A handbook to reform boring Telco (I)
Part 1 — exploring the ecosystem strategy
Two analysts meet. Says one: “I cannot understand what’s going on!”. The other: “well, let me explain it to you”. First: “I can explain it myself very well, but I just still don’t understand…”
In part 3 of “The Boring Telco” I wrote on the reason why carriers integrated model is not sustainable long term. The reason is that integrated companies tend to protect each part of their value chain, whereas:
Value Unbundling is driven by class of competitors which do not compete with Telco as a integrated model, but rather disrupting parts of the value chain. While aforementioned errors are rather due to Telcos internal actions, Value Unbundling is an external threat to which Telco has yet to find an answer
If Telcos are to sustain a new class of competitors the key is the focus. This is the reason why digital transformation failed — there was no focus, it was about fighting many fights, but in the same unchanged paradigm:
Digital transformation fails because it deals all the challenges except one: Value Chain Unbundling. Most programs I’ve seen aim to improve selected elements to compete with the many new comers. Whereas in most cases, the battle may be already lost
Hence in In my last piece of “The Boring Telco”, I examined several possible new types of Digital Operator business models, enabled by focus:
A key theme of “The Boring Telco” series was that carriers have eroded market value by trying to compete with identical business models. One model can be more superior to another, but beware!. My thesis is, that the strategy should be based on market context — strategy should be chosen based on what's going on, what are the others trying to do. This may lead to a balanced market position and several carriers can sustain without cannibalizing severely. More on that below, but first let's dive into the business model primitives.
In this piece, I will deep dive into the ecosystem model.
Ecosystem model — the power of asset bundling
Modern ecosystems first emerged in the west, but became popular in China, driven by online giants Alibaba’s and Tencent's myriad of services revolving around the core platform and fueled by massive hoarding and analysis of customer data moving within its “walled gardens”. Apart from their R&D, those two made over 1000 investments into different startups and products. Ultimately, every startup in China would have to choose which ecosystem to belong to.
What is it?
Ask experts on what an ecosystem is and you will hear all kinds of different statements. The original may well come from Moore’s book, The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems (1993):
An economic community supported by a foundation of interacting organizations and individuals — the organisms of the business world…
Even before such definition, car manufacturers have employed a proto-ecosystem model, building a supply chain web of different suppliers, effectively just coordinating the production cycle (=orchestrating). Despite the long-dating history, the hype around ecosystems is now stronger than ever, thanks to “Chinese wonder”: in annual reports, the term “ecosystem” occurs 13 times more frequently now than it did a decade ago. Another definition says:
a business ecosystem as a solution to a business problem, as a way to organize in order to realize a specific value proposition. […] business ecosystem is a dynamic group of largely independent economic players that create products or services that together constitute a coherent solution.
[Ecosystem] often using digital platforms, APIs, internet of things technology, and new tools for data gathering and analysis
The ecosystem, according to academia, is one of the possible governance forms on the organization structure spectrum. It's thinkable to have business ecosystems organized as Open Market models (an example would be IBM opening up its architecture to partners in late 1980 to combat Apple). However, today's most impactful and successful ecosystems are seemingly always centrally governed by a strong partner (as in the example with Alibaba and Tencent).
Ecosystems thus in narrow terms are _not_ Open Markets (in fact a different model). The central hub takes the role of an Orchestrator. And, although in theory otherwise, it remains also the central governing power, taking most of the profits from partners in the ecosystem. The main assets of central authority are:
- Customer Data,
- Platform (e.g. messenger Apps, like WeChat or QQ),
- Transactional System (payments or loyalty).
- Capital (to invest)
Today, 7 out of 8 most expensive companies are governed as ecosystems. At some point. And no wonder that ecosystems are launched by online companies. Offline was not able to launch ecosystems at scale — that is gaining more than 20% market share in relevant markets.
[text above is partially taken from this great article: https://medium.com/@timko/ecosystems-and-superapps-c64af1c3f8a, Google Translates the text very well! Highly recommended for deep dive]
Telco Ecosystems emerging
Arguably, telecom companies are closer to online business than to offline (ironically it's telcos who enable the “online” to be online first place). So far, most carriers operate as vertically integrated organizations, which in my view is exactly their problem, as they “fight many wars” and lose most. Ecosystem thinking is just emerging
Jio Platforms: the behemoth
Jio began as a wireless operator in 2016 with the industry’s most impressive growth story. Jio didn’t rest on the laurels of their popular devices and data plans. They expanded their ecosystem, covering services in six categories: news, financial inclusion, storage and security, entertainment, connectivity, and healthcare
In 2019 its parent Reliance Industries Ltd (RIL), created Jio Platforms, a wholly-owned subsidiary of his oil-to-telecom empire, and effectively submerge the telco. Simply put, Jio Platforms is Reliance’s digital arm that houses its telecom and digital offerings. The ultimate aim of Jio Platforms is to offer “anything and everything digital”.
