Telcos’ growth strategy in a digital world
Incumbents are now asking if digital is a
threat to or an opportunity for their business model. Beyond operational
efficiency, they will need to focus on excellence in execution.
As digital proliferates the telecommunications industry, incumbent telcos
find themselves in the middle of a paradox. First, “thinking digital” is deeply
embedded in their business models. They are, after all, not only providers of
their own digital products and services but also enablers for other sectors, by
providing the essential connectivity infrastructure for functioning and growing
in the digital economy, which results in a growing demand for broadband access.
Also, it is forecast that the number of digital customers will skyrocket
globally, and intensity, with respect to time spent using digital platforms as
a means of communicating, will increase over the next few years. At the same
time, consumer behavior regarding traditional communication services is
changing, and the total consumer spend on these services is expected to decline
even while overall communications activity grows. Finally, as technological
breakthroughs accelerate, more and more new digital natives are entering the
core telco market with innovative business models and technologies, leaving
many incumbents to wonder if they can keep up or if they will be displaced.
The
growing force (and changing face) of digital
There are two-and-a-half billion digital
customers globally who are under 25 years of age. What characterizes this group
is the fact that they are “always on” and that they show a different usage
behavior compared to that of the traditional “analog” consumer. On average,
these young digital users spend 315 minutes online each day (versus 126 minutes
for customers over 25 years). More than two-thirds of this group is on YouTube
daily, and 41 percent of 18- to 32-year-olds in the United States use
video-messaging-service Snapchat for 25 to 30 minutes per day.
More than just an enabler of entertainment
and social communication, digital is an instrument that helps this youth and
young-adult demographic “take care of business,” with 45 percent using social
media as their primary platform for customer service. In addition to digital’s
popularity as a preferred way of handling business, there is the trend of
“mobile only” Internet access. For example, over half of all active Facebook
users access their accounts solely through their smartphones. Together, these
trends—digital business and mobile access—contribute to the projection that by
2019, more than two billion users will make payments via mobile devices.
Overall, this will result in an increase in the absolute number of digital
customers as well as in a massive increase in the amount of time that consumers
spend when using communication and broadband services globally. According to
Ovum, communication intensity in regard tof time spent will grow by 63 percent
over the next ten years.
Cannibalizing
voice and messaging—offering more for less
As the overall digital market grows—an
additional billion middle-tier customers for telcos, mainly in emerging
markets, is expected by 2025—the door for new over-the-top (OTT) entrants is
opening. These digital natives are offering the same staple services of voice,
messaging, and video calls that used to be the domain of traditional telcos. In
particular, OTT players such as Apple’s FaceTime, Google Hangouts, Skype,
Tencent QQ or Tencent’s WeChat, and WhatsApp threaten to cannibalize these
staple offerings with innovative, easy-to-use, and even more-attractive
messaging and communication services.
Just a few years ago, messaging, fixed
voice, and mobile voice services from OTT players accounted for 9, 11, and 2
percent of relevant revenue, respectively. Several scenarios run by McKinsey
& Company reveal the possibility of a jump in share for each of these
services. In the most aggressive scenario, the share of messaging, fixed voice,
and mobile voice provided by OTT players could be at 60, 50, and 25 percent,
respectively, by 2018 in an all-IP environment (Exhibit 1). As those service
offerings are being built on innovative business models, they will be available
to users at a much lower price than traditional telcos are able to offer. According
to Ovum, this will likely result in a drop in spending on traditional
communication services by 36 percent over the next ten years, further pushing
incumbent telcos to the margins of voice and data provision.
Increasing
demand for communication infrastructure—broadband-access hype
“Thinking digital” is deeply embedded in
telcos’ business models. They not only provide their own digital products and
services but also the essential connectivity infrastructure that allows other
sectors to function and grow in the digital economy.
The digitization trend is currently
challenging every sector in industry and society. In almost all cases it is
having dramatic, if not disruptive, effects on existing traditional industry
dynamics and business models. Hence, all companies and institutions will have
to think about how to deal with this digital revolution and what their role in
the newly arising digital ecosystems might be. Digital is all about data, but
its full value can only be delivered when adequate IT and technology form the
infrastructure that seamlessly connects that data and enables its
exchange—anytime and anywhere. This growing demand for connectivity will
require companies to have broadband access and a gigabyte or high-speed
infrastructure, which would result in a rise in spending for ubiquitous
broadband access.
