Telco 2020 â How Telcos transform for the ... - Roland Berger

Competence Center InfoCom 1 

Alexander Mogg, Alexander Dahlke, Peter Wimmer, Christian Hoffmann 

Telco 2020 – How Telcos transform 

for the "Smartphone Society" 

Competence Center InfoCom

2 

Telco 2020 – How Telcos transform for the "Smartphone Society" 

Management summary 

A battle of giants is brewing in the world of telecommunications. Traditional telcos, with 

their five billion customers worldwide, are getting ready to take on new Internet-focused 

rivals offering communication platforms, services and content via smartphones, tablets and 

Internet-enabled TVs. Right now, the strongest of these are the "fab(ulous) five": Amazon, 

Apple, Facebook, Google and Microsoft, who serve over three billion customers between 

them. Traditional telcos and their modern rivals each have a total market capitalization of 

round about EUR 800 billion. Current public opinion favors the fab five with their superior 

innovative capabilities, breathtaking growth rates and large cash reserves. But will that be 

enough to threaten the traditional telcos? 

The fab five certainly enjoy a number of advantages, including daily "branded contact" with 

customers, close customer bonds with their easy-to-use, personalized service ecosystems 

and, increasingly, a willingness on the part of customers to pay for such services. Pureplay 

broadband access – the mainstay of traditional telcos' business today – will remain 

the cornerstone of digital communication in the future for both landlines and mobile 

communication. While usage and associated data volumes continue to grow exponentially , 

however, telcos are under the price pressure that inevitably accompanies commoditization 

while the industry so far has failed to monetize volume growth. 

So what can telcos do in their battle with the giants? This is the question answered by our 

global study "Telco 2020 – How telcos transform for the Smartphone Society". Our talks with 

more than 25 top decision-makers representing the entire spectrum of telecommunications 

revealed that the "right" strategic orientation for each telco will depend on five key levers: 

1) Personalization of service ecosystem and the customer experience; 

2) staunch defense of relationships with end customers; 

3) cost-efficient broadband network build-up; 

4) the realignment and radical streamlining of operating models; 

5) the financial resources to drive digital transformation and consolidation. 

Three realistic scenarios emerge from this finding. In extreme cases, telcos will do no more 

than engage in what can be termed "Access Minus" business, primarily providing network 

infrastructure as wholesale service providers that have all but been cut off from their 

relationship with the end customers. Companies with better strategic positions and deeper 

pockets will develop their own access-centric services and selective over-the-top (OTT) 

offerings, positioning themselves as "Access Plus" providers. Only a handful of regional telco 

groups will, through acquisitions, establish themselves as "OTT service groups" capable of 

competing with the fab five in the complex "OTT Game".


None of these three strategies is inherently right or wrong. Provided they make a convincing 

job of executing the strategy, even companies that back the Access Minus horse can develop 

successfully and stimulate hopes of value growth on the stock market. 

We believe that virtually all telcos can manage this approach, even if some incumbent 

players currently appear overvalued. Ultimately, though, five golden rules will separate 

the winners from the losers: 

1) Get the core access business right – Converged broadband access, 

personalized service suites, experience-based; 

2) Make targeted, realistic "bets" with regard to growth and differentiation 

(in the case of Access Plus strategies and forward-looking OTT investments); 

3) Transform into lean telcos with de-layered operating models and 

only half of today's workforce; 

4) Convince capital markets by presenting them with attractive consolidation 

and streamlining stories, abandoning secondary activities and committing 

to cooperative ventures; and finally… 

5) Act quickly and resolutely. 

Only then can the industry resume its pattern of value growth and begin offering shareholders 

attractive returns again – despite the erosion of its core business and the best efforts of 

global rivals such as Apple and Google. 

Welcome to the "Smartphone Society" – a glimpse of the future 

Snapping your fingers is all it takes to silence the smartphone alarm, getting digital assistant 

Siri to answer your mails before you even get out of bed, commenting on the first Facebook 

postings of the day while brushing your teeth and switching on the espresso machine. A 

doppio, if you don't mind. Since your girlfriend is still away on business, you will have to 

make do with the hologram projected onto the table by your mobile for small talk over coffee. 

Five minutes later, your phone opens the car door. As you climb in, you tell the voice control 

the name of the business partner in Korea who you want to talk to on the way to work – both 

of you speaking your own language, interpreted simultaneously and appearing on the headup 

video display. 

In short, the digital transformation is turning our day-to-day lives upside down.

4 


Ubiquitous communication: Ever since the smartphone, tablet and Internet-enabled TV 

began their triumphal march, we have been online almost permanently, often with multiple 

devices simultaneously. Worldwide usage data shows that, apart from over dinner and 

when we are asleep, there is no time when we do not engage in online communication. 

And that is only the beginning. We are well on our way to becoming a smartphone society, 

a telecommunicative world that, while perhaps still a distant dream for many consumers 

and providers, appears inevitable to us at Roland Berger. 

Customers don't buy access, they buy service ecosystems: In the future, our communication 

will revolve around social media platforms, dominated by Internet firms such as 

Apple, Facebook and others that do not even exist yet. The Google+ videotelephony project 

launched in 2011 shows the way forward for integrated communication environments that, 

building on a personal or organizational network, set up telephony, messaging, mail, chat 

or video links at the click of a button. 

