Making big beautiful: Multinational operators need the telco cloud

Telcos’ (economies of) scale in perspective

As a result of their wide regional or global footprints, multi-country operators typically generate tens of billions of USD in revenues. By this measure, telcos’ scale (as defined by their revenues) is indeed comparable with the likes of Google and Facebook (see Figure 2). However, we can consider scale through a different lens as well: defined by the number of users, it becomes evident that telcos are dwarfed relative to the large internet companies. When considering the number of users, the telecoms industry is more fragmented than the internet sector – resulting in the unfavourable comparison, since no one telco can achieve a similar customer-base.

The fragmented nature of the global telecommunications industry means that telcos tend to struggle to create so-called demand-side economies of scale. These economies of scale rely on network effects stemming from the value generated by having a large number of users. In such a case, there is both inherent value in the use of the service and value derived from other people’s use of the service.

The big success of the internet giants can, in part, be attributed to significant network effects. Telcos, on the other hand, are in a tougher position. Partly this is due to the nature of the services they traditionally provide. Unlike the internet giants who can reach anyone around the world with an internet connection, telcos are have largely been limited to serving users in the countries in which they operate networks.
Despite this, large operators should – in theory – be well-equipped to create so-called supply-side economies of scale due to the sheer size of their business. With telecoms being a high fixed-costs business, the cost of providing telco services per customer falls as the number of customers increases.

Figure 2: Some telcos are big – but they are unable to create the same network effects as the internet giants

So, have these large multinational telcos managed to create scale effects? Unfortunately, we find rather sobering evidence to the contrary. Figure 3 shows that multi-country operators tend to underperform the industry average. Large European multi-country operators – such as Orange, Telefonica, Vodafone and Deutsche Telekom – all underperform the telco global average operating margin of 17%. On the other hand, large single-market operators, namely AT&T and Verizon, achieve margins above the global average.

Figure 3: European giants struggle to create economies of scale

Contents:

  • Executive Summary
  • Multinational telcos have struggled to create economies of scale
  • A Telco Cloud strategy can deliver scale economies for multinational operators
  • Introduction – Economies of scale in telecoms
  • International expansion has delivered a global footprint for some telcos
  • Telcos’ (economies of) scale in perspective
  • Multinational telcos need to revisit their approach to creating economies of scale
  • The dilemma of multinational telcos – can Telco Cloud help overcome it?
  • Telco Cloud: a brave new world?
  • The cost problem: multinational telcos need to create synergies across markets
  • The revenue problem: multinationals need to calibrate the right innovation model across markets
  • The traditional Opco-driven innovation has inherent problems
  • Centralisation of innovation isn’t the answer either
  • What is the right model for telcos?
  • Conclusions

Solution: Transforming to the Telco Cloud Service Provider (Part 2)

Introduction

Structural barriers preventing telecoms business model change

In our recent report, Problem: Telecoms technology inhibits operator business model change (Part 1), we explained how financial and operational processes that have been adopted in response to investor requirements and regulation have prevented operators from innovating.

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