Inteligent Processes, Tech and Business, Telco

Telco Digital Opportunity

Software is eating the world. The digital transformation has come to all sectors and Telco is already in for the second round. Telcos have significant opportunities to capture across the P&L. Digital Services both for the B2B and B2C segments can boost the top line taking advantage of unique market access. Digital Processes can transform the way telcos execute every process, increasing efficiency and improving the customer experience at the same time. Digital Networks will transform the asset base of telcos, allowing to simplify and improve efficiency. All of this will require some scale, and specially industry collaboration.

Digital Services: optimizing the topline

Consumers and businesses are faced with an exploding array of digital services. To take the two clearest examples. In B2C video offerings are multiplying. First was Pay TV, then came Netflix, then HBO and Hulu, and now everyone is going Direct-to-consumer. We will soon have Disney+, HBO-all-access, CBS-all-access, Apple+, sports specialists like DAZN, and many more. In B2B cloud offerings, we used to have AWS, now Microsoft and Google, as well as Alibaba and Tencent, are rapidly joining the party. As well as literally thousands of SaaS products for different processes or verticals.

This cannot hold. History and psychology show that humans like choice, but not so much choice. Customers don’t want to keep track of which of the tens of services they will need to see their favourite show. So there is an opportunity to rebundle digitally access to content and other digital services. Customers need someone that can bargain for them against the increasingly powerful global digital players. Digital services, even leaders like Netflix or AWS, need a distribution edge over the increasingly crowded field of rivals.

Thus the opportunity for telcos to be the distributors of choice of digital services is already there. The entry of new OTT services created the opportunity for partnerships with Netflix and the like, that many telcos are already leveraging. Much like with physical retailers there is also an opportunity to white label for low-cost with acceptable quality. Reliance Jio in India, for example, has created a suite of basic digital apps it bundles with its services for first-time users of its basic line of sub $100 smartphones.

We shouldn’t only think of consumers, the same opportunity is there for businesses large and small. Companies are increasingly focused on their core competence, not caring to develop other skills that someone can provide from the outside. Finding the right suppliers and integrating the solutions in domains as complex as software-defined communications, internet-of-things, cloud, security, Big Data and new emerging fields like RPA is a daunting task for most companies. Thus telcos with a strong B2B presence are increasingly having an opportunity to extend their core connectivity offering in these areas.

Of course, being a digital services distributor will require new skills. Customers expect the same level of ease for purchasing and cancelling they get from digital services themselves. They also expect a seamless integrated experience with the same customer experience they get from any of the services directly. In the B2B segment, they expect professional services to handhold them through integration and change management. The good news is that these improvements are the same ones required for improving the telco core services consumer experience or B2B value delivery.

Financially the profile of this new digital distributor and integrator business will be very different. While the traditional telco business requires high EBITDA margins to compensate for the high CAPEX and high capital employed, the new distribution business has low capital employed and low CAPEX. Much like Amazon has done with its core Amazon e-commerce business (low capital employed, low margin) and its AWS division (high capital employed, high margin), telcos will have to learn to manage and make visible for markets two very different businesses.

Digital processes: improved efficiency and customer experience

The opportunity in digitizing telco processes is also immense. It is often said in the industry that “the cost optimization opportunity is endless”, and digitization makes the adage true for another decade. Not only that, but the customer experience opportunity is also endless, and digitization will also bring the opportunity to take it to a level far beyond what we now have. For the first time, cost efficiency and customer experience will improve in tandem instead of representing a trade-off.

It is seldom appreciated how complex telco services are from an operational perspective. We expect a global network of real-time connected infrastructure to interact seamlessly with billions of connected devices that move around. We also expect the result of those interactions to be correctly billed in real-time to billions of customers worldwide. The challenge of moving a call or a data session from one tower to the next without dropping. The intricacies of processing the millions of call and data session records that go into a single bill. It is amazing that operators are able to give the service level they give with only tens of thousands of employees.

Digitalization will bring the opportunity to take this miracle even further and at an even lower cost. A set of technologies are already being deployed into production that will transform each of the telco process domains:

