What can telcos learn from Silicon Valley?

Silicon Valley: The promise of “Open” Innovation and agile experimentation

Until the early 2000s, Closed Innovation, based on a model of internal, centralised research and development, was the de facto way for companies to protect intellectual property and gain competitive advantage. Latterly, assisted by the tailwinds of increasing connectivity, there has been a shift in mindset towards Open Innovation – sourcing and acquiring external expertise, scanning the environment, and tapping into ideas and input from beyond the four walls of the business. Today, the array of innovation models is varied and ever-expanding: scouting, crowdsourcing, idea competitions, collaborative design and development, spin-outs, corporate ventures, incubators, joint ventures, in- and out-licensing of intellectual property, consortia, innovation platforms and ecosystems to name but a few. Increasingly, this activity is taking place in clusters – auspicious geographic concentrations of interconnected companies and institutions – the most famous of which is Silicon Valley.

Thanks to a unique confluence of assets – the presence of tech giants and leading research universities, an abundance of venture capital and skilled labour, a disruptive culture, and a relatively benign regulatory environment – Silicon Valley is one of the world’s leading hotbeds of innovation.

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Hundreds of organisations of various sizes and industries – even those with plentiful local R&D talent in their home markets – have been drawn to the Valley in the hope of importing outside-in innovation, identifying new products and partners, and harnessing its ecosystem to solve strategic problems. Telcos are no exception: since the early 2000s, telcos’ core businesses have come under increasing pressure from OTT players as well as wider market forces to innovate and grow. Open Innovation is the antithesis of telcos’ traditional, vertically-integrated approach of translating their own R&D efforts into internally-developed products and services, typically tightly linked to their existing customer bases and offerings. Operators are hoping some of the Valley’s magic dust of disruptive thinking and speed of execution will rub off on them.

However, insiders sometimes quip that the Boeing 747s flying out of San Francisco International Airport have “amnesic” properties. The executive groups that typically descend upon the Valley, hoping to learn from its incumbents both large and small, take copious notes and leave fired up about re-energising innovation in their home base. But once back within the corporate environment, the seeds of innovation struggle to germinate and the majority of initiatives fail to generate any substantial return on objectives. There appears to be a degree of cognitive dissonance between the expectation of such engagements, and their impact.

Other approaches to the Valley, from CVCs (Corporate Venture Capital investments in start-ups) to environmental scanning and venture-building, are better established, with hundreds of corporate outposts currently in place. Four major routes to outside-in innovation, with illustrative examples are shown below.

Four major routes to outside-in innovation

Open Innovation

Unfortunately, truly transformational success stories are few and far between (gains tend to be small or incremental in nature) and there is a long tail of failures and missed opportunities.

For STL Partners, this raises a series of questions:

  • What are telcos hoping to learn from Silicon Valley and how are they going about it?
  • What are the challenges they face in implementing and operationalising what they learn?
  • What can they do differently to overcome some of the common pitfalls of Open Innovation to drive more significant successes?

In addition to its own primary and secondary research, STL Partners explored the challenges and opportunities in depth with Jean-Marc Frangos – Executive Fellow at INSEAD, Executive in Residence at the Plug and Play Tech Center, and Advisor to the Telecom Council of Silicon Valley and former Senior VP of BT’s Innovation function. Located in the Bay Area, Jean-Marc benefits from a 360° view of the disruptive technologies, revenue opportunities and shifts in the in the Valley landscape, and advises European and Asian players on how to integrate such innovations into the incumbent telecoms environment.

What are telcos hoping to do in Silicon Valley?

There are currently somewhere between 300 and 500 corporate outposts in Silicon Valley, as varied in their industries, size and depth of operations as they are in their motives, which are not exclusively tech-focused. The majority have a relatively small footprint, such as those acting as an innovation “antenna” or corporate venture capital (CVC) office, although some have established a more structured presence, for example an innovation lab or R&D centre.

Despite the diversity of these outposts, their common goal is to sense and respond to technology shifts, whether they be disruptive opportunities or disruptive threats. Many of these corporations may be struggling to keep pace with innovation in their own industry and are looking to infuse their organisation with a more entrepreneurial mindset and attract creative talent to gain competitive advantage. In the case of telcos, most are already facing disruption while the remainder can see it looming on the horizon.

