AI is starting to pay: Time to scale adoption

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AI adoption yields positive results

Over the last five years, telcos have made measurable progress in AI adoption and it is starting to pay off.  When compared to all industries, telcos have become adept at handling large data sets and implementing automation. Over the last several years the telecoms industry has gone from not knowing where or how to implement AI, to having developed and implemented hundreds of AI and automation applications for network operations, fraud prevention, customer channel management, and sales and marketing. We have discussed these use cases and operator strategies and opportunities in detail in previous reports.

For the more advanced telcos, the challenge is no longer setting up data management platforms and systems and identifying promising use cases for AI and automation, but overcoming the organisational and cultural barriers to becoming truly data-centric in mindset, processes and operations. A significant part of this challenge includes disseminating AI adoption and expertise of these technologies and associated skills to the wider organisation, beyond a centralised AI team.The benchmark for success here is not other telcos, or companies in other industries with large legacy and physical assets, but digital- and cloud-native companies that have been established with a data-centric mindset and practices from the start. This includes global technology companies like Microsoft, Google and Amazon, who increasingly see telecoms operators as customers, or perhaps even competitors one day, as well as greenfield players such as Rakuten, Jio and DISH, which as well as more modern networks have fewer ingrained legacy processes and cultural practices to overcome.

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Telecoms has a high AI adoption rate compared with other industries

AI pays off

Source: McKinsey

In this report, we assess several telcos’ approach to AI and the results they have achieved so far, and draw some lessons on what kind of strategy and ambition leads to better results. In the second section of the report, we explore in more detail the concrete steps telcos can take to help accelerate and scale the use of AI and automation across the organisation, in the hopes of becoming more data-driven businesses.

While not all telcos have an ambition to drive new revenue growth through development of their own IP in AI, to form the basis of new enterprise or consumer services, all operators will need AI to permeate their internal processes to compete effectively in the long term. Therefore, whatever the level ambition, disseminating fundamental AI and data skills across the organisation is crucial to long term success. STL Partners believes that the sooner telcos can master these skills, the higher their chances of successfully applying them to drive innovation both in core connectivity and new services higher up the value chain.

Contents

  • Executive Summary
  • Introduction
  • Developing an AI strategy: What is it for?
    • Telefónica: From AURA and LUCA to Telefónica Tech
    • Vodafone: An efficiency focused strategy
    • Elisa: A vertical application approach
    • Takeaways: Comparing three approaches
  • AI maturity progression
    • Adopt big data analytics: The basic building blocks
    • Creating a centralised AI unit
    • Creating a new business unit
    • Disseminating AI across the organisation
  • Using partnerships to accelerate and scale AI
    • O2 and Cardinality
    • AT&T Acumos
  • Conclusion and recommendations
  • Index

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Elisa: Telco leadership excellence – and how to do it

Elisa stands out among telcos

As digital services are reshaping our world, many different players are creating new and disruptive services, while telcos’ traditional revenue streams are plateauing and, in some cases, in decline. While many telcos have embarked on the journey to diversify their offerings and establish themselves as serious players in the digital services space, many are struggling to make business model adjustments that are critical to success as operators move into adjacent growth segments. Few telcos have figured out how to keep the wheels turning on their core business, while also building new businesses and embedding agile working practices across their organisation.

In our evaluation of new digital services propositions from Finnish telco, Elisa, STL Partners discovered a contender that punches significantly above its weight. (See our earlier case studies on Elisa Automate and Smart Factory.) Elisa’s successes in pioneering new services, maintaining customer relevance and delivering impressive financial results are not an overnight sensation but the product of long-term, systematic transformation and hard-won lessons.

We were curious to find out what combination of attributes make Elisa an exemplar of how to win in the digital revolution, and how other telcos can take a leaf out of the Elisa playbook to create a similarly agile, adaptable environment for innovation within their own organisations.

Through a series of in-depth interviews with key members of Elisa’s senior management, we set out to explore the company’s recent history of evolution and the culture, practices and processes that are positioning Elisa to co-operate as well as compete with digitally-minded telcos worldwide.

