Telco 2.0: Choose your future – while you still can

Introduction

Time to update Telco 2.0

Telcos are facing difficult choices about whether and how to invest in new technologies, how to cut costs, and how to create new services, either to pair with their core network services or to broaden their customer bases beyond connectivity users.

Through the Telco 2.0 vision (our shorthand for ‘what a future telco should look like’), STL Partners has long argued that telcos need to make fundamental changes to their business models in response to the commoditisation of connectivity and the ‘softwarisation’ of all industries, including telecoms. At the very least this means digitalising operations to become more data-centric and efficient in the way they deliver connectivity. But to generate significant new revenue growth, we still believe telcos need to look beyond connectivity and develop (or acquire) new product and service offerings.

The original Telco 2.0 two-sided business model

original telco 2.0

Source: STL Partners

Since 2011, a handful of telcos have made significant investments into areas beyond connectivity that fall into these categories. For example:

  • NTT Docomo has continued to expand its ‘dmarket’ consumer loyalty scheme, media and sports content and payment services, which accounted for nearly 20% of total revenues for FY2017.
  • Singtel acquired digital advertising provider Amobee in 2012, followed by several more acquisitions in the same area to build an end-to-end digital marketing platform. Its digital services accounted for more than 10% of quarterly revenues by December 2017, and was the fourth largest revenue segment, ahead of voice revenues.
  • TELUS first acquired a health IT company in 2008, and has since expanded its reach and range of services to become Canada’s largest provider of health IT solutions, such as a nation-wide e-prescription system. Based on a case study we did on TELUS, we estimate its health solutions accounted for at least 7% of total revenues by 2017.

Enter your details below to request an extract of the report


However, these telcos are the exception rather than the rule. Over the last decade, most telcos have failed to build a significant revenue stream beyond their core services.

While many telcos remain cautious or even sceptical about their ability to generate significant revenue from non-connectivity based products and services, “digitalising” operations has become a widespread approach to sustain margins as revenue growth has slowed.

In Figure 3 we illustrate these as the two ‘digital dimensions’ along which telcos can drive change, where most telcos are prioritising an infrastructure play, but few are putting significant resources into product innovation, and only a small number with the ability to do both.

  • Digitalising telecoms operations: Reduction of capex and opex by reducing complexity and automating processes, and improving customer experience
  • Developing new services: This falls into two categories on the right-hand side of Figure 3
    • Product innovation: New services that are independent from the network, in which case digitalising telecoms operations is only moderately important
    • Platform (& product): New services that are strongly integrated with the network and therefore require the network to be opened up and digitalised

Few telcos are putting real resources into product & platform innovation

2 digital dimensions

Source: STL Partners

Four developments driving our Telco 2.0 update

  • AI and automation technology is ready to deploy at scale. AI is no longer an over-hyped ideal – machine and deep learning techniques are proven to deliver faster and more accurate decision-making for repetitive and data-intensive tasks, regardless of the type of data (numerical, audio, images, etc.). This has the potential to transform all areas of operators’ businesses.
  • We live and work in a world of ecosystems. Few services are completely self-sufficient and independent from everything else, but rather enable, complement and/or augment other services. Telcos must accept that they are not immune to this trend, just because connectivity is one of the key enablers of content, cloud and IoT ecosystems (see Figure 4).
  • Software-defined networks and 5G are coming. This is happening at a different pace in different markets, but over the next five to ten years these technologies will drastically change the ‘thing’ that telcos operate: the ‘network’ will become another cloud service, with many operational functions instantiated in near real-time in hardware at the network edge, so never even reaching a centralised cloud. So telcos need to become more proficient in software and computing, and they should think of themselves as cloud service providers that operate in partnership with many other players to deliver end-users a complete service.
  • As other industries go through their own digital transformations, the connectivity and IT needs of enterprises have become much more complex and industry specific. This means the one-size-fits-all approach does not apply for operators or for their enterprise customers in any sector.

