Will mobile and fixed telecom converge?

After discussing how commoditization has re-shaped the mobile and fixed telecoms markets in two previous articles, today it's time to take a look at what might happen if mobile and fixed markets converge - and whether market data indicates that this is in fact what is happening.

The idea of convergence — the merging of mobile and fixed telecom markets — has been top of mind in the global market for more than a decade now. In the past few years, a flurry of M&A activity in the industry has led to the beginnings of convergence in some markets. Overall, however, worldwide telecom markets are just now beginning to make the technological advancements necessary for true convergence to emerge over the next few years, with 5G acting as the catalyst.

What exactly is convergence? It’s simple, in theory. In a perfectly converged market, distinctions between mobile and fixed broadband will disappear, and users will get their connectivity seamlessly, both at home and away, purchasing it as a single service from a single carrier for a single price.

This state of telecom nirvana — at least for consumers — will come about in two stages. First, providers will build assets through consolidation and M&A and expand into adjacent mobile or fixed markets, allowing them to offer bundles of mobile and fixed services, and thus increase their market share. Eventually, network technology will evolve into hybrid networks, with fixed broadband at its core and mobile both for consumers on the go and as the last-mile connectivity to homes and businesses.

Telecom markets will experience two kinds of convergence, in market share first, and then in price. Exhibit 5 illustrates the likely path for most markets. The first step, bundling, will give providers a proportionately equal share of the combined mobile and fixed markets, while they continue to compete on the basis of price. In hopes of gaining market share, carriers will likely begin by offering quasi-quad plays (voice, Internet, mobile, and television) — as Xfinity Mobile has in the U.S. — with little or no discount for bundling these services.

Over time, carriers will continue their push to expand their network nationally and try to gain market share by acquiring competitors, by making wholesale agreements with MVNOs (mobile virtual network operators), and in some cases by encouraging the construction of state-owned networks such as NBN in Australia and Red Compartida in Mexico. Building the capabilities and the new products and services needed may be done organically and by developing interim technologies that temporarily lower the cost of providing converged services, such as offering mobile services over local hotspots.

Only in the second step, when technologies such as FTTN (fiber to the node) and, ultimately, 5G, CBRS (Citizens Broadband Radio Service), and 6GHz implementation allow fixed and mobile networks to converge fully, will markets experience price convergence. In this final stage, every provider will offer the same single product: a fully converged offering of mobile and fixed services. Because there will be no differences among the offerings of different carriers, or because only one offering will be available, there will be no differences between ARPU and ARPA.

Once a market is fully converged, competition among carriers will no longer be based on their physical network assets. Instead, they will all compete for the same mobile customers and fixed households or businesses, differentiating themselves by the kinds of services customers want, and by other options such as speed and bandwidth.

As pleasant a scenario as this sounds for consumers, full convergence will likely open up a threatening new chapter of commoditization for mobile and fixed telecom companies. First movers in offering fully converged services will likely gain an advantage in both market share and pricing. But once others follow, carriers will run out of ways to differentiate themselves. In short, convergence offers the specter of an almost perfectly competitive, almost perfectly efficient market. But that will be a highly commoditized market as well.

Three territories

We measure convergence using two distinct factors. Individual operators are measured in terms of the difference between their fixed and mobile market shares, expressed as a percentage; 100 percent is totally converged. Each market is also measured in terms of a weighted average of the market shares of all the operators in the market, also expressed as a percentage (and referred to here as market share convergence). This allows us to assess the extent of convergence among individual operators and in the market as a whole as it changes over time (see Exhibit 6).

Germany. In Germany, overall market share convergence has risen slightly over the past decade, to just under 50 percent, as two of the country’s three major operators increased their level of convergence. Vodafone has been leading the charge, beginning in 2013, when it bought Kabel Deutschland and significantly augmented its fixed network. In July 2019, the company acquired some of Liberty Global’s European operations, which will help it ramp up its converged services further.

Similarly, in 2014, Deutsche Telekom launched its MagentaEINS service, which combined fixed voice, broadband, and TV services with its mobile plans. Since then, Deutsche Telekom has grown increasingly converged, and it is now Germany’s most converged operator.

Although Telefónica Germany has gained share in the country’s mobile market since 2008, its share of the fixed market has been in decline since 2011.

India. The fast pace of mobile market growth in India has vastly outstripped the growth in fixed services. Some incumbents with large fixed-market shares, including BSNL and MTNL, also offer mobile services, but they have been forced to lower their mobile prices in their struggle to compete against new, private operators. As a result, these companies have not been drawn into convergence of fixed and mobile. This trend is reflected in the data, which shows declining market share convergence in India from 2008 to 2015.

Recently, however, the telecom industry in India has been consolidating, and private players are expanding their fixed and wireless assets. Airtel, for example, primarily a wireless player in the past, has been moving into fixed services, and Jio, a recent entrant into the wireless market, has also been investing in “fiber to the X” (FTTX) services. With the private operators getting into convergence plays, market convergence has increased over the past few years.

