Telefónica entered into an exclusivity agreement with Hutchison Whampoa regarding Hutchison’s potential acquisition of the Telefónica subsidiary O2 UK for £10.25 billion in cash, valuing the deal at an estimated 7.5 times 2014 EV/EBITDA. The Hutchison-O2 UK deal — should it complete — will entirely redraw the telco landscape in the UK in terms of market shares. The acquisition of O2 UK will transform Hutchison from the smallest mobile operator with 7.5 million customers to the largest with 31.5 million customers and reduce the number of mobile operators in the UK from four to three.
This development follows on the heels of the announcement by Orange and Deutsche Telekom that they have entered into exclusive negotiations with BT Group regarding a potential divestment of 100% of their shares in EE, their joint venture in the UK. The increased merger activity is not surprising, and we predicted as much in our report Predictions 2015: Telecoms Will Struggle To Align To The CIO's BT Agenda. Still, these deals raise important questions for the European telecoms markets:
At the same time, for business leaders, having access to quality network infrastructure represents a vital underpinning for their digital business and their long-term competitive advantage. We predict that by 2015 and beyond:
The telco business model will shift from sustaining to enabling critical infrastructure. Traditionally, the telco business model focused on sustaining operational efficiency of network infrastructure. In the years ahead, we predict a shift toward enabling solutions that support telco clients to engage with their customers more effectively. This mirrors not only the CIO’s shift from IT towards business technology but will also be the overarching theme during the transformation of the telco business model.
The other day, I met with the strategy director of a European telco. Let’s call him Art. We shared an informal discussion about the future of telcos. Personally, I am fairly skeptical about the prospects of telcos to recover ground – in particular in Europe.
Consumers are more concerned about the apps they use and the devices that they have than what connectivity they use, as I outline in the report The Future Of Over-The-Top Services. Forrester’s Customer Experience Index, which measures consumer perceptions of telco services, shows telcos near the bottom of all sector readings.
On the business side, data from Forrester’s Business Technographics® Global Networks And Telecommunications Survey, 2014 shows that business users trust systems integrators and independent solution specialists more than telcos with almost all voice and data service, because they feel that telcos don’t understand their specific business requirements as well.
Add an unfavorable regulatory environment — which, under the umbrella of the net neutrality debate, is about to close the door on commercial relationships regarding quality connectivity between content and network providers — and it becomes difficult to be wildly optimistic about the future of telcos. Yet, this is not where our discussion ended. Art pointed to three major issues where telcos will need shock therapy:
I attended an NG Telecom summit in Hong Kong recently; at the event, I chaired a discussion on how telcos need to improve the customer experience.
Consumers now have powerful mobile devices in their hands, speedy access to social platforms, and the ability to call up information on the go. More importantly, customers today can choose to easily switch to a competitor if they don’t like the customer experience they are receiving. As a result, telcos no longer “own” customers — it’s the other way around.
The discussion participants all agreed that telcos must do the following to meet customer-centric needs:
Simplify systems and processes. The debate on how to simplify complex telco business support systems (BSS) to make it easy for customers to consume services is an ongoing one. When BSS cannot provide a single, unified view of the customer, it’s difficult to provide a consistent customer experience. This happens with CRM systems: Call center agents struggle through five or six screens just to get a complete customer profile while irate customers spend time repeating their personal details or waiting for a resolution. Telcos must be like OTT players, which have very complicated businesses, systems, and processes on the back end but present a simple front-end interface to the customer.
At Mobile World Congress 2014 in Barcelona, SingTel CEO Chua Sock Koong was reported as “call[ing] on Australian regulators to give carriers like Optus the right to charge rivals WhatsApp and Skype for use of their networks or risk a major decline in network investment.”
With the telecommunications industry unable to monetize over-the-top (OTT) traffic, telcos will struggle to find the funding they need to improve their infrastructure — meaning that network quality could deteriorate. Chua did concede that telcos should work toward partnering with OTT players.
What It Means
SingTel’s argument runs over familiar ground, similar to the ongoing net neutrality debate in the US. My colleagues suggest that telcos will offer tiered access at tiered pricing to OTT players in the future, charging higher prices for better connection speeds and greater data traffic. While I don’t doubt this, price-sensitive Asia may be a harder nut to crack; telcos here run the risk of customer churn by raising service prices.
