For 5G to succeed European operators need a new deal on regulation and consolidation

Telecoms.com periodically invites third parties to share their views on the industry’s most pressing issues. In this piece Bengt Nordstrom of Northsteam explains how regulation, M&A and consolidation in the European telecoms market have divided opinion over the industry’s future direction.

Europe’s large operators have long argued that anti-M&A measures by regulators undermine their future investments by preventing market consolidation. They contend that fewer national operators can devote more resources to better networks and services for their customers, including 5G.

But regulators disagree. They maintain that four-player national markets promote competition and therefore guarantee low prices and high service quality for consumers.

Can new players survive?

Regulators also encourage new players to enter and disrupt the market. That’s why regulators in Germany and Belgium over the summer opened the door for new players to enter their respective mobile markets. Both markets have already consolidated to three operators, but regulators are still prepared to offer spectrum to new players.

However, the overwhelming cost of building an entire nationwide network from scratch along with gaining access to suitable mast sites is the reason why we shouldn’t expect new players to enter the fray in Germany and Belgium.

No new customers in Europe

The reality in Europe is that there are no new customers to win. Operators currently engage in tit-for-tat price wars to steal subscribers from each other, either by lowering prices or through exclusive deals on new devices.

Questions remain over how profitable any new entrant can be in Europe’s largely saturated markets. Any new entrant that attempts to enter a mature European market is likely to be sold – probably at a loss – to a bigger incumbent operator a few years down the road.

Iliad launches in Italy

A case in point is Iliad in Italy. In May, the French operator group launched in Italy to compete against incumbents Telecom Italia, Vodafone and Wind Tre (who itself merged with Three Italia in July 2016). With its aggressively priced service plans, Iliad added one million users in its first 50 days in Italy: in the same quarter that Iliad launched, Vodafone recorded a 6.7 per cent drop in its Italian revenues.

It was Iliad who kicked off the current spate of operator price wars in Europe when, in 2012, it took the French retail market by storm with its cut-price voice and data services. However, since 2017, its share price on the Paris Exchange has dropped by fifty percent.

Analysts and investors are concerned by Iliad’s missed forecasts, plus its gamble on expanding into the Italian market. They’re also wary of the impact on Iliad’s subscriber numbers of France’s other operators investing in and upgrading their own networks for better service performance.

Iliad’s early success in Italy sounds impressive. But attracting one million customers from its competitors is not as much of an achievement when we consider that those customers are probably low ARPU subscribers who typically spend the least amount of money with their operator. These subscribers aren’t likely to be missed by their previous operator.

Iliad’s long-term prospects

The key question that Iliad – and any new entrant into a mature, saturated European market – must answer is whether its business is viable in the medium and long term. Does Iliad have deep enough pockets to keep fighting the price war it’s started in Italy?

Iliad depends on its Italian rivals for their networks and their coverage. None of them will offer it wholesale conditions that jeopardize their own businesses. And building an entire network of its own from scratch would be prohibitively expensive for Iliad.

What’s most likely is that Iliad – rather than become a long-term fourth operator in Italy – will instead sell its assets as part of some future consolidation of the Italian market.

Europe must catch up in 5G

Rock-bottom consumer prices versus continually rising data usage define how much capital operators can invest in upgrading and improving their networks – including 5G.

Europe currently trails both the Far East and North America in the move to 5G. Incumbent operators and investors alike have long demanded a more stable regulatory environment to deliver the sorts of returns needed to support future network rollouts, whether full-fibre or 5G.

If the current regulatory policy doesn’t change, the most likely outcome for Europe is continuing low prices for customers – but also very few 5G services by 2021.

Can France provide the answer?

Perhaps it’s appropriate that the next twist in this story might well come from France, where the current round of operator price wars began with Iliad in 2012. In May, Sebastien Soriano, Chairman of French regulator ARCEP, indicated in an interview that he would be open to allowing consolidation among the mobile players.

The reason? France’s operators have addressed the country’s coverage problems and infrastructure needs with two years of investment, including €9.6 billion in 2017.

Other national regulators, along with the EU, should be watching intently to see if policy changes by France that reduce the number of nationwide players to three will have a positive effect and trigger a fresh round of investment in 5G and fibre.

A new regulatory approach for 5G

In these changing circumstances, regulators should reevaluate their relationship with operators plus their own regulatory position. They can continue to protect consumers by closely monitoring both prices and service quality. At the same time, regulators must also remove their opposition to consolidation.

Instead, they should work more directly and closely with operators, to guarantee service quality targets for network performance issues like coverage, latency and speed. In this way, regulators can ensure fairness for customers, create new growth opportunities for operators, and help Europe catch up and compete in the race to 5G.

 

Bengt Nordstrom CEO NorthstreamBengt Nordstrom is CEO of strategic mobile telecoms consultancy Northstream, which he co-founded in 1998. A former CTO and Executive Director of Hong Kong mobile operator SmarTone, Bengt has also held senior management positions at Ericsson, Comviq and consultants Netcom. In addition, Bengt was a member of the Executive Committee of the GSM Association and chaired the GSMA’s Asia Pacific Interest Group.

