Seizing the core connectivity opportunity in B2B telecom

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In recent years, telcos have sought to grow B2B revenues by focusing on services that connectivity enables, rather than core connectivity itself. Around the world, carriers have doubled down on Internet of Things (IoT) solutions; IT services like desktop management and enterprise mobility; cloud-based solutions like infrastructure as a service (IaaS), platforms as a service (PaaS), and software as a service (SaaS); and security solutions designed to detect vulnerabilities or combat fraud.

As a consequence, operators’ revenues from information and communication technology (ICT) rose at a compound annual growth rate of 15 percent between 2017 and 2022, while revenues from fixed and mobile connectivity rose at a CAGR of just 3 percent.1

Even so, core connectivity, broadly defined,2 remains the largest opportunity for B2B growth over the coming years. While revenues from beyond-the-core services are growing more quickly than revenues from connectivity, the projected value of core connectivity remains substantially higher in absolute terms (Exhibit 1).

Though beyond-the-core revenues are growing faster, the total market for core connectivity is a much bigger opportunity.

Moreover, a recent McKinsey Global Technology and Telecommunications B2B Pulse Survey of more than 3,000 decision makers across 11 industries and 15 countries shows that many enterprises intend to shift their business—particularly for core connectivity offerings—from telcos to other vendors, predominantly channel partners and tech manufacturers (Exhibit 2). By giving renewed focus to core connectivity, operators may be able to turn a potential weakness into a strength and minimize churn.

Enterprises are increasingly planning to move away from telcos for connectivity and adjacent services.

To maximize the value they can capture from B2B core connectivity, telcos can carefully assess the risks and opportunities within four key value pools: broadband; enterprise network solutions (ENS), including legacy multiprotocol label switching (MPLS) and newer software-defined wide area networks (SD-WAN); enterprise communication services, including unified communications and collaboration (UCC) and voice; and 5G. Two of these value pools, broadband and 5G, represent pure upside potential, whereas the ENS and UCC pools include certain segments that are shrinking at the expense of others.

Reaching new heights in B2B core connectivity will involve placing strategic bets on the four value pools and relying on specific levers for tapping into them. In this article, we describe the most promising levers associated with each value pool. We also suggest how telcos can map out the opportunities and risks associated with each product in their portfolios to define their unique strategies for B2B growth.

Core value pools and their critical levers

Each of the four key value pools—broadband, enterprise network solutions, enterprise communication services, and 5G—presents opportunities for B2B growth. By examining related products (for example, MPLS and SD-WAN, UCC and voice) as components of a single value pool, operators position themselves to make coherent, strategic decisions as they navigate the migration to next-generation connectivity solutions and confront competitors including hyperscalers and software providers. For all value pools, carriers will need to balance their risk exposure, capabilities, and other factors to determine when to focus on protecting existing value and when to prioritize creating new value.

Making more of a more competitive broadband market

Enterprises have increased their broadband spending over the past five years in an effort to secure the bandwidth and capacity needed to digitize their businesses and leverage cloud opportunities, including SD-WAN. In the small and medium-size enterprise (SME) market alone, telcos are expected to generate $56.2 billion a year from fixed internet access by 2027 globally, up from $47.2 billion in 2023, according to IDC. The global large-enterprise internet access market is projected to reach roughly half that size, with revenues of around $27.3 billion by 2027, because large organizations tend to rely on specialized connections like MPLS and ethernet. Even so, some large enterprises are replacing their bespoke solutions with more cost-efficient combinations of broadband lines and overlay. While the arrival of fiber has boosted broadband quality, it has also introduced a range of new competitors. These include B2B specialists such as GlobalConnect and Eurofiber, as well as an assortment of private-equity-owned, B2C-focused fiber operators.

