Economist: Mobile Operators Feel the Pinch of Market, Tech, and Regulatory Changes

For mobile operators and service providers, 7 billion global subscribers pose an opportunity and challenge.

As of June 2017, there were 7 billion mobile subscribers, representing two-thirds of the world’s population, Economist said in the Telecoms section of its Industries in 2018 report, citing GSMA data.

Let that sink in for a minute. 7 billion. And that’s just people. Let alone Internet of Things (IoT) devices.

You know what comes next… this is both an opportunity and challenge for telecom operators and service providers.

“Resulting financial strains … may prompt a rethink of strategy and investment priorities,” Economist said in its report.

Half Full or Half Empty?

In response to subscriber and data usage growth, Economist expects that during 2018 operators will focus on expanding their 4G coverage in developing markets (like India and Sub-Saharan Africa), and improving reliability in more developed regions.

Overall, telecom will continue to be a buyer’s market, with consumers generally enjoying “a range of cheap data-rich packages.” Operators, however, are feeling the pinch of tight margins, as the “insatiable appetite for mobile connectivity” forces them to make large capital expenditures even as competition forces prices down, resulting in lower average revenue per user (ARPU). Economist predicts that over the next year mobile operator ARPU will fall by 2.3%.

It doesn’t help that the boundary between telecom and IT is blurring, and telecoms are “vulnerable to takeovers from internet players such as Facebook and Google.” Market competition forces really are different now, and will continue to change.

“The days when operators could rely on revenue from a reliable voice and SMS service are long gone,” Economist said in its report. “Competition from over-the-top (OTT) providers such as WhatsApp, Skype and Netflix has backed the telecoms sector into a corner. Now it faces a new challenge from app developers, whose business interests are expanding rapidly.”

Overall, Economist said market pressures mean telecom companies will struggle with revenue challenges, even as subscriber numbers continue to grow.

During 2018, Economist expects “total telecoms revenue in the 60 biggest markets to fall by 2% … This will largely reflect a 3% rise in telecoms investment as operators spend money on connectivity, which they hope will pay off in the longer term.”

Adapting to Change

How can and should telecom operators adapt? Economist suggests three strategies:

  1. Offer new, differentiated OTT services
  2. Enable a wider range of mobile applications
  3. Build greater flexibility into backhaul infrastructure using software-defined networking (SDN) and network functions virtualization (NFV)

On the bright side, continued IoT growth will create new revenue streams for some telecom companies.

Regulating Change

When Economist’s report went to press, the U.S. Federal Communications Commission hadn’t yet repealed Net Neutrality, but topic did get a mention.“Were net neutrality to be overturned, it could allow companies such as Verizon and AT&T to reassert their dominance in a market that is already narrowing,” Economist noted.

Meanwhile in Europe, “the elimination of EU roaming charges will bite further into the margins of telecoms companies in 2018.” And, contrasting strongly with the U.S., it looks unlikely that the EU’s competition commissioner, Margrethe Vestager, will ease up on merger and acquisition scrutiny, nor will the European Parliament pursue deregulation, anytime soon, Economist said.

In October, the parliament acknowledged that operators need encouragement to invest in 5G, but “limited the regulatory benefits enjoyed by operators that team up to deliver next-generation connectivity,” and voted that regulators should be “given greater powers to tackle ‘joint dominance’ and oligopolistic behaviour.”

Developing markets are yet another landscape for regulatory forces. Rapid market growth creates intense competition, and sometimes that forces regulators to intervene, Economist noted.

Two examples cited in the report:

  • In Mexico, America Movil’s takeover of Telmex won it two-thirds of the mobile market
  • In India, Reliance Jio has forced competitor’s hands with free and low-cost packages

Other forces at work affecting the telecom market, mentioned in the Economist report, include continuing development of artificial intelligence (AI) technology, struggles around cyber-security, and the availability (or lack thereof) of investment capital for new and upgraded telecom networks.