A Profile of Communications Industry Risk

The communications industry has become a dominant driver of economic and societal advancement. In particular, mobile access to the Internet has become indispensable to businesses and consumers, making the growth and innovation potential of the communications industry sure bets. The purpose of this article is to discuss the current state of this industry and to identify the top risks that its leaders should recognize and address to better manage the risk profile of their business.

We broadly define the communications industry to include manufacturers of communications infrastructure hardware and equipment for both wireline and wireless platforms; mobile device manufacturers; telecommunications service providers; Internet Service Providers (ISPs); and network service infrastructure companies. While a handful of major players dominate the telecommunications sector of the industry – e.g., AT&T, Verizon, Sprint, T-Mobile, Clearwire, Ericsson and Nokia – scores of smaller companies vie for position as a go-to provider of connectivity to the Internet for the end user.

CURRENT TRENDS

The communications industry is rapidly changing. Two significant trends are evident in the industry.

1. Vertical integration and partnerships – With the growth of cellular phones and local area networks, the communications industry as a whole has been shifting away from wired infrastructure towards wireless communications. This transformation is leading a surge of companies to vertically integrate their business models. AT&T and Verizon, once the dominant players in landline phone services, converted themselves to become leaders in cell phone and wireless Internet services. Sprint has established a strong relationship with Clearwire to expand its wireless Internet capabilities. Ericsson, originally a cell phone device manufacturer, refocused its business model to emphasize network equipment and its infrastructure for provider services. This trend is expected to continue and intensify in the coming years.
2. Next generation mobile technology – Perhaps the most notable current trend in the wireless industry is the migration towards 4^th generation (4G) communications technology that offers greater bandwidth and faster download/upload times. This advance is necessary to handle the enormous growth of data services that are expected to dominate the market over voice services due to the rising sales of smart phones and tablet computers. With the appeal of Apple’s iPhone and iPad, and Google’s Android platform, the major players in the industry recognize that they must now compete for customers based on their ability to offer extensive, if not unlimited, data plans that can handle the software applications, fast Internet access, video conferencing and location-based services that consumers increasingly desire. All these require extensive bandwidth capabilities that can be achieved only through networks utilizing advanced transmission technology.

TOP RISKS IN THE INDUSTRY

Protiviti publishes a guide to Risks in the Communications Industry that provides an overview of the realm of potential risks that companies in this industry face. In the context of this article, however, we identify the following seven issues as the leading risks for the industry in the near term:

1. Funding for growth – Many companies in the industry face significant risk of operating an inadequate or obsolete network if they do not keep pace with rapidly changing technological advances. As such, obtaining the financing for equipment and deployment will necessitate a large and rapid capital infusion from potentially reluctant investors as well as tapping into current revenues.
2. Cost and supply chain management – Given the high cost associated with upgrading and maintaining network infrastructure, companies must maintain a tight focus on controls throughout the network equipment lifecycle. They will need better oversight of their assets and rigorous planning; budgeting and financial management to ensure that money is being allocated; and spent efficiently and that network equipment is effectively tracked throughout the enterprise.
3. Customer loyalty – Customer loyalty is critical in this industry, where revenues and profits are driven by expanding the customer base and generating consistent (if not increasing) monthly subscription fees. Requiring long-term contracts and imposing penalties for changing carriers has helped cell phone companies protect themselves against unexpected customer migration – though when smart phones, especially the iPhone, first entered the scene, consumers appeared willing to pay penalties to switch carriers if they could obtain the newest devices. Today, however, nearly all the major carriers offer Apple’s iOS and Google’s Android platforms and similar versions of smart phones, thus leveling the playing field. But consumers are now chasing the best data plans – and this trend will drive customer loyalty in the future. The risk for companies is how well they can compete based on their network coverage and the cost and types of data plans they offer.
4. Privacy and security – As in many industries, concerns about privacy and security represent one of the most severe risks to communications. Criminals and hackers remain an ongoing threat to destroy or cripple networks, corrupt or steal data and disrupt business and consumer services. Privacy and security concerns will increase as users take advantage of open architecture to drive innovation in user applications. Companies will need to improve their capabilities to protect the security of their customers and live up to the public’s expectations for privacy and security.
5. Mergers and acquisitions – The trend towards vertical integration, as well as a competitive environment that favors larger, more well-funded enterprises, is driving an uptick in mergers and acquisitions in this industry as in others. AT&T’s prior offer to merge with T-Mobile USA is a good example of the consolidation that is likely take place in the coming years, especially among smaller wireless players that are candidates for friendly or unfriendly acquisitions.
6. Regulatory – In March 2011, the Federal Communications Commission (FCC) released a broadband plan freeing up new radio spectrums for transmission, as well as stipulating minimum speeds for downstream and upstream data transmissions. The new regulations are not, in and of themselves, a risk for companies, as the market will determine which companies are able to purchase capacity on the newly available spectrums; however, what remains to be seen is whether companies will be able to acquire the bandwidth they need to provide the coverage promised to consumers. The FCC may have to get involved to determine whether too few carriers dominate the airwaves in the face of industry consolidation
7. Reporting and analysis – Many companies currently are using disparate systems to manage critical functions such as procurement, equipment tracking, customer billing and financial accounting. This presents significant challenges in their reporting and analysis of information, such as customer data mining, market trending and forecasting. In the customer-oriented environment of the communications industry, however, this puts them at risk of losing competitive advantage.

