The telecommunications sector in the Middle East continues to experience change and the challenges of growth on levels not seen in most other industries. During 2012, consumers, businesses and governments embraced fixed data and mobile broadband in what appeared to be the unstoppable rise of digital technologies.
Our term for this mass adoption, and the transformation of lives, companies and administrations, is “digitization” and this year more than ever, we have seen this term coming to the fore. It is not so much a wave of new technology as a revolutionary momentum permeating the economy; for society, digitization is changing how we connect and how we work. Providing digital and digitized services is the growth business of tomorrow.
The Middle East’s telecommunications operators have two fundamental assets that put them in ideal positions to benefit from the digital boom: they have the networks and the customers. Yet, we have seen that they have found it difficult to monetize the growth in network traffic and capitalize on consumers’ increased willingness to spend via mobile applications. Operators continue to suffer from the ever-accelerating shift in value toward “over-the-top” players, such as Internet groups and device makers that use others’ networks to sell their products and services.
To handle these challenges, and be able to take advantage of digitization, we believe telecom operators need to continue to restructure, seeking to build new and powerful capabilities. We recommend that operators pick one — or several — new operating models and then systematically acquire the capabilities required to succeed, with innovation a “top of the list” priority for all. Innovation must unearth and bring to life the technologies needed to create the truly ubiquitous mobile broadband network/ecosystem combinations that will drive the industry forward.
Restructuring for growth
To position themselves for future growth, we advocate that telecom players in the region should reconsider their focus and operating models from a fundamental strategy perspective, paying attention to change in three categories: defending the core; expanding into adjacencies; and pursuing coherence and scale.
As the first rule under this approach, a telecom operator needs to nurture its operational “core” to the point that it can thrive as an organic growth machine, driving revenues and profits. The key words here are efficient and lean. A highly focused core business can help an operator tailor offerings to chosen segments using sophisticated customer analytics and profitable pricing schemes, while giving target customers a user experience that uncompromisingly fulfills their expectations.
Building on this, telecom operators must continue to seek opportunities in adjacent sectors. This requires an ability to develop suitable innovative products and services, which many operators continue to find challenging.
One approach gaining currency is to outsource innovation, using incubators to focus investment in startups and new technologies. To cite a regional example, Vodafone Egypt’s “Vodafone Ventures” fund concentrates on small firms that work on Internet and mobile projects, alongside an incubator called “Xone” that will help startups with cutting edge telecom technology, financial, legal and personnel-related support.
Activities along these lines should aim for coherence and scale: Coherence — in that operators should end up with an optimal portfolio of products and services. Scale — in that these new products and services make a definable and noticeable difference to the top and bottom lines.
Choosing the model
Beyond sharpening of focuses, the need for restructuring at telecom operators also extends to their business models. We see four different approaches that operators can select to get themselves in shape for the digital future, with the option to combine models as needed: network guarantor, business enabler, experience creator and the global multimarketer.
The network guarantor provides its network infrastructure and related services to retail and business customers. While operating as cost-effectively as possible, the network guarantor delivers high quality, reliable and smoothly integrated platforms and applications to its customers. In the past the network provision approach appeared staid and reminiscent of the “dumb pipes” model. We see this revised version of the network guarantor, however, thrive by looking after businesses, who are very demanding customers and need this essential service but are tired of overloaded networks.
The business enabler sells telecom network services to clients so that they can capture the benefits of digitization. The offerings of the business enabler include reliable virtual networking, cloud computing and other integrated services and applications.
We see operators wishing to become experience creators, providing their customers with an attractive combination of targeted applications and content, with the goal of giving them the best possible user experience. Services might include e-wallets (allowing customers to use smartphones to pay for goods and services), personalized information apps and access to music, video clips and games.
The global multimarketer model focuses on the opportunity to expand beyond home markets and into multiple segments and markets, creating value for operators by combining the other three models. For large operators in multiple geographies this means providing their many customers with unique digital identities and the broadest possible range of digital services.
Building the right capabilities
Once Middle Eastern telecom operators have started restructuring and decide on the best model, or combination of models, the next broad agenda step is to build the capabilities that fit the model.
The growing intricacy of the telecom sector and the increasing pace of digitization are reflected in the five, sometimes overlapping, key capabilities: enhanced customer analytics, customer experience management, digital enablement, strategic partner management and yield management.
Operators will need most, if not all of these capabilities. Certainly the success of all four business models shown above depends on enhanced customer analytics. Firms have to be able to gather and analyze data about customers and then use it to create just the right mix of price and services for each customer segment. They also have to determine profitability over the entire customer lifecycle.
Customer experience management is a vital capability for most operators, particularly those using the experience creator and global multimarketer models. This capability allows them to create innovative products and services that attract and retain customers, and to manage a complete portfolio. However, operators that become network guarantors do not have to build this capability.
Digital enablement is the third of the capabilities that operators can choose. Companies with this capability can turn their internal services and processes, such as billing, authentication and identification, and location-based services, into products they can then offer to business customers — customers who can resell these services to others. This capability is especially important for operators using the business enabler model.
The importance of adjacent sectors is forcing companies to partner with others in the broader digital space, which demands a strategic partner management capability. Partnerships provide market footprint, experience or services portfolios, and they are particularly important for fostering innovation.
Managing partnerships might sound like a capability operators already have. In practice, however, handling of deals that involve collaborative relationships can be challenging, because they differ substantially from existing partnership models and contractual relationships.
Finally, the yield management capability allows operators to understand the nature of their assets and to manage them optimally. This is vital if firms are to create appropriate cost structures and liberate resources for investment in their chosen operating models.
Each set of capabilities, just like each operating model, comes with its own challenges. Telecom operators are in for a demanding few years, but they have little choice but to restructure and transform if they are to prosper in the unrelenting digital revolution.
David Tusa, Bahjat el-Darwiche and Hilal Halaoui are partners at Booz & Company