Why telcos will flex their muscles in 2018

The digital advertising industry ended 2017 with an almost resentful and reluctant acceptance that the status quo of our industry is fast becoming that of a two-horse race otherwise known as "The Duopoly", for the uninitiated this duopoly refers to Google (G) and Facebook (FB). Two companies who managed to beat and stifle all competition, define and then claim the very category they set out to master i.e. search and social media respectively.

Depending on which trade press you read the statistics are worrying. eMarketer puts G and FB dominance of the U.S digital ad market at 63% and the U.K digital ad market at 54%, those are indeed astounding figures, great if you are G and FB, bad for advertisers and consumers because choice are slowly homogenised.

Reach and frequency

Advertising at its heart has always been about reach and frequency (R&F), how many people can your message reach and how often they are seeing the message. This is the reason why T.V was so revolutionary (back in its day and some might argue still is) because of its broadcast mass reach capability.

To that end, any media owner or ad tech platform that can promise huge R&F will always end up attracting advertiser dollars, as is the case for G and FB and rightly so, they have both done a fantastic job cornering their category and growing their audience base. (For the record, I am not bashing their achievements.)

For a constituent worried about G and FB's dominance, what alternatives are there? Who is on the horizon who can upset and/or provide a viable and sustained alternative?

Answer: The telecommunications companies (telcos). Why? Read on... :)

Addressable audience

Telcos around the world have huge reach, HUGE (I found saying this out loud in a Donald Trump voice helps)! Consider this.

Verizon and AT&T have ~146 million and ~134 million customers on their network respectively, while China Mobile (#1 ranked telco in China & globally) have ~849 million customers on its network. To put these numbers in perspective, Alibaba only reaches ~507 million users in China and look how valuable they are. While Vodafone Group have ~444 million customers on its network and Deutsche Telekom AG have ~100 million customers across 21 countries!

If those reach numbers are presented to you as an alternative to G and FB, wouldn't those numbers be compelling to you? Don't forget, telcos own a tonne of 1st party data (including payment history), if you find FB targeting data useful, imagine the targeting you can get with telco data?

From a R&F perspective, telcos make for a very compelling alternative coupled this with their granular 1st party data. In a post-GDPR era in Europe, where telcos have direct relationships with their customers, this access to verified 1st party data will set telcos apart from other media owners. Fact!

Motivation

It is no secret that telcos' revenue are declining in an age of OTT applications bypassing and replacing traditional voice calls and SMS text messaging services, both of which used to be the bedrock of telco revenues. PwC (*Disclaimer. Yes, I work for PwC. No, this article is not PwC's opinion.) have also published its observation of telco trends backing up my observations with its illustration of a global decline in average revenue per user (ARPU) here across all markets.

McKinsey&Company reported about this as well here while Fortune magazine reported a dollar figure (~$386 billion) for this decline in revenue to OTTs and that's in 2014 alone (yes I acknowledge it's outdated, but it's the best I can find)! Even GSMA, the industry body representing the interests of telcos globally acknowledges this in their annual 2017 Mobile Economy report with a reference to a "dip" in growth. This decline cannot go on for long (or can it?) and is as legitimate a motivation as I can think of to explore new revenue and growth options.

Observers have been saying for a while now that telcos need to address this long term decline in revenue, changing consumer habits (bypassing voice calls and texts) and falling ARPUs, moving into digital advertising is an option telcos should seriously consider. After all, if G and FB can build a behemoth of a cash-rich company off the back of advertising revenue, why can't telcos? Telcos already have a huge pool of addressable audience to tap into and they CAN easily do it because they have the financial might to do so.

Which leads me to my final observation why telcos can be the next challenger to G and FB. Monies, lots of it...

Cash is still KING. Long live the KING.

AT&T made $163 billion last year, Verizon $126 billion, China Mobile $106 billion, Nippon Telegraph and Telephone (NTT) $105 billion, Softbank (and recent huge investor in Uber) $82.1 billion and Deutsche Telekom $80.9 billion as compiled and reported by Forbes here.

These are truly deep coffers mind you, deep enough to say buy a few companies to kickstart a company's digital advertising ambition? Build, partner or buy is the general mantra for businesses trying to move into a new category.