This will naturally affect telcos' revenue streams. Voice over IP (VoIP) telephony is doing 

away with the need for traditional, landline phones. Free chat apps are replacing profitable 

services such as text messaging. Even online videotelephony is emerging as a free service, 

(although it tends to clog up networks). Future data tariffs will only compensate for part of 

these losses, even after more bandwidth and greater data usage has been priced in. Worse 

still, young, tech-savvy customers are getting used to interacting from within the service 

ecosystems set up by over-the-top (OTT) players and are just a click away from the latter's 

all-in service offerings. These ecosystems are where they come to meet friends, buy music, 

post news and pay for online purchases. So why should they leave their familiar "home" 

environment just to communicate?


Usability and service experience – the keys to customer acceptance: Separate individual 

contracts are increasingly giving way to demand for access packages that bundle broadband 

connectivity for mobile phones and the Internet. As things stand, just 10% of customers buy 

contracts that combine mobile and landline communication. Yet this figure is expected to rise 

to 60% by 2020. In the end, customers pick the provider whose digital service suite matches 

their patterns of usage as closely as possible, and that also supplies attractive handsets. Future 

offerings will have to function independently from devices and network access, especially at a 

time when mobile Internet is becoming increasingly important worldwide. Communication is no 

longer a separate service. It has become an integral part of social networks and other e-service 

ecosystems that embrace entertainment, shopping and healthcare, for example. 

Telcos need to compete with the fab five: Amazon, Apple, Facebook, Google and Microsoft are 

spreading their tentacles and occupying more and more of the service territory. They are offering 

Internet applications, their own devices and platforms on which customers can (although they 

rarely do in practice) combine all their online activities – even if the service ecosystem builds 

barriers to other ecosystems. In the future, customers will be willing to pay for simple, fast 

access to these ecosystems. Pure-play broadband access will remain the cornerstone that even 

the fab five will have to use. But given the forecast ubiquity of optical fiber networks and highspeed 

wireless connections, it is increasingly being regarded as an interchangeable commodity. 

As a result, price pressure is growing.

6 


Personalization: Ease of use based on intuitive access to a familiar ecosystem, one-stop 

shopping and customer services will become core requirements, precisely because the market 

is flooded with so many disparate devices and offerings. The fab five already attach great 

importance to personalized recommendation marketing ("I like", "Amazon Recommendations" 

and "Google Search", for example). Future telco offerings will have to be personalized to the 

same degree, including apps to answer everyday questions, from "What's on TV?" to "Is the 

freeway clear?", not to mention the availability in the cloud of personalized content that is 

independent of specific devices. 

Telcos have some fundamental rethinking to do – 

our motivation for this study 

Telcos need to understand each and every one of their five billion customers, their networks 

and their preferences, rather than trying to supply the masses with one-size-fits-all infrastructure 

products. The good news is that no-one has as much information as the telcos do. The bad news 

is that no-one does as little with it. They scarcely seem able to use this knowledge to personalize 

sales and services. 

Not so the five Internet players. Amazon (300 million shoppers), Apple (over 250 million iOS 

installed), Facebook (845+ million users), Google (over one billion search engine users, 200+ 

million "Androids") and Microsoft (over 660 million Skype users) dominate the OTT game. 

They have our data and they are not afraid to use it. Consistent personalization makes them 

indispensable. They are our daily companions because nearly all of us use their services. They 

also beat telcos on finance and innovation – a fact that stock markets have rewarded with 

considerable increases in their share prices in some cases. 

Tellingly, not a single European firm appears on the list of most valuable internet business 

brands. Nor do many people expect to see them there any time soon, as the digital transformation 

undermines the position of traditional telcos. Revenues and profits are in decline even as 

companies have to invest more just to compete. If the telcos continue to rely on their existing 

strategies and business models, revenues will drop by as much as 20% and EBITDA by as much 

as 40%. The lost profit will find its way to the fab five, other OTT providers and cable companies. 

At the same time, European telcos will need to invest a total of more than EUR 600 billion by 

2020. Most of this will be required by today's core business, on optical fiber networks and LTE, 

driven by political requirements and competition from cable operators with their 100+ megabit 

connections. 

In the short term, this will lead to a considerable increase in investment levels for some 

players. Others will attempt to spread their investments over a longer period, but in so doing 

lose valuable time in the competition for shares in the broadband market. In a shrinking market, 

telcos can only cope with these losses if they consolidate intelligently.


They must slim down their various network, sales and service business models, abandon 

secondary activities and use M&As or cooperative ventures to penetrate fast-growing markets. 

All of this leaves little money and less time to "bet" on new strategies and business models. 

Worse still, the experts we spoke to do not believe that the traditional telcos have the innovative 

capability required to engage in a competitive battle with the fab five. 

Prompted by the upheaval in the market and competitive landscape, Roland Berger took a 

closer look at the future role firms will play, expectations with regard to their business models 

and the necessary consolidation. To prepare our study "Telco 2020 – How telcos transform 

for the Smartphone Society", we interviewed more than 25 decision-makers representing the 

entire telecoms value chain all over the world, including six of the ten global leading telcos, 

equipment providers, Internet market leaders and investors. The participating companies post 

combined annual revenues of around EUR 400 billion – about a third of the global industry total. 

