Telecoms, like much of the business world, often revolves around measurements, metrics and KPIs. Whether these relate to coverage of networks, net-adds and churn rates of subscribers, or financial metrics such as ARPU, there is a plethora of numerical measures to track.
They are used to determine shifts in performance over time, or benchmark between different companies and countries. Regulators and investors scrutinise the historical data and may set quantitative targets as part of policy or investment criteria.
This report explores the nature of such metrics, how they are (mis)used and how the telecoms sector – and especially its government and regulatory agencies – can refocus on good (i.e., useful, accurate and meaningful) data rather than over-simplistic or just easy-to-collect statistics.
The discussion primarily focuses on those metrics that relate to overall industry trends or sector performance, rather than individual companies’ sales and infrastructure – although many datasets are built by collating multiple companies’ individual data submissions. It considers mechanisms to balance the common “data asymmetry” between internal telco management KPIs and metrics available to outsiders such as policymakers.
A poor metric often has huge inertia and high switching costs. The phenomenon of historical accidents leading to entrenched, long-lasting effects is known as “path dependence”. Telecoms reflects a similar situation – as do many other sub-sectors of the economy. There are many old-fashioned metrics that are no longer really not fit for purpose and even some new ones that are badly-conceived. They often lead to poor regulatory decisions, poor optimisation and investment approaches by service providers, flawed incentives and large tranches of self-congratulatory overhype.
An important question is why some less-than-perfect metrics such as ARPU still have utility – and how and where to continue using them, with awareness of their limitations – or modify them slightly to reflect market reality. Sometimes maintaining continuity and comparability of statistics over time is important. Conversely, other old metrics such as “minutes” of voice telephony actually do more harm than good and should be retired or replaced.
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Looking beyond operator KPIs
Throughout the report, we make a semantic distinction between industry-wide metrics and telco KPIs. KPIs are typically generated for specific individual companies, rather than aggregated across a sector. And while both KPIs and metrics can be retrospective or set as goals, metrics can also be forecast, especially where they link operational data to other underlying variables, such as population, geographic areas or demand (rather than supply).
STL Partners has previous published work on telcos’ external KPIs, including discussion of the focus on “defensive” statistics on core connectivity, “progressive” numbers on new revenue-generating opportunities, and socially-oriented datasets on environmental social and governance (ESG) and staffing. See the figure below.
Types of internal KPIs found in major telcos
Source: STL Partners
Policymakers need metrics
The telecoms policy realm spans everything from national broadband plans to spectrum allocations, decisions about mergers and competition, net neutrality, cybersecurity, citizen inclusion and climate/energy goals. All of them use metrics either during policy development and debate, or as goalposts for quantifying electoral pledges or making regional/international comparisons.
And it is here that an informational battleground lies.
There are usually multiple stakeholder groups in these situations, whether it is incumbents vs. new entrants, tech #1 vs. tech #2, consumers vs. companies, merger proponents vs. critics, or just between different political or ideological tribes and the numerous industry organisations and lobbying institutions that surround them. Everyone involved wants data points that make themselves look good and which allow them to argue for more favourable treatment or more funding.
The underlying driver here is policy rather than performance.
Data asymmetry
A major problem that emerges here is data asymmetry. There is a huge gulf between the operational internal KPIs used by telcos, and those that are typically publicised in corporate reports and presentations or made available in filings to regulators. Automation and analytics technologies generate ever more granular data from networks’ performance and customers’ usage of, and payment for, their services – but these do not get disseminated widely.
Thus, policymakers and regulators often lack the detailed and disaggregated primary information and data resources available to large companies’ internal reporting functions. They typically need to mandate specific (comparable) data releases via operators’ license terms or rely on third-party inputs from sources such as trade associations, vendor analysis, end-user surveys or consultants.
Telcos have invested in telco cloud for several years: Where’s the RoI?
Over a number of years – starting in around 2014, and gathering pace from 2016 onwards – telcos have invested a large amount of money and effort on the development and deployment of their ‘telco cloud’ infrastructure, virtualised network functions (VNFs), and associated operations: long enough to expect to see measurable returns. As we set out later in this report, operators initially hoped that virtualisation would make their networks cheaper to run, or at least that it would prevent the cost of scaling up their networks to meet surging demand from spiralling out of control. The assumption was that buying commercial off-the-shelf (COTS) hardware and running network functions as software over it would work out less costly than buying proprietary network appliances from the vendors. Therefore, all things being equal, virtualisation should have translated into lower opex and capex.
However, when scrutinising operators’ reported financials over the past six years, it is impossible to determine whether this has been the case or not:
First, the goalposts are constantly shifting in the telecoms world, especially in recent years when massive 5G and fibre roll-outs have translated into substantial capex increases for many operators. But this does not mean that what they buy is more (or less) expensive per unit, just that they need more of it.
Most virtualisation effort has gone into core networks, which do not represent a large proportion of an operator’s cost base. In fact, overall expenditure on the core is dwarfed by what needs to be spent on the fixed and mobile access networks. As a ballpark estimate, for example, the Radio Access Network (RAN) represents 60% of mobile network capex.
Finally, most large telco groups are integrated operators that report capex or opex (or both) for their fixed and mobile units as a whole; this makes it even more difficult to identify any cost savings related to mobile core or any other virtualisation.
For this reason, when STL Partners set out to assess the economic benefit of virtualisation in the first half of 2022, it quickly became apparent that the only way to do this would be through talking directly to telcos’ CTOs and principal network engineers, and to those selling virtualisation solutions to them. Accordingly, STL Partners carried out an intensive interview programme among leading operators and vendors to find out how they quantify the benefits, financial or otherwise, from telco cloud.
What emerged was a complex and nuanced picture: while telcos struggle to demonstrate RoI from their network cloudification activities to date, many other benefits have accrued, and telcos are growing in their conviction that further cloudification is essential to meet the business, innovation and technology challenges that lie ahead – many of which cannot (yet) be quantified.
The people we spoke to comprised senior, programme-leading engineers, executives and strategists from eight operators and five vendors.
The operators concerned included: four Tier-1 players, three Tier-2 and one Tier-3. These telcos were also evenly split across the three deployment pathways explained below: two Pathway 1 (single-vendor/full-stack); three Pathway 2 (vendor-supported best-of-breed); and three Pathway 3 (DIY best-of-breed).
Four of the vendors interviewed were leading global providers of telco cloud platforms, infrastructure and integration services, and one was a challenger vendor focused on the 5G Standalone (SA) core. The figure below represents the geographical distribution of our interviewees, both telcos and vendors. Although we lacked interviewees from the APAC region and did not gain access to any Chinese operators, we were able to gain some regional insight through interviewing a new entrant in one of the major Asian markets.
Geographical distribution of STL Partners’ telco cloud benefit survey
Source: STL Partners
Virtualisation will go through three phases, corresponding to three deployment pathways
This process of telco cloudification has already gone through two phases and is entering a third phase, as illustrated below and as decribed in our Telco Cloud Manifesto, published in March 2021:
Phases of telco cloudification
Source: STL Partners
Effectively, each of these phases represents an approximately three to five-year investment cycle. Telcos have begun these investments at different times: Tier-1 telcos are generally now in the midst of their Phase 2 investments. By contrast, Tier-2s and -3s, smaller MNOs, and Tier-1s in developing markets are generally still going through their initial, Phase 1 investments in virtualisation.
Given that the leading Tier-1 players are now well into their second virtualisation investment cycle, it seems reasonable to expect that they would be able to demonstrate a return on investment from the first phase. This is particularly apt in that telcos entered into the first phase – Network Functions Virtualisation (NFV) – with the specific goal of achieving quantifiable financial and operational benefits, such as:
Reduction in operational and capital expenditures (opex and capex), resulting from the ability to deliver and run NFs from software running on COTS hardware (cheaper per unit, but also more likely to attract economies of scale), rather than from expensive, dedicated equipment requiring ongoing, vendor-provided support, maintenance and upgrades
Greater scalability and resource efficiency, resulting from the ability to dynamically increase or decrease the capacity of network-function Virtual Machines (VMs), or to create new instances of them to meet fluctuating network capacity and throughput requirements, rather than having to purchase and maintain over-specified, redundant physical appliances and facilities to guarantee the same sort of capacity and resilience
Generation of new revenue streams, resulting from the ability that the software-centricity of virtualised networks provides to rapidly innovate and activate services that more closely address customer needs.
Problem: With a few exceptions, telcos cannot demonstrate RoI from virtualisation
Some of the leading telco advocates of virtualisation have claimed variously to have achieved capex and/or opex reductions, and increases in top-line revenues, thanks to their telco cloud investments. For example, in January 2022, it was reported that some technical modelling had vindicated the cost-reduction claims of Japanese greenfield, ‘cloud-native’ operator Rakuten Mobile: it showed that Rakuten’s capex per cell site was around 40% lower, and its opex 30% lower, than the MNO incumbents in the same market. Some of the savings derived from automation gains related to virtualisation, allowing cell sites to be activated and run remotely on practically a ‘plug and play’ basis.
Similarly, Vodafone claimed in 2020 that it had reduced the cost of its mobile cores by 50% by running them as VNFs on the VMware telco cloud platform.
The problem is that the few telcos that are willing to quantify the success of their virtualisation programmes in this way are those that have championed telco cloud most vocally. And these telcos have also gone further and deeper with cloudification than the greater mass of the industry, and are now pushing on with Phase 3 virtualisation: full cloud-native. This means that they are under a greater pressure to lay claim to positive RoI and are able to muster data points of different types that appear to demonstrate real benefits, without being explicit about the baseline underpinning their claims: what their costs and revenues would, or might, have been had they persisted with the old physical appliance-centric model.
But this is an unreal comparison. Virtualisation has arisen because telco networks need to do more, and different things, than the old appliance-dependent networks enabled them to do. In the colourful expression of one of the industry experts we interviewed as part of our research, this is like comparing a horse to a computer.
