The telecom industry has held a unique position in the digital economy since its beginning as it provides the infrastructure or platform on which the digital economy thrives. It has created the environment in which digital businesses operate. In a very real sense, the industry delivered the technical plumbing that accelerated innovation and the resulting business disruption that reshaped global markets.
Though communications service providers (CSPs) have been investing heavily in essential infrastructure – between 2010 and 2018, they spent globally well over US$1 trillion on upgrading their networks to 4G – it has been hard for them to monetize these investments. In contrast, the so-called “over the top” or OTT players – using the telecom infrastructure for their services but not directly contributing to the CSPs’ revenues – have been flourishing. Tech companies like Apple, Google, Facebook, Amazon, Tencent and Alibaba have thrived in the digital economy with their online businesses based on new business models, emergent ecosystems, and superior customer experiences.
Worse still, many of the OTT players have their own instant messaging, telephony and video capabilities. They have largely destroyed the healthy CSP revenue streams by effectively driving the cost of messaging and phone/video calls to zero. In the hope to counter the effects of commoditization and to get a piece of the digital economy pie, many CSPs have been focusing on developing new services and revenue streams beyond the sale of fixed and mobile connectivity,
But their revenue growth from non-traditional services has been slow so far. Research reveals that in the 5-year period 2015-2019, the combined annual revenue of the top 20 CSPs only increased some 5% (less than half of the global GDP growth over that same period), while their total market value grew with an unimpressive 15%. In contrast, the top 20 OTT and internet category of companies’ annual revenue grew 135%, and their total market cap increased by 145%.
Looking back now at one year of COVID-19, history seems to have repeated itself in the sense that the pandemic left CSPs making significant expenses to cope with the huge surge in internet traffic, but again without much success monetize their services and investments. CSPs’ services have been more essential than ever – in particular, lockdowns have driven employees and consumers to spend more time online for business activities and entertainment, but because of flat-rate price structures, CSPs are hardly getting extra revenue from those services.
At the same time, the telecom industry saw a significant revenue drop as most people were forced to stay at home since the beginning of the pandemic, with the result that revenue from segments such as roaming, prepaid, and handset upgrades (retail store closures) have all sunk. The overall decline of business activity and the layoffs by COVID-19 impacted companies and business closures have wiped off a significant amount of revenue.
In the calendar year 2020, the top 20 CSPs (based on their market caps as of January 1, 2020) lost about US$30 billion in revenues when compared to 2019’s figures. At the end of the year, their total market value had not really decreased, but only because the market cap of T-Mobile US made a huge leap from $67,2 billion to $167,4 billion due to its blockbuster merger with Sprint (see Table 2). When excluding T-Mobile from the list, the remaining 19 CSPs lost close to 6% in market value in just a year.
In contrast – again – the total annual revenue and the combined market cap of the top 20 OTT players showed impressive growths of 22% (251 US$ billion) and 62% (3495 US$ billion), respectively. While CSPs were under enormous pressure to continue delivering critical infrastructure and services during the coronavirus outbreak, these webscalers strikingly benefited from the COVID-19 lockdowns. In particular, the e-commerce sites saw a business boom as online shopping surged. Amazon, for instance, delivered a record performance in 2020 with annual revenue up 37.6% to $386 billion, a yearly increase of over $100 billion (see Table1).
Video conferencing sites benefited massively as well, because of widespread stay-at-home orders and limits on in-persons gatherings. Zoom, for instance, became massively popular in 2020, with as a result a stellar 413% increase in market cap and a 326% rise in revenue. And entertainment streaming platforms – such as Netflix – and gaming platforms experienced record volumes. Regarding revenue, Booking Holdings Inc., Uber and Airbnb found themselves – understandably – on the wrong side of history this time. Some CSPs were hit harder than others see (see Table 2). In the APAC region, SingTel, Telstra and CK Hutchison lost between 8 to 10% in revenue. Telefonica saw a revenue fall of 11% and a market cap decrease of 42%, resulting in dropping off the top 20 CSP list. In the US, AT&T was the big loser with a revenue drop of 5.2%, mainly due to the streaming revolution – clearly hurting the legacy DirecTV business –, lower content revenues at WarnerMedia, and the continued partial closure of movie theatres.
