The state of telco transformation

There are two possible interpretations of the phrase “the state of transformation”:

How is transformation going at telcos, i.e. where are telcos on the path to transformation
The condition of transformation, i.e. what does it mean to be in the process of transforming.

Over the summer of 2022, STL Partners carried out nine in-depth interviews with telco employees that were involved in influencing, coordinating, or implementing large change projects at their organisations. These change makers came from various disciplines: Strategy, HR, Transformation project management, Networks, Technology, as well as Research. Our first intention was to illuminate the first interpretation (where are telcos on the path to
transformation), but our findings suggest that transformation paths (and indeed end states) are unique to each operator, making it difficult to compare progress between telcos.

No one path – overlapping changes in multiple areas

Source: STL Partners

We have mainly come away with findings on the latter point – identifying the types of change initiatives underway and the challenges that change-makers are encountering on their journeys.

This report brings together insights from our interviews, contextualised with further information from secondary sources and ongoing conversations with operators, to give a sense of what telcos mean when they talk about transformation and what their challenges are in becoming more adaptable as organisations to find growth.

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Why is Transformation important to telcos

Far from being an irrelevant or out-dated concept, telcos continue to transform internally. Transformation is understood as a deep change initiative that might involve a shift in foundational technology or a broad-based change in the way an organisation does things, i.e. the culture, processes and the people required – or both.

Most commonly, transformation involves the integration of digital technologies/tools (e.g. cloud, automation, data analytics) into organisational processes to improve business outcomes – with an impact on ways of working (“digital transformation”).

Some telcos talk about transformation in terms of functional initiatives (e.g. IT modernisation), ostensibly affecting a subset of the business, while others talk about transformation from an organisation-wide perspective (e.g. a change in culture like Lean Six Sigma).

The common feature between telco narratives about transformation is that they are motivated by
trying to improve the organisation’s ability to achieve their future vision. This could involve:

Making the business more efficient,
Creating new value/finding new revenues,
Improving outcomes for customers.

Transformations are also undertaken when the vision changes (e.g. when a new leader takes the helm). STL observes that interview respondents described technology-led transformations as aligned to efficiency benefits in the first instance, while organisation-led change was more aligned to responsiveness, particularly in relation to customer needs (improving outcomes). Respondents tended to describe combined technology- and organisation-led change initiatives when there was an ambition to do new things/create new value for customers.

The meaning of transformation – activities cited in interviews

Source: STL Partners

Respondents also mentioned:

Transformation in the context of the industry, particularly the possibility that new technologies may change the shape of an industry (e.g. tech companies may find it easier to enter telecoms with their technology capabilities, while telcos may find it difficult to extend services up the technology value chain).
The enterprise opportunity represented by digital transformation services.

These were not topics for further exploration in our interviews. Industry transformation is a topic for STL’s Executive Briefing Service – however the threat of industry disruption can and should be an inspiration for corporate transformation. Digital transformation services are covered in our Enterprise stream.

Executive Summary
Introduction
Why is Transformation important to telcos
- Different change trajectories
The condition of transformation – being in the process of it
- Where do telcos have transformation efforts underway
- How are transformation projects approached at telcos?
- Who is responsible for transformation?
Barriers to transformation
- Change leadership issues
- People challenges
- Execution difficulties
What is holding telcos back from being future-ready organisations?
- Out with the old…
- …In with the new
Conclusion
- Recommendations

Related Research

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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

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.

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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

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

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

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VEON – Transition from telco to consumer IP communications platform

Introduction to Veon

Geographical footprint and brands

Veon came into being at the start of 2017, a rebrand of VimpelCom. The Amsterdam-based telco was founded in its current form in 2009 when shareholders Telenor and Alfa agreed to merge their assets in VimpelCom and Ukraine’s Kyivstar to create VimpelCom Ltd.

Veon is among the world’s 10 largest communications network operators by subscription, with around 235 million customers in 13 countries (see Figure 1).

Figure 1: Veon’s geographical footprint (September 2017)

Source: Veon, STL Partners

The telco operates a number of brands across its geographical footprint (see Figure 2).

Figure 2: Veon’s brands (September 2017)

Source: Veon, STL Partners

Veon’s largest market is Russia, where it has over 58 million mobile subscribers, making up 24% of its global total. Pakistan and Bangladesh comprise its second-largest markets by subscribers, while it has over 30 million customers in Italy under its Wind Tre brand, a joint venture with CK Hutchison (see Figure 3).

