It's no secret that the world's wireline and wireless service providers, telecom equipment vendors and Internet players face major challenges. While new market entries and IPOs reshaped the competitive landscape during the dot-com era, major bankruptcies and reorganizations are having an equally profound impact today.

Despite continued double-digit growth in the demand for data services, most carriers are seeing their prices pushed downward by competition and overcapacity. Meanwhile, innovations such as video on demand, IP applications, and 3G wireless services have yet to meet investors' high expectations for growth.

Telecom leaders are responding to this tough environment in two ways. First, they're focusing on core performance: enhancing their marketing efforts, improving their operations and reducing costs, and, more broadly, becoming more nimble and customer-focused. At the same time, companies are responding to six forces likely to shape the market in the next 3 to 5 years, says Rolando Balsinde, leader of McKinsey's European telecommunications practice:

	Access technologies. Continued penetration of broadband, wireless, wi-fi, and all that follows.
	Network technologies. Wider deployment of Internet Protocol applications, including voice over IP.
	Regulation. A changing mosaic in the U.S., European Union, and the emerging markets of Asia as regulators address the viability of companies and their ability to launch new products and services.
	On-line content. Growing sophistication – largely demonstrated by non-telecom companies – in how to profit from consumer and business content offerings, inspiring more partnerships like BT's alliance with Yahoo UK.
	Alliances and consolidation. More mergers and acquisitions amid an industry shake-out.
	E-commerce and e-services. A rebirth of Internet-based business and services as clarity emerges around which pure plays, such as E-Bay, are viable and as the volume of goods traded by traditional players grows.

If many of these issues sound familiar, at least one thing has changed today – there's actually less uncertainty in the global telecom market. Says Balsinde, "CEOs' priorities are much clearer than they were two years ago. We see increasing clarity around the evolution of the telecom industry and the need to focus on core performance."

With greater clarity about global challenges, executives can focus on their customers in local markets. "It's one thing to assess average industry performance," notes Jon Garcia, a principal in the Washington, D.C., office. "But you can't manage a customer-focused business on averages. Succeeding in telecom is all about understanding unique customer segments – not just that consumers spend an average of $40 a month on phone service, but understanding the 5 percent who spend over $150 a month. Building systems and capabilities to reach a targeted market segment, and then executing on that strategy, those are the kinds of challenges where we make a difference."