Are telcos smart enough to make money work?

Telco consumer financial services propositions

Telcos face a perplexing challenge in consumer markets. On the one hand, telcos’ standing with consumers has improved through the COVID-19 pandemic, and demand for connectivity is strong and continues to grow. On the other hand, most consumers are not spending more money with telcos because operators have yet to create compelling new propositions that they can charge more for. In the broadest sense, telcos need to (and can in our view) create more value for consumers and society more generally.

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As discussed in our previous research, we believe the world is now entering a “Coordination Age” in which multiple stakeholders will work together to maximize the potential of the planet’s natural and human resources. New technologies – 5G, analytics, AI, automation, cloud – are making it feasible to coordinate and optimise the allocation of resources in real-time. As providers of connectivity that generates vast amounts of relevant data, telcos can play an important role in enabling this coordination. Although some operators have found it difficult to expand beyond connectivity, the opportunity still exists and may actually be expanding.

In this report, we consider how telcos can support more efficient allocation of capital by playing in the financial services sector.  Financial services (banking) sits in a “sweet spot” for operators: economies of scale are available at a national level, connected technology can change the industry.

Financial Services in the Telecoms sweet spot

financial services

Source STL Partners

The financial services industry is undergoing major disruption brought about by a combination of digitisation and liberalisation – new legislation, such as the EU’s Payment Services Directive, is making it easier for new players to enter the banking market. And there is more disruption to come with the advent of digital currencies – China and the EU have both indicated that they will launch digital currencies, while the U.S. is mulling going down the same route.

A digital currency is intended to be a digital version of cash that is underpinned directly by the country’s central bank. Rather than owning notes or coins, you would own a deposit directly with the central bank. The idea is that a digital currency, in an increasingly cash-free society, would help ensure financial stability by enabling people to store at least some of their money with a trusted official platform, rather than a company or bank that might go bust. A digital currency could also make it easier to bring unbanked citizens (the majority of the world’s population) into the financial system, as central banks could issue digital currencies directly to individuals without them needing to have a commercial bank account. Telcos (and other online service providers) could help consumers to hold digital currency directly with a central bank.

Although the financial services industry has already experienced major upheaval, there is much more to come. “There’s no question that digital currencies and the underlying technology have the potential to drive the next wave in financial services,” Dan Schulman, the CEO of PayPal told investors in February 2021. “I think those technologies can help solve some of the fundamental problems of the system. The fact that there’s this huge prevalence and cost of cash, that there’s lack of access for so many parts of the population into the system, that there’s limited liquidity, there’s high friction in commerce and payments.”

In light of this ongoing disruption, this report reviews the efforts of various operators, such as Orange, Telefónica and Turkcell, to expand into consumer financial services, notably the provision of loans and insurance. A close analysis of their various initiatives offers pointers to the success criteria in this market, while also highlighting some of the potential pitfalls to avoid.

Table of contents

  • Executive Summary
  • Introduction
  • Potential business models
    • Who are you serving?
    • What are you doing for the people you serve?
    • M-Pesa – a springboard into an array of services
    • Docomo demonstrates what can be done
    • But the competition is fierce
  • Applying AI to lending and insurance
    • Analysing hundreds of data points
    • Upstart – one of the frontrunners in automated lending
    • Takeaways
  • From payments to financial portal
    • Takeaways
  • Turkcell goes broad and deep
    • Paycell has a foothold
    • Consumer finance takes a hit
    • Regulation moving in the right direction
    • Turkcell’s broader expansion plans
    • Takeaways
  • Telefónica targets quick loans
    • Growing competition
    • Elsewhere in Latin America
    • Takeaways
  • Momentum builds for Orange
    • The cost of Orange Bank
    • Takeaways
  • Conclusions and recommendations
  • Index

This report builds on earlier STL Partners research, including:

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How mobile operators can build winning 5G business models

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The chartpack for this report is available to download as an additional file

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STL Partners has long believed that telecoms operators need to and can do more to add value to their consumer and enterprise customers and to society more generally. For the telecoms industry, the need to do more is illustrated by flat or declining revenues and rising capital expenditure and debt levels. The opportunity for telecoms to add more value is also clear. The demands of society now call for greater coordination between all players and new technology – 5G, analytics, AI, automation, cloud – is now spawning the Coordination Age.