Aside from speeding up its rate of service innovation, SingTel should:
Facebook’s purchase of WhatsApp shows that the market for messaging is far from dead. But it’s just gotten worse for the telcos. We’ve already discussed the underlying reasons in a report — but the fact that Facebook put $19 billion on the table, of which $4 billion is in cash, for a global messaging service with 55 staff should scare telcos, with their millions of employees and high-cost structures. Over-the-top communications tools like WhatsApp, Line, KakaoTalk, WeChat, and Viber (which itself was bought a few days ago by Rakuten) have pushed telcos further and further away from any meaningful customer engagement.
To be sure, WhatsApp is about much more than instant messaging; it’s about content sharing — which is an emotional activity. Such emotional activities are critical to closer customer engagement. As the online giants use ever more granular user analytics to cement their position as marketing powerhouses, telcos’ hopes of developing new revenue streams from analyzing user behavior are slipping away faster and faster. This is what makes the deal so dangerous.
Of course, it’s tough to justify the deal simply on the basis of WhatsApp’s revenue model of $1 annual subscriptions. In my view, the deal is really about:
Bringing a major competitor into your family. Otherwise, someone else could have lured WhatsApp into theirs. The deal, which accounts for about 10% of Facebook’s market capitalization, could be seen therefore as an insurance cover.
Mobility is becoming pervasive in the enterprise. Smart devices, including wearables, are appearing in all sectors, both in developed and emerging markets. Businesses that fail to prepare for the mobile mind shift risk losing their competitive edge. I hope this year’s Mobile World Congress, which kicks off on February 24, will emphasize the interaction between business processes and mobility — in addition to the traditional gadgets.
I focus primarily on themes relating to the connected business and social collaboration, and I will travel to the world’s leading mobile event in Barcelona to gain new insights into several questions in these areas:
At the 2nd Annual Telco Cloud Strategies 2013 event in Singapore, I moderated a discussion on how Southeast Asian telcos are gearing up to offer cloud services. Here’s what I observed:
In the cloud era, SE Asian telcos are moving faster than they are used to. A year ago, Philippine telco Globe Telecom set up a new division, IT Enabled Services, to effectively deliver cloud services, supported by more than 100 professional services people on the ground. While revenues are still low, the new division is now freed from being part of the larger parent company’s processes and can move quicker than competitors to offer managed cloud services for specific industries. Indonesia’s Indosat, on the other hand, has brought both the IT and network divisions together to offer a bundled service — cloud with connectivity — in the same period. Others, like Singapore’s SingTel, acquired IT services company, NCS, to tap into the enterprise segment.
Telcos need partners for cloud services. This is essential, as telcos do not typically have all the pieces for an end-to-end solution. For instance, even with a solid IaaS offering, a telco still needs partners to build the value chain in their ecosystem, e.g., SaaS, and grow together. Indosat, for instance, partnered with Dimension Data to offer enterprise cloud services in Indonesia. The partnership combines Indosat’s nationwide connectivity backbone infrastructure and its 10 data center facilities in Indonesia with Dimension Data’s cloud consultancy services.
We recently attended Amdocs' customer event in Singapore. Amdocs is gradually adjusting its strategy to reflect one of the most fundamental changes in the ICT industry today: Increasingly, business line managers, think the marketing or sales officer, are the ones influencing sourcing decisions. Traditional decision-makers, CTOs and CIOs, are no longer the sole ICT decision-makers. Amdocs is addressing this shift by:
Strengthening its customer experience portfolio.Successful telcos will try to regain lost relevance through improved customer experience. Marketing, portfolio product development, and sales are therefore growing in importance for telcos. Amdocs’ integrated customer experience offering, CES 9, provides telcos with a multichannel experience; proactive care; and self-service tools.
Betting big on big data/analytics.Amdocs is leveraging big data/analytics to provide real-time, predictive, and prescriptive insights to telcos about their customers’ behaviour. Communications-industry-specific converged charging and billing solutions as well as other catalogue solutions give Amdocs the opportunity to provide more value to telcos than some of the other players.