The Future of Telecom

Operators in Europe
As the telecommunications industry faces a
mixed financial outlook and rapid change, telecom
operators have reached a strategic crossroads.

The Future of Telecom Operators in Europe 1

The boom years are coming to an end. Telecommunications industry leaders are faced with
shrinking revenues and profitability, as well as the effects of regulatory pricing intervention and
consolidation. In our recent survey of more than 60 C-level executives from Europe’s leading
telecom companies, more than two-thirds say their future success—and even survival—depends
on fundamental changes to business and operating models.

Just how the market will play out, however, is still up in the air. Telephones are no longer just
for making calls, as the market now encompasses a vast palette of data-related services. Will this
mean telcos become supporting players as mere network providers, while so-called over-
the-top (OTT) players such as Google, Apple, and Facebook hold sway over network-related
services and digital? Or can operators compete as primary providers of add-on services such
as messaging, video calls, and music downloads? Will they successfully make the leap to
packaging digital services for their customers?

What is clear to us in our analysis of the industry’s future, which combines our industry
research with interviews of 61 C-level executives, covering 46 of Europe’s leading operators in
25 countries, is that Europe’s telcos cannot afford to remain passive observers as the industry
evolves. They must choose a clear strategy, deciding how they will grapple with these changes
now—or others will decide their future for them.

Business Model Changes: What Our Interviewees Say

Mobile data traffic is expected to grow more than 60 percent annually between 2014 and 2018,
and fixed-line traffic will grow more than 20 percent annually. Yet telecom operators are
struggling to turn this into revenues and profits. Across Europe, most expect either meager
earnings or small losses in those areas. Our outlook is even more muted: Both fixed-line and
mobile operations are headed for revenue losses even in the most optimistic scenarios (see
figure 1). As such, cost cutting is a priority for most. Executives say operational and commercial
costs as well as capex will be on the chopping block over the next five years.

Figure 1
Despite traffic growth, revenue levels will remain stagnant

Projected CAGR, 2014–2018

Revenue Earnings
Optimistic
Fixed-line 0.4% 0.1%
–0.5%
–1.3% –0.2%
–0.8%
Pessimistic –1.8% Western Eastern
Western Eastern A.T. Kearney Europe Europe
European European projections
respondents respondents 3.1%
1.9%

Mobile
0.1% –0.5% –0.4%
–0.4% –1.4% Incumbents Pure mobile
–0.5%
–1.3%
Western Eastern A.T. Kearney Survey respondents
European European projections
respondents respondents A.T. Kearney projections

Notes: Earnings is before interest, taxes, depreciation, and amortization. Countries included in the analysis are EU27 plus Norway and Switzerland.
Sources: Analyst reports; A.T. Kearney analysis

The Future of Telecom Operators in Europe 1

Survey participants said they are considering a wide range of changes to their business model.

Old business models are already on the way out. Changes in customer preferences are driving
out old business models in favor of those introduced by OTT players. These include iTunes-like
pricing and hybrid pre- and post-paid models.

In particular, a shift from pre- to postpaid models is on the horizon. While most participants
expect the postpaid model to continue—and in some parts of Europe even grow—prepaid is
seen as shrinking. More executives believe a “hybrid” model, one that makes use of credit cards
and upfront billing or flat rates is likely to take hold in the future. Many participants believe
consumers’ demand for data will change how they pay for telco services, with pre- and postpaid
concepts blurring. A possible model is iTunes, where customers can buy products and services
on an ad-hoc basis.

Market share is taking a back seat. For many years, capturing market share was the most
important battle for operators. Our study finds, perhaps surprisingly, that this view is shifting
(see figure 2). By 2020, our respondents say, market share will diminish in importance, an apparent
rethinking of long-held strategies to chase market share above all else. Operators have learned
that trying to boost market share by slashing prices or offering special deals can be very expensive.

In five years’ time, many operators expect new business development to take top priority.
But whether operators actually shift course remains to be seen. As one respondent noted, this
has been the dream for more than a decade now, with very little progress to date.

Figure 2
More operators will seek to develop new business rather than chase market share

How is your company seeking to improve results today and in the future?
% of respondents

25%
Increasing market share –10 pp
15%
Business model

44%
Enhancing ARPU and ARPL +4 pp
48%

10%
Developing new business +28 pp
38%

65%
Cutting operational costs +8 pp
73%
Operating model

46%
Cutting commercial costs +12 pp
58%

52%
Lowering capex +11 pp
63%

Today In five years

Note: ARPU is average revenue per user; ARPL is average revenue per line; pp is percentage points.
Source: A.T. Kearney analysis

The Future of Telecom Operators in Europe 2

Data revenues are only a limited substitute for voice revenues. Data is now the fastest-growing
business for telecom operators, yet little more than half of the executives we interviewed
believe it can fully compensate for losses from voice operations. While some integrated players
believe they can profit from content rights sold via their networks, players in many countries
are skeptical about the ability to earn money from proprietary digital services. The possibility
of partnering with OTT players is a more realistic option, our respondents say.

