How Can BT, DT, and Vodafone Drive New Growth by Mapping Downward Toward Subsystems and Channel?

Communications Service Providers (CSPs) realize that the underlying foundation to deliver value in telecoms is taking a different shape. For example, there is a migration of branding power. That migration is composed of multiple tiers, and it is a process, not an event. Specifically, with 2G, 3G, and 4G, CSPs create value by mapping upward on their “sustaining” tech trajectory toward consumers that are not satisfied with the functionality that each preceding generation offers. For example, 2G introduced SMS; 3G introduced browsing, video, and photo sharing; and 4G introduced speed, capacity, and Internet protocol telephony. Therefore, branding power—and by extension, value creation—migrates upward on the improvement trajectory. This constitutes sustaining innovation. As voiced by vendors, with 5G, there are no not-yet-satisfied consumers that seek better performance than what is available with 4G (see IN-5794).On the other hand, the advent of 5G is the first time the industry is presented with an opportunity to introduce new growth capabilities that go above and beyond Mobile Broadband (MBB) services.

More specifically, 5G is the first “G” that paves the way for CSPs to operate in the software layer (see IN-5994). Further, adjacent approaches like Cloud Radio Access Network (RAN) and Open RAN introduce “vertical” and horizontal openness, respectively. With vertical openness, standard hardware (e.g., data center x86 servers) is deployed independently from software applications (e.g., virtualized central unit/distributed unit). With horizontal openness, there are open interfaces among network elements, including fronthaul (eCPRI), midhaul, and others (E2, X2). In addition, with 5G, service logic shifts from being centrally controlled by CSPs to being locally controlled by consumers and/or customers. This is decentralization (see IN-6603), and it makes for a fluid, agile, and dynamic marketplace that will almost certainly be horizontally stratified as opposed to vertically integrated. This “warp speed” marketplace demands that CSPs accept software innovation, take prudent risks, and pursue new growth by either mapping upward on the cellular improvement trajectory to expand existing business or mapping downward to find new business.

With 3G and 4G, CSPs drive value with a centrally governed operating model. A “build it and they will come” agenda is the starting point, and a “what tech we can build” agenda is the foundation of that model. Tech sets the (consumer) business agenda, constituting a top-down approach. By contrast, 5G presents CSPs with a competitive and dynamic landscape. In this landscape, a top-down approach may not work as there is no static offering (constantly changing requirements), there is no uniform offering (one size does not fit all), and there is no one singular end point (one terminal, multiple applications). In this landscape, CSPs can no longer run their business like the Roman empire, confident in their hegemony and certain that (intermodal) competition amassing on the borders is no threat. Yes, with 5G, CSPs can create value by continuing to map upward on the cellular improvement trajectory, but that is contingent on local market dynamics. For example, developed markets are arguably close to reaching the feasible end of the cellular sustaining tech trajectory, but in other markets (e.g., Middle East, Africa), MBB continues to be a strong revenue source.

If there is no growth by mapping upward on the improvement tech trajectory, CSPs can map downward toward the world of modular products where speed and convenience drive success—in other words, the power to create a profitable brand migrates toward subsystems and the channel. For example, for Elisa Polystar, the software arm of Elisa in Finland, the subsystem is network assurance and automation solutions. Elisa pursues new growth by selling those subsystems to other CSPs. For example, in 2022 alone, Elisa Polystar’s network automation solutions were selected by Montenegro’s One and Hutchison Drei Austria to support 5G rollouts. Telefonica Tech, the digital and software arm of Telefonica (see IN-6771), is another example. For Telefonica Tech, the subsystem is big data, Artificial Intelligence (AI), blockchain, cybersecurity, and cloud, providing industry-specific solutions to new and existing customers. It has been reported that Telefonica Tech’s revenues grew by 70.6% through September 2022. The process of selecting high-growth offerings, picking markets, and competing on the basis of distinctive sustainable capabilities is key for CSPs going forward. And this will be an ongoing challenge.

An alternative strategy to mapping downward toward subsystems is to map toward the “channel.” In this instance, the channel no longer means retail stores but rather any partner that adds value to or creates value around the core product of CSPs. For example, PCCW acknowledges that the basis of competition in the Asia Pacific is gradually changing. PCCW, in partnership with Lenovo, has created PCCW Lenovo Tech Solutions Limited (PLTS), a tech solutions business that integrates services, devices, and digital infrastructure (see here). In other words, speed to market and the rapid and responsive ability to configure products to specific, unmet requirements of customers in highly targeted market segments are not good enough. Therefore, for PCCW, the power to create value shifts toward the channel whose business model delivers on that not-yet-satisfied market requirement. With PLTS, PCCW is now positioned to benefit from growth outside of its existing domain. This diversification does not take PCCW away from its core skills; PCCW is simply extending its core skills to entirely new markets. But there must be symmetry of motivation here. So while PCCW enters new markets, Lenovo potentially benefits from growth in equipment and software sales.

The CSPs of today are a one-product company anchored on mass-market subscriber revenues. By now, there is consensus that we embrace 5G and software to vary that undiversified revenue base. But it is equally important to realize this: for conventional CSPs, their core competency in a 5G ecosystem (just as for 2G, 3G, and 4G) is still based on connectivity. To that end, BT, Deutsche Telekom (DT), and Vodafone must be cautious that attempts to diversify into new business does not weaken their base business. History shows that successful companies go through constant and sometimes difficult self-renewal of the base business (e.g., IBM, HPE, etc.). These companies don’t jump into new pools where they have no sense of the depth or the temperature of the water. But according to some industry voices, the challenge for BT, DT, and Vodafone is that their base business is being approached by nontraditional competitors, so it is important for these operators and their peers to avoid focusing on too narrow a segment and failing to see important changes in the market. While BT, DT, and Vodafone pursue base business longevity, they must also pursue new growth opportunity.

Further, operators’ existing structure is geared toward mapping upward on the cellular improvement trajectory. So by extension, mapping downward toward subsystems constitutes a disruptive interface. Processes honed for the consumer domain are not sharpened to make judgment calls outside of it. Though the barriers to entry are high, subsystems like cybersecurity, big data, and AI stand to create value. And CSPs can capture that value, but first, they should create measures of performance that are different from those that drive growth in base business. To achieve this, the CSP community must come to grips with how to separate the interface between mainstream and (new) disruptive growth business. BT, DT, and Vodafone should create separate growth-oriented businesses with an operating model that prioritizes not what consumers require but rather the job that needs doing in industry-specific settings, much like Elisa Polystar and Telefonica Tech have done. The idea is that new, growing market requirements should fit the organization’s operating model, or new growth forays may hit a roadblock.

The exact role CSPs will play to support the digital transformation of industries will be constrained unless they are proactive. If BT, DT, and Vodafone are not careful, the market will dictate the position they will occupy in the impending digital world. One thing is for certain—BT, DT, and Vodafone need to adapt if they are to drive growth by mapping downward toward subsystems and/or the channel. To sell subsystems—potentially where the next wave of value generation will be—BT, DT, and Vodafone need to stop using one-process-fits-all, one-organization-fits-all, and one-operating-model-fits-all growth forays. BT, DT, and Vodafone should start simple and small and be patient for growth but impatient for profit by demanding early modest success as they commercialize new offerings. They need to place long-term, high-risk bets for sustained new-growth business. Turning themselves into market-driven entities rather than being internally focused enterprises is a first step in that direction. Lastly, BT, DT, and Vodafone should establish and be clear on what new services they will sell, who they sell them to, and how they sell them. This ABI Research Insight, by illustrating some market examples, points to some potential answers to those questions.