Blockchain’s potential for the telecom industry

Blockchain’s potential for the telecom industry

The Delta Perspective

Authors:
Daniele Pe - Associate Partner
Nicola Purrello - Manager
Reema Sajnani - Research Associate

Blockchain – can the promise become reality? 

Blockchain has the potential to have a huge impact on the telecom industry thanks to the industry’s large customer base and internal processes.

There are numerous potential applications of blockchain in the telecom space, from voice settlement to mobile number portability.

Blockchain has ballooned in popularity in recent years mostly because of cryptocurrencies. Although they are two distinct entities, the buzz and hype around the technologies has led many to consider the two under the same umbrella. While cryptocurrencies are digital currencies that use cryptography for security and have a quite uncertain future—which is borne out by the volatility of prices in the last six months—blockchain is the technology that enables cryptocurrencies and is here to stay, regardless of cryptocurrencies’ destiny.

Blockchain is fundamentally an open, distributed ledger hosted in potentially millions of decentralized devices called nodes. It can record transactions between parties efficiently in a verifiable and permanent way. Whenever the ledger is modified, an additional “block” of information is added, which is then updated and synchronized on each device. This transparency eliminates the role of a central administrator. Blockchains can be public (high number of nodes and ledgers each publicly accessible/visible) or private (typically smaller number of nodes, and visible/accessible only to selected participants).

The greatest benefit of blockchain is security. It is extremely complex, if not impossible, to alter. The bigger the distributed ledger, the harder it is to adjust, as manipulation would be required in a huge number of machines at the same time.

Due to these benefits, blockchain is now starting to mature beyond the news headlines with practical proof-of-concept (PoC) use cases emerging.

Expectations for global blockchain revenues are still small ($9.2 billion in 2021 according to IDC); however, much of its potential comes from efficiency improvements, cost reduction and fraud mitigation that are not necessarily included in the revenue projections.

This has caught the attention of the investment community with venture capital pouring $2.6 billion in to Blockchain start-ups in 2017, excluding initial coin offerings. (An initial coin offering is a type of crowd funding using cryptocurrencies utilized by startups that does not want to use traditional fiat based crowd funding or initial public offering financing.).

Most tech giants have followed venture capitalists into the space. Google is working on blockchain-related technology to support its cloud business, while Amazon Web Services is developing a blockchain template to allow users to launch its own private or public network.

Finally, corporations are also showing interest in blockchain, yet mostly in financial services. As many as 28 banks, including Deutsche Bank, are testing a PoC swift application for blockchain.

Crystalizing the impact of Blockchain 

Blockchain technology can drive benefits across three main areas: Efficiency improvements; cost reduction; and fraud mitigation. See Exhibit 1.

Exhibit 1: Potential of Blockchain applications

Let’s unpack this: 

  • Efficiency improvements streamline multiparty transactions by automatizing and expediting the process while guaranteeing the accuracy of the settlements between parties (thus avoiding duplication of verification processes). The benefits can materialize in different forms depending on the type of industry and the type of interactions/transactions required. For industries with regular and low value interactions with their customer base, such as telecom, blockchain can verify and automate transactions, with increased transparency for the end customer. The higher the number of low value transactions, the greater the potential of blockchain. The higher the number of players, the higher the number of cross-transactions, hence whenever multiple parties are involved, blockchain plays at its best. For example, in a telecom intercarrier settlement scenario with three players, blockchain with deliver 3X value vis-à-vis the two players only scenario.
  • The Cost reduction potential is linked to the capability to eliminate intermediaries and reduce labour intensive processes through automatization. This is higher in industries with complex and labour intensive internal processes, like banking. Middle men can be eliminated as verification of transactions is automated and guaranteed through blockchain. This applies to telecom international roaming transactions and resulting international voice settlement where blockchain can replace the expensive mediation of clearing houses. 
  • Fraud mitigation is mostly associated to high delinquency ratio such as identity theft and similar fraud. The food industry can greatly benefit from blockchain by enabling trusted tracking of food life-cycle to ensure the integrity of the cold chain in transportation, helping reduce the high volume of fraud related to the sale of expired, contaminated or counterfeit food. Blockchain-addressable security related concerns are also related to long verification processes, as the longer the time, the more exposed the process is. International money transfers between banks is an area facing this problem and so too is roaming settlement between telecom players, which currently lose more than $38 billion annually in fraud costs, according to Deloitte.

