Introduction
In my first blog on the issue of demands for subsidisation from OTT operators and others, I concluded that:
“…the issue is not the growth in data volumes. While this does require increased investment, in a sensibly structured industry that should be a recipe for increased revenues and growing profits. It is the way that the market that the operators reside in is structured that is the fundamental issue”.
In this second blog, I want to focus on these issues of the telecommunication market structure. The key issues are as follows:
- There is often too much competition, but the normal routes to consolidation (mergers) are not available.
- There is very little ability to differentiate offerings.
- Expectations of operators result in uneconomic investments.
I’ll discuss each of these in turn.
Competition
Competition has been a mantra for telecoms regulators for decades, especially in relation to mobile communications. In the early years (2G and 3G), it brought clear benefits – as the third and fourth operators were enabled into markets, prices fell, and new offerings, such as unlimited data tariffs, appeared. But as we have moved to 4G and 5G, the benefits have been less clear.
Many mobile operators would like to merge. A merged operator would, eventually, have a single physical network but the number of subscribers associated with the two merging networks. With many costs being fixed, more subscribers per network enable greater profitability. Merging would also reduce the competitive intensity in the market, allowing all operators to increase margins. Such behaviour would be “natural” in a functional market, restoring acceptable levels of profitability. However, in the last decade, most proposed mergers have been barred by national or international regulatory entities. It is also likely that many operators have not even attempted to merge, since the likely outcome would be regulatory prohibition. A change in regulatory stance is needed.
There are strong arguments for regulators to rethink their preference for competition. With utilities, there is a balance between the benefits of competition and the costs of having multiple national networks. Few would believe it sensible to have multiple water networks to the home – the cost of building and maintaining multiple sets of pipes would outweigh the slightly reduced prices that competition might deliver. Similarly, few would imagine that tens of national mobile or fixed networks would make sense.
Competition brings the greatest benefits when competing operators can opt for different strategies. This allows the market to test out different approaches, with the best ones winning out. But in mobile and fixed networks, there is now very limited ability to select different strategies. Mobile operators use the same standards (4G, 5G) and have a very limited set of suppliers (for the most part, Ericsson or Nokia). They mostly have similar spectrum allocations and use the same sets of masts and other assets. As a result, they all adopt very similar strategies. The only benefit of competition is then to encourage efficiencies, but the scope here is limited.
Mergers
In many utility markets, there is monopoly provision – of water, gas, electricity, and often fixed telecoms. Regulators have found ways to inject competition through wholesale provision with competition in the retail sector, delivering differentiation from business-to-consumer (B2C), and have managed the downsides of monopolies through price controls and other regulations.
Regulators do appear to be signalling that they might be ready to allow mergers. Mergers have been allowed in the US, and a proposed merger in the UK is seeing more positive messaging – albeit not yet approved. As fixed and mobile operators tend towards stable utilities, mergers should be allowed.
There are shades of merger in the form of network sharing. A majority of operators in most countries share networks to some extent. Some regulators put limits on the extent of sharing, such as only allowing sharing of passive parts of the network, to prevent sharing from becoming a “merger by stealth”. Equally, some have encouraged complete network sharing (for example, in rural areas) to deliver better coverage. In the same way that mergers should be allowed, there should be no restrictions on any form of network sharing.
Differentiation
The second issue is differentiation. While competition continues to exist, differentiation allows operators to gain higher revenues through tailoring their offerings. There are differences in the coverage and capacity provided by different operators, but consumers struggle to understand how these differences will affect them and tend to fall back on simply buying based on price.
It is perfectly possible to provide consumers with tailored advice, based on their typical movements and usage of mobile data, as to which operator would deliver the best overall service. This can be achieved with an app that monitors their usage (with their approval) and compares it against the known network coverage and performance of each operator. Such apps do not exist because there is no clear way to monetise them, but if the regulator were willing to step in and commission such an app, this could enable competition based on coverage or quality that would both allow differentiation and incentivise network operators to enhance their networks.
Historically, operators have failed to develop new revenue sources in the consumer space because often it makes little sense for each operator to develop, for example, a social media service, when it is clearly more efficient and desirable for such a service to be developed globally and be available across all operators. It is possible that operators might be able to differentiate through new forms of service. Mobile operators are currently interested in selling private networks to industrial partners and have considered IoT and other new services – good examples of possible differentiation in the business-to-business (B2B) area. Operators remain optimistic that the new capabilities 5G is increasingly offering will allow them to target new, mostly business, markets where there will be ways to successfully differentiate.
Expectations
The final issue relates to expectations. As I set out in my first blog, operators have felt obliged to deploy 5G widely, even though there was no clear business case for this. While this is now mostly sunk cost, there is a risk that the same could occur with 6G or via coverage obligations or other government interventions. Much of the problem with 5G relates to the lack of balance resulting from operators pushing back against the futuristic visions of academia and manufacturers. This created expectations for a very fast “one to many” type of service rollout, whereas, in reality, 5G needs to be targeted carefully and gradually to areas where it is likely to make more sense, such as industrial usage.
Operators need to ensure that the same does not happen again by being much more actively involved in 6G and other future-oriented work, as well as ensuring that the industry, politicians, and others understand that the key focus must be profitability and solving current consumer issues, rather than a ”build it and they will come” view. They can do this individually, and also collectively through bodies such as GSMA and the Next Generation Mobile Networks (NGMN) alliance.
Summary
Both regulators and operators have a role to play in correcting current market imperfections. Regulators can allow mergers and deliver apps that enable differentiation. Operators can play a strong role in ensuring that they are not under pressure to make uneconomic investments. Undertaking some or all of these changes will allow the industry to improve its profitability and address the fundamental challenge underlying the calls for subsidisation. Alongside this, there is also much that the industry can do to minimise further costs associated with network expansion. This will be explained in my third, and final, blog.