  • Digital front-end. The telco customer interaction layer is one of the sore spots both from the cost and customer experience side. Digital channels and natural language processing have the opportunity to transform this completely. We are already seeing an ever-increasing share of service interactions being digitized and managed with digital agents. This is much cheaper and also gives a much better customer experience. Call-centre agents and shops will be still crucial for complex customer interactions, and they can be enhanced through digital tools that allow them to focus on the customer, instead of being “human data processors”. Dedicating humans to empathy and doing all the data processing and standard tasks through digital will create a new front end that is much cheaper and has much happier customers.
  • Eliminating the back-offices. Telco IT systems are complex, and a surprising number of a telco staff is now focused on making customer interactions “travel” through this complex and multilayered maze. Each back-office interaction is, first, a cost item and a failure of the system, and, next, an opportunity for mistakes and dismal customer experience. New tools like Robotic Process Automation (RPA) and cognitive machine learning systems are allowing to eliminate the need for human intervention in the back-office. Reducing cost and eliminating extremely frustrating mistakes and problems for customers.
  • Personalizing and adapting the offer. Next in the stack is the value proposition for customers. Historically telcos have taken a “shotgun approach” with the same offer and communication for everyone regardless of need and situation. Big data analytics and artificial intelligence are allowing to change this. The offering can be personalized for each customer according to situation and needs. Moving interactions from frustrating to delightful. And allowing to discover the ever-widening set of digital services a telco will offer.
  • Digital field operations. Another often unknown side of telcos is the army of engineers and field workers they employ. They might be installing a customer connection, sourcing and sending handsets to customers, repairing a base station or laying new fibre to upgrade connectivity. This complexly choreographed daily dance is another miracle, but also a source of cost and customer unhappiness. It also represents the opportunity to apply new technologies like Internet of things, augmented reality and Blockchain. Telco operations are being transformed with connected vans dispatched with artificial intelligence, blockchain-based supply chains and enhanced technicians that can access the top knowledge through AR to make a field repair. This will reduce cost and at the same time delight customers through seemingly “magic” service.
  • APIfied architectures. Finally, the telco IT systems themselves are being transformed. Again, not widely known, telcos are the most IT-intensive industry out there along with Technology and Finance. The need to give real-time service and billing to millions of customers has made IT indispensable from at least the 80s. This means that most telcos have layer upon layer of systems, ranging from mainframes to microservices. This makes connecting with those systems extremely challenging, which has been a traditional barrier for collaborating with third parties and improving the front-end. That is where APIfied architectures come to save the day. They are allowing telcos to isolate partners and the front-end from the byzantine complexity of legacy systems. While the direct impact on cost and customer experience will be difficult to trace, this will be the enabling layer for all the rest of the transformations mentioned in this section.

Digital networks: a programmable and open source asset base

Finally, there is the network. The real deal for an engineer like myself. Again, the telco network is a marvel of human engineering. The global telco network might be the most complex system on Earth at this point, even surpassing a human brain. We take it for granted that people in rural Nigeria can call someone in London in seconds and it will work seamlessly. We know that if we get mobile connectivity or Wifi anywhere we will be able to access the same digital services and world wide web we are used to. Making this happen has unspeakable complexity and layer upon layer of equipment interacting in milliseconds.

Digital allows transforming these networks into a new software-based paradigm. Creating very attractive new opportunities for telcos to move to a more liquid asset base, that serves customers much more flexibly at more attractive costs. It also has the potential to future proof the network, allowing to facilitate network evolution significantly. In a way, there has never been so much clarity about the future of telco networks for the next decades, and at the same time, there are plenty of opportunities.

The best way to understand this potential revolution is to take each layer of the telco network at a time. Looking at transformative technologies and their implications:

  • Fixed Access. The future technology of fixed access is fiber+Wifi. Fiber has incredible potential and upgradability in terms of bandwidth. Its passive optical nature makes it environmentally and operationally far superior to other active electrical alternatives (e.g. copper, cable). It also has great latency characteristics that will be increasingly important over time. A full optical IP access network also requires a fraction of the equipment that traditional technologies do, liberating substantial space, CAPEX and power consumption in local exchanges. This equipment is also increasingly open, allowing for many companies to design it instead of being locked into proprietary standards from large technology providers.
  • Mobile Access. 5G is the future of mobile access and will represent a revolution as important as the move from circuit-switched to packet-switched technologies. 5G will bring greater speeds, far greater number of devices and lower latencies. It will allow the creation of network slices, softwarizing mobile access and giving it the flexibility of software. 5G is still in its initial stages, and for at least 2-3 years its usefulness will be limited. However, once the final standard is in place we can expect a true revolution over the next decade. This revolution will also include open source equipment which breaks the hardware-software integration pushed by large technology providers in the previous generations.
  • Edge Computing. Fiber and 5G are a perfect match to create an extremely high bandwidth network that will enable the next generation of rich media content: Augmented Reality, Virtual Reality, Digital Twins, AI models, HD streaming and much more. These new applications will require much lower latencies in the millisecond range. For this to work computing and storage will need to move from the datacenter to the network. Telcos have the assets to do this and play a new role in the cloud.
  • Homes. The home is also part of the network, and increasingly turning into the bottleneck. Ensuring adequate WiFi in the home is becoming increasingly important for users to take advantage of the full advantage of the network. Making that WiFi work with the rest of the network and with 5G network slices while keeping users secure will differentiate connectivity for users even further.
  • Businesses. Businesses are also seeing a radical transformation on their networks and premises. To begin with, the new technologies are allowing software-defined virtual private networks that take advantage of fiber and 5G, while providing maximum flexibility in their configuration and deployment. We will see a move from a new private network point taking weeks or months to set up, to it being available in seconds, as soon as the connectivity is ready. Next, connectivity in corporation HQs, factories and other large campuses is becoming the limiting factor. 5G and WiFi 6 will bring a new way to deploy private campuses that will make connectivity work transparently and securely in any setting.
  • Metro and core network. Finally, hidden from view, we have the metro and core networks. These are the network elements that make the magic happen. Softwarization will transform the complex labyrinth of proprietary equipment that now powers a network into a mesh of transmission, compute and storage infrastructure that seamlessly executes the core and network virtual network functions were they are needed. They will create a more resilient, flexible and much cheaper network

