Consolidations and falling profits: what is happening in the telecoms market?

By Dave Millett, Equinox

The last few months have seen a bad run of financial results for some of the UK’s largest telecoms operators. Is this a sign of more to come? With rising numbers of acquisitions and consolidations, are the dynamics of the markets changing? What does this mean for customers?

BT’s announcement, in early May, of a drop in profits and 13,000 redundancies illustrates the challenges the larger operators are facing as they try to compete on multiple fronts. Since November 2015 its share price has fallen 60% from £5 to just over £2. That is the equivalent of wiping £30 billion off its market value. They are expecting this year’s profits to fall again, and chief executive Gavin Patterson has finally been removed by shareholders.

TalkTalk has fared even worse, with its share price dropping 70% in the past three years. Very recently the company announced a loss of £73 million against a profit of £70 million the year before. At the same time, it announced it was pulling out of its direct B2B operations by selling it to Daisy. This means TalkTalk will now be focusing on the lower margin residential sector and its channel business.

While these two companies have seen their share prices fall, during the same period the FTSE 100 has risen by over 15%.

Dixons Carphone has also said it will close nearly 100 Carphone Warehouse stores after its profits fell from £501 million to £382 million with the expectation of it falling again this year, to £300m. This was in part blamed on customers switching to sim only deals, away from longer contracts with handsets.

People’s habits are certainly changing – the number of texts messages has fallen by about 40% in the last four years. The rise of internet-based solutions (SIP and VoIP) has eaten into the traditional systems revenues of companies. New companies have entered the market more easily than before representing a near perfect storm for the older companies.

Any marketing person worth their salt will know of Kotler’s product life cycle curve. Kotler’s states that as a product matures, suppliers need to change behaviours and market dynamics change. The challenge for the larger established suppliers is that many products are in maturity (mobile, traditional broadband) or even decline (PBX, ISDN, SMS). Even newer products such as VoIP and SIP are now no longer taking business away from legacy products, instead customers who already have the technology are changing suppliers.

The market is certainly displaying consolidation characteristics (see the end of the curve in the diagram) with a number of recent major acquisitions affecting some of the largest suppliers of traditional PBXs: Mitel was sold to private investors for about $2bn. Over previous years Mitel had grown by acquiring competing PBX suppliers such as Inter-Tel, Aastra, Toshiba and ShoreTel. Mitel said the main reason announced for the sale is that it would provide the company with additional flexibility to accelerate its move-to-the-cloud strategy. This could be interpreted as an acceptance that revenues decline in the short term as you move from capital sales to recurring licence-based models. That was certainly something that was an issue for Nortel in the mid 2000s.

The company that ending up buying the PBX business of Nortel was Avaya. This year they emerged from Chapter 11 bankruptcy having cleared a lot of private equity debt – and one of the first things they did was acquire Spoken Communication, a Contact Centre as a Service (CCaaS) solution provider that uses artificial intelligence to improve real-time customer management.

Finally, Cisco bought Broadsoft which was perhaps the biggest strategic change. Broadsoft is the most popular VoIP platform in the world and used by many providers in the UK and internationally. In other words, a traditional hardware company has bought the largest cloud-based company. That is the common theme here which reflects the transformation that is happening and driving down the revenues of traditional telecoms suppliers.

Other acquisitions, of perhaps less well-known companies, such as Jive by Logmein and Polycom by Plantronics all reflect this move. There is also consolidation at the lower end with the industry publications reporting new acquisitions on an almost monthly basis.

Will this mean less choice for customers? Does less competition mean rising prices? At the moment, the latter is less likely as the problem for the existing suppliers is that cheaper or free alternative technologies are replacing existing ones; think Whatsapp instead of SMS. That hit revenues for mobile operators from texting, picture messaging and roaming. Alternative charging mechanisms are appearing for relatively new products such as SIP.

Customers will always want things cheaper, but this has a downside which will hit customers in the coming years; as a country we need massive investment in our telecoms infrastructure including 5G and ultrafast broadband. Currently, that investment comes from the industry out of the profits it makes – but with these in decline who will fund the investment now? The chancellor wants the UK to be fully ultrasfast by 2033, yet Japan and South Koreas are almost there already. So, we’ll be 15 years behind other countries – this will impact our economy, jobs, exports and the UK’s ability to compete internationally. This is especially worrying at a time when we’re trying to attract investment and trade from outside Europe.

There is no easy solution as the prevalent forces are pulling in different directions. But it does help ensure that the industry is one of the most fascinating to be involved in. It is also an industry that has outlasted many others, continually showing its ability to evolve – even if not every supplier makes the adjustment.

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