Why "Digital Transformation" is So Difficult

Clarity of thinking about “all things digital” remains rampant in the telecommunications business, for good reasons. There seems no universal agreement about what “becoming digital” means, and whether that applies mostly to internal processes or products sold to customers, or both, in what proportion.

That is why there is perhaps no more-controversial idea than telecom service provider strategy options over the next couple of decades.

Fundamentally, “strategy” is controversial because it is likely most service providers have few opportunities to move beyond the connectivity services they presently offer, and become “platforms” or providers of services beyond connectivity.

The reason is simply that becoming “platforms” and creating the foundation for partnerships requires scale, and most firms will never have the requisite scale (coverage, customer base, capital, skills).

Still, a handful of service providers now earn 10 percent to 15 percent of total revenue from “non-core” sources, and are making headway towards developing revenue sources beyond connectivity.

source: TM Forum                                                                                                                                                                                                                                                                                                                                                                                            

Others are building potential platforms around advertising (SingTel, AT&T, Verizon); enterprise or small/medium business cloud services (BT, China Mobile); payments (China Telecom, Vodafone; internet of things (DT, SK Telecom, Swisscom, Telefonica, Verizon).

But those are initiatives requiring some amount of scale, and most service providers globally simply will never reach that scale. So, fundamentally, the choice is simply to become a lower-cost supplier of connectivity services.

On the other hand, there are many potential new competitors for connectivity services within most countries. And that is among the key risks. To be sure, connectivity must be provided. But it is something of an open question “who” will be providing such services in two decades.

“The idea that the telecom business will die is preposterous, although it is possible that CSPs could lose control of parts of the retail market,” the The TM Forum report says. In a functional sense, that is true.

But we already have many examples of features and functions that remain vital, even if the business model supporting such operations changes drastically. The reason global voice and messaging revenues are becoming less important revenue drivers for service providers is that those apps are becoming features offered by many suppliers, and are not “for fee” services.

“It is also possible that the telecom industry will experience an inexorable stagnation of revenue and industry consolidation, but this does not necessarily mean that the industry will become less profitable,” since  “greater automation could mean that cost-cutting outpaces revenue decline.”

That might be true, but only if the amount of direct competition does not increase, and also if outside firms do not become major suppliers of connectivity functions, almost certainly with business model drivers to make those functions available without charge, or at very low cost.

source: TM Forum

Broadly, the strategy options are said to include focusing on connectivity almost exclusively; becoming a digital platform or a digital partner. But few service providers will have the scale to attempt the platform or partner strategy. Cloud computing, payments, advertising and IoT are, or will be,  scale businesses.

One issue is that “the term platform is used loosely,” TM Forum says. “In many cases CSPs describe a service as a platform business if they have more than 100 partners but it’s not clear that they have built partner ecosystems.”

The “digital partner” strategy always is equally tough to characterize, as it involves the access provider becoming an enabling platform for services delivered to end users. In the internet era, that generally is tough, as use of internet protocol means any lawful app or service entity can market directly to potential customers.

Also challenging is the tasks of converting internal support processes into actual services that can be sold to third parties, as Amazon Web Services converted an internal function (cloud-based services) into a retail offering for third parties.

Twilio, which provides application programming interfaces for communication features,  is cited as a prime example. Basically, Twilio allows developers to add communication features to any app or service.

But this approach is problematic, the report authors suggest. This approach requires “exposing core retail services”  to firms such as Amazon, Facebook or Google.

That could allow such firms to become competitors in the connectivity business, as Google’s Project Fi already has done.

Even the GSMA eSIM standard reduces the power of mobile operators, by allowing end users to toggle between service providers on demand.

“The GSMA’s eSIM specification enables remote SIM provisioning of any mobile device, allowing consumers to store multiple operator profiles on a device simultaneously, and switch between them remotely,” the report notes.

Network slicing might become a means of creating partnership models in a new way, however, the report suggests. Network slicing creates virtual private networks that might offer service differentiated by coverage, capacity, latency, throughput, security or time of day access, for example.

The report suggests one key problem: most service providers not be able to move up the stack.

“The connectivity services delivered by CSPs (communication service providers) have remained largely unchanged for the last 10 to 15 years, except for the type of traffic carried across networks,” say the authors a new report issued by the TM Forum.

Though the report is largely sanguine about prospects, the challenges and threats seem very real.

source: TM Forum    

Has Telecom Revenue Growth Already Begun Decline in Developed Markets?

Worldwide spending on "telecommunications and entertainment TV services" reached $1,662 billion in 2017, an increase of 1.4 percent year over year (in constant dollar terms), according to IDC. Virtually all of that growth came from Asia, Africa and the Middle East.

You might also notice something important: the market is said to be “telecommunications and entertainment TV.” If one backs out TV revenue, core telecom revenue might not have shown any growth at all in developed markets.

That is a "statistical trick" that often happens in the market forecasting business when technology muddles industry boundaries, and when it becomes tough to do anything but predict revenue decline, unless the category is expanded.

