Telia International Carrier Business (#1 Internet Backbone Network) Sold for $1.3B to Swedish Pension Funds

Telia Company today announced that it reached an agreement with Polhem Infra for the sale of its international carrier business.  At the same time, Telia Company entered a long-term strategic partnership with Telia Carrier, securing continuous world-leading network solutions to Telia’s customers.  The acquisition is Polhem Infra’s first investment in this field. The company is jointly owned by the Swedish pension funds First AP Fund, Third AP Fund and Fourth AP Fund.

Allison Kirkby, president and CEO of Telia, confirmed that the majority of the proceeds from the sale of Telia Carrier to the Polhem Infra unit “will be used to strengthen our balance sheet and thereby provide a solid financial base for Telia Company and our shareholders.  Telia can now fully concentrate on our Nordic and Baltic footprint.”

Telia Carrier holds the #1 position in the global ranking of companies with Internet backbone networks. Content, services and operator customers of Telia Carrier account for 65% of global Internet routes. Its network spans across Europe, North America, and Asia, connecting customers in more than 120 countries, with the Scandinavian footprint being particularly strong through the so-called Scandinavian Ring – the part of Telia Carrier’s network that connects major Baltic and Nordic cities.

The change of ownership will enable Telia Carrier, with its 530 employees, “to drive a level of investment in network development, services and customer care programs that brings benefits to content providers, operators and enterprises beyond that of any competitor.”

Kirkby has been CEO since early May, but has already been making her mark. As well as streamlining the Nordic telco’s operators, she has also assembled a new-look management team.

Jefferies said the sale of Telia Carrier appeared supportive and highlighted the use of near 30% of proceeds to top up the dividend.  “This is a welcome first move of the new, highly respected CEO,” the investment bank said in a note to clients.  Jefferies said the sale of Telia Carrier appeared supportive and highlighted the use of almost 30% of the proceeds to top up the dividend.

Nick Del Deo of Moffett-Nathanson wrote about Telia Carrier vs Cogent Communications (U.S.) in a note to clients:

While Telia Carrier doesn’t break out its business mix, a substantial share of its revenue comes from transit, likely in the same range as Cogent’s, or about one third of the total. It’s one of the four largest transit providers globally, along with CenturyLink, Cogent, and NTT. A broad suite of other services – DIA, wavelengths, wholesale voice, etc. – round out its product portfolio. Like Cogent, its internet backbone spans the globe, with its presence concentrated in Europe and North America. The comparisons may not be perfect, but Telia Carrier claims to have 67K km route miles of fiber vs. Cogent’s 93K km of intercity fiber, and 300 PoPs globally vs. the ~1K carrier-neutral data centers to which Cogent connects. Their route maps look quite similar, but Cogent extends into more small markets than Telia Carrier and has more of a presence in Latin America and Asia-Pacific.

Telia Carrier’s Global Fiber Optic Network:

Image Credit: Telia Carrier

References:

https://www.teliacarrier.com/

https://www.teliacarrier.com/our-network.html

https://www.reuters.com/article/us-telia-company-divestment/telia-to-sell-international-carrier-business-for-1-billion-idUSKBN26R1JW

https://www.lightreading.com/services/telia-flogs-international-carrier-business-for-$11b/d/d-id/764436?

EU Recommendations on very high capacity broadband network infrastructure and a joint approach to 5G rollouts

Summary:

On September 18th, the European Commission (EC) released a recommendation on how all 27 European Union (EU) member states could ensure a timely and more cost-effective way of deploying very high-capacity broadband connectivity infrastructure and develop a “joint approach” to 5G rollouts.  The EC says that 5G is the most fundamental block of the digital transformation and an essential pillar of the recovery.

The EC says “the timely deployment of 5G networks will offer significant economic opportunities for the years to come, as a crucial asset for European competitiveness, sustainability and a major enabler for future digital services.”