At the same time, the large geographic scale of the country makes the nationwide deployment of fixed services a challenge. The government recently announced bold ambitions for universal Internet access by 2022, and regulation may just end up as a catalyst for convergence in the country.

The U.S. The U.S. is a special case. Given the huge area to be covered and its vexed telecom and cable history, the market has evolved differently from the rest of the world. The old “Baby Bells” from the 1980s have consolidated into two giant players, Verizon and AT&T. The other two major U.S. telecoms, Sprint and T-Mobile, are almost certain to combine. Cable operators’ exclusive regional footprints give them captive markets.

The U.S., like India, is a vast country with a geographically dispersed population. Convergence evolution will probably not play out in those two countries as it will in most of the rest of the world. Instead, convergence in the U.S. will likely take place primarily over mobile rather than fixed networks, because the distances are too great for fixed investment, especially in rural areas. Indeed, over the past decade, growth in mobile has far outstripped growth in the fixed market. At the same time, some operators, including Verizon, have offloaded a portion of their legacy fixed assets, making their share of the fixed market smaller while increasing their mobile share. As a result, the data shows that convergence in the U.S. market has actually declined.

Current corporate strategies suggest that the divergence between fixed and mobile will continue, perhaps for a year or two. AT&T and Verizon will take years to build out their fiber networks, and the mobile operators will likely never expand nationally in the fixed market with fiber offerings. Although some cable companies, notably Comcast and Charter, are beginning to enter the mobile market, they face little or no price pressure because their fixed markets remain unthreatened.

Some industry observers argue that with fixed asset redistribution settled and mobile subscriber growth reaching a saturation point, this divergence trend will reach its end at some point in the next few years. From their perspective, the market is primed for convergence.

One key factor promoting convergence would be the implementation of 5G networking. It offers the promise of a national network that is equally capable of providing mobile and fixed connectivity. Nonetheless, given the patchwork nature of the U.S. market, significant challenges to deploying 5G on a national scale remain. The big telecom companies are struggling to build their 5G networks, the smaller players are proposing a heterogeneous mix of quasi-5G networking technologies, and the cable operators will continue to complement their coaxial networks with various wireless technologies.

In short, unless all these different players can figure out ways to partner with competitors for true 5G and to expand beyond their current geographical footprints, full convergence is unlikely to come to the U.S. anytime soon.

Conclusion: Living with uncertainty

Given just how different the process of convergence is for fixed and mobile services in each market, predicting the future is tricky. Factors include their current competitive setup, networking structure, and regulatory burden. Markets with a national fixed incumbent supporting a national fixed backbone and a few cable challengers, such as some markets in Europe, will evolve differently from markets with fragmented regional players, such as India and the United States. Heavily regulated markets such as Mexico and Australia will behave differently from more lightly regulated ones. And, of course, the willingness and ability of operators to make the investments necessary will greatly affect the timetable in every market. But one way or another, virtually every market can expect to experience convergence over the next five to 10 years.

And convergence can only mean further commoditization, as the services offered by players become less and less distinctive. This will present an existential problem for all players, unless they can find a way to distinguish themselves from their peers. The recent Strategy& report “Telecoms: Creating Value in a Disruptive Age“ outlines a choice between two strategic alternatives:

• Diversification. Many carriers have long sought to jump-start revenue growth by diversifying into sectors such as media and entertainment, financial services, and healthcare. The results have been decidedly mixed. But convergence, and especially the advent of 5G networking, should provide a boost in this direction. Companies with the will and ability to move quickly into new services could gain a distinctive identity and thus a competitive advantage.
• Infrastructure. Meanwhile, companies that decide to focus their efforts on converging their networking services can then provide a wide range of attractive services to consumers and businesses alike. They might offer a variety of speed and bandwidth alternatives, depending on customer needs, while selling access to their networks to others looking to benefit from their advanced technology.

In the end, convergence, and especially the promise of 5G, could help telecoms save themselves from becoming commoditized businesses. New consumer content and services will enrich everyone’s digital lives. The Internet of Things (IoT) offers a wealth of data and control over industrial activities in every sector. Ultra-high-performance networks will enable the customization of networking needs. Data privacy and security could be controlled centrally as Internet activities move through carriers’ networks.

Few if any of these opportunities will come to pass, however, if telecom executives do not find the will to develop a clear and coherent strategy for their company’s future — one that is decisively differentiated and clearly committed to a competitive edge. Too many operators are still trying to be all things to all people, and the results are bloated cost structures, mixed marketing messages, confusing brand identities, overextended managements, and unfocused innovation efforts.

The telecom industry is on the brink of a new era of connectivity, brought about by 5G, the IoT, and powerful new data analytics. Now is the time to devise and begin to carry out a focused strategy, one that stands a good chance of leading your company out of the dilemma of commoditization and into the brave new world of convergence.

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This concludes our 3-part mini-series - check out part 1 here, and part 2 here, or simply download the full 2019 Commoditization and Convergence report!