To be or not to be The future of the telco business model
To be or not to be | The future of the telco business model
Introduction 04 Thinking in scenarios 06 Relevant scenarios based on identified key drivers 10 Critical uncertainties and how they shape our four scenarios 12 Generic key drivers – the same but different 14 Journey into our four scenarios 20 Taking the long view 34 Sources 36 Methodology 37 Contacts 38
03 Introduction
The pace of change in the tele- There were incorrect predictions about the communications industry is accelerating: development of computers, too: the boom years are either over or coming to an end very fast for most telcos. The tech •• In 1949, Popular Mechanics magazine sector has seen enormous disruptive chang- forecast that the computers of the future es affect social life, politics and business. would weigh no more than 1.5 tons.4 Throughout history, both society and indus- try insiders have been colossally wrong or •• Even Steve Jobs, who was well known for totally underestimated markets and gadgets his sense of customer needs, was totally that we couldn’t live without today. wrong when he prophesied no hope for mobile computers: “For the average In the beginning, the telephone was not person, they're really not that useful, and expected to be a success story: there's not all that much software for them either”.5 •• Western Union, who dominated the telegraph industry at the end of the 19th Another major part of the communications Century, noted in an internal memo: “This industry, the Internet, is a hotbed for wrong 'telephone' has too many shortcomings predictions: to be seriously considered as a means of communication. The device is inherently •• Microsoft founder Bill Gates thought the of no value to us”.1 Internet was just hype.6
•• In Germany, the first telephone directory •• Ron Sommer, then CEO of Deutsche was popularly called “the book of 99 Telekom, said in 1990 that the Internet fools”, as the general public believed the was a gimmick for computer nerds and telephone had no future.2 he didn’t see any future in it.7
•• In the 1980s, when the first cell phones The accelerating pace of this change makes were introduced, AT&T forecasted that predictions hard, so we adopted a more there will be less than 1 million subscrib- holistic approach – and we now invite you ers in the USA by the year 2000.3 to travel with us into four scenarios for the telecommunications industry in 2030. Our scenario approach does not aim to predict the most likely outcome, but to illustrate what could plausibly happen in the telco world and how market players might deal with many uncertainties along the way.
1 Cairncross, F. (2001) 2 Winkelhage, J. (2006) 3 Lozano, A. (n.d.) 4 Meigs, J. (2012) 5 Erdmann, C. (2011) 6 Handelsblatt (2014) 04 7 Pillkahn, U. (2013) To be or not to be | The future of the telco business model
05 Thinking in scenarios
06 To be or not to be | The future of the telco business model
07 Most of the trends that telcos are exposed In this uncertain environment, industry to display a high level of uncertainty – they stakeholders such as telco companies, ven- could turn out to be disruptive, lead to dors, and other investors are asked to con- exponential change over the next decade, sider long-term assets, and the decisions or sink without trace. Shifting customer they make today will have a major impact behavior, with ever-increasing expectations on users, companies, and the economy and pressure from both existing and new in the future. As we have seen, traditional players in the game, affects their business, analyses struggle with forecasting, since while more and more revenue streams ei- no amount of research can remove all the ther face strong decline or are being taken uncertainties affecting the successful out- over by other players such as over-the-top come of a decision over decades. (OTT) players and tech giants, challenging the telcos’ traditional business model. Yet Nevertheless, telco players need to make the transformation of their core business, these decisions, and scenario design is one coming sooner and faster than foreseen, way to deal with the lack of certainty and is pushing telcos to step outside of their look beyond the conventional planning ho- traditional thinking and become innovation rizon. While predicting the future is usually drivers. impossible, scenario design helps to devel- op robust strategies that will work in dif- ferent potential futures by highlighting the risks and opportunities of certain strategic issues. Scenarios are stories, narratives about alternative future environments in which today’s decisions could play out: they are neither predictions nor strategies. Each scenario models a specific, plausible world of the future which differs considerably from the others. Scenario design emphasiz- es large-scale forces that might move the future in different directions.
08 To be or not to be | The future of the telco business model
Each scenario models a specific, plausible world of the future which differs considerably from the others. Scenario design emphasizes large-scale forces that might move the future in different directions.
09 Relevant scenarios based on identified key drivers
Extensive research based on Natural Examples are the ownership of network Language Processing algorithms, desk innovation, which is an important success The best research, and expert insights generated factor in the telco ecosystem. Network a long list of drivers that could shape the innovation could either be driven by the future of the telecommunications industry. telcos themselves or outsourced to other way to predict These were then analyzed and clustered players in the value chain, such as hard- into five categories: social, technological, ware vendors, while telcos merely use the the future is to economic, environmental, and political. The network. drivers were then rated for their degree of uncertainty and their impact on the tele- Another example of a high impact and high create it. communications industry. uncertainty driver is the role of OTT players, Peter Drucker who could become a significant threat for telcos as their power in the market increases. OTTs could take over customer relations if users perceive connectivity as a necessary but basic utility. It is also imaginable that the telcos own the user data, analyze their needs, and use this knowledge and insight to monetize the relationship.
