Summary: Operators face difficult choices on the best way to change their business models. In this note we analyse the approaches taken by AT&T, Verizon, Ooredoo, Singtel and Telefonica, extrapolate the options for all carriers, and offer a framework to help managers define the right new business model goal for their organisation. (March 2014, Executive Briefing Service, Transformation Stream.)

Below is an extract from this 13 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation stream here. Non-members can find out about the service and how to subscribe here. We'll also be discussing disruptive strategies further at our upcoming Executive Brainstorms in EMEA, the Americas, the Middle East and Asia. For other enquiries, please email  / call +44 (0) 207 247 5003.

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Introduction

The importance of setting Telco 2.0 goals…

Communications Service Providers (CSPs) in all markets are now embracing new Telco 2.0 business models in earnest.  However, this remains a period of exploration and experimentation and a clear Telco 2.0 goal has not yet emerged for most players. At the most basic level, senior managers and strategists face a fundamental question:

What is an appropriate Telco 2.0 goal given my organisation’s current performance and market conditions?

This note introduces a framework based on analysis undertaken for the Telco 2.0 Transformation Index and offers some initial thoughts on how to start addressing this question [1] by exploring 5 CSPs in the context of the markets in which they operate and their current business model transformation performances.

Establishing the right Telco 2.0 goal for the organisation is an important first-step for senior management in the telecoms industry because:

• Setting a Telco 2.0 goal that is unrealistically bold will quickly result in a sense of failure and a loss of morale among employees;
• Conversely, a lack of ambition will see the organisation squeezed slowly and remorselessly into a smaller and smaller addressable market as a utility pipe provider. 

Striking the right balance is critical to avoid these two unattractive outcomes.

…and the shortcomings of traditional frameworks

Senior management teams and strategists within the telecoms industry already have tools and approaches for managing investments and setting corporate goals.  So why is a fresh approach needed?  Put simply, the telecoms market is in the process of being irreversibly disrupted.  As we show in the first part of this note, traditional thinking and frameworks offer a view of the ‘as-is’ world but one which is changing fast because CSPs’ core communications services are being substituted by alternate offerings from new competitors.  The game is changing before our eyes and managers must think (and act) differently.  The framework outlined in summary here and covered in detail in the Telco 2.0 Transformation Index is designed to facilitate this fresh thinking.

Traditional strategic frameworks are useful to assess the ‘Telco 1.0’ situation

Understanding CSP groups’ ‘Telco 1.0’ strategic positioning: Ooredoo in a position of strength

Although they lack the detailed information and deep knowledge of the telecoms industry, investors have the benefit of an impartial view of different CSPs.  Unlike CSP management teams, they generally carry little personal ‘baggage’ and instead take a cold arm’s length approach to evaluating companies.  Their investment decisions obviously take into account future profit prospects and the current share price for each company to determine whether a stock is good value or not.  Leaving aside share prices, how might an investor sensibly appraise the ‘traditional’ Telco 1.0 telecoms market?

One classic framework plots competitive position against market attractiveness.  STL Partners has conducted this for 5 CSP groups in different markets as part of the analysis undertaken for the Telco 2.0 Transformation Index (see Figure 1).  According to the data collected, Ooredoo appears to be in the strongest position and, therefore, the most attractive potential investment vehicle.  Telefonica and SingTel appear to be moderately attractive and, surprisingly to many, Verizon and AT&T least attractive.

Figure 1: Strategic positioning framework for 5 CSP groups

Source: STL Partners’ Telco 2.0 Transformation Index, February 2014

Determining a CSP’s Telco 1.0 competitive position: Ooredoo enjoying life in the least competitive markets

As with all analytical tools, the value of the framework in Figure 1 is dependent upon the nature of the data collected and the methodology for converting it into comparable scores.  The full data set, methodology, and scoring tables for this and other analyses are available in the Telco 2.0 Transformation Index Benchmarking Report.  In this report, we will explore a small part of the data which drives part of the vertical axis scores in Figure 1 – Competitive Position (we exclude Customer Engagement in this report for simplicity).  In the Index methodology, there are 7 factors that determine ‘Competitive Position’ which are split into 2 categories:

• Market competition, a consolidated score driven by:
• Herfindahl score.  A standard economic indicator of competitiveness, reflecting the state of development of the underlying market structure, with more consolidated markets being less competitive and scoring more highly on the Herfindahl score.
• Mobile revenue growth.  The compound annual growth of mobile revenues over a 2-year period.  Growing markets generally display less competition as individual players need to fight less hard to achieve growth.
• Facebook penetration.  A proxy for the strength of internet and other ‘OTT’ players in the market.
• CSP market positioning, driven by:
• CSP total subscribers. The overall size of the CSP across all its markets.
• CSP monthly ARPU as % of GDP per capita. The ability of the CSP to provide value to consumers relative to their income – essentially the CSP’s share of consumer wallet.
• CSP market share. Self-explanatory – the relative share of subscribers.
• CSP market share gain/loss. The degree to which the CSP is winning or losing subscribers relative to its peers.

If we look at the first 3 factors – those that drive fundamental market competition – it is clear why Ooredoo scores highly:

• Its markets are substantially more consolidated than those of the other players (Figure 2).  Surprisingly, given the regular accusations of the US market being a duopoly, Verizon and AT&T have the most fragmented and competitive markets in the US.  For the fixed market, this latter point may be overstated since the US, for consumer and SME segments at least, is effectively carved up into regional areas where major fixed operators like Verizon and AT&T often do not compete head-to-head.
• Its markets enjoy the strongest mobile revenue growth at 8.1% per annum between 2010 and 2012 versus 4.6% in Telefonica’s markets (fast in Latin America and negative in Europe), 5% in the US, and an annual decline (-1.7% ) for SingTel (Figure 3).
• Facebook and the other internet players are much weaker in Ooredoo’s Middle Eastern markets than in Asia Pacific and Australia (SingTel), Europe and Latin America (Telefonica) and particularly the US (Verizon and AT&T) – see Figure 4.

 Figure 2: Herfindahl Score – Ooredoo enjoys the least competitive markets

Note: Verizon and AT&T have slightly different scores owing the different business mixes between fixed and mobile within the US market

Source: STL Partners’ Telco 2.0 Transformation Index, February 2014

Figure 3: Ooredoo enjoying the strongest mobile market growth

Source: STL Partners’ Telco 2.0 Transformation Index, February 2014

Ooredoo also operates in markets that have less competition from new players. For example, social network penetration is 56% in North America where AT&T and Verizon operate, 44% in Europe and South America where Telefonica operates, 58% in Singapore but only 34% in Qatar (Ooredoo’s main market) and 24% in the Middle East on average.

To read the note in full, including the following additional analysis...

...and the following figures...