Some scale and plenty of collaboration

To conclude, these three opportunities bring a perennial question to the sector. Given that software is global, wouldn’t it make sense to have global companies take advantage of these opportunities? Will a large global telco more quickly take advantage of these opportunities or will small organizations be equally able to leverage them? Let’s take them one at a time:

  • Digital Services at the basic level will be about partnerships with large and small digital service providers. Here scale will be clearly helpful for being on the radar and negotiating better. It won’t be necessary to be global, but it will be helpful to be substantial enough to be in the digital service providers priority list. This means scale in terms of high-value customers and ability to cover certain regions. There is also an advanced level, in which operators can create professional services organizations to deploy digital services in B2B, or advanced app ecosystems to deploy a combination of branded and white-label services. Here scale will be more important, both local scale and also a minimum scale to create the capabilities to work with customers. Scale can also be complemented with collaboration as smaller players join larger ones in alliances to strike partnerships with digital players or service organizations to provide professional services.
  • Digital processes will be about applying technologies to current operations. These technologies are mostly common to all industries and as such professional services organizations can support companies in adopting them. Telcos will be some of the most advanced users in some of them like natural language processing, big data or RPA, so if they have the scale they could transfer best practices quicker or even use that position to leverage digital services. However, digital processes themselves won’t require substantial scale. There might be the opportunity to transfer processes and technology from one market to another, but this will be limited to new entrants or low-complexity operations (e.g. no-frills MVNOs) which don’t have substantial IT complexity legacy.
  • Digital network is very much a telco undertaking and as such will require telco global scale to happen especially in terms of the open access, open network functions and edge computing. Telcos have started to create their own organizations to make it possible, such as the ORAN Alliance in which most major carriers have pooled their efforts to create a global standard for open radio access. Of course, Digital Network does require a critical mass of software talent in the networking organization, which could be challenging for smaller players.

So overall the digital opportunities for telco will require a certain minimum scale to fully take advantage of, but don’t seem to be poised to trigger a wave of industry consolidation towards greater scale. At the same time, they will require much more industry collaboration. At a global level to standardize the open digital network to capture the opportunity in each of the domains, and especially in Edge computing. And at a more local level as some of the larger companies can support smaller ones in their relationships with digital service providers and in building professional services organizations for B2B and app ecosystems for B2C.

Tech and Business, Telco

Predictions 2019

Following the great Fred Wilson from USV, I have tried to put together my 2019 predictions. They cover both the macro and the telco specific. I have tried to be specific so the predictions can be wrong. I am an optimist by nature, but my predictions have a negative tone. I think it will get worse before we wake up and put our act together. My predictions are biased towards tech. Other topics like climate change or biotech are very important but I don’t know enough to predict

Macro predictions

1. Populism continues its run and causes a serious event

3-4 countries will join the swelling populist ranks, electing a populist president or prime minister. Almost all major countries will have at least one populist party or candidate. People are stressed, afraid and distrustful of politicians, and will become more so in 2019. Populism is the natural (if often misguided) human response to stress and uncertainty.

We will have a serious at-scale event triggered by populism in one of the top 10 developed countries. By an event, I mean something that challenges our notion of the liberal cosmopolitan safe world we live in (in the developed world). We have had “virtual” events (e.g. Trump election, Brexit), small events (e.g. two children dying in American custody in immigration, CFO Huawei detention and Canadian detainees as retaliation) and at-scale events in the fringe (e.g. Venezuela collapse, Sirian war and the Russian invasion of Ukraine).