As we also strongly believe in the rise of
the Internet of Things (IoT) and Industry 4.0 as major drivers of this digital
revolution, we can expect to experience an increasing demand in machine-to-machine
and cloud services. McKinsey estimates that IoT’s potential economic impact on
factories will rise to as much as $3.7 trillion a year by 2025, mainly from
productivity improvements, including as much as 20 percent in energy savings
and 25 percent in potential labor-efficiency improvement. To deliver this
value, IoT envisions a world of connected devices that goes beyond mobile
phones and smart watches. Everyday objects would be linked, that is, they would
be able to send and receive data to and from one other. This level of
connectivity would require additional, related IT and infrastructure services,
which would further drive telco revenues.
Value
chain takeover—new technologies and increasing competition
Market forecasts are predicting increasing
margin pressure but no sea change with respect to fundamentally questioning the
relevance of telcos in the future. There is, however, something going on in the
traditional telco value chain and competitive landscape that is jeopardizing
the existing telco business model. Not only are we experiencing increasing
competition among traditional companies—telcos, cable providers, and mobile
virtual network operators—new OTT entrants are also cannibalizing services, and
Internet and other tech giants are moving onto the traditional telco and media
terrain as well. Amazon, Apple, Baidu, Google, Microsoft, Samsung, and Tencent,
as well as pure tech companies such as Cisco, Huawei, IBM, and ZTE, are all
growing their presence across the traditional telecom’s value chain with
innovative technologies—from network and service through devices and operating
systems to applications and media. And, to make things even more challenging,
many large and medium-size companies—telcos’ traditional customers—are starting
to build their own infrastructures.
OTT players are offering core telco
services such as voice or messaging, and the media space is becoming their
domain. Tech and Internet companies are also increasingly active in growth
areas, such as cloud space and services, competing with telcos for clients and
revenue. They are tying customers to their own ecosystems, while making
reliance on traditional operators a thing of the past. With carrier-neutral
connectivity (for example, e-SIM), many tech and Internet companies are enabling
seamless changes between operators and eliminating the hassle of changing
telecom providers. Hence, digital players are systematically attacking existing
telco profit pools and will continue to do so—eating up telcos’ revenues and
margins. This makes differentiation purely on B2C products for traditional
telcos a highly questionable proposition in the future.
In addition to these revenue-eroding
trends, regulatory developments—especially in Europe—have cut down roaming
revenues dramatically. All told, the opportunities that newcomers, tech, and
Internet players are capitalizing on may slow growth for traditional telcos,
costing them upward of $300 billion. Worldwide, the compound annual growth rate
(CAGR) for traditional telcos is estimated at only 0.7 percent through 2020.
For many telcos, largely in developed markets, the outlook is especially
disappointing with projected negative growth. Telcos in Western Europe and in
Central and Eastern Europe are facing –1.5 and –1.3 percent average growth,
respectively, over the next four years, while those in North America are
expected to barely tread water with growth at only about 0.3 percent.
Additionally, these new entrants—with
their global reach and a focus more on software and service than on hardware
and infrastructure—also enjoy significantly higher stock valuations than do
incumbent telcos. This is because their growth potential is seen as much higher
than that of those traditional incumbents continuing to operate under their
existing business models.
Implications
and opportunities for telcos
For traditional telcos, this disruption,
enabled by digitization, is anything but ordinary. Developments in digital
technology threaten their current investments and put their cost baseline under
significant pressure. New competitors are entering the core space of telcos,
which will reshape the existing company landscape. In addition, telcos will
continue to be forced to make major investments in future network technology.
But the cost of just doing this alone is expected to result in a drop in
revenue in the order of 15 to 30 percent. Nevertheless, the growing importance
and demand for connectivity and broadband access will ensure that there will be
some growth opportunities out there, too.
To remain relevant in an increasingly
digital space, incumbent telcos are advised to consider two strategic moves
and, if appropriate, take immediate action:
1) make the core business “super slim,”
cost efficient, and more agile and
2) identify new growth areas in the space
that combines the great potential of digitization and telcos’ existing core
competencies.
The
super-slim telco—a no-regrets move
Given the mounting pressure that telcos
are experiencing—particularly in Europe, where CAGR was –1.8 percent between
2014 and 2016—seeking greater efficiencies in core areas and establishing a
super-slim telco are no-regrets moves. But to get there, telcos will need to
rethink their operating models.
Transforming business models to optimize
efficiency hinges on the implementation of digital in B2B, commercial, and B2C
and spans all processes from marketing and sales through network all the way to
customer support. Especially areas that are driving the highest costs, such as
the network technologies, need to be reworked and moved into an IT-centric and
more software-driven environment. Such a move should reduce related baseline
costs by 30 to 70 percent, improve time to market and agility, and enable
flexibility and self-provisioning capabilities—but usually takes some time.
Also, telcos can learn from other leading pure digital players and pursue
developments to, for example, completely digitize their customer front ends
(including service), develop and deliver products that are completely software
generated (no in-home hardware), and fully automate processes, such as billing
and service coordination. In this area, some telcos are already making
progress. But the real benchmarks can be found within the crowd of pure digital
players, who have learned to rethink their processes completely, making them
digital, extremely agile, and cost efficient.