Traditional operators are incapable of digital transformation

The Digital Transformation World event this week shone a light on quite how far from achieving digital transformation many operators are.

Such is the perceived importance of this concept to the future health of the CSP industry that TM Forum, which has traditionally been more focused on just the underlying technology used by CSPs, decided to rebrand its big show of the year accordingly. Everyone in attendance seemed to agree it’s important, but that certainly doesn’t mean it’s going to happen anytime soon.

First, what the hell is ‘digital transformation’? Like many persistent buzzwords it’s sufficiently broadly and vaguely-defined that it can be applied to pretty much every aspect of corporate evolution. In the context of CSPs it’s generally understood to refer to the necessity of changing the way they do things to match the speed of innovation typically associated with Silicon Valley internet companies. Or, as CEO of consultancy BearingPoint Angus Ward said at the show “How do you create more compelling, differentiated products and services that are harder for other people to copy?”

In this respect digital transformation (which we would abbreviate if it wasn’t for Deutsche Telekom – sigh) can be broadly subdivided into technological and cultural evolution. The former concerns all the cleverness currently underway in virtualizing, cloudifying and automating network management, which was a major theme last year.

Culture club

This year we felt the discussion focused much more on the cultural side of things, a view shared by many others in attendance. And if you thought the technological transformation was tricky, the cultural challenges can seem insurmountable, so much so that you have to wonder whether it’s even possible.

“That’s our big question,” said Nik Willetts, CEO of the TM Forum (pictured above, delivering his keynote). “Let’s assume for a minute the technology problems can be overcome – if you look outside the industry a lot of them have been overcome by hyperscale internet companies. But if you put all this amazing technology in an environment where people work and procure and think and sell the way they always have, it’s a bit like having a Ferrari engine in a Skoda.”

TM Forum launched its Digital Maturity Model last year and a Digital Transformation Tracker this year, both designed to shine a light on the challenges associated with all this stuff and to help companies go about it. In common with the technological challenges, the culture shift can seem to enormous and daunting that companies need it broken down into manageable chunks to have any hope of making progress.

One person who seemed impressed with this approach was Mary Clark, CMO of Synchronoss, which specializes in providing digital products and services to operators that they can then pass on to their customers. “I was happy to hear a consistent theme of looking at digital transformation in a modular way – breaking it down into manageable chunks that can then be executed upon,” she said.

“Rather than hearing about all-encompassing projects, there is a real embrace of targeting specific areas, setting objectives, and executing in a much more narrow way, giving more opportunity for success. I heard several examples where there was focus put on a specific business area, like enterprise or SMB and the subsequent actions taken to improve the customer journey for standard actions. And then get to it. Then if there are lessons learned there they apply them to another area. It makes the whole prospect of even beginning with a digital transformation project more feasible.”

BearingPoint’s Ward flagged up some research his company has done, segmenting companies by business and this culture type. “It’s quite a nice framework for things like culture,” said Ward. “So asset providers are very centralised, with a business case for everything and slow decision-making. But that is in conflict with the retail side that wants to move a lot more quickly. Also the culture of an asset-intensive business may be very different to one based around intellectual property.”

Bearing point 4 models

Bearing point 4 quadrant

The customer is always right

Bengt Nordstrom of telecoms consultancy Northstream identified the key cultural challenge as the move to a customer-centric mindset. “A digital transformation project must always start with a customer and business process mindset,” he said. “For instance, how would we like to serve our customers in the future? How would they like to buy and consume our services? What in our ways of working can be improved and streamlined to gain shorter lead times and cost reductions? After such analyses they can investigate how technology can help them to achieve their objectives.”

And it’s not like the operators haven’t got the memo. We spoke to several and they spoke with a common voice. “You’ve got to know what people want to buy; how do you stay relevant and make that pipe something you never leave?” said Ibrahim Gedeon, CTO at TELUS.

“Operators need to offer their customers contextual, useful things and be careful not to appear to be trying to exploit them,” said Erik Meijer, who works in Strategy GPM/Group Innovation at Deutsche Telekom. “What John [Legere] did in the US was to go into the call centre rather than the board room and listened into the calls to understand where the problems are. Then he started to eliminate problem by problem, by asking how he could help them.”

“It’s all a question of still being in the value chain in two, three, five years from now,” said Thierry Souche, CIO at Orange and SVP of Orange Labs Services. “That’s why we put a lot of effort into conversational services and identity. Digits from T-Mobile in the US is a good illustration of this as it allows you to loosely decouple your identity from your number, SIM and device.”

“Ultimately it is about survival,” said Nordstrom. “In a fast-moving ICT world, operators are only relevant as a channel for its various service and product providers and for its customer if they are digitizing their businesses at least with the same pace as they do.”

A few people we spoke to agreed that, as well as introducing digital transformation incrementally, it’s probably a good idea to have distinct, semi-autonomous business units within the company that are largely insulated from the incumbent culture and given longer-term, more qualitative, more collaborative incentives.

