Two trends are transforming the global telecom industry—commoditization and convergence. Together they will alter how telecom companies operate and how customers use their services. Companies must respond with focused strategy that can enable them to avoid commoditization and seize the opportunity of convergence.
Commoditization is a loss of differentiation. It leaves companies exposed to competition based on price alone. A low-cost strategy virtually always leads to a race to the bottom, and to continually declining margins.
We measure commoditization as a function of two factors. The first factor is the spread in market share, or the difference between the largest and smallest shares of revenue in a given market. The second is the pricing spread, the difference between the highest and lowest average revenue per user (ARPU) among the operators in a particular market.
Over the last ten years, both these metrics have narrowed throughout the world as the mobile and fixed telecom markets have followed a long-term path towards commoditization. The market in the Middle East and North Africa region has been no exception, and now stands close to full commoditization. In the Middle East, almost all operators have the same market share and ARPU.
Convergence is the erosion of boundaries between fixed and mobile telecom services. In a totally converged market, distinctions between mobile and fixed broadband vanish completely. Users would experience seamless connectivity, in and out of their home, buying fixed and mobile as one service from one operator at one price.
To varying degrees, nearly every market will undergo convergence over the next five to 10 years. The pace of the convergence in each market will depend on several factors, including the current level of competition, the sector’s network structure, the stringency of the regulation, and the willingness and ability of operators to make the necessary investments.
Convergence will happen in two broad stages, first affecting market share, and then price. In the first stage, called bundling, operators will possess a proportionately equal share of the combined mobile and fixed markets, but will continue to compete on price. They are likely to start this process by offering a combination of various services, such as voice, Internet, mobile and television, with little or no discount for the bundling of services. In their constant battle to increase market share, they may then expand their network or acquire competitors.
However, new technologies, such as fiber to the node (FTTN) and 5G, will create the prospect of a national network that is equally capable of providing fixed and mobile connectivity. Consequently, all operators will be able to provide a fully converged offering of mobile and fixed services, and the respective markets will undergo price convergence. At this stage, competition between operators will no longer depend on their physical assets. Instead, they will have to differentiate themselves by the services they offer, or through other means such as speed and bandwidth.
In time, however, full convergence is likely to lead to further commoditization. The first operators to provide converged services may gain an initial advantage in both market share and pricing, but once others follow suit, the various competing players will soon exhaust ways to differentiate themselves. Unless they find a way to separate themselves from their peers, all operators will be confronted by an existential threat.
We believe that players then have a choice between two strategic alternatives. The first is diversification. For some time now, many operators have sought to promote revenue growth by moving into sectors such as media and entertainment, financial services and healthcare, but with varying degrees of success. However, the advent of convergence, and especially 5G networks, are likely to provide a welcome boost. Companies with the commitment and capability to move quickly into diversified services could establish their own identity and secure a competitive advantage.
The second way for operators to avoid commoditization is to focus on infrastructure. If they are able to merge their networking services, they may then be in a position to offer a variety of services to both consumers and businesses. This could involve speed and bandwidth alternatives, or selling access to their network to those seeking to benefit from their advanced technology.
Indeed, the advent of convergence and the arrival of 5G may allow telecom operators to prevent commoditization. New content and services for consumers and high-performance networks could open up a path towards greater customization, while the wealth of data produced by the Internet of Things (IoT) offers huge opportunities to understand customer behavior and tailor needs.
However, such an optimistic picture will not materialize unless leaders develop a highly competitive strategy committed to differentiation. At present, many operators are still trying to do everything, with confusion, lack of focus and excessive costs as the inevitable consequences. The time for clarity has arrived.
This article originally appeared in the December 2019 issue of Forbes ME.
About the author
Jad Hajj is a partner with Strategy& Middle East, part of the PwC network.
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