2. The economy, stock markets and trade wobble but make it through 2019

The economy and stock markets will end the year with a mild negative but will have swung quite a bit during the year. Going into significantly more negative territory but rallying back. Trade tensions and structural imbalances continue to be there but are not capable of causing a collapse. The trade situation between the US and China and more globally deteriorates slightly but doesn’t flare up radically

3. Big Techs start to receive the monetary penalties of popular distrust

The hate and fear towards the large tech firms from the US and China continue to increase across the world. It now moves from inquiries and protestations to real-world economic consequences. Most probably taxes, but also restrictions, fines and regulation. Popular distrust will also start to weigh on Big Tech employees.

4. Blockchain finds its Netscape Navigator, but cryptocurrencies are flat

Blockchain finds its application that makes it accessible to the public. Much like Netscape Navigator brought the internet to non-geeks, Blockchain requires a similar open democratizer. It will appear and start to gain traction in 2019. However, it will not be clear enough to create another crypto-craze in 2019 (wait until 2020 for that). What it will be I can’t imagine, but enough money and talent have flowed in for it to happen. The enterprise blockchain world will continue advancing slowly but surely.

5. AI and digitalization continue their march, Luddites strike

AI and digitalization will continue to take over parcels of the economy, silently but surely. We will see how new jobs that weren’t potentially automatable could be automated. At the same time, the real work of automation in businesses and organizations will continue pressuring middle-class incomes. We will see angry violent action against AI-enabled labor-saving devices, most probably against autonomous cars/Uber. Some visible organization will claim the Luddite name with pride.

Telco predictions

6. The heir to the smartphone won’t appear in 2019

We won’t see the next interface appear at scale yet. Mixed reality, voice-assistants and other candidates will continue to improve and amaze. However, no Steve Jobs will imagine the vehicle of their mass adoption yet, mainly because technology is still not ready. Smartphones will become more powerful and more commoditized. Folding devices will go the way of the 3D TV.

7. 5G be much ado about nothing in 2019

Without a device to really use its capabilities, 5G will be little more than 4G+. This won’t stop vendors, governments, pundits and telcos that have launched it from extolling its virtues. Adoption data and economic consequences will still not prove or disprove the investments of early adopters like Verizon, the Koreans or Telstra. 4.5/4.9G and fiber deployment will provide most of the real improvements in connectivity in 2019.

8. Regulators and governments will consider telcos as local tech champions

Populist and nationalist governments will realize that telcos are among the biggest tech companies in their countries, and the only ones really under some measure of control. Governments and regulators will start to support telcos as “national tech champions”. Allowing greater leeway in terms of consolidation and commercials, but at the same time requiring a stronger contribution to the national tech strategy. In this, they will follow what has already happened in the US with net neutrality and 5G.

9. AI, Digitization, virtualization and legacy switch-offs will accelerate.

Technology will continue to transform the way telcos operate, reducing costs and improving customer service. Real spend savings will combine with customer experience improvements to create an increasing space for differentiation for those that are able to execute. This will not come out of a single technology, but rather the implementation of hundreds of small transformations that will improve operations. Simplicity will be mandatory, so telcos will accelerate legacy switch-offs in terms of network (e.g. copper, 2G, 3G, transport) and IT stacks.

10. The sector will continue to do better in the stock markets

The opportunities and defensive qualities of the sector in a time of uncertainty will make the sector increasingly attractive. However, stock market and geographical volatility will also impact it during the year.

Telco

Superconvergence

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.

Telco

Telco Rising

After a hard decade since the financial crisis and an even harder couple of years of capital markets derating, telcos are poised for significant value creation. Telcos are already beyond the digital chasm, with fundamental threats to their connectivity business model behind them. Six additional catalysts will provide topline and bottom line growth over the next years. Beyond financial considerations telcos are the natural local champions to make technology human-centered and socially useful.

Dark decades

Since their peak during the internet and 3G booms telcos have struggled to find their place. First, mobile internet was far longer in coming than expected. Some 3G auctions took place in 2000. However, it was not until a decade later, with the iPhone, that mobile broadband started to contribute substantial revenue. At the same time, the internet applications that telcos aspired to capture were opened up through net neutrality. This brought an amazing wave of innovation, but decoupled infrastructure investment from monetization. To finish, Telcos have suffered from a difficult to understand regulatory obsession. A sector that has consistently reduced quality-adjusted prices by 99.5% per decade has been in the regulatory spotlight. With regulatory goals focusing on introducing asset-light competition and achieving slightly faster price reduction (99.6% vs. 99.5%), instead of focusing on infrastructure development.

The last two-three years have been even darker. With mobile and fixed broadband massification bringing destructive price spirals in connectivity, accelerated by regulation. While internet services are dominated by once-in-a-century digital monopolies, the Big Techs. At the same time as the copper infrastructure of the 20th century is being substituted by fiber. And the small oligopoly of equipment vendor try to push 5G before users require it, much like they did with 3G. This combination of top-line stagnation and perceived investment pressures has caused a massive industry derating, which has brought valuations to historic lows.

