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"Telco 2020" study by Roland Berger: European telcos are coming under pressure in the smartphone era. By 2020 they could see sales fall by 20%

Munich, March 6, 2012

  • Providers of online platforms and services and content for smartphones, tablet PCs and Internet TV are crowding traditional telcos out of the market
  • By 2020, European telcos could see their sales fall by up to 20%; EBITDA could even drop by 40%
  • The biggest challengers are the top 5 of the online world: Amazon, Apple, Facebook, Google and Microsoft with a total of three billion customers worldwide
  • Telcos must slim down their network, sales and service models and tap growth markets via M&A or joint ventures

The battle for market share in the telecoms business is getting tougher. Powerful providers of online platforms and services for smartphone users are crowding into the business segment of traditional telcos. This could have dramatic consequences in the long term. Experts predict sales falls of up to 20% for the industry in Europe; EBITDA could even drop by 40%. To counteract this scenario, telcos should align their core business of network access, focus on new growth areas and slim down their operational models. In view of the required infrastructure investments of up to EUR 600 billion between now and 2020, the European telecommunications companies also have to create leaner corporate structures, drive the consolidation of their domestic markets and enter into new collaborative ventures. Those are the main findings of the study "Telco 2020 – How telcos are transforming for the smartphone society" of the Roland Berger Strategy Consultants.

"The five biggest Internet companies showed us how to do it," says Alexander Dahlke, Partner at Roland Berger Strategy Consultants. "Only by staying focused on your customers and constantly analyzing their behavior can you still grow in today's digital world and improve your market position."

Internet providers are crowding European telecoms firms out of the market

The top 5 Internet companies – Amazon, Apple, Facebook, Google and Microsoft – now have around three billion customers worldwide in the areas of terminals, e-commerce, social media, online searches and content, with an upward trend. Their successful business model is based mainly on strong brands, user-friendly systems and an advantageous use of customer data. Thus Internet providers are increasingly putting the traditional telecommunications industry under pressure.

"Although broadband access will remain the basis of digital communication, telcos must focus more on their customers' wishes in order to bring suitable solutions to the market," explains Alexander Dahlke. "The core business in the telecoms industry is suffering from the drop in broadband prices despite a considerable increase in volume. Customers are no longer prepared to pay simply for Internet access; they want personalized, user-friendly communications platforms and products," says Dahlke.

Industry reeling from major falls in sales

The European telecommunications industry has been hard hit by this trend. Experts at Roland Berger predict that the industry's sales will fall by up to 20% between now and 2020 if it continues with its current business model. EBITDA among European telco groups could even fall by as much as 40%.

To counteract this downward spiral, investment of up to EUR 600 billion is needed. "It is not primarily about developing innovative products," explains Christian Hoffmann, co-author of the study. "The lion's share of the investment will go to new network technology for high-speed transmission such as fiber optic networks and LTE to counteract the fierce competition from cable providers offering 100 Mbit packages."

Business models of the future

To stay competitive in this fiercely contested market, telcos should slim down their business models in general and realign them. The experts at Roland Berger distinguish between three possible scenarios:

  • "Access Minus": In this scenario, telecommunications firms simply offer network operations and have little direct contact with end customers. By contrast, cloud service and OTT (over the top) firms provide their services with strong brands. In this scenario, telcos focus on their core competencies; in the areas of innovation and product development they stick mainly to network technology.
  • "Access Plus": Here companies offer not only their own network operations but also selected value-added services through partnerships with B2B2C and OTT providers. Networks themselves will become a commodity and thus split off from the telecommunications, cable and utility businesses. For reasons of efficiency, sales and services are separated from the network.
  • "OTT Service Groups": Telecommunications firms as fully integrated providers are crowding into the networked world with their own access-centric ecosystem and their own B2B2C models. Through their strong brands, they achieve a better market positioning than OTT providers. Few regional groups are able to achieve economies of scale through active consolidation.

"All three scenarios are possible," sums up Dahlke. "What is important is that companies focus on their core business going forward, realistically assess their growth opportunities, streamline their structures and look for consolidation opportunities. This is the only way they will be able to offer investors a convincing business model."

However, in the future, network access will play a key role in European telcos' business. It now generates sales of approx. EUR 300 billion; two thirds of this is from mobile communication. Whether this level of sales will remain stabile or shrink further depends not only on the decisions made by telcos but also on the future regulatory environment.


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