Broadband levers. Through our work with operators worldwide, we have seen incumbents in particular struggle with shrinking B2B broadband revenues over the past two years. The following two levers have helped multiple operators reverse this trend to achieve net-add revenue growth:

  • Establish an end-to-end commercial management team. When selling broadband to small enterprises, telcos tend to emphasize the technical superiority of the product, rather than the specific ways in which fast broadband connections can enable important use cases. Especially for large enterprise customers sales units are often organized by account rather than by product, limiting sales teams’ understanding of how products can drive business results and their ability to convey that critical information to customers.

    By assembling cross-functional teams spanning B2B marketing, sales, product, and finance, telcos can position themselves to develop and execute highly targeted, analytics-based marketing campaigns based on a deep understanding of enterprise customers’ needs. Many telcos have such teams in B2C, but very few have them in B2B. One reason is that the analytics are more complicated due to the smaller base of customers and broader span of variables, including industry, number of locations, workforce size, and network requirements for security, throughput, and stability.

    Broadband is the only product other than voice that is sold across both B2B and B2C mass markets, making it an ideal candidate for an advanced analytics approach. While B2C campaigns may target millions of customers at once, each B2B target segment might include dozens to thousands of customers. To develop effective B2B micro campaigns, telcos might reexamine how they collect, store, and process data on enterprise customers, as well as their ability to conduct advanced analytics to gather critical insights. In many cases, they will also need a deeper understanding of their own capabilities and approaches, so they can transfer them seamlessly from B2C to B2B departments. They could, for example, leverage the household analytic engines typically built for upselling and cross-selling B2C customers and add B2B-specific predictors to help sales teams.

    To reach enterprise customers, the commercial management function might review the existing channel mix to determine whether channels should be added or enhanced. In the large enterprise space, operators tend to be reactive; most new broadband contracts come in response to requests for proposal (RFPs). To be more proactive and effective, telcos might strengthen relationships with industry associations, sponsor prominent industry events, engage in high-level policy conversations on regulatory issues, or revamp digital channels (which telcos tend to underleverage in B2B).

  • Factor B2B considerations into fiber rollout plans. Telcos generally prioritize fiber rollout schedules based on their B2C footprints, with limited regard for B2B concerns. This is partly a consequence of telcos not fully focusing on core connectivity and partly a numbers game: Germany, for example, has roughly 40 million households but just five million business locations.

    Additionally, B2B considerations are more complicated than B2C considerations, which primarily involve being the first to introduce fiber in a given area. For example, if a telco already offers DIA—a high-speed connection that is fully dedicated to one organization—in an area without fiber, it may choose to deprioritize that area. Otherwise, it risks cannibalizing its revenues from DIA, which is more lucrative than fiber. Some enterprises may also have special requirements, like ethernet-over-fiber connections.

    B2B customers have a wide range of systems and configurations, making the transition from copper to fiber more challenging for some than for others. And the process of migrating B2B customers to new technologies is generally more complex, as it involves connecting multiple locations to one another, rather than simply connecting a single location and installing a router. If a company has 20 locations but fiber is available at only ten, network optimization will remain a challenge until fiber reaches the other half.

    Telcos that weigh these factors when creating fiber rollout plans stand to build a genuine competitive advantage in the B2B space. It will be important for operators to be fully prepared for the range of network configurations and requirements they can expect, to make the process as quick, seamless, and effective as possible. While early glitches might merely annoy B2C customers, they could cause real lasting damage for B2B clients.

Enterprise network solutions becoming table stakes

As organizations of all sizes migrate more assets and processes to the cloud, ENS is increasingly becoming a prerequisite for doing business. The largest organizations with the most complex networks have long relied on MPLS, which transports data via circuits that must be installed at every location. SD-WAN, by contrast, is a software-based approach that is less expensive, more flexible, and better suited to remote work environments. These features are attracting even small companies and are prompting many larger ones to consider migrating. As a result, the SD-WAN market is expected to reach $34 billion in 2027―roughly $10 billion from overlay and $24 billion from underlay (Exhibit 3).

