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Key takeaways
- AI a potential game-changer for telco, through direct application and indirect impact on regulation/consolidation prospects.
- Application: AI a potential 2ppt boost to ROCE with lower costs from expedited digitalisation, energy savings, network mgmt.
- Indirect: Consolidation is unavoidable to support the best networks for GDP growth. 2 fixed networks, <=3 mobile is optimum.
A second chance for Telcos
Franklin wrote "…nothing is certain except death and taxes". To that we can surely add data growth as the big data paradigm gathers pace. This needs a combination of advanced telco networks and Artificial Intelligence (AI) to manage not just the volumes, but the complexity of data. That should secure demand for telco's core product at least, and networks are evolving at pace. But more relevant is the need for network scale, and either regulation must support consolidation and the potential economic tailwind that AI can provide, or smaller players could fail. AI's more direct application within telco is to digitalise its service layer and network management, with points of ROCE to be gained. Telco revenues could benefit, opex surely, but capex too, now past its peak. AI could be the catalyst to redefine European telco as a beneficiary of this next industrial revolution.
Accelerating demand for data (needs networks)
AI is another factor supporting the growth in data traffic that means today's Megabyte becomes tomorrow's Yottabyte. Telco networks become increasingly relevant to carry the load, with fibre and mobile technologies evolving ahead of demand, and capex already past its peak. Fixed-wireless and satellite alternatives are niche, not substitutes.
Accelerating regulatory change (rebuilds barriers)
AI could add $16tn to global GDP by 2030, supporting the need for well invested large-scale networks that are increasingly mission critical for Governments to ensure economic growth and national security. This brings regulation into focus and will surely compel a shift to support investment and consolidation as we prove that smaller scale operators will struggle to survive; no more than 2 fixed networks per region, no more than 3 mobile. An ultimate incarnation of this shift is the move to break telcos up to provide more national influence over the 'NetCo', this could realise value. Else, 'Big-tech' taxation feels like an unlikely source of support to us, despite the rhetoric.
Accelerating digitalisation (boosts ROCE)
AI is a means to accelerate industry digitalisation through more automated and relevant customer interaction, (cutting call centre costs), and enhanced on-line sales channels (cutting expensive high street stores and commissions). But also, AI can be a powerful tool to plan network architecture (saving capex), predict and resolve faults and optimise energy consumption (opex). Our analysis suggests Telco could boost ROCE 2ppts from current c6% levels in the event of deep AI integration, moving above cost of capital.
Movers and shakers
The telco industry is starting to integrate AI solutions into digitalisation strategies; however our case studies indicate a more advanced state at Deutsche Telekom, Elisa and Telefonica. All should ultimately benefit, while consolidation (whether supported or forced) could also benefit those with more historic competitive disruption.
 Investment conclusions
BofA thematic strategists define the onset of generative artificial intelligence models such as ChatGPT as a pivotal moment similar to the launch of the iPhone in 2007 (see Me, Myself and AI - Artificial Intelligence Primer).
Did you know? By 2025, 10% of all data produced globally will be contributed from generative AI & 90% of online content could be created by AI. Sources: Generative AI Statistics, Nina Schick (interview on Yahoo Finance) |
For the beleaguered telecoms industry, the evolution and integration of AI provides a 'second chance' of sorts to evolve and grow profitability after poor monetisation of the initial growth of the internet and mobile connectivity. Considering multiple moving parts:
- Direct implications - Accelerating demand for data (needs networks): Managing the relentless acceleration of data growth requires a combination of advanced telecoms networks to carry traffic and the application of artificial intelligent to analyse and interpret results. For telecoms operators that means investing in fibre networks capable of 50Gbps upstream speeds to replace legacy copper and cable networks, and 5G mobile networks delivering multiple times better performance than 4G with speeds >500Mbps. Progress is well underway and ahead of the demand curve, and capex looks to have peaked. Beyond traditional infrastructure we regard satellite services as additive to coverage but not a substitute. And nor do we think fixed wireless access is a volume-based product given its poor returns on spectrum investment.
- Indirect implications - Accelerating regulatory change (rebuilds barriers): The need for well invested large-scale networks is mission critical for Governments to ensure economic growth and national security, both materially impacted by the onset of AI. This brings regulation into focus and will surely compel a shift to support investment returns - potentially via consolidation - or smaller scale operators could struggle to survive (with cracks already appearing). We show that fixed network economics are optimum in a 2-player market, but unsustainable in a 3-player market. Similarly, 5G networks are providing a better service with bigger spectrum blocks, 4 players per market looks increasingly unsustainable. An ultimate incarnation of this shift is the move by governments to break telcos up to provide more national influence over the 'NetCo' to influence investment and security implications, but this could realise value for telcos too. Meanwhile 'Big-tech' taxation, currently under consultation by the EC, feels like an unlikely source of support to us.
