February, 2019 On the verge of being disrupted Telco retail challenges in 2025, what is the end-game?Content Executive summary 3 1. An already disrupted world Overview of the current retail telco market 5 2. Catching up with the forces of change Global trends in retail impacting telcos 6 3. A leap into the future: how far will disintermediation go? 8 Conclusions and recommendations 10 Authors: Juan González Partner TIME*, Madrid gonzalez.juanadlittle Jorge Abril-Martorell Principal TIME, Madrid abril.jorgeadlittle Cristóbal Colón Principal AMG*, Madrid colon.cristobaladlittle * Telecommunications, Information, Media and Electronics * Automotive & Manufacturing Pedro Ugarte Principal TIME, Madrid ugarte.pedroadlittle Lokesh Dadhich Principal TIME, Dubai dadhich.lokeshadlittle Manuel Sampedro Manager TIME, Madrid sampedro.manueladlittle Paritosh Mukhija Manager TIME. Dubai mukhija.paritoshadlittle 3 Executive summary Most Western European mobile telecom markets have reached a high level of maturity and present a similar competitive outlook: they are markets with stagnating revenues and where well-established leaders with a steady market share are competing with MVNOs (Mobile Virtual Network Operators) that are now plateauing after their appearance over a decade ago. In this context, the rising digitalization across industries has allowed the entrance of e-tailers and retailers in the telecom market, totally changing the telco distribution arena. In addition, on the demand side, the instant gratification expectations from customers and consumer polarization, as a result of a growing base of digital natives and older population, will add even more uncertainty to the future scenario. Based on this, our paper presents recommendations to deal with three plausible scenarios for the telecom market in 2025, depending on the level of disintermediation in the supply chain: n “Digital differentiation” scenario: disintermediation has steered away from its current trend. However, digital excellence is now essential in order to compete in the market and the physical presence of sales channels has significantly shrunk.n “Cornerstone enablement” scenario: by 2025, telco operators have been able to conquer adjacent domains and provide offerings beyond connectivity. Some of these newly entered domains benefit from physical presence (banking, security, etc.). Now customers perceive a telecom operator as a cornerstone where digital excellence and physical availability are complementary and crucial to create market advantage (i.e.: in a similar manner as Amazon acquiring Whole Foods).n “Commoditized connectivity” (tick-in-a-box) scenario: disintermediation has dramatically affected the industry and derived from this effect, telco operators offering is now just another building block for other distribution players. As a result, telco players have moved their offering into e-markets where consumer electronics and e-tailers leverage connectivity as a “tick-in-a-box” when selling. Telco operators are now fully focused on searching for efficiencies and sales channel efforts are focused on influencing e-tailers. 4 As telco markets are moving towards any of these three scenarios, telco operators will need to decidedly review some of their fundamentals. Thus, strong leadership to assure a rapid evolution to develop a “digital differentiator” will be required. Additionally, this paper concludes that telco operators in Western economies would need to face the following key activities regardless of the final disintermediation scenario:n Attract and empower digital talent. n Substantially downsize physical channels while maintaining key strategic positions.n Set-up real ecosystem management capabilities to shape partnerships.n Commit to the most adequate commercial strategy depending on the scenario and lead the change. 5 1. An already disrupted world Overview of the current retail telco market The retail world was disrupted by the introduction of digital technology long ago and telecom operators, as retailers themselves, have launched several initiatives to catch up with the existing trends. However, in the majority of the Western European markets, none of the key players has managed to develop a significant competitive advantage over the others. In the mature Western European mobile telecom market, the key mobile operators have not achieved a significant level of differentiation from each other despite their measures to enhance their commercial channels. Most of the Western European mobile telecom markets currently present a similar competitive scenario: well-established leaders with a steady market share, stagnating revenues and MVNOs (Mobile Virtual Network Operators) that are now plateauing after their appearance over a decade ago. This is shown in Figure 1, where the evolution of two Western European markets are depicted as a reference