Recall. 2011, N17 Transition to digital in high-growth markets

Telecommunications, Media, and Technology

RECALL No17

Transition to digital in high-growth markets

RECALL No17

Transition to digital in high-growth markets

RECALL No 17 – Transition to digital in high-growth markets

5

Transition to digital Welcome to the 17th issue of RECALL, a publication for leaders in the telecommunications, media, and technology (TMT) sectors. In it, we pull together insights gathered from our extensive studies, market observations, and conversations with industry leaders on the transition to digital with a particular focus on high-growth markets. We begin by looking at the physical infrastructure that is making digital possible in the Asia-Pacific region and discussing exactly how the return stacks up to the major investment. We then take a deep dive into mobile data in particular and the risk of price erosion going hand in hand with a steep increase in mobile data traffic in emerging markets. Moving from mobile to fixed, our third article explores the investments made in fiber and the urgency with which operators must develop commercialization strategies in order to reap the rewards of their investments. The face of emerging markets is changing. Operators in this space are now employing new and innovative ways to sustain profitability. Specifically, as penetration is now quite high in many of these markets, our next article describes how operators in high-growth markets are turning to pricing as a strategy. Following this, we discuss yet another post-acquisition strategy that is now also important in high-growth markets – customer lifecycle management techniques more in line with the challenges and opportunities of the digital age. We continue with an article on customer satisfaction as another customer-centric approach to increasing wallet share and decreasing churn.

While customer acquisition is no longer the “name of the game” in many emerging markets, as in developed markets, it is still an integral part of operations. In our seventh article, we take a nuanced approach to boosting acquisition in increasingly saturated markets by focusing more granularly on customer segments. One subset of consumer activity is B2B, and our next article touches on current ICT in B2B trends and the unique advantages operators in high-growth markets have. In a brief departure from revenue to expenses, we then focus on the widely varying capital outlays from operator to operator and chart the course for optimizing these expenses. In the final article, we go back to revenue and discuss call centers as profit machines. As is our tradition with RECALL, the final word goes to a leader whose finger is on the pulse of the industry’s most current trends. Sanjay Kapoor, CEO of Bharti Airtel Ltd., India and South Asia, shares his experiences of the transition to digital and offers his perspective on its implications for operators in emerging markets. We hope that this issue of RECALL sheds light on the industry in ways that spark ideas or launch discussions about the challenges and opportunities your organization may be facing. As always, we welcome your feedback on these articles and any ideas on topics you would like to see covered in the future. To download a PDF copy of the articles or the entire brochure, please register at http://telecoms.mckinsey.com.

Jürgen Meffert Leader of McKinsey’s EMEA Telecommunications, Media, and Technology Practice

Daniel Boniecki Leader of McKinsey’s Eastern European Telecommunications, Media, and Technol­ ogy Practice

Paulo Fernandes Leader of McKinsey’s Latin American ­Tele­commu­ni­cations, Media, and Technology Practice

André Levisse Leader of McKinsey’s Southeast Asian Telecommunications, Media, and Technology Practice and Editor of this RECALL issue

RECALL No 17 – Transition to digital in high-growth markets

7

Contents 01

Big pipe, little payoff? The mobile data paradox

9

02 0.1 cent per MB: Ensuring future data profitability in emerging markets

15

03

FTTC – fiber to the cash: Making fiber investments pay off

21

04

Minding the gap: Customer perception and pricing reality in prepaid

27

05

CLM 2.0: Digital innovations in customer lifecycle management

33

06

Satisfaction guaranteed: Customer experience in mobile emerging markets

37

07

New customer overdrive: Turbocharging the acquisition engine

43

08 B2B 2015: The future role of telcos in ICT markets

51

09

Capex 2.0: Benchmarking network performance

59

10

For twice the value press “1”: Getting more from your call center operations

65

11

Digitally united: An interview with Sanjay Kapoor

71

Appendix 75

RECALL No 17 – Transition to digital in high-growth markets Big pipe, little payoff? The mobile data paradox

9

01 Big pipe, little payoff? The mobile data paradox

Asia-Pacific could soon see a data deluge. But without some key changes, operators could find that their big pipelines only deliver tiny profits. Telecoms operators have been working hard to push mobile data usage globally. In Asia-Pacific, this has held true not only in developed markets – such as Korea and Japan – but also in more emerging markets like China and India. Although there have been substantial investments in the deployment of mobile data networks, the question still remains: will it all be worthwhile?

Growing data puts pressure on ­economics Mobile data demand in Asia-Pacific is reaching a tipping point that will likely generate exploding data traffic. Unfortunately, the economics behind the massive network deployment investment have become uncertain. The rise in flat-rate pricing in some markets versus aggressive tiered pricing in others coupled with an inability to monetize mobile applications could turn the anticipated broadband boom into a profitability bust. McKinsey analysis shows that as little as 400 MB of average monthly data consumption per single user could be the break-even point for operator economics – for network costs alone – under current flat data pricing structures (Exhibit 1). The uptake of smartphones in the region will definitely put pressure on this consumption threshold and increase the threat of unprofitability. These economics will obviously change as network technologies become cheaper and telcos find other levers to improve their margins per user.

When investigating the options available to mobile operators in emerging markets, it is helpful to examine the entry strategies of different industry players. Such analysis can help operators understand which strategies pose threats and where these threats occur along the value chain. Players can then study the competitive battles and trends that will likely shape the Asia-Pacific mobile data market going forward – focusing specifically on emerging markets. Finally, it also makes sense to look at the internal choices operators need to make regarding the future roles they will assume and how they design the offerings they position on their markets.

Pursuing different data value chain strategies While go-to-market approaches do vary by region, McKinsey’s analysis of the mobile data value chain in emerging markets reveals that one aspect seems relatively constant: mobile network operators (MNOs) and OEMs have a strong starting position. These particular players could still emerge as value chain leaders if they pursue the right strategies. MNOs can readily control key pieces of the value chain because of the fragmented nature of Internet and value-added service (VAS) ecosystems in most emerging markets coupled with their unique billing presence (i.e., they typically “own” the subscriber). The best case is that they can control the handset, the network, content, and distribution. MNOs in the Philippines, for example, have attempted to exert greater control over the value chain by buying up local content providers and aggregators and by ­commissioning global vendors to develop back-end platforms for them. Operators in China have been actively

10

01

Flat-rate pricing impacts subscriber lifetime value Flat-rate pricing impacts subscriber lifetime value Lifetime value for smartphone consumers1 USD

India Philippines

3,000

China

2,000 1,000 0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200 2,400

2,600

2,800

3,000

Usage MB

-1,000 -2,000 -3,000 -4,000 -5,000

Low usage  Avg. usage: 200 MB per month  Use mobile data for – E-mail – Web browsing

Medium usage  Avg. usage: 800 MB per month  Use mobile data for – E-mail – Web browsing – Some video

Heavy usage  Avg. usage: 3,000 MB per month  Use mobile data for – E-mail – Web browsing – Entertainment (music, video, games)

1 Assumption: HSPA costs of 5 US cents per MB SOURCE: McKinsey

involved in value chain consolidation with large stakes in content aggregation, end device operating system customization to safeguard the user experience and service boundaries, and the deployment of core services (e.g., social networking, instant messaging). Device OEMs (such as Nokia) and possibly chipset players (such as MediaTek) could on the other hand also have a significant impact on the market, providing integrated offerings that bypass the MNO in everything but network access. Having said that, their movements have been quite tentative to date, and their ability to execute remains in question.

The mobile data “battles” in emerging markets McKinsey’s interviews and research into Asia-Pacific’s mobile data industry in emerging markets revealed a number of insights. First, several markets remain significantly behind levels in developed economies in terms of infrastructure readiness. Stated simply, the networks aren’t “ready.” Many have little 3G coverage – some, such as India, have only just started to deploy 3G. Still others have insufficient Wi-Fi networks. Beyond this, certain markets remain dominated by basic and low-end handsets. The high risk associated with providing credit in many markets prevents MNOs from push-

2010 ANALYSIS

ing harder to sign up postpaid subscribers or to offer handset subsidies linked to prepaid. Interviewees saw this situation as something that will be resolved over the coming years, not as an enduring structural issue. On the plus side, markets where operators have already launched HSPA (high-speed packet access) networks typically experience ­dramatic growth in data penetration and consumption. Malaysia, for instance, saw its average data consumption per user double in one year, even as operators were attracting increasing numbers of users. These markets also e­ xperience strong sales growth in high-end feature phones and smartphones along with PCs and laptops. China is expected, for example, to become the world’s largest smartphone market by sales volume in one to two years. Given this profile, McKinsey has identified five key mobile broadband battles under way in Asia-Pacific emerging markets. User interface – unified versus customizable experience. While advanced and individualized user experiences are taking off, there may still be room for a simple user experience strategy in mass-market offerings. Such a split could cause fragmentation in underlying platforms and application ecosystems, thus increas-

RECALL No 17 – Transition to digital in high-growth markets Big pipe, little payoff? The mobile data paradox

ing costs. Yet it might also lead to a further role for both operators and OEMs in creating more bound user experiences that have a wider appeal to consumers. Billing – operator billing versus other solutions. MNOs currently dominate customer billing but face increased pressure from leading vendors (e.g., Nokia Money) along with local retailers. The result: operators risk being disintermediated at one of their core assets. This is a fundamental battle where the operators currently have the upper hand. Still, over-the-top players have found innovative mechanisms to circumvent this in several emerging markets, e.g., MXit in South Africa. Device – branded versus unbranded. Strong brands such as Nokia have traditionally dominated the handset markets. However, “white boxing” by operators has emerged with strength. Consequently, players farther back in the value chain – such as chipset makers or original design manufacturers – could gain additional power. Furthermore, this challenges the effective value of large awareness-building marketing efforts. This device analysis does not include a “doomsday” scenario, where VoIP and other services would effectively lead to a stronger erosion of the core operator revenues, skewing marketing dollars to above-the-line campaigns. Data pricing – prepaid versus bundles. Markets are placing increased importance on bundles – either timebased or linked to specific categories – for data pricing versus mostly event-based prepaid monetization. This development adds new layers of complexity in data pricing, both from a technical and business perspective, but remains the key to cracking data usage. Players in China have created tiered data bundles that are offered to prepaid users and paid in advance on a monthly basis. They have also linked some handset subsidization to actual service usage, whereby users pay the full price of the device up front but get free data, voice minutes, and/or texts for each month they use the service. Value-added services – voice versus data. In many emerging markets, a large portion of VAS activity is still driven by voice- and IVR-enabled services such as ring-back tones and radio, among many others. Although the pricing for data consumption is decreasing and some of the services can be fully replaced by data, the innovation in voice VAS (such as ad-sponsored ringtones) and the lower literacy rates in markets like India, Pakistan, and Bangladesh may prevent full uptake of data consumption in some VAS categories.

11

As a result, voice VAS still cannot be neglected in future service ­deployments. This may also become a lever to fully utilize both circuit-switched and packet-switched networks instead of putting the entire burden on the packet-switched side.

Choosing roles and designing offers To some degree, mobile data’s external challenges are relevant to all that operate in this sphere. There is, however, no one-size-fits-all solution. Mobile data players in Asia-Pacific’s emerging markets need to clearly establish the roles they will assume and choose the market offerings that make the most financial sense for them. MNOs in particular should be mindful of five internal choice levers: building cost-advantaged infrastructures, choosing the right pricing strategy, managing the content ecosystem, determining the type of involvement in applications, and expanding into adjacent areas. Operators have a number of plays available to them that are linked to the roles and offerings they choose to pursue, any of which could rise in importance depending on market and business realities (see table). When discussing these levers with emerging market players, three stood out as the ones most commonly being explored: Pricing. Operators need to evaluate the current product portfolio along with the customer mix to carry out the right pricing strategy and to enable the uptake of ­content and services to further drive mobile data revenue streams. Bundling a hit content service like music with data traffic, for example, has proven successful both in developed and emerging Asian markets. In some cases, it may make sense to create price plans around specific services that would otherwise not be monetized, e.g., Facebook access. Although there is wide commercial appeal in several of these bundling options, some of the interviewees in emerging markets mentioned that various technology limitations still exist within their companies – e.g., no deep packet inspection, no IMS (IP ­multimedia subsystem) – that will hinder the widespread short-term adoption of more “intelligent” bundling. Content ecosystem. Leveraging the subscriber relationship, players are thinking of moves at three levels to tap into the content value chain. Aggregation play pushes the operator into a role of extending service provision-

12

MNO roles and offerings in emerging markets hinge on internal choices in five areas Decision areas

Strategic options

Underlying beliefs

Cost

Build a cost-advantaged structure

Gold-plated data access provisioning is not a must

Pricing

  Provide fair use flat rates and usage-based prices

 Competition will be rational in its responses

  Monetize services

  It is possible to charge for premium services, even if they used to be free

  Offer service-bundled pricing

  Users value “all you can eat” data packages at­ tached to specific categories, such as music or social networking

  Own/control key content to make it a choke point

 Unique content drives acquisition and retention and can be monetized

  Create end-to-end (E2E) experience with device, content, and network

 Telcos can build a compelling and optimized experience for premium offers

  Create core content aggregation

 Telcos can build or deploy an aggregation plat­ form and be the key content aggregator locally

  Allow OEMs to own apps

 Getting exclusivities with superior OEMs drives acquisition, and, in the long term, there will be enough competition among OEMs

  Create own app platform

 Platform is key to controlling monetization vehicle for apps

  Enable network hooks

 Unique network hooks can be used to avoid “free trap” for apps

  Control/own E2E platform

 Superior experience/premium offering can be achieved via E2E control of all aspects of apps and services

  Partner with social network players

 Social networking is likely to become the center of gravity for consumers on mobile

  Address industry verticals

 There is value to be captured in vertical niches (e.g., health)

  Ensure interworking beyond social networking

 Interworking with existing services and com­ munities beyond social networking, e.g., instant messaging or music, is valued

Content

Apps

Adjacent services

ing into content bundles in partnership with content players and can be a natural fit with the ability of MNOs to serve end users via billing integration. Wholesale information play makes key operator information visible via APIs (application programming interfaces) and other methods. This is a way to enable content providers to build on that information. Finally, end-to-end plays are being pursued by players that wish to control core service assets (social networking, music, and others) and key enablers (operating systems, middleware, etc.) as a way to provide a unique and distinctive user experience to their end users. Historically, SK Telecom has

pursued this strategy in Korea – and now China Mobile seems to be pursuing it in China. Application ecosystem. Under the Wholesale Appli­ cations Community (WAC) alliance, many operators are now reassessing their roles in the application ecosystem vis-à-vis Apple and Google. However, there are still very few signs that these strategies are being deployed. With the exception of announcements by Smart in the Philippines regarding their Android proposition using WAC-enabled widgets, very few have offered any signs of going to market.

RECALL No 17 – Transition to digital in high-growth markets Big pipe, little payoff? The mobile data paradox

13

   While emerging market mobile data players share many aspects in the fate of developed market mobile data players, they operate in an environment that presents a number of unique opportunities and challenges. To avoid the rapid commoditization of mobile broadband, MNOs in emerging markets need to explore new roles and product offerings that resonate with the market realities in these arenas. The core value drivers for operators, however, remain deeply linked to the battles that lie ahead: in particular, the fight for the billing relationship and the right data pricing execution. These should not be mere afterthoughts and definitely not taken for granted. Precisely these value drivers should form the basis upon which operators build their strategies.

Nuno Goncalves Pedro is a Senior Expert in McKinsey’s Beijing office. [email protected]

Ken Kajii is an Associate Principal in McKinsey’s Tokyo office. [email protected]

Eeleen Tan is an Associate Principal in McKinsey’s Taipei office. [email protected]

Lei Xu is a Knowledge Specialist in McKinsey’s Shanghai office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets 0.1 cent per MB: Ensuring future data profitability in emerging markets

15

02 0.1 cent per MB: Ensuring future data profitability in emerging markets

Can mobile data players in emerging markets secure the full profit potential from their significant 3G network investments? Or will the rapid price erosion accompanied by traffic volume explosion necessarily result in lower return on investment? Revenues in the worldwide mobile data market will likely double between 2010 and 2014 (Exhibit 1), providing plenty of new growth opportunities, several relating to new product categories that have been largely untapped in emerging markets so far. Mobile residential broadband services could, for example, outcompete the laggard fixed broadband infrastructure, or a low-end smartphone market could emerge, making mobile data services accessible to the mass market.

