Analyst Q&A: Consumer services - Entering a brave new world

Nitesh Patel

Director - Wireless Media Strategies Strategy Analytics

Paolo Pescatore

Founder and TMT analyst PP Foresight

Eleftheria Kouri

Research Analyst ABI Research

Experts in a range of vertical and horizontal sectors discuss potential opportunities available for operators away from mobile, including the advantages of diversifying and potential challenges

Q: What current opportunities do you see for operators to expand into new consumer services, and why is this important in 2020 and beyond?

Nitesh Patel (NP) Globally, annual operator service revenue will continue to shrink at a -0.7% CAGR over the next 5 years. While levels of growth will vary by market, it remains imperative for operators to offer subscribers consumer services which can be monetised, drive subscriber engagement, and which help to reduce churn in highly competitive markets. Currently, operators have opportunities to expand into new consumer services across a range of areas including entertainment, productivity, security and financial services.

Paolo Pescatore (PP)

Content and connectivity have never been as intertwined, as underlined by the need to be more connected, as we are today. Both fixed and mobile networks are getting faster. The arrival of gigabit connectivity paves the way for endless possibilities. With users owning a slew of connected devices, accessing a wide range of content across them, telcos need to enable better experiences. Convergence remains a key battle ground; beyond bundling fixed and mobile connections this will extend to content and other new services. Gaming is one of the next genres to benefit from this multi-screen usage world. The potential for cloud gaming is huge. Automotive, home and financial services represent other key consumer services for telcos to move and expand into.

Eleftheria Kouri (EK)

Given the new reality and norms due to the Covid-19 pandemic, telecom operators could play an important role in meeting the demand for remote entertainment, education and work. For example, by leveraging AR/ VR solutions and 5G speeds in the near future, mobile operators can play an important role in broadcasting live sport events, music concerts, fashion shows, allowing users to gain a panoramic view of events or actively participate. Moreover, another promising use case for telecom operators is the introduction of 3D human holograms in video conference calls.

Q: Have operators been slow in expanding into new areas and how can they catch-up on more established rivals?

NP Looking specifically at banking services, operators have been slow to expand, especially in developed markets where there is established competition from banks and new entrants. With regulation including PSD2 (Payment Services Directive 2), open banking and consumers increasingly accessing banking services via mobile devices, many operators have been slow to embrace this disruption in the financial services sector. We expect the COVID-19 pandemic to further accelerate consumer transition to digital and mobile banking. Catching up with established rivals will take time on a variety of levels, in terms of the services offered to consumers but also to encourage users to switch away from established providers.

However, operators can leverage the scale of their customer bases to promote, market and cross-sell services in new areas. In some instances, partnering with technology providers, as we have seen Samsung do with SoFi in the US and Curve in the UK as it evolves Samsung Pay. Acquisition of an existing financial service provider is another approach, as shown by Orange’s acquisition of a majority stake in Groupama Banque. Joint ventures with emerging or established financial service players are also an option.

Telcos typically do not move at web speed. They are slow in implementing new ideas and significantly lag behind the tech giants who move at stealth. In part, this was driven by huge concerns over cannibalisation of existing revenue streams (voice and messaging) during the early days of data. Telcos are always playing catch up and should avoid taking a DIY approach. Partnerships are key in this rapidly changing and diversified world.

By leveraging the growth/maturity of AR/VR and the deployment of 5G, telecom operators have the chance to develop new business models and increase their revenue streams. More specifically, apart from the fundamental role of providing connectivity and securing high bandwidth and ultra-low latency capabilities, telecom operators can accelerate device distribution (due to physical store presence and finance capabilities) and contribute in application/content development. For instance, early and exclusive partnerships with AR/VR HMD manufacturers will not only assist operators to differentiate from competition and generate extra revenues, but will assist in raising consumer awareness about the capabilities of AR/VR and contribute in customer acquisition/retention in the upcoming 5G journey. In addition, location-based AR and multiuser AR/VR applications are expected to be among the primary applications that 5G will empower. These applications include AR/VR cloud-based gaming that involves real time interaction with other players such as eSports tournaments, retail and e-commerce apps that support real time virtual try on or product visualisation in real time dimensions, AR navigation apps that support real time virtual recommendations/reviews about nearby restaurants or sightseeing information.

