Greatest challenges facing today's telecom world

1. What do you believe are the greatest challenges facing
the sector or industry you would like to specialize in at
IE? What role do you hope to be able to play in this
sector or industry in the medium term?
INDEX:
 Insight into the telecommunication industry
 Current situation and trends in the telecommunication industry
 Recent performance and trend of few leading telecommunication
companies
 Performance of a leading telecom company (Ericsson) in various
regions across the globe
 Indicative quotes of CEOs of leading telecommunication companies
from their 2012 financial reports
 Major challenges the telecommunication industry is facing
 My aspiration to play the role of a strategist in the
telecommunication or ICT industry in the medium term
 Conclusion

2. Insight into the telecom Industry
 Huge transformation in the last decade.
 World Mobile penetration reached to 70% in
2009 from 15% in 1999
 Revenue growth in voice market in developing
nations saturating.
 ARPU (Average revenue per user) also is on a
decline
 Revenue generated from telecommunication
industry figures particularly in developed
countries shows a flat or slightly downward trend
makes obvious that the telecom industry is
facing some serious challenges in recent years.

3. Current situation and trends in the telecommunication industry:
Telecom subscription growth in the last
decade
 Huge growth in mobile
subscription
 High growth in mobile
broadband subscription
 Decline in fixed-telephone
(PSTN) subscription
 Slight growth in fixed
broadband subscription
Telecom revenue growth in the last decade
 Flat revenue growth globally
 Decline in revenue generated
in developed markets
 Marginal growth in revenue in
developing markets

4. How some the telecom industry leaders are performing ? What is
the trend ?
 I have selected Ericsson LM
as being the largest OEM
(Original equipment
manufacturer)
 And Bharti-Airtel as being a
leading telecom service
provider (5th
largest) with
businesses in India, Sri-Lanka,
Bangladesh and most parts of
Africa.
 Ericsson LM’s operating
margin has dropped from 20%
in 2006 to 4.6% in 2012 (1st
Chart)
 Bharti-Airtel’s Operating
Margin fell from 17% in 2006
to 6% in 2012 (2nd
Chart)
 Sales for both of them has
significantly increased which
raises the question: Are they
really able to monetize their
content ?
Ericsson LM
132
153.2
179.8
187.8
208.9 206.5 203.3
226.9 227.8
20.2 21.6 19.9 16.3
7.8 2.9 8.1 7.9 4.60
50
100
150
200
250
2004 2005 2006 2007 2008 2009 2010 2011 2012
Year
Sales(SEKBillion)
Sales Operational Margin Linear (Sales)
Bharti Airtel
50.3
81.5
116.6
184.2
270.1
373.5
418.9
595.3
714.5
11.6 14.9 17.4 22.05 23.68 21.04 21.43 10.16 5.96
-100
0
100
200
300
400
500
600
700
800
2004 2005 2006 2007 2008 2009 2010 2011 2012
Year
Sales(INRBillion)
Sales Operating Margin Linear (Sales)

5. Growth Story Region wise - Source: Financial Report, Ericsson LM, 2012
N.America, 16
Mediterranean, -2
Latin America, 0
West/Central Europe, -
8
North Europe/Central
Asia, -25
NE Asia, -5
Middle East, 1
India, -34
Sub-Saharan Afria, 12
SE Asia and Oceania, 9
-40
-30
-20
-10
0
10
20
Region
PercentRevenueIncrease
Ericsson Market units
Let us have a closer look at the global picture. I am taking Ericsson’s example in analyzing the
current situation of telecommunications in the world because Ericsson is the market leader and also
a trend setter in ICT business. Let us have a look how the Revenue Growth figure looks like for
different regions for Ericsson:
As evident from the above Bar chart, apart from North-America and South-East Asia/Oceania, most of the
regions have fared badly with respect to 2011. Particularly Europe, India, China and the other BRICS
nations which have a positive GDP growth shows negative growth in revenue generation.

