Divergent convergence

The U.S. is providing rare leadership in convergence strategy and services as the formerly distinct markets of wireless, wireline, cable and content transform into one pervasive digital services market. Europe remains unconvinced, with leading players following a divergent strategy to dominate single product markets. For now, both regions are right.

Following years of laggard performance in pure wireless, the U.S. is now a leader in all things convergence. Many of the leading players are aggressively developing strategies and products that envisage a network-independent services and content market, and recent mergers and acquisitions activity are but the first roll of the die to create scaled convergence behemoths. Inherent in these aggressive moves is a belief that no player can be successful by dominating one industry alone.

Europe, in contrast, has immense skepticism toward both the bundle and the level of customer demand for converged services — things which many feel are too risky given the costs and distraction of making even the most basic converged services a reality. As players try to join the ‘other kid's sandbox,’ they point to the litany of failed attempts at convergent service development. Inherent in their view is the belief that no company has all the competencies under one roof to become a successful quadruple-play provider.

Both sides are, to a greater or lesser degree, correct.

While technology increasingly opens up formerly isolated networks, the Silicon Valley leaders see an immense opportunity to capture the very service revenue that wireless carriers have built into their business plans — and that wireline players have built into their fiber plans. In short, the powerful challenge from non-network players such as Apple and Google is precipitating a race to link network and services through the power of the bundle.

As players react, they are causing still more momentum toward convergence through the recent M&A to achieve the quad play. From a U.S. perspective, convergence and bundling are highly defensive but fundamental requirements to the apparent undoing of the traditional industry status quo. Whether customers actually want these services is another, often overlooked factor.

This is what worries European telecom players. Their research often fails to validate an untapped latent demand for convergent services, and their appetite for costly experimentation is minimal. Instead, while keeping an eye on U.S. developments, these players are focused on an ever-greater share of wallet within specific product silos such as wireless. Many of the large players are often only blessed with a full set of quad-play capabilities in certain markets, making converged services more problematic to deploy. Convergence is only grudgingly acknowledged.

Taking a global perspective, the U.S. will benefit from its convergence thrust — primarily because there is a strong latent demand for key cross-platform services such as those that tie together the mobile phone and the in-home TV. There could be significant benefits of churn from the bundle. But most important, major players such as Verizon and Comcast cannot ignore the clear emergence of a large multi-network digital services market. There will be large vortices of low churn, high ARPU multi-service customers revolving around three to four large converged players.

Although there always will be a market for basic wireless, basic broadband, basic TV and basic wireline telephony, the potential of the converged digital market is such that no company, no industry, indeed no continent can resist the ever-closer union of the telecom and media markets for long. It will, undoubtedly, take many years before the outcome is known, but until that time, the U.S. and Europe will likely follow largely divergent paths to convergence.

Andrew Cole is president of CSMG, the management consulting division of TMNG, a global consulting firm focused exclusively on the telecom and media market. He can be reached at (617) 943-2367 or at Andrew.Cole@tmng.com.