Business Model Transformation Now is Key
Gary Kim, Editor in Chief, IP Business Magazine
There is a perceptible shift in the telecom industry's focus away from cost reduction to business model
transformation and revenue growth, say Stuart McIntosh and Ekow Nelson of the IBM Institute for Business Value.
Where in 2002, 34 percent of telecom providers said business model transformation was
a source of value, 69 percent of polled telecom industry executives in 2007 said it would be the primary driver
of value in the industry going forward. Not so long ago, the top issues were challenges such as revenue growth,
operating expense reduction, capital expense reduction and even debt loads. Now, an overwhelming majority of
polled telecom executives (72 percent) say business model transformation requires extensive collaboration with
external partners. That is a stunning change for an industry that historically has had a "not invented
here" approach to innovations.
One manifestation of that thinking is the increased emphasis on "open networks" and
fostering of developer communities. In fact, just over half of the telecom executives polled by IBM expect to earn
revenues by making underlying telecom service components - such as messaging, location, presence, the ability to
initiate and terminate calls and conference calls - available to third-party service providers.
Globally, fewer than half of telecom providers have plans to move into IT services management
or media and entertainment, IBM notes. Keep in mind that 32 percent of respondents were integrated telecom operators with both mobile
and fixed operations, 32 percent were mobile providers while 11 percent were fixed-only providers. The other 25
percent were specialized providers of some sort, and do not necessarily serve consumers or operate wired broadband
networks, so media services might not be germane. Of the 75 percent of respondents that are classic "telcos"
or "mobile providers", not all believe IT services make sense, either. It is clear that a majority of
fixed (60 percent) and integrated telecom providers (57 percent) anticipate moves into IT services as well as
entertainment video.
As you might expect, executives say their "distinctive capabilities" include network
coverage, availability and access to a large customer base. Those assets were especially seen as valuable by incumbent
fixed providers in uncompetitive markets. Only about a third of telecom executives identified product and services
innovation or brand recognition and reputation as distinctive capabilities. Is that a cause for concern, since most
markets are competitive these days? Probably, yes.
The IBM analysts say "it is surprising that very few telecom executives recognize device
control and access (eight percent), ease of use and simplicity (11 percent) and customer service (16 percent) as
distinctive capabilities. The most obvious example of the growing importance of devices in the wireless space is the
Apple iPhone. In fact, it might not be overstating the case to note that it is the device that users "bond
with", not the service provider.
"As telecom providers seek to change their business model, the sources of sustainable
competitive advantage for new markets and revenue models are unlikely to be the same as those for traditional
telephony," McIntosh and Nelson say. Consider that a gentle reminder that industry executives are not clear
about what their sustainable advantages are, or do not believe they yet have mastered device "stickiness,"
ease of use and service issues.
And executives might be misguided even about the importance of some new revenue streams as well.
About 23 percent of surveyed global operators expect advertising to make a major-to-moderate contribution to overall
revenues. That might be a major disconnect. Today, cable operators, with decades of experience, still generate only
about five percent of their total revenues from advertising.
By 2017 SNL Kagan estimates US cable operators will derive 6.6 percent of total revenue from
advertising. If that is correct, it hardly seems possible that telcos will generate "major" or even
"moderate" amounts of revenue from advertising. To be sure, the optimism reflects a correct understanding
that highly-targeted advertising is a major opportunity. The issue is how much revenue can be generated, relative
to other obvious sources such as broadband access, voice and enhanced services built on that access.
On the operations front, a majority of telecom executives anticipate an increase in the share
of operational expenditure on outsourcing, from the current range of five percent to 10 percent up to 11 percent to
25 percent over the next five years. One example might be international long distance, where such scale is required
that even some tier one providers might not be able to justify operating their own physical networks.
But more likely candidates for outsourcing are non-customer-facing operations. The IBM analysts
suggest applications management and operations are functions most firms are likely to outsource in the next five years.
Order handling, supply chain and partner management, and billing and collections management also are likely candidates
for outsourcing.
IBM and the Economist Intelligence Unit, which conducted the poll, interviewed 252 executives,
40 percent from Western Europe, 30 percent from North America, 20 percent from Asia-Pacific and 10 percent from the
rest of the world.
As the share of the household expenditure for traditional communication services peaks, opportunities
for growth in competitive telecom markets will come from market share gains, services that take more of the household
budget, and advertising, the analysts say. "Telecom providers, however, need to be realistic about revenue
expectations for advertising and content," McIntosh and Nelson say. "The skills and capabilities required to
compete in these markets are very different from those traditionally nurtured by telecom providers."
Converged services also will require better service quality management. Service management
capabilities for traditional voice services are not sufficient for the delivery of high-quality converged voice
and data services, McIntosh and Nelson say. "Current levels of investment in this area, however, do not appear
to match its growing importance," they warn.
Business model transformation is the order of the day. It will require cultivation of new skills
and competencies. So it will not necessarily be easy or comfortable; simply necessary.
Back to the June 2008 newsletter
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