Adapting to new technologies along with questions surrounding regulatory uncertainty, privacy and organizational flexibility represent the latest risks and opportunities facing telcos. ‘Top 10 risks in telecommunications 2014’, the annual study based on the insights of EY’s Global Telecommunications Center and other leading sector practitioners, underscores that although the industry is starting to benefit from the global economic recovery, many structural challenges still exist. While operators stayed largely competitive during the downturn through defensive positioning, there is now an expectation for the industry to push new business models in the face of new technologies to unlock new growth.
Realizing new roles in evolving industry
The biggest threat facing operators lies in the industry’s ability to embrace new digital technologies and the new competition this landscape creates. This environment, while both volatile and rapidly changing, requires new value chain positioning in areas as diverse as cloud computing and over-the-top (OTT) smartphone applications. In many instances, telcos will share ownership of customers with a host of players, whether partners or more disruptive competitors. Isolating new roles in complex and fast changing ecosystems has never been more important.
Bogdan Tenu, Senior Manager, Transaction Advisory Services, EY Romania: ‘The constant evolution of value chains is forcing the industry to work more closely with OTT players. In many cases, OTT providers have created more appealing alternatives to traditional offerings, like mobile instant messaging with greater interactive features compared to standard SMS services. The challenge for telcos is whether to replicate these competitor offerings by developing their own apps, or to partner with these newer players to deliver a richer customer experience. The longer operators wait to enter a particular segment, the potential for lost growth only escalates.’
Regulatory pressures climb the list in this year’s study as the second highest risk as global operators seek greater scale efficiencies through more rational market structures. For example, European operators see consolidation as a route towards ultimately committing to higher levels of network investment in 4G. At the same time, ongoing uncertainty in both the US and Europe over netneutrality regulation continues to undermine the industry’s ability to solidify long-term business plans.
Rebuilding trust through privacy and security issues
Consumer trust in service providers has declined sharply this past year in the wake of the global political fallout over mobile data privacy and security. Operators must ensure that they cope with a changing compliance landscape while redefining their relationships with consumers and businesses alike.
Proactive stances are required on privacy and security issues with partners and policymakers so that new demands for data sovereignty, personal data privacy and cyber-security – which may vary according to geography – can be reconciled in the long term.
Improving flexibility and efficiency
Like adapting to new technologies, organizational flexibility is paramount as telcos compete with smaller, more agile competitors and expand their service propositions in new directions. Meanwhile, operators also need to improve interdeparmental communications and overcome the fragmentation of customer information assets if they are to make the most of big data opportunities.
1. FAILURE TO REALIZE NEW ROLES IN EVOLVING INDUSTRY ECOSYSTEMS
New growth opportunities require new value chain positioning
As operators focus on pursuing the fresh vistas of growth opportunity now opening up, not only must they change their business models — a process that many have started — but they must also adapt to new roles across a growing number of industry value chains.
For example, as telcos have moved into cloud service delivery stretching across enterprise ICT services, many have seized the opportunity to play a key role in providing infrastructure-as-a-service (IaaS) solutions. But from there they can also go on to realize higher value by doing more, such as aggregating services from IT specialists as a cloud ‘broker’ or acting as a channel partner for software-as-a-service (SaaS) vendors (see Figure 2). In such scenarios, existing partnering arrangements will need to be revisited as new forms of cooperation emerge.
New digital growth opportunities are attracting a number of participants from different industries, ensuring that value chains are both volatile and rapidly evolving — with startups taking new roles in growth areas such as mobile point-ofsale (mPOS) solutions and with consolidation under way at various points in the value chain as service providers seek scale in sectors like mobile advertising. For operators, such developments open up opportunities to extend their wholesale focus and engage in ‘white-labeling’ of services and platforms for a wider range of customers.
Sharing customer ownership with disruptive players
The evolution of value chains also brings operators’ interrelationships with OTT players to the fore. In many cases, OTT providers have created more appealing alternatives to traditional offerings — for example, with mobile instant messaging services offering greater functionality compared to traditional SMS.
The question for operators is whether they should try to emulate these OTT alternatives by developing crossplatform apps in-house or partnering proactively with these players to deliver a richer customer experience. Options here include bundling music streaming as part of mobile data packages but excluding data traffic on that app from the customer’s monthly data allowance.
As more and more operators choose to partner with application providers, a number of tactical and strategic options emerge. This in turn opens up a range of potential ecosystem positions for telcos, including forging exclusive partnerships with OTT players, engaging in joint product development or even providing services such as billing to OTTs themselves. A number of these various ecosystem positions are illustrated in Figure 3.
