A collegue and I have been discussing the Dutch market conditions for some time. The big paradigm that is currently materializing is that of a shift of vertically integrated service provides towards horizontal providers. The Dutch regulator actually published a report on this some years back and the EU regulators are in favor of such a shift.
What this means is that physical (access) networks must be opened for third party (over the top) service providers to deliver services. Based on this shift, Koen and I have been discussing what the competitive, strategic position is of current operators like KPN and UPC. Using Porter's 5-forces model for competitive analysis, you can see a trend of worsening conditions for existing operators.
On one hand these operators have shareholders who still have growth expectations (KPN announced another 2000 lay-offs yesterday, but also a "path to revenue growth" of 25% in three years), on the other hand there is a consolidating market (NL: Central Bureau of Statistics shows stagnation or even a modest decline since 2002) while competition of OTT providers is starting to become significant. It seems that shareholders expectations are not in line with market realities. There may be an overvaluation of the operator market (not specific companies, but the market in whole).
What this means is that physical (access) networks must be opened for third party (over the top) service providers to deliver services. Based on this shift, Koen and I have been discussing what the competitive, strategic position is of current operators like KPN and UPC. Using Porter's 5-forces model for competitive analysis, you can see a trend of worsening conditions for existing operators.
On one hand these operators have shareholders who still have growth expectations (KPN announced another 2000 lay-offs yesterday, but also a "path to revenue growth" of 25% in three years), on the other hand there is a consolidating market (NL: Central Bureau of Statistics shows stagnation or even a modest decline since 2002) while competition of OTT providers is starting to become significant. It seems that shareholders expectations are not in line with market realities. There may be an overvaluation of the operator market (not specific companies, but the market in whole).
As an example take Skype. In 2003 there were 10k users on-line and operators were probably not even aware of Skype. In 2004 KPN commented that Skype was not a serious service because it offered no QoS. In 2005 Skype partnered with ePlus (KPN mobile in Germany) to provide Skype over 3G. Still, analysts all over the industry said that the volume of Skype did not have any impact.
I see this differently. Skype generates more voice minutes that KPN per year. Yet Skype generates roughly 5% of the revenues that KPN does. That's not a problem, since they hardly have any costs. Yet, on a macro level, They've subtracted 4B EUR revenues from the total market. What's even worse, the price/value perception of customers has been seriously impacted by Skype and has driven down price points further.
This made me think that existing operators have three areas of interest:
CRM
Services
Network
The CRM capability is best explained as follows. Consider mobile payment. Who would you trust more, your bank or your operator, to handle your mobile payments? Rabobank has started such services (MVNO), ING bank has it on the drawing boards, etc...
Services: operators have a track record of not producing killer apps like Google, Yahoo, Skype and others have. Ultimately, the best people of the industry are not working for them, but rather for companies like Joost.com. Ultimately, if operators are forced to open their networks, I believe they will have difficulties to defend their position and since they have a nearly saturated market share, they much to loose and little to gain. To make a point, look at the website stats of Comcast and compare it with Youtube:
We can argue about the validity of statistics, but it does show a pattern. The only operator on Alexa's global top-100 is Free (http://www.free.fr/). http://www.alexa.com/site/ds/top_sites?ts_mode=global&lang=none
If you take a look at P/S (price/sales) of companies, you will find a similar trend. Companies like Google have a ratio of 5~10, companies like KPN typically have a ratio of less than 2.
Network: I believe this is the only area where operators can defend their position. The downside is that "network only" is a commodity/utility. I was absolutely shocked the first time I read the business case of Reykjavik Energy who had plans to deploy ftth as a barebone, utility service. The business case used a depreciation period of 30 years and a break-even in 16 years. It took some time to realized that the htc and twisted copper pair which is being used for broadband is already 25 years old. I realized that investors in operators expect shorter paybacks and that may be a reason why operators are struggling to invest in ftth (too low NPV, due to too high discount rate). In essence, investors may be looking for a different risk/return profile. Wireless equivalents to ftth could be WiMax or other technologies, although wireless inherently has less protective entry barriers.
So, it seems that the key question is: how can operators protect their shareholder value?
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