Knowledge@Detecon Future Telco Profitability in Telecommunications: Seven Levers Securing the Future DETECON Consulting
Knowledge@Detecon Future Telco Profitability in Telecommunications: Seven Levers Securing the Future DETECON Consulting
Copyright by Detecon International GmbH Cologne 2014 www.detecon.com
Knowledge@Detecon Future Telco Content Foreword 7 Challenging Future 01. Network is King! 8 2. Interview: The Capital Market Perspective 26 on Challenges Facing the Telecommunications Industry Modern Network Concepts 03. Future Network Architectures 34 4. Interview: At the Forefront: Network 50 Expansion Oriented to Customers and Needs 5. Virtualization Is Transforming the Telecommunications Industry 56 6. Interview: The Network Must Take Over 72 the Intelligent Management of Data Traffic. Integrated Deployment of Network Capacities 7. Future Broadband Communication Between 78 Wishful Thinking and Reality 8. Interview: How Is SaskTel Preparing for the Future 94 9. New Network Strategies Keep Telecommunications Business Profitable 100 10. An Effective Approach to Successful Integrated Planning of the Future 114 Detecon International GmbH 3
Knowledge@Detecon Focused Innovation 11. Innovation The Future of Telecommunication 128 12. Interview: The Importance of Innovation Can Not Be Overestimated 144 Enforcement Partnering 13. Successful Partnering Generates New Growth 148 14. Interview: Partnering as Strategic Growth Weapon 160 Empowerment Wholesale 15. Managed Services Are Entering the Stage of Maturity 164 Results of a Survey 16. Wholesale Under Pressure and with New Chances 174 17. Regionalization of the Markets Challenges 188 National Wholesale and Retail Operators Differentiated Market Approach 18. What Will Be Required from Future ICT Providers from 200 the Swisscom Perspective 19. Transformation to Value Orientation 208 in Marketing Performance Management 20. Interview: Successful Long-term Positioning on the 224 Competitive Telecommunications Services Market 4 Detecon International GmbH
Future Telco 21. Marketing and Sales: Total Turnaround 230 22. Interview: Brand Strategy Is More Important than Ever Before 244 in Telecommunications 23. Winning Hearts and Minds Loyalizing Customers 250 through a Convincing Customer Experience 24. Interview: Employee Pride Is an Important Element 264 of Customer Experience 25. Customer Self-Services: Efficiency and Customer Loyalty 270 in the Age of Digital Transformation Agile Processes and IT 26. Customer Self-Services: IT Architecture as Enabler 286 for Digital Self-Service 27. From Telecommunications Company to Process Factory 298 Outlook 312 The Authors 316 About Detecon International GmbH 320 Detecon International GmbH 5
Knowledge@Detecon Future Telco Foreword Neither the strongest nor the most intelligent survive, but the ones who can best adapt to change. Darwin s insights into the evolution of species (freely interpreted) can be applied with astonishing accuracy to the telecommunications industry as well: markets change and force all companies to review their structures, products, and business models and adapt them to new conditions. This is by no means a simple process and must be repeated constantly because in our fast-paced world of today transformation has become a constant.we see this in a positive light. Change is the driving force behind progress and always offers opportunities as well. Telecommunications companies should welcome transformation and boldly take charge of shaping and advancing it. Detecon International has defined seven fields of action which open up new opportunities for companies. They begin with modern network concepts which can be used to exploit to the full the possibilities created by digitalization. Network capacities must be expanded while simultaneously securing their integration. Fixed and mobile networks belong together. Companies should strive to incorporate more agility in their processes and IT systems, which will enable them to respond faster to changes in customer requirements and market conditions. Everyone involved in value creation must focus on innovation. New technologies, new products, and new services pave the way for penetrating new markets. As they set out in new directions, telecommunications companies will work together with partners and develop business fields that could not be any further from their thoughts at this time. Alliances and networks allow the sharing of risks, faster research, more specific advertising, and the realization of business models which would be out of reach for companies going it alone. There are revenue sources in the wholesale business just waiting to be developed in full. A strong infrastructure can serve as more than merely a unique selling proposition in the competition for end customers. It can also be used for business models founded on optimized utilization of network capacities and offering various levels of quality. In the future, retail business will differentiate market segments in greater detail. Factors such as variances in the capabilities of network infrastructures from one region to the next, varying intensity of competition between regions, and of course the differences in willingness to pay and preference structures of end customers must be given consideration. Companies which take the right factors into consideration will be successful on every market and in every segment. Shaping the markets of tomorrow will be the privilege of those firms which take on these exciting tasks today. I hope you enjoy reading these articles; may they inspire you with many new ideas. Best regards, Francis Deprez, CEO Detecon International GmbH Detecon International GmbH 7
