Perspective. Michael Peterson Stuart Cockburn Hannes Gmelin. Convergence Reloaded How Telecom Operators Can Best Capture Consumer Opportunities

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1 Perspective Michael Peterson Stuart Cockburn Hannes Gmelin Convergence Reloaded How Telecom Operators Can Best Capture Consumer Opportunities

2 Contact Information Beirut Bahjat El-Darwiche Dubai Karim Sabbagh Düsseldorf Roman Friedrich Thomas Künstner Frankfurt Olaf Acker Principal London/Düsseldorf Dr. Michael Peterson Mumbai Jai Sinha Munich Gregor Harter Martin Reitenspiess New York Christopher Vollmer Paris Pierre Péladeau San Francisco David Standridge Shanghai Edward Tse Sydney Simon Gillies Tokyo Paul Duerloo Booz & Company

3 EXECUTIVE SUMMARY After years of delay, convergence in the telecommunications industry the coming together of devices, services, and ubiquitous connectivity to provide consumers a seamless communications and entertainment experience is finally becoming a reality. Consumer expectations regarding the many benefits of convergence are high, and telecom operators must be prepared to offer the products, services, underlying technologies, and infrastructure required to meet those expectations. The benefits that operators can reap through convergence will include more loyal cus tomers and higher revenues from new consumer services, including those made available through partnerships with companies in financial services, healthcare, and energy. But to capitalize on the opportunities, operators must transform their businesses to offer better, higher-quality network services, more choice, and greater customization and opportunities for interactivity. Operators already possess a number of the key capabilities they will need to thrive in the age of convergence: a strong relationship with their customers; applications; enabling functionality such as billing and payment, and authentication and identity management; and underlying network infrastructure. But even if they already have some capabilities in the areas of devices and content, they are not likely to play successfully there in the long term. Moreover, they must acquire new cross-enterprise capabilities in better customer insights, more flexible organizations, and the creation of innovative products and services. Only operators that can develop these critical new capabilities, and put them together to offer an array of appealing new services, will have the right to win in the new world of telecom convergence. Booz & Company 1

4 Key Highlights Consumer demand for truly convergent telecom services is finally on the rise, as convergence becomes a real possibility. Telecom operators must rethink their role in the value chain and even how it is organized in order to take advantage of the many opportunities that convergence will offer, potentially becoming B2B2C players while maintaining their traditional consumeroriented business model. New capabilities will be needed and existing capabilities will need to be strengthened with respect to applications, enabling technologies, and network infrastructure if operators are to gain the right to win. Operators can serve as the basis of complete value networks of companies in various industries striving to leverage converged technologies to improve the services they offer their customers. THE NEW CONVERGENCE For years, it seems, the term convergence has been bandied about by executives, technology gurus, industry analysts, and journalists as the next great thing in telecommunications. The many elements of the telecom universe, they assured us, would soon converge, linking voice with data, fixed with mobile, and data with television into a seamless conjunction of networks, platforms, devices, and services. But that perfect world never seemed to come into being. Telecom operators and device manufacturers kept pushing onto consumers new products and services that promised to solve all their problems but were nothing more than simple, discounted product bundles. Consumers didn t see the value of such offerings and operators remained unwilling to shift their mind-set away from their traditional separate, siloed approach to the bundling of essentially unintegrated new products and services. Now, however, advances in technology and changes in consumer behavior have recast the issue of convergence. Consumers have begun to appreciate a wide range of converged products and services that can enable their mobile, always-connected lifestyles. Yet operators continue to dwell in the past, offering customers the same unconnected products and services they always have. It is time for operators to reevaluate those offerings, and to understand that a real opportunity awaits them if they can create products and services that offer customers a completely new experience, making their lives easier and simpler. In what follows, we analyze the changes that are transforming the world of telecom and the implications for operators. And we provide guidance on how operators can take advantage, including the capabilities they will need to succeed in the ever more convergent future. Consumers have begun to appreciate a wide range of converged products and services that can enable their mobile, always-connected lifestyles. 2 Booz & Company

