If telcos want to improve their profitability and become more resilient, they need to expand their information and communications technology (ICT) businesses. In an increasingly crowded B2B market, they must move into margin-accretive areas beyond basic connectivity. But telcos are in danger of being shut out of these fast-growing areas by newer players, such as hyperscalers and managed service providers (MSPs). Those players are piggybacking on telcos’ existing infrastructure and providing cloud migration and Internet of Things (IoT) services or selling customers artificial intelligence (AI) and data analytics solutions.
To compete, telcos need to focus on market segments that allow them to play to their strengths, including their strong relationships and local presence. While it is not the only segment that offers potential, we believe the middle market (made up of customers that employ a few hundred people) represents a particularly attractive opportunity for telcos for this very reason.
To compete, telcos need to focus on market segments that allow them to play to their strengths, including their strong relationships and local presence.
The Growing Complexity of Customer Needs
Demand for ICT solutions is growing rapidly. Combined revenues in the US and Europe are expected to expand at a compound annual growth rate (CAGR) of 8% and 11%, respectively, between 2024 and 2028. The strong market is being driven by customers’ ever more sophisticated IT requirements as they seek to transform their operations to reduce costs and boost productivity. Three areas in particular are benefiting:
AI. Companies are leveraging AI technologies to automate processes, optimize workflows, and enhance customer experiences.
Cybersecurity. With the number of annual cyberattacks worldwide more than doubling since the start of the COVID-19 pandemic, cybersecurity has become a top priority. Organizations require robust, scalable software solutions to protect their operations and data.
Cloud migration. Cloud services is the fastest-growing ICT area due to companies’ need for specialized support to ensure that their cloud migrations are seamless and low risk. The European market is growing at a CAGR of approximately 18%, with the US market expanding at around 14%. Many companies in more complex and risk-sensitive sectors, such as banking and finance, have yet to fully migrate their operations to the cloud due to concerns over business disruptions and migration difficulties.
The outlook for connectivity—which is an essential enabler for many ICT solutions—is not so reassuring. Revenues in the US and Europe are expected to increase by a CAGR of just 2.5% between 2024 and 2028. The reason: companies are prepared to pay for advanced ICT solutions that help them achieve their transformation goals. But to meet the cost of those solutions, firms are pushing for price cuts in internet connectivity, which is rapidly becoming a commodity product.
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A Crowded Market
This is bad news for traditional telcos. By focusing on providing connectivity services to customers through their existing networks, these players are particularly exposed to the downside of market shifts. In recent years, some savvy telcos have expanded their ICT offerings by targeting particular market segments and transforming their capabilities. (See the sidebar “What Savvy Telcos Can Teach Others.”) But even those companies are facing stiff competition from three distinct types of challengers that have emerged since the turn of the decade:
Hyperscalers. Major cloud service providers, such as Amazon Web Services (AWS), Microsoft Azure, and Google Cloud, are aggressively expanding their offerings, particularly in AI and cloud infrastructure services. They are selling solutions tailored to specific sectors, such as health care, finance, and manufacturing. AWS, for example, offers bespoke, integrated cloud solutions through its marketplace, enabling buyers to download software-as-a-service products over the internet. It is also opening localized cloud regions to address regional needs and regulatory requirements.
System Integrators (SIs) and MSPs. Global and regional SIs and MSPs, which integrate customers’ existing IT systems with new ones, are positioning themselves as key participants in digital transformations and capturing market share. There are approximately 20 to 30 global players selling customized IT solutions to the world’s top 2,000 companies. To expand their product offerings, players are partnering with or acquiring other players that have complementary capabilities. HCL Technologies, a global IT consultancy based in India, has partnered with US software developer ServiceNow to provide generative AI (GenAI)-powered transformation solutions. Similarly, global IT consultancy Accenture’s recent acquisition of US MSP Navisite has bolstered its portfolio of cloud-based services. Regional SIs and MSPs, meanwhile, are focusing on mid-size companies and providing comprehensive IT and cloud migration services that cater to local requirements.
Value-Added Resellers (VARs). VARs are low-margin players that resell hardware and software solutions to business customers. The VAR market is highly fragmented, especially in the US. There are more than 2,000 VARs competing for customers in the US mid-market and small business segments. However, VARs are losing market share to regional MSPs that are aggressively targeting these segments. As a result, VARs’ share of mid-market and small business clients is expected to drop from 35% in 2022 to 25% by 2028. To remain competitive, VARs are expanding their cloud products and cloud migration services for these companies.
