Telco leaders may be ill-prepared for changes coming down the road, says report

The survey, conducted by EY, interviewed more than 60 C-suite executives from over 50 telecoms operators to get a view of their priorities, and subsequently points to a ‘dichotomy that exists between defensive near-term strategies and more radical future sector dynamics.’

More than half foresee sector revenues and EBITDA growing by 3% or more over the next three years, and three quarters are expecting to outperform the market over the same period. 

The respondents identified two key drivers of profitable growth – growth in the core connectivity business (67%) and margin development through additional cost reductions and efficiencies (60%).

“These twin forces score well ahead of adjacent market services or more innovative business models, with only one in three respondents highlighting growth beyond the core business or growth in platform, ecosystem or as-a-service business,” reads the report.

Network quality leadership emerged as the most popular long term strategy, with some pointing to previous failures to monetise new digital services as reasons for prioritising this.

However, many respondents highlighted that network performance gaps between competitors are eroding as coverage and speeds become ‘more uniform’. The report quotes one unnamed CEO as saying: “Today, everybody has the same network. We all say we have the best network, but the customer experience between a good and bad network is imperceptible to the end user.”

In terms of threats on the horizon, hyperscalers were seen as the dominant threat five years out, with satellite companies ‘overtaking virtual mobile players’. Leveraging network quality was seen as a ballast against disruption from satellite providers, but less so to hyperscalers’ ‘capacity to innovate and disrupt’. Another unnamed CEO said “Hyperscalers are eating into our B2B business; it would be easy for them to take control by acting as intermediaries, providing connectivity to customers.”  

The crux of the report points to ‘dissonant perspectives’ by respondents as to the future state of the industry, and current business practices. As the report puts it:

“The telco of today is confident in near-term growth prospects, trusting in network quality as a differentiator while aiming to overhaul skills, systems and processes as part of established transformation agendas. However, this near-term mindset stands at odds with the more radical view of the telco landscape in five years’ time articulated by industry leaders, who expect significant evolution in stakeholder expectations, sources of disruption and differentiation, market structures and ecosystem positions. This view jars with current strategies that prioritize core products alongside ongoing cost optimization.”

As an example of this, the report points out that hyperscalers are perceived as the dominant disruptive threat to telcos’ business in five years’ time, but only 37% view business model overhaul as a strategic priority today.

Other stats to come out of the survey include 44% think telcos may split into two categories (net-cos and serve-cos), 79% think AI will double efficiency, and huge swaths of the workforce need to be upskilled or replaced.

In essence, the conclusion of the survey is that telco leaders need to ensure their current strategies are aligned with how they see the industry evolving in the next five years. Five suggestions towards this pursuit are listed as reimagining the business model, looking for new differentiators, evolving the employee proposition, improving ecosystem relevance, and preparing for new market structures.

The report says: “As telcos move forward with their transformation agendas, they should reconsider the foundational elements of their programs. Incremental improvements relating to network quality, customer experience, internal skills and digitization will still have a vital role to play. However, a more holistic and ambitious mindset that considers new points of differentiation, a clearer sense of organizational purpose and an evolving value chain position that considers adjacencies in infrastructure and software will be essential if they are to maximize long-term opportunities to create and enhance value.” 

There are some good insights to be gleamed from all this in terms of how the people running the industry see the next five years panning out, and how that maps onto current business activities. To offer a counter point – categorising something like prioritising network quality and cost optimisation as a ‘near-term mindset’ could be a little harsh.

Operators can hardly take their foot off the peddle on those fronts and while keeping an eye on any perceived threats in the future, prioritising the core product is surely something any business has to do, and has to do well if it wants to carry on doing it – regardless of how nice it would be for shareholders to enjoy disruptive tech startup levels of growth each year.

There has also been over the years plenty of talk from industry leaders as to the importance of diversifying, about becoming more than utilities or ‘dumb pipes’ as corporate entities. The other point to make however is where telcos have branched out ambitiously in the past, it hasn’t always gone well – perhaps the most notable example of this is AT&T’s hugely expensive foray into media.  

Certainly the industry faces challenges at the moment, the core of which could arguably be attributed to a seemingly unreversible business model in which it finds itself unable to charge tangibly more for successive levels of better connectivity, despite having to spend billions on upgrades to provide it.

But they do make money, just not in the category of what big tech scoops up each quarter. How the threat from hyperscalers, satellite firms, and ongoing market challenges this report identifies coalesce over the next five years is not set in stone, and there are unlikely to be any easy answers on how to deal with them. Diversification might be the solution in some cases, and it might not. That said, encouraging the industry to keep an eye on what’s coming down the road can hardly be argued with.