For this research we interviewed six members of Elisa’s executive management:

  • Veli-Matti Mattila, CEO
  • Henri Korpi, Executive Vice President, International Digital Services, including Elisa Automate and Elisa Smart Factory
  • Vesa-Pekka Nikula, at the time of the interviews Executive Vice President, Production – the Production team is responsible for networks, IT and software underpinning all of Elisa’s operations in Finland, Estonia and new international digital services. Currently Executive Vice President, Consumer Customers.
  • Merja Ranta-aho, Executive Vice President, HR – Elisa’s HR team plays a key role in developing processes and practices that encourage continuous learning across the organisation.
  • Liisa Puurunen, Vice President, International Digital Services, International Entertainment – this team is tasked with ideation and development of new business propositions built out from Elisa’s core capabilities in the area of entertainment.
  • Tapio Turunen, at the time of the interview, Director, Business Development – this team is responsible for strategy development across Elisa. Currently Vice President, Business Development, Corporate Customers.

The figure below shows a high-level view of Elisa’s operational structure, with additional notes on how those interviewed for this research fit into the organisation.

Elisa operational model and interviewee overview

Elisa operational structure and interviewees

Source: Elisa, with STL Partners notes

Comparing Elisa’s culture with other telcos

In parallel with our research into the Elisa’s critical success factors, STL Partners has been running a survey on culture, leadership and purpose in telecoms operators. The goal of the survey is to understand how important these factors are to telcos’ success, and what types of behaviours contribute to a working environment that motivates and enables people to learn new skills and innovate.

As of November 2019, we received 19 responses from Elisa out of a total of nearly 170 respondents overall, primarily from other European operators, as well as some from North America, Asia Pacific, and the Middle East. The results illustrated in the graphic below show a stark difference between how people in Elisa perceive their culture and leadership compared to their peers.

Elisa’s culture is perceived as significantly more effective than other telcos’

To what extent is Elisa's culture an enabler or barrier to success surveySource: STL Partners

The fact that people within Elisa feel as though the company culture is significantly more supportive to its success than in the average telco validates STL Partners’ view that it has a unique approach that others can learn from.

Elisa similarly stands out against its peers across other areas covered in the survey, such as how the organisation responds to mistakes, leadership and management styles and maturity of digital capabilities.

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Is it just a Finnish thing?

There are elements of Finnish culture and the regulatory environment that have benefitted Elisa:

  • Sisu, a Finnish word which can be translated as the spirit of determination and grit, which is considered by some to be at the heart of Finnish character.
  • Early deregulation of the telecoms industry meant that Finnish operators were further ahead than telcos in many other countries in adapting to commoditisation of telecoms services when global internet players disrupted the market
  • Unlike other European countries, the Finnish regulator never introduced a fourth mobile player, possibly because there was already strong price competition between Elisa, DNA and Telia. This has likely given the market more stability than others in Europe, as the telecoms industry has adapted to growing demand for data.

Although these circumstances have certainly helped Elisa, we believe that the position it is in today is the result of deliberate actions and processes implemented in response to its weak performance in the early 2000s, when falling revenues and curtailed dividends saw its share price plummet by 75% between January 2001 and December 2002.

Sixteen years later, Elisa has started to establish a healthy track record of pioneering digital services built on its core competences, scaling businesses in its domestic market, and expanding its international reach at pace through carefully selected acquisitions, and its share price has returned to previous highs.

