After a prolonged period of disruption spurred by new technologies, new competitors, rapidly evolving customer demands, and dwindling opportunities in the B2C space, the telecom industry is now in a position to catalyze rapid B2B growth.
McKinsey’s latest survey of decision makers across industries and geographies found that more than half of companies are planning to increase telecommunications and technology spending this year as organizations rush to embrace artificial intelligence (AI), virtualization, cybersecurity advances, and industry-specific solutions ranging from smart manufacturing to connected trucking. Moreover, we found that 80 percent of decision makers see operators as viable partners for products and services beyond core connectivity, which is critical, as leaders anticipate that beyond-core spending will grow two to three times faster than core spending. In fact, security—which decision makers rank as one of the domains best suited to telcos—is the domain poised for the greatest growth (6 to 9 percent per year).1
Our findings suggest that today’s telcos have a unique opportunity to step up, reshaping the trajectory of an industry that invested heavily in infrastructure over the past decade only to see tech companies reap the lion's share of the windfall. Even so, operators will continue to wrestle with the decline of traditional value pools like voice and multiprotocol label switching (MPLS) and the slowing growth of traditional broadband technologies.2 Moreover, our survey highlights a range of additional challenges.
Competition from hyperscalers and other non-telco players remains intense, with one-quarter of decision makers saying they would consider moving business away from telcos if viable alternatives materialized. To stay relevant, operators will need to prove they are not simply resellers but true integration partners providing end-to-end solutions—an important aspect of the value proposition, according to 55 percent of decision makers. And while information and communications technology (ICT) is already driving growth for some telcos (earnings from Swisscom’s IT business grew to 39 percent of total B2B revenues in 20244), the telco industry overall accounts for just 12 percent of the ICT market.4
Four plays, infinite pathways to growth
The landscape is shifting quickly, requiring operators to secure their presence by making bold moves now. Yet even for industry leaders who grasp the magnitude of the opportunity, it can be difficult to determine how, precisely, to seize it.
To illuminate the path ahead, we have distilled telcos’ options for accelerating B2B growth into four distinct strategies: the connectivity play, which refocuses the core connectivity portfolio by integrating “near-core” products and solutions5; the ICT play, in which telcos deliver products and services in areas like cybersecurity and cloud; the 5G network API play, which involves building and promoting application programming interfaces (APIs) to monetize network capabilities; and the ecosystem-building play, in which operators create new businesses in verticals like finance, healthcare, or security. Each operator will need to develop unique long- and short-term plans for where and how to play based on their capabilities, priorities, and market conditions. Understanding the contours of each play and choosing wisely will be essential: Combined, the four plays offer operators the potential to generate up to $160 billion in additional revenue by 2028 (Exhibit 1).
While the plays can be pursued in parallel, it is important to understand them as four distinct strategies, each with its own set of requirements and success factors. Virtually every telco will attempt the first play (connectivity), considering not whether but rather how and to what extent they might refocus their core connectivity portfolios to embrace near-core products and solutions. The second play (ICT) is within reach of most telcos but requires a distinct operating model, a strong portfolio fit, and specialized talent. The third play (5G network APIs) represents a fundamentally different way of doing business but has been gaining traction recently, as operators recognize the monetization potential of building and boosting network APIs. The final play (ecosystem building) is the starkest departure from business as usual and the heaviest lift; for most telcos today, the notion of creating new businesses in non-telco verticals remains a distant priority. Even so, it may be wise for operators to incorporate the relevant success factors into long-term decision making.
The connectivity play: Refocus the core connectivity portfolio
The first strategic play is the most familiar. Here, telcos lean into their legacy as connectivity providers while modernizing their product portfolios and go-to-market approach. Telcos succeed by positioning themselves as true strategic partners with a deep understanding of customer needs, including the most relevant 5G use cases and the connectivity required to deploy them. It will be imperative for operators to make inroads in growing maturing near-core product areas like software-defined wide area networks (SD-WAN), reduce their exposure to lucrative legacy products like MPLS, and smooth the transition for customers.
Aggregated global bandwidth demand tripled between 2019 and 2023 and is expected to continue growing. If the expected growth materializes, telcos that reimagine their approach to connectivity can capture roughly $25 billion in additional revenue by 2028.
The ICT play: Deliver ICT products and service offerings
With the ICT play, operators leverage their customer relationships and capabilities to deliver the holistic solutions that organizations increasingly prefer. Telcos position themselves as tech services players by coupling connectivity with value-added products and services in areas like cloud infrastructure, IT managed services, and cybersecurity.
