Connecting the future

Until a few years ago, the definition of a telecom company was straightforward: a communications services provider with a business model that combined and integrated a wide variety of components, including network infrastructure and operations, proposition development, and sales and service aimed at B2C or B2B customer segments.

What telecom companies will look like in the future is less clear. The fundamental shifts in revenues and value pools identified in PwC’s inaugural Global Telecom Outlook and its report Perspectives from the Global Telecom Outlook 2023–2027 are forging a new ecosystem, posing threats, and creating new opportunities. As leaders face the coincident challenges of industry reconfiguration and company reinvention, we’ve identified seven urgent priorities for telecom CEOs. Together, these priorities make up a comprehensive road map to higher value, competitiveness and growth.

In PwC’s 27th Annual Global CEO Survey, 52% of telecom CEOs said they believed their company would no longer be economically viable a decade from now if it continued on its current path, compared with 45% of all CEOs globally.

To ensure the continuation of telecoms’ value-creating potential, leaders need to fundamentally rethink the utility of a vertically integrated carrier model, with a core focus on examining, optimising and potentially separating the distinct business layers. The traditional telecom bundles together an array of very different businesses and activities. Some, such as building the network infrastructure, are capital-intensive and have long-term, utility-style payback profiles. Others, such as innovating products and services, are higher-value and higher-risk but offer a faster payback. Still others, such as operating commerce and service channels, require skills and capabilities that have more in common with retail businesses. Each business requires different management skills, has different capital needs and operates on different planning horizons. Running them together creates inefficiencies and dilutes leadership focus—factors that cause investors to apply a “conglomerate discount” to their valuation.

As the chart below shows, the business can be disaggregated, or delayered, into distinct components, such as “InfraCos” focused on operating passive infrastructure; “NetCos” designed to deliver network utility services; and “ServeCos” offering services to consumers. Doing so can sharpen leadership focus on the primary sources of value, provide greater clarity on strategy, and offer optionality to investors and strategic partners to contribute the necessary capital or capabilities. 

Valuation multiples for vertically integrated carriers are typically skewed towards the retail (or “asset-light”) end of the spectrum, even though many of them own and operate significant fixed-asset infrastructure. The chart below illustrates this skewing effect—and also shows the much higher multiples that would likely be applied to the entities owning those fixed assets, if they were to be spun out. 

Priority 1 CEO imperatives:

• Create a business architecture. Develop a view of the businesses you are engaged in, and sketch out their boundaries, objectives, resources and assets, and market and transformation priorities.
  
• Align corporate and business unit structures. Create self-sufficient units around a clear business purpose. The units should rely on a few coherently aligned metrics to manage performance.
• Execute deals. M&A, carve-outs and other deal-making strategies can monetise value, optimise capitalisation, bring units to best-owner/next-level scale, and position the organisation for growth and value creation.

As we’ve noted in Perspectives from the Global Telecom Outlook 2023–2027, the continuing rise in data usage, a lack of pricing power and the need to make heavy investments in networks are all pressuring margins. Simply put, in both mobile and fixed telecommunications, the data shows that telecom companies are becoming increasingly indistinguishable commodity service utilities (see chart below). To break out of this trend, leaders need to develop and apply competitive fortitude, solidifying their core by repositioning the cost basis, and providing opportunities for growth by earning and exercising pricing power. 

The evolving environment offers new tools and imperatives for action. Artificial intelligence (see “Priority 4” section below) promises a step change in productivity and cost-effectiveness in everything from rightsizing customer acquisition and retention spending to driving efficiency in high-volume processes such as supplier/customer contract management. The other big megatrend (after AI) influencing corporate strategy—climate concern—is also a catalyst. Product and network rationalisation is a key contributor to reducing carbon costs and meeting net-zero commitments, while also reducing operating expenditure.

Leaders can use this stronger base to summon the courage to raise prices. Connectivity services are essential to digital life and work, so the likelihood of price increases translating into reduction of demand is low. The risk of competitor churn, although real, is typically limited by the low number of credible alternative providers. The impact of higher prices can be softened when accompanied by attributes that create value.

The customer experience is the fundamental and necessary condition for pricing power. Companies have to rethink the entire customer experience: the network, the device, sales and service, and the potential to provide value-added products and services. Although providing both mobile and fixed broadband is already common, the addition of fixed wireless access is gaining traction and should add momentum to converged customer relationships. And the more that service relationships are established across devices, lines, subscriptions and household members, the lower the propensity is for churn. 

