One way or the other, the global telecom business might be “unrecognizable” in 10 years. “Do nothing” and the business model might collapse, say researchers at McKinsey. On the other hand, if telcos move aggressively into new lines of business, they might, in some ways, be equally unrecognizable. Either way, the business will not be the same in a decade, one way or the other.
Over the past five years, the telecom business has entered a period of slow decline, with revenue growth down from 4.5 percent to four percent, EBITDA margins down from 25 percent to 17 percent, and cash-flow margins down from 15.6 percent to eight percent, McKinsey says.
Just a few years ago, over-the-top messaging represented nine percent of revenue, OTT fixed voice 11 percent and OTT mobile voice two percent.
Forecast alternatives prepared by McKinsey & Company suggest that, in the most aggressive scenario, OTT messaging could be 60 percent share, OTT voice could be 50 percent of fixed voice revenue and 25 percent of mobile voice revenue.
In the “best” outcome, OTT messaging share of revenue would be 40 percent, share of fixed network voice 25 percent and mobile voice share could be seven percent of total.
Growth will continue globally, in newer markets. An additional billion middle-tier customers will likely be added, mainly in emerging markets, by 2025. But revenue growth and profit margins will be low, McKinsey says.
Globally, the compound annual growth rate (CAGR) for traditional telcos is estimated at only 0.7 percent through 2020. For many telcos, largely in developed markets, the outlook is worse.
Telcos in Western Europe and in Central and Eastern Europe are facing –1.5 and –1.3 percent average growth, respectively, over the next four years, while those in North America are expected to barely tread water with growth at only about 0.3 percent, McKinsey says.
So twin challenges lie ahead: to “create a super slim and efficient core business” and then “to strategically define and aggressively pursue growth areas.” That is why internet of things, machine-to-machine services and even artificial intelligence or deep machine learning will be so important: they are among the key ways to find growth and also run the core business efficiently.
Network technologies need to become IT-centric and more software driven, allowing service providers to reduce baseline costs by 30 to 70 percent. So do not be surprised if carrier capital investment declines, even as next-generation networks are built. The new networks will cost more than the older networks, so the dramatic cost savings will be necessary.