10 To be or not to be | The future of the telco business model
Fig. 1 – Driver evaluation according to degree of impact and degree of uncertainty
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11 Critical uncertainties and how they shape our four scenarios
All high impact and uncertain drivers in the The “Ownership of the (network) tech- users and network, or device producers zone of interest were clustered into critical nology layer” axis can tip in one of two might equip their devices with virtual SIM uncertainties based on feedback from in- directions. At one end, telcos own the cards that choose the best provider in a dustry clients and expert knowledge from network layer, at the other they are fully dynamic process. This cluster contains var- the Deloitte EMEA TMT Community. These separated from the network layer, which is ious drivers such as customer service and critical uncertainties were then enriched dominated by vendors as the main source contact, competitive development, willing- with other drivers which are less uncertain of innovation, while telcos outsource most ness to pay for telco services, the number and have less impact, in order to enhance tasks. This cluster is driven by network of personal devices used, (un)bundling of our understanding of the concepts the clus- innovation, bandwidth, and latency devel- services, the role of OTT players, and data ters represent. These critical uncertainties opments, the mobile communication cell protection and privacy. With the help of our were then tested for inter-dependence network structure in the form of 5G/6G, scientific scenario development approach, and the relevance of their combination. the Internet of Things, and also Software these critical uncertainties shaped four This process led to a scenario matrix with Defined Networks. possible scenarios. two axes, “Ownership of the (network) technology layer” and “Dominance of the The second critical uncertainty, “Domi- In “The engineer strikes back”, telco oper- traditional customer relationship”, as criti- nance of the traditional customer relation- ators master both customer relationships cal uncertainties. ship”, can logically also tip in one of two and the technology layer. In the second directions. At one end, telcos as primary scenario, “The new wholesale truth”, telcos providers of value-adding services like com- have been driven out of the customer munications and media access continue to domain but remain masters of the tech- own the traditional customer relationship, nology. Telcos retain the primary customer but at the other they could also be fully relationship but transfer the technology en- isolated from the customers, who are tirely to vendors in “The virtual telco”. In the served by various providers such as OTTs last scenario, “A vendor brand”, telco players or technology companies. For example, IoT are driven out of both domains. providers could insert themselves between
12 To be or not to be | The future of the telco business model
Fig. 2 – Four scenarios for 2030
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13 Generic key drivers – the same but different
Regardless of the scenario, some general topics emerge. Most of them reflect the external environ- ment, such as customer behavior, data privacy, and regulation, while other factors clustered under ope- rational excellence can be influen- ced by the telcos themselves.
14 To be or not to be | The future of the telco business model
Generic key drivers – the same but different
15 Customer behavior Fig. 3 – VR-Revenue forecast for Germany Today, 62% of under 24 year-olds look at their phone within 15 minutes of waking up, in million Euro compared to 36% of the overall population.8 0 0 With the accelerating pace of technological 00 development, customer behavior in 2030 will be significantly different from 0 today’s 0 world, since many aspects of our lives80 will 0 be interconnected and ‘smart’, featuring 0 re mote-controlled gadgets, automatic re- orders from fridges, and autonomous60 vehi- 300 cles. The way we communicate and interact 0 0 with technology will change enormously, from augmented reality to virtual reality40 and 330 40 30 eventually holographic communication. The 30 worldwide virtual reality market is already 4 0 worth USD 1bn; by 2020 the German 0 market 60 0 will have reached this size on its own, with 0 0 30 further exponential growth expected sub- 0 30 sequently.9 0 0 6 0 0 8 0 0 0 More than a third of the population will Hardware – CAGR 16–20: +44 % Content – CAGR 16–20: +150 % belong to a generation that has replaced Sources: Deloitte display-focused with conversation-focused communication, like Amazon’s Alexa. Data analytic capabilities enable highly proactive digital personal assistants (PAs) that can take part in any sphere of daily life.10 PAs increase in data generated by mobile de lowest level of Maslow's hierarchy of needs. will be connected to the human body by in- vices, from 17% of total data traffic in 2013 This is encouraged by an increasing number novative sensors that can read brainwaves, to 27% in 2020, a development that is likely of connections and the amount of data trans- and therefore interpret most interactions to accelerate in the future.12 ferred, making lower marginal costs possible. and analyze human desires. As early as However, additional premium services for the 2017, more than 300 million smartphones Customers expect perfect connectivity, digital economy can drive a higher willingness sold globally have neural network ma- with bandwidth matching their demand to pay. chine-learning capabilities on board.11 wherever they are and whenever they need it. Most customers will have little interest, A key differentiator will be a seamless journey Technological progress will enable average or none, in which underlying infrastructure throughout the customer’s lifetime: from smartphones to process in petaflops with connects them. Technological standards first contact to signing contracts via online their petabyte of storage capacity and are therefore not a major differentiator for channels or shops to incident management connection speeds of several gigabits per telcos, who are perceived as utility compa- and retention. second. This will facilitate new services and nies providing a commodity. Consumers user experiences, but also require greater have a low willingness to pay, basic connec- bandwidth. We are already seeing a massive tivity is considered a free service on the
8 Böhm, K. (2015) 9 Lutter, T. , Meinecke C.-M., Prescher, D., Böhm, K. & Esser, R. (2016) 10 Wigginton, C. (2017) 11 Sallomi, P. & Lee, P. (2017) 16 12 Briggs, B. & Hodgetts, C. (2017) To be or not to be | The future of the telco business model
Fig. 3 – VR-Revenue forecast for Germany Data privacy and security Apart from the technological possibilities, As Francis Bacon said in 1597, “knowledge data privacy is also driven by a social com- is power”. This knowledge is contained in ponent: customers’ demand for anonymity various data formats that humans have and privacy concerns. The absence of net- been trying to encrypt for thousands of work security and active data protection years. The interconnectedness of every as- systems has diminished customers’ trust pect of life that the digital world makes pos- in the international technology giants (as sible leads to a vast increase in data, which shown in the Snowden incident). At the offers new possibilities for encrypting and same time, it has opened opportunities for decrypting data. As a result, data protec- local telco carriers to position themselves tion is a major topic, as reflected by the as protectors of data privacy and gain a high-value market for security solutions. competitive advantage. Apart from external data abuse, the internal processing of data In all scenarios, computational processing is also viewed skeptically by consumers. speed will increase enormously, leading At present, 43% of consumers would offer to the emergence of new data protec- up their personal data in exchange for tion methods. At the same time, these special offers and discounts, while 39% improvements will be challenged by of consumers said they would share their attempts to crack the security solutions. information if it meant solving customer There will thus be more and more need for service problems faster. Since Millennials data protection, as the digital universe is display a greater willingness to share their growing exponentially and is set to reach data (49%) than Baby Boomers (38%), we 44 zettabytes in 2020, 10 times more expect future customers to be more likely than in 2013.13 Not only single data points to share their data with corporations.14 need to be protected, but also connected IoT devices and entire networks – in all scenarios. Stuxnet is an example that has shown how a computer worm can infiltrate a computer system and sabotage complex infrastructures. Network security tries to protect the usability and integrity of net- works in different dimensions by controlling access, preventing data loss, and actively defending the network against attacks. New technologies such as the introduction of software-defined networks will bring advantages and disadvantages in terms of network security. In all scenarios, we there- fore see a neck-and-neck race between encryption and decryption technologies and also between network protectors and network intruders – which forces the network owners, i.e. telcos or vendors, into mitigating these risks.
