STL Partners' industry transformation analysis, including a recent global survey of telco executives, suggests operators' digital ambitions are rising fast but, given 9 substantial implementation challenges, too little is currently being done to engender successful industry-wide business model transformation. We also look at the lessons from NTT DoCoMo, one of the operators that has made the most overall progress towards a 'digital' model.
Growing telco ambitions in new (digital) business models
Telco execs are bullish about long-term prospects for new digital business models
Respondents believe new business model revenues should reach nearly 25% of total telecom revenue by 2020
Despite recent evidence in Europe of material revenue decline from telecoms operators, the executives that STL Partners canvassed in its recent global survey were relatively optimistic about the opportunities for revenue growth from new business models. On average, executives felt that revenue from new digital business models should reach 9% of total revenue in 2015 and this should rise to 24% by 2020 (see Figure 1).
In the case of 2015, 9% is way beyond what will be achieved by most players and probably represents respondents’ theoretical target that their organisation should have achieved by the end of this year if management had invested more effort in building new revenue sources earlier: it is where their organisation should be in an ideal world. One of the few operators in the world that is at this level of digital revenues is NTT DoCoMo. We explore its digital activities later in this report.
24% of telecoms revenue coming from new business models in 2020 is also ambitious but STL Partners considers this a realistic target and one which would probably result in the overall telecoms market being no bigger than it was in 2013 – see the forecast on page 15.
Two drivers of digital business model importance to operators: digital revenue growth and core business revenue decline
A key question for the industry is whether the 2020 target can be achieved by growing material new business model revenues in tandem with limited voice, messaging and connectivity decline or whether it could result from an implosion of these Telco 1.0 revenues. In other words, modest new business model revenue could be 24% of a very much smaller overall telecoms market if voice, messaging and connectivity revenues suffer a precipitous decline.
Figure 2 charts the quarterly revenue for six European markets and illustrates a range of trajectories for telecoms revenues. At one extreme is Denmark where telecoms revenue in Q3 2014 was nearly 40% lower than Q1 2008. At the other extreme are the UK and French markets where the figure is 3% and 7% lower respectively. Clearly, if most telecoms markets follow the Danish route then the opportunity for modest digital revenues to become important to operators grows substantially. Interestingly, in most of the six markets, 2013 and 2014 has seen revenues stabilising (at least among operators that publish accounts which split out those markets over the time period) and in some cases, such as the UK and Netherlands, growth has been achieved from the lows of 2012.
STL Partners’ global forecast lies somewhere between the two extremes outlined in Figure 2: we believe that core telecoms revenues will decline by around 25% between 2013 and 2020. If this is indeed the case then for digital revenues to represent 24% of telecoms revenue, they will need to be very material – around $250 billion for mobile telecoms alone!
Figure 1: Digital business model revenue ambition, 2015 and 2020
Source: STL Partners/Telco 2.0 Operator Survey, November 2014, n=55
Figure 2: Telecoms quarterly revenue in 6 European markets
Source: Telecoms company accounts, STL Partners analysis
Note: Revenue is for operators reporting quarterly figures for each market. As a result, not all market revenue is captured.
Belief in the importance of future telecoms business models varies greatly by business function and by geography
Respondents from Network functions were most bullish; IT respondents most pessimistic
Where there were 10 or more respondents in a functional or geographic group, we examined the responses for that group. As Figure 3 shows, there were wide differences in ambition for digital services by functional area with respondents from Network being far more bullish than those in IT: the former suggesting 30% of 2020 revenue should come from digital services compared with only 14% from IT.
North American respondents seem to anticipate unrealistic digital business growth
There was a consistency among functional groups in their ambitions for digital services: those that were more bullish for 2015 remained more so for 2020. This contrasted with the regional split in which North American respondents believed the ‘correct’ proportion of revenue from digital services in 2015 is 7% (compared with 10% for Europe and Asia) rising to a formidable 26% in 2020. This suggests that North American executives remain confident that their organisations can compete effectively in consumer and enterprise digital markets despite the US, in particular, being the home market of many formidable digital players: Google, Facebook, Amazon, Microsoft, Salesforce, Twitter, and so forth.
