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We’re quickly moving into the 5G era and many assume the concept of unlimited data bundles will be commonplace, but how will the telcos fare in this new world?
As it stands, the telcos are under pressure. This is not to say they are not profitable, but many shareholders will question whether they are profitable enough. Tight margins and a squeeze on core revenue streams are common enough phrases when describing telco balance sheets, but this could get a lot worse when you factor in unlimited data packages.
As Paolo Pescatore of PP Foresight pointed out, when you offer unlimited data you are effectively killing off any prospect of revenue growth per subscriber in the future. In some markets, there are still fortunes to be made, but in some, such as the UK where 4G subscription penetration is north of 100%, where are you going to make the growth revenues from when consumers are demanding more for less?
More consumers are seeking unlimited or higher data allocations but are not willing to pay for the experience. Some MNOs might be able to resist, but the more rivals who offer such tariffs the more the rest will be forced into line. It’s the race to the bottom which is profitable in the short-term, but growth will end quickly. The price per GB is only heading one direction and unlimited data allocations will end the prospect of upgrading customers.
O2 fighting for air
This is the conundrum which the telcos are facing in the UK right now. All four have announced their 5G intentions and all four are promising big gains when it comes to the next era of connectivity.
Starting with O2, the only one of the four MNOs not to have released 5G pricing to date, this is a telco which looks to be in the most uncomfortable position. Over the last few quarters, the management team has boasted of increased subscriber numbers, but this can only go on for so long in the consumer world. Soon enough, a glass ceiling will be met and then the team will have to search for new revenues elsewhere.
This is of course assuming it plans to go down the route of unlimited data, it might want to stick with the status quo. That said, if everyone else does, it will not be able to fight against the tide for fear of entering the realm of irrelevance.
The issue here is one of differentiation. The idea of attracting new customers by offering ‘bigger, meaner, faster’ data packages will soon end and telcos will have to talk about something else. O2 does have its Priority loyalty programme, but with rivals launching their own version this USP will fade into the noise.
Differentiation and convergence are two words which have been thrown around a lot over the last few years, though O2 has thus far resisted. Last year, CEO Mark Evans suggested he was not bought into the convergence trend and would continue as a mobile-only telco, though this opinion does seem to be softening.
If O2 is going to be competitive in the almost inevitable era of unlimited data, it will have to source growth revenues from somewhere. It is making a push into the enterprise connectivity world, which will bring new profits to the spreadsheets, though does it want its consumer mobile business to stand still?
Bundles of fun
This is where the other telcos in the UK have perhaps got more of a running start in the 5G era. EE has its connectivity assets in broadband and wifi to add value, as well as a content business of some description. Three is already known as the data-intensive brand, while its FWA push will take it into some interesting connectivity bundling options. Vodafone also has FWA, a fibre partnership with CityFibre and is arguably the leader in the enterprise connectivity market. The rivals are offering more than mobile connectivity as a stand-alone product.
Looking at Vodafone to begin with, the recent announcement is certainly an interesting one. The innovative approach to pricing, tiering tariffs on speeds not data allocation, will attract some headlines, while it is also super-charging its own loyalty programme, VeryMe. It has secured content partnerships with the likes of Sky, Amazon, Spotify and gaming company Hatch, while its FWA offering also includes a free Amazon Alexa for those who sign-up early enough.
Combining the FWA product or its fibre broadband service, courtesy of CityFibre, also gives them the ‘connectivity everywhere’ tag, a strength of BTs in recent years, to allow them to communicate and sell to customers in a different way. Perhaps it is missing a content play to complete the convergence bundle, but it is in a strong position to tackle the 5G world and seek additional revenues should the unlimited craze catch.
The same story could be said of Three. With the acquisition of UK Broadband, it has forced itself into the convergence game and kicked off the ‘race to the bottom’ with an unlimited 5G data offer. As long as you have a Three 4G contract, you can get 5G for no additional cost, assuming you have a 5G compatible phone of course.
Three’s strength and weakness lies in its reputation. It is known for being the best telco if you have an insatiable data appetite, this works very well for the 5G era, though it is also known for having a poor network. Three regularly features at the bottom of the network performance rankings, especially outside of the big cities where it has not done nearly enough to satisfy demands.
