Telecom revenues remain steady during downturn
The global recession is seemingly receding and the telecommunication sector – with the notable exception of equipment and handset manufacturers – has escaped the worst of its effects.
Revenues among operators worldwide remained mostly steady, with the exception of mobile roaming revenues generated by business customers, and ongoing cost-cutting efforts enabled operators to maintain profitability, according to a new report by Booz & Company.
"The coming year, however, may be different. The industry is entering a period of significant change in which five distinct shifts will come into greater focus, in terms of geography, services, the move to digital, operations, and regulation," said Karim Sabbagh, Partner and the Global Practice Leader for the Communications, Media and Technology at Booz & Company. Those companies that can take advantage of these changes will find real opportunities for growth; those that cannot will be considerably challenged.
Much of the growth in the telecom industry will shift from mature Western markets to developing countries. This trend is already fully apparent among handset manufacturers, which build most of their handsets in Asia-Pacific. Even among operators, the vast majority of subscriber growth is outside the West. In the first half of 2009, for instance, India added 142 million net subscribers and China added 87.4 million, while the US added just 14 million. "In Asia, we still see telecom players with extraordinary Ebitda margins – above 50 per cent – that are generating tremendous amounts of cash," said Hilal Halaoui, a Principal at Booz & Co.
These rates of growth and cash generation are also changing the level of M&A and expansion activity across the globe. While cross-border activity on the part of US operators is negligible, and sporadic in Europe, carriers in Africa and the Middle and Far East continue to make deals to expand their influence over large territories – even into the West. "Just how disruptive a global force these rapidly expanding players will be remains to be seen," said Sabbagh.
Much of the telecom world is being rapidly commoditised – from connectivity and basic services to low-end handsets, to networking equipment to the networks themselves – prompting virtually every player in the sector to seek out new sources of value. The clear solution: services. Everyone is moving up the value chain.
Equipment manufacturers are offering networking and field operations services, handset manufacturers are building high-end smartphones complete with added services and fully stocked 'app stores,' and operators are moving to provide customers with more and more online applications, complete with content deals.
Meanwhile, internet and technology players such as Google and Facebook continue to stretch their wings into the telecom space. More media and consumer electronics firms are likely to jump into the space as well.
As clear a trend as the move to services is, it is still in its infancy. "It therefore offers lots of opportunity for growth for the most innovative players, as well as the capacity to be massively disruptive to those that can't keep up," said Halaoui.
As rivals in the telecom sector battle to move up the value chain, the world is quickly moving toward an "all digital, all the time" model. Consumers are coming to expect the digital experience – texting, social networking, news and information, high-definition movies – anywhere, anytime. Telecom operators are already beginning to view their internet portals as a critical asset in the race to provide services.
"Yet this trend will affect every aspect of the telecom industry – from the high-speed networks consumers will insist on, to the variety of new devices on which they will expect to be able to connect, to the ever-expanding kinds of applications they will be willing to pay for," said Sabbagh. "And the new generation of 'digital natives,' those who know no other world than always-on connectivity, will only grow more demanding."
The commoditisation of large swaths of the telecom value chain is forcing every player in the industry to create the most efficient operations they possibly can – to survive in the near term and to prepare for a future in which they must be more focused, agile, and innovative. Players in front of this curve are already looking at the long-term right-sizing of their organisations, outsourcing non-core functions such as engineering and network and field services operations, even spinning off entire passive infrastructures that are no longer central to creating real value, and completely overhauling their business processes. Many carriers are driving large-scale supply chain as well.
"The goal is to free up cash and resources for investment in truly strategic assets, such as new services, technologies, and business models that will truly differentiate players from their competitors," Halaoui said.
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