What Savvy Telcos Can Teach Others
Choose your primary market segments. While telcos can serve several segments, they should prioritize one or two—and, in our opinion, focus especially on the mid-market—so that they can tailor their approach, meet specific customer requirements, and maximize their market impact.
Focus on margins. To maintain profitability, telcos must transition from providing just basic connectivity to offering newer, higher-value products, such as managed IT solutions and cloud services. These newer ICT areas generate gross margins of 25% to 35% for telcos—compared with margins of 5% to 10% with reselling—and offer them a more sustainable revenue model.
Become ecosystem orchestrators. Telcos must redefine their role and shift from being pure infrastructure providers to orchestrators of the complex and evolving ICT ecosystems of their corporate clients. This change will enable them to offer more integrated solutions—involving their own and others’ products—that cater to businesses’ increasingly interconnected needs.
Engage with customers earlier. Telcos should adjust their go-to-market strategies so that they engage with trusted clients earlier. Doing so can help them ensure that their ICT solutions meet customer demands most effectively. It also allows them to capture revenue faster. Proactive engagement helps build stronger, more responsive client relationships.
Transform capabilities. To stay competitive in a crowded ICT market, telcos must transform their sales, tech delivery, and service capabilities. To gain competencies in key emerging areas, they will likely need to form partnerships with other players and pursue targeted acquisitions.
Incubate separate business units. By establishing independent business units, telcos can scale more quickly and respond to market changes with greater agility. Spinouts can also help telcos channel resources and expertise into ICT growth opportunities.
Until now, telcos have played a crucial role in providing connectivity and basic IT solutions, including reselling communication services such as Zoom and Microsoft Teams, because of their network expertise. By contrast, MSPs, SIs, and VARs have taken the lead in supplying enterprise software, data analytics, and integration services.
However, the lines between players are blurring: hyperscalers are starting to bundle internet connectivity with their cloud offerings, while some telcos are expanding into software development either through partnerships with IT companies or by creating their own development departments. This convergence is a clear sign that telcos must diversify their ICT capabilities beyond connectivity or risk being left behind by more ambitious players.
Telcos must diversify their ICT capabilities beyond connectivity or risk being left behind by more ambitious players.
The Mid-Market Opportunity
Several forces, meanwhile, are reshaping the global market environment in ICT. Data privacy and localization regulations are creating new region-specific compliance requirements for companies. Growing geopolitical tensions are causing countries to favor local players to safeguard their critical systems. And organizations are demanding faster, more reliable IT services, benefiting players with local infrastructure.
These forces are causing all ICT players to become more localized, through regional data centers, local partnerships, and tailored services. Telcos still have an edge over competitors, thanks to their widespread and established infrastructure networks, their familiarity with navigating complex local rules, and their deep-rooted relationships with local enterprises and governments. But they need to double down on their strengths and develop new capabilities to win.
Targeting a specific market segment can help them do this. There are four market segments for ICT services and solutions that telcos can choose from. While all four offer opportunities, we believe that the middle market is the most attractive, since customers in this segment place particular value on relationships with local players.
Large Enterprises and Multinational Corporations. This segment was worth an estimated $415 billion in the US and an estimated $550 billion in Europe in 2024. Because these companies require comprehensive digital transformation projects, hyperscalers and global system integrators are better positioned to meet their needs than are telcos. However, telcos can still play a pivotal role in providing connectivity and cybersecurity services.
Public Sector. Telcos may be able to gain an edge over hyperscalers and system integrators in this segment by leveraging their local expertise. Their ability to navigate complex regulatory environments and deliver localized infrastructure makes them well suited to meet public sector needs.
Mid-Market. This segment was worth an estimated $245 billion in the US and an estimated $150 billion in Europe in 2024 and is projected to grow at a CAGR of 8% and 9%, respectively, between 2024 and 2028. Some 76% of mid-market companies in the US and Europe prefer to purchase IT services from their existing ICT providers, creating a clear opportunity for telcos to expand beyond connectivity into selling mid-market customers more advanced solutions.
Small Office/Home Office and Small Businesses. This segment was worth an estimated $280 billion in the US and an estimated $145 billion in Europe in 2024. These businesses value simplicity and cost-effective ICT products. That means telcos have an opportunity to provide tailored, localized solutions and offer bundled services that integrate connectivity, security, and essential business tools.
Three Mid-Market Roles for Telcos
Before they enter the mid-market segment, telcos must select their strategy with care. The approach they choose will have significant implications for future costs, capabilities, and market positioning. We have identified three potential roles, each of which offers clear advantages and trade-offs: companies can become a connectivity provider, a core ICT services provider, or a full vertical-solutions provider.
