Traditional telecoms need to behave like startups to grow

Christian Götz, Head of Technology, media, entertainment & telecoms at BDO explores how traditional telecoms companies can learn from the disruptive power of innovative technology startups.

In an industry facing margin compression and significant structural change, how can traditional telecoms companies enjoy long-term sustainable and profitable growth? The answer may lie in embracing the innovation practices most often found in more nimble technology startups. This means being prepared to make radical changes to services, operating model and innovation processes in order to continue to meet evolving customer demands.

Traditional telecoms companies face big threats from industry disruptors. Within a relatively short space of time technologies such as WhatsApp, Snapchat and Skype have shifted customers’ communication preferences and their expectations about speed, quality, security and cost of service. In BDO’s recent report, 2016 Telecommunications Risk Factor Survey, which explores the biggest risks facing leading global telecoms companies, 60% cite new competitors as a major threat to their business.

As parts of their core business contract in response to changing customer demand, the need to innovate becomes even greater for traditional telecoms companies. It is likely that disruptors will continue to target additional elements of the core telecoms business in the near future, for example by targeting premium versions of their services at B2B customers.

In such a rapidly-changing industry, it is not unthinkable that today’s startups could be market leaders in 5 – 10 years. To avoid the loss of further market share, the way forward for traditional telecoms must be to disrupt their own business model from within.

At the incremental end of the innovation spectrum, traditional telecoms companies can find growth by utilising their existing assets in new ways. For example, the CFO of one North American telecoms company interviewed for the survey told us how his company has recently monetised its vacant property assets by converting some to data storage centres and by renting space to a local university to host a technology innovation hub. The company also plans to maximise return on its infrastructure investment by using spare capacity in telecoms maintenance vehicles to operate courier services for their business customers.

The bundling of services, such as voice telephony with fibre broadband, entertainment packages and mobile services, has become an increasingly popular option for telecoms companies to offer a more attractive proposition to customers, and to grow the amount of revenue generated per customer. Bundling has enabled more traditional providers within the telecoms sector to be more innovative in their pricing models, for example by charging a premium fee for access to exclusive entertainment content accessed through their network.

To fulfil these bundled service offerings, many telecoms companies have undertaken strategic mergers. The recent acquisitions of mobile operator EE by telecoms giant BT in the UK, and of satellite company DirecTV by telecoms provider AT&T in the USA, have both been driven by a need to offer a broader range of complementary services to customers. These game-changing mergers enable existing market leaders to stay one step ahead of their competitors. With bundling set to continue apace, further consolidation within the industry over the next three years is very likely.

Other telecoms companies will pursue growth by adopting more radical innovations. The development of proprietary mobile applications and content by traditional telecoms companies is becoming increasingly popular. An investment in content gives customers a reason to remain loyal to their network providers. It also plays to the advantage of larger, established telecoms companies who can more quickly monetise content than startups by leveraging their larger, captive customer base and significant marketing resources.

One example is mobile health, or mHealth, whereby mobile devices can be used to support a public health agenda. To succeed in mHealth, traditional telecoms need to behave like startups by radically rethinking how existing communication networks can be repurposed to achieve new health-based outcomes. If harnessed correctly, innovations such as mHealth present a much greater opportunity than a risk because they enable traditional telecoms companies to develop much deeper relationships with consumers.

There are also lessons to be learned from disruptive startups for how telecoms companies can turn their innovative ideas into reality. Some telecoms companies have set up internal venture capital funds or innovation incubators to fund disruptive initiatives. For example, Deutsche Telekom Capital Partners, the venture capital fund of the German telecoms provider, with more than $2bn under management and advisory has a portfolio of over 70 companies. Telefónica’s internal startup incubator, Wayra, provides seed capital, expertise and networking opportunities to entrepreneurs pursuing innovative telecoms projects.

In the near future innovative collaboration projects like Wayra and Deutsche Telekom Capital Partners may uncover the next rapid growth areas for the telecoms sector. In the meantime, traditional telecoms companies cannot stand still. They need to invest a greater proportion of their revenue into innovation, and learn from the disruptive power of startups, to remain relevant to the needs of their customers and remain competitive and successful in the light of challenging and quickly changing market conditions.