Telcos Need to Fight Economic Stagnation

Following the broadband and mobile booms of the past 20 years, telcos have reached cruising altitude—but do have places to go besides up, unfortunately.

Stagnation is a reality in the industry. In a Light Reading article, Bengt Nordstrom, the CEO of consulting firm Northstream and a former C-level telcom executive, said, “We are really in a business that needs to review the way it operates. We’ve been dreaming of and hyping growth for many years but it has never come.”

In other words, the telco market has reached maturity. Even though the industry will continue to produce economic winners and losers as digital transformation and automation evolve, the difficulty of growing sales is widely recognized in the industry.

Yet most telcos seem determined to uncover the next big opportunity. A lot of interest surrounds 5G—the next-generation network technology that promises faster connections, reduced latency and greater efficiency. Yet industry pundits expect that 5G will follow the trajectory established by previous generations of network technology: high hopes followed by failure to spur revenue in a saturated market.

Nordstrom believes there is a mismatch between ambitious 5G targets set by government authorities and the slow pace at which private sector operators are likely to roll out the next-generation technology. For example, while the European Commission wants to see all European Union member states “targeting early [5G] network introduction by 2018 and moving toward commercial large-scale introduction by the end of 2020 at the latest,” Nordstrom’s analysis suggests this is an unrealistic goal.

While the Northstream exec sees a need for 5G eventually, he does not see 5G generating a boost in revenues for operators or vendors. “If I was a vendor planning for the next five or six years, my prayers would go to operators continuing to invest in 4G evolution,” he said. Here are reasons he gives for lowering 5G expectations:

  • The first 5G standard is not expected to materialize until 2018, with commercial standards not expected until 2020 at the earliest.
  • To provide faster services than on advanced 4G networks, 5G operators will need access to millimeter-wave spectrum, which is not optimal for transmitting signals over long distances.
  • Lack of a clear business case for 5G technology, while capital expenditure constraints are growing.

Purely from a connectivity standpoint, the Internet of Things (IoT) could see 5G and more advanced 4G networks used to support billions of new devices over the next decade, but analysts, including Nordstrom, doubt that revenues from IoT services will be substantial. In the Light Reading article, Nordstrom is quoted saying, “Future IoT sales will account for no more than 1 percent of revenues generated by most operators, and for just 3-5 percent at the most successful companies.”

Operators have tried expanding into different parts of the value chain, enhancing their networks and even entering entirely new industry sectors—with mixed results. For example, moves into Web territory are not bearing much fruit.

Luckily, most operators are not pinning their hopes on 5G as a future engine of sales growth. A better approach may be to focus on high-visibility applications on the top that offer richer B2C opportunities. Some telcos are spending more on media to gain bigger wallet share from the entertainment market. The question remains whether this shift will serve their customers and maintain margins. It could be risky rather than stabilizing. After all, operators are good at connectivity, not so much media.

Another opportunity may be found in migrating from a product- to a platform-based business model. The platform can be leveraged to create innovative services for end customers. Such a bold move could spell success for telcos—as it has for Facebook, Apple and Alibaba.