Telcos and connectivity are not a central pillar, but an enabler in a much richer ecosystem

telco myth vs reality

Source: STL Partners

We are updating the Telco 2.0 Vision in light of these realities. Previously, we proposed six opportunity areas for new revenue growth, and expected large, proactive telcos to be able to address many of them. But telcos have been slow to change, margins are tighter now, implementing NFV/SDN is hard, and software skills are necessary for succeeding in any vertical. So telcos can no longer hope to do it all and must make choices of where to put their bets. As NTT Docomo, Singtel and TELUS show, it also takes time to succeed, so telcos need to choose and commit to a strategy now for long term success.

Contents:

  • Executive Summary
  • Introduction
  • Time to update Telco 2.0
  • Four developments driving our Telco 2.0 update
  • Analysing the current market state
  • Options for the future
  • If connectivity won’t drive growth, do telcos’ network strategies matter?
  • Imagining the future telecoms stack
  • Conclusions

Figures:

  • Figure 1: The telco stack
  • Figure 2: The original Telco 2.0 two-sided business model
  • Figure 3: Few telcos are putting real resources into product & platform innovation
  • Figure 4: Telcos and connectivity are not a central pillar, but an enabler in a much richer ecosystem
  • Figure 5: The network cloud platform within the telco stack
  • Figure 6: Steps to becoming a cloud platform
  • Figure 7: Horizontal specialisation within the telco stack
  • Figure 8: Vertical specialisation within the telco stack
  • Figure 9: Enterprise verticals
  • Figure 10: Consumer services and applications
  • Figure 11: Network technology company versus lean network operator
  • Figure 12: Example of a fixed telco stack
  • Figure 13: Example of a telco IoT stack
  • Figure 14: Example of a lean network operator stack

Enter your details below to request an extract of the report

The ‘Agile Operator’: 5 Key Ways to Meet the Agility Challenge

Understanding Agility

What does ‘Agility’ mean? 

A number of business strategies and industries spring to mind when considering the term ‘agility’ but the telecoms industry is not front and centre… 

Agility describes the ability to change direction and move at speed, whilst maintaining control and balance. This innate flexibility and adaptability aptly describes an athlete, a boxer or a cheetah, yet this description can be (and is) readily applied in a business context. Whilst the telecoms industry is not usually referenced as a model of agility (and is often described as the opposite), a number of business strategies and industries have adopted more ‘agile’ approaches, attempting to simultaneously reduce inefficiencies, maximise the deployment of resources, learn though testing and stimulate innovation. It is worthwhile recapping some of the key ‘agile’ approaches as they inform our and the interviewees’ vision of agility for the telecoms operator.

When introduced, these approaches have helped redefine their respective industries. One of the first business strategies that popularised a more ‘agile’ approach was the infamous ‘lean-production’ and related ‘just-in-time’ methodologies, principally developed by Toyota in the mid-1900s. Toyota placed their focus on reducing waste and streamlining the production process with the mindset of “only what is needed, when it is needed, and in the amount needed,” reshaping the manufacturing industry.

The methodology that perhaps springs to many people’s minds when they hear the word agility is ‘agile software development’. This methodology relies on iterative cycles of rapid prototyping followed by customer validation with increasing cross-functional involvement to develop software products that are tested, evolved and improved repeatedly throughout the development process. This iterative and continuous improvement directly contrasts the waterfall development model where a scripted user acceptance testing phase typically occurs towards the end of the process. The agile approach to development speeds up the process and results in software that meets the end users’ needs more effectively due to continual testing throughout the process.

Figure 5: Agile Software Development

Source: Marinertek.com

More recently the ‘lean startup’ methodology has become increasingly popular as an innovation strategy. Similarly to agile development, this methodology also focuses on iterative testing (replacing the testing of software with business-hypotheses and new products). Through iterative testing and learning a startup is able to better understand and meet the needs of its users or customers, reducing the inherent risk of failure whilst keeping the required investment to a minimum. The success of high-tech startups has popularised this approach; however the key principles and lessons are not solely applicable to startups but also to established companies.

