The last decade has seen an unprecedented level of growth in data consumption with a significant increase in voice calling. The customer spent more and more time online consuming anything from social media posts to Netflix originals. Telecom operators were in the epicenter of this growth. But for the better part of this decade, the Telecom operators have seen declining revenues, decreasing cash flow, and increasing investment. Their revenue and cash flow have dropped by an average of 6 percent a year since 2010. Their capital expenditure at the same time hovered at around 15 percent of the revenue for a decade.
Telecom operators for sure have missed the massive opportunity laid in front of them in the last decade mainly by playing the same old game: Cutting costs, reducing the workforce, and investing in expanding in more geographical areas to gain more customers. At the same time Over The Top (OTT) players such as Google, Amazon, Facebook, and Netflix, etc saw the potential of this growth and build their businesses on operators’ own infrastructure. These tech companies have enjoyed well over $1 trillion dollars in combined market cap by innovating and thinking differently. Why operator did not see this coming? What went wrong for them?
The story doesn’t end here. Similar growth is predicted it the next decade with a massive increase in data consumption and adoption of the Internet of things (IoT) and technologies like Virtual reality and edge computing. The future will be powered by the internet and will require massive investment in infrastructure mainly coming from telecom operators. So far, their investment is not bringing money they expected. Despite their investment in 4G infrastructure revenue shows flat or tepid growth. As per the Mckinsey report, In regions like Europe, and Latin America, revenue even dropped after 4G introduction. Another report by EY suggests that one of the top risks in the Telecommunication industry in Canada outlines how new customer demands, digital tools, and cost pressure are leaving Telcos no option but reinvent their services, business model and operation to improve the revenue stream and cost base. Therefore, embracing a strategic, forward-looking business model is critical to survival and growth.
Relooking the business model
The continuous erosion of legacy revenue streams driven by over-the-top (OTT) competitors continues, forcing operators to consider new ways of remaining relevant to consumer and enterprise customers. EY research shows more than half of telecom operators consider a lack of digital skills their top barrier to transformation. But they do not necessarily view it as a top strategic priority.
As per my understanding, Operators more than ever need to identify who are their real competitor, how to create a competitive advantage in the digital world, and how to continue investing in next-generation technology smartly by using analytics to ensure they are ahead of the game. More importantly, Telcos needs to address the growing pain of declining revenue in spite of heavy capital spending.
Understanding the real competitors
As the competitive landscape is changing, so do our sources of competitive advantage. Tech giants are the greatest competitive threat to Telcos. As per Mckinsey, the overwhelming majority of the economic value enabled by the communication industry over the last two decades has been captured by tech giants such as Apple, Amazon, Facebook, Google, and Netflix. Between 2005-09 to 2010-14, the economic value captured by Telecom operators decreased from 49% to 37% whereas for tech giants it increased from 13% to 24% in 2014. Some of the operators are well aware of this reality and already doing acquisition and strategic move to cope up with these challenges. AT&T acquisition of Direct TV and Time Warner, as well as Verizon purchase of AOL and Yahoo, are some of those examples.
Analytics for smarter capital spending
Doing more with less is seldom easy. But what can Operators do to meet the burgeoning demand on their network? What can companies do to alleviate the squeeze on margins and create more value without spending too heavily on capital equipment? With the 5G upgradation already knocking the door, operators have no choice but to invest in next-generation technology, but for what? Yet again will we see tech giants eating their piece of the pie?
Operators are already preparing for this change with a mixture of resignation and anticipation. They know that it will open opportunities to capture value from new 5G use cases while at the same time they are aware that they will have to increase their infrastructure investment in this technology. As per Mckinsey, between 2020 and 2025, capital expenditure would have to increase by 60%, roughly doubling the total cost of ownership.
Analytics for smarter capital spending is the answer. It can help operators to determine which capital investment in their network will produce the most value. By running the data through an algorithm, a wireless operator can pinpoint where and when network overload happens and which customers they affect most. With that information, it can project how much a possible upgrade might improve the satisfaction and ultimately the retention of its most profitable customer.
Analytics can also help gain a 360-degree view of the customer that could allow the customer-facing function to make a more precise data-driven decision that could cut down wasted resources. It allows wireless operators to make a smarter decision about how they deployed capital and adjust their network to maintain the quality of service. Additionally, they can use analytics to reduce customer churn, make better marketing-spend decisions, improve collections, and optimize network design. Operators can also use machine learning to adjust wireless networks automatically as demand changes or even to base adjustments on predictions.
This is a time more than ever for Telecom operators to understand their competitors, increase their piece of the pie, and leverage digital technology to retain a customer. More than ever they have access to cutting edge network equipment, rich data on customers and operation, analytical power, and organizational prowess. The potential benefit from digitization is now well known, and therefore making smart use of these digital technologies across their whole business is imperative for telecom operators who want to combat declining growth, shrinking margin, and intensifying competition. Moreover, it is a crucial time to seize the opportunity that could make them stronger and more profitable than before.