Explosion of (wireless) broadband: Profitability at risk? This growth, however, has a downside. Network capacity requirements increase rapidly as network traffic doubles every 16 to 18 months for most operators in developed markets. Such traffic escalation will most likely be even more pronounced for emerging market operators for three reasons. First, emerging markets start with far lower data traffic per user at the moment, and they are likely to catch up if not constrained by high prices. Second, fixed Internet access is much less common in emerging markets, so more people depend on mobile broadband as their exclusive way to access the Internet. And finally, lower affluence levels among subscribers in emerging markets increase price sensitivity, compelling customers to exploit flat rates and prepaid pricing, thus pushing the boundaries of their fair use policies.

As a result, fast-growing broadband could ironically cause operators to fall into a profitability trap. Heavy price competition with flat-rate offers coupled with a lower willingness to pay among customers saps revenues, while the customer base and data usage continually expand. Furthermore, after factoring in the typical network cost to serve, more and more mobile broadband customers are already unprofitable, and operators are on a trajectory to face even more red ink customers as usage rises relentlessly. With typical 3G implementations, the average network cost per MB will be roughly 0.8 to 1.2 US cents for an average operator. Network cost is usually cushioned by about 1.5 to 2.5 cents in service revenues less cost of sales, leaving room for the current data service profitability. The revenue stream, however, will come under siege from intensifying competition, i.e., the landgrab for the growing customer base and increased usage by customers in flat-rate pricing structures. As a result, revenues will likely plunge by 50 percent annually to approximately 0.2 to 0.4 cents by 2012/13 in a number of emerging markets (Exhibit 2). In this market environment, operators will be forced to put their mobile broadband production cost on the same reduction trajectory to retain the current level of service profitability or accelerate it if profitability is already negative today. In 2012/13, this would mandate the aspiration of a network cost per MB of about a tenth of a cent, or 0.1 cent. While undeniably an enormous task, we believe that it will be feasible if operators in emerging markets focus on three things: smart networks, smart costing, and smart pricing.

16

01

Mobile broadband will double between 2010 and 2014 and Mobile broadband will double between 2010 and 2014 and become become a growth engine for the entire industry a growth engine for the entire industry Global mobile broadband market USD billions, voice and messaging not included

226 27

Residential Internet via long-term evolution (LTE) mobile networks1

199

Traditional mobile broadband offers2

x2 114

114

2010

2014 (forecast)

1 Servicing residential Internet needs by mobile broadband via LTE on attractive frequency bands, e.g., 800 MHz 2 Including smartphone, e.g., iPhone, and data card offers SOURCE: Yankee Group; Merrill Lynch; Morgan Stanley; Credit Suisse; McKinsey

Smart3: Meeting the “0.1 cent per MB” ­challenge To achieve this “0.1 cent per MB” transformation, emerging market operators need to pursue a Smart3 program of continuously reducing cost per MB. As ­stated before, these three key elements are smart networks, smart costing, and smart pricing. Smart networks: Boost mobile broadband capacity while lowering network cost. Network capacity can be expanded primarily by launching successive network technology upgrades and by rethinking strategies for mobile broadband spectrum application. For example, technology upgrades to HSPA+ (evolved high-speed packet access) or even LTE (long-term evolution) can open up large amounts of additional capacity to operators, while significantly reducing their cost of capacity (Exhibit 3). McKinsey analysis reveals that such network technology enhancements could drive up ­c apacity fivefold from HSPA (with 7.2 Mbit/s) to a parallel HSPA + and LTE network infrastructure, while ­simultaneously reducing cost per MB by 70 percent or even more. Since demand for mobile broadband is currently lower in emerging markets than in developed markets, the

challenge in emerging markets centers on the operators’ ability to convince customers to take advantage of the new capacity without triggering price wars and intensified competition fueled by this excess capacity. A potentially more cost-effective way to increase network capacity involves adding more spectrum dedicated to mobile broadband through new spectrum auctions or by refarming existing 2G spectrum bands (i.e., reassigning the spectrum to different uses). This could make it possible for operators to migrate to LTE sooner and tap into the residential broadband opportunity with an even more competitive offering. Furthermore, operators need to redouble their efforts to drive down the costs of their sites, harnessing lean operating principles while keeping technology upgrade costs to a minimum. In addition, they can plan for a network transformation alongside network technology upgrades, e.g., a broad modernization of their site and network infrastructure or managed service contracts. Furthermore, LTE offers new opportunities for active and passive network sharing. These could translate into significant value creation for operators. Among others, the advantages of active network sharing are that it offers greater flexibility in spectrum application and it could address the political rural coverage objectives.

RECALL No 17 – Transition to digital in high-growth markets 0.1 cent per MB: Ensuring future data profitability in emerging markets

02

17

Operators need to reduce their network cost to 0.1 US cent per MB Operators need to reduce networkprofitability cost to 0.1 US cent per MB by 2012/13 to maintain mobiletheir broadband by 2012/13 to maintain mobile broadband profitability Expected revenue and cost evolution US cents per MB 2.5

2.5

Revenue drop fueled by 2.0

 Competition-driven price reductions (mobile, fixed) – Battle for gross adds – Fixed substitution

Revenue

1.5

1.5

-50% p.a.

1.2 1.0

 Usage increase per user – Increased adoption – New applications

Network cost 0.8

Need to lower cost

0.5

0.4 0.2 0.1 cent per MB

0 Status quo 2010

Expectation/aspiration 2012/13

SOURCE: McKinsey

Smart costing: Exploit network capacity utilization to the fullest. As operators attempt to use their networks more fully, employing a combination of smart costing measures can help them reduce their cost per MB (without new investments) by boosting network capacity utilization efficiently. To succeed, operators use smart costing to bridge the common gap between network operations and marketing. Historically, network costs have played only a minor role in pricing services for mobile operators. However, with future mobile broadband and its struggle for profitability margins, emerging market operators will be forced to adopt a more granular costing approach. The first step in this process focuses on gaining complete network cost transparency and understanding its key cost drivers at a high level of granularity, e.g., peak traffic demand in congested site locations caused by data-hungry applications. With this network cost transparency, operators are equipped to understand the causes of their usually poor network capacity utilization in detail and manage them with a set of technical and pricing initiatives. On the technical side, mobile data traffic demand distribution usually requires a targeted sectorization approach different from the one employed for 2G voice in the past. With data networks, sectors carry the same capacity, and sectorizations should be

adapted to balance traffic load and to achieve a more effective use of the existing capacity. Smart pricing: Employ granular network cost structures to define better pricing schemes. Discovering a new approach to mobile data pricing, rate structures, and offer design will be another crucial step toward achieving and sustaining a profitable mobile data offering. Based on granular network cost driver data, emerging market operators are equipped to review their mobile broadband offering to achieve two objectives. First, driving traffic away from peak hours at congested locations will free up network capacity to be monetized. Embedding incentives for customers to adapt their traffic profile can free up 35 to 50 percent more network capacity and could enhance the network quality experience of the average customer. Examples of these pricing actions include targeted off-peak usage incentives like relaxed traffic caps outside of busy hours (usage after 10 p.m. only counts half on traffic cap) and peak-hour speed reductions for low-end users. For the prepaid space, mobile data promotions can be restricted to times and areas in which capacity is abundant. Creative approaches in this regard are endless, and operators should deploy resources to test these pricing options to drive more efficient use of network capacity.

18

03

New technologies make additional capacity available to operators, New technologies additional offering a reduction inmake the cost per MB capacity available to operators, offering a reduction in the cost per MB Usable capacity for data traffic of one site GB per month1 LTE

LTE+

7,000

10,500

4G

2x10 MHz UMTS

HSPA (7.2 Mbit/s)

HSPA (14.4 Mbit/s)

HSPA+ (28.8 Mbit/s)

500

2,000

2,700

3,700

3G

2x10 MHz GPRS

EDGE

50

250

2G

1 Based on a 2x10 MHz spectrum, 3 sectors, and realistic assumptions on capacity utilization

OUTSIDE-IN ESTIMATES

SOURCE: McKinsey

Second, smart pricing also entails identifying unprofitable customers and managing them toward profitability. Some operators in extreme situations observe that less than 1 percent of their mobile data customer base accounts for 50 percent of the traffic, while contributing significantly less to their service revenues. Operators need to proactively start managing this unprofitable customer base with measures like upselling fixed broadband access at favorable rates to offload traffic, offering attractive off-peak usage promotions, applying quality of service differentiation, and forcing migrations to rate structures with more rigid fair use policies as a last resort. With these combined pricing actions, getting to the desired network cost level (and the subsequent profitability) of mobile data becomes achievable. A 90 percent unit cost reduction for mobile data service during the course of just a few years requires consider-

able corporate transformation – spanning the network, IT, marketing and sales, and finance divisions. The complexity involved in such an undertaking should not be underestimated. Only a concerted, targeted effort will bring about the smart network, smart costing, and smart pricing that will preserve the profitability of mobile data services into the future.    Although the emerging market mobile data arena will prove to be a sizeable growth engine for most telecoms operators, preserving its long-run profitability could become a significant challenge and priority for operators in emerging markets. Only a targeted set of initiatives that address network capacity, cost, and pricing will set these players on the course toward the objective of 0.1 cent per MB.

RECALL No 17 – Transition to digital in high-growth markets 0.1 cent per MB: Ensuring future data profitability in emerging markets

19

Arne Jeroschewski is an Engagement Manager in McKinsey’s Singapore office. [email protected]

André Levisse is a Director in McKinsey’s Singapore office. [email protected]

Alexandre Ménard is an Associate Principal in McKinsey’s Paris office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets FTTC – fiber to the cash: Making fiber investments pay off

21

03 FTTC – fiber to the cash: Making fiber investments pay off

After massive investments in infrastructure, fiber networks have become a reality in many markets. Now operators need an effective commercialization strategy to quickly transform fiber to the curb/home into cash. Launching next-generation high-speed networks is a once-in-a-generation transformational change in operators’ technical capability. Unfortunately, many operators fail to convert this into an appropriately exciting pitch to their customers and fall short of realizing potential revenue upside along with adequate return on investment. For companies operating in high-growth markets, fiber represents an opportunity to drive step change increase in ARPU and significantly accelerate take-up of broadband and additional services. Revenues from fiber services are not only an attractive target for nimble attackers but can also reverse declining fixedline revenues for entrenched incumbents and drive 20 to 30 percent fixed top-line growth. Given the immense challenges involved in designing and launching a fiber network, telcos can be forgiven for thinking that the job is virtually complete when they light the fiber. However, the real challenge – transforming top-performing technology into bottom-line value – has just begun. An effective fiber network commercialization approach is needed to accelerate subscriber uptake of new fiber offers, drive penetration of additional services, and quickly build revenues. Critical success factors include (1) designing a winning fiber value proposition and product portfolio that promotes upselling – particularly by using new TV services; (2) achieving excellence

in a new go-to-market and sales approach that targets attractive neighborhoods through high-touch door-todoor (D2D) selling; and (3) delivering against the service promise by ensuring that customers face minimal issues from the point of ordering through to installation and use in their homes.

Positioning fiber as a revolution Introducing fiber is a rare opportunity for telecoms operators to delight their customers. To capture the full fiber opportunity, operators need to develop portfolio strategies that lead existing subscribers to upgrade to higher offers (e.g., from low-speed limited to high-speed unlimited broadband or from single to multiple services), drive penetration of additional services (primarily IPTV), and attract new subscribers with innovative offers relative to existing market options. Hitting the sweet spot in product design can boost ARPU by 20 to 50 percent and spur strong subscriber acquisition. Offer a lot more for a little more. This is the most effective philosophy to drive upsell. It can take the form of making high-speed products affordable (e.g., 8 to 16 times the speed for a 20 to 40 percent price increase) and offering bundled solutions to meet multiple needs and increase customer value (e.g., double- and triple-play products that combine voice plus Internet, and voice plus Internet plus television, respectively). However, to design these portfolios, it is essential to understand not only the impact on the new contribution margin but also the impact on overall product profitability. Case in point: offering additional speed without optimizing cache mirrors and the content delivery net-

22

01

Select services appeal to consumers across multiple markets Select services appeal to consumers across multiple markets Average willingness to pay USD per month 10 Services with 9 future potential 8

School services Computer management

Total home equip. maint. Home management Advanced fixed voice Archive Control Multiplayer games backup point Karaoke Games Picture sharing Lottery

7 6 5 4

Gambling

3 2 1

Niche services

0 0

Video sharing One-on-one videoconference TV shop Multiple videoconference Voting

High-priority services

Personal video recorder (PVR)

Video on demand

TV on PC

HDTV

Shift TV Catch-up TV Advanced elec. program guide (EPG)

Information portal Instant news flashes 10

Key services for the short term

Video surveillance

Interesting services; difficult to monetize 20

30 Households interested Percent

SOURCE: 2nd Edition Survey “What do Customers want over High Speed Broadband,” 2009 – McKinsey proprietary data

work can multiply the cost of international connectivity for the telecoms operator. Introduce innovative services. This can help drive both penetration and acquisition. While fiber enables a host of features (including fast broadband and home management), consumers consistently converge across markets on a select feature set that increases willingness to pay – advanced TV services such as DVR, video on demand, and HDTV (Exhibit 1). Delivering a highquality TV experience with a rich selection of content and effective service delivery can win new customers and make it hard for competitors to steal subscribers (propensity to churn declines significantly from singleto double- and from double- to triple-play customers). And in most cases, these offers go beyond “the home” as bundles with mobility components (e.g., wireless broadband, Wi-Fi hot spots), which will become increasingly important in a converged world where customers demand seamless experience across fixed and mobile and across multiple devices. Bundle packages for different segments. Bundled packages targeted to meet specific customer segment needs can include: providing easy access to services for less tech-savvy users, offering low-cost, “feature light” alternatives for price-sensitive subscribers, and adding

innovative advanced features for tech-savvy, high-end subscribers. The art lies in bringing different offers together into a portfolio that, by design, drives upselling. One emerging market incumbent, for example, identified data limits as the most important buying factor for customers, then introduced a fiber portfolio with a consciously designed gradient of data limits for various speeds. In the process of migration to fiber, the operator managed to shift a subscriber base that had 90 percent of subscribers on packages below 1 megabyte per second (Mbps) on the old DSL-based broadband portfolio to over 90 percent of subscribers on fiber packages of 8 Mbps or higher after migration. This operator saw an ARPU increase of USD 25.

Buzz and door-to-door selling: The high-touch way On the one hand, the business case for fiber hinges on the cost of rolling out fiber to a locality. On the other, it is dependent on what penetration new fiber offers can achieve. Just as it is a transformation on the network side, fiber rollout needs to be treated as a market discontinuity for sales and marketing. A telco’s fiber go-to-market approach needs to have immediate and major impact in terms of creating “buzz” and signing up subscribers. Experience across markets shows that

RECALL No 17 – Transition to digital in high-growth markets FTTC – fiber to the cash: Making fiber investments pay off

operators have a 12- to 18-month window to capitalize on initial buzz and capture price premiums. Beyond this period, the higher speeds offered by fiber become the “new normal” and subscriber willingness to pay premiums dissipates. What telcos may not anticipate: this is anything but business as usual for their sales channels, and a new go-to-market approach can boost fiber sales significantly – in some cases, seven to ten times. Create market buzz. This is the foundation for a successful fiber launch. Great campaigns are designed to generate excitement and anticipation even before fiber becomes available. Fiber is enough of a discontinuity to warrant the launch of a new sub-brand. Telecoms operators worldwide have used new sub-brands and “disruptive” slogans to capture subscriber imagination. From Verizon’s declaration “This is FiOS. This is Big” to Orange’s “The broadband revolution,” bold messages can set the stage for maximal fiber sales. For wide-scale fiber rollouts, new fiber sub-brands need to be supported by above-the-line multimedia advertising campaigns and below-the-line localized targeting, e.g., e-mail and viral marketing techniques. To further encourage adoption, telcos can use short-term tactical levers such as free trial periods and free installation. Coach the customer and set expectations. It is important to coach customers on what to expect in the fiber migration process and also on how to use new fiber services to be able to enjoy the full benefits and avoid frustration. The process starts with creating awareness for why telco teams need to visit localities and homes to install fiber. Setting up demo stations at high-traffic locations, flagship stores, and kiosks in locations where fiber is being rolled out can create excitement, while enabling customers to experience the tangible benefits of high-speed broadband firsthand. During the sales and installation process, sales agents and technicians should demonstrate how customers can use new features (e.g., DVR). Beyond this, it helps ensure there is adequate how-to support in the form of literature left with the customer, help/demo channels in the TV lineup, online FAQs, and a responsive customer care helpline. Build selling skills and launch high-touch D2D selling. Following the period of creating market buzz and customer awareness, winning telcos put a major emphasis on signing up fiber subscribers and driving sales using their own stores, call centers, and – most importantly – with proactive, high-touch D2D selling. To ramp up their own sales channels, telcos must recognize that

23

fiber services are often as new to their own staff as they are to customers. Providing sales staff with proper training and coaching is important to enable them to effectively pitch these new services. The need to put enough “feet on the street” often means partnering with external firms. Done right, high-touch D2D visits can generate far higher conversion rates and amplify the buzz surrounding the rollout in the process. The challenges faced in making D2D an effective channel are unique. Thus, continuously iterating the sales approach based on street learnings becomes all the more crucial. This can include fine-tuning the sales pitch based on what specific subscriber segments find compelling, pairing low-performing sales agents with stars for on-the-job learning, and refining hours of field visits (e.g., “young singles” neighborhoods to be covered after office hours to increase chances of finding subscribers at home). For one leading telco, the D2D teams were contributing fully a third of total fiber sales within three months of the channel being launched. Motivate the team with the right incentives. Across channels, successful companies establish clear sales guidelines and migration paths that provide ample opportunities to upsell the existing customer base as they transition to fiber service. Sales incentives are then designed to disproportionately reward upselling and long-term contracts. Some players have innovative incentive schemes such as rewarding sales “seeding” and linking compensation to the sale quality (e.g., rewarding successful installation organization and/or penalizing early terminations). Track performance. A final key element of ramping up sales is to establish an effective performance tracking and monitoring system that covers all sales channels at a granular level (e.g., by store and agent). This provides management with the enabling tool to reach tactical decisions, replicate and reward successful cases, and address any issues or areas of weakness. One company saw a dramatic increase in same-store sales within days of implementing training and performance management systems, with daily fiber sales jumping sixfold.

