Telco’s burning exchange moment – a playbook of fixes

The previous article in this series, “Telecommunications has reached its burning exchange moment,” highlighted that the current telco business model is at risk. It described how we could be experiencing an era of creative destruction of capital based on the works of Schumpeter and Marx.

It also described:

• Poll results where nearly half of Europe’s telco CEOs don’t expect their businesses to make it through the next decade
• Why creative destruction is needed
• Evidence of telco’s ability to massively change, but not the right type of change
• Why I call it a burning exchange moment (telco’s version of a burning platform)
• Why OSS and BSS are an essential vehicle of change
• What we in the OSS / BSS industries can do to help
• The single mindset shift to trigger the change

That sounds dire, and in some ways it is. But telco services have never been in greater demand, so a fitter, stronger, faster business model is sure to arise to service the needs of the world. Will it be by the existing telcos, or disruptive new entrants to the market?

CSPs retain many strengths that new business models can be built around:

1. It’s not a lack of revenue ($1.55 trillion annually), but a lack of profitability of the current business model that needs fixing.
2. They have billions of customers willing to pay for services each month, and perhaps more importantly, they are trusted to issue bills each month (as well as having strong collections pipelines)
3. They have billions of companies that rely on bitstreams delivered by CSPs (but could also benefit from connections, partnerships and supply chains directly facilitated by CSPs)
4. They have masses of data (the new oil)
5. They have vast technical workforces that have honed their delivery skills to accommodate regulatory challenges in the countries / regions / jurisdictions where they operate
6. They also have vast technical sales machines that have an empathy for local needs, conditions and regulations
7. They have real-estate in highly valuable locations
8. Many have semi-monopolies in their access networks (but they’re not constrained to only offer services in those areas and they have the option of considering business models that are more global in nature)
9. They have technical implementation skills that allow the possibility of leveraging new technologies and delivery models (hat-tip to Amrit for highlighting this one)
10. They have innovation in their DNA (hat-tip to Stefano for highlighting this wonderful article that links Blade Runner, Schumpeter’s gale and how innovation can be linked with periods of creative destruction / progress / stagnation)

So, let’s take a look at the types of different business models that could rise out of these existing strengths. The following are just some top-of-head ideas, but I’m sure you can think of many others (note that it’s a bit lengthy, so it might be a bit TLDR):

1. It’s not a lack of revenue, but a lack of profitability

The total addressable market (TAM) of telco services globally is estimated at around $1.5T. It’s clearly not the top line (revenue), but the bottom line (profits) that are a concern as indicated in the graph below. Kevin Kelly predicted as much back in 2008, suggesting that everything is converging on free (which is not the ARPU that telcos are hoping for!!)

This graph, from Bain & Co / TM Forum shows just how far average shareholder returns of telco providers is lagging other industries (hat-tip to Tony for pointing me to this research). As we move into a cycle of increasing interest rates (cost of capital), will investors be deterred from investing in telco at these rates of return? With revenue per bit declining against increasing bandwidth consumption, along with the reduction of premium services revenues like international calls declining precipitously, profitability seems to also be steadily declining

Therefore, new business models are required that ensure a greater level of profitability (and shareholder returns) in the sector. Examples might include:

• Measuring revenues is relatively easy. Measuring profitability is much more difficult, especially apportioning costs by product. Telcos tend to have many product offerings (SKUs – stock-keeping units). However, many are simply not profitable. The Whale Curve analysis suggests that 20-30% of products make up 200=300% of a telco’s profits. Could a telco of vastly less SKUs (and possibly lower revenues) actually be more profitable? A much smaller SKU-count would certainly simplify the entire business and reduce the pyramid of OSS pain
• Vastly simplified operations models also reduce the pyramid of OSS pain. Instead of having every different make / model / type / topology of network, take the Southwest Airlines approach to the network (and related services)
• Many of the world’s biggest telcos also have a low-cost sub-brand / subsidiary with a much smaller operational footprint, simplified offerings and lower cost-to-serve (refer to this whitepaper by James Crawshaw for many examples of sub-brands)
• Regulated pricing models, generally associated with utilities, that ensure essential services like comms, power, water, etc remain commercially viable and resilient for consumers
• Enhancing profitability of telcos through subsidisation by big-tech companies (aka net-neutrality, as outlined well in this article by Tom Nolle)
• Telcos have done a great job of stripping out low-hanging costs (Tom Nolle suggests “Operators have already taken most of the accessible opex reductions, and the maximum capex reductions they could hope for would drop costs only by about 4.7 cents of every revenue dollar, and that would take five years to fully realize.”),
  • However, telcos remain large, bureaucratic organisations that, “manage huge organizational resources, but no longer derive the same scale advantages they used to” because technology has significantly reduced transaction costs. Perhaps zero-touch networks or concepts such as DAO (Decentralized Autonomous Organizations) or GenAI-led company models represent a path to far greater operational efficiency?
  • The communications, bureaucracy and political overheads of large organisations have the potential to be massively streamlined, such as the use of generative AI to reduce meetings and only highlight the most essential activities from meeting transcriptions or from this innovation in procurement being trialled by BT
• Flip from high-volume, low-value to low-volume, high-value services, such as this example that Warren Buffett deployed
• What other profitability optimisation techniques have you heard of and what part does OSS / BSS have to play?