Business
opportunity in B2B
While the odds may be stacked against
telcos in reclaiming the pole position in the B2C space, the good news is that
telcos can capture new business opportunities in B2B, as this space is just
beginning to develop. Here, specifically, telcos can leverage their
infrastructure advantage—combining this with state-of-the-art digital
technology—and position themselves as the backbone of fast-growing digital
ecosystems, especially around IoT, security, and Industry 4.0. This position
spans the categories of network, product, and services and offers telcos the
possibility of taking leading (sometimes exclusive) roles in, for example,
intelligent networks, solutions in information and communications technology
(ICT), cloud services, analytics, IoT platforms and security solutions,
billing, and customer relationship management. Evidence of this as a
potentially attractive space can be seen in the growing adjacencies-related
announcements of operators in IT and technology in their quest to meet the
customer’s appetite for ICT solutions and IoT. Unfortunately, experience shows
that telcos have historically only found success in transversal products (for
example, security, IoT, and cloud services for regional small and medium-size
segments). In all other areas, telcos have developed great ideas but have
failed to successfully execute them.
One example of the connectivity and
value-added solutions that telcos might explore could be playing a dominant
role in smart-city infrastructure. The existing infrastructure needs to be
transformed into a smart infrastructure (for example, converting traditional
passive pipes into self-regulating active and smart pipes or changing
streetlights into intelligent streetlights). Additionally, the whole smart-city
infrastructure needs a level of connectivity on the order of a gigabyte as well
as the capacity to provide additional services, such as billing or analytics.
A second example of telcos’ infrastructure
opportunity is the role they might play as the platform for Industry 4.0 or
IoT. In this case, a network operator would serve as the backbone or platform
of the complex data flow that links machine sensors to back-end services, such
as analytics or cybersecurity, and transportation supply-chain infrastructure
to navigation, factory floors, social media, and logistics apps. This could be
highly attractive because machine-to-machine revenues are projected to grow by
double digits over the next few years. Other examples for telcos include the
provision of healthcare infrastructure, platforms for smart mobility, or
enabling B2B2C consumer-retailer networks.
While increasing digitization presents B2B
opportunities for traditional telcos, leaders should be aware that the
competition in this infrastructure and value-added space will be intense.
Players from across telecom and other sectors will pursue these revenue
opportunities; however, only a select few will capture the value and move further
into the enterprise space.
Competing with digital natives in B2C in
the areas of voice, video, and messaging might be an uphill battle, yet even
here some options do exist for telcos in B2C. Combining their core competencies
with opportunities in digital technologies, telcos might consider options for
offering connected platforms for smart homes, self-marketing, digital
entertainment and secure-cloud and data services for individual consumers.
The digital B2B market for traditional
telcos is in its early stages, but it is fast-growing and expanding. Large OTT
players, however, are not sleeping—they have already started to look beyond the
pure B2C space into B2B, and they are trying to conquer it as well. For
example, Amazon, IBM, and Microsoft—the largest cloud-services players by far
in the Americas and Europe—are making B2B inroads. Of these, Amazon is already
positioning a B2B sales platform. Alibaba, Huawei, and others are following
suit out of Asia, as traditional telcos are currently asking for their
inexpensive services. And while some tech and Internet companies have already
started to discover this B2B space, telcos have yet to enter this arena. Most
telcos know about the B2B opportunity, including its inherent challenges, but
are having a hard time operationalizing it. So, the time for telcos to act and
fix their execution problem is now. Without swift action, they will almost
certainly fall behind once again, because OTT and tech players will do
everything in their power to dominate the B2B space.
The telecom industry is on course to becoming
unrecognizable within ten years’ time in a “do nothing” scenario. The global
market for potential customers is still growing, but the forecast for
traditional telcos is for low revenue growth and shrinking margins, because of
increasing competition from OTT and technology players. Despite the inevitable
change, opportunities exist for those that are willing to accept the challenge
and initiate change. To survive in an environment where digital dominates, telcos
must create a super slim and efficient core business. To thrive, they will need
to strategically define and aggressively pursue growth areas. Many have come up
with innovative digital ideas, but ideas will not be enough. Telcos have
already ceded much of the value in B2C to OTT and tech companies. Without a
demonstrated commitment to excellence in execution, they risk losing out on the
B2B opportunity to these same players as well.
By Jürgen Meffert and Niko Mohr
http://www.mckinsey.com/industries/telecommunications/our-insights/overwhelming-ott-telcos-growth-strategy-in-a-digital-world?cid=other-eml-alt-mip-mck-oth-1701
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