Global study reveals stunted growth in the telco industry

Date: Wed, 01/04/2012 - 18:51 Source: Simon-Kucher & Partners press department

Global study reveals the shortcomings of the telecommunications industry: Companies are destroying their long-term profitability with price wars and data flat rates – despite innovations and top products

Global study reveals stunted growth in the telco industry

Mobile World Congress, Barcelona


The telecommunications industry is stuck in a profit trap: no growth, an increasing number of price wars and data flat rates. Despite the fact that the companies have introduced a constant stream of innovations to the market – i.e. mobile communications for everyone, DSL and mobile internet – the industry today is worth ten percent less than it was in 2000. Making matters worse, Google and Apple are stealing the attention and enthusiasm of customers. Three-fourths of telecommunications providers are not achieving the prices they deserve for the products they offer the market, as the worldwide study by Simon-Kucher & Partners reveals.
Compared to other industries, the telco industry ranks the lowest in price execution – although prices are the most effective lever for sustainably increasing profitability. Half of the companies have succumbed to price wars with competitors. The Global Pricing Study 2011 surveyed over 3,900 companies from all industries. Almost half of the responding managers from Europe, Asia and the US hail from companies with annual revenue of over one billion euros; one-third works on an executive level.

The golden growth period is over
Only one-third of the telco companies name profit optimization as the number one target. A mere 40 percent focus their price strategy on margins. "The majority is fixated on volume and market shares, even though the market has been saturated for a long time," comments Dr. Ekkehard Stadie, Partner and telco expert at Simon-Kucher & Partners. 56 percent of the providers aim for higher volume, thereby challenging their competitors’ market shares. And what is the result of such a one-dimensional growth objective? Destructive price wars. After shifting their focus toward low-price segments, companies are now struggling to escape the general price cut trap. Curiously enough, 80 percent of the respondents blame aggressive competitors as the source of the price wars.
For over 15 years, the telco industry has been providing mobile telephony, then broadband and now mobile wireless data to the market. The name of the game was always to stay one step ahead of the competition by generating the highest possible volume. Unfortunately, the total market has been dwindling for a while. Almost 60 percent of the managers, according to the study, expect their revenue levels to continue to grow in the next three years. What prompted such an optimistic outlook, at least for 78 percent, was the further sales increase. "They’ve reached their limit in the total market. The industry has to stop obsessing about subscriber growth rates and start taking action," criticizes Stadie. Furthermore, the industry can’t afford to rely on existing business models and to show a lack of courage toward new price and offer models.

Lots of innovations, but where’s the money?
The market is saturated; a further boost in total sales is no longer feasible. The only area that’s still growing is mobile data. Flat rates are bad for generating future revenue. But data usage will continue its upward climb, saddled with growing costs and declining margins. Flat rates are in essence an invitation for providers such as VoIP providers, WhatsApp and similar companies to offer their services for next to nothing and without risk while utilizing the excellent and costly infrastructure for their own business models and simultaneously pilfering the classic provider business. This is why the industry needs to use this trend for their own benefit: Most people nowadays want to be constantly online, regardless of where they are. "The telco industry offers products and services that no one can afford to go without. The challenge lies in figuring out how to earn more money from innovations and must-have offers in the long run," says Stadie. It’s simply not enough to offer a higher speed as a means of gaining new customers or wooing them away from competitors. Instead, telcos must determine how they can make existing customers more profitable. "Those who invest large amounts of money in innovations and constantly expand their networks while also considerably improving quality make a huge mistake in lowering their prices."

Beyond minutes and megabytes
The wish to surf the internet at any time opens up completely new profit opportunities to companies that go beyond the pricing of minutes and megabytes. To accomplish this, though, they need new and highly differentiated offers. For instance, a customer can use all the services of the provider, but has to pay for the number of devices connected to the internet. The provider benefits in two ways: It’s tapping into one of the few growth drivers of the industry – namely, the number of devices used per person. In the past, these were computers, landlines and mobile phones. Today, this includes laptops, tablets and televisions. This approach allows companies to create a new platform for contacting customers and exciting them with new and supplemental offers.
There are other approaches to generating higher returns and profitability. One is to create high-end services and product offers for the much-neglected premium segment, where customers would pay more for service, priority and status. 10 to 20 percent of customers would be willing to spend more on better and faster networks as well as high service quality. The company StarHub in Singapore is pursuing precisely this strategy and focuses specifically on status and increased efficiency for premium customers. Similar to airports, StarHub offers its top customers their own counter in shops where they receive faster service and priority treatment. This may be a costly example, but it shows where the trend is heading. There are many opportunities to differentiate in pricing and marketing. In contrast, there are no possibilities to boost volume in a saturated market. Telco managers urgently need to accept this, and move on.
Six recommendations for the telco industry:
1. Stop focusing on unlimited volume growth
2. Orientate your price strategy on profit
3. Overcome major shortcomings and earn money from innovations
4. Have the courage to switch to new offer and price models
5. Avoid low-price offers or start differentiating low-range offers
6. Shift your focus toward the premium segment and tap the higher willingness to pay
Dr. Ekkehard Stadie is a Partner at the worldwide strategy consultancy Simon-Kucher & Partners. The expert in marketing strategy heads the firm’s Telecommunications/Online Business Competence Center.

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