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Operators in Europe
As the telecommunications industry faces a
mixed financial outlook and rapid change, telecom
operators have reached a strategic crossroads.
The boom years are coming to an end. Telecommunications industry leaders are faced with
shrinking revenues and profitability, as well as the effects of regulatory pricing intervention and
consolidation. In our recent survey of more than 60 C-level executives from Europes leading
telecom companies, more than two-thirds say their future successand even survivaldepends
on fundamental changes to business and operating models.
Just how the market will play out, however, is still up in the air. Telephones are no longer just
for making calls, as the market now encompasses a vast palette of data-related services. Will this
mean telcos become supporting players as mere network providers, while so-called overthe-top (OTT) players such as Google, Apple, and Facebook hold sway over network-related
services and digital? Or can operators compete as primary providers of add-on services such
as messaging, video calls, and music downloads? Will they successfully make the leap to
packaging digital services for their customers?
What is clear to us in our analysis of the industrys future, which combines our industry
research with interviews of 61 C-level executives, covering 46 of Europes leading operators in
25 countries, is that Europes telcos cannot afford to remain passive observers as the industry
evolves. They must choose a clear strategy, deciding how they will grapple with these changes
nowor others will decide their future for them.
Figure 1
Despite traffic growth, revenue levels will remain stagnant
Projected CAGR, 20142018
Revenue
Fixed-line
0.8%
Western
European
respondents
Optimistic
0.4%
Pessimistic
Eastern
European
respondents
Mobile
0.4%
0.5%
Western
European
respondents
Eastern
European
respondents
0.5%
1.3%
1.8%
A.T.Kearney
projections
Earnings
0.1%
0.2%
Western
Europe
Eastern
Europe
1.9%
0.1%
1.4%
1.3%
A.T.Kearney
projections
3.1%
0.5% 0.4%
Incumbents
Pure mobile
Survey respondents
A.T.Kearney projections
Notes: Earnings is before interest, taxes, depreciation, and amortization. Countries included in the analysis are EU27 plus Norway and Switzerland.
Sources: Analyst reports; A.T.Kearney analysis
Survey participants said they are considering a wide range of changes to their business model.
Old business models are already on the way out. Changes in customer preferences are driving
out old business models in favor of those introduced by OTT players. These include iTunes-like
pricing and hybrid pre- and post-paid models.
In particular, a shift from pre- to postpaid models is on the horizon. While most participants
expect the postpaid model to continueand in some parts of Europe even growprepaid is
seen as shrinking. More executives believe a hybrid model, one that makes use of credit cards
and upfront billing or flat rates is likely to take hold in the future. Many participants believe
consumers demand for data will change how they pay for telco services, with pre- and postpaid
concepts blurring. A possible model is iTunes, where customers can buy products and services
on an ad-hoc basis.
Market share is taking a back seat. For many years, capturing market share was the most
important battle for operators. Our study finds, perhaps surprisingly, that this view is shifting
(see figure 2). By 2020, our respondents say, market share will diminish in importance, an apparent
rethinking of long-held strategies to chase market share above all else. Operators have learned
that trying to boost market share by slashing prices or offering special deals can be very expensive.
In five years time, many operators expect new business development to take top priority.
But whether operators actually shift course remains to be seen. As one respondent noted, this
has been the dream for more than a decade now, with very little progress to date.
Figure 2
More operators will seek to develop new business rather than chase market share
How is your company seeking to improve results today and in the future?
% of respondents
Operating model
Business model
25%
15%
10 pp
44%
+4 pp
48%
10%
+28 pp
38%
65%
Today
73%
46%
Lowering capex
58%
52%
63%
+8 pp
+12 pp
+11 pp
In five years
Note: ARPU is average revenue per user; ARPL is average revenue per line; pp is percentage points.
Source: A.T.Kearney analysis
Data revenues are only a limited substitute for voice revenues. Data is now the fastest-growing
business for telecom operators, yet little more than half of the executives we interviewed
believe it can fully compensate for losses from voice operations. While some integrated players
believe they can profit from content rights sold via their networks, players in many countries
are skeptical about the ability to earn money from proprietary digital services. The possibility
of partnering with OTT players is a more realistic option, our respondents say.
Many think it will be difficult to increase revenue from digital services, such as telematics and
connected car, advertising and big data, home automation, health and mobile payments. Most
agree that access-near services (voice, texting, video calls) or selling wholesale connectivity
have the greatest potential to generate revenue (see figure 3).
Figure 3
Access-near services, such as mobile-to-mobile, hold the most promise in the
view of operators
Do you expect to generate significant revenues from these sources?
