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Growing opportunities in the Internet of Things

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Maturing underlying technologies will make Internet of Things technologies easier to implement and help companies and investors seize new opportunities.

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What employees are saying about the future of remote work

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Survey results show employees are feeling anxious about post-pandemic working arrangements and the future of remote work, even if you don’t yet know what to tell them.

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As digital proliferates the telecommunications industry, incumbent telcos find themselves in the middle of a paradox. First, "thinking digital" is deeply embedded in their business models. They are, after all, not only providers of their own digital products and services but also enablers for other sectors, by providing the essential connectivity infrastructure for functioning and growing in the digital economy, which results in a growing demand for broadband access. Also, it is forecast that the number of digital customers will skyrocket globally, and intensity, with respect to time spent using digital platforms as a means of communicating, will increase over the next few years. At the same time, consumer behavior regarding traditional communication services is changing, and the total consumer spend on these services is expected to decline even while overall communications activity grows. Finally, as technological breakthroughs accelerate, more and more new digital natives are entering the core telco market with innovative business models and technologies, leaving many incumbents to wonder if they can keep up or if they will be displaced.

The growing force (and changing face) of digital

There are two-and-a-half billion digital customers globally who are under 25 years of age. What characterizes this group is the fact that they are "always on" and that they show a different usage behavior compared to that of the traditional "analog" consumer. On average, these young digital users spend 315 minutes online each day (versus 126 minutes for customers over 25 years). More than two-thirds of this group is on YouTube daily, and 41 percent of 18- to 32-year-olds in the United States use video-messaging-service Snapchat for 25 to 30 minutes per day.

More than just an enabler of entertainment and social communication, digital is an instrument that helps this youth and young-adult demographic "take care of business," with 45 percent using social media as their primary platform for customer service. In addition to digital's popularity as a preferred way of handling business, there is the trend of "mobile only" Internet access. For example, over half of all active Facebook users access their accounts solely through their smartphones. Together, these trends-digital business and mobile access-contribute to the projection that by 2019, more than two billion users will make payments via mobile devices. Overall, this will result in an increase in the absolute number of digital customers as well as in a massive increase in the amount of time that consumers spend when using communication and broadband services globally. According to Ovum, communication intensity in regard tof time spent will grow by 63 percent over the next ten years.

Cannibalizing voice and messaging-offering more for less

As the overall digital market grows-an additional billion middle-tier customers for telcos, mainly in emerging markets, is expected by 2025-the door for new over-the-top (OTT) entrants is opening. These digital natives are offering the same staple services of voice, messaging, and video calls that used to be the domain of traditional telcos. In particular, OTT players such as Apple's FaceTime, Google Hangouts, Skype, Tencent QQ or Tencent's WeChat, and WhatsApp threaten to cannibalize these staple offerings with innovative, easy-to-use, and even more-attractive messaging and communication services.

Just a few years ago, messaging, fixed voice, and mobile voice services from OTT players accounted for 9, 11, and 2 percent of relevant revenue, respectively. Several scenarios run by McKinsey & Company reveal the possibility of a jump in share for each of these services. In the most aggressive scenario, the share of messaging, fixed voice, and mobile voice provided by OTT players could be at 60, 50, and 25 percent, respectively, by 2018 in an all-IP environment (Exhibit 1). As those service offerings are being built on innovative business models, they will be available to users at a much lower price than traditional telcos are able to offer. According to Ovum, this will likely result in a drop in spending on traditional communication services by 36 percent over the next ten years, further pushing incumbent telcos to the margins of voice and data provision.

Increasing demand for communication infrastructure-broadband-access hype

"Thinking digital" is deeply embedded in telcos' business models. They not only provide their own digital products and services but also the essential connectivity infrastructure that allows other sectors to function and grow in the digital economy.

The digitization trend is currently challenging every sector in industry and society. In almost all cases it is having dramatic, if not disruptive, effects on existing traditional industry dynamics and business models. Hence, all companies and institutions will have to think about how to deal with this digital revolution and what their role in the newly arising digital ecosystems might be. Digital is all about data, but its full value can only be delivered when adequate IT and technology form the infrastructure that seamlessly connects that data and enables its exchange-anytime and anywhere. This growing demand for connectivity will require companies to have broadband access and a gigabyte or high-speed infrastructure, which would result in a rise in spending for ubiquitous broadband access.

As we also strongly believe in the rise of the Internet of Things (IoT) and Industry 4.0 as major drivers of this digital revolution, we can expect to experience an increasing demand in machine-to-machine and cloud services. McKinsey estimates that IoT's potential economic impact on factories will rise to as much as $3.7 trillion a year by 2025, mainly from productivity improvements, including as much as 20 percent in energy savings and 25 percent in potential labor-efficiency improvement. To deliver this value, IoT envisions a world of connected devices that goes beyond mobile phones and smart watches. Everyday objects would be linked, that is, they would be able to send and receive data to and from one other. This level of connectivity would require additional, related IT and infrastructure services, which would further drive telco revenues.

Value chain takeover-new technologies and increasing competition

Market forecasts are predicting increasing margin pressure but no sea change with respect to fundamentally questioning the relevance of telcos in the future. There is, however, something going on in the traditional telco value chain and competitive landscape that is jeopardizing the existing telco business model. Not only are we experiencing increasing competition among traditional companies-telcos, cable providers, and mobile virtual network operators-new OTT entrants are also cannibalizing services, and Internet and other tech giants are moving onto the traditional telco and media terrain as well. Amazon, Apple, Baidu, Google, Microsoft, Samsung, and Tencent, as well as pure tech companies such as Cisco, Huawei, IBM, and ZTE, are all growing their presence across the traditional telecom's value chain with innovative technologies-from network and service through devices and operating systems to applications and media. And, to make things even more challenging, many large and medium-size companies-telcos' traditional customers-are starting to build their own infrastructures.

OTT players are offering core telco services such as voice or messaging, and the media space is becoming their domain. Tech and Internet companies are also increasingly active in growth areas, such as cloud space and services, competing with telcos for clients and revenue. They are tying customers to their own ecosystems, while making reliance on traditional operators a thing of the past. With carrier-neutral connectivity (for example, e-SIM), many tech and Internet companies are enabling seamless changes between operators and eliminating the hassle of changing telecom providers. Hence, digital players are systematically attacking existing telco profit pools and will continue to do so-eating up telcos' revenues and margins. This makes differentiation purely on B2C products for traditional telcos a highly questionable proposition in the future.

In addition to these revenue-eroding trends, regulatory developments-especially in Europe-have cut down roaming revenues dramatically. All told, the opportunities that newcomers, tech, and Internet players are capitalizing on may slow growth for traditional telcos, costing them upward of $300 billion. Worldwide, the compound annual growth rate (CAGR) for traditional telcos is estimated at only 0.7 percent through 2020. For many telcos, largely in developed markets, the outlook is especially disappointing with projected negative growth. Telcos in Western Europe and in Central and Eastern Europe are facing -1.5 and -1.3 percent average growth, respectively, over the next four years, while those in North America are expected to barely tread water with growth at only about 0.3 percent.

Additionally, these new entrants-with their global reach and a focus more on software and service than on hardware and infrastructure-also enjoy significantly higher stock valuations than do incumbent telcos. This is because their growth potential is seen as much higher than that of those traditional incumbents continuing to operate under their existing business models.

Implications and opportunities for telcos

For traditional telcos, this disruption, enabled by digitization, is anything but ordinary. Developments in digital technology threaten their current investments and put their cost baseline under significant pressure. New competitors are entering the core space of telcos, which will reshape the existing company landscape. In addition, telcos will continue to be forced to make major investments in future network technology. But the cost of just doing this alone is expected to result in a drop in revenue in the order of 15 to 30 percent. Nevertheless, the growing importance and demand for connectivity and broadband access will ensure that there will be some growth opportunities out there, too.

To remain relevant in an increasingly digital space, incumbent telcos are advised to consider two strategic moves and, if appropriate, take immediate action: 1) make the core business "super slim," cost efficient, and more agile and 2) identify new growth areas in the space that combines the great potential of digitization and telcos' existing core competencies.

The super-slim telco-a no-regrets move

Given the mounting pressure that telcos are experiencing-particularly in Europe, where CAGR was -1.8 percent between 2014 and 2016-seeking greater efficiencies in core areas and establishing a super-slim telco are no-regrets moves. But to get there, telcos will need to rethink their operating models.

Transforming business models to optimize efficiency hinges on the implementation of digital in B2B, commercial, and B2C and spans all processes from marketing and sales through network all the way to customer support. Especially areas that are driving the highest costs, such as the network technologies, need to be reworked and moved into an IT-centric and more software-driven environment. Such a move should reduce related baseline costs by 30 to 70 percent, improve time to market and agility, and enable flexibility and self-provisioning capabilities-but usually takes some time. Also, telcos can learn from other leading pure digital players and pursue developments to, for example, completely digitize their customer front ends (including service), develop and deliver products that are completely software generated (no in-home hardware), and fully automate processes, such as billing and service coordination. In this area, some telcos are already making progress. But the real benchmarks can be found within the crowd of pure digital players, who have learned to rethink their processes completely, making them digital, extremely agile, and cost efficient.

Business opportunity in B2B

While the odds may be stacked against telcos in reclaiming the pole position in the B2C space, the good news is that telcos can capture new business opportunities in B2B, as this space is just beginning to develop. Here, specifically, telcos can leverage their infrastructure advantage-combining this with state-of-the-art digital technology-and position themselves as the backbone of fast-growing digital ecosystems, especially around IoT, security, and Industry 4.0. This position spans the categories of network, product, and services and offers telcos the possibility of taking leading (sometimes exclusive) roles in, for example, intelligent networks, solutions in information and communications technology (ICT), cloud services, analytics, IoT platforms and security solutions, billing, and customer relationship management. Evidence of this as a potentially attractive space can be seen in the growing adjacencies-related announcements of operators in IT and technology in their quest to meet the customer's appetite for ICT solutions and IoT. Unfortunately, experience shows that telcos have historically only found success in transversal products (for example, security, IoT, and cloud services for regional small and medium-size segments). In all other areas, telcos have developed great ideas but have failed to successfully execute them.

One example of the connectivity and value-added solutions that telcos might explore could be playing a dominant role in smart-city infrastructure. The existing infrastructure needs to be transformed into a smart infrastructure (for example, converting traditional passive pipes into self-regulating active and smart pipes or changing streetlights into intelligent streetlights). Additionally, the whole smart-city infrastructure needs a level of connectivity on the order of a gigabyte as well as the capacity to provide additional services, such as billing or analytics.

A second example of telcos' infrastructure opportunity is the role they might play as the platform for Industry 4.0 or IoT. In this case, a network operator would serve as the backbone or platform of the complex data flow that links machine sensors to back-end services, such as analytics or cybersecurity, and transportation supply-chain infrastructure to navigation, factory floors, social media, and logistics apps. This could be highly attractive because machine-to-machine revenues are projected to grow by double digits over the next few years. Other examples for telcos include the provision of healthcare infrastructure, platforms for smart mobility, or enabling B2B2C consumer-retailer networks.

While increasing digitization presents B2B opportunities for traditional telcos, leaders should be aware that the competition in this infrastructure and value-added space will be intense. Players from across telecom and other sectors will pursue these revenue opportunities; however, only a select few will capture the value and move further into the enterprise space.

Competing with digital natives in B2C in the areas of voice, video, and messaging might be an uphill battle, yet even here some options do exist for telcos in B2C. Combining their core competencies with opportunities in digital technologies, telcos might consider options for offering connected platforms for smart homes, self-marketing, digital entertainment and secure-cloud and data services for individual consumers.

The digital B2B market for traditional telcos is in its early stages, but it is fast-growing and expanding. Large OTT players, however, are not sleeping-they have already started to look beyond the pure B2C space into B2B, and they are trying to conquer it as well (Exhibit 2). For example, Amazon, IBM, and Microsoft-the largest cloud-services players by far in the Americas and Europe-are making B2B inroads. Of these, Amazon is already positioning a B2B sales platform. Alibaba, Huawei, and others are following suit out of Asia, as traditional telcos are currently asking for their inexpensive services. And while some tech and Internet companies have already started to discover this B2B space, telcos have yet to enter this arena. Most telcos know about the B2B opportunity, including its inherent challenges, but are having a hard time operationalizing it. So, the time for telcos to act and fix their execution problem is now. Without swift action, they will almost certainly fall behind once again, because OTT and tech players will do everything in their power to dominate the B2B space.

The telecom industry is on course to becoming unrecognizable within ten years' time in a "do nothing" scenario. The global market for potential customers is still growing, but the forecast for traditional telcos is for low revenue growth and shrinking margins, because of increasing competition from OTT and technology players. Despite the inevitable change, opportunities exist for those that are willing to accept the challenge and initiate change. To survive in an environment where digital dominates, telcos must create a super slim and efficient core business. To thrive, they will need to strategically define and aggressively pursue growth areas. Many have come up with innovative digital ideas, but ideas will not be enough. Telcos have already ceded much of the value in B2C to OTT and tech companies. Without a demonstrated commitment to excellence in execution, they risk losing out on the B2B opportunity to these same players as well.

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Overwhelming OTT: Telcos' growth strategy in a digital world

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Incumbents are now asking if digital is a threat to or an opportunity for their business model. Beyond operational efficiency, they will need to focus on excellence in execution.

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You move to a new city for work and decide to switch to the well-regarded local leader in mobile services. You go to its website and port your number over, and, in seconds, your new service is working.

Soon, however, you experience some dropped calls and sluggish data in your apartment. The problem clears up quickly, though, after your provider's analytics identify you as a new customer in a key demographic who is experiencing service issues in a location where you frequently use your mobile phone. The provider's automated remediation confirms your apartment is in a strategic region with spare spectrum available and promptly provisions additional capacity.

That level of seamless customer service may seem like a distant dream. But if telcos are going not just to survive but also to thrive amid today's competitive disruption, it needs to become a reality in the not-too-distant future. Critical to that happening is the network, which must enable such superior customer experience.

But to do so, the network itself must undergo a radical transformation, shifting from a black-box cost center to a genuine change agent. It needs to leverage its unique position as the owner of the company's largest asset and the richest source of the data that generate key customer insights.

A makeover for the network

Despite (or perhaps because) the network accounts for such a large share of both operating and capital budgets (typically 30 to 40 percent), it has traditionally been relegated to the back of the organization, asked to help with cost cutting, while real change is led by commercial units (such as product and customer care) or the IT team (through system and software). This status goes hand in hand with the network and the network organization's long-standing image as monolithic and mired in complexity. The work done is still rooted in the technological limitations of the past: basic functions require long lead times, standard feature sets offer little customization, capacity can't be scaled dynamically, and processes are complex and rigid.

However, technologies have evolved to a point that networks can now be more digital and, as a result, more dynamic, flexible, and customizable. The use of analytics and artificial-intelligence (AI) techniques, like machine learning, can make the systems intelligent and more automated, enabling predictive and near-real-time actions. These solutions, coupled with an agile organizational model, can catapult the network team to become the driver of any telco's digital agenda.

Before telcos get there and fully realize the potential of the network of the future, they must make sure it is defined by five key characteristics (Exhibit 1). And once it is, the payoff could be substantial.

Modular

Today's network architectures are made up of multiple hardware boxes interconnected through the core. Network functions are loosely tied to customer-facing functions. The network of the future, however, will be more software based and modular-otherwise known as network as a service (NaaS)-allowing it to adapt to changing customer needs much more quickly and efficiently and to scale capacity dynamically based on user or application when needed (Exhibit 2).

Bringing modularity to the network involves three key considerations:

End-to-end process changes and simplification. Deploying the latest technologies, such as network-functions virtualization (NFV) and software-defined networking (SDN), should be accompanied by changes in the associated processes. One European operator had to rethink the B2B service-provisioning process completely by leveraging the virtual customer-premises equipment (vCPE) to provision services remotely based on demand. In doing so, it was able to reduce the service-provisioning time from two weeks to just a few minutes.

Jointly defined use cases. Typically, these initiatives led by the network team are viewed as technology solutions. However, deploying them also offers business use cases. For that reason, the network and business teams need to work together to craft the use cases and road map for building them. A European operator's network organization worked with the commercial teams to define and prioritize Internet of Things (IoT) use cases that would be supported in the network through application programming interfaces (APIs) for provisioning the service and to provide additional capacity.

