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The digital dilemma:
Telecoms firms prepare for the future
An Economist Intelligence Unit report
Commissioned by
The digital dilemma:
Telecoms firms prepare for the future
Contents
About the report 2
Executive summary 3
Introduction 6
1. Digital transformation needs bold helmsmen 8
Case study: The confident CTO 10
Case study: TU Go: Telefonica’s global communications app with a local twist 12
2. Making customers pay 14
Case study: Helpful regulatory environment? 17
3. Smart telcos build digital ecosystems 19
Case study: Smart pricing gives Bangladesh a mobile data boost 22
4. Untapped opportunities: from big data to M2M and IoT 23
Case study: Shopping in South Korea transformed by mobile and big data 26
5. The promise of network virtualisation 28
6. Beware of digital transformation banana skins 31
7. The road ahead 34
© The Economist Intelligence Unit Limited 2015 1The digital dilemma:
Telecoms firms prepare for the future
About the
report
The digital dilemma: Telecoms firms prepare for Neal Milsom, CFO, EE
the future is an Economist Intelligence Unit
Ulf Ewaldsson , CTO, Ericsson
(EIU) report commissioned by WIPRO. The report
strives to identify the key issues that companies Chakrapani Perangur, CIO, Indus Towers
within the telecoms sector are facing as they Riku Salminen, CEO, Jongla
attempt to reshape their businesses to compete
in a more digitised world. Eddie Moyce, Chief Customer Experience
Management Officer, MTN
This report draws on two main sources for its
Peter Glock, Director of Enterprise Solutions,
research findings.
Orange Business Services
In 2014 the EIU undertook a global survey of Sebastian Schumann, Senior Designer, Slovak
more than 200 C-level and senior executives from Telecom
telecoms firms, including 48 CEOs and 43 CIO/
CTOs. More than half of the companies involved Eduardo Navarro, Chief Commercial Digital
in the survey reported annual revenues of more Officer, Telefonica
than US$500 million. Frode Stoldal, CTO, Telenor
Alongside the survey, the EIU conducted a series Mikhail Gerchuk, Chief Commercial Officer,
of in-depth interviews with the following senior CEO (CIS Business areas), VimpelCom
executives and experts (listed alphabetically by Tom Mockridge, CEO, Virgin Media
organisation):
Marten Pieters, CEO, Vodafone India
Mobeen Khan, VP/ Enterprise IoT, AT&T
The report was written by Ken Wieland and
Marcus Weldon, CTO/President, Alcatel-
edited by Charles Ross. We would like to thank all
Lucent, Bell Labs
interviewees and survey respondents for their
Bruce Churchill, CEO (LatAM), DirecTV time and insight.
2 © The Economist Intelligence Unit Limited 2015The digital dilemma:
Telecoms firms prepare for the future
Executive
summary
Battered by increased competition, technological Digital growing pains: Survey respondents
disruption and regulatory constraints, the are confident digital technologies can create
telecoms industry is at a crossroads. One road new products and services, but they are less
leads to reinvention as a diversified telco with convinced about overall revenue growth. As a
multiple offerings and new revenue streams; the CEO of one major operator puts it, “There are
other descends into a valley of falling revenues, new opportunities in digital, but it’s extremely
thinner margins and commoditisation. Our difficult to compensate for losses that result from
research indicates that telcos are approaching those opportunities.” He draws a parallel with
this challenge in varying ways, with varying levels the challenges faced by traditional newspaper
of success and confidence. Anxiety exists at the print publishers in adjusting to online news and
top of the organisation with CEOs in particular social media. Digital transformation, for most
uncertain about the right strategy to take, while established telcos, will not be painless.
CTOs are generally more confident about having
the skills and resources to reinvent themselves. Internet players are not going away, so it’s
better to work with them: Network operators
This report is based on extensive desk research, a have little to gain by complaining about so-called
survey of 209 senior executives from the telecoms ‘over-the-top’ (OTT) players, such as WhatsApp
sector and interviews with 15 senior industry and Skype, ‘stealing’ core revenue. A more
executives. Among the key findings: constructive approach is to take advantage of
OTT innovation. By making it easier for internet
The telecoms industry at a crossroads: EIU
players to access their network and IT assets,
survey respondents expect dramatic falls in voice
operators can develop a broader (and more
revenue over the next five years. Only a small
attractive) service portfolio which they can then
minority representing fixed-line and mobile
package and promote. Operator interviewees for
operators think voice calls—once the business
this report happily concede that internet firms
mainstay of these firms—will generate more
are much better at designing digital consumer
than half of their organisation’s turnover by the
products than they are.
close of the decade. Operators wishing to remain
service providers (and be relevant to customers) More spadework needed on OTT
will need new revenue streams if they are to collaboration and partnerships: Survey
secure a long-term future. responses reveal an industry in the early stages
© The Economist Intelligence Unit Limited 2015 3The digital dilemma:
Telecoms firms prepare for the future
of putting structures in place that will make their enterprise customers are better placed
collaboration with others easier. Less than a fifth for growth. They become less reliant on basic
of survey respondents views greater cooperation connectivity services which are under constant
with app developers and content providers as price pressure. An M2M solution, for example,
a big transformative industry initiative today. could transform the business model of a copier
Look to the future, however, and more than 85% manufacturer from products (one-off charges
of C-level executives think most new digital for equipment) to services (charging per page
products and services will either originate from copied, better customer support) by remotely
external parties or be developed in partnership monitoring usage. While there’s little survey
with them. Realising this vision will require laying optimism that value-added and managed services
the groundwork for better collaboration. will drive much revenue growth in the near
term, views will no doubt change if more digital
Smart telcos build digital ecosystems: success stories emerge. This may happen soon.