“Webscale companies like Amazon focus on smaller product-focused teams with all the right people in them to get the job done and their focus is on an outcome for a customer,” said Willetts. “Compare that to your classical enterprise – telco or otherwise – in which people operate primarily within their siloed department, and it’s completely different.”

Play to your strengths

Another common theme was the need for operators to open up to collaboration with partners that are better at things like apps and digital services than they are. This involves things like open APIs and creates risk, but the risk of not doing so seems greater.

“These days few, if any, innovations, whether they’re service improvements, or new products and services, are solely created in-house,” said Ward, who unveiled some research on partner ecosystems at this year’s show. “So you have to have a differentiating ecosystem of partners and they bring with them different cultures.”

A great illustration of how badly it can all go wrong when a traditional, siloed organization tries to act in an agile, customer-centric way without having undergone digital transformation is the tragic case of Vodafone 360, which saw the telco attempt to combat the OTT threat by launching a walled-gardened hardware and software platform. It had problems from the start as it was a massively inferior experience to iOS and Android and was embarrassingly canned just two years later.

Attempting even minor changes to the culture of large, old organizations is notoriously different. Not only is there a general cultural inertia, but you have levels of management that have built their careers on the old way of doing things and often all the incentive structures are set up to support the status quo. It’s hard to see how operators can hope to do this with the way they’re currently set up. The cruel irony is that they’ve probably got to transform themselves a fair bit just to be able to make a start on full-blown digital transformation.

To paraphrase the Philosopher Sam Harris: the most harm is done by good people with bad ideas and bad incentives. For CSPs to have any hope of achieving the digital transformation they all agree they need, they need to communicate that idea throughout the whole company and incentivize every single employee to implement it. Sounds simple enough, doesn’t it?

Don’t hold your breath for 5G new revenue streams – Northstream

As we get closer to the arrival of 5G there are growing calls to chill out on the hype and be honest about the benefits its can realistically be expected to bring.

In an interview with Telecoms.com Bengt Nordstrom, CEO of telecoms consultancy Northstream, warned that not only is 5G likely to roll out slowly, but the benefits to CSPs will be mainly in the form of efficiencies rather than sexy new revenue streams.

“We are at a paradigm shift in the telecom industry where we, for the first time when a new generation mobile standard arrives, must focus on what efficiency gains and cost savings it can achieve for us rather than what new revenue streams it can create,” said Nordstrom.

“In a capex constrained operator market, we cannot expect them to rapidly roll out 5G when the revenue upside is very uncertain. Operator investments in mobile broadband have been extensive over the last 10 years but still operator revenues are declining.”

Ever since the industry went mad in bidding for 3G spectrum that it then struggled to monetize, the question on the ROI of new generations of wireless tech for CSPs has been a delicate one. Marketing teams understandably want to saturate every advert and press release with ‘5G’ such that the market is in danger of being sick of the sight of it before it even turns up. Vendors, of course, want CSPs to feel compelled to spend obscene amounts of money on network upgrades for fear of missing the boat.

One of the big problems with all this hype, however, is that consumers have come to expect continual improvements in their mobile service without paying any extra for it. Furthermore the enhanced mobile broadband aspect of 5G is likely to be especially anticlimactic as there will be no dramatic increase in bandwidth just because you stick ‘5G’ on a handset.

Nordstrom shared some of his company’s research with us, which provides some good insight into likely timelines associated with 5G. As you can see from the slides below, while the initial deployment is expected to commence in 2020, as everyone has been anticipating for ages, it’s likely to take a further three years for mass adoption to kick off. One reason for this is that MNOs can probably only afford to replace 10-15% of their gear per year.

Northstream 5G slide 1

 

Northstream 5G slide 2

Northstream 5G slide 3

Another commercial dilemma 5G might raise is the spectre of unmetered mobile broadband, moving to the model most fixed broadband has used for some time. The reason is likely to be similar – that diminished capacity constraints make such things more economically viable and unmetered plans may prove too great a competitive temptation for challenger MNO brands to resist.

“One interesting aspect of 5G is that the capacity improvements it delivers could result in all operators offering ‘all you can eat plans’,” said Nordstrom. “That would change the market dynamics quite a bit.”

Talking about operator market dynamics, Northstream has also been keeping an eye on quarterly IoT revenues from those operators that announce them. The final slide below indicates that after some promising initial growth, IoT revenues are now stagnating “When we look at the Q3 results from Vodafone, Telefonica and Verizon it seems like IoT revenues have stopped growing in spite of that the number of connections are growing fast,” said Nordstrom. “We take it as a sign of that it has become an increasingly competitive market place.”

That’s one way of looking at it, another is that IoT – one of the three pillars of 5G alongside eMBB and low-latency wireless – is also facing a moment of truth where the initial hype has hit a wall of new revenue reality. 5G and its offshoots will surely generate new revenue eventually, but Northstream’s message seems to be that this is unlikely to happen anytime soon and the ROI is more likely to come from boring old efficiencies in the mid-term.

Northstream IoT slide