Priority 2 CEO imperatives:

• Lead with transparency. On pricing, be clear about which factors are out of your control, such as energy and inflation, and pass those costs through unapologetically to customers as most other industries do.
• Create richer bundles. Look beyond converged offers that combine fixed and mobile services. Start with unmet customer needs, and look to content/software/XaaS/device partners to provide additional value-added services and experiences. These richer bundles will amplify value to customers and provide flexibility to pricing.
• Rationalise portfolios. Take an agile, continuous improvement approach to product and technology portfolio rationalisation. Each quarter that passes without addressing the mounting technical debt compounds the cost. 

In many industries, the cloud has passed the tipping point to near-universal adoption. It is rapidly progressing from an option to a business imperative, offering simplified, more scalable infrastructure and faster innovation. In PwC’s 2023 Cloud Business Survey in the US, 78% of executives across sectors said their organisation had adopted cloud computing in most or all parts of its business. In PwC’s parallel EMEA Cloud Business Survey 2023, 73% of the respondent businesses that were not yet all in on the cloud told us they would have all their operations in the cloud within two years.

Many telecom companies are well on their way to “cloudifying” their IT services and internal enterprise processes, although it will take years for legacy data warehouses, business support systems applications and enterprise resource planning (ERP) environments to complete the move. One key challenge—and opportunity—is to reassess the traditional definition of where application architecture domains start and end. Cloud-native XaaS providers have expanded up and down the value chain. For telecom companies, cloud transformation offers broader benefits and scope because it extends beyond the IT systems to their main customer offering: the core network services. The next wave of value creation lies in cloudification of the network, the largest area of spending from the standpoint of both capital and operating expenditures.

Although the first wave of cloud-native players—including Dish Wireless in the US, 1&1 AG in Germany and Rakuten Mobile in Japan—have yet to fully prove and scale their case, the technical, operational, and economic benefits of cloud-centric operations are undeniable. The PwC EMEA Cloud Business Survey 2023 found that only 47% of telecoms are ‘cloud-mature,’ compared with 54% of all companies. For incumbents sitting on large network estates, which often have a fragmented, federated structure involving multiple national operating companies, building an enterprise-wide cloud is a major commercial and technical challenge. 

Priority 3 CEO imperatives:

• Shape a cloud vision for the end-to-end value chain. Consider how best to align cloud technology with better business outcomes, be they improved customer experience; step changes in AI adoption; digitisation and automation; operational agility; or resilience.
• Take a full-stack view. Assess technology options and partnerships with a view across cloud-based infrastructure, platforms, and applications (e.g., IaaS to SaaS) to create a coherent yet modular cloud framework with interoperability and flexibility at its heart.
• Understand the legal regulatory implications. In different markets, laws and regulations vary widely on key matters, including data sovereignty, physical redundancy of core networks, local network ownership and control, and law enforcement interception rights. In many areas, quality-of-service regulations govern what service levels are considered adequate and dictate the time frames for restoring services after an outage. 

AI technology—and especially the emerging class of generative AI (GenAI) tools and capabilities—has tremendous potential in all aspects of a telecom company’s business (see chart below). Operating in AI-enabled ways will become the industry norm in areas including network management, device interfaces, and customer and employee experience. Those players who move early to lead this transformation stand to gain a significant competitive edge. However, although GenAI has captured the attention of executives across and beyond the telecom sector, many have yet to grasp how fundamentally it will change their business, and how quickly that will happen. According to PwC’s 2023 Emerging Technology Survey, 73% of US companies have already adopted AI in at least some areas of their business. And in PwC’s 27th Annual Global CEO Survey, 69% of telecom CEOs said that in the next three years, generative AI would significantly change the way their company creates, delivers and captures value. 

If they want to realise gains, telecom companies will use both GenAI platforms and embedded GenAI capabilities in enterprise apps to reinvent how their business operates. Industry CEOs must set guiding principles, accountabilities, and governance to advance from initial experimentation and excitement around use cases to a programmatic effort—one that can scale GenAI across functions and markets; ensure the right choices on large language model architectures and technology; and safeguard data integrity, privacy and ethical use of this powerful technology. To do so, leaders will have to focus on the six key leadership priorities that build into a road map for an effective “early days” GenAI strategy. Given the technology’s disruptive potential, it is particularly important to collaborate within ecosystems to enable imaginative rethinking of value chains and business models.

