Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
It’s been said that a rising tide raises all ships, but not so in the wireless industry. During the last decade, the number of wireless subscribers has leaped from 750 million to more than 5 billion worldwide. Yet, nearly every link in the wireless value chain, from network equipment providers to device manufacturers to service providers, has been hit by multiple waves of consolidation, with the number of companies shrinking even as the industry grows.
Over my next few columns, I’ll explore just what consolidation means for each key sector in the value chain, as well as for the industry as a whole. Regardless of the sector, one thing is clear: Companies that are able to acquire others, integrate effectively to achieve global scale, and establish world-class operating capabilities will prosper in this turbulent environment. To all the rest, best of luck.
The key drivers of consolidation
The wireless industry is far from the first to experience the pains of consolidation. Industries as diverse as automobile manufacturing, consumer packaged goods, and airlines have all gone through it. Other industries go through it as well to a lesser degree. In nearly every instance, three drivers prove key:
Driver No. 1: Decreased differentiation. Industries that fail to continuously innovate, are constrained by standards and regulations, or evolve towards commodity-like products are prime targets for consolidation. These sectors typically experience rapid growth as they discover the mass market. It’s not long, however, before they run off course as a result of virtually homogenous brands and undifferentiated customer experiences that lower switching costs and drive purchase decisions based on cost rather than value. Consider the difficulties faced by automakers such as General Motors Corp. and Toyota Motor Corp. as their cars and SUVs have become virtually indistinguishable.
Driver No. 2: Operational inefficiency. Slowing revenue growth exposes icebergs of inefficiency, forcing companies to seek safe harbor with competitors and private equity firms. And, sometimes it is too late to steer clear or to make corrective maneuvers, and the company sinks. Given that slowing revenue growth hits every company sooner or later, it is important to prepare for this eventuality. Think of how airlines like Northwest and Continental, riddled with inefficiencies, were swallowed up by larger competitors .
Driver No. 3: High barriers to entry. Extremely high capital requirements, access to infrastructure, intellectual property rights, or even the establishment of a global footprint can prevent new competitors from entering the industry. In this environment, the big fish divide the market among themselves and look to swallow up smaller competitors for revenue and cost synergies. Look no further than logistics companies FedEx Corp. and United Parcel Service Inc., which have acquired smaller competitors, gone into adjacent businesses and kept growing.
Wireless’ perfect storm
The wireless industry is experiencing not just one, but all three drivers of consolidation right now.
Differentiation has become all but non-existent in wireless. Network equipment providers universally boast of end-to-end solutions, multi-technology support, and world-class managed services. Mobile device manufacturers pursue “me too” strategies, leaving profits in the hands of true innovators, application providers, and the enabling “Quadroid” duo of Qualcomm Inc. and Google Inc. All the while, service providers lack the true differentiation and the market segmentation needed to attract and retain dwindling net adds.
Another harsh reality has set in across the industry. With wireless penetration approaching, or even exceeding 100% of the addressable market in most mature markets, the opportunity for revenue growth is limited. Competition has intensified, with average revenue per user peaking and starting to decline in many cases. This is happening even while mobile data usage has outpaced the original growth trajectory for the wired Internet, and is forecasted to exceed 2,000 petabytes per month in 2013, according to Morgan Stanley.
Finally, the wireless industry is limiting new entrants. Yes, competition is alive and well, but like the television broadcast, cruise, and beverage industries, the wireless sector is discovering that the cost of increased competition outweighs the value that additional players provide when they create innovative solutions and open up new markets. For most new entrants, the costs of building network infrastructure, hiring large cadres of engineers, and establishing defensible intellectual property positions are simply too high.
Wireless consolidation is a fact of life. Network equipment providers like Nortel Networks Holdings and Motorola Inc. are being broken apart and sold like scrap, while Alcatel SA and Lucent Technologies Inc., Siemens AGand Nokia Corp. join forces to remain afloat. In mobile devices, Sony Corp. and LM Ericsson Telephone Co. have combined to stave off attacks while Hewlett-Packard Co. has added Palm Inc. to its flotilla to ward off agile competitors such as Apple Inc. and HTC Corp. And service providers such as Sprint Corp. and Nextel Communications Inc., as well as Zain and Bharti Airtel, are looking to mimic the scale of Vodafone Group plc, America Movil, Orange, and Orascom. It’s dizzying just to watch.
Surviving and thriving
My upcoming columns will discuss what key competitors and new entrants in each link of the wireless value chain can do to survive and thrive during the perfect storm of industry consolidation. We’ll look at key strategic and operational levers including:
Lever No. 1 – Innovation: Strategies to innovate globally and locally, to increase customer intimacy, and to increase customer and employee commitment.
Lever No. 2 – Operational excellence: Ways to build world-class capabilities in core areas such as network operations, sourcing, and supply chain management.
Lever No. 3 – Customer experience: Techniques for improving channel management, customer segmentation, brand alignment, and customer care, ensuring that customers are not only attracted to services, but stay with and adopt more of them.
Wireless industry players can do many things to not only survive, but thrive, in the wave of consolidation that is washing across the industry. Until next month, may the seas of change treat you kindly.
Dan Hays is a partner in the services, electronics, and software practice of PRTM, a global management consultancy focused on operational strategy and innovation. Hays works with communications service providers, equipment manufacturers, software companies, and media firms worldwide to drive growth, boost profitability, and set new standards for market leadership. Hays welcomes your comments at dhays@prtm.com.