Many think it will be difficult to increase revenue from digital services, such as telematics and
connected car, advertising and big data, home automation, health and mobile payments. Most
agree that access-near services (voice, texting, video calls) or selling wholesale connectivity
have the greatest potential to generate revenue (see figure 3).

Figure 3
Access-near services, such as mobile-to-mobile, hold the most promise in the
view of operators

Do you expect to generate significant revenues from these sources?

% responding “very likely” or “likely”
Hope from expected IoT uptake—
but mostly wholesale

43%

Potential white
label—no major
revenues

Global Traffic driver—

Some hope—but solutions or shop-in-shop
25% lack of preparation
22% only potential
20% and skills
18% 18%
16% 16% 16%
14% 14%
12%

6%
4%

M2M Cloud M-payment Advertising Telematics and Home Healthcare

and big data connected car automation
Own Third party

Notes: IoT is Internet of Things. M2M is machine to machine.

Source: A.T. Kearney analysis

The industry is moving away from subsidizing handsets through contracts may be on
the wane. Companies may now seek alternatives to subsidizing devices through contracts,
further evidence of the shift away from traditional model. While this model remains important
for maintaining customer relationships and traffic, participants in some countries expect a shift
from subsidy-driven models in favor of credit and leasing, at least in budget segments. The fact
is that the old practice of locking in a two-year contract is becoming obsolete. Some people
plan to keep their phones longer, while others will demand the latest, greatest device as soon
as it comes out. Consumers are demanding flexibility and will find the operators who offer it.

The Future of Telecom Operators in Europe 3

On the other hand, some markets that until now had no major subsidies, such as Russia and
Ukraine, might consider testing moderate subsidies in target segments such as low-value
smartphones. This is a further indication that European markets are moving closer together
in characteristics and habits.

Operating Model Changes: What Our Interviewees Say

Network quality remains the preeminent goal for operators, but marketing, product
management, and sales are changing. Expectations for brand, sales, and customer service
could evolve based on whether operators sell network access or expand into new services.

The following is a look at how operators believe their key attributes will evolve in the coming
years (see figure 4).

Figure 4
Network quality remains top of mind for telecom executives

How important is this area to your success today and in five years?
% responding “very high” or “high”
90%
Network quality +2 pp
92%

43%
Sales setup +4 pp
47%

18%
Customer services +29 pp
47%

53%
Marketing and product development –16 pp
37%

55%
Branding +19 pp
74%

Today In five years

Note: pp = percentage points.

Source: A.T. Kearney analysis

Networks. Operators are clearly examining how to rein in operating expenses, even if they
believe network quality is more important than ever. Most executives believe the switch to
all- IP (Internet protocol) networks will enable further cost reductions.

Operators are also considering models that involve sharing and outsourcing. There is a good
possibility that going forward, more operating models in Europe will involve shared network
monitoring centers. In the past, many operators shunned these models, as network was seen
as a core competency.

Our respondents do not expect to sell assets and subsequently rent or lease them back—a
trend that has been seen in markets such as India, because they say it makes no commercial
sense. Maintaining healthy capital spending levels is seen as more crucial than ever in this
data-driven world.

The Future of Telecom Operators in Europe 4

Sales. Overall, our respondents see sales and service as key differentiators in a tough market, as
these create the basis for customer loyalty. Half of respondents expect drastic changes in retail
practices, vastly reducing storefront operations as they pursue all available sales channels in an
omnichannel setup. The remaining stores will either showcase the variety of services or become
service centers. The indirect channel looks set to be the big loser in this development, although
device makers’ stores will also increasingly pose viable threats.

UK-based giffgaff, the mobile virtual network operator (MVNO) owned by O2, has been a test bed
for new online sales techniques. Giffgaff has no stores, with purchases only possible on its
website and Facebook. It spends very little on marketing, relying instead on word-of-mouth and
community-driven promotion. Sales rely on peer-to-peer methods, including rewards points for
recommending giffgaff to friends, and even peer-to-peer financing for phone purchases.

Service. Survey respondents say they are moving from the traditional cost-per-call focus
toward more first-call-resolution, which most assume to have a big impact on cost to serve.
Additionally, fewer see outsourcing as the only means to reduce service cost. Some leaders
expect a shift toward more complex service interactions such as video, online chats, and
in-store appointments, with more standardized transactions shifting online either via fixed-
line access or, preferably, via smartphone apps. Thinking even further ahead, OTT players’
current customer operational setups may be the future model for telcos as well: Legacy call
centers and shop infrastructures will no longer exist, and traditional customer service will
be replaced by fully digitized and flawless processes.

