back to article Whew, US cellcos... Better find a new revenue stream, QUICK

The wave of operator consolidation across the Americas and Europe is driven by the urgent need to cut costs and achieve economies of scale. With average revenue per user (ARPU) falling, even for supposedly premium LTE and fiber services, and with huge infrastructure upgrades still ahead, carriers need to find drastic cost …

  1. Arctic fox

    "... be consigned to a spiral of rising debt and falling margins."

    The tears were streaming down my cheeks as I read of the likely sad fate of the telcos in Europe and in the US. I cannot tell you how deeply move I was to read of their plight.*

    *Satire alert.

    1. big_D Silver badge

      Re: "... be consigned to a spiral of rising debt and falling margins."

      Yeah, I was looking at a new contract for youngest daughter last week. Here, in Germany, it was overwhelming how many operators (including the MVNOs) there were, let alone trying to compare their offerings.

      We went with Congstar in the end. Although it was really a toss-up between about 7 different networks, having discounted a further 20 as either too expensive or poor coverage in this area.

      1. Charlie Clark Silver badge

        You can't defy gravity forever…

        I just topped up my PAYG with the annual minimum of € 15… and the provider is going to give me € 5 on top. However, now that it no longer costs me anything to receive calls in the EU I will be retiring on of my UK SIMS and using my German one there: it is now cheaper to use a foreign SIM for calls in most EU countries. The other one may go to if I can get a reasonable rate for data, once that becomes fully unbundled. So, my current provider may end up the winner for my miserly spend.

        Makes you wonder why the Yanks thought the same would never happen to them.

        1. big_D Silver badge

          Re: You can't defy gravity forever…

          It is funny, the US talk about free markets being good and about "socialist Europe" being bad, but as soon as you point out that the US telecoms market isn't a free market, but a cartel or monopoly, with laws pretty much excluding the entry of new players into the market and that they are paying too much for their services, they get very defensive...

          I remember reading Paul Thrurrott's column, when he went on holiday to Barcelona and was dumbfounded that he could get a PAYG data SIM with 5GB data for a tenner.

          Then there is the phone "problem" in the USA. Here I choose the phone I want, buy it and stick in the SIM I want, in the USA they are (generally) restricted to whatever handsets the provider offers with the contracts.

          The one that really made me laugh was that they would have to pay for incoming SMS! I mean who in their right mind would agree to that?

          And don't even get me started on the silly cable monopolies out there.

          1. Michael Wojcik Silver badge

            Re: You can't defy gravity forever…

            Then there is the phone "problem" in the USA. Here I choose the phone I want, buy it and stick in the SIM I want, in the USA they are (generally) restricted to whatever handsets the provider offers with the contracts.

            What? No we aren't. You can get a subsidized phone with a contract, or you can just buy an unlocked phone from the vendor of your choice and use it with or without a long-term contract. We have MVNOs here, too.

            Certainly availability and price in the US isn't nearly as good as in Europe, but there are still deals that are much better than the carriers' subsidized contracts. I pay an AT&T-hosted MVNO $40/month for unlimited domestic calling and SMS and some amount of data - I don't recall what the limit is, because I'm never anywhere close to hitting it. I got my phone from a grey-market dealer via Amazon for less than $100.

            Customers in the US do generally get their phones from their carriers, but that's a cultural problem, sown by a history of competing phone standards (CDMA vs GSM, etc), non-transportable numbers (fixed long ago), contract phone subsidies that entice people into renewing, and general FUD from the carriers. There's also the problem of uneven coverage in less-populous areas, of which the US has many, so those looking to switch to another carrier need to do a fair bit of research.

  2. Joe Harrison

    When will they learn

    People will pay for fast, reliable, and cheap network connectivity, and also for efficient customer service when things go wrong. But that is about it and nobody cares about the network operator's brand image or anything else.

    Everyone is tired of the convoluted tariff structures and other sneaky tricks - the networks should face reality they are bit pipes and that's all.

    1. Anonymous Coward
      Anonymous Coward

      Re: When will they learn

      But people will only pay so much, and when you have competition nipping at your heels threatening to undercut you, you have as the article noted: a price war. Meanwhile, to get that fast and reliable connectivity, you eventually have to plunk down for more infrastructure: either more spectrum or more cells. Either way, that's a cost that's being hampered by your reduced revenues from the price war. Worse yet, this is happening across the board. All the remaining big players are feeling the pinch. Meaning no one's willing to blink and the next big infrastructure investment is shaping up to be a gamble. You could lost customers and revenue to cheaper competition or to bad network service.

