Telecom Transformation: adapt or die
- W. European telcos’ fixed and mobile service revenue has been in decline for the past several years due a number of factors.
- Despite the challenging environment, inCITES forecasts that the W. European telcos’ combined fixed and mobile service revenues will grow at a CAGR of 0.3% between 2017-22.
- Telcos have to revisit their business models and embrace new technologies in order to make the most of their pivotal position in the market.
- During this transformation, capital intensive network-centric investments should be accompanied by investments in software.
Current market landscape
For around a decade, between 2008-16, both the fixed and mobile telecom market in W. Europe shrank (Figure 1) due to a number of reasons, ranging from price control regulation (see EU Roam like Home initiative) and the significant declines in the price per unit for all core telecom services to the disruption from OTT providers and change in consumer preferences.
During this timeframe (2008-16) the industry saw significant technological advances in both the fixed and mobile segments. On the fixed side, we have observed two key trends that have dragged fixed revenues lower, namely, the increased aversion to traditional telephony services (telephony cord cutting) and disruption from OTT players (see Skype, Netflix). On the mobile side, some of the key factors that have impacted service revenues negatively are the disruption from OTT providers (see WhatsApp, Viber), price regulation (see EU Roam like Home initiative) and declines in the price per unit for all core telecom services, i.e. Voice, Data, SMS, mainly due to the shift in consumer preferences as well as market competition.
Despite the various factors dragging telecom revenues lower, the telecoms landscape in W. Europe was not all doom and gloom. Between 2008-16, we have seen significant increases in fixed broadband adoption and revenues on the fixed side, growth in Machine-to-Machine (M2M) subscriptions and revenue – although still a negligible part of mobile service revenue, increased mobile Data revenue and usage and growing handset sales revenue – due to the increasing smartphone penetration.
inCITES believes that 2017 was a pivotal year for W. European telcos in terms of their revenue trajectory. In our market database, Prognosis, which offers a view in the historical and 5-year forecast data across a number of KPIs for the fixed and mobile connectivity markets for all W. European countries, we estimate that 2017 was the first year - after around a decade - that combined mobile and fixed service revenue showed growth (+0.5% y/y). That was a combination of increasing fixed broadband and mobile service revenues that offset the decline in the fixed voice market.
We believe that 2017 was a transition year for the service revenues for several reasons:
- In an effort to embrace disruption, telecom operators have started forming partnerships with OTT providers, a win-win situation for both.
- Roaming prices in Europe were abolished in 2017 (EU Roam like Home initiative). Since 15 June 2017 roaming charges within the EU were dropped for mobile Voice, SMS and Data services. The roaming market which once captured a double-digit share of the network operators’ revenues, is now in the low single-digit range. In order to adapt to the commoditization of this service, the operators have found various ways to counter this revenue decline, mostly by re-adjusting their national and non-EU roaming tariff plans. Hence, the roaming revenue stabilized in 2017 and it could start growing again from 2018 mainly from the adoption of roaming services from existing ‘silent roamers’.
- We believe that growth in mobile data revenue in 2017 offset the decline in the combined Voice and SMS revenue and, therefore, total mobile service revenue grew slightly in 2017. We expect this trend to continue during our forecast horizon and Data revenues to continue to drive growth in mobile service revenue.
Overall, inCITES forecasts the combined fixed and mobile service revenues in W. Europe to grow at a +0.3% CAGR between 2017-22 (Figure 2). At a high level, fixed broadband and TV markets are expected to drive growth on the fixed market while mobile Data and M2M will foster growth on the mobile side.
Having said that, we believe that network operators will need to revisit their business models in order to make the most of the new advances in technology (see Gigabit society and 5G) and reclaim the leading position as technology enablers in the new digital era.
Preparing for the future
inCITES Consulting has identified various actions that network operators could take to thrive in the new digital era as new technologies and applications, like 5G, Big Data analytics and IoT, are becoming mainstream in the market.
- Exploit your strong position as network owners: In the last years, network operators have seen OTTs and vendors disrupting their market and building direct relationships with end-users of their service. As connectivity revenue margins are getting squeezed, network operators have to act as intermediates between equipment vendors and OTTs and form partnerships with them, in order to reclaim part of the foregone revenue they are currently losing.
- Leverage new technologies to optimize your network: Network operators should resort to recent technologies such as network analytics, software defined networks and network virtualization to optimize network operation and improve its performance. By leveraging cloud computing and virtualisation, telcos will be able to extend their reach and provide their services internationally, realizing significant cost savings. Hence, investing in such technologies will enable network operators to make the most of their network by achieving economies of scale.
- Tailor your offering and capabilities to your client needs: Telcos are in the unique position of having access to vast amounts of client data. Using big data analytics, telcos can extract valuable knowledge for their users, enabling them to adapt their products and investment plans to meet B2B and B2C requirements. Using advanced computing capabilities, telcos can offer price differentiation to their customers by introducing hybrid pricing schemes based on their customer’s usage patterns.
- Intelligent investing is key: In order to stay on top of technological advances and achieve the aforementioned transformations, telcos should also change their investment strategies. Telcos should continue investing in physical infrastructure but since this is a capital-intensive exercise, telcos should resort to alternative investment schemes (such as co-investments and network sharing) and exploit governmental subsidies and PPPs. Moreover, investments in physical assets should also be accompanied by investments in software (see SDN, NFV, analytics), which are essential in sharing, controlling and maintaining the networks of the future.
About inCITES Consulting
inCITES Consulting is an innovative research and advisory firm specialising in the ICT market. Our mission is to support business and technology leaders make informed decisions on technology purchases and business strategy. Our executives have extensive experience in network engineering and the economics of the ICT sector with more than 100 scientific publications and over 300 citations in the past 20 years.
The list of our satisfied customers includes some of the largest telecoms operators, vendors, integrators, universities and telecom regulators globally. We also act as a trusted research and innovation partner for the European Commission on cutting edge research projects mainly in the areas of 5G, Cyber Security and Data Centres.