The key drivers for innovation outposts include:

  • Keeping a finger on the pulse of trends originating in the Valley;
  • Scouting emerging technologies with a view to investment, incubation, acquisition or some form of collaborative partnership and identifying new channels to market, new business models or new people/processes;
  • Acquiring expertise or best practices from outside the organisation that can be internalised (e.g. to evolve the corporate culture) with a view to accelerating the innovation cycle from start-up through Minimum Viable Product (MVP) to initial production.

Table of contents

  • Executive summary
  • Introduction
  • What are telcos hoping to do in Silicon Valley?
    • The dominant innovation outpost models in Silicon Valley
    • What to learn in Silicon Valley: Four levels of learning
    • Increasing acceptance of evolving business models
  • What should telcos do differently?
    • Purpose: Match effort to expectation
    • Whom to learn innovation lessons from in Silicon Valley
    • People: Who goes to the Valley, and who stays home
    • Practices: Dos and don’ts
  • Telco dynamics and challenges
    • Ambidextrous transformation is a hard art to master
    • Two-speed IT puts the brakes on digital culture
    • Capital-intensive infrastructure companies have a bigger turning circle
    • Design thinking must infuse the transmission belt
    • Telcos may struggle to win the battle for tech talent
  • Conclusion
  • Index

Related research

 

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SK Telecom: Lessons in 5G, AI, and adjacent market growth

SK Telecom’s strategy

SK Telecom is the largest mobile operator in South Korea with a 42% share of the mobile market and is also a major fixed broadband operator. It’s growth strategy is focused on 5G, AI and a small number of related business areas where it sees the potential for revenue to replace that lost from its core mobile business.

By developing applications based on 5G and AI it hopes to create additional revenue streams both for its mobile business and for new areas, as it has done in smart home and is starting to do for a variety of smart business applications. In 5G it is placing an emphasis on indoor coverage and edge computing as basis for vertical industry applications. Its AI business is centred around NUGU, a smart speaker and a platform for business applications.

Its other main areas of business focus are media, security, ecommerce and mobility, but it is also active in other fields including healthcare and gaming.

The company takes an active role internationally in standards organisations and commercially, both in its own right and through many partnerships with other industry players.

It is a subsidiary of SK Group, one of the largest chaebols in Korea, which has interests in energy and oil. Chaebols are large family-controlled conglomerates which display a high level and concentration of management power and control. The ownership structures of chaebols are often complex owing to the many crossholdings between companies owned by chaebols and by family members. SK Telecom uses its connections within SK Group to set up ‘friendly user’ trials of new services, such as edge and AI

While the largest part of the business remains in mobile telecoms, SK Telecom also owns a number of subsidiaries, mostly active in its main business areas, for example:

  • SK Broadband which provides fixed broadband (ADSL and wireless), IPTV and mobile OTT services
  • ADT Caps, a securitybusiness
  • IDQ, which specialises in quantum cryptography (security)
  • 11st, an open market platform for ecommerce
  • SK Hynixwhich manufactures memory semiconductors

Few of the subsidiaries are owned outright by SKT; it believes the presence of other shareholders can provide a useful source of further investment and, in some cases, expertise.

SKT was originally the mobile arm of KT, the national operator. It was privatised soon after establishing a cellular mobile network and subsequently acquired by SK Group, a major chaebol with interests in energy and oil, which now has a 27% shareholding. The government pension service owns a 11% share in SKT, Citibank 10%, and 9% is held by SKT itself. The chairman of SK Group has a personal holding in SK Telecom.

Following this introduction, the report comprises three main sections:

  • SK Telecom’s business strategy: range of activities, services, promotions, alliances, joint ventures, investments, which covers:
    • Mobile 5G, Edge and vertical industry applications, 6G
    • AIand applications, including NUGU and Smart Homes
    • New strategic business areas, comprising Media, Security, eCommerce, and other areas such as mobility
  • Business performance
  • Industrial and national context.

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Overview of SKT’s activities

Network coverage

SK Telecom has been one of the earliest and most active telcos to deploy a 5G network. It initially created 70 5G clusters in key commercial districts and densely populated areas to ensure a level of coverage suitable for augmented reality (AR) and virtual reality (VR) and plans to increase the number to 240 in 2020. It has paid particular attention to mobile (or multi-access) edge computing (MEC) applications for different vertical industry sectors and plans to build 5G MEC centres in 12 different locations across Korea. For its nationwide 5G Edge cloud service it is working with AWS and Microsoft.