This will of course change over the next couple of months. Three is working to improve its network with additional sites and a new Nokia 5G core, however it will have to do a lot to shake off the reputation is has acquired over the last few years.
EE is perhaps the most interesting of the four. It has lost its position as the market share leader when it comes to 4G subscriptions, but it does have the reputation for being the best in terms of performance throughout the country. It is regularly the fastest for download speeds, but its 5G pricing is by far the most expensive to be released so far.
That said, with the BT assets it has for wifi and broadband, as well as the content options, there is plenty for the consumer to be interested in. Should BT be forced to readdress the pricing conundrum, it might not have the fear regarding a glass ceiling on revenues as there are plenty of other products to engage the consumer. It will be able to find additional revenues elsewhere.
MVNO no you didn’t
Outside of the MNOs, you might also start to see some competition. MVNOs are nothing more than ‘also rans’ today, but Sky has officially entered the 5G race. This is an interesting competitor, one who could cause chaos to the status quo.
Firstly, understand mobile is not the primary business for Sky. This is an add-on, where it is seeking to drive additional revenues and attract more customers through bundled services. It is the leader in the UK when it comes to premium content and has a thriving broadband unit also. Sky can add services on top of connectivity to make itself seem more attractive than the traditional mobile service providers.
Then again, there are only a couple of MVNOs who can pose this challenge. Sky is one, while there are persistent rumours Amazon wants to get involved with the connectivity game and Google has its own Fi service. These are also companies who are at the mercy of the MNOs in terms of the commercial agreement with the MVNOs, so damage is likely to be limited unless one network owner decides to go down the wholesale infrastructure route.
But you cannot ignore these companies. They are cash-rich, constantly searching for new ways to make money and have incredible relationships with the consumer. They are also the owners of platforms and/or services which are very attractive to the mass market; bundling could be taken into a new context with these firms.
Diversity is our strength
This is of course only looking at the services which are common throughout telco diversification plans today, there are other options. Orange has launched a bank, has experimented in energy services and is making a move towards the smart home in partnership with Deutsche Telekom. Over in Asia, gaming is an important element of many telcos relationships with consumers and this trend is becoming much more prominent in the European markets also.
Elsewhere, the smart home could certainly offer more opportunities for telcos to add-value to an emerging ecosystem, while the autonomous vehicles offers another opportunity and so does IOT. The issue which many of these telcos are facing is competition from the OTTs. Arguably, the battle for control of the smart home might already have been won by the OTTs, though the same could be said for autonomous vehicles and IOT.
In many of the emerging segments, telcos will remain a connectivity partner though they certainly need more than that. This will remain a consistent stream of revenue, though it will also sleepwalk telcos to utilitisation. In IOT, as an example, the major cloud players are crafting business units to engage enterprise businesses for edge and IOT services; this is a market which the telcos would love to capitalise on for both enterprise and consumer services.
Security is another which is increasingly becoming a possibility. The concept of cybersecurity is generating more headlines and consumers are becoming more aware to the dangers of the digital world. Arguably, the telcos are in the strongest position to generate revenue from this segment; there is trust in the brand and they have largely avoided all the scandals which are driving the introduction of new regulation.
Unlimited data is certainly not commonplace today, but with the services of tomorrow promising to gobble up data at an unfathomable pace, it would surprise few to see more people migrating to these tariffs. The question is how you make money once you have migrated everyone.
Diversification and the acquisition of new products is not a simple task, but then again, it is becoming increasingly difficult to imagine how single revenue stream telcos will be able to survive in the world of tomorrow.
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Telecoms.com periodically invites third parties to share their views on the industry’s most pressing issues. In this piece Deepak Moudgil, Global Head, Go-To-Market, Enterprise Business, Digital Operations and Platforms at Wipro takes a look at the current and future competitive environment between telcos and OTTs.
The Groupe Spéciale Mobile Association (GSMA) estimated in its recent report that the telecoms industry will be worth a massive USD 3.7 trillion by 2020. With this, telecommunications continues to be a critical force for growth, innovation and disruption across multiple industries. Also, with “smart” being the new “green”, Telcos are fundamental to building the new-age civilisation of Smart Cities as they hold the core competency of facilitating connectivity. With the telecoms industry playing a pivotal role in facilitating IP services, rise of IoT is pushing this industry to gear up to handle higher volumes of data.
