After the Downturn BOOZ

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  • 8/7/2019 After the Downturn BOOZ



    After the Downturn

    Four Trends That Are Shaping Telecoms Future

    Ghassan HasbaniPeter WeichselDieter TrimmelStuart Cockburn

  • 8/7/2019 After the Downturn BOOZ


    Booz & Company

    Contact Information


    Mohamad [email protected] DubaiKarim [email protected] Dsseldorf Roman [email protected] Peter [email protected]


    Stuart CockburnSenior [email protected] MunichGregor [email protected]

    RiyadhGhassan [email protected] ViennaDieter [email protected]

    Mohamad Mourad also contributed to this Perspect ive.

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    Booz & Company


    As the global downturn begins to show signs of abating,forward-looking players in the telecom industry must begin to

    focus on the strategies that will ensure their success in a morestable and growth-oriented economic environment.

    Based on an extensive series of interviews with industryleaders, Booz & Company has identi ed four trends that will change the face of the industry in the coming years:

    Commoditization versus innovation Lean operations versus strategic investment Consolidation versus fragmentation

    Re-regulation versus deregulation

    Each of these trends requires industry players to understand the interplay between opposing forces and what that dynamicwill mean for them. All industry players, along the entiretelecom value chain, must examine their place in the industry,determine their aspirations for the future, and create the right set of strategic capabilities to get them there.

    Ultimately, companies need to de ne their undeniable right towin in the more challenging marketplace of the future.

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    After more than a year of slowor negative economic growthworldwide, many experts arebeginning to see glimmers of hopeon the economic horizon. Althoughthere is no real consensus thatthe worst is over, it is time forcompanies in every industry to startplanning for what is coming after thedownturn.

    The telecommunications industryis a case in point: On the one hand,the industry is weathering thestorm quite well compared withother industries. For the most part,consumer spending on telecom hasnot dropped signi cantly, especiallybecause so many consumers arein long-term, at-rate plans or seetheir telecom service as essential.On the other hand, the industrysability to gain access to nancingfor investment or acquisition capitalhas been signi cantly reduced by thestate of the nancial sector, which isin the eye of the economic storm.

    Thus, the downturn itselfcombined with the very nature

    of telecommunications, the kindsof services it offers, and the largeamounts of investment capitalrequired to sustain and grow theindustryhas created a set of opposing forces within the sector.Industry players must pay strictattention to the dynamics of thesetensions if they are to sustain theirbusiness after the recession ends:They are likely to transform thestructure of the telecommunicationsindustry, potentially driving bothoperators and equipment makersonto very different paths than theyare taking today.

    Anticipating this challenge,Booz & Company recentlyconducted a study of the globaltelecom industry, combiningprimary research and interviewswith industry leaders with a deepreview of a wide range of industryand economic data. The input wereceived has allowed us to identifyand explore four speci c sets of opposing forces with the potential torede ne the boundaries and practicesof the industry:


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    Booz & Company

    1. Commoditization versusInnovationThe commoditization of infra-structure, and especially basicconnectivity, has been acceleratedby the downturn. As a result, onlyplayers that can achieve signi cant

    scale will be able to compete onthe basis of infrastructure. Playersthat are not in a position to makemajor investments in infrast ruc-ture projects must shift theirfocus, differentiating themselvesfrom their competition withinnovative services, applications,and technologiesespecially thoserequiring relatively less investmentthan do infrastructure projects.One approach may be to partnerwith or acquire new, innovativeplayers to enhance their own capa-bilities in this area.

    2. Lean Operations versus StrategicInvestment Telecom players have turned toshort-term cost optimization as adefense against potential declinesin revenue and the limited avail-ability of nancinga trend thatwill continue as players hedge

    the risk of longer-term shifts inconsumer behavior. At the sametime, however, creating a sustain-able market position will demandthat players make selective smartinvestments in areas that willallow them to remain competitive

    after the dust has settled. The cir-cumstances and priorities will varydepending on the player, but every-one will have to dedicate futureinvestment to building scale and/orscope. Driving cost reduction willbe a critical capability. Telecomplayers will need to cut costssubstantiallynot just enoughto sustain their current business,but enough to generate cash owthat will allow them to invest ingrowth.

    3. Consolidation versusFragmentationThe commoditization taking placewithin the industry is forcinglarge operators to consolidate evenfurther to build scale. Domesticoperators must improve their costpositions by directly consolidatinginfrastructure. At the internationallevel, the same is true for service

    providers, such as IT system inte-grators, as well as most equipmentmakers. Although funding foracquisitions is scarce or availableonly on less than favorable terms,the strongest players still haveaccess to nancingand there are

    plenty of attractive acquisition tar-gets, now that company valuationshave dropped sharply. As alwaysin consolidating markets, oppor-tunities will arise for niche playersto assume attractive alternativepositions, based on a combina-tion of innovative technology andbusiness models. Therefore, everyplayer must gauge its capabili-ties either to take an active partin the consolidation trend or tode ne its own differentiated nichecapabilities.

    4. Re-regulation versus DeregulationThe heyday of accelerated liber-alization and deregulation, whenmarket forces were thought to bethe best way to shape the course ofthe industry, is over. Now, policy-makers and regulators are facing abipolar scenario: On the one hand,they want to continue promoting

    Industry players must pay strict attention to the dynamics of opposing trends and related tensionsif they are to sustain their businessafter the recession ends.

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    competition and deregulation; onthe other, they are realizing thatpure market forces will not bythemselves promote the signi cantinvestments in new infrastructureevery economy needs to build themass-market broadband network

    of the future. Thus, regulators arebeginning to take an active rolein enhancing value in the sector,promoting investments in nationaltelecom infrastructure as a meansof supporting present and futuregrowth, and even committing sub-stantial public funds to the effort.Every player therefore must deter-mine how best to position itself tobene t from changing regulatoryapproaches, while taking an activepart in shaping the outcome of those regulatory changes.

    These four tensions pose clearchallenges to the global telecommarketplace. Industry leaders mustnavigate this new marketplacecarefully, investing in the capabilitiesneeded to prevail in the longterm. Operators may decide toexit speci c segments or regions;suppliers may streamline existingproduct portfolios while determiningwhere to grow. Content andservice providers will bene t fromcommoditized infrastructure evenas they are challenged by thestruggles of the advertising businessand by operators expanding theirvalue chain.

    Several companies have alreadystarted on this challengingjourney. For instance, after 10

    years of rightsizing, one mobileoperator, the third-largest playerin a highly competitive market, isoutperforming the market leaderon a cost basis; now, however, it isstruggling to nance the next roundof 3G and 4G investments and

    seriously considering retiring fromthe infrastructure business entirely.

    Every companys overall portfolioof capabilities must be designed ina coherent and comprehensive wayto support its strategies, which maymean eliminating capabilities thatdo not t revitalized goals as well asbuilding new ones. Industry playersthat fail to recognize and respondto these new realities will nd it dif -

    cult to maintain their competitiveadvantage in the long run.

    Leaders must navigate the post-recession marketplace carefully,investing in the right capabilitiesto prevail in the long term.

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    Booz & Company

    As basic network services becomemore and more commoditized,industry players need to take ahard look at themselves anddetermine whether they have thescale to compete by offering thelowest possible cost. Most will not.Because commoditization leavesso little room for differentiationin network services, the industryis likely to see a clear move toacquire scale even as a new wave of innovation emerges, with industryplayers seeking out ways to se