Australia - The Telecoms market in 2014

Synopsis

The telecommunications business is a double-edged sword. On the one hand it is an enormous growth industry because of its function as a key facilitator in the transformation of societies and economies towards a future that is driven more and more by ICT developments.

Over the last decade companies such as Google, Apple, Samsung, Amazon and Facebook have made it to the list of the most successful businesses. At national levels we see similar developments, where ICT companies are all part of the engine of the national economy.

On the other hand many of the traditional telco businesses operating in this market are recording declining results – not because the market has not been growing, but because of the pressure on their margins. New technologies enable many of the traditional telecoms products and services to now be produced and delivered by the so-called OTT companies, often at a fraction of the cost. Competition from inside and outside the traditional industry is driving prices down further and faster than growth within that industry.

This is obviously a good development for the first category of players who built their businesses on top of telecoms products and services, and can now do so at forever decreasing cost. On the other hand, the traditional players are struggling in such an environment.

This trend of lower cost is set to continue at a higher rate than the overall telecoms market is growing.

While many of the digital economy players now include communications services in their offerings they do not rely on these telecoms incomes to sustain their business. They have been able to build business models that take telecoms as an input to create different products and services and different business models. This has given birth to a whole new of range of communications products such as apps, social media, video based entertainment, e-health, e-government, cloud computing etc. And that is changing how this market is measured. These new revenues generated through telecoms can be added on top of the traditional telecoms market revenues. This increases both the number of players in the market and the overall revenue.

But the traditional telecoms players have largely been unable to tap into these new revenues, and this inability to generate new revenues is creating significant resentment among the traditional players, as they see that others are using telecoms to build a new industry in which they find it hard to participate.

The key reason for that is cannibalisation. In order to be able to participate they will have to follow the same path as the newcomers – use telecoms as an input (utility) to build new products, services, models. This is worrying, as it is still uncertain whether following this path will enable the telcos to generate new revenues that will, over time, begin to compensate for their losses. So instead they hang on to their old models and confront what could be a slow death.

Internationally we see a sharp decline in traditional telecoms players, through ongoing industry consolidation. The next serious development for the telcos will be a further erosion of their mobile revenues. Already ARPUs are declining. This means deeper cost-cutting for the mobile operators to maintain their margins. Over the next five years the long-predicted fixed-mobile-conversion (FMC) will finally start to make some inroads.

Smartphones and tablets will force an increased overlap between fixed and mobile services, and to stop the ‘cord-cutting’ in fixed line services those operators will need to come up with attractive packages that will see a true integration of the two services. This has been talked about for close to 20 years and many trials and pilots have been conducted, but so far operators have refused to come up with sufficiently attractive price packages to make it happen. It falls into the same category of cannibalisation; however with further commoditisation of telecoms access services FMC will come to the market once there is sufficient pressure on the telcos to start making those changes.

As we have been predicting for the last 20 years the telecoms market will eventually double in size but the traditional telecoms services will no longer take more than 50% of the overall share. Obviously precise data is hard to provide as the border between telecoms, IT and digital media and economy services has started to blur. BuddeComm believes that the tipping point has been, or will be, reached in 2014. From that moment onward the non-traditional telecoms market will be larger than the one it is built on.

And there is no reason to believe that the overall industry will stop growing at its current rate of between 4%-5% per annum. So the overall future for the industry remains very bright.