Fighting smart Strategy options for telecoms operators A report from the Economist Intelligence Unit Sponsored by Fighting smart Strategy options for telecoms operators Preface ighting smart:Strategy options for telecoms operators is an Economist Intelligence Unit white paper, F sponsored by Amdocs. The Economist Intelligence Unit bears sole responsibility for the content of the paper. The Economist Intelligence Unit’s editorial team conducted the research and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. The analysis in the report is based on interviews with senior executives of telecoms network operators and independent industry experts, as well as on desk research. The following individuals were interviewed for the study: l Okan Alper, division head for Internet and community, Turkcell l Hannes Ametsreiter, CEO, Telekom Austria l Francis Deprez, senior vice-president of group strategy and policy, Deutsche Telekom l Sertan Eratar, divisional head, Turkcell l Colin Giles, global head of sales, Nokia l Michael Hecker, vice-president of strategy and corporate development, MTS l Bertrand Kan, global head of TMT, Nomura l Chris Lane, head of group strategy, Vodafone l Guy Middleton, head of corporate communications, 3 UK l Jan Ogren, vice-president of network planning, Ericsson l Tushar Rao, analyst, Capgemini l Scott Richardson, strategy adviser, Clearwire l Russ Shaw, head of mobile, Skype l Morten Karlsen Sorby, head of business development, Telenor 1 © The Economist Intelligence Unit Limited 2010 Fighting smart Strategy options for telecoms operators l Lin Sun, independent analyst on China’s telecoms market l Tim Whitley, chief strategy officer, BT l Richard Windsor, analyst, Nomura The author of the report was Iain Morris and the editor was Denis McCauley. Our sincere thanks go to the interviewees for sharing their insights with us. May 2010 2 © The Economist Intelligence Unit Limited 2010 Fighting smart Strategy options for telecoms operators Executive summary he rising importance of the Internet and data services, combined with the gradual decline of the T much older voice business, is creating threats and opportunities for telecoms network operators in almost equal measure. While data traffic revenue could more than compensate for the decline of voice, the networks needed to support them are costly to build. In the mobile broadband market, levels of usage are also putting a huge strain on capacity and threatening profitability. Perhaps the biggest threat to operators, however, comes from the so-called over-the-top players that the former’s own networks have allowed to flourish. Although these companies, through their online services, are attracting new users to the networks, they often play a bigger role than operators would like. The worry is that customers will develop closer relationships with the Internet companies than with operators, and that the latter end up being seen as little more than a utility service—a “dumb pipe”. Were that to happen, the commoditisation of services would accelerate and revenue would come under even greater pressure. Network-based operators do not often disappear, but a combination of low revenue-growth prospects and large, unavoidable capital outlays needed to deploy next- generation networks will spell real financial trouble for many players. A central premise of this study is that the spectre of a “dumb pipe” future is overstated for all but the most hidebound of operators. The latter have numerous assets that should allow them to compete— and partner—effectively with Internet companies. But operators urgently need to take action on several fronts. For a start, they need to work out how they can build a compelling customer experience, either in partnership with Internet companies or working against them. Given the likelihood that service prices will continue to fall, they also need to explore ways of restraining capital intensity and bolstering efficiency as they build out newer networks. At the same time, they must consider adapting their pricing practices so there is a closer connection between usage and retail rates—and do this without scaring off customers. Meanwhile, they have to think about ways of defending their traditional voice business without simply blocking Internet companies. Finally, they have to take a lead role in developing new opportunities in industries like energy, healthcare and publishing. Arguably no operators have yet found the “grail”—the business model which will enable them to achieve all the above, ensuring a profitable future even while the threats from Internet players and other non-traditional competitors multiply. But there are no shortages of experience and best practice 3 © The Economist Intelligence Unit Limited 2010 Fighting smart Strategy options for telecoms operators for operators to call upon. Based on interviews with a range of senior operator executives and industry experts, as well as extensive desk research, the Economist Intelligence Unit has identified five sets of strategy options, or “strategy typologies”, which operators should explore in seeking the optimal business models to take them forward: Smart pipe: By partnering with Internet companies rather than competing against them, operators can bring their own unique capabilities to content and applications development and stave off the threat of commoditisation. A smart-pipe strategy makes sense in markets where Internet companies are well-established. Even where the latter have less power, for example in Russia, operators such as MTS successfully partner with some online firms while also competing aggressively in the content and applications market. Efficient pipe: By carefully monitoring competition and demand, efficient-pipe operators are controlling the pace of next-generation network deployment. They are also using technologies such as femtocells, and sharing networks with rivals, to lower their capital and running costs. Greater automation of business processes could bolster profitability for numerous telecoms organisations, and especially those—like Germany’s Deutsche Telekom—that remain encumbered by their origins as state- owned monopolies. Pricing pioneer: Astute operators are examining new pricing models that better reflect actual network usage and guard profitability. Sophisticated schemes based on time-of-day usage and speed could meet with particular success. The UK’s Vodafone has been trialling such a scheme in Spain. Depending on the regulatory environment, charging content companies for providing a higher-quality service could give rise to an entirely new wholesale opportunity. Defender of the realm: An extension of the smart-pipe strategy, this approach recognises that partnering with, rather than blocking, innovative Internet companies is one of the best means of attracting and retaining customers. For example, while mobile operators generally fear the impact of third-party VoIP (voice-over-Internet Protocol), one or two have realised there is more to be gained from partnering with VoIP providers than blocking them which, among other things, makes operators unpopular with their own customers. The UK’s 3 has been able to attract more profitable customers through a deal with Skype, while Verizon hopes a similar arrangement will help it to capture a bigger share of US smartphone customers. Transformer: This strategy focuses on identifying new revenue opportunities in areas such as energy, healthcare and publishing. Deutsche Telekom, for example, is targeting €1bn in sales from “intelligent networks” by 2015. These opportunities look most attractive to operators having both business-to- consumer (B2C) and business-to-business (B2B) operations, and especially those that have already developed an IT-services capability. Operators should take a leading role in demonstrating the benefits of smart grids, e-healthcare and e-publishing, for example, to their customers. © The Economist Intelligence Unit Limited 2010 Fighting smart Strategy options for telecoms operators Introduction On the one hand, we’ve never had so many opportunities. On the other, we’ve never faced so “many risks.” Hannes Ametsreiter, CEO of Telekom Austria, the country’s largest network operator, neatly sums up the position of operators emerging from the recent recession. A surge of interest in broadband services, particularly in the mobile-phone world, should create enormous opportunities for the companies that own and run the networks. Mobile data revenue alone is forecast to rise from US$257bn this year to US$420bn in 2014, according to Pyramid Research, an analyst firm. Yet all that growth cannot happen without enormous investment—all the while that operators’ core voice businesses are going into decline. The biggest threat to operators arguably emanates from the Internet players that broadband networks have allowed to flourish. In the old voice-only days, ownership of the networks equalled full control of the service delivered to customers. But the rise of the Internet has brought about a disintermediation. Operators now see many companies competing to provide a service over their lines and build a relationship with their customers. As broadband has developed, a handful of these Global mobile revenue, 2010-14 (US$ bn) Mobile voice Mobile data 800 800 700 700 600 600 500 500 400 400 300 300 200 200 100 100 0 0 2010 2011 2012 2013 2014 Source: Pyramid Research. 5 © The Economist Intelligence Unit Limited 2010 Fighting smart Strategy