The Boring Telecom — Are the glorious days gone forever? (IV)
Part 4— Breaking the inertia of the past success
This is the fourth piece of a longer story. There is no need to read them in sequence, but its the way I was writing it up. In Part 1 and 2, I gave some historic retrospective, a mix of history and dynamics. Part 3 focused on the reasons for value loss and the value chain unbundling as biggest risk to deterioration. This part is an attempt to look for solution
“Past success breeds inertia” — Steven Wardley
Departing point
Lets briefly recap where Telco stands today from the previous parts:
- Core service model is commodity — there is no USP
- Being a commodity cannot justify premium — hence prices fell sharp
- Some of the misery is due to regulatory action, but not all of it
- To keep profits cost cuts are ongoing
- Its a David vs. Goliath fight — local business of Telco being attacked by global players
- Innovation is required, but there is no money to compete with BigTech (neither is culture or governance)
- B2C battle is almost lost — welcome Dumb Pipe!
- B2B may be the last resort but will it compensate for B2C losses?
- Value chain unbundling is beyond the control of Telco
- Worse, Telcos are under control of their equipment supplier
Which options do Telcos have? More importantly, what business model do they have to pursue? While I don’t have a universal answer (and guess that there is no such), a couple of thoughts below could outline at least directionally a possible journey.
Well the good news is that Telcos have all realized that. Digital transformation is not an empty parole, everyone is doing it. The problem is the way how it being done. At the core of digitalization should not be an improvement of the current value chain, but rather a rethinking of it. Ultimately it means find the right model too.
Digital Transformation ≠ an efficiency program
“Companies succeed and fail not based on their technology but on their ability to integrate within their value chain“— Ben Thompson
(acknowledgement: а lot of my inspiration came from Ben’s blog Stratechery, which I highly recommend to anyone interested in business model dynamics)
The chart above is essential: Telco is boring because it does no manage to make its customers happy. Its not the size that matters its the relentless pursuit to get better and better. (yeah I sound like a consultant here). No wonder that engagement and obsession with customer became so important. And since digital native companies have the highest NPS, Digital operator quickly became the leading narrative. No one wants to be called boring.
One more thing: today’s youth is tomorrows consumers. And today’s youth, the digital natives, find Telco as-is very super-boring. This alone is enough to get into transformation.
And so since the last 5–8 years industry is relentlessly exercising on Digital Transformation: consultants are spearheading the strategy discovery, analyst juggle valuations of “digital champion” and operators, well compete with press releases and brag with budget outlays for countless programs.
When looking closer, most of the transformation actions are dealing with either Engagement or Efficiency. Customer journey this, automate that, virtualize network, dispose assets (ultimately to Asset-Light Telco) you name it.
But most of these actions are essentially executed as cost efficiency measures to stabilize profitability, be it churn reduction (through engagement) or sales cost or network operations. Many of those measure can make Telco more flexible and user friendly, but they will not make them less boring. Consumer may like the flashy self-service app or the flashy Parallax design of the web page, but all he needs from his provider are basic services.
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
Digital Transformation = Value Chain Re-thinking!
Instead, transformation to a Digital Operator should address the challenge in the value chain integrally and not just by element. Below couple of loose examples of such approaches (I may elaborate them in other articles at a later stage.
Ecosystem play = integral chain
What these few have in common is a successful implementation of an ecosystem, an extended version of a partnership, where value is drawn from 3rd party providers without cannibalizing each other (ideally). We can call it interconnected value. Digital native conglomerates like Alibaba or Rakuten are all living ecosystem paradigm. Amazon Web Service is another.
Seems like a reasonable approach for Telco. But there is a catch, which is actually
There is a little catch though. Recall (from Part 3) my thesis that Telco is a local business model, while digital natives are often going beyond national border.
Drawbacks of an ecosystem:
- It puts you back to “many-fight-model” of an integrated value chain
- Keeping customer usually requires some loyalty currency (points, cashbacks, discounts, etc.), which usually means that some parties will subsidize others
- While barriers to entry are high, there is constant risk of competing ecosystems emerging or disrupting (like CloudFlare’s R2). Costs of maintaining status quo are much higher
- Ecosystem is mostly a single-brand approach, so high brand awareness is a must. But remember, Telco has quite low NPS. Brand repositioning would be required = cost!
