The former GSMA chairman and Telenor CEO discusses what telecoms operators need to do to adapt in the new competitive landscape. Jon Fredrik Baksaas is an adviser to McKinsey on telecommunications, having gained his expertise in the sector as president and CEO of Norwegian operator Telenor for more than a decade, and as chairman of the global telecommunications industry body, the GSMA. In an interview, he explains why operators need to modify their genetic make-up if they are to grow in a new competitive landscape. They must offer services as well as connectivity, and cooperate with those traditionally seen as their rivals—other operators.
McKinsey: What is the biggest challenge facing telecom operators?
Jon Fredrik Baksaas: To remain relevant to customers. Since the financial crisis of 2008, the value of over-the-top (OTT) companies—the likes of Google, Apple, Microsoft, Tencent, and Alibaba—has soared. But that of most operators, whom the OTTs depend upon to connect everyone, has grown only modestly.
The fact that the OTT companies were starting from a low base is only part of the explanation. The advent of new user interfaces on mobile phones—first seen on the iPhone in 2007—started to threaten some of the services traditionally offered by operators. Messaging was among the first to go, encouraged by the marketing of the BlackBerry to corporations as a more secure means of communications, and volumes quickly rose as more messaging platforms emerged. Today, OTT companies account for more than 80 percent of all messaging traffic. And a question mark hangs over voice. Young people hardly use their mobiles for voice calls today, except perhaps when their parents call!
Operators are now in danger of missing the boat on video calls too, as interworking and roaming are not resolved. It should be as easy for operators’ customers to make a video call as it is a phone call on the network. But instead, they invariably have to revert to an OTT service, again shifting the balance of power in the OTT’s favor.
The question is, therefore, what can operators offer that customers perceive as relevant? Will even 5G be relevant? It’s clear to me that operators will deploy 5G, but that alone will not ensure relevance: customers are likely to take high-quality network performance for granted. What customers will notice are the kinds of services provided on the network. Unless operators offer services that are valued, their customers may not recognize that they have any relationship at all with them, and the operators will end up as mere connectivity providers. Out of sight, out of mind.
Now, connectivity may not be a bad margin business if you hammer down on costs in networks and operations. And in every market, there will be one connectivity provider that goes the wholesale route, squeezing costs and prices to a level that others will find hard to match. But that tactic won’t drive growth and value creation. Growth will go to those that offer services along with connectivity.
McKinsey: How, then, do operators remain relevant? What needs to change?
Jon Fredrik Baksaas: There is, of course, a discussion to be had about the kinds of services operators could offer to remain customer-relevant. But before that, some genetic engineering is required.
First and foremost, we need to realize that operators’ genes are coded to build networks. It’s hard for them to think about developing services. To get people at Telenor to focus on services, we had to set up small, separate groups sheltered from the main organization—otherwise, the ideas wouldn’t have stood a chance. If you recall, many operators did much the same back in the 1990s, sheltering their nascent mobile businesses from their wireline operations, such was the resistance to change even though mobile was an alternative connectivity game that they could relate to. The shift to services is much more disruptive. There is a big talent issue, for example. Can operators, often viewed as staid, inflexible, and old-fashioned, attract the people needed to help them make the transition, or will OTT companies inevitably always be more appealing? Talent wasn’t an issue in the move from fixed line to mobile.
Therefore, the connectivity gene is the first one that needs modification for operators to offer services. The second is the gene that runs scared of collaboration. To build the scale required to offer certain services, operators will have to collaborate, particularly in Europe. They are right to be cautious, partly because of regulatory concerns over collusion, though to be clear, I am not suggesting any such thing. Operators still need to compete when they go to market with new services. But they also hesitate because most operators still see other operators, not the OTT companies, as their greatest rivals. For example, operators still measure their market share against national competitors, not taking into account the share grabbed by the OTT companies. Many fund managers and analysts do the same. All need to understand that the competitive landscape has changed, and operators need to shape their value creation strategies accordingly.
McKinsey: Are you optimistic that operators can make this radical shift?
Jon Fredrik Baksaas: I’m optimistic about collaboration in the connectivity part of the value chain. For example, progress has been made in laying the groundwork for the Internet of Things (IoT) by standardizing protocols and functionalities. This is a must if operators want to build a healthy ecosystem for developers and so fend off the threat from those offering services on unlicensed spectrum.
But of course, connectivity is only the tip of the iceberg in terms of the future value of the IoT. To capture more, operators will have to crack the collaboration code in services as well, creating their own industry verticals. There are good examples in some markets where operators have collaborated to provide the platform for mobile money transfers, greatly boosting use of the service.
McKinsey: What sort of services should operators provide?