13 Briggs, B. & Hodgetts, C. (2017) 14 DeNisco, A. (2017) 17 Regulation major effect on telcos in all scenarios and in The most valuable In the past, the telco industry was a highly various dimensions, since levies and taxes regulated environment with only one com- or other public subsidies could finance the commodity I know pany or state agency having the monopoly network. Another factor with a major im- in the markets. Since then, regulation has pact will be the payment of fees for mobile of is information. opened up the market enormously and spectrum licenses. changed entire business models, e.g. by Gordon Gekko, Wall Street abolishing roaming fees in Europe. It has Back to a fixed net world also enabled more players to enter the By the year 2030, 5G, the next mobile market and set up their businesses as telecommunications standard, will be at A third force affecting data privacy is the MVNOs (Mobile Virtual Network Operator) maturity. However, it will not be a purely regulatory environment. Privacy regulation or focus on land-line offerings only. The Eu- mobile standard, but rather a networked and its application in the technology ropean Union is planning to harmonize the convergence of wireless (based on 5G, industry is a highly disputed topic now, and spectrum access conditions which will allow Wi-Fi and LTE) and fixed networks, involving we assume that it will remain relevant. Reg- inter-operability across borders and pro- software-defined networking and network ulation is not governed by global standards, vide telcos with economies of scale, leading function virtualization. Due to the vast but rather in scattered regionalism. Apart to a more efficient use of the spectrum.15 amounts of data that will arise from ma- from telcos, other players such as OTTs or US wireless legislation and regulatory policy chine-to-machine communication and to e-commerce companies face severe chal- focused on enabling carriers to obtain satisfy the capacity demands of industry lenges to attain global scale. national scale by allowing market con- and end users, a fiber backbone is inevi- solidation. The new European legislation table. A more granular fiber network will Blockchain technology combines tech- will stimulate market consolidation in the be required down to the last mile to make nological development with human short term, as there are now more than 40 short latencies possible, thus providing desires and the regulation of data privacy. facility-based players in Europe, compared opportunities in the wholesale business Blockchains disrupt various processes and to four carriers in the USA that offer their to its owners. Yet the demand for a fiber transactions in all scenarios, and can serve services nationwide.16 Regulation will have a infrastructure as a strategic control point as gatekeepers of reputation and identity, provides the incumbents with strong not only to help establish trust but also to competitive advantages, as they already exchange assets safely and efficiently, and – possess this infrastructure and can use perhaps most promisingly – they offer it to differentiate themselves from the digital contracts. competition.
Fig. 4 – Competitive revenue and member per employee comparison
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18 To be or not to be | The future of the telco business model
Smart analytics and process Fig. 5 – Digital transformation and scaling automation While in today’s business environment the trillion analytics capacities of telcos are highly dependent on manpower, in 2030 analytics will be highly automated, driven by cheap computing power and advanced algo- 0 0 rithms. This is made possible by Artificial 0 billion Intelligence capabilities, machine learning, cognitive analytics, robotics process auto- mation (RPA), and bots that can take over tasks that today require human intelligence. 0 billion When these tools are interconnected, they can boost employee productivity, automate increasingly complicated workloads, and 00 million establish cognitive ‘assistants’ which mimic human thinking and engagement. These 00 million machine intelligence systems can make in- million 0 million
ferences and predictions and take the cog- 0 80 0 000 0 0 0 0 030 nitive insights they generate, transfer them into actionable plans, and finally process Connected computing devices
them, enabling companies to detect key Sources: Deloitte patterns and relationships from billions of data sources in real-time to derive deep and actionable insights about their customers and the network.
At the same time as becoming leaner, Leadership and talent drive innovation. In view of the shortage of telcos are required to tap into new data Management processes will change highly skilled technology experts and data sources for analysis. Today, companies only radically in all scenarios: not only will the analysts that we are likely to face in 2030, analyze a minor portion of the available development and use cycles for products telcos need to invest in employer branding data. Estimates show that by 2020, 37% of become shorter at exponential speed, but to remain an attractive employer when the digital environment will consist of valu- also decision-making cycles will change at expanding their workforce. In the case of able information once it is analyzed; conse- a rapid pace, leading to agile management downsizing, retention strategies for key quently, companies that tap into all relevant methods to stay innovative and relevant in staff are vital. The key to success will be a sources and analyze them sufficiently can an ever-changing market environment. new set of skills such as engineering, soft- achieve more than USD 430 billion world- ware, and analytics that enable employees wide in productivity gains in comparison to Across all scenarios, telcos will have to master new technologies and innovative their peers who do not leverage this data.17 outsourced most non-core activities that business models, yet such skillsets are rare. Based on their ability to analyze a full set of they still conduct in-house at present. Telcos therefore need to adapt their HR data, telcos can validate or formulate their Operational excellence will enable telcos in approach to attract the profiles needed. expectations, advise decision-making, and 2030 to capitalize on big data to be more formulate future strategies. efficient in the network and the customer In addition, the general workforce will need base, e.g. by lowering the costs of customer to be more flexible and agile. Only the core acquisition and retention and network workforce, consisting of top decision-makers maintenance. Despite technological and highly skilled risk-takers who would progress, the workforce will still be a key otherwise not join the company, should be resource for telcos. All companies, regard- employed permanently. All other areas of less of sector, will be looking for people the workforce will be staffed on demand on who have the mindset and the ability to a pay-per-project basis.