Operators can play a central role in building Among the survey group which think it vital to
platforms for innovation, bringing together be technology first movers, more than 40% see
the likes of application developers, device M2M (and Internet of Things) as being critical
manufacturers, distributors and systems initiatives over the next five years.
integrators to develop digital solutions. “By
developing digital ecosystems we’re in a better Network virtualisation promises much, but
position to collaborate on innovation and get operator chief executives wary: SDN (software-
products to market quicker,” says one operator defined networking) and NFV (network functions
CTO. Laying claim to a central role is easier if virtualisation) promise a new era of quicker
operators have large network footprints and service provisioning, easier collaboration with
plenty of customers. Digital partners can be lured application developers, new revenue streams
by the carrot of scale. and greater cost efficiencies. CTOs canvassed
in the survey are brimming with enthusiasm.
CMOs, CTOs and CIOs need to talk more: More than 70% see SDN and NFV as being critical
Survey respondents see the importance of over the next five years, but only a third of CEO
superfast broadband and speedier mobile respondents agree. One explanation is CTOs are
networks (it makes digital services easier to too focused on cost efficiencies when telling the
use) but they fret about getting a return on their SDN/NFV story. “It’s incredibly rare you get a
investment. One way to alleviate that concern CEO excited without the promise of both revenue
is to direct network investment firmly towards growth and cost savings,” says the president of
commercial opportunities (rather than simply Bell Laboratories, the world-renowned industrial
achieving wider coverage, which has long been the research specialist, insisting operator CEOs do
industry habit). While CMO and CTO interviewees become enthusiastic once the ‘full’ story on
acknowledge a need for closer collaboration to network virtualisation is told. Suppliers and CTOs
make this happen, a worrying survey finding is need to present a more rounded business case on
that only 8% of CEOs canvassed think the way emerging technologies if they are to quicken the
their organisations are structured might seriously pulse of chief executives.
inhibit internal (and external) cooperation.
Anxiety at the top: Chief executives are not as
Unlock enterprise growth with value-
confident about digital change as more technical-
added digital services: Operators armed with
minded colleagues. While over half of CTO survey
solutions to improve the business prospects of
4 © The Economist Intelligence Unit Limited 2015The digital dilemma:
Telecoms firms prepare for the future
respondents say management awareness about revenue can stifle innovation. Remaining
digital transformation is much stronger than relevant to customers, he argues, might mean
their closest competitors, only a quarter of investing in areas where revenue generation
CEOs feel the same. Feelings of insecurity are is not immediately obvious. Many C-level
perhaps understandable as innovation tends to executives canvassed in the survey appear to be
be technology-led. A surprise survey finding is wrestling with the same dilemma. Nearly 60%
how widespread those feelings of inadequacy see a financial return as a significant influence
are. Nearly 40% of CEOs think they are the same when evaluating which emerging technologies
or weaker on digital management awareness to invest in, but as many as 45% say consumer
compared to their rivals. This report argues desires are an equally important consideration.
that digital transformation requires bold and The two goals may not always be compatible.
confident leadership. Anxiety at the top should Launching new services without a clear idea
worry shareholders. where revenue might come from may well be
necessary to build up consumer interest and
Beware of chasing revenue: A chief digital develop a brand associated with innovation. The
officer at a major operator warns chasing bold CEO will recognise that.
© The Economist Intelligence Unit Limited 2015 5The digital dilemma:
Telecoms firms prepare for the future
Introduction
Stéphane Richard, in a glitzy presentation held heavyweight, is prepared to splash out US$48.5
in Paris, early October, showed off a range of billion to buy DirecTV, a US satellite TV provider,
new services his company was about to launch. to deepen its involvement in media services.
One was giving smartphone users the ability to Millicom, a Luxemburg-headquartered telecoms
remotely adjust lighting and heating in their group with operations in Africa and Latin America,
homes. If sensors pick up movement or smoke, wants to transform into a ‘digital lifestyle
they’ll get alerts. A unified screen interface is company’ by focusing on mobile data, broadband,
another innovation. Family members accessing pay TV and mobile banking. There are many other
favourite videos, games and music—stored in operators with digital aspirations.
a multimedia hub—can see the same screen
layout, no matter whether they are using A decline in core revenue, hastened by the
the TV, smartphone or tablet. Throughout growing popularity of so-called OTT providers,
his presentation Mr Richard talked about the has increased the urgency to diversify. Using
importance of partnerships in driving innovation voice over IP (VoIP) technology, OTT players like
and that consumer services—above all—should Skype and Lync (both owned by software giant
be fun. Microsoft) can offer customers a way to sidestep
voice call charges. VoIP makes voice calling look
Mr Richard does not belong to a high-flying start- like any other type of data spraying across an
up or a well-known technology outfit. He is chief IP network (which is a relatively small amount
executive of France’s Orange Group, a telecoms when people are chatting) so operators miss out
firm with fixed-line and mobile operations across on substantial revenue from more expensive
Europe and parts of Africa. He’s not alone in international calls and mobile roaming. Ovum, a
trying to revamp an established telecoms brand. consultancy, believes traditional telecom firms
will lose out on US$386 billion between 2012 and
Spanish giant Telefonica, which has an extensive 2018 because of OTT VoIP. Popular OTT messaging
presence in Europe and Latin America, wants to apps, such as WhatsApp, WeChat and Facebook
be defined as a ‘digital telco’ and is pushing in Messenger, also diminish the need for customers
different directions, including mobile money to make calls and spend money on texts. And it’s
transfer and machine-to-machine (M2M) to these internet brands which customers feel
solutions for the enterprise. AT&T, a US telecoms increasingly loyal, not the telco.
6 © The Economist Intelligence Unit Limited 2015The digital dilemma:
Telecoms firms prepare for the future
The pace of digital transformation—to decrease. Emerging technologies, such as network
compensate for core revenue declines—is far virtualisation, also hold out considerable promise
from uniform. Ulf Ewaldsson, CTO at Ericsson, in driving new revenue streams and generating
the world’s largest supplier of mobile network greater cost efficiencies. Going down the network
equipment, says he’s never seen the operator virtualisation route, however, will mean a radical
customer base so diverse in terms of their change in network design and increase the need
strategies and willingness in where to invest. for people with both IT and network skills.
