Is it time for telecom companies to ditch their reputation as just "dumb pipes"?
That's what a new global report from Citigroup Inc. argues, suggesting telephone and cable companies need to evolve beyond their wires and a business model premised on winning customers based on superior network quality.
The report, authored by 10 Citigroup analysts from around the world, argues that telecom operators should embrace a "digital transformation" that emphasizes selling service-based digital platforms and experiences to both retail and business customers.
Connectivity will still be crucial, but the Citigroup analysts propose a wide range of possible new avenues for telecoms, including mobile banking platforms, cloud-based television platforms, smart home and e-health services, advertising that leverages big data, and the connected devices that make up the so-called "Internet of things."
The report says a recent Citigroup survey of investors found support for the idea that traditional telecom operators should "face the OTTs [over-the-top services delivered directly to customers over the Internet] head on."
"They should move away from selling capacity (gigabytes of data) towards selling services, which their customers regularly use, understand and value."
Investors have long appreciated telecom stocks for their reliable dividends, particularly in a low-interest-rate environment. But the report argues that telecoms face "historically unprecedented challenges": sluggish growth rates in the range of zero to 3 per cent, a coming wave of heavy investment required to upgrade networks to 5G wireless technology and regulatory pressures to boost competition.
Traditional telephone and cable companies around the world are also facing pressure from specialized operators on both the infrastructure side (companies that focus solely on cell tower ownership or building fibre-optic connections, for instance) and the customer-facing side (online video-streaming services such as Netflix).
"Although the telecom industry may be able to slow this trend down in some instances, it is in our view unlikely to be able to reverse it," the Citigroup report states. "Some investors therefore believe that telecoms now face a choice of either becoming 'dumb pipe' infrastructure companies or transforming themselves into digital service businesses."
In some cases, following the latter model could mean "disposing of or sharing parts of infrastructure, which may allow them to free up capital for digital investment."
The report points to U.S. telecom Verizon Communications Inc.'s move to sell its cell towers while maintaining control of its wireless spectrum and networks, which are more strategic assets. Divesting towers, which are not seen as central to innovation, has been a trend in other countries, but one that Canadian carriers have thus far decided against.
The Citigroup analysts present examples from around the world, but don't single out any Canadian operators. Canadian companies have resisted loosening their control over infrastructure, but one can see this country's telecoms taking some steps toward the "digital transformation" envisaged in the report. For example, Telus Corp. owns no content but has invested heavily in an e-health strategy, Rogers Communications Inc. has been revamping its small-business division to focus on cloud-based services, and BCE Inc. has made continual improvements to Fibe TV to make its IPTV platform more appealing to customers.
Telecom companies have many assets they can leverage to support digital innovation – established brands and customer bases, access and/or control of local content, and familiarity with local regulators – but also must grapple with corporate cultures that have not historically embraced experimentation and risk-taking.
The question for investors may be how quickly telecoms can shed those cultures, born of their legacy as cable and telephone companies, and move to provide both connectivity and digital services that customers actually want.