The challenges of being a servco

De-layering and structural separation have come to the telecoms industry. And while infraco spin-offs have already generated billions for CSPs, and some netcos have established themselves as nationwide connectivity wholesalers, the servco identity remains in question. When seeking comparisons to existing telco businesses, the default tends to be mobile virtual network operator (MVNO)s. Servcos, however, are very different from MVNOs for a variety of reasons and if their aspirations don’t exceed those of the MVNO market, they won’t get very far.

What’s up with structural separation?

Structural separation is unfolding because growth has become more challenging for most communications service providers (CSPs). Kiran Karunakaran, Partner, Bain & Co says that when financial analysts see revenue, profitability and EBITDA forecasts that “do not reflect the value of the parts of that business” it “logically leads to delayering or structural separation for any business – telco just happens to be there now”. .

When CSPs are delayered, they are typically divided into three types of organizations – though not necessarily three units:

Infrastructure companies: Infracos are the most common type of structurally separated telco unit. An infraco holds passive, physical assets which can include anything from cell towers to dark fiber, data centers and real-estate. Each type has been spun out as a distinct infraco unit and generated anywhere from tens of millions to billions in new cash for CSPs in every part of the world.

Network companies: Standalone network companies (netcos) can be a little bit more difficult to come across, but examples include CETIN, formerly O2 Czech Republic; TDC Net, formerly Tele Denmark; and Chorus, formerly Telecom New Zealand. Netcos are primarily wholesalers that operate active network assets and services. They focus on providing connectivity to entities that serve end users, like servcos, and probably cloud providers and some enterprise buyers too.

Servcos: A separated servco’s main purpose is to serve customers’ digital needs, be they consumers or – increasingly – business customers. They may carry forward the CSP’s brand power and subscriber base. But they still face the same need as any CSP to find new sources of revenue growth beyond their core markets.

Because servcos will not be freed magically from declining legacy telecom services, they remain the aspect of the de-layered CSP model that raises the most questions. Lacking a better current example, servcos are often described by experts as being most like MVNOs. On further examination, however, this comparison falls short across several criteria.

Why MVNOs are not a model

Without question, servcos should strive to achieve success greater than the MVNOs to which they are so often compared. After all, the global MVNO market is more than 20 years old and yet was valued at less than $80 billion globally in 2022. Though some projections expect the market to reach or exceed $100 billion in 2029, this represents less than 7% of the roughly $1.55 trillion global market for telecommunication and pay TV services.

Yet it is important to keep in mind that the difference between a servco and MVNO may become irrelevant in the future. An MVNO that expands into new digital service categories like home and small business security, VPNs and cloud storage may well morph into a servco. Servcos may buy up their MVNO competition. All possibilities are in play today.

Here are three examples of how servcos are very different from MVNOs today:

1) They’re born different. According to Wikipedia’s citation of GSMA Intelligence data, there are roughly 2,000 active MVNOs in the world today. Some notable MVNO brands in the US remain part of, or associated with, their original parent CSP. These include Cricket Wireless (AT&T), Boost Mobile (formerly Sprint), Visible (Verizon), and Metro (T-Mobile). Beyond these, however, most of the world's MVNOs began life independent of a major CSP and continue to operate that way.

In contrast servcos begin life as the customer-facing organization within a vertically-integrated CSP. Their first market entrance comes with a target on their back after separation from their parent companies in which systems, processes, employees and management are all reconciled. Once separated, they must defend their brands and customer bases while finding new categories for growth. These challenges are fundamentally differently from those faced by a new MVNO, which has more flexibility as a challenger in what it offers and less territory to defend than an incumbent servco.

2) Servcos are brownfield. Many MVNOs launch with minimal IT and grow organically, often with the luxury of greenfield IT. For separated servcos, it’s brownfield only, and they will already have gone through a challenging division of processes and IT resources. “Sometimes you are cutting in two; sometimes each side has its own transformation or new systems; sometimes it’s a bit of both,” says Carsten Rasmussen, Head of IT Enablement for TDC Net.

3) MVNOs are not to scale. Lyca Mobile is the world’s largest MVNO, reported to be serving more than 16 million customers in 23 countries. Most or all of those customers are prepaid international voice users only. By comparison, BT Consumer supports more than 25 million customers across physical, digital, fixed and mobile services. While Lyca’s success in its markets is undoubtedly impressive, its scale compared to a medium or large servco is limited not only in number of customers, but also in breadth and depth of service offerings. At a granular level, the scale and product complexity differences in running a separated servco versus a typical MVNOs are not comparable.

In the near term, it is important to understand the unique challenges servcos face as they exit structural separations and not assume any MVNO’s business is similar enough or scaled enough to provide a worthy model of what a servco ultimately needs to be.

For a closer look at structural separation, look out for our upcoming report Delayering the business: is breaking up key to telco growth?