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2012 telecoms businessreport_13feb2012_low res

  1. 1. Top 10 risks intelecommunications2012
  2. 2. About this reportAs the challenges and opportunities facing telecoms operators around the worldcontinue to evolve, the sector’s risk universe is changing rapidly. And as companiesformulate and execute their strategies to sustain and grow value in today’s fast-moving environment, they have to ensure that their understanding and managementof risk keeps pace.Today, navigating through the sheer speed and scale of change presents challengesfor all operators. We have produced Top 10 Risks in Telecommunications 2012 to helpthem map out the right path. This is the latest in our ongoing series of studiesdesigned to pinpoint the most critical risk issues, analyze the sector’s evolvingresponses and highlight elements of emerging best practice.As in previous reports, we do not claim that the list of risks we present here iscomprehensive. Also, by its nature, it can only provide a generalized snapshot of therisks that we — and the sector as a whole — see at this time. Given this, we wouldencourage you to read this report with an open mind and inquisitive attitude. Arethese really the risks you face in your own business? If not, how and why are yourorganization’s risks different? And how do those particular risks impact you?The answers inevitably vary from company to company. But in every case, we believethat leaders should take the following steps:• Undertake a thorough risk assessment at least annually, to define your key risks and weigh their impact on business drivers. The risks in this report can provide a useful starting point.• Extend this risk assessment beyond the usual financial and regulatory risks to consider the wider environment in which the organization operates and the full extent of its operations, now and into the future.• Conduct scenario planning for the major risks that you identify, and develop a range of operational responses, possibly as an integrated part of the planning cycle.• Evaluate your organization’s ability to manage its risks — ensuring that the risk management processes are linked to the actual risks that the business faces, especially those that are new and emerging.• Ensure that effective monitoring and controls processes are in place to provide both earlier warning and an improved ability to respond.• Keep an open mind about where new risks may come from.Despite — or, in some cases, because of — the continuing uncertainty and volatility inthe global economy, there are major opportunities for operators. Each company’sability to identify and seize these opportunities depends critically on its ability tounderstand and manage risk. Unless your growth strategy has a solid underpinning ofrisk management, it will never be truly sustainable. This publication aims to help youbuild and reinforce that sound platform.
  3. 3. ContentsIntroduction 02The Ernst & Young risk radar 2012 03Editorial committee 04Sector context 06Executive summary 08The top 10 business risks: 1. Failure to shift the business model from minutes to bytes 10 2. Disengagement from the changing customer mindset 11 3. Lack of confidence in return on investment 1 2 4. Insufficient information to turn demand into value 1 3 5. Lack of regulatory certainty on new market structures 14 6. Failure to capitalize on new types of connectivity 15 7. Poorly formulated M&A and partnership strategy 16 8. Failure to define new business metrics 18 9. Privacy, security and resilience 19 10. Lack of organizational flexibility 20What’s below the radar? 22Contacts 25
  4. 4. Introduction Amid the recent global economic uncertainty, the telecommunications sector has performed relatively well, with operators once again emphasizing their strong defensive qualities and well-developed capex management capabilities. However, in a sector where new over-the-top entrants are competing fiercely for revenues from emerging service areas, the question is: Is now the time to shift from a defensive to offensive posture? For many telecoms executives, the answer today is a resounding “Yes.” As in previous years, we in Ernst & Young’s global telecommunications network seek to help operators maximize value and tap into new sources of growth through our ongoingJonathan Dharmapalan — series of reports identifying the key risks to their businesses. By addressing the top 10Global Telecommunications risks highlighted in this study, we believe that telecoms providers will positionLeader themselves to take their businesses forward more effectively and make the most of the growth opportunities that emerge. This report was produced by collecting and synthesizing the insights of our practitioners and sector professionals, supplemented by research and analysis by the Ernst & Young Global Telecommunications Center. During the research process, we asked our sector professionals to evaluate the most important strategic challenges for telecoms businesses globally and to rate the severity of these risks for the sector. As in previous years, our 2012 study indicates that operators face a wide array of risks, and that the relative positioning and scale of these risks have continued to change. An understanding of how to respond to these shifts will help operators manage risk more effectively, optimize performance and increase operational efficiency. It will also empower them to capitalize on the profound changes under way in the telecoms ecosystem, ranging from rapid advances in technology to new customer behaviors and expectations. The most fundamental of these changes is encapsulated in the risk that tops our list: the migration of sector value from minutes of usage to bytes of traffic  a change that must be mirrored in operators’ business models. Many of the other risks in our top 10 spring directly or indirectly from that seismic shift. To help companies formulate and execute the right responses, we provide an analysis of each of the top 10 risks. We also report on risks currently “below the radar” that our panelists believe may move up the risk tables in future years. I would like to thank all our contributors for their time, insight and cooperation in the preparation of this report. This is a valuable dialogue that we hope to continue for many years to come. Jonathan Dharmapalan Global Telecommunications Leader 2 Top 10 risks in telecommunications 2012
