Telecommunications 2012-01-01

Top 10 risks in
telecommunications
2012
About this report

As the challenges and opportunities facing telecoms operators around the world
continue to evolve, the sectors risk universe is changing rapidly. And as companies
formulate and execute their strategies to sustain and grow value in todays fastmoving environment, they have to ensure that their understanding and management
of risk keeps pace.
Today, navigating through the sheer speed and scale of change presents challenges
for all operators. We have produced Top 10 Risks in Telecommunications 2012 to help
them map out the right path. This is the latest in our ongoing series of studies
designed to pinpoint the most critical risk issues, analyze the sectors evolving
responses and highlight elements of emerging best practice.
As in previous reports, we do not claim that the list of risks we present here is
comprehensive. Also, by its nature, it can only provide a generalized snapshot of the
risks that we and the sector as a whole see at this time. Given this, we would
encourage you to read this report with an open mind and inquisitive attitude. Are
these really the risks you face in your own business? If not, how and why are your
organizations risks different? And how do those particular risks impact you?
The answers inevitably vary from company to company. But in every case, we believe
that leaders should take the following steps:
Undertake a thorough risk assessment at least annually, to define your key risks
and weigh their impact on business drivers. The risks in this report can provide a
useful starting point.
Extend this risk assessment beyond the usual financial and regulatory risks to
consider the wider environment in which the organization operates and the full
extent of its operations, now and into the future.
Conduct scenario planning for the major risks that you identify, and develop a
range of operational responses, possibly as an integrated part of the planning
cycle.
Evaluate your organizations ability to manage its risks ensuring that the risk
management processes are linked to the actual risks that the business faces,
especially those that are new and emerging.
Ensure that effective monitoring and controls processes are in place to provide
both earlier warning and an improved ability to respond.
Keep an open mind about where new risks may come from.
Despite or, in some cases, because of the continuing uncertainty and volatility in
the global economy, there are major opportunities for operators. Each companys
ability to identify and seize these opportunities depends critically on its ability to
understand and manage risk. Unless your growth strategy has a solid underpinning of
risk management, it will never be truly sustainable. This publication aims to help you
build and reinforce that sound platform.
Contents
Introduction
02
The Ernst & Young risk radar 2012
03
Editorial committee
04
Sector context
06
Executive summary
08
The top 10 business risks:

1. Failure to shift the business model from minutes to bytes
10
2. Disengagement from the changing customer mindset 11

3. Lack of confidence in return on investment
12
4. Insufficient information to turn demand into value
13
5. Lack of regulatory certainty on new market structures 14

6. Failure to capitalize on new types of connectivity
15
7. Poorly formulated M&A and partnership strategy
16
8. Failure to define new business metrics
18
9. Privacy, security and resilience 19

10. Lack of organizational flexibility
Whats below the radar?
20
22
Contacts 25
Introduction
Amid the recent global economic uncertainty, the telecommunications

sector has performed relatively well, with operators once again
emphasizing their strong defensive qualities and well-developed capex
management capabilities. However, in a sector where new over-the-top
entrants are competing fiercely for revenues from emerging service
areas, the question is: Is now the time to shift from a defensive to
offensive posture? For many telecoms executives, the answer today is a
resounding Yes.
Jonathan Dharmapalan
Global Telecommunications
Leader
As in previous years, we in Ernst & Youngs global telecommunications network seek to

help operators maximize value and tap into new sources of growth through our ongoing
series of reports identifying the key risks to their businesses. By addressing the top 10
risks highlighted in this study, we believe that telecoms providers will position
themselves to take their businesses forward more effectively and make the most of the
growth opportunities that emerge.
This report was produced by collecting and synthesizing the insights of our practitioners
and sector professionals, supplemented by research and analysis by the Ernst & Young
Global Telecommunications Center. During the research process, we asked our sector
professionals to evaluate the most important strategic challenges for telecoms
businesses globally and to rate the severity of these risks for the sector.
As in previous years, our 2012 study indicates that operators face a wide array of risks,
and that the relative positioning and scale of these risks have continued to change. An
understanding of how to respond to these shifts will help operators manage risk more
effectively, optimize performance and increase operational efficiency. It will also
empower them to capitalize on the profound changes under way in the telecoms
ecosystem, ranging from rapid advances in technology to new customer behaviors and
expectations.
The most fundamental of these changes is encapsulated in the risk that tops our list:
the migration of sector value from minutes of usage to bytes of traffic a change that
must be mirrored in operators business models. Many of the other risks in our top 10
spring directly or indirectly from that seismic shift. To help companies formulate and
execute the right responses, we provide an analysis of each of the top 10 risks. We also
report on risks currently below the radar that our panelists believe may move up the
risk tables in future years.
I would like to thank all our contributors for their time, insight and cooperation in the
preparation of this report. This is a valuable dialogue that we hope to continue for many
years to come.
Global Telecommunications Leader
Top 10 risks in telecommunications 2012
The Ernst & Young

risk radar 2012
Telecommunications
2.
Disengagement from
the changing
customer mindset
3. Lack of confidence in
return on investment
Compliance threats originating in politics, law, regulation or corporate governance

Operational threats impacting the processes, systems, people and overall value
chain of a business
Strategic threats related to customers, competitors and investors
Financial threats stemming from volatility in the markets and in the real economy
The radar below plots the top 10 risks for telecoms operators on the risk radar, and lists
the risks that are currently just below the radar.
Top 10 business risks for telecommunications in 2012
Fi
n
5. Lack of regulatory
certainty on new
market structures
l
cia
n
a
Failure to dene
new business
metrics
6. Failure to capitalize
on new types of
connectivity
7.
Lack of regulatory
certainty on new
market structures
Lack of
condence in return
on investment
Privacy,
security and
resilience
Failure to shift the

business model
from minutes to bytes
Disengagement
from the changing
customer mindset
Poorly formulated
M&A and partnership
strategy
Insufcient information to
turn demand into value
Poorly
formulated M&A
and strategic
partnerships
Failure to
capitalize on new
types of connectivity
t
ra
St
eg
ic
8. Failure to define new

business metrics
9. Privacy, security and
resilience
Co
m
pl
e
nc
ia
4. Insufficient
information to turn
demand into value
1. Failure to shift the

business model from
minutes to bytes
The Ernst & Young risk radar presents a snapshot of the top 10
business risks in an industry sector, by dividing risks into four quadrants
that correspond to Ernst & Youngs Risk Universe model. These
quadrants are:
Lack of
organizational
exibility
at
io
n
Top 10 business risks

for telecoms operators
er
p
O
Below the radar
10. Lack of organizational

flexibility
Evolving service cannibalization

scenarios
A more pressing green

agenda
Concentration of equipment
vendors
Difculties in managing debt

and cash
Editorial committee
Jonathan
Dharmapalan
Holger
Forst
Prashant
Singhal
Global
Telecommunications
Sector Leader
Global
Telecommunications
Markets Leader
Global
Telecommunications
Markets Leader
Jonathan Dharmapalan is Ernst & Youngs

Global Telecommunications Leader, leading
a team of over 2,000 telecoms professionals
across the world in their work with the worlds
leading operators. With 25 years of experience,
Jonathan has served some of the largest
companies in the telecommunications sector.
He has significant experience in both mobile
and terrestrial communications.
With 20 years of experience, Holger Forst has

been the Global Client Service Partner for
Deutsche Telekom AG since 2007. In 2011
Holger was appointed the joint Ernst & Young
Global Telecommunications Markets Leader.
Prashant has extensive experience of over