Operators can choose to occupy a range of positions within a single ecosystem in order to maximize the possibilities for value creation. There are already signs that different value chains themselves are combining to create new types of interdependencies — the convergence of mobile payments and location-sensitive marketing capabilities is a case in point. As a result, operators must take a holistic view of new digital ecosystems, considering how they are likely to expand as customer needs change and complementary use cases arise.
2. LACK OF REGULATORY CERTAINTY ON NEW MARKET STRUCTURES
Attitudes to consolidation and cross-sector relationships are in flux
A combination of factors — including price deflation driven by competition from OTT providers and adjacent market players such as cable companies and unbundlers moving into mobile services — mean market conditions for operators remain highly challenging.
Using the Herfindahl-Hirschman Index of market concentration, European markets vary significantly in terms of concentration of market share. At the same time, profit margins remain below average in markets such as the UK, France and Austria, where aggressive fourth market entrants have driven long-term price erosion.
Against this background, stressed European operators see consolidation as a route toward more rational market structures — which they hope will in turn help to justify higher levels of network investment at a time when 4G take-up in the region is lagging other markets worldwide and spectrum costs remain high.
In emerging markets, spectrum shortages and low telecoms prices mean more rational market structures are also envisaged — either through consolidation or new wholesale mobile broadband networks.
Although regulators recognize the need to reform existing rules to drive industry growth, attitudes to in-market consolidation remain unclear, with antitrust reviews of proposed mergers proving contentious. An EY survey of senior executives found that the regulatory environment is the leading reason for telcos not to pursue acquisitions.
At the same time, net neutrality issues are coming to the fore following legislative proposals and court rulings in Europe and the United States. Nevertheless, policy approaches in this arena also lack clarity, with competing viewpoints on how an open internet can function most effectively — and for the benefit of operators and content distributors alike.
Operators must help shape new regulatory attitudes
Breaking this logjam will require action and commitment from telecoms providers. Regulators already understand the need to balance pro-competition and proinvestment policies. But, to drive progress, operators need to seize the initiative by prioritizing shared industry positions and re-evaluating the relative merits of in-market consolidation — including conditions attached to mergers — versus network sharing and other synergy drivers.
Looking ahead, operators and regulators both need to focus on market structurerelated issues such as wholesale mobile network provision. Other key areas include the provisions around spectrum release, licensing and sharing. The release of new sub-1GHz frequency can support long-term growth in mobile data and provide associated uplift in economic productivity — and shared, well informed industry positions can help shape policy agendas in this regard.
At the same time, operators’ ability to innovate their business model will depend on new relationships with other industry entities. Definitions and frameworks of the open internet are likely to evolve gradually in ways that balance end-user freedoms with incentives for players across the value chain to compete, invest and develop innovative services.
3. IGNORING NEW IMPERATIVES IN PRIVACY AND SECURITY
Consumer trust levels are in decline as regulators revisit data protection guidelines
In the wake of recent negative headlines about telecoms and data privacy, the levels of consumer trust levels in various service providers are in decline. However, as Figure 6 shows, while trust in mobile operators and ISPs is falling, consumers’ attitudes toward other ecosystem players such as app developers and social networks have declined even faster.
The uncertainty and concern around data privacy and security are being exacerbated by an escalating political and industry debate, which is expanding into new areas such as data sovereignty and internet governance. Countries from Germany to Brazil are considering new ways of ensuring the integrity of national data amid a rising focus on cross-border collaboration to provide greater global consistency of cybersecurity policies.
At the same time, existing regulation remains in a state of flux following the Edward Snowden revelations. The EU’s data retention directive, established in 2006 to help combat serious crime and terrorism, is now deemed a threat to digital rights, and the EU is preparing full-scale overhaul of data protection and online privacy safeguards through general data protection regulation (GDPR).
New opportunities are opening up for differentiation
The unease over data privacy has contributed to highly ambivalent attitudes among consumers over companies’ access to and reuse of their personal data. Some customer segments are willing to release personal identification and usage data on an anonymized basis. However, many consumers believe that information on customer purchasing and related behavior benefit companies gathering big data more than end users themselves.
By catering to these ambivalent attitudeson personal data, operators have an opportunity to drive trust levels that can in turn help to unlock new service scenarios. For example, improved privacy and security features are vital to the take-up of services such as mobile payments. On the enterprise side too, demand is rising for secure cloud and connectivity services, with the physical location of data playing a far greater role in cloud purchasing behavior and higher levels of due diligence now conducted on cloud providers.
By adding enhanced privacy and security features to their service propositions while understanding the quid pro quo involved in the repurposing of big data, operators can reverse declining levels of trust among end users. At the same time, proactive stances are required on privacy and security issues with partners and policy-makers so that new demands for data sovereignty, personal data privacy and cybersecurity — which may vary according to geography — can be reconciled in the long term.
