Tag: vertical strategy

Growing B2B2X: Taking telcos beyond connectivity and 5G

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The telecoms industry is looking to revive growth

Telecoms operators have enjoyed 30 years of strong growth in all major markets. However, the core telecoms industry is showing signs of slowing. Connectivity revenue growth is declining and according to our research, annual growth in mobile operator revenues pre-COVID were converging to 1% across Asia Pacific, North America, and Western Europe. To help reverse this trend, telecoms operators’ have been investing in upgrading networks (fibre, 4G, 5G), enabling them to offer ever-increasing data speeds/plans to gain more customers and at least sustain ARPUs. However, this has resulted in the increasing commoditisation of connectivity as competitors also upgrade their networks. The costs to upgrade networks coupled with reducing margins from commoditisation have made it difficult for operators to invest in new revenue streams beyond core connectivity.

While connectivity remains an essential component in consumer and enterprises’ technology mix, on its own, it no longer solves our most pressing challenges. When the telecoms industry was first founded, over 150 years ago, operators were set up to solve the main challenge of the day, which was overcoming time and distance between people. Starting in the 1990s, alongside the creation of the internet and development of more powerful data networks, today’s global internet players set out to solve the next big challenge – affordable access to information and entertainment. Today, our biggest challenge is the need to make more efficient use of our resources, whether that’s time, assets, knowledge, raw material, etc. Achieving this requires not only connectivity and information, but also a high level of coordination across multiple organisations and systems to get it to the right place, at the right time. We therefore call this the Coordination Age.

Figure 1: New challenges for telecoms in the Coordination AgeThe coordination age overview

Source: STL Partners

In the Coordination Age, ‘things’ – machines, products, buildings, grids, processes – are increasingly connecting with each other as IoT and cloud-based applications become ubiquitous. This is creating an exponential increase in the volume of data available to drive development of advanced analytics and artificial intelligence, which combined with automation can improve productivity and resource efficiency. There are major socioeconomic challenges that society is facing that require better matching of supply and demand, which not only needs real-time communications and information exchange, but also insights and action.

In the Coordination Age, there is unlikely to be a single dominant coordinator for most ecosystems. While telecoms operators may not have all the capabilities and assets to play an important coordination role, especially compared to the Internet giants, they do have the advantage of being regulated and trusted in their local markets. This presents new opportunities for telecom operators in industries with stronger national boundaries. As such, there is a role for telcos to play in other parts of the value chain which will ultimately enable them to unlock new revenue growth (e.g. TELUS Health and Elisa Smart Factory).

New purpose, new role

The Coordination Age has added increased complexity and new B2B2X business model challenges for operators. They are no longer the monopolies of the past, but one of many important players in an increasingly ecosystem-based economy. This requires telcos to take a different approach: one with new purpose, culture, and ways of working. To move beyond purely connecting people and devices to enabling coordination, telcos will need a fundamental shift in vision. Management teams will need to embrace a new corporate purpose aligned with the outcomes their customers are looking for (i.e. greater resource efficiency), and drive this throughout their organisations.

Historically, operators have served all customers – consumers, small and medium-sized enterprises (SMEs), larger enterprises from all verticals and other operators – with a set of horizontal services (voice, messaging, connectivity).  If operators want to move beyond these services, then they will need to develop deep sector expertise. Indeed, telcos are increasingly seeking to play higher up the value chain and leveraging their core assets and capabilities provides an opportunity to do so.

However, in order to drive new revenues beyond connectivity and add value in other parts of the solution stack, telcos need to be able to select their battles carefully because they do not have the scale, expertise or resources to do it all.

Figure 2: Potential telco roles beyond traditional connectivity

Source: STL Partners

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Clearer on the vision, unclear on the execution

Many telcos have a relatively clear idea of where they want to drive new streams of revenue beyond traditional connectivity services. However, they face various technical, strategic and organisational challenges that have inhibited this vision from reaching fruition and have unanswered questions about how they can overcome these. This lack of clarity is further evident by the fact that some telcos have yet to set explicit revenue targets or KPIs for non-connectivity revenue, and those that have set clear quantifiable objectives struggle to define their execution plan or go-to-market strategy. Even operators that have been most successful in building new revenue streams, such as TELUS and Elisa, do not share targets or revenues for their new businesses publicly. This is likely to protect them from short-term demands of most telecoms shareholders, and because, even when profitable, they may not yet be seen as valuable enough to move the needle.

