Reinventing European telcos: The path to profitable growth

European telcos are emerging from the storm

The past decade has been tumultuous for European telcos. A perfect storm of declining revenues, mounting debt, and relentless investment demands has tested the industry’s giants. However, as the clouds begin to part, promising a brighter future for the sector.

The road less traveled

For years, European telcos have invested significant resources building network infrastructure: 4G, then 5G and fiber. And all for a little return. Customers have demanded more advanced, bandwidth-heavy services but have not wanted to pay for them in commoditized and competitive markets in which regulators applied a thumb screw that saw return on invested capital sink into negative territory.

Meanwhile, previous waves of technology have resulted in telcos struggling with the complexity of legacy systems, which we refer to as tech debt. In fact, European telcos are in step with global peers, recording 56% levels of tech debt on averageⁱ. Some of their technologies date back twenty years or more, making it more costly and difficult to deliver reliable connectivity – their core, scaled business – let alone good customer service and new services. And all this as cloud-native and asset-light players have entered the market.

We all know the outcome: stagnating revenues, disappointing shareholder returns, higher debt and poor customer satisfaction.

A turning point

Now, at last, there’s a hint of sun. Three factors are changing the weather. The first is largely out of the control of European telcos – deregulation, especially in fixed broadband, and public policy openness to consolidation, as promoted by Mario Draghi. This is set to increase the return on the cost of capital that, today, remains negative. Within the grasp of telecoms players, a key factor is those large capital investments, which are now largely behind the industry, at least in some markets (France and Spain are much further ahead on fiber rollout than, say, Germany or Italy).

It’s safe to say that, at a European level, we’ve reached peak CAPEX. Also, new digital technologies – including gen AI – are enabling telcos to reduce tech debt, improve their agility and pivot to delivering new services.

Across Europe, we see evidence that more reliable networks are resulting in rising customer satisfaction and lower cost-to-serve. And with levels of leverage (debt / EBITDA) dipping well below 3%, we can expect a more permanent change in the climate: a shift in the financial equation towards profitable growth. Goldman Sachs sees 4-5% EBITDA growth for Europe’s most attractive carriers, a level not seen for a decade.

That does not mean the job is done. European telcos are, however, turning a corner that will allow them to build on these foundations and secure the resources to drive new customer experiences in both the B2C and B2B sectors.

Securing the Future

In short, reinvention is within reach. But to secure it requires leaders to commit to some key actions. To fully realize the potential of this new era, telcos must take decisive action:

• Complete the 5G & fiber rollout. Apply AI and cloud technology to automate network provision and maintenance, and to improve the efficiency of delivering new services. There is still plenty of scope to monetize transformed networks, whether by leasing capacity, offering APIs to application developers or creating value from data.
  
  
• Embrace simplification and optimize operating models. That means delayering the key components of the enterprise and untangling the technologies that support them. Structural separation – the logical extension of this model – will help create new forms of value through autonomy and focus.
  
  
• Accelerate digital transformation. We advocate building a digital core – a foundational technology capability comprising digital platforms, cloud, data and AI. This will help accelerate the shift from legacy systems and support any new business model or technology that comes down the line. Our analysis shows that telcos enjoy 32% faster time to market for new products and services compared to those with lower technological sophisticationⁱⁱ.

A digital core also enables telcos to turn the tables in the relationship between tech and the business: from business priorities driving a proliferation of systems to one where the digital core makes available the data and capabilities that can deliver any business outcome.

• Prioritize customer-centricity. It’s all very well for customer satisfaction to recover on the back of more reliable networks, but that is not sufficient to keep customers loyal or willing to pay for more services. Leading players will apply AI and new talent to create an insight-led hub that not only helps address customer problems but creates a more effective platform for engaging with customers and offering services tailored to their needs. Others are strengthening their position in the B2B market by outcompeting incumbent IT providers with the strength of the sector’s advantage: core connectivity.

As the clouds thin, what was once an invisible horizon is now coming into sight. The convergence of deregulation, technological advancements, and strategic capital investments paves the way for a return to profitable growth. The winners of the next decade are those who use this improved outlook to simplify, accelerate their digital transformation, and refocus on customer needs.