ME PoV Summer 2016 issue
Time for strategic choices in the telecoms market
Three fundamental parameters drive the economics of Communication Service Providers (CSP): the customers who are willing to buy their services, the price realization of these services and the cost structure underpinning them. Arguably, each of these three is undergoing a transformation of unprecedented magnitude. While these changes are seen as major disruptors in the CSP marketplace and how they have historically run their businesses, they also unfold opportunities for innovation and development of telecom products and services in the marketplace.
Business model disruptions in the telecoms and media industry
The root cause of disruption to the telecoms business model is the pace and volume at which the non-traditional service providers (e.g. internet players or tech companies) are gaining a share of the traditional telco space. This nontraditional competition has been constantly redefining user experience through communication services innovation, challenging the more traditional service provider. As a result, and as seen over the course of the past five years, it has impacted both the value share and profitability of traditional telecom companies. Over the top (OTT) players, on the other hand, have achieved significant year-on-year growth, riding the wave of business model innovation in the communications sector.
There are two clear dimensions to the OTT-driven business model disruption: the first one being the services offering proposition–such as Google’s launch of its “project fi”–that signals the appetite to develop and diversify mobile virtual operations services. Amazon and Netflix are two similar examples of online players that are engaging in the communications and media sector, making inroads in cloud services and redefining the pay TV landscape. The second key lever to the disruption is the demand for infrastructure to deliver those services. A case in point is the evolution of the data center market that is no longer the monopoly of service providers. Facebook’s indigenous data center approach is a move in that direction. Utilities too are going through a transformative approach in how they monetize the large investments they have made in technology and telecoms infrastructure over decades, on the back of large programs such as smart metering or connected homes. Although these indicators are widely driven by western markets, the impact can already be seen in the Middle East, and the trend will only push regional service providers towards services innovation and business model transformation.
Even in high average revenue per user (ARPU) markets like the GCC, the impact of such business model disruptions has been dearly felt with a combination of price pressure coupled with high capital and operational spend. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Earnings Before Interest, Taxes (EBIT)margins of regional telcos have been under consistent pressure over the past five years as shown in the exhibit below, dropping by six percent on average in regional telco groups between 2010 and 2014.
The degradation of the operators’ financial performance is often linked to dilution in voice service’s ARPU, challenges in adequately monetizing data services, and the growth in alternative communications including Voice over IP (VoIP) and messaging services (Whatsapp etc.). Overall, the uptake of next generation services has not yet compensated for the erosion of traditional service ARPU in most of the regional telco groups (see exhibit below). While the regulation in the Middle East is playing a role to contain the erosion of traditional telco revenues from VoIP and other internet-based applications, it is often a partial and short-term solution to a rather complex challenge.
Middle Eastern telecom service providers have begun to address these financial, business performance and disruption challenges. For example, STC has a fresh approach toward digital services and has proven its commitment through the recent launch of Jawwy. Omantel has also announced its intent to implement agile and lean operations, while Mobily’s strategic initiative is to transform into a true information and communications (ICT) player, leveraging its leadership in data services.
The two transformation imperatives for CSPs
The telecom industry is one that has always experienced high-impact changes, however at present the industry is being re-defined in the true sense as disruptions drive CSPs toward making their strategic transformation choices. Deloitte views that the future lies in the choices that favor either a capacity pipe low-cost approach or a value player growth-driven approach.
Value stream player
These service providers gear their transformation towards adjacent incremental markets and revenues. These players will identify ecosystems that support the changes in the communications landscape through Internet of Things (IoT) digital platforms, premium content and smart connectivity solutions. Data monetization and innovative subscriptions-based pricing models enable these programs in a non traditional way for the CSPs. These programs aim to counteract the challenges from OTT players and diversify the addressable market.
A number of telcos have taken a step in that direction. Deutsche Telekom’s HomeNetwork 2.0 project is a smart connectivity initiative that is a step towards monetizing the IoT ecosystem. As a result, consumers are able to automate their home appliances through mobile devices. Smart metering applications similarly monetize the CSP access into the home. In the United States AT&T has embarked on its IoT program with an effective ecosystem of partners. This program is aimed at leveraging the ground-breaking communication access technologies and delivering value to the market through an integrated solutions provider approach.
Cost advantage player
Information management, collaboration systems, process automation and digital back office amongst others are helping CSPs reduce complexity and cut costs. The cost advantage choice, if made, must drive the organization, technology and processes in a direction that delivers on the principles of agility and flexibility. Cost player models should have a distinct cost advantage leveraged both from efficiency of operations and economies of skill and scale.
The virtualization of technology and functions is playing a major role in evolving better and more efficient cost structures for CSPs. Both network functions virtualization (NFV) and software defined networking (SDN) are a push in the direction of cost optimized operations.
One of the widely practiced cost rationalization program is around the processes and organizational transformation, and has proven critical in achieving the lowest cost base for CSPs. These programs are aligned to the objectives of making the business agile through the automation of core functions and reducing operational expenditure. The core competitive advantage of the cost player must enable it to apply innovative utilization-based consumption models to differentiate the connectivity and capacity offerings.
These drastic changes in the business models of telcos have forced them to find new ways to interact with the digital ecosystem. For telcos to create sustainable revenue streams from IoT or OTT they need to rethink their commercial models and terms of engagement with the other players in the value chain. Going forward we foresee that the partner lifecycle management function of CSPs will become the cornerstone of the next generation of telecoms services.
By Emmanuel Durou, Consulting Partner and Technology, Media and Telecommunications Leader, Deloitte, Middle East and
Hasan Iftikhar, Senior Manager, Consulting, Deloitte, Middle East