At one point in the early 00s telecoms operators (telcos) looked unassailable across fixed-line, mobile and broadband. Their share price was riding high on the coattails of the digital revolution that has been transforming our lives ever since. We now take for granted that we tweet, share our lives on Facebook, upload photos and so on – all of which is only possible through the infrastructure provided by telcos such as BT, Vodafone and indeed the cable operators such as Sky and Virgin Media.
In a sense, the increasing digitalisation of our lives has meant that telcos’ position has never been stronger. We need ever faster, more reliable networks, meaning the infrastructure business is more important than ever. Indeed, a recent KPMG analysis of the UK market alone estimated that planned ultrafast broadband investments (that will go into telcos’ pockets) could add up to £30 billion to UK GDP over the next ten years.
However, things have changed. Telcos are no longer the stock market darlings but have long been replaced by digital businesses that attract a market valuation of in excess of $1 billion. These businesses run over the top (OTT) of the telcos’ infrastructure so have much lower fixed costs. A good example of this is WhatsApp. It has over 500 million instant messaging customers but was run by little more than 100 employees when bought by Facebook. Contrast this to a telco that may have many multiples of that workforce in just its management team. WhatsApp was sold for US$22 billion, significantly more for example than EE, the largest mobile telco in the UK when it was sold to BT.
The problem of pipes
So, whilst the telco infrastructure business has never been more important, relative to the OTT ‘digital unicorns’, it looks increasingly boring in terms of the growth opportunities that it can offer investors. There has long been a mission for telcos to generate services that can offer greater growth opportunities than that which is offered by ‘dumb pipe provision’. There has been a long history of telcos exploring a wide range of digital services such storage, security, messaging and so on. However, it is fair to say that their success in this field has been mixed. OTT players either understand their particular market much better or have much deeper pockets. Just look at the way companies such as Nest have rapidly started to occupy the connected home market from connected security cameras to smart thermostats. Indeed, WhatsApp, Viber, and Apple’s iMessage represent over 80 percent of all messaging traffic, and Skype alone takes more than a third of all international voice traffic minutes. All this means that many telcos are facing significant decreases in their basic service revenues: drop-offs of as much as 30 percent in SMS messaging, 20 percent in international voice, and 15 percent in roaming. [i]
Telcos have also entered the media market with the UK’s BT TV being a prime example of a bold attempt to diversify from the core businesses. The problem again, however, is that there is inevitably stiff competition from other, nimble, cash-rich competitors. For example, Facebook has massive buying power and has just bought rights to NFL TV. Facebook, Apple or Google could all easily outbid most telcos for Premier League Football rights.
All this means that the telco market is not finding any solutions for a long-term strategy whilst at the same time suffering from reducing ARPU (Average Revenue Per User) meaning that it is pushed back onto reliable but thin margins of pipe provision. Telcos are therefore typically stumbling along at a fairly unexciting 2-3%, which is really not sufficiently exciting to meet investors’ expectations.
Underpinning all of this is the well-documented movement of telecoms markets from open and highly competitive environments to relatively closed markets with high barriers to entry. Business academic Timothy Wu famously wrote about the way in which telephony markets moved from one where entrepreneurial farmers would set up their own exchanges so they could communicate effectively with each other to one which is dominated by a small number of players. The cycle of technology development meant, as he captured it, that slowly but surely the creativity and ingenuity of early innovators would be by-passed as the need for predictable quality and continuity meant that a small number of companies dominate the field. And with it, the creativity and dynamism of the early days of the technology is then lost. Most telcos have attempted to create some degree of the lean innovation mindset into their organisations and have offices in Silicon Valley to capture the entrepreneurial spirit embodied by brands such as Facebook, Apple, and Google. The extent to which this has been achieved is questionable.
A dominant market position on infrastructure is clearly the strength and weakness for any telco –it is hard for competitors to enter to the extent that the effective threat to the core business is often less the competition and more the regulatory environment. But as Timothy Wu suggests, this dominance can also have the effect of dampening the creative environment, for which any number of initiatives such as outposts in Silicon Valley will struggle to compensate. This cycle means it is also hard for the telco to successfully enter adjacent industries such as media content, as the very same principles apply there. Very high barriers to entry mean that challenging the position of entrenched rivals requires deep pockets, patience, and a strong nerve.
