Life used to be pretty good in the wireless industry. Revenue growth may have slowed in recent years, but the cash kept streaming in. Profit margins on text messages were over 90%. Consumers kept forking over money for voice calls, and then added on pricey data packages. I was once an executive in the industry, and, let me tell you, I slept well at night.
Unfortunately, it seems that the industry’s leaders are still resting comfortably even while their business model implodes. Consider a report this week from technology analysts Ovum, which calculates that mobile networks worldwide lost out on $13.9 billion – just in 2011 – from text messages that have migrated to “free” platforms such as Skype and Viber. These apps also provide free calls from smartphones to other phones with the app, threatening the lucrative charges networks still levy for old-fashioned voice communication. Meanwhile, in France a new network called Free Mobile has just undercut legacy operators’ calling plans by more than 50% and has won 3 million subscribers in a mere 6 weeks.
Networks seem to be reacting like a ship spotting an iceberg on the horizon, slowly shifting course to avoid danger. Alas, the iceberg is already cutting gaping holes into the hull. The industry aggressively pushes the latest smartphones, even while a recent estimate calculates that every 10% increase in smartphone penetration in Europe leads to a loss of $1.5 billion in revenues due to use of “Over the Top” services such as Skype and Viber. Networks pour money into advertising – Verizon and AT&T together spend over $4 billion on ads annually – and hope that subscribers will sign on for profitable contracts, while these consumers quickly wise up to ways to cut their monthly bills sharply. With cut-rate plans, upstarts such as Free Mobile don’t need to shovel mounds of bullion into ads; consumers pay attention fast.
It is ironic that this complacency abounds in an industry that has evolved more speedily than almost any other over the past two decades, and which has had a truly transformative effect on lifestyles from Manhattan to African villages. Automakers took decades to evolve from hungry innovators to lumbering behemoths, but in wireless things just move faster.
Perhaps the explanation lies in the continuing appearance of new technologies that promise to create abundant new revenues and make the erosion of traditional profit formulas irrelevant. A few years ago the great hope was that people wanted to watch TV on their phone. More recently, networks have hoped to build giant businesses through offering mobile health applications and mobile wallets.
Yet, time and again, enterprising consumers and businesses have found ways to sidestep the networks. Mobile health is indeed a growing industry, but the networks are a minor player. Mobile banking has grown, but very few networks have made money on it, and banking giants such as Barclays are now aggressively launching their own network-independent offerings.
So is it all doom-and-gloom for wireless carriers? Absolutely not, but networks need to make hard strategic choices about how to respond to the disruption of their business model:
1. Will mobile broadband be the growth platform? Networks point to the rapid growth of mobile broadband usage as a powerful growth driver, and they hope that the blistering data rate of LTE networks will convince subscribers to upgrade to 4G plans. But if the company's strategy is to have the fastest network with the most reliable coverage, there can't be many winners of that game. Verizon has clearly cast its lot in this camp, but it's a tough proposition for a network such as Sprint which, as the #3 player in the US, doesn't have the subscribers to support that level of capital spending. For these second-tier players, broadband growth will still occur but the plans will need to be highly price-competitive to attract subscribers, which means that profit margins may be unexciting. (Sprint's current strategy of promoting its unlimited data plan, when it has an inferior data network, is a bit puzzling).
2. How will Over the Top services be monetized? OTT services such as Skype aren't truly free, because they use a broadband data plan, but operators price data at a vast discount to voice and text even though the underlying cost of a kilobyte is basically the same in each case. So high-priced kilobytes are migrating to become low-priced ones. Free Mobile is one company that seems to accept this will happen, and accordingly it has built a low-cost business model. Other networks may try to monetize the OTT traffic in other ways, such as through migrating subscribers to their own OTT-like offerings and making money from advertising and other new revenue streams. The carriers have an advantage versus independent OTT firms, in that OTT calls and texts require both parties to have the same app and a network can make an app standard on its phones. The networks might also distinguish data plan pricing depending on the quality of the connection they provide, particularly for video calls.
3. Will the network be an application integrator or a dumb pipe? For over a decade, networks have feared that the transition to IP communications and broadband data will relegate them to becoming "dumb pipes." And, despite all the consternation, that's pretty much what's happening. Free Mobile is content to be a dumb pipe. Many networks can't imagine their lucrative models deteriorating to utility-like margins, yet they have not truly distinguished their offerings through, for instance, integrating online offerings with offline partners (retailers, banks, healthcare systems, and the like). When they have tried to move into the offline world, their demands for high fees have frequently pushed potential partners to do things independently (witness Barclays' efforts in mobile banking). So the network needs to decide -- are these offline partnerships supposed to be big revenue generators on their own, or is their function to differentiate the core mobile offering through being the most ubiquitous and easy-to-use due to the breadth of its offline partners. It is exceedingly hard to accomplish both strategic objectives simultaneously.
4. Should the network seriously specialize? Another approach would be to focus intently on a new growth business, such as machine-to-machine (M2M) wireless communications. Some observers project that there may be 50 billion wireless devices by the end of the decade, with the great majority being machines talking to other machines. This is a huge growth opportunity, yet most networks have only a relative handful of staff focused on this business, and they don't give these ventures much entrepreneurial freedom. The result may be the same as for many of the networks' other growth initiatives -- a half-hearted offering that lacks flexibility and gets beaten by more focused players. M2M isn't for every network -- this is a very different business, and it requires capital -- but for some it may be a way to create a vast new market even while the historical core erodes.
Many industries have failed to deal with disruption soon enough and aggressively enough. Will wireless networks becomes the newspapers and bookstores of tomorrow? Making some hard choices now should allow these firms to escape such a dismal fate.
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