Core European telco revenues to decline by 1.8% p.a. until 2015

Big diversification revenues and cost transformation opportunities exist for operators making the right strategic choices in their markets – operators must act now.

The move to an all-IP world where everything is connected presents a major threat to telecom operators’ core voice and SMS revenues, but also significant opportunities for these operators to extract value from adjacent markets. This is one of the main findings of Telecom Operators: Let’s Face It, the 11th edition of the annual report[1] from global management consultancy Arthur D. Little and equity broker Exane BNP Paribas.

The telecoms and pay-TV sector faces a sustained decline in core revenues by -1.8% pa until 2015e, driven by a combination of macroeconomic headwinds, regulatory intervention and strengthening competition from Over-The-Top (OTT) players like Google, Apple or Skype.

Telecom operators in particular can expect stronger OTT cannibalization threats in mobile (in voice and SMS), but potential upsides in fixed line (acceleration of fiber and cable broadband adoption, and the opportunity to launch or partner for their own content services).

The new all-IP world with “everything connected” creates opportunities for telcos to enter adjacent markets such as automotive, energy and utilities, financial services, etc. Potential revenues could reach 4-9% of large telcos’ turnover by 2015e, significant but not enough to reverse the overall negative trend.

In this context, telcos must accelerate their cost transformation in both operating costs (“online-centric” business model, purchasing) and in investment (network consolidation/sharing). However, more fundamental changes to business models will be required – leading to the emergence of mega-operators, local specialists and infrastructure focused plays across Europe, as well as organizational transformation and M&A to appropriately address these challenges.

“Faced with declining core revenues and strong challenges from over-the-top players, European operators will need to design and implement new business models as well as consider revenues opportunities in adjacent businesses”, said Didier Levy, Director in Arthur D. Little’s Telecommunication, Information, Media and Electronics (TIME) practice.

“We forecast a negative revenue trend for telecom operators, which increases the need to restructure their cost structure including through network sharing to reduce pressure on free cash flows.” said Antoine Pradayrol of Exane BNP Paribas.”

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