Summary
The worlds of communications, media, and entertainment are converging as communication service providers look to provide a more compelling service experience to customers by offering a blend of services over a variety of end devices. As these industries converge, opportunities and challenges are being created for established communication service providers in this new environment. Current dynamics will force communication service providers to devise strategies to deal with the new realities of the market while ensuring long-term success.
Analysis
Convergence is altering the current industry structure and expanding the competitive field to new entrants with business models that offer customers a completely new experience. Web 2.0 companies such as Google/YouTube, MySpace, and eBay/Skype have developed compelling value propositions that are challenging the business models of established communication service providers (AT&T, Verizon, Qwest, BT, SK Telecom, Vodafone, China Telecom, etc.). The communication service providers’ business models are in constant conflict with those of the Web 2.0 players, which view transport as a commodity and thus have focused their efforts on delivering value at the applications/services level.
Web 2.0 players have gained significant mindshare within the user community, which has enabled them to establish strong brand recognition. This is a significant factor for communication service providers as it represents a potential source of disintermediation. This has spurred the battle to control the user experience.
Competition has also intensified between cable and telecommunications companies as both are making heavy investments in technologies such as VoIP and video that will enable them to compete in the other’s core market by offering a similar set of services to consumers. Driving competitive differentiation against traditional and nontraditional players will be a key component of communication service providers’ strategies going forward.
For communication service providers, intensified competition is only part of the challenge. Factors such as regulatory issues and technology disruption have also played a key role in compromising the value of their existing business models. In many cases, these factors have resulted in revenue declines, lost market share, and erosion of profit margins.
The worldwide telecommunications services revenue is growing from $1.3 trillion in 2006 to $1.4 trillion by 2011, which represents a compound annual growth rate of 3.5%. While this is a large market, the slow growth is largely related to a number of market dynamics.
We project worldwide wireline voice revenue, which still represents 62% of wireline services revenue, to decline nearly 3% from 2007 to 2011, falling from $382 billion to $342 billion. In the wireless market, growth in voice revenue is slowing. Revenue is projected to grow only 2.4% from 2007 to 2011. Voice (wireless and wireline) still accounts for the majority of most incumbent communication service providers’ revenue, and while wireless and wireline data revenue is growing, it is not growing sufficiently to offset declines in core voice revenue.
The message inherent in these trends is that standalone and discrete services will not provide the growth and profitability needed to increase shareholder value or meet the demands of customers. The commoditization of the voice market due to wireline technology substitution and the flattening of wireless voice ARPU are forcing communication service providers to seek new sources of revenue growth. Despite these factors, customers continue to have an insatiable demand for communications. However, it is no longer about bandwidth; customers are now demanding access to services that offer a unique experience in a wired or wireless environment. Communication service providers must demonstrate that they are more than "pipe" providers and can deliver the value to meet customer demand.
Delivering solutions that meet customer demands through value-added services creates an opportunity for communication service providers to capture a significant portion of the value that is migrating to nontraditional players. Accomplishing this will require a focus on a different set of services that include the bundling of media and entertainment content with traditional communication offerings. In addition, communication service providers must also expand their services portfolio to meet the growing demand for applications delivered as a service in a utility-based model.
