Reshaping telecom investment in a next-generation world

Telco operators are facing declining profitability from a combination of stagnant or negative revenue growth resulting from competition and increasing CAPEX/OPEX caused by increasing user traffic. While operators have always run efficiency programs, traditional methods are no longer sufficient to meet current financial constraints and future market evolution. This Viewpoint explains how successfully managing costs requires a new, more granular, holistic approach.

MAXIMIZING PERFORMANCE WHILE OPTIMIZING INVESTMENT

The changing pressures on telcos

Telecom operators play a critical role in a world that depends on ubiquitous connectivity and demands data traffic and services. However, rising costs and increasing competition have impacted their overall profitability. Providers understand the urgent need to transform themselves by developing an ecosystem approach that moves beyond traditional connectivity and provides both B2C (business-to-consumer) and B2B2x (business-to-business-to-any-end-user) customers with platform-based products.

Technology innovation is the essential lever for this transformation. Adopting open, modern, software-based architectures that are modular, reusable, cloud-native, AI-ready, and made of standardized components will transform company culture and enable new operating models and go-to-market and partnering approaches. Given the investments required and current financial pressures, there is a clear need to prioritize areas with the highest returns.

When prioritizing network investments, operators tend to focus on traditional metrics like speed. Although meeting customer needs is central to success, two other critical key performance indicators (KPIs) focus on customer expectations/experience and sustainability strategies:

1. Network reliability and quality. Currently, customers are generally satisfied with modern networks that deliver speeds of 50Mbps or higher and offer reliable coverage, so they are unlikely to perceive or value any future improvements. Operators therefore have to focus on reliability and quality. The recent Opensignal Global Reliability Experience Report highlights the relevance of reliability to retention and revenues; CTOs and chief network officers should reshape the investment mix by shifting from coverage and speed to pursuing network resilience based on three key pathways:
   • Achieving operational and infrastructure-led excellence. Focusing on the quality and reliability of services to maximize customer experience is critical when planning and operating network infrastructure.
   • Running service-centric operations. End-to-end (E2E) service orchestration and automation are essential to delivering the next generation of telecom services.
   • Becoming an ecosystem provider. By exposing their network to partners through application programming interfaces (APIs), telcos can create an ecosystem and increase their service offerings.
2. Network sustainability. As highlighted in the Arthur D. Little (ADL) Viewpoint “Enabling a Sustainable Telco Ecosystem,” operators must ensure their technology investments support the objective of running a more sustainable network. To deliver this, many telcos have modified their CAPEX appraisal process. For instance, they set aside ring-fenced funds for projects that offer sustainability benefits.

Factors behind need for greater efficiency

Four key factors drive the gap between stagnant revenues and greater required investment:

1. Regulatory pressure. Regulatory interventions are increasing to support various objectives, such as creating more competitive markets with lower customer costs (e.g., termination costs in the EU) and providing them with higher-quality services and experiences (e.g., fiber rollout in the Middle East).
2. Growing technology complexity. Rapid evolution adds new layers and network components, which increases the need for CAPEX spending to compete with rivals, while assets must be monetized in shorter time frames.
3. Market hyper-competition. Competition, especially in Europe, is lowering average revenue per user (ARPU) as operators offer generous deals to attract customers. Consequent low margins reduce resources to reinvest in the network and generate alternative dynamics in the telecom landscape (e.g., NetCo-ServCo separation, TowerCo, network sharing, mergers).
4. Mounting data traffic volumes. Data traffic is constantly growing, due to streaming, 5G devices, fixed wireless access (FWA), and fiber. Huge capacity expansions are required to maintain the same quality of service, necessitating higher CAPEX for investments and OPEX spending on maintenance.

Why CAPEX-intensity ratios are increasing

The above factors are expanding telco CAPEX-intensity ratios, which measure CAPEX against revenue (see Figure 1). Telcos are investing more in their network and IT infrastructures to support businesses and customers but are unable to fully monetize these investments. The main drivers for CAPEX intensity are a need to deliver a greater number of services, cope with technology evolution, and pay for higher energy consumption while data provision becomes commoditized. Compared to traditional players, new entrants are less constrained by a need to keep CAPEX-intensity ratios manageable, adding to competitive pressures.

In terms of technology, these growing CAPEX costs span:

• Fixed and mobile network fiberization
• Maintaining legacy copper infrastructure with fewer retail end customers
• Rolling out 5G networks and virtualization
• Continued network densification
• Huge investments to maintain high network quality across growing data traffic volumes
• Maintaining legacy 2G and 3G networks
• Rising IT maintenance costs

INTRODUCING NEW INVESTMENT PARADIGM

Telcos are under pressure to increase investment while revenues plateau; over the long term, this is financially unsustainable. Traditional telco efficiency programs that focus only on cost reduction through analyzing costs and budgets, redesigning processes, and adopting automation are no longer enough.

Operators need a new framework to guide CAPEX/OPEX spending to ensure ROI. There should be less emphasis on spending reductions and more on targeting investments to drive ROI. These investments must be correctly allocated geographically and over time. As illustrated in Figure 2, new efficiency levers can build on existing programs to deliver transformative improvements.

Geolocated tailored services

Instead of a blanket approach to network CAPEX, operators are evaluating their spending on a geographical basis, centered on the three KPIs of commercial, technology, and customer experience (see Figure 3).

They also must evaluate their complete service offering portfolio on a geographical basis. Both fixed and mobile operators should tailor the quality of service (including throughput and latency) and the portfolio itself at an access node level (i.e., the mobile site or access point for fixed-line networks). This analysis should be based on a financial evaluation of required CAPEX/OPEX versus expected revenues generated by the forecast customer base, competition, and customer requirements and expectations.

Technology transformation

Technology surely drives costs up; however, technology can also bring costs down. Automation, AI adoption, and equipment modernization are fundamental levers to speed up processes, reduce operational costs, and improve customer experience, as explained in previous ADL publications (“