  5. 5. The Ernst & Young risk radar 2012 Telecommunications The Ernst & Young risk radar presents a snapshot of the top 10Top 10 business risks business risks in an industry sector, by dividing risks into four quadrantsfor telecoms operators that correspond to Ernst & Young’s Risk Universe™ model. These quadrants are: • Compliance threats — originating in politics, law, regulation or corporate governance1. Failure to shift the • Operational threats — impacting the processes, systems, people and overall value business model from chain of a business minutes to bytes • Strategic threats — related to customers, competitors and investors2. Disengagement from • Financial threats — stemming from volatility in the markets and in the real economy the changing The radar below plots the top 10 risks for telecoms operators on the risk radar, and lists the risks that are currently just “below the radar.” customer mindset3. Lack of confidence in Top 10 business risks for telecommunications in 2012 return on investment4. Insufficient ial Co m information to turn anc pl Lack of regulatory n ia certainty on new Fi demand into value nc market structures e5. Lack of regulatory Lack of Privacy, confidence in return certainty on new Failure to define new business on investment security and resilience market structures metrics Failure to shift the business model from minutes to bytes6. Failure to capitalize Disengagement on new types of from the changing Insufficient information to turn demand into value customer mindset connectivity Poorly7. Poorly formulated Failure to formulated M&A and strategic capitalize on new M&A and partnership types of connectivity partnerships s strategy n St Lack of io eg r ra organizational at8. Failure to define new ic pe t flexibility O business metrics9. Privacy, security and resilience Below the radar10. Lack of organizational Evolving service cannibalization A more pressing green scenarios agenda flexibility Concentration of equipment Difficulties in managing debt vendors and cash 3 Top 10 risks in telecommunications 2012
  6. 6. Editorial committee Jonathan Holger Prashant Dharmapalan Forst Singhal Global Global Global Telecommunications Telecommunications Telecommunications Sector Leader Markets Leader Markets LeaderJonathan Dharmapalan is Ernst & Young’s With 20 years of experience, Holger Forst has Prashant has extensive experience of overGlobal Telecommunications Leader, leading been the Global Client Service Partner for 15 years in Assurance and Advisory Businessa team of over 2,000 telecoms professionals Deutsche Telekom AG since 2007. In 2011 Services, servicing Indian and multinationalacross the world in their work with the world’s Holger was appointed the joint Ernst & Young telecom clients. In 2011 Prashant wasleading operators. With 25 years of experience, Global Telecommunications Markets Leader. appointed the joint Ernst & Young GlobalJonathan has served some of the largest Telecommunications Markets Leader.companies in the telecommunications sector.He has significant experience in both mobileand terrestrial communications. Olivier Luis David Lemaire Monti McGregor EMEIA Americas Asia Pacific Telecommunications Telecommunications Telecommunications Leader Leader LeaderOlivier has 15 years of experience working in Luis has 19 years experience in the telecoms David has been with Ernst & Young for overthe telecommunication industry. As an Audit industry, and has worked with several large twenty six years and has worked in a number ofand Business Advisory Partner and chartered telecom groups. Luis is the leader of countries including the UK, USA and Australia.accountant, he has been rendering audit, Ernst & Young’s telecommunications He is the coordinating core assurance partnertransaction support and advisory services to practice for the Americas region. on Telstra and the telecommunications andmany international telecom operators across media & entertainment leader for Asia Pacific.Europe, Africa and Middle East. Olivier has beenleading the Global Telecom Revenue Assuranceteam for 6 years and led several revenueassurance global studies. He is also experiencedin group reporting under IFRS. Since September2011 he is the leader of Ernst & Young’stelecommunications practice for the Europe,Middle East, India and Africa (EMEIA). Rohit Bala Adrian Puri Balakrishnan Baschnonga Director, Global Telecommunications Senior Analyst, Global Telecommunications Partner — United States Telecommunications Center CenterRohit is a Director within Ernst & Young’s Bala has over 20 years of consulting and Adrian Baschnonga helps produce andGlobal Telecommunications Center, and industry experience within telecoms and other deliver thought leadership for the Globalcurrently leads the development and industries. Bala has assisted several cable Telecommunications Center. He advises clientsimplementation of the Center’s strategy. He and telecommunication companies with the on strategic issues in the telecommunicationsbrings over 12 years of professional services definition and implementation of strategic sector and is a regular speaker at industryexperience focusing on telecoms finance and initiatives, including channel strategy, sales events.business strategy. effectiveness, marketing effectiveness and analytics, CRM strategy and implementation, product profitability, and operations effectiveness initiatives. 4 Top 10 risks in telecommunications 2012
  7. 7. Vincent de La Dennis Mark Bachelerie Deutmeyer Gregory Telecommunications Global Telecommunications Telecommunications Partner — France IFRS Leader Partner — United KingdomVincent de La Bachelerie has been involved in Dennis has over 24 years experience Mark has over 25 years experience in morethe telecommunications sector for 20 years. providing auditing and advisory services than 40 countries as an advisor to theVincent has extensive experience working to of our largest U.S. telecommunications telecommunications industry, working inas lead partner on large telecom groups. clients. Dennis is the Global IFRS Leader strategy, regulation, cost and pricing analysisHe has also participated in other projects for the Telecom Sector. and market analyses. In his career he hasfor telecommunications operators including undertaken engagements for several largeconsulting and advisory work, merger and telecom groups.acquisition projects and valuations. Manesh Michael G. Jeremy Patel Stoltz Thurbin Telecommunications Telecommunications Telecommunications Partner — India Partner — United States Partner — FranceWith over 19 years of experience working With 35 years of experience serving global Jeremy is a partner in the Paris Assurancewith Indian and multinational companies in clients, Mike has extensive experience practice experienced in telecoms and media.the telecommunications sector, Manesh Patel working as lead partner on large telecom His experience covers the audit of thecurrently leads the telecommunications risk groups. He has also participated in other €30b French fixed line, internet and mobileadvisory services group in India. projects for telecommunications operators, operations, the internal control 404 audit, and including risk reviews, regulatory, the international operations. He has extensive operational assurance and improvement experience of internal audit, fraud, internal and valuations. control and risk management issues within the telecommunications industry. Pieter Verhees Telecommunications Partner — NetherlandsWith over 15 years of experience, PieterVerhees is currently working with leading fixedand mobile telecom operators, in and outsideEurope, delivering and implementing complexprojects, including price squeeze methods andmodels, costing models, cash-flow forecastingcapabilities, performance management andregulation. 5 Top 10 risks in telecommunications 2012
