How to Find the Right Telco Business Model in the Digital Economy

There are no sacred cows in digital transformation. Every aspect of what the Telco does and how it does it must be examined in excruciating detail, and if necessary changed or discarded. And business models are no exception to this rule.  This post focuses on the importance of choosing the right business model(s) to support the Telco transformation.

The choice of business model determines the success or failure of the organization – plain and simple! The success of a company or a particular product is rarely based on how good or clever the idea is, but rather on the seamless fit between the business model adopted and the market need. The success of the iPod is not simply due to its great engineering versus the Sony Walkman, just as the success of Airbnb has never been due to its great website versus the websites of the large hotel chains. Engineering and design factors matter, but success or failure of a new product or service is ultimately determined by the business model being adopted.

Value Creation & Value Capture

A firm’s business model is defined by how it creates value for its customers (its value proposition) and by how it captures value (e.g., how it makes money). This deceptively simple definition is core to understanding how to approach business models. Value creation is all about doing things that the customer values, while value capture is all about the myriad ways of extracting money (or some other economic advantage) for the value created. It’s important to look at both sides of this equation in order to identify the appropriate business model for the enterprise. As the table below shows, there are an almost endless list of value creation and value capture approaches that are in use by various players in various vertical markets. From the ‘freemium’ approaches of the music and storage players, to the data exploitation approaches of the search and social media players, there are numerous ways to skin the proverbial cat.

Over the years I have seen a reasonable amount of innovation from the Telco in terms of value creation, including being first to market with many concepts from IPTV to downloadable books. And in recent years the Telcos, while not as innovative as before, have continued to push leading-edge service concepts to the market, generally in the same timeframe as the OTT players. The big weakness for Telcos tends to be in their value capture mindset.

To a man with a hammer, every problem looks like a nail”. No matter the business concept, the Telco always tends to think in very simple value capture terms – such as adding an extra few dollars a month to the subscription fee, or charging directly for volume of usage. Meanwhile the OTT players are experimenting with much more inventive value capture approaches around advertising, brokering customer usage data, freemium models, in service purchases, memberships, and so on.

And this has now become a major problem for many Telcos. In these companies, every internal system, every internal business process, every investment approval process has been implicitly or explicitly linked to the traditional value capture model of the Telco. The shareholders have a pretty fixed expectation of the quarterly return on investment they expect from their Telco, and this gives relatively little latitude to an executive to defer revenue for a particular service for a few years while it grows a usage base. OTT players tend not to have such constraints and can work out ways to subsist on their investors funds for a few years while building up an equity value. They are happy to pivot their business model on a daily, weekly or monthly basis to ensure that it aligns with the customers’ expectations of the service.

Aligning the new service to the appropriate business model

This all leaves the Telco in a difficult position. Regardless of how good an idea it comes up with for a new digital service, the Telco must ensure it pairs that service with a well-designed business model. And this is where business model transformation comes in.

As I mentioned earlier, the core of a business model surrounds how it both creates value for its customers and the wider ecosystem, and how it captures value from its customers and that wider ecosystem. So business model design needs to address four broad topics: Ecosystem Value Creation; Ecosystem Orchestration; Value Capture (revenue and margin); Go-to-Market strategy. The business model design process asks (and hopefully answers) a series of questions about each of these topics:

Explore this concept and many other digital transformation concepts in detail in my latest book ‘Transforming the Telco’ published in January 2018.

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