Platform, Techco or Digital Services Provider Vision is Not Often Matched By Reality

A recurring discussion over the past couple of decades has been held over the question of whether telcos could become platforms. Perhaps the latest version of this debate asks the question of whether telcos can become techcos or digital services providers. 

None of these concepts are easy to explain, or commonly understood. Some might argue the “digital services provider” evolution means offering services such as internet of things, connected cars, smart cities or smart homes. Presumably the concept is that a connectivity provider supplies the apps that provide the value. 

So a connectivity provider acts as a home security firm, an industrial IoT system supplier, a connected car app, traffic management system or energy management firm. In other words, the connectivity provider is the branded developer and provider of the application, not just the connectivity provider supporting any app or use case. 

It is no easier to explain--and have people agree upon--what a “platform” or “techco” evolution means. 

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. 

We face the same sorts of problems when trying to explain what a “platform” looks like. 

Korea Telecom wants to become a digital platform company, not a telco. That ambition arguably is shared somewhat widely among tier-one connectivity service providers globally and has been a strategy recommended in some form by most bigger consulting companies. 

Simply, becoming a platform company changes the business model from direct supplier of products to a role as an ecosystem organizer or marketplace. That arguably is an aspirational goal more than anything else. 

What that aspiration means in practice is that KT as a digico “will shift our focus from the telecommunications sector, where growth is stalled due to government regulations, to artificial intelligence (AI), big data, and cloud computing businesses to become the nation's number-one platform operator in the B2B market," said KT CEO Koo Hyun-mo.

So there are qualifications. KT, if successful, would become a platform in the business market, not the consumer market. It would explicitly aim to become the center and organizer of an ecosystem for artificial intelligence, big data analytics and cloud computing. 

Purists and researchers will likely argue about whether all of that actually adds up to KT becoming a platform, in the sense that Amazon, eBay, Alibaba, ridesharing or lodging apps  might be considered platforms. 

A platform, definitionally, makes its money putting buyers and sellers and ecosystem participants together. In computing, a platform is any combination of hardware and software used as a foundation upon which applications, services, processes, or other technologies are built, hosted or run.

Operating systems are platforms, allowing software and applications to be run. Devices are platforms. Cloud computing might be said to be a platform, as systems are said to be platforms. 

Standards likely are thought of as platforms by some. 

In other cases components such as central processing units, physical or software interfaces (Ethernet, Wi-Fi, 5G, application programming interfaces) are referred to as platforms. Browsers might be termed platforms by some. Social media apps are seen as platforms as well. 

The platform business model requires creation of a marketplace or exchange that connects different participants: users with suppliers; sellers with buyers. A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. 

A platform orchestrates interactions and value. In fact, a platform’s value may derive in large part from the actions and features provided by a host of ecosystem participants. Facebook’s content is created by user members. Amazon’s customer reviews are a source of value for e-tailing buyers. 

Consumers and producers can swap roles on a platform. Users can ride with Uber today and drive for it tomorrow; travelers can stay with AirBNB one night and serve as hosts for other customers the next. Customers of pipe businesses--an airline, router or phone suppliers, grocery stores-- cannot do so. 

So KT can increase the percentage of revenue it earns from supplying digital, computing, application or non-connectivity services without becoming a platform. As a practical matter, that is what most telco executives have in mind when talking about becoming platforms. 

For KT, even limiting its ambitions to generating more digital and non-connectivity revenue does not make it a platform. That would still be an important, valuable and value-sustaining move. But KT has a very long ways to go, even in its stated objectives of becoming a B2B platform.

Total KT revenue is about 24 trillion won. All B2B revenues at the end of 2020 were about 2.78 trillion won (about 11.5 percent). Information technology services were about 1 trillion won, or about four percent of total revenues. AI and other digital services were about 0.5 trillion won, or about two percent of total revenues. 

It might be a long time between non-connectivity revenues in the B2B part of its business are as much as half of total revenues. And those revenues might not represent a platform transformation of the business model.

