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.
- 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.
- 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.1 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.