2021 – the year CSPs face the music and pay the ‘triple debt’

2020 will forever be remembered as a year of unprecedented change, when the world locked down and the telecoms industry donned the hero’s cape to keep us all connected remotely. Despite this, however, the share prices of telecoms companies dropped on average by 20% over the year. Clearly, there’s more to the story, and 2021 looks like the year when the industry finally has to face the music when it comes to 5G. Financial markets are forcing them to live by the mantra, “enough talking, time for action.” 

Most Communications Service Providers (CSP) see no option but to invest heavily in 5G, but it’s not just consumers who aren’t always on board, enterprise customers, who are key to the economics of 5G, 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 agenda for many CSPs is dominated by the vast technology choices needed to build their new 5G networks, but 5G won’t sell by itself. Unlike with 4G, CSPs can’t rely on the “traditional formula” of monetizing 5G by selling smartphones and contracts to millions of retail customers. Build it and they will come no longer works with 5G. In 2021, CSPs must execute a much broader set of changes if 5G is to stand any chance of being an economic success for them. CSPs have been uncomfortable with the level of change needed and it will take time, but time is not on their side!

What prevented CSPs making the necessary changes in 2020? 

Any business model change, such as the one needed to sell 5G services, requires a much deeper cultural and organizational shift to reset what a CSP values, how it operates, its core skills and what gets measured. With the 20% drop in share prices in 2020, change must be swift and led from the top, but there are three challenges (triple debt) that CSPs are faced with, and none are easy to solve:

1. CSPs are heavily debt laden from past network and M&A investments – their credit ratings are at or just above junk bond rating. At the same time, CSPs have a high dividend payout policy offering investors short term returns. This is whilst profit margins continue to narrow due to competition on price plans. Survival means adding new business models alongside the “traditional formula” to move CSPs “beyond connectivity” into B2B data and technology services – thus extending from connectivity into the full 5G solutions customers actually want to buy (63%). And the sky’s the limit! The share price gains for CSPs to successfully redefine themselves as technology or data companies are huge as P/E ratios for a TechCo sits, on average, 5x higher than for traditional telecoms i.e., a 5x gain in share price. 
   Vodafone is an example of a CSP that has announced its pathway to becoming a TechCo, 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 its debt pile. 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 move up the value chain to becoming a data services company. Likewise, BT has brought in new leadership to spearhead its new digital unit. In 2021, we will see more change to address CSP debt and move beyond connectivity to grow margins and retain enterprise customers as the best defense against the threat of takeover resulting from falling share prices.
2. CSPs have a high level of IT technical debt – inflexibility within their IT systems means CSPs lack the speed and agility to be able to deliver the changes needed to enable these new business models, such as working with partner ecosystems to co-create and co-innovate 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. Many CTOs recognize the urgent need to resolve IT technical debt as it allows them to keep the lights on for current quarterly earnings, but it can’t be at the exclusion of doing new things. Consequently in 2021, we will see more of a twin track approach using digital business platforms to overlay existing IT and so building new 5G revenues streams will be in parallel to transforming existing IT rather than it following several years later. To impact revenue quickly, IT architecture thinking will need to change to be much closer to the business.
3. CSPs have traditionally been structured in a way that best suits how they want to sell, rather than how their customers want to buy – typically, this has resulted in highly siloed product organizations with separate functions for technology and centralization of decision-making, rather than empowering those facing off to their customers. This permeates down to every level of the organization. Giving customers want they want from 5G means a more responsive, experimental, iterative and agile way of working focused on cloud-based pay-as-you-grow solutions self-served online that are easy to try, buy and consume rather than products needing lengthy and expensive integration with all upfront risks and costs. Culture needs to be much more responsive to customer need. In 2021, we will see more “FutureCo” models that address this organizational debt. They will step out new divisions empowered to join it all up for the customer with ecosystem partners and with new skills and ways of working to create compelling 5G solutions.

 Do all CSPs recognize the same need for change?

Could North America-based CSPs be the real trail blazers 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 knowing what customers want from 5G. There’s a lot less clarity though in the US when it comes to the role the CSP wants to play in providing solutions, as only one in five US-based CSPs expects to orchestrate an ecosystem of partners to help customers realize 5G use cases. Likewise, Verizon’s recent $6.9 billion acquisition of Tracfone sees renewed investment in the “traditional formula” which will see it acquire millions of relatively low-value prepaid B2C customers to protect connectivity rather than drive beyond connectivity – 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. After all, they wouldn’t want a repeat of the ‘missed’ 3G and 4G opportunity they experienced first-hand as the real money was made by companies selling over the top (OTT) of their mobile connectivity like gaming, eCommerce, streaming and social media.

CSPs will be forced to recognize the importance of the ecosystem

In 2021, those looking to move onto new business models will need to change how they operate. They've historically been focused on standard connectivity products and centralized decision-making away from the customer. Decisions have been driven by short term internal organizational and financial considerations rather than customer insight and needs. The more CSPs go into this and see 5G from their customer’s perspective, the more they will understand the importance of being bold in accommodating an ecosystem within a new operating and organizational model with a culture that enables a more experimental and agile approach to co-creating 5G-enabled solutions with partners and customers. The competitive threat now comes on many fronts from organizations borne digital and with a laser focus on the customer. 

Standing still is no longer an option, it’s all about change. Vodafone in its press release on TechCo (above) talks about needing to break through its “respective legacy cultural and technical doctrines”. BT with its digital unit speaks of a major shift in its technology operations focus, delivering digital platforms that harness new technologies such as AI and machine learning to create products, platforms and services, in areas such as healthcare and data.

Finally, how do CSPs embark on this journey for 2021?

Firstly, it’s important to try to understand the changes necessary for success and to simply learn by doing. It’s too slow to transform the whole organization, so the secret is to start small by creating a FutureCo or a pathfinder “TechCo” division. This is then 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. It calls for a very different approach to IT and IT architecture, sitting much closer to the business and the need to drive new revenue. This “step out” division needs to 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.