KT could win significantly without ever becoming a platform. And some might argue few telcos can ever actually hope to become platforms in the classic sense. Perhaps the more important goal is simply to reduce reliance on traditional connectivity revenues.

Unfortunately, what platform, techco or digital services provider actually means in practice falls far short of the grander visions.

Google Invests in Airtel: Why?

Google’s new $700 million investment in Airtel, with up to $300 million to follow over five years, is part of an initiative by Airtel to reduce the cost of Android devices in the Indian market. The deal includes a 1.2 percent ownership stake in Airtel. 

But that is not the first investment Google has taken in an India mobile operator Google in 2020 invested $4.5 billion for a 7.73 percent stake in Reliance Jio Platforms. 

Separately, Facebook invested $5.7 billion in Reliance Jio Platforms in 2020. 

In part, such investments can be driven by multiple different values. Securing market entry in a key new growth area is one reason for such hyperscale app provider investments in mobile service providers. Protection from overzealous regulation is another possible benefit. 

source: Mint 

Seizing early market share leadership and user base when there are rivals is another obvious value. To the extent that hyperscalers benefit from ingesting more data, that is another value. 

Such investments in mobile and other connectivity firms are not primarily driven by the desire to replace connectivity providers in the ecosystem. 

On the other hand, it is  hard to avoid noting that two hyperscale app providers are owners of stakes in India’s largest mobile services provider, while Google now becomes a stakeholder in India’s second-largest mobile operator. 

In other cases Google has worked with mobile operators to seek ways to reduce infrastructure costs, as the Telecom Infra Project is doing. TIP seeks to  “accelerate the development and deployment of open, disaggregated, and standards-based technology solutions” that deliver high-quality connectivity. 

As a clear byproduct, TIP expects costs of infrastructure to drop. 

Keep in mind the firm and ecosystem role advantages. Looking only at the internet of things value chain, suppliers of platforms and applications depend on the connectivity function to create their business models. In other words, Facebook and Google benefit from universal, high-quality broadband. Their businesses actually require that affordable, high-quality internet access be as widespread as possible, everywhere in the world. 

source: IoT Global Network 

Instead of a value chain, think of the concept of layers as incorporated in the Open Systems Interconnection model or TCP/IP. By design, applications can run independently of the ownership of networks. The modular design means different suppliers, vendors or entities can operate at each layer, independently of ownership. 

source: Medium 

Unlike the older “closed” model of telecom, where every app on a network was either directly owned by the infrastructure owner or operated with its permission, the layers model separates each layer. 

That creates the business model we call “over the top,” where any lawful applications can be used by any person or machine without the permission of the internet access provider. 

But layers also dictate possible business models. OTT exists precisely because any lawful app can be used by any user on any network. The bundled or closed approach to creating and using applications or platforms is replaced by an open and disaggregated model.

That has profound implications. Hyperscale app or platform suppliers benefit from universal, affordable, quality internet access. Anything that increases the ability to access the internet (such as home broadband, Wi-Fi, mobility networks, satellite and fixed wireless networks) is the foundation for app provider revenue models.  

Hence their interest in ensuring that internet access is easier to deploy, everywhere, at lower costs, since lower costs mean “everyone” can use the internet. 

Conversely, the same drivers operate almost in the opposite way for connectivity providers, in some ways. The business objective of driving down internet access costs obviously limits connectivity provider gross revenues and profit margins. 

For a hyperscale or any other app or platform provider, internet access is a cost of doing business. So there is an incentive to promote lower input costs. For a connectivity provider, the access is the business, so there is an incentive to raise prices when possible. 

On the other hand, TIP, for example, aims to help lower infrastructure costs by creating open approaches to infrastructure that lead to lower costs, as functions are disaggregated and designed according to open standards any supplier can build upon. 

Investing in important, fast-growing access providers sometimes is strategic when a big new market is opening and early scale is desired. But there are other potential benefits, such as deflecting regulatory opposition or gaining mobile operator marketing push. 

That explains why Facebook and Google made their investments.