4. FAILURE TO IMPROVE ORGANIZATIONAL AGILITY
Greater agility is essential in a more diverse industry ecosystem
The need to seize innovation opportunities and defend their legacy market positions will require operators to overhaul their siloed organizational structures for more flexibility and agility. While operators have moved in recent years from network-centric to customerfacing structures, and in some cases have also added new digital and app-focused business units, they essentially remain highly complex, multi-local organizations with a mixture of product- and geography-oriented business units.
Simplifying and streamlining these structures while driving new forms of interaction within organizations will be vital if telcos are to cope with a range of escalating trends.
These include the need to develop and launch new service propositions more quickly as technology cycles shorten, proving more responsive in the face of disruptive competition from smaller, more agile innovators, and creating the flexibility to interact with customers, partners and suppliers in new ways. The challenges to achieving these goals are illustrated in Figure 8. While most of the European operators surveyed by Comptel agree on the importance of interdepartmental collaboration, only a handful believe that the marketing function should be involved in formulating the technology strategy. This suggests that many executives’ existing commitment to increased collaboration within their organizations fails to focus on the more granular aspects of teaming across business functions.
Fostering flexibility and innovation from within
Effective and committed leadership will be vital in overcoming such entrenched, siloed attitudes. As such, matrix structures can be adapted to enable collaboration at various levels, whether in terms of customer segments, business functions, geography or products. For example, greater collaboration between enterprise and wholesale sales teams can help operators become more nimble as delineations between different customer types start to blur. At the same time, a ‘launch and learn’ mindset may help operators expand their product mixes at a time when the pace of service innovation across ICT is quickening.
It is also important for operators to take a flexible approach to ‘how’ and ‘where’ innovation is housed in the organization. While a range of options is available, including the carving-out of new digital business units, issues such as governance and oversight require attention. Rather than sudden reinvention of the organization, for example, incremental overhaul may bring greater long-term benefits, ensuring that agility permeates all parts of the business.
While changes to organizational structures and cultural mindsets form the basis for operators aiming to boost responsiveness, the evolution of systems and processes is no less important as telcos look to strike a balance in generating efficiencies and creating value, as shown in Figure 9.
Improvements to network architecture in the form of virtualized functions can help reduce vendor lock-in and speed the development of new services, while the simplification of billing platforms and integration of multiple customer relationship management (CRM) systems can pave the way for a better, more personalized customer experience. In this light, a holistic approach to organizational transformation that considers both people and processes is vital if agility in the widest sense is to be achieved.
5. LACK OF DATA INTEGRITY TO DRIVE GROWTH AND EFFICIENCY
Data integrity requires organizational overhaul …
Operators are widely perceived as having a natural competitive advantage in the big-data arena compared to other industries due to their legacy of strong customer, network and product information assets. However, the volume and diversity of such information creates additional challenges for telcos as they look to create value within and beyond their organizations through big data.
Big-data strategies are gaining traction at many leading telcos. However, early forays into the repurposing of various data sets reveal a number of challenges, with a lack of cooperation within the organization, lack of leadership understanding and commitment around the importance of data, and fragmentation of data sources all impeding progress. Figure 10 highlights the issues facing operators as they seek to monetize their information assets.
… and moving from big data to better data
Given these challenges it is perhaps unsurprising that the proportion of IT budgets projected to be devoted to bigdata solutions is set to expand significantly in the coming years. Yet this alone is no guarantee that operators will generate value from big data: long-term benefits will require carefully delineated strategic visions to be balanced with operational excellence.
With this goal in mind, value opportunities from big data must be defined and prioritized. Many internal use cases for big data are inherently interrelated, such as customer retention, up-sell and customer experience improvements. For example, successful early initiatives in customer retention can inform later projects where data is repurposed for third parties. As Figure 10 shows, big-data use cases can range from network via operations and customers to third parties, providing a spectrum of prospective benefits ranging from efficiency gains to incremental revenues.
To make the most of big-data assets in a collaborative environment, operators need to build higher trust levels with third parties, including overhauling traditional partnering frameworks, particularly for use cases where confidentiality is paramount, such as the sharing of patient health care information. This shift needs to include more consultative engagement with vendors, who can add big data functionalities to existing competencies in CRM and educate operators on the advantages of cloud-based business intelligence solutions. At the same time, increased data privacy commitments will help consumers feel comfortable with propositions that repurpose customer information for third parties.
Finally, operators will need to develop competencies within their organizations in order to maximize their big-data strategies. Other industries have created chief data officer roles in recent years — and telcos could benefit from similar moves given the already stretched responsibilities of CIOs and the need for leadership and effective resourcing of analytics capabilities. In addition, explicit pain points may exist in terms of machine-learning specialists and data scientists, which can be addressed through external hires.
