Digital transformation has turned the telco industry on its head with some telcos trying to buy themselves out of the hole, but recent events have proved money isn’t always the answer.
There are three events which we think demonstrate this ignorance aptly; the growing pile of insolvency petitions at the Reliance Communications, Goldman Sachs trying to cut its exposure at serial spender Altice and BT’s fragile-looking gamble in the sports content space. In each case there is hope to turn fortunes around, but there is damning common trait as well; failure to transform into an agile, combative organization ready for the connected economy.
Reliance Communications doesn’t prove to be a reliable investment
Reliance Communications has been circling the drain for quite a while, the signs were there long before the insolvency rumours emerged, but this just shone a light on inadequacies. The latest bombshell, according to Bloomberg, involves Fortuna Public Relations, which has asked an Indian court to place the telco under insolvency proceedings on the grounds it has failed to pay its bills.
Unfortunately for Reliance Communications, this $70,000 bill (roughly) isn’t the only financial headache. It’s largest creditor, China Development Bank hit it with an insolvency petition last week, while Manipal Technologies and Ericsson’s Indian business have also done the same.
The threat here was Reliance Jio. Jio changed the landscape of the Indian telco space, moving the consumer away from minutes and SMS, and onto data. It shook the market, and Reliance Communications is just one of several telcos which has suffered. To combat the threat, Reliance Communications tried to purchase fellow struggling telco Aircell, using the logic of scale to counter the digital transformation threat. This deal clearly fell through, and it looks like everyone is just getting bored with Reliance Communications.
The problem with Reliance Communications is it simply did not adapt to the new landscape in the Indian market. It didn’t move enough customers onto more lucrative postpaid contracts and didn’t evolve its offering to be more data-centric. It lost its relevance to the consumer which was eager to consume as many digital services as possible.
BT’s gambling habit comes back to bite
CEO Gavin Patterson has led the charge to dominate the sports content world, but according to the FT, BT is scaling back its ambitious position in the sports stakes.
At a Morgan Stanley investor conference in Barcelona, Patterson is acknowledging the possibility BT might lose the Premier League rights auction in February, and is putting together a plan B. Having spent £3.8bn on football rights since 2012, it would appear the shift into content and the multi-play market has not worked out as expected.
While purchasing sporting rights was not necessarily a bad move, BT forgot about everything else. It might have some of the best sports properties around but want about movies, or TV series, or culture? Perhaps BT focused too much on content with a shelf-life, as opposed to investing in areas which provide a more secure foundation.
Sport will always be relevant, and an excellent way to engage consumers, but you never own the rights, you are simply leasing them for a couple of years before another bidding war. When it escalated the price a couple of years ago, a trend begun, which has increased the price of Premier League and Champions League rights each year.
BT is perhaps the architect of its own downfall, as you have to wonder whether the billions spent on securing these rights is worth it. When you looking at the underwhelming growth of BT’s TV business this year, you might suggest it is not.
This is only one problem however. BT tried to buy its way to relevance, but it’s content platform did not evolve with the scale of its ambitions. Unlike Sky or Netflix, some have pointed at the BT platform suggesting it is not very user friendly. Customer experience will be the winner in many people’s eyes, and BT failed to evolve its platform to meet the requirements of the demanding customer.
Altice spending spree does not repay investor confidence
Altice is another company who tried to gain entry into the digital economy by flashing the cash, but investor confidence is pretty low according to the FT, as operational performance failed to back up the billions spent by Chairman Patrick Drahi on acquisitions.
Goldman Sachs is the nervous investor in question, as it has apparently been trying to reduce its credit exposure at Altice for the last couple of weeks. And there is some pretty good reason for the nervousness. Shares plummeted downwards after the most recent quarterly results demonstrated poor ROI from recent acquisitions, as well as a mountain of debt measuring €51 billion.
Altice has been on a spending spree over the last few years in an attempt to create a content empire to rule the world, alas, it seemed it forgot to do anything with any of the companies it bought. It would appear Drahi was more concerned with growing the size of his kingdom rather than actually making any money from it.
Recent acquisitions have included video ad tech firm Teads for $307 million, $17.7 billion purchase of Cablevision, €7.4 billion for telco PT Portugal, $9.1 billion for Suddenlink Communications, SFR for €17 billion and Virgin Mobile France for €325 million.
Drahi does appear to be an excellent deal maker, though the Goldman Sachs nervousness does seem to indicate debt has been allowed to rise to high compared to the performance of the business. Perhaps this is another case of someone believing the way to dominate an industry is to throw as much money as possible at it.
Back to that annoying buzzword…
When you look at the businesses which has successfully ventured into the digital economy, this has been done through intelligent purchasing decisions, but also designing products which are more suitable for the connected economy. Orange is a very good example.
Not only has Orange invested heavily in fibre and 4G technologies with the aim of long-term profitability, it looked to areas of disruption outside the traditional telco comfort zone to seek new revenue opportunities, as opposed to pleading the same subscriber. Its venture into the banking world is an excellent example of marrying its mobile expertise, with an industry which was ripe for disruption.
Unfortunately for Reliance Communications, BT and Altice, the fundamentals of the business didn’t seem to change, there was simply money exchanged in the belief it would ready the business for the onslaught of the digitally native consumer. While acquisition is not necessarily a bad strategy, it has to be done for the right reasons. Google’s acquisition of YouTube, for instance, was an excellent example of a company looking ahead of the curve, while Orange’s acquisition of Groupama in April 2017 took it into a new vertical to potentially be the disruptor.
In the three examples above, it seems the companies wanted to avoid the difficult job of digital transformation, instead choosing to try and buy themselves out of a hole. Doesn’t look like it worked this time though.