Finding telecom's link in the value chain
Avoiding the dreaded “dumb pipe” syndrome requires much more than just adding value to services. It requires reinventing business models.
There are many ways to describe what telecom service providers are attempting to do today, some of which have become clichés. Service providers want to move up the value chain, become strategic partners, add value to their services, own the customer, develop vertical markets, provide professional services in addition to transport services — the list could go on. Regardless of the description, however, what telecom operators essentially want to do is avoid being just the transport pipe for the next generation of services, while other companies reap the benefits of adding intelligence or customization that makes those services more valuable.
In the all-IP world, that goal is made more complicated by the constant shifts in the competitive landscape, as new Internet players move onto service providers' turf and relationships with old partners/competitors/customers shift as well. And as service providers work to be more valuable to key industry segments such as health care, energy and manufacturing, they have to tailor the value-added portion of their offerings to those industries.
This is not a new challenge. As Troy Cromwell, group vice president of Verizon Business' government and education group, said, one-third of his unit's business is no longer telecom. “We do a lot of professional services, strategic services,” he said. “We've been in that business for quite a while.”
But the nature of the challenge is changing, and growing, and requires a shift on the part of service providers to adopt new business models. Some of that change can be dramatic. For example, the telco 2.0 consultancy STL Partners is pushing hard on the concept of “two-sided business models” that require service providers to think less about end customers — be they consumers or business users — and more about providing services to partners.
In such a model, providers still target and collect revenue from those end users. But they also build platforms and services that target partners downstream in the value chain, including developers, retailers, advertisers, content owners and others. In addition to providing straightforward services downstream — things such as payment processing, for instance — carriers can use their data to add value to the value chain, including providing information such as customer demographics and relationships, device data, context information (such as location or presence), hosted user content and more. All of that data should willingly be bought and paid for by third-party partners, which can use it to enhance their businesses and transactions.
Such a model requires a significant service provider mind-shift, not just new technology or platforms. For instance, even as carriers deploy new back-office assets — such as more distributed IP multimedia subsystem/next-generation network architectures or new service delivery platforms — that would seem to open up their networks, the business models they support tend to be one-sided. They tend to be about launching new carrier services to end customers. That must change if service providers are to take a new role in the digital value chain. “We think there will be a significant shift toward two-sided market models in telecoms, with the telco as a facilitating platform for a much broader range of interactions between consumers and businesses,” said Simon Torrance, lead analyst and co-founder of STL Partners.
The TM Forum, a global industry consortium, has been working on standards and practices to support two-sided business models and value chain issues for some time, including defining best practices for how service providers share user profile data, deliver user location information and expose application programming interfaces that provide access to a variety of telco back-end systems, said Keith Willetts, the forum's chairman and CEO.
“Telecom companies, particularly mobile companies, hold a lot of extremely valuable information on their users that could be monetized back to advertisers, but it's in a myriad of different data formats and a myriad of different systems,” Willetts said. “We have to come to some common agreement on the kind of glue that's going to make these value chains work. Basic stuff like how we pass information from one to another, what format that's in, how we pay each other, how we pay bits of different things to different people in the value chain, and, in particular in advertising, how we can provide advertisers with a common set of information that they're prepared to pay for.”
Such two-sided business models “turn the telecom industry literally upside down,” Willetts said.
The problem, however, is that while service providers have shown an understanding of the two-sided, value chain-driven business model, they've been much slower to actually deploy it in the real world, said Martin Creaner, president and chief technical officer for the TM Forum. “[Expanding the value chain] is a topic that every large global service provider feels comfortable talking about, but we're not seeing them do a lot with it,” Creaner said. “For instance, utilizing customer revenue to drive additional ad revenue. We hear a lot of talk, but not a lot is happening yet. There's a fair bit of investigating, but it's at a very nascent state; nobody's really joining up the dots.”