In the first part of this report, we discuss the reasons why telcos generally cannot unequivocally demonstrate RoI from their telco cloud investments to date. In the second part, we discuss the range of benefits, actual and prospective, that telcos and vendors have observed from network cloudification, broken down by the three main pathways that telcos are following, as referred to above.
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Table of Contents
Executive Summary
Telcos have invested in telco cloud for several years: Where’s the RoI?
Virtualisation will go through three phases, corresponding to three deployment pathways
Problem: With a few exceptions, telcos cannot demonstrate RoI from virtualisation
Why do operators struggle to demonstrate RoI from their telco cloud investments to date?
For some players, it is clear that NFV did not generate RoI
It has also proved impossible to measure any gains, even if achieved
Is virtualisation so important that RoI does not matter?
Short-term pain for long-term gain: Why telco cloud is mission-critical
Cost savings are achievable
Operational efficiencies also gather pace as telcos progress through the telco cloud phases
Virtualisation both drives and is driven by organisational and process change
Cloud-native and CI/CD are restructuring telcos’ business models and cost base
Conclusion: Telco cloud benefits are deferred but assured
The telecoms operator’s conundrum – how to break the service innovation status quo
Telco CFOs need to upweight telecoms R&D investments to drive differentiating service innovations. If they don’t, telcos will recede further into the category of low yield, low growth commodities.
The relationship between a company’s financial and commercial model is complex:
The financial model determines the commercial model of a company – what commercial goals it is able to pursue and how it is able to pursue them
But the commercial model also feeds directly back into the financial model of the business and determines how resources are allocated
The interrelatedness of commercial and financial models means that change is sometimes difficult – a ‘chicken and egg’ situation occurs in which each model relies on change in the other before it can change.
This ‘chicken and egg’ situation is apparent within the telecoms industry:
Business owners within operators want their organisation to become more agile, more flexible, more innovative which implies having resources that can be (re)deployed quickly, but they find it hard to secure budget owing to the huge and slow capital investment programmes involved in upgrading networks
Finance departments at the same organisations want to deploy resources efficiently to maximise returns and capital investment in the existing business model (infrastructure that drives connectivity revenue) has a much stronger ROI than speculative operating expenditure in platforms and services that have (so far) proved unsuccessful
The result is status quo: the same financial model drives the same commercial model at a time when returns for core services are reducing every year.
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We start by mapping out the relationship between financial and commercial models…
In this framework, we use R&D operating expenditure (vertical axis) as a proxy for service innovation. We recognise that this is not perfect as service innovation requires much more than R&D. Nevertheless, it is probably fair to say that service innovation is unlikely to be sustained without material R&D expenditure.
Capital investment (horizontal axis) is a proxy for infrastructure build – developing assets which will generate returns over a long period of time such as buildings, manufacturing plants, telecoms networks.
Telcos are classic ‘Moat builders’, making money from capital investment in infrastructure and putting little into telecoms R&D investments.
The Internet giants and tech players typically start out as ‘service differentiators’, keeping capital investment light and instead focusing on flexible operating expenditure to drive service innovation. Increasingly however, they are investing capital in cloud computing infrastructure, to construct moats to protect their services – giving them cheaper distribution and better customer experience than smaller competitors.
A framework for understanding capex versus R&D spending
Source: STL Partners
…which reveals that telcos are moat builders and are radically out-invested in service innovation by tech players
Historically, for telecoms operators service innovation resulted from network capital investment because voice and messaging services were integrated into there were no alternative sources for communications – a customer had to use the service provider by the telecoms operator:
Telcos effectively outsourced innovation to Network Equipment Players (NEPs)
There was no need to invest significantly in R&D
Now, services are independent of the network (thanks to the internet) – telco customers can use communication (and other) services provided by dozens of third-parties and value has shifted to companies (such as the internet giants and tech companies) that invest in service innovation.
Telcos still invest only in infrastructure but value is increasingly in network-independent services so they are missing out on value-creation and are instead competing on price on the only commodity service that third-parties cannot substitute: connectivity.
R&D and capex % of revenue, 2020
Source: Company accounts, STL Partners analysis
Proof point: Internet players are vastly more valuable than telecoms operators – and now they generate more revenue, too
Revenue and market capitalisation, Telco v Internet, comparing 2017 and 2020/2022
Note: Telecoms industry data represents 165 telecoms operators for 2017, but 78 top operators for 2020. However, operators outside the top 78 are unlikely to have a significant impact on revenues or market capitalisation. Source: Company accounts, stock market data, STL Partners analysis
Seven internet giants’ market capitalisation is bigger than the 78 top telecoms operators combined because:
Service innovation + moats = Revenue + profit growth = Future value creation
In other words, telcos’ current business model (financial and commercial models) are not deemed to be strong value creators.
The result is that capital markets demand that operators hand profits back to investors in the form of high-dividend yields so that they can invest in higher-growth companies.
In the rest of this report, we outline why CFOs need to drive business model change that will enable telcos to compete more effectively as ‘Service differentiators’, and four steps they should take to start this process – fundamentally increasing telecoms R&D investments.
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This capex forecast is STL Partners’ first attempt at estimating the value of the O-RAN market.
This is STL Partners’ first O-RAN market value forecast
It is based on analysis of telco RAN capex and projected investment pathways for O-RAN
The assumptions are informed by public announcements, private discussions and the opinions of our Telco Cloud team
We look forward to developing it further based on client feedback
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What is O-RAN?
We define O-RAN as virtualised, disaggregated, open-interface architectures.
Our O-RAN capex forecasts cover virtualised, disaggregated, open-interface architectures in the Radio Access Network
They do not include vRAN or O-RAN compliant but single vendor deployments
O-RAN will account for 76% of active RAN capex by 2030
As mobile operators upgrade their 4G networks and invest in new 5G infrastructure, they can continue purchasing single vendor legacy RAN equipment or opt for multi-vendor open-standard O-RAN solutions.
Each telco will determine its O-RAN roadmap based on its specific circumstances (footprint, network evolution, rural coverage, regulatory pressure, etc)1. For the purpose of this top-level O-RAN capex forecast, STL has defined four broad pathways for transitioning from legacy RAN/vRAN to O-RAN and categorised each of the top 40 mobile operators in one of the pathways, based on their announced or suspected O-RAN strategy.
Through telcos’ projected mobile capex and the pathway categorisation, we estimate that by 2026 annual sales of O-RAN active network elements (including equipment and software) will reach USD12 billion, or 21% of all active RAN capex (excluding passive infrastructure). By 2030, these will reach USD43 billion and 76%, respectively.
Total annual O-RAN capex spend
Table of content
Executive summary
O-RAN forecast 2020-2030
Brownfield vs greenfield
Four migration pathways
Modelling assumptions
Migration pathways
Committed O-RAN-philes
NEP-otists
Leap-froggers
Industrial O-RAN
Next steps
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SK Telecom is the largest mobile operator in South Korea with a 42% share of the mobile market and is also a major fixed broadband operator. It’s growth strategy is focused on 5G, AI and a small number of related business areas where it sees the potential for revenue to replace that lost from its core mobile business.
By developing applications based on 5G and AI it hopes to create additional revenue streams both for its mobile business and for new areas, as it has done in smart home and is starting to do for a variety of smart business applications. In 5G it is placing an emphasis on indoor coverage and edge computing as basis for vertical industry applications. Its AI business is centred around NUGU, a smart speaker and a platform for business applications.
Its other main areas of business focus are media, security, ecommerce and mobility, but it is also active in other fields including healthcare and gaming.
The company takes an active role internationally in standards organisations and commercially, both in its own right and through many partnerships with other industry players.
It is a subsidiary of SK Group, one of the largest chaebols in Korea, which has interests in energy and oil. Chaebols are large family-controlled conglomerates which display a high level and concentration of management power and control. The ownership structures of chaebols are often complex owing to the many crossholdings between companies owned by chaebols and by family members. SK Telecom uses its connections within SK Group to set up ‘friendly user’ trials of new services, such as edge and AI
While the largest part of the business remains in mobile telecoms, SK Telecom also owns a number of subsidiaries, mostly active in its main business areas, for example:
SK Broadband which provides fixed broadband (ADSL and wireless), IPTV and mobile OTT services
ADT Caps, a securitybusiness
IDQ, which specialises in quantum cryptography (security)
11st, an open market platform for ecommerce
SK Hynixwhich manufactures memory semiconductors
Few of the subsidiaries are owned outright by SKT; it believes the presence of other shareholders can provide a useful source of further investment and, in some cases, expertise.
SKT was originally the mobile arm of KT, the national operator. It was privatised soon after establishing a cellular mobile network and subsequently acquired by SK Group, a major chaebol with interests in energy and oil, which now has a 27% shareholding. The government pension service owns a 11% share in SKT, Citibank 10%, and 9% is held by SKT itself. The chairman of SK Group has a personal holding in SK Telecom.
Following this introduction, the report comprises three main sections:
SK Telecom’s business strategy: range of activities, services, promotions, alliances, joint ventures, investments, which covers:
Mobile 5G, Edge and vertical industry applications, 6G
AIand applications, including NUGU and Smart Homes
New strategic business areas, comprising Media, Security, eCommerce, and other areas such as mobility
Business performance
Industrial and national context.
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Overview of SKT’s activities
Network coverage
SK Telecom has been one of the earliest and most active telcos to deploy a 5G network. It initially created 70 5G clusters in key commercial districts and densely populated areas to ensure a level of coverage suitable for augmented reality (AR) and virtual reality (VR) and plans to increase the number to 240 in 2020. It has paid particular attention to mobile (or multi-access) edge computing (MEC) applications for different vertical industry sectors and plans to build 5G MEC centres in 12 different locations across Korea. For its nationwide 5G Edge cloud service it is working with AWS and Microsoft.
