The telecommunications industry faced mixed results in 2010, with traditional services becoming commoditized in developed markets while emerging markets saw continued growth. In 2011, operators will face increased competition from outside the industry, such as technology companies entering with smartphones and apps. Operators must shift to providing innovative, value-added services to retain customers. Consolidation through mergers and acquisitions will continue as operators seek growth opportunities and efficiencies to fund transforming their business models and cultures to compete successfully.

1. 2011 Telecommunications Industry Perspective
As 2010 draws to a close, we wanted to offer a summation of how
the telecommunications industry fared this year and to share our thoughts on
what we foresee for the industry in 2011.
It has been a mixed year for most telecom operators. Traditional communications
services became increasingly commoditized and core service revenues continued
to stagnate. But incumbent operators in developed markets made some real
efforts to shift their focus toward value-added services, strengthening their
position in the services and applications space to offset growing competition
from new entrants in the market, such as Google and Facebook. Meanwhile,
operators in many emerging markets—including China, India, Indonesia,
Nigeria, Egypt, Brazil, Chile, and Argentina—continued to benefit from
sustained double-digit subscriber and service revenue growth. And operators all
over the world saw new opportunities as the “digital generation” continues to
set expectations for ease of access and ubiquity of services; this year brought
significantly increased demand for smartphones that offer a better user
experience in the form of enhanced communications, richer content, and more
powerful social networking anytime, anywhere. However, this development also
presents challenges as it gives players from outside the industry greater access to
the telecom ecosystem.
Operators in all markets continued their push for lean operations, rethinking
their cost structure, in part by selling off passive assets such as mobile towers.
However, mergers and acquisitions activity was not as strong as we expected it
to be, in part because of the lingering recession in much of the developed world.
Many of the deals that did take place were triggered by the desire to add new
capabilities, rather than to achieve scale for its own sake.
In the coming year, we expect to see several of these trends strengthen. The
industry will continue to take advantage of the ongoing digitization not just of its
own and adjacent industries, such as technology and media, but of other
industries looking to benefit, such as health and finance. As we noted in a recent
article called “The Future of Telecom Operators,” organizations are coming to
realize that advances in information and communication technology can help
them better reach their customers and constituents, better understand their
needs, and devise products and services accordingly. The move to fully digital
business models and processes will affect, in one way or another, all five of the
primary trends we see for 2011.

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Increased competition. Operators are beginning to understand that they are
losing the hearts and minds of their customers, because they haven’t been as
quick to offer innovative, value-added services as the competition has. Players
such as Apple and Google have already made real inroads into the telecom
ecosystem, and 2011 will see mounting competition from even further outside
the telecom industry. Expect big-box retailers like Walmart and Best Buy to
become MVNOs, and PC makers such as HP/Palm, Dell, and Acer to up the ante
in smartphones.
Unless operators can figure out a way to fend them off, or find a mutually
beneficial way to cooperate, these players will likely continue to take market
share in devices, while creating new markets in services and pushing into the
digitization of other industries in the coming year. The cracks in the telecom
ecosystem we are already seeing will open wider in 2011, leaving operators with
a stark choice: either accept and perfect their role as smart, scale-efficient pipes,
or reenergize their innovation engines to compete successfully with aggressive
new players. The fuel for these engines must be the close relationships operators
continue to enjoy with their customer base. We hope to see even greater efforts
on the part of operators to leverage their customer knowledge so that they can
offer more carefully tailored services to every segment they serve.
Added value. Operators are also facing real threats from inside the industry, as
structural changes shift value in their ecosystem. Thanks to the ongoing
evolution of both networks and devices, the user experience is improving
quickly. High-speed broadband networks—fixed, mobile, Wi-Fi, 3G, and 4G—
are becoming available everywhere. The popularity of smartphones and other
devices such as tablet computers is exploding in both developed and emerging
markets. And mobile apps are radically changing how customers use their
telecom services.
Unless operators can capitalize on these trends, 2011 will see an increasing shift
toward “over-the-top” technologies that travel over operators’ networks but
provide them no additional revenues. Google, Skype, Yahoo, and even Facebook
will thus be able to take an increasing share of both the industry’s core revenues
and new services revenues. As a result, we may see operators begin to lose
control over customers in 2011, as more and more over-the-top services appear.
Yet operators have many assets and capabilities at their disposal to counter these
incursions into their territory. Their ability to determine their customers’
presence and location, and to securely authenticate who they are, will become
more and more important, but they must devise ways to commercialize these
assets. By creating an innovative ecosystem in partnership with stakeholders in
adjacent industries—including financial services, health, energy, and the public
sector—operators can develop applications such as m-payments and e-health

