Telco Digital Opportunity

Software is eating the world. The digital transformation has come to all sectors and Telco is already in for the second round. Telcos have significant opportunities to capture across the P&L. Digital Services both for the B2B and B2C segments can boost the top line taking advantage of unique market access. Digital Processes can transform the way telcos execute every process, increasing efficiency and improving the customer experience at the same time. Digital Networks will transform the asset base of telcos, allowing to simplify and improve efficiency. All of this will require some scale, and specially industry collaboration.

Digital Services: optimizing the topline

Consumers and businesses are faced with an exploding array of digital services. To take the two clearest examples. In B2C video offerings are multiplying. First was Pay TV, then came Netflix, then HBO and Hulu, and now everyone is going Direct-to-consumer. We will soon have Disney+, HBO-all-access, CBS-all-access, Apple+, sports specialists like DAZN, and many more. In B2B cloud offerings, we used to have AWS, now Microsoft and Google, as well as Alibaba and Tencent, are rapidly joining the party. As well as literally thousands of SaaS products for different processes or verticals.

This cannot hold. History and psychology show that humans like choice, but not so much choice. Customers don't want to keep track of which of the tens of services they will need to see their favourite show. So there is an opportunity to rebundle digitally access to content and other digital services. Customers need someone that can bargain for them against the increasingly powerful global digital players. Digital services, even leaders like Netflix or AWS, need a distribution edge over the increasingly crowded field of rivals.

Thus the opportunity for telcos to be the distributors of choice of digital services is already there. The entry of new OTT services created the opportunity for partnerships with Netflix and the like, that many telcos are already leveraging. Much like with physical retailers there is also an opportunity to white label for low-cost with acceptable quality. Reliance Jio in India, for example, has created a suite of basic digital apps it bundles with its services for first-time users of its basic line of sub $100 smartphones.

We shouldn't only think of consumers, the same opportunity is there for businesses large and small. Companies are increasingly focused on their core competence, not caring to develop other skills that someone can provide from the outside. Finding the right suppliers and integrating the solutions in domains as complex as software-defined communications, internet-of-things, cloud, security, Big Data and new emerging fields like RPA is a daunting task for most companies. Thus telcos with a strong B2B presence are increasingly having an opportunity to extend their core connectivity offering in these areas.

Of course, being a digital services distributor will require new skills. Customers expect the same level of ease for purchasing and cancelling they get from digital services themselves. They also expect a seamless integrated experience with the same customer experience they get from any of the services directly. In the B2B segment, they expect professional services to handhold them through integration and change management. The good news is that these improvements are the same ones required for improving the telco core services consumer experience or B2B value delivery.

Financially the profile of this new digital distributor and integrator business will be very different. While the traditional telco business requires high EBITDA margins to compensate for the high CAPEX and high capital employed, the new distribution business has low capital employed and low CAPEX. Much like Amazon has done with its core Amazon e-commerce business (low capital employed, low margin) and its AWS division (high capital employed, high margin), telcos will have to learn to manage and make visible for markets two very different businesses.

Digital processes: improved efficiency and customer experience

The opportunity in digitizing telco processes is also immense. It is often said in the industry that "the cost optimization opportunity is endless", and digitization makes the adage true for another decade. Not only that, but the customer experience opportunity is also endless, and digitization will also bring the opportunity to take it to a level far beyond what we now have. For the first time, cost efficiency and customer experience will improve in tandem instead of representing a trade-off.

It is seldom appreciated how complex telco services are from an operational perspective. We expect a global network of real-time connected infrastructure to interact seamlessly with billions of connected devices that move around. We also expect the result of those interactions to be correctly billed in real-time to billions of customers worldwide. The challenge of moving a call or a data session from one tower to the next without dropping. The intricacies of processing the millions of call and data session records that go into a single bill. It is amazing that operators are able to give the service level they give with only tens of thousands of employees.

