STL Partners

Telco 2.0 Growth & Innovation

Telecoms 2015: New Game, New Players, but Who Wins?

Summary: The connected ‘digital economy’, underpinned by telecoms, is evolving fast. How will it play out in the next 5 years, what are the rules, and who will win? Telco 2.0 analyses some new scenario thinking by IBM and clarifies the key issues that need to be addressed. (March 2010, Executive Briefing Service, Transformation Stream.)

Overview


The Special Briefing below reviews IBM's new 'Telco 2015' Scenarios, gives a summary of how they fit with Telco 2.0 thinking, and outlines the key issues that executives in the Telecoms, Media and Technology sectors need to address to stimulate strategic growth.

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Chart Preview: IBM's 2015 Scenarios and Telco 2.0: Where to Play in the Ecosystem (see below)

NB. You can download this FREE Special Briefing in PDF format here.

IBM's 2015 Telecoms Scenarios


IBM's Institute of Business Value gave a fascinating presentation at Mobile World Congress in February on Telco 2015: Five telling years, four future scenarios, part of their smarter telecom initiative. It provides very useful context for the new business models that Telco 2.0 has been proposing to the telecoms industry to make it more relevant to stakeholders in the evolving ‘digital economy'.

NB The IBM materials in this report are IBM copyrighted and reproduced from IBM's Executive Statement entitled "Telco 2015 Five telling years, four future scenarios". The full whitepaper can be requested by emailing IBM at iibv@us.ibm.com.

What does this mean for the Telecoms industry?


The Telco 2.0 Initiative is currently focused on developing a clearer ‘roadmap to growth' for the industry: having defined the problems and the options, what do telcos need to prepare for, as they continue ‘business as usual'? We outline our scenarios for the roadmap below.

What does it mean for everyone else?


At the same time, what should online service providers, media companies, enterprise CIOs from multiple vertical sectors, small businesses, governments, investors...and consumers ...be demanding of telcos and the telecoms sector? Where's the value and which players can best realise it? What does the new game really look like, what are the new rules, who are the key players and...who wins?

What to do?


In addition to the analysis below, this ‘roadmap to growth' is a key theme behind the 9th Telco 2.0 Executive Brainstorm in London on 28-29 April 2010, which drills down on key business model innovation areas around Digital Entertainment, Wireless Network Economics, Mobile Marketing, Consumer Data/Privacy, Rich Wholesale, M2M and Smart Grid, Digital Payments/Money, AppStores and Devices. Importantly, underlying all of this, we're looking at the issue of how to co-habit with Google, where to collaborate and where to compete.

Telco 2.0 is also about to launch a new international ‘syndicated research' programme looking at detailed ecosystem definition and sizing to help inform the roadmap.

IBM's Vision of the Future


At Mobile World Congress in February, Ekow Nelson, from IBM's Institute for Business Value, presented some interesting conclusions about the industry's possible future in 2015 based on a scenario-planning methodology.

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Fig 1. IBM's 2015 Telecoms Scenarios

‘Clash of the Giants'


If the addressable market expands but the industry consolidates, we could expect to see a ‘clash of the titans' between a few huge telcos and Web 2.0 platform players - or essentially AT&T versus Google.

‘Survivor Consolidation'


If consolidation without growth occurs, we could expect a sort of nightmare scenario - huge, monopolistic operators and stultifying conservatism.

‘Generative Bazaar'


But things get interesting if competition, rather than consolidation, dominates; Ekow argued that we might see either a "Generative Bazaar", if both fragmentation and growth occurred, or else a "market shakeout", if the fragmentation persisted without growth. What's really interesting is his description of these two scenarios.

He characterised ‘Generative Bazaar' as follows:

Barriers between OTT [Over The Top] and network providers blur as regulation, technology and competition drive open access. Infrastructure providers integrate horizontally to form a limited number of network co-operatives that provide pervasive affordable and unrestricted open connectivity to any person, device or object, including a rapidly expanding class of innovative asset-light service providers.

That's very Telco 2.0-like, especially the mutual dependence between open access to shared civil works infrastructure and agile, service- and application-led, software-based entrepreneurship.