SD-WAN--the more ¬flexible, lower-cost approach to enterprise network solutions--is growing fast as more companies of all sizes make the switch.

For telcos, the rise of SD-WAN carries both opportunities and risks. Not only is SD-WAN roughly a tenth the price of MPLS, but it also offers telcos much smaller margins (around 30 to 40 percent, versus more than 70 percent for MPLS). And while some of the growth in the SD-WAN market can be attributed to customers new to ENS, the rest is coming at the expense of MPLS. According to Omdia, global MPLS revenues are expected to decline 6 percent between 2023 and 2027.

Additionally, with SD-WAN, the scope of competitors increases. While telcos compete for MPLS business with other carriers, the constellation of SD-WAN vendors includes tech companies such as Cisco and Palo Alto Networks. McKinsey research shows that 51 percent of SMEs but just 29 percent of large enterprises prefer to purchase SD-WAN from telcos and that cloud providers and systems integrators are poised to take over the midsize segment.3 This reflects that while small enterprises continue to prefer a one-stop shop with a single point of contact, larger companies often opt for a best-of-breed approach.

Even so, MPLS is not disappearing. Governments, banks, and other organizations that operate highly critical networks where security is at a premium will continue to require a hybrid of MPLS and SD-WAN. This dynamic requires that telcos double down on SD-WAN while continuing to invest in their existing MPLS business.

ENS levers. Through our work with operators, we have identified several powerful levers for unlocking growth in the challenging ENS space:

  • Establish clear migration paths. Telcos might begin by mapping out their entire customer base according to each customer’s existing ENS solutions, the customer’s anticipated timeline for migrating to (or adopting) SD-WAN, the customer’s key motivators, and the value at risk. By segmenting customers in this way, telcos can determine which customers to prioritize for MPLS retention, which ones to switch immediately to stem churn, and how to allocate resources like account management and sales expertise.

    Customers that do not have MPLS but may need an ENS as their network and security requirements increase can be targeted with SD-WAN offers. Such customers present a net growth opportunity.

    For organizations that are eager to shift from MPLS to SD-WAN as quickly as possible, telcos can establish migration paths that simplify the transition. It will be important to understand enterprises’ primary drivers for SD-WAN adoption, which can vary. The recent McKinsey survey of enterprise decision makers shows that greater flexibility is the chief objective for 27 percent of enterprises, with expanded coverage, reduced complexity, and redundancy in a tie for second place (at 19 to 20 percent each).

    Operators might assign technical experts to support key account managers or add a consultative element to their sales approach. Consultative sales can be particularly effective with midsize enterprises, which often lack the capabilities to plan ENS migrations end to end. By helping companies determine early which parts of the network to migrate to SD-WAN and when, operators position themselves as true partners that proactively connect customers with the right technology at the right moment for their business.

    For segments that continue to require the speed and security of MPLS (for example, financial services and the public sector), we’ve seen telcos successfully enhance the value of MPLS by bundling in services like managed security, wireless backup via mobile remote access, and secure cloud access, which allows customers to access cloud-based data and applications without using the internet.

  • Bundle SD-WAN into premium connectivity products. Telcos can soften the impact of SD-WAN’s lower revenues and margins by bundling SD-WAN with premium connectivity products that include high-cost service-level agreements (SLAs), rather than selling SD-WAN on top of broadband. Customers benefit from the simplicity of having a single point of contact for all network-related issues, and this approach differentiates telcos from non-carrier SD-WAN competitors, which must purchase the underlying connectivity from telcos.

    Many companies may see value in bundles that offer SD-WAN alongside guaranteed or synchronous upload and download speeds. Others may choose more elaborate propositions that incorporate DIA and private lease circuits (PLC), which provide best-in-class predictability, upload-download symmetry, and data security.