Some operators in North America, he says, are
much more advanced. “They know they have to Digital transformation, then, involves risk. How to
spend lots of money to transform their networks grow profitable revenue from network investment
and develop new revenue streams, and they are may not be immediately clear, and chief
ready to do so,” says Mr Ewaldsson. executives might have to weather a storm of lower
margins until greater operational efficiencies
An EIU survey of more than 200 senior executives from new technologies can be fully enjoyed (less
in the telecoms industry nonetheless reveals efficient legacy systems can hardly be shut down
widespread uncertainty about payback—at least immediately during the transformation phase).
in the short term—of taking the digital plunge.
When asked to pick the top three primary business That’s not to say operators can’t reduce their
benefits of increased use of digital products risk exposure. Putting structures in place that
and services today, 60% of survey respondents make collaboration easier with others can help
working in finance agreed that a big advantage spur innovation and quicken commercialisation
was the substitution of declining core revenue of new digital products. Ensuring CIOs, CTOs
streams with new ones. More worryingly, only and CMOs coordinate network rollouts with a
30% could see an increase in revenue as a major clear commercial objective—rather than simply
benefit, while a mere 15% highlighted a rise in aiming for wider coverage than rivals—can also
profit margins. help in getting a quicker return on investment.
Simplifying tariffs and empowering sales staff
The responses reflect a wider concern among to pitch more sophisticated services could be
canvassed C-level executives that consumers will another revenue boost.
be either unable or unwilling to dig sufficiently
deep into their pockets to justify huge investment Steering digital transformation will require
in superfast broadband and high-speed mobile strong leadership and a willingness to take risks.
networks. But without a network capable of Mr Richard, and others like him, are on the right
supporting video and their customers’ favourite track. The alternative is to sit idly by and watch
applications, the chances of future growth the traditional operator business slowly die.
© The Economist Intelligence Unit Limited 2015 7The digital dilemma:
Telecoms firms prepare for the future
1 Digital transformation needs bold
helmsmen
Successful navigators of digital transformation considerations. “Smaller companies may find
will not be afraid to take risks. As traditional it easier to jump generations of technologies,
sources of revenue decline, chief executives but it’s harder for bigger companies sitting on
searching for sustainable long-term growth will billions of dollars of investment,” says Marten
need to steer operators into the unchartered Pieters, CEO of Vodafone India.
waters of nascent digital services and emerging
technologies. Another more worrying explanation is network
operators may have developed a deep-seated
But when it comes to technology investment, resistance to vendors touting the next big
the EIU survey shows only a minority of top thing, which, in turn, slows down advantageous
management is willing to take bold action. change. “Suppliers are always claiming they have
Around a third of C-level executives canvassed a great technology, which can be implemented
think it’s vital—if they are to meet changing immediately, but there are always teething
consumer behaviour—to be a first-adopter of new problems and it always comes slower than
technologies. In the fiercely-fought markets of expected,” says Mr Pieters, a telecoms veteran
Europe, more than 40% think it necessary to be a with more than 25 years’ experience in various
first mover. management roles. “And very often ‘new’
technology is the same as old technology, only
Yet a hope that fortune might favour the dressed up differently. Operators have learned
circumspect more the hard way.”
Figure 1 than the brave
Fortune favours the circumspect nonetheless persists Dr Marcus Weldon, CTO of Alcatel-Lucent,
C-level view on the best time to adopt new in the boardroom. a supplier of broadband and cloud-based
technology
(% respondents)
The majority of technologies—and president of Bell Labs,
C-level executives Alcatel-Lucent’s prestigious industrial research
Time of adoption is not important First mover
canvassed prefer not division—concedes the vendor community over-
5%
Late adopter to be pioneers but promised in terms of the transformative potential
9% 36% early adopters of new of technologies in the past and that many chief
technology. (Figure 1) executives have become “fatigued” by constant
Early adopter 48% pushes for technology refreshes. This makes
There are a number of the pitch for what Dr Weldon sees as genuinely
reasons for a wait- transformative technologies—such as network
and-see approach. functions virtualisation (NFV) and software-
Some are practical defined networking (SDN)—much more difficult.
8 © The Economist Intelligence Unit Limited 2015The digital dilemma:
Telecoms firms prepare for the future
Figure 2
The technology guys say we are good at technology
Executives who believe they are stronger than their competitors in management awareness surrounding digital
transformation
(% respondents)
VP/Director 26%
Other C-level 30%
CIO 24%
CTO 54%
CFO 11%
CEO 25%
Board member 38%
Anxiety at the wheel down their role in steering technological change.
Only a quarter of CEO survey respondents think
This level of scepticism will not be helped by
management vision has a significant influence
knowledge gaps at the top of organisations.
on decision-making when evaluating which
Chief executives do not appear as confident
emerging technologies to invest in.
about change as more technical-minded
colleagues. Over half of CTO survey respondents This should worry industry shareholders. While
say management awareness about digital it’s wise to consult various experts who are
transformation is much stronger than their knowledgeable about cutting-edge technologies,
closest competitors (see case study: The such as start-ups, innovators, entrepreneurs and
confident CTO). Only a quarter of CEOs canvassed clever graduates—and of course CTO colleagues—
feel the same. (Figure 2) helmsmen still need a vision for the future and a
good understanding of the technologies that can
Feeling out of their depth is understandable. As
help them get there.
innovation tends to be led by new technologies,
non-technical chief executives face the challenge Mr Pieters, for example, says he’s under constant
of getting to grips with them and figuring out pressure to strike a balance between competing
how they might lead to innovative and attractive claims on the capital expenditure budget and
products. What might come as a surprise from that tough decisions need to be made. Marketing
the EIU survey is how strong the feelings of and commercial directors are more likely to be
inadequacy are. Nearly 40% of those at the keen on investing in big data analytics, while
industry helm think they’re the same or weaker CTOs are generally more interested in cloud-
on digital management awareness than rivals. based technologies. “Different departments
might not see the bigger picture and are more
An inferiority complex might help explain why
focused towards specific investments,” he says.
many chief executives appear willing to play
“That’s when the CEO needs to step in.”
