Telco business models are gradually evolving – but major headwinds remain

Most telcos are currently undergoing gradual transformation from network operators to IT service providers. Telcos are under pressure to innovate because traditional network services are a stagnating market with only limited opportunities. In contrast, various professional and managed services – from consulting and integration to cybersecurity, cloud services and application development – emerge as key growth areas over the next few years. 

However, as telcos transform, they face various challenges such as:

• Heightened competition from hyperscalers and system integrators (SIs) for controlling key customer relationships within their partner ecosystem
• Complexity of building an image as innovative end-to-end solutions providers
• Finding the right balance between infrastructure ownership and virtual service provisioning
• Separating or selling off non-core business units without losing core capabilities
• Monetization of industry-specific and emerging technology focused services
• Expanding in carefully selected geographies and verticals through partners or acquisitions

At the recent Future Vision Executive Summit, Omdia hosted a panel discussion that involved senior professionals from telcos and telecoms industry associations. During the conversation, we learned that most telcos have sold off assets such as towers and are looking to sell more infrastructure where possible. While this can provide a temporary boost to their balance sheets, it doesn’t necessarily provide any longer-term advantages. Telcos need to be cautious not to lose their core network advantage which is a key differentiator against hyperscalers and other players. At the same time, any revenues from selling off infrastructure (or entire business units) can be used to acquire specialist companies (e.g., in AI, IoT, and consultants with industry expertise) to prepare for future business models – this is mainly an option for larger telcos with more financial resources, and can also help to expand their geographic presence – for example, Telefonica and Orange have acquired various players in different markets.

The discussion also established that separating out legal entities such as a NetCo focusing on network infrastructure, and a ServCo managing customer-facing elements of the business is not the preferred option for most telcos. While such approaches have been tried with mixed results, the value usually lies in end-to-end solutions built on top of the network, and a disconnected business unit for customer-focused services built around emerging technologies may struggle to find its position in the increasingly complex and competitive services market.

A key growth area for telcos is media content streaming. Even smaller local/regional operators can expand to other markets if they offer targeted content for consumers, e.g., in a specific language, and in some cases featuring co-produced content by the telco. This can particularly work for entering markets that have a large diaspora from the telco’s home country. On the enterprise side, telcos are looking to innovate with futuristic concepts for industries and workloads based on emerging technologies – including generative AI and AR/VR for specific scenarios, process automation for smart industries, and even the metaverse. Edge computing and IoT capabilities are further enablers for future enterprise workloads, and telcos are keen to capitalize on them by offering managed solutions that can be integrated with network and cloud management.

Omdia believes that telcos need to focus on a handful of key workloads, industries, and technologies when looking to expand and innovate, as it is too easy to get lost in many different scenarios that all require specific expertise and are difficult to monetize. Telcos’ resources are limited, and they cannot compete head-on with global SIs and hyperscalers. Instead, they should position themselves as the trusted network and IT services provider and bring in other partners while managing customer relationships where feasible. Building a strong partner ecosystem is crucial for long-term success beyond network services, however telcos should be selective when committing to any joint go-to-market initiatives with hyperscalers and other partners. In addition, internal transformation of telcos’ operational processes, business structures, and innovative capabilities is equally important. This may require some bold moves such as replacing manual processes with AI-based automation and major reductions in their workforce.