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that cement their role as critical players in these growth areas. Forward-looking
operators are already doing so; the recent announcement of plans by Verizon
Wireless, AT&T, and T-Mobile to jointly build a mobile payments platform in
direct competition with the dominant credit card providers is just one example.
The exploding popularity of smartphone apps offers another avenue of value,
but again, operators must figure out how to collaborate with application
developers to create apps, and to offer those apps in ways that will attract and
keep customers.
This is the greatest challenge operators face—how to create new value out of
their many inherent advantages. As the CEO of China Mobile noted recently, his
company must become an “information services” company, not just a
communications facilitator. If operators can figure out this game, it will become a
fruitful source of growth.
The quest for growth. For operators to find a way to play this game, however,
they will need both a willingness to innovate and the financial wherewithal to
bring new services to the market. Look for operators in developed markets to
emphasize organic growth in 2011, developing new services like apps, social
media, and TV for existing retail customers; creating innovative services to
attract new commercial customers in industries such as financial services,
healthcare, and energy; and moving further into adjacent industries like media
and IT services.
The winners in the race for growth will be the operators that can successfully
manage the five ingredients of innovation: a consistent ideation process; the
ability to consistently nurture new ideas at every stage in the innovation life
cycle; a culture of innovation; fresh talent from outside the telecom industry; and
an entrepreneurial leadership style that brings all of these elements together.
Creating the innovations—and the innovation culture—needed to succeed will
be a challenge. It may not be an exaggeration to predict that changing their
cultures will be operators’ toughest challenge.
Broadband will be another crucial area for growth: Mobile telephony is now the
dominant force in the industry in emerging markets, but adequate mobile
broadband infrastructure continues to lag. In 2011, operators will most likely
continue to build additional mobile broadband infrastructure to cope with the
rapidly increasing demand for data across networks, and target additional
segments of their markets to benefit from fresh growth opportunities. But
building more mobile broadband infrastructure via low-frequency LTE will only
increase demand for hybrid access to fixed broadband infrastructure. Operators
in every market will soon find out whether continued investment in access
businesses, whether fiber or next-generation LTE, will deliver real growth and
value.

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Otherwise, we expect operators to remain relatively conservative in their search
for growth. European and especially North American operators will likely stay
close to home, concentrating on organic growth and acquisitions within their
local markets, while operators in emerging markets, which continue to see strong
subscriber growth, will focus on gaining scale through mergers with similar-
sized peers.
M&A recovery. M&A activity will revive in 2011, driven primarily by cross-
border consolidation deals but also by smaller in-country consolidation moves.
Cross-border deals will be dominated by nontraditional players, most notably
emerging market players, including Asian players moving west, and Russian
players venturing out of their home market. Otherwise, there will be few new
licenses or distressed players up for sale.
Funding for deals will become more readily available, thanks to accelerated
deleveraging over the past two years and the resulting better debt ratios. Banks
will become more willing to fund deals, although they will likely increase their
scrutiny of the business cases behind them. Despite the increase in deals,
valuations of targets will be more rational than in the pre-downturn era, due to
greater scrutiny on the part of shareholders and lenders of the rationale behind
deals. And we expect to see a range of new M&A “currency,” including paper
deals, mergers of equals, and cash plus stock, especially in emerging markets.
Ongoing efficiency gains. As operators look to define new operating and
business models and redefine their positions in the telecom value chain, they will
continue to focus on operational efficiency in 2011, in order to help pay for the
coming restructuring. This will mean finding new ways to cooperate with
suppliers and other new partners, both to shift the financial burden of building
next-generation fiber infrastructure from a capital to an operating expense, and
to devise collaborative new business models to enable them to compete
successfully as a team. Hence we expect to see more players structurally separate
their network business from their services business.
All of these imperatives will lead operators to pursue not just cost reduction but
cost “reshaping,” an effort that is likely to include new operating models, lean
management, resource sharing, and outsourcing.
* * *
Further digitization, increased competition, new infrastructure requirements—all
of these trends will be coming to a head in 2011. In light of this quickly evolving
environment, many telecom operators are already making the tough decisions
necessary to secure a share of future growth, expand into new areas, protect
value, and transform their organizations, both culturally and operationally, to
become more innovative and efficient. This will be the year for every operator to

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build the new capabilities required to remain relevant in the more open and
competitive telecom environment of the future.
It is our sincere hope that this letter will generate some serious thinking about
the state of the telecom industry and your company’s role in it. We welcome the
opportunity to discuss these issues with you in greater detail.
Karim Sabbagh
Partner
karim.sabbagh@booz.com
Roman Friedrich
Partner
roman.friedrich@booz.com
George Appling
Partner
george.appling@booz.com
Joseph Sims
Partner
joseph.sims@booz.com