Telecom industry’s value creation blueprint for the future

The telecom industry is going through a fundamental transformation, further accelerated by the Covid-19 pandemic. This aligns with the Middle East’s futuristic vision to build vibrant digital economies where efficient delivery of fundamental services depends on digitisation. Multiple sectors are transforming quickly, with the telecom sector uniquely placed to advance solutions that can propel the region’s ability to accelerate economic and social progress.

Telecom operator companies (telcos) as well as telecom infrastructure players such as tower companies are automating, modernising, and adopting digital capabilities throughout their operations. However, telcos and telecom infrastructure companies are forging different paths to create shareholder return.

According to the 2022 BCG Value Creators Report, in the 2016-2021 five-year period analysed for the rankings, infrastructure companies outdistanced telecom, wireless, and cable operators in five-year average annual total shareholder return (TSR) to become one of the industry’s top value creators. The value that infrastructure companies have created from simplified business models, streamlined operations and steady cash flow has attracted an array of investors. Funders have financed or acquired ownership interest in operator-owned independent business units and industrial tower companies.

Telco investments help secure the national digital future
By contrast to the infrastructure value creation narrative, globally traditional telecom operators struggled to create value in their core business. Regulated prices limit telcos’ ability to raise rates. In addition, many operators refrained from raising prices during the pandemic, when the world depended on them to stay connected.

Industry experts estimate that telecoms lost billions of dollars in revenue from lower roaming charges as people stopped traveling. At the beginning of the pandemic, revenue from traditional services fell by 3 per cent even as internet traffic increased by 47 per cent globally. This has implied telcos have needed to invest billions into the network without a commensurate return, directly impacting shareholder value.

Telecom leaders in the region, such as Saudi Telecom Company (stc) of the Kingdom of Saudi Arabia and e& (formerly Etisalat Group) of the UAE are leading the Middle East in the sector’s shareholder value creation. Ranking among the global top 20 telco value creators in the BCG study, both stc and e& are building the networks that are indispensable to digitising society. They understand that the services their companies provide is fundamental to the society, and know that their viability depends on delivering innovative products and services, built on the foundation of digital infrastructure that enable others to do more in a sustainable digital economy and society.

These telcos are already mobilising massive investment to build digital infrastructure and expand capacity and coverage, with the ambition of connecting everyone through high-quality networks. The goal is to ensure that all sectors of the economy and society benefit from new-generation networks and the services they enable.

Value creation blueprint for the future
Telcos are already speeding the digitisation journey with new products and solutions developed on their own or through public-private partnerships. They can expand these efforts in key areas. Telcos can help ensure continuity of education, improve the resiliency of small businesses, and enable other industrial sectors to improve their productivity, innovation potential, and sustainability, while cutting greenhouse gas emissions.

The diverging outlooks that telecom infrastructure companies and operators face will lead them to pursue different paths to retain or add value in the future. To continue value creation, Telecom infrastructure companies must continue to innovate and evolve their business model to digitise processes, optimise networks, expand coverage and services, and provide high-quality service.

On the telco operator front, notwithstanding the critical role they play in securing the national digital future, they continue to face multiple challenges to value creation, including regulatory hurdles, the need to increase utilisation of existing mobile and fixed network assets, and the need to invest in 5G before having a clear picture of how it will generate revenue. There is no single path to follow in overcoming these challenges.

However, they should consider taking action on a short list of must-dos – digitisation will be a key driver of profitable growth, along with robust strategies for 5G investments, fiber rollout, and sustainability. These are critical topics where value could be easily destroyed given the large investments required without a guaranteed equivalent payback. Properly implemented, these actions have the ability to not only protect shareholder value, but also make the telcos more attractive to customers and other stakeholders and put them on a path to stronger value creation.

Beyond these actions, to put the telcos on an accelerated value creation trajectory, they should double down on two particular strategic choices – diversification into tech plays and public-private partnerships. Middle East operators are already paving the way for such a value creation blueprint.

For instance, both stc and e& have announced significant investments into tech plays such as internet-of-things (IoT), cloud, fintech and even Web 3.0. stc’s recent JV partnership with the Public Investment Fund for IoT is a bold and positive step in the direction of value-creating public private partnerships that creates shareholder value whilst directly contributing to the national agenda.

The future for telcos can be bright – they are well-positioned to build on their strong foundations. However, this will require careful navigation of the strategic choices for investments, diversification, and partnerships to ensure they can continue to boldly invest to create shareholder value and play their critical role in the national development agendas.

Kaustubh Wagle, managing director and partner at Boston Consulting Group (BCG)

Read: Saudi’s PIF offers to buy stake in $5.8bn STC towers unit