Making the transition work A telco realized within the first couple of months of its fiber launch that a 30 to 35 percent gap existed between the initial fiber sales booked and the number of orders actually closed by swamped field technician teams –

24

with order backlog continuing to rise week after week and customer wait times creeping up even more. Transitioning to fiber entails at least three challenges. First, technical issues and teething problems are likely. Second, a successful sales campaign generates a sharp rise in demand for technical teams to provide downstream services that may be difficult to manage. Third, a subscriber learning curve is associated with new services. In some markets, up to 80 percent of migrated subscribers may face challenges in switching to fiber. Understand the end-to-end customer experience. To avoid, identify, and address such issues, telcos need to be fully aware of their customers’ fiber experience in its entirety. The exercise of mapping the process using a funnel from the point of receiving customer applications for service can be a real eye opener. One telco discovered that for every 100 sales orders received, over 20 were never entered into the system, more than 20 more were unilaterally cancelled by technical staff due to installation problems after work orders were issued. Five were cancelled by customers frustrated with the long wait. As a result, only about 55 percent of the telco’s fiber applicants were converted to invoiced fiber subscribers. Such gaps can occur for a number of reasons: incomplete or inaccurate data on fiber availability in specific locations, failure to fully update legacy sales order systems to adequately handle fiber subscription requests, and technical issues caused by faulty fiber connections. Experience shows that some issues are predictable and can be mitigated proactively. Context-specific issues

that can arise at any given telco, however, are inevitable. One telco, for instance, experienced that the higher speeds on migrated broadband connections required an ONT/modem reset after all technical tasks had been completed. This issue was only identified after a deluge of customer complaints stating that no change in broadband speeds was apparent at all after migration. Set up a dedicated office. The pragmatic approach to addressing such hurdles is to ensure end-to-end transparency in the customer experience. This makes it possible to identify issues early – and then implement a mix of temporary quick fixes and longer-term solutions to minimize impact on customer experience. Setting up a dedicated fiber-to-the-home monitoring office and SWAT teams has paid off for operators with ambitious fiber migration targets. Equally important is to ensure that customer care channels are well equipped to address subscriber queries and complaints, to provide solutions and support, and to address root causes by feeding recurring issues back into the organization.    The most critical and possibly toughest part of launching a fiber network often takes place after the build-out is complete: unless a telco crafts an effective commercialization strategy, the huge capital investment required might remain underutilized – and unprofitable – for decades. Paying particular attention to the product portfolio, marketing, and customer care can help operators dramatically shorten the time it takes to translate fiber to the curb into cash to the bank – and establish the foundation for future growth.

Saleha Asif is an Associate Principal in McKinsey’s Dubai office. [email protected]

Sanjeev Kohli is a Principal in McKinsey’s Dubai office. [email protected]

Wim Torfs is a Principal in McKinsey’s Dubai office. [email protected]

Alfonso Villanueva is a Principal in McKinsey’s Singapore office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets Minding the gap: Customer perception and pricing reality in prepaid

27

04 Minding the gap: Customer perception and pricing reality in prepaid

The world of prepaid telecoms is rife with signs of maturity, even in emerging markets. Rapidly decreasing yields or revenue per minute of use, increasing incidence of multiple SIMs per customer, price-volume elasticity well below one across the customer base, and declining ARPUs are the major culprits. In such a context, it’s hardly surprising that many forward-thinking telcos are looking to pricing as an important way to help them grow (or at least maintain) revenues. McKinsey’s experience across more than two dozen emerging ­markets shows that sophisticated pricing techniques can unleash 3 to 10 percent in revenue growth.

as volume uplifts and cost reduction. Many real-world examples show how the pricing lever can be used effectively. In the Middle East, for instance, one company found that 90 percent of its customers believed that usage was billed in one-minute increments when in fact 75-second units were the actual basis. Aligning reality with perception increased revenue by 10 percent, while keeping net additions to the base high. In Southeast Asia, a player chose to differentiate its offer to the existing customer base by giving more minutes for a slight ARPU increase, while competing for new customer additions with an aggressive SIM package in selected markets. This led to a 5 percent revenue increase over two years. In Eastern Europe, an integrated player decided to revise its data plans by differentiating smartphone usage from desktop-based broadband, which earned it a 9 percent higher product revenue and nearly 20 percent more new customers.

Extracting more from existing customers

Margin per day versus price per minute

Telcos recognize the need for better pricing to compensate for the industry’s slowing growth. McKinsey has seen that in many countries wireless telcos generate a wide range of revenue per base transceiver station (BTS): from USD 500,000 in Africa to USD 200,000 in Southeast Asia and USD 50,000 in India on average. Differences in GDP per capita can hardly explain such a wide range; it is sooner the result of industry structure and pricing behavior.

Telcos generally look to maximize margin per BTS per day, while customers tend to value something close to price per minute of voice or per megabyte of data. This, however, does not necessarily imply that telcos would have to sacrifice margins (by offering cheap price plans) in order to appeal to existing or potential customers and drive up their usage. Put another way, a price-up of calling minutes for more margin per BTS per day does not necessarily translate into fewer calls or a smaller customer base from higher churn. Just like wines and perfumes, the price consumers pay for making a call and the costs incurred (or margins captured) by a telco can have very little to do with each other.

Emerging markets were once exceptionally fertile ground for revenue in prepaid when acquisition was the name of the game. As even these regions begin to show signs of maturity, telcos are turning to pricing as a strategy to return to the path of profitability.

Sophisticated pricing is one of the quickest ways to improve revenue growth and generate EBITDA. It is the single biggest improvement lever relative to others such

28

01

A gap always exists between perception and monetization A gap always exists between perception and monetization Product positioning for two companies (CMax and XComp) and potential pricing moves for CMax

XComp

Perception price Index 200

CMax CTalkMore North Star

180

XComp Basic

CMax

XComp XSuperValue

Best plan at current perception Target premium

160

140

CMax CHappy Best plan at current monetization

120 80

100

120

140

160

Monetization Margin captured, indexed to 100 SOURCE: McKinsey

Telcos can simultaneously create positive price perception and maintain or even increase margins by leveraging a wide range of pricing elements (on-net or off-net, peak or off-peak, data versus SMS versus voice) to develop targeted offerings to address customer segments with different price preferences and elasticities. If an oversimplified, single plan is implemented, this fails to tap into the benefits of segmentation. If pricing is too complex, it could be confusing – confounding even one’s own marketing team – and might be misread by competitors, unnecessarily increasing the risk of a price war. The challenge is to strike the right balance.

A unifying framework: Perception and ­monetization To achieve this proper balance, it is helpful to have a unifying framework that allows managers to objectively determine how the pricing level and structure of an offer are positioned vis-à-vis the competition in terms of perceived value and actual value capture. Importantly, managers can check whether the positioning of the offer in the market is consistent with their intended pricing, brand strategy, and desired market conduct. A helpful tool toward this end is a single map of the market tariff portfolio – one that portrays the two dimen-

sions of any tariff – customer price perception and telco margin monetization. The perception axis is what a given customer perceives as the product price and is derived from primary customer research, including focus groups and statistical techniques such as conjoint analysis. Only a few items really matter in customer perception, and these items vary by market and customer segment, e.g., on-net peak voice price, peak SMS price, and denomination of the top-up voucher. The monetization axis measures what telcos actually earn from a given customer. This is the average of all price components, weighted by usage, plus the revenue associated with unused minutes. There is often a gap between perception and monetization of 20 to 30 percent – positive or negative. A disguised actual case proves helpful in illustrating this approach in more detail (Exhibit 1). In this case study, the competitor’s plan, XSuperValue, is monetizing about 15 percent higher than CMax’s current plan, CTalkMore, yet the customer perceives it as 14 percent less expensive. An analysis revealed that this gap between perception and reality was mostly driven by three elements: XSuperValue package would expire in five days, while CTalkMore would last seven (lower monetization for CTalkMore); XComp’s claim

RECALL No 17 – Transition to digital in high-growth markets Minding the gap: Customer perception and pricing reality in prepaid

02

29

Using the full spectrum of pricing elements is the key to success Using the full spectrum of pricing elements is the key to success Pricing elements by level of perception/monetization

Exclusively perception

Exclusively monetization

Free night minutes

Number of minutes in a pack

“Unlimited”

High off-net premium

Roaming

CLM below-theline offer

Number of SMS in a pack

Pack denomination

On-net peak

GPRS

Short validity (use minutes or lose them)

Registration for promotion

Dynamic discount level

Per-second billing

SMS peak

International

International SMS

Quota on promotion

SOURCE: McKinsey

of “0.1 cent per minute,” which it charged only after the first 40 seconds that were charged at 15 cents per minute (better perception for XSuperValue); and XComp’s offnet SMS were charged at 30 percent higher than on-net, which went unnoticed by most customers (higher monetization for XSuperValue). A Monte Carlo simulation – a method for estimating outcomes – of all possible plans under reasonable validity and technical constraints revealed a set of efficient plans that would best balance perception and monetization. Plans on this line either maximize monetization at a given perception or minimize perception at a given monetization. An analysis of the unifying tenets of these plans reveals that they maximize the price of invisible elements, have relatively short validity, and use simple headlines to “shout” and gain positive perception. CMax chose to converge toward an offer (North Star) that would maintain a 15 percent premium over the competitor (thus avoiding a price war) and was on the efficient frontier, with a potentially 35 percent higher monetization than CTalkMore. Given technical constraints and to smoothly transition the marketing communication, the company introduced the offer in three steps. This same approach was taken for four segments, creating four lifestyle plans.

The CMax marketing team considered a wide-scale launch of the CHappy plan, but determined that it would be highly value-erosive (monetization of 25 percent below XSuperValue’s current level) and likely induce a price war. CMax ultimately launched CHappy as an aggressive offer, but restricted it to new SIM cards for a period of two months, certain geographical areas, and a monthly quota (i.e., cap on the number of customers who could benefit from the offer at any one time) that could be revised. This framework allows leaders to have a productive dialog on pricing by answering several strategic questions: „„ What should our premium over our competitor’s be? „„ Are all of our plans aligned with this strategy (optimized monetization and perception)? „„ Do we have any leakage? „„ Are our competitors playing a smarter game? „„ Do we risk a price war? The value map also helps filter out opinions and realitycheck “gut instincts” on pricing strategy by showing if

30

these would either have no impact at all (often) or be very costly (even more often). Finally, this can also help drive a real reflection around customer perception: “How can we increase our brand premium?” and “How can we influence customer perception?”

Using all the pricing elements Once the perception-monetization framework to assess price plans is in place, the creativity of the marketing team can be unleashed to employ price elements from the full spectrum. Here, it is important to consider many elements, even if only some of these are actually used in the final packages. Naturally, each price element has a different profile on the perception-monetization spectrum (Exhibit 2), which varies by market and customer segment. Balanced perception and monetization. Some elements play equally on the customer price perception axis and on the telco monetization axis. For instance, on-net peak minutes and SMS are important to both customers and telcos. Per-second billing and “unlimited” offers also fall into this category: customers like them, but they are costly to suppliers. In general, players choose to be competitive on these elements and either match their competitors or levy a slight premium justifiable by brand, network, or community. Perception-heavy. Some elements play mostly on perception, with limited impact on telco margins. This

The value in validity Which top-up voucher is a customer better off purchasing? 100 minutes for USD 8 valid 8 days or 120 minutes for USD 7 valid 6 days? No straightforward answer? This is the tension at the root of the value of validity: telcos mostly care about revenue per day (here, USD 1.0 and USD 1.1 respectively), while customers care more about price per minute (8 cents and 6 cents respectively). This makes it possible for telcos to give more to customers and increase revenue. Shorter validity can be seen as a way to force elasticity.

category would include attention-grabbing headlines. For example, promoting “1,000 SMS for the day – only USD 1” would capture more attention than “120 SMS per day,” yet would have limited impact on margin, since an SMS costs next to nothing and most subscribers use fewer than 100. In a similar manner, night minutes often have negligible margin impact but can capture the imagination of young customers. Monetization-heavy. Some pricing elements definitely contribute more to monetization. Roaming, ringtones, off-net, and off-peak go virtually undetected by consumers but are well known by marketers. A hidden gem is the factor of validity: customers do not value a shift of one day to top-up validity at its true economic value (see example in text box). Since customers care more about price per minute, the more lucrative second offer is an easy sell. Sophisticated players may use mechanisms such as registration (e.g., dial #123* to get the offer) or quotas (e.g., first 100,000 customers to send an SMS get the offer) to allow for self-selection by price-sensitive customers. Some players may go even further and modulate these quotas by geography and period of the month to fine-tune their competitive position.    A wealth of pricing elements is available to marketers, who must in turn maintain simplicity for customers. Experience shows that this is more a matter of communication (perceived simplicity) than a matter of actual simplicity. Lifestyle packages, in which several pricing components are bundled in order to be attractive to students, rural homes, or heavy data users, are a good way to combine simplicity with the sophistication of a full array of elements.

RECALL No 17 – Transition to digital in high-growth markets Minding the gap: Customer perception and pricing reality in prepaid

31

André Levisse is a Director in McKinsey’s Singapore office. [email protected]

Ali Malik is an Associate Principal in McKinsey’s Dubai office. [email protected]

Samba Natarajan is a Principal in McKinsey’s Singapore office. [email protected]

Shaowei Ying is an Associate Principal in McKinsey’s Singapore office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets CLM 2.0: Digital innovations in customer lifecycle management

33

05 CLM 2.0: Digital innovations in

customer lifecycle management

As customers’ lifestyles evolve, so must the way operators manage them. Mobile operators in emerging markets can now adopt new customer lifecycle management techniques more in line with the challenges and opportunities of the digital age. Digital marketing innovations are rebooting customer lifecycle management (CLM) just in time to help operators in developing economies cope with their newly maturing markets, where the focus is shifting from attracting to retaining customers. Marketing directly to subscribers based on their individualized usage behavior has increasingly become the industry’s standard approach toward postpaid customers. Now, some leading operators are attempting to move prepaid CLM to the next level of sophistication and impact.

How next-generation CLM can help Sophisticated CLM is not just for postpaid customers in developed economies anymore. As the profiles of prepaid customers in emerging markets become more nuanced, some operators are beginning to reap the benefits of applying sophisticated, individualized customer management techniques to this segment as well. The tools that operators now have at their fingertips can enable them to capture new benefits in a number of powerful ways. First, these next-generation CLM tools can equip operators with the ability to make intelligent business decisions at a more granular level. These decisions can be based on aggregated trends such as the overall decline in the prepaid subscriber segment, or the ability to drill down into performance trends to acquire

new insights and take actions such as targeting prepaid subscribers who are also heavy SMS users. Second, CLM innovations can better empower marketers to design improved visibility into their actions, providing them with rapid feedback regarding marketing campaign effectiveness. Finally, the leading operators already employing CLM 2.0 are establishing structured and rigorous performance management routines that are driven by focused discussions on specific issues of the day rather than overall business performance.