A New Hope: The Digital Chasm already crossed

However, telcos are one of the few sectors that have already crossed the Digital Chasm. Other sectors like retail or media are still trying to find sustainable revenue streams in the digital age. Telcos, on the other hand, have already demonstrated that their core business model is safe. Attempts to substitute connectivity like Google Fiber or Facebook Aquila have fizzled. Disruptive ideas around low-altitude satellite constellations promise to tackle mostly remote areas, and just a fraction of today’s traffic.

Telcos have already demonstrated that they can handle the exponential growth of connectivity that the internet and digital transformation is bringing. Connectivity requirements continue to grow by orders of magnitude, with telcos prepared to service the avalanche. The regulatory and physical challenges of deploying completely new networks like fiber have also been navigated. Now, more and more parts of the world enjoy speeds and throughputs that seemed incredible just a decade ago.

The sector has a secure base from which to start with practically limitless demand. This base business is not threatened by substitutes. It has also demonstrated and incredible capability to transform and reinvent itself for ever-growing demand. It is true, that this connectivity base has been targeted by regulators focused on narrow price competition only, while allowing internet monopolies to build. But even considering this, a secure business that profits from digitization is something that few industries can claim.

Catalysts for Value: 6 transformative opportunities for telcos

Beyond the secure base that the ever growing demand for connectivity brings, there are six key topline and bottomline catalysts that telco will capture over the next decade to create value:

  1. Hyperconvergence. Fixed and mobile connectivity are already technically converged. Video and B2B Digital Services (Virtual Networks, Security, IoT, Cloud, Big Data) are converging fast with connectivity. Financial services, other content categories (e.g. gaming, AR/VR, eLearning) and digital home are coming next. Topline catalyst, at least doubling telco addressable market
  2. Big Techs need help. Big Techs are in trouble. The regulators, governments and public opinion have finally woken up to their unaccountable monopolist status. On top of that, they are starting to compete among themselves. With highly capitalized and digital native rivals the stakes get higher. They need help in the upcoming battle, and telcos can be powerful allies even with net neutrality. Topline catalyst, increasing telco relevance and capturing the increased addressable market effectively directly and through partnerships
  3. Regulatory rationality. Regulators, governments and specially the public have started to wake up to the danger of over-reliance on Big Techs. Countries start to worry that they might become irrelevant digital colonies to the US and China, with no strong tech players or jobs. This is leading to the search of strong local digital players. Telco’s happen to be those players. Extremely locally grounded, they define the digital infrastructure of a country and are totally invested in the country’s success. They also employ thousands of tech-savvy employees and support the local tech ecosystems. Topline and bottomline catalyst, with regulators changing their negative stance towards telcos allowing the build up of scale and investment to boost each country’s digital potential.
  4. Operating model digital transformation. We live at an incredible time in terms of the power of automation and personalization to improve the efficiency and customer experience of all companies. Telcos support some of the most complex service processes on the planet, so the opportunity is huge. Digital technology will be deployed to improve customer experience, while increasing efficiency and speed. So there is a massive transformation opportunity over the next decade from digitizing telco operating models. Bottom line catalyst, not only reducing cost but also improving customer experience and reducing significantly churn and its associated costs.
  5. Network and equipment virtualization. Beyond “normal” digitization telcos are experiencing their own special digital transformation. Networks are becoming virtual, allowing to define and manage them virtually. Increasing flexibility, scale and efficiency. Also bringing the possibility of substituting black boxes from a small oligopoly with whiteboxes with standard hardware and innovative software from a plethora of players. Bottom line catalyst, reducing cost and investment, increasing speed and eliminating friction. Also derisking vendor lock-in with the equipment vendor oligopoly
  6. Flexible asset deployment models. Virtualization, regulation and digitization allow to go a step beyond in terms of asset deployment models. It makes little sense to duplicate or even to fully own most new infrastructure telcos deploy. There is also significant capital with appetite for the stable growing demand that the telco sector is experiencing. Consequently network sharing and new ownership models are on the rise. CAPEX and ROCE catalyst, improving CAPEX efficiency at an industry level and reducing the assets necessary to capture deployment opportunities

Beyond this six tangible catalysts there are many new technologies that can bring further opportunity. AI, Blockchain, mixed reality, full APIfication, quantum computing and 5G will bring incredible opportunities that are still difficult to quantify. That is the icing on the cake, even more opportunity that could take telcos further. These opportunities give the long range growth prospects, once the six catalyst have been captured over the next 2-4 years.

Both the six catalyst and the opportunities beyond them are only very imperfectly captured in the capital markets industry vision. While investment banks have started to understand the potential over the last months, it is yet to be fully incorporated in target prices and stock prices.