  8. 8. Sector context“Safe haven” positioning threatened byquestions over future growthTelecommunications has weathered the downturn Figure 1. Europe — GDP and telecoms revenue development1and subsequent economic uncertainty and volatility % change y/yrelatively well compared to many other sectors. As a 6.0result, the sector is quite solidly positioned as a 4.0defensive “safe bet” in the eyes of investors (though 2.0the mobile segment is slightly more exposed). 0.0 -2.0Looking ahead to future structural trends in the -4.0sector, players in Europe and other developed -6.0markets are likely to benefit from some easing of the Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2regulations on mobile termination rates, while 08 09 09 09 09 01 10 10 10 11 11landline is set to see the pace of its structural decline European telecoms revenue growth Euro area real GDP growthslow down. More generally, the outlook is positive assmartphone growth opens doors to new However, challenges remain. Experience shows that operators’ revenue performance tends to be linked to employment rates opportunities in the sector. which are trending downward and under threat of anBut this silver lining comes with a cloud: investors accelerating decline. And of the sector’s segments, the still-are taking an increasingly ambivalent view of the growing mobile segment is the most economically sensitive, having seen its voice volumes fall significantly during 2009 insector, asking questions about the levels of capital the wake of the recession.expenditure that will be needed to support futuregrowth. They are also questioning whether operators Improving performance — supported by structuralwill take their fair share of future expansion in trendsservice revenues, or whether the over-the-top Operators can look forward to improving performance, helped byplayers will once again seize the initiative in positive structural trends. For example, rates of landline loss are slowing in the European fixed-line. And operators worldwidemonetizing new offerings. have proved themselves strong on cost control in recent years,Reaping the rewards of a defensive status with strategies such as network sharing helping to ease the pressure on infrastructure upgrades.Through its history, the telecommunications sector has oftendemonstrated its robustness in downturns and periods of market Figure 2. Telecoms companies’ Operating Cash Flow margin 2uncertainty. The recent past has been no exception. The sector is percentage by region, 2011F–2013Friding out the economic storms relatively well. For example, asFigure 1 shows, the fluctuations in telecoms revenue growth in Operating cash flow margin (%)Europe have been far smaller than the volatility in European GDP 25over last three years.This picture is being replicated in other regions across the world, 20with operators’ robust defensive positioning generally regardedas being reinforced by strong cash flow and rising dividend 15yields. In Asia, the high valuation multiples currently beingapplied to mobile players signal continued confidence in the 10outlook for the sector. And in North America, investors remainoptimistic about the ongoing impacts of increasing smartphone 5penetration and investment in 4G networks. 0 Global Americas Asia ex Japan Europe Africa Japan FY 2011 FY 2012 FY 20131Eurostat; Deutsche Bank, “European Telcos: The best way to play,” 5 September 2011(reports were sourced from author website unless otherwise noted).2Macquarie, “Global Telecoms,” 15 September 2011. 6 Top 10 risks in telecommunications 2012
  9. 9. Driven by such cost control measures, operating cash flow At the same time, global smartphone shipments continue tometrics are forecast to improve for global operators. Investors escalate at impressive rates, with wireless data growth set toare positive on North American telcos due to early investment in remain strong across all regions — although minutes of use (MoU)4G and high smartphone penetration, while high valuation are flattening in mature markets such as the US.multiples in Asia reflect confidence in continued revenue growth.This improving picture, highlighted in Figure 2, both reflects and … but clouds are gatheringreinforces the current assessment by investors and analysts that Against this generally improving outlook, there are conflictingthe global telecommunications sector can weather any financial perspectives on how the sector will evolve. As Figure 4 shows,storms that may be ahead. data is projected to rise from 20% of global mobile revenues inA bright growth outlook … 2008 to 36% in 2015, threatening major disruption to revenue models. Investors are also concerned about the massive capexAs these trends play out, the sector is already outpacing recent that will be needed to support this growth, and about whetherassumptions of its growth rate (see Figure 3). Mobile connections over-the-top players might once again beat the operators inare forecast to surpass the overall human population in 2014, as the race to secure new revenue streams, as they did withthe “long tail” of users in emerging markets get connected, and mobile apps.as trends escalate such as multiple SIMs and devices per person,embedded SIMs and machine-to-machine (M2M) connectivity. As a result, investors’ view of the telecoms sector remains fundamentally ambivalent, reflecting the difficulty reconciling itsFigure 3. Global mobile device and subscriber penetration3 structural weaknesses — such as heavy regulation of higher- margin activities — with specific opportunities for rapid growth,Global population and mobile connections (m) such as mobile data. There is also concern over the trade-off8,000,000 between the cost and value of new growth areas, given the uncertain capex commitments as mobile traffic growth and6,000,000 mobile data revenue growth diverge. Against this background, focusing on dividend yields tends to4,000,000 encourage a short-term view of the sector’s performance. Yet this is a sector where the models for long-term value creation2,000,000 need to be addressed — and soon. 4 Figure 4. Global mobile voice and data revenues 0 2008 2009 2010 2011 2012 2013 2014 2015 Revenue (US$m) Population Mobile connections 1,200,000 1,000,000 800,000 Annual smartphone shipments (m) 600,000 600 400,000 500 200,000 0 400 2009 2010 2011 2012 2013 2014 2015 300 Mobile voice revenue Mobile data revenue 200 100 0 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011E FY 2012E 3Ovum, UNFPA, 2008 Population Revision Database, Ernst & Young analysis; Deutsche Bank,“Global Telecommunications,” 25 July 2011.4Ovum Mobile Voice and Data Forecast 2011-2016, January 2012; Cisco Visual Networking Index. 7 Top 10 risks in telecommunications 2012