15 European Commission (2016) 16 Brake, D. (2015) 17 Briggs, B. & Hodgetts, C. (2017) 19 Journey into our four scenarios
20 To be or not to be | The future of the telco business model
21 Scenario 1: The engineer strikes back
In “The engineer strikes back”, telco companies Network/technology own the network technology domain and infra- The telcos’ operating model is highly dependent on innovation cycles and structure as well as the customer relationship. on leveraging the latest technology for This is where telcos come from and where they customers’ high bandwidth and short latency demands. Governmental regulation hope to end up. They drive network innovation has favored national players taking over with their technological competence and have the network, as multinational hardware vendors have been reduced to being mere the ability to maintain and operate their assets. hardware suppliers with limited power in The telco players furthermore master the cus- the value chain. The telcos orchestrate the cell mesh network structure which they tomer relationship and can thus focus on the only partly own. This is built on their own whole value chain. They own the revenue control mobile networks and also a large number of ‘private’ and public wireless networks points, having direct access to their B2B and B2C that are built on a granular fiber backbone. customers. While owning large parts of the value chain, telcos rely heavily on network analytics to improve their general operations. The net- work providers operate in an oligopolistic market environment. Global telco alliances and partnerships drive global communica- tions and infrastructure standards that are present in the market.
22 To be or not to be | The future of the telco business model
Customer relations Business model stage in the value chain they have a key More than a third of the population belongs In this scenario, a new generation of hands- competitive advantage. Telcos use their to a digital native generation that does not on, cutting-edge, software-based network knowledge of customer demand to tailor understand the concept of pay-per-minute engineers enable innovative rev-enue their product portfolio and bandwidth offerings; rather, they see communications generation. Telcos offer services that expansion roadmap. and basic connectivity as basic needs to be penetrate and connect different aspects of financed by a tax such as a network levy. people’s lives by providing individual, tech- With their platforms developed in-house, Customers are very willing to pay for fast based services that are tailor-made to meet telcos can orchestrate an ecosystem of bandwidth, superior network quality, and the requirements of their B2B and B2C external and self-built offerings. In the a premium customer experience offered customers. End-user products can leverage end-user, B2C environment, the telcos have by telco players going beyond free, basic optimized network utilization with special to offer total connectivity across devices connectivity. Display communications deal propositions that depend on user and multiple services. They can seamlessly have been replaced by conversational location and use time and thus boost the embed different smart home systems into communications like hologram technology, profitability of their business. Telcos also their world and connect it with third party communication lenses, built-in devices, need strong customer segmentation to of- applications such as health or mobility sys- or ultrasonic communications. All aspects fer perfect price differentiation and benefit tems. For B2B customers, telcos will be the of life have been changed by intelligent from individual users’ willingness to pay. single network enablers for all IoT solutions technologies, such as cognitive computing, that require connectivity. This will be highly which make life easier and shape human To further increase attractiveness for relevant in a market that is already expo- interaction. Even though digitalization is shareholders, highly profitable business nentially growing from 12.1 billion installed fully a part of daily life, device producers can be generated from OTT payments for IoT units two years ago to 30.3 billion units have a weak relationship with end users, premium connectivity to end users. Due to in the near future, making it a USD 3 trillion since telcos own the relationship and their strong position as network owners, market. Telcos can partner with enterprises directly provide value-added services to telcos can be highly selective in their choice who will be users of 60% of all IoT devices.18 customers. This is facilitated by other tech of OTT partner. The combination of sover- players such as OTT players, who remain eignty over network technology, software, in their traditional domains. With changes and innovation cycles provides telco players in the regulatory environment, the use and with stronger bargaining power over OTT analysis of user-specific data is now widely providers than they have seen for a long possible. time.
Telcos have developed platforms con- For network infrastructure elements, the necting users’ devices and providing the telcos have a good bargaining position with necessary connectivity, so they are the the hardware vendors. By managing third intermediary in the market. OTTs and tech party networks telcos can generate addi- players rely on access to these platforms tional income streams from small providers to interact with customers. Consequently, such as municipal utility providers. all end-user hardware devices made by various manufacturers are fully connected Furthermore, telcos initiate their own via the telcos’ platforms. Using a Swedish alliances with their partners of choice to smart home system with a Chinese mobile integrate their offerings and market indi- phone to play Arabic music on American vidualized products and services to their audio equipment does not cause any customers on their own platforms. The complications. This decouples hardware success of the platforms depends heavily companies and OTTs from their customer on the telcos’ ability to secure and interpret relationships. user data, which enables them to analyze customer needs and monetize the data. Telcos enjoy high loyalty on the part of their While acting as a broker between OTTs and customers, who consequently bear high customers, the telcos also lock consumers costs for switching their communications into their own ecosystem; as they are in a provider. position to analyze customer data at every
18 Vesset, D. & Schubmehl,D (2016) 23 Client interaction will require advanced data analytics to streamline operations. At the same time the corporate culture requires an entrepreneurial, change-driven mindset as telcos are in direct competition with innovative OTTs, incumbents and startups.