In one sense, simply because the challenges exist does not mean they are insurmountable. But there is inevitably an engineering-led culture in telco businesses and not unreasonably so, as revenues and profitability will often be driven by hugely important operational decisions. There is no reason not to go after other industries but it is a long haul that investors may start to tire of.
So what is a telco to do?
Surely the real opportunity for a telco operator comes from a much more immediate source. The very data that it carries is increasingly understood to be the source of an opportunity which may, in time, dwarf that of the physical networks on which it relies. Data is now considered to be one of the foremost drivers of value in markets, not least because of the way that, on average, about 70% of the valuation of listed companies is based on intangible assets which include data. And we are in an environment where we are failing to realise much of the value from the data which is available. As Viktor Mayer-Schönberger and Kenneth Cukier point out:
“Data’s true value is like an iceberg floating in the ocean. Only a tiny part of it is visible at first sight, which much of it is hidden beneath the surface. Innovative companies that understand this can extract that hidden value and reap potentially huge benefits. In short, data’s value needs to be considered in terms of all the possible ways it can be used in the future, not simply how it is used in the present.”
This is where we are led to another theory of technology but this one focuses on how technological innovation develops. Professor Brian Arthur is the recognised authority on the theory of evolution of technology. He talks about the way an individual technology becomes the building block for the construction of new technologies. This is combined with the demand for novel ways of doing things to organically create dynamic change and innovation. So, for example, the modern passenger aircraft is a combination of different technologies such as GPS, atomic clocks, fly by wires systems etc which means it is no longer a machine with fixed function but is instead a system with a network of functionalities. We can carry on creating ever more creative combinations, that in turn get built on.
The implication here for telcos is to apply this thinking to the huge data assets that they hold. Currently, they attempt to find ways to monetise their data by granting licenses for access to third parties but this has had limited success. There are a variety of reasons for this but essentially most telcos (and third parties in fact) are struggling to understand what they might do with all this data.
Telcos need to start creating their own insight building blocks from the data that they have available. It’s a classic situation where no-one party alone is going to identify the value, rather it needs to evolve, in the way that Brian Arthur has suggested. By packaging up certain pieces of data it is inevitable that different actors in the market will start to see value in them. So, for example, if a telecoms company can provide details on journey patterns then this might not only be of interest to town planners but also for transport providers, fuel retailers, advertisers and so on.
And it’s important to recognise the different types of customer data that a telco would have compared to OTT players such as Facebook. A telco will have a much greater variety of contextual data such as location history/habits, mobile sensors, store level beacons, etc. OTT players will only have some of this when people check in. Telcos position, by contrast, will get stronger with the Internet of Things.
What business are telcos in?
One of the key challenges for a telco is recognising how to monetise their highly valuable asset. And this requires some rethinking about their business model. Which in turn means we need to ask what business telcos are actually in.
If a telco sees itself as an infrastructure business then it is hard to see the role data has – it is a by-product of the process of connecting individuals and organisations. If a telco provider sees itself as a media company then there will be a desire to hold onto the data as this offers a means of real differentiation for content development and targeting. If a telco sees itself as a ‘digital’ business then there will be a desire to generate products and services that will appeal to end users.
There is no reason why a telco should not consider any of these but as we have seen, whilst there are opportunities, it feels as if telcos are not fighting on their ‘home turf’.
The good news is that there is rapidly emerging a new ‘business’ that telcos might want to consider themselves in, which is as platform providers. Platforms are a new breed of companies which bring together producers and consumers to exchange value. These include Airbnb, Uber but also eBay and Apple App store. The main asset of these organisations is, of course, the information they hold which, alongside the interactions, is the source of value they create and their competitive advantage.
By making use of the data then Airbnb can add value to the seller by helping them to market their property more effectively, through ensuring it is rented more frequently and for higher amounts. For the Airbnb end user, the information collected can be used to add value in terms of establishing the trustworthiness of the renter, identify properties they like and so on.
