Back to Basics in Telco

If I was an executive of a Telco, I think I’d be quite grumpy.? Not because I am a middle-aged guy and that is my natural state, but that is also true, because the boom in data networks for both business and personal use and 5G, generally, hasn’t translated into a boom in profits and growth.?

Wi-Fi (Broadband) and 5G went from being an almost unbelievable new technology to being a commoditised utility without, seemingly, Telcos gaining massive revenues and profits from them.? This has happened for several reasons which have all conspired against even the most dominant players.

Costs

Infrastructure -The cost of building out the fibre networks required to support the widespread use of high-speed internet services has been extremely high.? Couple this with the ongoing costs associated with the care and maintenance of the copper and MPLS networks and the underlying cost base for Telcos has remained high.? The fibre network costs are not just those associated with direct to customer but the back haul network required to build out 5G is extensive.

Spectrum – Many governments took the opportunity to reduce their deficits by auctioning off the potentially very lucrative spectrum needed to operate 5G.? Sadly, the revenue models that the network operators have used to monetise these assets have not delivered on the scale that was anticipated.

Interest Rates – With all the large investments required to make the infrastructure fit for purpose, financing these in a low-interest rate environment was a challenge.? This challenge became almost insurmountable when interest rates rose.? That led to a slowdown in the build out of infrastructure and a squeeze on the Business/Operational Support Systems (B/OSS) upgrade work which is necessary to enable traditional Telcos to operate more flexibly and responsively.? Digital Transformations slowed to a glacial pace.? Like banking, where incumbent operators have struggled with technical debt to battle the Fintech challenger operators.

Energy Costs – The Global instability which caused energy costs to jump in 2022 led to a spike in energy costs, which unless you live in a cave you’ll know all about.? That said if you do live in a cave the likelihood of you having 5G is negligible.? Telcos felt that energy shock as a sizeable hole in their budgets, further limiting the free cash available to remedy the underlying systems.

Competition from non-traditional sources.? Telcos were generally quite comfortable with competition from other players, many had dominant market positions within their home markets due to the barriers to entry being so high. What they didn’t anticipate was the competition from non-Telcos.

Multi-Protocol Label Switching (MPLS) and Hyperscalers – Many global players build their businesses on their MPLS Network and the provision of Global WAN.? This model worked well when enterprise customers needed to connect on premise data centres and server rooms to their offices.? The widespread move to using public cloud with the access to hyperscaler networks undermined this model somewhat.? Yes, the Telcos still benefitted from the installation of express links to Availability Zones but gone was the big cash cow of MPLS.

Streaming providers – In the Consumer market many Telcos tried to supplement the decline in revenue from the commoditisation of their broadband offering by cross selling, so called Quad Play, Broadband, Mobile, TV and PSTN.? This attempt to climb the value chain was a perfectly logical strategy which again has failed to deliver the revenues predicted because streamers such as Apple TV and Netflix have managed to move far further and faster than anyone anticipated.

Cyber Security – Handling a large proportion of the data required to make countries’ economies operate made Telco’s a juicy target for hackers, both criminally minded and state sponsored.? This resulted in Telcos being forced to spend significant sums to ensure that they were not the source of a major cyber incident affecting critical national infrastructure.? This is a necessary cost of doing business but like many of the other costs an increasing one, and one which is unlikely to diminish anytime in the foreseeable future.?

Amplifying the cybersecurity cost pressure and related to the geopolitical situation was Governmental pressure to step away from Chinese equipment.? While this may or may not have been based in valid technical concerns the result was an increase in costs and diversion of resources away from remediating technical debt in the B/OSS towards removing the embargoed assets.

Customer Perception – While all these pressures were being applied customers moved from being amazed by what mobile data networks and the internet could do, towards merely expecting it to happen and happen more reliably and cheaply.? Most customers have no real idea of how complicated the systems and processes are to ‘make the magic happen’ and neither do they care; they just want to watch or make Tik Toks.

Opportunity

I don’t want to have the readers rushing for the Nitrazepam with all of this because there is light at the end of the tunnel for those who are prepared to do something about the situation.? A decline in interest rates could provide a significant tailwind for telcos in 2025, this would allow refinancing and renewed investment.? Likewise, a continued decline in inflation and energy costs will provide a better environment for telcos.? Decommissioning of copper networks could provide a quick return on investment through the sale of the copper and reduced costs of moving to an all-fibre network.? This would improve reliability and hence customer satisfaction.? It is, however, a bit of a race to decommission and remove the copper before nefarious actors do so.

While the GenAI gold rush continues, telcos will be quick to adopt, while also trying to mitigate unintended consequences.? GenAI may provide a solution to many Telco woes, if they are able to move quickly enough to use it to remedy their sometimes-massive technical debt.?

There is, as ever some risk.? Wars in Ukraine and Israel, tension in Taiwan create uncertainty.? That could easily end the slightly lower energy costs and drive up the supply chain costs of hardware.

So what?? Well, the key take away is that if Telco executives want to get a better night’s sleep and increase their Heart Rate Variability, they really ought to make hay while the sun shines.? That is while interest rates are lower, and energy costs are lower, they should be investing in remediating their systems, reducing technical debt, moving away from their heavily capital based models and using SAAS, PAAS as much as they possibly can.? They need to stop pretending that robotics replacing swivel chair processing is real automation and start embracing a more modern technical architecture which will make them fit to operate in the future.? They should stop focusing on making non-core stuff work better and start focusing on being a Telco.?? Letting other, potentially, more able players run non-core systems.? Those partners can then take the time to make those systems as efficient and effective as possible.

So, if you are a Telco executive, no need to reach for the Nitrazepam, give me a call, I know a guy.