For smaller Telcos, running this model could be too expensive (albeit that all depends on free cash flow). Size of the market can be an inhibitor to scaling and compete against global players.
Even a bigger challenge is that having each Telco run own ecosystem walled garden ends up eroding USP again. So actually, if you have a competitor in the market with an ecosystem approach — running “me too” strategy could prove unsuccessful.
Notable examples: Jio, Turkcell, MTS
More on ecosystems in broader sense (and superapps specifically) in this excellent article (its in Russian, but any online translators handles it quite well)
Marketplace play = orchestration+platform
Whereas Ecosystem play is all about selling from own (branded) universe of products within a system loyalty-discounts, and controlled supply chian. market place is a transactional business model. As TMForum defines it: “rather than playing a direct role in the supply chain, a company builds a digital ecosystem connecting consumers with producers of goods and/or services, making it easy for them to do business”. AirBnB is an example (and that could be a problem for them, as I wrote earlier), Amazon eCommerce another, whereas Amazon Web Services is strictly speaking not a marketplace.
There is a mixed understanding of marketplace model as the chart below shows.
The dominating model is B2B2X, which is closer an ecosystem model, outlined above. The CSP internal and ODA models are interesting, but are rather niche (example of ODA would be Elisa Polystar).
What is more interesting is that a third of carriers sees it as a neutral 3rd party business, that is a true marketplace by definition. Neutral implies a non-telco player to bundle services on a platform for external customers. That excludes the carriers as no-one of them would be ready to offer services, e.g. of a competitor.
Instead, the B2B2x models seems to get adherence with 5G services, particularly for selling “slices”. If that is what the Telco marketplace model boils down to, I see grim outcome. There is no difference to current mode of operation actually, its just a more advanced (and costly) version of a dumb pipe. On one hand it would protect the core part of the value chain (communication platform), but there is no USP and no protection against OTT players…
To make this model work carriers need a platform to re-sell 3rd party services too along with innovating on the core. There is a great article by Dean Bubley on how Voice Services are much more than just Phone Calls.
The benefits of a B2B2x approach (and market place) are:
- Easier (faster) partner onboarding and offboarding
- Multi-brand
- Ability to monetize on own customers (reselling) and/or on the supplier (transaction margin)
The drawbacks are:
- More challenging retention, as no hard lock-in is possible
- Reseller model has lower USP and image of a “dumb pipe with vitrine”
- Value chain control is not regained. The illusion of “I control the customer” is wishful thinking
Unlike Ecosystem, Marketplace is bi-directional model. Marketplace operator has to establish a unique stance to both suppliers and customers (e.g. AirBnB is biggest broker, or Amazon eCommerce with range of additional services). This will be hard for Telcos, as in the eyes of a supplier and customers they are interchangeable (no USP). A possible solution could be specialization on certain industries and sectors. (at the moment my idea is vague, but I plan to write on that separately)
Digital Enabler — orchestrate suppliers
Ecosystem and marketplace are models aiming at defending the left side of the value chain, trying to monetize on customer base. Digital enabler on the other hand comes from the right side — Infrastructure. There are again definition issues, cutting through marketing terms is challenging.
The way I understand this approach would be the battle in the middle-field, i.e. on platform side after the network. This is a battle in the domain of Hyperscalers, cloud and Edge computing. Telcos proposition would be a blend of Connectivity+Platform and less the services on top.
Being successful in this approach requires a relentless cost control to match global players proposition. Financial math of the customer is easy: 1-stop-shop buying needs to be cheaper than buying pieces (e.g. Connectivity from Telco and DC/cloud from other providers).
I see the challenge to reduce cost base (and unit cost) as significant hurdle for the carriers. Foremost, because as written in Part 3, Telcos are spending Capex on suppliers and have virtually no control over the product and commercial model.
I see 2 main approaches to push the proposition:
- Offer connectivity for free and monetize on Platform
- Run (ultra)Light Asset Model, outsourcing as much capital intensive activities to third parties as possible.
This approach requires either scale-up or a scale-down and refocus on niche.
Lean NetCo
Down the road (and value chain) there is of course a sort-of a “capitulation model”, a focus on communication infrastructure only and selling access and capacity services through a simple SLA commercial model.
Not much different from Digital Enabler, only that the unit cost pressure is even more strict. I actually don’t believe large carriers will go for it. Rather it could be a model for TowerCo aiming to extend their scope and footprint.
