The global telecom industry is looking at an eventful 2014
where the trends of recent years are expected to converge and culminate into a
perfect storm. This is a Darwinian year that will distinguish between winners
and losers, ruthlessly and unequivocally. We believe that the players who will
define the next wave of industry growth will require scale and capabilities
that are substantially different from those that ensured success during the
last growth cycle. Not incrementally different, but substantially different.
The year ahead will be characterized by unprecedented levels of consumer
choice, ubiquity, and interactivity. To make it in this more dynamic and fluid
environment, operators need new skills.
Before looking at the key trends that will define 2014, it
is pertinent to take stock of what shaped 2013 from a telco perspective.
Impacted by the global economic downturn of 2009 onwards, the industry’s growth
naturally slowed and this has continued throughout 2013. As a clear sign of the
maturing global telecom, the industry’s growth rate is gradually aligning to
overall GDP growth rates. With the exception of Africa, which is still growing
at 7%, most other regions have a moderate growth rate of around 3%. America is
only at 1% and Europe is actually shrinking in core market value. The
competitive scene is also very happening, with mushrooming OTT players and
blurring boundaries between competitors and collaborators. Whatsapp is
estimated to exchange more than 1 Billion messages every day. As a result, some
operators witnessed a 50% Drop in SMS revenues. This cannibalization is also
supported by the 10% growth in the adoption of smartphones, which is estimated
to cause a loss of $1.2 bn globally in voice and messaging revenues.
Faced with unprecedented competition, telecom operators focused on cutting costs and increasing
operational efficiency to protect profitability. As infrastructure is becoming a commodity
compared to the differentiation happening at the service level, operators
engaged in aggressive network and tower sharing schemes both to optimize their costs
and monetize the excess capacity available on their infrastructure. Airtel took
it one step further by fully outsourcing their network to TDC, while BT
outsourced its IT infrastructure. Finally, some operators like Orange and
T-Mobile identified mutual benefits in joint procurement and combined their
purchasing power for non-core procurement. The increase in caution has also led to a significant slowdown in
mergers and acquisitions, with operators choosing to focus on domestic markets,
reversing the expansionary trend of recent years.
However, while telecom operators may have found the recipe
to align their cost structures to a lower economy, they have clearly struggled
to make breakthrough innovations, and are pretty much the only players in the
ICT value chain with no major innovation to take credit for. On the other hand,
the other players managed to introduce evolutions and revolutions in terms of
products and business models. For example, internet players have evolved beyond
the model of unilateral content provider to offer products and services that
directly compete with those of telecom operators. VoIP and other communication
tools offered by the likes of Skype, Google and Facebook directly cannibalize
voice and SMS revenues of telecom operators. Device manufacturers have also had
their fair share of innovation, with the introduction of smart devices and
disruptive ecosystems built around them. Samsung, Google, and Apple, which are
consistently ranked among the most innovative companies globally, not only
outperform operators in terms of the percentage of sales they devote to R&D
and innovation, they also far outstrip them in the number of patents they have
received. Patent ownership in the mobile communications space has become
critically important, judging by the increasing number of patent lawsuits, and
has been a primary factor in the main acquisitions of recent years. Finally,
network, high-tech and IT vendors are also participating in the innovation
process. The introduction of new products such as traffic control systems and
small cells creates opportunities for innovative business models. Cloud
computing and M2M solutions are also at the heart of innovative services
provided to enterprises.
Going forward, operators will need to carefully observe three key trends radically changing the dynamics of the market, which will dictate the strategy they need to adopt if they want to survive in this new environment.
