Future of telecoms Thesis 4: Strategy “Groundhog day”

Theses 1,2 and 3 concluded that most telcos face a market share driven, self-created downward pricing spiral but should not just give up and let the industry commoditisation happen as with a careful selection of measures to fill the ARPU gap improvements should be possible.

The majority of the previously discussed challenges are most pressing for mature markets – in which most of the telecom markets are by now. My impression is a good proportion of these challenges arose due to the fact that the operators’ strategies did not adapt quickly enough – or at all - to the market penetration phases they were going through. Based on the experience of more than 15 years in the industry here some observations:

Early days:

When mobile services were first launched the price models where often fixed-line like and the price levels were pretty high as early adopters were usually business customers and high net wealth individuals.

• Strategy should have been: skimming and covering of high initial cost
• Strategy often was: actually that

Penetration picking up:

With growing adoption prices dropped and more people could access mobile services. In most countries is was still either post- or prepaid rather than both and the value proposition was often a one-fits all. Handset availability and pricing were still limiting factors to rapid growth.

• Strategy should have been: gain market share but have cash-flow to finance network expansion
• Strategy often was: first price aggressions but still often close to “should have been”

Strongest growth:

After the initial two phases of development most markets experienced a strong growth with new operators entering the markets, new bill plans launched and stronger offer differentiation. The mass market joined the game and having a mobile phone was not a privilege for the rich and beautiful any longer

• Strategy should have been: Over-proportional market share growth in defined target segments that suit own positioning, clear value propositions to address these segments
• Strategy often was: aggressive market share grab across the board - in many cases via extreme handset subsidies and “price” as only sales argument

Slowing growth:

Once the penetration hit a certain level (usually above 90%) and growth was slowing, winning new customers meant more often than not to lure them away from competition. For most markets this was a phase of price wars and strong margin erosion.

• Strategy should have been: selective growth in remaining attractive pockets, consideration of second / multi-brand launch, further offer differentiation through value (e.g. higher speed) and new services, portfolio design to foster up-sell, increasing focus on retention
• Strategy often was: still pure market share focus, new customers still get better rates than existing ones, continuously high handset subsidies, further price drops and introduction of unlimited plans

Little growth left:

Once the penetration was above 100% all gross-adds (apart from youth) had to come from competition and all operators fought for a cake which size did not change any more. Many gross-adds never could never break even due to high acquisition cost, low contribution margins and high churn

• Strategy should have been: efforts to maintain brand (e.g. flagship stores), protect the customer base, dedicated offers for existing subs, comprehensive up- and cross-sell programs, inorganic growth / consolidation rather than gross-add focus, increase in internal efficiencies (e.g. online push)
• Strategy often was: still market share goals above profit targets, services like mobile data “thrown in” to attract customers without considering later cost implications of exploding usage, cost reductions that lead to quality and channel issues

The pattern you can see here is that since the high-growth phase in the middle of the penetration curve market share thinking prevailed and the necessary adaptions to the changed market environments did occur too late or not at all.

It seems like too many telecoms executives – also driven by shareholder and analyst opinions – were waking up every morning like Bill Murray experiencing the same story over and over again: market share day, market share day, market share day. Along the way they might have learnt to not step in the same puddle every day. But as in the movie it took them a long time to break the cycle and only recently the first ones "woke up" astonished that and it was not market share day any longer but a day to adjust the strategy to the actual market situation.