15 years in Assurance and Advisory Business
Services, servicing Indian and multinational
telecom clients. In 2011 Prashant was
appointed the joint Ernst & Young Global
Telecommunications Markets Leader.
Olivier
Lemaire
Luis
Monti
David
McGregor
EMEIA
Telecommunications
Leader
Americas
Telecommunications
Leader
Asia Pacific
Telecommunications
Leader
Olivier has 15 years of experience working in

the telecommunication industry. As an Audit
and Business Advisory Partner and chartered
accountant, he has been rendering audit,
transaction support and advisory services to
many international telecom operators across
Europe, Africa and Middle East. Olivier has been
leading the Global Telecom Revenue Assurance
team for 6 years and led several revenue
assurance global studies. He is also experienced
in group reporting under IFRS. Since September
2011 he is the leader of Ernst & Youngs
telecommunications practice for the Europe,
Middle East, India and Africa (EMEIA).
Luis has 19 years experience in the telecoms

industry, and has worked with several large
telecom groups. Luis is the leader of
Ernst & Youngs telecommunications
practice for the Americas region.
David has been with Ernst & Young for over

twenty six years and has worked in a number of
countries including the UK, USA and Australia.
He is the coordinating core assurance partner
on Telstra and the telecommunications and
media & entertainment leader for Asia Pacific.
Rohit
Puri
Bala
Balakrishnan
Adrian
Baschnonga
Director, Global
Telecommunications
Center
Telecommunications
Partner United States
Senior Analyst, Global

Telecommunications
Center
Rohit is a Director within Ernst & Youngs

Global Telecommunications Center, and
currently leads the development and
implementation of the Centers strategy. He
brings over 12 years of professional services
experience focusing on telecoms finance and
business strategy.
Bala has over 20 years of consulting and

industry experience within telecoms and other
industries. Bala has assisted several cable
and telecommunication companies with the
definition and implementation of strategic
initiatives, including channel strategy, sales
effectiveness, marketing effectiveness and
analytics, CRM strategy and implementation,
product profitability, and operations
effectiveness initiatives.
4
Adrian Baschnonga helps produce and

deliver thought leadership for the Global
Telecommunications Center. He advises clients
on strategic issues in the telecommunications
sector and is a regular speaker at industry
events.
Vincent de La
Bachelerie
Dennis
Deutmeyer
Mark
Gregory
Telecommunications
Partner France
Global Telecommunications
IFRS Leader
Telecommunications
Partner United Kingdom
Vincent de La Bachelerie has been involved in

the telecommunications sector for 20 years.
Vincent has extensive experience working
as lead partner on large telecom groups.
He has also participated in other projects
for telecommunications operators including
consulting and advisory work, merger and
acquisition projects and valuations.
Dennis has over 24 years experience

providing auditing and advisory services
to of our largest U.S. telecommunications
clients. Dennis is the Global IFRS Leader
for the Telecom Sector.
Mark has over 25 years experience in more

than 40 countries as an advisor to the
telecommunications industry, working in
strategy, regulation, cost and pricing analysis
and market analyses. In his career he has
undertaken engagements for several large
telecom groups.
Manesh
Patel
Michael G.
Stoltz
Jeremy
Thurbin
Telecommunications
Partner India
Telecommunications
Partner United States
Telecommunications
Partner France
With over 19 years of experience working

with Indian and multinational companies in
the telecommunications sector, Manesh Patel
currently leads the telecommunications risk
advisory services group in India.
With 35 years of experience serving global

clients, Mike has extensive experience
working as lead partner on large telecom
groups. He has also participated in other
projects for telecommunications operators,
including risk reviews, regulatory,
operational assurance and improvement
and valuations.
Pieter
Verhees
Telecommunications
Partner Netherlands
With over 15 years of experience, Pieter

Verhees is currently working with leading fixed
and mobile telecom operators, in and outside
Europe, delivering and implementing complex
projects, including price squeeze methods and
models, costing models, cash-flow forecasting
capabilities, performance management and
regulation.
Jeremy is a partner in the Paris Assurance

practice experienced in telecoms and media.
His experience covers the audit of the
30b French fixed line, internet and mobile
operations, the internal control 404 audit, and
the international operations. He has extensive
experience of internal audit, fraud, internal
control and risk management issues within the
telecommunications industry.
Sector context
Safe haven positioning threatened by
questions over future growth
Telecommunications has weathered the downturn

and subsequent economic uncertainty and volatility
relatively well compared to many other sectors. As a
result, the sector is quite solidly positioned as a
defensive safe bet in the eyes of investors (though
the mobile segment is slightly more exposed).
Looking ahead to future structural trends in the
sector, players in Europe and other developed
markets are likely to benefit from some easing of the
regulations on mobile termination rates, while
landline is set to see the pace of its structural decline
slow down. More generally, the outlook is positive as
smartphone growth opens doors to new
opportunities in the sector.
But this silver lining comes with a cloud: investors
are taking an increasingly ambivalent view of the
sector, asking questions about the levels of capital
expenditure that will be needed to support future
growth. They are also questioning whether operators
will take their fair share of future expansion in
service revenues, or whether the over-the-top
players will once again seize the initiative in
monetizing new offerings.
Reaping the rewards of a defensive status
Through its history, the telecommunications sector has often
demonstrated its robustness in downturns and periods of market
uncertainty. The recent past has been no exception. The sector is
riding out the economic storms relatively well. For example, as
Figure 1 shows, the fluctuations in telecoms revenue growth in
Europe have been far smaller than the volatility in European GDP
over last three years.
This picture is being replicated in other regions across the world,
with operators robust defensive positioning generally regarded
as being reinforced by strong cash flow and rising dividend
yields. In Asia, the high valuation multiples currently being
applied to mobile players signal continued confidence in the
outlook for the sector. And in North America, investors remain
optimistic about the ongoing impacts of increasing smartphone
penetration and investment in 4G networks.
Figure 1. Europe GDP and telecoms revenue development1
% change y/y
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
Q4
08
Q1
09
Q2
09
Q3
09
Q1
01
Q2
10
European telecoms revenue growth
Q3
10
Q4
10
Q1
11
Q2
11
Euro area real GDP growth
However, challenges remain. Experience shows that operators

revenue performance tends to be linked to employment rates
which are trending downward and under threat of an
accelerating decline. And of the sectors segments, the stillgrowing mobile segment is the most economically sensitive,
having seen its voice volumes fall significantly during 2009 in
the wake of the recession.
Improving performance supported by structural

trends
Operators can look forward to improving performance, helped by
positive structural trends. For example, rates of landline loss are
slowing in the European fixed-line. And operators worldwide
have proved themselves strong on cost control in recent years,
with strategies such as network sharing helping to ease the
pressure on infrastructure upgrades.
Figure 2. Telecoms companies Operating Cash Flow margin
2
percentage by region, 2011F2013F
Operating cash ow margin (%)

25
20
15
10
5
0
Global
Americas Asia ex
Japan
FY 2011
1Eurostat; Deutsche Bank, European Telcos: The best way to play, 5 September 2011
(reports were sourced from author website unless otherwise noted).
2Macquarie, Global Telecoms, 15 September 2011.
Q4
09
Japan
FY 2012
Europe
FY 2013
Africa
Driven by such cost control measures, operating cash flow

metrics are forecast to improve for global operators. Investors
are positive on North American telcos due to early investment in
4G and high smartphone penetration, while high valuation
multiples in Asia reflect confidence in continued revenue growth.
This improving picture, highlighted in Figure 2, both reflects and
reinforces the current assessment by investors and analysts that
the global telecommunications sector can weather any financial
storms that may be ahead.
A bright growth outlook