In recognition of the constraints imposed by the spectrum used by 5G, it is also working on ensuring good indoor 5G coverage in some 2,000 buildings, including airports, department stores and large shopping malls as well as small-to-medium-sized buildings using distributed antenna systems (DAS) or its in-house developed indoor 5G repeaters. It also is working with Deutsche Telekom on trials of the repeaters in Germany. In addition, it has already initiated activities in 6G, an indication of the seriousness with which it is addressing the mobile market.
NUGU, the AI platform
It launched its own AI driven smart speaker, NUGU in 2016/7, which SKT is using to support consumer applications such as Smart Home and IPTV. There are now eight versions of NUGU for consumers and it also serves as a platform for other applications. More recently it has developed several NUGU/AI applications for businesses and civil authorities in conjunction with 5G deployments. It also has an AI based network management system named Tango.
Although NUGU initially performed well in the market, it seems likely that the subsequent launch of smart speakers by major global players such as Amazon and Google has had a strong negative impact on the product’s recent growth. The absence of published data supports this view, since the company often only reports good news, unless required by law. SK Telecom has responded by developing variants of NUGU for children and other specialist markets and making use of the NUGU AI platform for a variety of smart applications. In the absence of published information, it is not possible to form a view on the success of the NUGU variants, although the intent appears to be to attract young users and build on their brand loyalty.
It has offered smart home products and services since 2015/6. Its smart home portfolio has continually developed in conjunction with an increasing range of partners and is widely recognised as one of the two most comprehensive offerings globally. The other being Deutsche Telekom’s Qivicon. The service appears to be most successful in penetrating the new build market through the property developers.
NUGU is also an AI platform, which is used to support business applications. SK Telecom has also supported the SK Group by providing new AI/5G solutions and opening APIs to other subsidiaries including SK Hynix. Within the SK Group, SK Planet, a subsidiary of SK Telecom, is active in internet platform development and offers development of applications based on NUGU as a service.
Smart solutions for enterprises
SKT continues to experiment with and trial new applications which build on its 5G and AI applications for individuals (B2C), businesses and the public sector. During 2019 it established B2B applications, making use of 5G, on-prem edge computing, and AI, including:
Smart factory(real time process control and quality control)
Smart hospital (NUGUfor voice command for patients, AR-based indoor navigation, facial recognition technology for medical workers to improve security, and investigating possible use of quantum cryptography in hospital network)
Smart cities; e.g. an intelligent transportation system in Seoul, with links to vehicles via 5Gor SK Telecom’s T-Map navigation service for non-5G users.
It is too early to judge whether these B2B smart applications are a success, and we will continue to monitor progress.
Acquisition strategy
SK Telecom has been growing these new business areas over the past few years, both organically and by acquisition. Its entry into the security business has been entirely by acquisition, where it has bought new revenue to compensate for that lost in the core mobile business. It is too early to assess what the ongoing impact and success of these businesses will be as part of SK Telecom.
Acquisitions in general have a mixed record of success. SK Telecom’s usual approach of acquiring a controlling interest and investing in its acquisitions, but keeping them as separate businesses, is one which often, together with the right management approach from the parent, causes the least disruption to the acquired business and therefore increases the likelihood of longer-term success. It also allows for investment from other sources, reducing the cost and risk to SK Telecom as the acquiring company. Yet as a counterpoint to this, M&A in this style doesn’t help change practices in the rest of the business.
However, it has also shown willingness to change its position as and when appropriate, either by sale, or by a change in investment strategy. For example, through its subsidiary SK Planet, it acquired Shopkick, a shopping loyalty rewards business in 2014, but sold it in 2019, for the price it paid for it. It took a different approach to its activity in quantum technologies, originally set up in-house in 2011, which it rolled into IDQ following its acquisition in 2018.
SKT has also recently entered into partnerships and agreements concerning the following areas of business:
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 purpose
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.
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.
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.
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.
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
Select priority verticals and how you will compete in the them
Adopt a new approach to resource allocation: less CapEx and more OpEx
Material OpEx should focus on building new skills, assets, capabilities, relationships
Establish senior management commitment and independence for the new venture
Focus on commercial as well as technological differentiation in order to disrupt verticals
De-emphasise network integration – at least to start with
Recognise that M&A will be needed for market entry in most cases
Realise that organic growth can work in exceptional operator or market circumstances
Conclusion
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The Coronavirus pandemic is an unprecedented event in our lifetimes. As well as the virus’s impact on health, shock and fear have rippled across the world. Everyday life is changing almost everywhere, with major impacts across the economy. It is having many of the same effects as a new world war, albeit a war against a common invisible enemy.
At the start of every world world war, people in the UK thought it would be over by Christmas. Coronavirus won’t be over by Christmas (December) 2020. Unchecked. Each person with COVID-19 infects about 3 people, on average. This means it is hugely infectious and can (re)infect populations rapidly. Hopefully, better healthcare treatments will be developed fast, and in time a vaccine too – though the World Health Organisation (WHO) believes this will take at least a year, and longer to immunise the population.
On this basis, unless several miracles happen, we think the world is likely to be dealing with some form of social distancing and other preventative and curative measures for a while. Given what we know today, here is our initial take on what telcos are doing now – and what they should do next, including four scenarios to help envisage a range of possibilities amid the current uncertainty.
Telcos and vendors can and should now do some great things
Telecoms is an essential service in today’s world. The initial focus of telcos has inevitably been on the short term crisis response: keeping the network working, adapting to new and changing patterns of customer behaviour, and trying to keep their employees and customers safe. Beyond that, telcos have been offering additional services and help to customers, and we outline some of the measures taken so far in this report (summarised below).
Beyond that, telco leaders must keep thinking and planning ahead. As a sector it is in a relatively strong position. Telecoms stocks are among those least impacted in the crisis, showing that shareholders see telecoms as a relatively safe haven with a more reliable future than many other sectors (e.g. travel, hospitality, etc.).
That’s not to say that all telcos will survive the crisis in the state they are in today. Some may be nationalised or struggle to finance debt or worse, though for the most part we imagine telcos will find state support where needed because of the importance of the service they deliver.
On a more positive note, the near term future will see an enhanced focus on addressing some big problems, such as accelerating the transformation of healthcare and making it and other critical functions such as logistics even more robust and resilient.
STL Partners believes that the crisis will further accelerate the evolution of the Coordination Age, as customers and governments will accept, change and learn new behaviours (such as online ordering, remote delivery, automated services, etc.) fast in the context of an environment in which they simply have to do so. The crisis will also place the importance of critical and sometimes limited resources (e.g. food, healthcare, communications) firmly in the spotlight, along with issues such as potential conflicts between the use of data and privacy.
It’s too early to say whether highly controlled economies like China will do better than less controlled ones. Yet the strengths of a coordinated response to a problem (such as how a national health service can organise and plan collectively) will become clearer, and is likely to shape regulation that prioritises desired outcomes in a more pragmatic way, potentially bringing regulated collaboration back into fashion somewhat compared to pure competition in some sectors.
True leaders think ahead
Despite all the near term focus that a crisis brings, the challenge of addressing future problems should not just be dropped. We recommend that telcos and vendors shouldn’t abandon their longer term ambitions to develop new services and solutions in order to deal with the crisis. By analogy, the countries that are doing best in the COVID-19 response today are those that were best prepared for a viral pandemic, i.e. those that have planned how to scale up testing and hospital capacity, and have previously outlined a pandemic response strategy. Likewise, the telcos that will do best will continue to offer resilient support to their communities, and develop new solutions for customer problems.
Perhaps the best that could happen is that telcos and other service providers could ultimately find this crisis a stimulant to accelerate internal and business model change. For this to happen, the change needs to come from the top, and leaders in telecoms need to set the example of looking to do everything possible to help deal with the crisis, while maintaining a strong forward looking outlook.
STL Partners will continue to research how to do that realistically in the new context. We believe that Coronavirus will change how services evolve. For example, some 5G capital investments are likely to proceed with greater caution in the near term. Our initial thoughts on this is that, rather than bin all development, telcos should use this as an opportunity to better develop their understanding of customer needs, and develop the non-network capabilities and offerings to support consumers and other sectors to prepare the ground better for when 5G does arrive.
Short-term: Some smart offers to copy
Telcos are broadly offering customer support in four ways:
Supporting healthcare, government and other critical care customers: prioritising communications and resources for first line responders and healthcare facilities, offering population movement statistics, participating in national tests, and providing other services (e.g. bulk SMS updates to patients and healthcare communities)
Business customers: support for home working such as increased capacity on collaboration services, support on business continuity
Consumer customers: quite a wide range of offers, varying from suspending data bundle usage caps, to providing free calls for pensioners, free calls to the worst hit countries, waiving roaming charges and late payment relief for COVID-19 impacted customers
Shops and customer premise visits: a range of measures to ensure customer and employee safety, including shutting shops entirely, keeping some open, and introducing social distancing
Mid term: Adjust, but don’t forget the future
For the next few months, humans will interact differently. People and businesses will want to survive, and will be keen to return to ‘normal’ – but they won’t be able to.
Thus new habits, such as home working, and work and social video conferencing, will become more deeply embedded behaviours. New support structures to care remotely for the isolated will evolve, potentially with lasting effects. Telcos will need to support these behaviours with appropriate service and capacity, and with considerate offers as they have started to do as the crisis bites. Telcos should not behave like or risk being seen as profiteers during the crisis. Such action would be wrong – and a PR disaster.
They will need to continue to focus on the needs of critical sectors such as healthcare, government, security and logistics, and maintain a close relationship with government to assist the centralised efforts to combat COVID-19 and support the pandemic relief effort.
