Creating, capturing and delivering value in the Telco industry

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Although being the backbone of the Digital age, Communication Service Providers (CSPs) must deal with the paradox of the world becoming more digital and connected but, at the same, their prevalence is starting to be challenged, with revenue and ARPU decrease, at a concerning rate.

Today, there are many organizations occupying the space once dominated by CSPs, monetizing on services that were once solely delivered by them. Competition has evolved, new players have entered the market from adjacent industries such as technology and media, who have now taken control of the customer relationship and relegated CSPs to a secondary role.

As providers of the infrastructure that supports the digital world, CSPs must now find new revenue streams and reinvent themselves by developing unique value propositions to customers or risk becoming the piping of a new economy, in which others reap the financial benefits.

In this scenario, how can CSPs create, capture and deliver value?

Great innovation and value creation not always go hand in hand if customers are unable to recognize it. CSPs are at a junction between having to continuously invest in new technology, in particularly, at the network level to ensure a great customer experience, but struggle to create sustainable differentiators in a commoditized market, with stagnant growth.

In Portugal, the fierce competition among the main players led to cost base differentiation, which overtime brings margins down and creates a vicious cycle of price dropping, with no winners.

To create value perceived by the market, CSPs can opt to either focus on efficiency or improve the customer experience. For the most part, I’ve see some investment in the latter, centered around providing a truly omnichannel experience, empowering customers to engage when they want, using their preferred touchpoints, either through assisted or in a self-service manner, but undoubtedly, it has been around efficiency that CSPs have concentrated their efforts.

In the telecommunication industry, CSPs are creating value by providing access and satisfying communication needs, but are they capturing that value?

This is the critical question CSPs across the globe face and for which the answer may be slightly different, albeit there is an agreement that along the value chain, other companies are doing a better job at capturing value.

There is a significant body of knowledge around the theory of competition and although different authors use different designations, there is an understating that value capture occurs by having strategic resources. As we learnt from Prof. Duncan Simester from the M.I.T. Sloan School of Management, strategic resources satisfy four criteria:

• Ownership and Control – the firm owns and controls the resource, otherwise whoever owns and controls it will extract the value;
• Differentiation – the resource is unique - competitors do not have an equivalent resource;
• Sustainability – it is hard to acquire the resource, requiring time or investment to do so;
• Satisfy Customers – the resource contributes to satisfying a customer need.

Each CSPs must reflect where their strengths are, deeply understanding their value chain and industry dynamics to identify and leverage their own sustainable competitive advantage. By understanding the context in which they operate, CPS can better determine their market power and focus on areas where the probability of success is higher, competitor’s efforts to disrupt are more significant or look for the industry’s remaining blue oceans.

Some of the most common strategic resources fall into 6 categories, presented below.

1. Cost Advantage |  Price sensitivity: do customers value any other differentiation in the market or do they just buy on price?
2. Brand | Can customers search? Is consumption conspicuous?  
3. Relationships | Ownership and control
4. Human Capital | Is it a system? Are they truly different?
5. Switching Costs | Can customers anticipate that they will be locked in?
6. Market Share | How will past success contribute to future success?

To level the battlefield, CSPs must decide where to focus and never forget that the main threats may come from adjacent industries because the frontiers of today’s industries are becoming more and more blurred. This takes us to the final part of this article where our attention will be on how to deliver value in an industry that is going thorough significant transformation.

It’s possible to pinpoint different periods in the telecommunication industry, characterized by trends, strategic options and resources. For a period, in the early 2000´s, CSPs invested heavily in controlling the whole supply chain, through vertical integration.

In this past monopoly era, CSPs created and owned content, service devices, infrastructure and actual service revenue. The bargain power was on the CSPs side which also owned the customer, forcing partners to play along, in an asymmetric position.

For many reasons, this business model didn’t deliver the expected value and proved to be unsustainable, forcing CSPs to go back to their core businesses.

Nevertheless, the ecosystem evolved with the emergence of new players and business models. Today we are witnessing a growth period where, contrary to the monopoly era, the value chain is more fluid and disaggregated [1], resulting in network access, while essential, is not where most of the value and revenue is being created.

To stay relevant, CSPs must redefine their offer and role. Traditional revenues stream such voice and messaging are in rapid decline, and, more and more CSPs run out of ways to differentiate leading to mobile services, in most markets, becoming commoditized.

In a digital knowledge society, CSPs are at risk of becoming the pipping, providing connectivity, leaving to others the benefits. There isn’t a silver bullet to crack this challenge but there are encouraging signs of how the industry can rebound.

On one hand, CSPs are opening to the ecosystem, creating bridges instead of walls and building a network of partners. By opening their APIs to third-party developers, they’ve managed to create a new dimension of operator-partner ecosystem engagement.

On the other hand, 5G deployment, across the world, together with the continuous growth of IoT and big data [2], are enablers of change, repositioning traditional telco businesses to explore new opportunities in a fast-changing competitive landscape.

The Telecommunications industry is at a crossroad. Innovate or die, albeit dramatic, captures how high the stakes are.