By Simon Torrance
“M&A is not enough to support a new wave of sustainable growth for telecoms operators – the most powerful business models in the digital economy are platform-based.”
Telecoms groups tend to base their growth strategies on ‘product’-based business models, but platforms will be the key to success in the digital economy. This article identifies the business model problem faced by most telcos and discusses the potential solution to this problem.
Telcos must fundamentally re-appraise their growth strategies
A few weeks ago, I was running a workshop on new growth strategy and digital disruption for the Board of a leading international telco. After a short while, the Chairman announced that he was more worried about the prospects for his company than he had ever been in the past.
Why was this? His company has a large or dominant market share in most of its territories. It has very good relations with local regulators. It has money to invest in a fibre roll-out, which could enable it to offer TV, broadband and cloud services to enterprises, and make it the leading converged operator in all its markets.
So why the pessimism? Fundamentally, the growth prospects do not look promising, given the decline in voice revenue and the increasing costs of providing data. Perhaps small single-digit year-on-year growth … if the business plans for quadruple-play and cloud services work out.
It is a common situation across the industry, with local variations of course. Telcos have become ‘defensive’ stock for investors and M&A seems to be the main growth strategy, for the big players at least. This is all fine and certainly important, but it is not going to support a new wave of sustainable growth for the industry, for big or small players, in emerging or mature markets.
It is time for telcos to move from a ‘product’-based business model to one based around a platform
Most telcos are aiming to become ‘digital telcos’, ‘digital lifestyle service providers’ and/or ‘regional ICT companies’. They know their networks play the key enabling role for the digital economy, they know they have unique and valuable assets, and most are experimenting with many different types of digital services from advertising to healthcare.
Many have set up specific ‘digital’ business units to try to fast track innovation, in parallel with significant investment in network virtualisation and more-flexible BSS systems to get fit for a digital future.
These are necessary developments, and some are starting to deliver results (especially in the M2M and ICT sectors), but they are still primarily driven as ‘products’ – capability is built or bought and then sold to customers.
The problem is that products are difficult to defend in the digital world, whereas the most powerful business models are based around ‘platforms’.
Platforms are the key to success in the digital economy
An open platform will create new opportunities for telcos to compete in the digital economy (see Figure 1). Apple is the most valuable company in the world not because it makes great devices, but because it has the best platform. AirBnB, Alibaba, Amazon, Facebook, Google, LinkedIn, Rakuten, salesforce.com, Uber, Xbox and many more facilitate interactions between multiple parties to create rapid scalability.
Figure 1: A digital innovation platform and its opportunities for telcos
WeChat – with 450 million users – is not just a free chat app, it is an ecommerce platform that drives significant revenue for Tencent via a range of shopping and banking services. Xiaomi has a market capitalisation of USD45 billion after only 4 years of existence not just because it ships more smartphones than anyone else today, but because it is also the third biggest ecommerce company in China – it sells its smartphones at near cost and makes money from commerce services. It is the opposite of Apple, but has the same platform business model.
Interbrand, a brand consultancy company, has produced a list of the ‘best global brands’. Of the top 30 in 2014, 13 were platform businesses. Those joining the category in 2014 included non-technology companies like General Electric (GE), with its industrial Internet platform, and Nike, with its open fitness platform.
How platforms work
Platform providers build ecosystems around their core business. Ecosystem members use the platform to create innovative services for the platform providers’ end customers. Apple has thousands of developers and hundreds of accessory manufacturers continually creating complementary products that work beautifully with Apple’s devices and create increasing demand for them. Apple takes no risk on its innovation efforts and takes a cut of the revenue from those that are successful.
The more complementary service providers drive demand for Apple’s core business, the more Apple has an incentive to disrupt more adjacent markets – such as payments and streaming music – to support this virtuous circle. When companies get this right, the ‘network effects’ kick in. As a result, Alibaba is worth more than Walmart Stores (see Figure 2).
Figure 2: Alibaba Group and independent businesses, by market [Source: Analysys Mason, 2015]
|Alibaba entity||Market||Similar company|
|Aliyun||Cloud services||Amazon Web Services|
|Aliyun App Store||Mobile apps||Google Play|
|Aliyun OS||Mobile OS||Android|
|AutoNavi||Maps and navigation||Google Maps|
|InTime||Retail outlets||J.C. Penney|
|Lyft, Kuaide||Car service, ride sharing||Uber|
|Taobao Travel||Online travel booking||Orbitz|
|Youku Tudou||Streaming video||Hulu|
|Yu’e Bao||Money-market funds||Ing Direct|
MySpace lost out to Facebook because it tried to create all its own products. Samsung is suffering because it lacks a strong platform model – and the same can be said of telcos.
Actions for telcos
So far, the industry has not evolved its business model from product- to platform-based. It has made various movements in this direction, particularly with its digital initiatives, but these have been isolated from a fundamental upgrade of the business model.
Our view is that it is time, at Board level, for all telcos in all countries to start by re-considering what their ‘purpose’ is and which companies they are really competing with and how. Will they remain ‘leading providers of telecoms/ICT services’ or could they become ‘creators of digital innovation platforms that drive local socioeconomic growth’? The latter provides scope for an exciting new future.
The successful business model template for the digital economy is available and ready for adoption and adaptation. It is time to put the objections aside and take some bold steps forward. Analysys Mason can help you on this journey.
Winners in the ‘digital economy’ are those companies that can create platforms business models around their products. The time has come for telcos to be bold and evolve to a platform-based business model to enable a more exciting and sustainable future. To discuss Analysys Mason’s experience and capabilities in this area, please get in touch.