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Are leaders ready for the telco of tomorrow?

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11 minute read 17 Jul 2024

To thrive in the future, telcos must seek differentiators beyond network quality and adapt to changing ecosystems and market structures.

In brief

  • The growth outlook for telcos is solid but unspectacular, based on core connectivity and continuing cost management allied to reliance on network quality.
  • Industry leaders foresee pervasive changes to the sector in five years’ time, which today’s defensive strategies are not equipped to address.
  • Rethinking business models and differentiators, and building new employee propositions and ecosystem positions, are vital for success on the road to 2030.

Telcos have reached an inflection point in their evolution. They are ever more focused on core connectivity and continue to drive new waves of organizational efficiency with the help of emerging technologies. However, industry ecosystems, stakeholder expectations and workforce needs are developing in new directions at pace. In this light, defensive strategies based on network quality and cost optimization may fall short of the more substantial transformation telcos need to achieve.

The EY organization interviewed more than 60 C-suite executives from over 50 telecoms operators to understand their views about organizational priorities alongside the current and future state of the sector. In this article, we explore insights emerging from our research, underlining the dichotomy that exists between defensive near-term strategies and more radical future sector dynamics, recommending key actions that telcos can take to ensure they remain fit for the future. 

Traditional growth drivers underpin a solid performance outlook

Survey respondents have a largely positive view of sector growth: more than half foresee sector revenues and EBITDA growing by 3% or more over the next three years. They are also confident of their own performance relative to their peers, with three quarters expecting to outperform the market over the same period. Inflationary pricing escalators built into consumer subscriptions have been supportive in some markets, indicative of wider resilience where customer spending has held up well in spite of the cost-of-living crisis, as highlighted in the EY Decoding the digital home study.

Looking ahead, two key drivers of profitable growth as cited by the management are: growth in the core connectivity business (67%) and margin development through additional cost reductions and efficiencies (60%). These twin forces score well ahead of adjacent market services or more innovative business models, with only one in three respondents highlighting growth beyond the core business or growth in platform, ecosystem or as-a-service business. That said, there are regional nuances at play: Asia-Pacific telcos are much more receptive to growth via platforms or ecosystems, cited four out of six telco leaders in the region.


Network quality leadership: a defensive North Star

Industry growth expectations are also accompanied by a strategic North Star that tends to favor network quality. When asked which strategic persona most accurately reflects their organization’s long-term positioning, network quality leader (48%) emerges as the most popular choice, followed by full digital services provider (37%). Both have premium connectivity as a foundation: the key difference between the two personas pivots on the breadth of the service portfolio. Other potential North Stars — the data utility that focuses on value-driven, basic connectivity and the digital InfraCo that wholesales connectivity — rank much further back.

The preferred positioning as network quality leader does come with caveats attached. Many senior executives highlighted that network performance gaps between competitors are eroding as infrastructure coverage and speed levels become more uniform within markets. As one CEO underlined: “Today, everybody has the same network. We all say we have the best network, but the customer experience between a good and bad network is imperceptible to the end user.”

Others pointed to previous failures to monetize new digital services as reasons for prioritizing network quality, underlining its role in a fundamentally defensive strategic mindset. Tellingly, network modernization itself ranks only fifth out of nine near-term strategic priorities overall, suggesting that network upgrades are not actually top of mind as a route to competitive advantage.


Widening competitive and compliance landscapes signal long-term risks to growth

While industry leaders favor defensive strategies predicated around high-quality network infrastructure, the sector operating environment is changing rapidly. Although financial performance is proving resilient in the face of macroeconomic headwinds, there are other factors to consider. The top challenges to delivering profitable growth cited by management are disruptive competition (56%) and regulatory or policy uncertainty (52%) — and perceptions of volatility and complexity accompany these pain points.

Looking ahead, disruptive moves from outside the sector will pose a growing threat, subverting telcos’ confidence that they will outperform their immediate peer group. Today, classical big telcos and mobile network operators (MNOs) loom large as perceived competitors, but survey respondents pointed to hyperscalers as becoming the dominant threat five years out, with satellite companies overtaking virtual mobile players. Leveraging network quality may help established telcos counter disruption from satellite providers but is less likely to act as a counterweight to hyperscalers’ capacity to innovate and disrupt. As one CEO put it: “Hyperscalers are eating into our B2B business; it would be easy for them to take control by acting as intermediaries, providing connectivity to customers.”  

Meanwhile, regulation of artificial intelligence (AI), digital markets and network suppliers are all cited by more than one-third of executives as having significant impact on the telco sector in the next three years. As a result, effective management of the compliance burden will require better understanding of industry ecosystems outside the traditional telecoms value chain.


There is room to raise the bar with near-term priorities

As telcos consider their priorities over the next three years, customer experience improvements lead the way, with many respondents keen to highlight the importance of ongoing product simplification as a key enabler. Improving organizational skills and talent rank second, with many telcos keen to overhaul their organizational DNA to bring in younger people with fresher thinking. Digitization, cost control and network modernization round out the top five.

These priorities align well with announced strategies, but do ambition levels travel far enough? When respondents are queried about key levers within each domain, some aspects are surprisingly muted. Simplifying products is rated twice as important as accelerating issue resolution in customer experience interactions. Attracting new talent dominates the people agenda, but the redefined employee purpose that can enable this is cited by just 10%, and the dangers of creating new silos persist. As one CFO highlighted: “It is challenging to get the right kind of talent. They think differently and they have different attitudes to work, compared with older generations.”