To put the North American perspective in perspective: if STL Partners’ global forecast for core telecoms services holds true in the US then a $120bn revenue telecoms company, such as Verizon, will lose around $30 billion in core service revenues by 2020. In this scenario, for Verizon to end up the same size as it is now in 2020, it will have to replace this $30 billion with new digital business revenues (which would equate roughly to the 26% proposed by North American respondents). In our deep-dive analysis of Verizon for the Telco 2.0 Transformation Index, STL Partners estimated that Verizon generated around $2.9 billion in Telco 2.0 digital business model revenues (around 2.4% of total revenue) in 2013. For that $2.9 billion to grow to $30 billion by 2020 requires compound annual growth of a whopping 40% per year: a tall order indeed and one that is almost certainly unrealistic.
Middle Eastern respondents least ambitious: signs of complacency?
Unsurprisingly, the Middle Eastern respondents whose companies are enjoying continued growth in core telecoms services and, in many countries advantageous regulatory environments, were least bullish about digital services in the near and longer term. The danger for this region is complacency: operators are in a similar position to those in Europe in 2007. European operators failed to prepare early enough for core service decline – most digital activities were not kicked off until 2012 by which time aggregate revenue from voice, messaging and connectivity was either flat or in decline in most markets.
Figure 3: Average digital business model revenue ambition, 2015 and 2020 by function and geography
Source: STL Partners/Telco 2.0 Operator Survey, November 2014, n=55
- Executive Summary
- Growing telco ambitions in new (digital) business models
- Telco execs are bullish about long-term prospects for new digital business models
- Belief in the importance of future telecoms business models varies greatly by business function and by geography
- Telco execs’ views on digital business Opex and Capex investment are closely correlated with their views on revenue growth
- Calculating a telecoms digital business P&L: Moving from investment in 2015 to (unrealistically?) strong returns in 2020
- STL Partners’ forecast suggests that new digital business should be 25+% of revenue by 2020 to avoid long-term industry decline
- The outlook for Telco 1.0 business models is not positive and Telco 2.0 business models are required to fill the gap
- Investment in new business models is increasing but results from the Telco 2.0 Transformation Index suggest it is still inadequate to engender success
- Scale of NTT DoCoMo’s ‘new digital business’ suggests bold vision is realistic for some players
- Long-term downward trend in Telco 1.0 core services in Japan with digital services a ‘gap-filler’
- Smart Life: A cloud-based (OTT) consumer-centric approach to digital services
- A digital business has fundamentally different characteristics to a telecoms business
- 9 challenges to overcome and all are important
- Overall, operator progress on all 9 challenges remains slow
- Too little progress on core challenges from most operators
- What next? Forthcoming STL Partners’ Telco 2.0 research supporting telecoms transformation
- Appendix 1: Survey details
- Appendix 2: Telco 2.0 Transformation Index overview
- Figure 1: Digital business model revenue ambition, 2015 and 2020
- Figure 2: Telecoms quarterly revenue in 6 European markets
- Figure 3: Average digital business model revenue ambition, 2015 and 2020 by function and geography
- Figure 4: Average required Digital Business Opex and Capex, 2015 & 2020
- Figure 5: Digital Business P&L for a $100 billion revenue telecoms operator, 2015 vs 2020, $ Billions
- Figure 6: STL Partners’ global mobile telecoms forecast by opportunity area
- Figure 7: STL Partners Telco 2.0 Transformation Index summary results, December 2014
- Figure 8: NTT DoCoMo quarterly voice, data and ‘other’ revenue, Mar 2007-Sep 2014
- Figure 9: Smart Life – NTT DoCoMo’s customer-centric approach to transformation
- Figure 10: Different companies…different business models – the change that telecoms operators are trying to make
- Figure 11: 9 challenges scored by ‘importance for operator digital transformation and future success’
- Figure 12: The degree to which operators have addressed the 9 challenges
- Figure 13: Strategists are much more bullish than other functions about their organisation’s transformation progress
- Figure 14: Lots to change…and its taking too long
- Figure 15: Operators appear to be at very different stages of resolving the ‘Big 6’ challenges
- Figure 16: Defining Digital Services