showing the mentioned effect. Moreover, the last decade has also been characterized by the disruption caused by the digitalization strategies from retailers and e-tailers. As a result, the large telcos, with strong retail networks, had to define and implement plans to adapt their commercial channels to the new reality. Just to cite a few examples: n n Physical channel reconfiguration plans: executed with the aim of ensuring optimal coverage, better locations and maximum efficiency. n n Customer experience design inside the Point of Sales (PoS): piloting with different technologies and layouts to improve shops customer service (i.e.: including a broad set of devices (such as touchscreens or tablets) that will later feed information into operators marketing tools. n n Digitalization and process agility focus: resulting in enhanced productivity, in addition to well-designed collaboration schemes with remote channels. n n Adequate exploitation of sales strategies to navigate through the constant developments of the market: for example, telco operators developing consumer financial strategies to counterattack the entrance of external players in the handset market. The aftermath of this situation has not resulted in a significant differentiation for any player. On the contrary, these changes have placed telco operators in a similar position against the real forces that are shaping the market. For instance, telecom leaders still have over-dimensioned retail networks with high level of overlapping, and thus incur high commercial costs without achieving any competitive advantage against retailers and e-tailers. Figure 1: Examples of mobile market share evolution per operator in Western Europe Source: Arthur D. Little analysis Spain France, 2013 2017, as of % of total subscribers 34% 31% 30% 23% 27% 27% 24% 25% 25% 7% 7% 10% 13% 11% 9% Others 2013 2015 2017 31% 31% 29% 28% 23% 21% 15% 16% 19% 13% 18% 18% 13% 11% 12% 2013 2015 2017 Others6 2. Catching up with the forces of change Global trends in retail impacting telcos The entrance of e-tailers and retailers in the telecom market, instant gratification expectations from customers and consumer polarization are the key factors that may disrupt the market in the coming years. The resulting upcoming changes are expected to become far more disruptive and will have a transformational impact on the telecom industry. Maturity and evolution of the market have facilitated the entrance of new players, who have unique characteristics, into traditional telecom domains. As mentioned earlier in this paper, this trend can be exemplified by a new type of competitor getting into traditional telecom domains, such as the handset market. Long established retailers have been steadily gaining share in the handset market. Their business strategy is based on high volume/low margin and a growing bargaining power, unbeatable capabilities for stock management and a much broader portfolio than any telecom operator. Again we can exemplify this trend with the Media Markt case within the Spanish market. Media Markt has more than 85 stores in Spain and an average store size of 1 .600 m 2 . They are much larger than any traditional telco PoS. In addition, Media Markt combines strong capabilities to handle a broad range of products and a high stock with a relatively low cost base, characteristics that cannot be easily replicated by any of the telecom operators. The entrance of new players is actually happening all across the value chain, not just in the handset market, as shown in Figure 2. Retailers and e-tailers not only excel in operations, being more cost efficient, but they also present strong capabilities to generate content and customer intelligence. Due to this aggressive entering of retailers and e-tailers in the market, telco operators will need to deploy more transformational strategies, in comparison with those initiatives carried out over the last few years, in order to remain competitive. Changes in customers behavior and their expectations are the key triggers of current market shifts. This is a consequence of what they are experiencing in other markets, enabled by the latest technological changes. Customers expectations are being radically influenced by the strategies and capabilities of e-tailers. Figure 3 illustrates the dramatic evolution of Amazon delivery services. The instant gratification delivered by this evolution is generating addiction to this core part of Amazons value proposal: proximity, simplicity and convenience. This effect, derived from the digitalization, is happening across industries, from music to banking, as shown in Figure 4. The music industry was one of the first ones disrupted by the digitalization. When this effect was extended to other industries, reaching more traditional ones such as financial services, it became clear that customers were inevitably