Enablers for humanized technology: a mission for telcos

Finally, the role telco’s can have go beyond creating the infrastructure of the future and delivering attractive returns for shareholders. Telcos are the connection between technology and the people. In contrast with global remote Big Techs, they are deeply local: embedded in countries and local communities, employing millions of local citizens, providing local champions for stock markets and paying substantial taxes. Regulation and local infrastructure makes telcos fundamentally accountable to citizens and consumers.

The world faces a monumental challenge in ensuring that the technological genie doesn’t escape out of the bottle. There are fears about the end of work, technological elites who capture our data and make all the money with no accountability, alienation through digital devices, the threat of AI and much more. Telcos are the base of the digital economy and can be counted on to make technology human and local. Society will increasingly demand to go beyond connectivity and services. Human-led technology will mean reducing digital divides, digital wellness in technology’s use, citizen’s owning and enjoying their own data, tax and financial flows that reflect value creation, job opportunities and much more. Telco’s are uniquely positioned to respond to this demand and embrace a mission that goes far beyond just providing the cables and the signal.

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The telco opportunity: A secure sector, already through the initial painful round of digitization, with exploding demand and substantial catalysts ahead. The opportunity to become the local linchpin of technological transformation, avoiding the Digital Colonies scenario for geographies beyond Silicon Valley and Shenzhen. A depressed valuation product of years of regulatory obsession with price as the only metric.

This opinions are my own and don’t reflect any official company position from Telefonica or any of its affiliates.

Tech and Business, Telco

Embedded Connectivity: The next wave of telco growth

Telcos have transformed their business once every decade since the 80s: fixed voice, mobile voice, fixed data, mobile data. Fixed and mobile data for homes, offices and individuals will continue to be required in ever greater quantity, but will be difficult to monetize further (see Connectivity Explosion). The next wave for the 2020s seems embedded connectivity for everything. Embedded connectivity holds substantial promise but requires a rethink of many traditional telco orthodoxies.

A sector in continuous revolution over half a century

Telco might be a 100-year old sector but Moore’s law has allowed a continuous transformation of the products it offers during the last four decades:

  • The 80s were the last decade fully devoted to fixed voice in the home and the business premises. It was also a decade of transformation, with voice lines being fully automated and digitalized, finally eliminating human operators in calls. I am old enough to have seen some of the last human operators routing calls in a small village of northern Spain when I was a young boy.
  • The 90s were the decade of mobile voice for the individual. First in the car and briefcase, moving gradually to pockets. While early analog systems launched in the 1980s (1979 was NTT in Japan, the earliest system), it was only the decade of the 1990s with 2G that really saw the explosion of mobile phones. Deploying mobile telephony at scale was a huge undertaking which required creating new companies, often owned by the former fixed monopolies but independent from them.
  • The 2000s saw the resurgence of fixed, through fixed data for internet connections. In the late 90s no one expected fixed and cable players to be able to capture much value from the internet revolution. Up to 2001 ISPs like America Online or mobile players with 3G seemed to be a much more attractive investment. However, the open internet based on a standard TCP/IP and HTML broke down walled gardens and was powered into broadband by ADSL and cable (DOCSIS). This gave back value to fixed operators who gradually transformed their business from voice to data, and over the next decade from copper to fiber
  • The 2010s saw the promise of mobile data finally materialize through the smartphone. The mobile data promise of 3G didn’t materialize, except in Japan where i-Mode created a walled mobile internet one decade ahead of the rest of the world. This lead to a crisis for mobile players in the 2000s, with voice penetration already saturating which was somewhat alleviated by SMS and blackberries. It was only in 2008 when Steve Jobs and his iPhone saved the industry and provided a way to leverage mobile data fully. The smartphone came to its own with the deployment of 4G and created a mobile internet which has quickly overtaken the fixed one in time spent. It is dominated by the two smartphone OS duopolists, Apple and Google, who have created a “semiwalled garden”

All these developments were always unexpected and full of uncertainty. Today they might look like sure things, but at the time they were uncertain strategic bets. Mobile telephony was a niche proposition. According to a mythical consulting study mobile phones had a ceiling of 3 million subscribers globally (they got it at least three orders of magnitude wrong). Fixed data came out of the internet, something that seemed reserved for tech geeks in the 1990s and only came to the fore in the internet boom. Even in the internet boom it was ISPs and browsers that where expected to capture most of the value, not telcos. Mobile data took a decade longer than expected in coming, and was created almost singlehandedly by an industry outsider with an iconic device that a decade later has created the first trillion dollar company.