In recognition of the constraints imposed by the spectrum used by 5G, it is also working on ensuring good indoor 5G coverage in some 2,000 buildings, including airports, department stores and large shopping malls as well as small-to-medium-sized buildings using distributed antenna systems (DAS) or its in-house developed indoor 5G repeaters. It also is working with Deutsche Telekom on trials of the repeaters in Germany. In addition, it has already initiated activities in 6G, an indication of the seriousness with which it is addressing the mobile market.

NUGU, the AI platform

It launched its own AI driven smart speaker, NUGU in 2016/7, which SKT is using to support consumer applications such as Smart Home and IPTV. There are now eight versions of NUGU for consumers and it also serves as a platform for other applications. More recently it has developed several NUGU/AI applications for businesses and civil authorities in conjunction with 5G deployments. It also has an AI based network management system named Tango.

Although NUGU initially performed well in the market, it seems likely that the subsequent launch of smart speakers by major global players such as Amazon and Google has had a strong negative impact on the product’s recent growth. The absence of published data supports this view, since the company often only reports good news, unless required by law. SK Telecom has responded by developing variants of NUGU for children and other specialist markets and making use of the NUGU AI platform for a variety of smart applications. In the absence of published information, it is not possible to form a view on the success of the NUGU variants, although the intent appears to be to attract young users and build on their brand loyalty.

It has offered smart home products and services since 2015/6. Its smart home portfolio has continually developed in conjunction with an increasing range of partners and is widely recognised as one of the two most comprehensive offerings globally. The other being Deutsche Telekom’s Qivicon. The service appears to be most successful in penetrating the new build market through the property developers.

NUGU is also an AI platform, which is used to support business applications. SK Telecom has also supported the SK Group by providing new AI/5G solutions and opening APIs to other subsidiaries including SK Hynix. Within the SK Group, SK Planet, a subsidiary of SK Telecom, is active in internet platform development and offers development of applications based on NUGU as a service.

Smart solutions for enterprises

SKT continues to experiment with and trial new applications which build on its 5G and AI applications for individuals (B2C), businesses and the public sector. During 2019 it established B2B applications, making use of 5G, on-prem edge computing, and AI, including:

  • Smart factory(real time process control and quality control)
  • Smart distribution and robot control
  • Smart office (security/access control, virtual docking, AR/VRconferencing)
  • Smart hospital (NUGUfor voice command for patients, AR-based indoor navigation, facial recognition technology for medical workers to improve security, and investigating possible use of quantum cryptography in hospital network)
  • Smart cities; e.g. an intelligent transportation system in Seoul, with links to vehicles via 5Gor SK Telecom’s T-Map navigation service for non-5G users.

It is too early to judge whether these B2B smart applications are a success, and we will continue to monitor progress.

Acquisition strategy

SK Telecom has been growing these new business areas over the past few years, both organically and by acquisition. Its entry into the security business has been entirely by acquisition, where it has bought new revenue to compensate for that lost in the core mobile business. It is too early to assess what the ongoing impact and success of these businesses will be as part of SK Telecom.

Acquisitions in general have a mixed record of success. SK Telecom’s usual approach of acquiring a controlling interest and investing in its acquisitions, but keeping them as separate businesses, is one which often, together with the right management approach from the parent, causes the least disruption to the acquired business and therefore increases the likelihood of longer-term success. It also allows for investment from other sources, reducing the cost and risk to SK Telecom as the acquiring company. Yet as a counterpoint to this, M&A in this style doesn’t help change practices in the rest of the business.

However, it has also shown willingness to change its position as and when appropriate, either by sale, or by a change in investment strategy. For example, through its subsidiary SK Planet, it acquired Shopkick, a shopping loyalty rewards business in 2014, but sold it in 2019, for the price it paid for it. It took a different approach to its activity in quantum technologies, originally set up in-house in 2011, which it rolled into IDQ following its acquisition in 2018.

