Is "Techco" a Marketing Platform or Something Else?

It never is completely clear why telco executives really mean in touting the transformation from telco to “techco.”

Many telcos--or those who advise and sell to them--say telcos need to become techcos. So what does that mean?

At least as outlined by Mark Newman, Technotree chief analyst and Dean Ramsay, principal analyst, there are two key implications: a culture shift and a business model.

The former is more subjective: telco organizations need to operate “digitally.” The latter is harder: can telcos really change their business models; the ways they earn revenue; their customers and value propositions?

source: TM Forum

It might be easier to describe the desired cultural or technology changes.  Digital touchpoints; higher research and development spending; use of native cloud computing; a developer mindset and data-driven product development or use of use artificial intelligence all might be said to be part of becoming a “techco.”

Changing the business model is the more-problematic objective. 

As helpful as it should be to adapt to native cloud, developer-friendly applications and networks, use data effectively or boost research or development, none of those attributes or activities necessarily changes the business model. 

If “becoming a techco” means lower operating costs; lower capital investment; faster product development or happier customers, that is a good thing, to be sure. Such changes can help ensure that a business or industry is sustainable. 

The change to “techco” does not necessarily boost the equity valuation of a “telco,” however. To accomplish that, a “telco” would have to structurally boost its revenue growth rates to gain a higher valuation; become a supplier of products with a higher price-to-earnings profile, higher profit margins or business moats. 

What would be more relevant, then, is the ability of the “change from telco to techco” to serve new types of customers; create new and different revenue models; develop higher-value roles and products or add new roles  “telcos” can perform in the value chain or ecosystem. 

To be sure, if “becoming a techco” has other intermediate value, such as boosting revenues and profits while reducing costs and speeding new product creation, the process would still have value. 

It would perhaps be the business model equivalent of the transition from analog to digital processes overall. That is important, but does not transform a telco into something else, which is what all the verbiage about “techco” implies. 

It is too early to assess whether “techco” is simply a change in marketing hype  or something more profound.

Why Telcos are Dinosaurs, and Must Be

Bureaucracy has few fans. “Bureaucracy saps initiative, inhibits risk taking, and crushes creativity. It’s a tax on human achievement,” say Gary Hamel and Michele Zanini of the Management Lab. 

But it might also be the “necessary outcome of complex businesses operating in complex international and regulatory environments.” 

There are other ways to spin it. Bureaucracy might be defined as a form of organization defined by complexity, division of labor, permanence, professional management, hierarchical coordination and control, strict chain of command, and legal authority.

It is rules based, with formal leadership based on roles. And yes, it is hierarchical. In practice, it can stifle innovation and initiative. 

But is it a necessary evil? Some would say so. Would you prefer a large organization run only informally, without bureaucracy? Do you believe any truly large organization can be run collegially? 

Sure, impersonal rules are an issue. Any rule can hinder rather than help, at least occasionally. Rules introduce inflexibility. 

But would you rather work in a very-large organization where hiring, promotion and benefits are doled out based on ties of kinship, friendship, or patrimonial or charismatic authority? Would you be happier if decisions were made without regard to professional competence or scope of decision-making authority?

Rules-based governance is designed to eliminate those sorts of processes. The rules inhibit, but they also protect. They tend to enforce equal treatment and some degree of perceived fairness. Bureaucracy tends to reduce capricious and random decisions and actions. 

Beyond all that, scale requires bureaucracy, with all its rules and challenges. That is why telcos always are criticized for being slow-moving, bureaucratic and cumbersome. To provide services and create products sold at massive scale, rules and uniform processes are necessary. 

To operate at high scale, repeatable processes and systems (rules based) are required.  Which is not to say it is easy. Product catalogs, especially for enterprise services, are complex and often customized. Without “bureaucratic” organization, it would be even worse. 

It is all well and good to argue that telcos and connectivity providers, no less than other organizations, need to learn to move faster, to develop the ability to learn and change fairly fast. 

But there always will be limits. To operate at scale, repeatable processes and rules are necessary. Managing complex systems necessarily requires more effort and time to mesh all the various operations on a consistent basis. 

