Telcos are a commodity and not innovative; so what?

While the world is worried about the trend of commoditization, a former Ericsson and Smartone telecoms industry heavyweight is asking what the big deal is.

Bengt Nordström, now CEO of consultancy Northstream, can boast of a more hands-off view on the telco landscape, and questions what the panic is all about. Yes, the telcos are being viewed as less innovative every day, and yes, business models are becoming more commoditized each week, but is that an issue?

“It’s not,” said Nordström in an interview with Telecoms.com. “We are saying this to all our clients that you’re in the best part of the value chain.

“The trend which we are likely to see over the next couple of years is the deterioration of revenues, because what telcos are bringing to the market is fairly commoditized and very similar to competitors. But there is an upside, the cost structures are too high.

“They can do what they do today and even better, by trimming the organization such as replacing legacy equipment and processes or hiring and retraining new people. They can still maintain margins even though top-line revenues are shrinking.”

The panic might only be setting in now, but the idea of the telecoms being a commodity is not a new one. The telco industry has always been one which has made use of the innovation of its ecosystem, packaging partner’s products and reselling to the market through expansive distribution networks. But the reality of being a commodity is still emerging.

According to Nordström, growth in the industry has disguised not only the fact the telco industry is largely a commodity, but also that it has not been hugely innovative for a number of years.

“The turning point is when the market stopped growing. A growing market hides a lot of the problems because everyone is making money. You are not penalised in an obvious way. It is post growth that the situation becomes much more clear.”

At the beginning of the mobile revolution, telcos were making heaps of cash converting people to the mobile way of life. Sales were vast as there was always people to sell mobile phone contracts to. Once the market hit the ceiling, the smartphone revolution came along, and telcos made another heap of cash converting the same customers to smartphones. Now we are at a stage where growth has stagnated, revenues are slipping, and the world is asking the telcos to be innovative in recapturing the missing cash.

The world is slowing finding out that the telcos are not innovative, and hiring smart people does not make you innovative. If you look at where innovation is coming from today, the likes of Huawei, Samsung, Apple or an unknown entity ready to take the world by storm, these are companies which are fundamentally different from the telcos. They have a fail fast attitude, an entrepreneurial environment, ambitions to break normality and a structure which encourages innovation.

Once again, Nordström points out that being out of the innovation loop is not necessarily a bad thing.

“You know who your competitors are, and they are in the same boat as you. They can build networks, they can change billing systems, they can launch new tariff plans and packaging of services, they can do this and that about roaming, but it is a very predictable market. You won’t get caught by surprise.

“For everyone else in the value chain there are unpredictable competitors and competitors that don’t even exist yet. If you make mistakes or in the you bring the wrong product to the market, then you are suddenly removed from being top of the food chain. This is not the case for operators.”

Samsung is a prime example. The Galaxy Note7 disaster could have been worse for the Koreans, but it is an example of what happens when you bring a dodgy product to the market. The telcos however were at arms-length from this disaster; they benefited from the revenues which were brought in through the Note7 marketing bonanza, but suffered none of the consequences of the fallout.

“We spend a lot of time communicating to the operators that your role is to source innovation from ecosystem,” said Nordström. “Not about building platforms that you build 10-15 years ago, it’s about asking the right questions. Who do we partner with? Who’s innovations can we bring to the market by packaging them in a clever way?”

So no, the telcos are not necessarily innovative, and yes, the segment might be getting commoditized, but that doesn’t mean there isn’t still a fortune to be made.