New risks arise in the telecommunications industry in the wake of technological advances

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IT Nation 2.0
February 2012

Companies operating in the telecommunication industry face numerous battles as the telecommunication sector evolves on a number of fronts. While the ability to quickly identify growth opportunities remains a key competitive advantage, operators need to detect and address new risks in order to better formulate and execute a sustainable growth strategy. Key risks in the telecommunication sector stem from technological challenges, regulatory pressures and the entry of non-traditional players in the industry.

Indeed, firms that typically evolved in the consumer electronics business started shifting their emphasis to the telecommunication sector, thereby threatening the market share and the viability of the original operators’ business models. The release of cutting edge mobile devices by Apple and Google for instance drastically reshaped the customer experience and put more pressure on operators to increase the speed and volume of data traffic exchanged across their networks.

In this context, the main challenge for telecommunication companies is to implement a framework that would enable them to understand and manage the risks resulting from innovation and technological advances imposed by device manufacturers.

In its latest series of annual reports “Strategic Business Risk, Telecommunications 2011”, EY highlights the top ten risks faced by the telecommunication sector which fall under four categories: compliance, financial, strategic and operational.

Graphe - Redistribution des risques dans le métier des télécommunications

The “Failure to shift the business model from minutes to bytes” is one of the most important risks since the proportion of data as a percentage of revenues continue to increase. However, while data is expected to rise from 20% of global mobile revenue in 2008 to 36% in 2015, data traffic has tripled over the past three years.

Thus, customers are putting higher demands on network capacity and operators are asked to provide network infrastructures with sufficient capacity to handle the data deluge. However, having sold data access packages primarily on a flat-rate, ‘all-you-can-eat’ basis, they cannot monetize the growing volume of traffic, and have therefore no certainty of generating sufficient financial returns to justify further investments in bandwidth.

Looking at operators’ business models, it appears that more than ever before, they have to embrace a new approach in a world were data is king. Consequently understanding and managing the aforementioned risk categories is key.

At the outset, “Insufficient information to turn demand into value” and “Failure to improve business metrics” suggest that operators need to better analyze collected accumulated data about subscribers so as to improve their business intelligence, create new services that respond to their needs and generate new revenue streams. Furthermore, internal and external metrics need to mirror the market dynamic and changes with the purpose of efficiently guiding performance management.

Then the “Lack of organizational adaptation to changing strategic needs” and “Failure to capitalize on new type of connectivity” depicts the necessity for operators to build flexible organizational structures that are properly aligned with new customer segments with the aim of serving them successfully and tap into growth opportunities.

Thus, addressing the sector risks will determine how successful telecommunication operators in Luxembourg will be in taking their businesses forward and being able to realise growth opportunities, such as laying down optical fiber in the Grand Duchy. While doing so, Luxembourg operators need to properly balance their focus and consider compliance, financial and strategic risks as important as operational risks.

Aïssata COULIBALY, Manager in the Telecommunications, Medias and Technologies sector at EY, Luxembourg.
Olivier LEMAIRE, EMEIA* Telecommunications, Medias and Technologies Leader, Partner at EY Luxembourg.

*EMEIA: Europe, Middle East, India and Africa

Posted on 16 February 2012