Introduction

At the beginning of the financial year, Venture Insights reviews the technology and market trends that will shape the telco industry in Australia and New Zealand over the coming five years.

Our views on these trends inform our other research, and flow into our forecasts for the telco sector published in March and September.

The final scenario (or scenarios) developed for the telco sector reflects our view on the long-term trends in market structure, competition, and regulation that will drive pricing and volumes across consumer, enterprise and wholesale segments.

Our view

There are some specific trends across the telco industry which, combined with the macroeconomic factors, are shaping the market both in the short and long term. We have identified the main trends that we believe will have the most important impact and assessed them against key metrics in the consumer, B2B (business and enterprise) and wholesale segments. We divided them in two groups: technology and commercial trends.

Some trends initially affect the supply side while others drive changes to customer demand patterns that would ultimately produce a response from suppliers. For example, some technology developments such 5G, edge computing, artificial intelligence, machine learning, are led by providers across their respective ecosystems who develop technologies, products, and services to help customers with their needs. Industry digital transformation, on the other hand, can emerge from customer requirements and prompt a response from industry players trying to address them.

The telco industry’s fundamental challenge over the next five years is whether it can reverse declines in returns and profitability in an environment where technology and economics are increasingly breaking down the industry’s traditional vertical integration. This is opening up the market to a range of smaller players and adjacent competitors who are lifting price pressure. It is also splitting the industry more clearly into infrastructure and service layers.

With Australia and New Zealand facing stalled population growth, we also expect to see slow growth in mobile and broadband revenues, particularly in the consumer/ household segment. However, the ongoing shift to digital will drive additional spending on networking infrastructure, connectivity, UC, cloud, cybersecurity, and managed services, particularly from the business and enterprise segments. But while growth rates in ICT services will be several times greater than in carriage products, margins are considerably lower. In addition, telcos will face competition from a broader range of players, including systems integrators, managed service providers, and hyperscalers.

While demand for enterprise connectivity will continue to grow, prices are expected to fall driven by SD-WAN adoption and intense competition enabled by a greater NBN presence in the enterprise segment. This will result in a relatively flat market in terms of revenue over the next 5 years. Declining prices will put pressure on margins.

With 5G expected to provide limited growth opportunity in the consumer market, industry attention has turned to the enterprise. Most of the transformative value of 5G will be realised in the enterprise. 5G combined with other digital technologies such as edge computing is poised to help organisations across every industry to transform by enabling more automation, new services, channels to the market, and data-driven decision making. While this is true in the long-term, most use cases are still nascent. The new revenue streams that can make a material impact to telcos top-line growth will take some time to materialise, leaving telcos a revenue gap until the middle of the decade.

As a result, the battle to increase profitability is expected to continue over at least the next couple of years. With major telcos financial health at historic low levels and without any new product categories on the horizon to bring new revenue streams at a scale that could change the game, prices are more important than ever. Also, the focus on costs and productivity will remain with all incumbent telcos continuing to press with their efficiency programs over the coming years.

Finally, the fortunes of the emerging telco infrastructure and service businesses will differ in this environment. Infrastructure companies will generate modest but reliable returns that will underpin their long-term future. The service companies left behind will face rising levels of competition from adjacent industries such as systems integration, managed service provision, media and cloud provision. With the end of the NBN rollout, we also expect consumer brands to push into NBN resale.

Macroeconomic context

Telco technology trends

Telco market trends

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Figures

Figure 1 Megatrends assessment framework

Figure 2 Change in consumer behaviour

Figure 3 Australia and New Zealand GDP and population growth trends (historic and 2021 forecast)

Figure 4 Australian multifactor productivity growth in 2019-20, hours worked basis

Figure 5 Labour productivity in New Zealand

Figure 6 Digital value added and share in aggregate value added (%), 2016-17 to 2018-19

Figure 7 COVID-19 impact to some consumer behaviour patterns

Figure 8 Industry trends impact summary

Figure 9 Centralised versus centralised network

Figure 10 Key verticals that will benefit from 5G

Figure 11 Telecommunications Sector Security Reforms and Security of Critical Infrastructure Act 2018 framework

Figure 12 Share of 5G related patent families

Figure 13 Australian telco industry ROIC (ex-NBN), revenue and EBITDA

Figure 14 SD-WAN underlay versus overlay

Figure 15 Conflicting forces driving mobile ARPU

Figure 16 Telstra T22 strategy simplification and cost reduction scorecard