Ming-Chyuan Chan also writes in this article
Commoditisation is sweeping across the global mobile telecoms industry with implications for corporate and investment performance.
In many countries, customers view mobile product and service offerings from different operators as interchangeable – no more distinctive than other commodities such as beans or gas. And the mobile industry is making matters worse. When competitors cannot differentiate themselves with products or services, they often just differentiate with price, draining billions of dollars of value from the industry.
To measure and better understand how commoditisation is affecting the mobile industry, we at Strategy& developed a national commoditisation score based on two independent variables – the difference between the market shares of the largest and smallest players in a market and the difference in the highest and lowest average revenue per user (Arpu). We then mapped the degree of commoditisation among 122 countries. In 2012 most countries (52 per cent) were either commoditised or on the edge of commoditisation. The remainder maintain some level of differentiation, but we believe many of these are likely to move down towards commoditisation in short order.
As part of our research we also developed an index to examine commoditisation trends by region. We found the level in North America and Europe to be similarly high, and similarly stable. However, other regions stood out for their very divergent commoditisation trends. Africa’s index experienced 18 per cent compound annual growth from 2009-12, bringing it in line with the level of commoditisation in the Asia-Pacific region. Interestingly, however, the Middle East’s commoditisation index fell in 2012 after 7 per cent growth from 2009-11, as operators retreated from pricing convergence and instead stressed innovation-based on products.
This tells us that commoditisation is not irresistible. While it has a strong gravitational pull, operators can loosen its grip. With this in mind, we have identified three strategies that telecoms companies around the world have used with some success to drive sustained differentiation. We call these commoditisation escape plans.
The first plan, “escape and challenge”, involves investing in new technologies and customer engagement tools, such as in 4G LTE and gamification. This investment helps to build an agile operating model that can create different products and services for different customer segments, thus establishing new revenue streams. Operators such as T-Mobile in Germany, SingTel in Singapore, and Vodacom in South Africa have used this plan successfully to increase Arpu.
Escape and challenge requires that operators cooperate internally across multiple stakeholders to keep the focus on products and services, pursue advanced customer segmentation, and nurture alliances with strategic partners. It also requires coordination with regulators to quickly identify rival operators who flout rules that unfairly tilt the playing field.
The second approach is to “accept and adapt” – to face the reality of commoditisation and make the best of a bad situation. Operators using accept and adapt focus on increasing market share instead of Arpu, providing the same services as the rest of the market but for far less. The key to making this strategy work is to provide market-par service at the lowest possible price point without triggering a price war.
To maintain the lowest cost operating model, companies need to make use of self-service technologies, aggressive business process outsourcing, network asset securitisation and contracted network maintenance. On the regulatory front, the operators should engage with regulators on issues such as active and passive radio access network sharing, rights of way simplification and simplified ownership transfer procedures for base stations sites.
The third plan, “consolidate to scale up”, involves growing through partnerships or acquisitions to gain scale and efficiencies, reduce marketplace fragmentation, and increase Arpu. For example, operators can expand network and availability by combining coverage footprints and reduce average marketing costs per subscriber by harmonising brands.
To make this plan work, operators must manage cultural and organisational integrations adroitly, and pursue headcount efficiencies with some finesse. Communicating with regulators is also important to head off any anti-competitive controversy when making an acquisition or agreeing to a partnership.
Commoditisation is a serious threat to most mobile operators around the world. However, there are ways to cope, either by escaping commoditisation or making the most of it. Each plan requires business leaders to think about their markets anew, to be nimble, and to consider how they can position their companies to succeed over the long haul. Those who do not respond in some coordinated fashion to the commoditisation threat will most likely experience a steady decline.
David Tusa is a partner, Milind Singh is a principal, and Ming-Chyuan Chan is an associate, with Strategy&, formerly Booz & Company
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