As these trends play out, the sector is already outpacing recent
assumptions of its growth rate (see Figure 3). Mobile connections
are forecast to surpass the overall human population in 2014, as
the long tail of users in emerging markets get connected, and
as trends escalate such as multiple SIMs and devices per person,
embedded SIMs and machine-to-machine (M2M) connectivity.
Figure 3. Global mobile device and subscriber penetration3
Global population and mobile connections (m)
8,000,000
6,000,000
At the same time, global smartphone shipments continue to

escalate at impressive rates, with wireless data growth set to
remain strong across all regions although minutes of use (MoU)
are flattening in mature markets such as the US.
but clouds are gathering

Against this generally improving outlook, there are conflicting
perspectives on how the sector will evolve. As Figure 4 shows,
data is projected to rise from 20% of global mobile revenues in
2008 to 36% in 2015, threatening major disruption to revenue
models. Investors are also concerned about the massive capex
that will be needed to support this growth, and about whether
over-the-top players might once again beat the operators in
the race to secure new revenue streams, as they did with
mobile apps.
As a result, investors view of the telecoms sector remains
fundamentally ambivalent, reflecting the difficulty reconciling its
structural weaknesses such as heavy regulation of highermargin activities with specific opportunities for rapid growth,
such as mobile data. There is also concern over the trade-off
between the cost and value of new growth areas, given the
uncertain capex commitments as mobile traffic growth and
mobile data revenue growth diverge.
Against this background, focusing on dividend yields tends to
encourage a short-term view of the sectors performance. Yet
this is a sector where the models for long-term value creation
need to be addressed and soon.
4,000,000
2,000,000
Figure 4. Global mobile voice and data revenues

2008 2009 2010 2011 2012 2013 2014 2015
Population
Mobile connections
Revenue (US$m)
1,200,000
1,000,000
800,000
Annual smartphone shipments (m)
600,000
600
400,000
500
200,000
0
400
300
2009
2011
Mobile voice revenue
200
FY 2012E
FY 2011E
FY 2010
FY 2009
FY 2008
FY 2007
FY 2006
100
0
2010
3Ovum, UNFPA, 2008 Population Revision Database, Ernst & Young analysis; Deutsche Bank,
Global Telecommunications, 25 July 2011.
4Ovum Mobile Voice and Data Forecast 2011-2016, January 2012; Cisco Visual Networking Index.
2012
2013
2014
2015
Mobile data revenue
Executive summary
The top 10 business risks for telecoms
operators
The top 10
1 Failure to shift the business

model from minutes to bytes
2 Disengagement from the

changing customer mindset
3 Lack of confidence in return on
investment

4 Insufficient information to turn

demand into value
5 Lack of regulatory certainty on

new market structures

6 Failure to capitalize on new

7 Poorly formulated M&A and

partnership strategy
8 Failure to define new business

metrics
9 Privacy, security and resilience
10 Lack of organizational flexibility
Aggregating our interview responses worldwide, here is a summary of

each of the top 10 business risks for telecoms operators.
Failure to shift the business model from minutes to bytes
As value shifts from minutes of usage to volumes of data, operators need to move away
from their legacy strategies focused on customer retention, which have had the effect
of commoditizing the value of minutes and bandwidth in customers eyes. Instead of
concentrating on fighting churn, operators need to target revenues from new services
that tap into rising demand and master a wider array of charging models to monetize
these services.
Disengagement from the changing customer mindset
With global technology brands now top of mind for consumers, and technology cycles
quickening, operators need to understand and respond to fast-changing customer
expectations and behaviors if they are to fight off the competitive threat from over-thetop providers. This will require operators to communicate clearly the underlying value
of the network and the sources of added value that differentiate their offerings in new
service areas. Innovation in the service model could also be used to build brand loyalty
in the same way technology players have done.
Lack of confidence in return on investment
While operators have proved adept at managing capital investment and balancing it
flexibly with free cash flow and dividends, it is increasingly clear that tight capex control
can limit their ability to grow new services quickly. So they need to maintain their
commitment to investing in growth opportunities, while tracking technology and
consumer developments closely to ensure they target their financial investments
at the right areas at the right time.
Insufficient information to turn demand into value
To drive profitable customer propositions and improve their time-to-market for new
services, operators need accurate, timely and comprehensive business intelligence and
customer analytics, underpinned by aligned and integrated operational support and
billing systems. These elements pave the way for efficient growth by enabling operators
to produce better business intelligence for decision-making, helping them understand
customer changes before their competitors, and allowing them to reuse network data in
collaborative partnerships. Better information can also help operators reduce
operational costs and ensure regulatory compliance.
Lack of regulatory certainty on new

market structures
Uncertainty over regulators approaches to new market

structures is undermining operators willingness to invest. It is
increasingly crucial for governments and regulators to adopt
pro-investment policies to sustain the sectors momentum and
for operators to form workable stances on a range of issues,
including the increasing relationship between fixed and mobile
policies. At the same time, all these groups must work together
to achieve greater clarity over regulatory approaches.
Failure to capitalize on new types of

connectivity
New types of connectivity such as machine-to-machine (M2M)

are redefining the concept of connectivity, requiring operators to
adopt new strategies. Instead of continuing to think of
connections in human terms, operators need to develop new
understandings of connectivity and target new growth areas.
This will mean identifying core competencies for use in
composite value chains and delineating clearly between the need
to build capability and the need to partner or outsource.
Poorly formulated M&A and partnership

strategy
Though M&A activity has accelerated recently, its nature and

risks have changed. Footprint control increasingly takes
precedence over footprint growth, and political, macroeconomic
and regulatory risks are increasing. But acquisitions and
partnerships are essential for success in emerging market
segments such as mobile advertising and cloud computing.
Operators need to clearly discriminate between when they
should acquire and when they should partner. The ability to
sustain partnerships will emerge as a strategic differentiator.
Effective management and implementation of M&A and
partnerships offers significant operational upside to telecom
players.
Failure to define new business metrics
The metrics and key performance indicators (KPIs) that

operators use to manage their operations internally and
communicate their performance and prospects externally have
not kept pace with the shift in business models from minutes to
bytes. Many internal metrics are still service- and networkoriented, and do not provide enough granularity to improve the
customer experience. Also, commonly used external metrics
such as average revenue per user (ARPU) fail to give investors a
full picture. Operators urgently need to define a new and
different set of metrics that puts the customer first and leads to
improved financial performance.
Privacy, security and resilience
Customers place more trust in operators than in social networks,

regarding operators as security guarantors across a range of
services. Yet they still hold operators responsible for threats
from third parties even for mobile malware attacks and rogue
apps. Operators should work closely with governments to clarify
their responsibilities in areas such as anti-terrorism and content
for children, and collaborate with suppliers and partners to
tackle privacy and security issues in new service areas such as
cloud security and mobile apps.

