Progressive Asian telcos set strong examples of monetization beyond connectivity

I recently had the privilege to be a panelist at CommunicAsia, part of the AT x SG and one of the largest ICT events in the region. The in-person conference held over three days was packed with a compelling agenda and it was great to be up on the stage with senior leaders from M1 (now part of Keppel), NCS (part of Singtel group), and Google.

The theme of our discussion is something I have acutely followed over the last decade of living in Asia. We were discussing the perennial question that every mobile carrier has been reflecting on here and around the world. How can telcos revolutionize their services in Asia and monetize beyond connectivity?

The question has become especially relevant in the last decade with the rise of brands like Netflix and Uber that have built new businesses worth billions of dollars “over-the-top”. It is worth reflecting on the term here. These businesses have been built over the top of the connectivity layer provided by telcos. To put it another way, telcos that provide the rails that made this value creation possible have largely been missing the windfall revenues from OTT services. At the same time, the average earnings before interest and tax (EBIT) margin decreased by 27% over the last decade for telcos, as their connectivity services became commoditized1. The mobile average revenue per user (ARPU) decreased by 24% over the same period. The market capitalization of FAANG companies (Facebook or Meta, Apple, Amazon, Google or Alphabet, Netflix) increased by a whopping 757% in the last ten years as they built new consumer services over the internet provisioned by telcos. The market capitalization of the top-ten publicly-listed telcos declined by 36% over this period2. On the one hand, the number of subscribers is increasing, and data consumption has increased more than a hundredfold in just a decade, but on the other, the price of one GB of data has fallen precipitously by over 90% in the past decade3.

In this new digital era, telcos will need to evolve into digital-first enterprises that can capture a bigger share of the value chain by diversifying into adjacent and new revenue streams beyond connectivity.

Exhibit: Key consumer revenue streams for telcos

Source: DOCOMO Digital

There has been a discernible shift towards digital entertainment offerings among telcos. Many are looking to prioritize the development of business models around digital content, games, home, payments, or a mix of these. Given the centrality of the smartphone in our lives, forays are also being made into a range of other services such as health, education, various aspects of productivity, and location-based services, including retail and travel.

The provision of digital services opens up several new revenue streams for telcos. And we’re talking of possibilities in the consumer market alone – the possibilities in the enterprise segment are separate and immense. IoT, predictive analytics, and machine learning are creating new business opportunities on the enterprise side. For example, the global IoT market alone is expected to be worth $1.4 trillion by 2026, up from $760 million in 20204. The bulk of this growth will be in the B2B space, but a smaller share will also come from the B2C uptake of IoT services.

As 5G networks start rolling out across the world, there is an enormous opportunity for telcos to make money with 5G bundling and network slicing. GSMA predicts that network slicing can generate $300 billion worth of new revenue for telcos by 20255. Bundling offers a combination of products or services to attract customers. For telcos, it often means adding on another or several services it provides into one package to enhance engagement, prevent customer churn, drive loyalty and generate higher customer lifetime value. Telcos and OTT platforms share a symbiotic relationship. Telcos facilitate content delivery to the end-user, while OTT platforms have the content that fuels data consumption. We see much traction with OTT partnerships, especially in the video streaming space.

Virtual reality applications are becoming mainstream, too, implying higher data consumption. In this scenario, telcos can maintain their competitiveness by offering low latency since an immersive experience like VR cannot be interrupted. In addition to video and music, cloud gaming and live sports will be the most important services that bundling will help unlock value in. We will also see increasing partnerships in the ar/VR applications space. Singtel, one of the largest telco companies in Singapore, offers the XO Plus plans, which provide users with a 5G handset, 150GB data allowance, and a three-month complimentary subscription to its AR educational content on Bookful and VR live music content with MelodyVR. The Bookful app brings to life stories using AR and 3D animations to enrich the learning experience. Meanwhile, “MelodyVR provides unlimited access to the world’s largest library of 360-degree VR concerts.”6

And similarly, home automation services are proliferating. Some telcos are well-positioned to offer services for energy management, home security, and appliance control and even keep a tab on vital health metrics7. The global home automation market totalled $39.6 billion in 2016 and is expected to reach $81.6 billion by 20238. China Mobile has set a strong example with 5G-powered 150+ ‘Smart Mining’ and 700+ ‘Smart Factories’, creating compelling enterprise use cases for 5G monetization.