Capability enhancements. Moving toward a NaaS model requires new capabilities within the network team. Previously, network teams were more engineering and operations focused; they now need to develop service-management and software-development capabilities.

Agile

The way network teams organize themselves is a critical determinant of how effective telcos are in leveraging the new network paradigm. Such organizations today are typically centered around major functions, such as planning, engineering, and operations, which has served them well.

Yet, as telcos go digital, the overall organization design is being revamped. Agile structures centered around digital tribes are taking root, mainly driven by the need to respond immediately to customer demands. This requires rapid iterations and decision making enabled by simplified processes and governance (Exhibit 3).

This is a complex transition that requires telcos to ask themselves two important questions:

What should be the scope of agile transformation within the network team? There are two potential models to choose from:

Based on the nature of activities. Functions that have shorter lead times and are closer to the customer, such as provisioning and configuration changes, move to an agile model, while infrastructure changes that require longer lead times remain traditionally managed.

Full agile. In this model, all functions are moved into agile tribes. A leading Asian telco, for instance, revamped its network organization into two tribes from a previous state of six subdepartments.

What should be the agile organizational design? Multiple agile design choices, such as flow to work, self-managing teams, end-to-end cross-functional teams, and agile overlay, could be evaluated. The choice of the design should be based on factors such as the scope of the functions going agile, the interface with the rest of the organization, and ease of implementation.

Automated

Adoption of analytics and automation is increasing, and many telcos have started building use cases and setting up centers of excellence. As network teams evaluate the next steps in their automation journeys, leaders need to assess three considerations:

Look beyond telecom. Inspiration for the automation journey should come from the best places and organizations, not just from within the industry. Telcos need to step outside of their peer set to look for inspiration on leading practices. For example, in transforming the customer-care journey, one telco took inspiration from various sources: a healthtech provider for building an AI engine to diagnose CPE issues and a heavy-machinery manufacturer for deploying augmented reality within its field-installation guides. Going outside the industry helped the telco capture an additional 5 to 7 percent productivity spike.

End-to-end automation. Ensuring end-to-end digitization across the network life cycle, as opposed to tactical automation of a single process, is essential. Consider the entire deployment journey, starting with the design of the network and continuing all the way to implementation and optimization. One telco used a zero-based-design approach to reimagine the entire deployment journey, weaving together disparate legacy tools, tactical process robotics, and machine-learning use cases to reduce end-to-end deployment time by 30 percent.

Architecture that supports scale. Driving impact at scale would be challenging if the digital architecture that supports network deployment and operations tools is neglected. Network teams should consider how they can build a modern, future-proof digital architecture that allows them to reduce their technical debt, adapt rapidly to new technologies, and capture and build on a wealth of data about the network (Exhibit 4).

Personalized

With the advent of NaaS, there will be increasing demand to offer customized bandwidth for different types of services. Network slicing enables operators to configure multiple logical networks to run on top of a shared physical infrastructure. Deploying network slicing involves two important considerations for operators:

'Hyperpersonalized' business models. Network slicing allows for operators to provide personalization at various levels. At the highest level, operators can distinguish between B2B and B2C services. Within B2B, for example, they can offer different classes of services (such as for IoT and vehicular communications). In B2C, operators can differentiate among the bandwidths being offered to various customer segments. This enables operators to move toward new business models centered around hyperpersonalization that require close coordination with business teams.

Trade-offs between multiple virtual layers and multiple physical layers. As the list of possible next-generation services keeps growing, implementing multiple virtual-network slices for each type of service may be very inefficient in terms of resources. Alternatively, deploying separate physical subnetworks with their own physical and functional layers may be a more viable option, but it requires more investment. The right balance between these two options needs to be studied based on the overall company strategy and outlook.

Insight generating

Given that all customer services have to pass through the network in one form or another, the network collects a trove of valuable information on the customers. This can include mobility patterns, call-usage records, and credit information, for example. Moreover, since network nodes and sites are distributed across a given country in which coverage is being provided, the network data can be localized to particular microlocations. (Such solutions would, of course, require careful consideration of matters around regulation, privacy, and customer consent.)

By leveraging advanced-analytics techniques on these data, operators are starting to tap into rich insights to which they previously didn't have access. However, chief technology officers (CTOs) should look to three key areas to take full advantage of these insights:

Going beyond the network. While telcos are already making progress in leveraging advanced analytics on network data to drive operational insights (such as predictive-maintenance models), network teams can potentially increase impact from these data significantly by combining them with customer insights. For example, can propensity to churn models improve precision by incorporating recent network key performance indicators (KPIs) as inputs? Similarly, can KPIs go beyond network focus into measuring customer experience by combining data from devices, service touchpoints, and network operations?

Cross-functional engagement. Getting the most value from analytics use cases would require engaging cross-functionally with other relevant teams to ensure there is a holistic view of value and there are robust approaches to execute. CTOs should consider whether the current engagement model (including forums, frequency, and ways of working) among their own network teams and others (including marketing and finance teams) are enabling or hindering such cross-team collaboration and what might be needed to knock down organizational silos.

Data architecture. Bringing data from multiple sources (network elements or organizational data, for example) requires scalable, cohesive data strategy and architecture to enable use-case deployment at scale. In an environment dominated by budget constraints, network teams should critically evaluate their data strategies to ensure that they optimize value from existing investments, that additions are backed by specific use cases, and that there is a clear link between the architectural road map and business value.

In this vision of network transformation, it's not just the network stature that is transformed. The role of the CTO is enhanced, going from playing a supporting role to leading the charge on digital transformation. As 5G deployments weigh heavily on already stretched capital budgets, such a transformation could also enable CTOs to achieve significantly lower costs with operating-budget benefits of 20 to 30 percent per year and capital-budget improvements of 15 to 20 percent per year (on a like-for-like basis).

The vision for this network is long term, but without concrete steps now, network teams might face an increasingly uphill task, and offering the best network to subscribers might come at a heavy price. To get started, network teams should define a holistic end-state idea for networks based on the five elements of the network of the future, their own guiding principles, and the operating models required to achieve them. Network teams should also consider conducting proofs of concept in selected areas (for example, agile B2B provisioning or analytics-driven field dispatch) to start making the vision a reality.

Transformation, after all, is about changing mind-sets and how we do things-and, ultimately, about perceived positioning in the company and external world. The question for CTOs and network leaders is: Do you want to play defense and keep explaining and justifying capital expenditures to the board, or do you want to shape the whole company's agenda?

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Reinventing telco networks: Five elements of a successful transformation

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For telcos to keep and grow market share, a network transformation can help the network division shed its cost-center past to become a leading function that influences the digital and analytics metamorphosis of the core.

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Energy costs for telecom operators around the world are already high: at the end of 2018, they accounted, on average, for around 5 percent of operating expenditures. In emerging markets, where low grid coverage often means operators must supply their own power with a generator set, energy can account for as much as 7 percent of expenditures. And costs look set to rise further, putting greater pressure on margins at a time when the industry can scarcely handle any additional financial burden.

This growing energy challenge is, in large measure, a result of the exponential growth in traffic that new 5G services are likely to deliver. Although the 5G-new-radio standard is more energy efficient per gigabyte than are the 4G standards, the proposed 5G use cases and new spectrum bands will require many more mobile sites, outstripping potential energy efficiencies. Each 5G site will need two to three times more power than the 4G-equivalent site, according to industry estimates. At the same time, as more services are provided at the edge, the number of data centers will need to rise. By our calculations, these already account for 5 to 10 percent of a telecom operator's energy costs.

Some savings lie in deploying artificial intelligence (AI) and the Internet of Things (IoT): some in structural and architectural transformations, and some in cheaper and more sustainable energy sourcing. The extent of the potential savings will vary by operator and market. Regulations governing distribution and retailing, green-energy incentives, OEM choice, and an operator's starting point in energy efficiency will all make a difference. Nevertheless, our work suggests that many operators can reduce energy costs by at least 15 to 20 percent in the space of just one year-and more over a longer period.

Seizing these opportunities, however, requires major organizational and mind-set shifts. Energy costs may well be aggregated at company level, but responsibility for the cost drivers is split across many different functions and divisions, such as network and infrastructure planning, field operations, facilities management, procurement, and IT, making managing this level of change all the more challenging. Moreover, reducing energy costs requires resources (labor and capital) at a time when operators are concentrating their investments on expanding the capacity and reach of their networks. For both these reasons, energy consumption and costs are unlikely to fall without high-level recognition of the importance of reducing them and a comprehensive strategy for doing so.

Where the opportunities lie

The biggest opportunities for energy-consumption and cost reductions lie in four areas. Some are more complex than others to capture, and some require more capital spending than others (Exhibit 1).

Artificial-intelligence-driven sleep and shutdown

Running systems that are not in constant use consumes significant amounts of energy. Typically, radio access network (RAN) accounts for about 60 percent of the power used at a mobile site. Data-traffic loads are intermittent, though, so that different parts of RAN can be put briefly into sleep mode, even during periods of peak traffic. A mobile operator in Australia found that simply turning off the power-amplifier symbol at a site could cut consumption by more than 7 percent, without any service degradation.

AI expands the potential for such energy-saving opportunities across the network. The ability to analyze vast amounts of data relating to traffic patterns, real-time demand, and network-resource availability allows for quick, automated decisions on the parts of the system that can be put into sleep mode or shut down. For example, this could involve shutting down frequency carriers or shutting down a site momentarily in areas where there is overlapping coverage. We estimate that such energy-conserving AI tools can deliver 5 to 7 percent savings for some operators, in addition to savings that accrue from stand-alone, site-level efficiency measures. And the potential will surely rise further. As open and cloud-native approaches to building RAN gain ground, additional AI solutions that not only save energy but also minimize related customer-experience issues, such as latency, are emerging. They can also be used on all networks, from 2G to 5G.

Similar energy-saving advances are occurring with AI on fixed networks. For example, AI can reduce the energy cost of central offices by between 3 and 5 percent by continuously calibrating the optimal settings of chillers, pumps, and fans to guard against waste.

Internet of Things-based energy optimization

It is hard, if not impossible, to reduce energy consumption and costs if you cannot measure consumption accurately. That is the starting point of any concerted energy-efficiency program. But until recently, accurate measurement on an industrial scale has been difficult. Old equipment does not always measure consumption, and even if it does, recording it requires hundreds of employees to make and submit accurate readings. The IoT, by contrast, uses sensors to track consumption.

That advance opens up all sorts of new ways for operators to save energy. Sensors that read consumption-essentially, smart meters-give companies access to time-of-usage discounts in markets where they are offered. One Southeast Asian operator saved 5 percent on its energy costs because of a differential pricing offer from the utility provider.

And the IoT can counter the theft of fuel and grid power, which is a serious concern in some developing markets, where it can raise energy consumption and costs for some operators by 10 to 15 percent. By placing sensors at various points to gauge grid-power input, fuel levels, the number of hours the generation set has been running, battery voltages, and consumption by different types of equipment and then analyzing the data, operators could uncover potentially costly anomalies. What's more, the IoT platform could provide real-time alerts when they occur.

Like AI, the IoT also makes it much easier to optimize consumption-with air conditioners, for example. Many operators have already moved heat-generating equipment outdoors to take advantage of natural convection cooling. Nevertheless, our analysis shows that, on average, about 20 percent of a telecom operator's sites and other facilities still use air conditioning. On mobile sites where this is the set case, air conditioning accounts for 30 percent of energy consumption. Here, the installation of sensors would allow monitoring and remote adjustment of the site temperature. The sensors could even alert the operations center if a door was left ajar or the maintenance crew altered the setting, forcing the air conditioning to work unnecessarily hard. The overall result could be a 1 to 3 percent reduction in a site's energy consumption.

Importantly, companies can retrofit the IoT for use by old equipment, even as OEMs are integrating it into newer equipment.

Structural and architectural transformation

Structural and architectural changes can deliver sizeable energy savings. Energy is the primary source of cost savings when decommissioning legacy networks, for example. A Southeast Asian operator realized a 3 percent saving on its total energy bill when it decommissioned its stand-alone 2G network and moved to a single-RAN architecture, as the legacy 2G equipment, although underused, was more energy intensive. Similarly, migrating to architectures such as cloud-RAN and "clean cloud" data centers can deliver energy savings of more than 10 percent.

Strategic and sustainable energy sourcing

Energy demand is only one part of the equation. Too often, operators fail to give enough attention to the supply sides of their energy expenditures. It is still rare to find an energy-sourcing specialist in a telecom operator's procurement department, even though sizeable cost savings lie in better sourcing. The following are the areas in which companies can find savings:

Procurement. An operator in the Asia-Pacific region was purchasing power for some of its sites through intermediaries, such as the site landlord or mall owner, rather than directly from the utility. This is not uncommon. Teams negotiating site rentals tend not to scrutinize energy costs, and site-deployment crews sometimes bypass required energy-assessment steps to meet strict schedules. An operator's energy costs then become unnecessarily high because the prices that intermediaries pay for their power are often more than those charged to industrial customers-and because the intermediaries themselves charge a commission. By going directly to a power supplier, this operator reduced its energy costs on affected sites by 15 percent. Even when operators procure directly from a utility and adhere to a structured procurement process, a close examination of supply market trends and pass-through costs can reveal room for renegotiation. Such scrutiny helped another operator in the Asia-Pacific market cut unit costs by 5 percent.

Diversification. Green-energy suppliers are cheaper in some markets. In India, the cost per kilowatt-hour of solar power is about 35 percent lower than grid power and about 65 percent lower than generator-set power. Some telecom operators are already taking advantage of such price differentials. Telefónica México, for example, sources 40 percent of its energy needs from a solar-energy provider, and Australia's Telstra has a contract with various solar and wind farms in New South Wales to buy and use all their output.

Generation. There are opportunities for companies to cut costs by generating their own green power on site. Japan's NTT DOCOMO is reported to have reduced grid-power usage by as much as 40 percent at some of its base stations by using solar panels and higher-capacity batteries. The extent to which a company can scale such a model will depend on the suitability of the site locations for solar power, availability of space, and cooperation of the site's landlord. Nevertheless, by sourcing from green suppliers or generating on-site green energy, we see no reason why all the energy needs of most telecom operators should not be met with green energy by 2030.

Keys to seizing the opportunities

Although there is huge potential to reduce the energy consumption and costs of telecom networks, realizing that potential is no easy task. Any successful strategy will include the following elements:

Establish accountability. Unless a senior leader has a charge to reduce energy consumption and costs, it is unlikely to happen. That leader will need influence across the company, which means they will ideally be a top executive from network operations.

Draw up a transformation plan. As with any transformation program, companies will need to set targets against current consumption, put detail behind planned initiatives for which line leaders are willing to take responsibility, pilot initiatives before extending what works across the company, and develop new capabilities (Exhibit 2). Bear in mind, however, that the data needed to assess current consumption versus what is achievable may not be readily available. Most companies do not have site-level energy-consumption data, for example, let alone an understanding of the consumption of various pieces of equipment on each site. When internal data are not available, much can be gleaned from other sources, such as element-management systems, vendor invoices, interviews with operations personnel, sample site measurements, and equipment-specification sheets. Predictive models will also be necessary to ascertain likely consumption given anticipated traffic growth and the addition of new equipment at mobile sites, central offices, and data centers.

Remember, too, that like any other transformation program, implementing this one will require a significant cultural shift that builds awareness of the extent of energy waste and the importance of reversing the trend. Network planners should come to regard energy efficiency as of importance similar to other parameters they currently prioritize, such as data speed and signal strength. There are carrots as well as sticks that companies can use to foster a change of attitude. Encouraging employees across a company to submit ideas on how to save energy and rewarding those who consciously try to reduce waste can be helpful. So can setting strict, site-level energy budgets.

Build partnerships. Telecom operators should not fight this battle alone. Their suppliers-telecom OEMs and software-solution providers, for example-can help by improving the energy efficiency of equipment they sell, and operators can insist on this as a prerequisite for their business. Another option is partnering with specialists in energy management, such as energy-as-a-service providers that help with large-scale enterprise energy-efficiency projects. In Spain, Telefónica works with Vertiv to help it improve its energy efficiency.