With their organizational structures subject to forces such as the
shift to data services, the rise of partnering and the rising
imperative for speed-to-market, operators have already made
significant changes to their organizations. But more are needed.
Operators now need to align their business units to maximize the
economies of scale and scope in their geographic footprints
while reconciling the competing forces of geographic sensitivity
and global strength.
The top 10 business risks
Failure to shift the business model from

minutes to bytes
Losing ownership of the client was ranked as the telecoms

sectors top business risk in 2008 and 2010. Our analysis shows
that this risk has now been overtaken by the urgent need to
develop and deliver new data-enabled services that will generate
fresh revenues from users. And the customer-focused risk of
disengagement from the changing customer mindset has
slipped to number two, as the ongoing fragmentation of the
sector value chain makes it increasingly clear that no single
participant can ever truly own the customer.
The risk of failing to shift from minutes to bytes reflects the new
challenges now facing operators around the world, as a result of
aggressive moves by competitors entering from other sectors
and rapid change in telecoms established value chains. Pivotal to
these changes is the migration of value from charging for
minutes of usage to carrying rising volumes of data across
networks.
Focusing on retention stifles value

As operators respond to this seismic shift, they need to move
away from legacy strategies that have focused on retaining
customers loyalty rather than monetizing demand. The focus on
preventing and minimizing customer churn has had the effect of
commoditizing the value of minutes and bandwidth in customers
eyes.
The direct impacts of this commoditization are clear in offerings
such as free upgrades for fixed broadband, flat-rate mobile data
services and discounted multi-play packages. These underline
the fact that user-loyalty considerations are now actually stifling
value creation.
Pursuing new service areas

Instead of concentrating on fighting churn, we believe that
operators should now raise their sights to target revenues from
new services that tap into rising demand. As Figure 5 shows,
data traffic is expected to grow exponentially in future years.
As demand increases, new consumer service areas are being
exploited by players with new business models, such as
freemium music and data hosting/file transfer services, and
advertising-supported apps. Even operator-provided products
such as SMS that were previously insulated from new offerings
are under growing pressure from new free services, such as
mobile instant messaging.
5Ovum Mobile Voice and Data Forecast 2011-2016, January 2012;
Figure 5. Global mobile data revenue and traffic growth5

Trafc
(PB per
month)
Revenue
(US$m)
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
6,000
5,000
4,000
3,000
2,000
1,000
2010
2011
Mobile data revenue
2013
2014
2015
Mobile data trafc
Adapting to a wider ecosystem

In response, operators need to adapt their business models to a
wider ecosystem and make firm decisions about which revenue
sources they are going to target within that broader
environment. As Figure 6 shows, the current split of revenues is
roughly 50% in the consumer segment, with the rest divided
between business and wholesale.
Depending on the chosen strategy, this split could evolve by
2020 into a smart operator with revenues dominated by
customers or a lean model rebalanced toward wholesale
service provision. In general, telecoms revenue mix forecasts
point to an increasing shift toward wholesale. Operators face the
challenge of identifying new types of wholesale customers in the
context of a shifting value chain.
Figure 6. Operator revenue mixes 2020 scenarios6
Current
Smart operator
2020
60%
Lean operator
2020
20%
0%
20%
30%
50%
30%
20%
40%
60%
Consumer
Business
25%
15%
50%
80%
100%
Wholesale
while seizing the enterprise opportunity

In light of developments such as the rapidly intensifying
competition for consumers spending, the revenue growth
potential in the enterprise segment remains high in comparison
to the consumer market. To exploit this potential, business
models for enterprise customers have to embrace new
approaches to provisioning such as cloud computing
alongside collaborative approaches to service development
and delivery.
Cisco Visual Networking Index.
6Ovum, Telecoms in 2020: Executive Summary, December 2009.
10
2012
Figure 7. Top 10 global brands 20117

Rank
2011
Rank
2010
Rank
2009
Brand
Industry group
Google
Technology
20
27
Apple
Technology
Microsoft
Technology
IBM
Technology
Walmart
Retail
Vodafone
Telecoms
10
10
GE
Diversified
Toyota
Automotive
11
14
AT&T
Telecoms
10
HSBC
Financial services
85
3DTV
Tablet
27
Netbook
33
e-Reader
54
One of the reasons for this acceleration is that operators fixed

and mobile networks are now a platform for access to a wide
number of sectors and services, such as television, retail and
banking. As this explosion in online/mobile applications gathers
pace, disruptive players are leveraging their rising brand values
to extend their service propositions. At the same time, devices
are playing a pivotal role in shaping the mobile customer
experience.
7Brand Finance, Global 100, September 2011.

8Ofcom, Communications market report: UK, 4 August 2011.
11
55
Smartphone
60
HDTV receiver
93
Laptop
100 98
80
60
40
20
0
Games console
This risk is underlined by the extent to which technology brands

are now top of mind with customers. As Figure 7 shows, todays
top four global brands are all technology players, with the
top-ranked operator brand coming in at number six.
UK device penetration
Q1 2011 (%)
HD-ready TV
As we previously noted, there is now very little prospect of any

individual participant in the value chain fully owning rather
than sharing the customer. So, as well as slipping to second
place behind the need to migrate from minutes to bytes, our
number one risk in 2010 of losing customer ownership has
evolved into the risk of becoming disengaged from the
customers changing mindset.
Figure 8. Take-up of consumer electronics devices8
Landline phone
Disengagement from the changing

customer mindset
This dominance by the technology players reflects the extent to

which quickening technology cycles across both the consumer
and enterprise segments are impacting consumers everyday
working habits and lifestyles, and reshaping their brand affinities.
As Figure 8 indicates, multiple devices per user is increasingly
the norm. And the time taken for new technologies to reach 50%
penetration is shortening rapidly down from 15 years for mobile
phones to 45 years for smartphones and tablets.
Mobile phone
In parallel with these initiatives, operators should seek to master

a wider array of charging models, ranging from flat-rate to
per-event and ad-supported. And cross-sector growth strategies
will require vertical market business models, tailored to the
particular sectors a need well served by the low costs and high
scalability and configurability of cloud services. All of these
changes, in turn, require changes to IT and charging systems.
Quickening technology cycles reshape brand

affinities
TV set
Operators are embracing this message, as demonstrated by a

raft of announcements in late 2011 of cloud-based unified
communications and collaborations services for businesses,
often supported by new data center investments. Small and
medium-sized businesses are expected to act as early adopters
for these cloud-based services, an area where operators are
continuing to make good headway.
Adapting to the new customer mindset
Ambivalent outcomes
As these changes in customers mindset and behavior continue

and seemingly accelerate operators have an absolute need to
adapt their service offerings and customer experience to reflect
these shifts in order to sustain and build customer engagement.
These responses should be supported by clear communication
with customers on the value of the network and on the effort and
investment required to provide high-quality services.
However, tight capex control has ambivalent outcomes and

increasingly risks sidelining operators from future growth.
External forces such as regulation and customer demand mean
operators remain cautious about investing in infrastructure.
These same considerations together with uncertainty over new
market structures are also contributing to persistent doubts
over the revenue potential of new services.
Network quality is often taken as a given, but it shouldnt be.

Service quality is not just about the device or application; it is
also about the network infrastructure without which these
elements would never work. If operators worldwide can get this
message across to customers, then they will be able to improve
perceptions of added value including price, quality and
convenience and to work the proven levers of brand strength in
telecommunications, including high trust and credibility.
As Figure 9 shows, levels of capital intensity remain largely

stable worldwide and are now relatively consistent in all regions.
Growth-driven capex in emerging markets is falling back from its
previous highs, and the release of new spectrum is lagging in
some developed markets. Nevertheless, there is a risk that tight
capex control can undermine service quality, competitiveness
and the growth prospects of new services.
The scalability, flexibility and low costs of cloud computing not

only help operators address the number one risk of failing to
shift the business model from minutes to bytes they can also
help operators better engage with the customer mindset. As a
host of players from the technology and telecoms sectors seek to
deliver new services either individually or via partnerships
the need to differentiate is paramount. With this imperative in
mind, operators should clearly define and communicate their
core added value in areas of new service provision such as
their security credentials in network-based enterprise services;
their ability to deliver new types of bundle packages for
consumers; and their role as a trusted provider of new and
emerging services, such as m-payments.
Lack of confidence in return on

investment
In our 2010 report, the risk of ineffective infrastructure

investment was ranked in fourth place. This year, the risks
around investment have risen to third, while also evolving into a
lack of confidence about the level of returns.
In the past two years, operators have been quite successful in
tackling the challenge of the data deluge on their networks,
thanks to a combination of smart investment and growing use of
alternatives such as WiFi and offloading to backhaul. These
factors, together with operators readiness to flex capex to
maintain free cash flows and dividends, have underlined their
strong capex control and reinforced their defensive status. There
is also a trend toward moving capex spend into opex through
outsourcing, in order to smooth capex spend over time.
Figure 9. Telecoms capital intensity by region 2008Q2 20119

