Invest in 'upstream' opportunities

Dominic Arena /AEC Advisory
16 Jun 2014

All telcos, global, regional and domestic, are adapting their businesses to major shifts in the telecom industry to generate sustained higher earnings for shareholders.

Fundamentally, the basic reference to "telecommunications" is being replaced by a broader market definition. Much like the evolution of other mature industries like oil & gas and electricity, the industry value chain of what we may call Telco 3.0 today is now firmly divided into three distinct or de-coupled parts: upstream (digital applications and services), delivery (ubiquitous, lean and intelligent infrastructure/platforms) and downstream (access devices and distribution).

Traditional telecoms has become a commodity, very much resembling a utility, with the bulk of value creation and innovation occurring not in "delivery" but in "upstream" and "downstream" phases. Breaking it down we can foresee that upstream and downstream sectors of Telco 3.0 will see market revenues grow at up to five times faster than that of delivery infrastructure over the coming years, with some upstream sub-sector growth rates exceeding 25% compared with 5% for delivery alone.

For examples of this look no further than at your own devices - virtually none of the applications you use today, apart from basic voice calling and internet/data carriage, are developed by your telco or earn incremental revenue for them. Expenditure on apps and in-app purchases goes to an upstream publisher, with the data carriage (the portion paid to the telco) being mostly provided at a flat rate.

The shift of value and de-coupling in the industry from "delivery" to "upstream" means traditional telco-centric approaches to product development are no longer appropriate to generate competitive returns, so tapping upstream opportunities is needed. Telcos are therefore adapting in three key ways as a means of remaining relevant, competitive and profitable.

Restructuring the organization and culture into a customer-centric model supported by a lean, ubiquitous and intelligent delivery network, with an innovation factory driving investments and strategic partnerships with developers and solution providers to offer ICT applications and services to target customer segments. Telcos also acknowledge the notion of "non-network customers" for new digital applications and services (eg. mobile advertising, e-commerce portals). Axiata for example has created new chief digital services officer roles and organization in the group and opcos.

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