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Yesterday I was reading the latest HBR article of David Robertson from the MIT Sloan School of Management, where he was talking about successful companies that innovate around their existing products. They do that by reconnecting with their core customers, innovating around their customer value chain and delivering humbly. While reading that, I couldn’t resist to reflect on what has been going on in the telecom industry in the last 5-10 years.

Telecommunications companies, with their products, services as well as their broad customer reach, have always been in the epicenter of innovation. They have an undeniably important role in delivering the promises of 5G, IoT/E, Smart Cities, Mobility and Digitalization to enterprises and to the broader community. That innovation had been the main driver of customer retention for a very long time, but it has been partially replaced by locking the customers to product bundles and long-term plans both in B2C and B2B – a very comfortable business model yet strategically seen very vulnerable to newcomers, substitutions and disruptions.

There’s a global decline in the average revenue per user (ARPU) over the industry as a whole. 

That disruption has been happening since a while now as PWC reports below, using ARPU as their key KPI. There’s a global decline in the average revenue per user over the industry as a whole. What is more striking is that this trend is globally effecting the telco companies – even in more conservative markets such as Western Europe.

There are several reasons behind that drop which is partially attributable to OTTs providing new services to consumers such as instant messaging, video & voice and streaming. Those services in the end make the traditional Telco products such as SMS, phone calls, roaming and broadcasting irrelevant to end customers. According to PWC, we see average revenue declines between 15-30% in each product area, and that hits the tight Telco margins.

Is that picture surprising? No, this is nothing new to the telco executives. As a reaction, some of them decided to stick to the status quo, focusing on cost-cutting measures (a.k.a. operational efficiency) defending their existing business models – that is; as long as it continues to make money. Platform consolidation and BSS/OSS transformation have become top priorities with the hope to decrease the bottom line with a positive effect on customer retention. As a result, it’s not uncommon to see 3-5 year cost cutting programs being announced in the industry today along with large lay-offs.  Reducing hierarchies and getting slimmer isn’t necessarily a bad move but there aren’t many examples around where a pure cost-cutting strategy resulted in a successful enterprise or industry turnaround. Lay-off decisions with a short-term focus are even more troubling from a talent management perspective, one of the biggest challenges that is awaiting the industry in the near future.

On the other side of the spectrum, some telco companies anticipated the change that was coming faster than their peers, but took the business model innovation too far and lost the focus on their core business and customer intimacy. A critical example of that is, how several telco companies who are active in delivering ICT Services around the world tried to convert their classical hosting operations and managed services to Cloud Computing with huge promises almost overnight and as a result – failed themselves and their customers. Reasons for such failures include missing strategic direction and USP, not understanding what the customers expect from a hyper-scale cloud, focusing purely on the technical transformation as opposed to the business/cultural transformation, missing backend integration and BSS support as well as failure to design operations that is necessary to take on such an aggressive journey. Telco companies certainly play an important role in delivering cloud solutions but the strategic error of trying to control the whole value chain resulted in several attempts to reinvent the wheel (i.e. production & operations) and not focusing on areas where they can bring tangible value (i.e. connectivity, infrastructure, integration, intelligent and secure edge as well as customer centricity and industry solutions). Arguably a better approach would be investing in partnerships and alliances with the technology leaders while building up a seamless, integrated and rewarding omni-channel experiences to the consumers. 

Telcos should focus on customer centricity now more than ever.

This brings me back to innovating around existing products by reconnecting with your customers and understanding the blockers that prevent them from buying your products. Luckily there are also good examples in the Telco industry on how companies focus on delivering the right solution at the right time to the right customer and use the market opportunities to address needs in an agile way.

Here’s an example of what Tele2 has done together with Microsoft in Europe:

By doing that, Tele2 did not re-invent communication – they basically innovated around their existing products to address a new customer segment; in this case refugees. They delivered humbly as well. They chose not to reinvent a new translation engine; instead they partnered with Microsoft, who is investing billions in its intelligent cloud services delivered through the Azure platform. In fact, Tele2 was able to develop this service and the market offering within weeks.

That type of focus, creativity and agility to execute will be crucial in the future; not only for Telcos but in all industries to master the upcoming challenges. And it’s high time for the telco companies to get out of the ivory tower of engineering and focus more than ever on the customer needs to be successful.