From Telcos to Tech-cos

From Telcos to Tech-cos

The Delta Perspective

Authors:
Mayssaa Issa - Research Director
Keshav Jha - Research Specialist


The global telecom industry has undergone major changes over the past two decades as tech companies like Facebook, Apple, Amazon, Netflix, Google and Microsoft expanded their value proposition to include products that were traditionally exclusive to telecom operators. The launch of instant messaging in the 1970’s followed by the increased popularity of Over-The-Top (OTT) messaging in 2010 and then the introduction of voice and video calling, changed consumer habits. This shift has negatively impacted telcos’ traditional revenues.

Tech players winning strategy: Building an ecosystem

While most tech players started with a limited product portfolio that defined their focus in the industry, they have constantly introduced new products and services (P&S) in an attempt to build an ecosystem that wins consumers’ loyalty and covers their needs under one umbrella.

For example, while Amazon and Alibaba are well known for their strong e-commerce proposition, Facebook for its social networks, Microsoft for its software capabilities and Google for its OS and search engine, these players have all become tech giants covering multiple customer touchpoints and parts of the TMT value chain. Such expanded P&S portfolio includes content (music, video), gaming, (including e-sports), e-commerce, payments, smart homes, messaging, devices, and cloud among others. All of these were typically a part of the traditional telco’s products or adjacent services that operators have pursued to diversify their revenue.

Tech players’ strategy to build ecosystems around core products has been positive so far, resulting in more customer affinity. Take Amazon Prime where customers spend 25% more than non-Prime customers1, and Facebook’s Bots’ adoption increasing by more than 2,600% within two years of its inception due to a growing B2B base using the platform2,3.

Exhibit 1: Traditional telco products and tech disruptors

Investing in connectivity

In addition to shifting the mindset from a product-focused to an ecosystem-focused approach, tech players have also invested in connectivity and infrastructure-related initiatives. These include Facebook’s Telecom Infrastructure Project, Aquila, Express Wi-Fi, Google Fiber, Google Fi, Google Station, and Amazon, Microsoft and Alibaba’s cloud and data centre assets. Furthermore, these players have invested and deployed submarine cables. Google’s investment in the Unity cable consortium, which was launched in 2010, was the first by a tech player in cable deployment but more players have joined in since (e.g. Facebook’s MAREA, HAVFRUE, and Pacific Light Cable Network and Google’s Curie, Dunant and Southeast Asia-Japan Cable).

Tech players’ moves into infrastructure investment were not driven by a plan to resell capacity or compete with international wholesale carriers but rather to meet their own bandwidth demand (inter-data centre, content distribution and cloud computing). These players’ international bandwidth consumption has grown 80% CAGR between 2013 and 2017 and was almost half the total international bandwidth consumed in 20174.

Other connectivity initiatives by these tech giants include efforts to complement operators’ offers and to connect the unconnected. This is best illustrated by Facebook’s Telecom Infra Project, Aquila and Express Wi-Fi and Google Fiber and project Loon. While some of these initiatives have struggled (Facebook killed its Aquila drone project in June 2018 and Google halted its 1 Gbps fibre deployment in 2016), they have triggered a response by operators. Google Fiber, for instance, pushed operators to accelerate their high-speed broadband deployment as they felt competition from tech players was imminent. This has helped Google as it was able to focus on delivering Smart Home solutions and content over these high speeds.

Operators moving to an asset-light model

Operators have realized their infrastructure assets are no longer the differentiator. As with tech players, competition now is based less on pricing or single products and more on an end-to-end proposition and a full ecosystem. This has encouraged some operators to spin off or sell key infrastructure assets such as towers, fibre or data centers to focus on services and innovation. Recent deals include Zain KSA’s sale of its 8,100 towers to IHS, and Vodafone India and Idea Cellular’s tower sale to American Tower Corp. In Europe, Vodafone is also believed to be mulling a sale of its tower assets across the continent. Some operators have also disposed of their data centers, such as Verizon’s sale of its data center assets to Equinix in 2016 and AT&T’s sale of 31 data centers to Brookfield Infrastructure Partners in June 2018. Telefonica is also rumored to be contemplating a sale of its data center business.

Exhibit 2: Tech players’ strategic moves shaping the telecom industry

Adopting the ecosystem concept: From telcos to tech-cos

As tech players have led innovation in recent years, the discussion nowadays is no longer on blocking such OTT providers, emulating their services or striking random partnership deals with them, but rather creating the right customer experience and loyalty to an end-to-end telco offer. One operator that stands out is Reliance Jio with its disruptive value proposition introduced in India in 2016. While one can argue that Jio’s approach was the traditional price war upon entering a market, this player was among the first to realize that to win in this digital age, the focus should shift from traditional connectivity to content and media. The operator saw a change in consumer spending, from legacy to digital services with more than 170 million subscribers having enrolled in Jio Prime membership (~93% of subscriber base)5.

This change in the value proposition strategy is not limited to disruptors in emerging markets but is also seen among big operator groups that are on a journey to become “tech-cos”. In 2016, Telstra’s CMO Joe Pollard stated that “the evolution of the company from telco to tech-co is the drive behind its rebrand”. This became essential once the operator realized that much of its wholesale business will be eroded due to the National Broadband Network and hence new revenue sources were needed. Similarly, another Asian operator - NTT Docomo – has worked on building an ecosystem that goes beyond legacy services to include AI (Corevo), cybersecurity, IoT, and SmartLife (content, e-commerce, mobile financial services, healthcare, video, etc.). Moving to Europe, operators like Telefonica and Orange have also invested in building ecosystems that cover similar services in addition to big data.

Conclusion

While telecom service providers are expected to keep investing in infrastructure especially as 5G is being piloted and planned in many countries, telcos’ CAPEX is expected to grow at a slower pace (3% CAGR between 2018 and 2022) compared to technology companies (15% CAGR during the same period)5 as the latter are increasing their investment to build sustainable and complete ecosystems. Operators’ legacy mindset of investing in infrastructure for the sake of infrastructure is shifting towards creating use cases for their networks and building a proposition that covers different aspects of the consumer touchpoints and digital lifestyles. Rich quality of experience resulting from seamless multichannel engagement, customer care, content portfolio, quality of network service, and digital solutions will be the defining element for consumers’ loyalty and adoption of new services.

Exhibit 3: Reliance Jio’s value proposition


Notes:

1https://www.fastcompany.com/40513159/amazon-echo-owners-spend-more-on-average-than-prime-members
2 BI Intelligence
3https://mashable.com/shopping/deal-sept-26-samsung-powerbot-star-wars-robot-vacuum/#ClwVcOlcQZq3
4 Telegeography
5 Ovum

Video

Delta Partners - TMT Advisory and Investment