The EC’s joint approach to 5G is by means of a “toolbox” that defines best practices, including “realistic measures” to assign radio spectrum for 5G networks under investment-friendly conditions.  The Commission aims to facilitate the deployment of very high capacity fixed and wireless networks “by, for example, removing unnecessary administrative hurdles and streamlining permit granting procedure.”

The objective is to agree on a toolbox by March 30, 2021. The commission has requested each member state provide it with a roadmap for implementation by April 30, 2021, reporting back by the same date the following year.  Please refer to detail timeline in Next steps below.

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In parallel, and closely linked to this Recommendation, the Commission proposed a new Regulation for the European High Performance Computing Joint Undertaking to maintain and advance Europe’s leading role in supercomputing technology to underpin the entire digital strategy and to ensure the Union’s competitiveness in the global setting.

The commission said the proposal “would enable an investment of €8 billion in the next generation of supercomputers – a substantially larger budget compared to the current one.”  The EC noted that the COVID-19 crisis “has shown that connectivity is essential for people and businesses,” and that “very high capacity networks” have been enabling remote working and schooling, healthcare, and personal communication and entertainment.  The EC said the pandemic “has changed the economic outlook for the years to come. Investment and reforms are needed more than ever to ensure convergence and a balanced, forward-looking and sustainable economic recovery.”

Virtual meeting with stakeholders on the draft BEREC Guidelines on Very High Capacity Networks - BEREC

Executive Vice-President for a Europe fit for the Digital Age, Margrethe Vestager, said:

Broadband and 5G connectivity lay the foundation for the green and digital transformation of the economy, regardless if we talk about transport and energy, healthcare and education, or manufacturing and agriculture. And we have seen the current crisis highlight the importance of access to very high-speed internet for businesses, public services and citizens, but also to accelerate the pace towards 5G. We must therefore work together towards fast network rollout without any further delays.”  

Commissioner for the Internal Market, Thierry Breton, added:

“Digital infrastructures have proven to be crucial during the pandemic to help citizens, public services and businesses get through the crisis and yet recent investments have slowed down. At a time when access to broadband Internet represents both a fundamental commodity for Europeans and a geostrategic stake for companies, we must – together with Member States – enable and accelerate the rollout of secure fibre and 5G networks. Greater connectivity will not only contribute to creating jobs, boosting sustainable growth and modernising the European economy, it will help Europe building its resilience and achieve its technological autonomy.”

The Commission invites Member States to come together to develop, by 30 March 2021, a common approach, in the form of a toolbox of best practices, for the timely rollout of fixed and mobile very high-capacity networks, including 5G networks. Such measures should aim to:

  • Reduce the cost and increase the speed of deployment of very high capacity networks, notably by removing unnecessary administrative hurdles;
  • Provide timely access to 5G radio spectrum and encourage operators’ investments in expanding network infrastructure;
  • Establish more cross-border coordination for radio spectrum assignments, to support innovative 5G services, particularly in the industry and transport fields.

The Recommendation also sets out guidance for best practices to provide timely access to radio spectrum for 5G as well as ensure stronger coordination of spectrum assignment for 5G cross-border applications. This is particularly important to enable connected and automated mobility, as well as the digitisation of industry and smart factories. Enhanced cross-border coordination will help to provide Europe’s main transport paths, particularly road, rail and in-land waterways, with uninterrupted 5G coverage by 2025. However, until mid-September 2020, Member States (and the UK) had assigned on average only 27.5% of the 5G pioneer bands. It is therefore essential that Member States avoid or minimise any delays in granting access to radio spectrum to ensure timely deployment of 5G.

The Recommendation also highlights the need to ensure that 5G networks are secure and resilient. Member States have worked together with the Commission and the EU Cybersecurity Agency (ENISA) on a respective toolbox of mitigating measures and plans, designed to address effectively major risks to 5G networks. In July, a progress report was published.