The problem for incumbent service providers is that there are companies building sophisticated value chain-driven communications businesses; it's just not them, Creaner said. Apple, for instance, has beaten them to the punch with its iTunes App Store. “Apple is a service provider at the center of what is becoming a very deep digital value chain,” he said. “They just aren't a telco.”
One important area to watch is which companies emerge as the true power-wielders within an extended value chain. Apple is a good example; it is partnered with AT&T and others, but it claims the most power and thus captures the greatest value back to its bottom line, Creaner said. “I've talked to a handful of senior-level telecom executives, even at the largest carriers, who admit insecurity about their genuine negotiating power against other players in the emerging digital value chain,” he added, noting that large carriers don't necessarily need to be value chain innovators, but they do need to know how to take their fair share of profits from their role. “Incumbents have to be in a sufficiently strong enough negotiating position to take advantage of and benefit from other people's innovation downstream,” he said.
SORTING THROUGH THE HEALTH CARE CHAOS
The challenge becomes even trickier in working to bring new services to existing markets or to enter those markets in new ways. For example, virtually every major telecom service provider has an initiative aimed at the health care industry, many of which address two specific trends: the health care industry's need to use IT and telecom to operate more efficiently, and an aging population's need to use remote health care monitoring to promote better care for the chronically ill in their own homes. While often moving separately, these two trends converge to create a booming demand for health care networking that ties together all the parts of the sprawling U.S. health care system: hospitals and clinics, doctors and other health care professionals, insurance payers (including the federal government), and patients and their caregivers.
What's not clear in the confusing world of the U.S. health care industry, however, is exactly where service providers play. The broadband connections into the home seem to be the perfect conduit for remote monitoring, but it's not clear what telecom providers would offer other than the transport pipe. Medical device-makers are already selling devices through hospitals and medical practices that enable doctors to monitor chronically ill patients in their homes, using a dial-up modem or a broadband service. For example, Philips Telehealth Solutions makes a variety of home health monitoring devices, said Mike Lemnitzer, its senior director for patient telemonitoring services. Generally speaking, Philips works with service providers only to iron out connectivity problems — such as the one recently encountered in Indiana, where a Philips device wouldn't work over AT&T's U-verse service. Telecom service providers are usually very cooperative in those situations, Lemnitzer said, but it's not clear how Philips might further work with them.
“I think on the per-application basis, there could be partnerships there,” Lemnitzer said. “But in terms of our clinical model — where you have to have a physician's order and data flowing into a medical record somewhere — it gets more dicey. You have to tie in the health care provider, link in physicians, have a [personal health record]. The service will always be a part of the solution, but it's not necessarily going to be anything more than the connection.”
There is a need for a new kind of service provider to tie everything together, said Charles Parker, executive director for the Continua Health Alliance, an industry group comprised of health care and technology companies that builds on standards from organizations such as the IEEE and others to create specific solutions for the health care industry. AT&T and Verizon are among its members.
“You are going to see existing providers or organizations who are going to be providing some of these capabilities now,” Parker said. “You are also going to see that new ones emerge as well. You are going to have these coordinating organizations who are going to, in essence, create a monitoring health stream.”
Companies such as Cisco and Microsoft are already stepping up to this challenge on some level: Microsoft with its HealthVault system for storing personal health information, now being testing by the Social Security Administration, and Cisco with a number of initiatives, including a nationwide health care network it is building with UnitedHealthcare to deliver clinics in the workplace. Telecom service providers are partnering with both Cisco and Microsoft, but where the telecom value exists, beyond the pipe, is not clear.
The role for telecom service providers to play in improving health care IT processes is more easily defined, and that's where much of the activity is happening today. For example, Verizon Business created Verizon Connected Healthcare Solutions to focus its attention on how existing and new network functions can better serve the health care industry.
“It's not just trying to build new stuff, but also saying, ‘How can we better position and utilize our existing portfolio of services to serve the health care industry?” said Barry Zipp, director of Verizon Connected Healthcare Solutions. “We have such a tremendous business portfolio that can be brought to bear on health care, but it hasn't been positioned as effectively as it could have.”