Table of contents

  • Executive Summary
    • Key success factors other telcos can emulate
    • Next steps
  • Elisa stands out among telcos
    • Comparing Elisa’s culture with other telcos
    • Is it just a Finnish thing?
  • How Elisa transitioned to a digital operating model
    • A long history of innovation
    • Developing the business case for innovation the Elisa way
    • The shift to a software-defined enterprise
    • A phased approach to turning an idea or opportunity into a business
  • Critical success factors
    • Leadership: Earning shareholders’ trust
    • Vision and strategy: Striving for excellence
    • Culture and practices: Embedding systematic learning
    • An unswerving customer focus
    • Talent strategy: Giving people the autonomy to experiment
    • Partnerships
  • The long-term outlook for Elisa

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Telco innovation: Why it is broken and how to fix it

Telcos have tried innovating in many verticals

Incumbent telecommunications providers have seen their margins fall as basic telecommunications services, both fixed and mobile, have been increasingly commoditised. The need to provide differentiated services to counteract this trend is widely recognised in the industry, yet despite considerable investment and many attempts, too often new services launched by operators have failed to deliver the anticipated results. Yet some, especially in mobile banking and related services, have proved successful. Why is this so?

This report focuses on product and service innovation for customers, rather than on innovation in sales, marketing, finance, operations or networks. It addresses the introduction of new and innovative services and not the repackaging of existing communications services, for example in new pricing and service bundles (see Figure 2).

It looks at examples from a range of services, covering most of the new types of services introduced by MNOs over the past decade. These include:

  • Messaging: RCS and its competitors
  • Mobile financial and insurance services: Orange Money / Orange Bank, Millicom/Tigo’s joint ventures
  • Health: O2 Telehealth, Telenor’s Tonic health service
  • Smart home: AT&T’s Digital Life, Deutsche Telekom’s Qivicon
  • Lifestyle: Turkcell’s range of apps and Vodacom’s Mezzanine

We have covered many of these individually in previous reports, looking at how they were developed and have evolved over time, and whether and why they are (or we expect them to be) successful.

This report seeks to identify the common factors that led to success or failure, in order to establish some best practices for telcos in innovation. While we recognise that there are often several causes of success and failure, in some cases a single failure can undo much good work.

Previous reports this one builds on include:

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Product development or true diversification: How ambitious should telcos be?

Historically, telcos have aimed to find new customers for existing telecoms services, where the their market is not yet saturated, or expanding geographically to achieve scale. However, most telecoms markets are now nearly saturated – at least in the areas that telcos can profitably reach – so true service innovation, corresponding to the right hand side on the figure below, is now a crucial component for long term revenue growth.

The seven telco innovations discussed in this report are shown on the figure below. It is worth noting the progression Orange has made in building on its experience with its mobile money service to providing full banking services. This is highlighted in the diagram by the arrow, and is discussed more fully in the body of this report.

Most telcos innovation falls in the product development category on the Ansoff matrix

Telco innovations plotted on the Ansoff matrix

Source: STL Partners. For more on market development opportunity, see STL Partners report Making big beautiful: Multinational telcos need the telco cloud

In theory, one of the most effective ways of maximising the chances of success, and achieving the scale required to make a significant impact on revenues and profitability, is for operators to select services that target a large part of their existing customer base.

However, our analysis of the telco innovations in this report shows that there is actually little correlation between the distance from telcos’ core customer base and level of success. This because by tying new products and services too closely to their existing customer bases, telcos are actually limiting their ability to scale. While this approach is intended to help them compete more effectively against their peers, by increasing loyalty for core telecoms services, in reality, any telco-driven product development innovation is likely to compete with network agnostic service providers. So while it may make sense to offer something only to existing customers at the start, to truly scale telcos need to reach a wider market.

Orange is a good example of this transition. While its mobile money services in Africa remain tied to its telecoms customer base, its move into full-fledge banking in France is separate from telecoms services. As it rolls out full banking services across its footprint, this separation is likely to become more entrenched.

Many of the examples discussed in the main body of the report, including AT&T’s Digital Life, Orange Money and O2’s Telehealth venture were set up as separate businesses, which allowed their initial development to progress well. But this was not enough on their own to make them successful.

How successful have telcos been?

Comparing telcos’ investments into service innovations shows that, too often, they have made bets on areas that seem like natural opportunities for new services, but failed to gain traction because they didn’t do a rigorous enough assessment of the conditions for success.

