From a global perspective the telecommunications sector, worth a whopping US$1.5trn, has struggled mightily in the last few years. The industry is undergoing continual disruptive transformation, and as a result revenue from fixed-line, mobile voice and text services – at one time the bread and butter of telecoms companies – is in terminal decline in most developed markets. Analysys Mason, a London-based consultancy, predicts that telecoms revenue in developed economies will remain flat or decline for the foreseeable future. In emerging markets, however, the outlook is much brighter. Analysys reckons that telecoms revenue will grow by 5% on average until 2017.

With such stark numbers, it is no wonder that most of the world’s telecoms giants are focusing their energies on the burgeoning economies of Asia, Latin America and Africa. But the risks for telecoms firms in these markets cannot be ignored. Aside from the usual macroeconomic and operational threats that affect all businesses operating in emerging economies, telecoms firms must pay particular attention to two sets of risks: the regulatory landscape and the competitive environment.

Regulatory risk— patience pays

Telecoms companies live and die by regulation – governments auction spectrum, dole out licenses, approve or disallow mergers and keep a close watch on consumer prices – and policymaking in emerging markets can be volatile. UK-based Vodafone’s experience in India, where it is the second-largest mobile operator with 160m subscribers, is instructive. The company has been embroiled in regulatory disputes with the government over back taxes and spectrum charges for several years. To manage these risks, Vodafone pursues a strategy of remaining committed to the market and continually pressing its case to the government to make policy changes, arguing that a more dynamic telecoms market benefits the entire country. It does not always win, but overwhelming operational success in India – with annual revenue topping US$5bn and double-digit annual growth rates – puts regulatory setbacks in perspective. Patience can pay off in the long term as well. Vodafone, along with other domestic operators, has reason to believe that the new government that took office in May 2014 will usher in a change in direction.

Competitive risk—convergence strategies

Telecoms operators face a number of complex competitive risks in emerging markets, and one of the biggest is the impact of industry convergence. Lines are being blurred and the telecoms operators, which provide the networks, are now competing with the technology and media companies which provide the mobile devices, apps and content. After floundering for a few years, the operators seem to be coalescing around a strategy that prioritises partnerships and bundling content services into mobile subscriptions. In 2013 Spain-based Telefónica partnered with music-streaming service Napster to include music streaming for customers in Europe and Latin America. In May 2014 India-based Reliance Industries announced it would acquire Network 18, a news, entertainment and e-commerce business, in order to bundle the content into Reliance’s 4G mobile offering, which is expected to be launched later this year.

Emerging global players?

Until recently, investments between developed and emerging markets generally flowed in one direction in the telecoms sector. A few companies have tried to reverse this trend, with mixed results. The best example is Huawei, the China-based telecoms equipment and smartphone maker, which has had success in Europe, but less so in the US and Australia. Another way forward for up-and-coming operators in emerging markets is illustrated by MTN, the South Africa-based operator, which has established itself in 21 African countries over the last 15 years. We are likely to see more of this kind of regional “emerging-to-emerging” expansion in the future, especially if developed markets remain in the doldrums, as expected.

This article is part of a series managed by The Economist Intelligence Unit for HSBC Commercial Banking. 

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.