Three strategies for MNO diversification

Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this piece Angus Finnegan and Harry Briffitt of law firm Reed Smith explore three ways in which operators can keep pace with a rapidly evolving market.

As mobile devices become an ever-increasing part of daily life, the ecosystem for mobile services continues to evolve. Returns enjoyed by mobile network operators (MNOs) from traditional services such as voice and text are being squeezed by competition from ‘over the top’ (OTT) providers not burdened with the costs of running a network.

Wholesale termination and roaming rates have also come under fire and net neutrality regulation will affect the ability of providers of internet access services to offer bespoke service levels for bandwidth-hungry applications.

To avoid becoming mere ‘dumb pipes’ – commoditised channels through which younger, nimbler tech companies offer services and deliver content – operators are diversifying into mobile payments, content and ‘internet of things’ applications. As these value-add services often fall outside their core competences, operators (and partnering technology companies) need to carefully consider the best strategy to develop and implement new services:

MNOs have access to valuable customer data and user-generated content on which to focus development and marketing of their own OTT services. However, in-house development is resource-intensive and speed-to-market may suffer. The most innovative technology is likely to come from the specialist technology businesses. By way of example, operators have had limited success in influencing solutions for mobile payments (other than in developing markets) and in-house messaging applications are yet to seriously challenge the likes of WhatsApp and iMessage.

Through acquisition, a mobile operator can quickly bring a new service to market based on proven technology – if it is able to secure an acquisition on the right terms.

Earlier this year, U.S. operator Verizon acquired AOL, owner of current affairs website Huffington Post and popular tech blogs Engadget and TechCrunch. The purchase instantly grew Verizon’s online video and content offering.

A number of mobile operators have also established their own venture capital arms to invest, alongside others, in a diverse range of businesses from infrastructure technologies to taxi apps. Last month, Deutsche Telekom launched (DTSI), a strategic investment arm with €360m under management. It promises to streamline investment in technology, media and telecoms.

While investee businesses are not precluded from seeking investment from competing carriers (as investors take minority interests), an investor has the option of entering into a commercial partnership with the investee to exploit the technology.

Indeed, for an operator, partnering with a tech that works with your competitors often drives innovation based on a broader understanding of the market. Moreover, through VC investment, tech businesses typically gain showcase clients and valuable customer insight, thus creating a mutually beneficial relationship.

Existing partnerships in the telecoms sector range from regulated and commercial wholesale arrangements to digital media distribution. The internet of things market is also expanding. This growth will drive further collaboration in health care, smart-city projects, and the automotive and energy industries. Solutions already include internet-connected pill bottles that notify patients when to take medicine, and the delivery of medical information to patients in remote locations via mobile phones.

Joint ventures and commercial partnerships allow operators to quickly launch new services, often in a new market, without the capital commitment required for an acquisition. They may not get (or wish for) exclusive access to a technology, but they can differentiate through the commercial terms of the deal and a broader service offering. Technology partners on the other hand will benefit from enhanced distribution, billing and network support.

Phenomenal growth in mobile services and applications creates an exciting environment for collaboration. As the ecosystems become more diverse, we expect to see more MNOs seeking commercial partnerships to deliver their diversification strategies and a higher level of investment through MNO venture arms.

Angus Finnegan is a partner and head of telecoms, and Harry Briffitt is a trainee, in the Technology, Media & Telecoms Group of global law firm Reed Smith.