DT Changes Boss, But Misses The Point

So Deutsche Telekom has forced out one CEO, Kai-Uwe Ricke, and replaced him with a new one, Rene Obermann. What does this tell us? It tells us that the German government has learned nothing from last time they changed a DT CEO. Last time the change was motivated by minor improvements to a badly flawed strategy, and the same is happening again. According to this article http://www.euro2day.gr/articlesfna/23879803/ the point is that the German government is fearful of reducing the number of German workers. Somebody should give them some advice on how taking a protectionist attitude to telecommunications is bound to fail.

I guess being big does not mean being clever. Take a look at the dinosaurs. Huge beasts that could eat up little mammals but brains the size of peas. And they all died out because they could not change; and the mammals got to rule the earth in the end. There has been a lot of speculation about DT buying BT, but that just shows how few options DT really has. BT is getting the point by speeding its growth in India http://news.bbc.co.uk/1/hi/business/6142496.stm on the back of successfully outsourcing a lot of jobs to the sub-continent, and pushing hard its broadband tv proposition. Meantime, DT is stuck on yesterday’s news about the mobile success story. Whilst big mobile rivals Vodafone and Orange/FT are slowly starting to realise they need to offer fixed-line services to the home to stay competitive, DT struggles to see beyond the consequences of losing its monopoly status in Germany. The irony here is that BT is a target because its home market was far more successfully liberalised than Germany’s.

What DT’s conservative backers fail to realise is that the money will never be in distribution, because ultimately USPs are few and far between. Apply Michael Porter’s thinking to telecoms and it all becomes clear – you either best your competitors on price (and so drive down your own costs) or your have something unique to your sales proposition. So where does DT’s strategy fit into this model? It does not. They are going to keep a high cost base by retaining most of their staff in Germany (and paradoxically try to offset this by reducing staff in operations in countries where labour is cheaper). And they have no meaningful way of differentiating their product.

The best way to differentiate your product, as everybody is starting to realise, is through content. 2-way communications may set the world free and empower us all, but ultimately with 2-way communications there are hardly any ways to differentiate your offering. The only consistent reason to chose one provider over another will be cost. On the other hand, access to exclusive content will enable distribution networks to charge a premium and build loyalty. That is why football will be a big part of BT’s new television offering. That is also why ntl is planning to buy the UK’s ITV network. That is why Rupert Murdoch has an investment strategy that matches his content to his distribution channels. That is why Apple do not just make iPods they also provide iTunes, and will gladly automatically convert your MP3’s to their format to help persuade you to switch to their supply line. And the incredible thing about content is that the big winners will be able to sell their content all over the world – which means the biggest players will come to the fore in dominating distribution of content in the three most popular languages: English, Spanish and Chinese. That is what sat behind Telefonica’s strategy for expansion in South America and that is what sits behind BT’s plans for expansion in India.

And, I will go further by making another bet. You should be familiar with the $100 laptop group, who now call themselves the One Laptop Per Child group http://www.laptop.org/. Most of the high-end mobile revenues are premised on the fact that they offer more sophisticated handsets than fixed-line providers do. Think of them as relatively fat clients in the client-server architecture, if you like. But despite their massive handset subsidies, that advantage is going to decay steadily. Laptops with wireless capability that can roam on and off local wlans, BT’s bluephone, set-top boxes of increasing sophistication with larger and larger hard drives, and ultimately the $100 laptop for the developing world, will challenge the assumption that there is a link between wireless connection and high-spec clients. In fact, if people pay a premium for content, my bet is that they will mostly want to enjoy it at home, not on the move, and so will want a device that can store and replay on to a large screen, not a small one. And if you pay for the content, not the distribution, why not just download to a device with a hard drive using the cheapest distribution channel (fixed line) and then copy that data to whatever device you want to reproduce the content with? Why would you want to pay extra for mobile transfer if you do not need it? After all, iPods have been so successful because people are happy to acquire and reproduce content from their fixed line in their home base, so why would they want to pay extra to download on the move?

By the way, if you do not see a link in all these things, may I point out the following about News Corp:
– they own a lot of content (Fox network, movies, newspapers etc)
– they set the precedent for big investments to get sporting rights
– they have been trying very hard to get into the Chinese market
– they were leaders in new distribution networks (satellite etc)
– they were leaders in putting hard drives into set-top boxes in people’s homes
– they are one of the backers of the $100 laptop group

So if you do not trust me, trust Rupert Murdoch. He seems to know how to make a buck or two, and seems to have a flair for making long-term bets that pay off.

I think the Murdoch’s of the world are the survivors, and the German government’s parochial vision of the telecommunications industry is doomed like the dinosaurs. Germany’s telco giant – and its government – is struggling to adapt to new conditions. It looks like they are focusing on being best at distribution, especially over wireless, in the hope of covering their high cost base. Instead, they should be following the commercial vision of focusing on securing content and a way to pipe that content cheaply to homes, whilst keeping costs low by taking a global view on where to locate your staff. Worst of all, their first language is not that popular world-wide. At least they all speak good English….

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.

1 Comment on "DT Changes Boss, But Misses The Point"

  1. I agree and completely disagree. The focus on profits from content is great, but for the creators, not the distributors (unless you’re vertically integrated (looking at you, News International et al) – note how Jobs says that Apple makes very little money on the iTunes store (>80% of revenue goes to the labels), but the music store drives iPod sales, where there *is* a healthy margin on the hardware.

    So DT should, as arguably T-Mobile has done in the UK, ‘get real’, accept they’re a commodity play and act accordingly. For example, flat pricing for mobile internet access is brilliant (in fact, revolutionary in it’s potential for worry-free unleashing mobile web access for consumers), but don’t try and layer content portals and sales into the mix – consumers will fly right past your expensive content and onto the regular internet. Sell it cheap and keep costs to a minimum.

    Would it be fair to say that in a commodity market, the real innovation comes in pricing strategies? E.g. ‘3’ with their deal to pay customers for receiving calls is pure commodity genius – 3 receives (e.g.) 5p/min from their competitor to terminate a call into their network and passes 2p/min to their customers…result? Customer encourages everyone to phone them, 3 and customer makes money, competitor pays for it…

    Now if you’re a content creator like Murdoch, you want to vertically integrate your content->delivery – and that’s where it makes complete sense…in Marxist and studio terms, he really does own the means of production…

    Your $100 laptop argument makes a lot of sense…but content is different in context – give me a movie at home, web on the bus and audio on my ipod…and if it syncs at home, or whilst mobile, if there’s no exponential cost increase, why do I care where it comes in?

    Subsidising handsets is an interesting strategy, but I’ve noticed Nokia now sell handsets direct – and the prices are comparable with ipods – i.e. ~£300 – http://shop.nokia.co.uk/

    Do handset manufacturers need the networks? With advent of high availability wifi, will cell networks matter (or more pertinently, will 3G networks matter)? And you can bet Nokia hate having their customer experience hijacked by operator screens and icon replacement…not sure if there’s a point here, other than subsidising handset’s pricing is desperation by networks, to attract handset-centric consumers who couldn’t give a monkey’s which network they connect on…so it all comes back to price!

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