Should operators in Europe be happy with single-digit revenue growth over the next few years? 

It really depends on who you ask.

Executives quizzed by European Communications at Mobile World Congress about the need to move away from connectivity-based business models displayed differing views on the subject.

But before their conjecture let’s consider some financial certainties from four operators on the continent.

Last year, Deutsche Telekom and Orange registered like-for-like revenue growth of 3.6 percent and 1.2 percent respectively.

Vodafone, whose financial year finishes at the end of March, revealed revenues increased by 3.1 percent in the six months to 30 September 2017.

MTS is also yet to report its full-year results, but in the first nine months of 2017 its revenues ticked up by 0.6 percent.

All four were up thanks to more consumers buying more fixed or mobile services somewhere in the world.

Yet Russia-based MTS’s VP of Marketing, Vyacheslav Nikolaev, puts himself squarely in the camp that this is not where the industry wants to be in the future.

“Connectivity [revenue] is growing again but it is one digit growth,” he says.

“This is close to levels of inflation so not real growth.”

He adds: “If [the industry] wants to grow faster it needs to move into new areas, otherwise you’re just guys sitting in a room discussing the next one percent [growth]… and it’s just dull.”

Dull is certainly not what you could accuse MTS of being as it pursues a range of new options.

Already this year, the operator has boosted its stake in online retailer Ozon, purchased an eSports club and acquired two event ticketing businesses.

This builds on its entry into the online taxi business in October 2017.

Its aim is to “enlarge our share of [the consumer’s] wallet” as Nikolaev puts it, and improve loyalty.

The move into selling events such as pop concerts is “natural”, he says, given MTS already knows what its customers are listening to and watching, thanks to existing music and TV apps.

“We can provide them with certain recommendations…and it improves our position in their entertainment universe,” he says.

The company’s taxi venture is somewhat more ambitious. 

MTS has teamed up with taxi operator Citymobil to provide a service that enables customers to order via a dedicated app and pay with loyalty points they accrue by using the operator’s other services, in addition to normal payment methods.

The two companies have agreed a revenue sharing deal and Nikolaev says it has been “profitable from day one”.

With Uber in the process of merging its business in Russia with that of local tech giant Yandex, Nikolaev believes there is “space for a third player” alongside Gett Taxi.

He admits MTS’s fledgling service has a “slightly longer” waiting time than its rivals and that he is “not 100 percent satisfied” with the customer journey.

He also reveals MTS may yet choose not to pursue this opportunity, which would have limited downside given the small financial commitment it has made.

“We’re going to learn for a few months then decide,” he says.

Orange is another operator that has made a decisive move into a new vertical.

Its mobile bank in France launched last November and has seen 100,000 customers sign up to the new service so far.

Like Nikolaev, Orange CFO Ramon Fernandez thinks traditional telecoms revenue streams are no longer enough.

“Connectivity is going to accelerate growth in our core business,” he says. 

“But this growth, except in some very specific areas, is going to remain at a level that is not going to allow massive acceleration.”

Banking is the most high profile new area that Orange is pursuing as it looks to boost its future financial performance, although describing it as “new” is something of a misnomer.

After all, it is 10 years since the France-based operator launched its first financial services product.

“When we launched Orange Money in Ivory Coast in 2008, even within the group there were questions because it was losing money,” says Fernandez.

“Today, there are no more questions.”

Would Orange have launched a bank in Europe had it not gained a decade of experience in another, albeit very different, market?

“Yes, although probably the degree of conviction that we could succeed would not be as strong,” the CFO says.

Not everyone shares this optimism.

Vodafone CEO Vittorio Colao thinks banking is “an emerging market thing, not a European thing”.

He says: “Maybe Orange will do very well… but it’s not where we want to go.”

The IoT is where Vodafone will continue to lay its hat, although there is an argument to suggest this is very much a connectivity play.

“We think there is much more [opportunity] in home security for example… that is the space where Vodafone wants to be,” Colao says.

“We can’t launch banks in 80 markets but we can launch IoT.”

At Deutsche Telekom, Srini Gopolan runs the operator’s businesses in Europe outside of Germany.

In contrast to Nikolaev and Fernandez, he appears happy for his business to deliver single-digit growth.

“GDP growth in my countries is three percent – I believe if we provide a good service in the long term our business should grow at that rate,” he says.

Like Colao he is somewhat sceptical of entering new verticals, saying it is “easy to underestimate” how hard it can be to move into them.

He says the focus is “very much on the core” over the next five years.

But is he not worried about missing on new opportunities and a chance to outperform GDP?

Noting that at group level Deutsche Telekom is looking at “a bunch of new stuff”, he responds: “The core connectivity is a very attractive business so I’m not worried about being stuck with it.”

There are certainly plenty of examples of operators that have been burned by entering new markets.

Telenor acquired a marketing tech company called Tapad for $360 million in 2016 that it hoped would propel it into the digital advertising space.

But it was forced to write down the value of its new acquisition by $218 million last year due to lower than expected growth.

Revenues at Telenor's digital business unit – which lumps Tapad in with the likes of financial services – still grew by 8.8 percent last year.

But the division only accounted for around two percent of the Norway-based operator’s overall sales in 2017.

If this is the benchmark, then single-digit revenue growth looks set to be with operators for the foreseeable future.

Nevertheless, both Nikolaev and Fernandez remain convinced that moving into new areas is the right way to go.

“If you don’t use your resources it’s kind of stupid sitting on them,” the MTS marketing chief says.

“If you’re not moving fast you go down.

“You can never stay on the same level, you either go up or down and we better go up… that’s a clear choice I think.”

Asked what his message to the industry would be when it comes to the need to move beyond connectivity, Fernandez is clear.

“I am absolutely convinced it is critical,” he says.

“Connectivity is not going to be sufficient to give the growth we need or want.”

Other operators must decide whether it is a bet worth taking or if they'd be better off sticking with what they have.

 

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