Half of our interviewees were board members or CEOs who take these changes into account 

in their decisions day in, day out. 

What industry CxOs think – the results 

The interviews were revealing. Top managers are clearly in broad agreement about the 

course the market will take. But they are very uncertain about their own relationship with 

end customers, their ability to cope with the digital transformation and about consolidation 

scenarios. The resultant strategic and timing considerations are equally unclear. At the same 

time, our interviews highlighted the different opportunities opening up for telcos. Depending 

on how they position themselves, incumbents can indeed stand up to new competitors and 

succeed in a game whose rules are changing beyond recognition.

8 


Current market figures and expectations for Europe suggest that two issues are key with 

regard to telcos' future strategic orientation: 

1. Access will remain the backbone of most telcos' business. 

2. To be equipped for growth markets, many telcos will also offer Access Plus services, 

covering everything from the marketing of access-centric platforms to mostly 

regional OTT services. 

Access will remain the major source of revenue and hence the core of every telco strategy in 

the long run. In 2015, we expect to see revenue totaling some EUR 300 billion in Europe. 

Around two-thirds of this amount will be attributable to mobile communication, partly because 

LTE networks will have substituted as much as 10-20% of landline Internet connections. 

Due to their experience with infrastructure, their heavy investment in more efficient 

broadband access networks and the savings permitted by leaner business models, telcos can 

continue to generate EBITDA margins of as much as 35% to 45% by delivering access alone. 

Having said that, this core business area will stagnate until 2015. Given the upheaval on the 

communications market, we expect to see a decline of 1% to 2% a year until 2020. Activities 

such as hosting, data storage and security services – all of which build on access – are the 

exception to the rule. These cloud technologies are enjoying double-digit growth. They are 

attractive to telcos because they upgrade "mere" access, allow to capitalize on their networks, 

help to retain customers, their data and their applications, and so allow companies 

to gain a foothold in the OTT segment.


In adjacent business lines that rely on the telcos' network and IT service platforms, it makes 

sense to cooperate and place selective bets in order to grow and cultivate a distinctive value 

proposition. To what extent telcos succeed, however, will naturally depend on their own capabilities, 

their potential to become market leaders and whether the markets they serve follow 

local or global rules. 

Regional telco groups such as Telefónica, Vodafone and Deutsche Telekom and national 

champions such as Telecom Italia, KPN and Swisscom are setting their sights on similar 

areas of growth: payment services, advertising, energy services, smart home services and 

healthcare services ("e-health"), to name but a few. To take the latter segment as an example, 

many patients may not yet be able to imagine having, say, their blood pressure 

measured by a mobile service provider. Yet Telecom Italia is using precisely this kind of 

remote monitoring system to save older patients the hassle of spending time in hospital 

and to save the national health system money. E-health may not be a large market. But 

given that healthcare is heavily dependent on national legislation, it seems a sensible niche 

to occupy as global OTT players are unlikely to be interested in developing suitable offerings 

for each and every country. European telco groups might even have the chance to establish 

a European standard – although there is as yet no sign that telcos plan to prioritize such 

opportunities in collaboration with healthcare partners. 

On the other hand, payment services and advertising business force national incumbents 

to line up against international competitors. Payment by mobile phone is regarded as a 

market that has so far been neglected but could be worth billions. Things are slowly beginning 

to move. Japan's NTT, for example, is already in possession of bank licenses in Europe. 

Deutsche Telekom, Vodafone and O2 have come together to form the "mpass" joint venture 

– a payment system for online purchases by mobile phone. OTT players are also joining 

the fray, as evidenced by the Google Wallet, Facebook's "Credits" and the eBay subsidiary 

PayPal. 

Telcos that go beyond access-centric services and platforms will encroach on the OTT turf 

that the fab five have made their own. In the short term, TV promises to deliver the most 

revenue and will be a necessary weapon in local competition. In the long term, however, 

traditional telcos will scarcely be able to hold this ground as they simply cannot keep pace 

with global OTTs such as Facebook and Google+ or portals such as iTunes, YouTube, Netflix 

and Hulu – particularly as local content providers can easily make use of their own platforms. 

Telcos face the same dilemma on the subject of music libraries, online games, app stores 

and e‐commerce stores. They may stand a better chance in sectors with a more local focus, 

such as special regional areas of e‐commerce. Alternatively, they might follow the example 

of Japan's telecommunications company Softbank and invest in a portfolio of potential 

future OTT market leaders – another way of betting on the future.

10 


Theoretically, then, the options range from pure-play access business – with telcos operating 

more or less as anonymous wholesale providers in extreme cases – to engaging in handto-hand 

combat in the OTT boxing ring. According to the results of our interviews, the best 

strategy for a particular operator depends on five key levers: the personalization of service 

suites and the customer experience; staunch defense of relationships with end customers; 

cost-efficient broadband network build-up; the realignment and streamlining of business 

models; and the financial resources to drive digital transformation and consolidation. 

