The European telco market in 2020: What we had predicted

In 2015, STL Partners made some predictions about where we thought European telecoms was heading in the next five years. Now that we’re in 2020, we look back to see what we got right, and where we were less accurate.

Prediction 1: There will be a retrenchment among telcos to traditional infrastructure-led activities with a focus on the network and delivering a strong data experience. M2M and IoT will take time to develop, but will offer significant growth in mobile connections over the period, albeit at very much lower ARPU and margin. Digital activities will largely be focused on customer interactions (exploiting digital channels) and operations (leveraging software and cloud capabilities in the network and OSS/BSS). 

9/10.  

By and large correct. Europeans operators have played it safe and sought to improve core services rather than invest in new digital services. 

M2M and IoT have seen slow growth over the past five years and have not yet been real revenue contributors at scale. 

Digital activities have indeed been focused on customer interactions and network operations rather than new services. Our research into 47 global operators revealed how operators are making substantial efforts to increase their digital customer engagement. Zain Bahrain are one example of this. Their simplicity programme for customer engagement involved extending digital channel capabilities through features such as zBot, a fully automated smart customer service chatbot.  The results were impressive: between Q1 and Q4 2017 Zain Bahrain’s NPS rose by 15 points, from 39 to 54. 

On the OSS side, NFV has failed to deliver its promises over the last five years but is recently seeing major progress through initiatives such as OpenRAN that hope to break the vendor lock-in and build a future-proof radio access network. This year, Rakuten are set to the be the first operator to deploy a fully virtualised and ‘open’ radio access network for both 4G and 5G. 

Prediction 2: Continued selective investment in digital services – less in consumer services, and more in Enterprise ICT and B2B2X. Those that pursue digital services will benefit, however, it will not be a ‘game changer’ in the sense of producing a return to growth.  

9/10.  

Operators have continued to look to digital services for both new revenue and customer retention. Digital service offerings have mostly been through partners with specific capabilities, and rarely done in-house.  

Where they have, we were right to say it would not be a ‘game changer’. Based on our research, significant returns from digital services can only be expected at least five years on from the point of investment. Those who started in 2015 are therefore unlikely to have strong evidence of success. An example is Jio owned Unlimit IoT in IndiaNonetheless some initiatives have had early demonstrable success. Elisa’s smart factory solution, for instance, has won some notable early stage clients, including P&G within only two years of launch. Our research shows that the more successful initiatives are focused on solving specific customer challenges, rather than merely throwing technology at the market. 

Telcos should not, however, be expecting ‘quick wins’, and should hopto emulate initiatives such as TELUS Healthcare or Verizon Connect launched in the early 2010sVerizon Connect offers fleet management solutions, and was built off the acquisition of $612 million Hughes Telematics in 2012. Through organic growth and some acquisitions, it now generates over $1 billion per annum – only a fraction of which is connectivity. 

Prediction 3: Successes in digital services will come from operators ‘going it alone’ rather than industry-wide collaborative activities. 

8/10.  

There have been few notable examples of collaborative efforts in new digital services over the past five years. Telcos generally create their own digital offering rather than seeking to create an industry offering together. And if not an in-house solution, telcos re-sell third party services. 

A recent exception is the collaboration of several operators (China Unicom, DT, EE, KDDI, Orange, Singtel, SK Telecom, Telefonica and TIM) with the GSMA to develop an interoperable Telco Edge Cloud Platform which seeks to accelerate developments in the edge computing sphere. 

Ultimately, however successes in digital services have not come through collaboration with other telcos, but rather through ‘going it alone’ or partnership with non-telcos. 

Prediction 4: Consolidation will gradually and relentlessly take place, with an acceleration in activity as 2020 approaches. National regulators will initially resist this but gradually accept that fewer operators in each market is an inevitability. 

5/10. 

To our surprise, consolidation has slowed down, with fewer success stories than expected. While there has been activity in the U.S. – recently with the merger of T-Mobile and Sprint – the European market has faced tough regulators who have blocked consolidation. Instead there have been examples of convergence of fixed and mobile operators. 

BT and EE merged in 2016, bringing together the UK’s largest fixed line business with its largest mobile business. Similarly, Virgin and Telefonica recently announced their intention to merge. Given that they occupy different spaces in the telco market, we are likely to see the merged company pursue a multi-play strategy. 