NTT DOCOMO and SK Telecom have pioneered the combination of payments (Direct Carrier Billing) and loyalty with dBarai and Moneta, respectively. More than 20% of their revenues come from services beyond connectivity. (Telco as a Bank). Airtel Payment Bank, its fintech arm, is already profitable and is likely to reach $1B in revenues by 2030, with the current Gross Transactions Value at $20B9. Until now, OTT apps launched by telcos were available only to their customers. However, Airtel India changed its strategy by allowing non-Airtel users to access the OTT app Airtel XStream for a subscription fee, broadening revenue opportunities10. Many Asian carriers have also created B-branded MVNOs to create a fresh digital-first identity to relate to the younger demographic (Telco as a Service). Asia’s MVNO market, with primarily B-brands from incumbent telcos, is forecasted to increase by 10% from 2020 to 2025, according to Arthur D. Little.

Beyond advanced markets such as Japan and South Korea, most Asian markets continue to be pre-paid. Thanks to the proliferation of affordable Android and Apple SE smartphones, consumers across Asia increasingly spend most of their time and money on their phones. Telcos can play a pivotal role in providing payment and content services and aggregating multiple content subscriptions in direct-to-consumer applications. Asia is considered the growth driver for the digital economy, and Asian carriers are increasingly embracing change faster than their counterparts in other emerging markets. The Asian consumer stands to benefit from this innovation. What a future telco will look like may be difficult to fathom. However, an ecosystem approach to growth with a diversified portfolio of services beyond the core seems to be a broadly agreed strategy.

[1] Bridge Alliance public financial statements of publicly listed telcos

[2] S&P market capitalization over ten years. Ten largest telcos by revenues

[3] Oliver Wyman. TELCO2025: Telcos Need New Revenue Streams, Even as Connectivity Demand Rises. Available online at:?https://www.oliverwyman.com/our-expertise/insights/2019/apr/telcos-need-new-revenue-streams–even-as-connectivity-demand-ris.html

[4] Mordor Intelligence. Internet of Things (IoT) Market – Growth, Trends, COVID-19 Impact, and Forecasts (2021 – 2026). Available online at:?https://www.mordorintelligence.com/industry-reports/internet-of-things-moving-towards-a-smarter-tomorrow-market-industry

[5] GSMA. Network Slicing Use Cases Requirements. Available online at:?https://www.gsma.com/futurenetworks/wp-content/uploads/2018/03/Network-Slicing-Use-Cases-Requirements-Wrapper.pdf

[6] Singtel. Singtel unveils next-generation XO Plus plans with 5G access, AR and VR content. Available online at:?https://www.singtel.com/about-us/media-centre/news-releases/singtel-unveils-next-generation-xo-plus-plans-with-5g-access-ar-and-vr-content

[7] Oliver Wyman. Telco2025: Telcos Need New Revenue Streams, Even as Connectivity Demand Rises. Available online at:?https://www.oliverwyman.com/our-expertise/insights/2019/apr/telcos-need-new-revenue-streams–even-as-connectivity-demand-ris.html

[8] Allied Market Research. Home Automation Market by Application, Type. Global Opportunity Analysis and Industry Forecast, 2017-2023. Available online at:?https://www.alliedmarketresearch.com/home-automation-market

[9]?https://economictimes.indiatimes.com/industry/banking/finance/banking/airtel-payments-bank-revenue-may-jump-to-1-billion-by-2030/articleshow/91057328.cms

[10] Exchange 4 media. How new market dynamics are changing the nature of telecom-OTT partnership. Available online at:?https://www.exchange4media.com/digital-news/how-new-market-dynamics-are-changing-the-nature-of-telecom-ott-partnership-110920.html