SKT has also recently entered into partnerships and agreements concerning the following areas of business:

 

Table of Contents

  • Executive Summary
  • Introduction and overview
    • Overview of SKT’s activities
  • Business strategy and structure
    • Strategy and lessons
    • 5G deployment
    • Vertical industry applications
    • AI
    • SK Telecom ‘New Business’ and other areas
  • Business performance
    • Financial results
    • Competitive environment
  • Industry and national context
    • International context

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How the Coordination Age changes the game

Introduction: Three ages of telecoms…

In this report, we elaborate on what we outlined in our recent report, The Coordination Age: A third age of telecoms, as a completely new paradigm for the telecoms industry. In the earlier report, we argue that this new age of telecoms – the Coordination Age – follows on from two previous, and still ongoing, paradigms for the telecoms industry: the Communications Age and the Information Age.

Chronologically, the three ages may be represented as follows:

The coordination age is beginning now

As the above diagram suggests, parts of the industry still exhibit characteristics of the earlier ages; and we are still working through the consequences of the paradigm shift from the Communications Age to the Information Age, even as we stand on the cusp of a further shift to the Coordination Age.

The report revisits our narrative of the three ages of telecoms to explore the different social, economic and cultural drivers and functions of telecoms in each period and the implications for telcos.

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Telecoms characteristics and functions have evolved over time

The fundamental service and business model characteristics of these three ages, as described in the previous report, are recapped in Figure 2 below:

Figure 2: Basic functions of telecoms in the three telco eras

telecoms functions across three ages

Source: STL Partners

The above table illustrates how the functions provided by telecoms services and networks across the three ages of the industry are radically different. In summary, we can say that:

  • In the Communications Age, telecoms networks and services were ‘physical’ in character: physical equipment and facilities delivering physical services; the core services being connectivity and communications centering on voice, which was transmitted by physical means (e.g. for voice, analogue electrical signals sent over wired or wireless networks).
  • In the Information Age, by contrast, while telecoms networks remained – initially, at least – physical in character and delivered increasingly advanced forms of connectivity, the services became digital. The ultimate expression of this is of course the Internet, which changed the role of the telco to that of providing the IP connectivity platform over which mainly third parties offered their web and digital services. Another way of putting this is that whereas telecoms network connectivity remained tied to physical hardware, the services were delivered via standardised software and compute devices: PCs and later smartphones and tablets. In the present era of NFV and SDN, the basis on which the connectivity itself is organised and controlled is now also migrating to (would-be) standardised software operating over COTS hardware.
  • The emerging Coordination Age of telecoms is not purely an extension of network and societal digitisation, but could be seen as a 180o reversal of its parameters, in this respect: instead of being a primarily physical connectivity system processing digital inputs to deliver digital services (as in the Information Age), the network becomes a compute- and software-centric system processing real-world inputs to deliver real-world outcomes. We will discuss further these aspects of the new paradigm later in this report. But examples of what we mean here include networked compute-driven applications around driverless cars, IoT, and automation of industrial and enterprise processes across many verticals.

The three telecoms ages correspond to different socio-economic and human functions

We set out how the general service and network characteristics of the Communications, Information and Coordination Ages relate to the different social, economic and human functions they serve.

Throughout this report, we describe what we see as some of the fundamental social, economic, cultural and technological drivers of the different telecoms networks and services across these three ages. The three ages represent distinct paradigms in which telecoms serves different needs and purposes.

We describe these socio-economic and cultural purposes through a simplified version of the psychoanalytical theories of Jacques Lacan. It seems legitimate to explore telecoms through this lens, as telecoms networks are human constructs, and telecoms services are social, economic and cultural in their purpose and value to modern society.

In brief, Jacques Lacan distinguishes between three interdependent orders of psychological experience: the ‘Real’, the ‘Imaginary’ and the ‘Symbolic’.

  • The ‘Real’ is the physical aspect of our existence: our bodies, the material universe, and the physiological determinants experience, including basic emotions
  • The ‘Imaginary’ refers to the sub-rational and sub-linguistic phenomena of mental experience, through which we form mental impressions of sensory experience (e.g. sights, sounds, etc.). Together with the emotional impact with which they are associated, these ‘imaginary’ elements form the foundation of our self-image and view of our place in the world
  • The third order is that of the ‘Symbolic’, which refers to language and other social, logical and cultural codes through which we give meaning to our lives, acquire knowledge, order our activities, and structure society and our relationships within it.

This is important because it provides a way to make sense of the paradigm shifts that have taken place throughout the industry’s history. And it also provides a narrative account of the human needs – including economic and social needs – that are invested in telecoms services. Understanding what customers want – and above all, what can offer real benefit to them – is the key to driving future value.