Fixed and mobile
capex/sales (%)
30
25
20
15
10
5
0
2008
2009
North America
Europe
Q1 2011
Asia Pacic
Q2 2011
MEA
The importance of timing

With the number of high-speed mobile connections globally
continuing to grow rapidly (see Figure 10), getting the timing of
new investments right is critical for achieving the targeted
returns. To do this, operators need to understand clearly how
infrastructure upgrades relate to customer demand, competitor
actions and government industrial policies. This can be
supported through better leveraging and optimization of legacy
networks to complement network/service availability.
9Ovum, Network infrastructure report, 19 September 2011.
12
2010
Figure 10. Global high-speed mobile connections10
3,500,000
Not having all these elements in place threatens operators

efforts to increase time-to-market and build customer-centricity.
It can also undermine the potential returns on their ongoing
investments. This risk relates to the inappropriate systems and
processes that ranked eighth on our list in 2010. However, the
issue now is both more holistic and more pressing.
3,000,000
Added urgency
Connections split by technology (000)

4,500,000
4,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
2009
2010
2011
2012
2013
2014
WCDMA
TD-SCDMA (incl. TD-HSPA)
HSPA
LTE
2015
2016
CDMA 1XEV-DO
This is a complex task. It requires confronting challenges such as

uncertainties in supply and demand amid factors such as
spectrum releases, soaring usage of high-bandwidth applications
and shifting market structures as network sharing and
consolidation continue to gain ground. Also, many operators
have multi-technology strategies and fail to fully understand the
complementarities and optimization factors between them.
Operators need to tackle all these challenges while continuing to
invest in network infrastructure. All too often, their capex
planning is driven by a focus on protecting cash flow or by
pressure to build out greater bandwidth capacity even though
the business case remains ambiguous, thus limiting the future
revenue and margin potential of new services.
These drivers for capex planning should change, for several
reasons. For example, industrial policies in many markets will
require substantial increases in super-fast broadband coverage
over the years to 2020. Also, customers in all segments and
markets are increasingly concerned about network quality.
Insufficient information to turn demand

into value
As operators undertake the shift from minutes to bytes and seek

to justify continued investment in new infrastructure and
services, information becomes increasingly vital to their ability to
create value. To drive profitable customer propositions,
companies need accurate, timely and comprehensive business
intelligence and customer analytics, underpinned by the right
operational support and billing systems.
The requirement to ensure the right systems and processes are

in place is being given added urgency by a widening gap between
what operators know they need to do and what they are
achieving. As Figure 11 shows, they agree that time-to-market is
increasingly important. Yet operators time-to-market for new
services has not improved in the last two years, and the
percentage of operators that can bring products to market
quickly has actually fallen since 2008.
As technology and product life cycles shorten, this represents a
growing risk especially since disruptive market entrants are
repurposing customer data dynamically for new services. In
contrast, operators are struggling to repurpose their information
assets, due largely to patchworks of legacy systems that hold
fragmented customer and network information, and a lack of
real-time analytics to build a single view of the customer across
multiple devices and territories.
Figure 11. Time-to-market telco perceptions and performance11
% service providers that say time-to-market is very important to
remaining competitive
2011
70
2008
59
50
55
65
70
75
% service providers that can bring a product to market within

6 months
2011
65
2008
67
50
55
10Ovum, Mobile Regional and Country Forecast: 201116, July 2011.

11Amdocs, Amdocs survey: time to market grows in importance, 14 April 2011
(125 senior sector executives).
13
60
60
65
70
75
Realizing the power and value of information

Operators are collecting more information about the customer
than ever before. Those who overcome the barriers weve
highlighted and leverage their information assets as successfully
as the over-the-top providers stand to reap significant benefits
(see Figure 12). Repurposing customer data in new ways can
enable operators to improve their market positioning, through
advantages such as better business intelligence for example,
anticipating market and customer changes before competitors
and reusing network data for collaborative partners and sector
verticals.
Operators that upgrade their capabilities in understanding and
applying customer data also open up opportunities to reduce
operational costs, while simultaneously improving the speed of
delivery of new data services and making it easier and cheaper
to ensure regulatory compliance. Furthermore, the value of
customer and network data extends beyond the organization
itself and will continue to rise as the sector becomes increasingly
partnership- and data-centric.
Figure 12. Advantages of repurposing data inside the business
Dynamic charging
capability
Improved
time-to-market
Better targeted marketing

initiatives
Better distribution
of network load
Deeper relationships with

third parties and partner
ecosystems
Improved monetization of new customer demands
Lack of regulatory certainty on new

market structures
As new market structures emerge, the regulatory approach to

these evolving sector ecosystems remains unclear. Consequently,
policy challenges are undermining operators willingness to
invest. This means that 2010s third-placed risk of rising
regulatory pressure has now narrowed into this years more
specific risk factor and that it is increasingly crucial for
governments and regulators to adopt pro-investment policies to
sustain the sectors momentum.
Shifting standpoints
The challenges and uncertainties around the policy approaches
to new market structures include shifting regulatory standpoints
on wholesale broadband access pricing, and the trend toward
imposing network separation as a pro-competition tool in
super-fast broadband. Going forward, new spectrum releases will
shape 4G market structures and the rules vary from market to
market in areas such as spectrum caps and trading. In new and
emerging areas such as mobile money, regulatory jurisdictions
and policies continue to lag behind the technology a challenge
compounded by the broadband as a human right lobby.
On top of these uncertainties, there is continued regulatory
pressure on legacy parts of the business, such as MTRs and
roaming. In combination, these issues have pushed regulatory
frameworks to the top of the list of challenges facing ISPs (see
Figure 13). And in tough fiscal conditions, operators know that
telecoms can be a rich source of government taxation as well as
a focus for government investment.
Figure 13. Survey: challenges facing ISPs12
Q. What is the key issue facing ISPs over the next ve years?
Regulatory frameworks
41
Return on investment
24
Launching new services
20
Access to capital
15
0
12Ernst & Young/ITU Telecom World poll, November 2011

(85 online respondents).
14
20
40
60
%
respondents
Seeking certainty
These factors are creating an urgent need for greater regulatory
certainty and, alongside greater clarity and consistency from
regulators, achieving this will require operators to engage with a
wider set of stakeholders. Consolidation in markets worldwide
will continue to impact pricing and investment, and the need to
fund next generation access and spectrum releases (see Figure
14 for European examples) will require broad market consensus
on the regulatory position. And overarching questions remain
about the impact of the net neutrality agenda across the whole
of the technology, media and telecoms ecosystem.
To engage effectively on these areas of uncertainty, operators
need to form workable sector stances on a range of issues.
These include the increasing relationship between fixed and
mobile policies for example, in the regulatory approaches in
adjacent markets (e.g., financial services) traffic management
of data services and the drive to increase broadband coverage in
rural areas.
Figure 14. European 800 MHz spectrum auctions13
Date
Country MHz Total

price
(m)
Sep 11
Italy
Jul 11
Mar 11
Spain
Sweden
60
60
60
May 10 Germany 60
Price/ Notes
MHz/
pop
2,962 0.82
1,205 0.47
228
0.42
3,600 0.73
Spectrum won by two of

three existing network
owners; simultaneous
1800MHz and 2600MHz
auction
900/1800/2600MHz
auctions also took place in
mid-2011; further 900MHz
spectrum to be released in
Q4 2012E
Failure to capitalize on new forms of

connectivity
This new risk, which has come straight into our top 10, springs
from the fact that new types of connectivity notably M2M links
require new types of strategies. As M2M takes off in various
vertical markets (see Figure 15), the very concept of
connectivity is rapidly being fundamentally redefined.
From human- to machine-based