Five CLM innovations To reap these promising benefits, some mobile oper­ ators have begun to explore new CLM tools and approaches that can enable them to react more quickly and more personally to the needs of individual sub­ scribers. The innovations these players are pioneering span five major categories. Using CLM as a customer insight factory. McKinsey research reveals that best-in-class operators often imbue their CLM departments with a variety of powerful tools and techniques that make it possible for them to gain new insights into the evolving needs of prepaid mobile customers. These players, for example, establish enterprise-wide “data marts” that can deliver virtually real-time data updates and use business intelligence tools to engage in granular analytics, data mining, and trend analysis. They also acquire the capabilities they need to build CLM “dashboards” full of key performance indicators that allow teams to monitor progress in meeting the needs of prepaid customers.

34

Social network analysis improves CLM through enhanced modeling, evaluation, and marketing Conventional approach

Approach with social network analysis

Improved churn modeling

 Determine churn probability based on sub­ scriber’s usage behavior, e.g.  - Low outbound call usage  - High frequency of calls to service center  Churn defined as SIM switching (in most cases, not necessarily subscriber leaving)

  Churn probability modeling using social ­network indicators  - Number of links within operator’s network vs. competitor’s network  - Loss of nodes within network   Churn defined as subscriber leaving network

More precise customer ­valuation

 Evaluation of subscriber value based on  - Average revenue from outbound usage  - Average revenue per month from both outbound and inbound usage

 Taking the subscriber’s network into consid­ eration when evaluating value  - Size of subscriber’s network  - ARPU of subscriber’s network

Better targeted marketing campaigns

 Targeting subscribers with cross-selling and upselling offers based on current usage ­patterns, e.g., free data campaigns to nondata users

 Viral campaigns targeting influencers in the network  Targeting use of new products within cliques

Establishing real-time channels. While SMS messaging remains a major channel for CLM campaigns, operators are also developing new and potentially more effective ways to complement regular text messages. New outbound channels include interactive voice response (IVR) systems; unstructured supplementary service data (USSD, a protocol that enables GSM handsets to communicate with an operator’s computer system); and application-based notifications. These solutions both complement and could potentially replace SMS. In one market with limited SMS usage, IVR delivered seven times the response rate for the same campaign compared to traditional text messaging. Some operators are also in the process of developing “trigger-based” and inbound channels. Trigger-based channels allow operators to dispatch real-time, targeted offers when subscribers perform specific actions, such as topping up minutes or making balance inquiries. Offers like these improve take-up rates because the targeted messages arrive when the subscriber’s attention is focused on their mobile device. Inbound channels such as automated incoming IVR are less intrusive and work particularly well in emerging markets. They deliver better take-up rates for abovethe-line marketing campaigns and build subscriber trust in the offers – an important element in many emerging markets where SMS fraud is prevalent.

Introducing “Analytics 2.0.” Operators continue to enhance their sophistication in how they apply analytic firepower in two primary ways. First, they use analytics beyond the regular focus on churn prediction. Second, they incorporate more sophisticated derived and external data sources into their analytical modeling. The move beyond churn helps operators deal with new customer developments. The increasing prevalence of consumers with multiple SIM accounts and the subsequent rotational SIM churn are two particular emerging market problems that some operators are beginning to manage with analytics. Operators attempt to identify multi-SIM users based on their on-net versus off-net calling behavior and then launch campaigns to capture a larger “share of wallet” from them. They also employ analytics to “fingerprint” subscribers based on their calling patterns and network use to identify the same subscriber regardless of SIM. The new data sources used in analytics include social network information culled from both call detail records and external social networks. Social network information improves traditional churn prediction models, better identifies high-value subscribers, and allows for more precise campaign targeting (see table). Other new sources of data are the campaign responses themselves, helping indicate a subscriber’s propensity to respond to different types of campaigns or messages.

RECALL No 17 – Transition to digital in high-growth markets CLM 2.0: Digital innovations in customer lifecycle management

Pushing data and value-added services (VAS): Word of mouse. Related to this increased analytical sophistication, operators are focused on the push to drive data and VAS usage within the subscriber base. Experience shows that “word of mouse” – especially in the form of recommendations on social networks – drives significant amounts of data and VAS take-up. In fact, this approach works far more effectively than direct campaigns. To make subscribers aware of available VAS content, operators need to build holistic databases capable of aggregating customer content preferences across multiple content providers. This then positions customers for the next “product to purchase” recommendation – a process similar in effect to strategies developed by Amazon and other Web retailers. Sales and distribution: Stimulating the micromarket. Operators can use their more granular subscriber data to direct sales and distribution activities more effectively. They can, for example, better determine micro-

35

market performance from subscriber usage information by mapping subscribers to their base station locations. Marketers can also match CLM data to retailers, particularly in prepaid environments where electronic minutes recharging dominates. Doing so allows operators to segment retailers based on subscriber base. For example, an operator could identify retailers where subscribers have low VAS usage and launch direct cam­ paigns that provide incentives to them to push VAS usage among customers. Similarly, retailers who are not selling enough SIMs could be targeted with direct ­c ampaigns to boost sales.    While mobile operators may consider these capabilities advanced, many are standard practices among online and digital Web content providers. As operators roll out CLM 2.0, they will be developing digital marketing capabilities on par with the broader competitive landscape of digital content providers.

Jia Jih Chai is an Engagement Manager in McKinsey’s Singapore office. [email protected]

Asbjørn Hansen is an Associate Principal in McKinsey’s Oslo office. [email protected]

Noppamas Masakee is an Associate Principal in McKinsey’s Bangkok office. [email protected]

Pradeep Parameswaran is a Principal in McKinsey’s Delhi office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets Satisfaction guaranteed: Customer experience in mobile emerging markets

37

06 Satisfaction guaranteed: Customer

experience in mobile emerging markets

After a decade of explosive mobile subscriber growth, acquisition in emerging markets is beginning to plateau. As “grow-with-the-market” acquisitions dissipate, operators need to shift focus toward truly satisfying customer needs in order to continue adding customers, to improve share of wallet, and to decrease churn. In the rough and tumble early days of emerging markets, the primary goal of most mobile operators was simply to sign up as many customers as possible. Other elements – such as providing an ongoing positive customer experience – were understandably secondary. Following this strategy led to explosive growth that far exceeded that of local GDP. At the same time, it resulted in downsides, such as annual churn that now tops 40 percent in many markets. Times are changing. Two developments are now be­ginning to define mobile markets in emerging econ­ omies – saturation of traditional voice services (e.g., SIM penetration of over 150 percent) and increasing customer sophistication. Learning from their Western counterparts, successful emerging market players are starting to recognize the strong link between customer satisfaction and the ability to attract and retain customers better than the competition. McKinsey analysis confirms this correlation and further demonstrates that ensuring a positive customer experience has become just as important in developing markets as it is in developed economies (Exhibit 1). The up-and-coming focus in emerging markets on improving customer satisfaction raises major new questions for operators (e.g., actions and investments to

enhance customer satisfaction), but also promises oversized rewards for those who get it right early (Exhibit 2).

Four key touch points In developed markets, satisfaction depends on strong performance across a wide variety of touch points – from network to retail to call center performance and beyond. Key satisfaction drivers in emerging markets, in contrast, typically concentrate on only a few touch points. In one recent emerging market survey, four touch points accounted for over 95 percent of total customer satisfaction: pricing (i.e., perceived value), connection quality (i.e., network quality), customer lifecycle management (CLM; including below-the-line communication and loyalty programs), and billing (Exhibit 3). The top three touch points of pricing, connection quality, and CLM drove over 80 percent of overall customer satisfaction. The concentration of impact within these few top touch points highlights the straightforward customer demand for solid execution of core voice and text ­products and “simplifies” the customer satisfaction improvement strategies operators should pursue. Heavy attention (and smart investments) should go toward ­outperforming competition on these four aspects. Improvements to the remaining touch points are, in contrast, unlikely to move the needle on an operator’s overall customer satisfaction. Among these lower-importance features, focus should lie on delivering good “hygiene,” i.e., removing the largest customer dis­satisfiers (satisfaction “killers”) that can drag down the overall experience.

38

01

Customer satisfaction also matters in emerging markets, where it correlates Customer satisfaction also matters in emerging markets, highly with gross gains and churn where it correlates highly with gross gains and churn Gross gains and satisfaction

Churn and satisfaction

Customer satisfaction Index

Customer satisfaction Index R2 = 0.5

R2 = 0.9

Each dot represents the company’s performance in one (sub-)market 15

20

25

30

Each dot represents the company’s performance in different calendar quarters 35

40

45

Gross adds share Percent SOURCE: McKinsey

The following sections explore some elements of the largest drivers behind positive customer experience in emerging markets – pricing, connection quality, and CLM – in greater detail.

0.09

0.10

0.11

0.12

0.13

0.14

0.15

Churn rate Percent DISGUISED EXAMPLE

30 percent – experience the impact of above-the-line pricing campaigns (e.g., television, radio, newspapers, billboards). As a result, the massive, price-focused above-the-line and storefront campaigns often generate less impact than expected and may in fact hurt overall market price levels and profitability without appreciably improving customer satisfaction. In reality, CLM and below-the-line activities using SMS messaging, direct mail, and other targeted options (such as customized offers at stores and call centers) are the real forces of influence for the existing customer base. Excelling at CLM and below-the-line marketing becomes a core winning competency that can allow an operator to simultaneously increase customer satisfaction and meaningfully improve customer lifetime value – through higher ARPU and longer customer lifetime.

Pricing: Lowest is not necessarily best. Pricing stands apart as the most important driver behind customer satisfaction in emerging markets, but one key finding is that low prices alone do not guarantee high satisfaction levels. Even though emerging market customers often face real budget constraints, offering the lowest effective price (i.e., total cost per traffic profile) is not necessarily the best solution. The research indicates that an operator might have the highest effective price plans by far and be the satisfaction leader in pricing. An operator can also have the lowest effective price plans but lag in pricing satisfaction. The key is to manage expectations and perception in creative ways – for example, by offering on-net minute bundles for a fixed fee. This can enable a low headline price (due to a low average price if all bundle minutes are used) but a higher real price since most customers do not use the full bundle – resulting in higher overall ARPU from increased usage.

Connection quality: Find the cliff, fix the micromarkets. The mobile network itself continues to be a major differentiator for operators worldwide. Perhaps nowhere is it more important than in emerging markets, where lively word-of-mouth recommendations quickly emphasize networks that offer high, reliable performance.

Another key consideration: as markets mature and a large part of the subscriber base “stabilizes,’’ only a small portion of subscribers – often no more than 20 to

Experience shows that a few operational metrics matter most when it comes to satisfaction. Operators should seek to gain experience leadership on precisely these

RECALL No 17 – Transition to digital in high-growth markets Satisfaction guaranteed: Customer experience in mobile emerging markets

02

39

Operators delivering a superior customer experience enjoy a premium inOperators the marketdelivering a superior customer experience enjoy a premium in the market Premium relative to average market satisfaction Percentage points

Vodafone, Portugal

+8.6

+5.6

O2, Great Britain

+5.2

Vodafone, Italy

SFR, France

+7.0

+7.3

Telenor, Denmark

Vodafone, Spain

Premium relative to average local market ARPU Percent

+4.2

+10.8

+4.5

+10.3

+3.0

+2.6

+3.9

SOURCE: Company data; McKinsey

metrics. Still, experienced leaders do not neglect any network parameter with a direct impact on customer experience, and “hygiene” or parity levels should be the target for these metrics. Furthermore, operators need to recognize that the importance of elements in the customer experience formula will change over time as markets mature. In many emerging markets, for instance, as outside coverage in urban areas becomes less of an issue, customers typically grow more sensitive to call drop rates (especially when driving) and to indoor coverage (which can differ significantly among players). Beyond urban areas, outdoor coverage is still important to customers in many developing markets and can drive their choice of operator. In terms of targeted levels for network parameters, operators should consider the existence of satisfaction “cliffs” – break points in real and/or perceived coverage, quality, or other factors beyond which customer satisfaction plummets. Operators should manage key network parameters considering these discrete cliffs, since attempts to improve satisfaction beyond them tend to deliver diminishing returns. Once key network parameters and their levels have been defined, these need to be delivered locally and consistently over time. This means individual customers

should experience the target levels where they use their mobile phones personally. Achieving country-wide performance – with possibly wide local variations – will result in a poor customer experience for many, and “unnecessarily good” experience for many others. Operators should, therefore, ensure that call drop rate performance, for example, is measured and maintained for individual base transceiver stations consistently at least on a monthly and potentially a weekly basis. When designing a connection quality strategy, operators need to determine whether a specific gap is only perceived or if it is rooted in real performance issues (or both). The former will require a focus on subscriber communication and expectation setting up front, while the latter will call for real operational fixes. Based on this assessment, the solution will differ by area and have a significant impact on the investment required. CLM: Control the below-the-line beast. Customer lifecycle management can help operators effectively manage price perceptions, especially in markets with maturing penetration. In effect, CLM enables emerging market operators to step beyond the frenzied activities involved in signing up as many subscribers as possible and introduce the processes needed to attract and retain their most valuable customers.

40

03

In emerging markets, just a few touch points truly matter In emerging markets, just a few touch points truly matter Touch point

Customer experience net importance Percent

Pricing

32

Connection quality

26

CLM

22

Billing Retail

15 1

Roaming Mobile devices IVR Call center Web site Mobile Internet

Key messages  Approx. 95% of overall satisfaction driven by top 4 touch points – perhaps highlighting the simple “voice and text” focus of the overall market  Pricing and network quality drive around 60% of overall satisfaction  Drivers of low satisfaction on other touch points should be addressed to ensure “hygiene” levels – but this will not result in significant satisfaction improvement across the base

Self-service Complaints DISGUISED EXAMPLE

SOURCE: McKinsey

Clumsy CLM attempts can backfire, especially if customers react negatively to excessive below-the-line campaigns or view overly aggressive third-party services as “spam” or an abuse of trust. In one case, an operator wanting to boost short-term revenues inadvertently increased its CLM-related SMS messaging frequency to between 10 and 20 “advertising” texts per day. This resulted in message overload, diluting impact and infuriating many customers. Since the operator had no gateway or single control point for the different messages it was sending, such overkill was almost inevitable. Poor targeting in terms of response rate or group size can also result in customer dissatisfaction. Another operator targeted very large subscriber groups for its SMS campaigns, often involving over half of all customers. These massive initiatives typically generated response rates of 1 percent or less, while best-practice campaigns often net reply rates in the range of 3 to 5 percent or more. A much more focused approach targeting specific segments of fewer but more similar customer groups would likely have yielded better results.

One size fits most: Emerging market caveats The quest to improve customer experience involves a few caveats. Operators should be wary of relying on

averages in the context of larger, more heterogeneous emerging markets. This is because satisfaction drivers, and the current satisfaction situation in particular, can vary by geography. Such variations are often driven by different competitive starting points and the prevailing competitive situation. They require operators to take a more granular approach to looking at customer satisfaction as it is in their particular market. Within emerging markets, McKinsey research also reveals that lower-income regions often concentrate even further on a smaller number of more basic touch points, while higher-income areas such as major cities embrace a wider variety, reflecting a broader set of customer needs. In fact, the most affluent and urbanized regions of emerging markets often bear a striking resemblance to mature EU markets, with customers concentrating on a longer list of touch points, requiring operators to achieve excellence on multiple fronts.    As the customer landgrab in emerging markets comes to an end and the focus shifts from acquisition to retention and from volume to value, operators with a clear understanding of their customer’s experience – and how to optimize it – are positioned to win.

RECALL No 17 – Transition to digital in high-growth markets Satisfaction guaranteed: Customer experience in mobile emerging markets

41

Daniel Boniecki is a Director in McKinsey’s Warsaw office. [email protected]

Conor Jones is an Associate Principal in McKinsey’s Dublin office. [email protected]

Nicolas Maechler is a Principal in McKinsey’s Paris office. [email protected]

Radim Rimanek is an Associate Principal in McKinsey’s Prague office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets New customer overdrive: Turbocharging the acquisition engine

43

07 New customer overdrive:

Turbocharging the acquisition engine

As markets mature and service ranges become more complex, mobile operators’ attempts to boost customer acquisition using traditional functional approaches have had limited success. Operators now need holistic programs that focus on multiple elements and are tailored to specific segments and micromarkets. Historically, two broad themes have dominated the customer acquisition efforts of most mobile operators in high-growth markets. First, mobile marketing and sales efforts have largely emphasized simplicity (in contrast to most consumer businesses), with few differences among customer segments aside from pre- versus postpaid. Second, activities have mostly been functionally oriented, such as optimizing pricing, improving distribution management, and launching new advertising campaigns. In a world enabled by 3G and smartphones, the fight is on for every incremental subscriber as markets mature and the breadth of products and services on offer rises by the day. In such a context, an acrossthe-board approach is no longer the best choice. Several operators have also found that a significant increase in customer acquisition is possible only if multiple functional levers are used simultaneously in specific micromarkets to help them shift into a higher gear.

