Telcos to techcos: what’s needed for success?

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Some telcos are well on their way to becoming “techcos” – combining automation and cloud-native networking with new organisational practices to deliver next-generation services for growth.  A new STL Partners report identifies the lessons from their experience to date.

Stagnated growth for telcos

In recent years, the telco industry has seen growth stagnate as software companies infiltrate their markets and offer more innovative solutions at lower operating costs. The rapid consolidation of major internet players, such as Google and Amazon, is only increasing with time, threatening to not only undermine the telco position but completely destabilise their revenue model and undermine their ability to operate profitably.

The top seven internet giants saw revenue growth of 72% between 2019 and 2022, pushing their total revenues above that of the telecoms industry as a whole (the figure below shows the revenues of all major telecoms operators and groups). As a result, telcos are urgently reassessing their business model, looking for key areas where they can cut costs and create new revenue streams, leveraging lessons learned from these internet giants to develop their proposition and ensure their long-term survival.

telcos to techcos comparison
Source: STL Partners

The enterprise customer: potential growth for techcos

The slowing of consumer profit growth has led telcos to explore the enterprise opportunity. Through the move to techco, telcos hope to increase profit margins. Heavy investment in 5G rollouts, as well as an increasing focus on edge computing and distributed networking, is providing telcos with a valuable footprint that can be leveraged for enterprise application services – a major new growth market for telcos, which have been historically limited to providing connectivity. The survey respondents felt that growing revenues was the key strategic objective of 5G and edge, and that this would be achieved through horizontal connectivity products.

telcos costs
Source: STL Partners “Telco to Techco” survey, 2023

Question : Which areas do you think will drive this revenue growth?

Source: STL Partners “Telco to Techco” survey, 2023

Telcos lack the prerequisite skills to target these customers properly

To develop products that truly deliver value to the end customer, telcos must first develop strong relationships within specific vertical ecosystems to ensure these products are able to provide real business value for enterprise customers. It is notable that surveyed telcos believed that vertical-specific solutions were the least likely approach to drive revenue growth through 5G and edge (14 respondents), suggesting telcos still believe that if they build the products, the customers will come to them.

Enterprise customers have specific characteristics

Within STL’s benchmarking index, it measured telcos on their development of B2B enterprise groups, with techcos much more likely to give autonomy to groups focusing on specific verticals. Unlike the consumer market, enterprise customers have specific characteristics that limit the effectiveness of a telco horizontal strategy:

  • Vertical-specific KPIs: When approaching the “enterprise market”, telcos are aware that each industry operates to a diverse range of KPIs, regulations and expectations. Each industry has unique KPIs reflecting its goals: for example, in manufacturing, annual plant output is a crucial metric, while the retail sector relies on other KPIs such as inventory turnover and customer conversion rate.
  • Siloed internal teams: Enterprise organisations often operate with siloed internal teams, particularly in the realms of IT and operational technology departments. These teams function with distinct decision-making processes, priorities and budgets. Techcos typically have strong exposure to all decision-makers across the enterprise, ensuring comprehensive buy-in leading to commercial deployments.

Telcos possess valuable technological expertise and robust infrastructure due to their longstanding role as connectivity providers. They have established extensive relationships with enterprise customers, albeit primarily centred around connectivity procurement rather than an application collaborator.

The full report (available here) leverages findings from an extensive research programme conducted in EMEA, including interviews with eight different CSPs and a survey with 54 responses from CSPs across the region. The research explored the progress of telcos within EMEA as they adopt techco practices.

Related article: Telcos to techCos: Harnessing data in a competitive space

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