© The Economist Intelligence Unit Limited 2015 9The digital dilemma:
Telecoms firms prepare for the future
Case study: The confident CTO
As the telecoms industry contemplates new The confidence could of course be part bluff.
technologies that will radically transform CTOs would unsettle colleagues if they admitted
networks, such as SDN (software-defined too much uncertainty about the worth of latest
networking) and NFV (network functions technologies. They may also be tempted to say
virtualisation), CTOs are inevitably thrown things are going more smoothly than they are.
into the spotlight. The EIU survey suggests More than 90% of CTO survey respondents, for
they are unfazed by the leading role. While example, think their organisation is effective at
only a quarter of CEO and CIO respondents replacing legacy systems with new technologies
believe management awareness about digital and their confidence appears to be rubbing off
transformation is much stronger than their on senior colleagues. Around three-quarters
closest competitors, more than half of CTOs of CEO and CFO survey respondents agree that
canvassed say it is. legacy replacement is indeed running along
smoothly.
CTO self-confidence is partly explained
by being more up to speed on the latest Ask the same legacy question to either general
technologies than their less technically-minded management or marketing and sales, however,
colleagues. Another reason is they seem to and the responses are much more mixed. More
pay closer attention to market developments than 40% of respondents from each group,
than other boardroom members, which who can arguably see more clearly than top
gives their voice added authority. More than management any service disruption from
half of CTO respondents place great store in technology upgrades, flatly disagree that
market research when evaluating which new legacy replacement is being done effectively.
technologies to invest in (compared with only
a third of CEO respondents). As for competitive CEOs and CFOs will no doubt be comforted by a
analysis, 50% of CTO survey respondents think strong and authoritative CTO in the boardroom,
it has a significant influence on decision- but the EIU survey indicates they would be unwise
making. to take everything they hear at face value.
Margin call business benefits of digital transformation are
revenue increases, the ability to create new
“Revenue growth and cost efficiencies are closely
products and services, and a substitution of
linked when investing in new technologies,” says
declining core revenue streams with new ones.
Tom Mockridge, chief executive at Virgin Media,
Only a fifth thinks a rise in profit margins is a big
a UK cable broadband and pay-TV provider.
advantage (Figure 3). One explanation is that
“We’re not interested in profitless revenue.” It’s
voice and SMS have been high-margin earners for
a sentiment no doubt echoed in all boardrooms
the telecoms industry, something which digital
contemplating new rounds of technology
services may well struggle to match.
investment, but chief executives steering digital
transformation will probably need to make Moreover, expectations about operational
sacrifices on margins and cost efficiencies in their efficiencies are low. The need to support legacy
bid for top-line growth. systems in parallel with emerging technologies
during the process of digital transformation
The survey’s first-mover group seems well aware
is no doubt a factor, as is the inevitable lack of
of bottom-line pressure. For them, the top three
10 © The Economist Intelligence Unit Limited 2015The digital dilemma:
Telecoms firms prepare for the future
Figure 3
First movers aware of bottom-line pressure
Expected benefit of business transformation for technology first movers
(% respondents)
Ability to create new products and services 44%
Substitution of declining core revenue
streams with new ones 42%
Increase in revenues 42%
Improved ability to keep existing customers 32%
Improved ability to reach new customers 30%
Enhanced customer experience 28%
Ability to improve existing products and services 28%
Rise in profit margins 20%
Opportunities for cross-sector parterships 10%
Improved internal organisational efficiency 8%
scale in the early stages of service development. immediate digital revenue and thinking more
Chief executives will need to endure bottom- about how to remain relevant to customers. A
line pain if they are to see through the digital good example is Tuenti. Initially billed as the
transformation process. Facebook of Spain, Tuenti is now transformed
into a so-called mobile virtual network operator
Beware of chasing revenue (MVNO). As well as running services over
“When you have an idea for a new service, the Telefoncia’s mobile network in Spain, Tuenti Movil
first question the comptroller always asks is takes advantage of cloud-based technologies. It
‘Where’s the money?’” says Eduardo Navarro, means customers can still access the operator’s
Telefonica’s chief commercial digital officer. aggressively priced voice and data bundles
While the question is understandable, Mr Navarro wherever they happen to be (provided they have
says too great a focus on top-line growth can be internet access). Another innovation is the Tuenti
harmful and betray a lack of long-term thinking. app, which allows free voice calls using VoIP
“Telefonica,” he adds, “was too focused on technology.
revenue generation as a sign of success and it
Although fully-owned by Telefonica, Tuenti
was stifling innovation in services that might not
competes directly with Movistar, Telefonica’s
have an obvious revenue stream in the very short
domestic mobile operation. Why take the risk of
term.” He points to ‘smart home’ and ‘smart city’
unleashing more competition, especially when it
as some areas deserving more R&D attention.
might harm an established operation? “It’s the
Following a group restructuring in February— famous innovation dilemma,” says Mr Navarro. “If
which saw the creation of the digital officer role— it can be done then someone else will do it, but
Mr Navarro can see top management becoming it’s better to do it ourselves and learn. Instead of
less obsessed, albeit slowly, about grabbing Tuenti being disruptive to our core connectivity
© The Economist Intelligence Unit Limited 2015 11The digital dilemma:
Telecoms firms prepare for the future
services, perhaps it can build on our core.” Mr right between driving sales and satisfying
Navarro admits a journey of innovation and customers will be a difficult trick to pull off, but
service development mapped towards attracting strong CEOs thinking long term will recognise the
customers (rather than driving immediate top- two goals are not always compatible.
line growth) can be an uncomfortable one.