The candidates for the next wave

There are many candidates for the “Next Big Thing” beyond the smartphone in terms of the next user interface: Augmented Reality, Virtual Reality, Artificial Intelligence, Blockchain… As covered in Connectivity Explosion all these technologies will indeed require exponentially more connectivity with significantly enhanced performance, which telco technology is perfectly ready to provide.

However, as we are already seeing over the last five years, regulation and the ultra competition it engenders will not allow to capture increasing revenues in the individual mobile connection or the home/office fixed connection. Users will get increasingly better performance that will cover the needs for these “Next Big Things” at similar prices. The telco sector will continue to provide its 99,5% price-performance discount as it has done decade after decade (only semiconductors and hardware have managed a similar feat). This will slightly shrink the weight of communications on household expenditure and business expenditure, as traditional connectivity revenues grow slower than GDP.

The next wave will take us beyond individual and home connections, to connect everything else in the world. This phase has been called “Internet of Things” or “Internet of Everything”, embedded connectivity seems more precise. It has to do with embedding connectivity in everything in the physical world, so intelligence and interactivity expands from digital to physical. This explosion has the potential to be as transformative and significant as fixed data or mobile data.

The 2020s and embedded connectivity

This new wave of embedded connectivity has already started haltingly with M2M and IoT. However, it is not growing at a pace at which it looks poised to transform the industry yet. It is like fixed data before the internet craze really got on, or mobile data before the iPhone. Something that looks like an attractive niche rather than a transformative wave of growth. Telco valuations are suffering from this, as the previous waves of growth have already saturated and the new one is not ready to take off.

Embedded connectivity also seems to require a rethinking of the model at several levels. First, connections will be numbered in the billions and trillions, so current ARPU levels are completely out of questions, we need to move from “connection scarcity” to “connection abundance”. Moreover, it is just too complex for the customer to pay a monthly fee for each object, so we can expect one-offs that are embedded in the initial purchase price or in a subscription related to other services. Finally, customers don’t want connectivity, they want intelligence, so connectivity will become a component in a larger value proposition sold by another business to a third party, an “Intel Inside” B2B2X model.

The last part of the 2010s is proving a very tough period for telcos, as the new wave still needs to take off. As usual, financial markets can not see beyond what is already in the P&L and this has lead to extremely low valuations, similar to fixed assets before the ADSL boom. We can expect the cycle to reverse as embedded connectivity kicks into high gear during the 2020s, but it is difficult to forecast if we will have a specific event that triggers the change (like the iPhone or the internet boom) or if we will see a steady growth beyond all previous expectations (like with mobile voice in the 90s).

Tech and Business, Telco

Connectivity Explosion

After two decades of increasing use connectivity continues to explode for the home/office, for the individual, and now for inanimate objects. New technologies being deployed like AR/VR, AI, cloud, Blockchain and IoT only promise increased connectivity needs and requirements. 5G, Fiber, Edge Computing and softwarization present a clear path to fulfilling these exploding needs over the next decade. Prepare for a world in which everything is connected at ultra-high bandwidth, securily, automagically and with ultra low latency: it will have its advantages, but we will also have to fight Orwellian nightmares.

Connectivity continues to explode

It has been already almost two decades since the internet boom and bust. Quaint 48kbps and 56kbps modems that loaded the initial text versions of Yahoo! have been replaced by homes connected at hundreds of megabits per second (x10.000 from 1997) and smartphones routinely reaching tens of megabits (x1.000). Load times of minutes have given way to trying to reduce hundreds of milliseconds of a web page or app load. Progress has been staggering and cost has plummeted. The cost per Mbps for consumers is at least 99,98% lower in an internet connection comparing the late nineties with today.

We can expect this explosion to continue. All projections of connectivity use point towards continued exponential growth. Taking Cisco for the 2016-2021 period, it is projecting a tripling of internet data, at least a doubling of speeds, more than three connections per capita and close to two thirds of the world connected.

We can imagine this predictions being fulfilled just with streaming video and file sharing. However, customer needs will go even forward. New emerging technologies have increased needs and requirements for connectivity:

  • VR/AR represents an order of magnitude increase in content size compared with video, and it has interactivity making connectivity make or break. The amount of data that needs to be send bidirectionally for AR and VR will strain even today’s connections. And latency will need to be reduced below 100ms to avoid degraded user experience and motion sickness.
  • AI requires great quantities of data, including live video and audio feeds as well as huge datasets to be effective. Integrating AI seamlessly in customers lives also requires extremely low latency so the lag between command and response is not perceptible. Connectivity and data security becomes critical in a context in which we are continuously monitored and commands can control the real world.
  • Cloud is increasingly distributing computing and storage, requiring connectivity to tie it back together in a way in which the distributed nature of the system is invisible to both human and machines. Connectivity needs and requirements (i.e. latency, security) to make apparently simple tasks, like editing a document remotely, work seamlessly are still significantly greater than what we have today.
  • Blockchain’s key problem at this point is scalability, and scalability has to do with network performance. A blockchain is a distributed system and as such requires the network to make it work effectively. To run our most critical trust infrastructure on the blockchain would require extreme bandwidths together with low latency and first rate security.
  • Finally, IoT, the connection of all things to the internet, is itself a tremendous connectivity challenge. Not so much in terms of bandwidth, but in terms of latency, power consumption, architectures that allow millions of connected things, and the security to protect us from cybercriminals.