Challenging Future Network is King! Dr. Peter Krüssel > Handling the growth in network traffic is becoming the key task for Carriers. > Only integrated heavy asset carriers will have a chance of surviving. Companies which do business exclusively as mobile network operators have come to a dead end. > Seven levers for each value-added stages can support carriers in securing their profitability long-term. > These plans position the companies as a key director of digital value creation, and a driver of digital transformation in business and society. 8 Detecon International GmbH
Network is King! Keen Competition Among Carriers and OTTs Breathtaking growth in network traffic will drastically change the telecommunications industry. The effect on the network operator landscape is especially forceful in its impact. One might be tempted to say that this development is a consequence of the success of Internet-based service providers. At the service level, carriers are finding themselves in increasingly stiff competition with the Internet-based service providers, the so-called over-the-top (OTT) players. Some of these players are large corporations active worldwide such as Google, Microsoft, Facebook, Amazon, Samsung, or Apple. They have been highly successful in realizing immense growth in revenues by offering attractive end devices and the matching ecosystem in terms of operating systems, services, and apps, bypassing telecommunications companies and directly establishing stable customer relationships as well as billing models. Although sales figures are comparable, the profit margin situation and market capitalization of some of these companies exceed the values posted by carriers many times over. Amazon is a prominent exception; the company is obviously pursuing a strategy of unrelenting market expansion at the expense of the margin. A bewildering number of smaller, specialist OTT service providers such as Dropbox, Spotify, Deezer, LinkedIn, Napster, Gameloft, WhatsApp, Twitter, Zattoo, or Flickr are operating in the shadow of the large OTT providers. Within a relatively short period of time, they have successfully managed to position themselves worldwide in the niches gaming, on-demand and streaming music services, films, business networks, news, cloud-based document management, messaging, or photos. In contrast to telecommunications companies, they offer services which scale worldwide and can consequently realize equally economies of scope and scale. Attempts by carriers to accelerate to match the pace of these innovations have shown limited success. Their offers derived from their fundamental core business or the result of the spin-off of startups, from independent innovation units, or in cooperation with other carriers tend to be reactive in nature and frequently come too late. Nevertheless, OTTs and end device manufacturers are also operating in a highrisk environment which is extremely fast-lived. Focusing on only a few products or services creates dependencies, and the effects are both immediate and negative if an important end device generation flops or if important trends in operating systems, usability, or usage habits slip past unnoticed. The similar development of companies which differ so widely from one another like BlackBerry, Nokia, Motorola, Myspace, or Zynga is a vivid case in point. Detecon International GmbH 9
Challenging Future The relationship of the carriers to these competitors is ambivalent. On the one hand, they have caused broadband connectivity the carriers core business to skyrocket. The demand for broadband connectivity on both fixed and mobile networks has in effect risen so drastically because of the attractive end devices and the corresponding services. But the other side of the coin is that the OTTs are contributing to the problem of the networks reaching the limits of their capacities faster, making substantial investments in capacity expansion necessary and these expenditures fall squarely on the shoulders of the carriers alone. In view of the keen competition among classic telecommunications companies and cable television operators (where the price is the primary weapon) and the dominance of pricing schemes oriented to flat rates which in the fixed networks at least is now firmly established, financing the investments by raising the prices for the connectivity services on this market is certainly difficult, perhaps even impossible. Moreover, end device and OTT players are invading the realms originally ruled by the telecommunications companies such as text messaging and voice services in ever greater numbers. In addition, there are additional openings for attack from the exploitation of the potential inherent in technologies such as esim or in open standards for real-time communication (VoIP, chat, video telephony) such as WebRTC now in the final stages of standardization. These factors are putting even more downward pressure on the earnings of telecommunications companies. Growth in traffic is becoming a key task The main driver for the forecasted change in the carrier landscape is the exponential rise in traffic volume. We currently generate as much traffic in two days as in all of the year 2003. Analysys Mason predicts that data traffic in worldwide mobile networks will increase by a factor of 17 between 2012 and 2018. 