The stalled acquisition engine Marketing and sales professionals spend most of their waking hours either engaged in customer acquisition initiatives or thinking of ways to innovate the process. Approaches include new product launches; distribution revamps to improve reach, capillarity, quality, and trade along with consumer promotions; new advertising

campaigns; plus improvements to network coverage and quality. These traditional initiatives are, however, becoming increasingly blunt. McKinsey research reveals that attackers and late entrants often struggle to make inroads into high-ARPU pre- and postpaid segments in most emerging markets. Generic interventions such as launching new rate plans for high-ARPU subscribers usually fail to help an attacker gain share, since their channel remains weak and retailers lack sufficient confidence to push the new plans. Even increasing channel commissions or launching promotions to support the new products prove ineffective because negative brand perception hinders stronger consumer pull for the products launched. Similarly, incumbents may find their share of customer acquisition flat or declining in markets with high competitive intensity. If a new player takes a very focused and aggressive approach, it can eat away share in a particular segment or geography, which it then starts to own. Incumbent attempts to match the attacker’s rate plans often fail to restore market share in that region. A new equilibrium with lower market share results. These kinds of constellations require a new approach to customer acquisition. First, levers must be tailored to each segment in which a player wishes to drive up acquisition. Second, several functional levers need to be used simultaneously for operators to see a leap in their level of customer acquisition. Successful operators using this new approach have ensured that the organizational effort devoted to this is similar to that of a new operator or market launch in terms of focus, investments, and

44

01

Turbocharging customer acquisition engines is having significant impact Turbocharging customer across high-growth marketsacquisition engines is having significant impact across high-growth markets Gross subscriber additions/month – after 12 months of the program Indexed to 100 South Africa

India

SMBs/SOHOs

130

HVIs1

130

Affluent youth

200

SMBs/SOHOs

200

Data dongles Mass market

1,000 120

Philippines

Mass market

Mexico

Data dongles

130

Affluent youth

130

1 HVIs = high-value individuals

125

Baseline: 100 EXAMPLES

SOURCE: McKinsey

resourcing. Third, since this intensive effort usually requires a high budget (often increasing below-the-line marketing spend by a factor of two to three), it works best if initially only conducted in the micromarkets with the greatest potential for improving market share, and tailored to these. This approach has the additional benefit of testing the strategy before a national rollout.

particular interventions. The following chapters outline the important elements of this new customer acquisition approach for two high-ARPU segments: affluent youth and SMBs/SOHOs (small and medium-sized businesses, plus small offices/home offices). Similar approaches are available for data dongles, the mass market, and the c­ orporate sector.

McKinsey research indicates that turbocharging customer acquisition can lead to an increase of 20 to 100 percent (and sometimes a great deal more) in the segments and micromarkets targeted (Exhibit 1). Before launching a multilever, segment- and market-specific customer acquisition approach, it is important for operators to identify and address any structural or systemic hurdles, such as a significant rate plan disadvantage.

Attracting young, affluent users

The turbocharged acquisition engine at full throttle Turbocharging the customer acquisition engine requires the use of multiple functional levers simulta­ neously to target a particular customer segment, often in specific micromarkets. McKinsey’s approach includes consumer insight-led, segment-specific strategies ­illustrated below for each segment, including multiple tools/templates that can be used to design and execute

In most emerging markets, the affluent youth segment accounts for 20 to 25 percent of market revenues. Customers often have top-quartile prepaid ARPU – two to three times the overall ARPU in most emerging markets. This segment is driven by content, applications, and handsets. Such customers are attractive for acquisition programs following the market launch of 3G services. Small-screen 3G data is often the hook that players weak in the affluent youth segment use to gain share. Sadly, most such efforts fail. Simply designing a few attractive 3G data plans and getting the starter packs distributed to existing outlets is frequently insufficient to overcome these customers’ barriers to adopting 3G data services or switching to a weak brand that leading stores might not carry. Gaining substantially more market share in the affluent youth segment requires a more holistic approach. Strategies specific to the affluent

RECALL No 17 – Transition to digital in high-growth markets New customer overdrive: Turbocharging the acquisition engine

02

45

Data packages for the affluent youth segment must be affordable Data packages for the affluent youth segment must be affordable yet adequate yet adequate Data share of total ARPU, March 2011 Percent

Minimum usage allowance MB per month

Vietnam

25

Colombia

21

Malaysia

21

Argentina

20

Mexico

19

Brazil

19

Chile

Video on demand App store/portal 200 - 240 MB/ month needs to be provided at 12 - 25% of ARPU

Video streaming Songs Push mail

90 - 100 90 - 100 5 - 10 10 - 20 5 - 10 <1

16

Thailand India

Live mobile TV

24

China

15 12

Browsing

<1

Total

200 - 240

Ø 19 SOURCE: Yankee, March 2011; McKinsey

youth segment that need to be applied simultaneously include the following: Adopt simple, balanced plans. When 3G services are introduced, data will account for only 12 to 25 percent of ARPU for customers in emerging markets – compared with 35 to 40 percent in developed markets. This is why operators in emerging markets need to offer simple, inexpensive data plans that provide customers with adequate usage to stimulate interest and trial, while remaining affordable within the overall telecom wallet (Exhibit 2). Operators in most emerging markets need to reduce data pricing for 3G services significantly compared with their existing 2G rates in order to drive data service trial and adoption. Develop a differentiated customer proposition. The most powerful stimulus for customers to switch operators often comes from having exciting and exclusive content (e.g., live World Cup video). Such content injects meaning into 3G for the average customer, generating distinctive pull for the operator. Since having exclusive access to all the best content would be prohibitively expensive, the operator will need to choose the “slivers” (infotainment, healthcare, education, gaming, etc.) it wants to dominate and be known for. Beyond content, the device the customer uses is crucial. The operator

will need to work with device vendors to obtain smartphones at the best possible value, since it is the device that defines the customer’s first 3G experience. Expand product reach and availability in top stores. Leading retail outlets are uncharted territory for weaker brands, meaning operators will need to launch a highenergy “beat storming” initiative. Here, three key initiative characteristics are crucial for success. First, the initiative should be systematic, meaning every high-volume retailer is mapped to a team. Next, contact frequency needs to be high – once a week for category A stores and once every two weeks for category B stores. Finally, initiative quality should be high. In other words, channel and territory management should contribute significant involvement with outlets, aided by senior executives. In support, a well-timed blast of below-the-line promotions – such as kiosks in high-traffic areas, mobile vans in specific clusters, and targeted ­promotions in category A stores – can convince key dealers that the operator has sustained energy and determination. Provide distinctive customer service. The affluent youth segment will expect intense support as they experiment with 3G data. Customer care both in-store and via call centers will thus need upgrading to handle the high volume of queries. Successful operators in emerging

46

markets launch high-power training programs for their own sales and retailer sales forces. They also generally launch a parallel effort to upgrade call center quality based on training or recruiting, often conducted six to eight weeks before the concerted effort goes live. Build a targeted network infrastructure. Weak spots in network coverage – particularly in buildings – will need to be proactively identified and remedied. The impact of suboptimal coverage on data speeds could impair many customers’ initial 3G data experience, generating negative word of mouth, which must be kept to a minimum. Drive customer education and personal experience. Finally, it is critical to invest heavily in educating emerging market customers about the benefits they can reap from 3G data: “Why access the Internet on your phone?” “Why is high-speed Internet essential?” “Why own a smartphone?” This can be accomplished by using the media as well as by conducting in-store/ in-market demonstrations. Operators who make smart investments in in-store demonstrations by very skilled salespeople at focal points with high traffic are capable of signing up a large share of early adopters.

Targeting the SMB/SOHO segment In most emerging markets, SMBs/SOHOs account for 40 to 60 percent of the total high-value postpaid subscriber base. Unlike high-value individuals (HVIs) – the other significant group among postpaid subscribers – SMBs/SOHOs are more willing to churn if they perceive significant value in doing so. Most operators have addressed this segment half-heartedly, often using store-based HVI-like initiatives. As a result, their aspired gain in market share has failed to materialize. McKinsey research reveals that winning in the SMB/ SOHO segment requires a completely different spin on customer acquisition. A holistic approach to gain market share in the SMB/SOHO segment should include the following strategies implemented simultaneously: Generate micromarket mapping. First, the operator should identify the most attractive SMB/SOHO pockets. These are typically areas within towns/cities where such businesses tend to cluster, often by industry. A granular understanding of these clusters – including current and future telecoms spend and competitor propositions – is vital in determining product and channel choice. A prioritization model aids in sifting out the most attractive markets in terms of revenue pools and

competitive intensity. This way, operators can sequence their efforts, focusing initially on the micromarkets with the greatest potential. Develop customer-centric products. Another important aspect is to design product bundles including devices. This should be both highly attractive for SMB/SOHO customers and designed to encourage this specific segment to transfer as much spend as possible to the operator. Inducing SMB/SOHO customers to switch from their existing operator involves leveraging the full power of the offering while increasing total perceived value. Using an effective savings calculator with the sales promoter will allow the front line to customize prices to ensure the SMB/SOHO obtains significant savings over their existing operator, making a compelling case to change providers. Build unique channels. Beyond this, the SMB segment requires a unique channel to serve it effectively. Since SMBs do not often shop for their services, they expect to have them “pushed” by direct or outsourced salespeople. This often requires setting up a new channel or significantly scaling up an existing channel. A leading South Asian integrated operator was able to increase its SMB/SOHO acquisition by 50 percent in select micromarkets within 60 days of creating an effective push channel for those specific markets. Provide distinctive customer service. SMB/SOHO customers expect special treatment. This should be delivered via a separate, dedicated call center and an in-store service area for specific service and billing queries. Build a differentiated identity and infrastructure. McKinsey research indicates that a unique identity – frequently a brand extension – can differentiate the operator in the SMB/SOHO customer’s mind. In emerging markets, the network coverage and quality in priority SMB/SOHO clusters is often inadequate to provide a distinctive customer experience. In such situations, superior network coverage – wireline in particular, as well as wireless for high-speed data – with the necessary in-building solutions must be established in the selected micromarkets after conducting thorough network mapping of the geographic SMB/SOHO clusters. Create an independent organization. Finally, operators have typically found that the SMB/SOHO segment never receives adequate attention, ownership, or energy if it is buried somewhere within the consumer or the enter-

RECALL No 17 – Transition to digital in high-growth markets New customer overdrive: Turbocharging the acquisition engine

47

Creating market leadership in wireless data dongles „„ Over 30 product launches in 18 months, fueled by continuous innovation

Hit by stagnating voice revenues and deteriorating quality in its pool of new subscribers, an emerging market telecoms operator was looking for new avenues of revenue growth. This operator identified an opportunity to meet an unfulfilled need in largescreen wireless broadband: fast, mobile Internet for profitable customer segments such as students and working professionals.

„„ Broadened sales reach into non-conventional ­channels, e.g., computer/electronic retail stores „„ Excellent service with a targeted program catering to high-value subscribers „„ Network growth with quality coverage in 70 percent of the country based on a three-phase expansion plan that ensured distinctive execution one city at a time.

Achieving success, however, meant concentrating on getting specific elements right simultaneously. To this end, the operator launched an extensive concerted effort lasting over 15 months. The results were convincing:

The operator now has a market share of 55 percent, generating USD 200 million in annual revenues.

„„ Distinctive branding with consistent messages

March Launch in top 5 cities and 2 regions with 20+ cities

April TV commercials promote brand message and brand recall

FY 2009

FY 2010

July - August Revenue share with partners, launch in 10+ cities, live TV introduced

November Alternate channels in select cities, sales double in 3 months

January - March Incentive program, ~ 100% growth over Q3

FY 2011

May Excess usage billing kicks in, complaints escalate

September Separate call desk, over-air activation, lower excess usage rate, complaints go down

December 4 bundle offers with laptop/ netbook OEMs

February Prepaid plans launched with smaller ticket sizes

Number of large-screen wireless broadband gross adds and market share Indexed 30%

30%

0

1 Q4

22

44

100 Q1

133

June - July Launch in 10 - 15 more cities, new ads with shift to intangible benefits

55%

45%

25% 0

May Unlimited plans with lower speeds above specified limit

167

233

Q2

244

256

272

Q3

344

444

500

Q4

556

567

578

589

Q1

SOURCE: McKinsey

prise business. It is best served by setting up an independent unit that reports directly to the CEO or CMO.

Managing the detail Once the broad idea of a segment-specific but holistic approach has been agreed, the major execution chal-

lenge is the sheer number of moving parts. All activity streams need to be executed flawlessly and should be ready almost simultaneously. This puts enormous pressure on the organization. Since the selected segments and micromarkets are not the organization’s only focus at any given time, it is usually difficult to spare the leadership and managerial resources required to make this

48

Tools and templates for designing and managing an SMB/SOHO acquisition Levers

Tools/templates

Objectives

1.

Generate micromarket mapping

a) Prioritization model

a) Apply best-practice micromarket selection methods based on revenue pools and competitive intensity

2.

Develop customer-centric products

a) Value proposition

a) Understand customer needs, link to available products

b) Savings calculator c) Data pricing d) Handset-app subsidy matrix

b) Identify price impact of offers on customer bills c) Understand pricing link to user consumption and satisfaction d) Increase handset subsidy/discount with increasing spend

3.

Build unique channels

a) Sales reach planner b) Sales force dimensioning model c) Channel partner ROI model d) Channel readiness tracker e) Funnel review tracker

a) Plan for optimum retail presence, interlink channel coverage b) Calculate manpower required with best-practice productivity c) Link commission structure to dealer sustainability d) Check personnel training, dealer infrastructure e) Review deal pipeline and accelerate approvals to close deals

4.

Provide distinctive customer service

a) Service tracker b) Escalation matrix

a) Track segment-specific metrics across churn, payment, and usage b) Ensure correct information flow of unfulfilled SLAs for complaint ­resolution

5.

Build a differentiated identity and infrastructure

a) ATL/BTL tracker

Create an independent organization

a) Recruitment pipeline

b) Network planner

a) Plan and review impact of individual campaigns b) Map network coverage and quality

6.

a) Review, track, and debottleneck recruitment efforts (managed at a recruitment agency level)

happen. As a result, this risks becoming a “best-effort” enterprise, just like one of the operator’s many functional initiatives. The product is rolled out at one time, while the channel initiatives and marketing activities are executed at another. The result is lackluster, rather than the anticipated step change in performance. The operator needs to realize that its execution quality and intensity must be better than that of the market leader in the selected segment and micromarket.

key to success is to execute all the initiatives simulta­ neously and to get it right the first time. The learnings from s­ imilar programs become most valuable precisely here. The table on this page provides examples of proven tools and templates. Dedicated PMO resources should ­manage the intricacies of the many initiatives such a new, comprehensive acquisition effort comprises. Intensive performance management will ensure robust, high-quality execution.

An operator’s first priority should be to swiftly define and design the segment-/market-specific strategies within the holistic approach. The levers described for the two segments above are a vital component. The

In McKinsey’s experience, these elements are an ideal mix to target a particular consumer segment or specific geography in a high-growth market, accelerating an operator’s customer acquisition engine.

RECALL No 17 – Transition to digital in high-growth markets New customer overdrive: Turbocharging the acquisition engine

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   Expansion in traditional high-growth emerging markets begins to taper off as mobile penetration reaches saturation. Then, operators struggle to increase their revenues at the same pace as before with their existing capabilities. Investing in a world-class retention engine can only stop the bleeding to a limited extent. Growing revenues structurally in the face of these challenges requires a sophisticated customer acquisition engine that allows operators to gain share in particular segments using a holistic, micromarket-specific approach.

Kushe Bahl is a Principal in McKinsey’s Mumbai office. [email protected]

Barnik Maitra is an Associate Principal in McKinsey’s Delhi office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets B2B 2015: The future role of telcos in ICT markets

51

08 B2B 2015: The future role of telcos in ICT markets

The convergence of telecoms and IT has opened the door for significant B2B activity in the ICT industry. Understanding the markets and the trends that shape them will help telcos take full advantage of the market share and revenue opportunities. In a dynamic industry like business-to-business telecommunications, four years can seem like a lifetime. Because the pace of change is so fast, even looking just a few years down the road is of strategic importance. Assessing the possible roles for telcos in the industry of the (near) future can provide leaders with valuable insights on how to position for success. To that end, McKinsey has undertaken an initiative to explore current trends in telecoms and identify the forces that will shape the market in the years to 2015.