This report focuses not just on telco ambitions in driving B2B2X revenues beyond core connectivity and the different roles they want to play in the value chain, but more importantly on what strategies telcos are adopting to fulfil their ambitions. Within this research, we explore what is required to succeed from both a technological and organisational standpoint. Our findings are based on an interview programme with over 23 operators globally, conducted from June to August 2020. Our participant group spans across different operator types, geographies, and types of roles within the organisation, ensuring we gain insight into a range of unique perspectives.

In this report, we define B2B2X as a business model which supports the dynamic creation and delivery of new services by multiple parties (the Bs) for any type of end-customer (the X), whether they be enterprises or consumers. The complexity of the value chains within B2B2X models requires more openness and flexibility from party providers, given that any provider could be the first or second ‘B’ in the B2B2X acronym. This research is primarily focused on B2B2X strategies for serving enterprise customers.

In essence, our research is focused on answering the following key question: how can operators grow their B2B2X revenues when traditional core connectivity is in decline?

Table of Contents

  • Executive Summary
  • Introduction
    • The telecoms industry is looking to revive growth
    • New purpose, new role
    • Clearer on the vision, unclear on the execution
  • Beyond connectivity, but where to?
    • “Selling the service sandwich”
    • Horizontal play: Being the best application enabler
    • The vertical-specific digital services provider
    • There is no “best” approach: Some will work better for different operators in different situations
    • 5G is a trigger but not the only one
  • Accelerating the shift towards partnerships and ecosystems
    • Some operator ‘ecosystems’ look more like partnerships
    • Not all telcos define ‘ecosystems’ the same way
    • Most telcos focusing on ecosystems want to orchestrate and influence the proposition
    • Many see ecosystems as a key potential route but ecosystems come with new requirements
  • The market is ripe for telco ecosystems
    • The interest in network intelligence is not new but this time is different
    • Telcos can provide unique value by making their networks more accessible
    • But so far, telcos have not fully embraced this vision yet
  • Conclusions and recommendations

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MWC 2018: Desperately seeking a business case

What we found at MWC 2018

STL Partners were delighted to again be official partners of the GSMA for the Mobile World Congress (MWC 2018). Our team decamped to Barcelona for the week, and the following is an extract of our analysis of what we saw, heard and thought – and what telcos should do.

No big surprises, but plenty of nuance

As we expected (see MWC2018: 5 things to watch out for), IoT, 5G, NFV/SDN, edge computing and AI were the main topics of discussion, alongside telcos’ continuing struggles with the challenges of managing digital transformation and creating new revenues.

With consumers, and especially in more mature markets, telcos are fighting to retain and regain relevance with their customers, and struggling to justify why they should pay any more for data, lower latency or the insights IoT data can bring.

Hence the telco business cases for IoT, 5G, and edge computing are all eyeing the opportunity to digitalise and connect enterprise applications, sometimes hyped as ‘The Fourth Industrial Revolution’. But the enterprise market is notoriously difficult to serve due to its complex demands, so success requires a good understanding of industry-specific issues, and the business cases are hard to make.

So IoT, 5G, and edge computing are (somewhat inter-related) technologies that will initially deliver the same business benefits, i.e. helping enterprises adopt more efficient, agile and data-centric processes. AI is rather different and will have a more widespread impact in telecoms as we outline below. But each faces its own challenges.

5G: patchy to start

5G should deliver more than enterprise applications in the fullness of time. But most telcos are reluctant to step straight back into a major network capital investment cycle, and still have money to spend to meet the rising demand for 4G.