Operators costs increasing faster than subscribers willingness to pay
Costs on operators are expected to increase much faster than their subscribers’ willingness to pay. In Q2 2013, more than 30% of broadband lines in Western Europe have a bandwidth above 30Mbps, and this proportion is expected to grow even further with the maturity of cable and fibre technologies. This demand for high bandwidth goes hand in hand with a higher demand for internet traffic, increasing operators costs required to secure this additional international internet capacity. In addition, operators will continue investing in deployment of fixed and mobile high speed broadband. On the revenue side, compensation for these costs increase will be limited, as subscribers expect will continue to expect a flat subscription fee despite their increased traffic and bandwidth consumption
Smart connected devices will become indispensable
The near future will witness a strong propagation of devices. While the world accounted for 0.5 billion connected devices in 2003, there are currently 2 connected devices for each human being, and this number will further increase to 6 or 7 in the next few years. These devices will be connected (4G, WiFi, NFC, etc), environment aware (GPS, Accelerometer, etc), always on low battery consumption and background sensing, and of course hands-free through voice and gesture control. This proliferation of devices will fuel a new hunger to measure everything through sensors. Notable examples include devices for measuring sports performance such as running or swimming, medical conditions tracking devices such as glycemic rate or hear rate, as well as devices for almost everything such as, Google glass, smart bands, smart meters, e-cups, and flexible displays.
Digitization will make its way into retail and commerce
With faster and higher-capacity networks, high-performance connected terminals, high digital adoption among consumers and gigantic data volumes, all necessary ingredients seem to be in place for a strong take-off of Digitization, especially in retail and commerce. Indeed, consumers expect a shopping experience that features high degrees of personalization, convenience, trust and emotional connection. Necessary infrastructure appears to be now in place to deliver that, through personalized offers, anywhere-anytime shopping solutions, trusted and secure transactions and an overall emotional and fun experience that consumers can rate and share with their networks in real-time. Much of this experience is increasingly mobile-based, with mobile internet traffic now reaching close to 30% of total internet traffic, and mobile-based search overtaking desktop-based search. Nike, with its Nike+ FuelStation digitally enabled retail space, was among the first to envision the next level of retail, offering a connected and engaging experience to shoppers and sport enthusiasts. We can expect to see more such initiatives in 2014 and beyond.
These trends will impose radical changes on the ecosystem as we know it today. Customers are likely to find less value in connectivity products, favoring over-the-counter model to the current widely adopted contract model. The core of value will emerge from digitization and digital customer experience, enabled by the proliferation of connected devices. Infrastructure players are likely to continue consolidating to maximize efficiencies, potentially supported by the governments as investment partners. In this new ecosystem, the global telecom market will unwind into three possible scenarios.
Internet/OTT Rule
Access to network will become a commodity, driven by the rapid evolution of technology and regulatory pressures. OTT players will further squeeze margins of operators and emerge as the main winners over the long term. These players could even move down the value chain to resell connectivity from operators as a bundle together with their products and services. Telcos will mainly invest in developing best quality hybrid network, to ensure sustainable revenues from connectivity.
Unbundled Coopetition
Operators manage to maintain the value of ubiquitous, seamless and reliable access, and resist the strong emergence of OTT players. Differentiating operators will emerge as the best partners of OTT and ICT players, and will invest towards ensuring the best integration platforms with those players while ensuring a good quality network. In this scenario, market value will be distributed in a stable way between connectivity players and OTT players
Telco Digital Paradise
Operators take advantage of the explosion of connected devices, and create market value by developing access based solution. Operators will also move up the value chain and innovate to create own apps portfolio, and ultimately transform into primary providers of digital life. Operators’ main investments will focus on developing unique digital services and devices. In this scenario, OTT players are confined to the long tail
Overall, in 2014, we expect that the major trends stated above will come into sharper focus, calling for greater clarity into the future roles of every operator. For operators that have not done so already, and there are many, 2014 is therefore the year to make the strategic choices necessary to determine their future direction in the radically changed competitive landscape, deciding which business model works for them and which markets to serve or leave out. This decision should depend both on whether they can effectively leverage the capabilities they already possess and on careful consideration of their ability to build new ones as required by their target markets, either organically or through strategic partnerships.
The writer: David Tusa, partner, and Adel Belcaid, principal, at Booz & Company