Experiment and have fun
Many C-level executives canvassed in the survey
Sebastian Schumann, a senior network designer
appear to be wrestling with the same problem of
at Slovak Telekom—who is also tasked with
how to attract customers and drive revenue at
exploring the potential of new communication
the same time. Nearly 60% of them see financial
technologies—believes traditional network
ROI as a significant influence when evaluating
operators should adopt a more experimental
which emerging technologies to invest in, but as
approach to services in parallel with what they do
many as 45% say consumer desires are an equally
already. If they continue to be fixated on quality
important consideration. Getting the balance
of service alone, he says, where everything is
Case study: TU Go: Telefonica’s global
communications app with a local twist
Ask Eduardo Navarro if he thinks Telefonica the use of national assets (the mobile phone
should be a global or local player and he says number in this case). “It’s a very local experience
it should be both. “By bringing our internet provided with a global product,” he says.
and local network assets together we can offer
a distinctive proposition,” says the operator’s Not that TU Go has been without teething
chief commercial digital officer. He highlights problems. An O2 UK spokesperson concedes
the TU Go app as a prime example of this type of the handling of customer feedback on certain
thinking. aspects of the service could have been better
when TU Go was in beta phase, which might
O2, Telefonica’s UK-owned subsidiary, launched have led to a smoother commercial launch and
TU Go in February 2013. By downloading the more targeted marketing campaigns. Moreover,
app, freely available to contract customers, TU Go’s official feedback thread on O2’s website
users can make and receive phone calls and text shows plenty of early customer disgruntlement,
messages—on up to ten devices—with their ranging from poor voice call performance,
mobile number. Customers can enjoy a number high battery power usage and the absence of
of benefits. If the smartphone runs out of text syncing between the mobile phone and
battery power, the app can be used on a laptop other devices. It wasn’t until May 2014 before
or tablet (a dialer-screen enables calls). When TU Go was made available in another country
beyond the range of a mobile signal, customers (Argentina) where Telefonica has a presence,
can still use the app over Wi-Fi. Those on the but Mr Navarro says more launches are now in
receiving end of TU Go calls and texts don’t the pipeline.
need to have the app installed to answer back.
All TU Go minutes and texts are deducted from O2 UK doesn’t reveal the number of active
customers’ monthly allowances. TU Go users, but it does say the benefits for
operators go beyond reducing customer churn
Mr Navarro parades TU Go as an example of how (the original intention of the app). TU Go users
operators can exploit the advantages of digital communicate more, have longer calls, and send
scale—TU Go runs on a global platform—but still more texts than those who don’t use the app.
differentiates from internet players through
12 © The Economist Intelligence Unit Limited 2015The digital dilemma:
Telecoms firms prepare for the future
engineered to 99.999% reliability—the exacting In summer 2013 Telenor quietly launched
‘five-nines’ industry standard—telecom firms appear.in, a video chat room service allowing
will be too slow to adapt in a fast-moving digital users to launch video conversations with up
world. to eight people with just a click on compatible
browsers. No money was spent on marketing,
“You have to try new things,” says Mr Schumann. relying instead on early adopters and influential
“You may not want to dabble with web-based bloggers to spread the word on social media. The
services for big B2B partners or mission-critical Telenor Digital team answered questions quickly,
applications, but if you approach it in the right listened to feedback and made modifications. The
way, perhaps by targeting not-so-sensitive and service is now used in 175 countries.
open customer segments first, you can launch fun
things. Some might take off, some won’t, but you Launching ‘fun things’ without a clear idea
can always bring them down again if they don’t. of where revenue is coming from may not
They can have a positive impact for the brand sit comfortably with traditional-thinking
even if they don’t make money initially.” top management, but building up customer
interest and developing a brand associated with
It’s a philosophy shared by Telenor Digital, innovation are valid business goals as well. The
the Nordic operator’s standalone digital unit. bold helmsman will recognise that.
© The Economist Intelligence Unit Limited 2015 13The digital dilemma:
Telecoms firms prepare for the future
2 Making customers pay
Many senior executives in the telecoms industry, fourth-generation (4G) mobile technology:
on survey evidence, appear to be in a quandary. faster speeds and greater network capacity
On the one hand they see the importance of should make digital services more attractive
investing in superfast broadband and LTE, a (Figure 4). On the other hand they fret about
Figure 4
The need for speed
Broadband and 4G/LTE are critical over the next 5 years
(% respondents)
Broadband 4G/LTE
Europe 67%
52%
North America 59%
56%
Rest of world 57%
65%
Figure 5
Europe most worried about affordability
What’s stopping customers from benefiting from digital transformation initiatives?
(% respondents)
Rest of world North America Europe
Location
60%
40%
Income and affordability Experience of sales force
20%
0%
Lack of ICT skills Insufficient network speed
Demonstrable business benefits
14 © The Economist Intelligence Unit Limited 2015The digital dilemma:
Telecoms firms prepare for the future
customers’ ability to pay extra and so justify the only been made recently. “How we sell and where
enormous outlays in capital required (Figure 5). we market is jointly discussed by the CMO, CIO,
CTO and me,” continues Mr Moyce, “but these
“The challenge in the media and communications types of conversations were unheard of 18-24
market is to get customers buying more existing month ago”.
services and more new services,” says Mr
Mockridge, chief executive at Virgin Media. A more collaborative approach also requires a
redefining of C-level responsibilities. “The role
The ‘smart home’, the ‘connected car’, and M2M of the CMO and CTO is in many ways converging,”
services are some of the promising new growth says Frode Stoldal, CTO at Telenor Group, a Nordic
areas explored in this report (see Chapter 4). operator with a presence in numerous emerging
But offering these additional services—not markets in Asia. “The CMO has to understand
necessarily charged by the amount of data they what technology means for my value proposition,
consume but by how much value customers and while the CTO also has to understand how to
enterprises attach to them—are arguably longer- bring value to the top line. This will be extremely
term prospects. important going forward.”
In the shorter term, C-level executives can do a There’s little survey evidence, however, that top
number of things to extract greater returns from management is giving the issue of boardroom
network investment and encourage customers to collaboration much thought. Only 8% of CEOs
spend more on existing digital services. canvassed think the way their organisations are
structured might seriously inhibit internal (and
CTOs, CMOs and CIOs need to external) cooperation; a meagre 7% of CTOs
talk more surveyed reckoned it was a major problem.
