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Swisscom out to conquer the digital economy

The Swiss telecoms giant is looking to expand into new sectors, ranging from connected health to sensitive data storage for businesses. And it has little choice, with no end in sight to the nosedive in revenue from telephone services.

© iStock

«We’re witnessing the dawn of a vast market, and we plan to play a strategic role in it.» Roger Wüthrich-Hasenböhler, chief digital officer of Swisscom, is not referring to the next generation of mobile phones but to new opportunities – data storage, connected health and the Internet of Things – created by the digital revolution. SCMN

Why is Switzerland’s telecommunications leader talking about the digital revolution? Simply because its revenue has been on a downward spiral, falling 300 million to 400 million Swiss francs a year. It must find new growth drivers to survive. Innovations such as digital TV and new subscription packages won’t be enough. “Competition is tougher than ever in these markets, where revenue streams have gradually dried up over the past few years,” says Christian Neuhaus, spokesperson for Swisscom. “Like with WhatsApp, which has caused operators to lose 50 billion, we’re at the mercy of some guy tinkering around in his garage who comes out with a new app that, from one day to the next, provides a paid service for free.”

It's not easy to carve out one's niche of the “Big Five” tech companies: Facebook, Google, Microsoft, Apple and Amazon

Swisscom faces no other choice but to diversify. The Swiss giant does have certain advantages enabling it to capture future markets driven by the digital economy. These include a loyal customer base, advanced infrastructure and expertise in network and data management. The operator has invested millions over the past few years to forge the ideal position for itself in the innovation race. It also has offices in Silicon Valley and has recently opened one in Shanghai. Fresh from a trip to China, Mr Wüthrich-Hasenböhler explained that these entities were set up to analyse the business and technology trends that will shape these markets. “It’s very important for us to stay on top of these transformations. We need to figure out how technology and new services can be adapted to our country.”

It’s not easy to carve out one’s niche under the domination of the “Big Five” tech companies – Facebook, Google, Microsoft, Apple and Amazon. But Mr Wüthrich-Hasenböhler is optimistic. “Some services are all about local added value, and major tech firms are not always interested in a small market like Switzerland.” For example, Swisscom has invested in the Valais-based start-up KeyLemon, specialised in voice recognition (including Swiss German dialects). The group then integrated this service into its online television plan.

Swisscom has many other options to explore. Healthcare services, for one, is a fast-growing market where the company employs more than 200 people. Its customers include the six hospitals run by Bern-based Insel Gruppe and the Zurich healthcare network. The national telecoms operator has built a platform that centralises patient records (X-rays, MRIs, lab exams, medication, etc.). The information is kept in digital files that can be accessed by authorised staff anytime and anywhere. If a patient suffers from a leg fracture and concussion, the hospital treating him can check his medical records online to avoid any unsuitable medicines, such as in the case of an allergy.

Numbers

11.64 bn

In Swiss francs, Swisscom’s 2016 revenue, down 0.3% on 2015.

1.6 bn

In Swiss francs, 2016 net profits, up 17.8%.

21.127

Number of employees.

2.4 bn

In investment in infrastructure in 2016.

22

In Swiss francs, dividends per share in 2016.

+12%

Growth in Swisscom’s bundle deals at end-March 2017. TV connections rose 8.7%.

Another growth area is data centralisation for city governments, which increasingly use this technology to better serve local citizens. Smart cities are booming, and Swisscom has initiated several of these projects in Switzerland.

The operator provides Pully, in the Canton of Vaud, with aggregate data from smartphones to better understand how citizens move about. “These indicators will help us decide whether it’s worth it to invest in a certain bus line,” Alexandre Bosshard, project manager at the City of Pully told Le Temps. Similar experiments are being run in Zurich, Geneva and Fribourg. “Swisscom has huge growth potential in this area, ” says Peter Grütter, president of the Swiss Telecommunications Association. Additionally, all gas, electricity and water meters will eventually be connected with the development of the Internet of Things. That will produce vast amounts of data that can be collected to better manage supply and demand.”

