Telecoms
Drivers
All industries are being shaped by the global Megatends of Globalisation, changing Demographics, Climate change and Technology innovation. Shaped by the these trends and now the pandemic, the industry is being shaped by five major drivers:
Customer Experience
The growing influence of BigTechs has raised the bar for customer service. Telecoms has performed poorly in customer satisfaction chasing new customers to replace lost ones. In the last five years, no leading telecommunications, cable or satellite company in the Americas or Europe has sustained a Net Promoter Score above 50, a threshold that indicates a company is “beloved” by a majority of its customers.
In a highly competitive market the customer experience is key. Satisfaction surveys highlight that network experience accounts for 40% of new users’ key buying factors and reason for churn; price is second and customer service third.
To shift the dial, operators have had to invest in digital engagement and online self-service channels, they now need to tailor their products and services to customers and improve customer loyalty.
Regulation
Regulation defines the operating environment for telecoms companies. In the UK, the Communications Act 2003 is the main source of regulation for communications providers in the UK, whereas in the EU it is the the European Electronic Communications Code (EU) 2018/1972 (EECC). The UK implemented the EECC in 2020 shortly before Brexit. The EECC regulation covers "Interpersonal communications service" which includes messaging services such as WhatsApp and Messenger. Regulation covers network functions, numbering and consumer protection. Some larger providers are also subject to specific terms such as providing network access to third-parties. The UK regulator is Ofcom.
Specific regulation applies to radio spectrum, satellite and digital broadcasting. Security and Resilience is also a key requirement and is the subject of the new Telecommunications (Security) Act 2021 which is in the process of implementation. The UK General Data Protection Regulation ((EU) 2016/679) (UK GDPR) is also an important regulation for protection of consumer data.
Sustainability is a growing focus for organisations as public awareness of climate change effects and increasing government initiatives take hold. The ICT industry accounts for 3 to 4% of global CO2 emissions, about twice that of civil aviation. The unprecedented demand for digital communications during the pandemic has forced telco infrastructures to consume more energy than ever, expanding their carbon footprint. Scope 3 emissions make up more than two-thirds of the sector's total carbon impact. All major telcos have said they want to become net carbon neutral by 2050, a goal supported by the GSMA. In addition, most major telcos have defined specific 2030 targets for emissions, waste and the share of renewable energy.
New Technology
Digitisation has been occurring in the telecoms industry since the eighties and will continue as digital transformation such as mobile, hybrid working, streaming media, the internet of things and automation will drive demand for ever more ubiquitous and faster networking and communications.
The telecoms industry has seen generational shifts in network technology since the launch of the first cellular network (1G) in Japan in 1979. To date, the typical gaps between generations is eight to ten years which allowed telcos time to adapt to meet demands and develop applications and commercial models on a new scale. However the shift to 5G, cloud, AI and blockchain are all accelerating the pace of change.
Over the next few years the focus will be on 5G mobile networks, full-fibre networks and network virtualisation (software-defined infrastructure) which will continue to drive large scale capital expenditure (approx. 18% of sales in Europe) and increasing debt levels.
Efficiency
In recent years, the source of competitive advantage for telcos has primarily been in network coverage and speed. However the investments have resulted in increased debt and declining ROI, which on average is little more than the weighted average cost of capital (WACC).
To improve operating margins, which on average hover around 13-14%, the focus is shifting to user-level quality of experience (QoE), software-defined infrastructure and automation. This approach exploits analytics, virtualization, cloud, open-network architectures, service orchestration and API exposure. These have the potential to help operators uncover new levels of efficiency and improve margins.
Growth
The telecommunications industry’s performance remains split between infrastructure companies, which have seen valuations skyrocket, and telecom operators, which have not realised the same upside benefit despite the vital role they play in keeping business and society connected.
In the UK average household telecoms spend was flat in 2020 @ £79.08 pm, despite the fact that Internet connection speed increased 69% and average monthly data increased 36% on broadband and 27% on mobile. This is a reflection of a strong competitive environment and aggressive pricing, and as a consequence revenue for telecoms companies is flat or even slightly declining. The traditional Telco business is not growing—expecting almost flat +0,1% global connectivity year-over-year revenues 2021-2024. Much of the potential growth opportunity has accrued to "over the top" technology and media players such as BigTech.
The impact of the need to invest to meet demand whilst not being able to grow the top line revenue has resulted in telecom operators shareholder value in the sector declining 30% since 2015. Average shareholder return was 4.8% in 2020 compared with the all sector average of 21.1% and the tech sector average of 47%.