Who are we?
STL is an advisory and analysis firm specialising in supporting innovation and change in the Telecoms, Media and Technology (TMT) sectors.
The telecom industry was structurally stable from the early days of the telegraph and telephone systems through to the arrival of mobile telephony, despite rapid technology change and varying fortunes of individual players. We now see a need for change in the industry to reflect a new world increasingly unlike that experienced before.
This Manifesto, which reflects our thinking on TMT industry change, is written by STL. STL has developed a number of unique Telco 2.0™ services that support successful innovation. We also run a Telco 2.0™ blog which further reflects our thinking.
Comments and feedback are welcome, and should be posted on the blog or sent to contact@stlpartners.com.
Why "Telco 2.0™"?
- Telecom (including mobile) is one of the worst-performing sectors in most stock markets in recent years.
- The vertically integrated business model is under attack from all sides: tougher regulation, new technology (most notably VoIP and open spectrum), arbitrage, new entrants, and advancing customer expectations.
- P/E ratios suggest little investor belief in this improving. They have low confidence in “converged” or triple/quadruple-play bundles providing high returns.
Our belief is that there is a single dominant source of structural change in the communications industry. This trend is the separation of network connectivity from user-facing application services and content. The phenomenon is both technical ("everything over IP") as well as financial (separate purchase of access and service).
The trend is clear and obvious. Changes to mass user behaviour are already seen (eg. VOIP, P2P music/video downloads, Social Media). Yet few (if any) operators have strategies that can be explicitly traced back to this underlying force.
If most of your revenues come from an endangered voice product, it’s time for a fundamental re-think: in the recent STL survey of 180 telco professionals, 60% said "Strategic re-think" is the top priority for telcos and 92% said it is a key priority.
Conclusion: Telcos need to review their business model in each of the markets they are serving: their position in value chain, what the products are, who the customers are and how they buy and pay for the products.
What is "Telco 2.0™"?
Telco 2.0™ is a new way of thinking about the Telco industry. It consists of STL's collection of unique products and services: Telco 2.0™ Industry Brainstorms, Telco 2.0™ reports, a Telco 2.0™ blog, Telco 2.0™ In-house Workshops and Advisory Services (with proprietary Telco 2.0™ methodologies).
"Telco 2.0™" defines any business model where connectivity is supported by a sustainable economic model. This means the end of artificial cross-subsidies between services and connectivity. We assume an all-IP world where choice of applications, devices and platforms is entirely driven by user preference. Connectivity charges will increasingly reflect actual costs of delivery (unlike, say, mobile roaming charges); relatively trivial services like standard voice call routing are effectively free; and thus the scope for the latter subsidising the former ceases to exist Customers will only take your replacement offering because they want it, not because they have no choice.
A change in thinking
The hardest, but most important, part of reaching Telco 2.0™ is a change in the culture and mindset of operators:
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An assumption of abundance, rather than rationed scarcity.
Example: Share a hundred images in a picture-sharing service rather than sell one MMS. -
A preference for openness, rather than hoarding of assets and information.
Example: How much brand value is lost locking down Bluetooth from reaching its full potential to users? -
A change for most from a network-centric view in favour of focusing on customer data, billing, relationship, distribution and partnership assets.
Example: What is the real value of the call detail records in creating intelligent call routing services? -
A desire to connect people above the promotion and consumption of media content or information services.
Example: Why invest so heavily in streaming video from media conglomerates when user preference and revenue consistently comes from the sharing of user content and experiences? -
A willingness to learn from, and interact with, the broader world of Internet players.
Example: What are the lessons of Skype for telcos wishing to broaden the reach of their voice and messaging products to new platforms? -
Agility and innovation in core messaging and voice products, in contrast to today’s stasis.
Example: Vonage’s troubles partly stem from having merely replicated POTS, rather than having innovated. -
Getting away from the fear of “dumb pipes”. Utility businesses can be very profitable given the right cost base, and funding/pricing approach.
Practical steps to define your strategy
To achieve the Telco 2.0™ goal, we believe that operators need to engage in the following activities:
- Aggressively optimise existing products and business. In particular, mobile handsets are not being fully exploited as a sales and promotion channel for existing products. Sales, support and operational costs are too high. These need to be engineered out through process and product redesign.
- Honestly re-examine strengths and weaknesses versus Telco 2.0™. This feeds into a “strategic map” of the positioning of yourself, other operators, and non-traditional competitors.
- Clearerly focus on the right part of the value chain. We believe that trying to be “all things to all men” in any market is a recipe for disaster: the separating layers of the business model will tear your business apart.
Every operator needs to understand which part of the value chain it has most affinity towards in each of the markets it serves:
- Trusted Relationship Brand for the "Digital Lifestyle"?
- Personal Communications Service Provider and Integrator?
- Enabling Platform Providers for 3rd party services?
- Connectivity Providers with maximum reach?
Whilst the above activities are clearly not mutually exclusive, we believe simultaneous pursuit of leadership in multiple “layers” of the value stack is unlikely to bring success.
Furthermore, operators need to consider diversification strategies outside of their current core business model of sinking network capital and then recouping the investment by tolling the traffic over that network.
From strategy to tactics
1.) Trusted Relationship Brand for the ‘Digital Lifestyle’: Need to divest themselves of unnecessary capital assets; enhance their affinity partnership and distribution capabilities; diversify into other offerings aimed at the same market or demographic; rapidly exploit ideas from emerging technologies and leading markets (such as Korea); and exhibit greater dynamism in product development.
2.) Personal Communications Service Providers and Integrators: Get a much better understanding of where value comes from in voice, messaging, community and presence. How will these worlds intersect with the strong growth of online game playing, social networking and self-expression?
3.) Enabling Platform Providers for 3rd Party Services: There are already precedents in coarse-grained platforms (e.g. MVNEs like Sprint) and more tightly controlled and integrated platforms (e.g. i-mode). Greater interoperability with the giants of the IT and Web worlds is needed, as well as an ability to attract smaller players.
4.) Connectivity Providers: often fall under the derogative “dumb pipe” mantra, but can be enormously attractive and profitable when suitably differentiated. We believe considerable unexplored opportunity exists in this space. For instance, new funding methods like municipal networks should be seen as much as an opportunity as a threat.
In all cases, there are many “leaks” in the abstraction of Internet Protocol that the operator can exploit: network topology, geography, location, identity, relationships between edge nodes, distribution, billing, and so on. Every one of these gaps between theory and reality is a business opportunity.
Welcome to Telco 2.0™
At the conclusion of the journey, you will have:
- Divested yourself of assets and activities not strategically aligned with the “Telco 2.0™” goal.
- Created new financial and operational metrics to measure the progress of your organisation.
- Updated your processes and product pipeline gating criteria to reflect your new priorities.
- Considerably enhanced your product portfolio and innovated in the space which fits your new business model.
- Engaged in the right new supplier and partner relations, potentially enabling other players to progress up or down the value stack.
- Adapted your products to be “IP-compatible” by reinforcing defences (where sustainable) and the creation of new value.
Above all, you will have a more compelling story to tell investors.
There is nothing more difficult for a truly creative painter than to paint a rose, because before he can do so he has first to forget all the roses that were ever painted
– Henri Matisse