Figure 1: The Coordination Age – new paradigm, new telco purposeThe coordination age overview

Source: STL Partners

Operators have the credibility, skills and relationships to contribute more in the Coordination Age. But the opportunity will not drop into their laps. Improved networks are not, of themselves, the driver of new value: it accrues to the provider of services that run on the network and it is up to operators to develop platforms and services that exploit ubiquitous, high-bandwidth connectivity.

So far, operators have found moving beyond connectivity challenging. There are a handful of success stories; most attempts to develop vertical solutions have failed to move the needle. In this report, we draw on successes and failures from within and outside telecoms to outline 8 core guiding principles for ambitious leaders within the telecoms industry who are determined to help their organisations to deliver more than connectivity.

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5G: A catalyst for change

In some ways, the challenge/opportunity for mobile operators has been present for the last 5-10 years: limited incremental revenue growth in voice, messaging, and data.

However, 5G is a catalyst for real change. There are internal pressures from the investments being made that mean operators must create new revenue streams. More positive reasons relate to increased demand for telco-driven services and the technological changes that telcos have implemented which will help the commercial side to adapt. Below are some of the main reasons why 5G has created a resurgent need to change business models.

  1. Making returns on network investments: It’s a given that 5G cannot be delivered without significant investment by the operators: be it in spectrum acquisition, upgrading the RAN and core network, managing a more distributed architecture of small cells, etc. Telcos can focus on ensuring that network runs efficiently to maintain margins, however many will need to look to new services. Data usage will surge, but the price customers will pay for each gigabyte will decline at a disproportionate rate.
  2. Building on telco cloud and edge computing platforms: Telcos have started to invest in developing their networks to become more like the cloud platforms that underpin the large cloud providers’ services. In fact, it’s a key part of the 5G core. Part of this has been the move towards SDN, network virtualisation and integrating edge computing. This flexible platform will allow telcos to innovate quickly and create new differentiated services on top if they have the desire to change their financial and operational models.
  3. Unlocking an enterprise business: Before 5G, mobile operators’ enterprise businesses have involved selling SIMs to enterprise customers with some forays into value-added services, such as cloud storage, mobile device management and M2M communications. Enterprises are genuinely interested in 5G and the capabilities it brings. For some, 5G has become an umbrella term for technological innovation. This is a good thing for the mobile industry, as it means enterprises will open doors to telcos and be keen to engage them for new solutions.
  4. Creating business value: 5G’s unique capabilities will enable use cases that solve real problems, particularly in industrial transformation. This last point is exemplified by research STL Partners previously conducted on the business value 5G brings to certain verticals by enhancing productivity, increasing output, creating efficiencies, etc. However, much of this value is extracted by the applications, solutions and services on top of the underlying network.

Figure 2: 5G enabled use cases could increase GDP by $1.5 trillion by 2030

Source: STL Partners

Table of Contents

  • Executive Summary
  • Introduction
  • 5G: A catalyst for chang
  • Guiding principles for mobile operators seeking to move beyond connectivity
    1. Select priority verticals and how you will compete in the them
    2. Adopt a new approach to resource allocation: less CapEx and more OpEx
    3. Material OpEx should focus on building new skills, assets, capabilities, relationships
    4. Establish senior management commitment and independence for the new venture
    5. Focus on commercial as well as technological differentiation in order to disrupt verticals
    6. De-emphasise network integration – at least to start with
    7. Recognise that M&A will be needed for market entry in most cases
    8. Realise that organic growth can work in exceptional operator or market circumstances
  • Conclusion

 

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Telco 2030: New purpose, strategy and business models for the Coordination Age

New age, new needs, new approaches

As the calendar turns to the second decade of the 21st century we outline a new purpose, strategy and business models for the telecoms industry. We first described The Coordination Age’, our vision of the market context, in our report The Coordination Age: A third age of telecoms in 2018.

The Coordination Age arises from the convergence of:

  • Global and near universal demands from businesses, governments and consumers for greater resource efficiency, availability and conservation, and
  • Technological advances that will allow near their real-time management.

Figure 1: Needs for efficient use of resources are driving economic and digital transformation

Resource availability, Resource efficiency, Resource conservation: Issues for governments, enterprises and consumers. Solutions must come from all constituents.

