When Digitization Isn't The Answer to Your Prayers

(Bloomberg Opinion) -- For all the promise that digitization offers, sometimes it’s worth reminding ourselves that it requires the right conditions.

Telefonica SA is illustrating why. The former Spanish national carrier is midway through a digital transformation program, and has succeeded in realizing almost two thirds of the 1 billion euros ($1.1 billion) in savings it’s targeting by the end of next year.

That’s clearly positive for the company’s cost structure, but the 40-million-euro increase in comparable first-quarter operating profit represented a modest 1 percent improvement, in line with expectations. The shares fell. Digitization can only take you so far.

In the 12 years since the iPhone was introduced, it’s not been easy to be a European telecoms investor. While the continent’s technology and media stocks have surfed the data wave to post gains in the intervening years, telecoms stocks have declined, particularly since smartphone sales peaked in 2016 even as 4G network investment continued. While carriers have built out new cellphone networks, they’ve not enjoyed the benefits that those pipes have afforded tech and media players.

When Digitization Isn't The Answer to Your Prayers

The arrival of next-generation 5G networks will herald a new wave of investment from carriers, begging the question: how can operators ensure that they are the primary beneficiaries of that outlay? Many see the answer in digitization.

In this context, the impact of digital tools can be split into two broad categories. Firstly, you have the improvement of processes which new automation tools allow, irrespective of 5G. Telefonica has started using bots to handle basic customer service queries, online marketing tools to improve the personalization of its product offering, and advanced analytics to improve supply chain management. Much of that is about improving profitability.

Secondly, the arrival of 5G promises to allow a bevy of new connected services, which ought to drive high-margin revenue growth: their low latency should enable companies and factories to hand off more processes to cloud or edge computing. And those networks could be managed more efficiently with the new technology.

The problem carriers face is a lack of visibility over how long it will take for their investment in new networks to pay off, given the fierce competitive landscape – the European Commission has estimated that it will cost 500 billion euros to meet its connectivity targets, which includes 5G coverage in all urban areas and an expansion of fiber optic infrastructure.

Regulators haven’t been fast enough to adapt to telecoms firms’ new capital expenditure requirements, according to Guy Peddy, an analyst at Macquarie Group Ltd. in London.

In Germany, for instance, where Telefonica’s local unit is one of three players, the regulator has stipulated that 98 percent of households and all main transport routes must have 100 megabit-per-second network coverage by the end of 2022. But it’s unclear whether that means every carrier has to offer that coverage, or that they do so collectively – if all three of them do, it’s three times the cost, for a third of the benefit. That lack of visibility makes it hard to realize all the possibilities that digital tools offer.

Telefonica is making the right moves, as are others. BT Group Plc. acknowledged Thursday that many of its processes could benefit from better use of technology. Vodafone Group Plc. is targeting 400 million euros in operational savings from digital transformation when it reports full-year earnings on Tuesday.

But digitization is not a panacea. It’s an enabler. As much as Telefonica and others are trying to use those tools, the industry remains a tough space for shareholders until regulators help the companies meet other preconditions.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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