Operational excellence as capacity planning or product design. By talent, especially for technology experts, Since customers see connectivity as a low- 2030 there will be few telco processes that with players from a vast range of industries, cost, low-involvement commodity and a basic cannot be automated with AI-enabled tools. the telcos rely on strong employer branding need, telcos must streamline their processes The virtualization of the network results in and attractive salary packages to gain and to cut costs and become leaner, which will very lean and automated operations that retain their talent. change operations significantly. enable a never-before-seen efficiency. As the telcos have ownership of the network, Due to the strong demand for innovation, Client interaction requires advanced analytical they need to hire and upskill talent such as they need to have strong R&D initiatives capabilities to offer in-depth knowledge of software developers, network technicians with a short time-to-market in order to fill customer needs. This is generated through and engineers. Physical network expansion customer demand gaps with new services near-perfect segmentation based on is fully outsourced to construction and field and products. This requires an entrepre- personalized insights, predictive analytics, and service partners. neurial, change-driven corporate culture as pattern recognition. Most basic customer- telcos are in direct competition with innova- facing processes are fully automated using AI- Global telco alliances are a key differentiator tive OTT incumbents and new startups. based tools, which permit them to anticipate for telcos in this scenario. On the one hand, Lobbying is a key enabler for telco players customer needs and wishes. In the rare cases they have to develop new global standards to steer political decision-makers into a in which these algorithm-based services together with other global telco operators favorable direction. They are consequently cannot find a solution, telcos run call centers to keep non-telco players under control. On developing and extending their lobbying staffed by humans to provide a first-class the other, they can boost their efficiency capabilities. customer experience to premium customers. by sharing network assets or operational These call centers make premium positioning capabilities such as network monitoring possible for the top ten per cent of paying centers, giving them scope for OPEX and customers in order to monetize their greater CAPEX reductions. These deals are a valid willingness to pay. alternative to market consolidation to reach global scale. Thirdly, telcos build alliances Software-defined networking and self- with partners from other industries such as organizing network assets rely on highly entertainment, banking, or smart home, to automated and predictive network analytics include partners’ offerings in their self-de- for all purposes such as incident handling, veloped services. maintenance, and network expansion. The softwareization of networks will bring Even though telcos are highly automated, automation and AI into the hardware they are still in need of talent with a funda- technology layer and automate processes mentally different skillset (such as software that currently require major human and analytics skills) to manage network and interaction, such clients. As they are in fierce competition for
24 To be or not to be | The future of the telco business model
Investment M&A activities enable them to carry their In this scenario, telcos need to invest in in-house skills into the new age of software- various directions. Firstly, they need to ization and drive network-focused innova- expand their network to a great extent – a tion based on self-organizing networks and major investment. Once connectivity has new technologies and standards. They are gained the status of a universal basic need, therefore buying tech companies with IT, a constant cash flow on a low profitability software, and network capabilities. These basis coming from network levies could skills enable the telcos to invent, build, and fund telcos’ standard network investment maintain the future network. and maintenance needs. The mesh-up network requires a strong granular fiber Research and development capabilities re- backbone. According to Deloitte Research, quire heavy investment to be at the leading connected mobility will require network edge in network innovation, in technology latency of around 1 millisecond (compared and in setting new industry standards. to today’s 50 milliseconds for 4G) for some applications.19
Due to the extensive analytical skills, this expansion is demand-oriented in terms of capacity expansion for mobile and fixed networks, as well as new fixed networks for urban development areas. The telco platforms require heavy investment in mar- keting and programming skills to develop a user-friendly environment, or those could also be acquired from external tech compa- nies and OTT providers.
19 Smud, D.; Wigginton, C. Ninan, S. Ramachandran, K. , Moceri, P. (2017) 25 Scenario 2: The new wholesale truth
In the scenario “The new wholesale truth”, telco Network/technology companies have finally lost the end-user control The telcos are focusing on fixed and mobile network infrastructure, so they have points they cherished for so long. To remain installed cutting-edge fixed broadband, relevant, telcos have gone back to taking over full 5G networks or both technologies that are central to the orchestration of network control over the network technology where they mesh-ups. Telcos are the only source of still have their core competencies. innovation for new mobile and fixed broad- band infrastructure-based services; how- ever, this expansion is very capital-intensive and therefore limited by the telcos’ ability to refinance their investment. Global telco alliances push new standards, shape the industry landscape, and facilitate partner- ships.
Telcos own and orchestrate the technolog- ical part of the value chain and form the intermediary between vendors and OTTs, who own the end-user relationships.
26 To be or not to be | The future of the telco business model
Customer relations As a key economic factor, the government Since the various telco players face a similar End-user devices are separated from the takes an active part by publicly subsidizing situation, combining their forces in alliances network and enable easy switching of net- the infrastructure and the necessary is a way to stay at the forefront of network work operators with soft SIM technologies. innovation to connect the entire population technology. OTTs and device producers have taken with high-speed internet and telco services. advantage of alliances to disrupt the mar- This makes telcos the lubricant behind the ket, which has enabled them to take over scenes that keeps the system running, as the customer relationship. Initially seen society and the economy depend on the as a gift, telcos opened up their customer services they offer. data to OTTs, enabling them to completely take over the customer relationships that Business model telcos had maintained and invested in for In this scenario, the telco business model so long. OTTs now collect and process needs to be refined to enable them to customer data to enhance the customer succeed as a ‘smart pipe’ provider, since experience, an advantage telcos cannot they can only offer wholesale products to compete against. The OTTs’ abundant data OTTs. This development can already be is a unique competitive advantage that can seen, as today’s customers spend more be intensified with data from third parties time with OTT-developed products such as which OTTs can acquire on the market. WhatsApp or Snapchat than with traditional OTTs leverage this data to enhance cus- telco services. Microsoft’s communication tomer service with a low headcount, thanks tool Skype already carries more than 25% to Artificial Intelligence. However, their of all global cross-border call traffic.20 network competencies make third-party connectivity revenues for telco companies Telcos have taken over the role of green- possible. Customers display strong demand keeper for the publicly funded network. for fast bandwidth and short latencies to Their main customers are OTTs who lease connect to their OTT services and consume network capacity to provide services to their multiple digital offerings. their end-users. In the buyer’s market of network infrastructure, the telcos have Traditional unbundled services are gone, a a good bargaining position as hardware multitude of connected devices are oper- vendors rely on them, and since they run ated in each home, family, and company. the publicly-funded network, the telcos Apart from the customer-facing OTTs, benefit from their scale and manage device manufacturers and tech companies external networks for third parties such as own the end-user control points, since their municipal utility providers, charging them devices are interoperable, connected, and for this service. consequently make life easier for users. OTT providers offer opportunities for Generally, connectivity is a low-value com- additional revenues through premium modity whereby the end-user segment of- connectivity sold via wholesaling. Having fers very low margins to all players engaged been pushed to the side, telcos focus in basic connectivity. Every citizen has the on developing the ‘smart pipes’ in “the right to a 100 MBit connection at home, new wholesale truth”; they have several which is financed with public network lev- choices here: they can offer small bundles ies. Although many customers pay for con- of data with low discounts and thus higher nected services and superior bandwidth, profitability or larger data-based wholesale these cash flows go only indirectly to telcos, packages with high discounts and lower as most revenues are generated by large profits. Furthermore, they can wholesale tech companies, device manufacturers, and their entire infrastructure with higher mar- OTTs. By now, customers can choose to ob- gins. As the network owners, the telcos are tain connectivity and a service level either an enabling partner of IoT firms, providing with a device or through a provided service. connectivity for manufacturers to connect their machines and systems.
