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Roland Berger Telco 2020 20120306
Roland Berger Telco 2020 20120306
Management summary
A battle of giants is brewing in the world of telecommunications. Traditional telcos, with
their five billion customers worldwide, are getting ready to take on new Internet-focused
rivals offering communication platforms, services and content via smartphones, tablets and
Internet-enabled TVs. Right now, the strongest of these are the "fab(ulous) five": Amazon,
Apple, Facebook, Google and Microsoft, who serve over three billion customers between
them. Traditional telcos and their modern rivals each have a total market capitalization of
round about EUR800 billion. Current public opinion favors the fab five with their superior
innovative capabilities, breathtaking growth rates and large cash reserves. But will that be
enough to threaten the traditional telcos?
The fab five certainly enjoy a number of advantages, including daily "branded contact" with
customers, close customer bonds with their easy-to-use, personalized service ecosystems
and, increasingly, a willingness on the part of customers to pay for such services. Pureplay broadband access the mainstay of traditional telcos' business today will remain
the cornerstone of digital communication in the future for both landlines and mobile
communication. While usage and associated data volumes continue to grow exponentially ,
however, telcos are under the price pressure that inevitably accompanies commoditization
while the industry so far has failed to monetize volume growth.
So what can telcos do in their battle with the giants? This is the question answered by our
global study "Telco 2020 How telcos transform for the Smartphone Society". Our talks with
more than 25 top decision-makers representing the entire spectrum of telecommunications
revealed that the "right" strategic orientation for each telco will depend on five key levers:
1) Personalization of service ecosystem and the customer experience;
2) staunch defense of relationships with end customers;
3) cost-efficient broadband network build-up;
4) the realignment and radical streamlining of operating models;
5) the financial resources to drive digital transformation and consolidation.
Three realistic scenarios emerge from this finding. In extreme cases, telcos will do no more
than engage in what can be termed "Access Minus" business, primarily providing network
infrastructure as wholesale service providers that have all but been cut off from their
relationship with the end customers. Companies with better strategic positions and deeper
pockets will develop their own access-centric services and selective over-the-top (OTT)
offerings, positioning themselves as "Access Plus" providers. Only a handful of regional telco
groups will, through acquisitions, establish themselves as "OTT service groups" capable of
competing with the fab five in the complex "OTT Game".
None of these three strategies is inherently right or wrong. Provided they make a convincing
job of executing the strategy, even companies that back the Access Minus horse can develop
successfully and stimulate hopes of value growth on the stock market.
We believe that virtually all telcos can manage this approach, even if some incumbent
players currently appear overvalued. Ultimately, though, five golden rules will separate
the winners from the losers:
1) Get the core access business right Converged broadband access,
personalized service suites, experience-based;
2) Make targeted, realistic "bets" with regard to growth and differentiation
(in the case of Access Plus strategies and forward-looking OTT investments);
3) Transform into lean telcos with de-layered operating models and
only half of today's workforce;
4) Convince capital markets by presenting them with attractive consolidation
and streamlining stories, abandoning secondary activities and committing
to cooperative ventures; and finally
5) Act quickly and resolutely.
Only then can the industry resume its pattern of value growth and begin offering shareholders
attractive returns again despite the erosion of its core business and the best efforts of
global rivals such as Apple and Google.
Usability and service experience the keys to customer acceptance: Separate individual
contracts are increasingly giving way to demand for access packages that bundle broadband
connectivity for mobile phones and the Internet. As things stand, just 10% of customers buy
contracts that combine mobile and landline communication. Yet this figure is expected to rise
to 60% by 2020. In the end, customers pick the provider whose digital service suite matches
their patterns of usage as closely as possible, and that also supplies attractive handsets. Future
offerings will have to function independently from devices and network access, especially at a
time when mobile Internet is becoming increasingly important worldwide. Communication is no
longer a separate service. It has become an integral part of social networks and other e-service
ecosystems that embrace entertainment, shopping and healthcare, for example.
Telcos need to compete with the fab five: Amazon, Apple, Facebook, Google and Microsoft are
spreading their tentacles and occupying more and more of the service territory. They are offering
Internet applications, their own devices and platforms on which customers can (although they
rarely do in practice) combine all their online activities even if the service ecosystem builds
barriers to other ecosystems. In the future, customers will be willing to pay for simple, fast
access to these ecosystems. Pure-play broadband access will remain the cornerstone that even
the fab five will have to use. But given the forecast ubiquity of optical fiber networks and highspeed wireless connections, it is increasingly being regarded as an interchangeable commodity.