With the ICT market poised for rapid growth, operators have an opportunity to capture $80 billion by 2028.
The 5G network API play: Build, boost, and monetize 5G network APIs
With the API play, telcos move further away from business as usual by creating and marketing network application programming interfaces (APIs), the interlocking puzzle pieces that connect applications to one another and to connectivity networks. Network APIs have the potential to transform entire industries, by allowing organizations to leverage 5G’s unique capabilities for use cases ranging from fleet management to video analytics-powered equipment maintenance. APIs could also be transformative for telcos, a realization that recently prompted some of the world’s largest carriers to launch a joint venture selling APIs that function across networks—allowing banks to detect fraudulent transactions, for example, or enabling streaming providers to dynamically adjust video quality based on users’ device status.
Operators pursuing the API play could capture $20 billion by 2028 by monetizing specific features like speed tiering, low latency, and edge compute discovery and by amplifying connectivity demand more broadly.
The ecosystem-building play: Create new businesses in non-telco verticals
The enormous potential of 5G and other advanced connectivity solutions presents the most sophisticated operators with a chance to break beyond the traditional boundaries of the telecom industry. With the ecosystem-building play, telcos place bold strategic bets on the most promising verticals, then set out to own relationships across the customer journey by creating independent businesses (like Telstra Health or Vodafone Automotive).
Ecosystem building is challenging, requiring operators to venture far from their comfort zones. Those that succeed could capture $35 billion in new revenue by 2028.
Playing it right: Critical success factors
Determining where and how to play is critical—and complex. By understanding the most crucial success factors, operators can identify where they are best positioned to play and where they might direct immediate investments to create the conditions for success. Knowing what it will take to win is also crucial for determining which plays are currently out of reach and how to lay a foundation for those aspirational plays moving forward.
Connectivity play success factors
Advanced technologies like SD-WAN and 5G are still considered next-gen connectivity within the telecom industry. The crux of the core connectivity play: embracing the reality that “next-gen” is now (hence our preferred term, near-core). Our survey shows that customers expect to spend 6 percent more on near-core this year than last, compared with 2.5 to 3.5 percent more on core, as they venture further into AI adoption. As organizations demand faster connections, lower latency, more comprehensive security, and a deeper understanding of the benefits that advanced connectivity can bring, telcos can lead B2B customers into the future while reducing their own reliance on legacy revenue streams. The following actions will be critical to success.
Ensure you have a strong network and get your underlay right. Near-core overlay services like SD-WAN and private network management are only as good as the corresponding underlay infrastructure. It is critical, then, for operators to double down on creating a strong and dense network infrastructure for the WAN and internet business, as well as the competitive capabilities to design and deliver state-of-the-art private network infrastructures. It will also be important to build an ecosystem of solution partners capable of integrating solutions into the core offering, as customers will expect telcos to offer differentiated SD-WAN overlay options that meet their specific needs.
Build a strong sales talent pool capable of consultative selling. Knowledgeable sales teams that are highly attuned to customer needs and deeply familiar with offerings can capitalize on 5G maturity by educating customers on the most relevant use cases and supplying the connectivity needed to bring them to life. Illustrating the value of solutions, rather than the technical superiority of products, and designing marketing campaigns around customers’ specific needs and pain points require deeper levels of expertise. Telco leaders are broadly aware that talent will be critical to growth, with 80 percent citing talent as a key enabler of value creation.6 To build sales teams capable of executing the connectivity play, telcos might shorten hiring cycles, invest in career development, and recruit leaders who have made their names in other industries and can access those new talent pools.
Create a centralized commercial management function. Success with the core connectivity play hinges on identifying granular customer segments, understanding their current and future needs, developing targeted products and offerings, and making a compelling case for themselves as the provider of choice. By creating agile, cross-functional teams spanning product, market, channel, sales, and finance, operators can develop, sell, and deliver the right solutions to the right customers at the right time. One approach is to set up a sales organization made up of agile delivery and service squads that work on shared road maps and can easily join forces to deliver complex solutions and product bundles. Squads may be organized along customer segment lines (for an end-to-end customer-centric view) or along product lines (for an end-to-end product-centric view). Either way, this may require significant changes, as many telcos have historically had separate delivery hubs for each segment—an approach that reflects and contributes to a siloed view.