And that means change can be complex as well. Moving fast in one area will always run into problems as other elements of the delivery chain are affected, and must also adapt. 

The point is that, like it or not, complex systems cannot move or change as fast as simple systems. As unpleasant as bureaucracy might be, it might well be unavoidable for organizations that operate at scale with many complicated systems that must all synchronize. 

Call them dinosaurs if you like. So long as they operate at scale, with high complexity, telcos will always move slow. They have to. “Google speed” is not possible, and if tried would likely break operations and cause chaos. 

Bureaucracy and caution can be maddening. They also can be necessary. Like it or not, entied based on physical infrastructure cannot change or move as fast as any organization producing “virtual” products. 

To be sure, any large organization will necessarily be run on bureaucratic principles. Scale requires it. Communications, in addition, is an industrial process. Creating and sustaining the capability requires lots of coordination. 

Does anybody believe a factory can move and change as fast as a big software company? Yes, telcos are “dinosaurs,” big and slow-moving. Bigness and complexity compel such behavior. 

If you do not believe that, try starting a new communications company. You quickly will discover why the need for repeatable processes leads to standardization and rules-based behavior. It will be bureaucratic, and you will not like it. But the alternatives are worse. 

EC Digital Services Act is Intended to Curb Hyperscaler Power: Will it?

The European Commission’s Digital Markets Act and Digital Services Act are intended to create a safer digital space and promote a level playing field for competitors. 

https://digital-strategy.ec.europa.eu/en/policies/digital-services-act-package 

As always, there are issues, some expected, some that will likely be unexpected. Implementation might be more complicated than expected, for example. “Intermediary services” are covered, including internet access providers, domain name registrars, hosting services, online platforms and marketplaces and “Very large online platforms.

Of course, in reality, some parts of the ecosystem will be affected more than others. At its core, the DSA is a regulatory framework that will impose rules around how platforms moderate content, advertise and use algorithmic processes.

Not many ISPs, hosting providers or some online platforms or marketplaces will have issues with content moderation, advertising and algorithms. Hyperscalers such as Facebook and Google are really the target. 

Though “safety” often is said to be among the desired outcomes, the DSA also represents an effort to restrain the market power of the hyperscalers. 

We shall see how well it works. Historically, big firms are better able to manage the costs of compliance than small firms. So, ironically, it often is small firms that suffer more from compliance costs than dominant firms that are the target of new regulations. 

Ironically, the new regulations should actually reduce effective competition and innovation because smaller firms will not be able to handle the compliance costs. Regulation increases the cost of doing business. 

So, ironically, and despite its intentions, the DSA is likely to be ineffective at restraining the market power of hyperscalers. If and when markets change, it is likely to be because new needs and suppliers arise that favor new firms that eventually displace the present leaders. 

In computing, for example, the leaders of any particular computing era do not retain that leadership in the next era. If you recall the market leaders in prior eras, leadership changed when the eras changed. 

source: Morgan Stanley

If IBM led during the mainframe era, DEC led in the minicomputer era, while Microsoft and Intel led in the PC era. Leadership arguably shifted to applications in the early internet era (Facebook, Google, Amazon). In the mobility era we saw more of a shift to social media. In the next era leadership will shift again. 

source: Deloitte  

Technology might not be destiny, but market leadership reflects such changes. Leaders in a mainframe or minicomputer era did not lead when the “desktop computing” era developed. 

Those leaders might not be the same leaders in the mobility era, and might change again in the coming era (which we do not uniformly agree on, in terms of characteristics or terminology). 

At least so far, consumer applications have defined leadership in the internet era (desktop and mobile). It is not so clear that this remains the case in the next one or two eras, when enterprise apps could lead, and produce a next generation of market leaders.

Personalization and Privacy are Tradeoffs

Personsalization necessarily involves giving up some privacy. So lots of personalization means giving up lots of privacy. 

Lowest Common Denominator Communications Sometimes are Necessary

Not every organization can rely on newer unified communications tools such as Slack or Microsoft Teams, especially organizations that are loosely-coupled and require frequent and essential communications across national boundaries and firms. 