      1. Anonymous Coward
        Anonymous Coward

        Re: When will they learn

        " to get that fast and reliable connectivity, you eventually have to plunk down for more infrastructure: either more spectrum or more cells"

        Only as a matter of commercial choice. I see no evidence that LTE will lead to better coverage, nor to any cost effective proposition to replace my fixed line broadband, so my network may as well stick to the current 3G H+ (when you're lucky) offer, and eschew the development of a 4G network.

        Eventually such an approach produces a two tier market, with those valuing high speed mobile data paying their way, and those prepared to tolerate the current mix of price and service able to stick with that. Seems to me the problem is only for telco's playing "keeping up with the Joneses" by investing in 4G for which there's not a genuine economic demand.

        1. Michael Wojcik Silver badge

          Re: When will they learn

          I see no evidence that LTE will lead to better coverage, nor to any cost effective proposition to replace my fixed line broadband, so my network may as well stick to the current 3G H+ (when you're lucky) offer, and eschew the development of a 4G network.

          Eventually such an approach produces a two tier market, with those valuing high speed mobile data paying their way, and those prepared to tolerate the current mix of price and service able to stick with that.

          Agreed. I care nothing for LTE - it doesn't help with my use cases at all. But my wife and daughter use a lot more mobile data than I do, and care more about both latency and bandwidth, for things like streaming video (something I have never, ever wanted to do with my phone). I'd like to continue paying little for the little I use. So a two-tier market fits my family's needs much better than Shiny LTE for Everyone.

      2. Tom 13

        Re: you eventually have to plunk down for more infrastructure

        A smart business man would have been plunking down more for infrastructure when the times were good, not waited until times were bad to panic.

        1. Anonymous Coward
          Anonymous Coward

          Re: you eventually have to plunk down for more infrastructure

          "A smart business man would have been plunking down more for infrastructure when the times were good,"

          You mean - in the days before the kit required for next generation networks was affordable or in some cases even available? Smart indeed.

    2. DavCrav

      Re: When will they learn

      "People will pay for fast, reliable, and cheap network connectivity"

      As the saying goes, you can only have two out of fast, reliable and cheap.

      But the point is, the consumer is apparently unwilling to pay enough to make fast and reliable also profitable. When this storm finally hits, expect bankruptcies and price hikes. It's incredibly difficult, as an ordinary person, to calculate how much a fast reliable service should cost. Apparently more than the money people are paying for it now.

  3. picturethis
    Stop

    Reason for M&A have nothing to do with cost savings

    The reasons have to do with eliminating competition and consequently being able to raise rates.

    Please stop buying into the spin (of cost savings) that these companies spew out. Also M&A's reduce jobs.

    So with M&A everyone loses:

    -employees layed off

    -customers get higher costs

    -customer service declines even further

    The only people that "win" are the stockholders.

    1. Charles 9

      Re: Reason for M&A have nothing to do with cost savings

      But being unable to raise rates (due to the price war) means they can't plunk down for that much-needed infrastructure. There's a risk of everything hitting the wall: too expensive to keep customers, yet not expensive enough to get the revenues you need to invest in improving yourself. When an industry hits this kind of wall, M&A is the only way out.

      1. Anonymous Coward
        Anonymous Coward

        Re: Reason for M&A have nothing to do with cost savings

        "too expensive to keep customers, yet not expensive enough to get the revenues you need to invest in improving yourself."

        I'm intrigued by this idea. Where do you think that the customers that a fragmented industry "can't keep" go? LTE is being driven by technology, the industry, and to a small degree regulators, but the message that industry are giving is that customers won't pay a necessary price to provide the toys they want.

        Hey! Mobile operators! Welcome to the real world, where customers want the world, they want it yesterday, and they want if for free. And as happens with good but expensive ideas elsewhere, maybe networks need to accept that if LTE is something that customers won't pay for, they shouldn't invest in it.

        M&A won't help unless it increases the customer density. But that reduces competition and moves market power to the telcos, which doesn't seem very desirable to me.

        1. Charles 9

          Re: Reason for M&A have nothing to do with cost savings

          "I'm intrigued by this idea. Where do you think that the customers that a fragmented industry "can't keep" go?"

