Telefonica observers may be forgiven for thinking the great Spanish telco is in a state of perpetual restructuring as it engages in yet another bout of transformation or realignment. This does not necessarily mean that the last transformation was a failure but merely that it did not account for subsequent macro-economic and other changes that altered the balance between its global businesses.
The main changes are that its Spanish speaking Latin American operations have stalled, with investment and growth prospects increasingly concentrated in the four key markets of the UK, Germany, Portuguese speaking Brazil and its home ground in Spain. At the same time, traditional telco revenues are in decline while broadband and pay TV are relatively saturated in those four markets, propelling the group towards new pastures in cybersecurity, IoT (Internet of Things), what it calls big data and cloud services.
Such at any rate is Telefonica’s rationale for the current bout of restructuring, which rounds up its 11 Latin American Spanish countries including Argentina, Colombia and Chile in preparation for possible complete spin out, while carving its remaining operations into two, infrastructure and technology.
This is part of Telefónica’s five-point action plan whose main points are a strengthening focus on those four key markets and the creations of both Telefónica Tech and Telefónica Infra, along with the operational spin-off of Hispanoamérica. The fifth part is then a redefinition of the corporate center. Telefónica optimistically anticipates that these measures combined will generate more than €2 billion additional revenue and a two-percentage point increase in operating cash flow margin, in both cases by 2022, although without making it clear where these gains will come from, presumably some scale efficiencies and elimination of redundancy.
The company justified the focusing on the core markets by noting that as of Q3 2019 Spain, Brazil, the UK and Germany between them accounted for 63% of the total 346 million accesses. This statistic is not that amazing considering the total population of those four countries is almost identical to South America minus Brazil, with the more salient difference being that Telefonica foresees much better growth prospects in the former.
To unpick the whole story we need to look back at least to the previous major round of restructuring, which evidence suggests has not gone as well as hoped. This began in 2015 when Telefonica developed a blueprint for transformation of its IT systems led by business processes, aiming to eliminate redundancy and migrate to commodity hardware, while allowing still for differences between countries and sectors.
This led to selection of key three core vendors with somewhat complementary skills and yet also serving as alternative suppliers to avoid overdependence on one and ensure some competition to keep costs under control. These were Amdocs with its Customer Experience Solutions (CES), Huawei with its Telco OS and Netcracker for its BSS (Business Support System). Telefonica said it picked Amdocs for robust governance methodology, Huawei for its strong record of delivering on major IT systems on time and to budget, and Netcracker for its out of the box package being well suited for smaller countries that need to be up and running quickly with less integration risk.
This was supposed to dovetail with Ericsson as the partner for managed network services in a deal which in February 2019 was extended for a further four years at least to incorporate AI algorithms to enhance network automation in the UK, Colombia, Peru, Ecuador and Uruguay. The UK operation at the same time deployed Netcracker having missed out first time round, but the Ericsson extension is already in potential jeopardy because of the latest decision to fence off the Spanish Latin American operations.
In that latest transformation, Telefónica is also consolidating business lines and segments into a single online charging system designed to unify the customer experience and enhance data-sharing across multiple regions. There is also a growing emphasis on cybersecurity across the operation, which is becoming a business center in its own right. The idea is that IT security should be factored in from the start in new IT developments, both internally and for customers, with a focus on automating identity and access management, as well as proactive security monitoring.
Going back to the previous transformation that began in 2015, Argentina, Mexico and Peru were identified as early targets to demonstrate the benefits, but that has not worked out too well. In Mexico, Telefonica subsequently abandoned plans to establish its own mobile network and instead became an MVNO using AT&T infrastructure. Under its Movistar operational brand, the group sold its units in Guatemala and El Salvador in March 2019 and has also looked at selling its business in Mexico, which could be worth €2 billion ($2.3 billion).
Then Argentina was initially trumpeted as a success but has become moribund as a market quite saturated for broadband and pay TV, contributing towards the decision to start retreating from Spanish speaking Latin America. The implications are more serious for Telefonica than for pay TV, where the story is of a similar switch from DTH and cable to OTT and IPTV as seen in other regions. It reflects Telefonica’s unwieldy operations in Latin America involving a plethora of platforms which has made an exit the path of least resistance.
Overall, Telefonica pay TV numbers for Latin America were flat for the year to June 2019 but down over the most recent two quarters. Yet IPTV numbers were up 16%, while the Movistar Play OTT service expanded by 59% to reach 1.2 million subscribers, offsetting DTH losses.
In Spain, however, overall pay TV numbers rose 4% year-on-year to 4.1 million, with even 11,000 additions in the last quarter which is traditionally poor coming at the end of the soccer season. Telefónica also witnessed strong IPTV growth in Germany, albeit from a small base of about 100,000, but Brazil fell by 9.5% to 1.46 million despite that being singled out for investment.
One significant aspect not mentioned in the recent transformation announcement is Telefonica’s partnership with Spanish broadcaster and movie producer Atresmedia, part owned by Germany’s RTL, announced September 2019 to create a catalog of Spanish-language fiction content around the world. The two companies are creating a 50/50 joint venture to produce and distribute original series and films for both the Movistar and Atresmedia brands, so this is an important move for Telefonica signaling that it is not looking to pull out of Latin America altogether. Rather it is migrating from distribution to content creation.