2013 Telecommunications Industry Perspective
by Bahjat El-Darwiche, Michael Peterson, Joe Sims, and Ashish Sharma
Originally published by Booz & Company: December 13, 2012
In 2012, data traffic grew at explosive rates, but monetization lagged behind; telecom companies must resolve this paradox this year by choosing how they approach the market.
The central paradox inherent in the business of telecommunications over the past several years was at its most vivid in 2012. Having finally recovered fully from the global economic downturn and come to terms with the challenge of mass broadband and digitization, the industry had to contend with the ongoing issues of how to grow and become more profitable. We define digitization as the mass adoption of connected digital technologies and applications by consumers, enterprises, and governments—a revolutionary movement that is reshaping the sector.
On the one hand, data traffic over both wireless and fixed networks continued to increase at explosive rates. Traffic growth is driven by the massive uptake of smartphones and tablets, the mobile Internet, and digitization technologies such as cloud computing, and to a far lesser extent by rapidly increasing machine-to-machine services. Indeed, data traffic appears to have risen even faster than expected.
The result was that many mobile operators struggled to meet demand, and instances of substandard network performance were more frequent. In response, telecom operators continued to invest heavily in their networks. With wireless broadband speeds fast approaching those of fixed-line connections, and with ever more users shifting their online activities to their smartphones, operators will need to rethink their roles within the PC and mobile value chains. In particular, the mobile value chain is becoming increasingly intricate.
Given these challenges, operators must treat 2013 as the year in which they double down on their efforts to resolve this paradox. They must settle on better ways to monetize the flow of traffic over their networks and capture considerably more of the revenue now going to Internet players. They must then use these new sources of income to keep making the investments in new technologies that are needed to build out truly ubiquitous mobile broadband networks on par with the current state of fixed-line broadband, and speed up their restructuring and innovation efforts.
Simply relying on higher demand over networks with limited capacity to boost prices and restore growth will certainly not be acceptable to policymakers and regulators increasingly aware of the importance of fixed and mobile broadband to promote economic growth.
These will not be easy tasks. Every telecom player will have to make numerous critical decisions regarding its strategic focus and its operating model, as well as the capabilities needed to operate coherently in its chosen markets. These decisions will lead to a significant increase in fundamental restructuring efforts on the part of operators, as they prepare to become Fit for Growth by making the right choices about streamlining their cost structures in order to be able to fund their expansion and investment plans. We expect these restructuring activities to fall into three categories:
Defending the core. All operators must determine exactly what their core business is, and then build it up to the point where it can thrive as an organic growth machine that drives both revenues and profits. At the same time, they must focus on transforming the core into a highly efficient and lean operation. This will require that they learn to tailor offerings to their chosen customer base and segments using sophisticated customer analytics to develop profitable pricing schemes, while offering these targeted customers the best user experience possible.
Expanding into adjacencies. Even as they defend their core business from interlopers coming from outside the traditional telecom space, telecom players must themselves seek out opportunities in adjacent sectors. Which areas they decide to venture into, and to what degree, will depend on their chosen business model. Indeed, some may prefer to concentrate on enabling their business customers to make such moves into adjacent sectors, rather than doing so themselves. In every case, entering adjacencies will require the willingness and the ability to develop suitable innovative products and services—not a traditional strength for most telecom operators. They must also be willing to enter into partnerships with companies that may have more experience in these adjacent areas. Most important, if they are to succeed outside their comfort zones, they need to begin soon to narrow their strategic focus and start making the tough and possibly expensive decisions about where to invest, and which assets—even possibly network assets—to divest.
Pursuing coherence at scale. Restructuring is a difficult process, particularly for companies as complex as telecom operators. Nonetheless, their ultimate goal must be to achieve coherence at the correct scale in whatever new form they choose to take on, and they must end up with an optimal portfolio of products and services if they are to thrive. For some, this may be a relatively simple process. For most, however, it is likely to require a wrenching combination of divestment and consolidation in their search for the correct combination of organic growth and synergistic new businesses.
How telecom operators will pursue these necessary activities of defending the core, expanding into adjacencies, and pursuing coherence at scale will vary. We believe that four business models can move telecom companies away from the vertically integrated structures of the past and enable them to meet the challenges of a disrupted sector while benefiting from existing opportunities. These business models are the network guarantor, the business enabler, the experience creator, and the global multimarketer—models that are not mutually exclusive.
The network guarantor. In this model, operators concentrate on providing their network infrastructure and related services to retail and business customers, promising high quality, reliability, and smoothly integrated platforms and applications, while operating as cost-effectively as possible. Until recently this was perceived as the “dumb pipes” model and was much too conservative for the new digital world. However, more operators are pursuing this model as network traffic grows and businesses look to operators for more and more essential services. Some companies have decided to advance this model by pooling their resources and those of their customers, offering them the ability to choose among different networks and services while saving considerably on operations and network maintenance.
The business enabler. This model depends on a strategy that extends traditional telecom network services to include helping businesses in different verticals serve their own business and retail customers. The business enabler assists its business customers in capturing the benefits of digitization through reliable virtual networking, cloud services, and other integrated services and applications. One model might involve extending the operator’s own billing and collection capabilities by developing platforms and selling them to customers. Another might include providing services that help customers to expand their online retail offerings.