Regulators may have a role to play too. For example, reducing network capacity at night, when demand is low, could save energy. But operators might hesitate to make such a move independently if they felt the regulator would view any dip in performance negatively, damaging their competitive standing. Regulators working with companies to set minimum off-peak network-performance requirements or energy-efficiency standards might overcome such a problem.

Raise the bar and make the business case. Besides reducing energy consumption, companies should set themselves high ambitions when it comes to using green energy to reduce their carbon footprints further. Indeed, they should work toward carbon neutrality, taking their lead from other companies and other industries. Amazon, for example, is working toward meeting 80 percent of its energy needs from sustainable sources by 2024, while its Amazon Web Services division has a policy that only permits setting up a new data center anywhere in the world if there are sustainable energy sources to run it.

Winning support for such lofty goals will be easier with the help of a good business case. When calculating total energy costs, companies should consider the high cost of carbon credits that many markets require to offset the use of fossil fuels. This is not uncommon in other industries. Leading consumer-packaged-goods companies, such as P&G and Unilever, have taken this approach to drive efficiencies across their supply chains. And the better the business case, the easier it will be for an energy-efficiency-transformation program to compete for resources against network expansion and capacity increases.

There is a huge gap between most operators' high levels of energy consumption and costs and the lower levels that are technically possible, even today. Companies that fail to take advantage of new tools being developed to cut consumption and of cheaper, sustainable energy sources will see that gap widen further as traffic grows, causing potentially lasting damage to their competitive positions. They can no longer afford to shy away from setting audacious goals that will benefit not just the company and the industry but also the environment and world at large.

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The case for committing to greener telecom networks

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Telecom costs from energy are rising, but new efficiency measures and technology can help reduce them by 15 to 20 percent in just one year.

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The connectivity that telecom operators provide has launched hundreds of thousands of new applications and services, creating enormous value at the edge of the industry. Despite this, telcos have underperformed shareholders' expectations. Moreover, rising valuations for network and infrastructure assets have driven their returns more than B2C operations have done.

To reverse this historic underperformance, some telcos are separating their network operations (handled by a "NetCo") from their customer-facing operations (handled by a "ServCo") to expose the value of their network assets or attract external investment to fund network expansion. For those operators, the move is forcing a critical review of how to drive growth for and maximize the value of the resulting ServCos. But even those telcos that are unconvinced about the merits of legal or structural separation can capture substantial value by adopting the mindset of a delayered ServCo.

Few telco leaders have sufficiently embraced the scale of transformation necessary to win in the current hypercompetitive environment. Part of the issue may be that the network margins of an integrated telco provide a cushion that obscures the urgency of transformation. However, as the rollout of fiber to home networks reduces fixed-line differentiation and the move to online purchase journeys eliminates entry barriers for digital native providers, margins will erode, and competition will intensify.

By adopting the mindset of a ServCo, B2C leaders of integrated telcos can accelerate transformation. An accurate reflection of a B2C business unit with lower margins (as well as lower capital expenditures) will promote a shift from the legacy practices that maximize short-term revenues (such as end-of-offer price hikes) to those generating longer-term customer value and satisfaction. At the same time, lower margins will make new revenue streams less margin dilutive-and therefore, more attractive. Finally, lower margins will mean that operators won't be able to swallow the high sales and marketing costs traditionally invested in acquiring new customers, who often receive deep discounts. This will spur them to focus on existing customers and reduce the negative market price dynamics that this practice has driven.

Without the shield provided by network margins, B2C telco leaders face a dramatically different economic reality (Exhibit 1). Suddenly, margins drop to 5 to 15 percent, from 30 to 40 percent, casting cost cuts and revenue growth as stark imperatives. It becomes essential to maximize value from existing customers, drive loyalty, and increase engagement. Because of this, operators that adopt a ServCo mindset may be well positioned to reignite growth, restructure their cost bases, and reimagine their capabilities.

The ServCo lens

To embark on the scale of transformation that a ServCo lens demands, B2C telcos will want to define a clear vision for how they will compete without the benefit of network differentiation. Then they can determine their approach to pursuing three key levers.

Each lever will require bold moves and fundamental shifts, but the rewards may be significant: there could be potential to quadruple valuations of telcos' B2C operations through margin improvements and multiple reratings. Depending on how many levers an operator chooses and how they execute these choices, it's possible to raise B2C margins (including a true accounting of network costs) to between 15 and 25 percent, up from 5 to 15 percent.

The three value-creating levers build on one another; although all telcos could benefit from engaging lever one, some will go on to engage level two, and others may pursue all three:

1. Lever one: driving value from core connectivity. A critical first step in a more expansive strategy is to optimize the existing connectivity business by driving growth in average revenue per user (ARPU) via customer value management and cost reductions. Telcos pursuing lever one without moving on to lever two will need to believe that the economics of selling connectivity alone can allow them to compete with players that also monetize customers across additional revenue streams. They will also need to believe in their ability to maintain a price premium over new digital entrants while achieving comparable cost efficiency.

2. Lever two: growing new revenue streams beyond connectivity. Building on the transformation of the core connectivity business, telcos can choose to grow new revenue streams by building new offerings in adjacent verticals, such as insurance and security. Alternatively, they can expand into new sectors by orchestrating an ecosystem of partners supported by a platform that allows customers to access a range of digital products and services-from home security to telehealthcare-seamlessly.

3. Lever three: scaling the ecosystem across markets. Telcos that are successful with levers one and two may consider scaling their B2C operations as platforms across geographies, wholesaling connectivity from local NetCos. Larger customer bases would allow these telcos to achieve further economies of scale, increase data monetization, and improve negotiation leverage with digital partners. Telcos embarking on this journey will need to believe three things: their platform can drive efficiencies while maintaining local relevance, the necessary local partnerships are within reach, and they can effectively compete with local operators.

The increased profitability of the core connectivity business (lever one) can also help fund investment in new revenue streams (lever two) as they are built. Meanwhile, repositioning telcos as digital platforms could drive a valuation multiple rerating. It could improve from the roughly four times enterprise multiple (the enterprise value divided by EBITDA) that the B2C operations of many integrated operators are valued at today to the roughly ten times multiple of many integrated operators with digital ecosystems.

Lever one: Driving value from core connectivity

To be successful, many telcos will likely need to drive ARPU growth from core connectivity while dramatically reducing costs. This is a precondition for levers two and three, and some telcos may determine that this approach is sufficient in and of itself.

Today's customers expect not only reliable connectivity and low costs but frictionless digital sales and service experiences and seamless interoperability between mobile and fixed-line services-across an increasing number of devices. While telecom operators have been pursuing digitization and cost transformation for years, the lower margins that come from adopting a ServCo lens can accelerate these changes.

An approach to personalized offers and pricing based on customer lifetime value (CLV) can raise ARPU by enabling continuous cross- and upselling and proactive churn management. Capturing the data to underpin such personalized offers and surfacing them to drive conversion requires regular engagement with customers who often have little reason to interact with their connectivity provider other than when experiencing problems. Lever one requires new approaches to revenue, costs, customer experience, and customer interactions (Exhibit 2).

As network differentiation dwindles, customer experience is becoming an increasingly important battleground. Simple tariffs (such as flat pricing), service models that automatically reimburse customers for network outages, gamified experiences, and loyalty programs can support longer-term customer relationships. These adaptations create the foundation for cross- selling connectivity offers and, should a telco choose to move on to lever two, for moving into adjacent services.

By accelerating the migration of transactional sales and customer care interactions to lower-cost digital channels, telcos can significantly reduce the scale and cost of large retail footprints. Simultaneously, they can invest in a smaller number of flagship stores to increase brand engagement. (In lever two, these can act as distribution channels for adjacent services.)

The MyTelkomsel app now gives customers tailored offers, real-time views of data usage, and easy payment options. It has close to 30 million monthly active users, a tenfold increase over the previous app. Veronika, Telkomsel's chatbot, handles 97 percent of customer inquiries made through the app, as well as driving incremental revenues from phone credits and data packages.

To appeal to digital natives, Telkomsel launched by.U, a fully digital brand. In record time, its cross-functional team created and refined a platform that allows users to select a prepaid SIM card that arrives at their doorstep, activate their numbers remotely, manage top-ups and quotas, and make payments. To ensure that innovation continues after launch, by.U adopted an agile organizational structure. The brand reached its one-year customer acquisition goal in nine months. Within 15 months, it had nearly two million subscribers and a market-leading customer satisfaction score.

Lever two: Growing new revenue streams beyond connectivity

As the penetration of fixed-mobile convergence rises and the shift toward unlimited tariffs continues, opportunities for cross- and upsell within connectivity are dwindling. By moving beyond connectivity into adjacencies, telecom operators can reignite cross- and upsell opportunities and reduce their dependency on acquisition.

Telcos can draw on several privileged assets to grow adjacent revenue streams (see sidebar, "Telcos' asset advantage"). These include rich insights on customers' location history and creditworthiness, unparalleled access to customers' homes, and the ability to authenticate customers.

With a careful eye toward market conditions, telcos might prioritize opportunities with growing revenue pools, unmet customer needs, clear customer pain points, limited competition, and a favorable regulatory outlook. They will also have to consider how best to expand their range of services and products, whether by building new propositions in-house or orchestrating a B2B2C ecosystem of partners.

Creating tailored adjacencies in-house

One approach to creating new revenue streams is to build new propositions in-house, potentially through acquisitions. Telcos that go this route need to possess two things. First, their existing assets, including customer relationships and data, need to provide them with a "right to win" in verticals beyond connectivity. Second, they need to have the capabilities for building compelling customer propositions that address untapped needs.

Norway's Telenor has unlocked growth by expanding into mobile phone insurance and security and privacy offerings. A prime example is its SAFE product, which provides protection against identity fraud and personal data theft. Since SAFE was released in 2020, it has attracted some 300,000 users who are willing to pay nearly $13 a month extra for the service. SAFE has met customers' desire for greater security protections and was directly integrated into the My Telenor app to facilitate the easiest access and payment. Telenor credits SAFE with reducing churn, increasing customer loyalty, and further driving top-line growth. Overall, adjacencies are responsible for two-thirds of Telenor Norway's ARPU increase between 2017 and 2020.

In Spain, Telefónica acquired 50 percent of the alarm business of leading home-security player Prosegur rather than trying to build a new proposition in-house, combining its own distribution channels and customer base with Prosegur's highly regarded product and brand. The resulting business, the country's first to offer 24/7 intervention services in response to a triggered alarm, was critical to Telefónica's success in growing its home-security customer base to 406,000 customers since launch, including roughly 60 percent year-on-year growth in the first half of 2022.

When it comes to building new businesses, surveys of telco chief experience officers highlight corporate culture as the primary obstacle (Exhibit 4). Cumbersome corporate processes, pressure for short-term results, and lack of buy-in from senior management can all stifle new initiatives. True cultural transformation is notoriously complex, and leaders may be reluctant to embark on this journey when viewing their businesses through a lens that includes network margins.

Building a B2B2C partner ecosystem

European telecom operators that have sought to grow new revenue streams have often done so by developing new offerings in-house. By contrast, some operators in other markets and players in other sectors have successfully developed ecosystems that aggregate services from a range of partners. For example, in entertainment, many telcos are moving toward a B2B2C model that aggregates and recommends content from over-the-top media services.

Telecom operators represent an attractive distribution channel for ecosystem partners. They have large customer bases that they can reach through owned channels, trusted brands, established digital and retail footprints, and the data to support a deep understanding of customers. Telcos can also provide incentive for ecosystem usage by upgrading or discounting connectivity and entertainment services, generating loyalty and engagement.

NTT DOCOMO has built a robust ecosystem offering digital content, healthcare expertise, financial services, and a B2C marketplace. The ecosystem was responsible for 23 percent of the operator's revenue in fiscal year 2021. The telco has relentlessly pursued innovation in customer experience while building its ecosystem; in 2021, it had the highest number of AI-related patent submissions in Japan. It has inspired cross-product engagement through its d POINT CLUB rewards program, in which customers earn points by purchasing products and services from ecosystem players.

Strategic investments and partnerships have been critical as NTT DOCOMO has ventured into new verticals. It has built out healthcare and telemedicine solutions through partnerships with Genova Diagnostics, Medley, and OMRON Healthcare. It partnered with ORIX to launch a ridesharing service and with THEO to offer an AI-driven investment advisory. It integrates video services from several partners, including DAZN, Disney+, and Hikari TV.

A successful ecosystem across adjacencies can generate a "flywheel effect" with self-reinforcing cycles. When telcos better understand their customers, they boost engagement, which in turn attracts more partners and raises revenue. Improved financial performance allows telcos to capture economies of scale, resulting in lower-cost services and more users.

Lever three: Scaling the ecosystem across markets

The European telco landscape is highly fragmented, with 87 customer-facing entities catering to more than one million subscribers each. In the United States, by contrast, there are only 16. Many pan-European telecom operators run largely independently across markets, with separate websites, apps, tech stacks, back-end platforms, and billing engines. While NetCos are likely to remain inherently local businesses because they own and operate physical assets that can't easily be scaled into new markets, telcos' B2C operations have the potential to scale across geographies by partnering with local NetCos to offer connectivity.

Telcos that scale their B2C operations across borders can leverage investments and capture insights across a wider customer base, as well as improve negotiating leverage with digital services seeking distribution. Under this model, telcos' B2C platforms would operate like Amazon, running the front- and back-end systems for customers in different countries while maintaining the ability to localize the offering in the front end.

This shift is likely to begin with the integration of pan-European telecom operators' existing country-specific divisions. Down the road, this could drive consolidation of European B2C telecom, subject to regulatory approval-taking advantage of low valuations for B2C operations and potentially leaving single-market operators subscale in the medium term. If the European market were served by a total of 16 B2C telecom platforms, the same number as in the United States, and operators were able to reduce their B2C IT-related operating expenses and capital expenditures by half, this would save more than $5 billion a year.

While this is uncharted territory for telecom, the energy industry offers a glimpse into the promise of scaling beyond borders. Octopus Energy, a renewable-energy retailer, has scaled internationally by licensing the Kraken technology platform that it built for UK B2C operations to partners in nine countries. The Kraken platform hosts the entire customer service operation, manages disaggregated energy sources, communicates with industry bodies, and uses tools such as machine learning to offer dynamic tariffs. Revenues from these licensing arrangements grew by 584 percent in 2021.

Companies that have made the switch have saved more than $100 million in 2021. In 2022 alone, Origin Energy is expected to save as much as $80 million. Octopus Energy is now using Kraken to expand its offerings, integrating utilities such as water and broadband.

Key enablers and next steps

Thinking like a ServCo can accelerate the changes key to winning in an increasingly competitive environment. But even telcos that embrace this mindset will struggle if certain elements aren't in place.

Thinking like a ServCo can accelerate the changes key to winning in an increasingly competitive environment. But even telcos that embrace this mindset will struggle if certain elements aren't in place.

Defining accountability and incentives

Regardless of which levers a telco exercises, it should carefully define the internal changes required to create end-to-end profit-and-loss accountability and establish incentives for improving B2C performance. This will include defining the internal transfer pricing for network access and determining which elements should be overseen by the B2C leader. In geographies with a competitive wholesale market, the internal transfer price can be informed by the market rate. Where such a market doesn't exist, the price can be set at a level that reflects the capital expenditure requirements (and cost of capital) for network investments, recognizing that the exact value may be less important than the visibility that the cost allocation provides.

Building the technology foundation

To help capture opportunities, B2C telcos can develop a technology architecture like that of e-commerce players. They can also strongly consider integrating third-party services via APIs, giving customers access to a range of services via single sign-on, maintaining a unified view of customer data, creating a single campaign orchestration engine, and centralizing billing and payments.

This approach may require decoupling customer and agent interfaces (such as websites and apps) from back-end platforms (such as billing engines and product catalogs) via APIs and replacing legacy components with off-the-shelf software-as-service tools (moving customization to front-end apps to reduce back-end complexity). This could enable true multichannel offerings, with elements such as a persistent basket, which saves items in customers' shopping carts. This can help increase conversion rates, lay the foundation for deep integration of third-party ecosystem offerings, and reduce IT run and maintenance costs.