20 Forge, S. (2015) 27 Operational excellence Investment To run this business model successfully, the In this world, telcos need to invest in two di- organizational set-up needs major changes. mensions. First, they need to expand their Telcos will have to transition into highly effi- network, where public funding is a strong cient, fully automated utility providers with lever. To be able to control the network, very lean structures. The telco players own telcos have to invest in IT and software large parts of the network value chain and capabilities to design, build, and run future rely heavily on network analytics to improve networks. Capabilities can be built in-house their general operations and thus boost or may be acquired from competitors and their revenues. Processes and predictive tech companies. Second, research and network analytics have become essential development capabilities require heavy in- for software-defined and self-organizing vestment in order to be at the leading edge networks to optimize operations such as in network innovation in technology and in incident management or maintenance. The setting new industry standards. softwareization of networks will also bring RPA into the hardware technology layer and automate processes that currently require major human interaction, such as capacity planning and product design. However, the telcos focus on technological service for their wholesaling partners. Physical net- work expansion as well as network opera- tion and maintenance are fully outsourced Hope is being able to construction and field-service partners.
Telco alliances develop new global industry to see that there is standards that amplify the telcos’ prime po- sition in network innovation. Thanks to their alliances, telcos can combine their assets light despite all of the via network sharing to split investment and maintenance costs. darkness. On the FTE side, telcos are reducing their overheads significantly. Due to the loss of customer interaction, almost all employees Desmond Tutu in customer-facing areas have become redundant. Most marketing and sales capa- bilities have been abolished, only a few key account managers and analysts for large customers such as OTTs remain in the com- pany. Apart from back-office capabilities, the workforce mainly consists of engineers and technology experts. However, to get access to this group of highly skilled people who are sought-after by various other play- ers, telcos need to develop best-practice approaches to attract and retain talent.
As network levies are an essential element of funding network maintenance and expansion, telcos need to direct political decision makers and therefore need strong lobbying capabilities.
28 To be or not to be | The future of the telco business model
Scenario 3: The virtual telco
In the scenario “The virtual telco”, telcos remain Network/technology the primary customer relationship holders but The network landscape is highly consolidat- ed. The infrastructure landscape is dom- are displaced from the network layer as they inated by a large, vendor-driven network. transfer tech domain sovereignty fully to vendors With their technology competencies, ven- dors drive the ongoing network innovation and other players who move into the network by based on SDN and NFV. The large global becoming new infrastructure players. vendors integrate the latest technologies and drive first 6G approaches that combine existing 5G capabilities with a satellite infra- structure, enabled through partnerships. Progress is limited as network providers’ offerings and end user requirements are decoupled, thus resulting in longer innova- tion cycles, so vendors push their innovation in the market. Ever-increasing bandwidth requirements are analyzed by vendors who orchestrate technological development.
29 Vendors not only drive the network infra- Business model for users to join and stay in these ecosys- structure, but also enable and facilitate This scenario requires a business model tems. Telcos initiate agile development IoT development, as they leverage their with tailor-made, individual products which capabilities to be able to fulfill customers’ customer relationships and their network meet customers’ requirements and which demands that are not yet served by partner ownership to major tech companies. Telco must display a high level of flexibility. Cus- offerings. Partners join this ecosystem and players own only a few parts of the network tomers demand innovative pricing concepts incentivize telcos with commissions to push capabilities which are dominated by large outside the classic minute-based plans that their specific offerings and hence provide vendors, and can consequently only easily facilitate data sharing and enable all a new and significant source of income. compete with these strong forces in global the benefits of connected living. To service These commissions are flexible, depending development with difficulty. all the different levels of willingness to pay, on the importance of the service to cus- strong customer segmentation for perfect tomers, and varies by customer segment. Customer relations price differentiation will be necessary. As all Telcos are therefore taking on a broker role Consumers’ lives are ‘smart’ and intelligent clients have different payment preferences, for B2B and B2C customers, which makes across multiple connected devices; telcos telcos offer hybrid pricing models that them the central point of communications, provide their customers with innovative – combine pre- and postpaid models with orchestrating the customer relationship, largely network-agnostic – services from different payment forms. This is based on which brings benefits to both customers the Cloud. Even though digitalization is fully the telcos’ ownership of user data, which and third party service providers. integrated into daily life in every aspect of enables them to analyze customer needs human interaction, device producers have and monetize user data. Operational excellence a weak relationship with end-users. Since This business model requires a new opera- connectivity is a commodity and consumers Telcos do not run their own network any tional excellence environment. As the telcos are decoupled from the network, network longer but rather use rent and lease mod- are no longer in charge of the network, all quality is no longer a unique selling point els from the vendors who run the network network operations have been handed any provider can benefit from. Regulatory cost-efficiently; many brands lease network over to partners. In order to stay relevant changes enable new data analytics meth- capacity for their customers and operate in this communications commodity market, ods and facilitate the use of customer data. as mobile virtual network operators who data analytics are inevitable for the telcos. Clients interact on automated customer supply the entire ecosystem with connec- Cognitive and conversational computing care platforms via chatbots and self-care tivity. Their optimized services enable high as well as analytics-based and optimized facilities with AI-enabled service offerings performance across all available infrastruc- processes are needed to remain relevant from their telco provider. Telcos are thus tures. Freed from their infrastructure base, and succeed in the market with improved, enabled to provide their customers with telcos are aiming for pan-European or even efficient customer