But it also is worth noting that hyperscale application and platform providers now also operate as forces to reduce infrastructure costs in ways that are helpful to connectivity providers. 

In one sense, among the changes is a shift from supplier-driven technology development to connectivity-provider led development. 

We may see other forms of connectivity role encroachment over time. At least some of that activity is a logical drive by an ecosystem participant to lower the costs of an essential business input, while increasing the revenue opportunity it can chase.

As Important as Edge Computing, IoT and Security Are, ARPU Increases and Account Growth Will Drive Service Provider Business Revenue

Most “new source of revenue” growth opportunities available to fixed and mobile service providers are incrementally important. Very few are expected to produce huge amounts of revenue in the near term.

On the other hand, most of the revenue volume will come from tweaks to the existing revenue model (consumer phone service). Perhaps surprisingly, 5G fixed wireless could be one of the biggest near-term contributors to new service revenue. 

Deloitte Global predicts that the number of FWA connections will grow from about 60 million in 2020 to roughly 88 million in 2022, with 5G FWA representing almost seven percent of the total. Most of the installed base consists of 4G connections and it will take some time for 5G to overtake 4G. 

By 2026 there could be 160 million FWA accounts in service. At an average monthly cost of $20, that generates perhaps $38.4 billion in service revenue. At $40 per month, FWA generates perhaps $76.8 billion in service revenue. 

The total fixed network broadband installed base is expected to be about 1.75 billion accounts in 2027. So FWA will represent about nine percent of total fixed network broadband accounts. 

source: Ericsson 

Compare that with projected revenues from other more-touted services such as internet of things, edge computing and security. Those three services will in 2024 amount to about 12.6 percent of total business service revenue of $400 billion globally. 

So security services, IoT and edge computing combined will amount to about $50 billion in annual revenues by 2024. If cumulative growth rate for those services is 17.9 percent, then 2026 revenue might be about $70 billion globally. 

source: IN Forum 

If global telecom service revenue is about $1.6 trillion in 2025, and consumer revenues are about 65 percent of total service provider revenues, then business revenues could hit $560 billion in about 2025 or 2026. 

If you assume consumer services in 2025 or so will be about 60 percent of total revenues, then business revenues could be as high as $640 million. 

How much of that could come from new sources such as edge computing, security and IoT is the issue. If those new sources are 12.6 percent of total business revenues, then existing business services will represent 87 percent of total revenue, or anywhere from $330 billion up to $556 billion.

In other words, improving revenue from existing services still drives most of the possible business revenue improvement. 

It is possible that fixed wireless access is a bigger business than edge computing, security and IoT in 2026. At the low end of the FWA estimates, fixed wireless might still be bigger than any of the other new services individually. 

The point is that we tend to overlook the new revenue impact of FWA, focusing on the more-touted areas of security, IoT or edge computing. But FWA is possibly going  to be a bigger revenue contributor. 

While fixed wireless will grow about 19 percent per year to 2026,  5G FWA connections will grow at an annual cumulative growth rate of nearly 88 percent, over the same period, Deloitte Global says. 

source: Deloitte Global 

source: IN Forum 

source: IN Forum 

source: IN Forum 

source: IN Forum

Can KT Become a Platform? Can Any Telco Do So?

Korea Telecom wants to become a digital platform company, not a telco. That ambition arguably is shared somewhat widely among tier-one connectivity service providers globally and has been a strategy recommended in some form by most bigger consulting companies. 

Simply, becoming a platform company changes the business model from direct supplier of products to a role as an ecosystem organizer or marketplace. That arguably is an aspirational goal more than anything else. 

What that aspiration means in practice is that KT as a digico “will shift our focus from the telecommunications sector, where growth is stalled due to government regulations, to artificial intelligence (AI), big data, and cloud computing businesses to become the nation's number-one platform operator in the B2B market," said KT CEO Koo Hyun-mo.

So there are qualifications. KT, if successful, would become a platform in the business market, not the consumer market. It would explicitly aim to become the center and organizer of an ecosystem for artificial intelligence, big data analytics and cloud computing. 