5 DEFINING CONVERGENCE What do we mean when we talk about convergence? From the technological point of view, convergence has historically been about the bringing together of devices, software and applications, and connectivity into product offerings designed to meet a possibly unproven consumer demand. From the point of view of the consumer, it is about attractive, relevant services they can use and enjoy regardless of which device they prefer and without having to worry about the technologies involved in delivering those services. The goal of convergence is to enable the further digitization of their lifestyles, and all the accompanying benefits of greater connectivity, mobility, flexibility, and efficiency. Only when these two visions come together felicitously when the actual products and services offered do indeed match demand can it be said that convergence is becoming a reality. That is what s happening now. Consider the ipad. Apple s tablet computer can be used for surfing the Web; reading and work-related documents; enjoying media like photos, video, and music; and reading e-books. And as with its cousin, the iphone, the ipad can be customized by its user with features such as educational programs, enhanced games, and shopping portals, and used to control home security systems, entertainment systems, and lighting remotely. Yet the popularity of the ipad is by no means due solely to its prowess as an all-in-one device and its increased usability. Rather, it comes thanks to an entire constellation of closely related changes. On the demand side, consumers have become more techsavvy, they are leading increasingly mobile lives, and they have come to depend on technology and ubiquitous connectivity to support that lifestyle. On the supply side, operators continue to invest in high-bandwidth, high-speed mobile and fixed networks; application developers offer more and more compatible, customizable applications; and media companies offer online versions of all kinds of media, including TV, movies, and books. Increasingly, adjacent industries are digitizing and going online, establishing creative new business models. The U.K. exemplifies how rapidly things are changing. By the second quarter of 2010, the BBC s iplayer TV service was receiving 3.5 million requests per day, a level almost double that of the same period the year before. 1 Furthermore, 58 percent of U.K. adults buy goods and services online, spending an estimated 4.4 billion (US$6.8 billion) in April 2010 alone. 2 This is just the tip of the iceberg, as more change and greater convergence can be expected in this market: Virgin Media s up to 50Mbps superfast broadband is now available to 13 million homes, 3 and BT s 40Mbps service is expected to reach 10 million homes and businesses by This fixed infrastructure, together with the deployment of LTE mobile technology, expected soon, enables an environment in which convergence can become reality. Booz & Company 3

6 the CONVERGENCE opportunity Unfortunately, telecom operators have not taken advantage of the recent convergence trend, either because they don t want to incur the cost of being the first mover, because they believe it is beyond their traditional capabilities, or because they have yet to see adequate results from earlier efforts. They have limited their role in this arena to product bundling of communications services. Many operators also offer various bundles of fixed, mobile, data, and TV services. Others push to consumers various convergent devices, such as BT s dual-purpose BT Fusion phone, which works like a mobile phone when the user is on the move and switches automatically to a fixed broadband signal at home via a hub. Some offer services that can be consumed on one device, using one phone number, and billed together. Operators and device manufacturers have also created mobile phones that can replace conventional consumer electronics like cameras, navigation systems, or audio players but the willingness of consumers to purchase such devices is by no means automatic. The primary factor governing the lack of success that telecom companies have found in trying to play in the convergence space has been the difficulties they have encountered in operating outside their traditional strengths and outside the traditional telecom industry silos of communications (and entertainment, for cable operators). By expanding their view of the opportunities available to them, particularly in terms of the multiplicity of connections they can enable to new devices, new consumers, and newly digitizing industries telecom operators will be in a much better position to benefit from the convergence trend (see Exhibit 1). As governments and businesses increasingly expand into fully digitized services, addressing the needs of the consumer will become even more important. This presents telecom operators with a real opportunity to offer their services to companies in a variety of adjacent industries: Financial services: Leverage customer data, billing, and mobile payment solutions to work more closely with the banking and insurance sectors. E-health: Work with healthcare companies to offer telemedicine, connected patient data, health card systems, and home monitoring of patient status. The smart home: with utilities to enable the smart metering of electricity and water consumption, and create complete surveillance packages. Media and social networks: with hardware and content producers and develop specialized platforms and social networks, underpinned by new technology and real-time customer feedback. Taking advantage of such opportunities will require that operators rethink how customers experience their telecom services and the adjacent services they get from others. There are five critical areas in which operators must transform 4 Booz & Company