While operators continue to think of connections in primarily
human terms, sector growth increasingly relies on new
understandings of connectivity. There is clear value in the
interconnectedness of devices, through technologies and links
including not just M2M but also NFC and multi-screen content.
The business models for monetizing connectivity are also
proliferating, spreading across the spectrum of B2B, B2C and
B2B2C.
The new connectivity-based services now emerging promise
increased efficiency, higher customer centricity and valueenhancing repurposing of existing infrastructure. But operators
moves into emerging market segments such as mobile money
are often defensive and piecemeal they also raise various
challenges that include high upfront costs, lower ARPU per SIM
card in the M2M environment, and exposure to new regulatory
and reputational risks.
14
Figure 15. Global M2M connections in 2020 by vertical

M2M connections (billions)
0.07, 3% 0.03, 1%
0.28, 13%
All three network owners

won spectrum; 1800MHz
auction took place in Oct
11 two of three network
owners won spectrum in
first round
Three of four network
owners won spectrum;
1800/2600MHz spectrum
awarded at same time to all
network owners (total price
445m)
15
Health care
Government, retail and
nancial services
0.45, 21%
14Analysys Mason, Imagine an M2M world with 2.1 billion connected things,
January 2011.
Security
Automotive and transport
Global M2M
connections:
2.1 billion
13Ernst & Young research.
Utilities
1.32, 62%
Deutsche
Telekom
International M2M
competence center
in Bonn; US M2M
outsourced to RACO
Wireless
M2M service portal

since 2010 can
be integrated into
customer environment
via API
Home security,
resource
management,
smart metering
and grid,
telematics,
logistics, retail
Vodafone
Dedicated M2M
organization launched
in 2010
Automated SIM
pre- and post-paid
provisioning; policy
management; API
integration with
customer systems
Environmental
monitoring,
remote
maintenance
and control,
tracking, health
care, metering,
automotive
telematics
and fleet
management
70
10,000
60
50
8,000
40
6,000
30
4,000
20
2,000
10
Deal value
15Ernst & Young research.

16Ovum, 14 November 2011.
16
# of deals
4Q10
Utilities, fleet
management,
security, health
care, consumer
electronics
12,000
3Q10
Jasper-powered Control
Center provides
analytics reports,
automated provisioning
80
2Q10
Emerging Devices
Org as dedicated BU.
B2B M2M is part of
Advanced Mobility
Solutions Group
# of deals
1Q10
AT&T
US$m
14,000
4Q09
Target
segments
Figure 17. Quarterly global telecoms M&A 20081016
3Q09
Service delivery
platform
There was actually a pickup in M&A deal activity in 201011

compared to 200809 (see Figure 17). However, plenty of risks
remain, including high levels of political risk in the Middle East/
North Africa, acute macroeconomic risks in Southern Europe
and uncertainty over shifting regulatory attitudes toward
competition. With operators eager to tap into the growth
potential in emerging Asia, competition and ownership issues
have emerged as hot topics in the region, notably Vietnam and
Indonesia.
2Q09
Operator M2M organization
Joining forces in an uncertain world
1Q09
Figure 16. Selected operator approaches to M2M15
Across the global telecoms sector, the rationale for consolidation

remains strong and partnership structures are gaining ground
by offering new routes to growth. At the same time, the role and
dynamics of M&A are changing, and operators are adapting their
strategies to reflect these shifts. These developments have seen
this risk rise two places from ninth in 2010.
4Q08
Local and market-specific factors such as regulation, the vertical

industry landscape and existing network coverage will play
a pivotal role in emerging service areas. Issues around
technological complexity must be assessed on a continual basis
if multi-operator and cross-sector partnerships are to succeed in
overcoming the current technological fragmentation.
Poorly formulated M&A and partnership

strategy
3Q08
By way of example, Figure 16 shows various operators

approaches to the M2M opportunity. Experience shows that
majoring on specific industries can help to differentiate
propositions and that the current stage of service maturity
varies widely between different vertical markets. So, to avoid
placing the wrong bets, operators should take great care in
evaluating emerging use cases.
2Q08
As companies seek to tackle these challenges, new strategies

can unlock incremental revenues. To realize these, operators
need to work out how best to align themselves to new growth
areas. This will generally mean deciding on their core
competencies for use in increasingly composite value chains, and
delineating clearly between the need to build capability and the
need to partner or outsource, in light of their existing network
and customer footprints.
1Q08
Unlocking incremental revenues
The changing risk landscape creates increasing uncertainty over

deal valuations and prompts greater board scrutiny and
stakeholder caution (see Figure 18). Meanwhile, the changing
nature of M&A deals reflects the fact that footprint control is
now more important than footprint growth for some players.
Also, shifts in the value chain are heralding new M&A trends,
such as the creation of joint tower management entities.
Under these circumstances, acquisitions and partnerships in
emerging market segments remain important. In the cloud
space, 2011 saw the launch of a raft of new services supported
and enabled by a diverse range of acquisitions, partnerships and
investments.
Figure 18. Deal factors in telecoms17
Q. Which of the following factors have increased/decreased over
the last six months?
Price expectation gaps
-7%
39%
Valuation uncertainty/complexity -3%

Regulatory pressures
-4%
Board/audit committee scrutiny
-4%
69%
To capitalize on such opportunities, operators need to

discriminate clearly between situations that call for
acquisitions and those more suited to partnering. Going
forward, the ability to create and sustain partnerships will
emerge as a strategic differentiator, as their scope and
usage widen due to a number of factors. These factors
include a continued focus on realizing cost efficiencies
through approaches such as network and procurement
joint ventures, and a growing reliance on cross-sector
collaboration for new product development.
In combination, these trends make it important that
operators build the ability to work with new types of
partner application developers, power utilities,
technology companies and more and continually
reassess their relationships with partners outside the
sector. However, issues over revenue shares within
partnerships remain a stumbling block.
46%
61%
Competition for assets
-7%
45%
Stakeholder caution
-7%
46%
Decreased
Partnering abilities come to the fore
Increased
17Ernst & Young Capital Confidence Barometer survey, November 2011
(interviews with 31 senior telecoms executives).
17
and externally
Failure to define new business metrics
In combination, operators internal requirement for information

to turn demand into value, and their need to sustain confidence
among investors and other external stakeholders, are driving a
further sector imperative: an urgent demand for fresh ways to
measure and communicate financial progress through a new and
different set of KPIs.
Metrics are inadequate internally

In terms of internal measurement, the problem is that operators
current metrics fall short of providing the new and timely
insights and business intelligence they need to maximize value in
the evolving ecosystem. Many internal metrics are service- and
network-oriented and do not provide enough granularity to
improve the customer experience.
In particular, customer-level usage metrics such as minutes-ofuse are failing to delineate the impact and effect of bundled and
flat-rate packages, and tend to hit a plateau once users
consumption behavior becomes established. But data service
metrics such as megabytes per user are failing to fill the gap and
are generally lacking at the customer level. For this reason,
operators are developing and applying a growing array of
operational metrics (see Figure 19).
Figure 19. KPIs for consumer fixed-line services18
External stakeholders such as investment analysts are currently

trying to gauge the value of telecoms companies by reviewing
revenue, ARPU and basic subscriber growth numbers that fail to
provide a full picture of a sector moving from a high-growth to a
pure investment-yield story. Legacy penetration rates fail to give
a clear view of the addressable market for new services, and
reliable metrics for new growth segments such as mobile apps
and advertising are lacking.
One critical issue is that analysts are not generally focusing on
or gaining access to the types of cost- and investment-related
metrics that can point to how operators can become more
effective at converting investment dollars into profitability.
Financial metrics such as return on invested capital (ROIC) offer
greater insight than EBITDA as a way to measure and
communicate intrinsic value.
Metrics to put the customer first