  • Build international delivery capabilities. A broad swath of midsize companies operate in multiple countries and are expanding into even more. Telcos can establish an advantage in the competitive market for these customers by building robust international delivery capabilities. This involves developing ongoing relationships and contracts with a variety of local vendors that can handle installation, network configuration, and customer support around the clock. By examining where their B2B customer base operates or is expanding to, telcos can better prioritize the countries where they should initially focus their efforts.
  • Pursue inbound global contracts. Historically, telcos have done a better job of securing “outbound” global contracts (international contracts with companies based in the telco’s home country) than “inbound” global contracts (with companies that are based elsewhere but engage the telco because of its superior offering). However, large global corporations are increasingly inclined to procure services from different providers in the various regions where they operate, if this benefits them.

    To secure inbound contracts, telcos will need a far greater understanding of the global customer landscape than most possess. This includes knowing how to scout for leads, where to find RFPs, and what different customers are willing to pay for SD-WAN. Telcos might begin by establishing partnerships with local systems integrators to leverage existing channels for reaching customers. They may also find it beneficial to move beyond their traditional relationships with procurement leads and pursue strategy-level conversations with C-suite leaders overseeing IT, digital, transformation, cloud, and security.

  • Bring agility to customer service management. Telcos tend to take great pride in their technological prowess. As a result, they often over-engineer their solutions from the outset and guarantee extremely high levels of service across their entire solution portfolios, regardless of customer needs and preferences.

    Certain customers, for instance, may respond well to offers bundling SD-WAN with premium connectivity. But for others, a more effective approach may be to start with modularized or semi-standardized solutions that meet customers’ most important requirements. Many customers may be satisfied with plans that guarantee 98.5 percent reliability, which is far easier for telcos to achieve than 99.9 percent reliability. Telcos can then keep in close touch with customers throughout the contract duration and offer upgrades or downgrades based on their needs at each moment.

    This requires highly skilled service managers who have strong sales capabilities and understand customers’ changing demands. If service managers have access to insights from advanced analytics, they can leverage data on usage patterns and traffic history to predict customer needs and proactively offer additional bandwidth, new applications, or a switch in technologies. In our experience, it is worthwhile for telcos to consider building a data foundation for customer value management (CVM) analytics; developing analytics models for cross-sell, upsell, and churn; and integrating model outputs into client sales tools.

  • Overhaul sales performance management. Typically, telcos measure B2B sales according to revenue and evaluate sales team members accordingly. But today’s B2B connectivity products have widely different margins, because many products include software packages that carry steep licensing costs for the telco.

    Aligning sales incentives with margins, rather than sheer revenues, requires a more sophisticated performance management system. Telcos can begin by dismantling each B2B product into modules associated with relatively well-defined margins. They can then create new incentive structures and performance evaluation metrics that are tied to the true value of each product acquisition.

Enterprise communication services: Customizing UCC and retaining voice

With cloud-based remote collaboration tools overtaking phone and conference calls as the business communications medium of choice, enterprise customers now rely on a growing array of integrated UCC solutions. These include Zoom, Microsoft Teams, and Webex by Cisco, as well as customized, enterprise-specific collaboration platforms developed by telcos.

Between 2023 and 2027, the UCC market is expected to soar at a CAGR of 10 percent, from $29.2 billion to $42.4 billion (Exhibit 4).4 The dynamism of this market has been attracting new competitors. Software providers have made it easy for customers to buy UCC products separately from connectivity, the way they purchase other PaaS and SaaS products, and telcos have not convinced enterprises that it is better to go through them. As a result, software players are poised to continue dominating the market. In contrast, operators’ UCC revenues are expected to increase by just $3.3 billion by 2027, roughly a quarter of the total segment growth.

As unified communications and collaboration (UCC) systems overtake voice, telcos will face greater competition.

At the same time, telcos’ lucrative voice market is expected to drop by 5 percent a year, from $34.6 billion in 2023 to $28.4 billion in 2027—a decline that is expected to accelerate in the foreseeable future. While UCC will generate substantially more revenue in total than voice ever did, the more competitive market—coupled with the decline of voice—will likely leave operators with a significant gap to fill.

