Part 2: Change of Status Quo - How current pressure turns into opportunities

Telecommunication operators - once the digital leaders who brought internet to every household - are now under attack from the new digital frontrunners. Messaging services like WhatsApp, Facebook Messenger or WeChat make the traditional SMS look useless. Also other classical telco services such as voice or TV have shrinking margins due to OTT offerings. But why didn’t telcos respond to this challenge? As identified inpart 1 of this series, it is not only because of the genius entrepreneur in Silicon Valley. The actual problem is inherent in the different style of production that does not allow telco groups to benefit from scope and scale.

In the first article of The Future of Telecommunication Business we focused on the current situation of the telco market and highlighted the need for multinational telco groups to become truly international players. A Detecon Research revealed that size does not matter in the telco industry today. Being a big multinational telco player with numerous independent subsidiaries often even means less profitability. While Over The Top players (OTTs) like Facebook, WhatsApp or Netflix develop services which they sell globally without major adaptation, telco groups develop each service separately on different hardware and software in every country they operate in. (see first article here: Why Size doesn’t matter in the Telco Industry).

Before we will take a look at solutions (part 3) and an approach (part 4) of how to put these into practice, let’s have a look first at the reasons for it. What led to the current market situation? The telco industry stands at a turning point. Change seems necessary to survive. While the industry is under immense pressure from new digital players, this pressure also allows for opportunities to emerge. History shows that the starting point of change is often a combination of pressure, vision and new technological possibilities. In case of the telecommunication industry, it seems that everything is in place.

The pressure is on as the gap between telcos and OTTs is increasing

Telcos worldwide stood by watching their products being substituted by digital champions. Just think about it: How often do you really send a good old fashioned SMS and when do you actually use iMessage, WhatsApp or other messaging services? Are you using the movie streaming service of your telecommunications provider or did you already switch to Netflix or Amazon Prime Video? Do you even possess a land line telephone? Looking into the number of conservative Germany alone we see that land line usage is decreasing for years and mobile usage is starting its drop after year of stagnation while OTT services are on the rise. Let’s face it: In the near future the only thing we want from our operator is a nice, fast and stable internet connection. But why didn’t telcos respond to this challenge?

Compared to Telecom operators OTT players today have a significant structural advantage if it comes to services: They can leverage their size. With a team of 50 engineers WhatsApp develops services and features that are rolled out simultaneously worldwide. As an OTT player they do not need to handle different legacy systems. WhatsApp implements it once, and immediately 1 billion customers will seamlessly benefit from the new feature. That makes them agile and efficient.

A global OTT player serves these 1 billion customers with a single messaging platform using 2 or 3 data centers, while a european telco, such as Deutsche Telekom AG for example, offers a standard SMS service based on a different messaging platform in each country they operate in, using more than 50 data centers to serve about 200 million customers in Europe alone. For other major telecom groups the picture looks similar. Until now, telcos were mainly silent observers of the global production model of OTTs. Any attempts to create cross border synergies failed. There are two main reason for that:

Decreasing Regulatory Challenges push towards Pan-European Market

In contrast to most OTTs, telecommunication companies have to comply with national laws, license obligations and rules. Many services offered are directly regulated in price and scope. Regulation, once set up to protect jobs and customers as well as security and sovereignty, is now an obstacle for cross-country synergies. On top, governments often still have a (veto) say at the former mostly publicly owned telecom operators. The stories of local governments intervening if telecom groups try to consolidate production of selected services like voice are well known in the industry. Reasons are not only the fear of cutting back jobs, but also concerns of national security and data privacy. Autonomy and direct access to the telecommunication services is regarded mandatory by many governments and intelligence services to ensure control in case of crises and supporting law enforcement agencies.

Now the EU commission pursues European Single Market initiatives, putting forward a regulatory framework for electronic communications that comprises a series of rules, which apply throughout the EU member states. The common goal is to establish a cross-national telecommunication market, opening the door for European telecoms to make European offerings. The most prominent example of these initiatives is probably the abolishment of the roaming fees starting on June 15, 2017. Besides the negative impact on the revenues this will create, it will push forward the only thing that is missing so far: A Pan-European telco market with a cross-border production and operation of telecoms.

New Technological possibilities will virtualize the industry

The idea of cross-border production is not new but now the technology needed is available to put the plan into reality. But in order to understand why multinational Telco Group do not produce centrally one has to understand the evolution of these groups. In contrast to the multimarket rollout of OTTs Telco groups have all started as national companies in a single market. Since the worldwide privatization of the telecommunication market their expansion was predominantly characterized through the purchase of an existing foreign Telcos including all their existing infrastructure. A highly complex and heterogeneous landscape has evolved among the groups.

So far, every telco service has been produced on specific hardware components run by a specific software. This resulted in proprietary hardware and software with vendor lock-in effects - meaning the telco is dependent on a single vendor.

On top, every individual telco service is set up as a monolithic piece of hardware and software. The disadvantage of this separation becomes clear when transferring the situation to the consumer world. Imaging of owning and maintaining a dedicated laptop for every application that you use: One to prepare documents, one for presentations, one for emails, etc. This would make working annoyingly complex and slow.

Today, new technologies allow for a standardized hardware where all the intelligence lies in the software providing the functionalities. Telecoms want to use common hardware that is independent from the applications running on top and available as shared resource pool for all applications. This approach is based on the current “softwareization” trend in the industry, better known as “virtualization”.

Vision

Although the telco industry has some structural disadvantages due to strict regulations and a historically grown technology set up that is unfavorable, the current pressure of the OTTs, new governmental initiatives and new technological opportunities allow for a major change in the telecommunication business. The vision for telecom groups are now to be agile and internationally scaled as an OTT but with the strong trust and credibility coming from the national roots. If OTTs cover whole continents from the cloud - why shouldn’t telcos be able to do the same?

How this journey of the telecom production towards softwareization, standardization and international scale can look like, will be the topic of part 3 of this series where we will take a look at solutions to elaborate how new technology allows for cross-border production and what telco groups can do today. The last article (part 4) will look into an approach of how to put the presented solutions into practice.