% responding very likely or likely
Hope from expected IoT uptake
but mostly wholesale
43%
Potential white
labelno major
revenues
25%
22%
18%
Some hopebut
lack of preparation
and skills
20%
16%
14%
14%
Traffic driver
or shop-in-shop
potential
Global
solutions
only
16%
12%
6%
M2M
Own
Cloud
M-payment
Third party
Advertising
and big data
18%
16%
Telematics and
connected car
Home
automation
4%
Healthcare
The industry is moving away from subsidizing handsets through contracts may be on
the wane. Companies may now seek alternatives to subsidizing devices through contracts,
further evidence of the shift away from traditional model. While this model remains important
for maintaining customer relationships and traffic, participants in some countries expect a shift
from subsidy-driven models in favor of credit and leasing, at least in budget segments. The fact
is that the old practice of locking in a two-year contract is becoming obsolete. Some people
plan to keep their phones longer, while others will demand the latest, greatest device as soon
as it comes out. Consumers are demanding flexibility and will find the operators who offer it.
The Future of Telecom Operators in Europe
On the other hand, some markets that until now had no major subsidies, such as Russia and
Ukraine, might consider testing moderate subsidies in target segments such as low-value
smartphones. This is a further indication that European markets are moving closer together
in characteristics and habits.
Figure 4
Network quality remains top of mind for telecom executives
How important is this area to your success today and in five years?
% responding very high or high
90%
Network quality
92%
43%
Sales setup
+4 pp
47%
18%
Customer services
+29 pp
47%
53%
37%
16 pp
55%
Branding
74%
Today
+2 pp
+19 pp
In five years
Networks. Operators are clearly examining how to rein in operating expenses, even if they
believe network quality is more important than ever. Most executives believe the switch to
all- IP (Internet protocol) networks will enable further cost reductions.
Operators are also considering models that involve sharing and outsourcing. There is a good
possibility that going forward, more operating models in Europe will involve shared network
monitoring centers. In the past, many operators shunned these models, as network was seen
as a core competency.
Our respondents do not expect to sell assets and subsequently rent or lease them backa
trend that has been seen in markets such as India, because they say it makes no commercial
sense. Maintaining healthy capital spending levels is seen as more crucial than ever in this
data-driven world.
The Future of Telecom Operators in Europe
Sales. Overall, our respondents see sales and service as key differentiators in a tough market, as
these create the basis for customer loyalty. Half of respondents expect drastic changes in retail
practices, vastly reducing storefront operations as they pursue all available sales channels in an
omnichannel setup. The remaining stores will either showcase the variety of services or become
service centers. The indirect channel looks set to be the big loser in this development, although
device makers stores will also increasingly pose viable threats.
UK-based giffgaff, the mobile virtual network operator (MVNO) owned by O2, has been a test bed
for new online sales techniques. Giffgaff has no stores, with purchases only possible on its
website and Facebook. It spends very little on marketing, relying instead on word-of-mouth and
community-driven promotion. Sales rely on peer-to-peer methods, including rewards points for
recommending giffgaff to friends, and even peer-to-peer financing for phone purchases.
Service. Survey respondents say they are moving from the traditional cost-per-call focus
toward more first-call-resolution, which most assume to have a big impact on cost to serve.
Additionally, fewer see outsourcing as the only means to reduce service cost. Some leaders
expect a shift toward more complex service interactions such as video, online chats, and
in-store appointments, with more standardized transactions shifting online either via fixedline access or, preferably, via smartphone apps. Thinking even further ahead, OTT players
current customer operational setups may be the future model for telcos as well: Legacy call
centers and shop infrastructures will no longer exist, and traditional customer service will
be replaced by fully digitized and flawless processes.
Marketing. Many interviewees expect a stable focus on current product development,
pricing, and branding-related tasks. Only a few see a shift to developing their own digital
services. There is more support for radical simplification, which would reduce marketing staff.
Simplification and process digitization is an important theme among respondents, and is also
a prerequisite for digitization, both on customer interfaces and internal processes. The major
driver, though, is not cost pressure, but rather customer expectations.
Respondents expect two further changes: a focus on data analytics to better understand
customers and stronger partnering with digital service players, not as part of todays
marketing departments but rather in new organizational setups such as joint ventures or
loose partnerships.
Telcos reputations as trusted and reliable brands in a fast-changing world will become crucial
in the sales and service experience. The proliferation of brands will be curbed, and most expect
one operator to have no more than three or four brands.
Overall, we see telco executives anticipating a number of changes, primarily driven by
customer expectations, not originating from the operators themselves.