ICT play success factors
The ICT (or beyond-core) market is projected to grow six times faster than core connectivity and near-core, combined (Exhibit 2). While the market is crowded, carriers have natural competitive advantages. Businesses increasingly value the simplicity of having a single vendor for connectivity and solutions, and telcos can build on existing customer relationships. Carriers have credibility in the ICT domain, but proving their value as true integration partners will be essential.
Narrow the proposition. Historically, operators have established ICT business units that offer the full portfolio of IT solutions and integration capabilities. However, they have often struggled to compete with global system integrators—failing to develop the competitive edge needed to be successful in a business that is markedly different from providing connectivity. Instead of trying to be “everything providers” that fulfill all of customers’ hardware, software, and service needs, operations would be wise to focus on a limited selection of carefully chosen products. Thoughtful, narrow propositions are more likely to result in seamless execution and fruitful consultative sales, as sales teams can develop a thorough understanding of each offering. When narrowing their ICT portfolios, operators might focus on cloud and security.
Bundle strategically. Our survey shows that for every product category except security, customers prefer integrated offerings over best of breed. Their chief reasons: improved performance and functionality, more favorable pricing, and easier integration across all technology platforms. This preference is strongest for core connectivity, where 58 percent of decision makers say integration is more important than product superiority. This finding underscores the threat posed by non-telco competitors, which can simply buy the infrastructure and play to their competitive advantages in integration excellence.
For telcos, it is critical to understand which products B2B customers value for bundled propositions. Our survey shows that security is the most sought-after feature in a bundle as well as the top criterion for vendor selection. Telcos might also pay special attention to mobile connectivity, which serves as a strong anchor product across additional connectivity and beyond-core offerings.
Pursue M&A, partnerships, and joint ventures. For certain ICT solutions, like customized unified communications and collaboration (UCC) services for large enterprises, end-to-end mobile device management, and remotely managed security, telcos are well positioned to build the solution in-house. But beyond this arena, it’s imperative to look outside the organization. Creating, scaling, and selling products like software as a service (SaaS) and platforms as a service (PaaS) requires different competencies, and tech companies have been leading the way.
It will be critical to pay careful attention to the details of post-M&A integration and joint venture execution, accounting for operating-model differences. Software businesses, for example, have ways of working that differ from those of infrastructure-focused telco businesses. Models of success include e& enterprise’s acquisition of Smartworld, one of the UAE’s leading technology solutions providers and systems integrators, which was fully integrated into the parent company´s Internet of Things and AI portfolio.
5G network API play success factors
The nascent market for 5G APIs is expected to grow to roughly $20 billion over the next three to five years. While the 5G network API play is further from the industry’s traditional domain than ICT, it could allow operators to derive substantial value from the roughly $1 trillion they have invested in their networks since 2018.7
Choose the right short-term targets while playing the long game. Telcos can begin by prioritizing use cases that either are easy to implement, like authentication APIs, or have the potential to boost revenues, like quality-on-demand APIs. Early wins that are eminently obtainable—like Deutsche Telekom’s Number Verify API, which allows apps to verify users’ mobile numbers without two-factor authentication—can serve as proof points for more complex APIs, like those leveraging edge computing. With this two-pronged approach, carriers can begin deriving value from relatively simple APIs while creating a market for more complex APIs, all the while bolstering their reputation as mission-critical partners to enterprises.
Cultivate the global developer community. Hyperscalers and tech companies have invested heavily in forging relationships with the global developer community, but carriers are just beginning to court this wellspring of innovation. If in-house, enterprise, and independent developers are enticed by the prospect of building applications that leverage network APIs, early adopters are likely to generate momentum that builds on itself. And if telcos are tapped into the developer community, they can set priorities based on developers’ needs and pain points to stimulate further demand. Telcos might remove barriers to entry with self-service platforms and freemium plans that only charge for upgrades, create developer education programs that illustrate 5G’s capabilities and current use cases, or hire developer evangelists to spread the word.
Partner with other carriers to ensure global interoperability. Developers and enterprises are unlikely to invest in creating apps using network APIs without the confidence that they’ll be able to scale them across functions, networks, and geographic regions. Carriers can enable global interoperability by collaborating with one another to create common API definitions and align on which APIs to prioritize. Momentum is already underway, with a growing list of operators embracing GSMA Open Gateway, a telco industry initiative promoting standardized APIs that function across networks. Last year, MasOrange, Telefónica, Vodafone Group, and the i2CAT Foundation research center joined forces in launching an Open Gateway API lab, described as a “developer-ready environment that will allow companies and creators to explore and leverage telco capabilities through standardized APIs.”8
Ecosystem play success factors
Some telcos may have a right to play in completely new arenas, including sectors that constitute a large share of their existing enterprise customer base. As industry solutions move from generic to verticalized, the ecosystem play offers telcos an opportunity to create differentiated solutions that increase their share of the value chain. For the vast majority of telcos today, however, the prospect of inserting themselves at the heart of industries like healthcare or manufacturing is not a viable option. Indeed, the expertise, relationships, and operating model required for ecosystem building are so distinct that they require creating a separate entity.
