What is the state and the most relevant changes of the Telco industry? Looking at it closely, we can see an industry ripe with opportunities but also threats. It is in this context that we must begin to grow again; we’ll talk about how in this post. Telecommunications is a strategic sector for most western countries. In fact, there has always been an important link between the development of telecommunications technology and the level of development of a nation. It is not by chance that when we talk about telecommunications, we think about the third industrial revolution, which led to the birth of our society as we know it: fast, connected, digital.
This is all the truer if we consider that some of the most significant changes in the industry started in this sector, where it was one of several that, in some ways, functioned as a sort of “laboratory” for experimentation of innovations that have been applied elsewhere.
The importance of this particular segment is also evidenced by the fact that projects and agreements in this area have been considered sensitive, sometimes even controversial. One example is the current controversy regarding the installation of 5G technology in America and Europe.
The innovation of Telco industry
In recent years, the Chinese telecommunications giant, Huawei, has become a major competitor, in terms of products, cost, and performance. However, one of the most important aspects of the company’s business is undoubtedly the provision of telecommunications infrastructure to various Western countries.
The 5G network is a very high speed integrated network that can be used for mobile communication, connection to drones, sensors, self-driven cars, and to complete the digital transformation of all public infrastructures: from hospitals to city management, to waste disposal and security. The advantages of adopting this network are significant. First of all, the possibility of downloading even very large files at high speed. Secondly, the fact that latency is reduced, i.e. the time between sending a request to a server and receiving a response is very short. The third advantage is the possibility of having many devices connected at the same time without significantly reducing connection times.
To all this is added the fact that the Huawei infrastructure guarantees a much lower cost compared to its competitors. Despite this, many countries, including the United States, England and Germany, have prohibited or questioned the adoption of these infrastructures because of the risk they present in terms of security and data protection. Also because every private Chinese company, including Huawei, must have a representative of the majority party of the Chinese Government within it and this, according to some intelligence services, could put the national security of other countries at risk.
Italy has not followed the other States in this estrangement and, on the contrary, has strengthened the link with China by concluding strategic bilateral agreements, of which the one for 5G is only the last example. In fact, for some time now, 16,000 Italian post offices have been using Huawei technology.
Beyond this specific case and whether or not the implementation of such infrastructure will lead to the realization of these risks, this example serves to demonstrate that the telco industry is complex. Given the many opportunities that this sector offers, in fact, it presents as many contradictions that place it, as will be seen, in an almost contradictory situation.
Despite the opportunities available, it presents as many contradictions. To begin with, it is enough to look at the structure of this market. Although it is a sector that has a good capacity for innovation, several aspects make it very rigid.
For example, it has considerable barriers to entry, since traditional telecommunications networks require very expensive infrastructures to function, which must be installed throughout the area and must be constantly modernized. For this reason, the players operating in the market are few and large, with a considerable spending capacity, which makes them very long-lived or at least more inclined to merge rather than disappear from the market. This has made them impervious to change and this is why they have entered into crisis, not so much with the advent of the internet and mobile telephony, but with the arrival of more agile digital competitors who are able to provide customer-oriented services without being bound solely on revenues.
So, although this is an area that would lend itself to exploit digital transformation, in reality, this has not happened and more traditional companies have only partially managed to seize these opportunities, preferring a pricing policy that has led them to cannibalize each other. The only result of this has been to aggravate an already critical situation in the sector.
A promising sector in crisis?
Another peculiar aspect of the Telco sector is the fact that, despite the potential mentioned above, companies operating in this field have been facing a period of crisis for some time now.
According to a 2018 Assintel report, in recent years, the entire Italian telecommunications sector has experienced a significant drop in revenue—30% to be exact—between 2007 and 2016, mainly due to the reduction in unit prices, which have fallen by 40% over the last 16 years. In addition, the sector has seen a significant contraction in net cash generation (which has fallen by 70% over the last 10 years) due to the increase in investments that failed to stem the reduction in revenues mentioned above. This has focused attention on the economic/financial sustainability of such a strategic development area for Italy.
There have also been repercussions on workers in the sector. For example, this year Vodafone presented Italian unions with a plan that will involve cutting the workforce by around 1130 units in the context of an organizational review and a radical simplification of the operating model to continue to invest, guarantee future sustainability, and return to growth.”