Long term: Four possible scenarios
When the future is as uncertain as it is now, scenarios are a useful way to envisage possible alternatives and enrich planning. We’ve therefore outlined four scenarios for the recovery stage:
Scenario 1:Back to (almost) normal. A cautiously optimistic scenario in which all economies recover reasonably swiftly without much impact on the global order. Global trade recovers gradually, and activities like 5G investments are merely delayed at the outset.
Scenario 2:Fragmented recovery. A moderately pessimistic scenario in which some economies are much more significantly damaged than others. Recovery takes longer and global initiatives are less successful because of lower collaboration. 5G take-up is patchy, nation by nation.
Scenario 3:Weak and distanced. The most pessimistic scenario in which nations have become much more insular and distrustful, and economic and social recovery is much slower. Economic realities have significantly delayed 5Ginvestments in most nations.
Scenario 4:Stronger than before. The most optimistic scenario. Collaboration and cooperation are enhanced, and the broadly successful response and recovery to the crisis has refocused strategic thoughts on the importance of resilience in the long-term. 5G is close to the trajectory it would have been on before the crisis and accelerating fast.
Introduction
World War C
The Coronavirus pandemic sweeping the world in 2020 is a truly disruptive ‘black swan’ event. It is impacting people’s lives in almost every nation and will continue to do so for many years ahead.
STL Partners, like all our customers and partners, families and friends, is feeling the impact already. We are lucky enough to be able to continue to work because the nature of our work is relatively unaffected by virtual working. Many in the global economy are not so lucky, and many others have been even more directly impacted by the illness. Our thoughts and best wishes are with you all.
Our job is to try to help others make better decisions to shape the future of their businesses. We believe that COVID-19 will change the global economy in a way that will impact all previous strategies and plans. This analysis is therefore intended to help preparations and planning for the next few months and years. Yet certainty is in short supply, and the situation is changing all the time. We do not claim to have all the answers and will update our analysis when it makes sense.
The scale and speed of this pandemic is unprecedented in the lives of the few alive today under the age of 102. Even so, when the so-called “Spanish Flu” swept the world in 1918, road and air travel were relative novelties, information spread slowly and its distribution was highly limited.
Today, the virus has spread much faster – but so too has news, information and research relating to it. The primary challenges for economies and societies as a whole are:
Supporting the frontline medical battle for the lives of the severely infected.
How the available information can be used to manage the disease to best effect by governments and authorities.
How other technological and economic developments such as globalised food chains and online information and entertainment services can help to sustain the rest of the population until the virus and the fear and disruption it has brought are defeated, or at least brought under control.
Operational and financial support to maintain economies and employment wherever possible.
Coronavirus and the Coordination Age
STL Partners has written at length about the Coordination Age – our view that the world economy now needs on-demand solutions enabled by the emergence of new technologies like AI, virtualisation, 5G, etc. These solutions must deliver outcomes (e.g. in healthcare) in a resource efficient way.
This age impacts all industries, but in the forefront are healthcare and logistics, which are also those most under test by Coronavirus. Succeeding against COVID-19 will require a massive and sustained effort of coordination, in this case mostly orchestrated by governments and health authorities.
Telcos and the telecoms industry will not solve this, but they can be major enablers of success. They can also have a major role in helping societies deal with the crisis and rebuilding and reshaping themselves after it has passed. This report starts to sketch out how this might happen.
Three stages and three questions for telcos
To simplify the analysis of what could happen, we’ve split the near future into three stages, and have structured the report correspondingly:
Now: shock and lockdown. Dealing with the initial global spread of the pandemic.
Next: finding a new, temporary normal. Coping with the longer-term impacts of social isolation, healthcare, and economic damage.
After: rebuilding and reshaping. What will be the lasting changes, what will need to be rebuilt?
In each case, we outline our best views on the ‘certainties’ – or at least more certain outcomes, and explore different scenarios where uncertainty is currently prime.
Throughout, we address three questions about what actions telcos and the industry should take:
What do telcos need to do to survive?
What can telcos do to help their customers?
How can telcos help the immediate response, then rebuild and reshape society?
Now: Shock and lockdown
The problems that need to be solved
A health crisis is a hard reminder of the need to serve the greater good of our societies. We need other people and organisations to survive and thrive, especially in today’s highly globalised and connected world. In this regard, there is an over-riding responsibility for those in positions of power to direct that power in service of the integrity of society and the economy – how we exchange goods and services to maintain our lives.
In such moments, the pursuit of competitive gains which is the normal function of companies and markets becomes secondary to the overall well-being of the society and the economy that supports it. This is a fundamental – albeit temporary – suspension of ‘business as usual’.
Telcos have a long history of providing support in times of crisis, and the COVID-19 pandemic is the broadest and most systemic global crisis of our times. The fundamental functions and sectors that the industry needs to support are:
Healthcare – sustaining and protecting the healthcare system in a time of critical demand and pressure
Logistics – ensuring that supply and delivery chains are enabled to operate and deliver the goods (e.g. food and medical supplies) and services (e.g. water, power, hygiene) required for the healthy function of society
Government – ensuring that governments and responsible authorities are enabled to function and make decisions to best manage, control and mitigate the impact of the virus and the accompanying fear and disruption
General communications – ensuring that the public, businesses and others can stay in touch with each other to provide information, economic, medical and emotional support, and maintain employment.
Immediate actions
Following airline safety advice
The classic airline safety advice is to fit your own oxygen mask before attempting to help others.
We expect that telcos will be putting in place their contingency plans for dealing with the COVID-19 pandemic – though of course, the exact circumstances cannot have been foreseen.
Clearly, maintaining the core functions of telecommunications networks will be the priority – doubling down on enabling and protecting data and voice communications across the network, especially to mission-critical establishments like hospitals, and other healthcare and state facilities.
This may require operators to scale up network capacity at key points, although early data suggests most traffic growth from home-working and home-schooling may come at historical off-peak times. There is likely to be a shift from mobile to fixed broadband in many cases, with mobile use being concentrated in residential areas rather than urban centres and transport corridors. Mobile voice traffic is likely to rise substantially (in Spain, a 50% rise has been reported) as people speak to elder relatives and connect to conference calls and other services. Encouraging customers to shift usage to fixed-line telephony (which usually has extra capacity) could be wise.
Most cloud and enterprise facilities have been engineered to be highly resilient, but there is also likely to be increased demand in the distributed consumption of data in many societies as social isolation measures move populations into home-working environments and away from traditional daytime centres of communications localised on business.
How telcos can support and are supporting their customers
Many telcos are putting in place wider measures to support their customers.
Figure 1: How telcos are supporting their customers
Telco responses to Coronavirus
Source: Operator announcements, STL Partners
For healthcare, government and other critical support customers:
Prioritising connectivity for frontline healthcareresponders (AT&T, Verizon and others)
Offering bulk text upgrades to patients and healthcarecommunities (Vodafone)
Offering insights on population movements and statistics (Vodafone, Deutsche Telekom, Telefonica)
Collaborating in other hospital and healthcaretrials and programmes (China Mobile, China Telecom, TELUS)
Extending free hospital Wi-Fi (Globe)
Free-rating data on healthcaresites and apps
For these sectors and business more broadly, additional:
Conferencing lines, VPN capacity, and capacity / licenses for collaborationtools (BT)
Other home-working security(BT, NTT)
Cut price access to digital marketing services and conferencing for small businesses (Telstra)
For consumer customers, telco measures include:
Additional free data in bundles (Telefónica, Telstra, Dialog)
Removing caps on some limited data bundles (AT&T, Sprint, T-Mobile, TELUS, Telstra, Dialog)
Additional entertainmentcontent in some packages (Telefónica, TELUS, Dialog)
Free or reduced tariff calls to the countries most impacted by COVID-19(Verizon, Sprint, T-Mobile)
Free landline calls for pensioners (Telstra)
Free medical hotline service (Dialog)
Free data packages for families with school children without internet access or no data charges on educational services (Du, Etisalat, Dialog)
Waiving fees / suspension of service for non or late payment for impacted customers, or extending payment terms / credit (AT&T, Verizon, Telstra, Dialog)
Waiving all or some roamingfees for overseas customers (TELUS)
Encouraging the use of digital cash and health apps (Globe)
And in terms of shops and customer premises visits, telcos are taking a range of measures from:
Closing shops, or keeping some open to provide critical equipment (AT&T, Sprint, T-Mobile, DTAG, TELUS)
Possibly stopping or limiting customer premises visits, or continuing but with new isolation/protection procedures in place (AT&T, Globe)
NB This is illustrative and not an exhaustive or comprehensive list. Please see our blog for links to some of the companies’ policies and articles relating to them at the time of research.
STL Partners is conducting a rapid survey of telco responses which can be found here. We will be updating and freely sharing what operators tell us over the next few weeks with details of the measures used so that other telcos can review what they can copy or learn from these measures to support their customers.
Help your employees
Again, many telcos in directly impacted environments have asked employees that can to work from home. We would also hope telcos are putting in place additional health measures to protect those employees that do need to make physical contact with customers and others, such as health advice and screening.
Starting to look ahead
Which sectors will be most affected?
The impact of the COVID-19 pandemic across the economy is very hard to predict at this stage, although there are certain sectors that are clearly already under immediate pressure, such as:
Consumer leisure and mass transport: cruise lines, passenger airlines, hotels and tourism as people shun travel and self-isolate
Consumer service industries such as cafes, bars, restaurants, gyms, hairdressers
Entertainment and mass gatherings such as sporting events, festivals, conferences and events, concerts, museums.
Wider impacts are anticipated in demand for other consumer goods and services, such as cars, clothes and other non-food and everyday items, and this knocks on to the value chains of those industries too.
This pattern is evident looking at the impact on FT.com share indices over the last month in Figure 2. Indeed, of the major sectors, telecommunications was the least devalued on the 16th March when we looked at this data (a day on which there was a 10% drop in global financial indicators).