          Never forget. There's always "AWAY." An unsustainable market can simply disappear, much as buggy whips and other obsolete tech. It can be a crash, or more likely a long death spiral as macroeconomic effects reduce cell phone tech back to an elite niche. LTE's already being deployed, so the costs are sunk. It's sink-or-swim time. So put it this way, if it's between going to the big telcos and simply disappearing, which would you prefer?

          You see, this is the endgame for capitalism. Sooner or later, you end up with a winner.

          1. Charlie Clark Silver badge

            Re: Reason for M&A have nothing to do with cost savings

            You see, this is the endgame for capitalism. Sooner or later, you end up with a winner.

            You seem to be ignoring the lessons of > 10 years 3G in Europe and the expansion of mobile in the third world. Companies can do it at a profit but not as monolithic providers of everything.

            What will happen is what's happened everywhere else: telco's will pool resources where possible and outsource whatever they consider not to be core business.

            The shareprice has been driven as much by money printing as anything else but debt is still ridiculously cheap so there are no real problems.

            Of course, pressure on the the regulator to smother the competition through a merger or a takeover can't be ruled out. I take this article as part of the lobbying process of the new Congress along those lines. Golden parachute for the FCC being packed as I write, no doubt.

            1. Anonymous Coward
              Anonymous Coward

              Re: Reason for M&A have nothing to do with cost savings

              "You seem to be ignoring the lessons of > 10 years 3G in Europe and the expansion of mobile in the third world. Companies can do it at a profit but not as monolithic providers of everything."

              Look at how many operators there are now and how many there were ten years ago. Spot a pattern?

              The vast majority of customers buy on price alone - nothing else, just price. These companies can't make a profit - which means that whoever has the deepest pockets will win by hanging on the longest. Monopolies rarely go bust.

          2. Anonymous Coward
            Anonymous Coward

            Re: Reason for M&A @ Charles 9

            "So put it this way, if it's between going to the big telcos and simply disappearing, which would you prefer?"

            Your argument is fatally flawed. Buggy makers went bust because even the earliest cars were better value investment for buyers - the demand for transport never went away, the customers simply went from the buggy maker's shop to the car maker's shop. In terms of this topic, mobile communications, where are you suggesting the customers for mobile communications go? It's not like somebody's come up with telepathy.

            Punters either need to pony up for LTE (which industry are claiming they won't), or industry needs to accept that there isn't an economic demand for LTE across the whole mobile market. Maybe some fraction of the market does have an economic demand (that is, desire for a product and the willingness and ability to pay for it), but that means that MNOs need to position themselves as mass market 3G providers using existing assets, or they can try and take a smaller, premium market position offering LTE - if the economics stack up.

      2. Anonymous Coward
        Anonymous Coward

        Re: Reason for M&A have nothing to do with cost savings

        The reason that you have shareholders is that they invest in the business. Profits come after investment, or is this wishful thinking in a get rich quick society.

    2. DavCrav

      Re: Reason for M&A have nothing to do with cost savings

      "So with M&A everyone loses:

      -employees layed off

      -customers get higher costs

      -customer service declines even further

      The only people that "win" are the stockholders."

      Moving past the idea that stockholders aren't people, it's not clear that M&A even benefit stockholders. The company taken over gets money, at least if it's a cash offer, but for the company doing the taking over it more often than not destroys value. I believe someone on El Reg has written about this before, probably Tim Worstall.

  4. Anonymous Coward
    Anonymous Coward

    Should have invested in the good times...

    As per the title.

    Saying that, we do need to be careful, or our mobiles will become like Freeview.. full of tacky crap that barely passes for a service.

    1. Anonymous Coward
      Anonymous Coward

      Re: Should have invested in the good times...

      I find Freeview excellent value for money!

      1. K

        Re: Should have invested in the good times...

        Well its free really is it, you've still got the BBC Tax, sorry I meant TV Licence ..

  5. Tom 13

    Sprint's problems are definitely of their own making

    I can't speak to the rest of the industry, but I expect it is the same there as well.