‘Market Shakeout'


What about the more pessimistic of the two right-hand scenarios? ‘Market Shakeout' is quite Telco 2.0 as well:

Under prolonged economic downturn, investors force carriers to disaggregate assets into separate businesses with different return profiles, and retail brands emerge to aggregate and package services from disaggregated units. The market is further fragmented by government, municipality and alternative provider initiatives (e.g. local housing associations or utility) that extend ultra-fast broadband to gray areas, while private infrastructure investments are limited to densely populated areas. Operators look for growth through horizontal expansion and premium connectivity services sold to application and content providers as well as businesses and consumers.

The Telco 2.0 View


We think that there isn't really that much difference between these last two scenarios. Investor pressure for network sharing and tower-selling would be even more powerful in the context of prolonged macroeconomic gloom, and that the lure of cheap VoIP - Skype on mobile - would be even stronger.

We're arguably already seeing this - a subtheme at Mobile World Congress last month was carriers making deals with OTT voice players, notably Skype and Fring, and now Nokia too. (Ed. - the strategy execs from these three companies will be at the Telco 2.0 Exec Brainstorm on 28-29 April in London).

The following chart compares the different scenarios in terms of forecast growth relative to GDP.

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Fig 2. IBM's Forecast of Growth Vs. GDP by Scenario

You should be able to see that the ‘Generative Bazaar' scenario delivers the best result for ‘Telecoms Services Growth'.

Moreover, the better the industry is expected to do in these scenarios, the more revenue will come from connectivity rather than legacy voice or content as the following chart shows.

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Fig 3. IBM Scenarios: Revenue Split by Product

Telco 2.0's Scenarios for 2015

The Future is more Horizontal...


Like any good scenario plan, some of the value of IBM's work comes from seeking to identify which scenarios are most and least likely. In our view the dimension of consolidated/vertical versus fragmented/horizontal is not really meaningful since consolidated/vertical is already the legacy industry structure and it seems increasingly clear that we are moving inexorably to a horizontal future (as shown on the right of the first IBM chart).

...not necessarily Fragmented...


In other words, the x-axis of the chart really plots time rather than likely future states. Having said that, it is really not clear if the industry will be fragmented in the long term or not, since it is perfectly possible to have horizontal consolidation as Google has shown in the area of advertising. We don't think, therefore, that ‘horizontal' and ‘fragmentation' should be linked together.

...and there are new opportunities too


What's also missing from the analysis is a sense of new growth opportunities for the telecoms industry. ‘Communications, Connectivity, and Content' are the existing industry service categories. But where are the B2B payment services, marketing services (beyond advertising), identity services, richer wholesale and content delivery services and, indeed, ‘voice 2.0' or what we refer to as ‘communications-enabled business processes'?

The New Opportunities use a ‘two-sided' Business Model


Followers of Telco 2.0 will know that we have modelled the opportunities in these areas, as described in the charts below, and are working with the industry (and 3rd party industries who may want to use more sophisticated telecoms platform services) to help realise the growth potential.
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Fig 4. Money comes from both sides in the ‘Two-Sided' Business Model

For those new to Telco 2.0, and for those in need of a refresher, our vision of a future ‘digital economy' is based on the following themes, issues and questions that any predictions of the future need to address.

We are seeing a move along two dimensions:

·         From ‘one-sided' to ‘two-sided' business models;

·         From distinct ‘telco' and ‘web 2.0' products and services, to blends, mash-ups and hybrids of the two.

We have previously modelled of the size of the potential opportunity in the ‘Two-Sided' Telecoms Market Opportunity and the Future Broadband Business Model Strategy Reports, (which is also about to be updated - see here).

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Fig 5. Telco 2.0 Future VAS Revenue Potential by Application

Source: Telco 2.0 - The ‘Two-Sided' Telecoms Market Opportunity Report

Telco 2.0's Scenarios


In our view, the important dimensions of the scenario matrix are 'Who Pays?' for the service, and 'Whose Product?' is being delivered.
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Fig 6. The Telco 2.0 Initiatve Scenario Map

We see ‘Telco 1.0' - where the end-user (consumer, enterprise, SME) predominantly pays the telco for telecoms products - shrinking. Telcos are moving (slowly) into ‘Telco 1.5' and ‘Hybrid' areas (see chart above) using better retailing solutions from certain vendors. At the same time, the web 2.0 and ‘Over The Top' market (dominated by big players like Google and Facebook) is getting more and more entrenched and powerful.

