From “just” connectivity to reselling digital life and work. Catalyst I ofTelco Rising
Superconvergence means revenues beyond connectivity. B2C has video already well positioned, and other areas are being explored. B2B starts with virtual networks and builds up to the workhorses of digital transformation: IoT, Cloud, Security and Big Data. Edge computing, B2B2X and 5G will up the telco game further in the medium term. Revenues are already visible, while margins are not being affected thanks to increased customer loyalty and fixed costs.
As discussed in “Telco Rising” superconvergence is one of the catalysts that telcos have ahead of them. While connectivity revenues are safe but stagnant, telcos are starting to have access to revenues in adjacent markets that can more than double the addressable market. There are opportunities in the Consumer/Residential side (B2C), in the Business side (B2B) and some new upcoming opportunities beyond the short term. The main data points that make this credible are that the revenues are already apparent in many markets, and margins haven’t been hurt with the inclusion of these new businesses.
B2C: Video and Beyond
Telcos have gone for Pay TV and video in a big way. DSL had technical problems, fibre deployments have made IPTV default. It is difficult to conceive ultra-broadband without video, totally in fixed and increasingly so in mobile. We can find everything from massive bets on original content like AT&T to reseller only strategies like Vodafone and DT, or Megafon’s Netflix-like service for its mobile customers in Russia.
Even if some telcos have ventured into content production successfully, the core of video is a reseller model. Content producers have a fixed cost investment and want to monetize it among as many customers as possible. So finding someone who can monetize it for you is of great help. The natural rivalry between content producers, the high cost of video content relative to music, and the risk of any single gatekeeper becoming a content producer probably preclude a Spotify-like model. Customer inertia and unwillingness to subscribe to 5-6 different products probably preclude a purely direct-to-consumer world, creating a big middle ground for telcos
Video is a great showcase of the new relationship between Telcos and Big Tech. Instead of competing against Netflix, Amazon Video and Youtube, most operators are opting for working together with them. AT&T is probably the only with competing ambitions after its 80Bn Time Warner/HBO acquisition. Cooperation is positive for both sides, telcos get the content integrated into their product without having to build it and Big Techs get access to large customer bases directly.
So video has become a strong revenue category and customer anchor for telcos. Beyond Video there are a host of other services for with a similar dynamic could develop. Financial Services like consumer lending or insurance, home devices, security services, basic app constellations and digital services. Anything that is mass-market, can be distributed through connectivity, and is easily understood by consumers can find in telcos an effective reseller given their customer scale and strength
B2B Digital Services
There are a number of business services that build on connectivity that are also being successfully exploited by many telcos. The data network of businesses is migrating again. Now it is IP MPLS for the most part, but with virtual networks and virtual network functions it can become more flexible, simpler and higher performing. Telcos are starting to lead this transition. While there are direct-to-enterprise offerings by technology players (e.g. Aryaka) these have been consistently rolled-up into traditional technology vendors in previous waves. There also seems to be a perennial risk of integrators like an Accenture, however, once the networks go from high technology to commonplace there is no place for the type of margins these types of players are looking for.
These virtual networks form the base for three of the workhorses of digital transformation – cloud, IoT and security:
- Cloud requires connectivity to effectively work across sites. Latency and interconnection of different providers and internal capabilities become key. Telcos are the perfect substrate for most companies in terms of integrating their hybrid infrastructure seamlessly. Telcos will not be cloud technology providers, with most having divested their datacenters already, rather they are looked at by the cloud players as a very interesting sales and integration channel for businesses.
- IoT also requires connectivity at its core. Virtual networks further improve its potential. Here telcos are in a privileged position. They have the opportunity to partner with other components of the value chain to deliver full solutions to clients.
- Security is increasingly important. Cyber-risks are on the rise. The best place to protect a system is in the virtual network itself. Again, telcos will not be the developers of the technologies. However, they are the best positioned to integrate them into a secure network and cloud offering that covers all endpoints.
Finally, Big Data is a digital workhorse that stands at another level. It does leverage the new virtual networks to extract, transfer and accumulate data. It is also highly integrated with the cloud and IoT requiring top-level security, as data is the prime target of cyber-crime. However, telcos can go even beyond this strong integration. Telcos generate an astounding amount of primary data. They can offer their data to businesses to make their big data efforts more effective. This can be done respecting customer privacy.
There are other areas into which telcos can get as resellers. Digital Workplace is one of them. They already control many of the devices and have strong relationships in place with many of the contenders. Played correctly and deploying the right level of professional services, telcos can become a privileged channel for much of the emerging technology for the business and public sectors.
The next wave
The opportunity covered up to this point is already massive and has been proven by many operators. There is more to do with new emerging technologies. We will cover the three most promising opportunities:
Edge computing. The next step from the cloud is taking compute and store infrastructure closer to endpoints. This makes sense from many angles: latency, compliance, bandwidth efficiency… Telcos have the opportunity to do this leveraging Central Offices and mobile base stations. Edge computing takes the integration of cloud, virtual network, IoT, security and Big Data one step further. It will likely reshape cloud infrastructure over the next decade
B2B2X models. Telcos are in the midst of redesigning their IT and network infrastructures. Taking advantage of virtualization and new API-based architectures to create flexible and efficient delivery models. While this is being done mainly for internal efficiency and customer experience goals, it has an external opportunity. Telcos can open up their programmable infrastructure and systems for others to sell and develop on top. This is already working effectively in some areas like carrier billing, but the opportunity is much broader
5G. Finally, we have the new generation of mobile network services. Previous generations were more focused on consumer needs. Conversely, 5G has focused on business needs like low latency, flexibility and security. 5G will bring the virtual network approach already available in fixed infrastructure to mobile. Redefining the internet of things and making mobile endpoints full secure members of the virtual network and cloud.
The opportunity is already here
All the B2C and B2B opportunities are not next decade opportunities. They are already here. They are demonstrated across many markets, with most advanced operators already having substantial revenues in this categories. The way is open to incorporate these revenue streams in the core.
Many of these opportunities are resale opportunities, with lower investment requirements but lower margins than connectivity. However, they have significant customer stickiness effects. Customers with adjacent services are more loyal and less liable to jump around. The net effect is that it is difficult to see a margin difference between the operators with substantial new revenues and those with connectivity only revenue bases. The lower resale margins are compensated by more loyal customers and a greater leverage of fixed costs, maintaining the telco cash-flow generation profile.