The fusion of IT and telecoms The evolution and convergence of technologies have blurred the lines that once separated telecoms players from the world of information technology, and the two sectors are on a collision course. Many telcos are actively trying to make use of their existing scale and IT savvy to move beyond basic voice and data services and begin selling IT services. A number of telcos have recently acquired IT companies in order to drive growth in ICT services and related network areas. Examples of this “border crossing” are KPN’s 2007 acquisition of Getronics and NTT’s recent acquisition of Dimension Data. The same trend has been observed in emerging markets, as shown by the partnership of Telmex with Hildebrando and Telkom

Indonesia’s acquisition of the IT player Sigma. Telecoms equipment players are also following suit and actively venturing into the IT space, as illustrated by Cisco’s move into the server market. However, the convergence taking place is not a one-way street. Many modern IT services such as cloud computing require communication products as integral parts of the offering. Also, a number of IT players are recognizing they have the ability to make inroads into the telecoms space. This is often accomplished by designing substitutes for traditionally delivered telecoms services, such as over-the-top application collaboration and IP-based communication applications. Supply-side changes are being mirrored on the demand side, with more companies expanding the role of the chief information officer (CIO) to include decisions regarding both IT and telecoms. Further evidence of these changes can be seen in the clear trend toward consolidating IT and telecoms suppliers. CIOs must expand their perspectives regarding enterprise-level ICT, as the boundaries between voice and data, mobile and fixed, telecoms and IT begin to disappear.

Emerging markets – B2B growth engines Emerging markets have recently been the focus of B2B growth, outpacing their developed market counterparts. Between 2005 and 2010, the Latin American B2B telecoms market grew at an annual rate of 12.5 percent, while in Eastern Europe markets grew at 8.4 percent. In even greater contrast, growth rates in developed economies like North America (+2.9 percent) and Western

52

01

The B2B space is expected to continue to grow at attractive rates, The B2B space isthe expected toespecially continueintoITgrow at attractive rates, surpassing B2C for first time, services surpassing B2C for the first time, especially in IT services Global ICT market growth, 2010 - 15 USD billions CAGR 2010 - 15 2,457 B2C telecoms

1,074

2,854

3.0%

1,187

2.0%

678

2.5% 4.7%

B2B telecoms

598

B2B IT services

785

989

2010

2015 Latin America

North America

B2C telecoms B2B telecoms

2010 2015 CAGR USD billions 2010 - 15 221 229 0.7% 162

172

1.2%

B2B IT services

322

411

5.0%

Total

705

812

2.9%

Western Europe

Eastern Europe

77

85

2.0%

263 263

0%

67

76

2.6%

58

69

3.8%

131 134

0.6%

48

57

3.5%

29

49 11.0%

232 270

3.1%

11

14

4.7%

626 667

1.3%

126 147

3.2%

164 203

4.4%

Middle East and Africa

Asia-Pacific

4.8%

329 387

3.3%

72

91

4.8%

128 155

3.8%

15

19

5.4%

175 225

5.1%

203 257

4.8%

632 767

3.9%

116 147

Note: Figures may not equal the sum stated due to rounding SOURCE: Yankee, March 2011; Gartner Worldwide ICT spending, Q1 2011; McKinsey

Europe (+1.8 percent) were much lower. Spurred on by the opportunity to capture some of the high growth, emerging market telcos are moving to establish themselves as credible ICT players. A survey of 30 Brazilian CIOs revealed that telcos are beginning to be seen as credible providers of ICT services in market segments such as data centers, WAN, LAN, call centers, and, to a lesser extent, desktop management. The continued convergence of IT and traditional telecoms markets and the opportunities it creates will cause telco B2B offerings to grow at attractive rates in the coming years, with B2B growth surpassing B2C growth rates for the first time ever (Exhibit 1). Globally, the growth of combined B2B telecoms and IT services will increase at nearly 4 percent annually from 2010 to 2015, eclipsing the expected expansion of the telecoms B2C market of 2 percent per year during the same period. Much of the momentum for this move ahead comes from IT services, which are expected to grow at almost 5 percent per year from 2010 to 2015 (Exhibit 2). While IT services offer attractive growth opportunities to a mature telecoms industry, they come with reduced margins. EBITDA margins for typical telecoms services can exceed 35 to 40 percent, whereas the EBITDA margins for IT services are commonly much lower, ranging

from 5 to 25 percent. However, EBIT is more appropriate as a profitability metric for IT services, acknowledging their lower capex requirements compared to telecoms services. The EBIT margins of pure IT services are typically around 5 to 10 percent, while EBIT margins for ICT services frequently amount to between 10 to 20 percent. Telcos must determine the appropriate focus of resources to manage margins and capture growth, and emerging market operators have key advantages over their developed market counterparts when moving into ICT: High growth rates. The steep ICT growth trajectory in emerging markets makes them very attractive. Emerg­ ing market customers often have a lack of legacy IT compared to those in developed markets, and surveys regularly show that customers are prepared to move directly toward the latest generation of technology and services, potentially leaving out entire generations of technology that more developed markets are transitioning through. For this reason, advanced ICT services will play an even more important role in enabling emerging market operators to grow and tap into new revenue pools. Open market structure. Secondly, due to their early stage of market development, market structures in emerging economies are more open. Emerging markets

RECALL No 17 – Transition to digital in high-growth markets B2B 2015: The future role of telcos in ICT markets

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53

Telecoms growth will be data-driven, and IT will grow at Telecoms growth willareas be data-driven, and IT will grow at attractive rates in most attractive rates in most areas Global B2B ICT market USD billions

Bold = fastest-growing segments

Telecommunications 598

678 38

11 22 53 49 35 156

23

25 55

Carrier ethernet Dedicated Internet access Legacy corporate data

CAGR 2010 - 15 Percent 2.5 28 2.8 -15.4

Broadband

73

IP-VPN

156

Switched access

2.4

IT services 785

58 72 87

15.7 0

CAGR 2010 - 15 Percent 4.7

989 79

SW support

6.6

93

Consulting

5.3

100

HW maintenance and support Process management

2.8

266

IT management

4.1

282

Development and integration

4.6

169

6.1

126 217

272

308

Mobile services

2.5 225

2010

2015

2010

2015

SOURCE: Yankee, March 2011; Gartner Worldwide ICT spending, Q1 2011; McKinsey

typically show higher fragmentation than developed markets with a more limited range of services available (except for multinationals often served with customized solutions supplied by extranational vendors). This open market structure means that telcos expanding into ICT will typically face fewer conflicts with channels and partners and have more opportunities to create win-win situations. One disadvantage of the early stage of market development, however, is that there are likely to be fewer established companies to acquire to drive growth.

Six B2B trends and their telco implications To better understand how telcos can position themselves to capture the B2B growth opportunity, McKinsey has conducted a survey of the forces shaping the market. We identified six trends that are defining the telco business-to-business arena through 2015, a number of which are already a reality in developed and some emerging markets. Ubiquitous Internet-based connectivity will drive growth rates of up to 33 percent each year for services such as managed Internet protocol, private branch exchange systems, and voice over Internet protocol – where telcos already have a natural advantage. Operationally, the shift to IP has a number of

implications. More sophisticated network design and inte­gration skills are needed to provide and service advanced IP-based products, which often call for some customization in order to make them work effectively with customers’ ICT systems. Software capabilities will become more important in the future, with service setup and integration depending less upon wiring and more upon programming. Additionally, the requirements for field technicians will change significantly and field force skill profiles must be adjusted accordingly. Finally, telcos will need to carefully manage the migration to IP-based solutions to avoid cannibalizing traditional high-margin telecoms revenues and diluting unit margins and cash flows. Unified communications and cross-platform integration are expected to grow at almost 20 percent annually in the coming years, exceeding spend on stand-alone communications services by 2012. Examples of these services include desktop videoconferencing and applications that can be used seamlessly across devices such as PCs, smartphones, and tablets. Telcos providing these services have an opportunity to reduce cost and complexity for their customers. However, some recent large deals have been problematic and even unprofitable, so strong mechanisms will be required to manage the contractual and commercial risks.

54

Big things come in small packages: The B2B cloud opportunity Of all the ICT trends, the one with the greatest potential influence on the future market is cloud computing – which is gaining increasing relevance and acceptance for large and small enterprises in developed and emerging markets. The adoption patterns (and opportunities) differ significantly between SMBs and large enterprises. SMBs are mostly looking at enterprise class features and mainstream computing services to ease the way they consume IT and reduce investment requirements. Horizontal services such as e-mail, backup, disaster recovery, and security are typically at the top of the adoption pecking order; however, software as a service (SaaS) can enable small enterprises to access and benefit from software previously only affordable for large enterprises. For example, Salesforce.com’s success made highend CLM capabilities available to a large number of companies that had previously not used such software.

data center capacity. Finally, “new business models” result when cloud computing (the public cloud in particular) is fully leveraged. This is especially beneficial when collaboration needs to happen across enterprise silos and organizational boundaries, with cloud used to set up marketplaces and exchange information across a fragmented supply chain and with a broad network of distributors.

The SMB opportunity The high growth rates of the emerging market SMB segment means that there are structurally fewer “entrenched” solutions invested in and more frequent natural transition or service switching points at which new services and service models can be adopted. Also, in emerging markets, the low investment cloud pricing model is attractive to finance constrained emerging market businesses, creating a potentially high latent demand for the services.

Large enterprise adoption of cloud is more segmented with a range of adoption cases. For example, “divisional IT” is the adoption strategy for large enterprises to free IT department management bandwidth. Smaller divisions or departments are provided with a standard, externally managed cloud offering, and the IT department only manages the portfolio of SaaS applications made available. “Load balancing” is a data traffic regulating technique that utilizes the public cloud in ways that manage overflow to allow for testing, minimize the impact of peak network demand, and maximize

In SaaS, telcos can operate as a channel and enabler, marketing and potentially bundling a range of SaaS offers with core telecoms products such as data connectivity. Experience shows that the more products from the same operator customers hold, the more loyal they are to that operator. Early indications are that this holds true for cloud computing despite the convenience and flexibility the “as-a-service” pricing model offers. In addition to reduced revenue erosion in core products, one telco moving quickly into this space has seen that churn for core products is 50 percent lower for SaaS customers than for the customer base as a whole.

Cloud computing is growing rapidly with spending in cloud infrastructure expected to increase by 30 percent each year through 2014. Cloud computing broadly has three service models (known collectively as “X” as a service – XaaS): software as a service offers finished applications to customers; platform as a service provides software integration and application development capabilities; and infrastructure as a service helps customers with infrastructure management, data storage, and computing power. Bridging the gap between the public

and private cloud space, virtual private clouds used by large enterprises are expected to become a major market. A virtual private cloud allows a company to utilize a secure, private space on shared infrastructure and is targeted to provide the security of a fully private cloud with the economics and flexibility of a public cloud. Research predicts that these virtual private networks in IT infrastructure could account for 30 to 35 percent of total cloud revenue in 2015. Expertise in incident ­management, security, and disaster recovery is a poten-

RECALL No 17 – Transition to digital in high-growth markets B2B 2015: The future role of telcos in ICT markets

55

There are potential winning plays for telcos in ICT Transformational ICT outsourcing for large enterprises System integration Enterprise software Middleware Computing services Hardware

Network

Winning play 1: Network-intensive outsourcing • Multiyear outsourcing deals with a significant network component • Reduced cost and complexity through IP and unified communi­ cations • Integration of private and public clouds, with emphasis on security and disaster recovery

Winning play 2: Provisioning of standard platforms in an on-demand mode

Cloud services for SMBs Winning play 4: XaaS for SMBs

•L  everaging the strong SMB footprint in voice and data (and in some • Provision of standard cases in desktops) to platforms and applica­ expand into applications tions in an on-demand for up-/cross-selling mode •P  artnering with software • Emphasis on Winning play 3: - End-to-end incident End-user-managed complexity players for complemen­ tary skills management and • Support for an array of endSLAs user devices and applications - Security and disas­ • On-site field services as differ­ ter recovery entiator vs. offshore attackers • Partnerships with offshore pro­ viders for complementary skills and footprints

tial asset for telcos, but they will need to act quickly or find themselves excluded from this space by the global IT giants. A new wave of mobile services such as machine-tomachine (M2M) applications represents an attractive area of opportunity for B2B services. M2M subscriptions are expected to make up 10 percent of all European mobile subscriptions as early as 2013. M2M plays can include remote healthcare services, smart metering for utilities, and vehicle asset tracking for logistics and field service providers. Telecoms players can create more value by leveraging their network assets, large customer bases, and distributed field forces. Success here will require excellence in partnering capabilities, with many of the aptitudes telcos will need to secure lying far outside their core businesses. Telcos will also need to adopt a culture of innovation to move them from simply ­passive infrastructure providers to platform and solutions providers. Selective “consumerization” is the convergence of business and consumer handset and PC markets; a development that could change the handset market and revolutionize the corporate desktop environment. User demand for more attractive devices is driving a proliferation of smartphone and tablet devices being supported by corporate IT departments. “Bring your own computer” programs, such as those that have been launched

by Citrix and Intel, encourage employees to, as the name suggests, use the same computer for both personal use and work, injecting consumer buying factors into the traditionally rather conservative and TCO-driven corporate PC landscape. The “applications revolution” describes the ­growing trend for a plethora of small applications sourced from different developers and channels to be used on a range of devices. Of the players in this sphere, telcos are the specialists in supporting these multi-OS/multipledevice environments. Click-to-buy app stores are increasing in popularity, with business needs being served both by categories with general application stores such as Apple’s and dedicated business app stores such as that of the Australian carrier Optus. App stores can round out telcos’ portfolios and support a “one-stop shop” value proposition – telcos can deliver on all of their business customers’ needs for network-enabled services. Software players, however, are already making inroads to owning the customer relationship, so this is not an open-ended opportunity. All six trends present operators with a number of potential opportunities and threats. Identifying the correct approach will mean the difference between capturing the growth potential from these opportunities versus suffering the potential threat that they also represent to the traditional telecoms business.

56

Positioning telcos for the B2B future B2B ICT markets will grow attractively in the coming years, and telcos are in a good position to shape them. A number of possible strategies could pay off for telcos seeking to grow in this space (see table on previous page). Broadly speaking, telcos can map their strategies along the two halves of their B2B client base. In the corporate market, telcos should look to leverage their network capabilities, their experience in supporting complex and diverse arrays of end-user devices, and their ability to manage the end-to-end performance of network-centric ICT services to establish strong value propositions. In the SMB market, telcos’ established customer relationships and strong channel presence can be the platform from which to build successful XaaS offerings. Experience shows that moving into ICT can bring significant risks. For example, one operator in the AsiaPacific region acquired an IT player with a broad offering including systems integration, but found that benefit­ing from becoming an integrated IT and telecoms player was more difficult than expected – the bulk of the IT and telecoms services were simply too different to enable commercial or operational synergies to be realized. A Western European operator faced difficulties of a different nature, underestimating the cost of delivering large contracts, which led to large write-offs.

Delivering on these strategies will require telcos to transform their commercial, technical, and operational capabilities. Commercially, sales teams need to expand their capabilities to recognize customer needs in new product areas and effectively communicate the new and often more complex value proposition of the new products. The trend to solution selling and requirement for solution sales capabilities will accelerate further, with communications becoming just one element of comprehensive, integrated solutions. Skills, systems, and assets need to evolve technically as the prerequisite to enable the efficient and scalable delivery of the new service.    Telecoms “business as usual” is being replaced by a “new normal” with a broader and more complex playing field that will offer significant promise to telcos prepared to meet its challenges. Telcos and IT organizations are vying for control of their new ICT intersection. Telcos in emerging markets, however, are positioned especially well to reap the benefits in the B2B realm if they can be mindful of the trends, understand their unique assets, and move quickly.

The authors would like to thank Christophe Meunier and Katrin Suder for their significant contributions to this article.