As a result, price pressure is growing.
They must slim down their various network, sales and service business models, abandon
secondary activities and use M&As or cooperative ventures to penetrate fast-growing markets.
All of this leaves little money and less time to "bet" on new strategies and business models.
Worse still, the experts we spoke to do not believe that the traditional telcos have the innovative
capability required to engage in a competitive battle with the fab five.
Prompted by the upheaval in the market and competitive landscape, Roland Berger took a
closer look at the future role firms will play, expectations with regard to their business models
and the necessary consolidation. To prepare our study "Telco 2020 How telcos transform
for the Smartphone Society", we interviewed more than 25 decision-makers representing the
entire telecoms value chain all over the world, including six of the ten global leading telcos,
equipment providers, Internet market leaders and investors. The participating companies post
combined annual revenues of around EUR400 billion about a third of the global industry total.
Half of our interviewees were board members or CEOs who take these changes into account
in their decisions day in, day out.
Current market figures and expectations for Europe suggest that two issues are key with
regard to telcos' future strategic orientation:
1. Access will remain the backbone of most telcos' business.
2. To be equipped for growth markets, many telcos will also offer Access Plus services,
covering everything from the marketing of access-centric platforms to mostly
regional OTT services.
Access will remain the major source of revenue and hence the core of every telco strategy in
the long run. In 2015, we expect to see revenue totaling some EUR300 billion in Europe.
Around two-thirds of this amount will be attributable to mobile communication, partly because LTE networks will have substituted as much as 10-20% of landline Internet connections. Due to their experience with infrastructure, their heavy investment in more efficient
broadband access networks and the savings permitted by leaner business models, telcos can
continue to generate EBITDA margins of as much as 35% to 45% by delivering access alone.
Having said that, this core business area will stagnate until 2015. Given the upheaval on the
communications market, we expect to see a decline of 1% to 2% a year until 2020. Activities
such as hosting, data storage and security services all of which build on access are the
exception to the rule. These cloud technologies are enjoying double-digit growth. They are
attractive to telcos because they upgrade "mere" access, allow to capitalize on their networks, help to retain customers, their data and their applications, and so allow companies
to gain a foothold in the OTT segment.
In adjacent business lines that rely on the telcos' network and IT service platforms, it makes
sense to cooperate and place selective bets in order to grow and cultivate a distinctive value
proposition. To what extent telcos succeed, however, will naturally depend on their own capabilities, their potential to become market leaders and whether the markets they serve follow
local or global rules.
Regional telco groups such as Telefnica, Vodafone and Deutsche Telekom and national
champions such as Telecom Italia, KPN and Swisscom are setting their sights on similar
areas of growth: payment services, advertising, energy services, smart home services and
healthcare services ("e-health"), to name but a few. To take the latter segment as an example, many patients may not yet be able to imagine having, say, their blood pressure
measured by a mobile service provider. Yet Telecom Italia is using precisely this kind of
remote monitoring system to save older patients the hassle of spending time in hospital
and to save the national health system money. E-health may not be a large market. But
given that healthcare is heavily dependent on national legislation, it seems a sensible niche
to occupy as global OTT players are unlikely to be interested in developing suitable offerings
for each and every country. European telco groups might even have the chance to establish
a European standard although there is as yet no sign that telcos plan to prioritize such
opportunities in collaboration with healthcare partners.
On the other hand, payment services and advertising business force national incumbents
to line up against international competitors. Payment by mobile phone is regarded as a
market that has so far been neglected but could be worth billions. Things are slowly beginning to move. Japan's NTT, for example, is already in possession of bank licenses in Europe.
Deutsche Telekom, Vodafone and O2 have come together to form the "mpass" joint venture
a payment system for online purchases by mobile phone. OTT players are also joining
the fray, as evidenced by the Google Wallet, Facebook's "Credits" and the eBay subsidiary
PayPal.
Telcos that go beyond access-centric services and platforms will encroach on the OTT turf
that the fab five have made their own. In the short term, TV promises to deliver the most
revenue and will be a necessary weapon in local competition. In the long term, however,
traditional telcos will scarcely be able to hold this ground as they simply cannot keep pace
with global OTTs such as Facebook and Google+ or portals such as iTunes, YouTube, Netflix
and Hulu particularly as local content providers can easily make use of their own platforms.