We argue this is relevant to the situation that telcos find themselves in today and to their strategic options for the future. In our view, telcos failed to adapt their business models to capitalise on the digital service opportunities of the Information Age. This was because the value drivers of the Information Age were so radically different from those that prevailed over the much longer time span of the Communications Age.

Learning the lessons from this previous paradigm shift will help telcos be more aware of how they need to adapt to another new paradigm – the Coordination Age – that is emerging. There may be only a very short window of opportunity for telcos to adjust their business models and organisations to become ‘coordinators’ of the network- and AI-based, automation-enabling and resource-optimising services of the near future.

Contents:

  • Executive Summary
  • Introduction: Three Ages of Telecoms
  • Differing characteristics and functions of telecoms across the three ages
  • The three telecoms ages correspond to different socio-economic and human functions
  • Speaking, showing and doing: The three ages of telecoms
  • The Communications Age: A telecoms of the Real, mediated by voice
  • The Information Age: A telecoms of the Imaginary, mediated by the screen
  • The Coordination Age: A telecoms of outcomes, driven by active intelligence
  • Coordination services rely on contextual and physical data, and the physical aspects of networking
  • Summary: Characteristics and purposes of telecoms across its three ages
  • Conclusions
  • Recommendations: A new telco age brings new opportunities but also renewed responsibilities

Figures:

  1. The three ages of telecoms.
  2. Basic functions of telecoms in the three telco eras
  3. ‘Real’, physical characteristics of the Communications Age telecoms network and service
  4. The core telecoms service – circuit-switched telephony – in the first telecoms age
  5. Comparison of the social, service and technology characteristics of Communications Age and Information Age telecoms
  6. Permanent, virtual presence to others replaces real-time voice communications
  7. Driverless car ecosystem in the Coordination Age
  8. Comparison between the three telecoms eras

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Why CFOs must start to drive telecoms business model change

The telecoms operator’s conundrum – how to break the service innovation status quo

Telco CFOs need to upweight telecoms R&D investments to drive differentiating service innovations. If they don’t, telcos will recede further into the category of low yield, low growth commodities.

The relationship between a company’s financial and commercial model is complex:

  • The financial model determines the commercial model of a company – what commercial goals it is able to pursue and how it is able to pursue them
  • But the commercial model also feeds directly back into the financial model of the business and determines how resources are allocated

The interrelatedness of commercial and financial models means that change is sometimes difficult – a ‘chicken and egg’ situation occurs in which each model relies on change in the other before it can change.

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This ‘chicken and egg’ situation is apparent within the telecoms industry:

  • Business owners within operators want their organisation to become more agile, more flexible, more innovative which implies having resources that can be (re)deployed quickly, but they find it hard to secure budget owing to the huge and slow capital investment programmes involved in upgrading networks
  • Finance departments at the same organisations want to deploy resources efficiently to maximise returns and capital investment in the existing business model (infrastructure that drives connectivity revenue) has a much stronger ROI than speculative operating expenditure in platforms and services that have (so far) proved unsuccessful

The result is status quo: the same financial model drives the same commercial model at a time when returns for core services are reducing every year.

 

We start by mapping out the relationship between financial and commercial models…

In this framework, we use R&D operating expenditure (vertical axis) as a proxy for service innovation. We recognise that this is not perfect as service innovation requires much more than R&D. Nevertheless, it is probably fair to say that service innovation is unlikely to be sustained without material R&D expenditure.

Capital investment (horizontal axis) is a proxy for infrastructure build – developing assets which will generate returns over a long period of time such as buildings, manufacturing plants, telecoms networks.

Telcos are classic ‘Moat builders’, making money from capital investment in infrastructure and putting little into telecoms R&D investments.

The Internet giants and tech players typically start out as ‘service differentiators’, keeping capital investment light and instead focusing on flexible operating expenditure to drive service innovation. Increasingly however, they are investing capital in cloud computing infrastructure, to construct moats to protect their services – giving them cheaper distribution and better customer experience than smaller competitors.

A framework for understanding capex versus R&D spending

Source: STL Partners

…which reveals that telcos are moat builders and are radically out-invested in service innovation by tech players

Historically, for telecoms operators service innovation resulted from network capital investment because voice and messaging services were integrated into there were no alternative sources for communications – a customer had to use the service provider by the telecoms operator:

  • Telcos effectively outsourced innovation to Network Equipment Players (NEPs)
  • There was no need to invest significantly in R&D

Now, services are independent of the network (thanks to the internet) – telco customers can use communication (and other) services provided by dozens of third-parties and value has shifted to companies (such as the internet giants and tech companies) that invest in service innovation.