  10. 10. Executive summaryThe top 10 business risks for telecomsoperatorsThe top 10 Aggregating our interview responses worldwide, here is a summary of each of the top 10 business risks for telecoms operators. 1 Failure to shift the business model from minutes to bytes 1 Failure to shift the business model from minutes to bytes 2 Disengagement from the As value shifts from minutes of usage to volumes of data, operators need to move away changing customer mindset from their legacy strategies focused on customer retention, which have had the effect of commoditizing the value of minutes and bandwidth in customers’ eyes. Instead of3 Lack of confidence in return on concentrating on fighting churn, operators need to target revenues from new services investment that tap into rising demand and master a wider array of charging models to monetize these services. 4 Insufficient information to turn demand into value 2 Disengagement from the changing customer mindset 5 Lack of regulatory certainty on new market structures With global technology brands now top of mind for consumers, and technology cycles quickening, operators need to understand and respond to fast-changing customer 6 Failure to capitalize on new expectations and behaviors if they are to fight off the competitive threat from over-the- types of connectivity top providers. This will require operators to communicate clearly the underlying value of the network and the sources of added value that differentiate their offerings in new 7 Poorly formulated M&A and service areas. Innovation in the service model could also be used to build brand loyalty partnership strategy in the same way technology players have done.8 Failure to define new business metrics 3 Lack of confidence in return on investment 9 Privacy, security and resilience While operators have proved adept at managing capital investment and balancing it 10 Lack of organizational flexibility flexibly with free cash flow and dividends, it is increasingly clear that tight capex control can limit their ability to grow new services quickly. So they need to maintain their commitment to investing in growth opportunities, while tracking technology and consumer developments closely to ensure they target their financial investments at the right areas at the right time. 4 Insufficient information to turn demand into value To drive profitable customer propositions and improve their time-to-market for new services, operators need accurate, timely and comprehensive business intelligence and customer analytics, underpinned by aligned and integrated operational support and billing systems. These elements pave the way for efficient growth by enabling operators to produce better business intelligence for decision-making, helping them understand customer changes before their competitors, and allowing them to reuse network data in collaborative partnerships. Better information can also help operators reduce operational costs and ensure regulatory compliance. 8 Top 10 risks in telecommunications 2012
  11. 11. 5 Lack of regulatory certainty on new 8 Failure to define new business metrics market structuresUncertainty over regulators’ approaches to new market The metrics and key performance indicators (KPIs) thatstructures is undermining operators’ willingness to invest. It is operators use to manage their operations internally andincreasingly crucial for governments and regulators to adopt communicate their performance and prospects externally havepro-investment policies to sustain the sector’s momentum and not kept pace with the shift in business models from minutes tofor operators to form workable stances on a range of issues, bytes. Many internal metrics are still service- and network-including the increasing relationship between fixed and mobile oriented, and do not provide enough granularity to improve thepolicies. At the same time, all these groups must work together customer experience. Also, commonly used external metricsto achieve greater clarity over regulatory approaches. such as average revenue per user (ARPU) fail to give investors a full picture. Operators urgently need to define a new and different set of metrics that puts the customer first and leads to 6 Failure to capitalize on new types of improved financial performance. connectivityNew types of connectivity such as machine-to-machine (M2M) Privacy, security and resilience 9are redefining the concept of connectivity, requiring operators toadopt new strategies. Instead of continuing to think ofconnections in human terms, operators need to develop new Customers place more trust in operators than in social networks,understandings of connectivity and target new growth areas. regarding operators as security guarantors across a range ofThis will mean identifying core competencies for use in services. Yet they still hold operators responsible for threatscomposite value chains and delineating clearly between the need from third parties  even for mobile malware attacks and rogueto build capability and the need to partner or outsource. apps. Operators should work closely with governments to clarify their responsibilities in areas such as anti-terrorism and content for children, and collaborate with suppliers and partners to 7 Poorly formulated M&A and partnership tackle privacy and security issues in new service areas such as strategy cloud security and mobile apps.Though M&A activity has accelerated recently, its nature andrisks have changed. Footprint control increasingly takes 10 Lack of organizational flexibilityprecedence over footprint growth, and political, macroeconomicand regulatory risks are increasing. But acquisitions andpartnerships are essential for success in emerging market With their organizational structures subject to forces such as thesegments such as mobile advertising and cloud computing. shift to data services, the rise of partnering and the risingOperators need to clearly discriminate between when they imperative for speed-to-market, operators have already madeshould acquire and when they should partner. The ability to significant changes to their organizations. But more are needed.sustain partnerships will emerge as a strategic differentiator. Operators now need to align their business units to maximize theEffective management and implementation of M&A and economies of scale and scope in their geographic footprintspartnerships offers significant operational upside to telecom while reconciling the competing forces of geographic sensitivityplayers. and global strength. 9 Top 10 risks in telecommunications 2012