Operators have tended to build network capacity
A third of CFO survey respondents nonetheless
first and think about ways to fill it later. A ‘build it
do see organisational flaws as a pressing issue.
and they will come’ attitude has long prevailed,
It may fall on finance executives, perhaps more
although this is beginning to change.
aware than senior colleagues about revenue
opportunities slipping through their fingers, to
Eddie Moyce, chief customer experience
push for organisational change if CEOs don’t take
management officer at MTN, a mobile operator
the lead.
in South Africa, says “huge investment” in
LTE—and the pressing need to get a return on
it—has focused minds. “There needs to be closer Network performance
collaboration between engineers and commercial There’s an opportunity for operators to
managers and marketing,” he says. “We need differentiate on a well-designed network that
to make sure that the marketing plan is tightly can handle booming volumes of data (and a
integrated with the network investment plan.” threat for those who don’t). Customers are more
likely to stick with operators who make sure their
Some ideas seem obvious. Roll out the 4G favorite apps work well and deliver video without
network where customers have access to annoying interruptions.
compatible devices, for example, or target more
lucrative commercial areas first to get a quicker “When video quality goes down customers stop
return on investment. But changes in the way watching it,” says Ericsson’s Mr Ewaldsson. “If
MTN makes decisions on capital allocation have you’re charging per packet of data, that’s clearly
© The Economist Intelligence Unit Limited 2015 15The digital dilemma:
Telecoms firms prepare for the future
lost revenue, but even if you’re delivering data broadband to access more content,” affirms Mr
as part of a flat package, and don’t lose revenue Mockridge.
directly, you still get angry subscribers. That
could start a downward spiral.” Fears about shallow pockets might well be
assuaged, then, provided there’s no skimping
And video traffic looks set to boom. According to on targeted network investment. It helps too if
Ericsson, video accounted for 40% of all mobile you have scale—to better accommodate modest
data traffic worldwide in 2013 but spurred on by premiums—and a well thought-out data pricing
bigger screen sizes with higher resolutions, the strategy.
Swedish network supplier reckons video will chew
up more than half of a much bigger global mobile Monetising data
data traffic pie by 2019. As customer habits move from calls to consuming
video, operators are wising up to the implications
But operator enthusiasm to pay extra for
of this shift. If generous data offers are scatter-
improved network performance, as the Ericsson
gunned across an entire subscriber base,
CTO acknowledges, is far from universal. And
customers might not attach much value to the
when there is a reluctance to invest, he says, it
extra they’re getting. Consequently, revenue
usually stems from uncertainty about customers’
growth lags well behind data consumption. This
willingness to pay more.
puts a strain on the business case.
There are some encouraging signs from North
“Our traffic volumes are growing 50-80% a year
America where investment in LTE does appear to
while revenue is stable,” says Mr Stoldal, Telenor
be paying off. A report published in September
CTO. “In a couple of years we will have to produce
2014 by GSMA, a mobile industry lobby group,
one gigabyte (GB) of data 10-20 times more
found that mobile revenue in North America
efficiently than what we are doing today.”
grew by 4.7% a year on average between 2008
and 2013, but declined in Europe at an annual It is important, therefore, to have a well-thought
average of 3% over the same period. out data pricing strategy—although roll-out can
be tricky. When Vodafone launched its ‘Vodafone
Stiffer competition in Europe, and greater
Red’ pricing plans in the UK in September 2012,
regulatory pressure on voice and texting revenue,
it mapped out a strategy for long-term revenue
no doubt play a part in explaining the difference,
growth based on data usage. Vodafone Red
Cisco Visual Networking
but not entirely (See case study: Helpful
1
subscribers get unlimited voice and SMS for ‘free’,
Index: Global Mobile Data regulatory environment?). Data from Cisco1
while only data is charged for—the higher the
Traffic Forecast Update indicates that North America in 2013 accounted
data allowance, the more expensive the tariff.
(February 2014) for over a quarter of global mobile data volumes,
despite the region having just over 5% of total Although Vodafone saw some downturn in ARPU
2
European Commission
mobile connections. Relatively low prices2— (average revenue per user) with the introduction
report, ‘Implementation
of the EU regulatory combined with the likes of tiered pricing, shared of Red, the simplified tariff structure has led
framework for electronic family data plans, broad device portfolios and to numerous benefits, including higher net
communications—2014’, faster networks—are helping to stimulate usage promoter scores (a key metric for measuring
(July 2014) says mobile and revenue. customer satisfaction), lower churn and greater
voice call and data prices
are higher in EU than US, data usage. Among Vodafone Red smartphone
“Customers are willing to pay more for better
but usage is greater in US customers, monthly average date usage per
quality and enhanced products, such as faster
leading to higher ARPU user is 800 megabytes (MB), nearly double
16 © The Economist Intelligence Unit Limited 2015The digital dilemma:
Telecoms firms prepare for the future
Case study: Helpful regulatory environment?
By the end of 2015, the EU plans to abolish service, giving the content provider an assured
roaming fees for European mobile users. This is performance level (so not scaring potential
welcome news for customers. European telcos, Netflix subscribers away). “We work with Netflix
however, see the end of a highly profitable so they pay their fair share of connectivity and
revenue stream. can’t ride on top of infrastructure for free,”
says Frode Stoldal, CTO of Telenor.