The approach may also require decoupling network activation and management from customer management. This can allow B2C units to connect customers without operating the network and to support 5G use cases, such as network slicing, wholesaling the fixed-line network, and improving fault visibility across the fixed and mobile networks.

Reshaping the operating model and culture

Thinking like a ServCo requires a fundamental shift away from a traditional business model built around running a network toward a new model befitting a digital distribution business such as Amazon. This shift will require a combination of organic transformation, partnerships, and acquisitions as telcos rethink dimensions ranging from governance to data and analytics to financing.

As telcos' B2C units come to resemble digital sales and marketing organizations, they will need different capabilities, talent, and ways of working. Cross-functional, agile squads will help bring together commercial, marketing, digital, and data and analytics capabilities to transform connectivity and build revenue streams. This new structure will require different KPIs and performance incentives.

Telcos may need to form separate business units to incubate adjacent businesses and insulate them from short-term-profitability pressures. Partnership management will be a new priority as telcos seek out best-in-class partners, structure deals, and manage relationships. Telcos will also likely require new financial and reporting constructs to create transparency on the life cycle cost of new investments and to orient investment decisions around long-term plays.

Ultimately, telcos may be able to capture the most value by pursuing three levers: transforming core connectivity, creating a robust ecosystem, and developing a best-in-class platform that allows for scaling across borders. While this approach to international scaling is unexplored terrain, there are signs that it's also fertile terrain. Even for telcos not yet bold enough to experiment with this approach, it's time for a new way of thinking about the relationship among network, infrastructure, and customer-facing operations. When operators think like ServCos, the demands of the moment are thrown into sharp relief.

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Thinking like a 'ServCo': How telcos can drive B2C growth

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Even without legal or structural separation, telcos can accelerate the transformation of their B2C business units by adopting the mindset of a service company ("ServCo").

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Niccolò Machiavelli, one of history's great futurists, might have predicted the Internet of Things (IoT) when he wrote, "There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things." The IoT's early innovators, who have grappled with mixed overall demand, a lack of consistent standards, and other challenges, would agree that their road has been difficult. But, like other visionaries before them, they have persisted in establishing a new order because they see the promise ahead.

Both consumers and the media are fascinated by IoT innovations that have already hit the market. These "smart" devices have sensors that communicate seamlessly over the Internet with other devices or the cloud, generating data that make the world safer, more productive, and healthier. In just a few years, some IoT devices have become standard, including thermostats that automatically adjust the temperature and production-line sensors that inform workshop supervisors of machine condition. Now innovators want to enable more sophisticated IoT technologies for self-driving cars, drone-delivery services, and other advanced applications.

Although some analysts are excited about the IoT's potential, others have argued that it is overhyped. We take a more balanced view, based on our extensive research as well as our direct work with IoT application developers and their customers. Like the optimists, we believe that the IoT could have a significant, and possibly revolutionary, impact across society. But we also think that the lead time to achieve these benefits, as well as the widespread adoption of IoT applications, may take longer than anticipated. The uptake of IoT applications could be particularly slow in the industrial sector, since companies are often constrained by long capital cycles, organizational inertia, and a shortage of talented staff that can develop and deploy IoT solutions.

For semiconductor companies, which are looking for new sources of revenue, the rate of IoT adoption is an important concern. In this article, we will look at the case for optimism, as well as the reasons for more modest expectations. We will also examine new technologies that could accelerate the IoT's growth and product-development strategies that semiconductor companies could implement to increase the appeal of IoT offerings.

Reasons for optimism: Increased connectivity helps the IoT

If we look at the IoT's recent growth, the optimists have reason to be encouraged. Consumers are more connected than ever, owning an average of four IoT devices that communicate with the cloud. Globally, an estimated 127 new devices connect to the Internet every second. A report from the McKinsey Global Institute estimates that the IoT could have an annual economic impact of $3.9 trillion to $11.1 trillion by 2025 across many different settings, including factories, cities, retail environments, and the human body (Exhibit 1).

The IoT is also benefiting from infrastructure improvements that have enhanced connectivity. For example, only 20 percent of the global population is now covered by low-power, wide-area networks (LPWANs) that allow long-range communications among connected devices while optimizing both costs and power-consumption requirements. By 2022, however, we expect that 100 percent of the population will have LPWAN coverage. Similarly, technological advances are reducing power requirements, decreasing costs, and promoting the development of more integrated IoT solutions. Consider lidar sensors, the laser-based sensor packages that scan and detect surroundings, which are essential for autonomous driving. Their price has declined more than 10-fold over the past eight years and is expected to drop more than 65-fold over the next two. This decrease, combined with the increased technological sophistication of lidar, is contributing to the development of fully autonomous cars, which could constitute 25 percent of all vehicle purchases by 2035.

Reality check: Industrial IoT adoption has been slower than expected

Many experts view the IoT's slower-than-expected growth within the industrial sector with particular concern. To gain more perspective, we investigated how industrial companies are using IoT applications and tried to estimate whether business-to-business (B2B) growth might accelerate. In addition to basic research, we interviewed and surveyed over 100 leaders from various industries, including public sector and utilities, discrete manufacturing, oil and gas, mining, telecommunications, technology, media, healthcare, and pharmaceuticals.

Few large-scale IoT projects

Our interviews revealed that most businesses are adopting the IoT only to a limited extent. With the exception of oil and gas and mining, leaders from all industries reported that their companies often received real-time data from IoT sensors. However, most leaders reported that their enterprise deployments were still at proof-of-concept stage, and none have yet embarked on large-scale programs (Exhibit 2).

Limited use of IoT data

Although IoT sensors collect vast stores of data, a recent report from MGI showed that companies do not analyze most of them. For example, on an oil rig that had 30,000 sensors, managers examined only 1 percent of data. What's more, business leaders seldom consider information from IoT sensors when making important decisions, including those related to maintenance planning or automation procedures. Their reluctance to examine IoT data stems from several factors, including a lack of data-analytics staff, but the most important reason is simple: as humans, we prefer to consult other people for advice or to look back on our own experience, when making decisions. Although hard data from IoT devices are more complete and objective, we tend to assign them less value. Before IoT data gain a more prominent role in corporate decision making, business leaders and other important managers-maintenance supervisors, field service technicians, and retail merchandisers, to name just a few-will have to appreciate their value.

A focus on simple IoT applications

In our survey, respondents favored simple use cases that enable tracking data and sending status alerts related to changes in the physical world (Exhibit 3). Some companies, for instance, have placed sensors in food packaging that track a product's location throughout the distribution supply chain. Simple tracking and alert functions are relatively easy to deploy because they do not require advanced analytics, complex algorithms, or data-science capabilities, allowing them to generate value quickly. Although some innovators are enthusiastic about IoT applications for optimization and prediction, we expect that most customers will remain focused on simple use cases, at least for the immediate future. And that means they will not obtain full value from the IoT.

IoT security concerns

IoT devices, connected cars, and edge gateways are all potential entry points for a cyberattack -and we recently saw the full extent of this vulnerability. In the 2016 Mirai botnet attack, hackers specifically targeted IoT devices, including appliances and routers, and disrupted many major Internet service providers. The attack, the most significant of its kind, was possible only because of human weakness-a failure to reset generic or default password and username combinations. This attack, and others like it, demonstrate that IoT vulnerabilities often result from a lack of basic care in managing and maintaining devices. Such weaknesses cannot be eliminated through encryption, attack-detection programs, biometric-access control, or other sophisticated technologies. That means companies that want to expand their IoT efforts will need to launch comprehensive security initiatives that address weaknesses resulting from both technological vulnerabilities and a lack of caution among those who use IoT devices.

Technology developments: IoT growth could accelerate

A few important, and potentially disruptive, developments could accelerate IoT uptake and create opportunities for semiconductor players.

Microphones and video: The ultimate IoT sensors

Video analytics-the application of sophisticated algorithms to video feeds-is spurring the creation of new IoT applications and use cases. For instance, data analysts can now examine customer demographics by applying sophisticated algorithms to videos taken as shoppers browse through merchandise. Recent evidence also suggests that the IoT will benefit from audio captured on microphones.

The costs associated with video and audio feeds are falling, with sensors now embedded in devices at low cost-under $2 each. The data gathered from these feeds are extremely rich, diverse, and relevant to many widely used IoT applications. Lower data-communication rates, the growth of 5G data networks, and ongoing decreases in cloud-storage costs will continue to encourage developers to find new uses for video and audio.

For semiconductor companies, the increased importance of IoT video and audio feeds may create an opportunity to combine hardware with end-to-end approaches for analytics and control. They will have to move quickly to meet customer needs, however, since the technology related to advanced applications, such as those that use analytics to recognize faces, is evolving rapidly. Semiconductor customers may be particularly interested in products that integrate hardware and software more closely, as well as new architectures that optimize transmission, processing, and analytics on devices, in the network, and in the cloud.

Energy harvesting: Providing power to IoT devices

The advent of standards that support truly LPWANs, including LoRa, NarrowBand IOT, and Sigfox, will enable large-scale sensor deployment of IoT applications in many areas, including agriculture (analysis of soil conditions), safety (citywide monitoring of air quality), and productivity (real-time logistical tracking along the supply chain). But the growth of the IoT, combined with the increase in sensors and connectivity, will also make it more challenging to provide power to untethered devices and sending nodes. Even with long-life battery technology, many of these devices can only function for a few months without a recharge.

Energy harvesting, a process in which energy derived from external sources is captured and stored for use in wireless devices, might resolve power-related issues. Although solar energy could provide an answer for many IoT applications, semiconductor companies should also investigate other sources, such as wind, thermal energy (derived from heat), and kinetic energy (derived from an object's motion). Optimizing energy harvesting, management, and storage will require companies to create innovative designs, at both the silicon and system level.

Embedded intelligence and device analytics: Better power and storage

As the IoT expands, innovators are rapidly developing complementary architectures that combine the following two important features:

the power of the cloud, which offers robust storage and greatly extensible computing power at low cost

the ability to process and store data on a device (or edge), or within a network at gateways that connect multiple end-devices to the cloud

Multiple IT architectures with these properties have already reached the market, each offering a compelling approach. But semiconductor companies have an opportunity to go further-and to make more rapid progress-in defining the future architecture of the IoT. In particular, they should focus on products related to video and audio sensors, since these devices are proliferating and generating significant amounts of data.

Many IoT applications require data to be processed on the devices themselves. For instance, applications for autonomous driving, surveillance, and security all have strict latency specifications that require systems to respond immediately after data input. To meet these requirements, the IoT devices that collect the data must process them and use the output to make decisions. Applications that require on-device processing are power hungry and include relatively expensive components, such as multiple application processors. Semiconductor companies could take the lead in optimizing on-device solutions for these applications. For instance, they could create edge-device solutions for autonomous control, facial recognition, and audio analytics, all of which have different hardware and software requirements with respect to computing performance, signal processing, and storage.

What needs to happen: How semiconductor companies and other players can capture IoT opportunities

Before any company explores IoT opportunities, it should take a new look at strategy, including the factors that it considers when developing solutions.

Focusing on outcomes (not technology)

Both developers and business leaders often focus on the technological potential of the IoT, including its ability to collect and analyze vast stores of data. But technological advances alone will not make an IoT application more valuable or desirable to customers. Instead, developers should focus on outcomes-how a new application will improve safety, financial returns (for businesses), and convenience.

Consider, for example, the outcomes that one airplane manufacturer achieved by using IoT sensors to monitor jet-engine performance. By providing real-time data, the sensors immediately alert the manufacturer about potential problems, which makes it easy to conduct preventive maintenance and maximize uptime. Other sensors help with parts-inventory management. Together, these IoT enhancements have contributed to 9 percent revenue growth and a 30 percent increase in engine availability. That means airplanes spend more miles in the air and less time on the ground, consistently reducing overall operating costs.

To focus on outcomes, companies will have to coordinate activities across the value chain. In addition to providing the technology and data that enable the IoT, they will need to adapt their business models-a difficult process, in our experience, since incumbents often resist change. If they fail to evolve, a start-up or another disruptive player may take the lead in establishing a new approach to IoT application development, especially if new investors emerge to finance innovative ventures.

As companies shift their focus from technology to outcomes, they will need to provide incentives that encourage upstream vendors and customers to support the use of their applications.

Designing for people (not enterprises)

Just as IoT innovators tend to focus on technology, many IoT marketing materials try to appeal to customers by discussing the latest product upgrade, including better sensors, connectivity, computing power, and analytics. But our experience has consistently offered one clear insight: users, both personal and industrial, are more likely to adopt IoT technologies that generate a positive emotional reaction. Consider smart homes, where technology companies have recently won many customers by offering voice-based products-devices with basic conversational abilities that often respond to a name, just like a person. For instance, Amazon's Echo, a smart-home speaker, answers to the name Alexa and can respond to basic commands and questions. Such qualities may create an emotional connection between users and devices, and they could be partly responsible for the strong sales of voice-based products.

As technology companies develop new IoT offerings, they should ask digital designers to provide insights about customer behavior, since this information might help them create products that prompt strong positive feelings and accelerate adoption rates. As always, products will also need strong technical and analytical capabilities, but companies are more accustomed to delivering such features.

Current IoT trends create an uncertain and sometimes confusing picture of the sector's future prospects. When we look at the evidence in total, however, we believe that the IoT is poised to serve as a major growth driver for semiconductor companies. Adoption rates have risen more slowly than expected, but that should not be a reason for pessimism, since many IoT technologies are immature or undergoing development. Semiconductor companies and other players can still undertake new strategies to accelerate IoT growth. Rather than focusing on technology upgrades, they could develop IoT products that truly improve customer outcomes for cost, performance, and other important metrics. They could also emphasize design-driven insights about customer needs, including the product features that generate a positive emotional response. This new approach to development will be challenging, but it will accelerate IoT adoption and help more customers, both personal and industrial, achieve benefits from this exciting new technology.

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Adoption of the Internet of Things is proceeding more slowly than expected, but semiconductor companies can help accelerate growth through new technologies and business models.

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The promise of 5G has captured the attention of business leaders, policy makers, and the media. But how much of that promise is likely to be realized anytime soon?

With the first true high-band 5G networks already live, we set out to gain a realistic view of how and where connectivity could be deployed and what it can enable over the next 10 years. But 5G is not appearing in isolation. A new discussion paper, Connected World: An evolution in connectivity beyond the 5G evolution(PDF-10.3MB), takes a more expansive look that ranges from fiber and satellites to Wi-Fi and short-range technologies.

To illustrate what is possible, this research looks at how connectivity could be deployed in mobility, healthcare, manufacturing, and retail. The use cases we identified in these four commercial domains alone could boost global GDP by $1.2 trillion to $2 trillion by 2030. This implies that the value at stake will ultimately run trillions of dollars higher across the entire global economy.

Most of this value can be captured with advanced connectivity, using technologies that have been available for some time now. This raises a puzzling question: Why is so much potential still sitting on the table, and will new technologies alone be enough to realize it? This research looks at the issues holding back the market and what it will take to create momentum.

Beyond the implications for industry, connectivity also has ramifications for equity and society. Enabling more people to plug into global flows of information, communication, and services could add another $1.5 trillion to $2 trillion to GDP, over and beyond the economic value of the use cases identified in the four commercial domains highlighted in this research. Although gaps will remain, this trend could unlock greater human potential and prosperity in many developing nations.

Existing connectivity technologies are expanding their reach as networks are built out and adoption grows. At the same time, the next generations of these technologies are appearing, with upgraded standards (Exhibit 1). Both of these trends are expanding and improving what we refer to as "advanced connectivity." In addition, a new type of more revolutionary (and more capital-intensive) "frontier connectivity" is emerging, although it is likely to have a more limited geographic footprint in the decade ahead, barring the mass-market deployment of satellite coverage.

Advanced connectivity: Existing connectivity technologies continue to proliferate and evolve, from backbone networks to the last mile that meets the end user. In the network, for instance, providers are upgrading existing 4G infrastructure with low- to mid-frequency "non-standalone" 5G network overlay. The results of these upgrades will vary significantly depending on the spectrum used and density of supporting infrastructure such as cell towers. But in general, these low- to mid-frequency 5G networks can offer significant improvements in speed and latency while supporting a greater density of connected devices. Meanwhile, fiber optic networks continue to expand, and the introduction of the new DOCSIS 3.X standard promises to bring the performance of cable broadband closer to that of fiber-and to do so over existing infrastructure. In the last mile of access, the next generation of Wi-Fi (Wi-Fi 6) will improve speeds while supporting many more connected devices. Technologies that use radio signals for tagging, tracking, and contactless short-range communication between devices (such as Bluetooth, NFC, and RFID sensors) are becoming more sophisticated. Low-power wide-area networks (LPWANs, with competing standards such as LoRa, NB-IoT, and SigFox) provide connectivity over broader areas and longer ranges. All of these technologies continue to improve in terms of affordability, functionality, and adoption.

