I love the telecom and Internet field. I try to read as much as I can about the developments, and I am blessed with meeting intelligent people from both of these merging industries every day. This post is an attempt to describe my personal view on where the industry should head, primarily from a telco perspective.
Let me first start with why I have chosen the Telco angle instead of the pure and increasingly popular Internet angle? My reasons are first and foremost the injustice I feel is dominating the “Internet fan” view on Telcos. It is mostly derived from the tip of their noses, and to often by their personal experiences with American carriers. Many of what I call the “Internet fans” generalize their views on telcos based on their own experiences with maybe two American telco companies, missing the fact that the world has more than 300 Telcos operating across the globe. Many of these have for the last 5-10 years been the most important engines in economic growth and society development, delivering access to information and people in areas of the world where people have been suppressed by politicians and corporations hunt for profits by their control of information. My experience from for instance Asian Telcos is that they are among the beloved brands because their products empower people to change their everyday life. So my challenge back to the hip and progressive internet fans, is to listen a little more before they judge, and to look for opportunities from interacting and discussing opportunities for how the two industries together can change the world again by increasing innovation and developments in the societies we operate.
But Telco people needs to change as well. And this post is mostly about what I envision that change to be in the future of Telcos.
The changed eco-systems
To set the stage, I need to address the fundamental differences between Featurephone- and Smartphone segments. They are fundamentally different in needs from their operator, and the differences will challenge the operating model of most telcos trying to serve the two segments with the same value network.
The Featurephone segment is the business how we used to know it. Their needs is first and foremost oriented around the need for making and receive calls and messages. They are very sensitive to three key parameters of a Telco offering, namely price, where to buy (distribution), and the reliability of the network (coverage). Most of the telco differentiation of offerings are made up of variances around these parameters. If you hold the coverage position, you are able to take out a premium on the other two. Price, and where to buy, is then modeled to attract different segments with the ultimate goal of finding the exact right price point for every micro segment so that the overall profitability is maximized.
In this model the Telco controls the full value network, from the connectivity network, through service platforms, and in many instances with partly control of the device and physical distribution. The model have brought mobility to the world, and the service work across phone- and platform vendors due to strong emphasize on standardization and the integrated Telcos taking the full responsibility of the service experience. The model makes a lot of sense for customers, society and the industry as long as quality and reliability is the primary target for the value network.
The Smartphone segment has additional needs, namely most importantly, a reliable Internet connection. The apps, the browser, and the size of the screen, invites the user to take their Internet behavior from their PC and onto their phone. The fact that the phones spends almost all of the 24 hours within centimeters of their owner, invites Internet to be used for new purposes earlier restricted to the PC. Some users have during very short time, shifted their main phone usage from voice and messaging, and over to Internet usage. The primary purpose of the phone then changes from voice and messaging, to Internet usage. That again challenges the key parameters of the Telco offering expanding the pricing element to include data pricing, the product offering to include what eco-system that is supported, and the coverage to also include capacity. The customer experience is therefor complicated seen from a operators perspective, and the expectations from the customers are diversifying and increasing at the same time.
The Smartphone eco-system changes everything for the operating model of a Telco, first and foremost in the way of Telcos loosing the end2end control of the value network. Connectivity is still mainly under the control of the telco, but the new eco system owners are starting to put requirements on Telcos (for instance on connectivity pricing), and the use of Internet services increases the complexity of the connectivity model by introducing CDN and other traffic optimizing elements often outside of the control of the Telco. An even more important change is the opening of the service platform layer. This was solely under the control of the Telco, but is now dramatically changed by the eco-system owners introducing public APIs and Digital Storefronts on the devices (app stores). The result is that anyone can access the SDK and build services for the eco-system, and even get distribution directly to the consumer for their products never involving an operator. This have created an innovation in the services field that are previously unheard of. The flow of services are again re-enforcing new uses of Internet effectively making every spear minute in the customers life an opportunity for either work or play with the Smartphone as the key enabler.
Power is dramatically shifted in the new eco-system, as the eco-system owner controls the public APIs, and more importantly as the eco-system owner also has a portfolio of APIs not publicly available. These Private APIs are awarded to developers that comply to commercial agreements, and to the eco-system owners own portfolio of services. Examples of that can be the deep integration of Skype in the Mobile7 OS owned by Microsoft, differentiating what Skype can do on Mobile7 phones compared to any other VoIP application like for instance Viber. The effect is that what services that are available, and what these services can do is under the sole control of the eco-system owners. There are also potential competitive restricting opportunities for the eco-system owner that could be closer studied by the appropriate institutions.