In our view the ‘Clash of the Titans', described by IBM, is not a ‘possibility', it is absolutely going to happen - but it is part of the story not the conclusion. Telcos will continue to partner with these major players who fall squarely into the ‘frenemy' camp (part friend, part enemy) and will compete hard to control the interface between ‘upstream' organisations (especially advertisers) and end users.

So, the future ‘Digital Economy 2.0' we describe in the chart above is approaching, but the rules have changed and there are new players emerging and so the key question is who wins - is it telcos or others?

We explore these questions in much more detail in our forthcoming report on Future Broadband Business Models 2.0, but for now the key questions we'd like you to consider are:

  1. Could ‘OTT' players take value by becoming bigger aggregators and/or enablers of telecoms-enhanced e-commerce? Players such as Google use their knowledge of end users and upstream players, coupled with Telco connectivity, to facilitate the delivery of a wider portfolio of products and services (their own and third-party).
  2. Could other smart intermediaries take value by aggregating telco (and others' assets), leaving telcos as commodity providers of raw materials? Ubiquitous, advanced telecommunications capabilities are a pre-requisite for the success of the ‘digital economy'. A number of organisations who are looking at playing a role in the aggregation of telco capabilities could capture most ‘platform' value.
  3. Could telcos take value by becoming trusted aggregators and/or enablers of e-commerce via real B2B support services? This was the original Telco 2.0 model we envisaged back in 2006, where operators work together to leverage their core assets to build a set of interoperable platforms that help third-parties improve the effectiveness and efficiency of their everyday business processes.

In determining the answer to these questions, we believe there are two important factors:

  • Operators' approach to developing the ‘two-sided' business model proposition
  • The extent to which telcos can collaborate to kick-start the market place in which they could all succeed

Operators' approach to the ‘Two-Sided' Proposition


End-users and service businesses, the key players in the ‘digital economy', do not generally buy ‘raw materials' and then manufacture their own solutions. Instead they seek ready-made products and convenient services. An approach in which telcos simply expose raw assets via APIs is, therefore, unlikely to succeed.

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Fig 7. Where to play in the Ecosystem?


Clearly, operators do not have the skills to develop complete one-stop shop services in every area of market opportunity. Determining where they play on the continuum described in the chart above (individually, but also collectively in local markets and/or globally) is a key strategic decision and will vary by:

  • Vertical Market.  In some industries, operators will have strong skills and markets will be fragmented enough to offer more scope to provide more complete solutions and services. In other markets, with well-established ecosystems and/or stronger vertical integration, operators will play more of an enabler or raw material provider;
  • Geography/region.  For example, where individual operators have a strong (50%+) market share (in Turkey and Japan for example) they will be more aggressive in adding more value to the core Telco platform;
  • Horizontal telecoms capability. Different operators, or sets of operators, will have different skills and asset qualities and may wish to take greater or lesser roles in the marketplace depending on their specific circumstances.

When to Compete, when to Collaborate?


When, where and how should and can telcos legitimately co-operate to create new markets? When do the benefits of working together to create mutual opportunities and ‘float all boats', exceed the benefits of head-on market competition? What are the bounds of anti-trust when it takes collaboration to create new competition?

These are important strategic questions for operators and the answers will to some extent vary by vertical market, by geography, and by horizontal capability.  For some opportunities, particularly where new customer connections are needed (e.g. for Smart Grids) operators may choose a go-it-alone strategy. In others, where upstream service providers need to be able to reach all Telco end-users in a certain geography or domain (e.g. Advertising), operators will need to collaborate (even if this ends up yielding some value to third-party aggregators).

Next Steps


The continuation and development of this analysis will feature in our research over the coming months and will be the key focus of the 9th Telco 2.0 Executive Brainstorm in London on 28-29 April 2010 and follow up Telco 2.0 events in 2010.

We are also embarking on a syndicated analysis project to explore the potential ecosystems, business models and market sizes for specific ‘Digital Economy 2.0' opportunities. This will address the key strategic questions outlined above.

NB. You can download this FREE Special Briefing in PDF format here.