Option 1: Connectivity Provider. By proactively partnering with MSPs, SIs, and VARs, telcos can offer business customers their connectivity services while other ICT players manage more complex solutions. Because this strategy leverages telcos’ existing infrastructure, it carries minimal risk and requires little new investment.
This option is particularly suitable for telcos that operate in markets where basic connectivity is still in demand, either due to geographical or technological considerations or where industry demand for IoT and smart infrastructure is growing. Telcos must also have an established network and strong partnerships with other ICT players so they can support the delivery of a range of services.
Telcos that adopt a connectivity provider model typically enjoy earnings before interest, taxes, depreciation, and amortization (EBITDA) margins of approximately 30% to 50%. However, as connectivity becomes an increasingly commoditized product, it may be difficult to maintain these high margins without significant streamlining and cost-reduction initiatives. Telcos also risk being perceived as low-value commodity players, with their partners seen as owning customer relationships and providing high-value services. Over time, these factors can limit telcos’ growth and result in low profitability.
Option 2: Core ICT Services Provider. Telcos can leverage their existing strengths in connectivity and security by offering mid-market businesses standardized ICT solutions in essential areas such as network management, cybersecurity, and cloud support. This strategy allows telcos to capture greater value across the tech stack without having to make substantial investments.
We consider this option the best one for telcos that are seeking to expand in the mid-market segment. Mid-market businesses want cost-effective, scalable solutions and automation technologies—which telcos are well-placed to provide. This option also helps telcos achieve an optimum risk-reward balance, as it allows them to drive growth by managing costs effectively and expanding their offerings to customers through deeper relationships.
While there are significant competitive pressures with this role, the operational efficiencies that telcos achieve through automating and standardizing their products and internal processes can help them sustain these margins. Nevertheless, the price sensitivity of mid-market business customers means telcos’ profitability is likely to be modest compared with strategic approaches that involve more value-added services or higher-paying customers.
Mid-market businesses want cost-effective, scalable solutions and automation technologies—which telcos are well-placed to provide.
To succeed with this strategy, telcos will need to make changes in these aspects of their businesses:
- Their Go-to-Market Strategy. Telcos should bolster the sales team’s skills so that members can identify the ICT requirements of mid-market businesses and offer appropriate solutions. They should also train sales employees to communicate effectively with business customers about IT services, not just connectivity, and adjust incentive structures to reward sales of service-based products.
- Their Product Offerings. Firms should develop standardized, pre-configured solutions that address the core needs of mid-market business customers. These offerings should give businesses the opportunity to outsource their IT requirements by including connectivity, cybersecurity, and managed services.
- Cost Efficiency. They should improve cost optimization by standardizing offerings and leveraging automation technologies, such as GenAI, to lower service desk costs. As well as curbing costs, simplifying deployment processes can also help maintain the price competitiveness and scalability of telcos’ product offerings.
Option 3: Full Vertical-Solutions Provider. To help them prosper in a crowded marketplace, telcos can build a differentiated ICT offering by providing solutions that are tailored to the needs of different sectors such as health care, manufacturing, and transportation. This option is best suited to markets where sectors are undergoing a rapid digital transformation but must still adhere to strict regulatory requirements.
In addition to giving telcos the opportunity to create a strong foothold in specific vertical markets, this approach can deliver EBITDA margins of up to 35%. Targeted margins are relatively low to start with because telcos must make significant upfront investments to diversify their service offerings and develop new technologies. However, by becoming full vertical-solution providers, telcos can capture a bigger share of the ICT value chain as they sell more value-added services, such as cybersecurity and cloud computing .
To succeed, telcos must develop a deep understanding of their target sectors—including ICT use cases, regulatory challenges, and compliance requirements—and design solutions that meet the precise needs of each one. Telcos will also need to equip their sales teams with sector-specific knowledge so that they can communicate the benefits of their offerings, align sales incentive models with new market penetration goals, and create credentials that foster customer trust in individual sectors.
Focusing on the mid-market segment represents a significant strategic move for telcos. As they chart a course to expand their ICT offerings, players can use their knowledge of local regulations and data rules to differentiate themselves from the competition. But depending on which role they select, they will need to develop standardized, scalable solutions; retrain their sales teams and introduce new incentive arrangements; utilize automation and AI to streamline operations and reduce costs; and consider providing more sector-specific, value-added products. The payoff for those that take the steps needed for mid-market growth will be a brighter and more resilient future.