Personalization of service suites and the customer experience 

The more complex our service environment becomes, the more important consumers will place 

on personally tailored, functioning offerings that meet all their needs. For providers, this means 

giving every user a platform on which they can bundle their apps, information, entertainment, 

shopping and communication services, and where they can also find someone to help them 

with any questions or problems that crop up. This service suite must be structured in such a 

way that it can be custom-tailored, irrespective of what devices and networks users choose or 

where they happen to be. In the future, customers will expect to be able to take an ongoing 

call seamlessly from their office phone to their mobile and have it put through to the handsfree 

device in their car automatically as soon as they turn on the ignition. To put that another 

way, service suites must work in the background; they will not always be visible. 

But what should a successful personalized suite look like? Let's take entertainment as an 

example: Premium and basic packages for different target groups – young people, families, 

over-50s – simplify the task of communicating and picking the right services. Each package 

will include standard content such as an app store, access to 3D Internet TV and preinstalled 

links to important networks and programs. Telephony and broadband Internet access will 

likewise be preinstalled. Switch on, go shopping, communicate immediately: that will be 

the value proposition. 

Personalized but free add-on services such as videotheques (along the lines of BBC's iPlayer), 

secure single sign-on facilities across mobiles, tablets and the TV, and a firewall or cloudbased 

storage will complement the standard-issue functions. Customers will select these 

functions either in a service configurator or, on the basis of past usage patterns, the provider's 

"recommendation engine" will suggest them itself (e.g. "customers who chose …, often 

choose …"). 

Exclusive add-on functions will allow users to further personalize the service suite, creating 

a genuine "wow factor" that boosts customer retention and enriches the brand experience. 

Variations on the theme of the Apple Store's Genius Bar, where specially trained staff provide 

live help for customer problems, would be conceivable in a service cosmos that combines 

offline and online support. Premium services such as links to American Express-style concierge 

services for local cultural offerings, and maybe a personal rendition of "Happy birthday to 

you!" by Lady Gaga – or at least her hologram – in the customer's living room, will set the 

bar for providers of OTT environments, services and consumer goods.


Staunch defense of relationships with end customers 

The battle for customers will be won not with services alone, but with every aspect of the 

ecosystem. Communication devices, too, will have a crucial role to play – partly because 

they often clinch a decision whether or not to sign a telco contract. 

Unlike the situation today, telcos will no longer determine which handset manufacturers 

succeed merely by displaying their devices in their showrooms. Instead, global brands will 

sell their own smartphones, tablets and Internet TV devices directly or via retail partners. 

Apple has been showing how this can work ever since it launched the iPhone in 2007. 

Google is strengthening its position with rapid dissemination of the Android operating system 

and the acquisition of Motorola's mobile communications arm. Together with HTC, Facebook 

plans to launch its own mobile phone – called Buffy – starting in spring 2012. Following its 

Kindle Fire, Amazon is also said to be working on a smartphone. Microsoft has teamed up 

with Nokia to develop the Lumia family if devices in an attempt to relaunch its own 

operating system. 

For now, however, it is unlikely that these moves by OTTs will trigger a power struggle in 

the device segment. The telcos still have a dominant 45% share of distribution channels 

in Europe. The billions that telcos pay in sales premiums give them huge clout in retail and 

reseller channels. Not only that, they massively subsidize consumers' handset purchases – 

to the tune of more than EUR 20 billion a year in Europe alone. That's the kind of cash the 

fab five would first have to splash to keep pace with telcos' forthcoming assault on the market. 

To reach the mass consumer market, over-the-counter prices have to be below EUR 100. 

And up to now, Amazon alone has dared to venture into this territory, with the Kindle. So 

there are a number of reasons to believe that, for the time being, telcos, OTTs and device 

manufacturers will continue to coexist more or less peacefully. "We quite simply depend on 

each other to an incredible extent," underlined Google CEO Eric Schmidt, as recently as the 

2011 G8 Summit. 

It is nevertheless a fact that OTTs and device manufacturers possess powerful weapons – 

their SIM technology, operating systems and seamless integration in app stores – with which 

to herald a "changing of the guard". Technologically, it is already possible to use apps or the 

operating system to install a "soft SIM" on the handset that allows users to choose the best 

or lowest-cost network. In many places, Internet access is already available via WLAN, and 

often free of charge. Alternatively, telcos that cannot use their infrastructure to full capacity 

due to regulatory requirements or simply a lack of end customers will themselves make Internet 

access available. Google Voice, Skype and WhatsApp give us a foretaste of how Internet 

groups are already co-opting a portion of telephony revenues. 

To date, however, the incumbent telcos still have control of the contracts safely in their 

own hands. Irked by this, some OTTs and device manufacturers are already discussing the 

possibility of opening their own distribution channels to ship phones and tablets with hardwired 

"e-SIM" cards.

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In our interviews, the Chief Strategy Officer of one national telco group added the following 

observation: "The biggest threat comes from Apple and Amazon. They will offer handsets plus 

e‐SIMs – and will walk off with our customer relationships." Contracts and billing could be 

handled via iTunes or Amazon accounts. The telco would thus become anonymous, a mere 

wholesaler of network capacity with no end-customer relationship of its own. 

