Is the business opportunity of 5G enough to boost the telcos?

The future growth of telecommunication companies around the world will be affected by their ability to create and own seamless customer experiences, according to Mazars’ recent Future of Telcos study.

But what are the forces at play in the battle to win the customer experience? How important is 5G to the future of telcos’ growth? And what can telcos count on in order to gain competitive advantage?

Romania’s mobile market is served by five mobile network operators utilizing a mixture of GSM, 3G and 4G technologies. Mobile internet and pay-tv services are to be considered the growth engines for the period 2016 up to 2021. Moreover, in five years it is estimated that the income related to mobile services will account for almost 61.9% of the market.

Although, telcos’ net income margins decreased over the last decade in Romania, the investment in networks such as mobile data (Internet) and optic fiber will continue to rise, thus offering new growth opportunities.

The ability to cope with the introduction of the 5G network on the Romanian mobile data market will have a significant impact on the retention of old clients and attracting new ones. Starting mid-2019, the most important operators on the Romanian market have already introduced the necessary 5G infrastructure. One of the main advantages of the adoption of 5G technology is the significant reduction in costs which in turn might lead to rising net income margins.

On the other hand, in Romania, the main telecom operators face mounting regulatory costs in the form of increased parafiscal charges. Some legislative changes increased the monitoring fee payable towards the telecom market regulator at a maximum level of 3% from the turnover realized by telcos (subsequently decreased during 2019 at 2%). This would have had a huge impact on the profitability of these companies as most of them have to cope with decreasing small net margins (e.g.: 4% net income margin in 2018 compared to 6% in 2017 and 8% in 2016 for some of them). Some of the explanations for this fall include the significant competition on the market which has led to the decrease of the fees overtime and the rise of the cost of labor in Romania.

The telcos’ competition on the Romanian market is still very strong and there is still enough room to increase the activity of a telecom operator, especially when we discuss urban and rural environments. The main challenge here is on how to increase the market share through organic growth without having to further negatively impact the net income margin given that the economic agents with no access to Internet are mostly located in rural or poorer areas with bad infrastructure which might require significant investment with a lower recoverability chance.