Source: STL Partners

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A new purpose for a new age

This new report outlines how telcos can succeed in the Coordination Age, including what their new purpose should be, the strategies, business models and investment approaches needed to deliver it.

It argues that faster networks which can connect tens of billions of sensors coupled with advances in analytics and process digitisation and automation means that there are opportunities for telecoms players to offer more than connectivity.

It also shows how a successful telecoms operator in the Coordination Age will profitably contribute to improving society by enabling governments, enterprises and consumers to collaborate in such a way that precious resources – labour, knowledge, energy, power, products, housing, and so forth – are managed and allocated more efficiently and effectively than ever before. This should have major positive economic and social benefits.

Moreover, we believe that the new purpose and strategies will help all stakeholders, including investors and employees, realign to deliver a motivating and rewarding new model. This is a critical role – and challenge – for all leaders in telecoms, on which the CEO and C-suite must align.

To do this, telecoms operators will need to move beyond providing core communications services. If they don’t choose this path, they are likely to be left fighting for a share of a shrinking ‘telecoms pie’.

A little history 2.0

Back in 2006, STL Partners came up with a first bold new vision for the telecoms industry to use its communications, connectivity, and other capabilities (such as billing, identity, authentication, security, analytics) to build a two-sided platform that enables enterprises to interact with each other and consumers more effectively.

We dubbed this Telco 2.0 and the last version of the Telco 2.0 manifesto we published can be found here – we feel it was prescient and that many of the points we made still resonate today. Indeed, many telecoms operators have embraced the Telco 2.0 two-sided business model over the last ten years.

This latest report builds on much of what we have learned in the previous fourteen years. We hope it will help carry the industry forwards into the next decade with renewed energy and success.

Other recent reports on the Coordination Age:

Table of contents

  • Executive Summary
  • Introduction
  • Industry context: End of the last cycle
    • The telecoms industry is seeking growth
    • Society is facing some major social and economic challenges
    • Addressing society’s (and the telecoms industry’s) challenges
  • The Coordination Age
    • Right here, right now
    • How would the Coordination Age work in healthcare, for example?
  • New opportunities for telcos?
    • The telecoms industry’s new role in the Coordination Age
    • Telcos need an updated purpose
    • This will help to realign stakeholders
    • A new purpose can be the foundation of new strategy too
    • Investment priorities need to reflect the purpose
    • New operational models will also follow
  • Conclusions: What will Telco 2030 look like?

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$1.4tn of benefits in 2030: 5G’s impact on industry verticals

Understanding the 5G opportunity in other industries

The aim of this report is to highlight the impact that 5G will have on global GDP between 2020 and 2030. To do this, we have focused on eight industries where we feel 5G will have the largest impact. Often when 5G is discussed, the focus is on the impact it will have on the consumer market. Here, we argue that 5G will unlock significant new revenue opportunities in the enterprise space, enabling innovative use cases that are currently impossible to scale commercially (with existing technologies).

Insight from this report is explored further in the following publications:

The document was researched and written independently by STL Partners, supported by Huawei. STL’s conclusions are entirely independent and built on ongoing research into the future of telecoms. STL Partners has written widely on the topic of 5G, including a recent two-part series into the short- and long-term opportunities unlocked by 5G, and lessons that can be learnt from early movers.

Comparing apples with apples: How to compare nascent 5G with established 4G

If you compare the technological specifications for 3GPP release 14 and 3GPP release 15 (the first 5G release), you might be underwhelmed. Despite the hype that 5G will be transformative, it does not appear to be delivering much more than incremental increases in speed and reliability. But, of course, 4G is now a mature form of connectivity (having been in-life for 6+ years) whereas 5G is still nascent.

To compare apples with apples, it makes sense to compare 5G release 16, where capabilities such as ultra-reliable low-latency and network slicing are being added, with LTE today.

Mature 5G benchmarked against the capabilities of mature 4G

Mature 5G benchmarked against mature 4G

Source: ITU, Nokia, ublox, gps world

Of course, these figures represent a best-case scenario occurring in a laboratory environment. This is true for both the 4G and 5G numbers. It’s also true that, in reality, it will take time before we see commercialised rollout of enhanced mobile broadband (“pure 5G”) rather than enhanced mobile broadband with 4G fall-back alongside fixed wireless access. Despite this, these figures make clear that when 5G reaches maturity, it will far outstrip the capabilities of 4G, and unlock new use cases.

