Reinventing the Business of Telecom
Telecom operators are at a turning point in the evolution of their industry. Three major trends—demand for ubiquitous connectivity, the rise of modular technologies, and increasing competition from outside the industry—are transforming how all players in the telecom space are creating value. In order to survive, operators have to create new business models that can take advantage of new opportunities in a hypercompetitive sector.
Over the past decade, the telecom industry has helped to fuel the digital transformation of entire industries, economies, and societies. “The rapid uptake of mobile communications, the increasing availability of broadband access, and, more recently, the development of smartphones and the widely popular mobile apps—all come thanks, in whole or in part, to the innovations and investments emanating from the telecom sector. Indeed, smartphone sales alone are expected to grow 23 percent annually through 2014, when they will represent 37 percent of total handset shipment, compared with 16 percent in 2009,” said Karim Sabbagh, Partner and the Global Practice Leader for the Communications, Media and Technology Practice at Booz & Company.
Now, however, the industry is experiencing a major aftershock following years of significant growth. Operators must build the next generation of high-speed fixed and mobile networks to keep up with customer demand and to take advantage of the ongoing digitization of virtually every other industry sector—such as healthcare, financial services, and media. Doing so will require massive investments, especially in fiber-based infrastructure. At the same time, they must invest in innovation and the development of new strategic capabilities. Operators are hindered in these efforts, however, as their traditional sources of revenues are becoming commoditized, and many continue to struggle to find new ones.
To meet all these demands, operators must strive to build leaner, more adaptive, modular, multifaceted, and increasingly complex business models. And they must acquire the capabilities needed to ensure that these new business models can succeed, even as they continue to invest in next-generation fixed and mobile infrastructures. Forward-looking business models must be based on a deep understanding of three overarching trends that are driving the industry into the future:
1. Customer Ubiquity: Consumers and businesses demand constant and universal access to digital applications and content. The more bandwidth and services that operators provide, the more their customers consume, and the more they expect. In the U.S., for instance, children ages 8 to 18 spend an average of seven hours and 38 minutes using entertainment media daily, up from six hours and 21 minutes five years ago. This demand will put huge burdens on operators’ current fixed and mobile networks: Data already makes up the vast majority of network activity, much of it driven by video streaming on the Web, and it just keeps growing: Video streaming on the Web in the U.S. has increased by a hefty 78 percent a year since 2005. The continuing rise of mobile apps—the hundreds of thousands of services available on smartphones and other devices everywhere—will only intensify the phenomenon of customer ubiquity, as consumers and business users alike use apps for entertainment, for information, and to boost productivity. Operators will lose ground to technology companies like Apple and Google unless they find a way to cash in on the mobile app business, which is expected to generate $40 billion in revenue by 2014.
2. Technology Modularity: Networks, services, and applications are rapidly evolving and shifting away from vertical integration toward modular, open systems. Different access networks (such as fixed, wireless, and broadband) will serve end-users directly, delivering the required ubiquitous connectivity. Both applications and service offerings such as on-demand movies and gaming will likely be based on systems that will essentially be independent of the infrastructure through which they are accessed. This means that parts of the entire system can be built not just by operators but by a variety of non-industry rivals as they try to gain a share of future revenues.
3. Industry Innovation: Operators used to focus on protecting their core business—the development of large-scale networks—rather than on experimenting with smaller initiatives. As a result, they have left themselves vulnerable to competition from Internet players, high-tech and IT companies, device manufacturers, application and service providers, and media companies that are developing apps and services.
Each of these trends has critical implications for the future of the industry. Once operators understand these implications, they must select, design, and build new business models—and accompanying capabilities—to respond to and benefit from them. “Operators that understand the need for new business models, and the capabilities needed to support those models, have a clear right to win in their chosen markets. They will be better prepared to make the leap from their traditional vertical structures into a future driven by ever more demanding customers, complex technology, and fragmented competition,” said Bahjat El-Darwiche, Partner, Booz & Company.
Based on the underlying trends that are shaping consumers’ and enterprises’ behavior, the competitive landscape, and telecom operators’ current positioning along the industry value chain, Booz & Company has identified four distinct business models that will shape the future of telecom operators. Each model targets different customers, shaped by the operator’s ability to create value; each presents a differentiated service offering and requires distinctive capabilities.
Model 1: Network Guarantor
In this model, operators use their network assets to generate increased revenue and profitability by efficiently providing widely available and open infrastructure and timely, reliable, cost-efficient services. Their primary customers are companies operating under the business enabler model, which can take advantage of network guarantors’ infrastructure to offer more advanced services to their own customers. The network guarantor model will require operators to be efficient in their planning, provisioning, and operations and to offer high levels of quality in terms network reliability and service levels.
Model 2: Business Enabler
The business enabler is a “double-sided” business model. On one side, it provides their end customers with the broadband services they need. On the other side, it helps application and service providers manage their own businesses, providing them with wholesale broadband, managed services, transaction and billing support, and platforms such as hosting and cloud computing. To make this model work, operators must cultivate their capabilities in partnership, flexible service customization, and the aggregation of customer bases and service providers.
Model 3: Experience Creator
Consumers’ thirst for new applications and services already appears insatiable—especially among younger consumers whose lives are increasingly spent in the digital realm. At the same time, companies in any number of industries are looking for support in their efforts to digitize their businesses and bring to their own customers the benefits of all the new information and communication technology being developed. Experience creators will look to take advantage of this growing market by moving up the telecom value chain and providing end-users—consumers and business customers alike—with the ubiquitous connectivity they demand, with targeted applications, fresh content, and a distinctive experience, and with the ability to create and distribute their own content. To do so, they must be extremely innovative in their products and services, as well as dedication to serving different customer segments effectively.
Model 4: Global Multimarketer
Each of the three business models discussed above offers operators a way to compete in increasingly fragmented telecom markets. To extend the gains made in one market by replicating the model in other markets, there is yet a fourth business model that operators should consider—especially if they already have significant scale and scope, as well as operations beyond single markets or regions. This model, the global multimarketer, offers a path for operators to make the leap to becoming truly global entities. “Thanks to their inherent strengths in branding, efficiencies, and reach, global operators are proving stronger than their local rivals: Already, more than 75 percent of telecom subscribers in regions such as Europe and the Middle East are owned by global operators,” said El-Darwiche.
The coming surges in consumer demand and in technological flexibility are working together to create a very different world for the telecom industry. It is a much flatter world, in which the traditional highly integrated, vertical technologies and operating models of the past are giving way to a plethora of new technologies, services, and devices. This far more open environment will enable all kinds of new competitors to enter the telecom arena, and it will force operators to make conscious strategic choices about the business models best suited to their customers and markets, and the capabilities they will need for those models to succeed.
The only way operators can counter the numerous threats they face is by creating new business models that can effectively respond to the rapid changes overtaking the telecom industry, along with the desire to create or improve the capabilities that will give operators the right to win in this new world. “Operators that understand the need to move away from their traditional vertical organizations and to develop one or more of these business models must ultimately transform themselves into one or another of the modular organizations described above, with the ability to replicate their capabilities and business models across different markets and customer segments. But building those capabilities and business models will take time. The winners will be those operators that are first to understand the need to make this transformation, and then move fast,” concluded Sabbagh.