- Application - Accelerating digitalisation (boosts ROCE): Telco's digitalisation has proven sluggish with digital sales channels still around 25% despite the 'commodity' nature of data. AI is a means to expedite strategies through more automated and relevant customer interaction, (cutting call centre costs), and enhanced on-line sales channels (cutting expensive high street stores and commissions). But also, AI can be a powerful tool to further boost returns through more automated network planning and installation (saving capex), being able to predict and resolve faults in advance and optimise energy consumption (opex). Our analysis suggests Telco could boost ROCE 2ppts from current c6% levels in the event of deep AI integration, this is a key support to surpass cost of capital 'hurdle'.
Operator case studies
Telecoms operators have been vocal on their digitalisation plans over time. All are communicating their intention to integrate AI over time, however we observe increased disclosure and perhaps some advanced integration at Deutsche Telecom, Telefonica and Elisa.
Nokia notes that just 2% of network professionals have implemented AI-driven network solutions, 78% expect AI-driven solutions to be an important part of network strategy and 50% are in the planning and testing phase |
We provide more detailed case study disclosure across all operators later in this report, but noting some commentary from these three:
- Deutsche Telekom: DT is one of the more advanced operators, with an all-IP network supporting its 'Telco as a platform' concept with software layers supporting the integration of AI into the digital journey from network planning through implementation, customer installation and management. Examples of efficiencies include the 10x acceleration of network planning from up to 4months to less than two weeks using AI to scan and plan potential rollout possibilities and further manage the engineering process. Also using AI within network maintenance has reduced downtime by 27% with 31% customers less impacted.
- Telefonica: TEF has established a global AI lab to support the integration of AI into day-to-day operations and is vocal on the use of technology in network planning, maintenance and deployment. And at the group level TEF has >30% of sales now via digital channels with ranges of 30-50% across lines of business.
- Elisa: Elisa is also one of the more advanced telecom operators, with a third of customer processes already automated (flagging a significant cost reduction) & efficient network management helping to keep capex/sales at a maximum of 12%. In addition to progress on own processes, Elisa is somewhat special as its international digital services segment is offering a mix of software services to other telecom/manufacturing operators, sharing their expertise & infrastructure. Accounting for <4% of group revenues, but growing by double-digits, the segment can potentially benefit a lot from advancements in AI. A key requirement remains reception by competitors for those services (we have heard positive feedback), while the scalability of the business is important to improve profitability: Despite past acquisitions of profitable businesses, EBITDA is still negative as investment focus now shifts from research & development more towards sales.
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 Direct implications
Franklin wrote that "...nothing is as certain except death and taxes". To that we can almost certainly add data growth as the big data paradigm gathers pace, perhaps even faster than previously expected.
As the volume of data doubles every 2 to 3 years, our vocabulary on data size will need to expand from gigabyte (GB) to terabyte (TB), petabyte (PB), exabyte (EB), zettabyte (ZB), yottabyte (YB), brontobyte (BB), and geopbyte.Â
Managing this requires a combination of advanced telecoms networks to carry traffic and the application of artificial intelligence to analyse and interpret results. For telecoms operators that means fibre and 5G technology investment and the decommissioning of legacy copper and cable networks. Satellite services are additive to coverage but not a substitute. And nor do we think fixed wireless access is a volume-based product given its poor returns on spectrum investment & remains focused on less-dense areas.
  Welcome to the age of Yottabytes
The digital universe has reached the level of the yottabyte, with 90% of the world's data having been created in the past two years (source: IBM).
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Did you know? We are creating 2.5 quintillion (million trillion) bytes of data, every day!1,2 and global data is doubling every 2-3 years3. Sources: 1Domo, 2WEF, 3IDC |
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According to IDC, the amount of data created is projected to double every 2-3 years and, according to Statista, in 2020 we created c.64ZB of data, projected to grow to 181ZB by 2025E. Nevertheless, new applications are being developed constantly that require more data. Holograms, metaverse, brain computer interfaces and EVTOL are just some of the technologies that will be very data-heavy and are yet to be launched. Not to mention quantum computing, which could leapfrog the total data creation once commercially available. In short, data could grow even faster than expected in the coming years.