The best examples of consolidation have been the merger of Tele2 and T-Mobile in the Netherlands in 2018 and the acquisition of DNA by Telenor in Finland in 2019. 

While these examples show evidence of both consolidation and convergence, there has also been ongoing divergence in the industry. Many telcos have sold off tower assets. Telefonica, for instance, have split off some of their tower business to Telxius this year. Orange, NOS, and Eir are other examples of telcos who have sold off tower assets. Some have gone as far as splitting their services and infrastructure businesses, as multi-play telco TDC Denmark split into Nuuday, comprising of digital services brands, and TDC NetCo that will maintain TDC’s network. 

Beyond tower, other service areas of the industry such as virtual networksprivate networksIoT and neutral hosting have seen new players enter the frame or else move higher up the value chain. For instance, some MNVOs, such as Sky Mobile, have become ‘thick’ or ‘full’ operators that operate their own core networks. 

Recently, the hyperscalers have turned their attention to the telecommunications business. How this will play out is difficult to say, but the tech giants will likely look to support NFV, further encouraging divergence of the telco industry. 

Looking forwards, CAPEX is set to come under enormous pressure from the expected new investments in 5G. This may drive more consolidation or perhaps even sharing of network infrastructure. 

Prediction 5: The ‘OTT players’ won’t have things all their own way. 

6/10 

We predicted that more stringent data protection laws for consumers would come into place. This has certainly proved to be the case in the past couple of years. Google, for example, were fined $57 million by CNIL for lack of transparency around usage of customer data. 

Regulators have also been increasing pressure on the technology giants with regards to antitrust and tax avoidance. Googleagainwere on receiving end of a fine in 2018this time amounting to €4.34 billion for breaching antitrust laws. 

However, this doesn’t appear to have slowed OTT growth in any meaningful way. In spite of increased awareness around breaches of trust with data, the technology brands are still far ahead of many telcos in terms of consumer perception. Moreover, the OTT players have succeeded in evolving their business model, transforming from largely application and software companies to now also being infrastructure providers. 

Europe is looking for ways to break the dominance of the technology companies in the Infrastructure-as-a-Service (IaaS) marketA number of heavyweight European companies – including Deutsche Telekom, Siemens and Bosch – are collaborating on a new project called Gaia-X, which aims for European data sovereignty by building an ecosystem of cloud and data services protected under EU laws. 

Prediction 6: Upstream service differentiation (e.g. guaranteed QoS) will not be successful 

10/10 

Yes, spot on. Not too much to say here. Net neutrality has remained in place in Europe. 

Prediction 7: Investments in networks in Europe will slow down because 1) increased price and revenue pressures 2) demand from end-users will slow 

5/10 

CapEx for European operators has in fact stayed roughly the same. This is because consumer demand has continued to increase, albeit slowing in terms of the rate of growth. This has forced operators to invest in increasing the capacity of their networks. In addition, telcos have been required to invest more CapEx into new technologies such as 5G and full fibre in order to keep up with competition. This cycle has been a root of telcos’ problems: demand from end-users has continued to grow requiring sustained CapEx investment, while revenues have declined. This has left them with little extra cash to invest in new services. 

The COVID pandemic has led to even greater internet usage, and telcos are now under more pressure to build denser and more resilient fibre networks and replace legacy copper assets. 

5G is also just around the cornerbut it is unclear what exactly the European timeline will look like. Generally speaking, Europe is slightly slower off the mark than some of their North American or Asian counterparts. However, there is increasing political pressure to not see them lag behind the rest of the world. 

How did our predictions fair? 

Overall, our predictions stood up well, with 5 out of the 7 correct. We were right about where we thought investment in new digital services would be focused, and also about the extent to which we could expect immediate returns. 

On the other hand, we were wrong about investments in the network slowing down. Furthermore, we did not anticipate the OTT tech players move to enter the infrastructure market with such speed and force. 

Looking forwards, the advent of 5G and increased virtualisation will see the telecommunications industry continue to change over the next five years. To keep abreast of our latest insights, make sure to check out our research page where we regularly publish reports on the future of telco. 

Author: Nikolai Siersted is a Consultant at STL Partners. He has worked across a range of client projects including 5G, NFV, and edge computing.

Leave a Reply

Your email address will not be published. Required fields are marked *