The
current telecoms business model is approaching its ‘end of life’.
Today, we’re previewing here on our blog an updated Telco 2.0™ Manifesto
which we hope will provide a cogent reference point for creating a
vibrant new business model at the heart of the digital economy.
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 progammes. 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?
We very much encourage your feedback, either in via the comments tool below, or directly to contact@telco2.net.
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.
Video: Hard 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.
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.
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.
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.
- 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 telcoms 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
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
workerservices), 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.
You are very welcome to join us at our fifth Telco 2.0 Industry Brainstorm in London on 4-5 Novemeber to discuss these ideas in more depth with your senior industry colleagues.
This Blog is republished from
www.Telco2.net/blog.
The Telco 2.0 Initiative is a new industry program focused on helping
with this thorny question: "How do we (telcos, handset manufacturers,
Media companies, IT players, NEPs, etc) make money in an IP-based
world?"
Posted
Jul 31 2008, 06:00 AM
by
Telco 2.0