Telecoms at the crossroads

The telecommunications industry has grown with breathtaking speed during the previous two decades. The mobile telecoms market started as a nascent new telecoms service in the early 90s and has fully taken the world in less than 20 years. The growth of mobile telephony, coupled with the offering of fixed and wireless broadband, has not only offset the gradual decline of traditional fixed telephony but has actually exploded the revenues of the many telecommunication service providers around the world. Combined with one of the best gross margins compared to most other industries (legal ones at least..)ranging between 20% and 60% (depending on the region and type of telecom service provider), has resulted in the creation of some of the largest and most profitable companies in the world. People are often unaware of or unable to grasp the size and profits levels of the large telecommunication companies. The revenues of the top telecom service providers in small European countries, such as the Czech Republic, are exceeding the 1 billion Euro revenue mark, and large EU countries have telecom companies with revenues in the tens of billions of Euros. The large customer base of telecom service providers expanding their reach across all population segments,and the ongoing penetration of mobile and broadband services during the previous decade,combined with the high profit margins, was more or less a license to print money. 

In the last 4-5 years though, the picture has turned markedly less rosy with most markets becoming saturated and, with price erosion due to competition-reducing revenues, eroding margins and seriously challenging profitability. There are no more customers to add in both fixed and mobile telephony, the average revenue per customer has gone down due to competition and lower prices, and the growth of broadband revenues can hardly compensate for the voice revenue erosion. Unlike many other industries, it is the timing of market saturation that has made things worse, and not the global economic crisis. The latter just compounded the problem. Most people in the industry, including the managers of telecom companies, had seen thiscoming for a long time and it was an obvious endgame for a market that would eventually saturate, and for the commoditization of the main service (voice) which would inevitably challenge revenues and profits. As a result of this early understanding, “new services” have been the talk of the industry for over 10 years. The advent of various mobile platforms, expected to bring acceptable broadband speeds and new revenue generating applications to the handsets of consumers in the previous decade -such as EDGE and 3G – did not result in any sizeable new service success stories. Service providers had very limited additional revenues from the non-voice revenues they experimented with. This was due to the lack of real need from the side of consumers at that stage, the lack of interesting services,but also to the lack of serious commitment from the side of the service providers. They went for the low hanging fruit, i.e. expanding to segments and markets they did not yet cover with the “high margin, easy to expand” mobile voice services, rather than going for the hard and arduous task of innovation towards new customer value enhancing services. These would yield a lot less for some time compared to the “easy money” from mobile telephony.The 4G technology, coupled with the fast penetration of smartphones and tablets,and a consumer market more familiar with using such devices for several different applications, is more promising,although the ability of the telecom service providers to generate substantial new revenue from new services and stop the ongoing downward pressures to their financials, is still questionable.

This is not to downplay the tremendous new service opportunities opening up to the telecom industry. The powerful combination of a more educated consumer, who is increasingly application savvy and armed with impressively improving smartphones and tablets, and the deployment of new telecommunication technologies, such as 4G, which are significantly enhancing the network broadband speeds, creates a very promising ecosystem to innovate and develop new services. Areas such as location-based services, mobile payments, mobile health, smart monitoring systems, machine-to-machine communications, mobile commerce, enterprise mobility and many othersare very promising and are current hotbeds of innovation. The telecoms industry is at the crossroads, having fully capitalized on the 20 years of growth of mobile and broadband services,but currently facing a serious challenge to its future growth. Telecommunication companies need to radically change, embrace innovation, manage the risk associated with venturing away from their area of comfort, i.e. the traditional telephony services, and to identify new services that will not only compensate for the existing voice services revenues erosion but that will also propel further revenue growth. The very significant opportunities introduced from all the above mentioned areas could be a promised land for many of the existing large and small telecommunication services, as well as for the many start-up companies which are mushrooming in these areas with various innovation offerings. We do need to wait to see who the winners and losers of that new era will be. However, what is certain is that the telecoms industry will drastically change, the array of new services that will become available will be impressive and will change the lives and lifestyle of large segments of society. In the process, the new winners will emerge in a market and sector landscape that will be very different by the end of this decade.