6. Let us see what some of the CEOs of leading Telecom operators
and vendors have to say in their respective Financial reports :
 “Profitability has been under pressure during the year due to operating losses in ST-Ericsson, the ongoing network
modernization projects in Europe as well as the underlying business mix, with a higher share of coverage projects than
capacity projects. Improving profitability has been a key priority throughout the year and we have taken actions globally to
reduce costs and improve efficiency” – Hans Vestberg (CEO Ericsson), Ericsson Financial Report, 2012
 “We carefully monitor the potential impact from increased economic uncertainties around the world. Short-term, we expect
operators to continue to be cautious with spending, reflecting factors such as macroeconomic and political uncertainty” –
Hans Vestberg (CEO Ericsson), Ericsson Financial Report, 2012
 “Despite strong underlying fundamentals, particularly continued data traffic growth, we expect the mobile broadband
market to be relatively flat, as operators maintain tight control of both capital and operating expenses and macro-
economic conditions remain uncertain. As a result, of this market environment, we expect competition to remain
challenging” - Jesper Ovesen (Chairman, Nokia-Siemens Networks), NSN Financial Report, 2012
 “During 2012, we decreased indirect spending by a fifth. We have reduced our real estate footprint by approximately 408
000 square meters. Internal headcount is down by approximately 20%. Five businesses have been divested, with two
more divestments ongoing” – Arun Suri (CEO Nokia-Siemens Networks), NSN Financial Report, 2012
 Competitors providing low-priced products and services from Asia have gained significant market share worldwide. They
have gained share both in developed markets and in emerging markets, which account for a growing share of the overall
market and which are particularly well-suited for those vendors’ low-cost, basic communications offerings. As a result, we
continue to operate in an environment of intensely competitive pricing – Alcatel-Lucent, Financial Report, 2012
 The overall state of the global economy impacted the market for telecommunications equipment and related services in
2012, as trends from 2011 continued into this year: western countries showed limited GDP growth on concerns of
sovereign debt issues, China focused on leadership change and political unrest continued to impact the Middle East and
Africa - Alcatel-Lucent, Financial Report, 2012
 “Similarly, the sovereign debt crisis in certain euro-area countries and rating downgrades in some of these countries
should be taken into account. Any further deterioration in sovereign debt markets or greater restrictions on credit in the
banking sector could have an adverse impact on Telefonica’s ability to raise financing and/or obtain liquidity. This could
have a negative effect on the Group’s business” - Financial Statements Telefonica, S.A., 2012
 “The year 2011-12 has been an exceptionally challenging year for the telecom industry. Uncertainty and ambiguity arising
out of the regulatory developments coupled with sustained hyper-competition is making this the toughest phase for the
industry since its inception” - Sanjay Kapoor, (CEO India and SE Asia, Bharti Airtel), Financial Report, 2012
 “…. the tough macroeconomic and regulatory environment in much of Europe has made revenue growth in that region
increasingly challenging” - Vittorio Colao (Chief Executive, Vodafone), Financial Report, 2012

7. Some of the major challenges facing the telecom industry are:
 Fixed telephony (PSTN) and voice revenues are on a steep decline as for example in EU-5 markets - France,
Germany, Italy, Spain and UK, outgoing fixed voice traffic amounted to 560 billion minutes of MoU (Minutes of
Usage) in 2008, down from 645 billion MoU in 2003. With this decline in usage of PSTN lines coupled with
decline in revenues from voice traffic, operating margins are taking a hit because OPEX for the infrastructure for
the same is on the rise.
 ARPU (Average revenue per user) which is used by telecom companies to judge their performance and
track the position of their competitors is on a decline due to the increased acquisition of new users from low-
value and rural segments, fierce price competition and commoditization of voice and messaging services. In a
fast growing market like India ARPU has decreased from 253.44 in Q1 2008 to 155.6 in Q4 2009.
 The challenge to monetize contents and solutions – With declining revenues from traditional solutions like
voice and SMS, there is an ever increasing requirement to monetize other data or voice based solutions such as
IPTV, Mobile-Gaming, Mobile-Streaming and HD (High-Definition) voice. Despite the meteoric rise in demand of
data services (Approximately 130% from 2008 to 2013) with the advent of 3G and 4G, the solutions provided by
telecom companies using data services has not been able to compensate the decline in traditional services
instead apps like “Wassup” is eating into the SMS revenue and apps like “Skype” and “Viber” is doing the same to
voice calls.
 Highly competitive market – Aggressive pricing, flat tariffs and lucrative packages coupled with latest 3G/4G
technology have helped in increasing mobile data traffic which has caused substantial increase in revenue for
app developers like Apple, Google and Facebook but the uncapped data plans have not opened new avenues of
revenue for the telecom companies.
 Slow economic growth – The euro-zone debt crisis, slow growth in the BRICS nations and USA and political
turmoil in usually profitable Middle-East have not helped matters for the telecom industry. With reduced consumer
spending, service providers in developed markets have not changed their voice communication service portfolio
and have not invested horizontally or into new verticals resulting in low CAPEX which has particularly hurt the
telecom OEMs who are having difficulty in selling new solutions and products.