Figure 2: Financial markets rate telecoms as one of the sectors of the economy least hit by Coronavirus
Coronavirus impact on industries
NB Oil and gas sectors have recently faced additional pressures from an industry price war. Source: STL Partners, FT.com
Moody’s credit rating agency paints a similar picture of their estimated impact of the pandemic on the credit worthiness of industries by sector as shown in Figure 3.
Figure 3: Moody’s credit rating impact of Coronavirus by industry
Source: Moody’s
At this early stage it’s very hard to be sure of what the overall impact of the COVID-19 pandemic will be on each sector. But there’s certainly some consistency between the logic of what is causing the impacts, and the degree to which markets and market rate-setters are reflecting likely changes in future value.
For telcos, the questions are: how can they support all sectors effectively during the crisis, and how can they help them recover and rebuild in due course. We will explore this a little further in subsequent sections.
Table of contents
Executive Summary
It won’t be over by Christmas
Telcos and vendors can and should now do some great things
When we published the report 5G: The First Three Years in December 2018, we identified that most of the hype – from autonomous cars to surgeons operating from the beach – is at best several years from significant volume. There are no “killer apps” in sight. Telco growth from 5G deployments will be based on greater capacity, lower cost and customer willingness to buy.
If carrier revenue doesn’t rise, the pressure to cut costs will grow
For the last five years, carrier revenue has been almost flat in most countries and we believe this trend is likely to continue.
STL Partners forecasts less than 1% CAGR in telecoms revenues
Source: STL Partners
In our 5G Strategies report series, STL Partners set out to established what 5G actually offers that will enable carriers to make more money in the next few years.
It builds on STL Partners’ previous insights into 5G, including:
The report explores the most recent activities in 5G by operators, vendors, phone makers and chipmakers.
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High-level takeaways from initial 5G deployments
This section provides a high-level overview of the current efforts and activities of select telcos around the world. Broadly, it shows that almost all are pushing ahead on 5G, some much faster than others.
Korea is the world’s most advanced 5G market, with two million Koreans having bought 5G phones by July.
Korea’s 3.5 GHz networks typically deliver download speeds of 100 – 500 Mbps. SK Telecom and KT are using Samsung equipment. LG Uplus is mostly Huawei. There is little evidence that either vendor has demonstrated superior performance. Korea’s government, supported by the operators, made a decision that speeding ahead on 5G would be valuable prestige and improve the Korean economy. Korea expects to have 200,000 radios in place by the end of 2019, compared with BT which anticipates fewer than 2,500.
China Mobile has confirmed Huawei’s estimate that the price of 5G phones will fall to under US$300 in 2020, which will stimulate a sharp increase in demand.
The Chinese and the Koreans are investing heavily in augmented and virtual reality and games for 5G. This will take time to mature.
Verizon has taken a radical approach to simplifying its core and transport network, partly in preparation for 5G but more generally to improve its cost of delivery. This simplification has allowed it to maintain and even cut some CAPEX investments while delivering performance improvements.
5G mmWave in 28GHz works and often delivers a gigabit. The equipment is of modest size and cost. However, the apparent range of around 200 metres is disappointing (Verizon has not confirmed the range but there is evidence it is short). Verizon expects better range.
Sprint’s 160MHz of spectrum at 2.5GHz gives it remarkably wide coverage at 100 – 500 Mbps download speeds. Massive MIMO (multiple-input, multiple-output with 64 or more antennas) at 2.5 GHz works so well that Sprint is achieving great coverage without adding many small cells.
Etisalat (UAE) shows that any country that can afford it can deliver 5G today. Around the Gulf, Ooredoo (Kuwait, Qatar), Vodaphone (Qatar), du Telecom (UAE) and STC (Saudi Arabia) are speeding construction to avoid falling behind.
BT claims it will “move quickly” and turn on 100 cells per month (which is relatively few in comparison to Korea). BT’s website also claims that 5G has a latency speed of <1 ms, but the first measured latency is 31 ms. At Verizon, latency tests are often a little better than the announced 30 ms. Edge Networks, if deployed, can cut the latency by about half. A faster air interface, Ultra-Reliable Low-Latency Communication (URLLC), expected around 2023, could shave off another 5-7 ms. The business case for URLLC is unproven and it remains to be seen how widely it is deployed. In the rest of the section we look at these and other operators in a little more detail.
Live commercial 5G deployments globally, August 2019
This is the best available information on 5G deployments globally as of August 2019, gathered from both public and private sources. We have excluded operators that have announced 5G launches, but where services are not yet available for consumers to buy, such as AT&T in the US and Deutsche Telekom in Germany.
Table of contents
Executive Summary
Introduction
If carrier revenue doesn’t rise, the pressure to cut costs will grow
Operators
High-level takeaways
European operators
Asia Pacific and Middle Eastern operators
North America
Phone makers
5G system vendors
Datang
Samsung
Ericsson
Huawei
Nokia
Chip makers
Qualcomm
Samsung
Intel
MediaTek
Huawei-HiSilicon
Conclusions: (Almost) all systems go
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Almost every telco aspires to innovate and become a ‘digital services player’, selling more than just data, voice, messages, and entertainment services, but few have made significant inroads to this aim.
Yet Elisa, the market leader in Finland, which has a population of only just over 5.5 million people, can stake a claim to having achieved more than most.
The Finnish word ‘sisu’ has no direct English translation. It means a spirit of determination, independence and fortitude, and is considered by some Finns to be the heart of Finnish character.
Elisa and the other Finnish telcos certainly have plenty of sisu. They have resolutely charted their own course and prospered, with Elisa quadrupling its market valuation over the last ten years.
Elisa’s share price has quadrupled since 2009
Source: Yahoo Finance
The genesis of Elisa Automate
Elisa’s overall strategy was based on a sound but uncommon piece of customer insight: nobody knows what a megabit of data actually is, so it is crazy to price data services based on the volume of data used. So Elisa and the other players in the Finnish market moved to unlimited data packages prices by speed (see report Sense check: Can data growth save telco revenues?).
The consequences of this decision have been that Finnish customers use a lot of data, and secondly, Finnish operators have built out coverage so that they can enjoy using it whenever and wherever.
This means that Elisa has to deliver a lot of data across its network.
Elisa’s data traffic has grown massively
Source: Elisa
Elisa has grown its revenues and EBIT too
Source: Elisa
Necessity can be the mother of invention
To manage profitability in a market where use and therefore data volume is effectively unlimited, Elisa had to tie its costs firmly to its revenues, and to do so elected to keep the ratios of capex and opex to revenue flat. This requires a very clear focus on cost management, and a determination to take every step possible to do so.
Elisa’s capex/revenue ratio is surprisingly low and stable
Source: Elisa
Out of this need came a powerful drive for automation: not to simply cut costs or reduce headcount, but to make the company as efficient as possible.
The result is Elisa Automate, a fully automated Network Operations Centre (NOC), one of three new business concepts that it is selling to others (in this case, telcos), along with Elisa SmartFactory and its video conferencing aggregation service.
Elisa is clearly succeeding, and not just in its financial results. For example, 18% of Finnish business customers say that it is the most innovative IT actor in its market, compared to 6% for CGI and 5% for Fujitsu.
STL Partners has long watched Elisa’s progress with a high degree of fascination. Elisa and its Finnish peers are a little like the Galapagos Islands of telecoms evolution but marked extraordinary by their distinctive approaches rather than extreme geographical isolation.
Contents:
Introduction
Elisa: creating an innovator
Building a stable foundation for innovation
Making the most of Finland’s advantages
The genesis of Elisa Automate
The early drivers of automation
The move towards ‘zero touch’
Augmenting human intelligence
Automation supports rapid mobile service revenue growth
Commercialising the opportunity
The value proposition
Customer spotlight: Orange Spain
Conclusions
Figures:
Elisa’s share price has quadrupled since 2009
Elisa’s data traffic has grown massively
Elisa has grown its revenues and EBIT too
Elisa’s Capex/Revenue ratio is surprisingly low and stable
Elisa shares data showing network performance improvements through automation
In this report, we elaborate on what we outlined in our recent report, The Coordination Age: A third age of telecoms, as a completely new paradigm for the telecoms industry. In the earlier report, we argue that this new age of telecoms – the Coordination Age – follows on from two previous, and still ongoing, paradigms for the telecoms industry: the Communications Age and the Information Age.
Chronologically, the three ages may be represented as follows:
As the above diagram suggests, parts of the industry still exhibit characteristics of the earlier ages; and we are still working through the consequences of the paradigm shift from the Communications Age to the Information Age, even as we stand on the cusp of a further shift to the Coordination Age.
The report revisits our narrative of the three ages of telecoms to explore the different social, economic and cultural drivers and functions of telecoms in each period and the implications for telcos.
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Telecoms characteristics and functions have evolved over time
The fundamental service and business model characteristics of these three ages, as described in the previous report, are recapped in Figure 2 below:
Figure 2: Basic functions of telecoms in the three telco eras
Source: STL Partners
The above table illustrates how the functions provided by telecoms services and networks across the three ages of the industry are radically different. In summary, we can say that:
In the Communications Age, telecoms networks and services were ‘physical’ in character: physical equipment and facilities delivering physical services; the core services being connectivity and communications centering on voice, which was transmitted by physical means (e.g. for voice, analogue electrical signals sent over wired or wireless networks).
In the Information Age, by contrast, while telecoms networks remained – initially, at least – physical in character and delivered increasingly advanced forms of connectivity, the services became digital. The ultimate expression of this is of course the Internet, which changed the role of the telco to that of providing the IP connectivity platform over which mainly third parties offered their web and digital services. Another way of putting this is that whereas telecoms network connectivity remained tied to physical hardware, the services were delivered via standardised software and compute devices: PCs and later smartphones and tablets. In the present era of NFV and SDN, the basis on which the connectivity itself is organised and controlled is now also migrating to (would-be) standardised software operating over COTS hardware.