Figure 3: Veon mobile customers by region, H2 2017 (millions)

Source: Veon, STL Partners

A brief history of Veon

1992: Veon began life as Russian operator PJSC VimpelCom in 1992.
2009: VimpelCom Ltd. founded as Telenor and Alfa Group (Altimo) agree to merge their assets in VimpelCom (Russia and CIS) and Ukraine (Kyivstar).
2010: VimpelCom acquires Orascom Telecom Holding (operating in Pakistan, Bangladesh, Algeria) and Wind Italy from Egypt’s Naguib Sawiris.
2017: VimpelCom Ltd. rebrands as Veon.

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The somewhat unusual development of both Veon’s shareholder structure and geographical footprint means the telco faces some unique challenges, but has also enabled a degree of flexibility in the company’s path to transformation.

Veon’s shareholder structure – an enabler of transformation

At the time of writing, Veon is 47.9%-owned (common and voting shares) by Alfa (via investment vehicle LetterOne), and 19.7% by Norway’s Telenor (with the remaining 32.4% split between free float and minority shareholders).

This structure means that the company is less beholden to dividend-hungry shareholders, allowing the telco more ease of alignment than many of its contemporaries. This extra “breathing space” also allows change to occur faster with fewer levels of managerial approval required, whilst the board of directors has given its backing to Veon’s transformation journey, offering full “top-down support”. Nevertheless there is some doubt about how the transformation plans will be greeted at local OpCo level, and the group faces some serious cultural challenges in this area.

Faced with lacklustre organic growth and in the face of headwinds of currency devaluations in its former Soviet markets, Veon has chosen to, in the words of CEO Jean-Yves Charlier, “disrupt itself from within”.

Reversing the revenue decline

Speaking at Veon’s rebrand in February 2017, CEO Charlier spoke of how the telco sector has been backed into a corner by aggressive disruptive start-ups like Skype and WhatsApp, meaning the industry now needs to reinvent itself and find new paths to growth.

The company began by improving its capital structure, in part through the consolidation of operations in two of its largest markets, with the mergers of Mobilink and Warid to form Jazz in Pakistan, and the formation of joint venture Wind Tre from Wind Italy and CK Hutchison’s Tre (3).

Veon states it has realigned its corporate culture and values, introduced a robust control and compliance framework, and significantly cut its cost base, and the operator returned to positive revenue and EBITDA growth in the second quarter of 2017.

Contents:

Executive Summary
Introduction to Veon
Veon’s digital strategy
What are the strengths of Veon’s offering?
What must Veon do to succeed?
Will Veon make it work?
Introduction
Introduction to Veon
The path to total transformation
Veon’s digital strategy
Reinvent customer experience
Network virtualisation
The product
An omni-channel platform
The strengths of the holistic platform
Can Veon’s consumer IP communications proposition succeed?
Can Veon beat the GAFA and Chinese giants to the market?
What must Veon do to succeed?
Conclusions

Figures:

Figure 1: Veon’s geographical footprint (September 2017)
Figure 2: Veon’s brands (September 2017)
Figure 3: Veon mobile customers by region, H2 2017 (millions)
Figure 4: Veon revenue and EBITDA, Q4 2015-Q2 2017 ($ billion)
Figure 5: Veon’s transformation from telco to tech company
Figure 6: Penetration of leading social networks in Russia (2016)
Figure 7: Veon IT stack scope of responsibilities
Figure 8: VEON app screenshots – a IP communication platform
Figure 9: Veon app access requirements
Figure 10: Comparison of consumer IP communications plays
Figure 11: Veon – a SWOT analysis

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Digital M&A and Investment Strategies – July 2017 update

Introduction

Digital M&A as a telco strategy

In June 2016 STL Partners published our inaugural Digital M&A and Investment Strategies report and accompanying database, focussing on key digital acquisitions and investments for 22 operators during the period 2012 – H1 2016. We have now updated this report to cover the following 12 months (H2 2016 – H1 2017), to examine new developments in telco digital M&A and a comparison with previous activities.

Communications service providers have long used M&A as a key growth strategy, with the most common approach being to acquire other operators to build scale organically. As growth in telecommunications slowed and user behaviour swung towards mobile, so M&A activity in the mobile sector has increased. However, acquisition opportunities in mature markets are becoming limited as consolidation reduces the number of telcos, whilst in Europe and North America the regulatory environment has made M&A consolidation strategies less viable.