Frontier connectivity: Frontier technologies like high-band 5G and low-earth orbit satellite constellations represent a more radical departure. Designed to be the most ultra-fast mobile option, high-band 5G (often in the form of standalone 5G) promises to put the speed, latency, reliability, and security of fiber in the air, expanding what mobile devices can do. It offers a significant step change in overall network performance from low- to mid-band 5G. Low-earth orbit (LEO) satellites could also deliver a breakthrough-not necessarily in network performance but in breadth of coverage. By essentially beaming broadband down from space, they could bring coverage to remote parts of the world where the economics do not work for laying fiber or building networks of towers. However, providing coverage requires a constellation of many satellites orbiting at once, making viability uncertain. OneWeb and SpaceX are the only companies to launch test satellites (as of this writing), and no commercial services are yet available.

The advances described above are occurring alongside an expansion of hardware and software capabilities. Cloud computing will provide a processing backbone and storage capacity for use cases that require significant computational power. Edge computing will do the same while removing latency limitations. The new architecture of connectivity will also include private corporate networks. These connectivity and computing advances will enable cheaper and much more efficient "thin" devices connecting with the cloud and localized servers; they could become mainstream at the end of the decade for both consumers and businesses.

Connectivity will enable businesses to do more in the next decade as well. Enhanced broadband will make streaming, downloads, and data exchange lightning fast. Because they require less power, LPWANs can extend the battery life of the devices and sensors they connect, making it viable for the Internet of Things to scale up like never before. Ultra-low latency and strong security will create the confidence to run "mission-critical" applications that demand absolute reliability and responsiveness-even in vital infrastructure systems and in matters of life and death. LEO satellites could provide true global coverage.

We have identified hundreds of use cases in commercial domains that would run on both advanced and frontier connectivity.

Based on extensive research and expert interviews, we have identified hundreds of use cases in commercial domains that would run on both advanced and frontier networks. These are independent of the many consumer-driven entertainment and internet applications that are possible. To convey the sheer diversity of use cases, as well as some of the opportunities and implementation challenges, we profile four commercial domains with some of the largest potential to capture higher revenues or cost efficiencies. The use cases we describe in this research are meant to be illustrative rather than exhaustive, and others will likely emerge over time.

Connectivity will be the foundation for increasingly intelligent systems. While the automotive industry is at the heart, mobility is a broader concept that includes car-sharing services, public transit, infrastructure, hardware and software, and more-in short, all of the actors and enablers involved in moving people (and goods) from one point to another on the ground. Connectivity could open up new revenue streams through preventive maintenance, improved navigation and carpooling services, and personalized "infotainment" offerings. Vehicle-to-infrastructure and vehicle-to-vehicle communications can prevent collisions, enable various levels of vehicle autonomy, and improve traffic flow. We estimate the GDP impact in mobility to be $170 billion to $280 billion by 2030.

Connected devices and advanced networks could transform healthcare. Low-latency networks and high densities of connected devices and sensors make it possible to monitor patients at home in real time, which could be a major boon in the treatment of chronic diseases. Data can flow seamlessly throughout entire medical systems to smooth operations and coordinate care. AI-powered decision support tools can make faster and more accurate diagnoses, and many tasks can be automated so that caregivers can spend more time with patients. The ability to aggregate and analyze enormous data sets could yield new treatments. Together these use cases could free up additional investment capacity in healthcare and generate $250 billion to $420 billion in global GDP impact by 2030.

Manufacturing and other advanced industries can run highly precise operations using low-latency and private 5G networks. Smart factories powered by analytics, artificial intelligence, and advanced robotics can run at maximum efficiency, optimizing and adjusting processes in real time-not only on select assembly lines but across multiple plants. A growing number of factories will incorporate features such as automated guided vehicles and computer-vision-enhanced bin picking and quality control; these functions require the kind of speeds and ultra-low latency that high-band 5G networks provide. The GDP impact in manufacturing could reach $400 billion to $650 billion by the decade's end.

can use sensors, trackers, and computer vision to manage inventory, improve warehouse operations, and coordinate along the supply chain. Connectivity can support frictionless in-store experiences-for example, eliminating checkout and adding augmented reality for better product information. Real-time personalized recommendations and promotions can increase sales. Some innovative retailers have already begun experimenting with and implementing some of these use cases, and advances in technology and affordability should lead to broader adoption by the decade's end. These use cases in retail could boost GDP by $420 billion to $700 billion.

The use cases we identified in the four commercial domains described above could boost global GDP by an estimated $1.2 trillion to $2 trillion by 2030. This would be equivalent to 3.5 to 5.5 percent of the expected GDP in these domains. Over and above the value generated in the four domains described in this research, use cases running on advanced and frontier connectivity could generate trillions of dollars in value across the entire global economy.

In the four domains we studied, advanced connectivity can enable some 70 to 80 percent of the economic potential. A great deal can be achieved without investing in frontier connectivity. This is because even in the wealthiest economies, only a relatively limited set of leading companies are deploying the most ambitious use cases that can run even on today's networks, from sensor-enabled inventory management to logistics tracking. As connectivity improves and hardware and applications become more affordable and mainstream, there is much more room for adoption to spread across domains, driving bigger productivity gains.

By contrast, use cases that require frontier connectivity such as high-band 5G could eventually generate some 20 to 30 percent of the potential impact, based on the use cases we have sized. High-band 5G will create greater network efficiency, boosting speeds and lowering latency even as providers accommodate more consumer-driven traffic and more devices. Existing use cases can run on a bigger scale while becoming more sophisticated and reliable. It is possible that the value of use cases running on frontier connectivity could exceed our estimates, depending on whether some high-potential but still speculative use cases like augmented reality and self-driving vehicles reach mass adoption by decade's end. A stronger digital backbone can also support new applications we cannot predict today.

While connectivity is full of promise, progress has yet to take off. In a world where future economic growth depends on improving productivity, the hurdles slowing both connectivity investment and the widespread adoption of use cases urgently need to be addressed. While the barriers vary somewhat in each commercial domain that we analyzed, many of the issues can be categorized into five groups.

Value chain coordination: Multiple players across an ecosystem may have to cooperate in order to implement a given use case. Many have never collaborated before, but they will need to work together on issues such as agreeing on technical standards. In mobility, for instance, vehicle-to-infrastructure and vehicle-to-vehicle warning systems involve public infrastructure providers, rival automotive manufacturers, connectivity providers, technology players, and equipment manufacturers. All must align on technical standards in the hardware for the system to work-but standards are still evolving, even in the most developed markets.

Use case fragmentation: The value at stake from enhanced connectivity is substantial when viewed cumulatively across the entire economy, but it requires aggregating many small pockets of potential across hundreds of use cases and domain participants. Connectivity use cases are not always core priorities for participants, especially those who are not as far along in their digital transformation journey. All of this can contribute to companies taking a "wait-and-see" approach or stalling in never-ending "pilot purgatory." Retailers and manufacturers, for example, could both benefit from advanced computer vision, but the value it could produce may not be significant enough for companies in these sectors to create strong demand for someone to deliver these services right away. In such cases aggregators may be needed to create enough viable scale in demand.

In a world where future economic growth depends on improving productivity, the hurdles slowing both connectivity investment and the widespread adoption of use cases urgently need to be addressed.

Misaligned incentives: This is the familiar monetization question. The actor assuming the cost and risk of investment (and doing the heavy lifting of implementation) in a domain may not be the one who captures the ultimate financial gain. In healthcare, for instance, several connectivity-enabled use cases have the potential to increase efficiency and improve health outcomes. But while hospitals and health providers may be the ones to make such investments, train workers, and change their day-to-day operations, the financial benefits may accrue to health insurers. Similarly, consumer internet, media, and advertising companies have long profited from offering "over-the-top" services that run on networks built and maintained by connectivity providers, but the providers themselves have struggled to monetize this activity in a proportional way.

Data complexity: Many use cases require data sharing across firm and industry boundaries. But standards to ensure privacy, security, ownership, and interoperability are still evolving. Protecting data is paramount for both companies and consumers to guard against ever-evolving risks. In addition, machine-to-machine transmissions (for example, between a hospital's health informatics system and a patient's home health monitor, or between equipment in a remote production plant and an operations hub) requires interoperability between IoT systems.

Deployment constraints: Some of the issues holding back progress include physical barriers slowing network enhancement and use case adoption. Connectivity providers and domain users alike may have an extensive legacy asset base that will be expensive to upgrade. Regulatory uncertainty also needs to be resolved around broad issues as well as domain-specific questions in areas such as mobility and healthcare. For connectivity providers, practical constraints like spectrum availability, access rights to public infrastructure, and power density limits are persistent challenges that often have to be overcome at the local level. Even among commercial customers such as retailers, manufacturers, or wholesalers, adopting connectivity-enabled use cases can be delayed by long capital investment cycles. In the past decade, many firms have postponed asset upgrades due to weak growth and an uncertain investment outlook.

These are thorny issues that cannot be solved by technological advances alone. But they are also not insurmountable challenges. Fragmentation presents an opportunity for an actor-whether government, connectivity providers, tech giants, or industry coalitions-to play a coordinating role. Likewise, current business models may have to evolve to allow for more cross-sector partnerships, realignment of incentives, and risk sharing. In most countries, governments can play a coordinating role or set standards, but the private sector will shoulder most of the weight of forming smoothly functioning ecosystems.

Even if the market issues described above are resolved, connectivity will not be uniform across different regions. Deployment will be influenced by each market's revenue potential, its existing telecom infrastructure, its urban density, and local market dynamics including competition and regulation. Connectivity providers' own ability to undertake and monetize major capital investment is crucial. Another consideration is the evolution of demand and its distribution across users, applications, and geographies. As a result of all these factors, the business case for deploying advanced connectivity, and especially frontier connectivity, looks very different across markets.

The evolution of connectivity will vary across four country archetypes

We define four country archetypes based on differences in revenue dynamics, such as average revenue per user and level of data usage; cost dynamics, such as the quality and extent of existing telecom infrastructure as well as urban density; and market dynamics, including differences in regulation and competition. Based on these characteristics, we classify countries as being pioneers, leaders, followers, or trailing in connectivity today. We consider China and India as two unique cases in addition to these four archetypes.

The countries that are out in front today can continue to expect superior performance and new capabilities that may remain out of reach for years for those that trail in connectivity today. The countries that stay in the forefront of connectivity could have a first mover's advantage and position themselves to be the innovators.

These four sets of countries are progressing along the connectivity continuum at varying speeds and are likely to continue to do so:

"Pioneers," including the United States, Japan, and South Korea, have consistently led the pack in connectivity. They are already beginning to deploy high-band 5G networks in cities, taking advantage of mature fixed infrastructure and the relatively strong capital positions of their providers. In these markets, competitive dynamics are forcing providers to race ahead.

"Leaders," typified by markets such France, Germany, and the United Kingdom, are consistently close behind the pioneers. But operator investment may be constrained in these markets since price competition has reduced margins.

"Followers," such as Brazil, Poland, and Turkey, are starting with less adept infrastructure, and their providers will find it hard to support the large capital investment needed to build more sophisticated networks. They are expected to lag a few years behind in deployment, especially for frontier connectivity, which will likely be limited to major urban cores only.

"Trailing" markets, such as Pakistan, Bolivia, and many African nations, are unlikely to gain widespread advanced or frontier connectivity in the near term. Although LEO satellites may provide connectivity options in these markets (and in rural areas of follower markets), the cost of deployment and the affordability of user devices will be limiting factors.

In addition to the four archetypes above, China and India retain their unique status:

China has poured huge investment into its fixed and cellular networks for the past several years. It is building out this backbone at a faster rate than any other country, with the aim of offering 5G in all major cities and switching a quarter of mobile subscriptions to 5G by 2025.

is digitizing faster than any trailing market. Although it is rapidly modernizing mobile networks, they are likely to have performance limitations outside of a few major cities. The country's connectivity providers have come under pressure from price wars, and it will likely take price increases or government action to spur buildout.

Over the next decade, connectivity providers will continue to build and upgrade networks, but the rate of progress will vary across these archetypes, with pioneers and China consistently leading the pack.

Advanced connectivity-in particular, advanced connectivity that relies on mobile networks, in the form of low- to mid-band 5G coverage-could reach as much as 80 percent of the global population by decade's end. This would come at a cost of some $400 billion to $500 billion. Yet significant gaps will remain. While coverage rates might exceed 90 percent in most of the world, they will likely reach only around 60 percent on average in trailing countries.

Advanced connectivity that relies on fixed networks is a different story. Today, pioneer countries and China enjoy very high fiber coverage rates relative to the rest of the world, due in large part to various private- and public-sector investments. In the years ahead, connectivity providers may not have a strong business case to expand fiber coverage further in many markets without subsidies from governments or other third parties. Without additional investment, fiber coverage is not likely to grow substantially in many parts of the world, although it could more than double in follower markets as they pursue catch-up growth. Overall, we estimate that fiber coverage rates could reach 90 percent or higher in pioneer markets and China, 65 to 70 percent in leader and follower countries, and 5 to 10 percent in trailing markets and India by 2030.

Advanced connectivity-in particular, advanced connectivity that relies on mobile networks, in the form of low- to mid-band 5G coverage-could reach as much as 80 percent of the global population by decade's end.

Frontier connectivity (that is, high-band 5G) drives the required investment much higher, creating a tougher business case to do so on a comprehensive scale. Yet in certain dense urban areas with very high per capita data consumption, providers may find that the network efficiency benefits alone justify deployment. Covering roughly a quarter of the world's population by the decade's end would require some $700 billion to $900 billion. While China and pioneer markets are projected to cover up to 55 percent of their populations, the corresponding share is projected to reach 35 percent in leader markets, 30 percent in follower countries, and 10 to 15 percent in trailing markets and India.

Despite the fact that huge populations stand to gain coverage for the first time, the digital divide that separates urban and rural populations and trailing countries from the rest of the world appears likely to persist in the decade ahead. If LEO satellites are successfully deployed, they have the potential to change the game and almost erase the gap. Yet they remain a wild card-and other barriers such as readiness and the affordability of devices and data plans would need to be addressed in addition to coverage.

Where will the value associated with these use cases flow?

For use cases running on frontier connectivity, the dispersion of value is more striking. We estimate that 70 to 75 percent would go to China and pioneer markets, 15 to 20 percent to leaders, 5 to 10 percent to followers, and only 2 to 5 percent to India and trailing countries. China stands to capture an outsized share that could be 40 to 50 percent higher than its share of global GDP, while the share going to pioneer markets could be 20-30 percent higher. The story is not as positive for the rest of the world. Leaders might capture a share that is 20 to 30 percent lower than what the expected size of their economies would indicate. Followers might punch 30 to 40 percent below their weight, while trailing countries and India could capture a share of the anticipated value that is 70 to 80 percent below their share of global GDP.

Unlike the value produced within commercial domains, approximately half of the $1.5 trillion to $2 trillion associated with bringing a larger share of the population could be concentrated in India, trailing countries, and follower countries. This is because the affordability and network availability gaps that can be closed over the next decade are most prevalent in these types of countries. An additional one-third would stem from China.

Providing connectivity is a tough business that could get tougher

The question of how to monetize usage has dogged connectivity providers (notably telecom operators) in previous technology cycles, and now the same issue threatens to carry over into the next. It will not be resolved solely through investing in new networks. Those networks will create major opportunities, but it will take new strategies to capture them.

The road for many connectivity providers has been rocky in recent years, and it does not look much smoother in the decade ahead. Build-outs and upgrades will demand major investment at a time when mature markets are saturated, and competition is leading to price wars. Many providers will struggle to find the required capital and make investments pay off with conventional revenue models. In some countries, competitive pressures or regulation are forcing connectivity providers to plunge ahead with build-outs and upgrades even before the economics have become clear.