Potential use cases for Blockchain in telcos  

Looking at the telecom industry, it’s clear blockchain can have a big impact, thanks to the industry’s large customer bases, complex internal processes, multiparty transactions, long value chains, and presence of intermediaries, as well as high incidence of roaming fraud and associated costs.

As indicated earlier, there are a variety of potential applications of blockchain in the telecom space, from voice settlement to mobile number portability.

To simplify these telecom use cases, we have structured them by the type of application —operational enablement, industry enablement and service innovation— and qualified the benefits that each use case can deliver across the efficiency improvement, cost reduction and fraud mitigation axis as shown in Exhibit 2. 

Exhibit 2: Blockchain’s use cases in Telecom

In operational enablement, we have seen potential applications in supply chain management. Automated smart contracts are leveraged to orchestrate telecom’s supply chain suppliers and automate functions such as inventory management and procurement. This application delivers cost reduction through elimination of several intermediaries, like agents, and improves efficiency because of fast and secure settlement process. 

Industry enablement examples include roaming, voice settlement and mobile number portability. The latter uses decentralized ledger for data and routing access across operators. A single store of customer data is created in the ledger, which delivers cost savings as information storage is not duplicated among several ledgers and porting can be executed instantaneously, improving customer experience. 

In service innovation, several uses are conceptualized. For example, an IoT device ID can be enhanced through a distributed ledger that automates and secures a device’s identification, authentication and P2P data exchange. The blockchain can make information exchange faster without intervention of third parties for data exchange and security. Other uses cases that are not exclusive to telecom operators, but could have a central role, include identity management by offering the chance to store personal information in decentralized identifiers. The individual can then decide which digital partners can access the personal information in the ledger. The individual can in this way regain ownership of their digital identities, while reducing the cost and bureaucracy of ID verification.

It is crucial to understand most of these applications are theoretical at this stage. To better understand reality versus theory, we have mapped the most discussed use cases in a Gartner hype cycle chart. As seen in Exhibit 3, most of these applications lie in the “innovation trigger” stage, where very early PoC, or just conceptualization, increased hype and expectations. Roaming and voice settlement are at upper edge of this phase, which is near the peak of inflated expectations. This is likely due to the first widely publicly disclosed PoC for intercarrier settlement of wholesale international services led by telecom operators such as PCCW, BT, Telefónica and Telstra in collaboration with startup Clear Blockchain Technologies. This is one of the few applications currently being tested in telecoms as others are still pure conceptualizations.

Exhibit 3: Hype Cycle for Blockchain applications in the Telecom industry

Real use case example – Inter-carrier voice settlement 

As highlighted earlier, there’s been concrete progress in intercarrier voice settlement, where manual transactions and intervention by expensive labor still prevails. Colt Technology Services and PCCW Global have collaborated with Clear to demonstrate that intercarrier settlement times can be reduced from hours to minutes using their proprietary software running a smart contract.   

The PoC was specifically focused on the settlement of wholesale voice minutes. This was first performed on the historical data and then in a live environment. When the daily settlement is executed, software automatically settles and pays all records/calls that are identical on the ledgers of the two operators. Discrepancies (normally ~5% of cases) are addressed in an automatic resolution algorithm. A private blockchain ensures that the software that executes the matching, settlement and resolution remains unmanipulated, while smart contracts are completed. Each operator owns a node (machine where the software is installed) and has visibility on the integrity of the whole blockchain. The security is further enhanced by each telco’s own IT security and firewall.