6. LACK OF PERFORMANCE MEASUREMENT TO DRIVE EXECUTION
Turning digital strategy into business reality …
Many — if not most — of today’s leading operators worldwide have clear and wellarticulated strategies in place that define their transformation initiatives and map out routes toward digital growth. However, as in any fast-moving industry, formulating the strategy is the easy part. Execution is much harder.
For operators, translating the strategy into actionable steps that deliver genuine business impact is especially challenging for several reasons, as summarized in Figure 12. These include a lack of established internal metrics to measure progress against new digital objectives and targets, and of external metrics that can communicate financial and operational performance in new ways. Meanwhile, short-term business planning processes are often out of step with the long-term strategic visions.
Both of these factors can combine to create an absence of accountability and of appropriate incentives to reach targets. Meanwhile, existing project and process management frameworks can remain detached from wider strategic principles, making it more difficult to set achievable objectives in the first instance, let alone assess their positive business impact. In this light, such shortcomings can undermine execution and render the strategy largely ineffective.
… requires new metrics to unlock measurable progress
In order to prioritize effective execution, operators must overhaul their business planning and metrics — enabling them both to drive and also demonstrate measurable progress against their strategic targets. Business planning is often annual, while guiding strategies consider a fiveyear timeframe. These cycles need to become much more closely aligned.
Metrics transformation is equally vital. This involves the creation of new internal metrics to track implementation of objectives within the organization, and new external metrics to communicate the positive business impact of transformation and innovation initiatives.
The case for revisions to external metrics is even stronger given that legacy KPIs — such as minutes of use (MOU) or average revenue per user (ARPU) — fail to reflect pronounced changes in the revenue mix, tariff structures and multi-device ownership. Figure 13 showcases examples of both internal and external metrics that are now being tracked by forward-looking operators to support their strategy execution.
Once the new metrics have been defined, they will need to be updated and enhanced over time to reflect changing customer definitions and use cases. They can also be used to provide greater insight on issues in the wider business environment, such as corporate sustainability initiatives, or to provide greater detail to regulators on service availability, for example.
7. FAILURE TO UNDERSTAND WHAT CUSTOMERS VALUE
Customer confusion limits appeal of new services A significant risk facing telecoms operators today is failing to understand and address evolving customer needs and expectations. As operators widen their service portfolios, care must be taken to ensure that customers’ real needs are being met. Operators seeking profitable growth must understand what customers want and then provide a better and more relevant end-user experience.
If telcos fail to do this, it is not only the immediate adoption rate for new services that is at stake. Operators’ long-term brand affinity with customers is also under threat, with large technology companies now consistently outscoring telcos in global brand surveys while fleetfooted OTT players continue to redefine customer expectations in new ways.
Worryingly, research by EY suggests that many telcos may be focusing on the wrong areas. As Figure 14 shows, a significant proportion of consumers don’t understand their mobile data tariffs. Such concerns are likely to increase as tariff options multiply in a tiered data pricing environment and there is a positive correlation between tariff understanding and willingness to try new services. And while many operators emphasize higher speed as the main selling point of their broadband offerings in fiber markets, our research shows that households are actually more concerned with service reliability.
Balancing simplicity with flexibility in the proposition
To close the gaps between what customers want and what telcos provide, operators need to focus their attention on those elements of the offering that are pivotal to successful customer engagement — including the regular bill. While consumers want more choice, they also want to understand what they are buying — and with today’s telecoms services these two objectives are often at odds.
To bring them back into alignment and drive service take-up, operators need to balance simplicity and flexibility of tariff options as a gateway to new user experiences and assess customers’ propensity to aggregate different services from a single provider to maximize up-sell. Sensitivity to local market factors remains vital due to differences in data consumption and pricing models and exposure to competing brand affinities from market to market.
These demands are making improved segmentation of customers increasingly important, as the boundaries blur between previously distinct segments such as SMEs and corporates. In some cases, even relatively small SMEs now require sophisticated international wireless services, making data-roaming packages and differentiated service levels much more important.
As the residential bundle market enters a new phase of evolution, with an increase in quad-play and smart home service options, operators can also leverage attitudinal insights to bring out further nuances that define customer groups. As highlighted in Figure 15, the most affluent and technology-centric customers may also be the least loyal, while sensitivity to customer service differs markedly between different segments.
8. INABILITY TO EXTRACT VALUE FROM NETWORK ASSETS
Addressing a wider mix of network technologies — and of potential rivals
Despite operators’ ongoing moves to share mobile network assets or jointly construct fiber networks, differentiation through network quality remains vital. While rollout of LTE technology has been aggressiv