The traditional core business of telecommunications operators—and communications equipment suppliers—is under pressure. Network service providers can choose to either optimize the traditional access business or search for new sources of revenue. In practice, we witness that often companies pursue a mixture of these two imperatives. In our view, companies must consider key strategic imperatives to better understand how they will impact the future profit pools. Only then can companies position themselves to compete better. Most telecommunication companies will need a game plan for:
Hunting for profits amid mounting competition and rising costs. Internet traffic will grow tremendously over the course of the next decade. Telecommunication services will see consistent growth over the next few years, with profits continuing to rise across all regions. Strong market leaders will garner a majority of the profits: Bain estimates show such leaders can expect a return on capital 2.5 times greater than their cost of capital. However, declining prices per minute and volume in fixed and mobile segments, as well as the diminishing number of fixed lines could contribute to decreasing revenues and operating margins for many companies. Vulnerable firms will need to identify and control the costs they can control—especially those which vary with customer segments or usage.
Defending market position with new pricing strategies and excellent customer experience. Few levers have as much power to influence profitability as pricing does. We help companies find the right pricing and product mix through clear segmentation processes. Premium services, in particular, require the sensible use of customer touch-points to drive loyalty and retention and achieve customer-led growth. A strong customer strategy will be critical to developing future-proof product strategy.
Riding the data surge and improving capacity expansion. As users embrace services and applications that heavily rely on the exchange of rich data–for example, video content–demands on network infrastructure capabilities will continue to rise. Mobile data traffic, for example, is expected to grow ten times in the next three years. More than ever, telecommunication companies will need to balance short-term profits with investing in capacity expansion for further growth.
Negotiating a changing landscape with redefined business models. Although network performance remains a key differentiator, innovation and new business models are becoming more important. Bain helps companies redefine their business models by identifying and tapping into attractive segments and adjacencies beyond the core business. Companies can position themselves to react nimbly to upcoming threats and retain their share of the ecosystem.
Managing growing complexity—in products, processes and the organization. Innovating telecommunications companies will need to excel in managing complexity on multiple fronts. They offer increasingly complex bundles of products and services. They support a universe of devices, operating systems and applications. They manage 2G, 3G and 4G networks simultaneously as well as off-load and caching for video. They track different sources of revenue from institutional and corporate customers. Telecommunication companies will need flexibility and efficiency to ensure operations run smoothly and that the organization delivers its full potential.
Anticipating the impact of regulation. Regulators have the ability to create significant impact on industry returns. Over the next few years, they are expected to maintain pressure in the telecommunications industry on managing the level of competition. Bain has considerable experience working with international clients and associations who seek to influence policy matters and regulation.