7 the way they currently do business in order to provide customers with the convergent experiences they are demanding: Availability: Telecom networks remain severely limited in terms of both geography and quality, and broadband coverage in rural areas remains sparse. Operators must provide seamless connectivity and a compelling always-on experience everywhere. Choice: Operators can compete with cable and satellite providers by offering customers comprehensive services and the ability to choose what to watch and when under flexible contract and payment terms. Quality: Operators should work to offer differentiated service models at different prices that can accommodate the needs of both customers seeking basic connectivity and power users. Achieving digital confidence will require trustworthy connectivity environments that offer assurances of protection. At the same time, operators must offer high-quality sound and visuals, no matter what media is being consumed. Customization: At present, customers can customize their devices but not their networks. Operators should seek to build flexible services that can be customized by the enduser, along with open platforms that enable users to create and share their own programs and applications. Interactivity: Operators must offer interactive services across a range of media, including fully interactive voting for TV shows, extended video-on-demand libraries, TV shopping channels, and deviceindependent multiplayer gaming in addition to extended customer service feedback. Exhibit 1 Expanding Opportunities in the Convergence Space CURRENT OPERATOR MARKET POTENTIAL FUTURE OPERATOR MARKETS Key Convergence Capabilities Communications Entertainment Financial Services E-Health The Smart Home Devices Customer Relationship Content Applications Enabling Functionality Operators are selectively present in this domain now Underlying Infrastructure Opportunity: Operators have the potential to enhance their capabilities and expand across the current market, rather than serving specific silos Opportunity: Operators can expand into other industries, thus enabling digitization there Source: Booz & Company analysis Booz & Company 5

8 CONVERGENCE CAPABILITIES How can operators meet the demands of customers for new technologies and new services? And in what areas should they concentrate their efforts? Operators possess a key advantage in the move to convergence their relationship with their customers. This capability needs to be improved and expanded, as do operators capabilities in three other critical areas: applications, the enabling functionality, and the underlying infrastructure. Operators are unlikely ever to build the capabilities necessary to gain the right to win in either the device space or the content space. Devices: Operators are unlikely ever to be able to compete with the likes of Apple in the device market. Given that they typically subsidize the cost of devices made by others, they should play a much stronger role in specifying the right devices and co-developing them with manufacturers to meet customer demand. Content: Content creation is well out of the range of operators, and it should remain that way. Instead of becoming a full-fledged pay-tv provider or a content aggregator like RTL, an operator should partner for content bundling deals, and could occasionally buy the rights to certain content directly. Therefore, operators must concentrate their efforts on those areas where they already have the inherent capabilities to differentiate their go-to-market efforts from those of competitors, thus positioning themselves vis-à-vis their customers as the enablers of digitization and convergence. Applications: This space will remain a considerable challenge for operators. Large swaths of the market have already been captured by global players like Apple and Google, leaving little room for operators to succeed, except perhaps on a national or regional level. While they are unlikely to develop the scale to compete globally, they could succeed by providing selected apps in areas where their knowledge of the local markets would give them an advantage utility apps such as navigation, for example but it will remain a highly fragmented play for them. Enabling functionality: The software needed to create interfaces with other applications or use basic functions and products is already available. So operators must develop the capability to extend these software platforms further in order to offer customers unique, attractive services and to differentiate themselves from other providers. Doing so will depend on two further capabilities: leveraging authentication and identification technologies such as SIM cards 6 Booz & Company