Marketing. Many interviewees expect a stable focus on current product development,

pricing, and branding-related tasks. Only a few see a shift to developing their own digital
services. There is more support for radical simplification, which would reduce marketing staff.
Simplification and process digitization is an important theme among respondents, and is also
a prerequisite for digitization, both on customer interfaces and internal processes. The major
driver, though, is not cost pressure, but rather customer expectations.

Respondents expect two further changes: a focus on data analytics to better understand
customers and stronger partnering with digital service players, not as part of today’s
marketing departments but rather in new organizational setups such as joint ventures or
loose partnerships.

Telcos’ reputations as trusted and reliable brands in a fast-changing world will become crucial
in the sales and service experience. The proliferation of brands will be curbed, and most expect
one operator to have no more than three or four brands.

Overall, we see telco executives anticipating a number of changes, primarily driven by

customer expectations, not originating from the operators themselves.

So, How Will the Market Develop?

What do all of these industry changes mean for its future? What will role will operators play
along the telecom industry value chain?

Among executives’ varied opinions, there are two schools of thought: Operators will either
be reduced to selling access products, or they will earn revenues from value-added services.

The Future of Telecom Operators in Europe 5

 In parallel to our survey, we analyzed industry data and possible regulatory developments to
determine how the market may shake out. Our research uncovered four primary scenarios
regarding this development—each with different profit implications (see figure 5).

Network companies: wholesale access providers. In the network company scenario,

operators no longer control the customer interface. Some have called this the bit-pipe scenario,
harkening back to the late 1990s when some worried that telco operators could end up as little
more than the pipes through which the Internet moves. In terms of revenues and margins, this
scenario could, in the most pessimistic outlook, dramatically reduce cash flow, or, in an
optimistic view, offer slight cash and margin gains.

Few of the interviewees considered this a possible outcome for the industry, but in our view it is
not off the table. One example is the recent advent of “soft SIM” technology, which lets users
switch easily between providers. This was recently introduced in Apple products such as the new
iPad Air, and UK operator 24 Seven wants to introduce this for its “national roaming” SIM. Soft
SIM is just one of many OTT developments that could do away with operators’ end-customer
interface altogether or at least threaten some of their major customer segments. Already,
younger generations of customers are adopting applications such as WhatsApp and Facebook
for messaging and calls. Amazon’s Kindle is just one product with integrated bandwidth. As the
Samsungs, Microsofts, and Apples of the world move into direct retail (often with omnichannel
models), it is not far-fetched to wonder whether operators could in fact be replaced.

Data utilities: wholesale and retail access providers. If the soft SIM scenario does not play
out, or if other international wholesale products do not gain market share, this scenario might
come true. Retail customers would acquire basic access to products from telecom operators

Figure 5
The “data utility” and “digital navigator” paths have the most potential for operators

25

Network company
Cash flow Cash flow change/
and margin x%/y% absolute cash flow
20 26%/19% improvement margin change
Absolute margin change (%)

Data utility

15 Premium player 4%/8%

Digital navigator
48%/11%
10

–1%/7%
5 20%/4%

0 –15%/0% 4%/–1%

–5

–10

–9%/–13%
–15
Cash flow and
margin decrease
–20
–50 –40 –30 –20 –10 0 10 20 30 40 50 60

Absolute cash flow change (%)

Notes: Size of bubble represents revenue. Indirect costs, direct costs, and capex costs depend on changes in business and operating models, not on
year-over-year efficiency gains.
Source: A.T. Kearney analysis

The Future of Telecom Operators in Europe 6

(mainly data access), while primarily using services and hardware from manufacturers and OTT
players, for example phone calls through Facebook and video calls via Facetime. In the worst-
case scenario, revenues drop and margins increase slightly. However in the best case, this could
be quite profitable for operators, as they lower operating and capital spending while increased
demand drives revenue.

This scenario would require a complete shift in how sales, service, and marketing are handled.
Operators would reduce as much cost as feasible—with a good but not superior network quality,
digitized processes based primarily on the Internet and phone, and physical retail that takes a
much smaller slice of the action. To maintain solid financial returns, operators would have to
rethink their marketing resources as well as other internal processes such as activation, billing,
and customer service to meet this scenario’s financial requirements.

Overall we would see a need to reduce costs by about 30 percent, in addition to efficiency gains
of about 20 percent for the next five years.

The digital navigator scenario would be

quite lucrative for operators.
Premium players: access and access-near services. Here, operators can tap customers who
are both willing and able to pay premium prices for a premium user experience, and who care
about seamless and integrated connectivity. Operators would need to boost capital spending
in their networks – to the tune of about 5 percentage points vs. revenue. Because of this, it is
possible this scenario could be quite detrimental, with big losses due to investment costs in the
worst case, and no growth at all in the best.