Digitalization will bring the opportunity to take this miracle even further and at an even lower cost. A set of technologies are already being deployed into production that will transform each of the telco process domains:

• Digital front-end. The telco customer interaction layer is one of the sore spots both from the cost and customer experience side. Digital channels and natural language processing have the opportunity to transform this completely. We are already seeing an ever-increasing share of service interactions being digitized and managed with digital agents. This is much cheaper and also gives a much better customer experience. Call-centre agents and shops will be still crucial for complex customer interactions, and they can be enhanced through digital tools that allow them to focus on the customer, instead of being "human data processors". Dedicating humans to empathy and doing all the data processing and standard tasks through digital will create a new front end that is much cheaper and has much happier customers.
• Eliminating the back-offices. Telco IT systems are complex, and a surprising number of a telco staff is now focused on making customer interactions "travel" through this complex and multilayered maze. Each back-office interaction is, first, a cost item and a failure of the system, and, next, an opportunity for mistakes and dismal customer experience. New tools like Robotic Process Automation (RPA) and cognitive machine learning systems are allowing to eliminate the need for human intervention in the back-office. Reducing cost and eliminating extremely frustrating mistakes and problems for customers.
• Personalizing and adapting the offer. Next in the stack is the value proposition for customers. Historically telcos have taken a "shotgun approach" with the same offer and communication for everyone regardless of need and situation. Big data analytics and artificial intelligence are allowing to change this. The offering can be personalized for each customer according to situation and needs. Moving interactions from frustrating to delightful. And allowing to discover the ever-widening set of digital services a telco will offer.
• Digital field operations. Another often unknown side of telcos is the army of engineers and field workers they employ. They might be installing a customer connection, sourcing and sending handsets to customers, repairing a base station or laying new fibre to upgrade connectivity. This complexly choreographed daily dance is another miracle, but also a source of cost and customer unhappiness. It also represents the opportunity to apply new technologies like Internet of things, augmented reality and Blockchain. Telco operations are being transformed with connected vans dispatched with artificial intelligence, blockchain-based supply chains and enhanced technicians that can access the top knowledge through AR to make a field repair. This will reduce cost and at the same time delight customers through seemingly "magic" service.
• APIfied architectures. Finally, the telco IT systems themselves are being transformed. Again, not widely known, telcos are the most IT-intensive industry out there along with Technology and Finance. The need to give real-time service and billing to millions of customers has made IT indispensable from at least the 80s. This means that most telcos have layer upon layer of systems, ranging from mainframes to microservices. This makes connecting with those systems extremely challenging, which has been a traditional barrier for collaborating with third parties and improving the front-end. That is where APIfied architectures come to save the day. They are allowing telcos to isolate partners and the front-end from the byzantine complexity of legacy systems. While the direct impact on cost and customer experience will be difficult to trace, this will be the enabling layer for all the rest of the transformations mentioned in this section.

Digital networks: a programmable and open source asset base

Finally, there is the network. The real deal for an engineer like myself. Again, the telco network is a marvel of human engineering. The global telco network might be the most complex system on Earth at this point, even surpassing a human brain. We take it for granted that people in rural Nigeria can call someone in London in seconds and it will work seamlessly. We know that if we get mobile connectivity or Wifi anywhere we will be able to access the same digital services and world wide web we are used to. Making this happen has unspeakable complexity and layer upon layer of equipment interacting in milliseconds.

Digital allows transforming these networks into a new software-based paradigm. Creating very attractive new opportunities for telcos to move to a more liquid asset base, that serves customers much more flexibly at more attractive costs. It also has the potential to future proof the network, allowing to facilitate network evolution significantly. In a way, there has never been so much clarity about the future of telco networks for the next decades, and at the same time, there are plenty of opportunities.

The best way to understand this potential revolution is to take each layer of the telco network at a time. Looking at transformative technologies and their implications:

