Telco longboat sails for Copenhagen in 'code red' crisis

More than a thousand years ago, some Danish farmers spoiling for a fight decided their industry needed radical transformation to avoid obsolescence. Hopping into a Viking longboat, they led a series of profitable raids against the British Isles, successfully expanding from agriculture into violence and plunder, and established Denmark as a preeminent regional force.

Taking inspiration from this example, the telecom industry last year shifted its big transformation-themed event to the modern-day Viking headquarters of Copenhagen. Next week, it will be invaded for the second time by thousands of executives attending the TM Forum's annual Digital Transformation World (DTW) shindig, branded "Ignite" this year for extra effect. The Vikings would have torched their destination and scarpered with the gold. For better-behaved telcos, any treasure is proving much harder to unearth.

That much is clear from a chart knocked up for a new TM Forum (TMF) report. It shows telco sales – tautologically defined here as global CSP (communications service provider) revenues worldwide – have been in decline for more than a decade, dropping to less than $1.8 trillion last year from more than $1.9 trillion in 2012. Collective investments of about $1 trillion in the last five years have brought a measly return of less than 1%, said Nik Willetts, the TMF's CEO, at a recent press briefing in London. It's a "code red" moment for the industry, he told reporters.

The report, entitled "Reigniting telecom growth: a playbook for CEOs," is both a diagnosis of the industry's problems and a menu of options for revival. If it seems like a departure for an organization that started out developing standards for telecom IT, the TMF's more recent foray into application programming interfaces (APIs) figures prominently in the recommendations, as does Open Digital Architecture, a standardized TMF framework for the design of software components.

Prognosis and remedy

Diagnosing the illness is easier than curing it. The consumer telecom business, where operators still generate most of their money, has plateaued now that even Luddites own smartphones. Telcos, meanwhile, have been "relegated to the role of data pipe in the 4G era," says the TMF report. A less generous assessment would be that telcos blew what chances they had in the noughties, when today's Internet giants were just precocious toddlers and telecom firms were in much better fiscal shape. Not learning from their mistakes would jeopardize any opportunity they now have in nascent enterprise markets. Such is the report's subtext.

The perception these Internet companies were able to "disintermediate" the vertically integrated telco model seems to explain why the report's authors attach such importance to the concept of delayering. "I'm not talking about structural separation," said Willetts. "The value we see in delayering is in acknowledging that you as a telco are trying to succeed in two different businesses at once."

The big idea, which the report expands on, is to separate the "service-centric" part of the telco from the asset-heavy business that routinely spends vast amounts on infrastructure. "They can coexist and hyperscalers show us they can coexist," said Willetts. "Hyperscalers have, after all, a very asset-heavy part of their business as well." But he acknowledges that delayering as envisaged by the TMF would be a "big shift" for telcos.

Global CSP revenues worldwide

(Source: TMF)

The TMF's hope is that an appropriately delayered telco would be freed to innovate through its service-centric unit. Unencumbered by the infrastructure division, this could operate on "digital," Internet principles. That would release the asset-heavy part of the company to focus on extreme automation. Picture a network that eventually runs itself, generating code to fix problems or power down networks when the humans are asleep.

How this delayering would happen in practise is not spelt out in detail. Nevertheless, much of the TMF's work right now is on APIs, seemingly pitched by everyone from Ericsson to AWS-housed Totogi as a vital intermediary between telcos and the wider world. By exposing valuable network features, operators can attract partners and profit. APIs can also be used in the network plumbing, where the TMF has historically dirtied its fingers, to ensure products from different suppliers are interoperable. This, at least, is the theory.

But even Willetts unflatteringly describes the different strategies telcos have toward platforms and marketplaces as "quite muddled." Telcos still look relatively cack-handed in software, judging by the examples he provided in London. At the heart of Stripe's app for taking payments are just seven lines of critical code, he said, whereas a bank would have reams of documentation. Telcos do not look so different, said Willetts, urging the industry to improve its understanding of developers and the world they inhabit.

Plunge into APIs

One of the multi-billion-dollar questions is how this headfirst plunge into APIs will spur revenue growth for telcos. Ericsson last year splurged more than $6 billion to acquire Vonage on the premise that a) telcos will standardize network APIs; b) those APIs will then be incorporated into Vonage's platform; c) application developers will subsequently pay Vonage for access to capabilities such as network quality-of-service; and d) Vonage will share what it makes with telcos.

In 2021, before the Ericsson takeover, Vonage made $1.4 billion in sales and a $24 million loss. To seriously benefit an industry making $1.8 trillion in revenues, Vonage would need to enjoy the sort of growth spurt that happens in children's literature when people accidentally drink magic potions. But Denmark, besides featuring Viking longboats, is also the birthplace of fairy-tale writer Hans Christian Andersen, so who knows what could happen next week?

An alternative approach comes from Totogi, a billing specialist that offers its services through the AWS cloud. "When it comes to offering APIs to developers, Twilio is kicking our ass," said Danielle Royston, the CEO of Totogi (among other things) in a recent YouTube-delivered verdict on telco efforts.

Twilio has become famous by offering so-called application-to-person (A2P) APIs for things like two-factor authentication. Founded in 2008, it is the main reason for telcos' dramatic loss of A2P market share, which fell from 80% in 2010 to 44% market share last year, said Royston. Totogi's proposed fix is Whoosh, a set of APIs conceived as a direct challenge. Telco customers would install it, reroute codebases and traffic from Twilio to Totogi's APIs, sell Whoosh to enterprise IT departments and share revenues with Totogi.

But the Twilio of today is an odd company to envy. Its market cap rocketed from about $11.3 billion in April 2020 to $72.6 billion less than a year later, making it look like one of the pandemic's big winners. Since then, however, it has slumped back to $12 billion. The market-cap chart resembles a stegosaurus, and the profit-and-loss statement bears similarly ugly features. Although sales were up 35% last year, to more than $3.8 billion, Twilio racked up a $1.3 billion net loss. Research-and-development (R&D) costs soared, wiping out most of the company's gross profit even before other expenses are deducted.

Buzzwords aren't lifelines

The telecom industry's other big problem is to assume that standardization, interoperability and tinkering with the pipes will save it. Technology executives and even some CEOs in the sector have been guilty of this for years, latching desperately onto any buzzword like capsized Vikings grabbing hold of driftwood. The latest manifestation of this can be seen in the industry-wide doggie paddle toward generative artificial intelligence.

Hyperscalers are obviously very good at that, as they are at using APIs, software-defined network technologies, cloud-native systems and so on. But those do not explain their success when telcos are struggling. They are successful because they are world-straddling players providing technologies that everybody now needs. They remain dominant in key markets. They can happily spend more on R&D than telco vendors make in sales, and still generate shareholder-pleasing profits. For years, they were largely ignored by regulators.

Twilio's market capitalization

(Source: Ycharts)

None of this is easily replicable by disintermediated, heavily regulated telcos restricted to small, mature and extremely competitive national markets. Like a child who wasn't praised after an epic round of housework, telcos sulkily complain they are not duly rewarded for all the value they create. But any utility could make the same case. After all, what good is Google without electricity?

The TMF's new report is not, by any means, a stupid one. It contains some good ideas and is at the very least a more positive response to the industry's problems than "fair contribution," the dodgy idea that big Internet companies should pay telcos for all the bandwidth demand that Internet apps generate. India and other countries have now picked up the call that started in Europe, implying US Big Tech is expected to fund the planet's networks. Operators should be careful what they ask for. One day, US Big Tech just might.