airlines? We believe the answer is “yes” – and we believe that there is a great risk that the combination of state ownership and employees and trade unions that believe that the state should support jobs and old-fashioned company structures adds up to a lethal cocktail.

We can see that there are many nationally owned telcos and airlines that actually believe that they can justify their existence regardless of whether customers support them and that do not take competition from market players that are doing a better job of running their business seriously. Simply put one could say that the nationally owned companies seldom have the same feel for a market as their competitors.

Usually it is quite easy to evaluate companies around the world; there are successful companies and not so successful companies. Companies that are not particularly successful often have difficulty in creating shareholder value. But in the airline industry we often see national airlines that are being kept afloat by their government – thereby putting national pride and ownership above the choices of the customers that these companies serve.

Air France is a good example of one of these companies and the question is whether France Telecom will over time develop similarly to Air France’s current development? We believe the risk is there – and that the French government should consider their ownership of France Telecom if they want a market that offers fair competition in France – which would both be beneficial to society and especially the French consumers. Basically a privatisation seems to be unavoidable if they want to avoid losing any more of the French tax payers’ money.

In Strand Consults report How to Succeed in the Second-Generation MVNO Market, we have described how the no-frill players on the telco markets in a number of countries have changed their market conditions and we have described how small MVNOs resulted in Orange sustaining large losses and leaving countries like Denmark, Sweden and Holland.

We have been following the telco industry for the past 15 years and seriously believe that nationally controlled telcos are a threat to competition and can easily over time develop in the same way as for example KLM, AirItalia and Air France – transforming themselves from high-profit nationally owned companies to companies that can only survive via direct or indirect national subsidies.

Where we come from, companies like Air France are ill. They are not in touch with their customers and do not know how to create satisfied customers. We believe those governments that own national telco and airlines should set the market forces free and let customers decide the fate of Air France and France Telecom – instead of having a combination of Trade Unions and a government using a national airline and telco to polish their national ego’s.
More information
How to Succeed in the Second-Generation MVNO Market

Contact us to get a copy of the report

Request the report