Strategy 2.0: The Six Key Telco 2.0 Opportunities

A summary of the six Telco 2.0 opportunities to transform telco’s business models for success in an IP-based, post PSTN world: Core Services, Vertical Solutions, Infrastructure Services, Embedded Communications, 3rd Party Enablers, and Own Brand OTT Services. It includes an extract from the Roadmap to New Telco 2.0 Business Models, updates on latest developments, and feedback from over 500 senior TMT industry execs. (July 2011, Executive Briefing Service, Transformation Stream).

Telco 2.0 Six Key Opportunity Types Chart July 2011

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Background – The Roadmap to New Telco 2.0 Business Models

The Telco 2.0 Strategy Report ’The Roadmap to New Telco 2.0 Business Models’ published in April 2011 examines ways in which operators can extend and solidify their roles in the future ecosystem, making themselves a cornerstone of a new structure. This Executive Briefing contains extracts from the full Strategy Report, and updates and validates it with feedback from recent Telco 2.0 and New Digital Economics Executive Brainstorms in EMEA and the Americas.

Updating the Telecoms Business Model

For the past four years, STL Partners has been using an iconic diagram (see Figure 1, below) to illustrate our views about the role of ‘two-sided’ business models in the telecoms industry. It highlights the critical role of a telecom operator in enabling interactions between its traditional end-user (“downstream”) customers and a variety of new “upstream” parties, such as application developers and media companies. In 2007, we also introduced the concept of “distribution” of Telcos’ core services through these upstream channels, with the addition of a range of value-added B2B services based around the inherent capabilities of the network and service platform.

This concept of two-sided business models originally introduced in the Telco 2.0 Strategy Report The $125Bn ‘Two-Sided’ Telecoms Market Opportunity has to a degree become synonymous with Telco 2.0, and has been widely embraced by the industry. We have now decided it is time to update our definition of “Telco 2.0” to reflect both business model evolution and fundamental changes in the telecoms industry structure itself. While these trends are indeed driving adoption of multi-sided business models, we have also observed that that are redefining the landscape for ‘traditional’ one-sided telecom model as well.

Figure 1: The high-level Telco 2.0 Business Model diagram

Telco 2.0 Roadmap Two-Sided Business Model Schematic Chart

Source: STL Partners / Telco 2.0

Pressure on All Sides

In particular, it is critical to understand the increasing pressure on Telcos’ traditional markets and value propositions, on all sides – not just by Internet/media companies (so-called “over-the-top” players), but also by third-party infrastructure operators and wholesalers, network and device vendors, governments, and even end-users themselves. In addition, there have been delays and organisational complexities in exploiting the true potential of some “upstream” opportunities. 

Newcomers such as Apple have developed their own communications/content ecosystems, regulators have pushed for structural separation, Governments have funded wholesale networks and application developers have cherry-picked lucrative domains such as social networking. Network equipment vendors are helping operators convert capex to opex – but in the process are themselves capturing more industry value through outsourcing. End-users have developed work-arounds to reduce their expenditure on telco services (e.g. “missed calls”).

Figure 2 – Telcos squeezed from all sides

Telco 2.0 Roadmap Report Telecoms Industry Squeeze Competitve Forces Chart

Source: Telco 2.0, The Roadmap to New Telco 2.0 Business Models

Taken together, the impact of these trends has led Telco 2.0 to expand its framework to embrace and refine its target market domains for telcos, especially in terms of innovation around advanced new “retail” services. We feel that it is becoming even more difficult for operators to navigate through this minefield – and if they are to succeed, they will need to develop and sell more appropriate, integrated and well-designed offerings. While defensive moves have their place, there is also an urgent need to innovate – but with well-focused efforts and resources.

Originally, we spoke of three business model elements for telcos: Improved retail telecoms services; ‘Distribution’ of core telecom products and services through alternate upstream channels; and delivery to upstream customers of value-added enablers. (In the past, we did not explicitly address wholesale telco-telco services, as they were essentially “internal machinery” of the day-to-day retail business).

