Telecom industry under stress

By bogaert

Over the past decade the telecom industry has been growing. Nowadays, the business models in place become stressed. I take here a brief look at the five drivers of growth over the past decade and five different ways to go for revival in the near future.

The historic growth and threats

The historic growth in the telecom industry was possible due to several drivers. I mention below five of them, as they played a role in the recent developments that impose stress on the current revenue models.
thumb down First, the technological developments of wireless communications in the early 90s lead the explosion of mobile phones, networks, and services. The telecom industry made massive investments in mobile networks and paid for the spectrum usage. The increase in subscribers and the increase in usage grown the revenue from mobile voice and SMS, the investments turned into profitable business. Recent developments, for example in social networks or voice over IP (VOIP)-services brought alternative ways to communicate. In particular small businesses and youngsters changed rapidly their attitude from voice calls or SMS to VOIP-calls or social network messaging.
thumb down Second, the usage of mobile phones combined with global mobility has grown revenue from (sometimes excessive) roaming charges. Regulation by the European Commission forced the industry to lower roaming charges, resulting in reduced revenue. Telecom operators became creative and for example maintained roaming on mobile data as a good source of income. Further regulation has been put in place to protect the consumer from excessive bills. Even in the near future way can expect that roaming will become more affordable. This will close the gap between fixed-line cost and mobile costs, consequently reducing the income of the telecom operators.
thumb down Third, the growth of the Internet, in particular for business and home use, increased the revenue from DSL connections. Also regulation played here a role. Regulation forced incumbent operators to open the physical network to other market players. This brought competition and reduced priced. Multiple telecom operators provide additional services over a separate DSL channel, such as IPTV. But also here we see the shift toward open over-the-top services, for example video on demand (VOD) by NetFlix. Recent reports show that over 25% of the IP-traffic in the US is coming from Netflix, still growing and leaving the telecom operators with their walled garden VOD services in the dark.
thumb down Fourth, the termination charges between telecom operators were a source of income for the incumbent operators. They had the vast majority of subscribers. This resulted in far more incoming voice calls and text messages than outgoing traffic; consequently more money is coming in than money is going out. Regulation continuously lowers these termination charges, thus lowering the income from the termination charges.
thumb down Fifth, the convergence occurred in several dimensions. We can distinguish the convergence (1) between fixed and mobile communications, (2) the convergence between telecom and IT, and (3) the convergence between telecom and media. The telecom operators responded to the convergence by bundling their offerings in triple-, quadruple-, and n-duple-plays. Competition brought also here stress on the prices. Moreover, now comes competition from global players who try to provide an exceptional user experience over the IP network directly to the end-user, a trend that risk commoditising the service of the local telecom operators to simple connectivity.

Future ways

So, what are the different ways towards growth for the telecom industry? As in every industry depends sustainable profit on two factors. The first factor is the continuous increase of efficiency, which results in the reduction of internal costs. The second factor is to keep the business shifting towards profitable areas. Combing both keeps the span of profitably. I will not focus on the first factor, although it is the prerequisite for the second factor. But, many things have already been said, in particular in the area of OSS- and BSS-transformation, to keep operational costs under control. I will focus on the second factor, in particular on five areas to evaluate for future growth.
thumb down First, we could think about providing cloud services in the network. Cloud is definitely an inevitable trend which has reached the maturity point of no return. From a first glance it might look very lucrative for a local telecom operator to provide cloud services from the own datacenter over the network to the customers. However, cloud is typically not bound to the local territory of the network operator, cloud business means global business. Competition was in the past between datacenters of several thousands of square meters. Nowadays, the competition is between datacenters of several hundred-thousands of square meters (read: above 500.000 square meters) among global players. Where global telecom operators can enter this market, it becomes difficult for local telecom operators. Therefore, it becomes necessary for local telecom operator to focus on those opportunities where the local presence plays a crucial role. This is in particular the case for data that must remain in the country (for example for legal reasons), or for services where bandwidth and latency are playing a crucial role (for example media content services). For the other cloud services can the local telecom operator liaise with one or more global providers and resell services to its customer base.
thumb down Second, the number of elderly people increases at a pace faster then number of healthcare workers. This creates opportunities in the healthcare market were telecom operators can play an important role. The role of the telecom operator can go beyond providing connectivity. The fragmented landscape can be aggregated in a telecom operated service platform. Such services can cover a wide variety of needs, such as the improvement of the customer wellbeing, support of extended homecare, the integration of the patient medical data, or management of subscriptions. All these services depend on network connectivity and on leverage the consumer relationship.
thumb down Third, the number of intelligent devices keeps growing. All these devices become dependent on network connectivity, and moreover on intelligent services in the network. Here we enter into area of machine-to-machine (M2M) business. Hence the opportunity for the telecom operators to provide smart added value services that goes beyond the connectivity. Nowadays telecom operators focus on the connectivity, which gradually becomes a commodity. Deployment of services on-top creates additional value. We distinguish multiple services on different level. At the lower level we see services related to the connectivity, such as security, the management of the device, or the maintenance of device software. At a higher level we see services related to the data, such as data consolidation, data cleansing, data manipulation, or data archival. At the highest layer we see intelligent services, in particular data analytics and prediction. In this approach gathers the telecom operator the huge amounts of data and provides valuable information to its customer.
thumb down Fourth, telecom operators manage and maintain the wire network nationwide. To do so, the install and maintain equipment in a huge number of buildings on a regular basis. The ability to manage the complexity of interventions and the good presence of workforce provides the opportunity to enter in the smart building business. The increase f complexity to manage modern buildings requires skills that can be provided as a service. Such service can be locally developed in close collaboration with grid operators, smart building providers, and building operators to turn data into valuable information by using analytics and prediction tools deployed in the network.
thumb down Fifth, the telecom operators have an extensive experience in large scale deployments of products and services. The knowledge of local market, sales, roll-out, billing, and customer care gives a unique opportunity to extend the portfolio of products and services with third party products and services.
Unfortunately I am not able to predict the future (do not have a crystal ball), but the current market trends have set the direction. Globalisation strongly impacts the local market (e.g., social networks, over the top content, cloud services) and end-users shift towards an open platform which pulls down the walled-garden approach. The current business model will further decline, therefore in particular local telecom operators must accelerate and take their business into a new heading.