Traditional Telecoms Lost Connections

Older telecoms service companies are failing to find ways to compete with Skype, WhatsApp and all the other web-based providers who are gradually taking control of the way we contact each other, a study shows.
No need for wires anymore.

The traditional telecom companies like Deutsche Telekom will soon find their business models obsolete as free online communication tools such as Skype, WhatsApp, Allo or iMessage take over, according to a new study by management consultants McKinsey.

Deutsche Telekom and its overseas equivalents such as BT in Britain have long complained that they are obliged to bear the cost of laying down and maintaining phone and internet cables and mobile phone masts while allowing access to rivals that then steal away customers and market share.

The McKinsey study shows the predicament will only grow worse. It predicts that by 2018, free-to-use services such as Skype will have taken over half of the communications that for many years filled the coffers of the telecommunications providers. McKinsey forecast that in 2018, so-called Over-The-Top (OTT) services that use the infrastructure of others will send up to 60 percent of messages, 50 percent of landline calls and 25 percent of mobile telephony.

That’s a lot in a market which, in Germany alone, has a volume of around €60 billion ($64 billion). These figures are even more dramatic when viewed historically. In 2014, the telecommunications challengers had a share of only 24 percent of messages, 16 percent of landline calls and 5 percent of mobile telephony.

The telecommunications providers don’t have a clear idea of how they can make inroads into the new commercial areas. Torsten Gerpott, professor for telecommunications business, Duisburg-Essen University

At the moment, despite some grumblings, the big telecoms players are remarkably calm about the success of their rivals.

“There is no doubt that they have shaken up the classic business models of telecommunications companies,” said a Deutsche Telekom spokesman, “but we consider ourselves quite capable of finding a response.”

Spain’s Telefónica, which owns the O2 brand, meanwhile said in a statement that: “We have a clear strategy that takes these developments into account.”

Vodafone more poetically said: “The old disappears, the new comes. We always consider all options and act from an entrepreneurial perspective.”

But there is little doubt things are changing fast. The German industry federation VATM estimates that almost 69 billion SMS messages were sent in 2012. Last year, the figure was only a quarter of that. At the same time, 40 billion short messages are sent via WhatsApp per day.

“The telecommunications providers don’t have a clear idea of how they can make inroads into the new commercial areas,” said Torsten Gerpott, professor for telecommunications business at Duisburg-Essen University. “There are a few ideas, but up to now, I don’t see a product with mass-market potential.”

Niko Mohr, a partner at McKinsey and co-author of the study, agreed: “If the companies don’t take vigorous steps, their margins will shrink further. This trend won’t abate.”

26 p20 German Telecoms Less Revenue, Bigger Investments-01

The telecommunications providers like to point out that without their infrastructure, things wouldn’t work. “OTTs are simultaneously rivals and partners,” said a Telefónica spokesman. “The OTTs are known to cannibalize core telecommunications products such as short messages and to a certain extent telephony. But on the other hand, the demand for data volume is growing and boosting revenues accordingly.”

But that won’t be enough to assure adequate profits that are attractive to investors. The McKinsey study said that the European telecommunications market shrank by 1.8 percent between 2014 and 2016. At the same time, providers had to invest heavily in order to satisfy the demand for more bandwidth. The study expects these expenditures alone to reduce earnings by 15 to 30 percent. The authors make two suggestions for escaping the dilemma: The companies must slim down significantly and increase investments in business customers.

The radical proposal is to reduce costs by 30 to 70 percent. This would be quite a challenge for many firms. Nor is the second proposal an easy matter. “The commercial customer area offers providers an opportunity to establish themselves,” Mr. Mohr said. But there as well, he observes, other competitors have got moving and are starting to occupy the market.

The telecommunications providers know that in this hotly contested market, at least business customers offer opportunities for growth. Only when asked what specific actions they intend to take do they betray a certain bafflement.

This is evident in a study by Boston Consulting Group which acknowledges that established providers are important to their commercial customers, but they have failed to create a close bond to customers such as Google and cloud providers do. Old, inflexible infrastructures and ineffective salesmanship are to blame.


Ina Karabasz is an editor at Handelsblatt's companies and markets team, covering telecommunications, IT and security issues. [email protected]