Priority 4 CEO imperatives:

• Manage the risk/reward tug of war. Navigate tensions between the importance of moving quickly to grab emerging opportunities and the need for prudence and risk mitigation.
• Experiment with an eye to scaling. Think big. Encourage experimentation throughout the organisation, with an emphasis on identifying use cases that can scale.
• Put humans at the heart of your strategy. Consider the impact of AI on your stakeholders—including regulators, customers and workforce—from the start. Stay focused on the effective governance of AI systems and processes, including applying responsible AI and incorporating the principle of trust by design, which means embedding best practices throughout AI development and deployment processes.

The business challenges facing telecom companies today are inextricably linked with talent challenges. PwC’s Global Workforce Hopes and Fears Survey 2023 shows that 46% of telecom employees don’t think their company will be in business in ten years (compared with 31% for employees of all companies), and 32% of telecom employees plan to change jobs within the next 12 months (compared with 26% of employees for all companies).

The result is a series of coincident workforce challenges. As the large population of industry workers age 55 or older are set to retire, there is a significant generational shift and concomitant brain drain. As telecom companies lean more into the cloud, AI, private networks and IOT solutions, new skills will be required throughout the labour force. At the same time, there is a cyclical surge to build fibre networks, especially in Europe and North America. The continued worldwide 5G network deployments—and the 6G networks that will follow—require telecom engineers and tech talent, and are also driving demand for construction and civil workers, But there are labour supply shortages in many of these markets. New modes of working as well as geopolitical and economic factors are prompting an industry-wide rethink of talent pools and formerly accepted approaches to using nearshore or offshore facilities.

Priority 5 CEO imperatives:

• Link workforce planning to strategy. The current backwards-looking and top-down approach to staffing decisions should be replaced with a smarter bottom-up approach centred on differentiating capabilities and skills. Look ahead to see how digital and AI will factor into the strategy over the next ten years, and come up with a plan to close any future capability gaps.
• Expand talent pools. Widen the recruiting net to include a greater range of schools and backgrounds. Forge a closer relationship with a particular school—for example, by funding a chair in engineering—to secure a regular influx of bright new graduates.
• Build your own pipeline. Telecom companies can develop their own training academies to teach their people vital skills for the future. In Germany, where industrial players create their own vocational training programmes, telecom companies often fund student tuition and offer internships and apprenticeships to supplement classroom sessions with on-the-job learning.

In today’s uncertain and fast-changing environment, no telecom CEO can afford to underestimate the importance of identifying and addressing emerging risks—and of responding proactively to changes in regulation.

Cyberattacks are escalating in telecommunication, encouraged by ongoing digitisation of business functions and expansion into adjacent digital areas. PwC’s 2024 Global Digital Trust Insights survey found that the biggest worries of senior executives are cloud-related threats—cited by 47% of respondents—followed by attacks on connected devices.

Regulatory scrutiny of deals is intensifying: PwC research reveals a 50% rise since 2020 in the number of deals reviewed by US national security watchdog CFIUS (Committee on Foreign Investment in the United States) and a seven-month increase in average EU deal duration since 2016. The scope of deals being reviewed on competition grounds has also widened, expanding beyond the traditional focus on horizontal deals to include challenges to several vertical deals around the globe.

As telecom companies increasingly seek growth through geographical expansion and diversification into non-core industries, they will engage with unfamiliar regulatory frameworks outside the telecommunication space. And, as we’ve noted, the rise of AI and GenAI is imposing a sense of urgency for leaders to ensure responsible use of these new technologies. These circumstances compel leaders to engage proactively with policy-makers in order to help shape regulatory frameworks and ensure compliance.

Priority 6 CEO imperatives:

• Engage with complex regulatory ecosystems. Telecom CEOs need to think like regulators—and act accordingly. Involve dedicated risk and compliance teams in strategic planning, and apply robust governance oversight throughout the life cycle of deals. Identify regulatory concerns, and plan for a range of scenarios and outcomes, including divestments and spin-offs.
• Manage cyber risks holistically and aggressively. Instead of implementing fragmented initiatives on a reactive basis, anticipate future cyber risks, proactively engage regulators to shape new rules and allocate a cyber budget to deal with the organisation’s top risks. Develop threat detection and response capabilities, and implement a cyber risk management culture throughout the business.
• Protect data privacy. The General Data Protection Regulation (GDPR) in Europe fired the starting gun on a rush of new data protection laws and regulations around the world. CEOs should put in place a comprehensive data privacy programme that includes a dedicated data protection function, a personal data register, timely responses to customer requests for personal data, open communication of data breaches and rigorous management of exposures to third parties.