The apps are already here, and soft SIMs and e‐SIMs are on the way. It is a matter of when, 

not if. OTTs still lack a sales and service presence on the ground in urban areas. Apple, for 

example, sells only 14% of all iPhones via its 350 stores; the rest are sold primarily by the 

telcos. In 2011, the company opened just 40 new stores worldwide – not exactly a powerful 

distribution network. By comparison, Orange has 850 stores in France alone. "The big OTTs 

will continue to need our local service and support," agreed a CEO at one European mobile 

network operator. 

That is why we believe the telcos will stay in control of a large proportion of contracts for the 

time being. Around 80% of contracts are today sold directly to end customers. By 2020, the 

figure will still be 50%, compared to 30% for smaller telcos. 

Cost-efficient broadband network build-up 

When relationships with end customers are eroded, cost efficiency and bandwidth become 

critical if a company is to remain competitive. Only those telcos that have suitably 

dimensioned infrastructures will be able to defend their market position in the long run, 

or at least to engage in successful cooperation with larger players. 

In the years ahead, a lot of money will have to be spent to ramp up the optical fiber and 

LTE networks. Why? Because OTT services are cranking up the volume of data traffic on ever 

more powerful smartphones, tablets and TVs. Between now and 2016, mobile data traffic 

will multiply tenfold, with video content acting as the biggest driver. By 2020, the OTTs' video 

offerings will account for more than half of the total data volume. That's why on the one hand 

the fab five need the telcos' broadband networks as the platform for their business model. 

Even though Google is now laying the first of its own optical fiber networks, only the telcos 

can guarantee general quality standards for networks at present. On the other hand, telcos 

have not yet found a way to tap into monetizing this exponential traffic increase. First attempts 

for monetization are tiered price plans and speed-step down tariffs that some 

European mobile operators deploy. 

But OTT Players and telcos can enter a cooperation, with positive impact for both parties as 

countries such as Japan, China and Russia show. Japan's specific cultural characteristics 

(language, collective mentality), industry structures (high-tech clusters, keiretsus) and state 

sponsored broadband program mean that ecosystems have developed around powerful 

telcos such as NTT, NTT Docomo and Softbank. These companies cooperate with Japanese 

chip, mobile phone, gaming and industrial companies on their own B2B2C platforms (such 

as mBanking) and OTT services (i-mode, Internet holdings).


China and Russia manage and protect their telcos and OTTs through state-led infrastructure 

development – and to great effect: Tencent, Baidu and China Mobile are among the Top 10 

in their sector worldwide and VimpelCom and Yandex are not far behind. These countries 

have given their national ecosystems a chance to position themselves effectively against 

the fab five. 

However, a maze of regulatory prescriptions and political interests is ensuring that there is 

no clear pattern to network expansion in Europe. The fab five have a free hand when it comes 

to European infrastructure. While German policy primarily focuses on moderate consumer 

prices, various countries give precedence to industrial policy considerations, national welfare 

or national security. This being the case, we envision three possible broadband expansion 

scenarios, described below. 

Infrastructure champions: Expansion of privately owned network infrastructure is advancing 

fastest in countries such as France and Switzerland, where favorable regulatory terms – 

wholesale prices, co-investment obligations and quality of service specifications, for example 

– offer financial protection to companies that invest in networks outside already well-developed 

conurbations. In most cases, national market leaders assert their dominance, ultimately 

ending up with market shares of over 50% even in heavily cabled areas. This policy encourages 

monopolies, but also drives the rapid development of next-generation networks. 

Network cooperation: The situation is different in countries such as Sweden and the 

Netherlands, where regulation focuses above all on consumer prices and competition. In 

these markets, a lack of subsidies for private players investing in broadband network deployment 

effectively limits expansion to densely populated areas. Market leaders, local governments 

and utilities apply cooperative models to develop and use networks. Next-generation 

networks take longer to build as a result, giving cable operators a temporarily strong position. 

Conversely, the telco market leader's nationwide market share is shrinking to between 

35% and 40%. 

Public broadband network: In countries such as Australia, developing the broadband 

network is a public work that is funded by floating the market leader's network subsidiary 

on the stock exchange, stumping up money from infrastructure funds or setting up a government-owned 

network company. Public access is controlled by the government, which involves 

telcos solely as its partners. The latter effectively become bandwidth resellers and capture 

correspondingly low market shares and margins. In most cases, only the mobile communication 

network is developed by private enterprise. 

These three scenarios have varying consequences for landline, mobile communication and 

cable providers. Ultimately, only market leaders and cable companies are bound to invest in 

optical fiber. Mobile communication firms are going the way of long-term evolution (LTE) and 

by 2015, will have substituted up to 20% of the landline broadband network. Alternatively, 

they will copy landline niche providers who do not own networks but rent access from other 

providers and then market it.

14 


Realignment and radical streamlining of operating models 

The different infrastructure strategies will leave the telco market – and telco companies – 

more fragmented than ever. For strategic and financial reasons, telcos must therefore 

undertake wide-reaching realignment and resizing of their operating models. 

