Few sectors are undergoing as rapid an evolution as the telecommunications industry – and the pace of change shows no sign of slowing.
The growth of the internet has driven a surge in data consumption by users of mobiles and smartphones, who have come to expect constant and universal access to digital content.
Where revenues in mature markets are stagnating, the rapid expansion prospects of emerging economies continue to grab the attention of telecoms groups that are struggling to prolong years of strong growth.
Meanwhile, the business environment has become noticeably tougher as increased regulation has squeezed margins. Shareholders have, however, continued to expect dividend rewards, which has in part encouraged large telecoms companies to sell off non-core assets.
Vodafone, for example, has led the way in slimming down its portfolio. In April, the UK group sold off its 44 per cent stake in SFR, France’s second-largest mobile phone company, to Vivendi. This followed the sale of its 3.2 per cent stake in China Mobile a year ago.
Operators are also under pressure to build the next generation of high-speed fixed and mobile networks to keep up with customer demand for uninterrupted access to data. This, however, requires enormous investment in infrastructure.
In January, Paul Otellini, chief executive of Intel, predicted that over the next five years the popularity of smartphones and tablets would mean a fourfold increase in the company’s internet data traffic to more than 1,000bn gigabytes a year.
“Over the past few years we have seen the real adoption of ... new services, [specifically] mobile broadband,” says Hossein Moiin, chief technology officer at Nokia Siemens Networks.
However, he adds: “We have not seen the growth and profitability that should come with such an explosive adoption of a new technology.”
The roll-out of the 4G spectrum – the fourth generation of cellular wireless standards based on a technology called long-term evolution – is already providing a wealth of challenges and opportunities for the industry.
The spectrum, which supports fast web browsing on smartphones and tablet computers, is already used in parts of the US and is scheduled to be rolled out in the UK by 2014.
This new technology, in turn, has created opportunities for players from outside the industry to compete with established telecoms companies, which have struggled to keep up with innovations in handsets from non-traditional telecoms groups, notably Apple, with its iPhone, and Google’s Android.
“In their current model, some traditional telecoms companies will not succeed,” says Roman Friedrich, telecoms expert at Booz & Company, the consultancy.
“Traditional operators were used to selling water in the desert, such as voice communication and SIM cards. They need to urgently change their operating model. Most now have to make up their minds – are they network players or not?” he says.
“Others might decide that they can source networks from others and focus completely on their customer base. And others might believe that they are great at innovation.”
Mr Moiin takes a different view. “Telecoms operators don’t have to give up. It is difficult to compete against wonderful innovators such as Apple or Google, but it is necessary,” he says. “I don’t think that either Apple or Google would mind another competitor in this landscape because it would force them to improve their products and technologies, and consumers would benefit.”
Maximising the efficiency of mobile operators is also becoming more crucial as government regulation drags down the prices companies can charge.
In July, for example, mobile operators in the EU received a blow when Brussels outlined plans to cut the average roaming cost within the region. The strict regime of price caps on mobile phone roaming within the EU is to be extended by four years to 2016, the European Commission said. It wants eventually to abolish premium charges for roaming data and voice services.
And in March, Ofcom, the UK watchdog, moved to cut the prices that mobile operators can charge to transfer calls from other networks by 80 per cent over the next four years.
Restrictive regulation, combined with pressure from operators in low-cost environments such as India, has forced traditional mobile companies to rethink how they charge for services such as data.
“You can see it in operators from India or the Philippines, [which are] able to produce a megabyte or a minute of voice communication for a much lower cost,” Mr Friedrich says. “There is a need [for established players] to rethink their cost structure [and] rethink some aspects of their business models.”
Morten Singleton, telecoms analyst at Investec, agrees. “Operators must find better ways to charge for the amount of data that customers use,” he says.
Tighter margins will also prompt operators to seek savings by combining parts of the network chain – such as field maintenance and use of mobile towers – to keep their independence but share the costs.
Alan Harper, chief executive of Eaton Towers, which owns and operates telecoms towers in Africa, says the sharing of mobile towers has become increasingly widespread in emerging markets across the continent.
“We are moving into a tougher business environment with more competitors, greater regulation and lower margins,” he says. “It makes sense for operators to share the use of towers, as regulators are pushing down rates to ensure that new guys can come into the market.”
Some industry observers believe such demands on operators could spark consolidation among established groups in Europe, following the 2010 merger of T-Mobile UK and Orange UK to create Everything Everywhere.
One country where such consolidation is expected is Ireland, where 5.3m subscribers are spread across just four operators – Vodafone, O2, Meteor and 3. This compares with Germany’s 105m subscribers, and the UK’s 85m, which both also share four mobile operators.
And as margins shrink in more mature markets, mobile operators are likely to continue looking overseas for rapid growth opportunities.
Operators in many emerging markets – including China, India, Nigeria, Egypt and Brazil – continue to benefit from sustained double-digit subscriber and service revenue growth.
Mr Moiin says: “Communication as a technology has become such an integral part of our daily lives that we don’t notice it unless it’s not there.
“Communications today are no longer a luxury, but a necessity. The key for operators is to understand that uncertainty is the future of the telecoms industry.”