MAKING MONEY ON THE GRID
Smart grids are both an expensive and potentially lucrative undertaking. That is the reason the market has a bevy of players looking to get involved, but also carefully weighing the best path to do so. From a telecom service provider's perspective, fatter pipes are their biggest bargaining chip, but the ability to do more with them is what makes the market so appealing.
As the market stands today, advanced meter infrastructure (AMI) and the new automated meters themselves are driving investment in grid overhaul. This is largely because most states are requiring utilities to update their meters, but it is also because they are the easiest to implement, said Teresa Mastrangelo, analyst with broadbandtrends.com. Most importantly, they are a logical step toward demand response, which is the ultimate goal.
“There are different levels of smart meters: pure smart meters, where someone can drive by and capture data, or others, where they can remotely send that information to some kind of operation center,” Mastrangelo said. “Then we have the next stage: the two-way ones that can involve some kind of demand-response applications, where it can monitor what's happening in your house or start sending information to the end user as to their power usage and maybe entice them to use less power because they'll save money and vice versa.”
From the network operator's perspective, moving to demand response will require them to learn a new way of business, similar to the beginning stages of entering the TV market, Mastrangelo said. They will have to change their business model and ultimately the structure of their company. And they will have to do this in conjunction with the utilities, which are subjected to much more regulation than service providers are accustomed to. This changes what they are permitted to do, as well as how they file their proceeding with customers, how they make rate-based changes and how they change their business model.
It is for this reason that T-Mobile formed a machine-to-machine (M2M) initiative that is completely separate from the rest of its business. John Horn, national director of M2M for T-Mobile USA, said that his division can shape its business model separately from the rest of the company and not worry about the normal issues of cost per action and average revenue per user, both of which M2M does not follow well. So far, T-Mobile has introduced tiny, embedded SIM cards for use in telematics (including smart meters), streamlined its certification process to simplify it for M2M and adapted its activation process to allow for more flexible rate plans, Horn said.
Like T-Mobile, AT&T, Sprint and Verizon executives agreed that AMI is what is driving investment today, but that doesn't mean they are not looking toward future smart grid-enabled apps and services. The carriers all said that they aren't looking to get into the energy reselling business by circumventing the utilities to sell directly to consumers, but that selling services to utilities that go beyond just a fatter pipe is an attractive option.
“We are not interested in reselling electricity, but if we look at the meter side, if the customer wants to buy the meter from us, from a procurement standpoint, absolutely,” said Chris Hill, vice president of mobility product management for AT&T Business Solutions. “We act as a contractor on a regular basis, but that would be directly to the utility, not an end consumer.”
AT&T already provides its utility partners with adjacent solutions, Hill said. An example of this is tying in enterprise offerings to inform a utility worker of a network outage and using location-based information to reroute them to where the outage is. AT&T also provides some degree of consulting to its customers, generally focused on helping them transition into being an IT-centric business and operating large data networks. “They need the ability to get the appropriate rate of return on those expenses versus having to do capital expenditures to do that,” Hill said.
Any new product or service a telco could provide utilities would require a new way of thinking about the business. Millions of meters transmitting tiny bursts of data are different than a $100 all-you-can-eat service plan. Before they can consider advanced services, telcos will be looking to provide quality of service, prioritization of traffic and cybersecurity, in addition to provisioning and activation. When it comes to handling an onslaught of bits of data from millions of meters, their 3G and 4G networks are arguably built to handle it. When it comes to what other services they can provide to increase their revenues, however, it is still largely to be determined.
“AMI is the basic piece, but once the infrastructure is there, I think you will see an explosion in solutions and energy management,” Horn said, adding that T-Mobile's strategy is not to go out and build the actual solutions, but to bring together the players that can. “It is more about energy communication,” he said. “As the communication links are all in place, you'll start to see true energy management.”
