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How can telcos respond to the strategic questions they face?

Traditional telcos are under tremendous pressure to reinvent themselves to remain competitive and relevant. BDO’s Christian Goetz looks at the options

Traditional telecoms companies are under pressure to reinvent themselves. They need to adapt their offering to keep pace with tech-savvy customers, to grapple with burdensome regulation, and to make significant infrastructure investments to remain competitive and relevant. At the same time new industry disruptors such as Snapchat, Skype and WhatsApp have been able to scale up their services very quickly, and are taking a growing share of the communications market.

This rapidly changing market is reflected in BDO’s latest annual survey of the risks reported by telecoms companies. Leading telecoms executives say that the risks that could derail the future performance of their companies are becoming more widespread and worrying. For example, a majority of telecoms companies, 55%, cite the rapid advent of new technologies as a major risk for their business. This proportion is up seven percentage points on 2015.

The telecoms sector is right to be worried. Telco profitability has been under pressure for some time, and the compression of margins shows no sign of abating. Companies face tough strategic questions ahead. Where should they prioritise future investments? How is the composition of their revenue sources likely to change? How do they respond to more active industry regulators? 

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Net neutrality

One issue that concerns all three of those strategic questions is net neutrality. It looks set to rise even further up the agenda and cause a major headache for the telecoms industry. Companies must consider how best to respond to regulators’ demands that access to the internet should remain a level playing field for all customers, with no obstacles to fair usage. Yet at the same time companies need to make sufficient investments to deliver a faster, more reliable service to meet demand.

As people use more connected devices to watch video content at home and on the move, additional bandwidth is needed to deliver the high-quality streaming experience that customers expect. A recent study by global market research company NPD Group suggests that 81% of smartphone users regularly stream video content on their devices, with users under the age of 25 downloading an average of 6.2 gigabytes of data each month. These trends are reflected in BDO’s survey, where many leading telecoms companies cite a reduction in demand for traditional voice telephony services in favour of new communication channels.

For telecoms companies one solution to this dilemma is to review their pricing model and the extent to which they can charge premium prices for faster, more reliable services. Yet this may not be a viable, long-term solution in an already very price-sensitive market. More radical reinvention may be required.

Proprietary mobile apps

Some traditional telcos are embracing business model innovation. They are making concerted efforts to diversify their income streams. Greater investment in proprietary mobile applications will allow telcos to generate additional income from their existing mobile infrastructure and to strengthen loyalty among their customer base. Mobile health, or m-health (the use of mobile phones in medical care – for example, for collecting data or delivering information) is one such growing area. The US telecoms giant Verizon has invested several million dollars in m-health app developers through its annual Powerful Answers Awards. Many other telecoms providers are making similar innovation investments.

When launching proprietary apps, traditional telecoms companies have two major advantages over industry startups: a large number of captive subscribers and vast marketing resources. For these reasons, it is likely that the coming years will see a proliferation in the number of telcos looking to monetise their infrastructure in this way. Launching new apps enables traditional telcos to collect valuable data about customer needs, service preferences and usage, which can be harnessed to adapt their offering going forward.  

M&A and partnering

However, for traditional telcos to successfully reinvent their offering requires new capabilities. It is likely, therefore, that telecoms will see more mergers, acquisitions and joint ventures because they are often the most effective way for traditional telcos to develop and deliver these new services. By bolting on new services and bundling with existing offerings, companies can increase the average number of services they sell to each customer. Recent high-profile deals have seen some of the largest global telcos acquire satellite and cable television networks as well as video and music streaming providers.  

It is clear that, whichever growth strategies traditional telcos pursue, increased infrastructure investment will be necessary to keep pace with changing customer needs. The regulation of spectrum intended for 5G, expected to launch first in South Korea to coincide with the 2018 Pyeongchang Winter Olympics, will be a crucial moment for the sector. It is likely to be a major catalyst for a further reinvention that will determine whether traditional telecoms have a bright future in a rapidly changing market.

Christian Goetz is leader of the global telecoms team at accountancy, tax and advisory practice BDO

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