• Lack of long-term strategic planning threatens the future of telcos as they reach “an inflection point in their evolution,” finds EY report
• Defensive strategies are not sufficient to overcome anticipated “pervasive changes” 
• Near-term mindsets are the antithesis of future-proofing
• Sole focus on incremental improvements in network quality and yet more cost cutting is not a recipe for survival into the 2030s

Telecom operators around the world are hampering their own progress by putting too great a focus on near-term plans and are too reliant on defensive strategies that will leave them ill-equipped to deal with the “pervasive changes” that will impact the telco sector over the next decade, according to a report from business consulting giant EY. 

The report’s title – Are leaders ready for the telco of tomorrow? – poses a highly pertinent question, and one that TelecomTV has been asking the industry for many years.

Of course, some of the “telcos of tomorrow” we have talked to over the years are now the ‘transformed’ telcos of today and still find themselves facing continuing and seemingly endless change. The old saying has it that “tomorrow never comes”, but the industry knows from hard experience that its tomorrow has dawned many times before, and will do so again. Forewarned is forearmed, and many of today’s top telcos, whilst currently robust, moderately innovative and (at least by some metrics) financially sound, are wondering how they can remain relevant as the rest of the world turns around them. They need to make long-term plans now, not sometime down the line, if they are to avoid the possibility, or even likelihood, of some world-famous brands going to the wall.

The EY report, co-authored by Tom Loosen, EY’s global telecommunications leader, and Adrian Baschnonga, the lead analyst of EY’s Global Technology, Media & Entertainment and Telecommunications (TMT) practice, makes the point that the “growth outlook for telcos is solid but unspectacular, based on core connectivity and continuing cost management allied to reliance on network quality.” 

However, whilst these assets give the telcos the opportunity to build and maintain strong defensive strategic positions, battles are not won by sheltering in the castle keep and hoping the revolutionaries outside will simply give up, go away and do something else. 

As the report notes, the defensive strategies of today will not be enough to address the “pervasive changes” to the telco landscape and environment that will convulse the sector by 2030. Thus it provides a sort of checklist that telcos might come to regard as a basic survival guide to be consulted frequently as they negotiate the rocky road ahead. The report stresses that telcos “have reached an inflection point in their evolution” even as they double-down on core connectivity and network quality whilst exploiting emerging technologies to further increase organisational efficiency and cut costs.

However, such a “near-term mindset” is, by definition, far from future proof. It is essentially time-limited and will prove incapable of supporting the radical changes that will be needed for business models and competitive differentiators that go beyond just network quality and yet more cost cutting. Further, such a mindset results in failure to adapt to rapidly changing market structures and ecosystems. 

In the preparation of its paper, EY analysts interviewed 60 CXOs from more than 50 telcos to understand their views on organisational priorities, alongside their present and perceived attitudes to the future state of the industry. The resulting data demonstrates a dangerous dichotomy between the pursuit of short-term defensive strategies and preparing for the radical changes that will be required in order to accommodate, realign to, and thrive within, the dynamics of a fundamentally changing sector.

That dichotomy between attitudes to the current and future state of the industry is evidenced in the frequent “head-in-the-sand” answers that respondents provided to EY researchers. For example, only 37% think that overhauling their business model is a strategic priority, let alone a necessity, even as 44% expect telcos will split themselves into ‘ServCos’ and ‘NetCos’.

“Second star to the right and straight on ’til morning” (JM Barrie, Peter Pan) 

Meanwhile, 67% of the CXO respondents cite core connectivity as their key driver for profitable growth in the future and 53% believe network quality will still be their most important differentiator as far out as 2030. On this point, the EY report waxes a tad lyrical, referring to network quality leadership as a “defensive North Star”. Apparently, telcos can hitch themselves to their own “strategic” Polaris to navigate growth expectations because it points towards network quality. Respondents to the survey were asked “which strategic persona most accurately reflects their organisation’s long-term positioning” – 48% said being a network quality leader, while 37% said being a full digital services provider. Both choices rely on a foundation of premium connectivity, but “the key difference between the two personas pivots on the breadth of the service portfolio.”

