High margin traditional voice services are being replaced by VOIP and non-voice communications services, including various social media apps.
Is automation the answer?
We’re all only too aware new services and providers have led to a shift in consumer behaviour and expectations, with a resulting erosion of traditional CSP consumer revenue streams. Pay TV has been under attack from OTT providers such as Netflix, Hulu and Amazon for several years, with cord-cutters, cord-shavers and cord-nevers becoming recognizable phenomena. For a snapshot of how prevalent this trend has become, here’s a useful snapshot of recent reported statistics (Techjury 2019 - Cord Cutting Statistics & Trends).
Similarly, high margin traditional voice services are being replaced by VOIP and non-voice communications services, including various social media apps.
The opportunities associated with digital transformation, largely driven by disruptive new market entrants, are already undermining the traditional CSP business model and this trend is set to continue. So what can CSPs do to counteract this threat and where will their expected future ARPU increases come from?
A shift of emphasis away from video and broadband
We’re already seeing some CSP movement away from video and towards broadband provision as the lighthouse service. This Cable Europe graphic demonstrates this drift:
As another example, in Q1’19 Comcast added 375,000 broadband subscribers to offset 121,000 lost video customers, and while overall revenues increased by 4.2%, this breaks down into growth of 10.1% for broadband and 21.4% for wireless, while advertising revenue slipped 4.5% and video less than 1% (Fierce Video 2019 - Comcast Q1 Results).
TV-free cable TV?
Cable One in Arizona takes an unusually stark view of video (CNBC 2019 - Future of Cable with No TV), focusing on broadband as the highest margin product and de-emphasizing video in particular, as this represents what many commentators call ‘empty calories… bulking up headline penetration and revenue without adding significantly to the bottom line.
“… we don’t put time and resources into pretty much anything having to do with video …”
Cable One CEO Julie Laulis notes bundling TV with internet is not a particularly effective method to hold on to customers… “We don’t see bundling as the saviour for churn. I know that we don’t put time and resources into pretty much anything having to do with video because of what it nets us and our shareholders in the long run. We pivoted to a data-centric model over five, six years ago, and we’ve seen nothing to derail us from that path.”. Incidentally, Cable One broadband ARPU was $69.90 at the start of 2019, the industry’s highest according to MoffettNathanson.
The value of broadband to consumers
An interesting survey, undertaken by ATKearney for Liberty Global (Liberty Global 2019 – Object of Desire), looked at how consumers perceive the value of their broadband service. The results suggest consumers would be willing to pay more for broadband if that were the only option, but perhaps more significantly once the consumer purchase decision is made, the reliability and usability features of the service become the dominant factors affecting customer satisfaction.
Key Findings from the ATKearney/Liberty Global Report:
- The value assigned to telco services by consumers exceeds the actual price paid for these services many times over.
- While price and price-related elements are very relevant at purchase time, they become less important thereafter.
- For consumers, 38% of telecom service value comes from collective benefits (e.g. coverage, quality), 33% from individual benefits (e.g. speed, bundle size), 16% from price and 13% from flexibility.
- Price and flexibility are traditional assessment metrics, but only account for 30% of consumer value. 70% relates to collective and individual benefits.
Maybe there’s a useful steer here for CSPs, encouraging the view that they shouldn’t stress to find a ‘magic bullet’ replacement service with the potential for PayTV-level revenues. Consumers will be attracted and retained via a combination of exceptional quality broadband (fast, consistent and robust) accompanied by a basket of CSP-provided services that not only add incremental value to consumers and CSPs alike, but also increase stickiness.
The 5G value prop – still not proven?
Having said that, a recurring note of caution surrounds a lack of clarity regarding the business case behind the huge CapEx investments being made, not least in 5G, where much of the revenue innovation is expected to be enterprise rather than consumer-focused. A 2018 McKinsey survey published in February 2019 (McKinsey 2019 - Cutting Through 5G Hype) highlighted that most service providers “see this latest wireless advance primarily as an opportunity to cement, gain, or regain network leadership”. The services which will populate the new environment are further down the priority stack.
Among the candidate services regularly identified as likely to populate the future consumer services ‘basket’ are AR/VR, IoT (including home automation, environmental control and security services), smart and autonomous vehicles, and real-time streamed games. On the B2B side are industry-specific opportunities in areas such as healthcare, automotive, gaming and other verticals, some benefiting from network slicing and the flexible SLA approach it allows for different enterprise segments and requirements. However, many of these will depend on the availability of next gen infrastructure, connectivity and flexibility… including advanced technologies currently in early deployment, such as 5G, SDN/NFV, cloud and edge computing. Enabling and optimizing use of these technologies will in turn depend on advanced analytics and automation, to dynamically configure and manage these capabilities and resources.