  12. 12. The top 10 business risks Figure 5. Global mobile data revenue and traffic growth5 1 Failure to shift the business model from minutes to bytes Revenue Traffic (PB per (US$m) month)“Losing ownership of the client” was ranked as the telecoms 450,000 6,000sector’s top business risk in 2008 and 2010. Our analysis shows 400,000 5,000that this risk has now been overtaken by the urgent need to 350,000develop and deliver new data-enabled services that will generate 300,000 4,000 250,000fresh revenues from users. And the customer-focused risk of 200,000 3,000“disengagement from the changing customer mindset” has 150,000 2,000slipped to number two, as the ongoing fragmentation of the 100,000 1,000sector value chain makes it increasingly clear that no single 50,000 0 0participant can ever truly “own” the customer. 2010 2011 2012 2013 2014 2015The risk of failing to shift from minutes to bytes reflects the new Mobile data revenue Mobile data trafficchallenges now facing operators around the world, as a result of Adapting to a wider ecosystem …aggressive moves by competitors entering from other sectorsand rapid change in telecoms’ established value chains. Pivotal to In response, operators need to adapt their business models to athese changes is the migration of value from charging for wider ecosystem and make firm decisions about which revenueminutes of usage to carrying rising volumes of data across sources they are going to target within that broadernetworks. environment. As Figure 6 shows, the current split of revenues is roughly 50% in the consumer segment, with the rest dividedFocusing on retention stifles value between business and wholesale.As operators respond to this seismic shift, they need to move Depending on the chosen strategy, this split could evolve byaway from legacy strategies that have focused on retaining 2020 into a “smart” operator with revenues dominated bycustomers’ loyalty rather than monetizing demand. The focus on customers or a “lean” model rebalanced toward wholesalepreventing and minimizing customer churn has had the effect of service provision. In general, telecoms revenue mix forecastscommoditizing the value of minutes and bandwidth in customers’ point to an increasing shift toward wholesale. Operators face theeyes. challenge of identifying new types of wholesale customers in theThe direct impacts of this commoditization are clear in offerings context of a shifting value chain.such as free upgrades for fixed broadband, flat-rate mobile data Figure 6. Operator revenue mixes — 2020 scenarios6services and discounted multi-play packages. These underlinethe fact that user-loyalty considerations are now actually stiflingvalue creation. Current 50% 30% 20%Pursuing new service areas Smart operator 60% 25% 15%Instead of concentrating on fighting churn, we believe that 2020operators should now raise their sights to target revenues fromnew services that tap into rising demand. As Figure 5 shows, Lean operator 20% 30% 50% 2020data traffic is expected to grow exponentially in future years.As demand increases, new consumer service areas are being 0% 20% 40% 60% 80% 100%exploited by players with new business models, such as Consumer Business Wholesale“freemium” music and data hosting/file transfer services, andadvertising-supported apps. Even operator-provided products  … while seizing the enterprise opportunitysuch as SMS  that were previously insulated from new offeringsare under growing pressure from new free services, such as In light of developments such as the rapidly intensifyingmobile instant messaging. competition for consumers’ spending, the revenue growth potential in the enterprise segment remains high in comparison to the consumer market. To exploit this potential, business models for enterprise customers have to embrace new approaches to provisioning — such as cloud computing — alongside collaborative approaches to service development5Ovum Mobile Voice and Data Forecast 2011-2016, January 2012; and delivery.Cisco Visual Networking Index.6Ovum, “Telecoms in 2020: Executive Summary,” December 2009. 10 Top 10 risks in telecommunications 2012
  13. 13. Operators are embracing this message, as demonstrated by a Quickening technology cycles reshape brandraft of announcements in late 2011 of cloud-based unified affinitiescommunications and collaborations services for businesses,often supported by new data center investments. Small and This dominance by the technology players reflects the extent tomedium-sized businesses are expected to act as early adopters which quickening technology cycles across both the consumerfor these cloud-based services, an area where operators are and enterprise segments are impacting consumers’ everydaycontinuing to make good headway. working habits and lifestyles, and reshaping their brand affinities. As Figure 8 indicates, multiple devices per user is increasinglyIn parallel with these initiatives, operators should seek to master the norm. And the time taken for new technologies to reach 50%a wider array of charging models, ranging from flat-rate to penetration is shortening rapidly  down from 15 years for mobileper-event and ad-supported. And cross-sector growth strategies phones to 4—5 years for smartphones and tablets.will require vertical market business models, tailored to theparticular sectors — a need well served by the low costs and high Figure 8. Take-up of consumer electronics devices8scalability and configurability of cloud services. All of thesechanges, in turn, require changes to IT and charging systems. UK device penetration Q1 2011 (%) 2 Disengagement from the changing 100 98 93 85 customer mindset 80 60 55 54As we previously noted, there is now very little prospect of any 60 33individual participant in the value chain fully owning — rather 40 27than sharing — the customer. So, as well as slipping to second 20 4 4 2 2place behind the need to migrate from minutes to bytes, our 0number one risk in 2010 of losing customer ownership has Landline phone Mobile phone Games console HDTV receiver TV set HD-ready TV Smartphone Laptop e-Reader Netbook 3DTV Tabletevolved into the risk of becoming disengaged from thecustomer’s changing mindset.This risk is underlined by the extent to which technology brandsare now top of mind with customers. As Figure 7 shows, today’stop four global brands are all technology players, with the One of the reasons for this acceleration is that operators’ fixedtop-ranked operator brand coming in at number six. and mobile networks are now a platform for access to a wideFigure 7. Top 10 global brands 20117 number of sectors and services, such as television, retail and banking. As this explosion in online/mobile applications gathers Rank Rank Rank Brand Industry group pace, disruptive players are leveraging their rising brand values 2011 2010 2009 to extend their service propositions. At the same time, devices 1 2 5 Google Technology are playing a pivotal role in shaping the mobile customer 2 20 27 Apple Technology experience. 3 5 4 Microsoft Technology 4 4 3 IBM Technology 5 1 1 Walmart Retail 6 7 8 Vodafone Telecoms 7 6 6 GE Diversified 8 10 10 Toyota Automotive 9 11 14 AT&T Telecoms 10 8 7 HSBC Financial services7Brand Finance, “Global 100,” September 2011.8Ofcom, “Communications market report: UK,” 4 August 2011. 11 Top 10 risks in telecommunications 2012
