As overcapacity makes connectivity a commodity and customers don’t care anymore, telcos need to take action
Struggling to create value for shareholders, the European telecoms industry is at a fork in the road. Faced with a glut in capacity, there is a risk that the gradual decline in the industry’s return on invested capital could soon go into free fall. There are two ways to arrest this decline – maximize automation to achieve a step change in the efficiency of the core business and/or push much deeper into the (beyond-core) digital services market. In other words, telcos need to concentrate on running networks as efficiently as possible and/or develop compelling digital services that can compete with the best the Internet has to offer. Although both options are likely to require radical changes to operating models, they are the only ways that telcos can hope to maintain the backing of investors.
Today, many European telcos are ‘stuck in the middle’, aiming to be successful in both core connectivity and beyond core, whilst maintaining a costly integrated operating model. Ironically, the root cause of the looming crisis is the telecoms industry’s investment in highly efficient fiber and 5G networks. These technologies have brought about a step change in the capacity available to both consumers and businesses, creating a situation where most telecoms customers now have all the connectivity they are likely to need for the foreseeable future: the industry is creating its own overcapacity!
The glory days are gone Unfortunately, telcos have since failed to translate their crucial role in connectivity to their shareholder returns. Telcos’ shareholder return started lagging behind the broader financial markets in 2017.
The future doesn’t look promising either In today’s structurally weak environment, telcos are even struggling to make a return on investment that will cover their weighted average cost of capital (WACC), which is rising with interest rates. In fact, figures from ETNO show that in 2022, telcos’ WACC surpassed their return on capital invested (ROIC) – see chart. Considering ETNO’s ARPU outlook for European telcos (<1% CAGR between 2022 and 2025), we expect the ROIC– WACC spread will remain thin.
Changing industry dynamics will make the situation worse. At the same time, customers’ perceptions of telcos have changed. Whereas they were once seen as providing premium services, they are increasingly regarded as offering a commodity,
How to get out of this situation? We believe telcos need to do two things:
1. Reducecostssignificantly.
Emerging technologies, such as Open RAN, virtualisation, AI and cloud-native architectures, make significant cost reductions possible. It is likely that at least one of the operators in a market will exploit these opportunities. If this operator decides to then reduce prices
Prepare the strategic decision how to sell connectivity services in the future.
Given the developments towards overcapacity and changing customer perception, it is key for an operator to investigate how connectivity in the future predominantly will be sold. Based on that, operators need to make a choice and adapt their operating model accordingly: Pure connectivity providers can remain an integrated company, based on simplified products, processes and organization. These operators should focus on a “digital first” customer journey with self-service capabilities, while radically simplifying their business to be able to compete on price, much like other utilities, such as gas, electricity and water. To grow beyond core services, operators should transform their operating model and potentially split into a NetCo and ServCo. To differentiate on functionality and emotional connection with its customers, the ServCo should focus on innovation, partnerships and growth, while the NetCo focuses on performance, reliability and costs
See below the full Article by Deloitte