Where Growth is Most Needed: at the Margin

Growth is the paramount issue for the glocal telecom industry; perhaps most obvious in saturated developed markets, but eventually an issue for every market, including those that are growing fast as more human beings use mobile phones. 

Growth was not always the primary objective. In the monopoly era, telcos were a slow-growth utility with guaranteed rates of return and not expected to “grow” revenues very much. They were expected to support high-quality voice services at affordable mass market rates. 

In the competitive era all that has changed. Telcos compete for sources of capital along with all other industries; face competition as do most firms and also face fundamental disaggregation of the value generation mechanism, which also means less revenue upside from the core business. 

source: Arthur D. Little 

As helpful as projected telco growth drivers are in the edge computing, internet of things, private networks and 5G areas might be, they are not likely to generate revenue growth at a rate faster than the attrition of legacy service revenue. Essentially, telcos are running on a treadmill that will reach an unsustainable pace. 

Enterprise and business services have always represented close to half of total revenues and are expected to be a key upside driver in the 5G era. 

On a global basis, telco revenues have experienced low-single-digit growth since 2014, faster in Asia; slower in Europe. North America has been perhaps the strongest-growth area among developed regions, where mobility revenues grew at 3.5 percent annually between 2008 and 2018, for example, compared to Asia mobile revenue growth of 6.4 percent and negative growth in Europe of -4.4 percent. 

That is the good news. The bad news is that some analysts expect mobile revenue growth to go negative in North America as well, with global mobile revenue growth slowing to below one percent per year.

There is a widely held perception that rapid growth of IoT devices will, in turn, drive connectivity revenue for operators. European Telecommunications Network Operators (ETNO), in its 2019 Annual Economic Report, estimates that the number of IoT connections in Western Europe will increase from 78 million to 433 million in 2023, but IoT connectivity revenues will increase from EUR 1.5 billion in 2017 to EUR 4.1 billion in 2023.

While helpful, that is not sufficient to replace half of all existing revenues over 10 years. The volume simply is not there. One might make the same argument about edge computing or private networks: the incremental revenue will not be large enough to offset a 50-percent loss of existing revenues. 

Service provider edge computing revenues will be helpful, but at relatively low magnitudes. Private networks likewise offer upside, but not at a level sufficient to really move the revenue needle overall, for large telcos. 

For large telcos, perhaps the good news is that--although mostly a zero-sum game--replacement of 4G accounts by 5G accounts could easily drive most of the replacement revenues over the next decade. That will not supply much growth, but likely is the only feasible way for telcos to replace half their present revenues, assuming average revenue per account does not change in a negative way. 

 “Lose half of 4G accounts and replace them by 5G” would represent most of the revenue transformation necessary over a decade. 

What then needs work is a way to replace lost fixed network revenues with other new sources. And that is where IoT, edge computing and private networks, plus other new revenue sources, really do matter.