Strategy Development: Competitive Forces in the Telecommunications Industry

Sunday, June 3, 2018

Competitive Forces in the Telecommunications Industry

During this week’s lecture we learned that strategy development is influenced by a number of factors, externalities and market competitive forces,⁴that help guide organizations not only to understand profitability in the industry they operate but in the broader context of their mission, goals and objectives. The focus of this posting is to examine some examples as an attempt to illustrate how these forces are being played out in the marketplace.

On example is the article titled “Cord-Cutters Sap AT&T’s TV Business” which caught my attention based on the network effects—demand-side benefits of scale—and the supply-side economies of scale discussed in Porter’s article.⁴ So, I was reminded of how the Telecom Industry and Telcos, including cable companies and traditional telecom such as Comcast and Verizon and AT&T respectively are aggressively vying for the same markets and customers.

In this case, the article talks about how large numbers of customers are abandoning traditional TV bundles’ services across the industry. It seems the numbers reported by AT&T are just the tip of the iceberg. AT&T announced that it had lost around 90,000 customers in the Q3 2017 alone, from customers switching from its video and satellite pay-services to streaming channels from content providers via the internet—in part because these online options are more affordable and cost effective to these customers, the demand side. The flip side of this market dynamic is that such traditional services are more profitable for the TV and cable providers, the supply side, than to the latter. The traditional service fees and prices for TV bundles and such are now above what customers are willing to pay. And, I’m thinking another key takeaway is that customer switching costs,⁴ are no longer a barrier to entry also.

Moreover, delivering the equivalent video contents online to these customers, is less profitable to video providers such as AT&T’s DirecTV Now and Dish Network as well as content providers including Viacom, Disney and AMC and others. The prevalent business model in the industry is that their revenue is derived, to a significant extent, from service fees charged on a per subscriber basis. So, this announcement from AT&T and similar downward trends reported from Comcast and Charter Communications sent shockwaves through the financial markets, as this change in consumer behavior could potentially have a significant impact to their revenue streams and profitability going forward.

Therefore, I think that this shows how competitive markets and economies of scales and pricing of services are being shaped in this industry and illustrates the ongoing fierce competition to ensure customer acquisition and retention as drivers for future profits.