In such instances, as odd as it might seem, whatever platforms are used for internal communications, external communications might have to default to the lowest common denominator, as participants cannot be sure every contact uses a particular framework. 

Other entities might not be able to rely as much as “chat” and “messaging” as there are legal requirements about archiving communications. 

source: SWZD 

Organizations that have extensive, routine and mission-critical communication needs across national boundaries might have to rely on email as the lowest common denominator message format, especially when the communications are heavily inter-domain or inter-firm.

TIM Structural Separation Will Not Change Revenue Much, in the Near Term

TIM’s plan for structural separation of its wholesale network and retail services businesses is not expected to dramatically affect revenues or earnings of either the new wholesale network services unit or the retail company. 

TIM will not be the only wholesale platform, either, as Fastweb will continue to offer a facilities-based alternative. 

Globally, the deal is part of a trend of merger, acquisition or restructuring activity led by in-market consolidation and a shift of infrastructure ownership towards institutional investment. 

source: Bain 

As it turns out, not only are the functions of wholesale network or infrastructure provider and retail services provider separable, those roles often appeal to different sets of investors. 

Can the Leopard Change Its Spots?

Competition has changed just about everything in the connectivity business except that connectivity services drive the revenue model. And that conditions most of everything else about the business: growth rates; profitability; valuation of public firms; even ability to retain and attract human capital. 

But after nearly 40 years (in lead markets) of life after monopoly regulation, some things still have not changed. Despite the best efforts of leaders and firms to change cultures; tempos; revenue models and sources; roles in the ecosystem and value in the eyes of customers, connectivity remains utility-like.

There is no other way to explain valuation metrics, growth rates, profits or even the interest of institutional investors in owning access networks. To the extent that fixed access networks serving mass markets have value, it is as “alternative assets” producing steady or at least predictable cash flow, with at least some elements of a business moat that keeps competitors away and non-correlated with stocks and bonds. 

That is often why assets in wholesale-oriented markets, where a single network owner provides services to any and all retail providers, are preferred to ownership of the retail providers. 

The retail end of the business often has limited moats. In Brazil, Oi, the former incumbent, has about 23 percent to 30 percent take rates of homes passed by fiber. Some of that might be attributed to demand side issues, but over the long term, results will be dictated by the ability of competitors to use a single wholesale network, rather than building their own networks. 

source: Oi 

Looking at market shares of fixed network internet access, Oi has about 13 percent share, trailing Claro and Vivo. 

source: Anatel 

In the total market, including fixed and mobile services, Oi has about 23 percent share. In part, facilities-based competition shapes results. Traditionally, mobile competition has been facilities-based, and mobility drives overall revenue. 

In most fixed network settings, only one network exists, and competition largely comes from wholesale mechanisms. In relatively few markets is fixed network competition substantially based on diverse facilities ownership. 

source: Researchgate 

Owners’ economics are the upside; stranded assets the downside in such markets. 

Far better, institutional investors believe, to own the scarce access networks rather than the retail service providers. 

That leaves retail service providers with difficult challenges. As profit margins in the core business shrink while capital investment demands rise, there is only so much any competent management team can do to optimize the core business by cutting costs, modernizing processes and platforms and improving customer experience. 

source: AD Little 

Historically, growth has come from acquisitions and mergers. Product sets have changed, but growth in new areas basically has only offset losses in legacy lines of business. Mobility now is the global driver of revenue, for example, not fixed network services. Within the fixed network segment, home broadband now drives revenue, not voice. 

And leaders still search for ways to create growth opportunities in adjacent parts of the ecosystem, as difficult a task as that has proven to be, over time. As one veteran of the connectivity business quipped recently after bolting for the data center business, “it’s nice to be in a business where prices do not continually drop.”

It remains unclear if there is one common model for the “telco of the future,” beyond the supply of retail connectivity services to businesses and consumers. Some will likely be more utility-like while others are more diversified in additional ecosystem roles. 

Some will be retailers; others more wholesalers. But the anchor of “connectivity services” will keep most from fundamental changes. That role cannot be avoided without leaving the business altogether. 

Despite all the “evolve and change” advice of four decades, it still appears the leopard cannot change its spots.