The obvious example is the "unified communications and business voice market," which now includes a range of industry segments ranging from business voice systems to services such as hosted voice, unified communications services and even the access used to support business IP telephony.

While it is true that the distinctions between the segments have fused, it also is true that unless the categories are merged, the forecast revenue is tiny, and shrinking, in some cases.

If "entertainment video" revenues were omitted, it is quite possible that revenue in many markets would show rather steady decline for some years.

We also have reached a point where inflation arguably has a greater impact on global telecom revenue than anything service providers can do. With the caveat that inflation rates vary substantially by continent and by country, net changes in global service provider revenue now are less than the impact of underlying inflation.

At a time when inflation is running between two percent and eight percent, with some countries having far-higher rates, it seems clear that actual growth is quite possibly already negative in most regions and countries.

Fixed voice is flat at best, while mobile revenues are dropping, so in the consumer market only internet access and video revenues are still growing.

IDC believes that the growth rate will accelerate to 1.6 percent in 2018, bringing worldwide spending on telecom and pay TV services to $1,689 billion.

For the period 2018 to 2022, the compound annual growth rate (CAGR) is estimated at 1.1 percent, IDC argues.

Global Regional Services 2017 Revenue 2018-2022 (revenues in $US billions)
Global Region	2017 Revenue	CAGR 2018-2022
Americas	$632	0.2%
Asia/Pacific	$537	1.9%
EMEA	$493	1.2%
Grand Total	$1,662	1.1%
source: IDC

How Soon Will Global Mobile Industry Reach Revenue Peak?

How soon will the global mobile industry reach revenue saturation? As early as 2021, according to Strategy Analytics. So from today’s vantage point, the mobile industry has three years left to grow. After that it reaches a plateau and then likely begins to decline.

In fact, the firm says, mobile service revenue will peak in 2021 at US$881 billion, just three percent above the level forecast for 2018.

source: GSMA

It might not seem obvious that every telecom service has a product life cycle, that is the case. Ignoring for the moment the overall adoption of mobile services, each network platform itself has a life cycle.

From 2G to 5G, the time from launch to peak takes between six to eight years, while the time from peak to end of life takes between seven to nine years.

Once every human that wants to use mobile services already is a customer, where does growth come from? For a while, mobile service providers in developing markets can hope to grow the amount of mobile internet access they sell.

In developing markets, even that revenue source is reaching a peak. The somewhat-obvious conclusion is that new revenue sources--beyond “humans using smartphones, tablets and PCs” will have to be found. That is why the internet of things is viewed as so important.

source: Chetan Sharma

Even as global mobile subscriptions increase from about 7.7 billion in early 2018 to perhaps nine billion by 2023, growing about 17 percent, mobile service revenues will rise about three percent over the same time period, according to Strategy Analytics.

source: Statista

User-linked mobile 5G connections will grow from 5 million in 2019 to 577 million in 2023 (excluding fixed wireless applications and industrial IOT). These will account for 10 percent of connectivity revenue in 2023.

But 5G will not “save” the industry’s business model, as most of the 5G revenue will simply cannibalize declining usage of 2G, 3G and 4G services.

source: Strategy Analytics

Mobile Has Enabled More than a Half Billion People to Use Financial Services and Banking

Financial inclusion is among the better examples of how mobile phones are producing positive outcomes in areas other than simple communications.

Some 66 percent of people globally without a bank account do have a mobile phone. In India and Mexico more than 50 percent of the unbanked have a mobile phone; in China 82 percent do.

That represents about 1.1 billion people who can, in principle, use a mobile phone to conduct banking and financial transactions.

Thanks to mobile banking, 69 percent of adults now have an account, up from 62 percent in 2014 and 51 percent in 2011.

In high-income economies 94 percent of adults have an account; in developing economies 63 percent do.

source: World Bank

The Global Findex database reports that 515 million adults worldwide opened an account at a financial institution or through a mobile money provider between 2014 and 2017.

In Sub-Saharan Africa, 21 percent of adults now have a mobile money account, nearly twice the share in 2014, and easily the highest of any region in the world.

source: World Bank

Globally, 52 percent of adults have sent or received digital payments in the past year, up from 42 percent in 2014, the World Bank reports.

The share of adults with a mobile money account has reached about 20 percent or more in Bangladesh, the Islamic Republic of Iran, Mongolia, and Paraguay.

Globally, about 1.7 billion adults remain unbanked — without an account at a financial institution or through a mobile money provider.

Virtually all these unbanked adults live in the developing world. Indeed, nearly half live in just seven developing economies: Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan. Some 56 percent of all unbanked adults are women.

"Best Effort Only" Was Never Part of the NGN Vision

Aside from the business advantages opponents in the network neutrality debates may perceive, there also are historic reasons why telecom interests want the ability to provide quality of service features.

Aside from industry culture, founded and built on the notion of “five nines” availability (uptime of 99.999 percent), QoS is, by definition, part of the global industry’s vision of the “next generation network.”

