Why Should BT and DT Use 5G and Software Innovation to Successfully Bake a Different (and Bigger) Growth Pie?

ABI Research estimates a consumer market of US$1 trillion by 2027. Now, there is an overall awareness that if Communication Service Providers (CSPs) move in the direction of consumer-only growth, they may miss the next wave of value creation that 5G promises. With 5G, the industry is at an inflection point between a past of strong consumer growth and a future of rapid change and software innovation. Change is inevitable in this period of advancement for CSPs. There is no stopping it. This never-ending change means more than “CSPs will be different.” It means technology innovation, the engine of change, is crucial for CSPs to insert themselves into new value chains and build new business lines. The CSPs of the future will be defined by how they hedge their bets now to lose out on low-risk, short-term gains to seize high-risk, long-term growth in the impending robust marketplace.

A growing group of CSPs are already investing in growth beyond the consumer business. For example, in addition to its consumer business, it is reported that China Telecom makes US$15.1 billion from services targeting industrial automation. In Europe, Orange, Telefónica, and Vodafone, among others, are positioning themselves as suppliers of cloud services. Orange Business Services sees expanding its cloud capabilities as an important part of its strategy. And of Orange’s 10,000 digital experts, 2,600 are cloud experts. Vodafone plans to add 7,000 software engineers by 2025 to its existing base of 9,000 software engineers. Telefónica Tech, the software arm of Telefónica, achieved US$1.5 billion in revenue through September 2022. However, the majority of CSPs face challenges in terms of understanding the dynamics that (5G) disruptive innovation introduces for new growth vis-à-vis sustaining innovation associated with expanding the existing consumer footprint.

When sustaining in nature, as is the case with 3G and 4G, technology remains vertical. Here, CSPs seek percentage improvements in the consumer line of business. For example, Jio Reliance and Vodafone India sell connectivity solutions for market segments where a simple, inexpensive solution has been beyond reach. Further, with market maturity, Jio and Vodafone India offer incremental data and voice product improvements. That, in turn, justifies an increase in tariffs for a market segment that is not satisfied with the functionality that the preceding generation offers. This strategy is relatively low risk because it fits with mainstream organizational resources. For low-risk growth based on a sustaining-technology strategy, CSPs coordinate across existing boundaries within the existing organization structure to target better products at existing consumer domains. This, in a nutshell, constitutes the CSPs’ business model. That does not require a change in “behavior,” but, importantly, it does not create new markets. In the case of Jio and Vodafone India, they compete to enlarge their slice of an existing pie. So yes, 5G as a sustaining technology strategy gives CSPs’ core business a new leg to stand on to capture more consumer market share.

By contrast, disruptive innovation is about creating market share. For example, Artificial Intelligence (AI), software, and 5G Application Programming Interface (API) exposure holds potential for new growth because technologies lift all boats across CSPs’ existing organization structure, improving all products and processes. Axiata Group, for instance, uses software APIs to bake a bigger pie. Axiata reports that 4% of its revenue is now derived from the exposure of APIs. Axiata has built a community of 70,000 developers to ride growth based on software, a disruptive innovation for Axiata. Technology for Axiata is important, enabling it to deliver on business goals and revenue. Axiata is among a growing group of CSPs that focus on value, not on tech per se, but rather the strategic leap forward that tech enables. Further, when disruptive in nature, technology is horizontal and/or exponential. This requires that CSPs develop a strong stomach for risk. Horizontal or exponential technologies fits neither CSPs’ business or operating models, nor their capabilities. They go far beyond disruption. It is about overall organizational maturity, so CSPs can invest and insert themselves in value chains where profits are most attractive.

Furthermore, for CSPs to drive growth with a sustaining technology strategy, they will need to compete against non-consumption. That constitutes customers who historically lack the resources to buy and use telephony products. There may be a significant amount of non-consumption in specific markets. For example, the markets in Asia, Latin America, and Africa offer the most potential for continued consumer growth. Other markets, however, may have reached the feasible end of the cellular sustaining tech trajectory. In those markets, a horizontal or exponential technology strategy is the likely answer for new growth beyond the consumer markets. But a disruptive innovation strategy alone does not guarantee success. It just helps with an important element in the total formula. Those CSPs that stand to create new growth businesses need to get on the right side of several other challenges. Chief among them is for CSPs to reframe their approach to risk by avoiding competing solely on a sustaining, cellular improvement trajectory for consumer markets.

When consumer markets mature, leading CSPs pivot into new segments. ABI Research’s view is that, in the long term, a sustaining technology strategy may not be a viable way to build new-growth business. Yes, CSPs can still use sustaining innovation to expand existing consumer markets. And many will do that. But ultimately, the consumer markets may not be where new growth will come from. Yes, consumers will be willing to accept improved telephony products. Are they willing to pay a marginal increase in price to get them? That remains to be seen, but to date, the answer is no. As performance of telephony products overshoots what consumers can use, the latter experience diminishes marginal utility with each improvement in product performance. Hence, the marginal increase in price that CSPs can sustain in the market may well be heading toward zero. So, if BT and Deutsche Telekom (DT), among other CSPs, are to successfully bake a bigger growth pie and expand the number of products that they bring to (existing or new) markets, they must evaluate if the “sell improved performance products” approach is a good fit for growth beyond the consumer market.

Ultimately, BT and DT will need to use 5G and cloud innovation to rearrange their existing assets to create new market share. They should reframe their approach to risk. BT and DT should focus on the upside, as well as the downside, laying out and assessing clear trade-offs and setting their organizations on a path that flexibly drives change in line with market maturity and changing ecosystem dynamics—in that order. Reframing their approach to risk means that BT and DT must continually and intuitively observe what existing and prospective customers seek to do. BT’s and DT’s strategy executives should couple synthesizing insights from intuitive observations with a strategy of rapid development and fast feedback. That can greatly improve the probability that BT’s and DT’s products will converge upon a job that new markets will try to get done. Ultimately, CSPs’ ability to take full advantage of 5G is not about a dearth of growth ideas (see ABI Research’s Operator Growth Strategies: 5G and Network Automation Beyond Consumer Markets report (AN-5277)). Rather, the challenge for CSPs is in shaping the right process(es) and organizational standing that do not turn existing structured cellular advantages into disadvantages.

To conclude, a sustaining technology strategy is critical to existing consumer business growth. However, a disruptive strategy offers a much higher probability of success in going beyond consumer growth. Arguably, 5G constitutes a disruptive innovation for CSPs. Consequently, BT, DT, and the CSP community at large must avoid forcing 5G to compete solely on a sustaining basis in consumer markets. Further, in markets beyond the consumer one, almost all current organizational processes, tools, and skills may have to be adapted to a new set of rules. All these functions will be rethought to become more valuable to address jobs that new customers will need to do. Time will tell how BT, DT, and their peers go about resetting their strategic direction in terms of skills, partners, and business models in their quest for new growth beyond the consumer market. One thing is for certain: what CSPs put on display with 5G and the cloud will need to be much more than the existing sustaining, improved-functionality telephony products.