Ahead of our upcoming Digital Transformation Tracker report, which will be published later this month, TM Forum’s Chief Analyst Mark Newman looks at how communications service providers (CSPs) are approaching digital services. In this piece, the first of a two-part series, he looks at where CSPs plan to develop new revenue streams. The next article will examine whether CSPs are making any money on digital services.
In 2011, Telefónica’s launch of its Telefónica Digital division motivated other CSPs to adopt a digital services strategy, but it was never clear precisely what a digital service was and was not:
- Was it something that could be delivered over the internet (in which case it represented an opportunity for CSPs to expand beyond their legacy networks)?
- Was the focus cloud-based services (public and private, B2C and B2B)?
- Or was it really just a new term for what had until then been called a value-added service?
In practice, a digital service contains elements of all three.
How did we get here?
During the past decade, CSPs have attempted to create new lines of business across a wide range of business-to-business (B2B) and business-to-consumer (B2C) markets. From 2000 to 2010 there was a strong focus on the consumer market. Given that CSPs derive most of their revenue from consumers, it was logical for them to target B2C markets with digital services. Mobile operators are especially consumer-centric, and when it comes to innovation in new services generally, the focus is very much on mobile rather than fixed services.
CSPs launched new services across a range of consumer sectors – music, video, games, payment services and IP voice and messaging. In doing so they tried to compete with digital native players in each of these categories, but as smartphones – and app stores – emerged as the dominant platforms for new services, CSPs found themselves unable to keep up.
Partnering in music
As such, they transitioned their strategies to focus on partnering with existing players. Nowhere was the shift in strategy more apparent than in music services where CSPs across the globe partnered with Deezer, Spotify and Rhapsody, offering their customers both hard bundles where the music is included in the cost of the mobile broadband subscription, and soft bundles where music is offered as an add-on.
CSPs also inked deals with social media and messaging service providers like Facebook and WhatsApp (now part of Facebook), and video providers such as Netflix and Hulu.
Partnership models tend to fall into one of two categories:
- CSPs offer their customers free data (zero-rated data) for usage of the relevant app/service. This is typically the case for free services such as WhatsApp or Facebook.
- CSPs buy subscriptions from the relevant app/service providers, and resell them to their own customers. This, in theory, gives CSPs the opportunity to generate a retail margin. In practice, however, CSPs tend not to see such partnerships as a line of business in their own right. Rather, the key driver is customer experience and loyalty.
Other consumer services
TV services have become a key focus for CSPs over the last five years and can no longer be viewed as a digital service opportunity. Rather, CSPs have become central players in the traditional pay-TV market, mainly offering managed services over their own DSL, fiber or CATV networks.
When it comes to over-the-top (OTT) TV, CSPs’ strategies tend to be similar to their approaches to music. Many operators have forged partnerships with OTT video providers to offer services over their LTE networks in an effort to accelerate migration from 3G.
Getting back to business
Recently, many CSPs have begun turning their attention to B2B digital services. Reasons for the shift include:
- They see IoT as a promising business opportunity.
- Whereas CSPs are facing disruption in consumer services, they can be the disruptors in IT services by using connectivity to provide services from the cloud.
- Convergence of IT and telecoms technology means that many of the new network and systems capabilities CSPs are deploying give them more opportunity to provide ICT services.
- Other verticals are also transforming digitally, and CSPs believe they’re well positioned to lead such projects with their connectivity and technology capabilities.
Cloud is central to B2B digital services, particularly IoT and ICT. Many CSPs have attempted to build their own public cloud businesses to compete with players such as Amazon Web Services and Microsoft, but they’ve been largely unsuccessful. However, CSPs see a role for themselves as providers of hybrid cloud services – integrating enterprises’ public and private cloud resources.
CSPs stand a better chance of competing with cloud service providers when it comes to providing complex services – where existing customer relationships and after-sales support represent a significant part of the value proposition – rather than simpler self-service propositions where they cannot compete on price or customer experience.
CSPs are also adopting a partnership model for enterprise cloud, bundling in services such as Microsoft 365 with core connectivity and communications. Unified communications is a strong focus too – CSPs need to be proactive in migrating customers from traditional communications to IP-based services to avoid losing business to third-party providers.
How to generate B2B revenue
In addition to cloud and IoT, where CSPs are providing services to the end user, many operators are looking to generate B2B revenue as enablers of third-party services.
Digital advertising, more specifically mobile advertising, has long been an attractive market for CSPs, but they have struggled to carve out a role in a sector that is dominated by Google and Facebook. Recently, however, many CSPs have begun to consider how they may be able to use their investments in data analytics to generate advertising revenue.
In July, Russian mobile operator group Veon (formerly Vimpelcom) launched a new social app and has already signed partnership deals with Deezer and Mastercard. Advertising is also emerging as an important line of business for CSPs as they push into pay-TV. Most CSPs that have expanded into pay-TV have also created their own OTT services.
Carrier billing, which is also called direct operator billing, allows third parties to sell their services through the CSP. In the past this has mostly been through SMS-based reverse billing, but more recently operators have begun billing for Google Play and Apple Store, which lets consumers to pay for purchases via their mobile bill rather than a credit card.
What about platforms?
The graphic below shows how successful CSPs have been with various B2C and B2B digital services. Platform as a B2B (or B2B2C) business model is the least well-defined of all the B2B models. This is because CSPs still need to decide which platform-based services they want to launch and which assets they can monetize.
CSPs must decide whether they are ready to evolve and scale their wholesale businesses, and automate access to a whole range of services and capabilities including connectivity, location, billing and hosting.
While the search for new revenue streams continues, the focus within CSPs has now shifted to transforming operations and customer experience. One senior executive from a global operator told us that his company’s focus is now on delivering on specific customer requirements, with the possibility of evolving the resulting solution into a full product, rather than building a strategy for a new line of business.
Nevertheless, all large operator groups, such as AT&T, China Mobile, Deutsche Telekom, Orange, Telefonica, Verizon and Vodafone, are building ICT services. In their consumer businesses, the digital services focus is on video. With the transition to all IP networks, and the migration to LTE (and eventually 5G), their roadmap also includes migrating to IP voice and IP messaging, but these are no longer viewed as ‘digital’ services that will drive new revenue streams.