Telcos still invest only in infrastructure but value is increasingly in network-independent services so they are missing out on value-creation and are instead competing on price on the only commodity service that third-parties cannot substitute: connectivity.

R&D and Capex % of Revenue, 2017

Source: Company accounts, STL Partners analysis

Proof point: Internet players are vastly more valuable than telecoms operators

Revenue and Market Capitalisation 2017. Telco v Internet

Source: Company accounts, stock market data, STL Partners analysis

Seven internet giants’ market capitalisation is bigger than 165 telecoms operators combined because:

Service innovation + moats  Revenue + profit growth  Future value creation

In other words, telcos’ current business model (financial and commercial models) are not deemed to be strong value creators.

The result is that capital markets demand that operators hand profits back to investors in the form of high-dividend yields so that they can invest in higher-growth companies.

In the rest of this report, we outline why CFOs need to drive business model change that will enable telcos to compete more effectively as ‘Service differentiators’, and four steps they should take to start this process – fundamentally increasing telecoms R&D investments.

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The Coordination Age: A third age of telecoms

The Coordination Age

The world is entering the Coordination Age, driven by growing needs for resource efficiency and enabled by new technologies such as AI, automation, IoT, 5G, etc. What does this mean, how is it different, how is it an opportunity, and what should telecoms industry players do?

Problems, problems, problems…

The telecoms industry’s big problem

The core telecoms industry is currently close to reaching maturity as the following chart illustrates.

Figure 1: Revenue growth is grinding to a halt

Source: Data from company filings, STL Partners analysis

This approaching maturity has taken many years to achieve and is built on decades of astonishing growth in the telecoms and ICT industries as shown by just a few data points in Figure 2.

Figure 2: 30 years of telecoms in context

Source: AT&T company reports, STL Partners analysis

We’ve used AT&T as a comparator as perhaps the world’s best-known telco, and because its 1988 revenues are readily accessible. The chart shows that AT&T has grown massively but also that recent growth has slowed.

It also shows how mobile and internet use has blossomed to mass-market adoption. No-one knew in 1988 that this is what would happen by 2018, or how it would happen. Most people would have thought you were talking about science fiction if you said there would be more mobiles than people in their lifetime, and that half the world would have access to most of the world’s information.

Yet it was clear that growth in telecoms lay ahead – it seemed like a kind of economic and social gravity that communications would grow a lot. The direction that the world would take was obvious and unavoidable. So many people were not yet connected, and so much was possible in terms of improving the world’s access to information using the technologies that were coming to fruition then.

What are the big problems the world needs to solve now?

It’s not a mystery now, of course. And while there’s plenty of work to do to make the world’s connectivity better and bring the second half of the global population online somehow, it’s unlikely to bring in masses of new revenues for telcos. So why the Coordination Age?

To create major growth, you need to solve some big, valuable problems. So, what are the big problems the world needs to solve?

There are some obvious candidates, e.g.:

  • mitigating climate change and minimising its effects
  • reducing the amount of waste and harmful by-products polluting the environment
  • the distribution and availability of human resources and services such as healthcare, education, employment, and entertainment
  • the availability of, and conflicts over, physical resources such as: water, fuel, power, food, land, etc…
  • global migration and increasingly hostile nationalism
  • concerns over increasingly skewed wealth distribution between the haves and have nots, and extreme poverty
  • a desire for greater business efficiency and productivity
  • concerns over employment due to automation and global economic changes.

Moreover, time is also a resource for people and business. Both want to make best use of their time – whether it is getting things done more effectively or enjoyably.

Making the most of what we have

STL Partners believes that these are all to some extent the manifestation of the same problem: the need to make the most efficient possible use of your/the world’s resources. In Figure 3 we call this helping to “make our world run better” for short.

Figure 3: How macro forces are creating a common global need

Source: STL Partners

It’s a widespread need

The underlying need for greater resource efficiency is widespread. While sustainability arguments are prominent symptoms of the problem, there are pressing needs being expressed in all areas of the economy for better utilisation of resources.

For example, most businesses are somewhere in the process of their own transformation using connected digital technologies. Almost every aspect of business, including product design, customer experience, production, delivery and value chain orchestration is being revolutionised by ‘digital’ technologies and applications.

