Are leaders ready for the telco of tomorrow?

To thrive in the future, telcos must seek differentiators beyond network quality, and adapt to changing ecosystems and market structures.

In brief

• The growth outlook for telcos is solid but unspectacular, based on core connectivity and continuing cost management allied to reliance on network quality.
• Yet industry leaders foresee pervasive changes to the sector in five years’ time, which today’s defensive strategies are not equipped to address.
• Rethinking business models and differentiators, and building new employee propositions and ecosystem positions, are vital for success on the road to 2030.

Telcos have reached an inflection point in their evolution. They are ever more focused on core connectivity and continue to drive new waves of organizational efficiency with the help of emerging technologies. However, industry ecosystems, stakeholder expectations and workforce needs are developing in new directions at pace. In this light, defensive strategies based on network quality and cost optimization may fall short of the more substantial transformation telcos need to achieve.

EY interviewed more than 60 C-suite executives from over 50 telecoms operators to understand their views about organizational priorities alongside the current and future state of the sector. In this article, we explore insights emerging from our research, underlining the dichotomy that exists between defensive near-term strategies and more radical future sector dynamics, and recommending key actions that telcos can take to ensure they remain fit for the future. 

Traditional growth drivers underpin a solid performance outlook

Survey respondents have a largely positive view of sector growth: More than half foresee sector revenues and EBITDA growing by 3% or more over the next three years. They are also confident of their own performance relative to their peers, with three quarters expecting to outperform the market over the same period. Inflationary pricing escalators built into consumer subscriptions have been supportive in some markets, indicative of wider resilience where customer spending has held up well in spite of the cost-of-living crisis, as highlighted in the EY Decoding the digital home study.

Looking ahead, two key drivers of profitable growth are cited by management: growth in the core connectivity business (67%) and margin development through additional cost reductions and efficiencies (60%). These twin forces score well ahead of adjacent market services or more innovative business models, with only one in three respondents highlighting growth beyond the core business or growth in platform, ecosystem or as-a-service business. That said, there are regional nuances at play: Asia-Pacific telcos are much more receptive to growth via platforms or ecosystems, cited four out of six telco leaders in the region.

Network quality leadership: a defensive North Star

Industry growth expectations are also accompanied by strategic North Stars that tend to favor network quality. When asked which strategic persona most accurately reflects their organization’s long-term positioning, network quality leader (48%) emerges as the most popular choice, followed by full digital services provider (37%). Both have premium connectivity as a foundation: the key difference between the two personas pivots on the breadth of the service portfolio. Other potential North Stars, the data utility that focuses on value-driven, basic connectivity and the digital InfraCo that wholesales connectivity, rank much further back.

The preferred positioning as network quality leader does come with caveats attached. Many senior executives highlighted that network performance gaps between competitors are eroding as infrastructure coverage and speed levels become more uniform within markets. As one CEO underlined: “Today, everybody has the same network. We all say we have the best network, but the customer experience between a good and bad network is imperceptible to the end user.”

Others pointed to previous failures to monetize new digital services as reasons for prioritizing network quality, underlining its role in a fundamentally defensive strategic mindset. Tellingly, network modernization itself ranks only fifth out of nine near-term strategic priorities overall, suggesting that network upgrades are not actually top of mind as a route to competitive advantage.

Widening competitive and compliance landscapes signal long-term risks to growth

While industry leaders favor defensive strategies predicated around high-quality network infrastructure, the sector operating environment is changing rapidly. Although financial performance is proving resilient in the face of macroeconomic headwinds, there are other factors to consider. The top challenges to delivering profitable growth cited by management are disruptive competition (56%) and regulatory or policy uncertainty (52%) — and perceptions of volatility and complexity accompany these pain points.