  14. 14. Adapting to the new customer mindset Ambivalent outcomesAs these changes in customers’ mindset — and behavior continue However, tight capex control has ambivalent outcomes — and and seemingly accelerate — operators have an absolute need to increasingly risks sidelining operators from future growth. adapt their service offerings and customer experience to reflect External forces such as regulation and customer demand mean these shifts in order to sustain and build customer engagement. operators remain cautious about investing in infrastructure. These responses should be supported by clear communication These same considerations — together with uncertainty over new with customers on the value of the network and on the effort and market structures — are also contributing to persistent doubts investment required to provide high-quality services. over the revenue potential of new services.Network quality is often taken as a given, but it shouldn’t be. As Figure 9 shows, levels of capital intensity remain largelyService quality is not just about the device or application; it is stable worldwide and are now relatively consistent in all regions.also about the network infrastructure without which these Growth-driven capex in emerging markets is falling back from itselements would never work. If operators worldwide can get this previous highs, and the release of new spectrum is lagging inmessage across to customers, then they will be able to improve some developed markets. Nevertheless, there is a risk that tightperceptions of added value — including price, quality and capex control can undermine service quality, competitivenessconvenience — and to work the proven levers of brand strength in and the growth prospects of new services.telecommunications, including high trust and credibility. Figure 9. Telecoms capital intensity by region 2008–Q2 20119The scalability, flexibility and low costs of cloud computing not Fixed and mobileonly help operators address the number one risk of failing to capex/sales (%)shift the business model from minutes to bytes — they can also 30help operators better engage with the customer mindset. As a 25host of players from the technology and telecoms sectors seek to 20deliver new services — either individually or via partnerships — 15the need to differentiate is paramount. With this imperative in 10mind, operators should clearly define and communicate their 5core added value in areas of new service provision — such as 0their security credentials in network-based enterprise services; 2008 2009 2010 Q1 2011 Q2 2011their ability to deliver new types of bundle packages for North America Europe Asia Pacific MEAconsumers; and their role as a trusted provider of new andemerging services, such as m-payments. The importance of timing 3 Lack of confidence in return on With the number of high-speed mobile connections globally investment continuing to grow rapidly (see Figure 10), getting the timing of new investments right is critical for achieving the targetedIn our 2010 report, the risk of ineffective infrastructure returns. To do this, operators need to understand clearly howinvestment was ranked in fourth place. This year, the risks infrastructure upgrades relate to customer demand, competitoraround investment have risen to third, while also evolving into a actions and government industrial policies. This can belack of confidence about the level of returns. supported through better leveraging and optimization of legacyIn the past two years, operators have been quite successful in networks to complement network/service availability.tackling the challenge of the data deluge on their networks,thanks to a combination of smart investment and growing use ofalternatives such as WiFi and offloading to backhaul. Thesefactors, together with operators’ readiness to flex capex tomaintain free cash flows and dividends, have underlined theirstrong capex control and reinforced their defensive status. Thereis also a trend toward moving capex spend into opex throughoutsourcing, in order to smooth capex spend over time.9Ovum, “Network infrastructure report,” 19 September 2011. 12 Top 10 risks in telecommunications 2012
  15. 15. Figure 10. Global high-speed mobile connections10 Not having all these elements in place threatens operators’ efforts to increase time-to-market and build customer-centricity.Connections split by technology (000) It can also undermine the potential returns on their ongoing4,500,000 investments. This risk relates to the “inappropriate systems and4,000,000 processes” that ranked eighth on our list in 2010. However, the3,500,000 issue now is both more holistic and more pressing.3,000,000 Added urgency2,500,000 The requirement to ensure the right systems and processes are2,000,000 in place is being given added urgency by a widening gap between1,500,000 what operators know they need to do and what they are1,000,000 achieving. As Figure 11 shows, they agree that time-to-market is 500,000 increasingly important. Yet operators’ time-to-market for new 0 services has not improved in the last two years, and the 2009 2010 2011 2012 2013 2014 2015 2016 percentage of operators that can bring products to market quickly has actually fallen since 2008. WCDMA TD-SCDMA (incl. TD-HSPA) As technology and product life cycles shorten, this represents a HSPA LTE CDMA 1XEV-DO growing risk — especially since disruptive market entrants are repurposing customer data dynamically for new services. InThis is a complex task. It requires confronting challenges such as contrast, operators are struggling to repurpose their informationuncertainties in supply and demand amid factors such as assets, due largely to patchworks of legacy systems that holdspectrum releases, soaring usage of high-bandwidth applications fragmented customer and network information, and a lack ofand shifting market structures as network sharing and real-time analytics to build a single view of the customer acrossconsolidation continue to gain ground. Also, many operators multiple devices and territories.have multi-technology strategies and fail to fully understand thecomplementarities and optimization factors between them. Figure 11. Time-to-market — telco perceptions and performance11Operators need to tackle all these challenges while continuing to % service providers that say time-to-market is very important to remaining competitiveinvest in network infrastructure. All too often, their capexplanning is driven by a focus on protecting cash flow or bypressure to build out greater bandwidth capacity even though 2011 70the business case remains ambiguous, thus limiting the futurerevenue and margin potential of new services.These drivers for capex planning should change, for severalreasons. For example, industrial policies in many markets will 2008 59require substantial increases in super-fast broadband coverageover the years to 2020. Also, customers in all segments andmarkets are increasingly concerned about network quality. 