1 The causes are rooted in various developments. 2 The number of tablet PCs and smartphones with display resolutions which are frequently higher than those of HD television sets regularly available in retail trade has grown steadily in recent years. The landscape for services and apps has truly experienced a big bang 1 Cf. Analysys Mason, Wireless Network Traffic Worldwide: Forecasts and Analysis 2013 2018. 2 Cf. Petry/Schnitter/Salisbury, Operators Caught Between Scylla and Charybdis How Much Differentiation Potential Does the Performance Capability of the Networks Really Offer?, DMR 2/2010. 10 Detecon International GmbH
Network is King! thanks to the enthusiasm for innovations on the part of the OTT players. These two factors, coupled with the expansion of the broadband infrastructures for fixed networks, the 3G and 4G hub in mobile networks, and the flat rates being offered by operators, influence the usage habits of customers because opportunity generates demand. The effects produced by the new services, some of which are still in their infancy (M2M, cloud services, virtualization of end device functions, and the digitalization of entire branches of industry think of Industry 4.0 and of people s private lives), have not yet made much of a splash. It must be emphasized that these influencing factors are by and large independent of one another. We assume there is an exponential rather than additive cumulation leading to the overall effect. So there is no reason to expect an end to the exorbitant growth in traffic. The fundamental challenge for the carriers will initially be on the side of the infrastructure. Carriers face the extraordinary difficulty to be forced to handle the growing traffic economically with to be upgraded networks by investing enormous financial resources, even though at this time corporate revenue are tending in the downward direction or, at best, stagnating. On the revenue side, the options open to carriers are essentially to increase prices for current services or to develop new sources of income from innovative services and new customers. The primary task on the side of costs and investments is the expansion and efficient operation of modern, powerful network infrastructures oriented to earnings potential. Regulatory framework from the political side is lacking If carriers want to secure their profitability, they must have an important prerequisite: a regulatory framework offering investment security and sufficient incentive for decisions in the face of risk. The political establishment in Europe has in the last few years set forth its demands on carriers with the intent of securing a functioning broadband infrastructure. But support, whether in the form of monetary aid or the creation of regulatory framework conditions, has generally been noticeable for its absence, or the proposed concepts have been too tentative. However, there have very recently been indications of a hesitant change of heart. It results first and foremost from recognition of the fact that a high-performance telecommunications infrastructure is a major competitive factor for industries. Europe has fallen Detecon International GmbH 11
Challenging Future behind in the competitive race among the regions of the world. Comparative statistics of broadband expansion in Europe, Asia, and the USA reveal just how clearly Europe now lags behind in fixed network and even in mobile services. The coverage rate of the 4G standard in the USA is three to four times greater than in Europe. South Korea is a prime example of an FTTH infrastructure which is more or less full-area coverage and has completely run away from the Europeans. Regulatory rulings such as the vectoring decision of the Federal Network Agency in Germany, recent access decisions for the last mile of some national regulatory authorities, and the initiative of the EU Commissioner Neelie Kroes, responsible for the European Digital Agenda and author of a new draft for a regulatory package with an eye on the single European telecommunications market, are headed in the right direction. While it is true that the initiative aimed at eliminating roaming fees within the EU by 2016 will wipe out yet another substantial source of income volume for carriers from the market, a path is also being mapped out which could allow operators, under certain conditions, to assign priorities to the handling of services from other providers based on the payment of monetary charges. This will offer opportunities for better financing of the required network expansion and force OTT players to contribute to the financing of the networks. In the end, the signals being sent out by the regulatory side in Europe are highly disparate, as was once again demonstrated during the most recent auction of mobile frequency licenses in Austria. The three mobile network companies bidding for the frequencies here had to pay really high amounts in excess of two billion euros. The network factor: integrated heavy assets as first choice What does the business model for telecommunications companies which will be successful in the future look like? The possibilities range from a strict bit pipe model to a full-service provider. Which model is ultimately most promising is a question of three factors in particular: the infrastructural base of the fixed and mobile network, the competitive position on the end customer market, and the ability to manage partnerships successfully. But the consequences are of even greater scope. The challenge traffic growth and the need for seamless connectivity across all infrastructures and the most highly diversified access technologies will force carriers to build an infrastructure which is increasingly finely meshed and truly integrated. Carriers with a granular fixed network of full-area coverage and a 12 Detecon International GmbH