Sustainable network deployment for improved connectivity:

The Recommendation also builds upon the Broadband Cost Reduction Directive. It promotes the rollout of high-speed networks by reducing deployment costs through harmonised measures to ensure network providers and operators can share infrastructure, coordinate civil works and obtain the necessary permits for deployment. The Recommendation is calling on Member States to share and agree on best practices under this Directive, to:

  • Support simpler and more transparent permit-granting procedures for civil works;
  • Improve transparency on existing physical infrastructure, so that operators can access more easily all relevant information on the infrastructure available in a certain area, and facilitate permit-granting procedures, through a single information point in the administration of public authorities;
  • Expand network operators’ rights to access existing infrastructure controlled by public sector bodies (i.e. buildings, street lamps and those belonging to energy and other utilities) to install elements for network deployment;
  • Improve the effectiveness of the dispute resolution mechanism related to infrastructure access.

Improved connectivity can also minimise the climate impact of data transmission and thus contribute to achieving the Union’s climate targets. Member States are encouraged to develop criteria for assessing the environmental impact of future networks and provide incentives to operators to deploy environmentally sustainable networks.

Next steps:

The Recommendation calls for Member States to identify and share best practices for the Toolbox by 20 December 2020. The Member States should agree on the list of best practices by 30 March 2021.

As announced in its strategy “Shaping Europe’s digital future” in February, the Commission plans two further actions in this area:

  • The update of its action plan on 5G and 6G in 2021. The updated plan will rely and expand on the spectrum-related actions in this Recommendation. It will look at the progress made so far, and set new, ambitious goals for 5G network roll-out.
  • The revision of the Broadband Cost Reduction Directive. The next steps in this process are the launch of an open consultation in autumn 2020 and of a dedicated study to evaluate the current Directive and assess the impact of several policy options.

The Recommendation will contribute to the achievement of the objectives set out in the Broadband Cost Reduction Directive as well as the European Electronic Communications Code. The Code, which needs to be implemented into national law in Member States by 21 December 2020, aims to promote connectivity and access to very high-capacity networks by all citizens and businesses.

The Commission’s strategy on Connectivity for a European Gigabit Society sets the EU’s connectivity objectives. By 2025, all main socio-economic drivers (i.e. schools, hospitals, transport hubs) should have gigabit connectivity, all urban areas and major terrestrial transport paths should be connected with uninterrupted 5G coverage, and all European households should have access to connectivity offering at least 100 Mbps upgradable to Gigabit speeds.

Other EU Projects and Country Plans:

As announced in June 2020, the EU is funding 11 new technology and trial projects to enable 5G connectivity and pave the way for autonomous driving on main road, train and maritime routes in Europe.

Individual EU member states are also grappling with their own post-pandemic recovery plans. For example, France is earmarking €240 million ($284 million) for fiber networks as part of its €100 billion ($118 billion) stimulus package.

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References:

https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1603

https://ec.europa.eu/digital-single-market/en/news/commission-recommendation-common-union-toolbox-reducing-cost-deploying-very-high-capacity

https://www.lightreading.com/5g/ec-pins-recovery-hopes-on-5g-and-supercomputing/d/d-id/764064?

Commission adopts Implementing Regulation to pave the way for high-capacity #5G network infrastructure

https://berec.europa.eu/eng/events/berec_events_2020/232-virtual-meeting-with-stakeholders-on-the-draft-berec-guidelines-on-very-high-capacity-networks

 

Very High Capacity and 5G Networks:

 

Deutsche Telekom earnings beat, seeks to be #1 U.S. carrier

Deutsche Telekom AG (DT) said Wednesday that net profit rose 78% in 2019 as revenue climbed higher, and forecast further growth in the year ahead.  Highlights of DT’s earnings report:

  • Annual revenues increased 6.4 percent to EUR 80.5 billion.
  • Adjusted net profit rose 8.9 percent to EUR 4.9 billion, and free cash flow was up 15.9 percent to EUR 7.0 billion.
  • Adjusted EBITDA after leases improved 7.2 percent to EUR 24.7 billion, led by growth at T-Mobile US.
  • CAPEX, before spectrum investments, was higher than forecast in 2019, at EUR 13.1 billion, a 7.6 percent increase over 2018. The increase was due to the accelerated 5G build-out in the US, the company said. Spending is expected down slightly to EUR 13.0 billion in 2020, with the US stable at EUR 7.8 billion.
  • DT also grew to 3.3 million fiber homes passed in Europe, completed its FTTC build in Germany and expanded to 28 million premises with super-vectoring at up to 250 Mbps. The all-IP migration was completed in the consumer market in Germany and is expected finished in the B2B segment by end-2020. In the rest of Europe, 91 percent of lines were moved to IP, up 9 percent points over the year.
  • DT ended the year with 9.6 million Magenta Eins subscribers taking both fixed and mobile services, up by 2 million from 2018. Mobile postpaid subscribers increased by 2.4 million in Europe to 58.0 million at year-end, and the US business grew by a total 6.4 million customers to 86.0 million.

In the fourth quarter of 2019, the company’s growth strengthened, with revenues up 5.4 percent to EUR 21.4 billion and adjusted EBITDA growing 8.2 percent to EUR 6.0 billion. Revenue growth reached 1.0 percent in Germany, 7.7 percent in the US, 3.0 percent in the rest of Europe and 0.2 percent at Systems Solutions. On an organic basis, adjusted EBITDA after leases rose 16.8 percent at Systems Solutions, 4.7 percent in the US, 3.1 percent in Europe and 2.4 percent in Germany.

“The results were strong, particularly in Europe, and reassuring on Germany,” said Citi analyst Georgios Ierodiaconou.

For 2020, the #1 German network operator forecast revenue growth and adjusted EBITDA up around 3% to EUR 25.5 billion, including EUR 13.9 billion outside of the U.S.  That guidance does not take into account the impact of the U.S. merger and Deutsche Telekom will revise its outlook once it goes through.

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DT is aiming to become market leader in the United States, CEO Tim Hoettges said on Wednesday, now that a deal for its T-Mobile US unit to take over Sprint is within reach.

“We have the chance to become No.1 in the United States, to overtake AT&T and Verizon. That is our ambition,” Hoettges told reporters in Bonn after Deutsche Telekom reported record annual results in its 25th year as a listed company.

Ebullient, Hoettges brandished a coffee cup bearing a picture of U.S. World War Two character Rosie the Riveter and the slogan ‘We Can Do It’ in front of photographers.

“We’re going to build the best 5G network,” he added (see CNBC video reference below).

Timotheus Höttges Deutsche Telekom

DT CEO Tim Höttges said the T-Mobile US/Sprint deal benefits Deutsche Telekom on all levels. (Deutsche Telekom)

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References:

https://www.marketwatch.com/story/deutsche-telekom-profit-soars-and-forecasts-growth-2020-02-19

https://www.reuters.com/article/us-deutsche-telekom-results/deutsche-telekom-sees-slower-core-earnings-growth-this-year-idUSKBN20D0HT

https://www.cnbc.com/2020/02/19/deutsche-telekom-ceo-tim-hoettges-goes-on-offensive.html

https://www.telecompaper.com/news/deutsche-telekom-tops-fy-forecasts-sees-further-growth-in-2020–1327147

 

 

Sigfox boosts its IoT global footprint, achieving national coverage in 17 countries

At Sigfox World IoT Expo last week in Prague-Czech Republic, Sigfox announced that its network now spans 36 countries, as part of its mission to offer a consistent level of connectivity quality and service anywhere in the world.

Here are the highlights of the Sigfox conference:

“We’re excited to work with all of our new partners, this move marks yet another key milestone towards Sigfox’s vision of a global IoT network. We are looking forward to collaborating with our new Sigfox operators to help their local ecosystems to seamlessly scale IoT solutions wherever the Sigfox network is present in the world. Together, we’re building a future that will be better to live in,”  said Rodolphe Baronnet-Frugès, Executive Vice President of Operators at Sigfox.

Sigfox operators are not only contributing to accelerate IoT development in their local markets, they are also committing to deploy and operate the network infrastructure and offer national coverage in their country. Up to now, almost 100 million euros have been invested by Sigfox operators to offer a unique access to the Sigfox IoT services, with the exact same quality of service.