Despite the fact that (most of) these methodologies or philosophies have existed for a long time, they have not been adopted consistently across all industries. The digital or internet industry was built on these ‘agile’ principles, whereas the telecoms industry has sought to emulate this by adopting agile models and methods. Of course these two industries differ in nature and there will inevitably be constraints that affect the ability to be agile across different industries (e.g. the long planning and investment cycles required to build network infrastructure) yet these principles can broadly be applied more universally, underwriting a more effective way of working.

This report highlights the benefits and challenges of becoming more ‘agile’ and sets out the operator’s perspective of ‘agility’ across a number of key domains. This vision of the ‘Agile Operator’ was captured through 29 interviews with senior telecoms executives and is supplemented by STL analysis and research.

Barriers to (telco) agility 

…The telecoms industry is hindered by legacy systems, rigid organisational structures and cultural issues…

It is well known that the telecoms industry is hampered by legacy systems; systems that may have been originally deployed between 5-20 years ago are functionally limited. Coordinating across these legacy systems impedes a telco’s ability to innovate and customise product offerings or to obtain a complete view of customers. In addition to legacy system challenges, interview participants outlined a number of other key barriers to becoming more agile. Three principle barriers emerged:

  1. Legacy systems
  2. Mindset & Culture
  3. Organisational Structure & Internal Processes

Legacy Systems 

One of the main (and often voiced by interviewees) barriers to achieving greater agility are legacy systems. Dealing with legacy IT systems and technology can be very cumbersome and time-consuming as typically they are not built to be further developed in an agile way. Even seemingly simple change requests end in development queues that stretch out many months (often years). Therefore operators remain locked-in to the same, limited core capabilities and options, which in turn stymies innovation and agility. 

The inability to modify a process, a pricing plan or to easily on/off-board a 3rd-party product has significant ramifications for how agile a company can be. It can directly limit innovation within the product development process and indirectly diminish employees’ appetite for innovation.

It is often the case that operators are forced to find ‘workarounds’ to launch new products and services. These workarounds can be practical and innovative, yet they are often crude manipulations of the existing capabilities. They are therefore limited in terms what they can do and in terms of the information that can be captured for reporting and learning for new product development. They may also create additional technical challenges when trying to migrate the ‘workaround’ product or service to a new system. 

Figure 6: What’s Stopping Telco Agility?

Source: STL Partners

Mindset & Culture

The historic (incumbent) telco culture, born out of public sector ownership, is the opposite of an ‘agile’ mindset. It is one that put in place rigid controls and structure, repealed accountability and stymied enthusiasm for innovation – the model was built to maintain and scale the status quo. For a long time the industry invested in the technology and capabilities aligned to this approach, with notable success. As technology advanced (e.g. ever-improving feature phones and mobile data) this approach served telcos well, enhancing their offerings which in turn further entrenched this mindset and culture. However as technology has advanced even further (e.g. the internet, smartphones), this focus on proven development models has resulted in telcos becoming slow to address key opportunities in the digital and mobile internet ecosystems. They now face a marketplace of thriving competition, constant disruption and rapid technological advancement. 

This classic telco mindset is also one that emphasized “technical” product development and specifications rather than the user experience. It was (and still is) commonplace for telcos to invest heavily upfront in the creation of relatively untested products and services and then to let the product run its course, rather than alter and improve the product throughout its life.

Whilst this mindset has changed or is changing across the industry, interviewees felt that the mindset and culture has still not moved far enough. Indeed many respondents indicated that this was still the main barrier to agility. Generally they felt that telcos did not operate with a mindset that was conducive to agile practices and this contributed to their inability to compete effectively against the internet players and to provide the levels of service that customers are beginning to expect. 