Connectivity providers that have already invested heavily in laying digital infrastructure foundations will likely be able to maintain stable ratios of capital investment to earnings even as they continue with their rollouts. But the pressure will be acute for those that have not yet invested heavily and now find themselves facing a game of catch-up with new technologies. Those outside of pioneer markets and China will collectively need to find significant additional annual revenue growth to deliver adequate returns to their shareholders while continuing to cover the costs of advanced connectivity upgrades-let alone frontier networks.

Advanced and frontier connectivity will give companies in every domain a powerful new platform for innovation. The full range of new use cases that can be developed on top of this digital backbone will become apparent in the decade ahead, including some that we cannot imagine today. Turning all of this potential into reality depends on whether connectivity providers, end users in multiple domains, and public officials can forge new models and clear away some of the barriers. The world could soon be more connected-setting the stage for both innovation and disruption along the way.

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Connected world: An evolution in connectivity beyond the 5G revolution

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The promise of 5G has captured the attention of business leaders, policy makers, and the media. But how much of that promise is likely to be realized anytime soon?

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Digital trust not only meets consumer expectations, but also connects to business growth.

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The next telco battleground: Network experience and competitiveness

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Declining ROIC, evolving customer expectations, and growing competition from hyperscalers will push operators to rethink the importance of the network.

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McKinsey & Company Partner Onur Mumcu had a talk with McKinsey & Company Senior Partner Kevin Neher to understand why survey results do not properly account for the real customer experience and what companies should do to solve this problem. This podcast was recorded at the Harvard Business Review's live webinar. The following transcript was edited for clarity.
Podcast Transcript
Onur Mumcu: We have a McKinsey Senior Partner, Kevin, here with us. Welcome, Kevin. So, Kevin and I have known each other for, almost 15 years now. When I was working for our Chicago office in the US and since then, he started to work for our Denver office in the US and now he is the global co-leader of McKinsey's customer experience efforts. And in this session, we would like to talk about the future of customer experience with Kevin. Today, customers are becoming more sophisticated and customer experience has become very important for businesses all around the world. Our future of customer experience research reveals that improving the customer experience increases sales revenues by two to seven percent and profitability by one to two percent. And in addition to this, the overall shareholder returns increase by seven to 10 percent with better customer experience. And we also saw that during COVID, seventy five percent of consumers changed their buying habits, and 40 percent switched brands retailers. The future of growth will be experience-led and customer-centred. And unfortunately, many organizations fail to see that, and despite their efforts, many still struggle to understand what really drives the customer experience. Today, Kevin, we would like to get some insights from you, and my first question is, what's going wrong in terms of customer experience according to your observations? In the report, you talk about the survey results do not properly account for the real customer experience and the companies are trying different methods. Can you elaborate a little bit on that one?

Kevin Neher: Absolutely. Thank you, Onur. Thank you HBR for having us. It's a great pleasure to talk to everyone today. To your question on our survey-based systems, we think of customer experience, a lot of the work that customer experience groups do today is around getting feedback from customers. And this happens across sectors, right? Whether it's patient experience, customer experience, client experience, consumer experience, everyone is looking to get feedback, and this has been a long-standing method for over 20 years. People have been sending out emails or recently through texts or apps or other avenues, but it's virtually stayed the same.

Onur Mumcu: When you get calls from the customer, the call centres.

Kevin Neher: Yes, you get outbound calls and all kinds of things that will hassle you. But this has really stayed the same, right? This hasn't evolved really in 20 years, except for some minor details on the software. And what we're seeing is that it doesn't reach everyone. Segments are not answering in the same way. People are overloaded with these emails and calls and reach outs of all sorts. In addition, it's got a big lag in it. In the world that's speeding up. The speed of everything is getting faster, digital and communication, and we just move so much quicker. Yet we're still have this huge lag. And when people receive surveys, fill out surveys and companies and organizations analyse those surveys. And so, you have this lag in it as well. Third, you also don't get the root causes out of what people tell you. You get symptoms. People say the line was long, but they don't. You don't know why the line was long. You have to go do work to then figure that out. And then finally, there's one pitfall in all my customer experience work that I see companies make is they don't link customer experience to value, and surveys do not help with this problem. They make it very hard to actually understand what my return is for investing and fixing some of these things. It just doesn't come from survey work. And so, we've kind of taken on those four challenges to say, hey, how can we do this better? How can we actually get more out of customer experience? And maybe surveys aren't the answer anymore.

Onur Mumcu: What is the answer, Kevin? What do some of the companies do? You know, what are other methods, other than the surveys to measure customer experience?

Kevin Neher: Absolutely. There is an explosion of data out there. That's no surprise to anyone and you see other functions taking that on, right? You see, maintenance organizations using data to get predictive on what is going to fail and getting ahead of it, right? You see revenue and pricing organizations using all sorts of data to try to understand how to adjust and where to price better and get a better return. Customer experience just hasn't moved in this direction, and that's what's been missing. We have all kinds of data out there, yet we're still acting like it's 20 years ago and we need to send emails to people. So, take advantage of all the data and we think about data. Think about it in three big buckets. Think about it in customer data, things like demographic data, all kinds of things describing the customer who they are, what they do and where they're headed. Think about operational data? So, all the things that are out there in the experience, right? I don't need to have you fill out a survey to tell me that the airline lost your bags, right? I know whose bags they lost every day if I'm an airline, and I should be doing something about it before I actually get surveyed. That's a problem. And then financial data, which links back to that link to value understanding. The history of a customer and what their potential is very important than linking it back to the investment case for how we're going to go fix the experience. It's about data and then using it to put machine learning, put more predictive algorithms on top of that so that I can address the entire customer base, not just the ones who fill out a survey.

Onur Mumcu: So, Kevin, on that one, I can clearly see the demographics data and also the operational data. But there are certain experiences where you cannot measure with operational data, right? Let's take your airline example. Like I fly with, let's say, Turkish Airlines, Pegasus, or Lufthansa, and I had an issue with a flight attendant or, I didn't like the food on the plane, right? And you probably do not measure it. Similar to your losing the back example, right? What do you do in these cases? How do you measure the customer experience in those cases?

Kevin Neher: So, a couple of thoughts. First off, we're not saying get rid of surveys all together, getting some feedback as part of that customer data set. It's just don't make it the top of the pyramid. Make it an input into the system, right? Because it is valuable for what it is, and it does help you make the connection. So, you do get good feedback. People do still give you feedback, but just don't make it the top of the pyramid. That's kind of point number one. Point number two is you might need to add some data sources, some listening posts, some different ways together. So, in your example, having a way for flight attendants to quickly rate the meal based on what customers say or the amount of food that's not eaten gives important feedback into the system and the product group or whoever is designing that meal and that piece, right? And that's about now adding data to the thing. And then maybe third, we've talked a lot about the quantitative set of customer experience, and that is how you get into prediction. But designing great experiences is still about human centred design. And that's a whole another big part of customer experience that has really evolved in the last 10 years. Where you really are not doing customer experience if you're not bringing human-centred design into your processes. And so that is how you then take action on what you've learned, maybe in some of the quantitative data on what to go fix. And that's an important basis for how it all comes together.

Onur Mumcu: Very cool. We are not very open about our clients and the type of work we do. But without breaching that confidentiality, can you share some of the good examples, good companies and some of the cool stuff that they've been doing on this one? So, we can also get a bit understanding of this.

Kevin Neher: Well, you're right, we don't usually talk about individual companies, but I think it's important to look out there at some of the sectors that have really had a rise in the last few years and what they're doing about it, right? So first off, if you think about who the winners of the last two years have been, it is a lot of companies that were ahead of the digital curve. Companies that really brought an integrated experience and you see this, whether it's streaming services, right? I'm sure you have examples in Turkey as well. But whether it's Netflix or others, right, who really invested in that experience and have built the content and been able to use data to figure out which ones, how to invest, where to invest and continue to improve that. You also see it in even banking, right? Banking used to be a very stodgy old industry, especially in the U.S. not sure around in Turkey, but the integration and the move to digital and really rethinking experiences. So, the account opening experience, right? That used to be something that took many forms and all kinds of visits to a retail branch. But now you can do it in seconds, literally.

And things like that, where they appreciate what was required was, yes, you want security and trust, but you also want speed. And that has changed. And I think it's important to realize that what we're seeing is that it's B2B companies. It's companies that serve farmers, companies that serve businesses, companies that serve all these other industries are now the ones trying to catch up because customer experience is part perception. Meaning that when my expectations change, then I change how I view everybody. So, if Amazon is going to deliver me a package in 24 hours or 48 hours, and now I'm at a railroad and I have customers who I'm shipping cars of sugar for their candy factory. Guess what? Those same people on the other end are buying Amazon as well, and now they're wondering why their train cars can't get there in 48 hours, or at least why they can't know where they are on the system. And changing expectations that really have set customer experience onto a faster speed and why it's really mattering so much more in how people make choices.

Onur Mumcu: So, let's say I am a chief customer experience or chief consumer officer or even a CEO, right? And I hear this and I get very interested. Where do I start? I mean, do I start with collecting a bunch of data and asking for my teams, and tell "OK, now please use this". Or should I think about what kind of use cases or what kind of questions I need to ask and then start getting the data? Because we also hear from our clients that collecting data is a problem and processing data is another problem. Finding the right people to do all this work is another problem. So, what would you do if you were an executive on this one? And how can you measure the value or the return on investment on this one?

Kevin Neher: Yes, for sure. Let's set it up. It's a three-step approach to getting to value in customer experience. So, you've got to set an aspiration. Then you have to invest in the new experiences and then you have to have capabilities to go after it. But let's talk about that first one for a second, because that's your question is really about where do we start? Well, in talking about the senior executives, it does have to start with them. Customer experience is fundamentally a cross-functional problem. And what I mean by that is most great companies, have done well over time. These great companies have done so by getting functionally excellent. And customer experience actually cuts across those. Customers don't care who's in finance department or who's in marketing or who's in operations, right? They see their journeys. They need to accomplish stuff. They need to set up that account. They need to get an issue resolved. They need to make a payment. And those don't often align with internal structures. And a company first say, we really want to tackle this. We have to have cross-functional alignment and it does often role all the way up to the CEO because that's the person who can really help push it and drive it and get alignment. So, you do have to have that alignment. Then the second piece is you do need to know your starting point, right? One of the first places that we start with is understanding this current satisfaction and the current importance of the different experiences.

So, just to double click on that for a brief second. What that means I need to know how I'm doing on different journeys. So, taking a journey-based view, but I also need to know what matters to the customer more. What we find is that often it's only two or three journeys out of eight or nine that really drive 70 percent of the experience. So, invest in those first, because getting to your point, we know the ROI is going to follow. Then third, coming back to one of the points from earlier, you have to get after the link to value. You have to start with an aspiration. I don't know the Turkish business landscape well. But in the U.S. and a lot of the multinational corporations' CFOs are stronger than ever. Finance organizations want a business case. They want to see that solidly in numbers. And if you don't have those six months down the road, your program, your initiative is likely on the chopping block if you can't show tangible value. So, we have to start in that first piece around setting. The aspiration has to include a real link to values that you can show with a fact base. What is the potential ROI from customer experience? And be ready to hang your hat on that because that business case then helps to build the longevity of the program.

Onur Mumcu: Thank you. When the companies are starting these programs what are the typical challenges that they face? Is it more on the technology side, on the talent side or on setting the aspiration side? Where do you think the real challenge lies for the organizations?

Kevin Neher: Yeah, let's assume you get the alignment which we just talked about. Because that is a big one to get going. The two that often hold back people from kind of launching from really getting going around data and people and skill sets. So, let's talk about that for a second. First one is data. Just like I talked about, great organizations are functionally excellent, so is their data. That means, you have a lot of data silos out there. You have a lot of data that have grown up and even been protected by different parts of the organization. And you do have to think about how you engineer some setup, some data lakes, data architecture to bring some of that together around those that customer data, operational data and financial data. But we're not talking about is a big data project, though this is not about a big data mart, a big data warehouse. This is about a flexible data layer that allows you to pull and do that. Often, it's tokenized. We do a lot of work with GDPR and other sort of data privacy pieces to make sure that it's all able to be used, but that's important. It's being able to go after the data and bring it together and having permission. So that's a big thing because again, data is just as separated as sometimes people are or more so. That's one big challenge to take on early and understand that it's a lot easier to say what you want to do with the data than it is to go get it.

And then the second one is on people and skill sets. I mentioned human-centred design earlier, right? We find that companies need to build their design capabilities. They need to have designers part of each journey redesign. They need to have that skill set data science. They need to be able to have people who can help see through the data and have the data work for them rather than having too many people off doing different types of analysis. You need one source of truth in data science can help kind of build that capability, and then you need some strong athletes. This might sound funny coming from someone who leads customer experience globally and works a lot of organizations, but I don't believe necessarily in see experts in an organization. I think it's such an important problem. You want your highest potential people; you want your people who you want to see build different capabilities to work in customer experience as almost to rotation. Give them a project, give them a journey ownership, something that does cut cross functionally because that's only going to serve them better as they take on more in different roles. But you need some strong athletes that know how to work across functional lines that don't necessarily just see themselves as an expert. So those two things are usually the biggest challenges both the data and then also those resources of people and skill sets to bring into it.

Onur Mumcu: So, if I am the CEO of an organization in any industry and if I want to start what would be your advice to me? What should I do first thing in the morning?

Kevin Neher: Yes. This is a strategic choice. Are you going to win with the customer? That is where the commitment starts. Is this going to be part of your differentiation, is this going to be part of how you win in the future? As industries change, as trends change, as all sorts of different things around us go on and on, are you going to set your organization up for success by differentiating with a better experience? Customers for sure, you need to be thinking about your employee experience, too, by the way. We're not going to go into deep on that right now, but the experience I quite like, are you going to differentiate on that? You have to make that commitment as a CEO because it is going to be one of the top two or maybe three things that you do this year and you're going to make a commitment to that. And this is not a quick win type of move, this is a strategic choice.

Onur Mumcu: Thank you, Kevin. I mean, this was very insightful, and I'm sure a lot of our listeners today already started thinking about the customer experience and how they can implement it in their organizations going forward as well. Always a pleasure having you.

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Prediction: The future of Customer Experience | Türkiye

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Many organizations fail to see how improving the customer experience can create value. And despite their efforts, many struggle to understand what really drives the customer experience. McKinsey research reveals that improving the customer experience has increased sales revenues by 2 to 7 percent and profitability by 1 to 2 percent.

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Each generation of business leaders tends to believe that the challenges they face are more profound than those endured by previous generations. For the current generation of telecom leaders, this is stark reality, not merely perception.

Over the past decade, telcos have been under continuous pressure as their traditional value pools have gradually eroded and new growth horizons have proven elusive, driving return on investment capital (ROIC) ever closer to weighted average cost of capital (WACC). While telcos rose to the challenge of 2020-connecting people to work, school, family, and healthcare-the pandemic accelerated and amplified trends that were already redefining the basis for success.

Our prior research has demonstrated that organizations that move early to restructure and change during times of crisis come out ahead in the subsequent decade. Therefore, we believe that 2021 will be a critical year for operators: a unique opportunity to fundamentally reimagine their business or, alternatively, risk another decade of decline.

The next generation of telcos will be defined by leaders who act now, risking short-term incumbency advantages to seize untapped growth. The current moment demands a holistic, future-back approach to transformation, in which leaders deliver on four or five bold, integrated changes to reset their organization's DNA.

Decision time for telcos

By the time the pandemic hit, the telecom industry had been managing over a decade of disruptions, driving deteriorating economics (Exhibit 1). There has been customer-back disruption, in which digital-native companies like Uber and Netflix have set a new standard for seamless online experiences, forcing incumbents to redefine their interaction models. There has been business-model disruption, with technologies like AI, big data, and the Internet of Things redefining service-delivery and value-capture models. There has been new-entrant disruption, with increased competition among traditional players as well as nontraditional players, which have shifted value toward technology-focused parts of the value chain (for example, software-defined networking in a wide area network [SD-WAN], software as a service [SaaS], and over the top [OTT]).