8. By analyzing financial reports of various telecom companies, analysis reports of few telecom
consulting firms and from my own experience from working in a leading telecom OEM for the
past 7 years, I would like to play the role of a strategist in a OEM where I can work with other
members of my domain to formulate a strong plan to effectively fight against the odds facing
telecom industry now. Few of the areas where I would like to focus are as follows:
 I would like to continue and stress more on the managed services front which to me is beneficial for both the
service provider and the OEM because with this business model, operators can focus in their core business
leaving the operation and maintenance part of their network to the experts - the OEMs, and this model will be
most effective with revenue sharing among the operator and the OEM because the quality of the network is a
major factor in the operators profitability to which the OEM has a stake and this makes the model a win-win
scenario for both parties – This model is currently a prime focus area in the telecom sector.
 Currently OEMs around the world are having difficulty in selling their products and solutions to their customers
who as discussed before are focusing more on market consolidation and less into new verticals. It is necessary to
work together with operators to understand their business mix and develop solutions which have the potential to
increase revenue for the customer rather than developing discreet products no matter how good they are and
then trying to sell it to the operators.
 With declining revenue from legacy telecom solutions, new avenues of revenue generation needs to be found like
those in transport, retail, banking and health sectors by creating a partnership with the stake holders. Solutions
catering to their specific requirements needs to be developed.
 The huge growth in mobile data has not converted to equivalent growth in revenue for the telecom operators but a
significant growth in revenue for the application developers which means a large chunk of money spent by
consumers are going to the application developers like Facebook, Google, Skype etc rather than the telcos. A set
of solutions like “cloud” needs to be added to the product portfolio of telecom operators so that they can also
benefit from increased data usage of consumers. The below chart helps explain the current situation where the
traffic and revenue growth path are diverged:

9. Conclusion:
 Despite the challenges the telecom industry is facing recently, there
are some positive trends like high mobile data usage, steep
increase in sale of smart phones, roll-out of 4G/LTE technology in
some markets and these can foster growth in the telecom industry in
the coming years.
 According to a report, “The 2012 Telecommunications Industry
Review: An Anthology of Market Facts and Forecasts,”
telecommunications services revenue on a worldwide basis will
grow from $2.1 trillion in 2012 to $2.7 trillion in 2017 at a combined
average growth rate of 5.3% so there is a huge potential in the
telecom industry which needs to be harnessed and channelized in
the correct direction which has already started with new verticals of
services and solutions being included into the offering of the
telecom service providers like “Cloud”, “IMS”, “VoLTE” etcetera.

10. Conclusion:
 Despite the challenges the telecom industry is facing recently, there
are some positive trends like high mobile data usage, steep
increase in sale of smart phones, roll-out of 4G/LTE technology in
some markets and these can foster growth in the telecom industry in
the coming years.
 According to a report, “The 2012 Telecommunications Industry
Review: An Anthology of Market Facts and Forecasts,”
telecommunications services revenue on a worldwide basis will
grow from $2.1 trillion in 2012 to $2.7 trillion in 2017 at a combined
average growth rate of 5.3% so there is a huge potential in the
telecom industry which needs to be harnessed and channelized in
the correct direction which has already started with new verticals of
services and solutions being included into the offering of the
telecom service providers like “Cloud”, “IMS”, “VoLTE” etcetera.