Telcos pursuing greater success in UCC can benefit from distinguishing themselves from non-telco competitors by offering enterprises customized solutions that incorporate both core connectivity and tailored UCC packages. In addition, voice margins are wide, so it will be important to preserve them wherever possible.

UCC levers. In this growing but competitive market, telcos may increase their chance of thriving if they pull the following levers:

  • Think holistically about voice, broadband, and UCC to create tailored bundles. Operators can lean into their natural competitive advantage by bundling UCC platforms with core connectivity. This gives telcos full ownership over the speed and reliability of collaboration software while offering customers the convenience of having a single point of contact for troubleshooting.

    By bundling UCC with broadband, operators create a compelling case for speed-upselling and higher-revenue SLAs. Carriers agree to take full accountability for UCC suites operating smoothly—but only if customers purchase broadband products that are up to the task. This dynamic helps to shift customer conversations away from theoretical arguments about higher speeds and toward concrete explanations of how higher speeds can support business-critical use cases.

    Telcos that offer enterprise customers UCC solutions are competing with a variety of non-telco players. But only telcos are positioned to offer businesses holistic, tailored packages that include the right mix of voice, private branch exchange (PBX), UCC, and other communication solutions. Many enterprise customers still conduct business using landlines and PBX (private telephone networks that interconnect multiple locations). Law offices, for example, use PBX so that automated or live receptionists can easily transfer calls to lawyers. Holistic communications packages offer enterprises something they need while enabling telcos to preserve valuable voice margins wherever possible.

  • Lean into communication platforms as a service (CPaaS). Communication platforms as a service (CPaaS) require a mix of connectivity, software, and hardware. Here, too, telcos’ ability to provide connectivity differentiates them from non-industry players. They might lean into this competitive advantage by positioning themselves as the go-to integrators of the various CPaaS products on the market. Such integrators can play a crucial role, particularly among small and medium-size enterprises (SMEs).

    Cloud-based phone systems, or cloud PBX, are CPaaS solutions that have generated significant value for telcos. Cloud PBX allows operators to route calls directly from the cloud, without installing equipment onsite. By integrating cloud PBX and other CPaaS solutions, operators can preserve their role in all dimensions of enterprise communications.

    Strategic acquisitions can accelerate the path to CPaaS solutions. Verizon’s 2020 acquisition of BlueJeans boosted the capabilities of its One Talk platform, a comprehensive suite of business solutions. One Talk’s 50-plus features include call queuing, group forwarding, and an automated receptionist.

Cloud data center - stock photo

Technology and telecommunications B2B customer buying trends: Bright horizons with some warning signs

Generating new 5G revenue streams

With 5G networks reaching maturity, B2B revenues from the latest wireless generation standard are expected to rise at a 17 percent CAGR to reach $116.7 billion in 2027 (Exhibit 5). But given telcos’ significant investments in 5G infrastructure, especially in B2B, they will need to unlock new revenue streams in the second and third horizons of 5G monetization: premium connectivity and platforms and solutions, respectively.

5G maturity is expected to fuel strong B2B and private network revenue growth over the next several years.

The premium connectivity growth opportunity has two main components: premium corporate plans and private 5G networks. By enabling network slicing, 5G allows telcos to differentiate their offerings based on speed and bandwidth and to adjust their pricing accordingly. Enterprise customers with steep requirements for speed, latency, stability, security, and network access will likely be willing to pay for premium mobile plans that guarantee high performance, just as many will likely to be willing to pay for premium fixed connectivity plans.

Our recent survey indicates that 34 to 38 percent of large enterprises are planning to invest in private 5G networks in the next 12 months, fueling strong, double-digit annual growth over the coming years. Private 5G networks are ideal for 5G use cases that take place outdoors, across large geographic spans, or in areas with limited Wi-Fi infrastructure. These networks offer greater security, latency, speed, and bandwidth than Wi-Fi, so they are well suited to agriculture vehicles, off-road construction vehicles, mining equipment, and streaming video.