9 that allow the unique identification of subscribers, and improving their ability to collect and analyze customer data. These technologies will also allow operators to further develop their billing and payment relationships with customers, using both prepaid transactional models and postpaid subscription models, as well as the enablement of micropayments for third parties. Underlying infrastructure: This remains the area where operators are strongest. Most have extensive legacy networks with national coverage that are very difficult for competitors to copy, and some have cooperation agreements with foreign providers as well. Operators should consider the possibility of extending their networks further, in connection with new product offerings, and of extending their cooperation agreements. The result should be networks that are geographically comprehensive, allowing for a seamless customer experience, and regularly upgraded and augmented so operators can provide guaranteed availability and quality no matter what service is being provided. Relationship with customers: To date, operators have succeeded in combining their capabilities in the above areas to build large customer bases and to collect huge databases on customer demographics, usage, and payment. Building on these capabilities, they should be able to acquire more customers while increasing their impact on existing ones by improving the customer interface; enabling interaction over various interlinked channels, including contact centers and online; allowing customers to manage these interactions on their own behalf; and offering additional products and services. Building up their capabilities in these four areas will allow operators to play a significant role in the move to convergence not just in communications and entertainment but also in the enablement of convergent offerings in adjacent industries such as health, financial services, and energy. Doing so, however, will require that they build additional functional capabilities across three areas: customer interaction, organization and skills, and products and services. Customer interaction: While operators are already strong in the areas of branding and expanding their channel capabilities, they continue to face challenges in managing their customers and generating the detailed customer insight that would allow them to predict future customer needs. By focusing on these areas and investing carefully, operators should be able to build these capabilities, using their current solid customer relationship as a foundation. Organization and skills: In general, operators are not known for having flexible, consumer-driven organizations or for their ability to manage partner relationships and to innovate successfully. And despite experiments with new offerings for adjacent industries, they must still gain considerable experience in these areas. Concentrating on partner management to gain some of these other capabilities can make a significant contribution to closing the gaps. Products and services: The traditional business model of operators depended on long-term, infrastructureoriented product life cycles. But that model will not succeed in the future against a host of fast-moving competitors. Either internally or through partnerships and acquisitions, operators must build the capabilities needed to bring new products and services to market quickly and flexibly, along with the new pricing models needed to benefit from them. The long-term businesses they depend on for ongoing revenue, including their networks and other infrastructure, will always be there to smooth cash flow and help finance new products and services. Booz & Company 7

10 VALUE NETWORKS IN THE MARKET Once all these capabilities are in place, operators will be in a much better position to compete in the convergence arena. That arena, however, is likely to become more fragmented and more modular, and operators will need to position themselves within extended value networks that will include numerous other players from other industries, operating together in a B2B2C context. Exhibit 2 lays out a simplified example of how such a hypothetical network might work: The incumbent operator forms the telecommunications basis of the network, leveraging its current position in underlying infrastructure and enabling functionality, building capabilities in the application space, and most likely partnering to create the content and devices needed. Its relationship with its customer base can serve as one source of consumers for the entire network. Such networks can be extended to include players in adjacent industries such as banks, thus boosting the potential value of the network by offering financial services as well as more traditional communications and entertainment. In order to attract players from adjacent industries to these B2B2C networks, operators will have to develop the capabilities needed to extend their customer offerings voice and data for both residences and businesses, as well as billing and identification services to provide more sophisticated business services. These might Exhibit 2 The Potential for Value Networks CURRENT OPERATOR MARKET POTENTIAL FUTURE OPERATOR MARKETS Key Convergence Capabilities Communications Entertainment Financial Services E-Health The Smart Home Devices Operators can partner with technology players for capabilities Customer Relationship Content Applications Enabling Functionality Underlying Infrastructure Operators can further build capabilities Operators can leverage current assets & capabilities Operators can partner with adjacent Industry players for capabilities Example of a Value Creating Network Source: Booz & Company analysis 8 Booz & Company