These operators, particularly the larger ones,
have grown weary about what they see as It is unclear what the official regulatory position
unhelpful meddling in wholesale and retail is on paid peering arrangements, both in Europe
prices. Only 21% of respondents from Europe and elsewhere, and whether or not authorities
agree that the regulatory environment is good will clamp down on them. A two-tier internet,
for network investment and innovation, yet in which operators are free to charge extra for
nearly a third of executives based in North better quality of service, is nonetheless vital for
America take the positive view (Figure 6). Mr Stoldal. “If telcos are to exist long term, net
Figure 6
Mixed views on helpfulness of regulators
Operators who agree the regulatory environment encourages network investment and innovation
(% respondents)
Africa, Middle East 40%
Asia-Pacific 33%
Latin America 30%
North America 32%
Europe 21%
“I’m wary when regulators take the consumer neutrality has to go away,” he says.
perspective that voice and data prices should
always be lowered, as this can lead to network Despite grumblings about an unfriendly
underinvestment,” says Ulf Ewaldsson , investment environment, Europe’s network
Ericsson CTO. “That should worry regulators operators keep digging deeper to pay for
and society at large. There’s a link between the likes of 4G and superfast broadband. A
broadband development and GDP growth.” report from the European Commission said
EU telecoms revenue declined in 2013 yet
The next area of concern for European and investment grew.3 Even arch-critics of Europe’s
global telecoms executives is that regulators regulators—Cesar Alierta and Vittorio Colao,
stamp down on paid peering arrangements the chief executives of Telefonica and Vodafone
between content providers and network Group respectively—have sanctioned enormous
operators on the grounds of net neutrality (the increases in network spending.
principle by which all web-based traffic should
be treated equally by networks), even though The need to ‘stay in the game’, either through 3
European Commission
such arrangements involve direct links that network differentiation or developing new report, ‘Implementation
bypass traditional internet traffic. digital services to offset core revenue declines, of the EU regulatory
is clearly a strong investment driver. Digital framework for electronic
Telenor, for instance, has struck a commercial transformation is not for the faint-hearted.
deal with Netflix, a popular video streaming communications—2014’,
(July 2014)
© The Economist Intelligence Unit Limited 2015 17The digital dilemma:
Telecoms firms prepare for the future
the average consumed by non-Red customers C. Bernstein, a brokerage, calculated in 2013
(430MB). that mobile contract churn among established
European operators was averaging out at about
Vodafone Red customers also talk more than 16% a year. The quad-play churn levels of Virgin
those on different plans. Although there’s no Media in the UK, however, were under 8%.
direct revenue uplift, free voice and texting gives
Vodafone some protection against the likes of However, bundling is not only about connectivity
Skype and WhatsApp. The appeal of OTT players and content. Operators can be aggregators and
diminishes if customers can already get free voice distributors, cleverly packaging digital services
and SMS from their mobile operator. Vittorio that have been created by others, as well as
Colao, Vodafone’s chief executive, says the more adding their own products—such as cloud-based
successful he is with Red, the more relaxed he is storage and back-up—on top of core connectivity.
about discussions with OTT players.4 This type of bundling extends to both the
consumer and enterprise segments.
Going for a bundle
Mobeen Khan, responsible for bringing AT&Ts
Increased pressure to offer bundled services—a
M2M and internet of things (IoT) products
mixture of broadband access, TV, fixed-line voice
to market—targeted at the enterprise—says
calls and mobile—is forcing an industry re-think.
building on core connectivity with valued-added
In recent months, this has been manifested
services takes customer discussions away from
in a frenzy of M&A activity: AT&T has agreed a
the cost of data—which, in competitive markets,
US$48.5 billion deal to buy DirecTV, a satellite
is likely to fall—and onto talks about products
provider; Telefonica has snapped up GVT, a fixed-
and solutions that add value and which have
line broadband player in Brazil, to complement
greater resilience to price erosion.
its Vivo subsidiary (Brazil’s largest mobile
operator); Orange has launched a US$4.4 billion “We offer best in class M2M solutions that
bid for Jazztel, a Spanish fixed-line operator, go beyond global connectivity,” asserts Mr
while Nordic operator TDC has splashed out Khan. “Yes, there’s value in transport and
US$2.2 billion to buy Get, a cable-TV provider in communications, but there’s lots of additional
Norway. value in other infrastructure elements, such as
cloud and security platforms, which we provide
Underpinning these deals is a desire to get bigger
already to our enterprise customers. We want to
shares of customers’ wallets, boost economies
extend those services to M2M customers, which
of scale and reduce churn—it’s trickier for
increases value.”
customers to leave operators if they’re signed
up to multiple services. Analysts at Sanford
4
Speaking at Vodafone
Group Q4 earnings call, 20
May 2014
18 © The Economist Intelligence Unit Limited 2015The digital dilemma:
Telecoms firms prepare for the future
3 Smart telcos build digital ecosystems
César Alierta, Telefonica’s chief executive, Laying claim to a central role is easier if
outlined four ‘growth pillars’ after a group operators have large network footprints and
restructuring in February. One was increased plenty of customers—digital partners can be
revenue through new services, another was lured by the carrot of scale. It helps explain why
network and system modernisation by deploying Telefonica’s M2M global partner programme
fibre and LTE, and a third was increased efficiency managed to attract as many as 250 partners in
through cost cutting and simplified structures. Europe and the US little more than a year after
The fourth was strengthening the company’s it was launched in June 2013. Partners include
position in the digital ecosystem. device manufacturers, solution providers and
distributors.
Mr Alierta is not alone in seeing the benefits
of a more central digital role. “Through Running fixed and mobile networks, which
partnerships we can acquire skills sets that collect and analyse data, can give operators
would take too long to build up ourselves,” says a head start in ‘smart cities’ too. By bringing
Mr Stoldal, Telenor CTO. “And by developing together what can often be a fragmented
digital ecosystems, we’re in a better position to ecosystem, operators are in a strong position
collaborate on innovation and get products to to become the single point of contact for
market quicker.” local authorities, especially if they already
have strong links with them. Orange is
Mr Khan enthuses about the operator’s ‘foundry’ aiming to do just that in France. Armed with
innovation centres. Funded to the tune of numerous partnerships to beef up its smart city
US$100 million from AT&T and a range of big- proposition, the country’s biggest operator
name technology sponsors (including Microsoft has launched a five-point plan targeted at
and Intel) there are five centres (four in the local government. The programme includes
US, one in Israel) where AT&T innovators can giving car drivers real-time information on
work with outside experts to develop consumer traffic jams and suggesting alternate routes to
and business solutions. One based in Plano, avoid congestions. The use of public transport
Texas, is focused on M2M solutions for different is encouraged through mobile payments for
industry sectors. “Engineers, customers and tickets and on-board Wi-Fi. Smart grids (helping
ecosystem partners can collaborate and jointly distributors to manage energy more efficiently)
innovate using our tools and resources,” says Mr and smart buildings (monitoring energy
Khan. “The foundry is a very important growth consumption) are also included in the scheme.
platform for us.”