Meanwhile, artificial intelligence (AI) ranks behind software-based networks as a critical emerging technology — although executives expect it to grow in importance over the next five years while digital infrastructure sharing and cloud migration lack traction as drivers of improved operational efficiency. Upgrading and decommissioning infrastructure lead network strategy, with network energy efficiency and adoption of network application programming interfaces (API) much less prominent. 


Dissonant perspectives emerge as telcos consider the future state of the industry

The telco of today is confident in near-term growth prospects, trusting in network quality as a differentiator while aiming to overhaul skills, systems and processes as part of established transformation agendas. However, this near-term mindset stands at odds with the more radical view of the telco landscape in five years’ time articulated by industry leaders, who expect significant evolution in stakeholder expectations, sources of disruption and differentiation, market structures and ecosystem positions. This view jars with current strategies that prioritize core products alongside ongoing cost optimization.

Hyperscalers are perceived as the dominant disruptive threat to telcos’ business in five years’ time, but only 37% view business model overhaul as a strategic priority today. Only half of telcos surveyed believe that network quality will still be the most important differentiator in five years, calling into question their faith in core connectivity as a profitable growth driver. Fifty-nine percent believe most of today’s workforce will be upskilled or replaced, but very few see employee proposition and purpose as a focal point in their people agenda today.

Most believe that telcos will play a top role in cross-industry ecosystems, but ecosystem positioning does not rank as a top five strategic priority. Some do recognize this Achilles heel, with one CTO highlighting that “poor ecosystem collaboration is a challenge — way more than before, it’s important to have people who can accept trade-offs within partnerships.” Finally, 43% of industry leaders believe that telcos will split into NetCos and ServCos, but digital infrastructure through M&A ranks last as a near-term priority.

The dichotomy between the current and future state of the sector

75% see hyperscalers as a disruptive threat in five years

only 37% view business model overhaul as a strategic priority.

67% that cite core connectivity as their key profitable growth driver in the future

53% think network quality will still be the most important differentiator in five years.

58% believe most of today’s workforce will be upskilled or replaced in five years

only 10% are redefining employee proposition and purpose as a people priority.

69% see telcos playing a top role in cross-industry ecosystems in five years

only 32% are developing ecosystem relationships as a strategic priority today.

44% believe telcos will split into NetCos and ServCos

only 16% are pursuing digital infrastructure M&A as a strategic priority today.

How EY can help

Conclusions and next steps

As telcos move forward with their transformation agendas, they should reconsider the foundational elements of their programs. Incremental improvements relating to network quality, customer experience, internal skills and digitization will still have a vital role to play. However, a more holistic and ambitious mindset that considers new points of differentiation, a clearer sense of organizational purpose and an evolving value chain position that considers adjacencies in infrastructure and software will be essential if they are to maximize long-term opportunities to create and enhance value. Key steps include:
 

1. Reimagine the business model

Product simplification is an important route to greater efficiency but should not be a strategic end point. There is scope to overhaul business models, which can help widen addressable markets and counter disruptive threats emerging from outside the sector without over-extending the solutions portfolio. Exploring more wholesale-oriented concepts, such as network-as-a-service, supported by emerging technologies such as generative AI (GenAI), will have an important role to play going forward.
 

2. Look for new differentiators

Many operators still only trust network quality as a differentiator, even though they recognize that in-market network quality gaps between competitors are diminishing, challenging the average revenue per user (ARPU) uplift available through infrastructure upgrades. It is critical to seek new points of differentiation — from AI and Environmental, Social, and Governance (ESG) credentials through to network APIs — in order to position for long-term growth and break the reliance on new network upgrade cycles.
 

3. Evolve the employee proposition

The demand for younger talent with digital and software-based skills is one of the strongest sentiments emerging in the survey. Yet, new skills and retraining will provide only short-term benefits unless they are accompanied by more pervasive transformation of organizational purpose and employee proposition, which will build a more sustainable talent pipeline. Internal collaboration should be an ongoing focus, particularly as new thinking enters the organization.
 

4. Improve your ecosystem relevance

Partnering and ecosystem strategies require greater prioritization. Hyper-scalers are a growing example of a “frenemy” that offers new growth opportunities alongside disruptive risks. Exploring new value chain positions —supported by innovative ownership positions in legacy and adjacent markets — will help redefine the growth horizon for telcos. Better engagement with the developer community and industry verticals can help unlock and serve new demand scenarios.
 

5. Prepare for new market structures

More telcos agree than disagree that the structure of the industry will change dramatically in five years, with a split of NetCo and ServCo capabilities. Exploring new operating models and organizational structures can help combine skills in new ways and also prepare for more radical “sell and separate” initiatives that are driven by business logic and not short-term financial gains. At the same time, it is critical to consider new consolidation scenarios as regulatory views change and new “scale-up” opportunities appear.

Summary 

Telco leaders need to ensure their current strategies are aligned with the industry landscape they expect to see in five years’ time. Will these strategies prepare them to operate and compete within that industry landscape?

The EY telco of tomorrow CXO study reveals a few mismatches between telcos’ focus today and their predictions for what the industry will look like tomorrow.

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