So here we have a perfect soup of ingredients (ecosystem):
- Data: 300m customers
- Platform: Telco network, apps
- Glue (transaction): internal payments (JioMoney)
- Central authority: Reliance.
Jio itself is part of a broader Reliance Ecosystem, which is seemingly “At war with everyone” (that was Amazon).
This case study is particularly interesting in that it shows a very rapid evolution, in just 5 years, Jio went from pure Telco (LTE only, too!) to a completely new model. Their infrastructure assets were demerged — the company was essentially stripped off their Telco legacy and drag! to focus on digital services. This is the right strategy: not just spinning off or selling assets (towers, fiber) but separating them to focus on the specific part of the value chain. (I wrote about the futile sell-off in “The Boring Telco: Value Lost”)
What makes Jio’s (or Reliance) ecosystem so successful is similar to what defines Alibaba’s or Tencent’s success: platform, an array of smaller services, payment system but also capital investments.
Speaking of later: Investors love Jio and in 2020 the company attracted around $20bn from various PE houses, but foremost Facebook, who invested around $6bn to essentially get access to Jio’s assets (subscribers and small shops of Jio Markets)
More on Jio story here: https://hbr.org/2021/12/how-working-with-competitors-made-jio-a-telecom-giant
MTS Ecosystem: first in its market
MTS is the only telecom company actively marketing its wide service portfolio as “Ecosystem”. The carrier offers a variety of services: Banking (classical and neo), media (streaming) along with a strong loyalty system and a subscription package (“Premium”).
The large pillars of their ecosystems are the Bank (transaction), Media (TV, streaming, and music), and a loyalty system (Premium and Cashback). All that is available to over 50m MTS customers. There are further services, like classical telco vas (e.g. security) or non-core, like ticket sales (at a small discount) or digital live streaming in AR.
Particularly “Premium” is a very interesting pricing tool used by Tech companies, but not Telco. Paying a fixed monthly amount (ca. 3$) the user unlocks a bunch of free options, such as 50GB of mobile data, free online film streaming, and more.
Lastly, through its Cashback service, customers can benefit through discounts at different retail partners, as well as for MTS internal services. This makes the otherwise closed ecosystem appear more hybrid — the control over the key assets (customers and their data) is available solely to MTS alone.
It is still too early to tell if this strategy is successful — a growing number of subscription users indicates certain traction at least. Outstanding are all the questions regarding the ROI.
Interestingly, just like Jio, MTS is abstracting from its network: in 2021 company announced to transfer all network and IT/cloud-related infrastructure into a legally separate unit called MTS Web Services (the resemblance with AWS is intended). Being quite radical and bold, the strategic motivation behind is what I wrote earlier: Focus.
Telco Ecosystem: risks and benefits
What both, Jio and MTS have in common is a closed and well-controlled ecosystem. There is no partnership of equals there — both telcos are in full control of the ecosystem core assets, and using partnerships where scaling and/or control over service is too expensive, marketing partnership (trading discounts for user traffic). Moreover, services are all branded to make them stand out uniquely.
Ecosystem, at least in common sense, should provide much better retention — user is locked in a walled garden. The ecosystem offers him discounts and benefits but also retains all his spending. It is thus a closed loyalty-reward system, like hotel chains or airlines use, where leaving the garden means losing all the perks. Particularly the Loyalty Subscription services are very interesting as a tool for other telcos but also non-telcos to explore.
There are drawbacks and risks as well:
- High coverage of customer use cases is vital. Telcos are all running retention portfolios. Triple and Quad-play services are aimed to capture the wallets. Yet ecosystem goes far beyond the core — customer will be locked not by bundles but by wide arrays of services, ideally covering a big portion of his needs.
- Competing ecosystems impact USP. Especially when there are other strong ecosystems in the market it is very challenging to compete on service coverage. Vice versa, if competing ecosystems have a coverage overlap of 80% (=low differentiation), protecting USP is very costly
- It's capital-intensive: a costly game to acquire, rebrand, and integrate the services, that requires not only capital but also a very strong M&A team and process. Telcos historically were bad at it. Most telcos are also quite cash-strapped.
- Regulatory scrutiny. There is already pressure on BigTech ecosystems, which are sometimes touted to behave monopolistic and abusive. Telcos are not yet affected, but the risk of collateral damage is there.
Which Telcos can play this game?
Foremost the capital requirements could be the biggest hindrance to transforming to Ecosystem Strategy. Both MTS and Jio have substantial resources for specific asset acquisition. Cash-strapped Telcos will not be able to run an Ecosystem strategy, at least not on mass-market (I did not cover B2B ecosystems yet, but the volumes are far lower there).
Market context also determines if such a strategy could succeed. If there are no ecosystems that provide competing services coverage be it local or global digital players (Banks, Tech, Retail) — that’s positive. The more other ecosystem players operating in the market the more expensive will it get (1) to build or acquire services and (2) attract and retain customers.
Last but not least, and I cannot stress it enough, it requires sharp focus. Finding the right services to increase coverage, defocusing top-management resources from infrastructure-related decisions seems to be key (Infra = commodity).