Rohan Jain, Senior Consultant at Avalon Consulting authored a blog on the global telecom market, valued at approximately $2.9 trillion in 2023, that is projected to grow to around $3.9 trillion over the next five years. Traditionally known for enabling voice and data communication, the telecom industry is now at a crossroads. As growth slows and services become commoditized, telecom companies are looking beyond connectivity to chart new paths for growth.
Global Telecom Market
The telecom market encompasses the revenues generated by companies offering a diverse range of telecommunications services which include local and long-distance voice calls, enabling people to connect over vast distances, and sound and video transmission, which supports everything from everyday communication to media broadcasting. The global telecom market currently stands at ~$2.9 Tn in 2023 and expected to grow to ~$3.9 Tn in the next 5 years.
Why Telcos Must Diversify: Overcoming the Challenges of Staying Solely in Telecom
- Shrinking growth prospects: Telecom operators have faced challenging economics over the past decade, marked by sluggish growth and lower returns with significant value capture by tech companies. The sector’s share of the global economy has declined despite the increasing digitization of the world. A 2022 study by McKinsey reveals that the market cap share of the top 25 global telecom companies compared to the top 8 listed tech companies has drastically declined, dropping from 68% in FY2010 to 18% in FY2020.
- Commoditization of services: Traditional connectivity services are increasingly viewed as commodities by consumers. This commoditization is accelerated by the trend of infrastructure sharing, which diminishes the importance of network quality as a competitive edge.
Strategic Diversification for Telcos
Telecom operators are diversifying due to flat or declining revenues caused by saturated markets, price wars, service commoditization, and consumer resistance to price hikes. As per McKinsey, The revenue of the top 25 telcos globally had increased from ~$1200Bn to ~$1400Bn from 2010 to 2020 growing at a modest rate of ~1.5%. They are looking to leverage their trusted brands, sales reach, customer experience focus, and data analytics expertise to compete in digitally disruptive businesses.
Technology companies have diversified into cloud services, auto, healthcare, and telecom domains, similarly, telecom operators are seeking new revenue streams beyond broadband and wireless. They are exploring financial services, insurance, healthcare, home security, telematics, identity and security operations, and media. For example, Verizon has acquired businesses in cybersecurity.
Most telecoms have seen mixed results in diversification for two reasons. First, they struggle to focus and scale new ventures and to implement innovative business models. Second, some operators have moved into non-telecom areas where they lack a competitive edge, facing entrenched competition and lacking the necessary capabilities.
Most telecom companies excel in engineering and network maintenance but lack the skills needed for fast-moving, consumer-centric businesses.
To bridge capability gaps, telecom operators should ask 2 questions- A) Do we have the capabilities to support our diversification efforts? B) Will our move into the chosen industry disrupt it and give us a competitive edge?
Diversification options vary for each company, with unique advantages and disadvantages for each option.
Identifying Growth Opportunities (Where to Play):
- Core Market Expansion – Targeting underserved regions with high growth opportunities by offering additional services over the core telecom services meeting unmet needs of the clients
- Adjacent Markets & Emerging Markets – Targeting regional and global markets which suits the companies’ offerings and pose significant growth opportunities
- Verticals Expansion – Identifying opportunities in high growth verticals (such as Financial Services, Healthcare, etc.) to mitigate risks associated with traditional verticals and utilize organizational strength to create significant shareholder value
Building Competitive Advantage (How to Win):
- Diversified offerings – Telecom companies must extend offerings to be an end-to-end value chain service providers to dictate high margins that would propel growth for the companies
- Operational Efficiency – Streamlining operational processes by negotiating favourable terms with suppliers and collaborating to share infrastructure costs
- Innovation – Investing in new technologies and services and build the capabilities organically through investment in employee training and development; and exploring inorganic opportunities for a faster time to market and gaining a competitive edge in the market
A successful example is of Orange which diversified early, moving into content, IT integration, and cybersecurity. It launched Orange Money in Africa in 2008 and Orange Bank in France in 2017, with plans to expand to Spain and beyond. Orange aims to disrupt financial services by focusing on online banking and credit services, leveraging its extensive shop network, trusted brand, and customer data for accurate credit scoring.
The traditional telecom industry is at a critical juncture, facing challenges like market saturation, commoditization, and competition from tech giants. To remain relevant and profitable, telcos must diversify beyond traditional connectivity services. Key strategies include investing in cybersecurity, embracing new technologies like 5G and VoIP, focusing on business solutions, and exploring new verticals such as financial services and healthcare. Success requires overcoming challenges in scaling new ventures, embracing consumer-centric business models, and bridging capability gaps.
Rohan Jain
Rohan is a Senior Consultant at Avalon specializing in Strategy and Growth Projects including M&A, Market Entry and Performance Improvement, with 6+ years of experience in Information Technology and Automobile Industries. His previous experience includes Product Development and Market Entry Strategy for one of the largest Indian Automobile Player in the Commercial Vehicles space. He has pursued his MBA in Marketing from Symbiosis, Pune and holds a Bachelor’s degree in Mechanical Engineering from West Bengal University of Technology.
Email: rohan.jain@consultavalon.com
Abhishek Dewangan
Abhishek Dewangan has worked with clients across various industries on projects that include Market Entry Assessment, Project Feasibility, Strategy Mapping, Financial Modelling. Prior to joining Management Consulting, he has pursued his MBA (Finance) from JBIMS, Mumbai and B.Tech. (ECE) from VIT University, Vellore.
Ashish Mittal
Ashish is a strategy consultant specialising in Strategy and Transformation projects including commercial due diligence, Finance Transformation, Market entry strategy and Performance Improvement, with 5+ years of experience across sectors including chemicals, banking, consumer products and automotives. His previous experience includes Sales acceleration strategy for a consumer product manufacturer and finance transformation for a Fortune 500 petrochemical company. He has pursued his MBA from Masters’ Union College, Gurgaon and is a qualified Chartered Accountant (CA). He is a CFA Level 3 candidate.