Figure 3 – The three opportunity areas in the original Telco 2.0 business model

Telco 2.0 3 Original Business Model Opportunities Chart

Source: Telco 2.0, The $125Bn ‘Two-Sided’ Telecoms Market Opportunity

Introducing the New Telco 2.0 Framework

A long-term, strategic framework for is needed for telcos, both in fixed and mobile sectors. While the industry has strong cash flows, it needs to redefine its own space, exploit its strengths, and seek out areas of revenue growth and strong differentiation. Telcos also need to look for sources of their own profit in areas such as managed services, rather than just exploiting the cost savings offered by vendors and outsourcers.

Figure 4 – The New Telco 2.0 Industry Framework

Telco 2.0 Roadmap Report Telecoms Industry New Industry Framework Chart

Source: Telco 2.0, The Roadmap to New Telco 2.0 Business Models

Our new framework is an evolution of the old, incorporating the two-sided model, and defining six opportunity types, comprising three existing types previously defined by Telco 2.0:

  • Core services (previously ‘Enhanced retail’), which encompasses structural and strategic improvements to existing wholesale and retail services;
  • Embedded Communications (previously ‘Distribution platform’);
  • Third-party business enablers (previously ‘B2B VAS platform’);

and extending it in three main directions:

  • A separated and richer tier of Infrastructure services;
  • Explicitly identifying the integration of telecoms, IT and networking being undertaken by operators in the corporate space – Vertical industry solutions (SI)
  • Own-brand OTT services.

The Six Telco 2.0 Opportunity Types

We have grouped the opportunities into six types shown in the following diagram and discussed further in the rest of this report.

Figure 5 – the Six Telco 2.0 Opportunity Types

Telco 2.0 Roadmap Report Telecoms Industry Six Opportunities Chart

Source: Telco 2.0, The Roadmap to New Telco 2.0 Business Models

1. Core services (previously Retail Services), which encompasses transformational structural and strategic improvements to existing mainstream “Telco 1.0” offerings such as subscriptions, telephony and broadband access. These will remain at the core of telco revenues irrespective of other shifts, enhanced by the smart and targeted delivery of improved offers, manifesting in benefits via revenue addition, up-sell, and customer satisfaction. Our research identifies a portfolio of approaches here, such as:

  • Incremental improvements to basic products’ quality or speed;
  • Exploitation of new device categories driving service adoption and usage;
  • Supply of added-value content and services;
  • Better segmentation and customisation;
  • More targeted, personalised and granular pricing;
  • Better channels to market;
  • Efforts to gain improved (and genuine) loyalty and value perception;
  • Innovative ways to drive incremental usage and spending, for example through incentives and promotions.

In parallel with the revenue drivers, operators are also focusing on cost savings, throughout network operations and other areas such as retail channel costs and commissions, device subsidies and so forth.

2. Vertical industry solutions have been developed by fixed operators over the last decade and now starting to be demanded by customers for mobile solutions too. They comprise telephony services (voice and data) being integrated with IT with the operator acting in a systems integrator role to provide a complete solution. These solutions are tailored and packaged for specific vertical industries – transport, logistics, banking, government, manufacturing, utilities, etc. Companies such as BT (with BT Global Services), Orange (with Business Services) and Deutsche Telekom (with T-Systems) are examples of companies that have moved aggressively into this area.

3. A separated and richer tier of Infrastructure services, which includes telecom capacity “bulk” wholesale, as well as more granular “distribution” two-sided business models and aspects of hosting/cloud services. Some of these offerings have been around for a long time – bitstream ADSL, unbundled local loop sales and so forth. Others (data MVNOs, wholesale wireless networks) are relatively new. At the same time, operators are cutting new deals with each other for network sharing, backhaul provision, national roaming and so forth. We are splitting the new services out in this category, as a reflection of their impact on the cost side of operators’ business models, and new regulatory regimes (such as open access) that are redefining industry structure in many markets.