The emerging Coordination Age of telecoms is not purely an extension of network and societal digitisation, but could be seen as a 180o reversal of its parameters, in this respect: instead of being a primarily physical connectivity system processing digital inputs to deliver digital services (as in the Information Age), the network becomes a compute- and software-centric system processing real-world inputs to deliver real-world outcomes. We will discuss further these aspects of the new paradigm later in this report. But examples of what we mean here include networked compute-driven applications around driverless cars, IoT, and automation of industrial and enterprise processes across many verticals.
The three telecoms ages correspond to different socio-economic and human functions
We set out how the general service and network characteristics of the Communications, Information and Coordination Ages relate to the different social, economic and human functions they serve.
Throughout this report, we describe what we see as some of the fundamental social, economic, cultural and technological drivers of the different telecoms networks and services across these three ages. The three ages represent distinct paradigms in which telecoms serves different needs and purposes.
We describe these socio-economic and cultural purposes through a simplified version of the psychoanalytical theories of Jacques Lacan. It seems legitimate to explore telecoms through this lens, as telecoms networks are human constructs, and telecoms services are social, economic and cultural in their purpose and value to modern society.
In brief, Jacques Lacan distinguishes between three interdependent orders of psychological experience: the ‘Real’, the ‘Imaginary’ and the ‘Symbolic’.
The ‘Real’ is the physical aspect of our existence: our bodies, the material universe, and the physiological determinants experience, including basic emotions
The ‘Imaginary’ refers to the sub-rational and sub-linguistic phenomena of mental experience, through which we form mental impressions of sensory experience (e.g. sights, sounds, etc.). Together with the emotional impact with which they are associated, these ‘imaginary’ elements form the foundation of our self-image and view of our place in the world
The third order is that of the ‘Symbolic’, which refers to language and other social, logical and cultural codes through which we give meaning to our lives, acquire knowledge, order our activities, and structure society and our relationships within it.
This is important because it provides a way to make sense of the paradigm shifts that have taken place throughout the industry’s history. And it also provides a narrative account of the human needs – including economic and social needs – that are invested in telecoms services. Understanding what customers want – and above all, what can offer real benefit to them – is the key to driving future value.
We argue this is relevant to the situation that telcos find themselves in today and to their strategic options for the future. In our view, telcos failed to adapt their business models to capitalise on the digital service opportunities of the Information Age. This was because the value drivers of the Information Age were so radically different from those that prevailed over the much longer time span of the Communications Age.
Learning the lessons from this previous paradigm shift will help telcos be more aware of how they need to adapt to another new paradigm – the Coordination Age – that is emerging. There may be only a very short window of opportunity for telcos to adjust their business models and organisations to become ‘coordinators’ of the network- and AI-based, automation-enabling and resource-optimising services of the near future.
Contents:
Executive Summary
Introduction: Three Ages of Telecoms
Differing characteristics and functions of telecoms across the three ages
The three telecoms ages correspond to different socio-economic and human functions
Speaking, showing and doing: The three ages of telecoms
The Communications Age: A telecoms of the Real, mediated by voice
The Information Age: A telecoms of the Imaginary, mediated by the screen
The Coordination Age: A telecoms of outcomes, driven by active intelligence
Coordination services rely on contextual and physical data, and the physical aspects of networking
Summary: Characteristics and purposes of telecoms across its three ages
Conclusions
Recommendations: A new telco age brings new opportunities but also renewed responsibilities
Figures:
The three ages of telecoms.
Basic functions of telecoms in the three telco eras
‘Real’, physical characteristics of the Communications Age telecoms network and service
The core telecoms service – circuit-switched telephony – in the first telecoms age
Comparison of the social, service and technology characteristics of Communications Age and Information Age telecoms
Permanent, virtual presence to others replaces real-time voice communications
Driverless car ecosystem in the Coordination Age
Comparison between the three telecoms eras
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The telecoms operator’s conundrum – how to break the service innovation status quo
Telco CFOs need to upweight telecoms R&D investments to drive differentiating service innovations. If they don’t, telcos will recede further into the category of low yield, low growth commodities.
The relationship between a company’s financial and commercial model is complex:
The financial model determines the commercial model of a company – what commercial goals it is able to pursue and how it is able to pursue them
But the commercial model also feeds directly back into the financial model of the business and determines how resources are allocated
The interrelatedness of commercial and financial models means that change is sometimes difficult – a ‘chicken and egg’ situation occurs in which each model relies on change in the other before it can change.
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This ‘chicken and egg’ situation is apparent within the telecoms industry:
Business owners within operators want their organisation to become more agile, more flexible, more innovative which implies having resources that can be (re)deployed quickly, but they find it hard to secure budget owing to the huge and slow capital investment programmes involved in upgrading networks
Finance departments at the same organisations want to deploy resources efficiently to maximise returns and capital investment in the existing business model (infrastructure that drives connectivity revenue) has a much stronger ROI than speculative operating expenditure in platforms and services that have (so far) proved unsuccessful
The result is status quo: the same financial model drives the same commercial model at a time when returns for core services are reducing every year.
We start by mapping out the relationship between financial and commercial models…
In this framework, we use R&D operating expenditure (vertical axis) as a proxy for service innovation. We recognise that this is not perfect as service innovation requires much more than R&D. Nevertheless, it is probably fair to say that service innovation is unlikely to be sustained without material R&D expenditure.
Capital investment (horizontal axis) is a proxy for infrastructure build – developing assets which will generate returns over a long period of time such as buildings, manufacturing plants, telecoms networks.
Telcos are classic ‘Moat builders’, making money from capital investment in infrastructure and putting little into telecoms R&D investments.
The Internet giants and tech players typically start out as ‘service differentiators’, keeping capital investment light and instead focusing on flexible operating expenditure to drive service innovation. Increasingly however, they are investing capital in cloud computing infrastructure, to construct moats to protect their services – giving them cheaper distribution and better customer experience than smaller competitors.
A framework for understanding capex versus R&D spending
Source: STL Partners
…which reveals that telcos are moat builders and are radically out-invested in service innovation by tech players
Historically, for telecoms operators service innovation resulted from network capital investment because voice and messaging services were integrated into there were no alternative sources for communications – a customer had to use the service provider by the telecoms operator:
Telcos effectively outsourced innovation to Network Equipment Players (NEPs)
There was no need to invest significantly in R&D
Now, services are independent of the network (thanks to the internet) – telco customers can use communication (and other) services provided by dozens of third-parties and value has shifted to companies (such as the internet giants and tech companies) that invest in service innovation.
Telcos still invest only in infrastructure but value is increasingly in network-independent services so they are missing out on value-creation and are instead competing on price on the only commodity service that third-parties cannot substitute: connectivity.
R&D and Capex % of Revenue, 2017
Source: Company accounts, STL Partners analysis
Proof point: Internet players are vastly more valuable than telecoms operators
Revenue and Market Capitalisation 2017. Telco v Internet
Source: Company accounts, stock market data, STL Partners analysis
Seven internet giants’ market capitalisation is bigger than 165 telecoms operators combined because:
Service innovation + moats = Revenue + profit growth = Future value creation
In other words, telcos’ current business model (financial and commercial models) are not deemed to be strong value creators.
The result is that capital markets demand that operators hand profits back to investors in the form of high-dividend yields so that they can invest in higher-growth companies.
In the rest of this report, we outline why CFOs need to drive business model change that will enable telcos to compete more effectively as ‘Service differentiators’, and four steps they should take to start this process – fundamentally increasing telecoms R&D investments.
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The world is entering the Coordination Age, driven by growing needs for resource efficiency and enabled by new technologies such as AI, automation, IoT, 5G, etc. What does this mean, how is it different, how is it an opportunity, and what should telecoms industry players do?
Problems, problems, problems…
The telecoms industry’s big problem
The core telecoms industry is currently close to reaching maturity as the following chart illustrates.
Figure 1: Revenue growth is grinding to a halt
Source: Data from company filings, STL Partners analysis
This approaching maturity has taken many years to achieve and is built on decades of astonishing growth in the telecoms and ICT industries as shown by just a few data points in Figure 2.
Figure 2: 30 years of telecoms in context
Source: AT&T company reports, STL Partners analysis
We’ve used AT&T as a comparator as perhaps the world’s best-known telco, and because its 1988 revenues are readily accessible. The chart shows that AT&T has grown massively but also that recent growth has slowed.
It also shows how mobile and internet use has blossomed to mass-market adoption. No-one knew in 1988 that this is what would happen by 2018, or how it would happen. Most people would have thought you were talking about science fiction if you said there would be more mobiles than people in their lifetime, and that half the world would have access to most of the world’s information.
Yet it was clear that growth in telecoms lay ahead – it seemed like a kind of economic and social gravity that communications would grow a lot. The direction that the world would take was obvious and unavoidable. So many people were not yet connected, and so much was possible in terms of improving the world’s access to information using the technologies that were coming to fruition then.
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What are the big problems the world needs to solve now?
It’s not a mystery now, of course. And while there’s plenty of work to do to make the world’s connectivity better and bring the second half of the global population online somehow, it’s unlikely to bring in masses of new revenues for telcos. So why the Coordination Age?
To create major growth, you need to solve some big, valuable problems. So, what are the big problems the world needs to solve?
There are some obvious candidates, e.g.:
mitigating climate change and minimising its effects
reducing the amount of waste and harmful by-products polluting the environment
the distribution and availability of human resources and services such as healthcare, education, employment, and entertainment
the availability of, and conflicts over, physical resources such as: water, fuel, power, food, land, etc…
global migration and increasingly hostile nationalism
concerns over increasingly skewed wealth distribution between the haves and have nots, and extreme poverty
a desire for greater business efficiency and productivity
concerns over employment due to automation and global economic changes.
Moreover, time is also a resource for people and business. Both want to make best use of their time – whether it is getting things done more effectively or enjoyably.