According to the International Telecommunications Union, “a Next Generation Network (NGN) is a packet-based network able to provide services including Telecommunication Services and able to make use of multiple broadband, QoS-enabled transport technologies and in which service-related functions are independent from underlying transport-related technologies.”

Note the key phrase “QoS-enabled.” The ability to provide guaranteed performance is, and has been, a key requirement for telco networks, including the present generation of networks.

You might say that telcos still have the ability to apply QoS to their own managed service (voice, messaging, video entertainment). That was true in an analog environment. It is not so clear that remains true in an IP environment, however. \

Service provider branded voice might feature QoS (Voice over LTE and non-IP digital voice,  for example). But any use of voice over IP or voice over Wi-Fi is not going to have such quality protections.

And as telcos move to supply entertainment video on an on-demand, internet-delivered basis, no QoS is allowable when strong versions of network neutrality prevail. That primarily refers to rules that bar any consumer service provider from applying QoS mechanisms, forcing all packets to be delivered “best effort.”

Again, the point is simply that the global vision for an NGN has been a network that is packet based, QoS enabled and which separates transport from apps.

Without QoS, telecom interests are always going to believe the vision is incomplete. Of course, for the better part of a decade, strategists debated the merits of ATM and IP as the foundation of the coming future network. ATM, by definition, it was argued, supported QoS, while IP was, also by definition, “best effort.”

Eventually, business model issues won the day: ATM interfaces were simply too expensive, and too complex, compared to the cost and simplicity of an IP interface. But proponents tried everything, including encapsulating IP over an ATM infrastructure, to try and keep ATM alive.

source: Iceland Telecom

Will NFV Eventually Enable Third Party Competition?

Network functions virtualization (NFV) is a major way network operators can create new capabilities while lowering cost. In that sense, NFV is a tool used by network owners.

But NFV also could be a way for third parties to federate multiple networks. In some cases, that could essentially allow entities to create their own virtual networks out of capacity sourced from multiple physical networks.

Source: Nokia Bell Labs

If you think about it, even without using NFV, Google Fi combines access assets of Sprint, T-Mobile US and any local Wi-Fi as the foundation of its mobile phone service.

Google Fi already federates Wi-Fi, Sprint network and T-Mobile US network access assets in support of its mobile phone service.

Ultimately, what matters is whether the additional value of federating assets is high enough to outweigh the costs of leasing access on the underlying mobile networks, in relation to the business value contributed by the actual phone service.

It is commonplace to hear arguments that owner’s economics eventually become necessary for any leading mobile service provider. Whether or not that is true for all future leading mobile providers is an open question.

So far, virtualization arguably has posed a threat mostly to suppliers of network infrastructure systems, software and hardware, as virtualization allows service providers to avoid buying more-expensive branded gear and rely instead on open source and white box solutions, while also reducing the amount of intelligent network elements scattered around the network.

By separating the data plane from the control plane, networks can centralize control functions while shifting to dumber appliances in the field, reducing overall cost.

But we should eventually see something possibly unexpected, when many major networks are virtualized, and that is the ability of any entity to construct a big virtualized and custom network of its own.

While it is true that any such effort would not have owner’s economics, that might not be so important for an entity with a different business model, not reliant on access revenues, but for which the ability to integrate access with the other business functions creates more total value.

In the past, large networks with scale have found ownership more affordable than renting. In the future, that could change, but possibly mostly for third parties with business models based on content, transactions, advertising or app and service products beyond network access revenue.

So perhaps NFV, though a tool to increase agility and reduce cost for any single service provider, might also serve in the future as a way for third parties to create communication services in a different way, much as IP messaging, video communications and voice are features of apps that create revenue other ways.

Australian Customers Buying More 50-Mbps Service; 63% Buy at Speeds of 25 Mbps or Less

Internet access customers in Australia are starting to buy faster-speed plans  offered by retailers of National Broadband Network services. In the most-recent quarter, 26 percent of consumers were buying 50-Mbps plans, up from 4.6 percent in December 2017, the NBN says.

About 29 percent of customers buy service at 12 Mbps, while 34 percent buy service at 25 Mbps, the Australian Competition and Consumer Commission says.

Some 11 percent buy service at 100 Mbps, with negligible adoption of services at 250 Mbps, 500 Mbps or 1,000 Mbps.

source: ACCC

As almost always is the case, lower prices have helped. In December 2017, NBN offered a temporary credit to retailers for acquiring 50 percent more Connectivity Virtual Circuit (CVC) per user and reducing the price of the Access Virtual Circuit (AVC) for 50-Mbps services.

Retailers in turn passed some of the savings on to their customers in the form of lower prices.

Average CVC per user continues to increase, rising from 1.52Mbps in December 2017 to 1.55Mbps in March 2018. This follows a 38 per cent increase in CVC per user in the quarter to December 2017.

Over time, consumers always have shifted to higher-speed tiers, in part because internet service providers have kept increasing speeds, in some cases virtually at rates consistent with Moore’s Law. But price reductions seem always to help.