• Fixed Access. The future technology of fixed access is fiber+Wifi. Fiber has incredible potential and upgradability in terms of bandwidth. Its passive optical nature makes it environmentally and operationally far superior to other active electrical alternatives (e.g. copper, cable). It also has great latency characteristics that will be increasingly important over time. A full optical IP access network also requires a fraction of the equipment that traditional technologies do, liberating substantial space, CAPEX and power consumption in local exchanges. This equipment is also increasingly open, allowing for many companies to design it instead of being locked into proprietary standards from large technology providers.
• Mobile Access. 5G is the future of mobile access and will represent a revolution as important as the move from circuit-switched to packet-switched technologies. 5G will bring greater speeds, far greater number of devices and lower latencies. It will allow the creation of network slices, softwarizing mobile access and giving it the flexibility of software. 5G is still in its initial stages, and for at least 2-3 years its usefulness will be limited. However, once the final standard is in place we can expect a true revolution over the next decade. This revolution will also include open source equipment which breaks the hardware-software integration pushed by large technology providers in the previous generations.
• Edge Computing. Fiber and 5G are a perfect match to create an extremely high bandwidth network that will enable the next generation of rich media content: Augmented Reality, Virtual Reality, Digital Twins, AI models, HD streaming and much more. These new applications will require much lower latencies in the millisecond range. For this to work computing and storage will need to move from the datacenter to the network. Telcos have the assets to do this and play a new role in the cloud.
• Homes. The home is also part of the network, and increasingly turning into the bottleneck. Ensuring adequate WiFi in the home is becoming increasingly important for users to take advantage of the full advantage of the network. Making that WiFi work with the rest of the network and with 5G network slices while keeping users secure will differentiate connectivity for users even further.
• Businesses. Businesses are also seeing a radical transformation on their networks and premises. To begin with, the new technologies are allowing software-defined virtual private networks that take advantage of fiber and 5G, while providing maximum flexibility in their configuration and deployment. We will see a move from a new private network point taking weeks or months to set up, to it being available in seconds, as soon as the connectivity is ready. Next, connectivity in corporation HQs, factories and other large campuses is becoming the limiting factor. 5G and WiFi 6 will bring a new way to deploy private campuses that will make connectivity work transparently and securely in any setting.
• Metro and core network. Finally, hidden from view, we have the metro and core networks. These are the network elements that make the magic happen. Softwarization will transform the complex labyrinth of proprietary equipment that now powers a network into a mesh of transmission, compute and storage infrastructure that seamlessly executes the core and network virtual network functions were they are needed. They will create a more resilient, flexible and much cheaper network

Some scale and plenty of collaboration

To conclude, these three opportunities bring a perennial question to the sector. Given that software is global, wouldn't it make sense to have global companies take advantage of these opportunities? Will a large global telco more quickly take advantage of these opportunities or will small organizations be equally able to leverage them? Let's take them one at a time:

• Digital Services at the basic level will be about partnerships with large and small digital service providers. Here scale will be clearly helpful for being on the radar and negotiating better. It won't be necessary to be global, but it will be helpful to be substantial enough to be in the digital service providers priority list. This means scale in terms of high-value customers and ability to cover certain regions. There is also an advanced level, in which operators can create professional services organizations to deploy digital services in B2B, or advanced app ecosystems to deploy a combination of branded and white-label services. Here scale will be more important, both local scale and also a minimum scale to create the capabilities to work with customers. Scale can also be complemented with collaboration as smaller players join larger ones in alliances to strike partnerships with digital players or service organizations to provide professional services.
• Digital processes will be about applying technologies to current operations. These technologies are mostly common to all industries and as such professional services organizations can support companies in adopting them. Telcos will be some of the most advanced users in some of them like natural language processing, big data or RPA, so if they have the scale they could transfer best practices quicker or even use that position to leverage digital services. However, digital processes themselves won't require substantial scale. There might be the opportunity to transfer processes and technology from one market to another, but this will be limited to new entrants or low-complexity operations (e.g. no-frills MVNOs) which don't have substantial IT complexity legacy.
• Digital network is very much a telco undertaking and as such will require telco global scale to happen especially in terms of the open access, open network functions and edge computing. Telcos have started to create their own organizations to make it possible, such as the ORAN Alliance in which most major carriers have pooled their efforts to create a global standard for open radio access. Of course, Digital Network does require a critical mass of software talent in the networking organization, which could be challenging for smaller players.

So overall the digital opportunities for telco will require a certain minimum scale to fully take advantage of, but don't seem to be poised to trigger a wave of industry consolidation towards greater scale. At the same time, they will require much more industry collaboration. At a global level to standardize the open digital network to capture the opportunity in each of the domains, and especially in Edge computing. And at a more local level as some of the larger companies can support smaller ones in their relationships with digital service providers and in building professional services organizations for B2B and app ecosystems for B2C.