By Richard Swinford and Didier Levy of management consultancy Arthur D. Little
European operators need to implement far-reaching strategic choices now in order to protect the bottom-line.
The consequences of the move to “all IP”, a tough macro-economic outlook and heightening competition from non-telco players mean time is no longer on the operators’ side.
Our own analysis, found in “Telecom Operators; Let’s face It” a report based on meetings with 105 organisations across 15 countries, reveals core telco revenues face a sustained decline of -1.8 percent per annum until 2015.
Crucially, although diversification into adjacent markets can add significant revenues, it cannot generate enough to stabilise the top-line.
In this context of prolonged revenue pressure, all telcos must accelerate their cost transformation both in opex (through more online-centric business models) and capex (through network consolation and sharing).
Additionally, more fundamental changes to business models will also be required.
What then is the next best action for operators? That depends on their market position, ambitions in terms of global reach and other differentiating factors.
For example, each has different visions on the industry’s outlook (more or less negative), different views on key assets to leverage (the infrastructure or the customer) and also very different starting positions (leaders versus challengers or local versus global).
Taking all of this into account we predict three key strategic routes will emerge:
The mega operator
This approach can, in theory, create the most value in the long-term, but is the most difficult to execute and hence the most risky.
Competing and collaborating with OTT providers will require both scale and a range of new capabilities.
Likely to lead large incumbents to make acquisitions, it requires extensive capital and multi-faceted competitive challenges across Europe, meaning only a handful of European telcos can consider this strategy.
The local hero
Concentrating on one or a few countries and providing a full service telco with a presence in some vertical businesses could lead to a slightly better top-line than the infrastructure play outlined below.
However, it involves a commitment to additional opex and capex in the next few years, as well as further execution risks.
The infrastructure play
Focussing on the network while developing a range of partner agreements in services and distribution is the least risky option, but also brings the lowest potential returns.
In any case it cannot be implemented by operators who lack opex flexibility due to the requirement to be the “low cost” producer.
To some extent each operator’s individual strategic choices will be made according to their individual circumstances and decisions. However, there are also some clear common prerequisites for operators to succeed.
Strong infrastructure and lean opex is the key to operators preserving their strategic position – under investing compared to the competition is a key risk.
In particular, a leaner cost base will be essential in remaining competitive. Notably there is a substantial opportunity from the online transformation of the business model, which we estimate could reduce a typical mobile operator’s total opex by nine percent by 2015.
Across all three routes a strong infrastructure will also continue to be necessary – requiring continued capex on FTTx and 4G networks.
However, different types of network consolidation can enable typical mobile operators to save 10-30 percent on network opex and capex in the coming years.
Big diversification revenues and cost transformation opportunities exist for operators making the right strategic choices in their markets.
But they must act now and quickly make the necessary adjustments if they are to reap the benefits in the long-term.
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