Today, over nine in ten Americans use the Internet according to Pew Research Centre, which is characterised by high levels of smartphone ownership and access to high-speed broadband. Telcos cannot afford to ignore the always-online generation – 32% of the world’s population that falls under the age of 25. Dominance of this generation is fuelling digital disruption in the telecoms sector. According to research conducted by McKinsey in January 2017, on average, this generation spends about 315 minutes online every day. One can only imagine the volume of digitised data streaming over telecom networks across the world!
While digital disruption pushes telecom to change the value proposition of its current offerings, the industry continues to battle pain points like commoditisation of services, bandwidth issues, falling Average Revenue per User (APRU) and poor IT infrastructure. These issues have undermined capacity of telecom companies to fully embrace the digital disruption. This also means that telcos have not been able to monetise most of the digitised data running over their networks. This scenario has made the telecoms sector vulnerable to the competition posed by future-ready digital entities like Over-the-Top (OTT) players.
OTT players offer a wide array of digital content, and broadcasting and streaming services to consumers over the web. These players have also increased their dominance in former core telecoms services like text messages and voice calls. OTT players not only enjoy about 80% of all messaging traffic, but also account for major international voice traffic minutes. Besides an easy user interface and low-cost connectivity, a major reason for the rise of OTT players is its acceptance by the always-online generation. This has led to a sharp dip in traditional, cost-heavy analogue voice and text services and an upsurge in usage of services provided over the web. With this, OTT players have taken a huge chunk of telecom’s market share, decreasing its revenue and diluting its value proposition. Telcos are left with no choice but to adapt.
To reap the benefits of a promising future, telecom operators need to upgrade their IT infrastructure and expand their operations, which may result in high CAPEX investments. Therefore, it is time for telcos to hit the bullseye by driving cost-effective growth strategies to win over OTT players.
Simplify to amplify: Telecom operators need to think from a customer’s perspective in order to offer them superior service delivery. This requires narrowing the transformation-inhibiting gap between telcos and its customers by disrupting orthodox practices and flattening complex organisational hierarchies. Doing so will not only help telcos become agile, but also induce a desired cultural change by stimulating an innovative and open culture of efficiency that accelerates growth while cutting down operating costs.
Time to be nimble: Organisational agility comes from removing redundant platforms, automating core processes and consolidating intersecting capabilities. Thus, making future-proof IT infrastructure begins with standardising and automating core processes using Lean and Six Sigma, followed by digitisation of back-office services and, finally, by providing digital customer engagement for superior, yet cost-effective, customer experience. Once the core processes are leaner, telcos can avail services of a Managed Services Provider (MSP) in some areas to amplify the benefits of domain expertise and cost leadership.
5G to save the day: Telcos must collaborate with large global technology suppliers to manage their network upgrades and IT infrastructure, which is currently resulting in bandwidth-sharing issues among various telcos. While the technological landscape is still developing in this sector, major telecoms players are already dedicated to rolling out the 5G network – a critical component to fend off competition from OTT players. In fact, the rise of the 5G network has sparked an enormous wave of change in the telecoms sector since 2017, which continues to gather pace. Future-ready IT infrastructure and strong networks will enable telcos to monetise almost all digitised data that streams over its network. It will also enable telcos to provide services that are at par with OTT.
Thrive with ancillary business: Telcos are also reaping revenues from businesses related to financial services, media, IT services, etc. With Telecoms being at the forefront for driving the digital wave in every sector, they have a competitive advantage over traditional players in other sectors. However, to succeed in vast business lines, telcos must have a clear positioning, strong USP, future-ready infrastructure, and of course, cutting-edge technology.
AI is the reality: OTTs are delivering AI enabled services at a pace that telcos cannot match. But, as telcos drive interaction between media and IT industries, it stands to benefit most from radical technologies like AI. Analysis of offer conversion rates, content usage trends and network activity through AI will help telcos push more customised offers to their subscribers, just when they need it. Further, predictive analytics will help improve telco’s business and network capabilities with insights on consumer behaviour.
Glorify your value proposition: There’s no doubt that value proposition of analogue telcos in the digital era will change. However, telcos can use their legacy to gain a competitive edge against OTT players. For this, telcos need to emphasise the strong customer relationship built over years through their brand values and tenets.