    Instead of following the age old dictum of "under-promise, over-deliver" they reversed it, over-promising and under-delivering. About 3 years ago I bought an smart phone I liked on their network. It was sold to me as a 4G phone and I was paying extra to use it as a wifi hotspot to connect my laptop. My intention was to use it on my 30-40 minute train ridge to and from work. Given that I have a train available for my commute, I'm in a high density area of the country, not the rural parts that usually grab the spotlight for bad service. But the best I could manage was a 3G connection, and even that was exceptionally prone to dropped signals and loss of signal during the commute. Which made it completely unsuited for its primary purpose. I waited for a while assuming that as an early adopter the situation would improve over time. It didn't. One day as I was looking at my bills and my debt I decided I wasn't getting $100/month value from my smart phone. So I canceled the contract. I now use a Trac Phone and pay for only the calls I make. My service at the moment is good until November with 1000+ minutes available to me. I might at some point upgrade the Trac dumb phone to a smart phone. But there's no way in hell I'm ever going back to Sprint.

    1. DavCrav

      Re: Sprint's problems are definitely of their own making

      How fast was this train going? The problem with things moving more than about 30 mph is frequent cell handovers that might result in dropped connections. Also, trains are not very good Faraday cages, but they are tubes of metal, and this has to be taken into account. I'm not saying Sprint isn't crap, I'm just saying that bad signal in a fast-moving train (if it is fast moving) is not an uncommon thing.

  6. Mark 85

    Big time fail for Telcos?

    Being investor driven, they've failed miserably at their business. Yes, they should have taken profits from the good times and used that to do upgrades or put it away for future upgrades. Investors won't let them do that.

    Then there's "price point" and what the customer needs/wants. Everyone who makes decisions in this industry fails to see that when the Telco bill hits a certain point, they're dropping services. "Need" suddenly becomes a priority as opposed to "want". Sure, junior wants streaming videos on his smartphone. Those who foot that bill at some point wake up and wonder why they're paying that much money for this service. Enough of them do that, and there's a dip in revenues.

    Monopolies live in their own world where they expect customers to pay whatever they want to charge. Seems that they have forgot about how a customer sees it.

    1. Charles 9

      Re: Big time fail for Telcos?

      "Monopolies live in their own world where they expect customers to pay whatever they want to charge. Seems that they have forgot about how a customer sees it."

      Thing is, when the monopoly is in a highly-active industry (like in mobile communications—you want to tell the boss you're no longer on call and get laid off and become unhirable?), it's not just a monoply but a captive market. You have what everyone needs but no one else can provide. Like refreshments at a closed venue. You can try to go without, but sooner or later hunger or thirst gets the better of most people, so venues can charge a mint and no one can complain.

      The big IF for the cellcos is if mobile communications at this stage of the game really is a captive market or is the world at large ready to find some other way to communicate, especially in a highly-mobile, frequently-wireless society. One thing the cellcos have on their side is a high barrier of entry for alternatives, given the inherently-limited nature of radio spectrum.

    2. Turtle

      @Mark 85

      "Monopolies live in their own world where they expect customers to pay whatever they want to charge. Seems that they have forgot about how a customer sees it."

      I have seen the opinion that that's not really classical monopoly behavior, which would consist of keeping prices low in order to discourage competitors from entering the market, so making it a source of low but steady and reliable profits for the incumbent. Duopoly has different dynamics. As would captive markets in which the availability or dearth of substitutes is key. And then there is the inherent threat of government regulation, along with barriers to entry and imperfect competition. But these are all different things.

      The situation might be somewhat more complex than you realize.

  7. Version 1.0 Silver badge

    An eye-opener!

    Gosh, and I always thought that the business was all about whether or not you are profitable. But most people here seem to think that it's the mobile company with the most subscribers that wins?

    1. Anonymous Coward
      Anonymous Coward

      Re: An eye-opener!

      "But most people here seem to think that it's the mobile company with the most subscribers that wins?"

      Yes - because scale is king in telecoms*. Greatest number of users equals lowest average cost in serving those customers. Lowest cost also means you can go lower on price, hurting the smaller players more - it's a vicious or virtuous circle depending on which side of the fence you sit.

      The only way for smaller players to catch up and survive is to merge - because standing alone they don't have the headroom to compete on price and they don't have the cash or investment potential to invest in services and compete on quality.