So, we think the market development of 5G will look different to the other ‘G’s, and the initial uptake of 5G will be patchy:

  • The US market is looking set to talk itself into a 5G war, with each operator having its own motivation to be seen as the leader in 5G. AT&T because it wants to do everything, Verizon because it has an instinct to retain its premium network tag, T-Mobile because it wants to punch all the other operators, and Sprint because it needs to find a way to differentiate. The US market is also big enough to tempt handset vendors into production – or at least into experimentation in 5G. From a PR perspective at least, the US operators’ fingers are twitching on their triggers, but it’s likely that the CFOs and shareholders will need a little more persuasion that it will work economically. This means there will probably be an initial period of ‘phoney war’ as they work out how to play it in various tests and trials, while making increasingly aggressive claims to win the opening propaganda contest.
  • South Korea and Japan also seem determined to head off on the 5G path, and are probably sufficiently advanced markets that are suited to taking the technology upgrade early.
  • Elsewhere though, the enthusiasm for 5G is a little more muted, but the enterprise applications could well make sense for reasons we discuss later in this brief report. Having said that, much of what we saw at MWC 2018 would best be described as “technology seeking a business case” – some interesting technical developments, but little coherent economic rationale that even vaguely approaches a credible business case. “If we build it they will come” may turn out to be the most pragmatic argument, so it is again initially likely to be something of a “test and pivot” approach, as operators dip a toe in the water to see what they can make work, and where, before betting more widely.
  • Wider new applications such as autonomous cars and AR/VR won’t move the needle until later in most markets. Autonomous cars because they won’t be able to rely on a network until it’s widespread and highly proven (see Autonomous cars: Where’s the money for telcos?), and AR/VR because it will take significant time to develop as a widespread and highly used technology (see AR/VR: Won’t move the 5G needle).

Many network vendors, notably Huawei, while hoping to bet big on 5G are sensibly taking an ‘incremental’ approach to 5G, and designing it as an add-on or upgrade to 4G or 4G+ solutions.

NB. We will soon be publishing a detailed report on our analysis of 5G’s progress.

Edge computing: the need to move beyond technology

MWC 2018 has shown that the industry is still mainly focussing on technology-focused PoCs in the area of edge computing. Key use cases that were demonstrated typically revolved around optimised video delivery, IoT edge gateways, and control of autonomous vehicles or drones.

However, it seems that the industry hasn’t got much closer to articulating viable business and monetisation models for these – technically impressive – use cases. Telcos still need to find out how to cope with three fundamental challenges and uncertainties which represent the key road blocks for success at the edge:

  • Commercialisation: It is – and will be for the foreseeable future – unclear which edge use cases will deliver significant commercial value to telcos (and to their customers for that matter). In addition, telcos lack clarity on which business models need to be employed to monetise individual use cases. We have addressed this issue in Edge computing: Five viable telco business models.
  • Operationalisation: Edge computing capabilities might be relevant for very different parts of the telco organisation – for both internal and external use cases, as well as wider efforts which are related to NFV and 5G. This calls for a certain degree of coordination within the organisation. Equally important is the need for an edge platform which ensures flexibility and speed in developing and onboarding applications.
  • Ecosystem orchestration: Telcos need to work out what their role in the wider distributed (multi-)cloud ecosystem should be, as edge computing is not solely a telco concept (see e.g. AWS Greengrass). This boils down to the question of who telcos should partner with and who they should compete with in the edge computing and edge cloud space. In addition, telcos are starting to acknowledge that there needs to be significant technical and commercial interoperability between operators providing edge computing capabilities to third parties. Otherwise, telcos will stumble over the usual problem of market fragmentation, which would make it unattractive for application providers and developers to offer their services through the telco edge cloud.

STL Partners is currently undertaking primary research on this topic to identify the key short-term and long-term strategic principles for telcos to overcome the above barriers and ensure commercial success at the edge. The findings will be discussed in an upcoming report.

IoT: the struggle to add value

What we saw at MWC 2018 lined up with what we said in Monetising IoT: Four steps for success. “IoT is not a quick win for telcos. The value of IoT connectivity is only a small portion of the total estimated value of the IoT ecosystem, and therefore telcos seeking to grow greater value in this area are actively moving into other layers, such as platforms and vertical end solutions.”

Telcos therefore face a conundrum in IoT. At one extreme, they can focus on the connectivity, and can do reasonably well by providing SIMs plus functionality in reporting and management. Above and beyond that, which is where the bulk of the economic value lies, industries need sophisticated and evolving solutions that integrate connectivity, applications, machines and data.

