End of the golden weather: Vodafone's loss and the uncertain future of telcos

End of the golden weather: Vodafone's loss and the uncertain future of telcos
Last week, Vodafone NZ announced a loss of $120.7 million for the financial year ending March 31 (up from a $28 million loss last year) due to falling revenue (down 4.4% to $1.97 billion from $2.56 billion) and continued costs from its acquisition of Telstra Clear’s New Zealand operations in November 2012.

The week before, we reported that, despite a 2.9% decline in revenue (down to $3.53 billion), Spark’s annual results showed, for the first time, less than 50% of revenue came from its legacy business of landlines, voice calling, broadband connections and managed data.

It’s a step in the right direction, but, in a sector that’s rapidly changing (and is one of the biggest targets of Silicon Valley disruption), will it end up being too little, too late?

With every new model and feature, smartphones are incrementally changing telecommunications. As Wired pointed out last year, smartphones are essentially small tablets, and anything you would want to use them for - including making calls and sending texts - can now be done without a phone plan by using services like Skype, Google Voice, and WhatsApp. The iPhone 6 can even make calls over wifi without the use of any third party application, through many providers (including Vodafone and Spark) disable this feature.

Cellphones have cannibalised the home phone. The low-hanging fruit of 20c texts and 89c cellular calls has long been cleared. So how will the telcos adapt?

“Everything’s moving to data,” says Blair Galpin, a senior equity analyst at Forsyth Barr specialising in Telecommunications, Media and Technology stocks. “The telco industry will generate less revenue over time from traditional telecommunications services. The question is - can they find new ways to generate replacement revenue?”

Google's Project Loon balloon

They’re certainly trying. Vodafone is offering consumers Sky TV, Sky’s streaming service Neon, Netflix, and its free-to-view television service Vodafone TV; and offering businesses cloud-based storage and security services. Spark is offering consumers its streaming service Lightbox and home security system Morepork; and offering businesses data analytics as Qrious, and cloud services as Revera.

But, as internet connections get cheaper, and expensive phone plans drift towards obsolescence, are these services - which are often used as sweeteners for consumers rather than money makers - enough?

"No device will work without a network and that's the fundamental thing,” says Adam Clarke, consultant at TeleConsultants. “You will always need connectivity but people aren't willing just to pay for that. They expect that as cheap as possible. The telcos can't make enough money just on connectivity, they've got to provide additional value on top that people are willing to pay for."

"If you look at Vodafone's figures, they are so poor because they're having to spend so much money in transition,” he says. “They bought TelstraClear and they've had to merge companies and change the way people work. Spark have gone through the pain of buying companies and they're still having to transition people off delivering the basic connectivity into delivering the smart stuff people will buy - just giving people connectivity isn't enough. In addition to funding transition they face declining revenues for traditional services which means they've got less money to do this with."

Facebook's internet drone (approximation)

So what’s ahead for Spark and Vodafone in the near-future, say in the next five years?  Will Facebook’s internet emitting drones or Google’s balloons be a threat to local telcos?

"You're always going to need cell towers to get to mobile devices. And someone's got to run them, someone's got to build them, and someone's got to get money back from them," says Clarke. “Could Google buy a network provider? Could they buy cell towers? Yes they could, but then they would just be another network provider and they are not in the business of running network infrastructure.”

“Even if Google or someone like that wanted to do something direct in New Zealand, they will go to someone who has the infrastructure. You can't bypass that without going up into space, which is a bit futuristic.”

Galpin agrees. “I still think that in most Western countries, content will be delivered by fixed cable or fibre of some kind and that’s more because of capacity,” he says. “If you look at the wireless internet services that have been offered, there still are capacity issues. A home that wants to watch 4k content on three different devices, you’re not going be able to solve that by satellite in the next ten years or so.”

While drones and balloons may be useful in getting internet access to remote regions and in developing countries, Galpin says they will serve philanthropic, rather than commercial, goals. Sure, they could someday overtake the cable and cell tower networks, but it's just as likely that some other unforeseen technology would do that instead.

For telcos, change really is the only constant. So what you pay for, how much you pay for it, and who you pay is all up for grabs. Will Vodafone and Spark be able to innovate back to profitability? Or are we heading towards a globalisation of services, provided through local networks owned by companies considerably smaller than the telecommunications monoliths we're used to?

I guess we'll just have to wait and see.