This unique global offer is enriched with Sigfox new service Monarch, now allowing IoT devices to recognize and automatically adapt to every local communications standard in the world without roaming. By enabling ‘globe trotter’ assets that can seamlessly adapt as they move across borders, Monarch could be a game-changer for logistics, freight, and consumer goods industries.

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In Ireland, Sigfox Operator VT signed a €1-mill IoT subscription with Dunraven Systems, a market leader in the design and development of ultrasonic fuel tank monitors.

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In addition to its core IoT connectivity service, Sigfox offers a range of services to make even more simple to use Sigfox’s technology, to deploy and to adopt mass IoT solutions. These services allow to connect billions of wireless devices that are not yet connected to the internet.

Image result for SIGFOX image

Above illustration courtesy of Sigfox

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This potential game-changing development has been made possible by the cognitive capabilities of the Sigfox network and its Software Defined Radio technology, where all the network and computing complexity is managed in the Cloud rather than on the device. This enables Sigfox to constantly improve its network features and make them available by simple software upgrade.

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A key question for Sigfox is whether they’ll also support the new LPWAN standards and specs (LTE category M1, NB-IoT, LoRA WAN, etc).  We’ve asked the company and are eagerly awaiting their reply.  Stay tuned.

 

 

Telecom Italia “5G” trial to blanket San Marino in 2018

According to the Financial Times (on line subscription required):

Telecom Italia plans to test its home grown “5G” technology in the micro-state of San Marino next year, making it the first country in the world to boast a nationwide 5G network.  The state of San Marino, which has little more than 30,000 citizens, extends to only 61 sq km, making it the smallest republic in the world.

Telecom Italia Mobile (TIM) has signed a memorandum of understanding with the government of the tiny country to upgrade the existing 4G-LTE network in advance of a trial of “5G” services in 2018. It will double the number of mobile sites and will install a network of small cells in downtown San Marino, a Unesco heritage site, this year that will provide the backbone of the future commercial network. Investment in 5G network trials are taking place around the world with carriers in South Korea, China and the US among the most active in testing 5G technology. Giovanni Ferigo, head of technology for Telecom Italia Mobile, said San Marino’s 5G network would be the first in Europe “for sure.”

It was not revealed who created the specs for the Italian telco’s “5G” network or where Telecom Italia will procure the end point devices/handsets.  One would assume that Ericsson is supplying TIM with the “5G” base stations, based on a MOU signed between the two companies in March of this year.  TIM wrote in a press release on March 2, 2017:

TIM and Ericsson are committing to share skills, projects, laboratories and resources for designing, testing and building the technological components of the new 5G network needed to create a complete and open ecosystem around next-generation digital services.

In particular, the agreement will directly involve the research and innovation structures of the two companies, focusing on the design and testing of access infrastructure, the respective antenna systems and network virtualisation solutions, particularly through joint participation in Italian and European research projects and integration of service platforms for testing in the field of innovative Use Cases.

The 5G system will provide peak speeds of up to dozens of Gbps for UltraHD services and cloud computing solutions, a decrease in communication latency, reducing it to a few milliseconds, reliability for mission-critical services and service density with the ability to connect up to a hundred thousand terminals per cell. These characteristics mean that 5G will become the reference mobile network for next-generation digital services (such as virtual reality) and for the industrial Internet (robotics, manufacturing, health, environment, self-driving logistics).

The agreement is part of the “5G for Italy” initiative launched in 2016 by TIM and Ericsson for the establishment of an ecosystem of experimental industrial partners, confirming the commitment of the two companies to innovating technologies and networks in support of the socio-economic growth of the country.

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Telecom Italia is also testing “5G” in Milano and Torino, but has more freedom in San Marino to experiment because of fewer restrictions on the use of airwaves than in Italy.

“We need to experiment as soon as possible,” Mr Ferigo said.  The work done in San Marino would play a critical role in the future of 5G technology in Italy but was also crucial to the wider European sector as standards for the new network are refined.