Jon Fredrik Baksaas: Every operator will need differentiated content and more personalized services. These will be retention tools, and customer acquisition tools. There are plenty of possibilities. What about a simple application for editing videos on a mobile so they can be stored, securely, in a personal video bank together with other pictures? I’d certainly be interested in that as a customer. All those holiday videos I have on my phone of me falling over on the ski slopes go nowhere. I don’t share them with anyone.
More seriously, I believe a customer authentication service could be a particularly strong asset for operators. This eliminates the need to remember all the different usernames and passwords or to undertake the security protocols required for the different applications we use. How many times have we all struggled to remember the right password? It’s also more secure. A single sign-in code gives access to all applications, be it banking, controlling the heating at home, or paying for a parking meter. It is a service offered by operators, who recognize and authenticate the user through the SIM card, but it’s managed by customers themselves.
Operators could build on existing customer relationships and trust to claim this space, and in so doing take both to a whole new level. Customers get a valuable service, and operators strengthen their hand with other service providers. After all, the hassle of registering is one of the main reasons for abandoning an app or a Web site. And here again it goes without saying that if operators collaborate, the service becomes much more compelling.
A couple of years ago, the GSMA and a group of operators from around the world launched a digital identity platform called Mobile Connect, providing authentication, authorization, and verification capabilities delivered via a standardized, technical interface. Take-up to date has been rather slow—the GSMA estimates there are just over 100 million registered users out of some eight billion SIM cards worldwide. I suspect this has a lot to do with operators underestimating the significance of a service that could position them at the center of customer interactions, and viewing it rather as a cost item. Today, however, US operators are collaborating on another customer authentication initiative and China Mobile is understood to be developing its own identity service.
McKinsey: What other opportunities do you see? Could operators be more effective in monetizing their data?
Jon Fredrik Baksaas: They could—and they should have been more aggressive in doing so in the past.
To some extent, operators have been prevented by regulatory restrictions. Looking back, it occurred to me that had I as CEO of Telenor used our customer data in the way that Google uses data, I would quickly have been pulled up by the regulator. But operators’ hesitation is also again explained by their traditional way of thinking. It goes a bit against the grain for operators to use personal data. The moment the person in the exchange who connected all the calls was replaced with an automated system, was the moment the telecom companies’ relationship with customers started to weaken as the flow of information between them became anonymous, private. So, for operators to start to capitalize on private data in some way threatens the self-image of the secure and trusted provider they have since built.
There is still some advantage in that positioning. Certainly in Europe, there is concern about privacy—how much OTT companies know about us, and how much they use that data for their own purpose and profit. As a result, new and stricter EU regulations are about to be introduced. Operators, on the other hand, are less intrusive, more cautious about using customer data. But there is no getting away from the fact that to compete in new digital services, they will have to experiment with different business models. The data they have is a currency that needs to be put to good use. If operators were to start using that data, they could offer an opt-in, opt-out service, whereby customers continually decide when to allow their data to be used. They might opt in when they are looking for a location-relevant restaurant recommendation, for example, then promptly opt out again.
McKinsey: Do you not think operators have missed out, given the dominance of OTT companies?
Jon Fredrik Baksaas: Both yes and no. With some exceptions, success as a global provider of digital services may by now be beyond the reach of operators. Mobile Connect may become one such exception. But not all digital services are global. On the contrary, culture, language, regulation, and habits differ enormously in different markets, and tailoring services to local conditions may command a premium.
Take advertising. Global OTTs might have the upper hand in some advanced markets, but in others—particularly emerging ones where digital services are on the rise—operators can still put up a good fight. Addressing privacy concerns might be a winning tactic. But again, collaboration will prove key. Advertisers in many markets are unlikely to be interested in the market share base of a single operator. Operators will have to unite.
McKinsey: What is the role of regulation in all this?
Jon Fredrik Baksaas: In Europe, the industry has lobbied hard for “same service, same rules,” arguing that OTT companies should be subject to the same licensing, regulatory, tax, and pricing treatment. If a customer wishes to change operator, he or she is entitled to keep the same number and have everything up and running within days or even hours—the number portability principle. Yet OTT players are under no obligation to ensure the same smooth handover of contacts, photos, and the like when a customer switches between operating systems.
However, perhaps an even stronger argument centers on innovation. I don’t think it is particularly controversial today to say that some of the regulatory decisions made in Europe in the last decade helped the United States and China take a lead in mobile usage and mobile innovation. If Europe wants to stay in today’s race for innovation—if it wants to help shape tomorrow’s digital society and not see all the innovation coming from Palo Alto—regulators must find a way to support operators in developing successful new services and unleashing investments. Allowing more collaboration may be a case in point. Operators must raise their ambitions. But regulators should not limit operators’ ability to innovate. Innovation can’t be all left to the OTT players.
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