Most operators responded to these daunting challenges with a mix of efficiency measures, digitization efforts, structural changes (such as network sharing), and productivity improvements. In parallel, many expanded into new industries, such as TV and information and communications technology (ICT), to increase revenue streams. As demonstrated by pre-COVID-19 performance, though, that formula has been running out of steam.

The pandemic amplified the urgency of profound, accelerated reinvention. It provided a blueprint for a faster, leaner new operating model, made possible by rapidly shifting behaviors. And it put telcos front and center, as almost every aspect of human interaction moved online amid lockdowns and physical-distancing measures.

Faced with an unprecedented crisis, operators innovated quickly, adopting rapid decision-making and response processes across the board-from assurance to credit decision making to pricing-with an absolute focus on customer support. Throughout the pandemic, they were remarkably responsive to customers' rapidly changing habits and surging connectivity needs. Operators kept people connected to vital public-health and safety information, supported enterprises and their employees in work-from-home arrangements, and helped to maintain the (virtual) fabric of families and communities worldwide. In many cases, they took it upon themselves to make remote learning and online business possible in underserved communities. And for an entire ecosystem of suppliers, distributors, and partners, they acted as an anchor.

At the same time, the industry was experiencing seismic, irrevocable shifts. Customer behaviors leap-frogged five to ten years ahead. The importance of digital-enabled sales interactions doubled, with consumers moving online and increasingly embracing self-service customer care. One Asia-Pacific (APAC) operator, for example, was able to transition its entire B2B customer base to its digital portal in less than six months, rather than the original three-year plan.

Bandwidth-heavy activities like remote learning, gaming, and videoconferencing grew dramatically, a change that is expected to be permanent. More than half of companies expect to see increasing migration of assets to the cloud, creating demand across both operator and adjacent value pools. And consumers are paying more attention to how companies do business, with issues like sustainability or values increasingly factoring into their buying decisions.

On the flip side, while tech companies (including digital natives like Tencent and Amazon and large, tech-centric businesses like Samsung, Sony, and Qualcomm) increased their investments by more than 30 percent in 2020, supporting long-term changes and new growth vectors, operators reduced their capital-expenditure investments by around 2 percent, on average. This response made sense while navigating 2020's challenges, including supply-chain shortages and call-center closures. Nonetheless, 2021 demands a wholly different approach: a doubling down to emerge stronger.

Companies that emerged from the 2008 global financial crisis in sound shape succeeded by leading with a through-cycle mindset, pulling back in some areas but ramping up in others while protecting innovation and sales capabilities. They were able to grow during the downturn and early recovery stages because they made big moves-including three times more cost reduction, five percentage points more deleveraging, and 20 percent more acquisitions-and they made them early (Exhibit 2). Significantly, their outperformance persisted for ten years.

In 2021, telcos find themselves at a crossroads: they can either tinker around the edges to achieve incremental gains or make a bold choice to reinvent their value-creation formula and bravely, firmly commit to that choice-seizing the opportunity to create a permanent new role for themselves in a world reshaped by a pandemic that put them at the center.

Reimagining and reverse engineering the telco future

To design a new, value-creating role for themselves in a post-COVID-19 world, operators must first define a detailed vision of what the reimagined telco will look like. From there, leaders have to take a future-back approach, reverse engineering their vision by making three to four bold moves that fundamentally change the DNA of their organization. These carefully orchestrated moves, undertaken simultaneously, build on one another-shifting performance, yielding new service models rooted in new capabilities and success factors, and delivering growth as well as cost and capital efficiencies.

Given the extraordinary pressures the industry is facing, we recommend an almost "greenfield" approach, with minimal regard for the starting point. Often, this will require a new mindset on the part of the leadership, which may be more accustomed to resetting the business "today forward" rather than fully reimagining it future back. This involves painting a clear, vivid picture of how you will reimagine across five critical axes:

1. Your core business, including value pool and service model. As hybrid networks, edge computing, and full cloud migration change the definition of enterprise-grade connectivity, operators will need to change how they monetize their assets. They'll need to move away from selling network services and toward selling outcomes, as measured by cloud performance, security, and resilience.

2. Your approach to customer engagement. As digital natives set a new benchmark for customer experience across industries, operators can capitalize on recent behavioral shifts to rethink their approach to serving, satisfying, and delighting customers.

3. Your network, IT, and data. Telcos' success will hinge on their ability to leverage data and deploy advanced analytics, AI, and automation at scale to drive new sources of growth and change the broader economics of the business.

4. Your approach to talent. Unlike tech companies, most telcos are relatively hierarchical. During the pandemic, however, they began cutting through established decision-making frameworks to enable change to happen much more quickly and pervasively. Shifts like these will be critical to future success.

5. Your relationships with stakeholders and society. Operators have played a crucial role in society throughout the pandemic, not only connecting people to work and family, but also helping create features like contagion heat maps and virtual clinics. Going forward, there's an opportunity to cement this critical societal role by engaging stakeholders and advancing public health, education, and connectivity across communities.

The following three archetypes are examples of potential end states to design around. Each archetype demands different responses in the areas outlined above. While this list is not exhaustive, these archetypes illustrate some of the possible pathways toward sustained competitive advantage for operators.

Operational and infrastructure-led excellence. This archetype is defined as a classic, integrated provider of telecom services that captures the value of data and, in parallel, optimizes network total cost of ownership (TCO) and physical footprint to provide high-quality, reliable connectivity services. This archetype can be successful with either a commodity-driven approach, prioritizing efficiency and low costs, or a true network-leadership approach, which will likely require sizeable investments in 5G, broadband, and other capabilities to achieve structural advantages. Iliad, now the sixth-largest mobile provider in Europe, has embraced the commodity-driven approach to this archetype. In France, for example, Iliad disrupted the market by offering customers significantly lower rates and only three simple products. (For an example of the network-leadership approach, see sidebar, "Example: How an APAC telco reinvented itself.")

Service-centric operator. This archetype is defined as an agile, digital-first provider of telecom services (and more) that meets the expectations of digital natives through fully digital experiences, including customer care. Incumbent operators pursuing this archetype must make fundamental business, service-delivery, and operating-model changes that can be difficult to deliver. To succeed, they might emphasize premium, customized product leadership; create an unparalleled customer experience; or target a focused segment of the market in a unique way. After undergoing a full review of its user interface, a European operator invested in a "digital factory" to fully reset its journey, then adapted its offering around a set of household and family experiences. Similarly, a North American company differentiated itself through premium content and strength in the connected home ecosystem.

Ecosystem provider and adjacencies. This is a digital-first ecosystem player that's integral to customers' daily interactions by providing access to a portfolio of diverse digital products and services. This option requires an agile operating model and extensive partnerships in industries such as financial services, professional services, and energy. The ecosystem archetype may appeal to traditional operators eager to lean into self-disruption because of the great revenue pressures they face. But the broad, international competitor set that exists in many markets is a meaningful obstacle. In one example, a global operator doubled down on managed services, particularly around hybrid cloud and security. It launched a series of acquisitions (up to 50 percent of its size), transformed its go-to-market strategy, and reset its approach to software and delivery, prioritizing standardization and zero-touch delivery.

Each of these archetypes, and the many other permutations that exist, has the potential to deliver market-beating returns on investment. The decision to pursue one over the other will depend on your starting point, market specificities, and appetite for change. In all cases, leaders will need to discard the industry's familiar transformation formula of sequential projects and incremental changes in favor of an ambitious future-back approach. This will depend on pulling a subset of instrumental levers to fundamentally and irrevocably upend their organization's entire makeup.

Nine key levers for holistic transformation

The decision to pursue one archetype over the other will depend on your starting point, market specificities, and appetite for change.

While most CEOs might be looking at the right areas-simplification, digital, agile, managed services-few are moving as quickly or deeply as the current environment requires.

We believe there are nine structural levers (Exhibit 3) with the potential to radically transform both business and operating models, catapulting telcos into their chosen future. Each represents a turning on its head of all that is familiar. In general, we advise that companies pull at least four to five of these levers simultaneously, beginning now and continuing over the following two to three years.

Levers fall into three main categories outlined below.

Customer engagement

To create and scale digital-native customer experience, or CX (as Sprint, for example, has done), operators would move away from digitizing existing interactions. Instead, they would focus on designing entirely new interactions by focusing on a digital-back approach to create distinctive digital experiences robust enough to be customers' first port of call. By pulling this lever, a Southeast Asian operator boosted its Net Promoter Score (NPS) by 40 points, increased unsupported interactions by more than 70 percent, and reduced cost to activate and cost to serve by 30 to 50 percent.

To adopt a zero-touch service model, operators would move aggressively toward simplified product- and service-agreement portfolios, supported by fully automated, AI-enabled, cloud-based processes (Exhibit 4). This digital-first strategy departs from the familiar approach of incrementally making manual work more efficient through piecemeal offshoring and outsourcing. Operators such as BT and MASMOVIL have embraced a radical, future-back redesign of their service operations, enabling them and others to drive down costs (up to 35 percent in one case) while improving cycle times, improving accuracy, reducing call volume (up to 50 percent in another case), and increasing NPS by 20 points.

Other options for reimagining customer engagement are to build new businesses at scale or go to market with a radically simplified product offer. Today, operators generate an average of 10 to 15 percent of their revenues outside of core connectivity. There are a few exceptions, notably in the United States and Japan, following large M&As; generally, though, these ventures remain subscale and at challenging profitability levels. Going forward, operators will need to couple big bets with a clear reallocation of resources and management bandwidth while reinventing themselves across all parts of the business (for example, sales moving toward solution selling, operating model transitioning to a more digital-native agile model, emphasis on new capabilities with data and software developers at a premium). The focus will likely move more toward B2B, with edge computing, managed services, and broader ecosystem plays. By doubling down (both in terms of investment and operational change) on three such new businesses, a Southern European operator grew revenues by more than 20 percent.

Network and IT

Transforming a legacy stack cobbled together over decades of business evolution and M&A is extremely costly and slow, so many operators are choosing to decouple and deploy a greenfield IT stack that is fully cloud native and leverages open-source technologies. With evolutions in open source and cloud, a reimagined stack is affordable, easy to maintain, and can accommodate quick changes. This approach has enabled an APAC operator to reduce capital expenditure by 80 percent and a European operator to increase IT velocity-the time it takes to go from feature definition to release-by up to ten times.

By moving to deploy an asset-light network, an East Asian mobile operator reduced network total cost of ownership by more than 20 percent. The operator used a shared network, differentiating itself through customer experience and product differentiation. Beyond network sharing, new technologies like open radio access network (RAN) (Rakuten is a leader in this approach) are fundamentally resetting economics and traditional constraints. In so doing, they are not only reducing traditional barriers to entry for new operators, increasing competition, but also offering new opportunities for incumbents as they deploy 5G.

Using advanced analytics, operators can run thousands of simulations to prioritize capital spend across a portfolio of projects, allowing for greater transparency and quicker decision making.

Telcos are also focusing on driving capital efficiency, notably through analytics, to avoid the familiar frustrations of capital projects, like competing demands on scarce capital, limited visibility into projects' performance, and budget overruns. Using advanced analytics, operators can run thousands of simulations to prioritize capital spend across a portfolio of projects, allowing for greater transparency and quicker decision making. Applying these principles to a 5G rollout, an Asian telco accelerated deployment timelines by a full year.

Structure and talent

By pursuing structural separation and introducing new external capital, an Eastern European operator increased ROIC by over 50 percent and doubled available funds. Separate entities allowed the network to attract cheaper capital, grow revenue, and gain regulatory relief while avoiding the difficult trade-offs inherent in a closely integrated structure. Moreover, this forced the noninfrastructure part of the business (the "serveco") to confront a new set of economics and determine how to differentiate itself going forward: Would it win on customer experience? Price? Personalization? This questioning sharpened the focus on the basis of competition and a broader capability set.

Finally, by moving to a radically simpler operating model, operators are resetting their internal systems, processes, and capabilities to compete effectively against digital natives, increasing speed to market and continuously improving customer experience. Spark NZ and TDC are among a group of operators that have started down this journey, driving changes over an 18- to 24-month period that include significantly increasing speed to market, employee engagement, and productivity. In creating a flatter organization made up of cross-functional teams, each with clear links to business value and the resources to deliver on their missions autonomously, these operators are able to fluidly reallocate talent, considering employees' skills and interests and prioritizing "doers" over managers.

To illustrate how each lever works, consider our archetypes. A telco taking a commodity-driven approach to achieve operational and infrastructure-led excellence may go to market with a radically simplified product offer, deliver a zero-touch service model, manage capital expenditure through analytics, and deploy an enterprise-agile operating model. While producing 95 percent fewer products, this operator could reduce the cost to serve by 30 percent, increase productivity by 30 to 50 percent, increase NPS by 30 points, and improve ROIC 2 to 4 percent. (For an example of a telco taking a network-leadership approach to achieve operational and infrastructure-led excellence, see the sidebar, "Example: How an APAC telco reinvented itself.")

Alternatively, a telco that chooses the ecosystem-provider and adjacencies archetype might create digital-native scaled CX, build new businesses at scale, decouple and deploy a greenfield IT stack, and deploy an enterprise-agile operating model. This approach could boost growth by two to three percentage points, NPS by 40 points, and employee engagement by 30 points. It could, based on our experience, increase speed to market tenfold and IT velocity by more than 50 percent.

While pulling these levers, it is critical that leaders closely track key performance indicators, adjusting course where necessary. They will also need to develop the talent, governance mechanisms, processes, and mindsets essential to drive and sustain dramatic cultural change.

A dynamic roadmap for a pivotal year

Business transformation is notoriously difficult; in fact, 70 percent of all transformation efforts fail. Because telcos' future success depends on their ability to drive not one but three to four large-scale transformations simultaneously, the risks rise exponentially.

Because of both the scale and pace of change, as well as the complexity of making it happen, CEOs cannot rely on the historic transformation formula of sequential, largely siloed programs, with a central team driving reporting and tracking. The transformation playbook must shift across two dimensions: scale and change management.

First, operators need to revisit their ambition and deliver not one or two bold changes but four or five. These changes must be delivered in an integrated manner, over two to three years (rather than four to five). Moves conducted in parallel must build off of, enhance, and inform one another. For example, a "flip" to agile may be effectively combined with the required model and capabilities to support a greenfield IT stack or new business-resulting in the accelerated launch of new business ventures or zero-touch service models.

Most journeys start with the clear articulation of a bold, structurally transformative end-state vision of the operator and its value-creation formula. Once this direction is set, and the required shifts identified, leaders must develop a blueprint detailing each move and how they fit together into a coherent model. The blueprint should lay out the roadmap from the end state back (versus from today forward), highlighting cross-functional and cross-program interdependencies, critical value drivers, and associated operational changes (for example, reduced truck rolls, changes in billing, and new fulfillment rules).

By its very nature, the blueprint will need to be constantly revisited to reflect the reality of delivery, with programs paused while upstream dependencies are resolved, ensuring resources are free to flow to the areas of highest impact.

Second, leaders must pursue a multilevel orchestration, with change, culture, and capability at its core. Teams will need to work across silos, with traditionally "back office" parts of the business embedded in frontline teams and digitalization work leveraged across business-unit lines. Facilitating this typically requires some changes to incentive models and considerable effort deployed around middle management.

In general, we would see a three-level orchestration approach (Exhibit 5), with the central team acting as an orchestrator, challenger, and enabler to the rest of the organization-ensuring pace, driving interdependency, and continually updating the blueprint. Because a multilevel transformation is simply too big to be delivered exclusively from the center, teams must genuinely be empowered to work with one another, clearing bottlenecks and adjusting sequencing when necessary. Some operators have gone so far as to recast their "accountability framework" as an "empowerment framework."

To gain buy-in for this enormous change-management challenge, leaders must translate their blueprint into a clear, coherent narrative for employees, investors, and other stakeholders. The narrative should articulate how each piece of the work contributes to the organization's larger strategic goals.

Finally, CEOs will need to be aggressive in setting a course and forging ahead. This is especially critical when the change requires the leader to bridge differences in stakeholders' views and expected time horizons and when the leadership team needs to work together at greater speed and effectiveness than most are used to. We see five critical moves:

Bridge the needs of different stakeholders, including investors, working with the board to balance current momentum and results with long-term sustainable value creation and social license to operate.