      *I was presented the results of some analysis into the US market when I worked for a Euro telco that was a smaller player in the US market, maybe a decade ago. It showed the amount of infrastructure deployment required to get us to a point where even our cost of providing service was the same as our competitor's price to their customers. Something of a milestone if you want any hope of ever making money. That was then overlaid with the cost of achieving that deployment. We'd have gone bust, spectacularly, before even 20% of the work had been done. It's not just barriers to entry that are insurmountable, but barriers to growth too. You won't necessarily win from scale but you can only lose without it.

  8. Henry Wertz 1 Gold badge

    Coupe points

    "Apart from mergers, carriers may also choose to preserve profit margins by sacrificing market share, losing the lower value consumers and keeping those who choose an operator not on price but for network quality, added value services or choice of devices, for example."

    Well, the problem is (as you really did cover in the same page of the article), AT&T and Verizon Wireless already do this. Damn are they expensive! But, network-wise they absolutely clean Sprint's and T-Mobile's clocks, VZW has the most coverage but both VZW and AT&T have enormously more coverage than Sprint or T-Mobile.

    T-Mobile, they have very fast network in a very limited area and way the hell too much EDGE* everywhere else (which they are in the process of upgrading directly to LTE, since 3G is already obsolete.) *This is a bigger deal than you might think, EDGE in the US isn't getting that 100-200kbps data speed you might see on European EDGE, it's usually like 0-5kbps (1/10th dialup speed, so even GMail etc. will simply time out.)

    Sprint... well, they do have loads of spectrum, but the execution? Heh. Typically, they'll 1) Release grandiose 3 or 4 year upgrade plan that'd result in a good to excellent network (depending on the market.) 2) When the first year's up, it seems they've gotten through like 2 months of planned upgrades. 3) Delay delay delay... 4) After 4 or 5 years, they'll be through the originally first year or so of upgrades, and the rest is scrapped since they are on the *next* round of upgrades by then. I do hope they do their upgrades this time, and with Softbank's cash maybe they will.

    Two other points:

    First, LTE. MetroPCS *did* acutally roll out LTE and the world's first VoLTE deployment, in order to provide 1-2mbps data and voice at lower costs than their existing CDMA network, then passed some of those savings on through lower monthly bills. However, the other carriers viewed LTE as this magic cash cow and thought (at least at first) that they'd be able to charge all this extra money for the service, whereas (most) customers see it as the carriers problem to maintain a reasonably fast service and don't care if it's 3G or 4G as long as they do so. I must agree, if there were a "4G surcharge", I'd happily accept ~1mbps or so EVDO service and pocket the surcharge. (There are the other customers, as seen on howardforums, who love to see just how high a speedtest they can get, whether they "need" the speed or not.)

    Second, AT&T *loves* to conflate wireless, wireline, and cable figures. (Well, now that I Google it appears Verizon now also does this.) Last figure I saw for Verizon Wireless alone was (a few years ago) like $5 billion, and AT&T Mobility was like $4 billion (with both planning to bump it up as high as maybe $8 billion a year in the fastest -- i.e. most expensive -- portion of the LTE upgrades.)

  9. Henry Wertz 1 Gold badge

    "I have seen the opinion that that's not really classical monopoly behavior, which would consist of keeping prices low in order to discourage competitors from entering the market, so making it a source of low but steady and reliable profits for the incumbent. Duopoly has different dynamics."

    Monopolies only keep prices low to drive competitors out of the market, then jack prices up high to the profit maximization point (i.e. the point where $ per customer x number of customers yields maximum dollars.). There can be two of these points, one lower $ per customer but more customers, and the other higher $ per customer but fewer customers, with both being higher than a free market would have.

    That said, the US market is no monopoly. Don't get me wrong, I'd like a more competitive market, but it simply is a very very high barrier of entry to be able to run enough cell sites to even cover a region, let alone the country. (MVNOs are another matter but they are run at the pleasure of the big 4...) The original buildouts (1980s), if the coverage started out spotty... well, tough, there was probably nobody else to go to, they could build out over time and get plenty of customers to fund it. Now, if you started even a regional carrier, you'll have trouble getting enough customers with a lesser buildout, to fund completing the buildout. You could need $1 billion or more to build out a regional network, let alone national, and very few investors would invest in this. After all, VZW has been spending like $4-5 billion a year at least since 2000 ($75 billion), AT&T something like that, and even if T-Mo and Sprint have been spending $1 billion a year (I think it's somewhat more than that) that's $15 billion since 2000. And these carriers are older than that actually.

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