In terms of business and operating models, additional important changes would be needed
as well. Some are similar to the requirements for the data utility model, but the motivation is
different—not cost cutting, but rather meeting customer expectations for simple, automated
payment structures and simpler call center interactions. In practice, this means simplified
value-added services focused on automation, radically altered but still premium service and
call center support, and a focus on access-near products (such as cloud services, mobile-to-
mobile offerings, and payment services) where operators can control the service experience
and yet keep the portfolio simple.

Compared to today’s strategies, in which operators try to cover a broad span from low to high
value, this would require a much clearer focus on high-value propositions and on a strong,
consistent brand presence, enabling stronger positioning.

Digital navigators: access providers and leaders in digital. In the final scenario, operators
are able to take advantage of the wide range of current opportunities, mobilizing the trust
they’ve generated as network operators to offer more services and bundles to their customers.
Customers know that operators are here to stay due to their large capital investments, while
OTT players cannot offer this security. The “Snowden effect” has also left many customers in
Europe distrustful of international tech players in terms of data security, making telecom
operators in many markets the trusted brand.

The Future of Telecom Operators in Europe 7

This scenario could be lucrative for operators, potentially increasing revenue 50 percent by
2020 in the best case, and securing substantial gains even with a less optimistic view.

As operators drastically reduce complexity in their legacy voice-driven tariff models (and
subsequently in marketing, sales, and customer services), they can also refocus their attention
on understanding customer behavior and requirements and offering appropriate content and
access services—all bundled easily into existing operator invoices.

In particular, we believe an iTunes-like tariff model, in which once-a-month usage plans are
increasingly replaced by ad-hoc services (such as paying a small fee to watch a football game
online) could offer substantial revenue upside. This would, of course, require a complete
rethinking of sales and service. A drastically reduced distribution network with close online-
offline integration will be key, as well as a complete horizon of gadgets and services around the
superior network experience (see sidebar: The Verizon Example).

The digital navigator scenario would enable operators to take a strong position in the future
industry battleground—against OTT players, OEMs, and indirect retailers fighting for a piece
of a lucrative pie.

Preparing for Change

Everyone sees an industry on the cusp of major change. The next step is to take the strategic
initiative to ensure you are a player in the future industry, and not just an observer.

Our study finds several success stories in addressing this change – be it thanks to network
optimization and outsourcing, increased focus on customer experience and digital services,
and operational improvements. Unaddressed challenges include corporate culture, consoli-
dation, and data monetization.

When it comes to strategic direction, however, we have observed a hedging of bets. Many
operators are spreading their bets among two models—part data utility, part premium player—with
few aiming to be pure digital navigators, even though that offers perhaps the greatest reward.

The Verizon Example

Although many executives
tell us that a more favorable
regulatory environment gives
U.S. operators an advantage in
the battle against OTT players,
we believe the issue is more
complex and that operators can
do much to defend their turf.
speaker phones, Beats by Dre
headsets, Fitbit- and Nike+-
enabled devices—demonstrating
everything a customer can do
with a network connection and
feeding the demand for more
data usage, and better quality
and service.
These are ideas that haven’t
arrived at even the latest concept
stores in Europe. If you want
to be digital navigator, a key
step is making sure your stores
get this message across to
the customer.

Verizon’s new store setup is a Perhaps most importantly, there

good example. The American
carrier brings operator services
right to the customer in an
attractive way. Verizon stores
feature the entire ecosystem
of network-enabled services—
is a much greater integration
of online and offline stores
compared to telecom stores in
Europe. At Verizon, you can order
online, pick up at a store, and be
up and running immediately.

The Future of Telecom Operators in Europe 8

Just 30 percent of respondents say they feel well prepared for the future. Many are focused
on operations and cost cutting and few on how they can enhance their business models.

We believe today’s environment demands a fundamental rethinking of operators’ roles vis-à-vis

OTT players, the impact of regulation, and how customers are changing. Trying to bet on too
many different possibilities can blur the consequent financial implications, while failing to
take steps that will offer the biggest reward. Preemptive moves will help avoid the slide toward
becoming mere network providers. These should involve a continuing to focus on costs,
running digitization initiatives, simplifying products and IT processes, managing capabilities
and executing appropriate HR strategy.

Now is the time for operators to define the strategic scenario they want to follow—and to align
their organizations and resources to ensure this happens.

Authors

Florian Dickgreber, partner, Düsseldorf Claudio Campanini, partner, Milan

florian.dickgreber@atkearney.com claudio. campanini@atkearney.com

Soeren Grabowski, principal, Moscow Thomas Sorensen, principal,

soeren.grabowski@atkearney.com Copenhagen
thomas.sorensen@atkearney.com

The Future of Telecom Operators in Europe 9

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