Examples cited at the Total Telecom Congress in October 2018, included:

  • Brendan Ives, VP Telia, Division X, said that the top priority of 70% of 500 enterprises surveyed in the Nordics was resource efficiency, with cost control a distant second at 20%.
  • Henri Korpi, Executive Vice President, New Business Development, Elisa, described a new ‘Smart Factory’ application that it offers to enhance productivity.
  • Durdana Achakzai, Chief Digital Officer, Telenor Pakistan, described its Khushall Zamindar feature phone application for 6 million small-scale farmers in rural Pakistan, that gives them access to local weather and market information and helps to improve yields.

All of these are examples of where telcos are already thinking about or addressing customers’ needs with respect to resource efficiency, in all of these cases via a B2B application, but the concerns apply to consumers too.

Ipsos’s global survey on consumer concerns from July 2018 (Figure 4) gives a flavour of what people across the world worry about today. The colouring applied to categorise the issues is STL Partners’, based on our view of their relevance to resource utilisation and distribution (and hence the Coordination Age).

Figure 4: Global population worries reflect underlying concerns about the availability and distribution of resources

Source: Ipsos global survey, July 2018, STL Partners analysis

Clearly, the weighting of needs varies in different countries, but most of the most pressing concerns relate to the distribution of economic resources within society (red bars). Concerns on social resources such as education and healthcare (orange bars) are second in prominence, while more classic ‘environmental’ worries (grey bars) are slightly further down the list.

People’s concerns also vary with their current circumstances. The closer you are to the bread-line, the more likely you are to prioritise where your next meal is coming from over the long-term future. Hence there is a natural tendency for near-term concerns to feature more highly on the list.

Many other day-to-day concerns relate to the efficient use of time (another resource): prompt service, availability of resources on-demand, business productivity, etc.

The fundamental enabler needed is coordination: the ability to enable many different players, devices, solutions, etc., to work together across the economy. These players and assets are a diverse mixture of both physical and digital entities. The drive to allow them to work together must be widespread and ultimately systematic – hence the Coordination Age.

The thorny issue of sustainability

We now live in a world of seven billion people that uses 1.7 times its sustainable resources (Figure 5). The argument goes that if we keep on at this rate we will face major environmental and societal pains and problems.

Figure 5: What does “the world need now”?

Source: Global Footprint Network

Climate change is arguably one consequence of the over-use of resources. Not everyone buys in to such concerns, and it is a matter for each person to make their own mind up.

However, even traditionally highly conservative bodies like the UN’s International Panel on Climate Change Panel (IPCC) are sounding alarm bells. In its recent report “Global Warming of 1.5 °C”, the IPCC says we may not even have thirty years to avoid the worst problems.

The editorial in The New Scientist put it like this:

“We still have time to pull off a rescue. It will arguably be the largest project that humanity has ever undertaken – comparable with the two world wars, the Apollo programme, the cold war, the abolition of slavery, the Manhattan project, the building of the railways and the roll-out of sanitation and electrification, all in one. In other words, it will require us to strain every muscle of human ingenuity in the hope of a better future, if not for ourselves then at least for our descendants.”[1]

The challenge is huge, and it reaches across all economies and sectors, not just telecoms.

Enlightened self-interest

STL Partners believes that telcos and the telecoms industry can play a significant role in addressing these issues, and moreover that the industry should move in this direction for both business and social reasons.

This should not be treated as a PR opportunity as it sometimes has in the past, as a kind of fop to regulators and governments in exchange for regulatory preferences.

It is a serious and significant problem to solve for humanity – and solving such problems is also how industries create new value in the economy.

Nonetheless, STL Partners believes that if telecoms industry players genuinely take on the challenges of addressing these issues, it may well have a significant impact on their sometimes-troubled relationships with governments and regulators. It’s one thing to be a big economic player in a market, which most telcos are, and quite another to be a big economic and social partner in an economy.

By truly aligning these goals and interests with governments telcos can start to foster a new dialogue “what do we need to do together for our economy?” This requires a very different level of heart-and-soul engagement than a well-intentioned but peripheral gesture under the Corporate Social Responsibility (CSR) banner.

Moving the needle…

Internally, the industry has long faced two self-defeating challenges.