Purists and researchers will likely argue about whether all of that actually adds up to KT becoming a platform, in the sense that Amazon, eBay, Alibaba, ridesharing or lodging apps  might be considered platforms. 

A platform, definitionally, makes its money putting buyers and sellers and ecosystem participants together. In computing, a platform is any combination of hardware and software used as a foundation upon which applications, services, processes, or other technologies are built, hosted or run.

Operating systems are platforms, allowing software and applications to be run. Devices are platforms. Cloud computing might be said to be a platform, as systems are said to be platforms. 

Standards likely are thought of as platforms by some. 

In other cases components such as central processing units, physical or software interfaces (Ethernet, Wi-Fi, 5G, application programming interfaces) are referred to as platforms. Browsers might be termed platforms by some. Social media apps are seen as platforms as well. 

The platform business model requires creation of a marketplace or exchange that connects different participants: users with suppliers; sellers with buyers. A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. 

A platform orchestrates interactions and value. In fact, a platform’s value may derive in large part from the actions and features provided by a host of ecosystem participants. Facebook’s content is created by user members. Amazon’s customer reviews are a source of value for e-tailing buyers. 

Consumers and producers can swap roles on a platform. Users can ride with Uber today and drive for it tomorrow; travelers can stay with AirBNB one night and serve as hosts for other customers the next. Customers of pipe businesses--an airline, router or phone suppliers, grocery stores-- cannot do so. 

So KT can increase the percentage of revenue it earns from supplying digital, computing, application or non-connectivity services without becoming a platform. As a practical matter, that is what most telco executives have in mind when talking about becoming platforms. 

For KT, even limiting its ambitions to generating more digital and non-connectivity revenue does not make it a platform. That would still be an important, valuable and value-sustaining move. But KT has a very long ways to go, even in its stated objectives of becoming a B2B platform.

Total KT revenue is about 24 trillion won. All B2B revenues at the end of 2020 were about 2.78 trillion won (about 11.5 percent). Information technology services were about 1 trillion won, or about four percent of total revenues. AI and other digital services were about 0.5 trillion won, or about two percent of total revenues. 

It might be a long time between non-connectivity revenues in the B2B part of its business are as much as half of total revenues. And those revenues might not represent a platform transformation of the business model.

KT could win significantly without ever becoming a platform. And some might argue few telcos can ever actually hope to become platforms in the classic sense. Perhaps the more important goal is simply to reduce reliance on traditional connectivity revenues.

Consumer Mobility Will Not be Tomorrow's Revenue Driver

As hard as it might be to envision, mobile services that now drive revenue growth in the global telecom business will not always do so. Something--and we cannot say for certain what it is--will emerge as the revenue leader within a decade. For the past 30 years, that replacement process has happened with regularity.

Voice services once represented as much as 82 percent of total communications service provider revenues, as recently as 2004, according to International Telecommunications Union data. 

Mobile represented about half of voice revenues by that point. In 1990, mobile voice was in single digits as a percentage of total service provider revenue. 

By 2021, fixed network voice will represent only about 7.7 percent of total global telecom revenues, compared to mobile subscriptions at 59 percent of total, according to researchers at Ovum. 

The point is that connectivity provider service revenue sources have changed fairly fast since 2000, illustrating the strategic importance of developing new revenue sources in the connectivity business. 

Some 30 years ago, about 1990, mobile service accounts were in single digits, globally, as a percentage of total revenue. About 20 years ago--around 2000--mobile service revenues had leaped to more than 21 percent of total. 

By 2010, mobile service revenue had grown to a majority of total revenue, and also was providing as much as 80 percent of the revenue growth. 

About 2000, voice services represented as much as 89 percent of total global service provider revenues. By 2010, the revenue driver had changed to mobility services, with growing contributions from internet access. 

source: ITU 

According to researchers at IDATE, mobility represented about 80 percent of revenue growth, with 64 billion Euros generated by mobile services; 15.6 billion by all fixed network services. 

source: Idate 

Before 2020, mobile services revenue had become the revenue driver in every market regionally. 

source: Idate 

But mobility itself will be challenged as subscriptions and use of mobile internet access reach saturation. 