…and the winner is…
The classical consultant answer is: “it depends”. As its the most hated answer, I usually try to avoid it. In this case, its challenging giving how different the approaches are. Dependent variables, such as market size, concentration (Herfindahl–Hirschman Index), cash position, brand awareness, regulation play a certain role.
Nevertheless, antinomically I would say that:
- More than 2 ecosystems run by Telco in a country will likely to engage in dog-eat-dog
- First-mover skims on ecosystem, follower should rather explore other models (like B2B2x or Digital Enabler)
- There can be more than one B2B2x-run carriers, but these have to ring-fence their USP (e.g. through specialization)
- Discounters and strong infrastructure players have betters chances to operate as Digital Enabler, given either their cost discipline or network quality
The main risk I see is that carriers will all rush to the first two models and end up in a price war while re-focusing strategies.
The winning factors
I leave this one blank. After all, consulting is the business I am in. But feel free to reach out if you need advice :)
Enterprise opportunity — last battlefield
From segment perspective, all eyes are on Enterprise. There is no secret there: business segment has much more sophisticated demands and requires a more tailored approach than Consumer markets. Enterprise is also ready to pay premium for quality — especially when they can resell that premium for a premium to their end customers.
The good news is there is an opportunity for double-digit revenue growth — one, two.
The bad news is there is an opportunity for double-digit revenue growth. Given that total telecom revenue market is growing ~2% CAGR, everybody wants a piece of growth. Highest growing product segment in Enterprise are Cloud services and security. And this is a native turf of Hyperscalers, Integrators, Startups and Telcos. Competition is intense, carriers USP is questionable, even when it comes to IoT solutions.
The good news is that Enterprise customer need both: Connectivity (Access) and Cloud. The bad news, for now at least, the customer is ready to pay premium for the latter only.
The question is if that will ever change
Fighting off the Big Tech elefant
My thesis is that Cloud market will undergo the same price erosion as once did the Telecom industry. It will undergo the same value chain disruption. If not, the regulators will step in and help out, for sure. And so, the battle will reduce prices.
So, my thesis is about what will be commoditized more aggressively: access (=Telco) or Cloud (=Hyperscaler&Co). It is important, as it will determine the focus of customer budget spend. Those controlling the more costly service (as in replacement or switching costs) will retain control over customer. Notably, the way Amazon&Co retain customers is through their extraordinary high exit costs — data egress pricing. This is why CloudFlare’s R2 announcement is so intriguing!
There is a reason why Big Tech never went for building own access network, although Google had tried (remember Google Fi?). Digging a trench and laying last mile is a very different model from erecting another Data Center.
To me this is the most interesting development to see! Why? Well no one can take out extra-margin for an extended period of time without getting challenged.
What’s left?
“Any value creation in telecom ended about 11 years ago”. — CTO Vodafone
What is definitely not boring are the headlines in the industry. A lot of them resemble war news at finest: “Battle for the home”, “Battle for the Edge”. Another set of news and articles are calling the immediate change, last chances, closing widow of opportunities… Journalists and my fellow consultant colleagues alike.
For one thing clear. I do not see the industry dying any time soon — the companies in there are just to big to vanish quickly. But that does not mean all will survive as they are. Remember from previous parts — Telco was the second worst investment sector in the past decade.
Can’t blame the investors for being apathic and bored. Investors are bored. Investors are also irritated how classical Telco (wireless and wireline) are running business by double spending: first, to pay their suppliers, second to pay their customers to join. Literally paying: TMUS offers to pay off what customers owe their current carriers for their smartphone up to $1,000… where is the shareholder value here?
We see CableCos (“Content Ecosystem”) surpassing traditional integrated carriers. There is SoftBank and NTT which bet on venture investments to diversify spread (B2B2x). And there is a TowerCo a sign of new set of players to rise (Digital Enabler, Lean NetCo). Notably, Deutsche Telekom is in that last just because of their stake in TMUS, a derivative effect, no more.
I think the glorious days of traditional wireless/wireline are over and those who fail to re-think the value chain will become obsolete burden to their shareholders.
The common scary tale of the industry is summed up in just a word: “Utility”. Energy Sector is undergoing a paradigm change. I fail to see that in Telco industry yet.