Making the most of what we have
STL Partners believes that these are all to some extent the manifestation of the same problem: the need to make the most efficient possible use of your/the world’s resources. In Figure 3 we call this helping to “make our world run better” for short.
Figure 3: How macro forces are creating a common global need
Source: STL Partners
It’s a widespread need
The underlying need for greater resource efficiency is widespread. While sustainability arguments are prominent symptoms of the problem, there are pressing needs being expressed in all areas of the economy for better utilisation of resources.
For example, most businesses are somewhere in the process of their own transformation using connected digital technologies. Almost every aspect of business, including product design, customer experience, production, delivery and value chain orchestration is being revolutionised by ‘digital’ technologies and applications.
Examples cited at the Total Telecom Congress in October 2018, included:
Brendan Ives, VP Telia, Division X, said that the top priority of 70% of 500 enterprises surveyed in the Nordics was resource efficiency, with cost control a distant second at 20%.
Henri Korpi, Executive Vice President, New Business Development, Elisa, described a new ‘Smart Factory’ application that it offers to enhance productivity.
Durdana Achakzai, Chief Digital Officer, Telenor Pakistan, described its Khushall Zamindar feature phone application for 6 million small-scale farmers in rural Pakistan, that gives them access to local weather and market information and helps to improve yields.
All of these are examples of where telcos are already thinking about or addressing customers’ needs with respect to resource efficiency, in all of these cases via a B2B application, but the concerns apply to consumers too.
Ipsos’s global survey on consumer concerns from July 2018 (Figure 4) gives a flavour of what people across the world worry about today. The colouring applied to categorise the issues is STL Partners’, based on our view of their relevance to resource utilisation and distribution (and hence the Coordination Age).
Figure 4: Global population worries reflect underlying concerns about the availability and distribution of resources
Source: Ipsos global survey, July 2018, STL Partners analysis
Clearly, the weighting of needs varies in different countries, but most of the most pressing concerns relate to the distribution of economic resources within society (red bars). Concerns on social resources such as education and healthcare (orange bars) are second in prominence, while more classic ‘environmental’ worries (grey bars) are slightly further down the list.
People’s concerns also vary with their current circumstances. The closer you are to the bread-line, the more likely you are to prioritise where your next meal is coming from over the long-term future. Hence there is a natural tendency for near-term concerns to feature more highly on the list.
Many other day-to-day concerns relate to the efficient use of time (another resource): prompt service, availability of resources on-demand, business productivity, etc.
The fundamental enabler needed is coordination: the ability to enable many different players, devices, solutions, etc., to work together across the economy. These players and assets are a diverse mixture of both physical and digital entities. The drive to allow them to work together must be widespread and ultimately systematic – hence the Coordination Age.
The thorny issue of sustainability
We now live in a world of seven billion people that uses 1.7 times its sustainable resources (Figure 5). The argument goes that if we keep on at this rate we will face major environmental and societal pains and problems.
Figure 5: What does “the world need now”?
Source: Global Footprint Network
Climate change is arguably one consequence of the over-use of resources. Not everyone buys in to such concerns, and it is a matter for each person to make their own mind up.
However, even traditionally highly conservative bodies like the UN’s International Panel on Climate Change Panel (IPCC) are sounding alarm bells. In its recent report “Global Warming of 1.5 °C”, the IPCC says we may not even have thirty years to avoid the worst problems.
The editorial in The New Scientist put it like this:
“We still have time to pull off a rescue. It will arguably be the largest project that humanity has ever undertaken – comparable with the two world wars, the Apollo programme, the cold war, the abolition of slavery, the Manhattan project, the building of the railways and the roll-out of sanitation and electrification, all in one. In other words, it will require us to strain every muscle of human ingenuity in the hope of a better future, if not for ourselves then at least for our descendants.”[1]
The challenge is huge, and it reaches across all economies and sectors, not just telecoms.
Enlightened self-interest
STL Partners believes that telcos and the telecoms industry can play a significant role in addressing these issues, and moreover that the industry should move in this direction for both business and social reasons.
This should not be treated as a PR opportunity as it sometimes has in the past, as a kind of fop to regulators and governments in exchange for regulatory preferences.
It is a serious and significant problem to solve for humanity – and solving such problems is also how industries create new value in the economy.
Nonetheless, STL Partners believes that if telecoms industry players genuinely take on the challenges of addressing these issues, it may well have a significant impact on their sometimes-troubled relationships with governments and regulators. It’s one thing to be a big economic player in a market, which most telcos are, and quite another to be a big economic and social partner in an economy.
By truly aligning these goals and interests with governments telcos can start to foster a new dialogue “what do we need to do together for our economy?” This requires a very different level of heart-and-soul engagement than a well-intentioned but peripheral gesture under the Corporate Social Responsibility (CSR) banner.
Moving the needle…
Internally, the industry has long faced two self-defeating challenges.
First, the idea of ‘moving the needle’. So many new opportunities are dismissed because they simply don’t seem big enough for a telco to bother, and telcos continue to search for the next ‘killer app’ like mobile data or SMS.
Despite looking for many years, it still hasn’t been found. Yet somehow the telecoms industry has missed out on capitalising on social media, search, online commerce – pretty much all growth industries of the last twenty years.
Why? For many reasons, no doubt. But there has certainly been a kind of well-fed corporate complacency, a general aversion to commitment to new ideas, and a huge reduction in investment in R&D and innovation. Telcos’ R&D spends are minuscule compared to technology players. We will publish more on this soon, and why we think telcos need to change.
This has gone arm-in-arm with a failure to understand that new business models are not linear and predictable. A sound business case is all very well when you have a predictable business environment. This is typically the case when looking at incremental changes to existing businesses where the consequences are relatively predictable.
In new areas, especially where there are network effects and other unpredictable and non-linear relationships, it’s very hard to do. Even if you succeeded in making a numerical model, most would frown heavily at the assumptions and their consequences, and the decision-making process would stagnate on uncertainty.
Where companies have been successful in building new value, they have at some point made a serious management commitment against a need that they recognise will persist in their market, continued to invest in it, and be willing to admit and learn from mistakes. We would cite TELUS in Healthcare, and Vodafone’s M-PESA as examples where leadership has protected and nurtured the fragile flower of innovation through to growth.
… and moving the people
The second big internal challenge to change and growth has been much of the telecoms industry’s inability to excite its people to buy in to the uncertain and worrying process of change.
Change and its accompanying uncertainties are uncomfortable for most people, and they need support, guidance and ultimately leadership to see them through. Too often, companies only truly address change when they sense the ‘burning platform’ – a (usually threatening) reason that means they simply must abandon their current beliefs and behaviours.
And frankly, why should most employees care about, for example, their company ‘becoming digital’? They care about being paid, having a job with some status, and being reasonably comfortable with what they must do and who they do it with. They are working to support themselves and their families. To most, “becoming digital” sounds like another excuse for a round of job cuts – which in some cases it is.
Our argument is that there is now a powerful new job for telecoms companies to do in the Coordination Age, and that this means we all must change. If we don’t do that job and make those changes, the future will potentially be much worse for us and them as we age, and their kids as they grow.
We believe that the additional insight in the story as we now see it should make it compelling to customers, employees, governments and shareholders. But first, the management of the telecoms industry need to grasp it, improve it and lead the rest forward.
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Network sharing has become well established as a useful means of reducing capital and operating expenditure by mobile network operators and sharing of passive infrastructure such as towers has become commonplace. The main reasons for sharing are a need or desire to:
as a precursor for possible merger or acquisition.
The speed at which operators wish to roll out their 5G networks will depend on a number of factors, including their need for additional capacity to meet market demand, respond to or pre-empt competitive actions by other operators, and their overall business strategy. Minimising the costs of doing so will be important, although some dominant and well-funded operators, such as Verizon, may choose to avoid sharing to put pressure on weaker competitors. Operators choosing to share have several options which may include mergers or acquisitions.
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Where are the largest current costs?
Analysis of data from mobile operators in both developed and developing countries shows that network operating costs are split between three main areas:
the radio access network (RAN)
the core network
IT systems and service platforms.
While the proportions of the total operating costs taken by each of the three areas vary between operators, the overall pattern is the same for all. Typically, the RAN accounts for over half of operating costs, and the core network from one eighth to a quarter. IT and platforms account for the rest. Average operating cost splits for mobile operators are shown in Figure 4. Most operators find that around half of the RAN cell sites generate insufficient revenue from the traffic they carry to cover their operating costs, although such a simple measure does not take account of the benefit that wide coverage brings to overall business revenues. Nevertheless, it is important to manage the costs of the RAN effectively to ensure that resources are used in the most efficient manner. Typical cost splits are shown below.
Typical top-level split of network opex costs
Source: STL Partners
5G is bringing changes
5G is designed to cater for the rapidly growing demand for mobile broadband and for new use cases that require higher speeds and lower latency while at the same time minimising capital and operating costs. To cater for these requirements the use of higher frequency bands is being introduced, together with network slicing and wherever possible the use of standard computing equipment. The use of mid band frequencies of 3.5GHz and above and millimetre wave (mmWave) will enable much higher speeds, but these frequencies have shorter range and are less able to penetrate most buildings. The impact of the poorer propagation will depend on several factors.
Where very high levels of traffic are concentrated in a small area the extra bandwidth provided may permit the replacement of a number of low frequency base stations by a single mid-band or mmWave base station. In other cases where traffic is more thinly spread but still heavy enough to warrant the use of and investment in high capacity high frequency base stations then it is likely that more base stations will be required to provide equivalent coverage, placing greater demands on the availability of suitable sites and provision of associated infrastructure for backhaul and power.
In more remote areas use of low frequencies will be required to provide wide area coverage, but their use may place limits on the bandwidths that can be economically delivered.