2. They have billions of customers willing to pay for services each month

Telcos are trusted as billers each month (or via payments for credits). This opens up alternative finance-based business models such as:

• Under-served banking markets like Africa have opened the door for novel uses of mobile money for non-telco related transactions and telcos are often trusted more than banks
• “Valued-added service” businesses have successfully partnered with telcos to incorporate their services into a monthly telco bill
• Telcos could tap into a buy-now, pay-later or Loyalty programs in partnership with financial and retail institutions. Some airline’s frequent flyer programs are more profitable and valuable than their airline business, and telco services have more flexibility than flyer miles
• There’s been discussion about “SuperApps” or portals where subscribers (presumably retail subscribers mostly) can buy anything. Small margin, high volume sales apps are a possibility if the platform is done right. I feel like the enterprise SuperApp might be more of a target for telcos to add value in conjunction with comms, compute, cloud, APIs, etc (but also the “match-making” service discussed below)
• What other models could BSS natively support?

3. They have billions of companies that rely on CSPs

Billions of businesses are customers of CSPs around the world. CSPs have to find a better way of adding value to these many business customers than just transporting ones and zeros for them, carrying many other over-the-top premium service offerings to these businesses. Many of these businesses are looking for better ways to do business, such as reach new customers, markets and partners, especially in the modern e-business world.

If we assume the principle of “everything is downstream from the lead,” then lead generation is incredibly valuable. You can guarantee that these businesses would love for telcos to assist them in finding new sales targets and revenues, for providing more secure business services, for providing one-stop e-business packages:

• Some telcos and cloud providers already offer a marketplace of network services and other partner products. This could be scaled up to help list the products / services of any of the telco’s products. Telcos previously provided Yellow Pages directories, but they died out as more people relied on Internet search. Telcos have the subscriber lists and other data to provide a much more personalised connection  service (assuming privacy mechanisms are adhered to)
• OSS and BSS are already a full e-business stack. They manage orders, inventory, invoicing, collections, customer relationships, and much more. They currently only do so for the telcos themselves, but there’s no reason these OSS/BSS stacks couldn’t be offered as a consolidated e-business service to subscribers as well (what I refer to as a Business Operating Systems or BOS)
• Rakuten’s ecosystem of different brands / products / markets , as shown in the diagram below, provides a strength through loyalty and cross-selling. Whilst many telcos don’t natively have this same ecosystem under their own brand, there are partnership models
  
• As mentioned above, with so many existing subscribers looking for ways to sell their own wares, a telco-based loyalty program and related marketplace could help add value to subscribers
• A partner connection / supply-chain support network where the telco performs match-making services for their customers
• Secured, managed services for e-businesses to allow them to focus on their core businesses. These managed services could be provided by the telcos or clients that provide services

4. They have masses of data

Telcos collect vast amounts of data on subscribers, networks, transactions, locations, environmentals and much more. There are many different ways to unlock the value in this data whilst considering privacy concerns. These include personalised services (eg health and wellness in conjunction with accredited suppliers), or B2C services (eg targeted advertising) or B2B services (eg environmental data recorded from tower sites).

5. They have vast technical workforces

• Telcos require vast workforces, both in terms of size and geographical spread, to maintain their networks and the services that operate on them. Telcos also have sophisticated workforce management and skills-based-routing to ensure the right people get to the right locations, at the right time to do a multitude of activities correctly. They also have the appropriate processes established to ensure all this work is done within applicable regulatory regimes.
• These workforces could offer multi-technology support, especially in remote / rural areas where skilled technicians aren’t nearby. With the advent of Augmented Reality set to arrive soon, telcos could provide remote guidance of a much more specialised nature to general-purpose skilled workforces as a service.