MANAGING THE MANUFACTURING SUPPLY CHAIN
As service providers look to participate in industry value chains, the manufacturing industry shows up as a major target. It's certainly not a new opportunity — global carriers such as DT (and their U.S. unit T-Systems) have built fairly large businesses selling hosted versions of key supply chain applications such as SAP. These implementations are moving from hosted apps to something more virtualized or “cloud-based”; T-Systems, for instance, now offers its SAP implementation as a utility-style pay-as-you-go service.
But fitting into the manufacturing supply chain requires more than just hosting an app or delivering a managed service. Traditional telecom carriers also must attract consulting talent that can not only support deployment of supply chain applications, but understand the business processes they support. That finds them competing not just with software and network providers, but with systems integrators and consultants ranging from IBM to Cap Gemini to Accenture and beyond — professional services-based businesses with a completely different way of doing business.
While global service providers such as AT&T, BT and Verizon are making just such a shift, the transition can be challenging. For instance, BT's global services group earlier this year reported an 81% slide in profits due to what it admitted were out-of-control costs in servicing 17 large enterprise customers. The main problem was failing to account for the higher costs and lower revenues at the start of such large five-to-seven-year service projects — typical of the large enterprise-class projects.
The value chain for providing such network-delivered managed services is a complicated one, with service providers/telcos, IT integrators, and telecom equipment-makers and their service divisions forming the three corners of a “dynamic, competitive triangle,” said Bill Leiseur, analyst with the Aberdeen Group. “They are the combination of suppliers, partners and competitors in the [managed services] value chain.”
MANAGED SERVICES STILL A SAFE BET
Despite the challenges, there are huge opportunities in managed services — serving not just manufacturing but all industry sectors. According to IDC, by 2012 28% of all new business application purchases will be delivered via software-on-demand, representing about 5% of worldwide software spending. This summer Merrill Lynch tried to put a forecast on the larger cloud computing market — encompassing software-as-a-service (SaaS), platform and infrastructure providers — and came up with a market opportunity just north of $100 billion by 2011.
In the managed services area, telcos would do best to focus on areas where they have expertise or have made significant investments. That means solutions and apps closely tied to communications and collaboration, things such as managed security or unified communications, for instance, said Amy Larsen DeCarlo, analyst with Current Analysis. When it comes to industry solutions, their role in the value chain gets trickier. “Most of the major telecom providers will partner rather than try to do a vertical solution on their own; by themselves, they don't have a strong-enough play there,” DeCarlo said, adding that while there have been some examples of telco/system integrator partnerships, “most service providers are still working out their delivery models.”
Overall, incumbent providers are an appealing value chain partner. They bring network experience, strong customer connections and deep pockets to the table. They might not make the first move as an early market mover in managed services or cloud computing — rivals such as Rackspace or even Amazon/Google are better suited going after fellow start-ups — but when the managed services game goes mainstream — and especially in partnership with enterprise-trusted partners like Accenture or CSC — telecom service providers “have the ability to create attractive, compelling service bundles, including industry solutions,” DeCarlo said.
THE WIRELESS CHALLENGE
Wireless operators have traditionally focused on two areas with regard to enterprises, connectivity and devices, and recently they've moved into a third, administration, allowing enterprises greater control over employees' use and spending on the network. The Holy Grail for them is a fourth area, services, providing cloud-based offerings such as e-mail and enterprise apps as well as a dashboard that allows them to run all aspects of the network, from connectivity to device management to individual managed apps.
“As with any transport type, carriers struggle with this,” said Kathryn Weldon, senior analyst with Current Analysis. “They want to focus on their core strengths as network services providers, but want to have more account control and deeper relationships with large enterprise customers than they would if they only provide voice and data services and, of course, devices in the case of mobility.“
All major carriers not only recognize this, but they've taken different approaches to the market, Weldon said. In the U.S., both AT&T and Verizon (Verizon Business and Verizon Wireless, both separately and together) are trying to figure out how to add managed and professional services for device management, mobile security, managed apps (i.e. for business processes such as field force automation, sales force automation and customer relationship management) and telecom expense management.