Network is King! matching mobile network infrastructure will clearly be at an advantage in comparison with single-business mobile network companies. Resources at the air interface are proving to be limited. The available spectrum will be exhausted in the foreseeable future, even refarming will not be sufficient, and innovative technologies such as MIMO (multiple input, multiple output) and AAS (adaptive antenna systems) cannot promise to do more than gain a little time. Sooner or later, mobile network corporations will be forced to make the cells smaller and smaller. 3 The bottom line is that the number of cells which must be created, maintained, connected to the core network (backhaul), and integrated into network management will increase substantially. At this time, the four mobile network companies in Germany operate perhaps 80,000 macrocells. In the middle term, this figure will increase by a factor of 5 at the very least. In addition to these small cells, end customers will utilize indoor cells (WiFi offloading, femtocells) at their locations. Not every mobile network company will be able to afford this. In fact, considering the immense investment requirements and the necessity to connect this large number of additional cells to the core network, the fundamental question arises as to whether single-business mobile network companies are even capable of survival at all. Two options, dependent on parameters such as competitive position and infrastructural base, are moving to the forefront: either doing without an exclusive mobile network and divesting the network (sale and lease back), taking advantage of managed service from a third party and, as a kind of reseller, operating as a service provider or virtual network operator (MVNO) on the market; or stepping out in the other direction and building up or acquiring a fixed network. However, a project of this type would presumably be difficult to carry out on mature markets because suitable options cannot be developed in every country. If neither of these options can be realized, or can be realized only under difficult conditions, there is no choice other than the exit option. We can already observe movement in this direction on the market, prominently exemplified by Vodafone. The company has divested its mobile network holding in the USA and acquired the cable television operator KDG in Germany. Traffic growth will be the prominent driver of consolidation on the market. Size, volume (scaling effects, cost leadership), and utilization of network capacity which can be monetized will be decisive for survival on the market. 3 Cf. Petry, Future Broadband Communication, p. 78 pp. in this volume. Detecon International GmbH 13
Challenging Future This is why only integrated carriers (heavy assets) will have a chance of surviving. Companies which do business exclusively as mobile network operators have come to a dead end. They are left with essentially three options: > Development in the direction of an integrated carrier by acquisition or creation of a fixed network (heavy asset) > Positioning as an MVNO/reseller/service provider (Light Asset) > Exit. The priorities for a light-asset approach, an OPEX-dominated business model, focus less on the refinancing of the networks and more on achieving the greatest possible spread between the costs for the purchased wholesale services and the retail prices which can be realized on the market in conjunction with OTT partnerships. If the alternative of the heavy asset approach is chosen, the previously defined question about the business model must be answered. In contrast to the light asset model, the heavy asset model is CAPEX-dominated and requires business logic oriented to the long term. The networks are at the hub of all business decisions. The necessary investments must be justified by the achievable revenues and profit and/or be refinanced as quickly as possible (monetarization of the networks). Primary focus is on improving efficiency in the allocation of CAPEX and OPEX for the networks, the full utilization of network capacities, and the increase in revenues. Efficiency of the networks Modernization heightens network efficiency Modern network concepts enable an increase in network efficiency. Virtually all carriers have taken a step in the direction of IP and are in the process of rigorously shutting down legacy systems and heterogeneous, service-specific production platforms which have developed over the course of time and of implementing IP technology. More advanced steps toward centralization of intelligence in the network, virtualization of network functions, reduction of active components and locations in the network, strict application of IT principles to the classic telecommunications products such as software-defined networks, and, finally, automation are in the planning stages and undergoing feasibility tests; in a few cases, some of these steps are already being implemented. 4 Concepts of this nature do more than simply reduce CAPEX and, above all, OPEX; they accelerate and flexibilize innovation, product development, provision 14 Detecon International GmbH