demanding this immediacy in every aspect of their daily lives. Figure 2: Focus of e-tailers and retailers in the telco value chain Source: Arthur D. Little analysis (1) Radio access, network routing and interconnection (2) Billing, service provisioning MNOs Retailers E-tailers Application and OTT services Network infrastr. (1) and service provisioning (2) Marketing and sales Operations and customer care Content delivery End-to-end infrastructure and service provisioning capabilities Traditional delivery and customer intelligence approaches Strong focus on physical channel Focus on improving logistics able to compete with e- tailers capabilities Hybrid approaches with support of online channel as cost efficient tool Content creation and delivery Strong logistics and excelling in customer intelligence Online channel as a main channel of interaction and thus increase the top line Player in that part of the value chain Winning player in that part of the value chain No/low presence in the value chain Figure 3: Amazon delivery services Source: Arthur D. Little analysis 2005 2007 2014 1 hour 1 day 2 days Entry Delivery time 7 Another key risk for telecom operators is driven by technology developments and applications, which are about to introduce more entropy into the ecosystem. As described in Figure 5, technological developments result in cheaper IT products, more informed consumers and higher competition, which ultimately brings a reduction in prices and margins. Examples of this would be the introduction of the eSIM, which would facilitate users to switch easily between providers, or the rise of delivery service platforms that intermediate in the ecosystems and become a barrier for any telco trying to directly create relationships and a fruitful dialogue with its customers. This enables further disintermediation of telecom value-chain for new players. In addition, over-the-top (OTT) players such as Google, Apple and Facebook are also offering OTT messaging services such as FaceTime, iMessage and WhatsApp, reducing some of the classic telco revenue streams. Finally, it is also important to take into account the evolution of the demographics in Western Europe. As can be observed in Figure 6, population in this region is expected to age and its growth to slow or even decrease, and this shift has a multiplying effect over total expenditure since older population segments have, on average, higher income levels. Therefore, in addition to the digitalization trends, close attention has to be paid to the needs and expectations of these older segments when designing commercial strategies and distribution models. Figure 4: Benchmark of digitalization disruption level per industry Source: Bell Labs, Statista, Arthur D. Little analysis (US, % of digital sales/transactions/spend) Moment of digital sales/transactions/spend overcoming non-digital 0 10 20 30 40 50 60 70 80 90 100 2000 2005 2010 2015 2020 2025 US banking transactions US entertainment spend US music sales value US book sales US advertising spend 2007 2010 2015 2017 2025 Figure 5: Technological development impact over goods pricing Source: Arthur D. Little analysis Technological development More informed consumers E-commerce Higher competition Tighter margins Reducing cost of technology Decreased price 1 2 3 Figure 6: Example of demographics evolution in Western Europe (1) Source: United Nations and Arthur D. Little analysis (1) Western Europe includes: Albania, Andorra, Austria, Belgium, Bosnia and Herzegovina, Croatia, France, Germany, Gibraltar, Greece, Holy See, Italy, Liechtenstein, Luxemburg, Malta, Monaco, Montenegro, Netherlands, Portugal, San Marino, Serbia, Slovenia, Spain, Switzerland, The former Yugoslav and Republic of Macedonia Key messages Population is expected to increase and age, resulting in a growing importance of older segments 2016 107,9 90,7 144,5 >60 years 108,2 103,6 2026e 133,9 30-59 years < 29 years 343,5 345,3 +0,1% Western- Europe (WE) (1) population evolution per age (WE, 2016- 2026E, million inhab.) CAGR 16-26 +1.7% -0.8% -0.4% Figure 7: Summary of main difficulties posed by trends Source: Arthur D. Little analysis Competing with retailers and e-tailers: Low margins and growing bargaining power National network of stores Stock management Range of products “Digitalization” of the physical experience: Automatic satisfaction Proximity, simplicity and convenience Affordability through technology developments Disappearing barriers Transformation paradoxes Polarization of the customer base: Slower growing or even decreasing populations Increasing expenditure depending on the main breadwinner8 Future telecom market scenarios The effect from the digitalization and disintermediation trends could go far beyond any expectation and this paper tries to expose what could be the resulting end-game. Based on these trends, we can predict three p