Rodrigo Diehl is a Principal in McKinsey’s São Paulo office. [email protected]

Simon Fagan is an Associate Principal in McKinsey’s Sydney office. [email protected]

Rene Langen is a Director in McKinsey’s Athens office. [email protected]

Dörte Loebel is a Knowledge Expert in McKinsey’s Düsseldorf office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets Capex 2.0: Benchmarking network performance

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09 Capex 2.0: Benchmarking network performance

Wide cost gaps among players in an industry can represent enormous opportunities for companies seeking to improve their performance. Among mobile operators, perhaps no gap is wider than the chasm that separates network operators with the highest per-network-site capex from those that spend the least. To quantify this gap, McKinsey conducted a global benchmarking initiative: One Cent per Minute. The One Cent per Minute benchmarking initiative covered operators with an aggregated footprint of over one billion customers and 535,000 sites across emerging and developed markets in Asia, Africa, and the Americas. The results were startling: A 250 percent canyon separates the best (those who spend the least in capex) from the worst (those who spend the most in capex) per network site. On average, players with the smallest capex outlays spend only USD 90,000 per new site, while those with the biggest costs spend up to USD 290,000 per new site. This striking difference gives rise to a number of questions. If operator sites are often quite similar, why do these sites diverge so much in terms of cost? Is it because of specifications, design elements, procurement advantages, or market factors such as tower sharing? How much of this cost difference is linked to “unavoidable” factors such as import taxes or labor costs? Beyond this, how should an operator systematically tailor the right combination of passive, active, and transmission designs for a specific environment? What does the best total cost of ownership profile look like? And what breakthrough ideas have players in other countries successfully implemented?

The elements of network capex The capex costs of an operator’s site in the middle of the spending spectrum typically totals USD 135,000 and can be “deconstructed” into four primary categories: „„ Passive and civil engineering elements (USD 50,000 to 60,000) like the tower, mechanical and electrical equipment such as air conditioners, batteries, shelters, fences, and diesel backup generators „„ Active and radio access network (RAN) components (USD 45,000 to 60,000) such as the antenna, the base transceiver station (BTS), and associated equipment „„ Transmission components (USD 20,000 to 40,000) like fiber-optic cable installations, microwave technologies, fixed wireless access, and leased line or satellite equipment „„ Allocated core and IT costs (USD 5,000 to 10,000) including switches, gateways, plus various servers and platforms. McKinsey’s benchmarking effort reveals a wide variance across operators in each of these dimensions, with the biggest gap occurring in the cost of the passive infrastructure (Exhibit 1). Further analysis of the reasons behind the gaps suggests that at least two-thirds of the variance between a median and a top performer results from differences in “archetype mix,” i.e., owned versus shared, rooftop versus indoor. A substantial part of this can be controlled (e.g., sharing rooftop towers

60

01

The capex gap is largely due to differences in passive and Theengineering capex gapspend is largely due to differences in passive and civil civil engineering spend USD thousands per site p.a., 2010

Best1 quartile 5

15

25

35

45

55

65

Total

75

85

Median 135

215

90 135

Passive + civil eng.

Civil (tower, shelter, etc.) Mechanical and electrical equipment (AC, DG, battery, etc.)

Active + RAN

BTS Antenna RF cable and miscellaneous

26

49

Transmission

Fiber Microwave VSAT

26 32

48

Core + IT

Core infrastructure (MSC2, BSC3) Miscellaneous IT

32

46

Worst quartile 295 290

193

65

6 8 12

1 Best = lowest capex cost, worst = highest capex cost 2 MSC = mobile switching center 3 BSC = base station controller SOURCE: McKinsey’s ONE database

in a build-out). The remaining one-third is caused by “overspecifying” capex build-outs – overestimating requirements and thus the costs. This component can be reduced by using design-to-cost levers, primarily on passive infrastructure such as towers and shelters.

Slashing site capex McKinsey’s research shows that the differences in capex between best and worst quartile costs vary widely in all four categories. Operators with oversized capex budgets spend two to six times the amount of those who have optimized their capex outlays. As soon as an operator generates transparency in its site costs, then benchmarks them against performers with the “right” capex budgets, it can begin to explore the drivers behind these cost differences. Why are our tower costs so high? Can we reduce shelter costs further? Is it possible to cut BTS material costs more? Do we really need as many remote units and repeaters as specified in the build plan? A portfolio of tools and approaches can help operators optimize their capex outlays across the four key ­c ategories. Passive and civil engineering site elements. Companies can employ three different techniques in these areas.

ESTIMATES

The first – design to value – relies on a cost comparison for specific location strategies against benchmarks to understand design-driven cost differences (e.g., speccing a 30-meter, ground-based tower versus a 12-meter rooftop tower). A detailed analysis of the cost drivers follows this in order to minimize the differences. One Asian operator, for example, reduced its tower capex by almost 20 percent by optimizing its specifications across structures. It examined its choices on design elements such as life (e.g., moving from 100 years to 50 years), support (fewer, more robust supports versus multiple supports), and foundation (from four legs to three on low-risk towers). It also minimized painting and worked to avoid any unnecessary construction. Other operators have revisited their BTS housing decisions and found that they could reduce costs significantly by shifting from building a large shelter to adopting several smaller footprint designs, the most efficient of which could deliver cumulative savings of 10 percent. Experience shows that rigidly adhering to previously set specifications without routinely assessing changes in market conditions can end up causing unnecessary costs. One operator, for instance, systematically built its network towers 40 meters high, but subsequently discovered that fewer than 10 percent of its sites needed towers this tall. In response to this, it adjusted its stan-

RECALL No 17 – Transition to digital in high-growth markets Capex 2.0: Benchmarking network performance

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61

Making the fiber versus microwave choice based on bandwidth Making the fiber versus microwave choice based on bandwidth requirements can optimize costs requirements can optimize costs TCO of fiber vs. microwave USD per link p.a.

Map of best TCO technology

2,000

Capacity Number of E1 links

Average cost/meter Fiber

Fiber

Leased lines

STM-1: 63 E1

1,200

63

Microwave

STM-1

PDH: 16 E1

Microwave

500

16 PDH 300

1,200

300

Distance: site to network Meters

Key variables  Cost of leased lines in the country  Cost of fiber trenching  Ability to share fiber or microwave  Spectrum fees and availability

600

1,200 Distance between BTSs Meters

SOURCE: McKinsey’s ONE database

dard tower height to 30 meters (using 40-meter towers as needed). Its cost per tower dropped by 2 to 3 percent. The second option – procurement excellence – can generate savings across capex categories based on tight and transparent vendor development and management. One operator fully utilized its procurement function to analyze all aspects of tower design. This facilitated a vendor development exercise to come up with a new hybrid design that met common wind-speed requirements and generated savings ranging from 28 to 35 percent compared with the company’s current tower design. What’s more, this improved tower maintenance since purchasing used the same vendors across the market. Finally, operators can gain significant and immediate benefits by examining and optimizing their mix of towers between archetypes. One operator even reduced its passive capex by nearly 35 percent by simply fine-tuning the mix of rooftop and indoor sites it used, and by reducing tower heights that had no impact on coverage. Active and RAN site elements. Regarding active expenditures, telcos can move to optimize their network capacity and coverage, minimize the active infrastructure setup by leveraging options like BTS “hotels” and distributed antenna systems, or choose some combina-

tion of the two. Based on McKinsey’s experience, operators can either capture at least 15 percent capex savings or increase the revenue impact from their capex outlays by fine-tuning planned deployments to generate the highest return on invested capital possible. An investment approach based on ROIC or net present value – one that combines comprehensive revenue and cost analyses by micromarket – can help an organization get the most “bang for the buck” from their capital expenditures. At the same time, it can minimize downstream corrections such as the redeployment of underutilized assets that lie hidden on long capex to-do lists. Operators can also build BTS “hotels” and distributed antenna systems. BTS hotels are centralized base stations that serve multiple sites via fiber-optic connections. This approach allows operators to use existing sites to minimize the need for high-cost building rentals. Savings as high as 20 percent of BTS costs are possible. A distributed antenna system (DAS) employs several low-power antennas rather than a single highpower one to cover the same area. A DAS not only saves up-front capex costs of 20 percent or more, it also uses less power and provides enhanced reliability. Transmission site elements. Methods to promote cost efficiency of transmission sites include optimizing

62

03

Cost optimization in all four elements can bring a 20 to 30% reduction optimization in all four elements can bring a 20 to 30% reduction inCost capex in capex Cost per site – passive (example: 40 meters) USD thousands

Cost per site – active Indexed to 100

40 - 42 32 - 35

Previous

Current

Capex savings due to cancelled/ delayed projects based on NPV Indexed to 100

Previous

95

Previous

Current

-5%

Cost per transmission USD millions/km

Co-build

1.16 0.15 0.25 0.30

Own-build

0.46

0.38

Previous

Current

100 77

100 -15 to -20%

-23%

Current

Swap Lease

0.93 0.08 0.15 0.32

-20%

SOURCE: McKinsey’s ONE database

the network-based architecture, pursuing total cost of ­ownership optimization, and choosing co-build and swap options. In most cases, transmission networks have grown organically rather than having been set up using a predefined and optimized architecture. Freeing up capacity can ultimately lead to lower future capex requirements. For instance, teams can work to reduce the number of “hops” a signal makes among sites before it reaches the base station controller (BSC). Operators can also free up capacity and reduce capex needed by expediting signal routing back to the BSC – creating an architecture that links a fiber ring to the BTS and connects all stations directly to the ring in high traffic and uses hops when traffic is low. TCO optimization requires teams to make the best trade-offs between fiber optics, microwave, and VSAT technologies for the network’s backbone. Fiber is most cost-effective where high bandwidth is needed and in high-density BTS areas, but can cost from USD 35,000 to 170,000 per site. Microwave solutions cost less than fiber and work well in low-bandwidth areas, while VSAT installations are suitable for backhaul applications in remote regions where fiber or microwave options are economically unfeasible (Exhibit 2).

An operator reduced its planned capex for a fiber backhaul upgrade by approximately 11 percent by using higher-performing microwave technology in some places and adopting shared solutions such as swaps with other network operators, leases, and joint building projects. Core and IT site elements. Optimizing the core architecture, performing a capacity utilization review, and load rebalancing are actions taken to reduce capex outlays for a site’s core and IT elements. Operators can fine-tune their core circuit switching (CS) or pack switching (PS) architecture to be more capital-efficient. In the CS core, for example, teams review the feasibility of revising an operator’s mobile switching center capacity design rule to reduce the need for new investments. They can also extend software upgrade cycles if hardware capacity remains underutilized. In a PS core, companies rationalize the number of radio network controller (RNC) locations by deploying highdensity solutions that can usually reduce the number of RNCs required by anywhere from 10 to 50 percent. One operator used this approach to capture capex savings of approximately USD 7.5 million. McKinsey’s experience across geographies suggests telcos can reduce capex by 20 to 30 percent (Exhibit 3).

RECALL No 17 – Transition to digital in high-growth markets Capex 2.0: Benchmarking network performance

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In fact, one operator was able to reduce the network gateways it needed and ultimately cut its core spending by nearly 40 percent based on conducting a capacity utilization review and network load rebalancing initiative.    In a challenging capital environment, operators in developed and developing markets alike should rethink their capex deployment strategies to generate the biggest bottom-line returns. An average operator can reduce capex by almost USD 50 million for every one thousand new sites using benchmarking, leveraging international best practices in design and mix, building strong capabilities, and striving for a disciplined execution of the entire process.

Sumit Dutta is a Principal in McKinsey’s Mumbai office. [email protected]

Olazhir Ledezma is a Principal in McKinsey’s Mexico City office. [email protected]

André Levisse is a Director in McKinsey’s Singapore office. [email protected]

Ankit S Shah is an Engagement Manager in McKinsey’s Mumbai office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets For twice the value press “1”: Getting more from your call center operations

65

10 For twice the value press “1”: Getting

more from your call center operations

Telcos can extract much more value from their call centers. Doing so, however, requires revisiting the fundamental setup of their operations, platform costs, utilization, and outsourcing contracts. Telecoms players have long focused on improving the performance of their call center operations. Beyond the direct opportunities in revenue by up-/cross-selling and by reducing the cost to serve, customer satisfaction remains at the top of the executive agenda. The relevance of call centers increases further with more complex and integrated telecoms products and services being launched every day. Furthermore, an additional competitive advantage in high-growth markets is the ability to rapidly scale up effectively at par with the booming subscriber base, while retaining quality levels and controlling costs.

Telco call center performance lagging behind Using McKinsey’s Process 360 (P360) benchmarkingto-implementation methodology, we have collected comprehensive data from over 150 call centers in 18 countries (see text box on following page). The data reveals that high performance on cost to serve, revenue per call, and customer experience are not mutually exclusive. In fact, applying the right set of levers can improve performance in all three areas simulta­neously. Despite initiatives taken by telecoms providers, however, performance of their call centers lags that of other industries in several areas. Therefore, call centers serving telecoms customers miss out on the tremendous upside that can be captured from collectively uplifting performance in the three areas mentioned.

Telecoms companies trail other sectors along three key call center performance metrics. Revenue uplift. A critical performance driver is the ability to turn an inbound customer call center – something that might be purely cost to companies – into a revenue center. While banks have pushed their service-to-sales capability by implementing sharp customer segmentation, intense frontline training, and strong performance management, most telcos have not awakened to the opportunity. This results in higher conversion rates of 5 to 6 percent for banks versus approximately 2 percent for telcos (Exhibit 1). Cost to serve. There is high disparity between telco call centers and other sectors in their abilities to manage costs effectively. The first obvious variable tied to this cost difference is demand management. In McKinsey’s experience, many telcos have yet to fully leverage selfservice channels. In recent engagements with leading operators, McKinsey discovered that telcos only route 30 to 40 percent of their call volume through interactive voice response (IVR) systems. Banks, on the other hand, prevented 60 to 70 percent of calls from reaching a live agent. Telcos experience extremely high call volumes, so fine-tuning this lever can be of great importance. The other big service cost variable for telcos is agent utilization. For calls an IVR system cannot handle, the number of agents employed is the largest cost driver. Here again we observed that telco call centers have more unplanned leaves and idle time and are not able to minimize hold times and repeat call rates as effectively as their counterparts in high tech and banking (Exhibit 2).

66

01

Telecoms players are less effective in service to sales Telecoms players areinless effective in service to sales than their than their counterparts banking counterparts in banking Indexed to 100 Bank player 1

Sales conversion rate

100

78

22

Bank player 2

37

100

72

28

Telecoms player 1

37

35

37

27

37

4.3

6%

31

3.6

5%

26

1.3

2%

17

0.8

2%

100 64

36

Telecoms player 2

41

100 51

49

33 Total calls

Ineligible calls

Calls eligible for sales

Missed sales opportunity

18 Attempted sales

Unsuccessful sales

Converted sales

SOURCE: McKinsey’s Process 360

Customer experience. Given the emphasis telcos place on the customer satisfaction index (CSI), it is surprising to find them behind banks and high-tech companies along this dimension (Exhibit 3). Contrary to common belief, McKinsey’s research indicates that self-service rate (IVR utilization rate) and service level (percent of calls answered within 20 seconds) are not key drivers of CSI in the telecoms industry. Here, the average handling time and first call resolution rates are by far the top two drivers behind customer satisfaction in the industry.

Actions to increase call center value To see improved cost and revenue performance along with an increase in the customer satisfaction scores described above, telcos should address operational issues in four dimensions. Operating architecture. Getting to the most optimal setup of the call center network is critical. This typically involves deciding on the level of outsourcing based on local availability and expertise needed for each type of operation, while considering overall cost-quality tradeoffs. Moreover, vendor footprint is an important driver to optimize. Rebuilding the operating architecture toward a capability-driven vendor footprint often leads to a high payoff (e.g., all high-net income customer calls

at one vendor, prepaid calls to a set of one to three vendors). Lastly, use of tier-2 and 3 locations for call center operations is an important lever, especially in highgrowth emerging markets where clear signs of labor supply saturation are apparent in top cities. Platform costs. For internally managed operations, there is a set of actions that can help reduce direct agent costs and improve indirect costs (e.g., physical infrastructure). Pruning direct costs involves tight control of the agent bench to backfill for attrition and ensuring the right supervision span of control. The bench can be optimized based on initiatives that reduce agent attrition (e.g., improving the agent value proposition through

McKinsey’s Process 360 McKinsey’s P360 is a benchmarking-to-implementation methodology focused on call centers that relies on three distinctive assets: a comprehensive benchmarking database, a true-and-tested idea bank, and a set of dedicated experts. It has been deployed in over 150 call centers across more than 50 companies in 18 different countries.

