Perfect storm to hit telcos next year
© Flickr/cc-licence/John Morton
- Finances strained by increased capex demands, competition and falling ARPU
- Total telecoms revenue in 60 biggest markets to fall by 2% to $1.2 trillion
- Mobile ARPU will fall by 2.3% and fixed line by 11.5%
- Time for a rethink of strategy and investment priorities?
We are now into the second full week of December and that means it's the time of year when various organisations and enterprises pepper telecoms journalists with prognostications, divinations and auguries about what will happen in the global telecoms industry over the course of next year.
Depending on where and from whom they come the forecasts that waft on zephyrs of unseasonably balmy (or, in some cases, barmy) air on to the editorial desk range from the thoughtful, insightful and scientific, on through such ludicrous levels of corporate bombast and delusion as to be worthless and then forwards to the outer limits of bizarre but entertaining wackiness.
It is traditional for TelecomTV to report on at least a couple of such missives and we'll start this time around with something from the top of the pile; something eminently sensible and considered from the London-headquartered Economist Intelligence Unit (EIU), a venerable and trusted British business which is part of the Economist Group. The EIU provides forecasting and advisory services through research and analysis, such as monthly country reports, five-year country economic forecasts, country risk service reports, and industry reports.
In its latest special report, "Telecoms in 2018", (ominously subtitled "Telecoms : Throttled?") the EIU stresses that next year the finances of the global telecoms sector will come under sustained strain as the industry faces a perfect storm of differential pressures. In 2018 the push for 4G and 5G connectivity will continue unabated even as demand for mobile bandwidth reaches new levels of insatiability. This will require telcos and service providers to undertake massive (and massively expensive) programmes of capital expenditure at a time when intense competition and its attendant price wars will further diminish operator's revenue streams.
To stay in the game and eventually to reap the promised and perceived rewards of the worldwide wave of network transformation and the commercial deployment of 5G (by 2020 or some time shortly thereafter), operators will, perforce, have to continues to expand their footprints and place even more emphasis on providing amplified mobile broadband coverage whilst introducing 4G to as many parts of the world's developing countries as they possibly can.
This will be great for subscribers but operators will have to find fresh sources of revenues from innovative and compelling new services and apps or live with the fact that average revenue per user (ARPU) will continue to decline as operators are forced to offer discounted data-rich packages and bundled services - and that way, sooner or later, lies disaster.
The Economist Intelligence Unit report says, "In 2018 we expect ARPU across our 60 markets to fall by 2.3 per cent for mobile operators, and by 11.5 per cent for fixed line. ARPU can recover in time, at least in the mobile sector, but part of the problem for operators is the blurring of the boundaries between telecoms companies and IT. The days when operators could rely on revenue from a reliable voice and SMS service are long gone. Competition from over-the-top (OTT) providers such as WhatsApp, Skype and Netflix has backed the telecoms sector into a corner. Now it faces a new challenge from app developers, whose business interests are expanding rapidly."
A silver lining but pocked with rust
That's the downside and there is no point in underplaying just how dangerously deep it might prove to be for those telcos that cannot (or will not) adapt to the brave new world they now find themselves in. They don't have much longer to adapt to the new ecosystem and that is why 2018 will be so important to them. In a year's time, if they do nothing or too little, the game will be all but over.
But, there is an upside and there are opportunities, provided telcos can adapt to competition from over-the-top (OTT) providers by making alliances, forging partnerships and developing clearly differentiated services and a much wider range of mobile apps that are definitely relevant and appeal to paying consumers. Simultaneously. they will have to leverage the benefits of software-defined networking (SDN) and network functions virtualisation (NFV) to build far greater flexibility into backhaul infrastructure.
Probably the greatest danger they could find themselves in would be aggressive takeover by giant Internet companies such as Facebook and Google. The EIU points out that, notwithstanding current storms swirling around the iconoclastic machinations of the US regulator, the Federal Communications Commission (FCC), such a wave of actions would have profound implications for net neutrality in any event.
One sector that could almost be tailor-made for the benefit of telcos is the increasing spread and importance of the Internet of Things (IoT), especially with the launch of new devices that rely on continuous connectivity.
As the EIU report says, "Increased use of big data analytics and cloud computing will drive the development of smart homes, autonomous vehicles and improvements to commercial operations. There will be disagreements over technology standards, particularly for connected vehicles, as telecoms operators and carmakers jostle for market space. [However] … all this, however, will underscore the need to invest heavily in fast and reliable connectivity." Those telcos that can quickly capitalise on the new opportunities, lucrative new revenue streams will result.
Regulation still a force to be reckoned with
Then there's the little matter of regulation and how it is applied in various countries and trading blocs. In Europe, and notwithstanding the Brexit shenanigans that are convulsing and distracting the UK, regulation will continue to affect the speed with which operators can roll out infrastructure and restrict their room for manoeuvre as they compete and consolidate. For example, next year the effects of the elimination of EU roaming charges will further erode telco margins.
At the same time, the European Commission (EC) will continue to monitor and police sectoral mergers and acquisitions to ensure that a competitive environment is maintained and consumers have a real choice. Telcos had been hoping that the EU might slacken its grip on the reins a little next year but the European Parliament recently voted to give regulators enhanced powers to investigate and prevent “joint dominance and oligopolistic behaviour." Thus, although the telco sector will almost certainly need to consolidate, mergers, acquisitions, joint ventures and strategic alliances will be scrutinised more closely than ever. Deals could be delayed, amended or stopped altogether.
Meanwhile, in some other parts of the world, regulators are becoming more openly interventionist in markets where competition is being eroded and prices rising as a direct result. Elsewhere though, deregulation could well come to the aid of telcos by permitting them to broaden the scope of their services as the line between operators and media companies blurs and telcos transmute into a generalise tech companies.
You can download the full EIU report here.