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TELECOMS AND SOFTWARE NEWS
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Tesco increases pressure on broadband players
Michael Philpott, Charlie Davies
Tesco increases pressure on broadband players
Tesco, the leading supermarket brand in the UK, with a strong international presence, announced last week that it intends to ramp up its broadband business with a new five-year deal with Cable & Wireless that will allow it to offer competitively priced voice and broadband packages in its home market. The initial reaction may be to just dismiss this as yet another broadband reseller initiative, but our view is that this is an indication of bigger and more disruptive activity on the long-term horizon.
The next decade will see dramatically altered telco revenue streams
Currently approximately 70% of consumer telco fixed revenues come from voice services. By the end of the next decade, the majority of revenues will come from broadband services, and the fixed telephony market as we know it today will hardly exist. This represents a huge shift in business models for today's telcos. Broadband access is of course a large part of that future, but falling costs, greater wholesale availability and competition is turning it into a commodity that is packaged into service bundles. Such bundles will not just be offered by traditional telcos, but pay-TV operators, high-street and online retail brands, and even consumer electronics companies and webcos such as Google and Yahoo. Competition will ramp up. The future will see telcos heading off in different directions
Going forward telcos will compete on different levels. At one end of the scale there will be the large consumer brands that bring a rich portfolio of services to the end user and aim to control the complete end-to-end user experience. These will be companies such as Orange in France, BSkyB in the UK and Verizon in the US. At the other end there will be leaner players that focus on offering a simple, cost-effective but best-in-class access product, leaving other players to provide the premium services and applications. This group of players is far more likely to also provide connectivity to 'networkless' companies on a wholesale basis. In markets like Australia and Singapore, where governments have clearly committed to a separation of infrastructure, networks and services, there is a definitive move towards greater development of wholesale services to supply a plethora of such virtual players. Tesco has the power to elbow others out of the connectivity market
Although Ovum doesn't believe Tesco's announcement will have an immediate impact on the UK's broadband market, it indicates the appetite of huge retail brands to enter a space that has traditionally been the preserve of telcos. This has long-term strategic implications. Retailers such as Tesco and Carrefour (see our report on Carrefour's MVNO activities) have already successfully encroached on areas such as personal finance and electronic goods. They have existing retail space, customer care units, billing mechanisms, and detailed information on customers through customer loyalty schemes - all assets they can leverage in broadband-related services. Happy with the 'bread and butter': less margin and profit pressure
Supermarkets build their business models on scale and efficiency: key factors in making basic broadband successful. We do not believe the likes of Tesco will seek to launch premium services and compete directly with pay-TV providers, for instance; rather, they will be content with plain services that are cheap and easy to launch and supply. The killer factor for competing retail telcos is that broadband services are not their sole revenue stream, which means they can undercut the competition as they can make higher margins elsewhere. Watch out for a squeeze
The potential for supermarkets such as Tesco to gain substantial market share at the lower end of the market in the long term is significant. If successful Tesco will place added pressure on the large players holding the middle ground, such as TalkTalk, BT, O2 and Vodafone, as they gradually start to get squeezed between such resellers of basic broadband and full multimedia service companies like Sky. There is potential for telcos to adapt to these new competitive dynamics, potentially by shifting to a more wholesale-based business or by partnering, but one thing is clear - further consolidation is inevitable.
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This article is an extract taken from Ovum's Straight Talk service. This daily email bulletin provides our expert's views and opinions on important news and events in global IT and telecoms. If you have a comment or question regarding this article then please submit your details here:
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