“For 5G, our intention is a European leadership in standardization,” he said. The European Commission published a 5G action plan last year when it estimated that sectors such as healthcare, transport, cars and utilities would see economic benefits of €113bn by 2025 from the technology.  However, the European Commission does not generate any telecom standards.  For Europe, that’s ETSI which contributes to 3GPP and its members contribute to ITU-R WP 5D which is standardizing true 5G (as we’ve noted in numerous blog posts/articles).

Earlier this year, Telecom Italia Mobile (TIM) said LTE customers are expected to account for around 90% of its mobile broadband customers by 2019;  That’s due to almost blanket LTE coverage of Italy with network speeds up to 75 Mbps and peaks of 500 Mbps in the main cities via the use of LTE Advanced Carrier Aggregation.

The above referenced FT “5G” article states:

Some countries have committed to the first 5G launches in 2019 but the wider telecoms industry is still struggling to define exactly what 5G technology is and some have argued that it is not yet clear how they can justify spending billions on the new network.

Mr Ferigo said the San Marino launch would be “very important” in defining the use case for 5G that would transform all sectors from healthcare to robotics to public transport. Telecom Italia has started working with companies including Maserati and Ducati on the use of better wireless technology but also the makers of parmesan cheese who want to better monitor the cows in their fields. Small territories have been used in the past for telecoms testing. The first 3G trial in the UK took place on the Isle of Man, while the remote Isle of Bute in Scotland was used to test “white space” technology.

Copyright The Financial Times Limited 2017. All rights reserved.

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References:

http://www.telecomitalia.com/tit/en/archivio/media/note-stampa/corporate/2017/TIM-Repubblica-San-Marino-MoU-5G-ENG.html

http://www.telecomitalia.com/tit/en/archivio/media/note-stampa/market/2017/PN-TIM-Turin-5G-Day.html

http://www.telecomitalia.com/tit/en/archivio/media/comunicati-stampa/telecom-italia/mercato/business/2017/10-03-17CS-TIM-Comune-di-Torino-5G.html

https://www.ericsson.com/assets/local/publications/white-papers/wp-5g.pdf

https://www.ericsson.com/en/news-and-events/press-center/media-kits/5g

 

Arthur D Little- Telco Europe CEOs: 1% CAGR for Next 5 Years + Telco Transformation Issues

Source:  Karam Targa, Managing Partner & Global Practice Leader at Arthur D Little-Austria.

On May 15th, Arthur D Little held its flagship Telco CEO & Private Equity Event in its office in Vienna, Austria.  The event covered the key trends in the telecom industry, in which 60+ Telco CEOs, Managing Directors, Private Equity firms, Telco shareholders and European Regulators from more than 18 countries participated.   

Exclusive Telco CEO & Private Equity Event

This year’s gathering focused on the industry’s hottest topic:

How digitalization will impact telecommunication operators’ configuration

It addresses five critical questions for the telecom industry:

1.      Volume-driven growth in core telcos on the horizon, back to growth?

2.      B2B2x: will operators finally take advantage of the digitization of the industry?

3.      Changing production models: why and how?

4.      A new art: managing assets – why owning everything may not be optimal?

5.      Quantifying the impact for a new telco model?

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The event began with a welcome by Karim Taga, Global TIME Practice Leader and Managing Partner of Arthur D. Little – Austria. Following that was a presentation on the key observations and future strategic choices by Bela Virag, Partner at Arthur D. Little – Austria and lead author of this year’s flagship report. The event finished with a Q&A session, during which the topics raised a lively discussion about the implications of the findings on the future development of telecom operators (telcos).

