The last few years have seen attempts by many leading telecoms operators to refresh their business model and generate new sources of growth and value. Now many digital initiatives are being scaled back. Telefonica and Telenor, two companies in the vanguard of the ‘drive to digital’ have both disbanded their digital organisations. In the first of two reports, STL Partners explores why efforts to yoke platform and product innovation businesses to a traditional infrastructure business have proved so difficult. The financial and operational constraints associated with traditional telecoms – particularly the need for long investment cycles in ‘one-function’ infrastructure – have made achieving the switch to ‘agile digital innovation’ all but impossible. But all that may be about to change and the future could be a little brighter.
Everyone loves to moan about telcos
‘I just can’t seem to get anything done, it is like running through treacle.’
‘We gave up trying to partner with operators – they are too slow.’
‘Why are telcos unable to make the most basic improvements in their service offerings?’
‘They are called operators for a reason: they operate networks. But they can’t innovate and don’t know the first thing about marketing or customer service.’
Anyone within the telecoms industry will have heard these or similar expressions of dissatisfaction from colleagues, partners and customers. It seems that despite providing the connectivity and communications services that have truly changed the world in the last 20 years, operators are unloved. Everyone, and I think we are all guilty of this, feels that operators could do so much better. There is a feeling that these huge organisations are almost wilfully seeking to be slow and inflexible – as if there is malice in the way they do business.
But the telecoms industry employs millions of people globally. It pays quite well and so attracts talent. Many, for example, have already enjoyed success in other industries. But nobody has yet, it seems, been able to make a telco, let alone the industry, fast, agile, and innovative.
A structural problem
In this report, we argue that nobody is at fault for the perceived woes of telecoms operators. Indeed, the difficulty the industry is facing in changing its business model is a result of financial and operational processes that have been adopted and refined over years in response to investor requirements and regulation. In turn, investors and regulators have created such requirements as a result of technological constraints that have applied, even with ongoing improvements, to fixed and mobile telecommunications for decades. In essence, operators are constrained by the very structures that were put in place to ensure their success.
So should we give up?
If the limitations of telecoms operators is structural then it is easy to assume that change and development is impossible. Certainly sceptics have plenty of empirical evidence for this view. But as we outline in this report and will cover in more detail in a follow up to be published in early February 2016 (Answer: How 5G + Cloud + NFV can create the ‘agile telco’), changes in technology should have a profound impact on telecoms operators ability to become more flexible and innovative and so thrive in the fast-paced digital world.
Customer satisfaction is proving elusive in mature markets
Telecoms operators perform materially worst on customer service than other players in the US and UK
Improving customer experience has become something of a mantra within telecoms in the last few years. Many operators use Net Promoter Scores (NPS) as a way of measuring their performance, and the concept of ‘putting the customer first’ has gained in popularity as the industry has matured and new customers have become harder to find. Yet customer satisfaction remains low.
The American Customer Satisfaction Index (ACSI) publishes annual figures for customer satisfaction based on extensive consumer surveys. Telecommunications companies consistently come out towards the bottom of the range (scoring 65-70 out of 100). By contrasts internet and content players such as Amazon, Google, Apple and Netflix have much more satisfied customers and score 80+ – see Figure 1.
Figure 1: Customers are generally dissatisfied with telecoms companies
Source: American Customer Satisfaction index (http://www.theacsi.org/the-american-customer-satisfaction-index); STL Partners analysis
The story in the UK is similar. The UK Customer Satisfaction Index, using a similar methodology to its US counterpart, places the Telecommunications and Media industry as the second-worst performer across 13 industry sectors scoring 71.7 in 2015 compared to a UK average of 76.2 and the best-performing sector, Non-food Retail, on 81.6.
Poor customer services scores are a lead indicator for poor financial performance
Most concerning for the telecoms industry is the work that ACSI has undertaken showing that customer satisfaction is linked to the financial performance of the overall economy and the performance of individual sectors and companies. The organisation states:
- Customer satisfaction is a leading indicator of company financial performance. Stocks of companies with high ACSI scores tend to do better than those of companies with low scores.
- Changes in customer satisfaction affect the general willingness of households to buy. As such, price-adjusted ACSI is a leading indicator of consumer spending growth and has accounted for more of the variation in future spending growth than any other single factor.
Source: American Customer Satisfaction index (http://www.theacsi.org/about-acsi/key-acsi-findings)
In other words, consistently poor performance by all major players in the telecoms industry in the US and UK suggests aspirations of growth may be wildly optimistic. Put simply, why would customers buy more services from companies they don’t like? This bodes ill for the financial performance of telecoms operators going forward.
Senior management within telecoms knows this. They want to improve customer satisfaction by offering new and better services and customer care. But change has proved incredibly difficult and other more agile players always seem to beat operators to the punch. The next section shows why.
- Everyone loves to moan about telcos
- A structural problem
- So should we give up?
- Customer satisfaction is proving elusive in mature markets
- Telecoms operators perform materially worst on customer service than other players in the US and UK
- Poor customer services scores are a lead indicator for poor financial performance
- ‘One-function’ telecommunications technology stymies innovation and growth
- Telecoms has always been an ‘infrastructure play’
- …which means inflexibility and lack of innovation is hard-wired into the operating model
- Why ‘Telco 2.0’ is so important for operators
- Telco 2.0 aspirations remain thwarted
- Technology can truly ‘change the game’ for operators
- Figure 1: Customers are generally dissatisfied with telecoms companies
- Figure 2: Historically, capital deployment has driven telecoms revenue
- Figure 3: Financial & operational metrics for Infrastructure player (Vodafone) vs Platform (Google) & Product Innovator (Unilever)