Head of Innovation Business Unit, IDATE DigiWorld
Telcos are in a crucial need to reinvent themselves. Their pure connectivity revenues (voice, messaging, broadband, linear TV) are expected to be flat at best for the next 4 years, while CAPEX are continuing to increase (6% in 2015) with the development of digital services (OTT, IT and IoT), pressuring the networks with an ever increasing demand.
The overall economic climate, quite negative in advanced economies and even in many emerging countries, is also detrimental to the telecom industry, which - like many other industries - has become a cyclical economy in the last three years and is therefore subject to slowdown in case of recession. Competition is coming from large OTT players, but is in reality quite marginal compared to the intense internal competition from telcos themselves, favoured by tough regulatory regimes and by the introduction of disruptive technologies like IP.
In this overall quite dark picture, telcos have nonetheless some signs of hope on which they can prepare the future. Their EBITDA margins remain quite high, and the regulations are becoming more relaxed. Without a surprise, the biggest expectations should come from the digital disruptions, which can serve both as enablers of the telco’s operations (internal optimisation) and as new revenue generators through diversification, when combined with digital assets of telcos. Indeed, in all scenarios, telcos will benefit significantly from developments around cloud services, M2M and payments.
All the major telcos have embarked in such transformations through plans for 2020 (or sometimes less coordinated activities). But most telcos are betting here with an approach that corresponds to the Club scenario. In this scenario, telcos would follow the same approach than large OTT players, building a platform with proprietary technologies and investing in their own infrastructure and stores to offer an advanced customer experience, mostly paid by consumers themselves. They would likely succeed around payments, video services, M2M or smart home, but would likely significantly fail to expand around other services, dominated by large OTTs or vertical players for IoT. Whatever the criteria (revenue, EBITDA, FCF), this scenario is indeed not the most attractive for telcos, especially in terms of EBITDA.
The most favourable scenario for telcos in terms of revenues is in fact the Shield scenario, with a 3.8% CAGR for the 2016-2025 period (compared to only 2.4% for the Club scenario). Telcos would strive in a market dominated by cybersecurity issues and less intensive usage of personal data. They would leverage their network assets with additional investments and combine them with devices (generic and vertical) and cloud services. Their more local approach and their brands would make them appear as key players for M2M, security and payments. But this would require huge investments and additional OPEX, degrading both EBITDA margins and FCF margins compared to 2016 in order to ensure security. This would make it the least attractive scenario for telcos in terms of FCF, with even less than in 2016.
Regarding EBITDA margins, there is more to expect for telcos from the Tech scenario. The market (at 4,600 billion EUR, the biggest for all digital services of all scenarios) would skyrocket through the combination of advanced interoperable technologies sold as a service or as API at a low unit price and recombined into innovative solutions. A lot of the development would be funded with advertising and analytics around new connected objects. Telcos would benefit mostly indirectly from such developments, as wholesalers of premium capacity and (critical) connectivity in addition to other assets like billing. Telcos would enter an environment of commodity services but with a huge demand. With more indirect sales through APIs, their margins would improve in spite of still requiring spending more to meet the demand.
Finally, the best in terms of FCF margins for telcos is the Low cost scenario, performing a little better than the Tech scenario, which would develop in line with lower expectations from end-users in terms of technical innovation but more requirements in terms of privacy/data control and cost-efficiency. Telcos would focus on a limited portfolio of basic products, both traditional and digital, and take a leaner and more agile approach, with network outsourcing and sharing to pure utility cost-optimised companies and digital-based sales and customer-care through self-service. Advanced digital disruptive standardised technologies would be used intensively internally to optimise all processes, allowing telcos to operate with EBITDA margins of 41% (compared to 30% in 2016) and lower CAPEX. This would provide the best level of FCF, despite smaller markets for digital services overall and even declining markets for traditional telecom services.
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