Key insights:

  • AD Little expects that telcos will master the “ARPU x volume” battle moving forward, which will amount to approximately +1% CAGR (in Europe) over the next five years, stabilizing top-line growth.
  • B2B2x is gaining importance – it represents a new segment and an untapped opportunity for telcos, which can be captured by leveraging core assets and capabilities and understanding what is needed to help companies digitize.
  • New production models begin to emerge – a tailored transformational journey will be key to drive improved customer experience, lower production costs and more innovative/faster time to market.
  • Telecom Operators (telcos) will need to review how they manage their diverse portfolios of assets to deal with a potentially significant impact on balance sheets due to a shift from depreciation to OPEX.
  • AD Little expects the markets to recognize that, given a change from the traditional approach of asset management, vastly different types of operators will offer different risk profiles and abilities to scale.
  • Volume-driven growth in core European telcos is on the horizon, with an estimated 1% CAGR over the next five years (in the geographic perimeter considered in the report modeling).
  • Seeking further growth, some operators are expected to focus on new market opportunities outside their core segments and reconfigure their businesses in order to address the increased pressure on various financial margins.
  • The “ARPU x volume” equation remains a key characteristic of the telecom services market. Declines in ARPU are anticipated across nearly all market segments, coupled with volume increases.
  • AD Little forecasts that telcos will win the “price x volume” battle.
  • Mobile and fixed broadband services will act as key growth drivers and offset declining segments such as fixed telephony. This is part of a transition from having voice segments as the main revenue driver to becoming a complementary service in converged bundles.
  • Voice markets will become less relevant as the revenue share of converged services grows stand-alone segments and revenue becomes too complex to be attributed to the voice market.

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B2B2x: Will operators finally take advantage of the digitization of the industry?

B2B2x is a new segment seen as an extension in new markets, in parallel with the existing segments of B2B, B2C and wholesale. It is developing to capture the business opportunity of operating customers’ digital solutions. B2B2x differs from the other segments in that services become part of the client’s value chain.

It differs from the Internet of Things (IoT) in that it does not include B2C, but does involve services delivered by people.

AD Little expects this market segment to reach $276B in size – or 8% of global ICT spending – by 2020 and, as such, it should be one of the fastest-growing fields for telcos to focus on.

By leveraging their assets, telecom operators can carve out a space in the segment and address a much larger share of the “digitization of the industry” mega-trend than they have historically. Doing this requires a thorough understanding of what is needed to help companies digitize. We expect that some operators will actively address this new segment in an attempt to become part of their customers’ value chains, while others may choose not to participate. The main perceived drawbacks are around possibilities that the company is not ready yet, the opportunity is too small, or IT providers are better positioned, deterring the telco’s entry. Industrial digitization is already in motion, and there is a material opportunity in providing and operating digital services for B2B clients. Telcos can, as well as or better than IT companies, operate technical assets on a reliable, low-cost basis. In order to capture this new opportunity, telecom operators need to work towards proactively engineering and jointly operating business models for their customers, adopting a perspective of value co-creation.

Telcos need to amend the design, sale and operation of offerings, as well as increase the agility and openness of their internal systems and processes so they can produce repeatable and scalable results from the B2B2x segment.

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Changing production models: Why and how?

Three factors are driving new production models:

  1. An improved customer experience
  2. Lower production costs
  3. More innovation/faster time to market

AD Little Forecasts:

  • Eventually network resources will become elastic, transparent and accessible – moving far away from today’s often slow, cumbersome and inefficient architectures.
  • We will see web-like collaboration between companies emerge – even in the network and Operations Support System / Business Support System (OSS/BSS) domain.
  • We will also see web-like competition emerge (amongst telcos).
  • Cross-border service competition will arise and international expansion will be accelerated.
  • We expect groups with multinational footprints to be able to leverage group-wide scale effects and eventually achieve lower costs.
  • Beyond this, we expect some of them to become suppliers to off-footprint operators. Transformation programs must be tailored to achieve the strategic goal of the operator initiating the move.

AD Little Takeaways:

Four key takeaways emerge from AD Little’s analysis:

  1. There is no “one-size-fits-all” transformation program available, at least at a feasible price. As a consequence, telcos need to evaluate and set their goals and prioritize their choices.
  2. Customer experience strategies are geared towards enabling delivery of the demanded solutions, which still may lack the technology or an attractive business case.
  3. Cost optimization from business-model abstraction is enabled as hardware, software and related processes are automated and centralized, while divestment optimizes asset structure.
  4. Operators must make production models more accessible and programmable to enable swift and efficient innovation, beating competitors to market with a differentiating offering. Operators have struggled to monetize the growth of data traffic. More importantly, though, many operators have recognized that they need to redesign their production models to meet the continued demand for bandwidth, agility, accessibility and efficiency increases.

