Reuben Chaudhury Crunch Network Contributor Reuben Chaudhury is a partner at A.T. Kearney .
Reuben Chaudhury Crunch Network Contributor Reuben Chaudhury is a partner at A.T. Kearney.
How to join the networkImagine a world where you buy mobile phone, data, voice and television services from a single provider. A world where you don’t worry about running out of wireless minutes, exceeding text message limits or running up roaming charges. A world where you talk, text and stream video on an iPad, TV, laptop or mobile phone, seamlessly using the same user interface and applications across wireless networks, fiber optics and Wi-Fi.
A pipe dream? Not in Europe, where the long-awaited convergence of wireless and wireline telecommunications services is already underway. Major combinations in the past two years include wireless giant Vodafone’s $10 billion purchase of Spanish cable operator Ono, and the $1.4 billion purchase of Belgian mobile carrier BASE by Liberty Global, Europe’s largest cable company.
And now convergence is crossing the Atlantic — with big implications for U.S. customers and carriers. Comcast, the largest U.S. cable company, has signaled it will add wireless to its menu of fixed-line video, data and voice services, making it the first to offer the complete convergence experience. This move is all but certain to send other carriers scrambling across the wireless-wireline divide.
The case for convergence in the U.S.
U.S. consumers who have shown lukewarm interest in bundled telecommunications services don’t know it yet, but they’re going to love convergence. Comcast’s pilot testing next year will give many U.S. customers their first glimpse at truly comprehensive, seamless services at a reasonable price. As Steve Jobs might have said — when they get it, they’ll realize they always wanted it.
Customer benefits start with savings. The average price of bundled voice, data, video and mobile service runs about 10 to 12 percent below the total cost of purchasing all four separately, based on A.T. Kearney analysis of prevailing plan prices in France and Spain.
Greater benefits will materialize in the long run as convergence triggers innovation. A provider offering all four services has a powerful incentive to drive usage by creating seamless experiences that encourage customers to stay connected. And a simplified pricing and billing system could replace today’s bewildering array of charges with a single price for services across all devices.
Convergence can expand profit margins through cost synergies and enhanced customer loyalty.
Convergence also makes business sense for the maturing telecommunications sector. Both wireless and wireline carriers have seen subscriber growth plateau. At wireless companies, average revenue per customer is falling and profit margins are under pressure. Adding new services to the mix would open a new revenue channel. At the same time, convergence can expand profit margins through cost synergies and enhanced customer loyalty. In recent wireless-fixed mergers in Europe such as Vodafone/Ono and Everything Everywhere/BT, companies projected consolidation synergies in the range of 8 to 10 percent of wireless costs in their investor presentations.
European experience also demonstrates that customers who buy more than one service from a carrier tend to stick around longer. According to Ovum, churn reduction is the most common objective of convergence; Ovum research found a 50 percent reduction in churn among customers with multiple services at Belgacom and KPN, the leading telecom carriers in Belgium and Netherlands, respectively.
Convergence, American style
Convergence won’t reach the entire U.S. all at once. Unlike European countries, where wireline carriers offer nationwide service, fixed-line companies in the U.S. have fragmented regional footprints. The largest, AT&T, covers less than 40 percent of the country, according to the FCC. As a result, convergence is likely to progress on a city-by-city basis until the whole country is covered.
Comcast will provide both a catalyst and an initial model for convergence in the U.S. The cable giant is moving into wireless as a mobile virtual network operator (MVNO) under an agreement that allows it to resell service on Verizon’s network. Others likely will start out as MVNOs, too. But as we’ve seen in Europe, the end game appears to be outright mergers of wireline and wireless companies seeking the full synergies and other benefits of convergence.
Cable companies are well-positioned to take the lead in consolidation, thanks to their dominance of wireline markets around the country. Few localities have more than one cable television company, but most have several wireless carriers. This means cable companies can pick and choose among potential merger partners, while wireless carriers will have only one option in each market.
What convergence means for carriers
Convergence will drive structural change in the telecommunications industry, as consolidation reshapes the competitive landscape and carriers confront the technological and operational challenges of combining wireless and wireline services.
Customers who love the seamless experience of converged wireless and wireline services will expect that experience to extend beyond the screen.
An initial hurdle is consumer indifference. A 2015 consumer study by GSMA found just 5 percent of U.S. customers with access to bundled services buy more than one from a single provider, even though 36 percent purchase the full suite of mobile, video, voice and data services. That’s where the discount off à la carte pricing comes in. Customers attracted by cost savings will quickly grasp the other benefits of bundling. As word spreads, adoption rates could rise to the 30 percent to 40 percent range, as seen in countries such as Portugal with mature converged offerings.
Customers who love the seamless experience of converged wireless and wireline services will expect that experience to extend beyond the screen. For example, they’ll want a single customer service representative to handle all their service needs. This poses a challenge to carriers with different service organizations for different services, MVNO carriers reselling wireless service on another company’s network and companies working to integrate newly acquired operations.
Convergence also will spark an evolutionary change in telecommunications networks. Combined wireless-wireline service requires a multi-layered network architecture spanning 4G wireless and Wi-Fi capabilities. Expanded Wi-Fi capacity is essential for the MVNO model, so carriers will need to invest in more hotspots, as well as new technology that automatically switches traffic from mobile networks to Wi-Fi routers.
Winners in the converged future will have evolved networks, fully developed digital platforms and the ultimate driver of convergence — a unified customer experience.
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