services. The telcos any information at any time via self-service global scale with their purely cloud-based therefore require a high level of customer offerings. Customer service is a key differ- services that enable them to take advan- knowledge which is enabled by Big Data entiator in the overall customer experience. tage of economies of scale by operating in a and analytical capabilities, leading to a Furthermore, in case of interaction with single European market. world-class AI-enabled customer service. human customer services representatives, They generate this through nearly perfect AI can provide all relevant information to Other players are beginning to offer com- segmentation based on personalized solve issues that go beyond the scope of munications services over the networks in insights, predictive analytics, and pattern the self-service platforms. Telcos use their competition with the telcos. Having shed recognition. The telcos steer their custom- understanding of customer demands to their network responsibilities, telcos directly ers’ connectivity by switching between approach clients on the most appropriate engage in customer sales and also fulfill networks according to time, place, capacity, channel and supply them with innovative, their role as an intermediary between OTTs, and use case. tailored products. tech-companies, and other players on the one hand and customers on the other, Telcos can thus significantly reduce the by offering open platforms that connect number of client-facing service agents; different devices and services. As virtual nevertheless, customer service is often out- operators, telcos have their own platform sourced to third-party providers who can environment in which they can easily inte- offer leading-edge solutions. The telcos are grate offerings from their various partners in a customer-facing position and obtain with a variety of services such as banking, insights into network issues, but detailed media, or smart home connectivity. These problem analysis and troubleshooting are cloud-based platforms are open for exter- conducted by network operators. nal developers to increase attractiveness
30 To be or not to be | The future of the telco business model
In order to source the required network ca- pacities, the telcos need predictive procure- We see our customers as ment to offer their customers time- and lo- cation-specific services with high efficiency. invited guests to a party The headcount will be reduced, especially in IT and network technology, as these func- tions are no longer needed. At the same and we are the hosts. It's time the marketing and sales departments will be transformed. There is demand for our job every day to make customer relationship managers and data scientists to understand existing clients better; these analytic capabilities also facil- every important aspect of itate addressing prospects. For innovative product developments, telcos need an agile the customer experience culture that accepts failure with a fail-fast approach to generating constant, IP-based, incremental innovation. a little better.
Investment Since they use the network under a leasing Jeff Bezos model, telcos are freed from investing here. The sale of their existing assets will initiate an inflow of funds, which they can use ei- ther to fund future investment or to distrib- ute to shareholders. To stay relevant and attract customers, telcos need to enlarge their product development, marketing, and customer service capabilities by investing; they also need agile trend-sensing to quickly acquire upcoming trends with their M&A machine.
31 Scenario 4: A vendor brand
In the scenario “A vendor brand”, telco players Network/technology have been driven out of both domains, customer The consolidated European communica- tions market is harmonized. Outsourcing relationships and technological mastery. They plus the introduction and exponential focus on their few remaining capabilities, trying growth of IoT have enabled large network and technology players to enter the market, to find their sweet spot in the market to maintain taking control of the networks by acquiring their relevance. Telcos are mere ghosts of their technology and network capabilities from telco companies. They have developed former selves, and serve as the wholesale sales further IT and software capabilities to and service teams of their parent tech companies design, build, and maintain future networks based on SDN and NFV. With 5G at its for B2B customers. peak deployment and 6G in the process of introduction, a large number of private networks have created a high-performance mesh network, built on the back of a vendor-deployed highly granular fiber core infrastructure which vendors also run and maintain. Whilee vth endors have taken over the networks, telcos have lost their network competencies altogether.
32 To be or not to be | The future of the telco business model
Customer relations Operational excellence Customers see connectivity as merely The harmonized market enables telcos to another utility, although apps and operate with their small vertical service and value-adding service in connection with sales teams from a few European hubs. flexible connectivity products are impor- The majority of the staff consists of key tant to their digital lives, with seamless account managers for the top B2B accounts connectivity across multiple devices in the that generate most of the revenues. All background. However, as private data are other business processes are outsourced protected by strict laws across Europe, to external service providers or the parent telcos and their parent companies are company. Ever-increasing bandwidth re- limited in their use of personalized data. quirements are analyzed and technological Customer contact is owned and controlled development is orchestrated by the parent by OTT players and device manufacturers, companies of the telcos – the vendors. The who can leverage this control by providing telcos have used insolvency cases to free innovative products and services in the up personnel capacities and terminate market. Vendors not only drive the network other unwanted contractual relations. infrastructure, but are also at the heart of IoT developments, as they utilize their cus- Investment tomer relationships and network ownership The telcos have limited investment capa- to major tech companies. Over time they bilities that they use to sustain their brand, integrate vertically in IoT, Automotive and which still has a high brand awareness e-health. based on past end-customer interaction. Maintaining brand equity is therefore a key Business model challenge, even though they only act as a This scenario, in which telcos are no longer sub-brand. In this scenario, telcos are not in charge of the network or the client, has investing in network infrastructure, while major consequences for the business mod- investments in customers are very limited el. Those telco companies who are still in to the few B2B customers they handle. the market belong to large companies and Other infrastructure is provided by their are merely a sales division with a strong parent companies and thus requires no brand name. The raison d'être of the telcos investment by the telcos themselves. is their in-depth sales competence with a high level of customer understanding. The majority of the telco workforce consists of flexible, contracted workers to cope with the volatile marketplace.
