This second edition reflects the changes in our thinking over the last two years since we launched the Telco 2.0™ Initiative. It is based on output from four major Telco 2.0™ 'executive brainstorm' events, multiple consulting engagements around the world, and our formal research programmes. We'd like to thank the many people who have wittingly (or unwittingly) provided input to it.
The Manifesto is relevant to:
- Those developing strategy across the telecoms, media and technology (TMT) sector.
- Corporate managers in all vertical industry sectors looking to improve efficiency and effectiveness through Information and Communications Technology.
We believe it provides new insights into future business models for the 'information economy' at large. The Manifesto seeks to answer eight critical questions:
- What are the fundamental properties of today's telecoms business model?
- Why do these create challenges for future growth?
- Why are current efforts to find a new business model too limited in scope?
- What are the real issues that need to be addressed?
- What are the key principles behind the new business model?
- What are the core products and services of a Telco 2.0™ business model?
- How big is the size of the opportunity?
- What does the journey to this new business model look like?
Is bundling of voice, broadband data and media content enough to grow the telecoms industry? We think that a vital part of the business model is missing.
New value lies in addressing the friction that exists in everyday interactions between businesses and consumers, and governments and citizens. Typical examples include: authenticating users, market research, targeting promotions, distributing goods and content, collecting payments and providing customer care. These processes today are often slow, inefficient and ineffective. They waste money and affect customer satisfaction.
Telcos collectively have assets that can address this situation: real-time user data, secure distribution networks, sophisticated payment processing capabilities, trusted brands, a near universal subscriber base, as well as core voice and messaging products.
To realise a new business model opportunity these assets must be re-organised. A 'two-sided' telecoms market structure is required where telcos facilitate improved interactions and transactions between people and organisations. Telcos must continue to attract retail consumers and satisfy their needs. But, in addition, they should extend the capabilities of their traditional consumer products to explicitly support enterprise business processes.
To do so they will need to create open and standardised platforms that third party organisations can plug their enterprise IT and communications systems into - just as they plug into the telephone and Internet networks today.
We estimate this total opportunity could be worth $350bn of new revenue to telcos in 10 years' time, equivalent to c.15% of total telecoms revenues at that time. The value to the wider digital economy - industry and consumers - will be many times bigger.
(Please see: Future Broadband Business Models "Beyond bundling: winning the new $250Bn delivery game" and The 2-Sided Telecoms Market Opportunity "Sizing the new $125Bn platform services opportunity")
Boom, bust and bundling
The 'Telco 1.0' business model has been stable from the inception of the telegraph right through to the mass adoption of the mobile telephone. This model has two pillars:
vertical integration, where the network owner controls the services on the network, and repays the capital investment by billing for them. This control can be created either by (i) embedding the service in the network (as with voice or SMS), or (ii) through control over the edge devices — handsets, set top boxes, network storage devices, home hubs. Device control can be direct via technical means, or indirect, such as via subsidies of devices with preferred configurations.
the revenue model is a one-sided market, where the telco buys equipment and content from suppliers ('upstream'), integrates them, and bills the end user for services ('downstream'). The upstream side is cost, and the downstream side is revenue.
This model survived both technological revolutions (e.g. fibre optics, digital switching, microwave radio, and spread spectrum wireless) as well as regulatory change (e.g. divestiture, privatisation, and unbundling). It has been very successful, particularly in emerging markets. All aspects of a service, from sales to support, are conveniently packaged in a single easy-to-buy proposition to the end user.
The arrival of Internet access as a mass market consumer product in the 1990s challenges these two pillars. Users can acquire content and services independently of the network operator — a horizontal market structure. Furthermore, the business model of many Internet content companies is a two-sided market (more here and here). They acquire a 'downstream' audience using either cheap or free content. Advertising is the primary revenue source, coming from the 'upstream' side of brand owners and merchants.
The demand for Internet access sparked an infrastructure boom, which ran in parallel to the mobile boom.
Following the subsequent dotcom bust, telcos have been focused on three activities:
- Managing the explosive growth of the mobile business (especially in emerging markets), as well as (mostly fixed) broadband in developed markets.
- Bundling the voice, video and data services together as the ‘triple play’, to reduce churn.
- Consolidation via M&A, to maintain prices.
All three have placed huge strain on the back office systems, and attention has largely been focused internally on operational issues, rather than strategic or structural ones.
Triple play trouble
The telco business model is under strain. The hyper growth phase in mobile and broadband is over in developed markets. The underlying tensions between the telco and Internet models are no longer masked. We are seeing increased price competition. The regulatory environment is becoming less favourable, with reduced termination fees, capped roaming rates and effective unbundling rules.