11 include the creation of platforms that businesses can then brand and use as interfaces with their own customers. Success in creating these services will require a high level of technical competence, the ability to manage open platforms, and a strong focus on costs. The many opportunities opening up across the telecom and media value chains has encouraged the entry of any number of new players. In every market, from mobile and fixed voice and data to media content and television to hardware and software, traditional telecom operators are facing new competition from outside their industry. Equipment makers are offering infrastructure services; cable players, and even traditional mobile operators, are offering fixed voice and data services; and Internet players are moving into all of these markets. And their success is very much due to their ability to cater to the demands of consumers for convergence by offering services like free VoIP, convergent devices, new convenience-based functionality, and innovative consumer-focused bundles of content and services. So far, however, most operators have responded defensively, going so far as to ban competing new products from their networks in hopes of sustaining their own businesses, as several mobile operators did when they blocked the use of Skype s voice services on their mobile networks. More successful moves have included efforts to profit from the innovations of other players by forming alliances, as many mobile operators did in making exclusive deals with Apple for the iphone, and from more attractive offerings of products and services, such as quadruple play (bundled cable television, broadband Internet access, and fixed line and mobile telephony) and premium content. But true innovation that extends beyond the core infrastructure business remains at a premium at most telecom companies; the typical telecom company spends just 1.4 percent of its revenues on research and development, a far cry from new competitors from the Internet and electronics industries, which spend 11.4 and 7.1 percent of their sales, respectively, on R&D. 5 The typical telecom company spends just 1.4 percent of its revenues on research and development, a far cry from new competitors from the Internet and electronics industries. Booz & Company 9

12 Operators must break out of their defensive stance in the face of rising competition. And the only way to do so is by leveraging their capabilities both the old ones that have served them well so far and the new ones needed to play now and in the future to build new business models that take operators beyond their traditional B2C markets and into areas where capabilities in the B2B2C arena will matter greatly. The realm of services like smart metering, e- and m-payment, digital marketing, digital retail, e-government, e-learning, telematics, e-health, and others provides many such possibilities for operators to gain a foothold in a fast-emerging market, but they must move quickly if they are to stave off the competition already arising (see Opportunity in the Growing E-Health Market ). Opportunity in the Growing E-Health Market The telecom industry has a significant role to play in the market for online healthcare services. Operators must provide the always-on connectivity demanded by the many stakeholders in that market patients, providers, hospitals and pharmacies, insurance companies, and health authorities. And they must offer new applications and services that will increase knowledge, speed up healthcare delivery, and make the entire system more efficient and effective. What capabilities will they need to play this new role, and what challenges will they face in doing so? Patients Operators can enable the provision of quick and flexible access to online and mobile health information, provide mobile monitoring devices, and offer emergency and scheduling services. This will require new infrastructure and user-friendly interfaces for a variety of platforms, as well as enhanced data security and privacy and the high standards and quality of service needed to meet emergency usage requirements. In order to succeed here, operators must possess the capabilities needed to design and integrate large-scale, complex systems, and to build and operate high-quality, high-volume national and customer infrastructures. Providers Operators can generate new revenue and lower costs by enabling such services as disease management and telediagnosis and teleconsultation. Required infrastructure will include dedicated devices and software to enable basic diagnostic activities and data transfer, and technically complex, highly integrated health information networks with remote access, most likely in cooperation with partners. Operators will need to build capabilities, and the financial strength, to create and support such networks. Hospitals and Pharmacies By creating scheduling, e-prescription, and clinical decision support systems, operators can help ensure greater patient safety while lowering costs. This will require sophisticated, secure local networks, dedicated devices, and user-friendly interfaces that integrate hospitals and pharmacies internal systems. To play in this area, operators need the capabilities to build and operate national e-health infrastructures, as well 10 Booz & Company

13 as rigorous cost management, financial strength, secure provisioning of information and communications networks, and location technologies. Insurance Companies Electronic health records can increase transparency, enable fraud detection, and save costs. The SIM cards that operators now include in many mobile phones can be improved to hold medical information, while new applications will be needed to manage the data. Progress has lagged due to the lack of national information standards, privacy concerns, and funding constraints. Here, too, operators must be able to design and integrate large-scale systems and operate high-quality national infrastructures in order to be able to play. Health Authorities Operators can help build portals that encompass health education and training and enable the effective cost management of public health systems. Here, they can provide infrastructure, data storage and analytics capacity, and user interfaces, and partner for health-oriented content. Again, capabilities needed by operators include the enablement of adequate national infrastructures. The emerging e-health market offers operators a significant new source of revenue from consumer-oriented products and services such as remote assistance devices, mobile tele-assistance and health- and wellnessrelated information portals, and business-driven products such as online booking systems, hospital and emergency services, and administrative tools as well as the opportunity to participate in large projects such as national electronic medical records systems. How big is the opportunity? In Germany alone, the e-health market is expected to grow from 0.2 billion in 2004 to 3.1 billion in 2015, an average annual growth rate of 28 percent. 6 The competition in the e-health market is already heating up, with players from other industries like software, the Internet, and medical equipment looking to capture share. Yet as societies age, the demand for health information and medical services will only grow, and operators are in a strong position to offer the value-added communications, infrastructure, and services that will be needed. Services like smart metering, digital retail, e-government, telematics, e-health, and others provide many possibili ties for operators to gain a foothold in a fast-emerging market. Booz & Company 11