Understand existing capabilities and bolster them where needed. In our work with telcos worldwide, we have observed many examples of operators launching a new endeavor without first conducting a thorough capability analysis. This exercise is critical, as the ecosystem play will likely require strategic investment in new talent and capabilities and redesigned organizational structures that conform with vertical norms. Developing specialized offerings for specific industries requires a deep understanding of those industries. When operators rely too much on existing talent, they may struggle to understand the specific needs of customers in the new vertical and, consequently, to design compelling solutions.
Form partnerships or pursue M&A to gain scale. To gain scale quickly and access the capabilities needed to penetrate ecosystems, operators might prioritize mergers and acquisitions for deep adjacency plays into specific industry verticals or, alternatively, pursue a partnership strategy for a broader telecom orchestration role. Both approaches can help operators enhance their market presence and capabilities. An example of the M&A approach is Vodafone’s 2014 acquisition of Cobra Automotive Technologies, which laid the foundation for the Vodafone Automotive business build.9 With acquisitions, it will be critical to focus on the details of integrating the organizations fully.
Adopt a venture capital mindset and distinctive operating models. Ecosystem building requires operators to adopt a venture capital mindset. This strategic shift involves leveraging existing assets, expertise, and market position to explore new business opportunities, implementing agile methodologies, and adopting a structured, three-step venture capital process: ideation, launch, and scale-up. Ideally, operators will create focused, independent units with distinctive operating models and KPIs. Dedicated product development, marketing, and sales teams should operate autonomously to drive growth without being constrained by traditional telco offerings or corporate red tape. KPIs should encourage teams to develop the right products, test them in the right markets, and prioritize long-term growth.
The financial factor
Finally, it’s important to note that each play is associated with a distinctive financial return profile (Exhibit 3). When pursuing the ICT and 5G API plays, it will be important to recognize that the additional revenue opportunity comes with a margin dilution, as average EBITDA margins for these businesses are typically half the size of margins associated with infrastructure-backed connectivity businesses. At the same time, the capital expenditure requirements of these plays are generally lower, while the return on invested capital can be three times greater.
Getting started
To identify the most promising opportunities, operators might consider the following questions:
- Are the market conditions conducive to success with each play? It will be important for telcos to consider the maturity of demand within their geographical markets, as well as the competitive landscape. Is there room in the market for telcos to compete with non-telco players? Is the space saturated with tech players or other competitors that are further along in their journeys, making it difficult to catch up? For example, while the data center opportunity is currently high on operators’ agendas in Europe and the Middle East, US telcos must contend with the reality that hyperscalers like AWS and Microsoft have already achieved scale.
- What is the potential market size and growth rate for each option? Understanding growth projections within each play and for each potential industry vertical is crucial. Operators can compare these growth rates against their current business performance to identify the richest opportunities.
- How can we leverage existing assets and data? Operators might consider how to unlock the most value from their proprietary assets and data. This includes exploring opportunities in monetizing data, enhancing customer experience, and utilizing omnichannel capabilities to gain a competitive advantage in the evolving tech ecosystem.
- What are our capability gaps, and how can we close them? Operators will need to evaluate whether they have the capital, talent, and technological capabilities to support new ventures. After determining how well positioned they are to build solutions in-house, they can evaluate the benefits and risks associated with mergers and acquisitions versus strategic partnerships.
- What are the strategic implications of each growth path? It will be critical for operators to assess the strategic implications of focusing on their core business versus branching into new areas. This includes evaluating the potential benefits and challenges of refining the core business, the impact of new infrastructure investments, and the competitive landscape.
As organizations seize on advances in AI, virtualization, cybersecurity, and more, telcos have a unique opportunity to position themselves as mission-critical partners—and rapidly accelerate B2B growth. Four strategies hold the potential to capture value in this new arena: the connectivity play, the ICT play, the 5G network API play, and the ecosystem-building play. Understanding where to play and what it will take to be successful is essential. With $160 billion at stake over the next few years alone, the game is officially on.
