Telco’s revenue growth over last few years is not promising

Global telecom companies revenues grew 2% YoY in 1Q17, to US$443.6bn. A modest recovery in mobile revenues is the primary factor, with Japan, Brazil, and Australia among the best performers. By contrast, India, China, the US, and several other big mobile markets declined in 1Q17. The decline in the US is particularly worrisome.

The telecommunication industry continues to face considerable headwinds in the face of technological advances that have cut into their respective revenue streams. In particular, telecom providers are seeing the encroachment over-the-top (OTT) competitors into their market, with Whatsapp and Facebook Messenger just two examples of companies leveraging data to offer a richer texting experience – undercutting the traditional SMS.

US-based companies continue to drive innovation in key telecoms-related areas such as virtualization, 5G, AI, and IoT. The recent lack of telco growth in the US could reverse soon; as mergers are absorbed, new entities might exercise greater pricing power and roll out new services. And weak telecoms growth is partly just a sign of shifting industry borders, as OTT/cloud internet content providers (ICPs) bump into telco markets and eat into their growth. This shift is most advanced in the US, where most of the largest ICPs are based. Even considering its maturity, the US market sometimes still outperforms: for instance, in 1Q17 the top-spending ICP, Google, grew revenues faster in the US (25%) than globally (22%).

n a new report from accounting and consulting firm EY, titled ‘Digital transformation for 2020 and beyond’, the current conditions for telecommunications are considered in light of rapidly changing technologies and business environment.

While digital business models and services rank as a key business strategy for the firms surveyed, the report notes that many telcos say that they face barriers to implementing such changes. Top among them is the ‘burden of legacy IT platforms and architecture’, followed by a ‘lack of skills and expertise in digital domains’. The survey also found that ‘continuing pressure on overall budgets’ and ‘leadership focus on tactical considerations’ are creating barriers to transformation.

Another new cost pressure for CSPs comes from the software-centric network. Increased use of software and the cloud to provide network functions and services is causing CSP IT operations opex to rise, from 3.6% of opex in 2008 to 5.9% in 2015. Software’s share of total capex is also rising.

The end result may be a more flexible operational model, bringing benefits such as faster service innovation, but a lower cost base is not inevitable