14 Conclusion The core markets served by telecom operators in most developed economies are maturing quickly, and as growth slows, operators must uncover new sources of revenue to replace the traditional revenue streams, at the very least. Meanwhile, the trend to convergence of devices, applications and services, and enabling technology has become a reality, boosted by the rollout of high-speed networks offering ubiquitous connectivity and by consumer demand itself. The new technologies have enabled the emergence of a significantly more consumeroriented telecom market and opened up the market to new competitors from outside the telecom industry, which are fighting to capture a share of the coming growth in telecom and in the adjacent industries that will also benefit from these changes. Despite the competition, operators are well positioned to capture their own share of this new market, thanks to their unique assets and capabilities their relationship with customers, and their billing, authentication, and SIM technology. But the real make or break capability they will need involves how best to provide desirable services to customers, and to enable surrounding industries such as healthcare and utilities to do the same. Operators must make a conscious decision regarding the capabilities and new business models needed to give them a clear right to win, but only in the markets where they have real potential to succeed. When necessary, partnering will be an effective way to build these capabilities quickly. Most important, the time to begin analyzing the many potential opportunities and building the required capabilities to capture them is now. 12 Booz & Company

15 Endnotes 1 Ofcom, The Communications Market 2010, Aug. 19, Martha Lane Fox, Manifesto for a Networked Nation, Race Online 2012, July raceonline2012.org/sites/default/files/resources/ manifesto_for_a_networked_nation_-_race_online_2012.pdf 3 Ofcom, The Communications Market 2010, Aug. 19, Ofcom, The Communications Market 2010, Aug. 19, Company reports; Booz & Company analysis. 6 Macroeconomic Impacts of Broadband Use in Germany, MICUS Management Consulting; Booz & Company analysis. About the Authors Michael Peterson is a Booz & Company partner based in Düsseldorf and London. He specializes in corporate strategy and business model transformation for communications companies and in convergence and customer-facing processes in the broader media and telecommunications environment. Hannes Gmelin is a senior associate in Booz & Company s Berlin office. As part of the European communications, media, and technology practice, he focuses on converging TV and telecom infrastructures and the implications for the content industries. Stuart Cockburn is a senior associate with Booz & Company based in London. As a member of the communications, media, and technology team, he specializes in strategy and new business models for fixed and mobile telecom operators. Booz & Company 13

16 The most recent list of our offices and affiliates, with addresses and telephone numbers, can be found on our website, Worldwide Offices Asia Beijing Delhi Hong Kong Mumbai Seoul Shanghai Taipei Tokyo Australia, New Zealand & Southeast Asia Adelaide Auckland Bangkok Brisbane Canberra Jakarta Kuala Lumpur Melbourne Sydney Europe Amsterdam Berlin Copenhagen Dublin Düsseldorf Frankfurt Helsinki Istanbul London Madrid Milan Moscow Munich Oslo Paris Rome Stockholm Stuttgart Vienna Warsaw Zurich Middle East Abu Dhabi Beirut Cairo Doha Dubai Riyadh North America Atlanta Chicago Cleveland Dallas DC Detroit Florham Park Houston Los Angeles Mexico City New York City Parsippany San Francisco South America Buenos Aires Rio de Janeiro Santiago São Paulo Booz & Company is a leading global management consulting firm, helping the world s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in Today, with more than 3,300 people in 61 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. For our management magazine strategy+business, visit Visit to learn more about Booz & Company Booz & Company Inc.