Most importantly, each element of the triple play bundle — voice, video and data — has problems with either growing revenues, or the cost of service delivery, or both.
Voice: Slower growth precedes decline
In developed markets, increased usage of voice is no longer sufficient to compensate for price deflation. Revenues are starting to peak and fall. High-margin mobile voice and SMS services are vulnerable to arbitrage (e.g. roaming SMS, international calling). This is particularly true when IP is used as a signalling system independent of the telco network and charging regime.
Complete ‘over the top’ replacements for telco voice and messaging services have achieved adoption in some markets (e.g. MXit vs. SMS in South Africa, Skype for small businesses replacing long-distance, international and conference call revenues). These services remain at the periphery at present, but are still growing fast.
(Please see Voice & Messaging 2.0 "What to learn from - and how to compete with - Internet Communications Services")
Video: Harder to enter than expected
Both fixed and mobile video are failing to generate the level of profit anticipated. In both cases, telcos lack the content acquisition, packaging and promotion skills that more mature media players have long perfected. The Internet market is driving rapid innovation in content aggregation at a speed telcos cannot match. Telco forays into becoming a media business have generally been underwhelming.
For mobile video, user interest isn’t matched by a willingness to pay. The only exception in media is ringtones, which is a market that is also maturing and facing decline. Music may also flourish for a short time, although that is a very troubled industry indeed due to piracy.
(Please see Online Video Market Study: Options and Opportunities for Distributors in a time of massive disruption.)
Data: Not a golden goose after all
Users fail to intuitively understand megabytes and megabits, and would prefer ‘postage and packing’ to be included with the device or content. There is minimal differentiation between ISP plans. Pricing, usage and value are disconnected, since price discrimination is difficult. Price competition is the norm. Online video is driving the need for fresh capital investment, as well as operational expense. Some of this can be justified by reduced operational costs (as fibre is cheaper to maintain than copper, and LTE/WiMAX have more capacity than 2G/3G) but there remains a significant funding gap. Mobile data usage is growing very rapidly, but typically over 90% of traffic is from laptops, which don’t generate commensurate revenue. Continued growth may result in congestion and spectrum exhaustion in urban hotspots.
(Please see: Future Broadband Business Models "Beyond bundling: winning the new $250Bn delivery game")
New sources of value remain elusive
Network operators are aware of these issues and are experimenting with new business models. Media products, as noted above, have met only patchy success; yet operators are heavily investing in servicing the media and entertainment sector. Advertising-funded services exist, but the entire online advertising industry — including Google — is still under 2% of global telecoms revenues. Advertising alone cannot significantly impact the telco business model.
(Please see: Telcos' Role in the Advertising Value Chain "How to make the Telco Advertising Channel work for Brands and profitable for Telcos")
Advertising is too small to be the basis for a new business model
Meanwhile, in the economy at large, there are inefficient business processes in every industry, through every stage of production from creating a customer relationship and promoting the offer, via service delivery, through to billing and customer care. Typical examples might include delivering parcels, authenticating banking customers, or servicing welfare recipients. These often waste labour and energy, and tie up working capital. Could the telco be in a position to optimise these time and trust sensitive processes?
The trillion dollar re-think
Given these issues and opportunities, is necessary to answer two questions: What is the purpose of a telecommunications service provider? And what does the future business model look like? To answer these we need solutions to the following problems:
- How should the underlying infrastructure be funded, and what is the role of the telco in this?
- How do we protect and evolve the core voice and messaging products?
- How do we turn online video distribution into a profit driver, rather than a cause of cost inflation to the ISP?
- How do we create more value from our current assets, both physical (e.g. networks and IT systems) as well as those less tangible (e.g. brand, trust, customer data)?
- How do we find new classes of customer to service, and therefore revenue sources?
In answering these questions, we see a need for change in the industry to reflect a new world increasingly unlike that experienced before.
Telco 2.0™: A new vision
To resolve these issues, telcos must learn from the structural changes that have taken place in other industries where vertical integration was weakened. There has to be a change of priorities:
- A shift to revenue growth via wholesale and business-to-business services, rather than consumer retail (see here).
- A shift to evolving the core personal communications products - a conduit for businesses to interact with the customer - rather than media services to temporarily fend off user boredom.
- A shift to treating customer data as a valuable by-product, not a form of digital waste.
- A shift to servicing universal business processes performed across many industries, rather than competing with services specific to verticals (e.g. finance, entertainment, IT services) that inevitably compete with entrenched suppliers.