No doubt, OTT is currently a big trend that has influenced customer’s connectivity behaviour patterns making it imperative for the telecoms industry to embrace digital transformation before it is too late. However, with the rollout of 5G, which will be the connective tissue for the Internet of Things (IoT), AI, and smart cities, the telecommunication industry is just a click away to win over OTT players.
Deepak is an accomplished IT/ITeS professional, with over 20 years of international and diverse industry exposure. Deepak has expertise in telecom operations, platform and processes (order to activate, assurance, billing and revenue management), providing business enterprise transformation solutions (simplification, automation, intelligence and immersive experience) specifically focused on communications service providers.
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The last decade has seen the rise of the OTTs at the expense of the telcos; if the Africa connectivity issue is going to be addressed, this is a trend which cannot be replicated.
If you head back to the 90s and early 00s, the telcos ruled the world. The mobile revolution was in full swing, with the telcos hoovering up cash through tariffs built on text messages and voice minutes. It was a glorious time, but then came the OTTs, and some would say the telcos felt a bit used and abused.
Nothing has changed over the last couple of years; the OTTs still enjoy a much more lenient regulatory environment allowing them to monetize data and services on a different scale to the telcos. This is unfair, after all the telcos have mountains of data waiting to transform into fortunes, but this isn’t the point we are getting at. The point here is much more basic; OTTs reap the rewards of the digital age without having to build the networks which facilitate it.
All over the world this is a relationship which ultimately screws the telcos. They spent billions on building the infrastructure, but the OTTs are the ones getting rich. It is the status quo which many operators have come to accept, however grudgingly. But it cannot happen in Africa, and there is one simple reason; incentive.
During the 90s and 00s, the telcos built the infrastructure and had an opportunity to monetize it. Years passed where we paid a fortune to the telcos for SMS messages and voice minutes, and then the OTTs came along. This might have destroyed the traditional telco business model, but at least they were given the opportunity to generate some ROI in the early days.
In many places on the African continent, the basic infrastructure is not there. This means there are greenfield projects without the promise of monetization; forking out the cash with the fear there might be a few OTTs out there just waiting to take advantage of your hard work and significant investment. If this trend continues in Africa, there is no incentive for the telcos to build the infrastructure in the first place.
“To tackle the infrastructure challenge, you have to go back to the root cause; it isn’t commercially viable,” said Charles Murito, the head Googler in Kenya.
Google seems to be one of the tech giants who are helping address the basic issue of connectivity. Across the continent, there are numerous projects where Google is contributing hard cash to roll out infrastructure. But there aren’t many other supporting voices from the OTT community.
During one of the panel sessions at AfricaCom this week, the topic of discussion was network sharing. It sounds like a good idea, one which has been floated in other regions as well, but there has been little evidence of it been taking beyond glorious promises so far.
One of the jobs of the government should be to encourage investment. In Africa, this is especially true considering the connectivity issues which the continent is facing. One of these responsibilities should be to create a regulatory environment which demonstrates to the telcos that there will be a ROI.
This is certainly easier said than done, but Airtel’s Purumedh Gupta highlighted this should come with cross-border infrastructure projects, the harmonization of SIM registrations, rural connectivity and the removal of fragmentation across the continent. In short, a consolidated effort.
Sometimes this will start with government funding into infrastructure projects. In this sense, it reduces the financial burden, but also provides the telcos with a bit more security; there is confidence from the government behind these projects. It also creates an independent focal point for network sharing. Don’t forget, most of the time these telcos are fierce competitors; getting them to play nice is a tricky task.
Ultimately, the telcos need to see there is an opportunity to make money, which brings us back to our original point. The OTTs, who so readily benefit from connectivity, need to create a model where they assist the telcos. This could be from upfront investment in the infrastructure, like Google has done, or assurances there will be some sort of revenue sharing scheme moving forward. The connected economy could easily be known as the sharing economy; if the wealth is not dispersed throughout the ecosystem, it fails.
The OTTs have made billions off investments made by the telcos; that is the operating model of this fast growing segment. It might be a successful business in Europe, but it won’t work in Africa; the basic infrastructure is not in place, and it never will be if there is no incentive for the telcos. In short, the OTTs cannot be allowed to screw the telcos again.
Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this piece Avi Kulshrestha, Industry Head – Communications Media, Entertainment & Global OEM Business at Infosys, looks at some of the ways telcos are fighting back against ever-growing commercial pressures.
The global telco marketplace faces competitive and revenue pressures from almost every conceivable direction. The rise of over the top (OTT) services has undoubtedly caused issues – placing more pressure on telco costs in order to deliver on customer expectations without necessarily increasing inbound revenue. However, the OTT phenomenon is not the only issue, or indeed the only opportunity for the sector to fight back, restructure and realign its revenue base.
On the face of things, the revenue prospects look promising, with analyst expectations that global sector revenues will reach $2.4 trillion by 2020, up from $2.2 trillion in 2015. Demand for mobile devices and greater anytime, anywhere bandwidth remain key drivers of telco sector growth. While the shift to cloud-based services and on-demand content delivery over linear broadcast is putting pressure on both core network capacity and WAN capability. The cost of bandwidth is rising amid greater consumption, while greater competition and deregulation is also driving increased marketing spend along with mergers and acquisition (M&A) costs.
The M&A drive in the sector is seen as an effective way of tackling the competition posed by OTT providers, as well as injecting telco operators directly into the content market. Doing so allows them to compete directly for OTT revenues head-to-head. In the last year, we have seen Verizon move on Yahoo in order to bolster its AOL investment. Meanwhile, AT&T is making progress in its acquisition of Time Warner. These are the latest moves in a market that has already seen Comcast expand its footprint with its purchase of NBC Universal. Meanwhile, BT has launched sports and entertainment content services via linear and online streaming, securing first-run broadcast rights rather than just using a back catalogue of content.
Using OTT to expand telco reach and boost revenues is just one area that operators are exploring to boost revenues and broaden the service offering. Telcos are also looking to simplify their networks and move to a single IP-based platform. Trials in the US have seen legacy operators abandon traditional PSTN infrastructure in favour of a fully IP-based telephony service running over the same fibre or DSL line as the customer’s broadband service.
This approach offers a number of potential value-added opportunities. A single network cuts on-going investment and maintenance costs, increasing profit margins and offering more scope for price-led competition. It also enables value-add and innovative services such as service portability – allowing users to receive calls and messages across a range of devices via an app, rather than only via a fixed analogue line. Services like this are important in the face of growing OTT competition from the likes of Skype, WhatsApp, WeChat and Facebook Messenger. Along with others, these are posing a threat to both fixed-line as well as mobile voice and text revenues. Data from UK regulator Ofcom showed that average fixed voice call volumes per line fell 8.3% in 2015, a trend being mirrored in most developed economies.
Telcos are also exploring the integration of services to form triple and quad-play service offerings. Particularly in the consumer space, but also for B2B customers, this is a way of building loyalty and lock-in, as well as simplifying billing and utilising a single network for maximum effect. Offering bundled services such as fixed line telephony, mobile telephony, fixed line broadband and content services in a single package offers convenience, while also diversifying revenues across physical network services, content and OTT.
The future prospects for the telco sector remain complicated. For example, European market curbs on both voice and data roaming charges that came into effect in June 2017 will impact on revenue streams and turnover expectations. In the UK, regulator Ofcom has announced plans to force BT to divest its Openreach infrastructure arm. This is a major shake-up that aims to make last mile service delivery more accessible to competing providers, levelling the playing field for all. Emerging markets such as Africa, India and China have some of the most heavily regulated communications markets. In these regions, we expect to see more partnerships with local incumbents as an easier way into heavily regulated markets. The use of specialist services firms to support these telcos through their metamorphosis is essential to ensure smooth and cost-effective consolidation of networks, infrastructure and services.
Avi heads Infosys business for Communications, Media, Entertainment and OEMs for Infosys Europe. He is responsible for creating strategy and driving business growth through 4 sub-verticals for Europe. He is responsible for helping CSPs, media business and OEMs ‘renew’ their existing business while adding ‘new’ capabilities and revenue streams. Avi is part of Europe Leadership Council at Infosys, responsible for driving thought leadership, Innovation, and corporate initiatives across portfolios. Avi sits on the Communications Industry Council of Tele Management Forum (TM Forum). The Advisory Council is appointed by the board of TM Forum to shape and drive the Forum’s strategic work programmes for global communications industry.