Telecoms firms in a race to the bottom - TechCentral

Telecoms firms in a race to the bottom

peter-walsh-180Having been in the telecommunications industry for 15 years now, it never ceases to amaze me how businesses typically contract with the cellular providers based on the size of the discount on offer.

This practice has become the normal way of engaging business on tenders and RFPs, is now finally arriving at “ground zero”, where there is no more discount to give.

Stories abound around key enterprise accounts in Sandton where Vodacom owned the account for two years and then MTN for two years, and then Vodacom, and then MTN — until the margins were so low, all that was left for the service providers was the commission incentive bonuses and the volume breaks paid to the service providers by the networks.

During this race to the bottom, the one thing that never changed was the noise from the market on how bad the service was. It surprises me that there was this expectation from the businesses that the service provider should give up its margin and improve its service. Unfortunately for the service provider and the businesses, cellphones and 3G cards have become a commodity. And they only have themselves to blame.

Why to blame? Because the role of the mobile device is so mission critical to business today, and the only value proposition from the networks supplying the dumb pipes still remains: how cheap is your service?

No partnership, no value proposition and bad service, just a race to the bottom. And more pain for less money. Which has ultimately brought about the demise to the likes of Nashua Mobile and more recently Autopage, leaving the operators — MTN, Vodacom, Cell C and Telkom — increasingly faced with higher levels of frustration from their client bases and lower and lower average revenue per user.

Nevermind the insatiable demand for bandwidth, no new spectrum becoming available (thanks to the digital migration and the television set-top box debacle) and the fact that although the networks were busy selling on discount and spending the profits, Facebook, WhatsApp and Instagram et al ended up disrupting the market and owning the mobility space. This leaves the networks to sell dumb pipes at paper-thin margins.

One would have thought that the lessons were learnt.

But no, there is more. The marketplace continues to be disrupted at pace, and the race to bottom continues. The enterprise expects more and more from its service providers by way of converged voice and data networks and solutions. For their part, service providers have larger and larger product sets but still the same problem. Margins within the telecoms industry are falling and so are service levels (yes, it can get worse). And the salespeople selling these solutions have to work three times harder to make the same commission and have very little incentive to optimise and manage their customers’ telecoms solutions more efficiently.

share-down-640

Selling at ever increasingly low margins, service providers are unable to offer their customers the service they require in an increasingly more complex field. It is not that they don’t have the skills, they just don’t have the time or enough resources. Less margin requires more volume to make the same return on investment.

So, ultimately, the chief information officer, under pressure to increase operational efficiency and empower competitive environments in the new complex digital economy, ends up buying more pain at a lower price.

The service providers, seemingly devoid of any plan to increase their level of service, or innovate or partner with their customers, continue to sell on lower margins, hoping for higher volumes, while providing average service at best.

The very industry selling the telecoms infrastructure, products, solutions and services on which businesses are meant to engage with the opportunities brought about by the new digital economy is again without a value proposition and is selling on purely price.

  • Peter Walsh is director at voice and data consultancy CommsCloud

7 Comments

  1. “Telecoms firms in a race to the bottom”
    Wow, I believe it is just called competition. Finally the consumer, the customer has become in a better position. When the consumer decides that the service is below par, he will just change to another telecoms provider with maybe slightly higher prices but better network, services or whatever.
    This article like also so often the ones by the editor are typically written with the view of the telecoms/IT companies, not the consumer or the general public.

  2. Time will tell. Consumerism and Democracy have a lot in common. Both result in The People getting The Service they deserve.

  3. Andrew Fraser on

    Race to the bottom? Or just the natural process of pricing in a commoditised market? There seems to be a view from the networks that high (obscene) profits are the natural order and that this order has been upset. But the fact is that the market has matured and the rapid growth that typified the mobile phone industry in the 1990s and early 2000s has came to an end. It shouldn’t have been a surprise, it happens in most industries in some way. It is time for the networks to accept the fact that they’re utilities (or dumb pipes, as you put it), and to focus on what they’re supposedly good at.

    While there are constraints on their business (spectrum availability for one), the fact is that all businesses have to deal with constraints of some type, and all of the operators are facing the same issues – so they should focus on competing as best they can.

    I don’t buy your argument that pricing is the only critereon that CIOs consider when choosing a service provider/network. If so, then they’re not doing a very good job. Operational efficiency is not a function of price, but rather one of value. Quality of service should be measured against price to determine this value.

    Unfortunately it seems that the networks aren’t prepared to enter this kind of marketplace, opting rather to focus on the blunt tool of pricing to be competitive. That, and arcane subsidy/financing schemes for handsets.

    I’m sure that, if a network was to offer a mobile subscription that guaranteed network priority and improved QoS for a premium, there would be significant uptake.

  4. Greg Mahlknecht on

    All this article is missing, is “GET OFF MY LAWN!” a the end. Wow, what a grumpy piece.

    >The enterprise expects more and more from its service providers by way of converged voice and data networks and solutions.

    And what’s wrong with this? New tools and platforms make it easier and cheaper to deliver those converged solutions without compromise in quality.

    >Margins within the telecoms industry are falling and so are service levels

    Having just moved my service provider from an “oldskool” one to a new, solid upstart, I can state this is categorically false. The new provider simply has better tools and network architecture, so can offer much the same product (plus some awesome value-adds) and noticeably better service for almost half the price of old company, and they’re probably making larger profit margins. This is not an uncommon occurrence. Just look at Telkom vs the new FTTH upstarts if you want an extreme example how less can get more if done right.

  5. Please file story under the “It couldn’t happen to a nicer bunch” category.
    Telecomms is a mature industry that has moved on from the High Priest, big mystery (rip ’em off) era of the early cell phone introduction phase in the late 1990’s. It has simply gone the way of all ‘new’ technology, sorry for the reality check, but that’s life I guess.

  6. Race to the bottom? Puuhhleeease! It’s more like watching stalactites “racing” to the bottom. And boohoo to the networks, and the mega-billions in insane profits they STILL make each year and which are STILL way way higher than both the African and global average. We are still getting ripped off.

    Altech Autopage and Nashua Mobile did not close their doors because they tried to race to the bottom. It’s because the networks cut the commission margins on the products they resell down to a bare minimum, killing off the business model of being a reseller. The reason the networks did this? To protect their profit margins in the wake of
    MTR reductions, by cutting out the middlemen and commission they earned. There is now a little less to go around, so instead of spreading the loss equally to everyone, the networks dumped the losses on the resellers.

    The next steps in saving costs and protecting profit margins for the networks:
    – infrastructure sharing (which I fully agree with, and should have been legislated years ago)
    – downsizing their workforces (already happening)
    – outsourcing certain areas of their businesses (already happening)

    The networks have shown that they will protect their profit margins at all costs. Prices have remained largely flat as we continue to “ooze” to the bottom, while the networks continue to pay their shareholders very handsomely, and continue to rid themselves of non-essential costs.

    Eventually we will reach a point where the networks are super-efficient and cannot reduce costs any further. This is what I look forward to, when we will see real competition, and when the operators profits will finally take a much-needed knock to bring their businesses in line with the rest of the world.

  7. The Emperor has no clothes... on

    MTN’s EBITDA was 43.7% (R30.3 Billion in currency terms). I’d hardly call those ‘paper thin’ margins. Imagine what their EBITDA could be like if they actually provided value for their customers. With profits like this by being a ‘dumb pipe’ is anyone surprised that they don’t even bother to try and provide innovation or value for money?

© 2009 – 2019 NewsCentral Media