Telco

Telco Rising

After a hard decade since the financial crisis and an even harder couple of years of capital markets derating, telcos are poised for significant value creation. Telcos are already beyond the digital chasm, with fundamental threats to their connectivity business model behind them. Six additional catalysts will provide topline and bottom line growth over the next years. Beyond financial considerations telcos are the natural local champions to make technology human-centered and socially useful.

Dark decades

Since their peak during the internet and 3G booms telcos have struggled to find their place. First, mobile internet was far longer in coming than expected. Some 3G auctions took place in 2000. However, it was not until a decade later, with the iPhone, that mobile broadband started to contribute substantial revenue. At the same time, the internet applications that telcos aspired to capture were opened up through net neutrality. This brought an amazing wave of innovation, but decoupled infrastructure investment from monetization. To finish, Telcos have suffered from a difficult to understand regulatory obsession. A sector that has consistently reduced quality-adjusted prices by 99.5% per decade has been in the regulatory spotlight. With regulatory goals focusing on introducing asset-light competition and achieving slightly faster price reduction (99.6% vs. 99.5%), instead of focusing on infrastructure development.

The last two-three years have been even darker. With mobile and fixed broadband massification bringing destructive price spirals in connectivity, accelerated by regulation. While internet services are dominated by once-in-a-century digital monopolies, the Big Techs. At the same time as the copper infrastructure of the 20th century is being substituted by fiber. And the small oligopoly of equipment vendor try to push 5G before users require it, much like they did with 3G. This combination of top-line stagnation and perceived investment pressures has caused a massive industry derating, which has brought valuations to historic lows.

A New Hope: The Digital Chasm already crossed

However, telcos are one of the few sectors that have already crossed the Digital Chasm. Other sectors like retail or media are still trying to find sustainable revenue streams in the digital age. Telcos, on the other hand, have already demonstrated that their core business model is safe. Attempts to substitute connectivity like Google Fiber or Facebook Aquila have fizzled. Disruptive ideas around low-altitude satellite constellations promise to tackle mostly remote areas, and just a fraction of today’s traffic.

Telcos have already demonstrated that they can handle the exponential growth of connectivity that the internet and digital transformation is bringing. Connectivity requirements continue to grow by orders of magnitude, with telcos prepared to service the avalanche. The regulatory and physical challenges of deploying completely new networks like fiber have also been navigated. Now, more and more parts of the world enjoy speeds and throughputs that seemed incredible just a decade ago.

The sector has a secure base from which to start with practically limitless demand. This base business is not threatened by substitutes. It has also demonstrated and incredible capability to transform and reinvent itself for ever-growing demand. It is true, that this connectivity base has been targeted by regulators focused on narrow price competition only, while allowing internet monopolies to build. But even considering this, a secure business that profits from digitization is something that few industries can claim.

Catalysts for Value: 6 transformative opportunities for telcos

Beyond the secure base that the ever growing demand for connectivity brings, there are six key topline and bottomline catalysts that telco will capture over the next decade to create value:

  1. Hyperconvergence. Fixed and mobile connectivity are already technically converged. Video and B2B Digital Services (Virtual Networks, Security, IoT, Cloud, Big Data) are converging fast with connectivity. Financial services, other content categories (e.g. gaming, AR/VR, eLearning) and digital home are coming next. Topline catalyst, at least doubling telco addressable market
  2. Big Techs need help. Big Techs are in trouble. The regulators, governments and public opinion have finally woken up to their unaccountable monopolist status. On top of that, they are starting to compete among themselves. With highly capitalized and digital native rivals the stakes get higher. They need help in the upcoming battle, and telcos can be powerful allies even with net neutrality. Topline catalyst, increasing telco relevance and capturing the increased addressable market effectively directly and through partnerships
  3. Regulatory rationality. Regulators, governments and specially the public have started to wake up to the danger of over-reliance on Big Techs. Countries start to worry that they might become irrelevant digital colonies to the US and China, with no strong tech players or jobs. This is leading to the search of strong local digital players. Telco’s happen to be those players. Extremely locally grounded, they define the digital infrastructure of a country and are totally invested in the country’s success. They also employ thousands of tech-savvy employees and support the local tech ecosystems. Topline and bottomline catalyst, with regulators changing their negative stance towards telcos allowing the build up of scale and investment to boost each country’s digital potential.
  4. Operating model digital transformation. We live at an incredible time in terms of the power of automation and personalization to improve the efficiency and customer experience of all companies. Telcos support some of the most complex service processes on the planet, so the opportunity is huge. Digital technology will be deployed to improve customer experience, while increasing efficiency and speed. So there is a massive transformation opportunity over the next decade from digitizing telco operating models. Bottom line catalyst, not only reducing cost but also improving customer experience and reducing significantly churn and its associated costs.
  5. Network and equipment virtualization. Beyond “normal” digitization telcos are experiencing their own special digital transformation. Networks are becoming virtual, allowing to define and manage them virtually. Increasing flexibility, scale and efficiency. Also bringing the possibility of substituting black boxes from a small oligopoly with whiteboxes with standard hardware and innovative software from a plethora of players. Bottom line catalyst, reducing cost and investment, increasing speed and eliminating friction. Also derisking vendor lock-in with the equipment vendor oligopoly
  6. Flexible asset deployment models. Virtualization, regulation and digitization allow to go a step beyond in terms of asset deployment models. It makes little sense to duplicate or even to fully own most new infrastructure telcos deploy. There is also significant capital with appetite for the stable growing demand that the telco sector is experiencing. Consequently network sharing and new ownership models are on the rise. CAPEX and ROCE catalyst, improving CAPEX efficiency at an industry level and reducing the assets necessary to capture deployment opportunities

Beyond this six tangible catalysts there are many new technologies that can bring further opportunity. AI, Blockchain, mixed reality, full APIfication, quantum computing and 5G will bring incredible opportunities that are still difficult to quantify. That is the icing on the cake, even more opportunity that could take telcos further. These opportunities give the long range growth prospects, once the six catalyst have been captured over the next 2-4 years.

Both the six catalyst and the opportunities beyond them are only very imperfectly captured in the capital markets industry vision. While investment banks have started to understand the potential over the last months, it is yet to be fully incorporated in target prices and stock prices.

Enablers for humanized technology: a mission for telcos

Finally, the role telco’s can have go beyond creating the infrastructure of the future and delivering attractive returns for shareholders. Telcos are the connection between technology and the people. In contrast with global remote Big Techs, they are deeply local: embedded in countries and local communities, employing millions of local citizens, providing local champions for stock markets and paying substantial taxes. Regulation and local infrastructure makes telcos fundamentally accountable to citizens and consumers.

The world faces a monumental challenge in ensuring that the technological genie doesn’t escape out of the bottle. There are fears about the end of work, technological elites who capture our data and make all the money with no accountability, alienation through digital devices, the threat of AI and much more. Telcos are the base of the digital economy and can be counted on to make technology human and local. Society will increasingly demand to go beyond connectivity and services. Human-led technology will mean reducing digital divides, digital wellness in technology’s use, citizen’s owning and enjoying their own data, tax and financial flows that reflect value creation, job opportunities and much more. Telco’s are uniquely positioned to respond to this demand and embrace a mission that goes far beyond just providing the cables and the signal.

*******

The telco opportunity: A secure sector, already through the initial painful round of digitization, with exploding demand and substantial catalysts ahead. The opportunity to become the local linchpin of technological transformation, avoiding the Digital Colonies scenario for geographies beyond Silicon Valley and Shenzhen. A depressed valuation product of years of regulatory obsession with price as the only metric.

This opinions are my own and don’t reflect any official company position from Telefonica or any of its affiliates.

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