Telco Business Models Diverge

Until recently, most global communications providers had business models that were highly similar. These days, it is clear enough that providers are starting to differentiate, and that the future business will feature several to many different business models.

Four telco business models will exist in the future, says Forrester Research analyst Mike Cansfield. Some carriers will stick with the vertically integrated model of the past, because they still can make it work. You will tend to see this most frequently among the largest global carriers, with the biggest customer bases and very large bases of recurring revenue.

Others will move to a partnership-based model, where some functions previously conducted in-house are shifted to business partners. Smaller national carriers with moderate customer bases will frequently use this model, as will carriers making aggressive expansion moves outside their historic footprints.

Some might shift to a horizontal model, though Cansfield points out that no legacy telco has actually decided to do so. This approach has been tried by some new competitors though. Vanco, which knit together a global VPN capability, is one example.

In the United Kingdom, other new contestants have chosen this approach, including Tesco, the supermarket chain, as well as the U.K. Post Office, says Cansfield.

In the mobility space the mobile virtual network operator model uses the horizontal approach. No major established operators have yet shifted from a vertically-integrated model to the horizontal model, though in some respects the “functional separation” model or “structural separation” model is an example.

The disaggregated model likewise is mostly a concept at the moment, not a practical option.

The horizontal model splits the network from the retail business, but in the future it will be easier to consider, if not adopt, a very-disaggregated approach where different functions are assembled on a virtualized basis.

This is a sort of cloud computing or “software as a service” concept applied in a very big way and perhaps can be thought of as the partnership model on steroids.

This fourth variant is based on the premise that a telco has a choice, says Cansfield. Does it own, operate, and manage a network within a horizontal structure or not? If it decides on the latter, then it can choose to disaggregate itself and find partners/outsourcers that can provide more or less all things.

The issue for the latter three models is that ownership of access assets remains valuable, and most would likely say strategic. Ubiquitous wired access networks are so expensive there always will be few of them.

Spectrum rights likewise are relatively scarce and expensive to acquire. Most executives probably would agree ownership of such assets, when possible, confers clear business advantage that should not be disaggregated. Some executives in some countries do not have a choice, of course.

The vertically-integrated communication service provider model is not going away, Cansfield argues, though it will not be the only model. Some providers will largely be able to retain the traditional model, where one entity controls the channel; owns, operates, and manages the technology deployed (usually meaning fixed and mobile); and runs the underlying network that delivers services.

The reason is simply that the networking business remains one where scale economies exist, allowing a large provider to operate efficiently where smaller providers simply cannot. A large provider of services to wholesale customers, enterprise, smaller business and consumers can leverage investments across multiple customer segments where a smaller provider cannot.

So the former incumbents of the world clearly will be prominent users of this model. Still, it is more than a semantic shift to note that the network becomes a platform in the new model, not the center of the model. Software, content and many new applications partially created by end users will be key.

That said, scale in and of itself will prove necessary but not sufficient. Carriers still will have to leverage scale to meet customer demand better than other providers can.

The multiple models also will lead to changes in performance metrics. While traditional financial performance is key for all contestants, there are changes in the need to measure product profitability and network performance, Cansfield argues.

This might sound odd, but what he appears to mean is not so much that the profitability of any single application or service need not be measured, but rather that it should be increasingly possible to gain visibility into the real costs and real profit margin for any service when providers gain the increased visibility many of the models allow.

That isn’t to say any service provider can dispense with a need to measure network and element performance.

At the network layer, measures like jitter and latency will clearly remain important. But Cansfield says other operating metrics assume new importance.

Non-traditional measures such as time between “lead to cash” also are measures of effectiveness. Likewise, the time taken from order to receipt of payment; cost to serve, or discrete analysis of how much it really costs to provide service to a specific customer and cost per transaction are better measurements of provider effectiveness.

This approach will enable the telco to benchmark itself against Google rather than other “me-too” operators, he says.

Those types of analysis are easier when a service provider actually sources inputs from partners, as there is a measurable and discrete cost. The traditional problem with conducting analysis at this level is that the traditional vertically-integrated model requires “guessing”: costs largely are allocations. And allocations inherently are political, based on any number of formulas that may not reflect the actual cost to create a product, sell and support it.

Getting a better handle on transaction or sales costs also is required, so service providers can derive unit total costs per service, a key step in understanding and then maintaining profitability, Cansfield says.

That is important if one assumes that retail pricing for products will decline over time. If that happens, more efficient sales and provisioning mechanisms are needed.

Rather than just focusing on metrics like financials, network performance and customer retention, new metrics also are needed. Measures such as cost per transaction, discrete customer profitability, and returns from bundles become important, he says.

The changes are propelled by choices in revenue dynamics. “Only five years ago, voice revenues at British Telecom amounted to 45.4 percent of total revenues,” says Cansfield. “In 2007 and 2008, BT voice revenues accounted for 39.3 percent of the total.” And virtually nobody thinks the basic trend can be reversed, though many think it will stabilize at some point.

But some other changes suggest where the communications industry already is headed. “Communications is no longer a discrete sector,” says Cansfield. That might overstate the case, but it is the direction things are moving as we move from single-purpose networks to multi-purpose networks.