Mark Billige, Managing Partner UK, and Ekkehard Stadie, Global Head of Telecoms, at Simon-Kucher & Partners

Eurocomms.com: Telcos appear to be caught in a continual downward spiral when it comes to pricing. What’s your view?

Billige/Stadie: The telecoms industry has a fixation on market share and volumes at the expense of profitability. There's a “culture” of failing to monetise innovation and passing on efficiencies to the end consumer.

In fact, telcos have educated their customers to expect price decreases, even with increasing speeds, service, etc.

In mature markets, telco services are becoming more commoditised but without some key elements of a commodity business model: for example, annual price rises, which are common with utilities.

The key problem is that the industry tends to see pricing as an acquisition lever (something to drop to get clients in the door) rather than a revenue lever (something to prioritise and carefully manage in order to profitably grow revenues).

Is there any logical, commercial reason why telcos should have this view that price deflation is natural?

There is no sound commercial reason - but it's easy to see how they've ended up with this mindset.

Given a lot of their costs are fixed and sunk, the assumption is that they have "almost no variable costs" and hence each additional subscriber on their network should contribute to profit.

But this mindset can be very dangerous. The reality is that there are variable costs and many customers never return a margin as they create more cost than revenue (through acquisition costs, data usage, etc.).

In fact, for many telcos the cost of acquiring a customer is higher than their market capitalisation divided by the number of customers - in other words: it is cheaper to acquire a competitor than its customers.

Continually lowering prices simply drives competitors to lower their prices and erodes profit for the whole industry.

Is it too late to change tack?

It's never too late to change. However, it would require an industry turnaround as opposed to any one operator.

Other industries have successfully done it. When prices get so low that sustainability is at risk then players are forced to find ways of increasing prices again (or engage in major consolidation as we are starting to see in the UK).

Most operators around Europe have now realised they need to change.

What’s the best way to increase prices?

It's not a case of simply introducing blunt price increases. It requires a holistic approach that coordinates and differentiates pricing for each end of the market.

It's about understanding new/innovative ways of extracting value from different customer segments.

One route is to focus on smaller/profitable segments with differentiated offers, such as priority and status (think gold card members) who pay for privileges & benefits. This helps move the industry away from commoditisation.

Other industries – think financial services (retail banking / credit cards) – have done this with great success.

Does the move towards converged (triple/quad-play) offer a way out too?

Only if done correctly. Simply bundling more (very high cost) products and discounting them could do more harm than good.

It may drive revenue and ARPU but it doesn't solve downward pressure on prices.

In our experience, bundling can be very effective at reducing churn - so it's very beneficial as a measure targeted at existing customers.

This churn-reducing effect is often underestimated, while increases in sales volume are overestimated. Focusing on bundling for existing customer segments would be more profitable than using it as a lever to acquire new customers.

What lessons can be learnt from other industries?

As mentioned, banking and financial services have tackled this with tiering and service development.

Other industries such as software have changed their entire business/pricing model and moved to a cloud-based subscription model.

The airline industry de-bundled its pricing to exploit differences in willingness to pay across segments and change price perceptions.

There's no one right answer for the whole industry, every operator has its own unique situation - but businesses that don't change can be left behind.

What are the specific implications if telcos don’t change their approach?

A number of things could happen: there could be further consolidation as returns get squeezed, communication services offered by players like Amazon, Google and Apple could continue to make gains over the traditional operators.

However, telcos are aware they need to change. It is still a profitable industry, and they can be even more profitable in the future if they focus on pricing, start thinking of price as a revenue lever and come up with the right price models/propositions for growth.

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