Build

Most telcos don't have the expertise to build their own ad tech solution, it is simply not their area of expertise, so that rules building out (in the short/medium term at least) and besides, it takes too long, precious time that the telcos don't have.

Partner

Partner might work from a "try before you buy" perspective with an eventual goal of buying the ad tech partner out, as Spanish telco giant Telefonica has proved with the launch of Axonix.

This is a preferred route as it allows the gradual learning, build up and recruitment of talent and teams to realise one's ambitions but how that translate might hinge on the impending GDPR complications as you will be deemed to be sharing/passing data to partners that your users might not have agreed to, it is also just that bit messier with GDPR looming.

Buy

The most immediate route is to buy, assuming of course the telcos have agreed that digital advertising IS one of the many remedies to declining revenues. After all, we have already witnessed a slew of telcos making a move, some more aggressively than others into this space, once a precedent is established, it is hard to argue against it.

Verizon is the most aggressive and prominent buyer, first swallowing up AOL (reported cost of $4.4 billion), who themselves were a prominent buyer of companies, Adapt.TV, Converto, Millennial Media and ROYT comes to mind. They then followed it up with Act 2 by inhaling Yahoo! (reported $4.83 billion) who also owned such companies as BrightRoll, Tumblr, Flurry and Summly. If this is not a show of intent to move into the digital advertising industry, I don't know what is.

SingTel (Singapore's national telco) also moved aggressively into this space with its acquisition of Amobee who then bought Adconion, Kontera and GradientX before sinking its teeth into Turn (reportedly for $310 million) at the start of 2017. Dutch telco Altice dropped $308 million for Teads and Norwegian telco Telenor bought Tapad for $360 million. Australian telco Telstra bought Ooyala for a reported $270 million who then bought Videoplaza for an undisclosed sum and Spanish telco Telefonica buying Statiq for a bargain of $4.2 million.

It certainly does appear that the telcos are slowly waking up to the digital advertising potential and they have the ability to do it. But if they do decide to do it then I say go big or go home, doing this piece meal is not going to make a dent in reversing revenue decline and certainly not going to announce and cement their intentions.

Summary

So then, in conclusion, my observations for why I believe telcos can be a viable challenger to G and FB are simple. 3 key reason stands out above all else.

1. Addressable audience - R&F is still paramount in advertising, size does matter and telcos have the numbers.
2. Motivation - faced with declining revenue, changing consumer habits and falling ARPUs, telcos need to look at something else. Why not digital advertising where you can easily transform from a small fish in a big pond to a big fish in a bigger pond!
3. Money - if anyone has the money to do it, telcos definitely have bucket loads of it, Verizon dropped just under $10 billion on 2 major acquisitions! It is simply a question of how big their ambitions are and how willing they are to fund it. Verizon and (tiny) SingTel have, so why can't others who are equally or more profitable?

For the sake of diversity of the digital advertising industry, I sincerely hope that some telcos will move meaningfully (and by that I mean putting together a serious and credible ad tech stack challenge to G and FB) into this industry and present a different and compelling proposition to the market.

The day when the telcos do wake up and pursue this opportunity is a day where we can all rejoice as we bear witness to an established industry disrupting itself to stay ahead of change!

Do great things!

P.S. I acknowledge that Amazon can be another challenger to G and FB. However, this article is my attempt to focus on identifying yet another challenger(s) to the widely-accepted view that Amazon will be the next great big disruptor.

P.P.S Do not think for a moment that G and FB are resting on their laurels waiting for telcos to cut their lunch, they are already trying to disrupt the telco industry itself to prevent the telcos from being able to launch a raid on the digital advertising industry through a whole suite of "benevolent" initiatives. From Google Fi, Google's own mobile network to its own Internet solution and Facebook's Telecom Infra Project and it's not so secret ambitions. G and FB both know the day of reckoning will come when (not if) telcos present a credible challenge, they are; laying the foundations to take/replace the telcos when the day comes.

**Disclaimer: The views and opinions expressed in this article are those of the author and do not reflect the official position of PwC UK.