New Business Models Rise from Digital Disruption

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Consumers’ digital choices are eating into telco revenue. New business models step away from building a bigger subscriber base and look at where telco assets—the network, data, and subscribers—meet Big Data, the Internet of Things and digital transformation.

Here’s a bold prediction for communications service providers (CSPs) at Mobile World Congress: 50% of you will survive beyond 2020. There’s flip side to this prediction too, the other 50% of service providers leading discussions and exhibiting in booths are going out of business.

The digital economy, along with a wave of new consumer behaviors, is taking a sharp bite out of CSP revenue. Skype, WhatsApp, Netflix and other services have become habit forming, as these numbers show:

  • $479 billion of revenue will be cannibalized by Over-the-Top VoIP players between 2012 and 2020
  • 990 million active WhatsApp users in the world send more than 30 billion messages a day
  • Streaming video and audio are responsible for more than 70% of the total fixed bandwidth consumed during peak periods

This digital disruption is not a short, angry squall that carriers will pass through and find still waters on the other side. Consumers’ digital lifestyles are the new normal, and as data and bandwidth demand increase, telcos are paying for it—while seeing revenue from voice-related services plummet. Across every carrier segment, margins are declining as capital costs skyrocket.

Looking sideways at this telco market dilemma, other potent stats show that for all the doom and gloom, service providers can get back on track if they let their inherent assets—powerful networks, abundant data, and expansive customer base—work for them.

Asset 1, the powerful networks created from billions of dollars of investments, is what brought telcos to the digital party and keeps the party going for all of us to enjoy. In the past few years, network investments have risen steadily to handle increased bandwidth demands. In 2010, LTE deployments, for example, were few and far between. Now they are commonplace as the push continues for 4G, 5G and higher. Also in 2010, 100 Gigabit Ethernet was relatively new and pricey, which dampened its overall sales. In 2015, deployments of 100 GbE ports spiked significantly, spurring carrier investment to reach $3.4 billion in core routers by 2020.

In terms of data (asset 2) 90 percent of data ever created happened in the last 24 months, and lots of that data, including device location, call detail records, usage, websites visited, and much more, is stored and collected by telcos for as many as five years.

Asset 3, the subscriber base, is declining, but the percentage points aren’t worth the hand wringing when you realize that in the first quarter of 2015, global mobile adoption reached 99 percent. Even with the cord-cutting facing cable companies, 98.3 million U.S. households subscribe to cable or satellite TV service. These end users, the data they create, and all their activities on your networks can—and will—be monetized in the digital economy in new and innovative ways.

Trends and Transformation

These three assets have been the crown jewels for telcos since the now-ancient Bell Telephone Company first opened shop. More than a century later, these jewels are even more valuable in the face of these major trends:

  • Big Data
  • Internet of Things (IoT)
  • Digital transformation

With Big Data, the telecom sector’s use of analytics tools is expected to grow at a compound annual growth of 28.28 percent over the next four years. Telcos are awash in data from both subscribers and network infrastructure. They (like other businesses) have been slow to turn to analytics as less than 1 percent of data that exists in businesses today is analyzed and turned into business benefits. Telco executives appear to be changing courses, as they invest in resources and plan to apply Big Data analytics for internal models to improve customer engagement. In addition, telcos will sell their Big Data to third parties that want a clearer understanding of specific demographics and user groups.

The volume of data will continue to increase as the second trend, the Internet of Things, comes alive with the activity that is generated by millions of sensors and chips in “things” that use the Internet to communicate without human interaction. Forecasts expect that 212 billion things will be connected by the end of 2020, contributing vast amounts of additional data traveling across carrier networks. The impact of IoT is already apparent in connected cars, smart factories, smart farms and smart cities.

Both Big data and IoT impact the growing trend of organizations seeking digital transformation. These companies are overwhelmed by the existing complexity that increases costs and inhibits innovation. But they are intrigued by the agility and rewards digital businesses such as BMW, eBay, the NBA, Under Armour, and more are achieving. A digital transformation will align them with the new digital economy. Among business leaders, 78 percent said achieving digital transformation will become critical to their organization with the next two years.

Emerging Business Models

This intersection of carriers’ three main assets and these three trends is the juncture that will launch carriers into business models that promise profit and growth rather than ongoing decreases in margins. Let’s look at four business models that leverage existing assets and expertise and have an eye on the future.

Digital lifestyle provider. In this model, telcos provide services such as mobile wallet, media sharing, home security, and tele-health to their customer base. The Spanish provider Telefonica is taking an early lead in this space with a mobile wallet service that allows subscribers to use its mobile devices for mobile purchases. Telefonica is targeting both developed and undeveloped regions. In undeveloped regions, unbanked subscribers, meaning those who are not bank customers, can use the mobile wallet for their banking needs. Subscribers in developed regions can use the service for mobile payments.

Business cloud service provider. This model already exists but has ample room for growth. The market numbers are extremely positive for all types of cloud services, and telcos are in the perfect position to sell these to all types of businesses, especially to the fast growing SMB market where 78 percent of small business are expected to adopt cloud computing by 2020. From 2014 to 2015, T-Systems increased its cloud revenues by 40 percent. Platform as a service, software as a service and managed mobility are sound sources of new revenue in a rapidly growing market.

Digital transformation catalyst. Service providers have been experiencing digital transformation for the past decade. This expertise is a valuable service that can be sold to businesses that are starting the transformation journey. These services are highly sought after by industries and customers that are struggling to achieve their digital transformation goals.

Data broker. Telcos have the data that businesses need to understand their consumers and create engagement. This business model would provide information such as demographics, clicks to purchase, geo-location, preferred device data and more. Verizon has already embraced this business model and created Precision Market Insights that compiles and sells anonymous information to marketing firms. Buyers purchase demographic, psychographic and behavioral information to improve their mobile advertising.

These are only a few of the potential new business models that promise high revenues, yet they are decidedly different than past models. The telecommunications industry has chased subscribers and Average Revenue Per User for decades. That model no longer works in the digital economy, and it’s even hurting digital entertainment businesses, such as Pandora in Oakland, CA. Even with its status as the No. 1 radio station in 36 U.S. markets, Pandora has been forced to spend heavily in an effort to attract more users in a highly competitive streaming market. As Pandora’s ability to make money off its 80 million users is waning, it has started talks to discuss a sale. Pandora, like telcos, will need to re-assess how it makes money from subscribers.

Telcos may have an advantage over these digital businesses though. Those three assets–the network, data, and subscriber base—can lift telcos up as they explore the new opportunities coming out from Big Data, IoT, and digital transformation.