5G levers. To have a greater chance of success at unlocking new value from 5G, telcos can consider the following levers:

  • Rethink proposition design. Operators create new B2C packages (phone plans) every two to three years. Family plans, which consolidate billing and make it easy to add new lines, are a prime example. In B2B, however, telcos have generally stuck to the same model: charging customers according to the number of SIM cards and devices they need. This may no longer be the best approach.

    As 5G unlocks new opportunities for enterprises, it also presents telcos with an opportunity to rethink B2B proposition design, focusing on the value enterprises gain instead of the quantity of devices used. Telcos might offer packages that include seamless connectivity across all devices (so employees can easily switch among desk phones, cell phones, and tablets), security features, and a quick way to add new employees. Propositions that decouple connectivity from device quantity allow customers to bring on new team members without additional charges or paperwork.

  • Build commercial management capabilities. In the past, B2B mobile operators have generally prioritized technical and engineering capabilities over marketing and commercial management prowess. Consequently, even carriers that excel at developing complex solutions have struggled to understand business customers’ needs and to clearly communicate how their mobile products and services can address these needs.

    By building robust commercial management capabilities for B2B mobile, telcos position themselves to develop targeted campaigns that clarify for customers how private networks and premium connectivity can propel their businesses. These capabilities also support consultative selling, which can generate further insight into customers’ goals and pain points. Telcos can start by establishing an agile, cross-functional commercial management team for mobile, much as they can for broadband growth.

  • Engineer and deploy private networks at scale. Currently, telcos engineer each private network separately―a lengthy, costly process that duplicates effort. By developing prepackaged modules for private networks, telcos can transform the process, making it quicker and easier than installing a router.

    Telcos can start by analyzing private network demand to identify the most sought-after features. They can then determine what hardware and software fit into which module. It will be critical to ensure that salespeople understand when customers’ needs can be served with off-the-shelf modules and when the needs require more tailored private networks.

Charting a path for growth

To prioritize the most impactful levers, telcos should identify the most promising opportunities while carefully assessing their risk exposure. It may be useful to create a prioritization matrix that depicts the risks and opportunities associated with each product in the portfolio (voice, UCC, MPLS, SD-WAN, etc.). Then, for each product, telcos can consider the following three questions:

  1. How are we positioned in the market? The size of a company’s current market share for each portfolio item may correspond to the degree of the company’s risk exposure or the size of the opportunity at stake. But there are other factors to consider: Is the market highly fragmented, offering potential to gain ground? Is a strong competitor about to act? If a global technology migration is taking place, is the local market at the forefront or the back end of this transition?
  2. How is the market developing? Here, operators might consider how quickly the market is expected to grow or shrink and what key forces are causing this movement. Market dynamics may be influenced by regulatory changes, technology migrations (such as the shift from MPLS to SD-WAN), and increased competition from hyperscalers, software providers, or other carriers.
  3. What are our capabilities? Each product requires a distinctive mix of capabilities related to technology, service delivery, talent, and client access. Telcos can begin by assessing the superiority of their current propositions, factoring in any momentum fueled by new partnerships or projects. Another important step is to weigh the difficulty of enhancing certain capabilities through upskilling, strategic acquisitions, or other measures.

The interplay among these three considerations determines the risk/opportunity profile of each product. Based on the risk/opportunity profiles of all products falling within each of the four key value pools―broadband, ENS, UCC, and 5G―telcos can determine which value pools to prioritize and which levers to use as they define their unique strategies for B2B growth.

Amid ongoing excitement about the potential of adjacencies, very few telcos have fully exploited the core connectivity opportunity in recent years. However, B2B core connectivity will continue to be a significant growth vector for carriers. Telcos that make strategic, explicit bets on the B2B core growth opportunity can position themselves to capture new value and reduce the most urgent risks while establishing themselves as enterprises’ trusted partners of choice.

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