The telco industry, globally and in APAC stands at a critical juncture. Many of the industry players are currently beset by declining profitability, stagnant revenue growth, and rising CAPEX/OPEX while user traffic continues to keep going up.
The gap between stagnant revenues and investment required is now significant and is driven by four factors: regulatory pressure, growing technology complexity, market competition, and growing data traffic volumes.
Data traffic is growing, due to streaming, 5G devices, fixed wireless access (FWA), and fibre. Huge capacity expansions are required to maintain the same quality of service. To cope, substantial capital is now urgently needed for network upgrades, technology advancements and new infrastructure.
This new infrastructure contrasts sharply with the limited revenue growth.
Speaking with iTNews Asia on the need for telcos to change, Dr. Vincenzo Basilem, Partner, Arthur D. Little Middle East, said traditional methods such as focusing on coverage and speed and cost reduction through analysing costs and budgets are no longer viable for the industry. Over the long term, as revenues plateau, this same approach is also financially unsustainable.
He outlines four reasons on why telcos need to rehaul their business model:
Firstly, in developed countries, the market is becoming saturated as most users already have access to the main telco services (data, voice, and SMS). As a result, expanding coverage and speed does not significantly differentiate telco providers anymore or drive revenue
Secondly, telcos face high competition from not only traditional telco operators, but also cable providers, ISPs, technology companies, ICT players, etc. This drives the need for differentiated services beyond the traditional ones.
Thirdly, speed and coverage are becoming a commodity for customers, who are generally satisfied with modern networks that deliver speeds of 50Mbps or higher which users see as reliable enough and do not need any future improvements.
Fourthly, adding to the above factors, the costs of upgrading network infrastructure to increase coverage and speed is significant and outweighs the expected benefits, resulting in low ROI. These challenges remain the same regardless of the region they operate.
“A data-driven business model (investment) remains applicable. Telcos in the Asia Pacific region face unique challenges (e.g., regulatory, market competition, high data traffic volumes, etc.), which may necessitate a different investment and technology focus compared to their counterparts in North America and Europe, but the overall approach remains the same for revenue maximisation,” said Basilem.
Telcos vs banks – telcos have very little compulsion to innovate
Compared to banks which are a lot further down the digital transformation curve, Basilem said telcos have to content with unique challenges that hinder their ability to transform and innovate.
These challenges firstly include infrastructure complexity and dependency. Unlike banks, which are relatively asset light and heavily invested in digital services, Basielm said telcos are burdened and dependent on complex legacy infrastructure which are not easy to change.
He said that while banks and telcos are operating in a highly regulated environment, the regulatory environment for telcos limits their ability to innovate (e.g., spectrum allocation difficulties, price control, standardisation, etc.), whereas banking regulatory environment promotes competition and innovation.
Another challenge is the market dynamics are vastly different, said Basilem. The telco market is characterised by high price sensitivity, stagnant / declining ARPU, and customer expectations not really centred around innovation (they see it more as a commodity).
“Telcos are facing pressures in cutting costs rather than innovating. This is unlike the banking market, where substantial investments in fintech and digital transformation is driving demand for new digital financial services and enabling banks to innovate and retain customers.”
Furthermore, he said telcos are also generally conservative in their approach to change, where the focus is more on maintaining their network rather than customer centric innovations. In contrast, banks have a more proactive approach in embracing innovation which is driven by fintech and customer needs for more secure and transparent financial services.
Where should telcos prioritise their investments?
Basilem said substantial capital is needed for network upgrades, technology advancements.
The need for change is crucial as failure to addressing this gap poses a serious risk on the future of telcos, potentially leading to loss of competitive advantage, inability to meet customer expectations, and even affect long-term financial stability.
- Dr Vincenzo Basilem, Partner at Arthur D. Little
Telco must learn to monetise their investments and explore new revenue streams (e.g., IoT, etc).
Basilem added that investing in AI and machine learning (ML) is extremely important for managing increasing traffic and addressing the evolving demands of telecommunications network. By analysing vast amount of network and business data, AI and ML can identify patterns, predict traffic trends, and consequently optimise network performance.
Additionally, he said these technologies enable early threat detection and could help mitigate cybersecurity attacks. They also provide valuable insights into customer behaviour, enabling telcos to offer more personalised customer services and improve the customer experience.
Will 5G development be stymied?
The buildup and evolution towards 5G may face delays, particularly in emerging markets, due to existing telco challenges, said Basilem.
He added that factors such as infrastructural complexity, stringent regulatory frameworks, and financial constraints could be significant contributors.
“The transition to 5G necessitates substantial investments in new infrastructure (e.g., new sites, expanding fibre optics network, etc.), and regulatory complexities around spectrum allocation, data privacy, and security also pose substantial challenges.”
What's a framework that can deliver success?
To address the gap between stagnant revenues and increasing CAPEX/OPEX investments, Basilem said telcos should consider four critical factors:
- Know the business demand and required CAPEX/OPEX spending. Revenues should be highly granular and closely correlated to demand and spending.
- Understand that the service offering portfolio and quality of service required will vary between locations.
- Knowing the competitor offerings and provide a service offering portfolio and quality of service that is tailored to customer needs.
- Ensure the new technical and business plan will ensure they stay within budget while maximising expected revenues and increasing ROI.
