Telecom capex will more than double, outpacing CSPs' forecasted revenue growth, and steadily grind down telcos' free cash flow if they continue to conduct business as usual, according to a new report by Arthur D. Little.
The consulting firm interviewed more than 100 telecom executives around the globe, combining information gleaned from those professionals with data, analytics and its own insight into the industry's investments, buying patterns and other factors to determine the importance and value of digital transformation on telecom.
The answer: €200 billion (or about $227 billion US) in additional cash flow. That's one of the many interesting details you'll find when you explore "Delivering the Digital Dividend." Without digital transformation investment, the consulting firm argues, operators will see cash flow shrink due to higher capex and opex and a poorer competitive outlook. (See Telecoms Can Reap €200B Digital Transformation Benefit: Report.)
Same old, same old
If CSPs continue business as usual, their free cash flow will face more pressure as they must increase capital expenditures and find only slight relief from limited operational payments, the report said. After all, operators will continue to roll out thousands of miles of fiber, both for gigabit-speed broadband and to support 5G. There are spectrum auctions and OTT competitors to consider. Each one demands a team, an executive, a budget.
To review digital transformation's potential impact, the consulting firm first considered providers' financial future if they continue along their current paths -- adoption, albeit typically slow, of digital transformation technologies from the network out, but often with inadequate funding, high-level executive focus or leadership necessary for success and lagging other industries such as finance or retail.
Arthur D. Little's team then reviewed the impact it believed true implementation of digital transformation solutions, mindsets and culture would have on operators, including the overall boost to the bottom line from savings on opex and capex, as well as increased revenue.
Big Expectations for Digital Transformation
As it stands today, the consulting firm expects revenue growth to accelerate between 2017 and 2022 at a compound annual growth rate (CAGR) of 3% worldwide. Operators will see higher revenue from their fixed infrastructures due to the surge in data consumption generated from countless uses, ranging from video games and smart-home applications to next-generation wireless and machine learning. Emerging markets' demand for high-speed wireless data coverage and new use cases for 5G deployments also will positively impact CSPs' revenue, according to Arthur D. Little.
"Indeed, new revenues from 5G are expected to arise from new B2B and B2B2X use cases, as significant incremental revenues are not immediately expected from consumer 5G services," the report said. "Increasing wireless coverage and subscriber penetration will be a boom for telecoms revenues in regions with significant room for growth, such as Latin America and the Middle East and Africa (MEA). In those regions, we forecast total revenue CAGRs of 5.2% and 4.9%, respectively, from 2017 to 2022."
Those service providers that embrace and fully deploy digital transformation are more likely to survive, the team wrote. And they should thrive, the report said. Given the complexities of many providers today, the multiple lines of business in which they are involved (content, wireless, fixed, finance and banking, healthcare and security, for example), digitally transforming their business is imperative; CSPs must use technologies to shave opex and capex costs, increase revenue and profits, and figure out complementary services or new lines of business because of cultural changes that empower and encourage departments to work together.
"The result of the digitally enabled revenue acceleration and growth opportunities is a 1-2 percentage point uplift in our revenue growth forecast over the next five years," the report said. "Telecom operators also stand to realize opex savings across all facets of their businesses..., with opex CAGR over the next five years slowing to 1% from the base case projection of 2.7%."
Capex, despite the investments necessary for an organization's digital transformation (which Arthur D. Little defines as the "application of digital technologies and interfaces" to create new work to change the current business model to add opportunities to add more revenue, services and value) decreases with investment in these solutions, the report said. "Through digitalization, the telecom industry can buck the trend of weakened revenue growth and increased cost pressures to return to profit growth," according to the study.
In fact, when asked about things shaping the communications industry today, 26% said digital transformation was the biggest topic for the next 12 months, compared with runner-up 5G at 15%, the study found. And in the next three years, 32% of respondents named digital transformation as the key topic versus 17% for 5G.
"Digital transformation is a fundamental requirement not just for success, but also for survival, as it changes the ways telcos operate internally and engage with their customers and opens up new and incremental revenue streams," the report said.
— Alison Diana, Editor, Broadband World News. Follow us on Twitter or @alisoncdiana.