Developments in the telecommunications industry and the broader digital economy have opened up many new markets over the last few decades.
Telecoms has changed from a more or less standalone, horizontally-organised industry to one that has become a key facilitator in a range of vertical markets.
The keyword that is used to indicate that change is "smart". We are talking about smart transport, smart energy, smart cities and so on. Essentially what this means is that internet and communication technology (ICT) technologies are increasingly being strategically added on and embedded in these industries.
The technological developments have been mindboggling: broadband, mobile communications, cloud computing, data management, storage, AI and analytics. Combined these have created the ideal environment for the development of technology platforms on which social and economic transformations can be developed. These platforms are often called "labs"; places where innovation, sharing, collaboration and piloting can take place.
The telecoms industry was right at the forefront of the digital explosion, but for a long time telcos concentrated on protecting their very lucrative incumbent voice businesses.
And so companies such as Google, Apple, Facebook, Amazon and many others in the internet market had free rein to develop over-the-top (OTT) business models, using the existing telecoms infrastructure to build their own platforms from which to distribute their own services to end-users.
Despite what could be called "missed opportunities" for telcos they were able to maintain a strong market position in the basic telecoms market (connectivity). The massive increase in OTT services also stimulated a far greater use of the telecoms network. In most cases, telcos remain strong and healthy players in the connectivity market. However it has become a low-margin utility service. Within their current business models there is little room for them to develop more value-added products with opportunities for premium-based revenue models.
There are obvious various scenarios for the telcos to pursue:
- Current model of an integrated telco: a strong focus on technology and engineering, combined with good customer relationships;
- The wholesale model: full control over the network, intermediaries between vendors and OTT retail providers; and
- Platform: a more virtual telco model based on first-class infrastructure with a strong focus on innovation and new services and strong relationships with customers, partners and developers.
I would like to concentrate on the third option.
The nature of the telecoms business, its culture and its business models is not very well-suited to a more vertical approach that can be provided through platform-based models.
For example, let’s look at the massive transformations that are taking place in transport, cities and energy. What is needed is a holistic approach to these developments. Telcos could take control of such a platform, rather than just being a supplier to some of the underlying elements of new smart models.
Looking around the globe we see the car industry, cities and energy companies trying to take charge of the platform. As they often lack in-house ICT skills, the success of these platforms is a hit-and-miss situation. In other cases, IT companies are taking charge (such Cisco, IBM and Huawei) or companies such as PWC and Accenture. The problem with these latter organisations is that their clients have become increasingly wary of proprietary solutions.
So far very few telcos have taken a leading position in such developments. Key reasons are that their financial, technology and business models are not well-suited to starting a platform and taking the risks involved in setting them up. Instead, we see IT companies taking the lead, like Google (Alphabet), for example, in Smart City Toronto.
Their business models are much better suited to such opportunities and they are prepared to take risks and accept that several investments may fail. However, this allows them to learn on the job. They know that the total value of the platform markets that will be developed over the next 10-20 years will be in the trillions of dollars.
Perhaps Spain’s Telefonica has gone the furthest of all the telcos. While still not adopting the full platform approach they are taking a lead in a range of international smart city projects. KPN in the Netherlands is another example of a leading participant, but again not a full platform operator.
Of course, telcos quickly become partners in such projects but most of the time they are relegated to providing basic telecoms services. Often, these services are tendered for by the project leader and competition makes sure that the margins for the telcos remain rather subdued.
Looking at the very upbeat messages that the telcos are sending out regarding 5G the situation will become even more complex. In order to deliver the applications that the technology promotes, such as Internet of Things (IoT) and the much-promoted connected car business, platforms will require cooperation between telcos. Such applications can’t rely on one supplier alone. You cannot have a driverless solution that only uses the Telstra network or the Optus one.
Telcos are not used to partnering with competitors. Often the message is "let’s partner, but you have to do it my way". Car manufacturers in Europe have already indicated that they are not going to build the roadside IoT platforms and are looking at the telcos to collaborate. So who will develop the "build it and they will come" business model?
If the telcos do want to better monetise their network they will have to move up the value chain and this will require a totally different business model. Most likely this will require setting up structurally separated new companies, each individually specialised, based on the markets they are selecting. The platform would largely be built around a virtual "telco" model, mainly operating in the cloud. They should be open to external developers and partners securing an ongoing development of new and innovative offerings.
In such a model the telcos’ unique skill sets allow them to take a greater controlling role. Rather than being asked to be a partner they should set up the ecosystem for the platform, select the partners, develop the financial models around the platform and be in control. Their independent position also allows them to scale this business model and replicate it where opportunities arise.
There is no doubt that such an approach holds significant risks. Some initiatives will fail. Of course, such a model should be thoroughly assessed through scenario design but that shouldn’t lead to procrastination. If done well the rewards will be large.
The telcos arguably have the deepest insight into customers’ behaviour, but if they are to move up the value chain they will need to use this insight to move out of partnerships and establish themselves in a controlling position.
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