Such industry solutions need to be tailored to niche demands and limitations, such as specific regulations or legacy infrastructure. As an example, hospitals want to digitalise their operations, but they can’t afford to replace expensive medical equipment like 15-year-old MRI machines, which might not be compatible with the latest technologies and application programmes. On top of that, connecting sensitive medical data comes with sensitive data protection and security requirements. To make all this work well and securely is no small matter, and the province of some highly sophisticated specialist players, well beyond the appetite of most telcos. (NB. We discuss other possible healthcare approaches on page 8 of this report.)

To be successful at a wider level in Industrial IoT will take serious knowledge at both technical domain and sector level, and this is not easy to put together for even one industry, let alone several. It takes vision, commitment, time and investment.

NFV/SDN: grinding forward

NFV/SDN at MWC 2018 was again very much in line with our previous findings and expectations. Operators are making progress, but it is slow and piecemeal.

On the ‘progress’ side of the equation, two new open source initiatives to develop standards for RAN virtualisation were debuted at MWC: the Open RAN (ORAN) project (in which AT&T, China Mobile and Deutsche Telekom are pooling their efforts) and the Cisco-led Open vRAN initiative (vRAN and C-RAN will feature in our forward research). On the ‘piecemeal’ side of the equation, these developments only add to the sense of fragmentation in industry efforts to arrive at NFV standards and interoperability frameworks, which will be critical for realising the potential of NFV to support 5G use cases in areas such as IoT, edge computing and network slicing (as discussed above).

In our forthcoming reports on emerging NFV / SDN technology and use cases, we will build on the analysis in our recent report NFV/SDN deployment pathways: Three telco futures and attempt to show how strategic clarity about the type of telco they wish to be, and the social and economic functions they see their services as performing, is vital to inform operators’ engagement in NFV and SDN, and their selection of NFV / SDN use-cases and associated vertical markets (see discussion of expansion into new verticals below). The first of these reports will take in the MWC ‘hot topics’ of 5G, edge computing and network slicing, with subsequent analyses looking at SD-WAN / on-demand enterprise networking, and industrial and telco automation.

And of course, we are continuing to build our database of information on live, commercial deployments of NFV / SDN, the NFV Deployment Tracker, with further updates adding data on deployments in the Asia-Pacific region, the Middle East, Africa and Latin America, in addition to those recently completed for Europe and North America.

AI: Strategies taking form

AI is an exception to the other technologies because it has both

  • Internal applications for telcos, helping to streamline repetitive and data-intensive tasks across their businesses,
  • And the potential to complement external enterprise solutions.

While 5G, IoT and edge computing seem to be all about finding the use-cases, every sector and every part of telcos’ businesses, from network planning and operations, to back office functions, customer experience and product development, can be streamlined with more advanced data analytics and automation. So, it’s not surprising that all telcos are thinking about how to implement AI.

Tier 1 players such as AT&T, SK Telecom, Orange, Deutsche Telekom and Vodafone already have clear plans on what they are prioritising in the short-term, and what they want to do internally versus partner with vendors like IBM. Improving customer experience is by far the priority area right now, reflecting telcos’ desire to regain credibility with consumers, as well as the relative maturity and awareness of natural language processing within the wider field of AI/machine learning (ML).

Despite having clear ideas of what they want to do, most telcos are still in the early days of implementation. Any live telco chatbots still have limited capabilities and are only operational in one or two markets, so 2018 will be a year of scaling into new markets and channels.

The crucial initial promise of AI is to save costs across the business, and behind the highly hyped chatbot programmes there is evidence that telcos are taking steps towards using machine learning for predictive care (see our report AI in customer services: It’s not all about chatbots), back office resource planning, and network maintenance and operations.

The major question for telcos is how they should organise their AI initiatives and skills for the highest impact, and where and with whom they should partner. Right now, most telcos are taking a decentralised approach to deploying AI, so as not to stifle or hold back progress across various business units or opcos, with an aim to shift towards becoming more centralised.

Whether this is the right approach is still up for debate. We are addressing this question as part of an interview programme with telcos on their progress and strategies around AI and will publish our findings in a forthcoming report outlining the telco AI roadmap.

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Contents:

  • What we found at MWC 2018
  • No big surprises, but plenty of nuance
  • 5G: patchy to start
  • Edge computing: the need to move beyond technology
  • IoT: the struggle to add value
  • NFV/SDN: grinding forward
  • AI: strategies taking form
  • So, what should telcos do?
  • Next steps

Figures:

  • Figure 1: TELUS Health Exchange