If they want to offer cost-efficient broadband access, market players need an efficient 

network company (a "NetCo") and a flexible, customer-centric sales and service company 

("SalesCo"). In addition, corporate services ("HQ") must oversee the interaction between 

the various units in order to set the right priorities for strategy, innovation, partnerships 

and talents. A separate OTT service group should be attached to HQ and be tasked with 

committing to selective cooperative ventures and investing in the lucrative but risky OTT 

game. This separation is necessary if due provision is to be made for different markets, 

response times and investment cycles that differentiate core telco access businesses 

from new OTT businesses. 

While the NetCo operates anonymously in the background, rather like a utility, the SalesCo 

acts as a brand (portfolio) and has daily contact with its customers. SalesCos are allowed 

to stir things up, but NetCos simply have to work – for all parties including third-parties. To 

optimize network capacity utilization and quickly achieve payback on investments, activities 

can be bundled locally in a NetCo. This NetCo should then plan, build and operate nextgeneration 

broadband networks as efficiently as possible: on its own, by sharing networks 

with rivals, by outsourcing them to an equipment supplier, or by simply acting as a wholesale 

customer for partner networks. Network capacity can then be marketed to the internal 

SalesCo and other, external SalesCos, depending on strategic, regulatory and market positioning 

requirements. In most cases, this will mean observing the rules of network neutrality: 

providing wholesale access offerings that are player-, device- and service-independent, 

but that generate higher revenues than today. 

However, by no means every provider will be in a position in the future to set themselves 

apart through their product offerings or sales and service constellation. Depending on the 

market and target group, SalesCos must offer a top-class mix of proprietary and partner 

products. In B2C business, the latter may include services from the fab five. In B2B business, 

the mix could just as well include IT services from companies such as SAP and IBM. Whatever 

pieces ultimately make up the puzzle, the overall brand experience will be critical to the 

success of the SalesCo. This experience is delivered by top products, commensurate advice 

at the point of sale and compelling customer service. Moreover, the door to new distribution 

partners with strong brands and innovative concepts of their own – selling via post offices, 

gas stations, utilities, OTTs, IT service giants or whatever – is wide open. 

Traditional telco channels appear to be core components of the existing business model. But 

this approach should be re-assessed. Does a SalesCo really need a store on every corner? Or 

might it not be better to "do an Apple" and run exclusive experience stores flanked by various 

other distribution channels? Do call centers really have to be kept in-house?


Or would it be enough to provide excellent service to VIPs and outsource the rest? Does 

the company have to run its own e-commerce outlets? Or might partnerships with online 

shopping platforms, electronic retailers or even device manufacturers be more effective? 

Telcos that rigorously and swiftly farm out everything apart from their true core business can 

cut costs by as much as 12%, investment spending by 6% and the workforce by 50%. In 

return, they become more agile, engender a more entrepreneurial spirit and can realize the 

value of each part of the company. When that happens, they at last end up with fair valuations: 

three to four times EBITDA for NetCos, seven or eight times for SalesCos and twenty 

times for OTT service groups. 

Financial resources to drive digital transformation 

and intelligent consolidation 

If undertaken properly, digital transformation and intelligent consolidation are evidently 

worth the trouble. They can enable European regional groups to eliminate the typical 15% 

conglomerate discount. But it doesn't end there. Boldly pruning their portfolios would also 

enable them to free up a further cash, also by aggregating ShopCos and CallCenterCos 

at the European level and selling them. 

Less aggressive but equally intelligent moves, such as cooperative ventures, can likewise 

create significant financial leeway. France Telecom and Deutsche Telekom are seeking to 

save billions through procurement joint ventures and network cooperation in international 

markets. In some cases, these arrangements also involve local partners – such as "3" in the 

UK. This kind of "co-opetition" model – a balanced mix of cooperation and competition – will 

probably be a wise path to tread when preserving cash for the battle with the major OTTs. 

This is all the more important given that telcos – especially those in Europe – have little room 

to maneuver as the forthcoming wave of market consolidation approaches, let alone throw 

money at attacks on the OTTs. The ten biggest global players are groaning under net debts 

totaling a staggering EUR 252 billion. Interest payments and dividend guarantees place 

tight restrictions on what they can do with combined cashflows of EUR 69 billion. 

Nevertheless, virtually every decision-maker sees further consolidation of the European telco 

sector as unavoidable, especially in order to realize economies of scale in the costly access 

business. Within national markets, underweight players will club together. More than one 

landline supplier and one cable provider per country is hardly likely to survive. In the mobile 

segment, two or three might make it – a view substantiated by the interviews we conducted. 

Cable and mobile communication firms will merge to be able to offer integrated access. 

Something like 220 of today's 300 niche providers are likely to disappear; of the 25 major 

cable players in operation today, only half will still be independent in 2020.