First, the idea of ‘moving the needle’. So many new opportunities are dismissed because they simply don’t seem big enough for a telco to bother, and telcos continue to search for the next ‘killer app’ like mobile data or SMS.

Despite looking for many years, it still hasn’t been found. Yet somehow the telecoms industry has missed out on capitalising on social media, search, online commerce – pretty much all growth industries of the last twenty years.

Why? For many reasons, no doubt. But there has certainly been a kind of well-fed corporate complacency, a general aversion to commitment to new ideas, and a huge reduction in investment in R&D and innovation. Telcos’ R&D spends are minuscule compared to technology players. We will publish more on this soon, and why we think telcos need to change.

This has gone arm-in-arm with a failure to understand that new business models are not linear and predictable. A sound business case is all very well when you have a predictable business environment. This is typically the case when looking at incremental changes to existing businesses where the consequences are relatively predictable.

In new areas, especially where there are network effects and other unpredictable and non-linear relationships, it’s very hard to do. Even if you succeeded in making a numerical model, most would frown heavily at the assumptions and their consequences, and the decision-making process would stagnate on uncertainty.

Where companies have been successful in building new value, they have at some point made a serious management commitment against a need that they recognise will persist in their market, continued to invest in it, and be willing to admit and learn from mistakes. We would cite TELUS in Healthcare, and Vodafone’s M-PESA as examples where leadership has protected and nurtured the fragile flower of innovation through to growth.

… and moving the people

The second big internal challenge to change and growth has been much of the telecoms industry’s inability to excite its people to buy in to the uncertain and worrying process of change.

Change and its accompanying uncertainties are uncomfortable for most people, and they need support, guidance and ultimately leadership to see them through. Too often, companies only truly address change when they sense the ‘burning platform’ – a (usually threatening) reason that means they simply must abandon their current beliefs and behaviours.

And frankly, why should most employees care about, for example, their company ‘becoming digital’? They care about being paid, having a job with some status, and being reasonably comfortable with what they must do and who they do it with. They are working to support themselves and their families. To most, “becoming digital” sounds like another excuse for a round of job cuts – which in some cases it is.

Our argument is that there is now a powerful new job for telecoms companies to do in the Coordination Age, and that this means we all must change. If we don’t do that job and make those changes, the future will potentially be much worse for us and them as we age, and their kids as they grow.

We believe that the additional insight in the story as we now see it should make it compelling to customers, employees, governments and shareholders. But first, the management of the telecoms industry need to grasp it, improve it and lead the rest forward.

Contact us to get a full copy of the report.

Contents:

  • Executive summary
  • Problems, problems, problems…
  • The telecoms industry’s big problem
  • What are the big problems the world needs to solve now?
  • Enlightened self-interest
  • Moving the needle…
  • … and moving the people
  • The Three Ages of Telecoms
  • The first age: The Communications Age, 1850s onwards
  • The second age: The Information Age, 1990s onwards
  • The third age: The Coordination Age, 201Xs onwards
  • So, what is the Coordination Age opportunity for telcos?
  • The telecoms industry has some important assets
  • Two possible jobs for telecoms
  • Having a clear role is motivational
  • So, what should telcos and the industry do?
  • Finally, a need for the technologies we’re developing
  • Conclusions and next steps

Figures:

  • Figure 1: Revenue growth is grinding to a halt
  • Figure 2: 30 years of telecoms in context
  • Figure 3: How macro forces are creating a common global need
  • Figure 4: Global population worries reflect underlying concerns about the availability and distribution of resources
  • Figure 5: What does “the world need now”?
  • Figure 6: The three ages of telecoms
  • Figure 7: The Communication Age
  • Figure 8: An early manual telephone exchange
  • Figure 9: Electro-mechanical ‘Strowger’ exchanges automated analogue switching
  • Figure 10: The Information Age
  • Figure 11: The Coordination Age
  • Figure 12: What are the unique assets of the telecoms industry?
  • Figure 13: Broadly, there are two possible jobs for telcos
  • Figure 14: Battle of the business models – Technology vs Telco
  • Figure 15: A new corporate reality
  • Figure 16: How a unifying purpose (a “why?”) helps create value

[1] The New Scientist, Vol 240 No. 3199, page 1.

Making big beautiful: Multinational operators need the telco cloud

Telcos’ (economies of) scale in perspective

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

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

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

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

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

Figure 3: European giants struggle to create economies of scale

Contents:

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