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A new art – managing assets: Why owning everything may not be optimal:

Traditionally, telcos owned and operated their infrastructure for both fixed and mobile telecommunication services. They obtained a unique strategic advantage by owning infrastructure that was wider in geographical reach and better in technology than that of competitors. The strategic advantage of owning infrastructure needs recalibration in importance compared to the past. Diverse asset groupings, such as data centers, towers and legacy networks, among others, require differing managerial approaches and strategic objectives. Operators will need to consider establishing dedicated approaches that suit each asset class. Certain assets, such as fiber and small cells, will likely work in asset-sharing models. As many copper-network owners embark on fiber-upgrade journeys, they will have to balance the need for fiber sharing with their legacy roadmaps. This is in stark contrast to cable network operators, which, given their technical nature, can follow “upgrade with demand” strategies.

Clearly, this will have a significant impact on balance sheets: a shift from depreciation to OPEX makes EBITDA levels less comparable.

However, the most dramatic impact will stem from the vastly different types of operators that spring into existence: we will have traditional players competing with asset-light players following rigorous cost-cutting approaches while operating on simple, customer-centric models. Beyond that, we will see international operators expanding their footprints based on equally available infrastructure assets.

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Quantifying the impact:

AD Little expects the markets to recognize that these vastly different types of operators offer very different risk profiles and abilities to scale. Operators can differentiate their plays by: becoming truly global players; partnering with capable players that fully embrace the new segments and customer needs; remaining strong and highly efficient in their domestic markets; becoming asset-heavy or -light operators; or becoming pure asset-holding and operating players. All of these possible paths have one thing in common: they anticipate the arrival of the next wave of efficiency increases – this time on a much more global scale.

AD Little expects to see an increase in the importance of non-tangible assets in the sense of capabilities: e.g., the “degree of openness” of an operator to third parties, the “market-oriented approach to assets”, and the ability to “take design responsibility for the software that runs their factories” will gain weight when assessing operators.

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Q&A Discussion:

Should operators be as they are today, or transform into asset-light and asset-heavy parts?

What role will the production platform play?

It became clear that changing the current set-up will raise a number of subsequent questions, e.g. how to manage the transition, what ownership and governance models to adopt and how differentiation from competitors can be achieved.

The B2B2x opportunity also raised interest. The main issues discussed were related to telcos’ ability to build up capabilities to partner and to open their production platforms. Overall, there seemed to be a consensus on the need for clearer evaluation of the necessary steps in terms of investments, acquisitions, and other means of capability building to engage in the B2B2x opportunity.

One of the final topics discussed related to the management of such diverse operators. Will EBITDA or EBITDA margins still be as relevant? It seems that management and investors alike will need to refocus on EBIT and FCF as the leading KPIs by which operators will be managed. As some operators will own infrastructure while others share or buy access to it, the EBITDA performance may vary greatly.

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About Arthur D. Little:

Arthur D. Little has been at the forefront of innovation since 1886. We are an acknowledged thought leader in linking strategy, innovation and transformation in technology-intensive and converging industries. We navigate our clients through changing business ecosystems to uncover new growth opportunities. We enable our clients in building innovation capabilities and transforming their organizations. Our consultants have strong practical industry experience combined with excellent knowledge of key trends and dynamics. Arthur D. Little is present in the most important business centers around the world. We are proud to serve most of the Fortune 1000 companies, in addition to other leading firms and public sector organizations. For further information, please visit www.adlittle.com

Copyright © Arthur D. Little 2017.

Contacts:

Ines Matzelle – matzelle.ines@adlittle.com

Karim Taga – taga.karim@adlittle.com