Those patterns illustrate a principle: telecom service providers have had to replace about half of total existing revenue every decade, since about 1990 at the very least. 

As a rule, I expect that any given communications service provider will have to replace half of current revenue about every decade. Among the best examples (because we have the data) is the change in composition of U.S. telecom revenues between 1997 and 2007.

Back in 1997, nearly half of total revenue was earned from “toll” services (long distance, including international and domestic long distance voice. Profits also were disproportionately driven by long distance services.

A decade later, toll service had dropped to 18 percent of total revenue, while mobile services had risen to about half of total revenues, up from about 16 percent of total.

In addition to mobility revenues displacing long distance, internet access began to build around 2000. Between 2000 and 2010, internet access had grown to represent 24 percent of total revenues.  

Voice is an essential feature of a mobile account, of course. But voice usage--as such--does not drive revenue. The reason is the low--and declining--prices of carrier voice services and substitution by over-the-top messaging. 

By 2021, fixed network voice will represent only about 7.7 percent of total global telecom revenues, according to researchers at Ovum. 

Fixed network broadband will represent 18 percent of total revenues, while subscription TV represents about 15 percent of total revenues.

Travel Restriction Impact on Telecom Revenue

Economic shutdowns and travel restrictions have been widely used during the Covid-19 pandemic to control the rate of infection. Sometimes it helps; sometimes it does not. Health policies should, when possible, disrupt economic activity as little as possible, a team of researchers says.

Though primarily affected travel-related industries, such travel bans also negatively affect mobile industry revenues by reducing the amount of roaming revenue. People who are not traveling also are not using their phones out of their home regions. Early March 2020 forecasts were that mobile operators globally could lose $25 billion in roaming revenue. 

In September 2020, research from roaming experts Kaleido Intelligence suggested a 53 percent fall in retail roaming revenues would happen in 2020. According to GSMA, that could represent a revenue hit of as much as four percent to eight percent. 

Combined with other revenue deceleration from reduced new customer acquisitions and upgrades, TBR estimates average revenue growth could dip about six percent in the first half of 2020 alone. Some estimates suggest revenue losses could be far greater, approaching 20 percent in some cases.  

source: TBR 

The issue, some might say, is striking a balance between public health and economic health, especially unemployment and recession, with economic contraction between five percent and eight percent in 2020, compared to 2019. 

The expected 2021 rate of recovery might also depend on how rapidly consumers are willing to resume “normal” life activities. 

Stringent travel restrictions might have little impact on epidemic dynamics except in countries with low Covid-19 incidence and large numbers of arrivals from other countries, or where epidemics are close to tipping points for exponential growth, a team of researchers reports.

“In May, 2020, imported cases are likely to have accounted for a high proportion of total incidence in many countries, contributing more than 10 percent of total incidence in 102 (95 percent credible interval 63–129) of 136 countries when assuming no reduction in travel volumes (ie, with 2019 travel volumes) and in 74 countries (33–114) when assuming estimated 2020 travel volumes. Imported cases in September, 2020, would have accounted for no more than 10 percent of total incidence in 106 (50–140) of 162 countries and less than 1 percent in 21 countries (4–71) when assuming no reductions in travel volumes,” say researchers Timothy Russell, Sam Clifford, W. John Edmunds, Adam J Kucharski and Mark Jit, working on behalf of the Center for the Mathematical Modelling of Infectious Diseases Covid-19 working group and published in the Lancet. 

“Countries should consider local Covid-19 incidence, local epidemic growth, and travel volumes before implementing such restrictions,” they note. “Although such restrictions probably contribute to epidemic control in many countries, in others, imported cases are likely to contribute little to local Covid-19 epidemics.”

As a matter of science, travel bans might or might not have much material impact on rates of new Covid-19 infections. And the benefit has to be weighed against the costs of movement bans on economic performance, as any other public policy should be evaluated, one might argue.