RECALL No 17 – Transition to digital in high-growth markets For twice the value press “1”: Getting more from your call center operations

02

67

Telcos have the opportunity to bring agent utilization up to par Telcos have an opportunity to bring agent utilization up to par with with other sectors other sectors Indexed to 100 Telecoms Utilization

High tech 100

Total available time Planned and unplanned leaves

15

56 6

Net productive time

12 13

64 2

50

9

12

19

Agent utilization

100

9

12

Idle time, other losses

Repeat calls, hold time

100

13

Breaks

Waste

Banking

66 4

62

62

SOURCE: McKinsey’s Process 360

explicit career planning, enhancing recruitment and training practices to hire more stable profiles, and a ­r igorous new employee onboarding program). For indirect costs, seat density and utilization are the biggest drivers in reducing the physical and IT infrastructure cost per agent. Utilization and productivity. This dimension creates significant impact on both costs and revenues by focusing on extracting maximum throughput from a call center operation. To achieve impact on cost, it is important to define a productivity metric that translates explicitly into operational cost: on-phone time per agent per day provides a clear view into agent productivity and overall workforce management practices in the center. A drill-down of the data from the McKinsey P360 benchmarking reveals that unproductive time in the industry is due to unplanned absenteeism, poor on-floor discipline, and idle time. Here, building distinctive workforce management practices is the absolute key. These practices include forecasting, long- and short-range capacity planning, scheduling of agents, managing outof-seat activities, and ensuring real-time adherence to schedules. This is equally applicable for outsourced operations, as telcos can partner with business process outsourcing (BPO) providers to improve forecasting and capacity planning practices.

Improving sales conversion rates is another important source of value, with potential to convert a cost center into a profit center. Impact in this area can be achieved quickly (typically within eight to ten weeks). Sources of value here are reducing variability in conversion rates between agents and smartly identifying calls that have a higher likelihood of becoming a sale. Inter-agent variation can be reduced based on three initiatives: „„ Implementing a simple and visible program of non-financial recognition that focuses not only on high performers, but also on those who show big ­improvement „„ Revising the variable incentive structure to verify there are no incentive caps and continuously resetting the bar for each agent to ensure that performance improvement is a challenge but always within reach „„ Improving the bottom quartile of performers through a combination of on-the-job and classroom coaching. In addition, call segmentation based on using simple analytics on consumer historic data (e.g., average revenue, services purchased) helps agents pitch the right mix of products to the target customers, thereby improving sales conversion rates.

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03

Telecoms satisfaction gap to other sectors is primarily explained by handling Telecoms gap to other sectors is primarily explained by time and firstsatisfaction call resolution handling time and first call resolution Correlation of satisfaction with different variables1 Percent

End-customer satisfaction index (scale of 1 to 5) Average

Average handling time 0

1

2

3

4

72

5 37

High tech

4.3

Banking

4.1

First call resolution 12

Telecoms

3.7

Fixed

20

Mobile

-14% 1 Based on R2 of linear regression, with customer satisfaction index as independent variable SOURCE: McKinsey’s Process 360; McKinsey 2009 European Telecom Call Center Benchmark Survey

Provider contracting and management. Simpler and transparent provider contracting and management can lead to high payoff. First, structuring contracts that focus on outcomes (e.g., service levels, customer satisfaction) not on inputs (e.g., team leader span of control, agent compensation, number of quality and training staff) provides great incentive for providers to seek and achieve operational improvements instead of purely following (and being limited to) contractual stipulations. Moreover, the outsourced operations with a clear linkage to performance indicators (e.g., repeat call rates, customer churn rates) tend to have stronger operating and management practices. This not only forces providers to gain greater transparency regarding operational issues, it also offers room for the development of alternative high-impact solutions from joint client-provider problem solving. The practices that any given operator implements and the net improvement in a particular area will vary from

one telco to another (see text box on following page). But strategizing along these four fundamental dimensions has the potential to double the value of a telco’s call center. Improvements in the utilization of agents, demand management, and platform costs can collectively account for 35 percent increased value. Changes in contract structure and churn reduction can increase value by another 25 percent. Finally, agent skill building and customer segmentation can boost service to sales by another 40 percent.    Telcos do not need to trade customer satisfaction for cost reductions or revenue increases in their call centers. They can double the value from their operations, but doing so requires tackling four different dimensions, while establishing a win-win relationship with BPO providers based on value sharing.

RECALL No 17 – Transition to digital in high-growth markets For twice the value press “1”: Getting more from your call center operations

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From money pits to profit centers: Examples for call center improvements Operating architecture in North America. By implementing a capability-driven vendor footprint strategy, a preeminent global telco was able to reduce its overall call center costs by 20 percent, while maintaining high levels of customer satisfaction. The approach taken involved consolidating from eight to two providers, increasing delivery from low-cost locations from 8 to 28 percent, and segmenting and routing calls based on complexity (e.g., all handset troubleshooting calls go to one center) to improve productivity and reduce average handling time. Utilization and productivity in Southeast Asia. A leading player managed to reduce call center costs by more than 25 percent while increasing customer satisfaction by 500 basis points. They achieved this by acting on three areas at the same time: increasing productive time per agent from 4.1 to 4.8 hours per day, reducing inter-agent variation from 47 to 32 percent (gap between top quartile and average agent), and attacking repeat calls to reduce them from 17 to 8 percent of all calls. Utilization and productivity in India. By engaging in joint forecasting and capacity planning exercises with its call center providers, a tier-1 telecoms player in India was able to improve on-phone time per agent per day by 15 percent across more than 4,000 agents and reduce its overall call center costs

by close to 10 percent. Challenges and key success factors for this effort lay in jointly partnering with the providers to transparently forecast demand and plan capacity, accelerating the flow of inputs from the marketing team on campaigns that drive call center demand to the workforce planning team, and investing in IT tools that help improve forecasting accuracy and agent scheduling. Outcomes-focused contracts in Europe. A top ­telecoms and Internet services player in Europe used to have a traditional input-based contract with its BPO providers. In it, the telco defined the schedule of agents and paid the provider based on delivered agent hours, capped upside on sales, and controlled platform cost inputs – with a predefined span of 12 agents per team leader and 6 quality and 3 training staff per 100 agents. By switching to an outcomes-based contract structure, the telco managed to renegotiate a lower price with its providers and reduce its call center spend by approximately 6 percent, while improving top-box customer satisfaction by 400 basis points. This involved paying for time spent on the phone and tying incentives to customer satisfaction, repeat calls, first call resolution, and customer churn. In addition, they defined mechanisms to share productivity gains, with call centers free to decide on supervision spans and number of support staff.

Mario Faustini is an Associate Principal in McKinsey’s São Paulo office. [email protected]

Ivan Galli is an Associate Principal in McKinsey’s São Paulo office. [email protected]

Sameer Khetarpal is an Associate Principal in McKinsey’s Delhi office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets Digitally united: An interview with Sanjay Kapoor

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11  Digitally united:

An interview with Sanjay Kapoor

CEO, Bharti Airtel Ltd., India and South Asia

Bharti Airtel Ltd. is a leading telecommunications services provider. As the flagship company of the Bharti Group, it has emerged as one of the world’s top five wireless operators. The company offers services in the fields of mobile, telemedia, enterprise, and digital TV across 19 countries in Asia and Africa.

coms providers isn’t solely based on physical infrastructure anymore. Now, they compete on a combination of physical and virtual infrastructures. No matter which telco and no matter what economy, operators are very concerned with regard to how they will shape their broadband strategies and their virtual infrastructures.

Sanjay Kapoor joined the Bharti Group in 1998. As Director of Corporate Strategy and Planning, he created and managed the early deployment of the strategic blueprint for Bharti’s telecoms activities before moving on to become President and CEO of TeleTech Services India Ltd. In March 2006, Mr. Kapoor returned to Bharti as President of Bharti Airtel’s Mobile Services. Three years later he advanced to Deputy CEO, leading all consumeroriented businesses. He now holds the position of CEO for Bharti Airtel Ltd. in India and South Asia, with 119,382 sites serving 177 million subscribers and generating USD 10.4 billion in revenues.

McKINSEY: What’s behind this added layer of competitive complexity?

McKinsey & Company had the recent privilege of speaking with Mr. Kapoor. He shared his perspective on the rise of digital in telecommunications and its implications for customers and mobile network operators in emerging markets. McKINSEY: From your unique vantage point, what have you observed in terms of the shift in telecoms from digital to data in India and throughout the world? SANJAY KAPOOR: I’ve been fortunate to be a part of several important discussions that are happening around the globe. Worldwide competition among tele-

SANJAY KAPOOR: Well, the world at large is facing a spectrum shortfall. The degree of constraint varies from country to country – only 200 MHz for some and up to 500 MHz for others. Operators are wondering where this new spectrum will come from and how exactly they will use the digital dividend to the biggest advantage. Countries like India need to join this discussion. I think we are a trifle behind in our own debate on the subject. McKINSEY: What will this issue of spectrum scarcity mean for telecoms players from a services point of view? SANJAY KAPOOR: It means that companies like ours will need to start planning for strategies that enable us to successfully deliver life enrichment data services in addition to voice. Whether it is entertainment or health – touted to be even bigger than commerce – life enrichment services will be at the center of mobile services. Cisco estimates that the total volume of data consumed will actually grow from 0.09 exabytes per month in 2009 to 3.6 exabytes by 2014. This is almost a doubling of global data consumption every year for the next three years. Such demand puts tremendous pressure on

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the system, meaning a completely new ecosystem and social engine need to evolve. McKINSEY: Is the focus on adequate capacity to meet the skyrocketing demand the primary challenge for mobile operators? SANJAY KAPOOR: It’s one of the challenges. This shift to life enrichment services has some organizational implications as well. Companies like ours will need to move from managing scale to managing complexity. In the first phase, or the first 15 years of our existence, managing scale was the big challenge. In the future, the challenge will be to navigate the highly complex maze of an ecosystem with multiple elements – some familiar, some new. We’re talking about financial, educational, entertainment, advertising, and health services as elements of a single telecoms entity. McKINSEY: You mentioned that all operators – regardless of their market – would be facing significant challenges. Are there really no advantages for those operating in markets that are already well established? SANJAY KAPOOR: Actually, the opposite may be true. The opportunity in some verticals will be greater in emerging markets than in developed ones. In many emerging markets, these service areas are not well organized, and their infrastructure is weak. Hence, the infrastructure that telcos provide proves revolutionary. This reality presents a large opportunity for telecoms operators. What makes it exceedingly promising for emerging markets is that young people are a growing percentage of the population. They are much more aware and accepting of technology than others. They are going to be the catalyst that bridges the digital divide between emerging and developed markets. The other thing that drives consumer behavior change is the burgeoning middle class in these countries. In India, this group actually drives consumption. As prosperity comes to places like Bangladesh and many African countries, you will see a similar pattern emerge here as well. McKINSEY: Besides the spectrum challenge, are mobile companies prepared to offer these life enrichment services from a structural point of view? SANJAY KAPOOR: Mobile companies will have to make investments in fixed networks again. To backhaul so much traffic, you need fiber. For the last eight to ten years this did not seem to be a necessity. Everybody

thought wireless companies would need radio. I think radio will develop, but you need a solid investment in the fixed-line infrastructure to carry so many exabytes of data. Everyone I talk to believes that data consumption will increase by some astronomical figure, but when I ask them how their IT spend is going to grow, many talk of either capping their IT expenses or even lowering them. That tells me that the only way to manage these IT expenses is by taking the products and services to the cloud. The cloud seems to be inevitable, and I believe it will drive productivity. McKINSEY: What will the availability of these “life enriching” services mean for the customer? SANJAY KAPOOR: With every passing day, more and more computing capabilities are being built on smart devices with better and better browsing capabilities. I think customers will start using these devices like they use their personal computers. There will be a very thin line between personal computers and mobile devices. McKINSEY: Will the rise in data services have a similar impact on businesses? SANJAY KAPOOR: In addition to large corporations, there are countless small and medium-sized businesses and home offices where I think the real impact will be seen. These people will be the early adopters of cloudbased data services. We have already begun to see the effect. Tally, for example, is an accounting package that we sell to small and medium-sized businesses as a service in the cloud. Along with security, antispamming, and antivirus packages, it is useful to businesses that aren’t prepared to invest in full-fledged services. The cloud comes to their rescue. McKINSEY: For emerging markets, the road into the digital age has had its bumps. Are things starting to get any smoother? SANJAY KAPOOR: Countries like India were trailing the world when it came to 2G, 2.5G, and even 3G technologies. We got our 2G technology three to four years after the Europeans – maybe even five years. We were eight to nine years behind other parts of the world in getting 3G. But when it comes to 4G technology, we are virtually in line with everyone else. We are working along with the rest of the world, so services that emanate out of the 4G ecosystem – like LTE – should materialize in India almost at the same time they appear elsewhere.

RECALL No 17 – Transition to digital in high-growth markets Digitally united: An interview with Sanjay Kapoor

On data, Japan and Korea have taken the lead; some operators already see more than 50 percent of their revenues coming from non-voice and data. India is trailing a little behind that, but today 22 or 23 percent of Bharti’s revenues come from non-voice services. McKINSEY: What would you say is behind this narrowing in the digital divide you mentioned earlier? SANJAY KAPOOR: One component of the progress in India and in countries like ours is definitely the talent working in the telecoms sector. Another one is the ability to partner. At Bharti Airtel, one great thing is that we strongly believe in the power of partnerships. We are not averse to working with those who can do this work at better quality, better productivity, or better cost than us. In fact, we are happy to bring that added value into our ecosystem. We also need to make sure that affordability – the hallmark of growth in countries in the developing part of the world – remains a strategic priority. McKINSEY: Has the nature of your partnerships changed along with these shifts in strategy? SANJAY KAPOOR: Two things are becoming very important. In an environment where you depend so much on a larger ecosystem, it is imperative that you develop goal congruence with your partners and align them all toward this agenda. The second thing is that when the technology is shifting to such a major extent, customers now have to deal with networks and services that are getting very complicated at the back end. There is a 2G layer, there is a 2.5G layer, there is a 3G layer, and there will be a 4G layer. Someday, there will be a 5G layer, but the customer does not understand all of this. Customers are essentially looking for seamless services and a great interface experience regardless of what they’re doing – no matter how many companies are involved behind the scenes. We need to take on a customer perspective of technology and delivery rather

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than a technology view of networks and back-end systems. Our partners believe this as well. That is the fundamental change for my own agenda: aligning the ecosystem and the partner ecosystem, simplifying business delivery, and ensuring a great customer experience at the interface. My focus is to align these two very important elements: the customer stance and the partner ecosystem stance. McKINSEY: At the outset of our conversation, you mentioned that physical infrastructure used to be an operator’s competitive advantage, but this is no longer the case. What do you believe will be the basis of competition in the future? SANJAY KAPOOR: This is a little enigmatic, but I would say that one long-term competitive advantage will be a company’s ability to successfully manage the customer experience. Another crucial distinction will be the quality of employees. It will become increasingly important for companies to have the right type and mix of talent along with the right depth of management to ensure they can scale and transform their businesses. A third piece is the ability to innovate, and this will further distinguish one company from another. When I talk of innovation here, it is not about products, services, or content. Eventually, all content and every application will be available to virtually everybody. I think the distinguishing factor will actually come from innovations in business models. Finally, operational excellence is fundamental. Managing people and the ecosystem, delivering on innovative business models, and providing a simplified customer experience are all based on an extremely well-oiled delivery system. Without that, all of these areas will be compromised.

Sanjay Kapoor was interviewed by André Levisse, a Director in McKinsey’s Singapore office, and Gautam Kumra, a Director in McKinsey’s Delhi office.

RECALL No 17 – Transition to digital in high-growth markets Appendix

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News, views, insights McKinsey’s Telecom, Media & High Tech Extranet is the gateway to some of the best information and most influential people in the TMT industry. The extranet offers selected McKinsey-generated information that is not available on the general Internet.

McKinsey’s Telecom, Media & High Tech Extranet lets you:

Updated weekly with new articles on current issues and trends, this site allows extranet users to access selected McKinsey articles on topics such as mobile telecoms (including data, media, and broadband), fixed networks, next-generation network infrastructure, enterprise hardware, online services, software, and many more. Direct communication channels ensure that your questions and requests are addressed swiftly.

„„ Access cutting-edge know-how, interact with experts to gain new insights, and contact industry leaders

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Serving clients around the world Building on the strengths of three of McKinsey’s strongest industry practices, the Telecommunications, Media, and Technology (TMT) Practice has been established to better address the convergence and value chain synergies for our clients in the sector. The TMT Practice serves clients around the world in virtually all areas of the TMT industry. Our consultants are individuals who combine professional experience in TMT and related disciplines with broad training in business m ­ anagement. As in McKinsey’s work in every industry, our Practice’s goal is to help our clients make distinctive, substantial, and lasting improvements in their performance.

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