What are the challenges in the telecommunications industry? The telecommunications sector is one of the most sensitive areas for digital transformation. Despite this, digitization has brought many challenges to this sector, but they are also opportunities for growth. Of all industries, the telecommunications sector has been especially affected by digital transformation. In fact, before they were applied in other sectors, many digital innovations and solutions were first tested here.
Let’s start by defining what we mean by “telecommunications.” The term refers to the set of techniques and procedures for the remote communication of sound (voice, music), images, text, etc.to which we refer as signals of an electromagnetic, acoustic, or other nature, now almost always represented in numerical (or, more widely, digital) form.
In general, telecommunications technologies can be divided into two groups: technologies for information and those for communication. The first refers to the use of computers and other telecommunications equipment to store, retrieve, transmit, and manipulate data in the context of a business or financial activity. The second refers to the set of methods and techniques for the transmission, reception, and processing of data and information.
The development of these technologies is at the basis of the so-called third industrial revolution, which led to the birth of an information-based society, which also occurred thanks to the spread of mass media such as the telephone, radio, and television. It is no coincidence that many people see a close correlation between the presence of a good telecommunications infrastructure and a high level of socio-economic development of a country, both in microeconomic and macroeconomic terms.
The importance of this sector is also linked to the fact that the technologies and solutions included in this sector are constantly increasing. For example, the distinction between pure telecommunications and programming or computer engineering is becoming increasingly blurred. This is because the applications developed for one exploit the channels and infrastructures of the other or, vice versa, and the operation of certain digital architectures affect the development of certain physical channels.
We can imagine that, in the future, television, energy resources, security, and surveillance services will closely coexist with sensors, monitoring and traffic information, geolocation, management, and organization of the so-called smart cities. This is also thanks to the fact that in Italy there is a tendency to move from a model where individual synergies occur vertically, in the context of the individual distribution chains, to a model that provides for the horizontal sharing of infrastructure, bringing together telecommunications, energy, heating or energy cogeneration, gas, water, and much more.
In other words, the sector will move from a narrow field of interest to create product combinators that improve the country’s economic growth, but also provide opportunities for investment.
In any case, companies currently operating in the market will be asked to learn to adapt to new market demands and conditions. This is already happening, albeit gradually. As time goes by, we are witnessing a significant turning point for telco companies, who are changing their business approach and deciding whether to turn into pure infrastructure companies or single service companies or to remain mere service companies.
All of this is in the face of a new type of consumer demand which, at the moment, rewards more hybrid and integrated business models. Perhaps this is one of the most evident transformations as a result of the digitization of the sector.
Competition that transforms skills
While it is true that the digital transformation has changed telecommunications if only because it has provided new communication tools until recently, the real jolt to the sector is the competition digitization makes possible. The telecommunications sector, in fact, has three specific characteristics:
- it has a few large players;
- the birth and success of new companies on the market is very slow;
- market players tend to merge with each other or transform their core business to survive.
For this reason, it can be said that as a market segment, telco is not very elastic and has important barriers to entry, mainly represented by infrastructure costs and expertise that is difficult to come by. This is also demonstrated by the fact that even the advent of mobile telephony has not significantly changed the traditional telco business model.
Also until the advent of the internet and its diffusion on the mass market, telecommunications companies were limited to offering connectivity services such as voice for consumer customers and voice and data transmission services for business customers. It was only with the arrival of the OTTs that the sector felt the impact, and the identity of telco operators changed, accentuating their role as infrastructure providers at the expense of the service provision business.
New players for a changing sector
But what are these OTTs that have revolutionized such a static sector?
OTT, or, Over The Top, refers to the media companies that provide digital content and services through the internet, where users do not have to subscribe to services as with traditional outlets such as cable or satellite television. The most immediate example is Netflix, although it is not the only one.
To be an OTT it matters less what you deliver; what matters is how the content is transmitted. Netflix is an OTT technology for the television sector; for messaging, its applications like Whatsapp and Telegram, which allow data transfer even though they are not proprietary telephone operators. Similarly, Skype and Viber are OTT voice services, as they allow users to make voice calls using only a data connection or WiFi.
In general, to be considered an OTT means that they do not have dedicated facilities or networks for the transmission of their content, but instead have a technology that relies on so-called content delivery networks.
AGCOM, in its study on next-generation TV, defined OTT as the distribution of “web-based content […] via a broadband connection over open networks, accessible through multiple devices.”
OTT have ushered in a revolution. First, they have disconnected the idea of service provision from infrastructure ownership. Second, they have revolutionized the idea of business. The main focus is no longer on revenue, but on the level of adoption. In fact, the main objective is to build an application with a user friendly interface, which relies on local Telco infrastructures in free mode in order to attract as many users as possible. To ensure a high number of subscribers, OTTs generally provide their services in free mode, which only switches to a freemium model later.
In addition, OTTs develop applications in free mode capable of offering services equivalent, or even more flexible, to those that other players offer for a fee. Once a sufficient number of subscribers has been reached, the company transfers ownership to companies that are willing to pay for the ability to increase knowledge about their customers.
A model of this kind could jeopardize the more conservative business model typical of traditional telcos, which have suffered in recent years.
The changing face of the sector and challenges in the telecommunications industry
How have the major telecommunications companies reacted to these market pressures?
In reality, the reaction has not been particularly strong or effective. In general, telcos have tried to manage the cloud environment for business or have only asked OTTs to pay for the use of the network. Other competitors, however, were effective in obtaining a favorable regulation.
This is the case, for example, of European Regulation 2120 of 2015, which definitively outlined the concept of net neutrality, which states that internet access must not be discriminatory. “Every European must have access to the open internet, and all internet traffic will be treated equally.”
This response, combined with a decidedly aggressive strategy on the part of the most technologically advanced and competitors, has opened up a crisis in the sector. Also, the gradual reduction of available market space and the large (and expensive) infrastructure required to keep up, have led to a price war that has exposed the limits of the telco IRR business model.
As always, it is precisely moments of difficulty that are the most capable of bringing positive news. For example, where the regulatory authorities have grasped the size and direction of the transformation, it has been possible to support the birth of the OTT while safeguarding the IRR logic. This has driven a rapid concentration of operators, without particular pressure on prices, which has led to investments for the construction of ultra-wideband fixed and mobile infrastructures.
Some companies have realized that, OTTs can be frenemies—, potential partners to be integrated within their business and from whom they can learn all the necessary know-how. Moreover, some experts argue that the crisis in the teleco sector can be overcome by opening the market to new, more technologically advanced companies, which are able to overcome the limits that traditional players encounter.
The future of telecommunications
This brief reconstruction allows us to better understand where the sector currently stands and the challenges it is facing. It also allows us to reflect on the future.
As one of the most technologically advanced sectors, telco is in some ways a victim of its own digital transformation. For this reason, we must start from digitization in order to regain a leading role in the economy and attract capital and investment. To do this, organizations must work on two fronts.
On the one hand, it is necessary to improve infrastructure performance to increase productivity margins by also integrating it with platforms that take advantage of open API technology. On the other hand, companies must rethink how the business is organized and move towards services that can generate a competitive advantage.
As a result, skills will need to be up to speed to meet these new opportunities. This will require management to ensure that innovation and training are key focus areas within the workforce.
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