Another sector at boiling point

Ricardo Pérez. Professor. IE Business School

24 October 2012

Things are changing, and if teleco companies are to survive they need to offer added value beyond that of their network. Why?

The telecommunications sector is at boiling point. A few weeks ago we saw the launch of another new iPhone model, followed by announcements and launches by nearly all the firms in the industry. In Spain, Telefónica continues to lead the way with an integrated range of landlines and cell phones that have caused controversy in the sector. The competition in terms of value added for the clients of telecommunications companies is increasing by the minute. What are the reasons for this state of affairs in the telecommunications market?

Let me tell you a story. It is, of course, highly simplified, but you will be able to draw some conclusions. Not so many years ago teleco firms dominated the market. They decided which technology to use, which cell phones they were going to sell us, and how products and prices would evolve. If anyone wanted to sell any kind of additional service, they had to adhere to their conditions.

The market changed fast. Nokia’s designs and quality made clients place increasing importance on what they could do with their phones rather than what communications services they provided.  Then Nokia began to lose its power, and its position as market leader.

But suddenly a radical change took place. The first iPhone brought with it several revolutions. First a usability revolution, based on an emotional component that went beyond technology being groundbreaking and innovative. Then came a concept revolution – a cell phone which by definition supplies a connection to data was basically a “gadget” that was connected. But  rules change. Everything we do with cell phones now is because of Apple, which controls the experience. Value added services no longer come from teleco firms, they come in the form of Apple applications. The concept of technological platform, where Apple supplies the gadget and the software, while innovation and additional services come from third parties, makes them a formidable competitor.

Android hit the ground running so that Google did not miss the cell phone publicity train. Meanwhile, Nokia was still in crisis together with Blackberry, because it did not change the way it competed. Big players from only a few years earlier were left out in the cold as far as new revenues were concerned. As were teleco companies. All they could sell now were connections, and at increasingly lower prices. Their profit margins are still around 10%, but Google and Apple are clearing over 25% net profit. To give you an idea, today Apple is worth ten times more on the stock market than Telefónica. They still have pretty healthy businesses but if they do not evolve they may end up serving as mere channels for the data we use.

So what can they do? In order to offer new generation networks, they have to find revenues that will fund them. The controversy about whether or not Google or Facebook should share their revenues has not been very productive. What they have to do is change the rules of the game. Change their organizations in order to be more global. Global in terms of how they understand added value products. Opportunities are certainly related to being able to add value to their capacity to understand the network they manage and to offer a personalized product to their clients.  Being able to have all telecommunication services on one bill, pay additional “online stuff” to a company we more or less trust, are some short-term possibilities.

So who will win? Surely those who can both manage an organization that is competing in a highly regulated sector and one that offers unique added value services, with many partners, and in an increasingly open way. A difficult task, but one in which European teleco firms, the only really global firms of their kind, have already made headway by being able to explore these new services in markets operating at different speeds. So get used to controversy, and make offers that you do not expect to receive from your teleco operator. It will be far better for us clients.


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