Resist the tyranny of short-termism, focusing on long-term value-creation logic and levers and, where necessary, resetting in-year forecasts and expectations.

Reframe the approach to risk, focusing on upside as well as downside, laying out and assessing clear trade-offs, and allowing the company to set an aspiration that redefines it.

Be the catalyst, not the expert, leading through uncertainty, setting the direction, and empowering those with the greatest expertise to lead the way.

Shock and unfreeze the organization by driving significant change in the first 12 months and using "moments of truth" to signal that business as usual is over.

Transformation is nothing new to the telco industry. Operators have been reshaping themselves over the past several decades to drive down costs, introduce new digital channels, and deploy new technologies. Along the way, the most effective leaders have demonstrated qualities that remain relevant for any transformation: the imagination to envisage how things can be different going forward, the courage to pursue that vision, and the commitment to inspire others to join the journey.

The next wave of change for operators is more fundamental in nature. The telco landscape of the next decade will be shaped by the extent to which today's leaders can recognize the magnitude of change that is already under way-and act with speed and conviction to truly reimagine how their organizations can thrive, front and center, in this new reality.

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A blueprint for telecom's critical reinvention

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The next generation of telcos will be defined by leaders who act now, risking short-term advantages to seize untapped growth with a holistic approach to transformation.

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The barriers that once hampered efforts by telco companies to launch new ventures beyond connectivity are weakening, offering them the chance to begin what, for many, is the essential task of regaining growth. New business-building, however, is not proving particularly easy. A recent McKinsey survey of 50 senior executives (CxOs) from telco companies around the world showed that 77 percent had embarked on more than five business-building initiatives over the past ten years. Some of these businesses are clearly newer than others. Nevertheless, while half of the CxOs estimated that their new businesses were showing, on average, healthy profits, a quarter said the initiatives were not yet profitable, while another quarter had net profitability of less than 10 percent

Our research and industry analysis suggest how the odds might be improved. It entails understanding the factors that underpin the success of different business archetypes that go beyond telco operators' core activities, helping them select the archetype that will confer maximum competitive advantage. And it involves selecting the right approach to building a new business to help ensure it flourishes.

The growth imperative

Despite the huge capital investments made by operators to keep pace with successive waves of new technology over the past decade, their core business has become increasingly commoditized and growth has slowed. Instead, most of the value created in the industry has been captured by so-called edge players-those manufacturing handsets, developing apps, building infrastructure, or providing streaming or other digital services. Exhibits 1-3 show the extent to which telco operators-those providing the connectivity upon which other industry participants depend-lost more and more ground with the introduction of 3G and then 4G technology. The performance gap with the big streaming and digital service companies, the likes of Netflix, Amazon, Facebook and Apple, is particularly wide, whether measured by revenue, earnings, or market capitalization (Exhibit 4).

Aware of their predicament, operators around the world are exploring ways to reignite growth. The core business still offers many such opportunities, be that by creating a digital attacker to capture underserved customer segments, for example, or launching new businesses to monetize 5G use cases. Yet many operators are also seeking to establish new businesses that reach beyond connectivity.

Driving new opportunities

Two shifts in the industry are facilitating telcos' expansion into new business areas beyond connectivity.

1. Market structure. One of the key advantages enjoyed by tech companies has been their global reach. Netflix, for example, can be streamed in more than 190 countries and Uber provides ride-hailing services in more than 70. In comparison, operators' market reach has been more limited given the necessary infrastructure and investments. Today, however, as the market for digital services matures, more companies are emerging that offer alternative or additional services to those offered by the global giants, catering to local tastes and preferences. Regionally focused super apps such as Careem in the Middle East and Rappi in Latin America, for example, offer a range of services and have gained a substantial following (48 million and 10 million active users respectively). And in India, where there are 22 official languages, numerous new video streaming services now offer local-language content. Global reach is no longer a prerequisite of success for a telco wishing to expand beyond connectivity.

2. Technological know-how. For many years, telcos were playing catchup when it came to their tech capabilities, not least because leading tech players had their pick of the top technical talent required to build innovative solutions. But technological know-how should no longer be a barrier to operators wanting to build new digital businesses. Outstanding talent is of course still in high demand and cutting-edge innovation depends upon it. But more general tech skills, if not yet ubiquitous, are not as scarce as they once were. Moreover, today's tools and software make it much easier to develop digital services. A handful of developers can build and release an app in a matter of months-a task that might otherwise have required far larger teams featuring the very best technical talent.

This altered market landscape gives operators the chance to deploy several important assets in the building of new, noncore businesses. Their established customer base gives them a broad range of data such as call history, app usage, data consumption and payment history for millions of customers and often for entire households. That data-and the accompanying customer relationships-often stretches back years, as many customers tend to remain loyal to a single operator. The result is rich information on which to build accurate consumer profiles, behavioral predictions, and thousands of microsegments, boosting targeted marketing efforts and decreasing customer acquisition costs. Indonesia's Telkomsel, the largest mobile operator in Southeast Asia, runs 50-plus analytical models every month to identify the best way to interact with its customers and propose relevant offers.

Telco operators' established distribution channels, whether they be owned stores, partner/vendor stores, e-commerce channels, or channels with major e-commerce players such as Amazon and Rakuten, are also an advantage. Some operators in developed markets have more than 3,000 stores each, for example. Their well-recognized, strong brands are advantageous too. These assets-distribution channels and brands-will stand telcos in good stead, particularly when bringing new services to market.

Three business archetypes

Against this backdrop, we see companies building three main types of new, noncore businesses.

Data analytics businesses. Some companies are leveraging their data from customer interactions to offer big data services, business insights, and data consultancy services to corporate clients. Anonymized and aggregated data can, for example, help retailers understand the duration and frequency of physical and online store visits, or government departments plan road traffic controls. Telkomsel has built a large data analytics business that serves various customers, including those in retail, banking, and even telecom. Product offerings include geolocation insights, predictive analytics, predictive customer insights, and credit scoring.

Ecosystem businesses. Some telco companies are building portfolios of digital service businesses that not only drive new revenue but also reinforce the core business. One such example is the ecosystem built by Turkish mobile operator Turkcell. Its digital services portfolio now includes Paycell, a leading payments platform in Turkey, and BiP, a messaging super app that serves as a gateway for other Turkcell and third-party apps and services such as news, entertainment, and gaming. In 2021, Turkcell's digital and financial services generated more than $150 million in stand-alone revenues, accounting for 8 percent of total revenues. At the same time, mobile churn fell by between 5 and 12 percent, while the average revenue per user among active users across all services rose between 5 and 10 percent.

Telkomsel leveraged its data analytics platform to make an ecosystem play across gaming, media streaming, and loyalty points. Globe, a Filipino operator, has also developed a successful ecosystem business, though one that is more focused. Launched in 2015, its Mynt subsidiary aims to be a one-stop, mobile solutions shop for all financial needs, offering wallet, payment, loan, and credit services. Today it is valued at more than $2 billion.

Marketplace businesses. Marketplace businesses are either e-commerce trading platforms that earn the telco revenue from goods it sources and sells itself or in partnership with retailers, or from the commission it earns on transactions. SK Telecom's 11Street is the third-largest e-commerce player in South Korea by gross merchandise value, with revenue from multiple categories of goods accounting for 5 percent of SK Telecom's total annual revenue in 2020. Here too, the business is used to strengthen SKT's core offering by providing special discounts and benefits to SKT subscribers.

Selecting the right archetype

New businesses that go beyond core telco activities require certain market conditions to thrive. They also require that operators have a certain position in the market along with certain capabilities (Exhibit 5). While an agile IT team is a prerequisite whatever the archetype, other elements are archetype specific, for example:

Data analytics, ecosystem, and marketplace businesses all need a large subscriber base in order to supply enough data on which to conduct analysis and draw insights or target market offerings. But an ecosystem business also requires large market share. A subscriber base of, say, 55 million would be large by any measure. But if, in a big market such as Indonesia, a rival has 150 million or more subscribers, it would prove harder for the comparatively smaller player to kick-start a vibrant ecosystem and secure its position versus competitors.

Both an ecosystem and marketplace business require that the telco enjoys high user engagement. Lots of existing customers will not suffice. Those customers must also be willing to engage with the brand if a new platform is to get off to a flying start.

Robust e-commerce capabilities such as order fulfillment and distribution are key for a successful marketplace. A marketplace business must meet customer expectations when it comes to fast delivery, for example.

An IT and network infrastructure capable of integrating data from telcos' existing but still often disconnected IT systems (billing, POS, call centers, stores) is a prerequisite for a successful data analytics business.

Such factors will drive an operator's choice of business. To some extent, its starting position will be decisive. There is little any company can do to organically augment its subscriber base significantly or improve user engagement overnight. But other factors, such as e-commerce capabilities or integrated IT systems, can either be developed or improved. The question then becomes whether the company has the appetite or resources to do so.

Building new businesses

Incumbents with sound business ideas that match their capabilities in the right market still have to consider how to go about building a new business. Analysis of more than 200 corporate business builds that McKinsey has supported-businesses close to the company's core as well as in adjacent markets-shows three major approaches that have met with success, whatever the industry. They differ in aspects such as their strategic intent and the maturity of the business concepts, so the choice will be guided by the company's own circumstances. Importantly, however, all three help address what CxOs identify as a major stumbling block when it comes to new business building-the existing corporate culture-as all three give the new business a degree of separation from the parent (see sidebar, "Corporate culture choking the growth of new businesses").

Internal VC-like incubator. Here, employees within the parent organization develop concepts for new businesses and pitch them to a dedicated, venture-capital-style board comprising internal and external experts, who select the most promising. Budgets are automatically released once milestones are met. In our experience, the internal incubation approach works best at the very start of business development, giving the company space to consider a range of new business ideas.

Scale-up factory. This approach can help companies short of the specialized resources required to quickly develop promising concepts in the parent's R&D into revenue-generating businesses. The parent sets up a fully owned "factory" in a separate office staffed with a dedicated team, most of whose members are hired for their specialized skills and a start-up mindset. The new company is governed by its own leadership and a dedicated, internal board of directors rather than by business-unit leaders. While senior group leaders dedicate significant time to strategic decision making and steering the business toward targets and milestones, they do not get involved in the scale-up factory's day-to-day decision making. Giving employees equity in the business can help attract and retain digital talent.

Globe used this approach to launch several successful businesses, including telehealth and primary care services, an online grocery, an e-wallet service, and a digital advertising agency.

Clean-slate build. This approach can suit new business ideas that go well beyond the organization's core focus-healthcare as opposed to gaming on a mobile device, for example. The new business is typically fully owned by the incumbent (or jointly owned with external investors) but enjoys organizational independence and all talent is hired externally. It has different compensation and hiring models from the parent company's, as well as its own R&D and insights capability to aggressively test new markets.

Shifts in the industry regarding its structure and technological capabilities as well as telcos' rich set of assets offer them an opportunity to capture value beyond connectivity. The experience of many companies underscores how difficult it can be to turn this opportunity into thriving new businesses. A small but growing number of outperformers, however, have demonstrated what it takes to succeed in this critical area. Awareness of the prerequisites of success for a given business archetype and selecting the right approach to building that business should help others follow the same path.

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How telcos can succeed in launching new businesses beyond connectivity

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Telcos' diversification efforts have often failed. Understanding what underpins the success of different business archetypes can help ensure that more flourish.

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BOSTON-October 11, 2021- Over the next five years, Bain & Company expects 5G to enter the mainstream, gaining popularity through accelerated deployment by telcos, affordable handsets and other major uses for the technology. According to the firm's analysis, the adoption of 5G is expected to be faster in its first seven years-2018 to 2025-than the adoption of 4G in the seven years following its market debut in 2009.

Bain & Company's research shows that the number of 5G connections worldwide will triple from less than 700 million today to more than 2.1 billion by 2025. This strong momentum reflects heavy operator investment in 5G infrastructure, a gradual expansion of 5G use cases and a global hunger for data connectivity-which has increasingly surged during the pandemic. Yet, despite this insurgence, many telcos still struggle to reap the full rewards that 5G has to offer. In Bain's new report, AI = ROI: How Artificial Intelligence Is (Already) Solving the 5G Equation, the firm explores how operators are using artificial intelligence to accrue a better return on investment (ROI) from 5G deployment.

"Artificial intelligence is already being used by leading telcos to gain a strategic advantage in 5G," said Herbert Blum, head of Bain & Company's Global Communications, Media & Entertainment practice, "But being AI-native requires more than an optimization of existing business processes or workflow overlays. It demands that the role of employees across all functions evolves in partnership with the technology as well."

Bain's new research shows how a telco that uses AI tools in its 5G rollout could develop a differentiated capability for putting the right infrastructure in the right place, with surgical precision and at dizzying scale. For instance, one major ROI challenge with 5G stems from the spectrum bands that the technology uses. 5G's higher-frequency signals do not travel as far, or penetrate buildings as well as the lower-frequency signals used by 4G-requiring operators to deploy as many as 100 times the number of cells used by 4G for their 5G services. AI can help solve this engineering conundrum, and one of the sector's toughest challenges, by accelerating decisions from months and weeks to days and minutes, with a precision and scale that exceeds what is humanly possible.

"Even digitally native telcos are not immune to the complexities brought by 5G adoption, particularly if they still rely on a labor-intensive workflow," said Darryn Lowe, a leader in Bain & Company's Communications, Media and Entertainment practice. "In the coming years, winning telcos will be operators that use 5G, and other high-stakes business areas, as a proving ground for the deeper AI capabilities they'll need to gain to remain competitive."

Editor's Note: To arrange an interview, contact Katie Ware at katie.ware@bain.com or +1 646 562 8102.

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The AI-enabled telco takes shape: Why telcos are using artificial intelligence to rollout their 5G services

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Bain & Company's new report details how artificial intelligence (AI) can help telcos achieve a stronger return on investment from their 5G adoptions

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It's been standard practice for telecommunications companies to pursue ongoing productivity improvements, adopting new technologies as they become available. So, it's no surprise that in recent years, telecom workforces have been declining by about 1% to 5% annually across most regions worldwide, including Europe and the Americas. Asia-Pacific is an exception, and there was a small rebound across most regions last year following the Covid-19 downturn (see Figure 1).

Now, as artificial intelligence (AI) reaches an inflection point, it's poised to unleash step changes in operations and business models that weren't previously possible. Similar to other sectors, telecommunications companies are abuzz with exciting potential use cases that could transform their industry.

One of the questions is what this will mean for today's telecom workforces. Recent layoff announcements in markets such as the UK might be an early signal of the accelerated changes to come.

These changes arrive amid a major industry transition already underway. Intensifying revenue and cost challenges have hampered many telcos' total shareholder return, pushing them to make changes, in some cases radical ones. These challenges are squeezing large, integrated telcos in particular. At the same time, telcos have been increasing their investments in technology, including digitalization, process automation, and adoption of AI tools, as they look to increase productivity and stay ahead of the curve.

As telcos try to capitalize on the latest advances in AI, the most effective leaders will bring strategic workforce management to the fore to ensure that the right mix and supply of talent is available at different points in time. Successful telecom carriers won't just prioritize and execute exciting AI use cases; they'll also design transformation programs to strategically deploy their workforce's capacity freed up by AI-all while investing in talent and new skills where required.

Here are several potential places to start.

Enable the workforce with AI. Democratizing access for all employees to AI and other advanced technologies is potentially one of the single largest company-specific and society-wide benefits that executive teams can support. Training and upskilling employees in AI can help them enhance productivity in the work they're doing today, thereby helping secure them an integral place in the telco of the future.

Redeploy employees. In functions in which automation and productivity gains free up workers' capacity, they can be redeployed to operations where there have been a shortage of experienced skills or where AI unlocks value creation opportunities, whether through new products and lines of business or enhanced customer service.

Fill in gaps. AI has created a new capability profile for telcos, some of which will require outside recruitment, outsourcing, or even M&A to attain these required skills.

AI could potentially bring the most significant changes to ways of working since the industrial revolution. Time will tell how much and how quickly things shift, but in any case, the previous trajectory of digitalization and automation will likely be altered. Thinking carefully about strategic workforce planning can help assure that all stakeholders, including employees, can benefit.

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Telcos, Talent, and Technology: How AI Is Catalyzing Change

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AI is poised to transform telecommunications companies' approach to strategic workforce planning.