4. Embedded communications (previously Distribution Platform) – essentially the delivery to consumers of basic telecom services, primarily voice telephony, SMS and broadband data access, through new routes such as application-embedded functions or devices which “come with data” pre-provisioned.

5. Third-party Enablers (previously B2B VAS Platform) – the provision of extra capabilities derived from the operator’s ’platform’ rather than just network transport. This includes functions such as billing-on-behalf, location, authentication and call-control, provided as basic building blocks to developers and businesses, or abstracted to more complex and full-featured enablers (for example, a location-enabled appointment reminder service). Another class of third-party enablers originates in the huge customer databases that Telcos maintain – in theory, it should be possible to monetise these through advertising or provision of aggregated data to 3rd parties – subject to privacy constraints.

6. Own-brand OTT services. Many operators are starting to exploit the scale of the wider Internet or smartphone universe, by offering content, communications and connectivity services outside the perimeter of their own access subscriber base. With a target market of 1-2bn people, it is (in theory) much easier to lower per-unit production costs for new offerings and gain “viral” adoption. It avoids the politics and bureaucracy of partnerships and industry-wide consortia – and potentially has the ‘pot-of-gold’ of creating huge value from minimal capital investment. On the downside, the execution risks are significant – as is the potential for self-cannibalisation of existing services.

Figure 6 – The Six Opportunity Areas – Strategy, Typical Services and Examples

Telco 2.0 Roadmap Six Opportunities Examples Table

Source: Telco 2.0, The Six Opportunity Types Executive Briefing

To read the report in full, including the following contents…

  • Introduction & Background
  • The Roadmap to New Telco 2.0 Business Models
  • Updating the Telecoms Business Model
  • Executive Summary
  • Introducing the New Telco 2.0 Framework
  • Summary: The Six Telco 2.0 Opportunity Types
  • New Developments and Feedback from Telco 2.0 and New Digital Economics Brainstorms
  • Relative Attractiveness of Opportunity Areas
  • Different Opportunities need Different Business Models
  • The Unwelcome Need to Increase Investment in Innovation
  • New Metrics to Unlock New Investment
  • A Common Theme: Time is Short
  • Next Steps – M-Commerce 2.0: how Personal Data will Revolutionise Customer Engagement
  • The Six Opportunity Types Described
  • Opportunity Type 1: Core services
  • Opportunity Type 2: Vertical industry solutions (SI)
  • Opportunity Type 3: Infrastructure services
  • Opportunity Type 4: Embedded communications
  • Opportunity Type 5: Third-party business enablers
  • Opportunity Type 6: Own-brand “OTT”
  • Index

…with the following figures, charts and tables…

  • Figure 1 – The high-level Telco 2.0 Business Model diagram
  • Figure 2 – Telcos squeezed from all sides
  • Figure 3 – The three opportunity areas in the original Telco 2.0 business model
  • Figure 4 – The New Telco 2.0 Industry Framework
  • Figure 5 – the Six Telco 2.0 Opportunity Types
  • Figure 6 – The Six Opportunity Areas – Strategy, Typical Services and Examples
  • Figure 7 – Americas 2011: What will be the impact of Telco 2.0 Growth Opportunities?
  • Figure 8 – EMEA Nov 2010: B2B Enabling Services and Distribution Platform Need Investment
  • Figure 9 – Each Opportunity Area will have Different Revenue Splits
  • Figure 10 – Operators must invest more in services
  • Figure 11 – Different Business Models Need Different Metrics
  • Figure 12 – Impact of New Business Models on CROIC
  • Figure 13 – Other than “being a pipe”, Telcos have the most time and Opportunity to address Identity & Authentication Control Points
  • Figure 14 – Customer Data and Mobile Money are CSP’s most under exploited Assets?
  • Figure 15 – 100% campaign gain from personalisation
  • Figure 16 – Closed-loop of customer relationships & loyalty
  • Figure 17 – Ericsson’s Mobile Broadband ‘Fuel Gauge’
  • Figure 18 – BT Global Services vertical industry approach
  • Figure 19 – Many regulators see wholesale as key to NGA success
  • Figure 20 – Three Different Types of Embedded Communications
  • Figure 21 – Broadband access market forecast 2005-2015
  • Figure 22 – ‘Comes with Connectivity’
  • Figure 23 – Distribution and Enablers Vs Ontology of Telco wholesale and VAS offerings
  • Figure 24 – What is the best revenue model for Telco API programmes?
  • Figure 25 – Skype is a good fit for many Microsoft products
  • Figure 26 – Telco strategy options for co-opetition with Skype
  • Figure 27 – The Seven ‘VAS Platform’ Applications / 3rd Party Business Enabler Areas
  • Figure 28 – 5 Strategic Options for Developing OTT Services

……Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation Stream can download the full 50 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for £795 (+VAT), or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations and products referenced: 3UK, Alcatel-Lucent, Amazon, Amazon Kindle, Android, Apple, AT&T, BlackBerry, BT, BT Global Services, Carphone Warehouse, Cisco, Clearwire, Deutsche Telekom, Equant, Facebook, FCC, Gamesload, Google, Harbinger/SkyTerra network, iPad, iPhone, Jajah, KDDI, LightSquared, LinkedIn, Microsoft, Musicload, O2, Ofcom, Openzone, Optism, Orange, ProgrammableWeb, Qualcomm, Revoo, Scout24 family, Skype, smartphones, SMS, Softwareload, Telefonica, T-Mobile, UQ, Verizon, Videoparty, Vodafone, W3C, Xiam, YouTube.

Technologies and industry terms referenced: 3G, 4G, ADSL, API, appstore, authentication, B2B VAS platform, backhaul, billing-on-behalf, bitstream ADSL, broadband data access, Bulk wholesale, cable, cloud, Comes with data, Core services, CRM, data centres, Embedded Communications, femtocells, fibre, freemium, GSM, healthcare, Identity, Infrastructure services, location, LTE, M2M, managed services, messaging, MiFi, MVNO, MVNOs, Net Neutrality, NGA, NGN, own-brand OTT, Own-brand OTT, pipe, platforms, QoS, R&D, Retail, Sender pays, SIM, slice and dice, smart grids, Third-party business enablers, two-sided, unbundled local loop, Vertical industry solutions, voice telephony, VoIP, wholesale wireless networks, WiFi, WiMAX.

Full Article – Case Study: how to grow when your core market shrinks

Summary: Only the fit survive market changes, and evolving the business model to adapt is key. Strategy lessons for telcos and vendors alike from Boungiorno, a content aggregator that evolved to beat the shrinking portal services market. :

Overview

As traditional revenue streams come under threat, operators are starting to look at new business models. But how should they make the transition? The case of Buongiorno provides some clear lessons as it has successfully moved from being an aggregator of basic mobile content to a strategic partner of operators seeking to deepen their retailer capabilities and their customer intimacy.

For Operators, building such CRM capabilities will help maximise the value of the existing business model and provide a stepping-stone to new sources of value. It will provide operators with substantial near-term revenue growth as they will be able to offer more appropriate content and applications to their customers and will open up a $125+ billion medium-term growth opportunity by helping other upstream service providers interact more effectively and efficiently with their customers via a Telco platform.

Buongiorno’s success

Buongiorno has successfully circumvented the decline experienced in ringtones and other portal services since 2007, it’s core market only a few years ago, and moreover has continued to grow.

buongiorno3.png

As well as promoting greater customer interaction, Buongiorno has employed a systematic and sustained acquisition strategy that has clearly added substantial revenue to the business over the last several years (including around €130m from iTouch in the 2008 figures). It is not realistic therefore to suggest that all of Buongiorno’s success is derived from its increased customer interaction strategy.