Not all CSPs came off badly in the COVID-19 year. As mentioned earlier, T-Mobile profited from the Sprint merger and the related customer growth, resulting in an impressive revenue upturn of 52%. The revenue of Japanese operator Softbank increased by 4.8%, its market cap even with an impressive 58,5%, boosted primarily by the rise in Uber’s holdings, the food delivery group Doordash, and the home selling platform Opendoor. After hitting rock bottom with the flopped IPO of office-sharing firm WeWork, Softbank’s investments in the so-called sharing economy seem to finally pay off.
Saudi Telecom Company (STC) reported a revenue increase of 8.4%, despite the challenges resulting from COVID-19. But the most notable in the top 20 list – disregarding the extraordinary situation at T-Mobile – is Bharti Airtel, with an impressive 18.5% rise in revenue. The insufficient availability of fixed-line infrastructure in the areas the company operates in, and the surging demand for internet access, driven by the work-from-home culture, online education and popularity of streaming services, has led to a significant increase in new mobile subscribers and average revenue per user.
Overall though, 2020 has not been kind to the global telecom industry. CSPs worldwide have dealt effectively with the COVID-19 pandemic by ensuring service continuity through sharp traffic increases. Still, altogether the income growth from these services – such as special solutions for schools, healthcare and small businesses – was by no means large enough to offset the costs of investments and the loss in traditional revenues. In addition, many of them had to announce delays in the rollout of 5G internet, affected by supply chain and logistics disruptions, or because of the need to reallocate part of the planned 5G budgets to more urgent areas.
It will not be easy for CSPs to reverse course in the short term. The pandemic still wears on, and, more importantly, the lockdowns and economic impact have changed the foundation on which CSP business models are built – for good. With a notable shift in customer preferences, a path back to normality is unlikely. The same customers can’t be expected to behave the same. Most of them have gotten used to working and learning from home, watching streaming video, playing remotely, and interacting digitally with suppliers.
It may be too soon to assess long-term impacts on the telecom industry, but the current situation around COVID-19 is clearly inducing a shift in the industry verticals that look into 5G deployment. And that is where the CSPs’ future for significant growth most probably lies.
Industries have experienced not being immune to COVID-19 as it impacts the way they operate and do business. This will push them forwards to the new industrial revolution enabled by 5G, rather sooner than later. Manufacturers, the healthcare sector and other industry verticals are revisiting strategies and adjusting operational models. They realize that supply chain visibility and adaptability, increased automation, and resilience will be needed to survive in uncertain and highly competitive environments.
The difficulties in 2020 have only heightened the importance of digital transformation, intelligent automation and resilient networks. Shocks to demand and supply chains associated with the COVID-19 pandemic are likely to accelerate the adoption of emerging technologies that make this possible. Industries are starting to realize that the faster they move to such an environment, the more they see a transformative effect on their business.
Emerging technologies, such as cloud and edge computing, network slicing, AI, robotics, IoT, additive manufacturing and AR – all brought together with efficient 5G connectivity – will be the enablers of innovative use cases that are highly desirable – if not essential – during uncertain times and in highly competitive environments. These use cases include robotic health workers, AI health management, easy reconfiguration of production lines in smart factories, and HD video transmission and AR solutions for remote maintenance and control, to name a few. Many industry verticals have already started this journey and are investing in new emerging technologies to achieve cost savings, create high adaptability and responsiveness, and above all, generate new revenue.
Last year’s COVID-19 related difficulties have only heightened the importance of this journey. It is the only way forward to alleviate and overcome the pressures in the uncertain times ahead. To that effect, CSPs will continue to play a critical role. The question that remains is whether this time they can really do things differently from the past and make the fundamental changes that are needed to optimally benefit – in a financial way – from the 5G revolution.
Written by Rob van den Dam, Van den Dam Consulting