In-building coverage may well prove more difficult to provide, and although some tests suggest the problem may be less severe than initially feared, in many cases it will require the provision of alternative means of delivering in-building coverage. Options include the provision of indoor base stations, potentially meaning multiple installations to support different carriers, the use of neutral hosts or increased reliance on Wi-Fi. The requirements of different industries, large and small businesses and individual householders or tenants will vary enormously, and means will need to be found to meet a wide variety of situations in an economic manner. Neutral hosts for 4G already exist in some venues and products are appearing that connect an internal network to an antenna installed externally.
With rollout of the first 5G networks beginning soon, operators need to ensure that they can deploy their networks fast enough to meet market demand and any regulatory targets whilst at the same time containing costs to a level consistent with their revenues. However, in some cases plans for sharing, especially active and spectrum sharing, may result in delays caused by the time required to reach agreements with prospective partners and to gain any necessary regulatory approvals. They will also wish to ensure that they at least maintain or preferably improve their position relative to their competitors.
Technical changes that can be expected to affect the need for and viability of sharing therefore include:
Use of spectrum in higher frequency bands:
shorter range of higher frequencies
densification and the availability of sites and backhaul links – and ease of access.
availability of sufficient low frequency spectrum for rural areas
spectrum sharing
regulatory factors
Changes in architecture for:
slicing
NFV, cloud
use of off-the-shelf IT components and their reliability and availability.
Contents:
Executive Summary
Introduction
Network sharing is well established
5G is bringing changes
Obstacles: MNO fear of sharing
Other Issues
Structure of report
How will 5G drive demand for sharing?
Overview
Spectrum: Use of higher frequency bands
Options for sharing
How will 5G affect costs of sharing?
Current costs
How will networks costs be split in the future?
NFV, Cloud and Slicing
How soon does the market need 5G?
Other options for MNOs
Neutral host
Implementation: Lessons from experience
Timing is important to obtain best results from sharing
Lessons from existing sharing arrangements
Conclusions & recommendations
Recommendations for telcos
Figures:
Figure 1: Types of network sharing
Figure 2: Typical network cost splits of no sharing versus sharing active RAN
Figure 3: Modelled effect of 3.5 GHz RAN sharing on 5G rollout speed in UK
Figure 4: Typical top-level split of network costs (opex)
Figure 5: Losses from building penetration as frequencies increase
Figure 6: MORAN sharing
Figure 7: MOCN Sharing
Figure 8: Shared spectrum efficiencies
Figure 9: Examples of spectrum sharing
Figure 10: Range of typical network costs as percentage of total
Figure 11: Typical breakdown of RAN opex costs
Figure 12: Network and IT costs
Figure 13: Effect of increased number of cell sites on proportion of network cost in RAN
Figure 14: Population and coverage data for the UK
Figure 15: Capex and opex infrastructure costs
Figure 16: Population coverage for different levels of gross annual capex
Figure 17: Base case coverage (£2 billion per annum)
Figure 18: The effect of sharing small cell layer on rollout
Figure 19: Effect on regional rollout of sharing small cells
Figure 20: Ericsson mobile data growth forecast
Figure 21: Ericsson forecasts data traffic growth 2018–2023 by region
Figure 22: Growth in traffic for different applications
Figure 23: Neutral host configuration for US 3.5GHz CBRS
Figure 24: Red Compartida coverage targets
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Operator management teams make large investments over seven- or eight-year investment cycles and are responsible for deploying and managing the networks from which revenues flow. As we show in Figure 1 below, operators therefore have much more of their costs tied up in capital expenditure than platform players or product innovators. Furthermore, they need large quantities of operating expenditure to maintain and operate their networks. The result is a rather small percentage of revenue – we estimate around 15% – which they devote to activities focused on innovation: marketing, sales, customer care, and product and service development (the green section of the bars). This compares unfavourably to a platform player, such as Google, which we estimate devotes around 35% of revenue to these activities. The difference is even more pronounced with a product innovator, such as Unilever, which minimises capital investment by outsourcing some of its manufacturing and all product distribution and so devotes nearly 70% of revenue to ‘innovation’ activities.
Figure 1: The telecoms cost structure inhibits innovation
Sources: Company accounts; STL Partners estimates and analysis
Seen in this context, how can anyone expect operators to be successful at developing new platforms, channels, or products?
Executive Summary
Introduction
Structural barriers preventing telecoms business model change
Digital service innovation is proving tough for operators
Structural barriers coming down?
Virtualisation + cloud business practices could transform the telecoms business model
The drive for virtualisation is underway
Cost reduction and a new cost structure
Cloud business practices are a critical component in the future telco
The Telco Cloud Service Provider (TCSP)
Two benefits from becoming a Telco Cloud Service Provider
Product and service creation in the Telco Cloud Service Provider
From incremental and slow innovation today…
…to radical and fast innovation in the TCSP of tomorrow
Figure 1: The telecoms cost structure inhibits innovation
Figure 2: Telcos have struggled to launch successful digital services
Figure 3: Cloud and virtualisation can allow a telco to transform its cost structure
Figure 4: Cloud business practices – key principles
Figure 5: Defining the Telco Cloud Service Provider
Figure 6: Telco Cloud can spur transformation across the entire telco business
Figure 7: Product development – telco today vs Telco Cloud Service Provider
The telecoms industry is embracing network virtualisation and software defined networking, which are designed to both cut costs and enable greater agility. Whilst most operators have focused on the operating and capital cost benefits of virtualisation, few have attempted to define the range of potential new services that could be enabled by these new technologies and even fewer have attempted to forecast the associated revenue growth.
This report outlines:
Why and how network functions virtualisation (NFV), software defined networking (SDN) and distributed compute capabilities could generate new revenue growth for telcos.
The potential new services enabled by these technologies.
The revenue growth that a telco might hope to achieve.
This report does not discuss the cost, technical, organisational, market or regulatory challenges operators will need to overcome in making the transition to SDN and NFV. STL Partners (STL) also acknowledges that operators are still a long way from developing and launching some of the new services discussed in this paper, not least because they require capabilities that do not exist today. Nevertheless, by mapping the opportunity landscape for operators, this report should help to pave the way to fully capturing the transformative potential of SDN and NFV.
To sense-check our findings, STL has tested the proposed service concepts with the industry. The new services identified and modelled by STL were shared with approximately 25 telecoms operators. Hewlett Packard Enterprise (HPE) kindly commissioned and supported this research and testing programme.
However, STL wrote this report independently, and the views and conclusions contained herein are those of STL.
Introduction
The end of growth in telecoms…?
Most telecoms operators are facing significant competitive pressure from rival operators and players in adjacent sectors. Increased competition among telcos and Internet players has driven down voice and messaging revenues. Whilst demand for data services is increasing, STL forecasts that revenue growth in this segment will not offset the decline in voice and messaging revenue (see Figure 5).
Figure 5: Illustrative forecast: revenue decline for converged telco in advanced market
Source: STL Partners analysis
Figure 5 shows STL forecasts for revenues over a six-year horizon for an illustrative converged telco operating in an advanced market. The telco, its market characteristics and the modelling mechanics are described in detail later in this report.
We believe that existing ‘digital’ businesses (representing consumer digital services, such as IPTV and managed services for enterprises) will not grow significantly on an organic basis over the next six years (unless operators are able to radically transform their business). Note, this forecast is for a converged telco (mobile and fixed) addressing both enterprise and consumer segments; we anticipate that revenues could face a steeper decline for non-converged, consumer-only or enterprise-only players.
Given that telcos’ cost structures are quite rigid, with high capex and opex requirements to manage infrastructure, the ongoing decline in core service revenue will continue to put significant pressure on the core business. As revenues decline, margins fall and telcos’ ability to invest in innovation is curbed, making it even harder to find new sources of revenue.
New technologies can be a catalyst for telco transformation
However, STL believes that new technologies have the potential to both streamline the telco cost structure and spur growth. In particular, network functions virtualisation (NFV) and software-defined networking (SDN) offer many potential benefits for telcos.
Virtualisation has the potential to generate significant cost savings for telcos. Whilst the process of managing a transition to NFV and SDN may be fraught with challenges and be costly, it should eventually lead to:
A reduction in capex – NFV will lead to the adoption of generic common-off-the-shelf (COTS) hardware. This hardware will be lower cost, able to serve multiple functions and will be more readily re-usable. Furthermore, operators will be less tied to vendors’ proprietary platforms, as functions will be more openly interchangeable. This will increase competition in the hardware and software markets, leading to an overall reduction in capital investment.
Reduction of opex through automation. Again, as services will be delivered via software there will be less cost associated with the on-going management and maintenance of the network infrastructure. The network will be more-centrally managed, allowing more efficient sharing of resources, such as space, power and cooling systems.
Product lifecycle management improvements through more integrated development and operations (devops)
In addition to cost savings, virtualisation can also allow operators to become more agile. This agility arises from two factors:
The nature of the new infrastructure
The change in cost structure
As the new infrastructure will be software-centric, as opposed to hardware-centric, greater levels of automation will be possible. This new software-defined, programmable infrastructure could also increase flexibility in the creation, management and provisioning of services in a way that is not possible with today’s infrastructure, leading to greater agility.
Virtualisation will also change the telco cost structure, potentially allowing operators to be less risk-averse and thereby become more innovative. Figure 6 below shows how virtualisation can impact the operating model of a telco. Through virtualisation, an infrastructure player becomes more like a platform or product player, with less capital tied-up in infrastructure (and the management of that infrastructure) and more available to spend on marketing and innovation.
Redefining the cost structure could help spur transformation across the business, as processes and culture begin to revolve less around fixed infrastructure investment and more-around software and innovation.
Figure 6: Virtualisation can redefine the cost structure of a telco
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
Note: Telecoms industry data represents 165 telecoms operators for 2017, but 78 top operators for 2020. However, operators outside the top 78 are unlikely to have a significant impact on revenues or market capitalisation. Source: Company accounts, stock market data, STL Partners analysis
Source: STL Partners