Nonetheless, the company has successfully repositioned itself from being a content aggregator to being a strategic partner of operators seeking to deepen their retailer capabilities and their customer intimacy, and fundamentally changed it’s position and role in the value chain – which is the key strategy parallel for Telcos.  We analyse Boungiorno’s repositioning and transformation strategy below.

Background History – the fundamental problem of growing in a shrinking market

Buongiorno was founded in 1999 as a content aggregator for the mobile market, providing a distribution platform for developers and media companies, and acting as a wholesale provider for operators. The company usually ‘white labels’ its services so that operators can use their own brand when retailing to their customer base. It initially focused on basic mobile content such as music, games, video, wallpaper and ring tones. Buongiorno enjoyed strong growth in its early years. However, by 2004 management could see that revenue growth from many of these basic services was going to slow down for four principal reasons:

  • Alternative ways of downloading content for free or more cheaply – peer-to-peer networks on PC followed by sideloading on to the device;
  • Excessive pricing of ring tones by operators and other retailers;
  • Hidden subscription charges for some services – reflected in fines being levied on some content providers;
  • More sophisticated devices that enabled, for example, ring tones to be created from music stored on the device.

The company therefore then faced the same problem as operators increasingly do now: how to generate greater revenues from end users at a time when revenue growth from core services was starting to dry up?

buongiorno.png

Strategic Solution: A focus on being a better retailer

In 2004-5, Buongiorno management decided that in addition to the existing assets (content and a technology platform) the company needed to grow its CRM and marketing capabilities. This would better enable them to support operators seeking to strengthen their relationship with customer bases that were spending increasing amounts of time and money off-portal. In so doing, they would also provide pull through for Buongiorno content.

The company had launched an advertising and digital promotion company, Buongiorno Marketing Services, in 2002 but the focus of the much bigger Consumer Services company now also shifted towards database building and management, CRM and consultancy, all underpinned by a flexible technology platform.

The first part of the strategy was to introduce CRM capabilities to the content platform so operators could better understand the buying patterns of their customers. This enabled operators to automatically provide targeted advertising and marketing, including personalised offers based on users’ past purchasing and click histories. Buongiorno thereby aimed to help operators be more relevant to their customers to encourage on-portal activity and increase loyalty, resulting in:

  • Increased ARPU;
  • More inactive users converted into buyers;
  • Reduced customer churn;
  • Reduced off-portal activity.

Example Operator Retail Campaigns: O2 ‘Extras’ and ‘Top-Up Surprises’

Buongiorno helped O2 in the UK create O2 Extras, an opt-in ‘club’ that provides update texts, bespoke advertising, free downloads and location-based services for its 1m+ members. The results below are clearly impressive, showing a tangible difference in value for O2 between O2 Extra customers and the rest.

buongiorno1.png

[NB What is not clear fom this data is whether the behaviour of members changed after they joined the club. To some extent it is possible that the club’s success is predetermined – those people that use O2’s portal more and are more loyal to the company sign up for O2 Extras thereby confirming their value rather than the incremental benefit of being part of an opt-in club. It is also possible that the club has tied in more deal sensitive users who are more likely to churn. Overall, we believe that the club has tangible benefits but would advise further analysis to quantify the benefits for clients considering implementing a similar programme.]

The second move by Buongiorno was to enable greater interactivity via their platform, allowing operators to respond immediately to consumer behaviour with contextually relevant offers using pre-defined business rules. Boungiorno says that this enables operators to implement a simple but powerful concept: ‘Customers Do X and Get Y’. The aim is to further increase customers’ interactions with the operator by incentivising specific customer behaviours. Operators define what the reward (or penalty) is as well as the behaviour to be targeted.

