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Falling margins spell doom for carrier diversification

Telcos should stick to their knitting

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Telecom carriers are spending billions investing in IP technology but more than half will fail to establish new lines of business over the next four years, according to analyst group Gartner.

Mobile broadband, Internet Protocol (IP) technology and the desire to become content providers are increasingly driving telecom carrier strategies. But in attempting to tap into new markets carriers run the risk of over-investing in immature technologies. Gartner reckons carriers need to adopt to a world with lower margins, rather than hoping that unproven business models and new technology promise a sure bet for future profits.

Historically, carriers have been able to depend on high revenue growth from broadband or mobile services, but this is changing. Gartner predicts that year-on-year growth of telecom services (80 per cent of total global telecoms market size) will shrink to just 1.7 per cent by 2010. By that reckoning, telecom services revenues will rise from $1.3tn in 2006 to $1.5tn in 2010.

Gartner reckons carriers need to be more realistic about future revenues, adapting to a world where they need to be profitable on lower margins and concentrate on making the most of their core businesses.

Many carriers are attempt to invest in new markets, such as content provision or IT services, to compensate for revenue losses in traditional telecom services like voice calls. For example, Telecom Italia recently reinvented itself as a media company after signing deals with Fox, MGM and Sony to distribute content over high-speed fixed-broadband connections. Meanwhile BT Global Services and HP have teamed up in IT service integration, particularly in the areas of hosting and application delivery. In Asia, SK Telecoms has acquired Korea’s largest music recording label, YBM Seoul Records.

But more than half of these initiatives are doomed to failure because many carriers have a limited knowledge of their existing subscriber base and weak understanding of new business models, Gartner warns. It cites a number of failed business ventures - sports channel ESPN's abandoned investment in mobile services, the failure of Germany telecoms firm E-Plus with content portal iMode - in support of its argument that carriers should concentrate on core areas such as connectivity or service aggregation.

"The synergies between the different business models and markets are very limited," said Martin Gutberlet, research vice president at Gartner. "This type of diversification carries a high risk of losing focus on today’s core business priorities such as customer retention and cost cutting, with no guarantee of increased revenue growth in the long-term."

"It will take more than just hiring a few media or IT executives for carriers to succeed in these new markets," Gutberlet concluded.

Those carriers who do decide to diversify are likely to do so by acquisition. Gartner predicts more partnerships between carriers and media or IT service firms, which will lead to heightened competition and greater pricing pressures, particularly for businesses targeting consumers. Due to the high risk of failure, Gartner is advising carriers to think through risk mitigation and potential exit strategies such as separate network access and new non-telecom service units into individual companies, which might be more easily disposed up if projections run aground. ®

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