Telcos have long attempted to monetize their access to subscribers and their data about these subscribers, with a mixed record of success.  These attempts have manifested as simple targeted SMS campaigns for everything ranging from real estate to diapers, as well as more sophisticated location-based campaigns and bundled offers (e.g., free video subscription for all subscribers that meet a certain criterion).  Over the years, these efforts have led to low single digit percent contributions to revenue.

Meanwhile, digital native players such as the large search, social networks and independent digital ad network players have created massive advertising revenue streams, several times those earned by the telcos.  They’ve been able to do this because of the sticky user engagement that they have created, together with their ability to seamlessly integrate the right marketing messages into the right user’s journeys thanks to highly sophisticated analytics engines. So, despite having a lot less information than telcos do at the outset, the behavioral profiles they can build over time are much more sophisticated, informative and monetizable than what telcos have been able to do.  This value creation ability reflects in the market valuation – for instance, in the U.S., over the last five years, the top three digital services players have created 16 times the market value that the three major telcos have.

Increasingly, digital native players are solidifying their hold over their users by launching a range of adjacent services (either by themselves or in partnership).  For instance, a search or social network player may launch payments, entertainment, or healthcare services.  These, in turn, lead to even higher engagement, richer information, better targeting ability, and more opportunities for seamless marketing messages.  Such virtuous circles of multiple digital services being orchestrated by a central intelligent customer profiling and targeting engine is sometimes referred to a “digital consumer ecosystem” and virtually every leading digital consumer player is trying to create one.  While the most striking examples are the ones created in China, these are being created in most other markets as well.

While billions of dollars of value have been created in consumer digital ecosystems, the telcos which provide their Internet access backbone, have only seen erosion in value due to competitive forces. Over the years, almost all telcos have attempted to create digital services of their own, including entertainment, chat, gaming, news, shopping, health, etc. Most such attempts around the world have either ended in failure or received moderate success. There are of course a few glaring exceptions, which are well known, but these are outliers by far. There are variety of reasons for widespread failure but underlying these is the traditional telco mindset and way of operating. The inability to be agile (putting something out there and then sticking to it despite low traction). The inward-orientation and inability to create disruptive user experiences (not putting the user first or providing distinctive benefits over OTT offerings). The unwillingness to partner (wanting to build everything in-house as a proprietary asset, even if it isn’t best-in-class). Inadequate investment in driving adoption of the new services (leadership time, money, experimentation). Using traditional analytics techniques as the basis for cross-sell campaigns, as opposed to the much more sophisticated machine learning driven “N=1” personalization engines that are feasible today.

We believe that the time is now right for telcos to break out and reassert their claim by creating digital consumer ecosystems of their own.  There are three reasons for this – (a) The “how to” recipe for creating winning digital products is much better understood and replicable (b) The advanced analytics techniques that digital natives use to create magical targeting are now widely available, and (c) The risk capital that is available to digital natives can also be made available to digital ventures spawned by telcos.

Creating winning digital products: Learning from digital natives, there are a few ground rules for building great digital products:  (a) start with the user and design a disruptive experience that’s markedly better than existing offerings (e.g., don’t just aggregate, add value) (b) rapidly test and learn –  don’t try to get it right the first time, (c) partner wherever possible for components/solutions or entire services, (d) spend disproportionate time and energy on generating and improving traction.

Leveraging Advanced Analytics: The most sophisticated digital natives can create surprisingly targeted campaigns that seem to pop up just at the right time and the right place with the right message. “Clicking” on these seems almost natural and their success in generating new registrations or new sales or usage of their services is several times what is achieved in conventional campaigns. These brilliantly targeted campaigns are the outcome of using sophisticated analytics techniques as neural networks, automated through “machine learning” methods, to continuously improve their “hit rate”. The techniques work on data sets that include basic customer profile information along with every other kind of data that can be collected including location, surfing and social behavior.  Their success depends less on the extensiveness of the underlying “data lake” and more on the quality of algorithms used to design, track and improve campaigns.

Inviting Risk Capital: Often the costs of customer acquisition and retention for new digital services can be high. At the same time, the services need to be promoted aggressively until they achieve critical mass and network effects, or word of mouth, take over. While telcos access to subscribers gives them an advantage (especially when its activated using the targeted approaches outlined above), the total cost of customer acquisition can still be substantial. It is critical for telcos to bring in risk capital (Venture Capital or Private Equity) to help fund this. This risk capital is best suited for financing such ventures with high uncertainty in outcomes. It also creates the option for the telco to hold a minority stake in the digital services company so that the losses due to customer acquisition costs don’t have to be consolidated with the main P&L. Finally, these investors bring valuable perspectives from their experience with digital natives, which can help balance the traditional telco thinking in governance of the digital services venture(s).

Using these simple learnings, a telco can today spawn a new digital ecosystem, use both its online and offline assets to drive adoption of the new digital services, add a range of new services using partnerships with best-in-class players, and bring in external investors for both money and perspective. Each of the services provided will have its own revenue model, but the largest source of revenue and profits in such ecosystems around the world is advertising. The sophisticated targeted marketing capability discussed above can be deployed for other brands, running true “performance marketing” campaigns, and this is most likely the primary source of monetization. If executed properly, and with a bit of good fortune, the market valuation of the digital ecosystem, can soon surpass the value of the telco!

Kushe Bahl

Kushe Bahl

Leads the McKinsey Digital and McKinsey Analytics Practices in India, helping leading companies across sectors accelerate their digital journeys. Kushe provides strategic direction for the firm’s digital and analytics work in India. He has...