RESPONDING TO THE LEADING ISSUES

All of the risks discussed above are critical to manage. They require savvy leadership that can stay on top of those risks and proactively work to find solutions in advance of letting a challenge get out of hand. Beyond this advice, we offer the following recommendations about what we consider to be effectively the two most critical issues facing management in communications companies.

1. Financial control – With enormous investments in existing capital equipment plus the need to raise more funds to build out network capacity, one issue executives must worry about most is controlling the costs associated with expanding network coverage. On one hand, they need to have enough investment capital to expand and, on the other, they must be sure to spend what they have wisely. The former is a function of persuading Wall Street investors that one’s business model is profitable and accurate; the latter, however, is a function of having expertise in such areas as cost and supply chain management, planning, forecasting and budgeting. We’ve seen many instances of companies that allocate resources to projects without the proper planning and asset controls, only to run short and find themselves halting the work, terminating leases and stranding people and equipment mid-stream. Instead, companies must be able to tightly manage their deployment allocations, control costs and improve efficiencies. Management must ensure they are effectively planning network growth, procuring network equipment, deploying assets to operational field locations, installing and adding components to the existing asset base, maintaining and repairing network equipment, monitoring transfers and disposals, and ensuring adequate information for management reporting is available.
2. Business intelligence – As cited, communications companies will increasingly vie for customer loyalty based on their ability to provide well-priced comprehensive data plans. Meanwhile, one of the top risks facing communications companies is the integration of their disparate systems containing information critical for management decision-making. Putting the two together, it is clear that companies must do a better job at building their business intelligence to gather information for critical marketing purposes as well as to improve their forecasting and budgeting processes. This requires leaders to recognize when they are missing out on valuable metrics and analyses that could guide their strategic planning and business models. If the expertise and skills to resolve this problem are not available internally, management must seek out outside experts who can help them upgrade their systems to improve the depth of information collected and the capabilities to mine it for critical business intelligence. This issue impacts both consumer loyalty and financial control.

ON THE HORIZON

It can be surmised with a high degree of certainty that the communications industry is facing a promising future. Few would doubt that the new technologies of mobile phones, wireless communications and Internet-based services will only grow in market size and depth. The Millennial generation is almost completely unfamiliar with analog devices and hardwired landlines. As they enter the workforce and create the new businesses of the future, their familiarity and comfort with these technologies will push the cutting edge of communications even further towards connecting the entire world through global wireless networks and Internet-based computing.

All this bodes well for the communications industry. Equipment manufacturers can expect to see continuous growth in network infrastructure. Device manufacturers will enjoy a constant demand for innovative new cell phones, tablet computers and ancillary equipment. And communications carriers and ISPs can count on customers looking to them to offer an expanding range of service that helps them become more productive at work, stay in touch with family and friends and find new ways to entertain themselves. But all this carries risks for any company in the industry. Staying on the cutting edge of technology, ahead of one’s competitors, and being able to offer the bandwidth and data plans that consumers and their devices will need, must become priorities for any company that intends to thrive in the new communications world.


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