Telco to Techco: Six tenets for success

The stagnated telco growth

In recent years, the telco industry has seen growth stagnate as software companies infiltrate their markets and offer more innovative solutions at lower operating costs. The rapid consolidation of major internet players, such as Google and Amazon, is only increasing with time; threatening to not only undermine the telco position, but completely destabilise their revenue model and undermine their ability to operate profitably.

The top seven internet giants saw revenue growth of 72% between 2019 and 2022, pushing their total revenues above that of the telecoms industry as a whole (the figure below shows the revenues of all major telecoms operators and groups). As a result, telcos are urgently reassessing their business model, looking for key areas where they can cut costs and create new revenue streams, leveraging lessons learned from these internet giants to develop their proposition and ensure their long-term survival.

Telco revenues, 2019-2022, trillions of US dollars

Source: STL Partners

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The enterprise customer: Potential growth for techcos

Slowing of consumer profit growth has led telcos to explore the enterprise opportunity

Through the move to techco, telcos hope to increase profit margins. Heavy investment in 5G rollout, as well as an increasing focus on edge computing and distributed networking is providing telcos with a valuable footprint which can be leveraged for enterprise application services – a major new growth market for telcos which have been historically limited to providing connectivity. Our survey respondents felt that growing revenues was the key strategic objectives of 5G and edge, and that this would be achieved through horizontal connectivity products.

Question: What is the primary business objective for your 5G and edge strategy?

 

Source: STL Partners “Telco to Techco” survey, 2023

 

Question : Which areas do you think will drive this revenue growth?

Telco to techco

Source: STL Partners “Telco to Techco” survey, 2023

 

Telcos lack the prerequisite skills to properly target these customers

To develop products that truly deliver value to the end-customer, telcos must first develop strong relationships within specific, vertical ecosystems to ensure these products are able to provide real business value for enterprise customers. It is notable that surveyed telcos believed that vertical-specific solutions were the least likely approach to drive revenue growth through 5G and edge (14 respondents), suggesting telcos still believe that if they build the products, the customers will come to them.

Within our benchmarking index, we measured telcos on their development of B2B enterprise groups, with techcos much more likely to give autonomy to groups focusing on specific verticals. Unlike the consumer market, enterprise customers have specific characteristics that limit the effectiveness of a telco horizontal strategy:

  • Vertical-specific KPIs: When approaching the “enterprise market”, telcos are aware that each industry operates to a diverse range of KPIs, regulations and expectations. Each industry has unique KPIs reflecting its goals: for example, in manufacturing, annual plant output is a crucial metric, while the retail sector relies on other KPIs such as inventory turnover and customer conversion rate.
  • Siloed internal teams: Enterprise organisations often operate with siloed internal teams, particularly in the realms of IT and operational technology departments. These teams function with distinct decision-making processes, priorities and budgets. Techcos typically have strong exposure to all decision makers across the enterprise, ensuring comprehensive buy-in leading to commercial deployments.

Telcos possess valuable technological expertise and robust infrastructure due to their longstanding role as connectivity providers. They have established extensive relationships with enterprise customers, albeit primarily centred around connectivity procurement rather than an application collaborator.

 

Table of content

  • Foreword
  • Executive Summary
    • Six tenets telcos must consider to pursue a techco transformation
  • Introduction
  • The enterprise customer: Potential growth for techcos
    • Slowing of consumer profit growth has led telcos to explore the enterprise opportunity
    • Telcos lack the prerequisite skills to properly target these customers
  • Complex and expensive networks limit the profitability of consumer products
    • Revenue increases as a result of 5G penetration are not enough to drive growth of the telco as a whole
    • Techcos will develop effective customer feedback loops and build only what is demanded
  • Changing the organisational model of a telco
    • Becoming a techco requires a more horizontal structure with fluid roles
    • Cross-functional teams with software-first KPIs will lead telcos into the new world
  • Sustainability: No longer a nice to have?
    • To reach net-zero targets, telcos must embed sustainability across the organisation
    • Collaboration will be instrumental to accelerate sustainability across the industry
  • Cloud native: Technology or mindset?
    • Network-as-a-service will enable techcos to offer transformative products
    • Internal automation and industry collaboration are critical steps to true cloud native NaaS
  • Ecosystem participation to develop new expertise
    • Techcos will leverage the skills of others through diverse ecosystems of partners
    • ISVs will bring applications and expertise to telcos developing their sector-specific capabilities
    • Telcos can leverage their trusted local presence to provide value and assurance in an open ecosystem
  • Conclusions and recommendations
    • Enterprise customer recommendations
    • Consumer customer recommendations
    • Organisational recommendations
    • Sustainability recommendations
    • Cloud native recommendations
    • Ecosystem recommendations

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Telco Cloud Deployment Tracker: Will vRAN eclipse pure open RAN?

Is vRAN good enough for now?

In this October 2022 update to STL Partners’ Telco Cloud Deployment Tracker, we present data and analysis on progress with deployments of vRAN and open RAN. It is fair to say that open RAN (virtualised AND disaggregated RAN) deployments have not happened at the pace that STL Partners and many others had forecast. In parallel, some very significant deployments and developments are occurring with vRAN (virtualised NOT disaggregated RAN). Is open RAN a networking ideal that is not yet, or never will be, deployed in its purest form?

In our Telco Cloud Deployment Tracker, we track deployments of three types of virtualised RAN:

  1. Open RAN / O-RAN: Open, disaggregated, virtualised / cloud-native, with baseband (BU) functions distributed between a Central Unit (CU: control plane functions) and Distributed Unit (DU: data plane functions)
  2. vRAN: Virtualised and distributed CU/DU, with open interfaces but implemented as an integrated, single-vendor platform
  3. Cloud RAN (C-RAN): Single-vendor, virtualised / centralised BU, or CU only, with proprietary / closed interfaces

Cloud RAN is the most limited form of virtualised RAN: it is based on porting part or all of the functionality of the legacy, appliance-based BU into a Virtual Machine (VM). vRAN and open RAN are much more significant, in both technology and business-model terms, breaking open all parts of the RAN to more competition and opportunities for innovation. They are also cloud-native functions (CNFs) rather than VM-based.

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2022 was meant to be the breakthrough year for open RAN: what happened?

  • Of the eight deployments of open RAN we were expecting to go live in 2022 (shown in the chart below), only three had done so by the time of writing.
  • Two of these were on the same network: Altiostar and Mavenir RAN platforms at DISH. The other was a converged Parallel Wireless 2G / 3G RAN deployment for Orange Central African Republic.
  • This is hardly the wave of 5G open RAN, macro-network roll-outs that the likes of Deutsche Telekom, Orange, Telefónica and Vodafone originally committed to for 2022. What has gone wrong?
  • Open RAN has come up against a number of thorny technological and operational challenges, which are well known to open RAN watchers:
    • integration challenges and costs
    • hardware performance and optimisation
    • immature ecosystem and unclear lines of accountability when things go wrong
    • unproven at scale, and absence of economies of scale
    • energy efficiency shortcomings
    • need to transform the operating model and processes
    • pressured 5G deployment and Huawei replacement timelines
    • absence of mature, open, horizontal telco cloud platforms supporting CNFs.
  • Over and above these factors, open RAN is arguably not essential for most of the 5G use cases it was expected to support.
  • This can be gauged by looking at some of the many open RAN trials that have not yet resulted in commercial deployments.

Global deployments of C-RAN, vRAN and open RAN, 2016 to 2023

Image shows global deployments of C-RAN, vRAN and open RAN, 2016 to 2023

Source: STL Partners

Previous telco cloud tracker releases and related research

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