To succeed in innovation, telcos must evaluate proposed new services or products much more painstakingly across three areas:

  1. User needs and requirements: that the product or service meets a real user need. This breaks down into two points:
    • The product or servicemust be easy to use and fit into users’ lifestyles.
    • And at the right price point. Most consumer products need a free tier to encourage customers to try and engage before paying (if ever). In some cases, the end user might not be the payer, so if that is the case then telcos need to identify the payer and ensure the product is relevant and valuable for them, too.
  2. Market structure and characteristics: clear vision of where the ROI is coming from. There are two main options for ROI – increased customer loyalty and new revenue.
    • For loyalty, telcos need a clear means of measuring whether the product or service is improving retention.
    • If telcos are seeking to build new revenue, they need to be realistic about how long it will take to achieve profitability and the size of the opportunity. Too often, telcos give up because they deem a new venture not valuable enough compared with the core business..
  3. Business structure: deciding on whether to develop something in house, to set up a joint venture, or acquire, and what the relationship is with the core business. The further away a new product or service is from the core business, the more independence it needs to develop and grow.

In this report, we compare the approaches of seven telco innovations, drawing on in-depth analysis from previous STL Partners reports, summarised in the table below.

Strategy is more important that degree of difficult for successful innovation

Assessment of quality of strategy and execution for telco innovationsSource: STL Partners

Our analysis shows that the difficulty of the innovation, i.e. whether it is product development or diversification into a new vertical, is less important to success than doing the difficult strategy and planning work outlined above.

For instance, while RCS is very closely tied to telcos’ existing customers and services, the necessary cooperation between telcos to bring it to market in a way that is valuable to consumers and potential enterprise customers was unrealistic from the start. By constrast, Tonic’s health insurance proposition is very different from Telenor’s core telecoms services, but Tonic’s clear vision and strategy, and ability to adapt to customer needs, have underpinned its early success in Bangladesh.

Read the full report to see a detailed assessment of each innovation across the three categories.

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Investing in original content: Is it worth it?

Introduction

An in-depth analysis of whether telcos can make money from original content, this executive briefing builds on previous STL reports exploring the role of telcos in entertainment and advertising:

This new report evaluates the success of AT&T, BT and Swisscom’s original content and related distribution strategies, as well as identifying lessons to be learnt. It also appraises their investment in original content, exclusive content (e.g. sport) and buying content creators (e.g. Time Warner).

Following the acquisition of Time Warner, AT&T is a content owner and content distribution colossus. What is its underlying objective for providing a wide range of over-the-top (OTT) services, including DTV Now (satellite TV service delivered over-the-top) and AT&T Watch (live and on demand content)? How will content from Time Warner’s acquisition in June 2018 be incorporated into its products?

Has BT’s head on clash with Sky in the market with live sports met expectations? Has its heavy investment in football grown its revenue take, broadband subscriptions and attracted eyeballs?

Swisscom has grown to become Switzerland’s largest TV provider, using live sports as its differentiator. What other initiatives have contributed to its market leadership and can it maintain its dominance?

The case for investing in original content

Telcos typically invest in original content to achieve three objectives:

  • to open up new sources of revenue (direct subscription sales, wholesale distribution and ads sales)
  • to increase sales of core telco services/products (e.g. fixed broadband)
  • to raise their profile, increase their relevance and build brand loyalty.

But trying to pursue all these objectives simultaneously requires some difficult compromises – maximising content revenues means distributing the content as widely as possible, which means it no longer becomes a competitive differentiator through which to sell connectivity and build loyalty to the core proposition. In any case, regulators may require telcos to make some original content, notably the rights to live sport, available to competitors.

Therefore, achieving all of these objectives requires telcos to perform a delicate balancing act between making their content widely available and integrating it with the core connectivity proposition from both a technical perspective (using a cloud-based or physical set-top box) and a commercial perspective (attractive bundles and/or zero-rating the content). They need to perform this balancing act at a time when the digital entertainment market is in upheaval – customers in many markets are migrating from traditional pay TV (one or two year contracts) to video-on-demand subscriptions (month-by-month).