50 55 60 65 70 75 4 Insufficient information to turn demand % service providers that can bring a product to market within 6 months into valueAs operators undertake the shift from minutes to bytes and seek 2011 65to justify continued investment in new infrastructure andservices, information becomes increasingly vital to their ability tocreate value. To drive profitable customer propositions,companies need accurate, timely and comprehensive businessintelligence and customer analytics, underpinned by the right 2008 67operational support and billing systems. 50 55 60 65 70 7510Ovum, “Mobile Regional and Country Forecast: 2011–16,” July 2011.11Amdocs, “Amdocs survey: time to market grows in importance,” 14 April 2011(125 senior sector executives). 13 Top 10 risks in telecommunications 2012
  16. 16. Realizing the power and value of information Lack of regulatory certainty on new 5Operators are collecting more information about the customer market structuresthan ever before. Those who overcome the barriers we’ve As new market structures emerge, the regulatory approach tohighlighted and leverage their information assets as successfully these evolving sector ecosystems remains unclear. Consequently,as the over-the-top providers stand to reap significant benefits policy challenges are undermining operators’ willingness to(see Figure 12). Repurposing customer data in new ways can invest. This means that 2010’s third-placed risk of “risingenable operators to improve their market positioning, through regulatory pressure” has now narrowed into this year’s moreadvantages such as better business intelligence — for example, specific risk factor — and that it is increasingly crucial foranticipating market and customer changes before competitors governments and regulators to adopt pro-investment policies to— and reusing network data for collaborative partners and sector sustain the sector’s momentum.verticals. Shifting standpointsOperators that upgrade their capabilities in understanding andapplying customer data also open up opportunities to reduce The challenges and uncertainties around the policy approachesoperational costs, while simultaneously improving the speed of to new market structures include shifting regulatory standpointsdelivery of new data services and making it easier and cheaper on wholesale broadband access pricing, and the trend towardto ensure regulatory compliance. Furthermore, the value of imposing network separation as a pro-competition tool incustomer and network data extends beyond the organization super-fast broadband. Going forward, new spectrum releases willitself and will continue to rise as the sector becomes increasingly shape 4G market structures — and the rules vary from market topartnership- and data-centric. market in areas such as spectrum caps and trading. In new and emerging areas such as mobile money, regulatory jurisdictionsFigure 12. Advantages of repurposing data inside the business and policies continue to lag behind the technology — a challenge compounded by the “broadband as a human right” lobby. Dynamic charging Improved Better distribution On top of these uncertainties, there is continued regulatory capability time-to-market of network load pressure on legacy parts of the business, such as MTRs and roaming. In combination, these issues have pushed regulatory Deeper relationships with frameworks to the top of the list of challenges facing ISPs (see Better targeted marketing Figure 13). And in tough fiscal conditions, operators know that third parties and partner initiatives telecoms can be a rich source of government taxation as well as ecosystems a focus for government investment. Figure 13. Survey: challenges facing ISPs12 Improved monetization of new customer demands Q. What is the key issue facing ISPs over the next five years? Regulatory frameworks 41 Return on investment 24 Launching new services 20 Access to capital 15 0 20 40 60 % respondents12Ernst & Young/ITU Telecom World poll, November 2011(85 online respondents). 14 Top 10 risks in telecommunications 2012
  17. 17. Seeking certainty Failure to capitalize on new forms of 6These factors are creating an urgent need for greater regulatory connectivitycertainty — and, alongside greater clarity and consistency from This new risk, which has come straight into our top 10, springsregulators, achieving this will require operators to engage with a from the fact that new types of connectivity — notably M2M linkswider set of stakeholders. Consolidation in markets worldwide — require new types of strategies. As M2M takes off in variouswill continue to impact pricing and investment, and the need to vertical markets (see Figure 15), the very concept offund next generation access and spectrum releases (see Figure connectivity is rapidly being fundamentally redefined.14 for European examples) will require broad market consensuson the regulatory position. And overarching questions remain From human- to machine-basedabout the impact of the net neutrality agenda across the wholeof the technology, media and telecoms ecosystem. While operators continue to think of connections in primarily human terms, sector growth increasingly relies on newTo engage effectively on these areas of uncertainty, operators understandings of connectivity. There is clear value in theneed to form workable sector stances on a range of issues. “interconnectedness” of devices, through technologies and linksThese include the increasing relationship between fixed and including not just M2M but also NFC and multi-screen content.mobile policies — for example, in the regulatory approaches in The business models for monetizing connectivity are alsoadjacent markets (e.g., financial services) — traffic management proliferating, spreading across the spectrum of B2B, B2C andof data services and the drive to increase broadband coverage in B2B2C.rural areas. The new connectivity-based services now emerging promiseFigure 14. European 800 MHz spectrum auctions13 increased efficiency, higher customer centricity and value- enhancing