In parallel to our survey, we analyzed industry data and possible regulatory developments to
determine how the market may shake out. Our research uncovered four primary scenarios
regarding this developmenteach with different profit implications (see figure 5).
Network companies: wholesale access providers. In the network company scenario,
operators no longer control the customer interface. Some have called this the bit-pipe scenario,
harkening back to the late 1990s when some worried that telco operators could end up as little
more than the pipes through which the Internet moves. In terms of revenues and margins, this
scenario could, in the most pessimistic outlook, dramatically reduce cash flow, or, in an
optimistic view, offer slight cash and margin gains.
Few of the interviewees considered this a possible outcome for the industry, but in our view it is
not off the table. One example is the recent advent of soft SIM technology, which lets users
switch easily between providers. This was recently introduced in Apple products such as the new
iPad Air, and UK operator 24 Seven wants to introduce this for its national roaming SIM. Soft
SIM is just one of many OTT developments that could do away with operators end-customer
interface altogether or at least threaten some of their major customer segments. Already,
younger generations of customers are adopting applications such as WhatsApp and Facebook
for messaging and calls. Amazons Kindle is just one product with integrated bandwidth. As the
Samsungs, Microsofts, and Apples of the world move into direct retail (often with omnichannel
models), it is not far-fetched to wonder whether operators could in fact be replaced.
Data utilities: wholesale and retail access providers. If the soft SIM scenario does not play
out, or if other international wholesale products do not gain market share, this scenario might
come true. Retail customers would acquire basic access to products from telecom operators
Figure 5
The data utility and digital navigator paths have the most potential for operators
25
Network company
20
15
26%/19%
Data utility
Cash flow
and margin
improvement
x%/y%
4%/8%
Premium player
Digital navigator
48%/11%
10
1%/7%
20%/4%
15%/0%
4%/1%
5
10
15
20
50
9%/13%
Cash flow and
margin decrease
40
30
20
10
10
20
30
40
50
60
(mainly data access), while primarily using services and hardware from manufacturers and OTT
players, for example phone calls through Facebook and video calls via Facetime. In the worstcase scenario, revenues drop and margins increase slightly. However in the best case, this could
be quite profitable for operators, as they lower operating and capital spending while increased
demand drives revenue.
This scenario would require a complete shift in how sales, service, and marketing are handled.
Operators would reduce as much cost as feasiblewith a good but not superior network quality,
digitized processes based primarily on the Internet and phone, and physical retail that takes a
much smaller slice of the action. To maintain solid financial returns, operators would have to
rethink their marketing resources as well as other internal processes such as activation, billing,
and customer service to meet this scenarios financial requirements.
Overall we would see a need to reduce costs by about 30 percent, in addition to efficiency gains
of about 20 percent for the next five years.
This scenario could be lucrative for operators, potentially increasing revenue 50 percent by
2020 in the best case, and securing substantial gains even with a less optimistic view.
As operators drastically reduce complexity in their legacy voice-driven tariff models (and
subsequently in marketing, sales, and customer services), they can also refocus their attention
on understanding customer behavior and requirements and offering appropriate content and
access servicesall bundled easily into existing operator invoices.
In particular, we believe an iTunes-like tariff model, in which once-a-month usage plans are
increasingly replaced by ad-hoc services (such as paying a small fee to watch a football game
online) could offer substantial revenue upside. This would, of course, require a complete
rethinking of sales and service. A drastically reduced distribution network with close onlineoffline integration will be key, as well as a complete horizon of gadgets and services around the
superior network experience (see sidebar: The Verizon Example).
The digital navigator scenario would enable operators to take a strong position in the future
industry battlegroundagainst OTT players, OEMs, and indirect retailers fighting for a piece
of a lucrative pie.
Just 30 percent of respondents say they feel well prepared for the future. Many are focused
on operations and cost cutting and few on how they can enhance their business models.
We believe todays environment demands a fundamental rethinking of operators roles vis--vis
OTT players, the impact of regulation, and how customers are changing. Trying to bet on too
many different possibilities can blur the consequent financial implications, while failing to
take steps that will offer the biggest reward. Preemptive moves will help avoid the slide toward
becoming mere network providers. These should involve a continuing to focus on costs,
running digitization initiatives, simplifying products and IT processes, managing capabilities
and executing appropriate HR strategy.
Now is the time for operators to define the strategic scenario they want to followand to align
their organizations and resources to ensure this happens.
Authors
Florian Dickgreber, partner, Dsseldorf
florian.dickgreber@atkearney.com
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