This is a complete about-turn from ‘pipeline’ businesses where value is created by the effective management of resources (e.g. network infrastructure), internal optimisation (e.g. ensuring efficiency of the network) and individual customer value (as opposed to nurturing the value of the eco-system overall). There are huge growth opportunities in platform businesses due to network effects – the larger the network, the healthier the matches between supply and demand and the better the data that is available to create matches.
In a very physical sense telcos are of course already a platform business – they connect buyers and sellers. But the business model is a traditional ‘pipeline’. The opportunity that telcos have with data is to offer brands the means with which they can enhance their relationship with consumers. The huge array of new businesses that rely on technology to mediate the relationship with consumers is the place in which network operators have a potentially hugely powerful role to play – helping to optimise the nature of the relationship. Which is a classic platform play – but in a sense, it is powering the platforms on behalf of these brands. Some examples of the way this can operate includes:
- Hyper-personalisation: A wide range of services are now based around catering for individual differences. A good example of this is Spotify Running which matches your music to your running speed.
- Personal optimisation: These services rely on understanding your personal preferences which are then used to underpin smart devices. Examples of this include the Oral B Smart Series toothbrush and the Kérastase Smart hairbrush
- Optimising moments: As delivery services can now cater for consumer desires, bridging the gap between desire and fulfilment, the means of identifying and predicting these desires has become more important. Examples of this are food delivery services such as Ben & Jerry’s or drinks delivery services such as US company, Saucy hand delivering Jack Daniels to customers’ doorsteps by Frank Sinatra impersonators
- Servitization: We are increasingly seeing the movement away from the purchase of products and a move towards ongoing access to services. This means that data becomes key to help service innovation but also to optimise the customer experience. Good examples here include coffee (Nespresso), razors (Dollar Shave Club)
All of these business models (and there are more of course) have one thing in common. Data. This is an essential part of their proposition – it is used by brands to optimise their offer and by consumers to identify their preferences. Small digitally native start-ups have understood this and are streaks ahead in terms of their data usage – take Spotify or Asos as examples of huge ambition and achievement on these terms.
Where does the money come from?
As these new digital markets mature, we are starting to see large, established brands realise that they need to play in this space. Look at the way Unilever has made a huge bet when it bought Dollar Shave Club for $1bn. Or P&G experimenting with Tide Wash Club, their subscription laundry service. These are brands which are making huge investments in data but often struggle to understand how to relate this to building relationships. Their heritage has been with retailers and they suffer from ‘not knowing what they don’t know’ on relationship building with the customers themselves.
The key strength for telcos is the millions of customer relationships they have and the sales/support infrastructure with which they maintain it. Telcos can make good use of their increasingly intimate relationship with customers, deriving insights from the data tentacles that reach into every more granular aspects of our lives. The data they hold becomes part of that infrastructure narrative. Because just as pipes connect people then so data increasingly has that role. Relationships between consumers and brands are mediated by data, so optimising those dealings offers huge value. And this is only set to increase as technology weaves its way into more of our lives from connected coffee makers to condoms.
There is a huge opportunity here for telcos to subtly reposition themselves but in a way that capitalises on the business, they are in, which is connecting people with brands. In some ways, it is a radical rethink of the telco’s role – from pipeline to platform – but in other ways, it is a natural evolution. The telcos can create units of value that will power these new digital services – and as they are used there is potential for a massive evolution in creativity. The network providers simply need to generate the units of analysis that act as the building blocks and, as they are used, the market should generate ever more variants and combinations in just the way that Brian Arthur set out. All of this creates a new ‘cycle’ for technology, as to, paraphrase Timothy Wu, there is potential for telcos to enter a new era of growth and creativity.
By Colin Strong
Brian Arthur (2010) ‘The nature of technology: what it is and how it evolves’. Penguin
Viktor Mayer-Schonberger and Kenneth Cukier (2013) ‘Big Data: A Revolution That Will Transform How We Live, Work and Think’. John Murray
Timothy Wu (2010) ‘The Master Switch: The Rise and Fall of Information Empires’ Atlantic Books
Colin Strong (2015) ‘Humanizing Big Data: Marketing at the Meeting of Data, Social Science and Consumer Insight’. Kogan Page
Geoffrey G. Parker, Marshall W. Van Alstyne, Sangeet Paul Chouda (2016) ‘Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You.’ W. W. Norton & Company