Our assumption is that by 2025 5G technology will be mature, enabling massive M2M / IoT use cases as well as those that require ultra-reliable low-latency communications. Several of the 5G use cases we’ll go on to explore in more detail are reliant on this technology, so it is important to acknowledge that their commercialisation is only likely to start from around 2023 and in many markets they still won’t be fully deployed in 2030.

It’s not all about LTE: 5G must be compared to all available technology

Mobile is not the only form of connectivity used by enterprises. Plenty of industries are also making use of Wi-Fi, LPWAN, Zigbee, Bluetooth and fixed connectivity as part of their overall connectivity solution. When 5G is rolled out, in some cases, it will need to integrate with these existing technologies rather than replace them. The table below summarises some of the key benefits and shortcomings of current technologies, including highlighting the sorts of situations in which industries are making use of them.

Current technologies will not be entirely replaced by 5G, but it can address some of they key shortcomings

current technologies will not be entirely replaced by 5G, but it can address some of their key shortcomings

There are clear scenarios where 5G will be superior to existing technologies and bring significant benefits to industrial users. Ultimately, in particular, 5G will enable:

  1. Low latency and high bandwidth requirements for wireless connectivity
  2. Massive IoT through ability to handle high cell density
  3. Ultra-reliable and secure connectivity.

Table of Contents

  • Preface
  • Executive Summary
    • 5G enabled solutions are estimated to add c.$1.4 trillion to global GDP in 2030
    • Operators must embrace new business models to unlock significant revenues with 5G
    • Recommendations for operators: how to capitalise on the 5G opportunity
  • Introduction
    • Background
    • Comparing apples with apples: how to compare nascent 5G with established 4G
    • It’s not all about LTE: 5G must be compared to all available technology
    • 5G deployment: 5G will mature over the next ten years
  • 5G will add more than $1.4 trillion to the global economy by 2030
  • Mobile network operator strategic options with 5G
    • 5G alone will not change the game for operators
    • Strategic options for operators to add more value with 5G
  • 5G-enabled digital transformation in healthcare
    • Example 5G use case: Remote patient monitoring
    • Implications for telcos
  • 5G-enabled digital transformation in manufacturing
    • 5G can create $740bn in additional GDP by 2030
    • Example 5G use case: Advanced predictive maintenance
    • Implications for telcos
  • Conclusions for operators: how to capitalise on the 5G opportunity

Table of Figures

  • Figure 1: Mature 5G benchmarked against the capabilities of mature 4G
  • Figure 2: Current technologies will not be entirely replaced by 5G, but it can address some of their key shortcomings
  • Figure 3: Forecast of 5G deployment in major regions
  • Figure 4: Responses from industry surveys
  • Figure 5: 5G will contribute ~$1.4 trillion to global GDP by 2030
  • Figure 6: Manufacturing, energy & extractives and media, sports & entertainment industries will see the largest upticks to their industry thanks to 5G use cases
  • Figure 7: In 2030, manufacturing and construction will be the largest industry sectors (in 2030)
  • Figure 8: High income countries will see almost 75% of the benefit of 5G in 2025, but the share is more even across all geographies by 2030
  • Figure 9: 4G rollout did not produce sustainable revenue increase
  • Figure 10: What should telcos’ role be in 5G B2B?
  • Figure 11: As telcos move beyond just connectivity, they can increase their share of the wallet
  • Figure 12: Telcos must focus efforts in specific verticals – some are already doing this
  • Figure 13: Global impact of 5G on healthcare across four key contact points
  • Figure 14: Remote patient monitoring enables wearables to send data about the patient to the hospital for monitoring
  • Figure 15: Estimated impact of 5G-enabled remote patient monitoring
  • Figure 16: The potential roles for telcos can within healthcare
  • Figure 17: The TELUS Health Exchange as a point of coordination
  • Figure 18: There is opportunity for telcos’ to play multiple roles higher up the value chain in healthcare
  • Figure 19: Estimated impact of 5G on manufacturing GDP (USD Billions) by use case
  • Figure 20: Advanced predictive maintenance enables many sensors to send data about machinery for monitoring and optimisation