And, it seems, there are multiple potential North Stars, such as “the data utility that focuses on value-driven, basic connectivity” and the “digital InfraCo” that wholesales connectivity, but these bodies are of lesser luminosity in a telco’s vision. Interestingly, some respondents said they had focused on network quality after earlier failures to monetise new digital services.

The report also says such attitudes underline a network’s central role “in a fundamentally defensive strategic mindset.” After all, network modernisation comes in at fifth place in the league table of nine near-term overall strategic priorities, which suggests that “network upgrades are not actually top of mind as a route to competitive advantage.” What’s more, a mere 8% of respondents said that being a utility devoid of digital services would be an acceptable corporate strategy.

The report further shows that just 32% of respondents are currently developing ecosystem relationships because they do not currently regard them as a strategic requirement, even though 69% say telcos will play a major role in cross-industry ecosystems in five years’ time. Such a contradiction just doesn’t stand up to close scrutiny – it just exposes another gap in the telcos’ armour. Three-quarters of respondents admit the hyperscalers will be a “disruptive threat” in five years, which begs the question of why they haven’t been looking back over their shoulders during the past five years as the hyperscale threat grew.

There’s also a big problem with telco C-level attitudes to the skilled personnel who will work in the telcos of 2030. Whereas 58% of respondents to EY’s survey reckon that most of the current workforce will have been either “upskilled” or replaced within five years, a mere 10% are “redefining the employee proposition and purpose as a people priority” (whatever that might mean in practice). Some actually claim that new blood with digital and software experience would be a problem because they might disturb the comfortable and even tenor inside established telcos that has prevailed for so long. A CFO quoted in the report said, “It is challenging to get the right kind of talent. They think differently and they have different attitudes to work compared with older generations.” 

What?! Isn’t the entire point and purpose to take on creative personnel with massively relevant outside experience who are not mired in the old model of a 40-year climb up the greasy corporate pole? This sort of attitude is further complicated because 44% of respondents believe telcos will inevitably split into NetCos and ServCos and are not sure of what the organisation might become or the shape it will have. Meanwhile, only 16% are looking to merger and acquisition (M&A) activity in the digital infrastructure sector as a strategic priority. 

Many survey respondents reckon that, basically, everything is hunky dory because telco revenues and EBITDA will grow by 3% or more over the next three years. Some 67% believe improved profitability will come from growth in the core connectivity business, while 60% believe it can also come from “margin development through additional cost reductions and efficiencies”. That is far from ambitious, smacks of smugness and complacency, and won’t be enough to keep the wolves at bay.   

So, telcos have set, or are setting, a defensive chess board based on the strength of high-quality network infrastructure but are facing serious aggressive and innovative hyperscale competition from the other side. Of the CXOs interviewed, 56% said disruptive competition could affect their businesses, while 52% cited concern that legislation and regulation could upend the status quo they have enjoyed for so long, especially in areas such as AI and digital markets. One CEO quoted in the EY study said, “Hyperscalers are eating into our B2B business; it would be easy for them to take control by acting as intermediaries, providing connectivity to customers.” Wake up! It’s happening already…

Basically, telcos can’t continue to have their cake and eat it. Small, steady incremental developments in network quality, digitisation, apps, and customer service and experience are all very well. They have served their purpose and will continue to do so in the short-to-medium term, but hyperscale competitors have longer-term goals and nearly all the armaments they need to take on the telcos in a war of attrition that will be marked by sudden raids, unexpected incursions and left-field technological developments that could well knock the old guard off balance and down to long-term defeat. Now is the time for them to think big to ensure they’ll still be round in a recognisable form by the 2030s. Some might be – many won’t.

- Martyn Warwick, Editor in Chief, TelecomTV