All telcos know they need to change. We believe the defining characteristic of those that will grow most is a clear focus on where and how they can create value beyond connectivity. This report lays out the two viable paths forward, and six steps all telcos must take in this new version of the Telco 2.0 vision.
Time to update Telco 2.0
Telcos are facing difficult choices about whether and how to invest in new technologies, how to cut costs, and how to create new services, either to pair with their core network services or to broaden their customer bases beyond connectivity users.
Through the Telco 2.0 vision (our shorthand for ‘what a future telco should look like’), STL Partners has long argued that telcos need to make fundamental changes to their business models in response to the commoditisation of connectivity and the ‘softwarisation’ of all industries, including telecoms. At the very least this means digitalising operations to become more data-centric and efficient in the way they deliver connectivity. But to generate significant new revenue growth, we still believe telcos need to look beyond connectivity and develop (or acquire) new product and service offerings.
The original Telco 2.0 two-sided business model
Source: STL Partners
Since 2011, a handful of telcos have made significant investments into areas beyond connectivity that fall into these categories. For example:
- NTT Docomo has continued to expand its ‘dmarket’ consumer loyalty scheme, media and sports content and payment services, which accounted for nearly 20% of total revenues for FY2017.
- Singtel acquired digital advertising provider Amobee in 2012, followed by several more acquisitions in the same area to build an end-to-end digital marketing platform. Its digital services accounted for more than 10% of quarterly revenues by December 2017, and was the fourth largest revenue segment, ahead of voice revenues.
- TELUS first acquired a health IT company in 2008, and has since expanded its reach and range of services to become Canada’s largest provider of health IT solutions, such as a nation-wide e-prescription system. Based on a case study we did on TELUS, we estimate its health solutions accounted for at least 7% of total revenues by 2017.
However, these telcos are the exception rather than the rule. Over the last decade, most telcos have failed to build a significant revenue stream beyond their core services.
While many telcos remain cautious or even sceptical about their ability to generate significant revenue from non-connectivity based products and services, “digitalising” operations has become a widespread approach to sustain margins as revenue growth has slowed.
In Figure 3 we illustrate these as the two ‘digital dimensions’ along which telcos can drive change, where most telcos are prioritising an infrastructure play, but few are putting significant resources into product innovation, and only a small number with the ability to do both.
- Digitalising telecoms operations: Reduction of capex and opex by reducing complexity and automating processes, and improving customer experience
- Developing new services: This falls into two categories on the right-hand side of Figure 3
- Product innovation: New services that are independent from the network, in which case digitalising telecoms operations is only moderately important
- Platform (& product): New services that are strongly integrated with the network and therefore require the network to be opened up and digitalised
Few telcos are putting real resources into product & platform innovation
Source: STL Partners
Four developments driving our Telco 2.0 update
- AI and automation technology is ready to deploy at scale. AI is no longer an over-hyped ideal – machine and deep learning techniques are proven to deliver faster and more accurate decision-making for repetitive and data-intensive tasks, regardless of the type of data (numerical, audio, images, etc.). This has the potential to transform all areas of operators’ businesses.
- We live and work in a world of ecosystems. Few services are completely self-sufficient and independent from everything else, but rather enable, complement and/or augment other services. Telcos must accept that they are not immune to this trend, just because connectivity is one of the key enablers of content, cloud and IoT ecosystems (see Figure 4).
- Software-defined networks and 5G are coming. This is happening at a different pace in different markets, but over the next five to ten years these technologies will drastically change the ‘thing’ that telcos operate: the ‘network’ will become another cloud service, with many operational functions instantiated in near real-time in hardware at the network edge, so never even reaching a centralised cloud. So telcos need to become more proficient in software and computing, and they should think of themselves as cloud service providers that operate in partnership with many other players to deliver end-users a complete service.
- As other industries go through their own digital transformations, the connectivity and IT needs of enterprises have become much more complex and industry specific. This means the one-size-fits-all approach does not apply for operators or for their enterprise customers in any sector.
Telcos and connectivity are not a central pillar, but an enabler in a much richer ecosystem
Source: STL Partners
We are updating the Telco 2.0 Vision in light of these realities. Previously, we proposed six opportunity areas for new revenue growth, and expected large, proactive telcos to be able to address many of them. But telcos have been slow to change, margins are tighter now, implementing NFV/SDN is hard, and software skills are necessary for succeeding in any vertical. So telcos can no longer hope to do it all and must make choices of where to put their bets. As NTT Docomo, Singtel and TELUS show, it also takes time to succeed, so telcos need to choose and commit to a strategy now for long term success.
- Executive Summary
- Time to update Telco 2.0
- Four developments driving our Telco 2.0 update
- Analysing the current market state
- Options for the future
- If connectivity won’t drive growth, do telcos’ network strategies matter?
- Imagining the future telecoms stack
- Figure 1: The telco stack
- Figure 2: The original Telco 2.0 two-sided business model
- Figure 3: Few telcos are putting real resources into product & platform innovation
- Figure 4: Telcos and connectivity are not a central pillar, but an enabler in a much richer ecosystem
- Figure 5: The network cloud platform within the telco stack
- Figure 6: Steps to becoming a cloud platform
- Figure 7: Horizontal specialisation within the telco stack
- Figure 8: Vertical specialisation within the telco stack
- Figure 9: Enterprise verticals
- Figure 10: Consumer services and applications
- Figure 11: Network technology company versus lean network operator
- Figure 12: Example of a fixed telco stack
- Figure 13: Example of a telco IoT stack
- Figure 14: Example of a lean network operator stack