2020 will forever go down in history as a time of unprecedented change. The world as we knew it locked down and all businesses were faced with new, unforeseen challenges. It’s true that not all heroes wear capes: enter the telecoms industry which became indispensable, keeping us connected via Zoom, Teams and Slack. To the surprise of some however, the value of listed telecoms companies dropped almost 20% on average over the last year! In order to reroute the ship, 2021 will be the year CSPs face the music when it comes to 5G and will be forced to live by the mantra, “enough talking, time for action.”
This month, a report was released highlighting the potential of small and medium-sized enterprises (SMEs) as a major source of future 5G revenue for CSPs. The report reveals that, despite SMEs representing 99% of the world’s businesses - a market worth an estimated $433 billion by 2025 - it remains a vast and untapped market segment with the majority of CSPs focusing 70% of their resources on the 1% enterprise market. Despite this revelation, not enough CSPs are recognizing SMEs as a major source of B2B revenue, especially when it comes to 5G. Yet SMEs, many of which already see value in 5G, perceive CSPs as their trusted 5G go-to partner with 42% prioritizing them to execute their 5G strategies.
As it stands at this juncture, CSPs identify large multinational enterprises as the segment that will drive 5G revenues, but the large enterprises surveyed do not regard CSPs as their primary 5G provider. In fact, the report finds that 72% of enterprises will prefer to work with a service provider that is not a CSP. Findings show that 31% of large multinational enterprises will choose cloud service providers to execute their 5G strategies and 34% even favor taking a D.I.Y. approach.
Most CSPs see no option but to invest heavily in 5G, but it’s not just consumers who aren’t on board - in fact, this also includes enterprise customers who are vital to the economics of 5G, and are going elsewhere (40%) when it comes to buying compelling 5G solutions. Some are even doing it themselves (31%) rather than with a CSP (20%). The focus for many CSPs is all the technology choices behind their new 5G network, but 5G won’t sell by itself. CSPs can’t rely on the “traditional formula” of monetizing 5G by selling smartphones and contracts to millions of retail customers.This year, it’s imperative that CSPs execute a much broader set of changes if 5G is to be an economic success for them. Most are uncomfortable with change and it will take time, but delaying will come at a cost - literally.
The need for change in 2021
A change in the 5G business model requires a deeper cultural and organizational change. What we need to be asking is: what’s the CSP’s value? How does it operate? What are its core skills? And what gets measured? With the value of listed telecoms companies dropping almost 20% on average over the past year, change needs to be swift.
There are three roadblocks that CSPs are faced with, and none of them are easy to solve:
- Past network and M&A investments have created heavy debt for CSPs: This is a slippery slope and as a result, their credit ratings have little wiggle room, if any, if they want to escape junk bond ratings. Their dividend policy is set to offer short term returns, while profit margins are narrowing through price competition on the “traditional formula”. Not just surviving, but thriving, will require adding new business model(s) alongside the “traditional formula” that moves beyond connectivity into B2B data services and technology - thus building the 5G solutions customers (63%) want to buy. And the sky’s the limit! The P/E ratio for technology companies sits 5x higher than for traditional telecoms. Vodafone is an example of a CSP that has announced its pathway to becoming a technology/industry platform provider, better integrating its service portfolio (5G, IoT, Cloud and Edge) and spinning off its pan-European mobile masts and rationalizing its OpCo portfolio to address debt. 2020 saw a wave of similarly inspired mergers with T-Mobile/Sprint, O2/Virgin Media and Telefonica also divesting in Latin America as it called time on the “traditional formula” in favor of core markets in Spain where it aims to become a data services company. In 2021, we will see more of this restructuring as CSPs address the debt as an obstacle to change.
- CSPs have a high level of IT technical debt: Inflexibility within their IT systems means they lack the speed and agility to be able to deliver the changes needed to enable new business models, such as working with partner ecosystems to co-creating and co-innovating new solutions. On top of that, with the “softwarization” of many elements of the 5G value chain (rigid hardware is being replaced by configurable and customizable IT applications), CSPs will need to fend-off competition from technology and webscale competitors. With many CTOs perceiving resolving IT technical debt as the priority, it allows them to keep the lights on for current quarterly earnings. In 2021, we will see more of a “twin track” approach using digital business platforms to overlay existing IT, so that building new 5G revenue streams can be done in parallel to transforming existing IT rather than after the fact.
- CSPs have traditionally been structured in a way that best suits how they want to sell, rather than how customers want to buy: They were trying to approach 5G the same way they approached 4G, with a clear focus on consumer and enterprise. Typically, this focus on selling vs. buying and the actual customer journey has resulted in highly siloed product organizations with separate functions for technology, and the centralization of decision-making, rather than empowering those facing off to customers. Giving customers what they want from 5G means a more experimental, iterative and agile way of working focused on cloud-based pay-as-you-grow solutions that are easy to try, buy and consume rather than products needing lengthy and expensive integration with all upfront risks and costs. In 2021, we will see more “FutureCo” models that step out a new division who joins it all up for the customer with an ecosystem partner to create 5G solutions.
Is it a one-size-fits-all scenario for CSPs?
Some speculate that US-based CSPs could be the real trailblazers in 2021 when it comes to the 5G B2B revolution. Research shows that they appear to be clearer in their understanding than their Asian and European counterparts when it comes to what customers want from 5G, perhaps due to APAC and EMEA’s aforementioned focus on buying vs. selling. There’sa lot less clarity when it comes to the role the CSP wants to play in providing solutions, as only one in five US CSPs expect themselves to orchestrate ecosystems of providers to help customers realize 5G use cases. Likewise, with Verizon’s recent $6.9 billion acquisition of Tracfone - the “traditional formula” which will see it acquire millions of relatively low value prepaid B2C customers - it doesn’t look good. Given that the US was one of the first regions to see the real potential of cloud, CSPs may be best placed to seize the huge B2B 5G opportunity that we will see unfold in 2021. The ‘missed’ 3G and 4G opportunity should serve in 2021 as a cautionary tale when the result was value shifting from telecommunication services to OTTs.
CSPs will be forced to recognize the importance of the ecosystem
In 2021, those looking to move on to new business models will need to change how they operate. They've historically been so focused on standard connectivity products that they can’t seize the day and put their head above the parapet to understand what customers really want. The more they go into this and see 5G from their customer’s perspective, the more they will see 5G’s real value for this lucrative market lies in the creation of partner ecosystems. These will drive them to achieve significant strategic shifts to sell more services and reach larger audiences of partners and customers.
Recommendations: how do CSPs embark on this journey for 2021?
It’s important to first try to understand the changes necessary for success and to simply learn by doing, starting small at the beginning. It is too counterproductive to transform the whole organization, so the secret is to create a FutureCo or a pathfinder “division X” which is given full freedom on bringing in the right talent, ways of working, partnership and technologies to create the 5G-enabled solutions that customers want to buy. This “step out” division should be fully empowered and allowed to try out new things including new business and operating models that break down silos, but most important of all, start with what the customer wants.
There’s a big prize for those using 5G to redefine the mission and starting small, iterating fast and scaling with success is the only way forward in 2021. Those that don’t start the journey with this methodology will lag behind when it comes to developing the necessary skills, capabilities, services, understanding, etc., losing the revenue life blood necessary to stay relevant in an ever-challenging market. The ability for CSPs to create a more complex value proposition across vertical industries will be key in today’s competitive environment.