Telcos face the same dilemma on the subject of music libraries, online games, app stores
and ecommerce stores. They may stand a better chance in sectors with a more local focus,
such as special regional areas of ecommerce. Alternatively, they might follow the example
of Japan's telecommunications company Softbank and invest in a portfolio of potential
future OTT market leaders another way of betting on the future.
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Theoretically, then, the options range from pure-play access business with telcos operating
more or less as anonymous wholesale providers in extreme cases to engaging in handto-hand combat in the OTT boxing ring. According to the results of our interviews, the best
strategy for a particular operator depends on five key levers: the personalization of service
suites and the customer experience; staunch defense of relationships with end customers;
cost-efficient broadband network build-up; the realignment and streamlining of business
models; and the financial resources to drive digital transformation and consolidation.
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In our interviews, the Chief Strategy Officer of one national telco group added the following
observation: "The biggest threat comes from Apple and Amazon. They will offer handsets plus
eSIMs and will walk off with our customer relationships." Contracts and billing could be
handled via iTunes or Amazon accounts. The telco would thus become anonymous, a mere
wholesaler of network capacity with no end-customer relationship of its own.
The apps are already here, and soft SIMs and eSIMs are on the way. It is a matter of when,
not if. OTTs still lack a sales and service presence on the ground in urban areas. Apple, for
example, sells only 14% of all iPhones via its 350 stores; the rest are sold primarily by the
telcos. In 2011, the company opened just 40 new stores worldwide not exactly a powerful
distribution network. By comparison, Orange has 850 stores in France alone. "The big OTTs
will continue to need our local service and support," agreed a CEO at one European mobile
network operator.
That is why we believe the telcos will stay in control of a large proportion of contracts for the
time being. Around 80% of contracts are today sold directly to end customers. By 2020, the
figure will still be 50%, compared to 30% for smaller telcos.
China and Russia manage and protect their telcos and OTTs through state-led infrastructure
development and to great effect: Tencent, Baidu and China Mobile are among the Top 10
in their sector worldwide and VimpelCom and Yandex are not far behind. These countries
have given their national ecosystems a chance to position themselves effectively against
the fab five.
However, a maze of regulatory prescriptions and political interests is ensuring that there is
no clear pattern to network expansion in Europe. The fab five have a free hand when it comes
to European infrastructure. While German policy primarily focuses on moderate consumer
prices, various countries give precedence to industrial policy considerations, national welfare
or national security. This being the case, we envision three possible broadband expansion
scenarios, described below.
Infrastructure champions: Expansion of privately owned network infrastructure is advancing fastest in countries such as France and Switzerland, where favorable regulatory terms
wholesale prices, co-investment obligations and quality of service specifications, for example
offer financial protection to companies that invest in networks outside already well-developed conurbations. In most cases, national market leaders assert their dominance, ultimately
ending up with market shares of over 50% even in heavily cabled areas. This policy encourages monopolies, but also drives the rapid development of next-generation networks.
Network cooperation: The situation is different in countries such as Sweden and the
Netherlands, where regulation focuses above all on consumer prices and competition. In
these markets, a lack of subsidies for private players investing in broadband network deployment effectively limits expansion to densely populated areas. Market leaders, local governments and utilities apply cooperative models to develop and use networks. Next-generation
networks take longer to build as a result, giving cable operators a temporarily strong position.
Conversely, the telco market leader's nationwide market share is shrinking to between
35% and 40%.
Public broadband network: In countries such as Australia, developing the broadband
network is a public work that is funded by floating the market leader's network subsidiary
on the stock exchange, stumping up money from infrastructure funds or setting up a government-owned network company. Public access is controlled by the government, which involves
telcos solely as its partners. The latter effectively become bandwidth resellers and capture
correspondingly low market shares and margins. In most cases, only the mobile communication network is developed by private enterprise.
These three scenarios have varying consequences for landline, mobile communication and
cable providers. Ultimately, only market leaders and cable companies are bound to invest in
optical fiber. Mobile communication firms are going the way of long-term evolution (LTE) and
by 2015, will have substituted up to 20% of the landline broadband network. Alternatively,
they will copy landline niche providers who do not own networks but rent access from other
providers and then market it.
