RESEARCH REPORT
The future of the digital telco: Paths to CSP profitability
5-MINUTE READ
September 27, 2022
In brief
- In the middle of an exponentially increasing digital and connected world, communications service providers (CSPs) are a central force.
- However, the pressures on telcos have never been greater: Capex and Opex are on the rise even as traditional revenue streams only grow modestly.
- But a window of opportunity exists, where -with tech and innovation- CSPs can transform their business and the experience of the customers they serve.
- We have charted five transformative pathways to profitability for industry leaders, elevating their role in tomorrow's digital ecosystem.
Over the past two years, the way we connect and are entertained, the way we work and conduct business, and even the way our social, economic and government institutions are run has changed. Entire industries are re-thinking how they operate, responding to everything from demands for greater operational efficiency to higher environmental standards.
Operating in a saturated market facing declining returns and increased connectivity demands, CSPs continue to face commoditization pressures, even as they face rising operating costs preparing for the next era of connectivity and connected services. Telcos are facing three major industry-wide trends, and, as agile, asset-light digital natives continue to gain ground in the market, their response must be swift.
Telcos at an inflection point: the next 1-3 years
The world's insatiable appetite for data is translating into large scale investments by CSPs without the return.
137%
Projected growth in data traffic by 2026 (24% YoY 2022-6), rising to 1.8 million petabytes. [source: Analysys Mason Datahub based on a sample of 27 countries]
-37%
Decline in median ARPU between 2012 and 2021 [source: Analysys Mason Datahub based on a sample of 27 countries]
1.4T
Cost of capital expenditure to build and upgrade networks between 2022 and 2026. [source Analysys Mason]. Contrasted to -15.4% decline in ROIC over the past 5 years. [source CapIQ]
Telcos are facing 3 major industry-wide trends
Their response must be swift, as the agile, asset-light digital natives continue to gain ground in the market.
1. Business model pressures
Aggressive end-to-end enterprise reinvention and bold structural transformation – often fueled by a new approach to partnerships – can accelerate progress within compressed timelines.
2. Evolving customer expectations
Markets and business models have shifted, and so have the expectations of customers – for sustainability, accessibility, versatility – whether they are personal, SMB or enterprise users.
3. Pace of technological change
The aggressive adoption of new and emerging applications, from 5G and cloud to web3 and the metaverse, must drive innovation, agility, and talent.
There is a window of opportunity for CSPs to digitize their businesses in a way that delights their customers and employees while enabling them to reduce their operating expenses and improve their margins.
Amidst change, charting pathways to profitability
We have identified five scenarios that can guide CSPs through the transformation and business reinvention processes towards profitability that starts at the core. These pathways to profitability capitalize on the strong foundations of the telco business, guiding CSPs on their journey to improve the returns on their investments, deliver products and services that delight customers, and elevate their role in tomorrow’s digital ecosystem.
In the expanding digital ecosystem, CSPs are not only positioned at the nexus of core control points, but they also boast strong trust with customers, owning these critical relationships. As they explore building differentiated solutions, they are often partnering with digital natives who compete for market share. This new approach across the ecosystem will drive growth beyond connectivity, spurring development and charting the way for five pathways to profitability.
1. The future of networks
Establish the foundation for a new era of connectivity, leveraging AI + analytics for speed and value.
2. Connected consumer
Use data & consumer trust to become the ecosystem control point for the “connected life”.
3. SMB growth
Become a true advisor and business partner invested in SMB success through new services and targeted offerings.
4. Large enterprise orchestration
Build horizontal & vertical E2E solutions that demonstrate the power of 5G, connectivity, edge, and security.
5. Industry restructuring
Create innovative business structures to focus on core and differentiating capabilities, and to streamline investments.
Making the move from learners to leaders
CSPs are unlocking their value potential with a deliberate focus on four key fundamentals. The journey is different for each telco, but the foundations of these actions are the same.
1. Network foundation
Build advanced networks and deploy with speed.
2. Improve operations
Reduce costs to improve margins and fund innovation.
3. Business innovation
Create new offers and transform go-to-market to find growth.
4. Revenue capitalization
Execute necessary structural changes to unlock value and capital.
The window of opportunity to elevate the communications industry's role in tomorrow’s digital economy is now.