On one hand those operators are obvious go-to suppliers for those types of services because they can bundle them with mobile access plans. On the other hand, Weldon said, “Large enterprises and especially global multinational corporations have relationships with multiple carriers, so which one will they entrust their networks and applications to? If the carriers try and offer multicarrier solutions, are they considered objective enough to do this well across their rivals' network services and devices?”
There are other opportunities for services beyond transport. Carriers also provide consulting and professional services to business customers. In the mobile space this can include everything from analysis of mobile requirements, security policies and middleware to ongoing management of mobile deployments, a basic help desk, lifecycle management, support and maintenance, Weldon said.
The obstacles for operators to achieving all this are partially of their own making. “On the one hand, it hasn't occurred to operators to adopt these new business models because the existing paradigms have served them well for a very long time,” said Chris Hoover, senior director of product marketing for Openet. “At the same time, it hasn't occurred to enterprises to ask their operators for them.”
Once wireless operators step up, though, Hoover believes they will have a tremendous advantage by mere virtue of their visibility into their own networks. A company like Google or IBM can deploy customer-based solutions that can monitor spending and traffic usage at the enterprise, but an operator already has the infrastructure to supply this data automatically. And while an operator would have to deploy the same hosted e-mail and application servers as a systems integrator of a SaaS provider, they can deploy them closer to the edge of the mobile network and optimize those networks for the individual app.
With deep packet inspection (DPI) becoming a critical element in network management, it becomes easier for operators to craft services for their customers that an independent managed services provider would have more difficulty offering. For instance, an operator could use DPI to create personal/business accounts for each employee in an enterprise. Anytime an employee uses an authorized app such as e-mail or a sales force portal, the enterprise is billed. Every time they use an unauthorized app such as Hulu or Skype, though, billing switches to the individual.
“Operators can do this at a dramatically lowered capex and opex,” Hoover said. “They have a built-in advantage because they can provide services and connectivity as a bundle. Google has to take an extra step the operators don't.”
But that initiative doesn't have to come from with a wireless organization. On Sept. 9, Verizon Business launched a new suite of business mobility management and consulting services designed to put Verizon front-in-center in the enterprise services game — though not necessarily Verizon Wireless.
Verizon is leveraging its massive internal IT operations and partnerships with Quickcomm Software and Sybase. The objective is to create a platform that starts with professional services, consulting and planning, and culminates with five core services: inventory and expense management (to track and control overall spending on wireless and limit individual use of pool resources), logistics (setting up processes to provision devices and get them into the hands of employees), mobile device management (controlling those activated devices), security (setting parameters for what information can be accessed over the network and what corporate data can be shared across it as well as processes for dealing with security breaches or rogue devices) and application management (setting up a system for approving and managing access to corporate applications and personal apps for individual employees).
All of this will be supported with a new customer service organization and a unified portal, allowing customers to see their data and manage their services across all carriers' networks, not just Verizon Wireless.
Becoming carrier-neutral is key to the success of the platform, said Amanda Chesley, product marketing manager for managed mobility solutions for Verizon Business. Verizon doesn't view managed mobility services as an “upsell,” but rather a stand-alone business it will provide with or without an access or transport component. Verizon Wireless will also sell the service as part of a bundle and offer appropriate discounts, Chesley said, but the aim is to sell a carrier-independent platform irrespective of which operator an enterprise gets its service from, Chesley said.
“For any large global deployment, an enterprise can have in excess of 50 carriers supplying their wireless networks,” Chesley said. “We have to be carrier-neutral. Managed mobility and the pipe have to be completely separate negotiations. Otherwise we lose our status as an independent solutions provider.”
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