Looking ahead, disruptive moves from outside the sector will pose a growing threat, subverting telcos’ confidence that they will outperform their immediate peer group. Today, classical big telcos and mobile network operators (MVNO) loom large as perceived competitors, but survey respondents pointed to hyperscalers as becoming the dominant threat five years out, with satellite companies overtaking virtual mobile players. Leveraging network quality may help established telcos counter disruption from satellite providers but is less likely to act as a counterweight to hyperscalers’ capacity to innovate and disrupt. As one CEO put it: “Hyperscalers are eating into our B2B business; it would be easy for them to take control by acting as intermediaries, providing connectivity to customers.”  

Meanwhile, regulation of artificial intelligence (AI), digital markets and network suppliers are all cited by more than one-third of executives as having significant impact on the telco sector in the next three years. As a result, effective management of the compliance burden will require better understanding of industry ecosystems outside the traditional telecoms value chain.

There is room to raise the bar with near-term priorities

As telcos consider their priorities over the next three years, customer experience improvements lead the way, with many respondents keen to highlight the importance of ongoing product simplification as a key enabler. Improving organizational skills and talent rank second, with many telcos keen to overhaul their organizational DNA to bring in younger people with fresher thinking. Digitization, cost control and network modernization round out the top five.

These priorities align well with announced strategies, but do ambition levels travel far enough? When respondents are queried about key levers within each domain, some aspects are surprisingly muted. Simplifying products is rated twice as important as accelerating issue resolution in customer experience interactions. Attracting new talent dominates the people agenda, but the redefined employee purpose that can enable this is cited by just 10%, and the dangers of creating new silos persist. As one CFO highlighted: “It is challenging to get the right kind of talent. They think differently and they have different attitudes to work, compared with older generations.”

Meanwhile, artificial intelligence (AI) ranks behind software-based networks as a critical emerging technology — although executives expect it to grow in importance over the next five years while digital infrastructure sharing and cloud migration lack traction as drivers of improved operational efficiency. Upgrading and decommissioning infrastructure lead network strategy, with network energy efficiency and adoption of network application programming interfaces (API) much less prominent. 

Dissonant perspectives emerge as telcos consider the future state of the industry

The telco of today is confident in near-term growth prospects, trusting in network quality as a differentiator while aiming to overhaul skills, systems and processes as part of established transformation agendas. However, this near-term mindset stands at odds with the more radical view of the telco landscape in five years’ time articulated by industry leaders, who expect significant evolution in stakeholder expectations, sources of disruption and differentiation, market structures and ecosystem positions. This view jars with current strategies that prioritize core products alongside ongoing cost optimization.

Hyperscalers are perceived as the dominant disruptive threat to telcos’ business in five years’ time, but only 37% view business model overhaul as a strategic priority today. Only half of telcos surveyed believe that network quality will still be the most important differentiator in five years, calling into question their faith in core connectivity as a profitable growth driver. Fifty-nine percent believe most of today’s workforce will be upskilled or replaced, but very few see employee proposition and purpose as a focal point in their people agenda today.

Most believe that telcos will play a top role in cross-industry ecosystems, but ecosystem positioning does not rank as a top five strategic priority. Some do recognize this Achilles heel, with one CTO highlighting that “poor ecosystem collaboration is a challenge — way more than before, it’s important to have people who can accept trade-offs within partnerships.” Finally, 43% of industry leaders believe that telcos will split into NetCos and ServCos, but digital infrastructure through M&A ranks last as a near-term priority.

The dichotomy between the current and future state of the sector

• 75% see hyperscalers as a disruptive threat in five years, but only 37% view business model overhaul as a strategic priority.
• Only 53% think network quality will still be the most important differentiator in five years, below the 67% that cite core connectivity as their key profitable growth driver in the future.
• 58% believe most of today’s workforce will be upskilled or replaced in five years, but only 11% are redefining employee proposition and purpose as a people priority.
• 69% see telcos playing a top role in cross-industry ecosystems in five years, but only 32% are developing ecosystem relationships as a strategic priority today.
• 44% believe telcos will split into NetCos and ServCos, but only 16% are pursuing digital infrastructure M&A as a strategic priority today.