Not all content is equal

Ownership of sports rights should guarantee an audience linked to the size of the fanbase. Investing in original content, such as dramas, is far riskier. For every series of The Crown, a Netflix hit airing its third series in 2019, there is Marco Polo that cost US$200 million, cancelled after two series and an abject failure. Telco shareholders would baulk at taking such risks, given many have qualms about BT’s investment in Premier League rights (32 matches a season, 2019-22), which are equivalent to £9.2 million per game.

Alternatively, telcos could purchase a content developer/media company with a back catalogue of proven programming, as AT&T has done by buying Time Warner in June 2018. Investment in original content is a differentiator for pay TV providers (e.g. Sky) as well as over-the-top players (e.g. Netflix). Netflix has dramatically increased its investment in original content from its early foray with the House of Cards. During 2018 Netflix invested about US$6.8 billion in original content, including films, simultaneously screening some films at cinemas (e.g. Coen brothers’ The Ballad of Buster Scruggs).

However, the audience for expensively-created content is finite. They are binge watching fewer shows. In the USA, according to Hub Entertain Research, viewers watched an average of 4.4 favourite shows in 2018, compared to 5.2 in 2016. These viewers increasingly find out about favourite shows through advertisements and watch them on an video-on-demand service.

More and more competition

Although they benefit from economies of scale and scope, the major global online players are not oblivious to the risks of creating original content. Amazon somewhat mitigates the risk by using co-production. Amazon is working with pay TV companies (e.g. Sky / Sky Atlantic) as well as public service broadcasters (BBC). The co-production of content with Sky provides Amazon with the rights to show series outside Sky’s footprint. For the BBC, a junior partner in the relationship, it gets to air the co-produced programmes after Amazon has shown them (e.g. the final three series of Ripper Street). Apple is also investing US$1 billion in original content, which will be distributed by its new streaming service[1]. The new service, business model unknown, will also be accessible on non-Apple products. New Samsung, Sony, LG and Vizio TVs will support Apple iTunes movies and TV shows[2].

It is not just the major Internet platforms that are competing with telcos for eyeballs. Major content rights owners are also taking their first steps to launch direct-to-consumer services. The Disney Play streaming service will launch in late 2019, once its existing distribution agreement with Netflix comes to an end. New sports streaming services are vying for attention, e.g. DAZN owns the rights to English Premier League (EPL) in Germany, Switzerland, Austria and Japan, as well as combat sports (e.g. Matchroom Boxing and UFC) and other sports. Many sports federations also provide direct-to-consumer streaming services, alongside the sale of linear TV sports rights. These include The National Hockey League’s NHL.TV and National Football League’s GamePass in the USA, and the English Football League (EFL)’s iFollow service in the UK. Consumers outside the UK can also pay to stream EFL matches.

The importance of multiple content distribution models

But it is not just about having the right content: consumers also want the right commercial proposition. Pay TV providers recognise that not all consumers are willing to sign-up to 12- or 18-month contracts. Falling pay TV subscription rates, and a realisation that one-size doesn’t fit all has seen the emergence of month-to-month skinny pay TV packages. These offers may or may not be packaged with broadband connectivity.

Those that do subscribe to traditional pay TV will not subscribe to a second pay TV subscription, but many households are willing to subscribe to more than one additional over-the-top service. Half of the video-on-demand (SVOD) subscribers in the UK subscribe to more than one VOD service (Amazon, Netflix, NOW TV), and 71% of households with a VOD service also have a pay TV subscription (according to GfK SVOD Tracker).

There are essentially four key roles in the content value chain, identified and discussed by STL partners in previous reports. These roles are programme, package, platform and pipe. Traditionally, telcos’ primary objective is to sell as many pipes as possible. To that end, they offer packages of content (generally TV channels), which are sold on a subscription basis or offered for no fee, supported by advertising. A platform is used to distribute the channels, films and other content created and curated by another entity.