repurposing of existing infrastructure. But operators’ Date Country MHz Total Price/ Notes moves into emerging market segments such as mobile money price MHz/ are often defensive and piecemeal  they also raise various (€m) pop challenges that include high upfront costs, lower ARPU per SIM Sep 11 Italy 60 2,962 0.82 Spectrum won by two of card in the M2M environment, and exposure to new regulatory three existing network and reputational risks. owners; simultaneous 1800MHz and 2600MHz 14 Figure 15. Global M2M connections in 2020 by vertical auction Jul 11 Spain 60 1,205 0.47 900/1800/2600MHz M2M connections (billions) auctions also took place in 0.07, 3% 0.03, 1% Utilities mid-2011; further 900MHz spectrum to be released in 0.28, 13% Q4 2012E Security Mar 11 Sweden 60 228 0.42 All three network owners won spectrum; 1800MHz Automotive and transport auction took place in Oct Global M2M 11 — two of three network connections: Health care owners won spectrum in 2.1 billion first round Government, retail and May 10 Germany 60 3,600 0.73 Three of four network 0.45, 21% financial services owners won spectrum; 1800/2600MHz spectrum 1.32, 62% awarded at same time to all network owners (total price €445m)13Ernst & Young research.14Analysys Mason, “Imagine an M2M world with 2.1 billion connected things,”January 2011. 15 Top 10 risks in telecommunications 2012
  18. 18. Unlocking incremental revenues Poorly formulated M&A and partnership 7As companies seek to tackle these challenges, new strategies strategycan unlock incremental revenues. To realize these, operators Across the global telecoms sector, the rationale for consolidationneed to work out how best to align themselves to new growth remains strong  and partnership structures are gaining groundareas. This will generally mean deciding on their core by offering new routes to growth. At the same time, the role andcompetencies for use in increasingly composite value chains, and dynamics of M&A are changing, and operators are adapting theirdelineating clearly between the need to build capability and the strategies to reflect these shifts. These developments have seenneed to partner or outsource, in light of their existing networkand customer footprints. this risk rise two places from ninth in 2010.By way of example, Figure 16 shows various operators’ Joining forces in an uncertain worldapproaches to the M2M opportunity. Experience shows that There was actually a pickup in M&A deal activity in 2010–11majoring on specific industries can help to differentiate compared to 2008–09 (see Figure 17). However, plenty of riskspropositions and that the current stage of service maturity remain, including high levels of political risk in the Middle East/varies widely between different vertical markets. So, to avoid North Africa, acute macroeconomic risks in Southern Europeplacing the wrong bets, operators should take great care in and uncertainty over shifting regulatory attitudes towardevaluating emerging use cases. competition. With operators eager to tap into the growthLocal and market-specific factors such as regulation, the vertical potential in emerging Asia, competition and ownership issuesindustry landscape and existing network coverage will play have emerged as hot topics in the region, notably Vietnam anda pivotal role in emerging service areas. Issues around Indonesia.technological complexity must be assessed on a continual basis Figure 17. Quarterly global telecoms M&A 2008–1016if multi-operator and cross-sector partnerships are to succeed inovercoming the current technological fragmentation. US$m # of dealsFigure 16. Selected operator approaches to M2M15 14,000 80Operator M2M organization Service delivery Target 12,000 70 platform segments 10,000 60AT&T Emerging Devices Jasper-powered Control Utilities, fleet 50 Org as dedicated BU. Center — provides management, 8,000 B2B M2M is part of analytics reports, security, health 40 6,000 Advanced Mobility automated provisioning care, consumer 30 Solutions Group electronics 4,000 20Deutsche International M2M M2M service portal Home security, 2,000 10Telekom competence center since 2010 — can resource in Bonn; US M2M be integrated into management, 0 0 outsourced to RACO customer environment smart metering 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 Wireless via API and grid, telematics, logistics, retail Deal value # of dealsVodafone Dedicated M2M Automated SIM Environmental organization launched pre- and post-paid monitoring, in 2010 provisioning; policy remote management; API maintenance integration with and control, customer systems tracking, health care, metering, automotive telematics and fleet management15Ernst & Young research.16Ovum, 14 November 2011. 16 Top 10 risks in telecommunications 2012
  19. 19. The changing risk landscape creates increasing uncertainty over Partnering abilities come to the foredeal valuations and prompts greater board scrutiny andstakeholder caution (see Figure 18). Meanwhile, the changing To capitalize on such opportunities, operators need tonature of M&A deals reflects the fact that footprint control is discriminate clearly between situations that call fornow more important than footprint growth for some players. acquisitions and those more suited to partnering. GoingAlso, shifts in the value chain are heralding new M&A trends, forward, the ability to create and sustain partnerships willsuch as the creation of joint tower management entities. emerge as a strategic differentiator, as their scope and usage widen due to a number of factors. These factorsUnder these circumstances, acquisitions and partnerships in include a continued focus on realizing cost efficienciesemerging market segments remain important. In the cloud through approaches such as network and procurementspace, 2011 saw the launch of a raft of new services supported joint ventures, and a growing reliance on cross-sectorand enabled by a diverse range of acquisitions, partnerships and collaboration for new product development.investments. In combination, these trends make it important thatFigure 18. Deal factors in telecoms17 operators build the ability to work with new types of partner — application developers, power utilities, Q. Which of the following factors have increased/decreased over the last six months? technology companies and more — and continually reassess their relationships with partners outside the Price expectation gaps -7% 39% sector. However, issues over revenue shares within partnerships remain a stumbling block. Valuation uncertainty/complexity -3% 69% Regulatory pressures -4% 46% Board/audit committee scrutiny -4% 61% Competition for assets -7% 45% Stakeholder caution -7% 46% Decreased Increased17Ernst & Young Capital Confidence Barometer survey, November 2011(interviews with 31 senior telecoms executives). 17 Top 10 risks in telecommunications 2012