O2’s Top-Up Surprises, a popular campaign in the UK that rewards the consumer with a prize whenever they put money on their pre-paid balance, uses Buongiorno’s ‘Instant Mobile Marketing’ platform. O2 offers prizes that are tiered according to the amount the consumer spends (bigger prizes for topping up more than £15), so that spending is ‘encouraged’. It cleverly contains the cash cost of the programme by mainly offering ‘network prizes’ consisting of minutes, texts and browsing time and only having a few ‘headline-grabbing’ prizes such as cash, cars and computer games.

The results of the Top Up Surprises campaign are not public but, according to O2, it has been ‘hugely successful’ and has demonstrated a clear business benefit from building some excitement into a relatively unfulfilling and mundane activity. The fact that O2 chose to extend the campaign beyond its planned timescale and invest £5.5m in a marketing campaign to support it would seem to bear this out.

Future Strategy: Options to develop a two-sided business model

Several products are currently being heavily marketed through the Top-Up Surprises campaign including Nintendo DS, Sony TVs, Toshiba laptops, Marks and Spencer vouchers and even a Toyota car. There is clearly an option for O2 (and other Instant Mobile Marketing platform operators) to charge brands for access to their customers through the interactive marketing campaigns. Getting this right would enable operators to generate more value from both sides of the platform. In other words, there are two available pricing models and O2 is currently only exploring the first.

buongiorno2.png

Implications…

Buongiorno’s story suggests that the road to Telco 2.0 should be via ‘Telco 1.5’. In other words, the focus for Telcos should be on developing the skills that will be valuable for upstream customers initially for themselves.  If they can make their retail offerings better by being able to target and customise offerings more effectively, then this can later be translated to the offerings of third-parties.  Becoming a best practice retailer, like Amazon, and developing a meaningful two-sided business model, like Google or Microsoft, will not be achieved overnight.  Operators need to become good retailers first and then add the second upstream revenue source.

…for Operators

The initial focus of operators should be on developing a stronger, more interactive and more profitable relationship with existing customers via:

  • Developing better CRM and data mining skills so operators have a clearer understanding of what customers want. Operators need to be able to answer the questions that Amazon, Tesco, Walmart, etc. wrestle with every day:  What has this customer bought in the past?  What does this tell us about what they might buy in the future?  What does their demographic profile tell us about their attitudes and needs?  How can we capture preference information from them to better understand how we can service them?;
  • Creating a longer term strategy for generating revenue from upstream players in a way that does not cannibalise existing end user revenues or, put another way, that creates more value across both customer groups than can be achieved from one group alone. This is a key point for all two-sided platform players.  For example, Google generates more value by making its search engine free to searchers than it would by charging them.  Why?  Because a free search engine (and other Google products) generates massive usage of the Google search engine which results in high value to merchants and advertisers.  If Google charged for search then the volume of searchers would rapidly diminish and Google would lose advertising revenues.  Operators need to consider their pricing strategy very carefully as a two-sided platform player – where should they continue to charge the user and where should they give up revenue from the end user in order to derive greater value from the upstream customer?

…for Vendors and Enablers

There has always been a fine line between ‘leading edge’ and ‘bleeding edge’ in telecommunications, and all vendors and enablers of future Telco success need to ensure that they are relevant now and not just promoting solutions for the future. This is even more important in the current economic climate.

Having said this, 94% of delegates at a plenary jointly hosted by Telco 2.0 and the Telemanagement Forum agreed that innovation and revenue growth as well as operational efficiency should remain a priority throughout the recession. In other words we cannot forget the future as we struggle with the present.

Vendors and enablers need to focus on continuing to solve the immediate ‘pressing concerns’ of operator management including churn prevention, ARPU growth and cost reduction, while also developing a strong thought leadership and position about how operators can win in the medium term.  They must:

  • Develop solutions that are flexible enough to be ‘forward compatible’ and support future operator business models, including two-sided models, at low incremental cost…
  • …and deliver solutions that make operators better retailers NOW – including improved customer interactivity and intimacy.  This will drive near-term revenues for operators and enable them to build a business case for investment that is not based on ‘jam tomorrow’ – something which will not get through investment committees in the current economic climate.