Q: What new opportunities are brought about by 5G technology, and what do operators need to do to take them?

NP Operators have been very successful at voice, text and data connectivity. However, with the exception of multi-play service providers offering TV services, very few are successfully generating revenue on-top of this connectivity. 5G provides operators with a range of new opportunities in consumer and enterprise sectors. 5G delivers throughput and latency to support real-time game streaming, and video streaming in ultra-high definition (UHD), where the user experience is sensitive to lag.

Operators need to prioritise which opportunities they address by understanding market demand and potential, evaluating which roles they will play in the value-chain, assessing the competitive landscape, identifying key partners and business models, and importantly understanding consumer perceptions towards their brand.

5G promises so much. In reality, this next generation mobile technology remains in its infancy. A long road awaits in order for it to achieve its full potential. While the business model for 5G remains unproven in the consumer segment, it has reignited unlimited price plans. This removes one of the key obstacles towards accessing numerous bandwidth hungry services on the move. In essence, it will not open new use cases overnight. For now it should offer users a better experience with faster speeds, more robust connections with significantly lower latency. In time new use cases will emerge, allowing consumers to access and engage with content and services in a different way.

At the current stage of the AR/VR market, telecom operators are slow in introducing new services due to the immaturity of the market. They should continue the efforts of increasing consumer awareness and building strategic partnerships with AR/VR content providers and HMD manufacturers to drive demand.

In addition, M&A is another opportunity for telecom operators to strengthen their footprint and increase participation in content/platform landscape, instead of building platforms from scratch, especially in services where they lack experience, expertise and competitive branding. Last but not least, partnerships with cloud providers (such as AWS Wavelength with Verizon, Vodafone, KDDI and SK Telecom) will play a catalytic role as well, allowing the combination of cloud and cutting edge 5G to achieve a greater coverage/scale of customers and better performance of AR/VR apps.

Q: What are the common pitfalls and issues operators face in offering non-core telecoms services?

NP In order to succeed in offering non-core telecom services, providers need to define clear objectives and ensure strong willingness to succeed. Historically operators have had high expectations for fast returns with limited investment. The success of mobile money in emerging markets indicates a more patient approach can reap rewards. For example, the vast majority of mobile money services deployed in Africa and other emerging markets have taken 3-5 years to breakeven, but are now profitable.

Fragmentation across operators has presented itself as a barrier in strategic areas, like mobile payments and digital advertising, hindering operators’ ability to achieve levels or reach required for two-sided business models to compete with OTT players. Operators have been able to successfully grow the pie when interconnecting and collaborating in areas like voice, messaging and mobile money.

PP Telcos are renown for making the same old mistakes time after time. Some users would argue they aren’t good at selling connections either as they are limited by choice. In essence, the proof is in the pudding. They need to do a better job of executing the introduction of new consumer services (including marketing).

EK The primary issue is that the consumer market itself (mainly AR) is not mature enough yet due to multiple reasons, such as lack of consumer awareness, expensive devices, poor/not engaging content. At the same time, although there are numerous advantages of 5G, mobile operators face the challenge of ROI, monetisation and business model/pricing planning. Also, operators lack experience and branding in areas beyond network infrastructure.

Q: What qualities and culture do operators need to successfully transition to providers of these services?

NP Adjacent market opportunities need to be run independently of operators’ core telco services, have well defined goals, strong leadership, expertise and commitment. Operators with a culture of openness, innovation, and agility and with strong marketing capabilities are well placed to achieve success.

Telcos need to better understand their customers, needs and behavioural patterns. This will give them better knowledge and confidence to offer new services. In turn, this must be supported with a simple marketing message and channel for purchasing.

A huge cultural shift in mindset and approach is required. Overall, telcos should strongly consider reinventing the user relationship in order to provide the best in class experience. To successfully execute they need to rapidly transform their operations, be more efficient and regain consumers’ trust.

Increasing consumer awareness and education regarding AR/VR capabilities, building strong partnerships and leverage the experience for consumer IoT services are some of the key strategies for telecom operators.