Fierce competition is driving down prices and creating a race to the bottom for mobile data services. How can Telcos turn the tables and transform their fortunes? Dominic Smith investigates the business models and finds there are reasons for optimism.
Sitting on a British Airways flight from Nice back to London, I couldn’t help but contemplate the difference between the business models of the airlines and the telecoms operators I’d been listening to in the keynote presentations at TM Forum Live! 2017
In the past, a ticket on a BA flight would have been all inclusive – seat reservation, checked baggage, in-flight food and drinks. But not anymore. If you want to choose a seat you have to pay in advance or it’s lucky dip on check-in. Food and drinks? Choose from the in-flight menu and pay by card or Avios (air miles) on-board. Thankfully my BA ticket did include an item of checked baggage, but on many airlines you now pay separately for this too.
Contrast this with the direction of travel in the telecoms industry, where for example, T-Mobile USA now offers an all-inclusive plan for families with everything included for $140 a month. Easy to understand, no risk of ‘bill shock’ and perceived to be a great customer experience. T-Mobile USA is of course famous for being the “un-carrier” – that is they like to do things differently. But inevitably the other players in the USA are now scrambling to follow suit which has resulted in US mobile data revenues declining for the first time in 17 years
So what’s happening here? An industry that used to charge for every item of usage is adopting an all-inclusive model, whereas the industry that used to be all-inclusive has adopted more granular charging?
The answer it seems lies in the competition these companies face. Airlines primarily compete with other airlines, but also other forms of transport including rail, car and boat in many situations. However, they still involve moving physical things (people, goods) from A to B. Airlines have digitalised
the customer experience through online check-ins and mobile apps, but there is not really a fully digital alternative to these traditional businesses. Sure, you can do video conferencing instead of travelling for face to face meetings, or use “webinars” and virtual events rather than attending conferences, but there’s no teleportation, yet!
As a result, airlines take a more dynamic approach to pricing with seat prices going up and down according to demand, and by stripping back the service to its most basic elements to ensure that customers are not paying for something they don’t need.
Contrast this with the telecoms industry, where every Telco faces a very real threat from fully digital services. And how do Telcos compete with these Digital Services Providers (DSPs)? By bundling. They try to make their own services more “sticky”, by including more value in the bundle – more minutes, more data, video, music streaming and so on.
However, some DSPs are adopting a bundling approach too, with Amazon Prime being a great example. To some customers this is a next day delivery service for the ecommerce business, but for others it is a streaming video service and cloud storage service. The trick here is that by bundling apparently unrelated services together, Amazon has created more reasons why customers will sign up to its subscription service. And by doing so, customers are in turn more likely to continue buying from Amazon’s online store, which is no longer always the cheapest, but the convenience of free next day delivery is clearly a differentiator.
And herein lies the nub of the issue. The bundled approach is designed to drive more revenue through Amazon’s core ecommerce business. Similarly, the majority of things that Google gives away for “free” actually feed data back into their core advertising businessand drive more revenue opportunities there. Neither of these companies would give you unlimited shopping or advertising for a fixed monthly fee as they know this is their real cash cow.
So this is the problem that Telcos face. The core value they provide today is connectivity. Without their networks there would be no internet, no ecommerce, no streaming music / video and so on. But by giving away ever greater bundles and unlimited data this has been totally devalued and it’s becoming a race to the bottom.
Back in the 1990s, BT in the UK ran a famous advertising campaign featuring Bob Hoskins with the slogan “It’s good to talk”
. The idea being that if everyone made one more phone call, they would make more money.And they did – reportedly £5bn of incremental revenue in 5 years. Similarly, some of the best mobile value-added services of the last decade worked in exactly the same way – for example, the “missed call alert” text message which usually resulted in the recipient calling back the person who dialled them earlier.
The problem now is that for every extra byte of data that a customer consumes on their mobile or home broadband connection, the Telco makes no more money. In fact it actually costs them money as they need to invest in the network capacity to cope with the ever-growing volumes of data they carry.
So, what’s the answer? Well, Telcos need to look very carefully at their business model and work out what their core value proposition is. If that’s as advertising businesses, payments businesses, trusted identity managers or any other new-fangled digital service provider, then by all means they can offer unlimited connectivity as a carrot to get the data they need to run their new digital services. They’d just better be damned good services if they are to compete with the likes of Google, Amazon and Facebook.
However, if Telcos want to be connectivity providers, then they need to get lean, efficient, and make their money from charging for the use of their networks. They can bundle whatever they like with this to make them more attractive than their competitors; they can price in different ways and even charge different parties, but the model should be designed to drive more usage of their networks which will in turn drive revenue. The good news is that a recent survey
indicates that customers are now ready to swap their unlimited plans and pay for more flexibility and control of their data services. It just needs a brave Telco to buck the trend.