Defining the new business model
The future telecoms industry structure comprises the following functions (although not all may necessarily be found in any one telco):
Infrastructure services. Our view is that in the long term passive infrastructure becomes part of a completely different multi-utility business, and not part of the telecoms industry at all. Rather than build duplicative competing access networks, capital has to be freed up to invest in ‘network edge’ assets. Telcos should aggressively pursue network sharing and outsourcing initiatives, and co-opt municipal or open access models.
A retail arm, which deepens the intimacy of the customer relationship by offering packaged ‘digital lifestyle’ products and services. For example, a wireless picture frame for the grandparents is the perfect complement to a picture messaging phone. Innovation is centred on the core personal communications products, which must be integrated closely with the online services the customer prefers. The retail arm invests in the home and office network, and these assets form part of the network that the wholesale division can re-package. It also broadens the range of goods and services on offer, with each integrated into a single e-commerce, identity, billing, operations and support infrastructure. To do this is has to learn new skills by emulating the best of the retail sector, such as grocers.
A rich wholesale delivery platform. Compared to today this platform addresses a much broader range of online delivery problems, on behalf of a much broader range of commercial customers, using a broader range of delivery assets. It turns ‘over the top’ competitors into customers, rather than threats to revenue and sources of cost.
A business process platform that creates value-added services (VAS) that extract more value from the customer data assets of the telco. These services address a wide range of cost, efficiency and effectiveness problems in the economy at large, again for a broad range of commercial customers.
We have identified seven core value-added B2B value-added services:
- Identity, Authentication & Security;
- Advertising, Marketing Services & Biz Intelligence;
- E-Commerce Sales;
- Order Fulfilment - Offline;
- Order Fulfilment - Online (E-content);
- Billing & Payments;
- Customer Care
(Please see The 2-Sided Telecoms Market Opportunity "Sizing the new $125Bn platform services opportunity")
Other complementary businesses may legitimately exist - systems integration, managed IT services, hosting, money transfers - but are not core to the Telco 2.0™ model.
Each component of the ‘triple play’ is impacted:
Voice minutes are sold at wholesale and re-packaged and sold under a wide variety of branded services, where voice is just am integrated feature of that service, not the whole product.
For video delivery, the telco video platform focuses on supporting consumer electronics companies, content providers and aggregators to creating the user experience. Revenue comes from taking pain and cost out of their businesses, and enabling value to flow along the whole chain. The telco should exit trying to run gatekeeper portals for video.
Data products are diversified beyond the simple retail ISP, with a mixture of hybrid consumer/business products (e.g. home worker services), and fixed/mobile products (e.g. femtocells backhaul over landlines). The retail ISP works to offer a ‘connected lifestyle’, not a series of disjoined broadband products tied to particular places, devices or times of use.
Two key enablers are (i) sender party pays data, where the upstream party pays for delivery of voice, video or data; and (ii) communications enabled business processes (CEBP), which optimise interactions between consumers and merchants through the voice and messaging tools. CEBP demands that new (wholesale B2B) capabilities are added, such as the ability to directly deposit an interactive voice message into a voice mailbox.
Size of the opportunity
We have modelled the potential size of the opportunity, as shown below. Our model suggests that by 2017 (ten years out) this is around $250bn for new wholesale services and $125bn for the VAS.
Size of the opportunity
We have deliberately excluded a revenue opportunity from the retail side. In a two-sided market, a key feature is that the charges for using the platform have to be balanced between the two sides to get the right size of audience. So newspapers sell at a price that barely covers their print and distribution costs. This maximises revenue from advertisers, who are less price sensitive than readers. Just as with advertising, telcos will be forced to adjust their retail pricing to maintain mass audiences: retail is the tool you use to acquire a customer relationship that can be monetised through activities such as CEBP.
Making the journey to Telco 2.0™
The seven key steps to approaching this challenge are:
- Divest yourself of infrastructure assets and activities not strategically aligned with the Telco 2.0™ model.
- Create new financial and operational metrics to measure the progress of your organisation.
- Update your processes and product pipeline gating criteria to reflect your new priorities.
- Focus your retail business on (i) evolving the voice and messaging products, (ii) creating the necessary edge assets for video distribution, (iii) engaging a wider range of partners and products, (iv) benchmarking yourself against the leading non-telco retailers.
- Considerably enhanced your wholesale product portfolio, as this is the new growth engine.
- Add in the two-sided value-added services based on your strengths and local market conditions.
- Work with existing partners, and collaborate across the industry, to create the transaction networks needed to support these value-added and 2-sided market services.
To find out more please visit our searchable knowledge base here or email firstname.lastname@example.org for more on how STL Partners and the Telco 2.0™ Initiative can work with your organisation to support your journey.