“Top business risks in the telecommunications industry” by Rosanna A. Fajardo (November 22, 2010)

Suits The C-Suite By Rosanna A. Fajardo
Business World (11/22/2010)

Telecommunications is one of the few industries that was able to create and protect shareholder value during the recent economic crisis. However, the shift of the global economy from defense to growth brings new challenges to the industry.

Based on quarterly reports as of June 30 submitted by the top five telecom operators to the Philippine Securities and Exchange Commission, average earnings before interest, taxes, depreciation and amortization continue to remain high at 46%.

However, the Ernst and Young’s Top 10 Risks report, which is based on interviews of telecom industry professionals conducted worldwide, identifies challenges that remain significant to Philippine telecommunications companies (telcos) and need to be managed collectively.

Losing customer ownership

Losing ownership of the customer ranks as the top risk globally.

In both consumer and enterprise markets, no single entity owns the customer. Studies show that many enterprise customers no longer care if they buy telecom services from traditional operators.

An intensifying cross-sector battle is under way for the loyalty of customers. Smartphone users, for example, consider device manufacturer brands as a strong reason to switch operators. Cable players are battling for triple-play customers, while a new wave of web applications continues to undermine legacy voice and data services.

Locally, where customer loyalty is largely driven by pricing, about 30%-50% (depending on the operator) of mobile subscribers maintain multiple SIMs to take advantage of cheaper services, such as unlimited call and text. The availability of affordable SIM cards, including plans that offer devices (including smartphones) for consumable monthly fees, contributes greatly to switching.

Although a switching decision is more difficult for enterprise customers because of potential impact on operational continuity, they are keen to consider price offerings from other operators as long as service quality is ensured.

To address the risk of losing customer ownership, operators need to work harder to change customer mindsets to reflect the real and substantial contribution made by the telcos to the overall service experience. They need to emphasize network value in ensuring high quality. By successfully communicating this, operators can remind consumers that service excellence is not just about the device or application; rather, it is highly dependent on network quality which is not a “given” with limited financial value.

Operators also need to balance two conflicting forces: surging data traffic is increasing network management costs, but not generating enough cash to offset declining voice revenues, or to fund the capital expenditures needed to ensure that network bandwidth keeps pace with exploding data volumes.

Failure to maximize customer value

Operators recently turned to unlimited usage plans and bundling practices to acquire and retain subscribers. However, experts warn that this practice may be counterproductive.

Fixed price and flat-rate usage can greatly increase bandwidth consumption without increasing profitability.

To moderate this, operators need to revisit their business models and strategies. Tiered usage policies are increasingly vital, as is striking the right balance between free and premium services. They should also consider new models such as smart-metering and repurposing network assets for third parties like mobile advertisers. Local players may look at Spotify and YouSendIt as examples of companies who have successfully added premium versions of previously free offerings.

Many telcos have also increased focus on customer value, reorganizing themselves along customer lines (i.e., consumer and enterprise) rather than technology lines (i.e., fixed or mobile). Customer intimacy is, after all, a key advantage. Moving forward, operators must go beyond merely meeting demand; instead, they must actively build or create new demands, improve customer experience and ensure that appropriate organizational structures are in place.

Lack of innovation

Operators feeling the pressure on traditional business models must also consider this risk. Relying on bundled offers cannibalizes revenue and results in investments without corresponding revenue growth.

Local executives believe that Filipino consumers have grown more sophisticated, adopting technology at a pace at par with, if not faster than, what local telcos can offer.

If operators are to delight a new generation of consumers while deriving their fair share of revenues from new data services, they should stay focused on innovation, not just for the sake of technology and the product, but with the customer in mind. They must energize their workforce through talent acquisition from technology and media sectors, or strategic partnering. They should reconnect with communities and applications developers, leveraging on new talents and approaches to capitalize on unique assets such as real-time and location sensitive customer data, maximizing adjacencies and improving partnership management capabilities to provide a truly differentiated customer experience.

Inability to contain and reduce costs

With revenues from legacy services remaining either static or falling and the revenue potential of new services uncertain, many operators need to cut costs.

For the last two years, most have practiced cost-reduction measures such as creating shared services, outsourcing noncore activities and reducing headcount. Network sharing has yielded some success in some countries but regulatory and technical hurdles remain.

Locally, the concept of tower sharing can be explored but may be difficult to implement as players consider their towers as a competitive advantage. The concern now is that most cost-cutting opportunities have been exhausted, and further cost-cutting will be more difficult to achieve.

Telcos will need to take a more systematic approach, identifying ways to operate with a structurally lower cost to increase margins; increase efficiency and scalability by rationalizing operations and infrastructure to support and monetize high volumes of traffic; simplify service creation processes to focus more on customer needs; and make the most of new network architectures and continually benchmark cost programs against strategic business objectives.

The telecommunications industry is one of the most dynamic business sectors, marked by fierce competition among the various market players.

To achieve competitive advantage, operators should keep one eye on these risks and the other on business growth, reexamining their strategies to take advantage of new opportunities arising in the post-crisis economy.

(Rosanna A. Fajardo is a partner of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.