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Telcos Can Accelerate Growth by Embracing New Services & Reconfiguring Assets

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Telcos Can Accelerate Growth by Embracing New Services & Reconfiguring Assets

Telcos are undergoing a scissor effect of a widening gap between revenue and investment. While the demand has increased considerably since the emergence of lockdown, telecom executives have their backs against the wall, trying to deliver growth while juggling both increasing CAPEX and investor unwillingness to cut back dividends, mentions a report by Arthur D. Little (ADM). Titled ‘Time to accelerate growth’, the report is based on a global survey of over 100 C-level executives.

The report lays out how telecom firms (telcos) can meet the challenge of soaring data-traffic demands while moving beyond traditional connectivity and legacy services. It shows that 90 percent of respondents have considered alternative options to unlock value from network assets. However, it also shows that while most, if not all, telcos have tested the waters of asset reconfiguration, there is incremental value to be extracted as models evolve. Questions of value creation, however, remain an executive priority, but are unclear, including ways of monetizing 5G and future value chain positioning of telecom players.

The report mentions 5G as an oxygen boost to the economy. As 5G starts its journey, disruption and innovation will occur in three key value creating business segments.

• Maximizing 5G potential. To further enhance customer experience, telcos and media companies need to form alliances and use 5G to create new and compelling consumer products – for example, premium bundles that combine content, experience and devices in novel and exciting ways. Solutions for B2B customers beyond connectivity, include mobile private networks and network slicing, which are prime candidates for 5G monetization. To capture wholesale infrastructure business opportunities, telcos should also consider structural separation into two businesses, one that manages consumers and commercial operations or ComCo and one that operates the network or NetCo.

• Moving beyond core services. Telcos have attempted to diversify their offerings for decades, often without any significant ROI. Looking at various “beyond core” options, the report identifies how to diversify successfully and recommends four main priorities – target a market which offers both sizable growth and revenues; build a multi-model approach that combines both internal and external resources; work with a “start-up” mind-set and in private equity mode; and adopt a phased and agile approach for roll-out that sequentially prioritizes key concepts.

• Reconfiguring telco assets. Maximizing 5G’s potential in the core businesses of B2C and B2B, kick-starting new wholesale infrastructure businesses, and moving beyond core imply an appropriate reconfiguration of underlying assets and ownership structure. While asset reconfiguration is not new, there is a growing tranche of opportunities that telcos should consider – for example, the TowerCo model promises further options for monetization. Asset reconfiguration can drive value creation by lifting financing constraints, increasing asset utilization, de-risking investment, strengthening the wholesale value proposition, increasing management focus on distinct core businesses, and preempting unfavorable regulatory decisions.

Karim Taga, Managing Partner in ADL’s TIME (Telecommunications, Information Technology, Media & Electronics) Practice, comments: “The ‘scissor effect’ of a widening gap between revenue and investment means that the pressure on telcos’ cash flow has never been so intense. Executives must deliver growth while juggling both increasing capex and investors’ unwillingness to cut back dividends. And the COVID-19 pandemic has certainly not helped matters. However, the telecoms industry still has a bright future ahead if it is willing to embrace the opportunities that exist and move beyond its traditional comfort zone. We hope that this latest edition of our flagship report provides both inspiration and guidance for executives currently strategizing ways to move their company forward.”

Barnik Chitran Maitra, Managing Partner and CEO of ADL India and South Asia, states “As Indian telecom operators enter the 5G arena, a monetization roadmap will be critical. This will require compelling 5G-enabled products and services complemented by new asset and service revenue streams. All are key to returning to profitable growth after a period of declining revenues and profits for the industry.”

However, how to diversify will remain the key to success. Arthur D. Little’s benchmark of telecom diversification initiatives shows that less than 15 percent of initiatives are generating sizable revenue 24 months after launch. It also says that mostly, revenue contribution of Beyond Core initiatives remain highly marginal as telcos face multiple internal challenges, which bring down the initial ambition. The report suggests that to succeed, telcos must adopt a ‘test and fail’ mindset.

On the other hand, it is time telcos monetize their assets. Reconfiguration has unlocked value for shareholders in multiple ways: securing new funding, increasing consolidation EBITDA and revenues, and increasing overall enterprise value. Such reconfiguration can drive value creation in six ways: accelerating deployment by lifting financing constraints, increased asset utilization, de-risking investment, strengthening the wholesale value proposition, increasing management focus on the distinct core businesses, and possibly preempting unfavourable regulatory decisions.

However, asset reconfiguration has its own set of challenges, and the value creation equation needs to be carefully assessed based on the specific market context of each telco.