Organisational Structure & Internal Processes

Organisational structure and internal processes are closely linked to the overall culture and mindset of an organisation and hence it is no surprise that interviewees also noted this aspect as a key barrier to agility. Interviewees felt that the typical (functionally-orientated) organisational structure hinders their companies’ ability to be agile: there is a team for sales, a team for marketing, a team for product development, a network team, a billing team, a provisioning team, an IT team, a customer care team, a legal team, a security team, a privacy team, several compliance teams etc.. This functional set-up, whilst useful for ramping-up and managing an established product, clearly hinders a more agile approach to developing new products and services through understanding customer needs and testing adoption/behaviour. With this set-up, no-one in particular has a full overview of the whole process and they are therefore not able to understand the different dimensions, constraints, usage and experience of the product/service. 

Furthermore, having these discrete teams makes it hard to collaborate efficiently – each team’s focus is to complete their own tasks, not to work collaboratively. Indeed some of the interviewees blamed the organisational structure for creating a layer of ‘middle management’ that does not have a clear understanding of the commercial pressures facing the organisation, a route to address potential opportunities nor an incentive to work outside their teams. This leads to teams working in silos and to a lack of information sharing across the organisation.

A rigid mindset begets a rigid organisational structure which in turn leads to the entrenchment of inflexible internal processes. Interviewees saw internal processes as a key barrier, indicating that within their organisation and across the industry in general internal decision-making is too slow and bureaucratic.

 

Interviewees noted that there were too many checks and processes to go through when making decisions and often new ideas or opportunities fell outside the scope of priority activities. Interviewees highlighted project management planning as an example of the lack of agility; most telcos operate against 1-2 year project plans (with associated budgeting). Typically the budget is locked in for the year (or longer), preventing the re-allocation of financing towards an opportunity that arises during this period. This inflexibility prevents telcos from quickly capitalising on potential opportunities and from (re-)allocating resources more efficiently.

  • Executive Summary
  • Understanding Agility
  • What does ‘Agility’ mean?
  • Barriers to (telco) agility
  • “Agility” is an aspiration that resonates with operators
  • Where is it important to be agile?
  • The Telco Agility Framework
  • Organisational Agility
  • The Agile Organisation
  • Recommended Actions: Becoming the ‘Agile’ Organisation
  • Network Agility
  • A Flexible & Scalable Virtualised Network
  • Recommended Actions: The Journey to the ‘Agile Network’
  • Service Agility
  • Fast & Reactive New Service Creation & Modification
  • Recommended Actions: Developing More-relevant Services at Faster Timescales
  • Customer Agility
  • Understand and Make it Easy for your Customers
  • Recommended Actions: Understand your Customers and Empower them to Manage & Customise their Own Service
  • Partnering Agility
  • Open and Ready for Partnering
  • Recommended Actions: Become an Effective Partner
  • Conclusion

 

  • Figure 1: Regional & Functional Breakdown of Interviewees
  • Figure 2: The Barriers to Telco Agility
  • Figure 3: The Telco Agility Framework
  • Figure 4: The Agile Organisation
  • Figure 5: Agile Software Development
  • Figure 6: What’s Stopping Telco Agility?
  • Figure 7: The Importance of Agility
  • Figure 8: The Drivers & Barriers of Agility
  • Figure 9: The Telco Agility Framework
  • Figure 10: The Agile Organisation
  • Figure 11: Organisational Structure: Functional vs. Customer-Segmented
  • Figure 12: How Google Works – Small, Open Teams
  • Figure 13: How Google Works – Failing Well
  • Figure 14: NFV managed by SDN
  • Figure 15: Using Big Data Analytics to Predictively Cache Content
  • Figure 16: Three Steps to Network Agility
  • Figure 17: Launch with the Minimum Viable Proposition – Gmail
  • Figure 18: The Key Components of Customer Agility
  • Figure 19: Using Network Analytics to Prioritise High Value Applications
  • Figure 20: Knowing When to Partner
  • Figure 21: The Telco Agility Framework