Network is King! and billing of services, and the integration of external partners. In other words, they create the key prerequisite for the sustained monetarization of the networks and pave the way for marketing departments to realize innovative product ideas and price models, either alone or in collaboration with partners on the market. Moreover, they reduce dependencies on network component manufacturers and create maneuvering room in dealings with OTT players. They are of transformational significance for carriers and implicitly entail precisely such structural, cultural, and procedural changes. Examples include the closer interaction of the process landscapes of IT, technology, and product development departments (which are usually strictly separated in organizational structures and lack adequate harmonization of processes) and partnering capability. Expansion of network capacities by means of small cells and hetnets The largest investment items are related to the increase in network capacity either through the more efficient utilization of existing resources or by the generation or acquisition of additional resources. In the fixed network segment, there will ultimately be no other choice than to expand the optical fiber infrastructure in the various FTTx variants such as fiber to the building (FTTB), fiber to the curb (FTTC), or fiber to the distribution point (FTTDP). This is an undertaking demanding extremely high investments because it is usually necessary to do civil and underground work when laying the cable. Enormous investment sums ranging as high as 93.8 billion, depending on the scope of the estimates and the planned technology, have been projected for the FTTH expansion in Germany to achieve full-area coverage. 5 The mobile networks have the choice of increasing either the spectral efficiency of the radio access technologies or the spatial reutilization of the spectrum in cellular mobile radio systems. This ultimately means a reduction in cell sizes and an increase in the number of cells. 6 The optimization of the spectral efficiency by means of methods such as smart antennas and MIMO as well as the utilization of higher modulation frequencies and improved channel coding are the technologies now in use. But they will not be sufficient to cover the rising demand or to assure viability of certain application 4 Cf. Schnitter/Bornhauser, Future Network Architectures, p. 34 pp.; Gonsa/Chrestin/Reith, Virtualization, p. 56 pp. in this volume. 5 Cf. Study on behalf of the German Federal Ministry of Economics and Technology (BMWi), August 2013, p. 8. 6 Cf. Petry, Future Broadband Communication, p. 78 pp. in this volume; Heuermann, New Network Strategies, p.100 pp. in this volume. Detecon International GmbH 15
Challenging Future scenarios such as adequate radio coverage in street canyons or availability in buildings. There is simply no alternative to more finely meshed networks. Rather than a few large base stations with a wide range, usually involving high costs, it will be necessary in the future to plan, build, connect, and operate additionally a large number of small, inexpensive cells. In supplement to the small cells, which will be used primarily outdoors, it will be necessary to use DSL-connected WiFi routers for end customers (indoors) as an offload opportunity and to install so-called 3G/4G femto cells with SON (self-organizing network) capability for improved coordination of potential interference, all possibly requiring additional expenditures for operators related to infrastructure and integration. Future access routers used by end customers should ideally contain both an LTE and WiFi modem. But these devices are beyond the conventional control of the network operators. In the end, there will be completely new and enormous challenges in network planning, roll-out, backhaul, logistics, required installation and maintenance capacity, location acquisition, roll-out processes, network management, management of increasing interference, and processes for eliminating disruptions. 7 Integrated planning of fixed and mobile networks The concern will be to allocate these investments for the build-up of new grids or the expansion of existing ones on the basis of market needs and with an eye on the existing infrastructure to ensure that they deliver an economic profit as quickly as possible. A precise geographic forecast, as granular as possible, of the traffic volume is indispensable to guarantee the profitability of local capacity increases. 8 It is just as important to regard fixed and mobile networks as integrated so that the synergies between the two networks can be mined. These synergies arise from full-area coverage from existing fixed networks, above all from the locally available WiFi offload capacities, and from the opportunity to provide low-cost backhaul for the smaller-cell mobile networks of the future. The smaller the cells of the mobile networks, the greater the synergies between fixed and mobile networks! The two networks grow together and supplement each other synergetically. For its part, the fixed network supports the mobile network because it can divert mobile network traffic (backhaul) or can provide offload capacities (WiFi/femto cells). In return, the integration of the small cells can contribute to a substantial improvement in the business case for the FTTx roll-out in the fixed network. 7 Cf. Petry, Future Broadband Communication, p. 78 pp. in this volume. 8 Cf. Fritzsche/Schweigel/Rhong, Integrated Planning, p. 114 pp. in this volume. 16 Detecon International GmbH
