Telco 2.0 and the prisoner’s dilemma

Telco 2.0 and the prisoner’s dilemma
Dominic Smith reviews the recent Telco 2.0 New Digital Economics EMEA Executive Brainstorm in London.

It’s now six years since the Telco 2.0 initiative was launched by boutique analyst and consulting firm, STL Partners, but this was my first opportunity to participate in one of their ‘Executive Brainstorms’ here in London. It’s fair to say that in amongst the noise of many industry conferences, the Telco 2.0 events stand out as following a very different structure built around collaboration rather than the standard ‘death by powerpoint’ seminar format. And from the outset, the agenda is designed to stimulate discussion and use the collective brainpower and creativity of the participants in an effort find answers to the burning questions and challenges faced by Communications Services Providers (CSPs) today.

The two-sided business model

The overall premise of Telco 2.0 is that of creating a new ‘two-sided’ business model, which helps Communications Services Providers (CSPs) move away from their traditional position as suppliers of telecoms services, to becoming valued enablers of the digital economy. Think about eBay or Betfair – these are companies who don’t operate a linear ‘1.0’ business model with a supplier to customer relationship. Instead they have created marketplaces that connect buyers with sellers and provide an infrastructure that makes it very easy to do business – for which they earn a very healthy share of the revenue.

This is the new world of the ‘2.0’ business model, and there are more and more companies emerging with this approach all the time and in all industry sectors – for example a recent one that caught my eye is Housebites, a new take on the traditional takeaway food model. The challenge for CSPs is that in the face of declining revenues from traditional services and the rise of over-the-top (OTT) providers, how can they transform from Telco 1.0 to Telco 2.0?

Some of you may be wondering why this is important – surely there is enough revenue opportunity on the table for CSPs to continue as providers of voice services and data connectivity without having too much to worry about? Well in the opening stimulus presentation, Chris Barraclough, Chief Strategist and Managing Director at STL Partners, laid out the results of some recent research that showed just how quickly things are changing.

Traditional revenues in decline

Tracking the UK’s mobile operator revenues over the last six years, STL Partners have identified that the peak was reached in 2008, with overall revenues in decline ever since. Though there has been undoubted growth in data services and SMS revenues during the last four years, this has been insufficient to make up for the decline in voice revenue caused by price erosion, whilst the volume of voice minutes has remained pretty much flat.

Looking at when the peak occurred, personally I think it’s no coincidence that the time of the revenue peak coincided with the arrival of the iPhone in the UK market. O2 introduced the iPhone at the end of 2007 and retained exclusivity for nearly two years, and during this period their competitors continued to bundle more and more minutes in an effort to compete with the iPhone exclusivity. So in effect, this accelerated voice price erosion in the UK market which has continued since the iPhone became available on all networks.

Looking ahead and if business models don’t change, STL Partners projects that from 2009 to 2018, there will be a 24% drop in UK mobile operator revenues, which equates to £4bn. The message to CSPs from STL Partners is clear: Worried? You absolutely should be. To survive and thrive, CSPs must think differently, move fast and crucially, collaborate.

The prisoner’s dilemma

I’ve previously put forward the case for CSPs partnering with OTT providers, however STL Partners also recommends greater co-operation between CSPs within the industry – the GSMA’s joyn initiative being a good example. However, the key challenge is the so-called prisoner’s dilemma – in essence, there is a competitive tension between these two partnership models. CSPs that work independently and form their own OTT partnerships may be able to gain a short-term competitive advantage, but at the same time destroy long-term industry value; whereas collaborating with other CSPs may create overall value for the industry in the long-term.

So what’s the answer? Well CSPs probably need to try and cover both bases. The rise of the OTT providers is unrelenting, and CSPs need to pick their OTT partners wisely, whilst also working on the long-term collaboration model with other CSPs to secure their future.

Urgency and focus

This analysis of ‘The Market 2.0’ and the following discussions around ‘The Digital Consumer 2.0’, ‘Customer Experience 2.0’ and ‘Network 2.0’ posed some very interesting questions and confirmed that cultural change is probably the single biggest challenge for CSPs in the transition to Telco 2.0.

Did we all come away with clear answers? Well no, not entirely, but then I suspect there is no one-size-fits-all answer for the industry. But overall the ‘Executive Brainstorm’ provided real food for thought and I’m sure that the majority of delegates returned to their day jobs with an increased urgency and greater focus on the challenges that lie ahead.