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Or would it be enough to provide excellent service to VIPs and outsource the rest? Does
the company have to run its own e-commerce outlets? Or might partnerships with online
shopping platforms, electronic retailers or even device manufacturers be more effective?
Telcos that rigorously and swiftly farm out everything apart from their true core business can
cut costs by as much as 12%, investment spending by 6% and the workforce by 50%. In
return, they become more agile, engender a more entrepreneurial spirit and can realize the
value of each part of the company. When that happens, they at last end up with fair valuations: three to four times EBITDA for NetCos, seven or eight times for SalesCos and twenty
times for OTT service groups.
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On a European level, regional groups are realigning their portfolios. They are jettisoning
minority interests (e.g. Vodafone/SFR), exiting from weak market positions (e.g. Orange
Switzerland) and scaling back peripheral activities (Telefnica/Endemol) to reduce their
debts, buy back shares and regain strategic room to maneuver. Conversely, cooperative
ventures and mergers will be stepped up among regional groups as in the case of VimpelCom
and Orascom. The chief strategist at one European telco group goes so far as to forecast
that, in Western Europe, "three or four large groups at most will survive and be able to compete in the global arena." Even the 15 market leaders in smaller countries will be taken over
to optimize regional footprints. Of course, there is always the risk that transactions will fall
at political hurdles or due to antitrust concerns. The protracted debate surrounding the
consolidation of the artificially created German cable landscape is a case in point.
Especially among regional groups, free cashflow will be plowed back into promising future
developments: to accelerate growth plans for B2B2C platforms (such as payment, advertising and e-health), say, or to place relevant strategic bets in the OTT game. Telefnica, for
example, acquired VoIP provider Jajah formerly a Deutsche Telekom minority investment
in 2009. Deutsche Telekom in turn then acquired web hoster Strato and payment provider
ClickandBuy. Both have reorganized their innovation activities and set up OTT service groups.
But how serious are the telcos about Access Plus in reality?
One thing is for sure: the fact that OTT players are valued at five times higher multiples than
telcos makes it expensive for the latter to diversify into OTT activities. Nor, with the exception of Softbank in Japan, are there any examples of firms doing so successfully. That said,
Softbank is a pretty impressive success story; its 900 affiliates, forming softbanks internet
segment already contribute 10% of revenue and 16% of profits. And the group even has
a presence on the fast-growing Chinese market, where it now owns a stake in Renren (the
country's biggest social network), Alibaba (a global e-tailer) and Ustream (China's foremost
live video portal).
In India too, Softbank has launched a joint venture for mobile Internet incubation with Bharti
Airtel. Regional OTT partnerships and investments are beefing up telcos' knowledge of the
Internet business. They are also giving incumbents an early insight into how this business
might dovetail with their own core business. In treading this path, regional groups the only
players big enough to step into the OTT ring are making a clear statement of intent: They
will not give up their acquired privileges without a fight.
Telcos desperately need a level playing field, however, as OTT groups are already expanding
into the infrastructure business. Google, for example, is currently laying optical fiber networks
in Kansas City, is part of the US broadband program and plans similar forays into Europe.
Showing true vision, Google is also investing in satellite operator O3b with the aim of delivering high-speed Internet access to the "other 3 billion" people in developing countries. "Our
mission is to make the world's knowledge available to everyone," a Google spokesman said.
So how are the telcos responding? Waiting and seeing (again)? Acting in concert? Engaging
in "co-opetition" (competing in some areas and collaborating in others)?
In this scenario, telcos fade into the background but can still survive as brands if they deliver
outstanding quality. Lack of coverage and poor voice quality are, after all, the main reasons
why customers switch providers. Every fifth Internet user in the industrialized world is willing
to pay more for access in return for a guarantee of top network and service quality.
Access Minus works best if the company keeps its NetCo and SalesCo separate, focuses
on investing in network expansion, spins off its SalesCo or seeks long-term partnerships
for it with virtual network operators, resellers or OTTs (Verizon/Google) and distributes the
cashflow it generates to shareholders.
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Access Plus
The name says it all: Companies adopting this model go beyond access business, positioning themselves as service providers and complementing the SalesCo and NetCo with a third
element, a "telco innovation factory" charged with developing and marketing new services.