Most B2C revenues end up with OTTs and the network owner parents of the telcos, so the telcos can only focus on their parent companies’ B2B customers, to whom they offer individual solutions. The technological environment of the telcos is an open API world. They have to leverage the capabili- ties and offerings of their parent company for all their services.
33 Taking the long view
American management author John C. Having developed their future aspiration Maxwell said “Change is inevitable. Growth and identity, telcos need to define which is optional”. However, for telcos, it is not business model helps to monetize this idea only growth that is called into question, best. This requires companies to shape based on current trends taking place but their operational excellence and allocate also the entire business model. their investments to enable success.
To grow, and even more importantly, to sur- Despite all these questions, there are some vive, telcos need to define for themselves ‘no regret’ moves telcos can easily execute: which role they want to occupy.
Do they want to be the holder of the net- work infrastructure and customer relation- ships at the same time or would they rather focus on one of those two domains in order to maximize shareholder value? Develop virtual plat- forms that are open to external developers and partners as well Strengthen their position as as implement new and appealing employer, while innovative offerings updating the required skillset of their workforce in an ongo- Continuously participate ing process to attract and in regulatory discussion by retain the best talent in the active lobbying since con- market nectivity will be seen as a low-involvement commodity in future
Adapt the latest AI-based technology to automate as many tasks as possible, significantly reducing operating costs in the medium to long term
So now it’s the telcos’ job to decide where they place their priorities – and which bets they are willing to take!
34 To be or not to be | The future of the telco business model
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36 To be or not to be | The future of the telco business model
Methodology
The methodology of this study is based Fig. 6 – Center for the Long View Scenario Methodology on the proven scenario approach first employed by Shell, and then perfected by Monitor Deloitte. A seven-step scenario development approach (see figure 6) applies the guiding scientific principles of 7 on tor n 1 o e t on objectivity, reliability, and validity. The study is the outcome of a series of interviews, questionnaires, and workshops involving TMT experts from the Deloitte EMEA network and industry professionals as well as experienced scenario practitioners from Monitor Deloitte’s Center for the Long View 6 t on e en te 2 r n t on or e (CLV). en r o e e o ent Scenario design starts by identifying the ro focal question of the underlying issue. Since we could tell an infinite number of different stories about the future of the telco indus- try, we first had to agree on the issue or en r o 3 r t 5 n ert nt e strategic challenge we wanted to address. rr t e This enabled us to support our telco clients’ decision-making in an appropriate way. Sce- narios are tools for shedding light on the strategic challenge, while the focal question 4 en r o r e or sets the scope of the scenarios. In the pres- ent case, we focused on the question “What will the telco world look like by 2030?” avoid the bias of the traditional approach, for creating our scenario sets. Scenarios are a way of understanding the which often has a built-in tendency based The scenario framework was developed in dynamics that shape the future. Therefore, on the character, mood, or preferences of the next step by focusing the entire list of in a second step, we pinpointed the forces the scenarists. related uncertainties into two orthogonal that drive the focal questions. Driving axes. We then defined a matrix consisting forces are fundamental sources of future As a part of the workshop series, in a third of crossing and independent axes that change. They shape the course of events step we identified the critical uncertainties allowed us to define four very different, and history and dramatically enhance for the focal question. Not all driving forces but plausible, quadrants of uncertainty. In our ability to imagine future scenarios. are uncertain, some may be pre-deter- the underlying study, we used “Ownership These drivers can be grouped into five mined. These are the trends already in the of traditional customer relationship” and categories, known as STEEP forces, as they pipeline, unlikely to vary significantly in any “Dominance of the technology layer” as consist of Social, Technological, Economical, of the scenarios. Critical uncertainties are critical uncertainties. Environmental and Political forces. Since driving forces with the potential to tip the most issues involve more than one of these future in one direction or another. They categories, they are only handles. In order have two fundamental characteristics: they to derive our driver list, we also conducted have an unusually high impact and are expert workshops using Deep View, an ar- uncommonly uncertain or volatile. Initially, tificial intelligence (AI)-based trend-sensing all uncertainties appear unique, but by and analysis machine. Deep View helps to stepping back, we can reduce uncertainties to clusters that serve as the building blocks 37 Contacts
Arun Babu Mark Casey Neville Hounsom Africa Telecommunications Leader Global Media & Entertainment Director Deloitte and TMT Africa Leader TMT – Strategy & Operations Tel: +27 (0)11 517 4114 Deloitte Deloitte [email protected] Tel: +27 (0)11 806 5000 Tel: +27 (0)21 427 5542 [email protected] [email protected] Thanks to contributing authors:
Alexander Mogg Tim Bottke Dr. Andreas Gentner Partner Partner Partner Technology, Media & Telecommunications Technology, Media & Telecommunications Technology, Media & Telecommunications Monitor Deloitte Monitor Deloitte Consulting Tel: +49 (0)89 29036 7939 Tel: +49 (0)89 29036 8964 Tel: +49 (0)711 16554 7302 [email protected] [email protected] [email protected]
Jaime Rodriguez-Ramos Dr Florian Klein Sabrina Frühauf Partner Director Manager Technology, Media & Telecommunications The Center for the Long View Technology, Media & Telecommunications Monitor Deloitte Monitor Deloitte Monitor Deloitte Tel: +34 (0)911 5772 97 Tel: +49 (0)69 9713 7386 Tel: +49 (0)89 29036 2527 [email protected] [email protected] [email protected]
38 Special thanks to Daniel Glaser and Andreas Schühly for their contribution. To be or not to be | The future of the telco business model
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