Network is King! Monetarization potential of the networks in wholesale and retail Investments in the networks must produce a return. The creation of the technological basis for the efficient transport of the growing traffic volume is not an end in itself for carriers. They must be in a position to monetarize these investments in the networks and to realize appropriate earnings. Network cooperationen In view of the investment demands sketched out above, the related necessity to utilize network capacity to the full, and the significance of scaling effects for profitability, it is only logical to locate an important source of income in the wholesale business. 9 Cooperative ventures among carriers in the sense of infrastructure sharing or wholebuy will be essential in the future if these investments are to be economically justifiable. 10 The room for alternatives in the mobile sector ranges from wholesale services pursuant to regulatory requirements to managed services of varying ranges. 11 The following examples are illustrative: 12 > Site sharing refers to the sharing among network operators of the passive elements of the infrastructure such as installation sites or masts. This model will presumably find great favor in view of the difficulties in finding suitable locations which already exist today. > National roaming to increase reach and/or network coverage is enticing for new network operators on the market or for operators who do not want to finance the next round of investments for the development of less attractive areas. > Network sharing includes the joint usage of active as well as passive elements in access or core networks. Spectrum sharing occurs when one network operator takes over the optimized utilization of the spectral resources which are jointly available on behalf of the partner(s). 9 Cf. Nielinger/Steingröver, Wholesale, p. 174 pp. in this volume. 10 Cf. Lundborg, Regionalization, p. 188 pp. in this volume. 11 Cf. Schmitz, Managed Services, p. 164 pp. in this volume. 12 Cf. Schultz/Schieder, Ways Out of the Frequency Bottleneck New network concepts for the cost-efficient provision of mobile broadband services, DMR 2012. Detecon International GmbH 17
Challenging Future > The most far-reaching form of cooperation ends with a network operator divesting its own network, transferring it to a third party, and acting strictly as a reseller, virtual network operator, or service provider with respect to customers. This option essentially corresponds to the light asset approach described above. Carriers which have a strong infrastructural base for both fixed and mobile networks on a market have a unique opportunity to score points, especially in wholesale business, as a consequence of the demand for network expansion briefly described above and the imminent roll-out of small-cell networks and their integration. They can force other competitors out of the infrastructure business and consign them to the position of virtual network operators or resellers. Business models based on QoS in wholesale Besides the aspects of wholesale business revolving primarily around the question of securing the required network capacities and network coverage on national markets, additional opportunities result from the ICTization of the world or the Internet of Things. New business fields such as cloud services, XaaS, or M2M are leading to the dramatic gain in significance of worldwide connectivity which functions seamlessly no matter which of the many and diversified access technologies are in use. This achievement is subject to the conclusion of interconnection agreements, either direct or indirect, with as many access network operators as possible around the world. The laws of large numbers apply to this business as well so that production and delivery at low cost are possible. However, the transport of the data traffic also has aspects of quality. Providers must be able to attach various quality parameters such as delay, jitter, or packetloss probabilities to the transport. 13 QoS differentiation in retail An alternative to driving wholesale business is the chance to offer a superior network infrastructure exclusively to the company s own retail division and to initiate competition based on quality in the hope that end customers will be willing to open their wallets to pay for this quality. But this is an approach which will be difficult to turn into reality in view of the intense price competition, established flat rates, a lack of awareness on the part of many customers that there is any shortage (in the fixed network, at least, best effort is still sufficient for most applications), the performance capability of cable network operators, and the 13 Cf. Gerlach/Knoben/Schellschmidt, Everything Flows The emerging cross-industry ICTization changes competition within the wholesale business 2032, DMR 2/2012. 18 Detecon International GmbH