16 


On a European level, regional groups are realigning their portfolios. They are jettisoning 

minority interests (e.g. Vodafone/SFR), exiting from weak market positions (e.g. Orange 

Switzerland) and scaling back peripheral activities (Telefónica/Endemol) to reduce their 

debts, buy back shares and regain strategic room to maneuver. Conversely, cooperative 

ventures and mergers will be stepped up among regional groups as in the case of VimpelCom 

and Orascom. The chief strategist at one European telco group goes so far as to forecast 

that, in Western Europe, "three or four large groups at most will survive and be able to compete 

in the global arena." Even the 15 market leaders in smaller countries will be taken over 

to optimize regional footprints. Of course, there is always the risk that transactions will fall 

at political hurdles or due to antitrust concerns. The protracted debate surrounding the 

consolidation of the artificially created German cable landscape is a case in point. 

Especially among regional groups, free cashflow will be plowed back into promising future 

developments: to accelerate growth plans for B2B2C platforms (such as payment, advertising 

and e-health), say, or to place relevant strategic bets in the OTT game. Telefónica, for 

example, acquired VoIP provider Jajah – formerly a Deutsche Telekom minority investment 

– in 2009. Deutsche Telekom in turn then acquired web hoster Strato and payment provider 

ClickandBuy. Both have reorganized their innovation activities and set up OTT service groups. 

But how serious are the telcos about Access Plus in reality? 

One thing is for sure: the fact that OTT players are valued at five times higher multiples than 

telcos makes it expensive for the latter to diversify into OTT activities. Nor, with the exception 

of Softbank in Japan, are there any examples of firms doing so successfully. That said, 

Softbank is a pretty impressive success story; its 900 affiliates, forming softbanks internet 

segment already contribute 10% of revenue and 16% of profits. And the group even has 

a presence on the fast-growing Chinese market, where it now owns a stake in Renren (the 

country's biggest social network), Alibaba (a global e-tailer) and Ustream (China's foremost 

live video portal). 

In India too, Softbank has launched a joint venture for mobile Internet incubation with Bharti 

Airtel. Regional OTT partnerships and investments are beefing up telcos' knowledge of the 

Internet business. They are also giving incumbents an early insight into how this business 

might dovetail with their own core business. In treading this path, regional groups – the only 

players big enough to step into the OTT ring – are making a clear statement of intent: They 

will not give up their acquired privileges without a fight. 

Telcos desperately need a level playing field, however, as OTT groups are already expanding 

into the infrastructure business. Google, for example, is currently laying optical fiber networks 

in Kansas City, is part of the US broadband program and plans similar forays into Europe. 

Showing true vision, Google is also investing in satellite operator O3b with the aim of delivering 

high-speed Internet access to the "other 3 billion" people in developing countries. "Our 

mission is to make the world's knowledge available to everyone," a Google spokesman said. 

So how are the telcos responding? Waiting and seeing (again)? Acting in concert? Engaging 

in "co-opetition" (competing in some areas and collaborating in others)?


From Access Minus to OTT – three scenarios for the future 

A company's strategy will be determined by its power to activate the five levers described 

above. We see three realistic scenarios emerging from telcos' efforts: Access Minus, 

Access Plus and the OTT Game. 

Access Minus 

Companies that adopt this strategy do not operate a fully-fledged access business but act 

primarily as wholesalers. In extreme cases, they merely make their data network available 

to other companies – SalesCos and content providers – and operate solely on the B2B level, 

maintaining no contact with end customers. Incidentally, more than 50% of OTTs see this 

scenario as the most likely future development for today's telcos, according to a study by 

Nokia Siemens Networks (NSN). Other telcos will complement wholesale activities with their 

own branded business and so will need at least a lean SalesCo to complement their NetCo. 

The SalesCo will facilitate direct customer contact and provide a platform on which the 

service suites of other content providers can run. 

In this scenario, telcos fade into the background but can still survive as brands if they deliver 

outstanding quality. Lack of coverage and poor voice quality are, after all, the main reasons 

why customers switch providers. Every fifth Internet user in the industrialized world is willing 

to pay more for access in return for a guarantee of top network and service quality. 

Access Minus works best if the company keeps its NetCo and SalesCo separate, focuses 

on investing in network expansion, spins off its SalesCo or seeks long-term partnerships 

for it with virtual network operators, resellers or OTTs (Verizon/Google) and distributes the 

cashflow it generates to shareholders.

18 


Access Plus 

The name says it all: Companies adopting this model go beyond access business, positioning 

themselves as service providers and complementing the SalesCo and NetCo with a third 

element, a "telco innovation factory" charged with developing and marketing new services. 

The latter will primarily consist of access-centric services that use the existing network and IT 

platforms – in the e-health segment, for instance – or regional OTT-related offerings such as 

TV. Such services will be embedded in partners' service suites or, depending on the extent 

to which the "Plus" aspect is to be emphasized, on proprietary platforms that integrate 

third-party services. 

Some of our interviewees nevertheless question whether many telcos will really be able to 

handle this business. "The industry lacks knowledge, good people and speed," says a CEO 

from one of Europe's telco heavyweights. To make this strategy succeed, incumbents must 

first master their core business and see adjacent business lines as bets on the future. But 

they must not make the whole company and its infrastructure revenue too heavily 

dependent on such bets. 

OTT Game 

This scenario is feasible for regional telco groups commanding sizable customer franchises, 

making them attractive for global partnerships. Companies that go down this road see their 

service suites as the primary communication gateway in their customers' online life. "The big 

telcos have what it takes to create their own OTT platforms," says one board member at a 

leading Asian telco. Rather than producing all the content themselves, they will, for example, 

partner up with gaming and credit card firms to provide entertainment and finance offerings. 

