Special Report: Global parterships
The classic mobile telecoms model is increasingly reliant on scale. MNOs cannot expect significant increases in ARPU from their established mobile broadband user bases and applications, yet they have to invest in new capacity on a constant basis. Upgrading to 5G architectures, though imposing a capex spike, can reduce the total cost of ownership of providing that capacity over the life of the network. However, growth will depend on operators doing at least one of two things – pursuing new revenue streams, especially in under-tapped enterprise environments and emerging Industry 4.-type use cases; and/or achieving huge network scale in order to improve cost efficiency and market share, and have sufficient capacity to support wholesale business as well as retail.
In the past, scale was often a matter of geographical expansion, with operators establishing large regional or even global groups that could command significant market share. That will continue, but it will not be enough. Buying into markets that are already saturated, or have significant ARPU and regulatory barriers, can deliver poor returns and high risks, as Vodafone’s Indian woes highlight. Beneath the layer of multinational operator groups, there are springing up smaller network deployers – new entrants with low cost architectures and new business models, such as Dish in the USA; and a host of private network operators enabled by more flexible spectrum regimes.
With a few exceptions such as Reliance Jio, these newcomers will not compete on the basis of market share and scale, but on picking off the new revenue opportunities introduced by 5G, and the most profitable applications, such as critical B2B services. That risks closing off some growth paths for larger telcos that cannot move in such an agile way.
Increasingly, operators need to address new geographies not by building another national network but by forming partnerships that will take them into new business models and generate additional revenue without the capex cost of a full build-out.
They are becoming more selective about the geographies they inhabit, aiming for countries in which they can generate significant share and growth, rather than blanket territorial coverage. Last week saw Deutsche Telekom selling its Netherlands operation, which has been squeezed by the merger of Vodafone and Liberty Global’s Ziggo – though not to Reliance, as had been rumored, but to private equity investors. Meanwhile, DT is increasing its investment in T-Mobile USA, a highly successful operator in a market that has gradually become more competitive and expansive, but is examining its smaller holdings carefully. Its 12% stake in the UK’s BT, for instance, is likely to be reviewed, and could be increased or sold off.
But many operators are thinking beyond the usual decisions about the best markets to target and starting to consider expansion that is driven by alternative business models, and partnerships that will take them into new sectors.
Rakuten is an extreme example, having turned itself into a global vendor with its Symphony platform business. This is an expanded version of a model that several Asian operators have adopted in the past – offering expertise and consulting, and even co-investment, to operators that are just starting on a new network project. SK Telecom is an example, and the largest Korean MNO has also recently set up new business units to build up its digital and applications operations at home and abroad.
Now it is followed by compatriot KT, which aims for a place in the global data services market, initiated by the acquisition of Epsilon Global Communications.
Such deals provide many new opportunities for private equity investors to get involved in shaking up the telecoms market. But the most interesting partners – for co-investment and to enable new revenue streams – are the major cloud providers. Google, Facebook and Microsoft have all invested in Indian operators in the past year, giving them a route to the vast number of consumers and enterprises in that country, while giving Reliance and Bharti Airtel, in particular, the platform to launch or expand new cloud-based services.
Edge-centric cloud partnerships are important to operators such as Verizon and Vodafone as they look to widen their portfolio of enterprise services without necessarily having to make all the investment in infrastructure, ecosystem and cloud platform themselves. The hyperscalers are actively targeting telecoms business, though they also present the risk that they might, in the enterprise market at least bypass MNOs if alternative spectrum and go-to-market strategies are available. NEC, which is making itself central to the Open RAN ecosystem thanks to its presiding role in Rakuten’s 5G platform, has greatly extended its strategic partnership with AWS, to build a joint 5G offering that could potentially enable hosted and private 5G networks without operator involvement.
The risk is less obvious in the other direction. Cloud providers will, in many cases, prefer to work with an operator for connectivity and related expertise such as mass-scale device management. But they are increasingly able to work with alternative partners if that seems more attractive to them, or even build connectivity themselves. Telcos, by contrast, have generally backed away from building their own clouds to support enterprise or consumer services, and some, notably AT&T and Dish, are even turning to public clouds to support their own networks.
Some operators do plan to build their own edge clouds, which could support both their dense 5G vRANs and public services. But while cloud giants may increasingly be able to do without operators, it will be challenging for operators to do without the cloud partnerships, if they wish to expand into non-traditional services and markets. Even the much discussed national clouds – which could address data sovereignty and cybersecurity issues – while presenting an opportunity for operators in countries like Germany and Italy, are unlikely to be built without the participation of US hyperscalers.
To deliver growth and make the 5G build-out commercially worthwhile, we will see increasingly creative alliances between operators and cloud providers, as well as many data and IT organizations and other industrial allies, to diversify the 5G model and rewrite the terms of telecoms competition.