Updated on 11/01/2023
What is the telecommunications industry?
The telco sector is one of the most sensitive areas for digital transformation. Despite this, digitalization seems to have made this market more difficult than others. How is that possible? The answer is not so simple, yet it is precisely among the causes of this crisis that we can find the right starting points from which to start.
The telecommunications sector, abbreviated as TLC, is certainly one of the market sectors most affected by the digital transformation, in which this transformation has shown its most effects. Most of the digital innovations and solutions applied to other sectors have, in fact, been first “tested” right within the TLC sector. This is so true, to the point that the contours of this area have gradually widened, so that this sector “merged” with those adjacent.
In order to clarify the situation and characteristics of this sector, we need to start with a question: when we talk about the telco sector, what is it?
The term telecommunications means: “the set of techniques and procedures for the remote communication of sounds (voice, music), images, texts, etc. which today are referred to as signals, quantities variable in time and of an electromagnetic, acoustic or other nature, now almost always represented in numerical (or, more widely, digital) form”.
Basically, then, telecommunications is a long-distance transmission of messages between two or more subjects through electronic devices that exploit a physical channel of communication. In general, telecommunications technologies can be divided into two groups: information and information and communication technologies, and ICT by acronym.
The first expression refers to the use of computers and other telecommunications equipment to store, retrieve, transmit and manipulate data in the context of a commercial or economic activity in general. The second expression, on the other hand, refers to the set of methods and techniques aimed at the transmission, reception and processing of data and information.
Precisely the development of these technologies is the basis of the so-called third industrial revolution, which led to the birth of the information society, which also took place thanks to the spread of mass media such as telephone, radio and television. It is no coincidence, in fact, that many 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 the telco sector is also linked to the fact that, as has already been said, with the passage of time, the technologies and solutions covered in this sector are constantly increasing.
For example, the distinction between pure telecommunication and computer programming or engineering is becoming increasingly blurred, partly because the applications developed for the one exploit the channels and infrastructures of the other or, conversely, the operation of certain digital architectures affects the development of certain physical channels.
It can even be assumed that in the future the productive context of telecommunications will not be clearly delineated but will appear, on the contrary, increasingly fluid and without boundaries, including television, energy resources, security and surveillance services, the entire sector of sensors, monitoring and information on traffic, geolocation, management and organization of so-called smart cities. This is also thanks to the fact that in our country – and not only – there is a tendency to move from a model in which the individual synergies occur vertically, in the context of the individual distribution chains, a model that provides for the horizontal sharing of infrastructure, “bringing together” in this way telecommunications, energy, heating or cogeneration, gas, water and much more. In other words, the sector will exit its “narrow field of interest” by creating relevant production combinations that should not only improve the economic growth of the country, but provide very interesting investment prospects.
In any case, companies that currently move in the market will be required to “change skin” and learn to adapt to new demands and market conditions. Part of this is already happening, albeit very gradually. With the passage of time, in fact, we are witnessing a remarkable turn by telco companies, which are changing their approach to business, having to decide whether to turn into pure infrastructure companies or, in any case, into single-service companies, or remain simple service providers.
All this, in the face of a new type of demand from consumers that, at this time, rewards definitely more hybrid and integrated business models. Perhaps this is one of the most obvious changes brought about by the digitalisation 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.