What emerges from the plan delivered to the unions somehow confirms the reconstruction provided above. The report pointed out that all Telcos have seen a reduction in turnover and margins due to the combination of two factors: the structural transformation of the market (the arrival of OTTs that provide attractive services by exploiting the existing infrastructure) and the significant drop in prices linked to extraordinary competitive pressures.
In short, downward prices and aggressive competition have led to a sharp contraction of the entire telecommunications sector.
From crisis to opportunity?
But is this crisis really as irreversible as it seems or is there a way out? The answer is yes; as is often the case, the periods of greatest difficulty are often those that offer the best opportunities for growth.
First of all, in the last few years there have been some positive signs, which suggest a timid improvement in the situation, provided that we are able to seize them, of course. This is what emerges, for example, from a study from Valebo that examined the exchange value of shares in the telecommunications sector, showing that technology, media, and telecommunications are the three sectors that make publicly traded companies in Italy grow. It was found that the shares of companies in the technology, media, and telecom (TMT) sector traded on European markets have recorded a widespread increase, with valuations capable of exceeding the threshold of 20 times the gross operating margin.
This means that there is a certain receptivity on the part of investors, which must be supported and transformed in order to jump start the entire sector. There are also business segments that are proving particularly vital and showing signs of positive recovery. This is the case, for example, of the fixed network market, which has seen more positive signs regarding broadband subscriptions, reaching an average of 16.8 million (+4.9%) in 2018 thanks to a mix of services and higher performing connections. This is confirmed by the fact that last year, ultra-broadband connections (i.e. those with a download speed greater than 30Mbps) increased from 23% to 37.9% (+14.9pp) of total broadband connections, thus making a significant contribution to the entire fixed network market, which grew by 1% overall in 2018, despite the contraction in voice services.
Another component driving the sector’s recovery is the consolidation of the positive trend in the IT segment, which from 2016 onwards has continued to grow both in terms of investments and revenues, thus confirming previous projections. The 2020 Assintel Report indicates that IT spending in Italy exceeded €31 billion, achieving growth of about 2% compared to the previous year. The same report underlines that this positive moment is destined to continue, thus confirming the role of digital solutions and infrastructures as a driving force. In 2020, the estimated expenditure will grow further, reaching €31.5 billion, which, in perspective, should become €32.4 billion of investments in 2022, thus closing the 2018-2022 period with an average 1.6% growth.
Another positive aspect to underline is the investment in infrastructure. Although the consolidated revenues of the telecommunications and services sector continue to decline, investments by sector operators are constantly increasing, having reached €7 billion in 2018, which is the highest value recorded in the last 10 years.
If this has caused a certain reduction in net cash generation, it should also be noted that thanks to these investments, the infrastructure gap in Italy compared to other European countries has been reduced. The European Commission has confirmed that, in Italy in 2018, the coverage of broadband greater than 30 Mbps reached 90% of homes and above the average of other European States. This means that investor attention remains high for a sector that is strategic for national growth. In addition, the fact that we have such a widespread and (fairly) efficient infrastructure network puts Italy in a position to compete with most other Western countries.
Moreover, if well exploited, these continuous infrastructural innovations can spur growth in the entire sector. All of this is based on the condition that telecommunications companies are willing to change and modify their business structure in order to become more competitive.
Despite the positive statistics reported above, the Telco crisis cannot be considered completely over. In fact, the sector continues to show dual signals, where every positive signal also faces a challenge.
For example, let’s consider what has been said about the growth of the fixed network. The growth of this segment was counterbalanced by a decrease in the volumes of “human” lines, as well as a reduction in spending on mobile devices, especially smartphones, also due to lowered pricing. However, this should not discourage market players, especially those in Europe. On the contrary, it must push them to be more receptive to new trends, to be surgical in choosing where and how much to invest and to be aggressive in terms of their market strategy. This is because, on closer inspection, European players can count on the highest level of expertise, which allows them to compete on an equal footing with foreign giants.
Returning to the 5G theme, a recent report by international patent and technology law firm Bird&Bird showed that the race for super-fast integrated networks is still open and that Europe can still have its say thanks to the fact that it carries out quality research with excellent results. What is missing, perhaps, is some regulatory foresight on the part of European regulators who must put suppliers in a position to express themselves to the best of their ability.
If the ability of the latter to change and adapt is accompanied by the harmonious and effective intervention of the former, the whole sector can once again become the driving force behind the economy and society.