Telcos of the future: Six business models for the next era

Herbert Blum leads Bain & Company’s Global Communications, Media & Entertainment practice. Steffen Zimmer is the practice’s vice president for Europe, the Middle East, and Africa; Paul Smith the practice’s chairman; and Jennifer Binder-Le Pape the practice’s executive vice president. They are based in Toronto, Munich, Silicon Valley, and New York, respectively.

For people around the world, telecommunications services have become even more critical to everyday life since the outbreak of Covid-19. Communication networks have allowed many people to work from home and maintain social connection amid lockdowns and physical distancing. Healthcare and retail services have increasingly shifted online. Telcos have helped governments monitor and fight the spread of the virus. In short, telcos’ networks have helped keep societies and economies going.

But, paradoxically, telcos’ crucial societal role hasn’t translated into strong returns for their shareholders.

During the pandemic, telcos have created less value for shareholders than every sector but one, financial services, according to Bain & Company analysis of nearly 8,000 companies worldwide. From February to mid-December of 2020, telcos’ total shareholder return (TSR)—which measures the total return a shareholder receives from share price changes and dividends over a certain time period—trailed the average of all sectors by 16 percentage points, though the top quartile of telcos managed to outperform the cross-sector TSR average. What’s more, telcos have fallen further behind the longer the pandemic continues. From April to mid-December, telecommunications was the worst-performing sector as measured by TSR.

That means the pandemic has only exacerbated a trend that has frustrated industry stakeholders for years: Despite telcos’ massive investments in infrastructure and services aimed at realizing the vision of a digital economy, the financial rewards appear to accrue to others. The stark contrast between the sense of pride that many telco leadership teams and employees have deservedly felt about their pandemic response, and the subsequent financial outcomes, is telling.

The road ahead won’t be easier. As we look to the current year and beyond, telcos face unprecedented challenges in responding to the continuing Covid-19 crisis while simultaneously trying to stay ahead of a rapid industry transformation that began before the pandemic. Leading companies will navigate this tumultuous period by making strategic choices to secure the future of their business and improve their value creation—even if it requires a bold transformation.

We see six primary telco business models that will underpin the profound changes in the communications industry’s market structure over the next decade.

#1: Integrated. Competition will further intensify among companies that adhere to the traditional model of the integrated telco that provides a comprehensive set of services. Premium product bundles typically attract most of the value, which will likely push telcos to integrate fixed and mobile services, and accelerate market consolidation. In addition, many of these integrated telcos will start bundling third-party services with their core offerings, while at the same time opening their networks to other enterprises for use in their respective businesses.

#2: Value-focused. As stand-alone connectivity further commoditises, customers will increasingly opt for lower-cost, “good-enough” services. As a result, a value-focused set of telcos will choose to compete by shedding some of the most costly aspects of the traditional model and focusing on more concentrated coverage, narrow product lines, and customer service functions powered by automation and self-service tools. 

#3: Pure infrastructure. The separation of network assets into stand-alone entities is becoming more common. Compared with integrated carriers, pure-play telecom infrastructure companies’ advantages include the ability to more freely resell their assets and raise the utilization rate of their networks. This creates value that accrues to all participants. Despite the recent merger-and-acquisition activity and the high prices in this segment of the industry, we view the current phase as only the beginning for pure infrastructure companies.

#4: Asset-light. As network infrastructure becomes more widely available, it will be possible to rent capital-intensive network assets only when needed. This will give rise to a class of asset-light telcos that can earn sufficient profit through services that more than cover the costs of network rents. The result will be the proliferation of asset-light models not only in connectivity, such as providing managed network services, but also in consumer and enterprise network security, communications services for healthcare, and many other segments.

#5: Smart platform. As digital economies advance, demand for core, network-centric telecom capabilities will surge. Telcos have the chance to play an important role in the growth of digital-enabled economies by configuring their capabilities so that they’re easy for technology and digital service companies to discover, consume, and scale up. Yet telcos probably cannot build and orchestrate these platforms alone. In order to capture a meaningful share of the future wealth creation, the most successful telcos will forge the right partnerships with established and rising digital leaders. 

#6: Digital niche. As smart platforms proliferate and power digital economies, starting and running a digital-focused business is going to be easier than ever. Less capital will be needed for upfront technology investment. Far fewer specialized employees with niche talents will be required. Fixed costs will decrease as resources can be rented or purchased as needed. With the barriers of entry lowered, telcos can more easily experiment with new businesses focused on digital-powered products and services adjacent to the sector’s traditional model. Edge and cloud computing, the Internet of Things, and digital media are just a few examples of rapidly evolving sectors that open up opportunities for many companies, including telcos, to design and scale up new ventures.

Some of these models are gaining traction now, while others remain a few years out—or less. Nevertheless, their catalysts are already well underway. That means telcos have an opening now to tap into new sources of value and put their companies in a strong position for the future.

Interested in hearing industry leaders discuss subjects like this? Attend the co-located 5G ExpoIoT Tech ExpoBlockchain ExpoAI & Big Data Expo, and Cyber Security & Cloud Expo World Series with upcoming events in Silicon Valley, London, and Amsterdam.

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