Major telecom operators Telefónica and BT later joined the trial. Private blockchain is the key to making this solution attractive as it does not require the huge computational power of public blockchains to ensure security (as only a limited number of ledger is required) and limits the application’s cost.

Eran Haggiag, co-founder and executive chairman of Clear said the solution could potentially:

  • Improve trust across operators and security. Intercarrier settlement is an area where fraud costs $17 billion annually for operators and dispute resolution is complex;
  • Save costs, like overheads required for legacy settlement and intermediaries (carriers of carriers); and
  • Expedite the entire settlement process.

“Through our collaboration with Colt we are eager to demonstrate how the many potential uses of blockchain across our industry can deliver value by improving the ways in which we interoperate,” said Marc Halbfinger, CEO of PCCW Global, in a prepared statement.

“Collaborating with PCCW Global and Clear is ground breaking, as we have demonstrated how Blockchain can transform the way we conduct business in the telecom industry,” Carl Grivner, CEO of Colt, said in the same press release as Halbfinger.

Exhibit 4: Inter-carrier voice settlement scheme

Real use case example – Loyalty program

Another ongoing PoC that’s currently ignored by telecom operators is Singapore Airlines’ blockchain-based loyalty wallet. The program aims to boost customer’s spending of loyalty program miles by enabling consumption with retail partners. Blockchain allows many partners to work together based on smart contracts (e.g. defining the relative value of different loyalty programs) without the need of lengthy cross verification of transaction, deals and eventually defining a common token for the common customer that can be spent seamlessly. The company said the initiative came after a successful trial in partnership with KPMG and Microsoft and they are signing up Singaporean retail merchants to join the service. Singapore Airlines’ CEO Goh Choon Phong stated: “This groundbreaking development in which we will be using blockchain technology to ‘digitalize’ KrisFlyer miles is a demonstration of the investment we are making to significantly enhance the digital side of our business for the benefit of our customers.”

The role of Telecoms in Blockchain

Blockchain can have significant impact on telecom operators but the question is how operators can capitalize on this technology.

It’s clear that operators will be unlikely to develop their own blockchain applications, so operators would be best placed to partner with or invest in blockchain startups or tech giants to test the use cases explained earlier.

Given the embryonic state of the industry and the limited proof of its benefits, operators could also act in “groups,” as in the voice settlement example, or create regional association to minimize the effort while still exploring the positives. In fact, this is already happened with LG Uplus, Etisalat Group, KT, Telefónica and PLDT creating the Carrier Blockchain Study Group, an initiative to develop a blockchain platform for telcos.

However, the operator’s role can expand beyond pure telecom use cases. In emerging markets, operators can promote and lead the development of the blockchain ecosystem through the creation of blockchain-focused incubators. For instance, Indian operator Jio has launched startup accelerator Jio-GenNext to help spur blockchain-related innovations.

In more advanced settings, the operator can deliver blockchain building blocks and use cases as a service to business customers: Verizon, for instance, is already planning to leverage Guardtime’s blockchain experience and technology to provide blockchain solutions for clients seeking safeguard their critical infrastructure and customers’ essential information systems. Similarly, PCCW Solutions has developed “the next generation insurance platform”, which will help streamline back-office operations of insurance companies and will be offered as-a-service. Insurance companies will be able to automate and secure flow of information between agents and brokers engaging with their clients, adding security and efficiency.

It’s for these reasons that we believe telecom operators should not delay in experimenting with the technology. They have an opportunity to not only improve their operations and the industry, but also to help modernize other sectors and create benefits for the whole economy.

Telecom operators virtually compete with players from other industries, such as retail, banking and airlines, to assume the role of pivot for cross-industry IoT applications (e.g. loyalty programs that involve players from different industries). Speed of execution is key to leapfrog and assumes a leading position. For this reason, telecom operators should increasingly partner with each other to carry intercarrier trials and proof the validity of concepts at system level. This will expedite the development of industry-wide solutions for their own benefit and the industry overall.

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Delta Partners - TMT Advisory and Investment