To address these shortcomings in their internal management
information and external communications and reporting,
operators should evolve metrics that put the customer first, and
create more granular external KPIs that highlight network usage
and related costs or new service take-up. This will enable the
sectors metrics to catch up with the way its products and
services are progressing from mobile voice growth to mobile
data maturity (see Figure 20).
Figure 20. Evolution of KPIs in mobile data
Key performance
indicator
Rationale
Return on invested capital

(ROIC)
Measures efficiency to utilize the capital

invested to generate returns
Mobile voice
growth
Return on capital employed

(ROCE)
Indicates the efficiency and profitability of the

telcos capital investments
Revenue generating unit per

subscriber
RGU per sub describes the average number of

services taken subscribers, reflecting bundle
take-up
TV market share
Share of the TV market helps communicate

IPTV strategies
Voice maturity, mobile Mobile data maturity

data growth
Network coverage SAC/SRC

Subscribers
Churn
Penetration
Data share of revenue
Customer market
Mobile internet page
share
MoU
ARPU
Pre- and post-paid
split
hits
Revenue market
share
transmitted
3G/4G network
utilization
Data usage per

subscriber
M2M connections
Mobile payment users
3G handset take-up
Smartphone take-up
On-portal visitors and

traffic
App store revenue
18KPN, Third Quarter Results 2011, 25 October 2011.
18
Cost per bit
The new KPIs for this environment will need to include metrics
such as revenue generating units (RGUs) per customer and
segment market shares and track the penetration of new
services into the installed base. They will also have greater
sensitivity to households and existing coverage areas, provide
deeper insights into network utilization patterns such as urban
versus non-urban traffic, and delve deeper into customers
smartphone behaviors.
Additional internal operational metrics will also help operators
improve the customer experience, with more insights into quality
of experience, and KPIs built on aggregated data drawn from a
variety of systems and processes, such as service configuration,
billing and customer care.
Trusted to be secure but blamed for breaches

Carriers should be well placed to help users address these
threats, since they are regarded as more trustworthy than other
service providers, such as social networks. Yet customers hold
operators responsible for threats or attacks from third parties
and suppliers even including mobile malware and rogue apps. At
the same time, privacy concerns hamper service innovation. For
example, location-sensitive data can support advertising-based
revenue models but may raise concerns around customers
privacy.
Figure 21. User perception of responsibility for mobile security19
Unexpected items on bill
Privacy, security and resilience
This risk area has risen by one place since 2010, reflecting the
conflicting pressures that operators face. On the one hand,
operators are widely regarded by customers and business
partners as security guarantors across a range of services. On
the other, they have to try to fulfill this role while coping with an
array of threats that are expanding rapidly in number and
severity.
The challenges are compounded by rising concerns among
customers. As mobile phones evolve into personal data hubs,
end users are facing privacy and security dangers that are
escalating and multiplying, as threats converge from a range of
environments, including SMS, cloud, Web 2.0 and mobile apps.
As a result, customers are now as concerned about data integrity
as call quality (see Figure 21).
6 9 11
SMS text phishing
55
15
22
Unsolicited messages/spam
54
18
21
23
20
Malware/viruses
Rogue apps that can
steal data/spy
0%
Carriers
Content/app provider
46
36
11
10
50%
37
17
100%
Mobile handset manufacturers

Me/the individual
A recent survey by Futuresight for the GSMA highlighted privacy

issues. The survey showed that a large majority of mobile users
in developed markets feel uncomfortable with personal data
being collected and repurposed by applications or shared with
third parties for promotional purposes. It also found that four out
of five end users believe safeguarding their personal information
is very important, with customers voicing concern about areas
such as targeted advertising, location-based services and
third-party information-sharing.
19Adaptive Mobile, Mobile Trust & Security Barometer US, September 2011
(survey consists of online interviews with 2,000 smartphone users).
19
74
New definitions new responsibilities

To manage the resulting risks effectively, operators should bear
in mind that concepts of digital rights are an emotive issue for
customers and that national security considerations are rising in
importance. The picture is further complicated by the fact that
the nature and scale of security concerns vary for different
customers and stakeholders, such as consumer, enterprise and
government.
At the same time, changing definitions of privacy and security
are creating new responsibilities for the sector. In response,
operators need to work closely with governments to define
clearly their responsibilities regarding content and data, such as
anti-terrorism measures and content for children.
Operators should adopt a similarly collaborative approach with
suppliers and partners, working with them to tackle privacy and
security issues in new service areas (cloud security, mobile apps).
Emerging service types such as mobile money and M2M
connectivity will require new approaches to ensure solutions are
secure. Data retention is a particularly sensitive issue, with a
wide range of related effects (see Figure 22).
Figure 22. Key issues in data retention regulation
Period of data
retention
Timing of
implementation
Delineating data types

according to type of
operator
This risk is new to our top 10 this year, driven by the need for
operators to develop more agile organizations that can execute
their new strategies. With their organizational structures now
subject to various forces, including the shift to data services, the
rise of partnering and the growing imperative for speed-tomarket, operators have already made significant changes to
their organizations. But more are needed.
The changes to date include a concerted sector-wide move away
from product-based structures and toward segment-orientated
organizations. New business units have also been created to
investigate and exploit new growth areas (see Figure 23).
However, the forces affecting organizational structures continue
to change and strengthen. These forces include intensifying
regulation of many incumbents domestic businesses, fastchanging levels of market maturity across different regions, and
the need for in-market and cross-border efficiencies in fastchanging areas of demand, such as enterprise ICT, smart
services and fixed/mobile bundles.
Figure 23. Carrier organizations sample new business units20
Date
Conditions of access
to and use of retained
data
Regulatory
issues
Operator
Sep 11 Telenor
Notes
Digital
Services
Driving growth in internet-based

ecosystems. Includes existing
businesses such as Telenor Next
and Comoyo
Group
New unit established to drive
Industrial
operational efficiency, crossDevelopment market streamlining and other
synergies
Cost reimbursement
of service provider
compliance
External attitudes to
data retention, e.g.,
end users, privacy
groups
New Unit
Sep 11 Telefonica Telefonica

Digital
Headquartered in London, with

2,500 employees from Global
Services unit, Jajah, Telefonica R
+ D among others
Global
Resources
New operating unit designed to

leverage economies of scale and
drive transformation into fully
global company
Customer
Sales and
Service
Merger of existing sales and retail

customer service
Jul 11
Telstra
Applications Created to spearhead investment

and Ventures in new and emerging broadband
businesses
20Operators, Ernst & Young research.
20
Further refinements needed for new market dynamics