Sensitive data storage is also a promising industry for the national telecoms operator. Switzerland offers considerable advantages for this market, such as political stability and a legal framework that protects privacy better than the United States. Swisscom already offers its services to multinationals, banks and even small businesses. It advises companies on their strategy, comes up with data management and security solutions, and designs file sharing platforms.



« Most of our revenue comes from products that didn’t exist 10 years ago »

And finally, the latest sector that everyone wants a piece of: mobile payment services. Swisscom joined the Twint project, which brings together several Swiss banks and retailers to compete with the giants Apple Pay and Samsung Pay. Launched in April, Twint is expected to expand its base of 25,000 points of sale and develop new functionalities such as invoice payment. “Switzerland is not in the lead in this segment,” Grütter says. “We still have a way to go before we can offer a decent alternative to the other applications available. For example, Denmark has an application that works with all the country’s banks and retailers. Practically all citizens use it.”

To become a leader in these future markets, Swisscom will have to invest massively in infrastructure and 5G network technology, which will bring greater speed and data transfer capacity. But it will not come cheap. The group thus finds itself in a predicament: its core market is winding down and it is unsure how much revenue its future growth drivers can generate. The national telecoms operator did not wish to disclose how much of its total revenue these new businesses represent, but it is probably still minimal. Nor was it willing to provide details about the revenue generated by its digital TV solutions. So the elusive statements from Christian Neuhaus are all we have to go on. “Most of our revenue comes from products that didn’t exist 10 years ago,” he says.

Could the same formula apply for the years to come? Swisscom enjoys recognised expertise and a critical mass of customers, but the long-standing operator will have to move quickly, while disseminating a risk-taking corporate culture. Swisscom’s managers believe it can happen. “When we launched our digital TV services 10 years ago, we were looked down on,” Roger Wüthrich-Hasenböhler says. “We had to prove our worth. But now the sector is a major source of revenue for Swisscom. We believe this will also be true with the digitisation of the economy.”

Analyst's opinion

« Intelligent strategy »

Sunrise brought in more mobile subscribers than Swisscom for the first time in 2016. Will that trend continue?

I don’t think so. Sunrise can most likely gain more subscribers in some segments, but rather over Salt. With 60% of the market, Swisscom remains ahead of the rest. But that means Switzerland has a vibrant telecommunications market, with real competition. Sunrise is now also moving into bundle deals and digital TV, products that have developed fast at Swisscom these past few years. Swiss customers remain loyal to the national operator, which provides quality network service and renews its plans and options regularly to keep up with the latest market trends. For example, its inOne package offers discounts for multiple subscriptions within the same household. It’s a great idea.

But the fight will be tough because growth prospects are limited on the market…

Exactly, the traditional telecoms market is mature and will not grow much in the years to come. Monthly revenue per subscriber has fallen in recent years to about 50 Swiss francs today. Some sectors, such as landline phone service, are even upside down. In Switzerland, things are relatively stable with only three operators on the market – less than in most European countries – but their market share is unlikely to change much. The merger between Sunrise and Orange, rejected by the European Commission’s Competition authority in 2010, is not going through. And licences won’t be renewed until 2028. The Swiss Confederation has a 51.2% share. The dividends it collects are a welcome contribution to the federal coffers. What’s more, it’s increasingly important to have strategic control over communication infrastructure.

To offset the lack of growth in the telephone market, Swisscom is pushing ahead in the digital economy, investing in healthcare, finance and energy services. What do you think about that?

Given the current situation, Swisscom has to find growth drivers. It’s only logical to look for them in the markets where its infrastructure will be used in the future. Entire swathes of the economy will be exchanging a growing amount of data, and Swisscom wants to capture that growth. It’s an intelligent strategy, even though many unknowns remain as to where the digital economy will go. We don’t yet know how much growth it can really bring Swisscom.

What do you recommend investors do with Swisscom shares?

Q1 2017 earnings were strong and the company met its targets. Although we don’t recommend buying the share due to its high valuation, we recommend holding the stock for its healthy annual dividend of 22 Swiss francs. Not bad considering the current climate. This 4.85% return is not expected to change much over the coming year. It is worth noting that Sunrise produced slightly higher returns, at 5.3%, after a stronger stock market performance than Swisscom.

 
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