6. They also have vast technical sales machines

• Telcos have vast technical sales teams, but also all of the technology to manage those teams, the products they sell and the customer relationships they need to manage. Many of these teams manage complex technical sales too. At the moment, these sales teams tend to only sell the telco’s own services and some partner services. However, with appropriate solution-identification tools, these sales teams could also sell solutions from their broader customer marketplace (mentioned earlier) and clip the ticket on each sale made
• Again, everything is downstream from the lead and telcos have most of the pieces to be amazing lead-gen and match=making engines for their subscribers

7. They have real-estate in highly valuable locations

To service widespread locations, telcos have many sites in highly valuable locations near businesses and residences. These sites (eg exchange buildings, cabinets, towers, equipment vaults) often have advanced, resilient power and comms that are suited to many other partnership purposes. Examples of valued real-estate business models could include:

• Due to the miniaturisation of active network devices, equipment footprints in exchanges (and even cabinets) have often shrunk, leaving available capacity. These can be leased to other organisations such as edge data centres, secure storage, community batteries, charging stations and more. Refurbishment could even make exchange sites into multi-purpose buildings
• Tower asset sell-offs are starting to become commonplace, especially to non-telco investors. These investment organisations take a vastly different approach to monetising thes assets. Unlike traditional telcos with their large operations and maintenance teams and age-old processes, investCos want to keep head-count to a minimum, automate and outsource any labour possible. This makes them far more open to digital twin, drone and augmented reality technology models to remotely support their assets. In additional InvestCos are far more interested in maximising the number of leases, to as many network operators as possible
• Telco REITs (real-estate investment trust) models
• Infrastructure sharing with other telcos or mixed-model service providers like IoT or sensor networks, private networks, content delivery, gaming, etc

8. Many have semi-monopolies in their access networks

• Access networks are expensive to build and maintain. In many cases, it doesn’t make commercial sense to build where others have network. This is why wholesale network models and InfraCo models exist. The incumbent network providers have a significant advantage. It also gives the incumbent a significant monopoly over “ownership” of customers served by the access network.
• This opens up partnership opportunities such as this approach used by Jio to build a network and sign up customers, making the network an attractive investment for providers wanting access to those customers. As described in this article, Jio built a 4G data network for $32B and sold 42% for $16.8B (note these numbers may have changed since the article was written). This is an interesting alternate strategy to the net-neutrality model of forcing big-tech to pay for service (note some of the investor groups in the table below)

9. They have technical implementation skills

Telcos have strong technical implementation skills that provide the possibility of leveraging new technologies and delivery models such as edge, AI/ML/GenAI, private networking, etc to craft new business models around, but only if new thinking is applied. Some B2B business model examples include:

• Managed tech services – consulting to businesses to help them deliver Business Operating Systems (BOS) as described earlier, AI/ML
• Edge compute – including compute, comms, private networks, etc for organisations wanting localised services and/or where low-latency / improved-performance networking is essential
• Augmented reality (AR) applications, services, content and compute as a bundled offering for organisations
• Smart cities
• Digital twins
• I’m sure you can think of many others

10. They have innovation in their DNA

This wonderful article links Blade Runner, Schumpeter’s gale and how innovation can be linked with periods of creative destruction / progress / stagnation.

The telco industry was a technological juggernaut throughout the 1900s and created breakthroughs such as OSS, transistors, lasers, solar cells, satellites, communication theory, Unix operating system, the C and C++ programming languages, etc. Unfortunately, most telcos have dismantled the primary research and development arms in a corresponding period to their structural declines.

The telco industry’s R&D leadership in tech has waned in recent decades and to be honest, any reinvestment now is unlikely to lead to significant business model changes in the near term.

Summary

As mentioned in the previous article, big telco today has already been experiencing its burning exchange moment for years and needs a drastic business model change if it wants to continue to play a significant role in the future of the telecommunications services industry. We’ve shared a numerous ideas for alternate business models the telcos could use to stay relevant and profitable into the future. I’m sure you have many other ideas to share (we’d love to hear all about them from you).  As the OSS/BSS industry, it’s our job to build the tools that enable these business models to be enacted by the telcos. Our projects depend on it. You might also like this article, which describes personal approaches for navigating around the burning exchange.

If you’re a telco, OSS/BSS vendor or consulting firm and would like to brainstorm possible business models that could be a good fit for you or your clients, please leave us a note and we’d be delighted to discuss with you.