Given these forces, operators have to work out how they can best align their business
units to maximize the economies of scale and scope in their geographic footprints. To
do this, they must revisit their combinations of regional and globally integrated
structures and devise new organizational constructs that reconcile global strength with
important local market factors such as a unified customer view and collective
purchasing power.
Four options for operators organizational structures are shown in Figure 24, and the
outcome for most operators is likely to reflect a balance between all of these. In
achieving the right structure, flexibility and pragmatism will be essential.
Segmentation strategies should recognize that the boundaries between customer types
will remain blurred, while regular large-scale restructuring is impractical and
prohibitively expensive.
Figure 24. Options for operators organizational structures
Segment-based
Consumer
Enterprise
Product-based
Wholesale
Fixed
Function-based
Finance
HR
Operations
Mobile
Other
Geography-based
Domestic
21
Regional
Intl
Whats below the radar?
The top 10
1 Failure to shift the business

model from minutes to bytes

2 Disengagement from the

changing customer mindset
3 Lack of confidence in return on

investment

4 Insufficient information to turn

demand into value
5 Lack of regulatory certainty on

new market structures
6 Failure to capitalize on new

7 Poorly formulated M&A and

partnership strategy
8 Failure to define new business
metrics
9 Privacy, security and resilience
11 Evolving service
cannibalization scenarios
12 A more pressing green agenda
13 Concentration of equipment
vendors
14 Difficulties in managing debt

and cash
In addition to identifying the top risks, we also asked our telecoms

commentators to identify risks that sit directly below the radar, and
which may rise up the agenda in years to come. The four risks they
highlighted are split evenly between the categories of compliance,
operations, financial and strategic.
Below the radar the next four risks

service cannibalization
11 Evolving
scenarios
This represents a new below-the-radar risk for 2012. New types of cannibalization are
appearing, such as the rapid rise of mobile instant messaging as an alternative to SMS.
Operators need to anticipate and manage such trends by moving beyond legacy
assumptions about users behavior.
12 A more pressing green agenda

The green agenda is now top of the sectors below-the-radar risks. Operators should
move beyond regulatory compliance and ensure that they begin to differentiate
themselves in customers eyes through greater sustainability.
13 Concentration of equipment vendors

Consolidation is an ongoing feature of the telecoms equipment market and M&A
activity in the device and equipment market remains high in 2012. Operators need to
ensure they are not overly reliant on any single equipment manufacturer.
14 Difficulties in managing debt and cash

Operators entered the economic crisis in better shape than other sectors due to their
balance sheet repair efforts in 200203. But a more constrained environment is now
putting new financial demands on the sector. More defensive capex programs are
helping to maximize operating cash flow, and current net debt/EBITDA levels remain
strong, with the European average currently around 2.0x.
22
ial
c
an
Failure to define
new business
metrics
A more pressing green

agenda
Lack of regulatory
certainty on new
market structures
Lack of
confidence in
return on investment
Failure to shift the
business model
from minutes to bytes
Disengagement
from the changing
customer mindset
Poorly
formulated M&A
and strategic
partnerships
ra
tio
ns
t
ra
St
Lack of
organizational
flexibility
Evolving service
cannibalization
scenarios
23
Privacy,
security and
resilience
Insufficient information to
turn demand into value
Failure to
capitalize on new
eg
ic
Co
m
pl
e
nc
ia
Fi
n
Difculties in managing
debt and cash
e
Op
Concentration of
equipment
vendors
24
Global
Telecommunications
Center contacts
Global Telecommunications Leader
+1 415 894 8787
jonathan.dharmapalan@ey.com
Holger Forst
Global Telecommunications Markets Leader
+49 221 2779 20171
holger.forst@de.ey.com
Prashant Singhal
Global Telecommunications Markets Leader
+91 124 671 4746
prashant.singhal@in.ey.com
Olivier Lemaire
Telecommunications Leader EMEIA
+352 42 124 8356
olivier.lemaire@lu.ey.com
Luis Monti
Telecommunications Leader Americas
+55 11257 33550
luis.monti@br.ey.com
David McGregor
Telecommunications Leader Asia-Pacific
+61 3 9288 8491
david.mcgregor@au.ey.com
25
Ernst & Young

Assurance | Tax | Transactions | Advisory
About Ernst & Young
Ernst & Young is a global leader in assurance, tax,
transaction and advisory services. Worldwide,
our 152,000 people are united by our shared
values and an unwavering commitment to quality.
We make a difference by helping our people, our
clients and our wider communities achieve their
potential.
Ernst & Young refers to the global organization of
member firms of Ernst & Young Global Limited,
each of which is a separate legal entity.
Ernst & Young Global Limited, a UK company
limited by guarantee, does not provide services
to clients. For more information about our
organization, please visit www.ey.com.
About Ernst & Young's Global
Telecommunications Center
Telecommunications operators are facing the
challenges of growth, convergence, business
transformation, technological change and
regulatory pressures in increasingly difficult
economic conditions. Operators choose
Ernst & Young because they value our
industry-based approach to addressing their
assurance, tax, transaction and advisory needs.
They know that theyve much to gain from
our clear understanding of the opportunities,
complexities and commercial realities of the
telecommunications industry wherever in the
world theyre operating.
What gives us this understanding is our Global
Telecommunications Center. Operating from
Paris, Johannesburg, Riyadh, Delhi and San
Antonio, the Center brings together people and
ideas from across the world, to help our clients
address the challenges of today and tomorrow.
Our clients benefit from our insights on key
trends and emerging issues whether relating
to the economic downturn, next-generation
services, infrastructure sharing, outsourcing,
revenue assurance, operational efficiency,
regulations, future growth markets or mergers and
acquisitions. So they can react to trends in a way
that improves the financial performance of their
business.
www.ey.com/telecommunications
2012 EYGM Limited.
All Rights Reserved.
EYG no. EF0102
This publication contains information in summary form and is
therefore intended for general guidance only. It is not intended to
be a substitute for detailed research or the exercise of professional
judgment. Neither EYGM Limited nor any other member of the
global Ernst & Young organization can accept any responsibility for
loss occasioned to any person acting or refraining from action as
a result of any material in this publication. On any specific matter,
reference should be made to the appropriate advisor.

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Top 10 risks in

About this report

The Ernst & Young risk radar 2012

The top 10 business risks:

2. Disengagement from the changing customer mindset 11

4. Insufficient information to turn demand into value

5. Lack of regulatory certainty on new market structures 14

7. Poorly formulated M&A and partnership strategy

8. Failure to define new business metrics

9. Privacy, security and resilience 19

Amid the recent global economic uncertainty, the telecommunications

As in previous years, we in Ernst & Youngs global telecommunications network seek to

Global Telecommunications Leader

Top 10 risks in telecommunications 2012

The Ernst & Young

Compliance threats originating in politics, law, regulation or corporate governance

Top 10 business risks for telecommunications in 2012

Failure to shift the

8. Failure to define new

1. Failure to shift the

Top 10 business risks

Below the radar

10. Lack of organizational

Evolving service cannibalization

A more pressing green

Difculties in managing debt

Top 10 risks in telecommunications 2012

Jonathan Dharmapalan is Ernst & Youngs

With 20 years of experience, Holger Forst has

Prashant has extensive experience of over

Olivier has 15 years of experience working in

Luis has 19 years experience in the telecoms

David has been with Ernst & Young for over

Senior Analyst, Global

Rohit is a Director within Ernst & Youngs

Bala has over 20 years of consulting and

Top 10 risks in telecommunications 2012

Adrian Baschnonga helps produce and

Vincent de La Bachelerie has been involved in

Dennis has over 24 years experience

Mark has over 25 years experience in more

With over 19 years of experience working

With 35 years of experience serving global

With over 15 years of experience, Pieter

Top 10 risks in telecommunications 2012

Jeremy is a partner in the Paris Assurance

Telecommunications has weathered the downturn

Figure 1. Europe GDP and telecoms revenue development1

European telecoms revenue growth

Euro area real GDP growth

However, challenges remain. Experience shows that operators

Improving performance supported by structural

Operating cash ow margin (%)

Top 10 risks in telecommunications 2012

Driven by such cost control measures, operating cash flow

A bright growth outlook

At the same time, global smartphone shipments continue to

but clouds are gathering

Figure 4. Global mobile voice and data revenues

Annual smartphone shipments (m)

Mobile voice revenue

Top 10 risks in telecommunications 2012

Mobile data revenue

1 Failure to shift the business