© The Economist Intelligence Unit Limited 2015 19The digital dilemma:
Telecoms firms prepare for the future
For all the growing industry recognition about more incentive to work closer with OTT players
the importance of partnerships and ecosystems, knowing they can’t easily elbow them out the
the EIU survey suggests there’s still some work digital game.
to do. Under a fifth of respondents, for example,
view greater cooperation with app developers Another explanation is operators increasingly
and content providers as a big transformative recognise OTT players as being more innovative
industry initiative today. And only 13% of C-level in consumer services. It’s a view held by
respondents think opportunities for cross- VimpelCom, which has mobile operations
sector partnerships is currently one of the main in Russia, Italy and various CIS markets. It
benefits of digital transformation—a meagre 2% has partnerships with more than 40 global
of C-level executives based North America think OTT players, including Google, Facebook and
this is the case. WhatsApp. Mikhail Gerchuk, VimpelCom’s chief
commercial officer (and chief executive of CIS
The survey reveals an industry in the formative operations) happily admits that internet players
stages of digital transformation. Look to the are more skilled at designing digital services.
future and more than 85% of C-level executives
think most new digital products and services will A study from Northstream, a telecoms
either originate from external parties or done in consultancy, nonetheless shows operators—on
partnership with them (Figure 7). the whole—are not doing a very good job at
working with internet firms. By not having
Figure 7 platforms in place that would make collaboration
easier, the consultancy calculates operators in
Innovating together Western Europe are in danger of missing out on
Where C-level executives believe future products and
services will originate from in the next 5 years €2 billion gross profit over the next three years.
(% respondents)
A platform allowing OTT players to access the
Internally 11% operator’s network and IT assets can have
a number of mutual advantages. A music
Collaboratively 56%
streaming provider, for example, wishing to
Externally 29% create a free day pass by ‘zero-rating’ data (so
customers don’t pay for the service), could
set that up quickly if it had easy access to the
More spadework needed on operator’s billing systems. And if the operator
OTT collaboration made an SMS application programming interface
(API) available, the music company could launch
Riku Salminen, chief executive of Jongla, a
its offer via text (to which customers reply to
start-up with an app for instant messaging,
access). The OTT firm, not the operator, is doing
believes operator attitudes towards OTT players
most of the work in setting up the service,
have “totally changed” over the last two
which reduces cost. There are various revenue-
years. “They’ve moved from competition to
generating business models as well. OTT players
collaboration,” he says. One reason, he argues,
could pay operators wholesale data rates when
is regulators have taken a tough stance on
data is fully sponsored—as in the free day
net neutrality—the principle that all digital
pass example—or revenue could be split when
traffic should be treated equally by internet
customers pay for services or goods. Operators
service providers. Operators, he says, now have
can also charge for API usage.
20 © The Economist Intelligence Unit Limited 2015The digital dilemma:
Telecoms firms prepare for the future
It’s also easier to scale up the number of OTT has various mobile operator subsidiaries in Asia)
partners and services if the IT department and XL Axiata, a mobile operator in Indonesia.
doesn’t need to be involved each time something Jongla can then take advantage of operator
new is offered. “There’s a vibrant start-up partners’ greater marketing muscle. But Jongla’s
community in Scandinavia but they’ve been put partners, maintains Mr Salminen, can also take
off from dealing with operators because it’s too advantage of start-up innovation. Jongla’s
difficult to work with them from a technological lightest instant messaging app, for example,
point of view,” says Bengt Nordstrom, takes up only 0.7MB of data—the lightest IM
Northstream’s chief executive. app ever created, claims Mr Salminen—making
it ideal for low-budget smartphone users: it
Seeing the benefits for both internet and doesn’t hog limited memory space on the device
telecom firms to collaborate, VimpelCom and money-conscious customers don’t make big
invested in a ‘global hub’ that makes working dents in their data allowances by downloading
together easier. By using an API, OTT players the app. By packaging the IM app into their
can plug into the hub and make their services service portfolios, argues the Jongla CEO,
accessible in each of the 14 markets where mobile operators in emerging markets can offer
VimpelCom has operations. Paid-for applications more attractive services to budget-conscious
and services are billed to the user’s mobile smartphone users.
account; any revenue-sharing agreements
between VimpelCom and OTT partners can be If OTT players and operators are to strike up
settled (see case study: Smart pricing gives partnerships, however, Mr Salminen says it helps
Bangladesh a mobile data boost). “The hub is our if the operator has a clearly-defined digital
big achievement and a point of differentiation strategy. “It’s better to talk with people who see
for potential partners,” says Mr Gerchuk. “Many the value of the digital world and how digital
OTT players are very lean start-ups, so they can’t content can be consumed.”
afford to integrate and launch services in each of
our country operations. The global hub makes it Softening operator attitudes towards OTT players
much easier.” doesn’t mean industry resentment for ‘stealing’
revenue has gone away. The EIU survey finds
Mr Salminen at Jongla agrees there are mutual OTT players much more optimistic they will be
benefits for OTT players and network operators comfortable partners with traditional telecom
to work together. To create a stronger local operators than the other way round. A sizeable
presence in Asia’s emerging markets, Jongla has minority of operators still envisage OTT players
partnered with Nordic operator Telenor (which as being outright competitors in the future.
© The Economist Intelligence Unit Limited 2015 21You can also read