The strategic opportunities emerging from the changes in the industry
Change leads the way for opportunities. I believe that we have just started to see the changes coming from the new Smartphone eco-system, and potentially there are a growing underserved market of emerging Smartphone users. They are today served by Featurephone centric operators, that are not really looking to the opportunities but more dragged along in someone else lead change of their industry. I believe a Telco should revise their operating model, and dependent on whether they regard it to be a Featurephone segment in their market, either change their operating model to better serve the emerging Smartphone segment, or set up an independent Smartphone value network with a new operating model. The new, or revised model should centralize around the following three principles:
- Highest quality (coverage, capacity and traffic optimization) and extremely cost efficient production of Internet access.
- Productify APIs where assets are held, or assets are with local variances (payment, distribution etc), to deliver value elements to third party service production.
- Choose a segment, then a value proposition, and set up an internet service portfolio based on competitive assets operationalized through a private API logic.
Most Telco people will nod their heads, at least to parts of this. It is at the next level things start to get interesting, when the consequences of the principles are visible.
So what does it take to become a leading Internet provider? I believe that starts with a fresh look at our value network with the view that anything that does not directly or indirectly is there to deliver a better internet connection, is potential vast, cost or complexity. A telco infrastructure is primarily built to deliver voice services, and most service platforms and business support systems are there for the voice- or value added services. Take LTE for instance. It is an infrastructure built to deliver Internet, but when telcos add voice platforms and different value adding services they risk to build a complexity that in the end might weaken the delivery of the Internet product. If the practical consequence of adding telco voice and messaging functionality in LTE means that the cost or flexibility in producing Internet Access by LTE marginally increases compared to a Internet only LTE network, a telco should not add those capabilities and rather produce voice and messaging through its legacy infrastructure or with Internet OTT logic. And an access network is not enough to become leading on Internet Access products, an intelligent traffic machine and how content and services are placed in your network is as important. So to become leading on access an operator must radically re-invent its value network to reduce complexity by removing vast, reduce its cost structure, and build an intelligent network to increase the quality and flexibility.
APIs are not a new for most Telcos, but as most Telco value networks are tightly vertically integrated, the layered approach needed to be able to single out assets that can be offered as part of third party value networks is not a small one. Some of the assets held by Telcos are about to loose relevance as Telcos over and over again has failed in offering them outside of their own value network. That goes for notification and location as two examples of assets held by Telcos, that for OS owners has been easier to build themselves. Telcos still hold some assets with payment as one of the most obvious example. These are assets that is hard to replicate, often because it needs to be abstracted from locally diversified contexts (tax rules and legal issues), to a scalable efficient process that can be offered to partners. Another challenge for Telcos entering the enablement business is that they will need a slight mind set change. The Telco logic is pretty much to deliver the same product to 100% of the market, a classic for infrastructure heavy products like airlines , trains and telecom. The product is more or less the same, but the packaging, distribution and pricing is differentiated to optimize revenues. Entering into the enablement business might lead to more differentiation on the product side by enabling new players and new entrants in markets previously protected by high barriers to entry. That again might lead to a diversification of customer needs and then segments, ultimately leading to a situation where no product will be able to fulfill every segment need. This is a challenge for Telcos realizing functionality demanded in one segment in the same value network often adding cost on the whole customer base. A successful enablement business must thus be followed by a competitive and most importantly a flexible cost structure. I also believe that Telcos in the enablement business should classify its APIs into private and public categories, already done by most Internet companies. APIs should also be presented like services, and priced as a service rather than an revenue share model.
The last bullet is about the Service position, and the opportunities a Telco has to deliver more than access. As stated above, when number of service providers increases enabled by APIs and SDKs, customer needs are also expected to be diversified. If that happens I believe Telcos will need to choose what segments to serve, and to choose what value propositions to focus on. I believe the attempt of Vodafone in their 360 efforts was a classical miss the segment try to serve all problem driving out execution power. Choosing segment does also mean someone else will serve the segments you are not targeting. And the Internet access product is still fit for the full market approach. Therefor operators will need to partner with the service providers they themselves compete with in the services layer. This is a radical change, a execution problem, but also the best opportunity to differentiate from other operators if performed well.