Telecom innovation in the network

New technologies have made innovation in the network imperative for telcos’ survival. But the focus and scope of innovation varies by the type of company telcos aim to become: infraco, servco or (telecom) techco.

Telcos need a culture of permanent innovation

Telcos should view innovation as their biggest driver of future value. In a way, that is stating the obvious. But it is not so obvious how, where and at what speed telcos should innovate.

What does ‘permanently innovating’ look like? One senses that yet another call from the analyst community for telcos to be more innovative would be met by many senior echelons of telcos with a sigh and a shrug of the shoulders. It is as if to say: ‘We, telcos, are already permanently investing in new technologies and creating new services – and yet, it never seems enough for you guys!’

But the need to permanently innovate should not be seen as an additional burden on already overloaded telcos struggling to generate a decent ROI from their existing investments in technologies and infrastructure, such as 5G and fibre access. And, in any case, it is arguable that ‘investing in new technologies’ is not always the same thing as ‘being innovative’ or having a culture of permanent innovation.

So, what do we mean by that?

It means, essentially, that telcos need to change from a utility mindset to a technology business mindset. Many – STL Partners included – have expressed this change as a transition from telco to ‘techco’. In essence, telcos need to re-envision themselves as vital enablers of technological innovation throughout their societies and economies. Sure, telcos will continue to operate and guarantee critical infrastructure and basic connectivity services for their markets. But these things will be all the more critical, precisely because they enable the countries in which they operate to function and develop as advanced, technological societies.

This perpetual innovation culture is something telcos can import from the cloud, software and ‘technology’ worlds. (And the mere fact that we refer to the world of technology as something other than the world of telecom is revealing of the perceived gap between telco and techco.)

But a spirit of innovation is also something that telcos need to recapture from their past, when they did innovate much of the technology and equipment that delivered the services and networks of the first age of telecom in STL Partners’ framework: the Communications Age. Innovation is in telcos’ DNA – but if that DNA dies out, so will the telcos. This will be a different type of innovation from the past, though: centred in software and cloud rather than hardware; and focused on delivering solutions addressing specific customer and industry needs, in partnership with technology providers in other vertical markets. But it’s the innovation that is key.

Simply put, it is necessary for telcos to import and recapture this innovation mentality because we live in a world of rapidly evolving technology. And telco networks have to keep up with this evolution in order to serve and enable those technologies. In this way, they can ensure that customers still want to use telco networks to access those technologies rather than using networking services created by non-telcos, including the hyperscale cloud providers (HCPs).

Our report Network innovation as an engine for growth: A manifesto, published in October, looks at three approaches to permanent innovation that bring about a natural evolution of the legacy telco business. These are the ‘infraco’, ‘servco’ and ‘techco’ (with an intermediate phase of the ‘telecom techco’).

Figure 1: Relationship between telco, infraco, servco and (telecom) techco

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Briefly put:

• The infraco focuses on innovation within its network infrastructure, both physical and virtual, and making that infrastructure available to third parties as a programmable platform for applications, connectivity and digital services. A good example of such a player is Lumen Technologies.
• The servco innovates at the service layer, i.e. it creates software-based digital and connectivity services that are delivered over any network infrastructure – typically, infrastructure provided by an infraco (whether an evolved telco or a non-telco). The servco can also diversify into other industry verticals, and can provide products and services that do not involve delivering connectivity (such as healthcare, finance, content, etc.). Console Connect is a good example of such a servco.
• The techco, ultimately, is an enabler and/or a co-creator of technology-based services and processes. These do generally involve an integrated networking component; and the connectivity can be delivered across any infrastructure, including that of the HCPs. But these are not ‘network services’ in the classic sense: they are technology services that are enabled by networking in a way that is fundamental to their design and effectiveness. For example, this could involve autonomous industrial or logistics processes/use cases that rely on advanced compute and AI capabilities and data flows, and where these need to be distributed at ultra-low latencies and high reliability across a network.
• There is an intermediate techco phase, which we call that of the ‘telecom techco’. This is where the techco’s services are more focused on the connectivity elements – provided on an increasingly bespoke (application-specific) and on-demand basis – and are delivered (or at least, are developed and tested) over its own or hybrid infrastructure. The telecom techco can combine both infraco and servco capabilities and assets. But it is greater than the sum of its parts, insofar as the value that can be addressed by the telecom techco is bigger: deriving from innovating in the network to deliver valuable new services tightly aligned with specific client needs. The pure techco opportunity is even bigger, in our view, as this is where AI assumes a leading role to help innovate and deliver radically new, network-enabled technology services across all industry verticals and areas of society.

Finnish operator Elisa is a good example of a telecom techco, leveraging a combination of both infraco and servco strengths. There are not many existing examples of a fully evolved techco, as this is still a model that is in the early stages of development. However, one example – which also illustrates the pivotal role of AI – would be SK Telecom. The Korean operator now defines its strategy as that of a ‘global AI company’.

Innovate to be a telco of the future, not of the past

The infraco, servco and (telecom) techco are distinct businesses, although they could be carried out by functionally separate units within the same company rather than different enterprises. Regardless of this, these models are not just abstract, theoretical concepts. On the contrary, we believe that they represent realistic pathways for telcos to remain relevant and generate new sources of revenue – rather than stagnating and sliding irrevocably into terminal decline as many are doing at present. And following these pathways will translate not only into top-line revenues but also into profit and shareholder value.

Telcos need to decide which variety of future telco they wish to be, and direct their network investments and innovation activities accordingly. Our report Network innovation as an engine for growth: A manifesto contains guidance on some of the key new network technologies, the degree to which they are critical for the different new types of telco and where those investments should be made physically: in owned or third-party infrastructure.

But the time for making those investment decisions and adopting a new business model is now. Otherwise, we could be talking more about telcos of the past than telcos with a future.

Our report Network innovation as an engine for growth: A manifesto discusses these issues in greater depth. In summary, we believe that telcos must become innovative to their core if they are to survive. And this also means innovating the type of service provider and technology company they are to be.

Author

David Martin

Senior Analyst

David Martin has specialised on telco cloud at STL Partners since 2016, writing numerous strategic reports on different aspects of the topic. He also originated STL’s Telco Cloud Deployment Tracker: a major database of commercial telco cloud deployments by leading telcos worldwide. He is a telecoms analyst of around 25 years’ experience. David obtained a First Class degree in French and German at Trinity Hall, Cambridge, where he also pursued doctoral studies in French.