Overall, the connectivity explosion for the next decade will not only mean much greater speeds and capacities, but will also provide lower latency, lower power consumption, greater security, and greater scalability in number of connections.

Telco technology is ready for the challenge

Given this extreme wave of connectivity needs coming, is telco technology ready to cope with them? The answer is a clear yes. The industry has pulled together to create technologies and standards with significant runway in terms of performance and flexibility to meet the challenge.

Fiber will underpin all connectivity. While it hasn’t been widely appreciated yet, fiber deployments taking place across the world are equivalent to the paved roads that allowed our automobile-based economy. We are moving from copper, equivalent to earth roads, to fiber, equivalent to paved roads, and we are doing it quickly and efficiently. Some countries like Japan, Korea or Spain are almost finished in their transition. Fiber infrastructure has the potential to take us very far, with GPON technology already capable of several orders of magnitude of improvement of our average speeds with negligible latency and much lower power consumption and line faults.

5G is built on fiber and softwarization. 5G is the latest industry buzzword and it represents the next standard for mobile communications. This standard is already built with fiber and softwarization in mind. Beyond gigabit speeds we can expect 5G to deliver millisecond latency, much greater flexibility in network architecture, and another level of security through network slicing. While speed and latency in 5G will be evolutionary with 4G, 4,5G and 4,9G, its architectural flexibility and the security provided by network slicing provide a paradigm jump similar to fiber.

Edge computing will optimize latency, bandwidth and data security. Increasing bandwidth, reducing latency and improving security and privacy in the last mile access with fiber and 5G won’t be enough for many applications. The datacenter needs to be closer to the customer, both for performance and data security. Fiber, softwarization and improved datacenter technology is making it possible to deploy “mini-datacenters” in telecom infrastructure or even at the customer’s home or office to make this real.

Softwarization will make the network liquid. Finally, the telco network is being digitized, with specialized hardware losing importance to edge computing and network software. Once the network is softwarized it becomes much more flexible, as happens in all transition from atoms to bits. This is the silent transformation that makes all the other technologies so powerful.

In summary, technology is ready. The only risk some countries might face is making the deployments economically unfeasible through regulation. A natural monopoly like telecommunications needs and benefits from regulation. However, some regulators, especially in the EU, have shortsightedly prioritized short term consumer price reduction (making the 99,98% cost per Mbps reduction a 99,985% reduction) vs. industrial policy for innovation and creation of the infrastructure for the long term economic growth and leadership. The EU hasn’t created any of the Big Techs, has almost managed to destroy its technological lead in mobile with Nokia overthrown in handsets, and the equipment providers are under siege from China and Korea’s much more long term focused industrial policy.

How will the next wave of connectivity change your life and your business?

Picture a world in which connectivity is so ubiquitous, powerful and secure that it can basically transfer all information (including live 360 video) instantly. Private secure connections can be created and decommissioned in milliseconds, completely through software. Processing and storage capacity in the edge allows to perform most computation and storage really close to where the information is being generated, without having to surrender ownership of the data.

A physical store might have even greater data granularity than ecommerce, understanding and analyzing continuous video feeds without compromising user privacy. A doctor might be able to experience a patient fully even if she is hundreds of kilometers away and call on a specialist for support if needed, without sensitive health data being in danger. A teacher might be able to take students into an immersive trip into whatever is being studied, with students attending physically or virtually and having real-time personalization adequate to their level of understanding. This is only some of what we can imagine now, but as the internet and the smartphone revolutions showed our current imagination is a poor guide to what could happen.

Of course, there are also dystopian scenarios already being deployed and many others that can be imagined. China’s social credit system with complete monitoring and censorship of citizen’s actions in the digital and physical world will only be further empowered through the new wave of connectivity. This kind of 1984-like monitoring is in conflict with western values like privacy and freedom. And we shouldn’t only fear state actors, the last months have put companies like Facebook or Google on the spotlight for similar reasons.

So prepare to take advantage of the instant ubiquitous connectivity, but also prepare to fight against whatever intrusions it starts to allow on our hard won rights. As Bill Gates famously said: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”