As operators continue to build digital capabilities and strive to deliver digital services and content, M&A and investment beyond ‘traditional telecoms’ is increasing. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation as well as operational excellence. This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of Verizon, AT&T and SoftBank. There is an accompanying database which tracks telco M&A activity for the period.

Drivers for operator M&A and majority investment

Figure 1: Drivers for operator M&A and majority investment – traditional and digital

Source: STL Partners

Traditional/Telco 1.0 drivers: reach and scale

As illustrated in Figure 1, what we refer to as ‘traditional’ or ‘Telco 1.0’ drivers for M&A and investment are well-established:

Extending geographic footprint is a common trend, as many operator groups look to:
- Enter new markets that are adjacent geographically (e.g. DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
- Enter markets that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
- Enter markets that simply offer good opportunities for expanded footprint and increased efficiencies of operation in emerging regions where demand for mobile services is still growing strongly (e.g., SingTel and Etisalat’s numerous investments in operators in Asia and Africa, respectively).
Extending traditional communications offerings is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the UK is one example.
Consolidation has slowed to some extent, as regulators and competitors fight against mergers or acquisitions that remove players from the market or concentrate too much market power in the hands of stronger service providers. This has been a particular issue in the European Union, where regulators have refused to approve several proposed telecoms M&A deals recently, including Telia and Telenor in Denmark in 2015, and the proposed Hutchison acquisition of Telefónica’s O2 to merge with its subsidiary 3 UK in 2016. Other deals, such as the proposed Orange-Bouygues Telecom merger in France which was abandoned in April 2016, have failed due to the parties involved failing to reach agreement. However, our research shows continued interest in operator M&A for consolidation, with recent examples including Orange’s acquisition of Sun Communications in Moldova in 2016, and Vodafone’s merger with Indian rival Idea in 2017.
The acquisition of service partners – primarily channel partners, or partner companies providing systems integration and consultancy capabilities, typically for enterprise customers – has proved an important driver of M&A for many (mainly converged) operators.
Finally, operator M&A is also being driven by the enthusiasm of sellers. Many operators are looking to sell off assets outside of their home markets, pulling back from markets that have proven too competitive, too small or simply too complicated, as part of a strategy to pay down debt and/or free up assets for investment in other higher-growth areas:
- Telia’s pullback from its non-core markets has seen it sell off its majority stakes in Spanish operator Yoigo to Masmovil and in Kazakhstan’s Kcell to Turkcell in 2016
- Telefonica’s attempt to sell its O2 UK mobile unit to CK Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its debt, including a planned IPO of O2 UK.

Contents:

Executive Summary
Evaluating operator digital investment strategies
Key findings
Recommendations
Introduction
Drivers for operator M&A and majority investment
Evaluating operator digital investment strategies
22 players across 5 regions: US shows the most aggressive M&A activity
Comparison with previous period (H1 2012 – H1 2016)
European telcos remain largely focussed on Telco 1.0 M&A
Which sectors are attracting the most interest?
Telco M&A investment is falling behind other verticals
What are the cultural challenges to digital M&A in the boardroom?
Operator M&A Strategies in detail: Consolidation, content and technology
M&A as a telco growth strategy
Adapting telco culture to ensure digital M&A success
Recommendations

Figures:

Figure 1: Drivers for operator M&A and majority investment – traditional and digital
Figure 2: Number of operator digital acquisitions and majority investments, H2 2016-H1 2017
Figure 3: Largest 7 telco digital M&A and majority investments, H2 2016-H1 2017
Figure 4: Number of operator digital acquisitions and majority investments, H1 2012 – H1 2016
Figure 5: Operator digital acquisitions and majority investments, H1 2012-H1 2017
Figure 6: Largest 10 telco digital M&A and majority investments, H1 2012 – H1 2016
Figure 7: Mapping of operator digital M&A strategies
Figure 8: Number of digital M&A and majority investments by sector/category, H2 2016-H1 2017
Figure 9: Comparison of investment in digital M&A as a percentage of service revenues, 2012-H1 2017

Tag: digital strategy

Telco 2.0: Choose your future – while you still can

Introduction

Time to update Telco 2.0

The original Telco 2.0 two-sided business model

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Few telcos are putting real resources into product & platform innovation

Four developments driving our Telco 2.0 update

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

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VEON – Transition from telco to consumer IP communications platform