As brands, they will be so strong that groups outside the industry and large OTT players will 

willingly cooperate with them and place their content in the telco's ecosystems, aiming to 

reach end customers via the resultant B2B2C partnerships. Since it was the telcos themselves 

that ramped up the networks, they have close ties to customers and can use their 

steady stream of access profits to constantly improve their ecosystems. 

The bottom line 

What role will telcos play in 2020? Will they be mere data pipes? Broadband access 

and platform service providers? OTT service groups even? Whatever the future holds, 

all companies are called on to refocus and realign – and to do so fast. 

All three scenarios will see some telcos playing their part successfully. As we have seen, 

none of the fab five will cover the entire ecosystem. Nor will any one player dominate the 

entire market, even in its core business. Given the right strategy, telcos can therefore consolidate 

their position at crucial links in the value chain. We believe that observing five 

golden rules will help them to do this. Quickly acting on Rules 1 and 3 alone will deliver 

significant value growth.


1. Get the access strategy right – broadband, personalized, experience-based: 

Expanding LTE and FTTH networks, providing converged access offerings and optimizing personalized 

service suites will safeguard telcos' core business and maximize their cashflow. 

2. Place realistic Access Plus bets that promise growth and set the telco apart: 

The key is to invest selectively but consistently in B2B2C platform services and regional OTT 

services. Even so, telcos will succeed only if they are realistic about their market position and 

enter into partnerships that genuinely make sense. Beyond that: Steer clear of risky bets! 

3. Transform into a lean telco – and cut today's workforce in half: 

Telcos should split themselves up into a SalesCo, a NetCo and corporate services (HQ) and 

make the remaining core activities as cost-efficient as possible – even in comparison with 

consumer goods, service and OTT champions. 

4. Convince the capital markets with Access Minus, Access Plus or more: 

Digital transformation and intelligent consolidation can guarantee shareholders annual returns 

of 10% and more, on a par with top utilities. To write a compelling investor story, it is vital to 

be the first to align with the appropriate core business. Units that do not fit in should be sold 

or committed to joint ventures in order to eradicate their conglomerate discount of 15%. 

5. Act quickly to gain first-mover advantage, especially with a view to OTT: 

Customer demands, communication technology and competition are all developing faster 

than ever. All of which creates an environment in which telcos can no longer afford the 

luxury of sluggishness, strategic inertia or blind spots. 

Stock markets currently put a value of EUR 810 billion on Europe's telco industry (5.3 x EV/ 

EBITDA). Sticking to today's strategy will see that value erode to EUR 570 billion (4.1 x) by 2020 

– destroying nearly 30% of their market capitalization in the process. The underlying root causes 

are obvious: After 2015, revenue will decline by 7% triggered by the emerging e-SIM, further 

regulatory cuts and two-fisted competition. Hence, EBITDA is expected to slump from 

EUR 155 billion to just EUR 140 billion. 

That does not have to happen. If telcos do their homework with respect to broadband access 

strategy, transformation into a cost efficient lean telco, and to consolidation they have a real 

chance not just to stand up to the fab five, but also to grow in enterprise value caused by 

strongly improved earnings. Our interviewees anticipate a development that would still raise 

the industry's valuation to EUR 745 billion (4.4 x) by 2020 – almost a third more than if they 

stick to their current strategic direction. Roland Berger is slightly more optimistic: Based on 

the assumption of fruitful regional consolidation, from which regional groups would reap the 

greatest benefits, we expect the telecommunications industry to be worth EUR 795 billion 

(4.6 x) in 2020. Telcos would thus virtually retain their value and as result grow EBITDA clearly 

above EUR 170 billion – and all this, despite heavy revenue losses in their core business. 

Not bad for an industry taking guard against the likes of Apple, Google and Facebook.

Amsterdam 

London 

20 Telco 2020 – How Telcos transform for the "Smartphone Society" 

Barcelona 

Madrid 

Beirut 

Manama 

Beijing 

Milan 

Berlin 

Moscow 

Brussels 

Mumbai 

Bucharest 

Munich 

Budapest 

New York 

Casablanca 

Paris 

Chicago 

Prague 

Detroit 

Riga 

Doha 

Rome 

Dubai 

São Paulo 

Düsseldorf 

Seoul 

Frankfurt 

Shanghai 

Gothenburg 

Singapore 

Hamburg 

Stockholm 

Hong Kong 

Stuttgart 

Istanbul 

Tokyo 

Jakarta 

Vienna 

Kuala Lumpur 

Warsaw 

Kyiv 

Zagreb 

Lagos 

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Lisbon 

Authors 

Alexander Mogg 

Partner and Head of Competence Center InfoCom 

Alexander Dahlke 

Partner 

Peter Wimmer 

Partner 

Christian Hoffmann 

Principal 

CONTACT 

Phone: +49 89 9230-8037 

E-mail: Telco2020@de.rolandberger.com 

Roland Berger Strategy Consultants 

02/2012, all rights reserved 

www.rolandberger.com

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