Telco content distribution models

four ways to monetise original content: pay TV, bundling and OTT

Source: STL Partners

Telco revenue from content and related services

An in-depth analysis of telcos’ return on investment in sports or film rights or original content is tricky. Telcos are not in the habit of revealing content revenue data. Figure 5 summarises the main metrics that need to be considered to evaluate the effectiveness of telcos’ investment in content.

The revenues that telcos can generate from content consist primarily of:

  1. Sale of the content to consumers
  2. Sale of banner, video and TV ads that sit / roll alongside the content
  3. Wholesale of content via third-party platforms
  4. Net additions of broadband / mobile pipes, increased ARPU/C and reduction in user/connection churn, increase in broadband / mobile pipe revenue.

Measuring return on investments in content

measuring original content ROI through direct sales, advertisement, wholesale and connectivity

Source: STL Partners

In the rest of this report, we evaluate AT&T, BT and Swisscom against these criteria.

Contents:

  • Executive Summary
  • Introduction
  • The case for investing in original content
  • More and more competition
  • The importance of multiple content distribution models
  • Telco revenue from content and related services
  • Swisscom sells content with strings attached
  • Investing in rights holders to secure original content
  • It is about the packaging, as well as the content
  • Limited advertising
  • Enriching the viewer experience
  • Mixed financial results
  • BT and its big bet on live sport
  • BT TV reaches an inflexion point
  • BT TV – getting more expensive
  • Is BT Sport changing direction?
  • BT’s broader branding strategy
  • BT as a content aggregator
  • BT Sport is available to rivals’ pay TV customers
  • Is BT making a financial return?
  • Is there a case for continued investment?
  • AT&T takes on Netflix
  • King of content?
  • DirecTV Now: A lackluster start
  • Takeaways: Walking a tightrope between old and new
  • A shaky financial performance to date
  • Conclusions

Figures:

  1. The differing strategies of Swisscom, BT and AT&T
  2. AT&T’s Entertainment Group is dragging down the broader business
  3. Rating the different elements of telcos’ original content strategy
  4. Telco content distribution models
  5. Measuring return on investments in content
  6. Swisscom’s TV subscriptions and market share
  7. Summary of Swisscom’s TV products
  8. Cost and availability of Teleclub Sport
  9. The growth in Swisscom’s TV Connections and Bundles
  10. Swisscom’s content strategy hasn’t arrested the decline in wireline revenues
  11. Swisscom’s ballpark annual revenue run rate from TV
  12. BT TV packages, February 2019 compared to end 2015
  13. BT has bought more low-grade matches and is paying less per game
  14. How BT tries to monetise its sports content
  15. A breakdown of BT’s brands and target segments
  16. BT Sport App packages across its multiple brands
  17. How BT is using content partnerships to broaden its offering
  18. BT Sport has helped to drive a major uplift in annual revenue
  19. BT’s Consumer Division has struggled to increase profitability
  20. BT’s TV and broadband customers are now flatlining
  21. Growth in BT TV and BT Sport connections has tailed off
  22. BT’s consumer fixed line revenue has been fairly flat
  23. BT Sport residential and commercial revenue estimates 2018 and 2022
  24. AT&T’s telecom, media and entertainment businesses (February 2019)
  25. AT&T’s pay TV and SVOD services (as of February 2019)
  26. The Entertainment Group’s revenues are slipping
  27. AT&T’s traditional pay TV business is in decline
  28. AT&T’s broadband connections are fairly flat
  29. AT&T’s Entertainment Group is seeing its top line squeezed
  30. AT&T is combining inventory to help increase ad spend

[1] Apple TV will be launched in 2019 https://www.fool.com/investing/2018/12/15/apples-original-content-ambitions-are-growing.aspx,  https://www.macworld.co.uk/news/apple/apple-streaming-service-3610603/

[2] Content can be streamed from an Apple device using Apple’s AirPlay wireless streaming protocol stack, which will be integrated into TVs.