One of the points raised on LinkedIn regarding my blog yesterday was also raised by some telcos in my chats. That point was whether telcos now needed to consider “adjacent” opportunities rather than get bogged down (as they surely have) in the muck of connection services. I think that may be true, and many telcos (roughly two-thirds over time) have told me they did as well. What they’re concerned about is just what those adjacent opportunities are, and what they’d have to do to exploit them.
One example from LinkedIn was a telco role in the energy transition. “Low-carbon energy and emission reduction solutions” are adjacent to telco operations to the extent that they create systems to produce one or the other. Many telcos do have power-generating capabilities and have applied emission reduction strategies themselves, but none of the telcos who talked with me about adjacent areas of opportunity named either one of them. I suspect that the reasons are 1) energy production is another low-margin utility function that they don’t want to get involved in further, 2) most telcos have gotten outside consulting on emission reduction strategies and so have relatively little internal expertise.
A few telcos have talked long ago about the energy dimension, but their investigation was more aligned with a merger of utilities than about their taking on an energy role. Suppose that a telco and an electrical utility merged. There’s clearly a lot of symbiosis here; both have to run “wire”, both have to install things in homes and businesses and sustain outside plant, both have massive billing and collection practices…you get the picture. The problems that were raised at the time started with the almost-certain lack of regulatory appetite for the deal, and moved on to the fact that telco consolidation over time coincided with electric utility privatization, and there are now many such utilities operating in the area where telcos are deploying facilities. Do you merge with them all?
Frankly, I think you could make a stronger case for electrical utilities getting into the telco business. As we move to things like passive optical networks (PON) and fixed wireless access (FWA) you surely lower barriers for such an encroachment. Some telco management has been concerned about this, but today most think that the network connection business isn’t all that attractive to a utility.
What have operators said might be other adjacent opportunity areas? The top of everyone’s list is IoT, but with this particular opportunity I found a polarization within the telcos that seemed to characterize almost every opportunity they talked about. On one side are the service and technology planners, and on the other side the CxOs and their direct reports.
The planners see IoT as being comparable to the original voice telephony services that launched the telcos more than a century ago. We needed universal infrastructure, a common model of technology and service, or the value of telephony would be destroyed by creating little lakes of service that couldn’t interact and build communal value. Thus, they needed a regulated monopoly. IoT, says the planners, has a similar profile. You need an open technology base, broad service area, and most of all you need standard hosting of the applications that create the IoT ecosystem. Telcos should play a role there.
Most of the CxOs blanch at this. The creation of all that stuff is so far outside telcos’ wheelhouses that you can’t even see water from where it starts. The investment would be massive and, unlike telephony, there isn’t a simple mission of providing handsets and the infrastructure that lets them call each other. That means that realization of return on investment would likely be long delayed, which CFOs don’t like. The CEOs think that past initiatives in IoT have failed to gain traction, and “hosting” really means an edge-centric model of cloud computing, which has also been tried and has failed to produce.
The CxOs have long believed that the best adjacent opportunity for telcos to consider is providing billing, accounting, and collection services. They have vast OSS/BSS infrastructure investments and expertise, and their technology is hardened and proven. Some CxOs have even suggested that telcos should get into the credit card business, not by reissuing cards under their name but by actually becoming a Visa or Mastercard. Again, they have the software to form the basis of this, and they obviously have the network resources to carry transactions.
Planners are unimpressed with this. They point out that OSS/BSS software in use is actually from a third party provider, and that any attempt they made to build a financial service position could well induce those providers to simply offer their stuff as SaaS, which would give them pricing power over the telcos. They also note that progress in the OSS/BSS space is glacial, and that would mean that efforts on their part to get something to happen would require considerable time just to prepare for the offering. During that time, everyone would know what the telcos intended and likely be able to move faster to get their offerings out.
Planners also like the general edge computing opportunity. They believe that telcos have two assets that they could leverage for edge supremacy. First, they have facilities where you could install servers, and that are connected directly to the edge. Second, they have a historical tolerance for limited ROIs and high “first costs”, which could enable them to make investments that other players would find crippling from a stock-price perspective. There is, the planners point out, no firm structure for an edge platform, and 5G is at least leading telcos to define ad hoc platform specs that could be advanced to the generalized edge computing space.
Ha, says the CxOs. Telco facilities at the edge are rarely prepared to host a bunch of servers. The historical tolerance for low ROIs and high first costs is exactly what telco business management has been trying to change. ROIs are getting lower, and that’s the problem they want to solve. And financial markets are watching telco stocks carefully and looking for signs that they’re spending like sailors with no realistic near-term return. Their own shareholders would revolt. Finally, telco software expertise is so narrowly focused that they’ve been outsourcing hosting to cloud providers. Why would planners think that they could now not only deploy a competitive edge platform, but define what that platform would be?
In short, there’s on consensus I can see for the development of any adjacent opportunity areas, or even acceptance of any such areas’ existence. And I have to add my own view, which is that getting a notion like any of these things through telco decision processes would be almost totally hopeless. This is like asking a florist to sell circuit boards, or vice versa. Another barrier is this; telcos are going to have to be telcos first and foremost even if they can define adjacencies. If you sell, as your prime product, a service whose ROI is far below even your own standards and make up the low ROI with something else, you’re competing in markets with suppliers who don’t have your massive loss-leader service, and so can handily under-price your offering. Telcos have to make their prime services at least somewhat profitable, and that’s the dilemma. They can’t revolutionize, they have to evolutionize in some way.
I think we have to assume that telco revenue enhancement is going to have to build upward from connection services. That probably means that AT&T’s idea of “facilitating services” may be their only hope.
