Dave Millett explains what falling profits and consolidation mean for the telecoms industry
After a bad run of financial results from some of the UK’s largest telecoms operators, one has to ask if this is a sign of things to come. The increasing number of acquisitions suggests the dynamics of the market are changing.
In early May 2018, BT announced a drop in profits and 13,000 redundancies. This illustrates the challenges the larger operators are facing as they try to compete on multiple fronts. Since November 2015 BT’s share price has fallen 60%, from £5 to just over £2, wiping £30 billion off its market value. BT is expecting this year’s profits to fall again, and chief executive Gavin Patterson has finally gone.
With its share price dropping 70% in the past three years, TalkTalk has performed even more badly. Very recently, the company announced a loss of £73 million against a profit of £70 million the year before. It also announced it was divesting its direct B2B operation by selling it to Daisy, which means TalkTalk will be focusing on the lower-margin residential sector and its channel business.
In the period that these two companies have seen their share prices fall so markedly the FTSE 100 has risen by over 15%.
How is Dixons Carphone faring? After its profits fell from £501 million to £382 million, with the expectation of a further fall to £300 million this year, it announced plans to close nearly 100 Carphone Warehouse stores. Its troubles were blamed in part on customers switching to sim-only deals, away from longer contracts with handsets.
Changing market dynamics
Older companies are facing a near perfect storm of changing customer habits (the number of text messages has reduced by around 40% in the last four years); the rise of internet-based solutions (SIP and VoIP), which has eaten into systems revenue; and easy market entry for new competitors.
Kotler’s product lifecycle states that as a product matures, market dynamics change and suppliers need to change behaviours. The challenge for larger, established suppliers is that many products are mature (mobile, traditional broadband) or declining (PBX, ISDN, SMS).
Not surprisingly, the market is displaying consolidation characteristics, with recent acquisitions affecting some of the largest suppliers of traditional PBXs. These include the sale of Mitel to private investors for about $2bn. Mitel, which over previous years had grown by acquiring competing PBX suppliers, such as Inter-Tel, Aastra, Toshiba and ShoreTel, said the main reason for the sale was to provide the company with additional ﬂexibility to accelerate its move-to-the-cloud strategy. This could be interpreted as an acceptance that revenues will decline in the short-term, as it moves from capital sales to a recurring licence-based model.
This was an issue for Nortel in the mid-2000s. The company that ended up buying its PBX business was Avaya, which this year emerged from Chapter 11 bankruptcy after clearing a lot of private equity debt. One of the first things it did was to acquire Spoken Communication, a Contact Centre as a Service (CCaaS) solution provider that uses artificial intelligence to improve real-time customer management.
Finally, in perhaps the biggest strategic change, Cisco, a traditional hardware company, bought Broadsoft, the world’s most popular cloud-based VoIP platform – a clear example of the transformation that is happening across the industry and driving down the revenues of traditional telecoms suppliers.
There is also consolidation at the lower end, with industry publications reporting new acquisitions on an almost monthly basis, such as those of Jive by Logmein and Polycom by Plantronics.
Will this mean less choice for customers? And 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 established ones. Think WhatsApp instead of SMS, which has hit mobile operators’ revenue from texting, picture messaging and roaming. Even for relatively new products, such as SIP, alternative charging mechanisms are appearing.
What this means for resellers
These trends create uncertainty for resellers, in terms of what products and services to sell and what suppliers to partner with.
If your supplier has well publicised financial difficulties or is taken over, it creates another barrier to sale. If the supplier goes bust or decides to pull out of a market, as Toshiba did in 2016 when it exited the UK PBX market with little or no notice, all your years of knowledge and experience will go to waste. Having several options to offer customers can guard against this, but it is more expensive to sustain.
It is also possible that a new owner might have a preferred solution in an area that is important to your business. It may attempt to stop new orders for the old solution or attempt to migrate your customers across to their preferred solution.
Another challenge for resellers at a time of consolidation is working out what it means for contracts. Will targets go up? Will commissions remain? Will they be stopped altogether? The larger the consolidation, the smaller the clout an individual reseller has. As recent events have shown, even dealing direct with manufacturers is no protection against change.
There’s no doubt about it, we are in a period of uncertainty and change that is affecting everyone in the industry. On a positive note, it does make the telecoms industry one of the most fascinating to be involved in! We should also remember that the telecoms industry has outlasted many others, continually showing its ability to evolve with the changing times.
Dave Millett runs Equinox, a leading independent brokerage and consultancy firm working with companies, charities and other organisations. He also regularly advises telecom suppliers on improving their products and propositions.