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Time to pick up: The strategic choice facing the telecom industry
- Data is the future for telecommunications, with ever more applications connecting our physical and virtual worlds.
- For telecoms operators, incremental change will no longer cut it in pursuit of growth and customer satisfaction.
- Strategic choices will need to be made between diversification and the doubling-down on infrastructure.
Will the telecommunications industry be able to handle the vast amounts of data coming its way? Not without making some hard choices on how to reshape business models and enterprise.
That’s the finding from a report by Strategy&, PwC’s strategy consulting business, Sink or swim: Making strategic choices for the telecom industry of the future. In it we look at the current state of telecommunication providers and the data onslaught enabled by 5G and Internet of Things (IoT). While the report was released just before COVID-19 locked many countries down, its findings remain relevant to the telecommunications industry — indeed, they may even be more acute as the pandemic heightens the disparities between companies, and differentiation and survival take on new meanings in an economic downturn.
While telecoms providers have so far managed to keep up with the incremental change needed in the move from landline to mobile, soon the underlying network infrastructure will no longer be able to keep up. Users are controlling their increased data use through smartphones and portable devices, and operators will soon be forced to manage communications platforms that they own but don’t unilaterally control.
There are different paths to take in order to build and profit from technological advances, so operators need to make bold strategic choices today to safeguard tomorrow.
Current communications
It’s undeniable that digital technology has vastly changed how people use and interact with telecommunications over the past few decades. From mobile to smartphones and dial-up to broadband internet, the nature of consumption has shifted seismically.
Despite this, most telecom operators have survived by gradually evolving their business models and organic growth rather than by dramatic intervention. While barriers to entry into these new modes of communication remained high, there was still room for more subscribers, and by packaging and bundling services, pricing could be mostly maintained. The amount of data flowing through their networks remained manageable even with the increased demand.
But due to these factors, most mobile telephony and, increasingly, broadband markets have become, or are on the verge of becoming, commoditised. Operators have lost the ability to differentiate themselves, selling the same products and competing on price alone. It’s led to a steep decline in margins and poor returns for stakeholders.
Things are getting dire: global telecom markets are at saturation point for subscribers, and customers no longer willing to pay more. Players from adjacent industries, such as over-the-top streaming companies, are piggybacking on operator networks and even competing directly. Regulators too are struggling with their response to these changes, and are unpredictable in their decisions.
A new tech trajectory
Now, technology is causing further turmoil. We see this in two main trends: the convergence of mobile and broadband services and the deployment of 5G.
Convergence means operators are bundling their telecom services, from fixed voice and broadband, to mobile and television — sometimes all at once. The scenario reflects the narrowing market shares of telecom players, but while those who first achieve convergence in a market will gain market share and pricing power, the advantage lasts only as long as it takes for others to offer similar. More commoditisation follows as businesses are forced to compete on price yet again.
As Sink or swim notes, the promise of 5G is immense, but it will not be as easy as simply turning it on. While 5G networks offer the potential ability to cope and even surpass the increased data demand on the horizon, the time it will take to fully implement it is long, and the capital investment required, huge. New infrastructure, software and device management capabilities will be needed, and whether or not consumers will pay more for 5G is far from certain.
Nevertheless, for those who can meet the challenge, new business applications will be possible, such as extreme mobile broadband (useful for VR and connected medical devices), critical machine-to-machine communication (for applications such as automated factories and smart mobility where fast response times are required) and massive machine-type communication to support scalable, low-power systems such as smart cities and drone-based logistics.
The road less travelled
Whether seeking top-line or bottom-line growth, we’ve identified two paths telecom operators can travel to make their investments pay off.
Firstly, there is the diversification route. While results have been mixed, and so far most shareholder returns have come through dividends, not share price, many operators have decided to diversify into other industries. Those wishing to go this way need their strategies to take two primary considerations into account. Do they have the capabilities needed to compete in the industry they’re looking to enter? And is the market they’re targeting ripe for disruption — or already entrenched (and struggling themselves) with new digital realities?
On the other hand, there is an infrastructure road. If the business already possesses strong infrastructure and networking capabilities, it may be able to leverage them for growth. Creating and maintaining industry-leading networking infrastructure could lead to a reliable long-term dividend stream. It will, however, require substantial long-term investment to stay at the top of the pack, particularly as 5G ascends. The key will be in developing a network that is fast and flexible enough to be used for different things, by different customers — for example, high-speed reliability to mobile virtual network operators or superior speed and bandwidth to streaming content providers. There may even be, for those game enough, opportunities in security and privacy solutions.
Partnering for perfection
No matter which path operators take, they will not be able to go it alone. Collaboration with companies in a variety of industries will be crucial, especially as the move to 5G opens up more strategic opportunities. Legacy B2B and B2C business models may no longer work, and indeed, we think the most promising models will embrace a B2B2X model — providing telecom connectivity such as 5G to 3rd party services to bundle (eg. media streaming in 5G, where the content provider pays the operator), or offering 3rd party services to the operator’s own customers (eg. selling broadband plus a VR content subscription).
Partnerships such as these will allow both the telecom operator and its partners to profit from new connectivity and avoids the trap of becoming nothing more than a commoditised pipeline for others. It also allows telecommunications companies to play to their own strengths, and others to play to theirs. To succeed, and this is a big caveat, operators must be willing to become far more open to opportunities outside their traditional business and view themselves as more than just service providers.
Connected to the future
As new technologies create new possibilities, telecom companies must be imaginative and daring in considering their strategic options. As the landscape changes, and COVID-19’s economic effect is felt, operators must be alert, analyse opportunities carefully and ensure that they can become proficient in new areas and technologies — quickly. Doing so will allow them to leverage their customer bases or infrastructure, escape the commoditisation spiral, and remain resilient in the face of uncertainty.
For more insights on the future of the telecom industry, including the challenges it faces, such as securing new technology networks, download the full report, Sink or swim: Making strategic choices for the telecom industry of the future.
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