The latter will primarily consist of access-centric services that use the existing network and IT
platforms in the e-health segment, for instance or regional OTT-related offerings such as
TV. Such services will be embedded in partners' service suites or, depending on the extent
to which the "Plus" aspect is to be emphasized, on proprietary platforms that integrate
third-party services.
Some of our interviewees nevertheless question whether many telcos will really be able to
handle this business. "The industry lacks knowledge, good people and speed," says a CEO
from one of Europe's telco heavyweights. To make this strategy succeed, incumbents must
first master their core business and see adjacent business lines as bets on the future. But
they must not make the whole company and its infrastructure revenue too heavily
dependent on such bets.
OTT Game
This scenario is feasible for regional telco groups commanding sizable customer franchises,
making them attractive for global partnerships. Companies that go down this road see their
service suites as the primary communication gateway in their customers' online life. "The big
telcos have what it takes to create their own OTT platforms," says one board member at a
leading Asian telco. Rather than producing all the content themselves, they will, for example,
partner up with gaming and credit card firms to provide entertainment and finance offerings.
As brands, they will be so strong that groups outside the industry and large OTT players will
willingly cooperate with them and place their content in the telco's ecosystems, aiming to
reach end customers via the resultant B2B2C partnerships. Since it was the telcos themselves that ramped up the networks, they have close ties to customers and can use their
steady stream of access profits to constantly improve their ecosystems.
1. G
et the access strategy right broadband, personalized, experience-based:
Expanding LTE and FTTH networks, providing converged access offerings and optimizing personalized service suites will safeguard telcos' core business and maximize their cashflow.
2. Place realistic Access Plus bets that promise growth and set the telco apart:
The key is to invest selectively but consistently in B2B2C platform services and regional OTT
services. Even so, telcos will succeed only if they are realistic about their market position and
enter into partnerships that genuinely make sense. Beyond that: Steer clear of risky bets!
3. Transform into a lean telco and cut today's workforce in half:
Telcos should split themselves up into a SalesCo, a NetCo and corporate services (HQ) and
make the remaining core activities as cost-efficient as possible even in comparison with
consumer goods, service and OTT champions.
4. Convince the capital markets with Access Minus, Access Plus or more:
Digital transformation and intelligent consolidation can guarantee shareholders annual returns
of 10% and more, on a par with top utilities. To write a compelling investor story, it is vital to
be the first to align with the appropriate core business. Units that do not fit in should be sold
or committed to joint ventures in order to eradicate their conglomerate discount of 15%.
5. Act quickly to gain first-mover advantage, especially with a view to OTT:
Customer demands, communication technology and competition are all developing faster
than ever. All of which creates an environment in which telcos can no longer afford the
luxury of sluggishness, strategic inertia or blind spots.
Stock markets currently put a value of EUR810 billion on Europe's telco industry (5.3 x EV/
EBITDA). Sticking to today's strategy will see that value erode to EUR570 billion (4.1 x) by 2020
destroying nearly 30% of their market capitalization in the process. The underlying root causes
are obvious: After 2015, revenue will decline by 7% triggered by the emerging e-SIM, further
regulatory cuts and two-fisted competition. Hence, EBITDA is expected to slump from
EUR 155 billion to just EUR 140 billion.
That does not have to happen. If telcos do their homework with respect to broadband access
strategy, transformation into a cost efficient lean telco, and to consolidation they have a real
chance not just to stand up to the fab five, but also to grow in enterprise value caused by
strongly improved earnings. Our interviewees anticipate a development that would still raise
the industry's valuation to EUR745 billion (4.4 x) by 2020 almost a third more than if they
stick to their current strategic direction. Roland Berger is slightly more optimistic: Based on
the assumption of fruitful regional consolidation, from which regional groups would reap the
greatest benefits, we expect the telecommunications industry to be worth EUR795 billion
(4.6 x) in 2020. Telcos would thus virtually retain their value and as result grow EBITDA clearly
above EUR 170 billion and all this, despite heavy revenue losses in their core business.
Not bad for an industry taking guard against the likes of Apple, Google and Facebook.
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Telcos transform for the "Smartphone Society"
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Authors
Alexander Mogg
Partner and Head of Competence Center InfoCom
Alexander Dahlke
Partner
Peter Wimmer
Partner
Christian Hoffmann
Principal
CONTACT
Phone: +49 89 9230-8037
E-mail: Telco2020@de.rolandberger.com