How operators can differentiate enterprise connectivity

Tom Rebbeck:

Hello, you're listening to the Analysys Mason podcast with Tom Rebbeck, and I'm here with Catherine Hammond. Catherine has recently published research on differentiating fixed connectivity in the business market. 

Introduction to fixed connectivity

Tom Rebbeck:

So let's start with this. Why should operators be thinking about fixed connectivity, given that all the revenue growth is from new IT services?

Catherine Hammond:

So you're right in saying a lot of the revenue growth is coming from IT services. We do see that fixed connectivity revenue, certainly in the business market, is generally flat or falling for most operators. But I think from my perspective, there are three reasons why operators should be really thinking seriously about fixed connectivity and focusing on it. 

Firstly, it's just the sheer amount of revenue that is generated by fixed connectivity. So for the typical operator, we would expect it to account for at least a third of their enterprise revenue over the next 5 years. Mobile connectivity would be another big chunk of that.

Secondly, the margins of fixed connectivity are generally quite good, often significantly better than the margins for IT services. 

And then thirdly, I think for me, being a supplier of connectivity is really the standout reason why operators even have a right to play in IT markets. They have existing relationships with customers, they’re the ones providing the connectivity that's fundamental to those businesses' ability to consume IT services. So, it places them really well to benefit from those growth services if they can get the fixed connectivity right. 

Tom Rebbeck:

Right. So, it's a really good base on which they can sell other services and move into those high-growth areas.

Catherine Hammond:

Absolutely.

Tom Rebbeck:

So how feasible do you think it is for operators to differentiate meaningfully with connectivity? Isn't it to a large extent a commodity service, particularly if they're relying on wholesale inputs which are literally the same from one operator to the next?

Catherine Hammond:

Yes, you're right it is difficult to differentiate and the operators that I spoke to many of them recognise that, especially for someone relying on wholesale connectivity, it's really difficult. And if you find a way to stand out, then competitors, given enough time, can usually match that. 

But I do think there are a few ways that operators can differentiate, at least in the short to mid-term. Either through the types of services that are offered, particularly if they do have some of their own infrastructure. Or the way in which those services are being delivered, be it through good customer care or be it through automation and ways of consuming those services.

Research insights on differentiation

Tom Rebbeck:

Ok, let's turn to the research that you've been doing on how operators are differentiating their fixed offer. Can you talk a bit about the research that you've done? 

Catherine Hammond:

So I've spoken to about a dozen operators spread across quite a large mix of geographies, some in Europe, some in the Middle East, some elsewhere in the world – really just trying to better understand what the demand is that they're seeing from their enterprise customers and to identify the different ways in which they're trying to stand out from other providers, in order to meet that demand for connectivity.

One of the things I asked all of the operators I spoke to was, what in their view are the most important factors to enterprises when they're selecting a connectivity provider. And for me, quite a few interesting things came out of that. 

So first of all, the most important factor for supplier choice was fault response and reliability. So then you ask the question, well, how can operators use that as a differentiator? How can they make fault response and reliability help them stand out? 

And it's quite hard on paper because actually, the SLAs that are being offered by different operators are all quite similar. But in practice, operators’ ability to meet those SLAs can vary, and quite a few of the operators I spoke to felt that they excelled in that area, and therefore they need to think about how they can promote their successes when they have them. 

So for example, if there's a big extreme weather event, lots of networks are down, they perform better than the competition in getting customers back up and running again. Or perhaps there's analytics reporting that they can have to highlight the strength of their responses. Because obviously, businesses don't notice if an operator sees there's a fault likely to happen, they do something about it, they fix it, that's kind of not seen to the business. But if they can use analytics to say, actually, here's what we've been doing here, you can see what's going on, then that helps to build confidence in the customer as well. And just pointing to tangible measures like investments in resilient access, investments in failover solutions, trying to kind of point to tangible ways in which they can offer that fault response and reliability.

So that was one thing that came out. And then the other really important factor for supplier choice was felt to be the existing customer relationship. And that's quite an interesting one in a way. It points to the fact that fixed connectivity is generally quite a conservative market and most enterprises are very reliant on their fixed connectivity, so they don't want to switch supply if they haven't got a good reason to do so. But that means that on one hand, customer care is really important, retaining customers is much easier than winning new customers – that whole customer care package is super important. And then for operators who are trying to increase their market share – well, how do they go about that? There needs to be some way of gaining trust. One of the operators we spoke to talked about how they were using customer references from similar firms, allowing potential customers to talk to existing customers to kind of build that confidence in their abilities. 

And then, beyond those two things, there were other factors like price, technical solution, portfolio breadth, they all sit a little bit lower in importance. I don't think that's necessarily because enterprises don't value those things as well, but most operators are offering basically the same things in all of those areas. So it's not really making a difference in terms of supplier choice.

Innovations in connectivity services

Tom Rebbeck:

A lot of these things sound like operators trying to do the basics a bit better than their competition when you're talking about customer care or response times and things like that. Is there anything that you saw that operators can do to really stand out? 

Catherine Hammond:

I think there are a few things. As I said, most advantages are short-term because given enough time your competitors can catch up, if it's really worth doing. But you can certainly get a first-mover advantage. 

So in terms of technical innovation, probably one of the best examples of this is Deutsche Telekom's premium internet underlay. Essentially it's a service that provides better SLA’s than a pure internet connectivity but not as good as MPLS, and then the price point sits somewhere in between. So it's kind of filling a gap that other operators don't have and it's great for routes into China and other parts of Asia. 

Some other operators are looking at other kinds of technical innovations, one mentioned quantum networking, one mentioned identity management. Colt have got what they call green routes, which are basically an option for enterprises to say, actually, I'd like to choose my networking solution based on carbon footprint, and I'm happy to pay a little bit more for that route if it means that my carbon footprint is lower. So those kind of more innovative things. 

And then the other way in which operators can really stand out is just the way in which the connectivity is delivered and consumed.

So one of the things that's shaking up the fixed connectivity market a bit at the moment is NaaS, network as a service. Lots of operators are investing in more automation and bringing on-demand as service consumption models to connectivity. So certainly some customers really love the self-service aspect of that. Others really like the fully managed services that they have more traditionally. But actually, a lot of operators now seem to be wanting more flexibility, a sort of co-managed option where operators can expose some of the network management capabilities to their customers, but not all of them. They're quite complex to deliver, and I know that some of the operators I spoke to are putting a lot of time and money into developing those. Others are a little bit more cautious. So again, that's an area where those who have the scale and the appetite to invest could certainly gain at least a temporary advantage, by having a model that other operators can't necessarily replicate.

Surprising findings on ESG and operators

Tom Rebbeck:

And finally, was there anything that surprised you from the research and what the operators told you? 

Catherine Hammond:

Yes, one thing that was slightly surprising was the kind of relative importance of ESG and perhaps the lack of its attention from operators that I spoke to – compared with what we see in the press about sustainability and what we hear about operators investing in sustainable networks. Only two of them I spoke to actually identified their ESG credentials as a differentiator.

And we know that ESG is really important to enterprise customers. So I'm not quite sure how to take that, you could argue that actually, ESG credentials are just table stakes, everybody's got them, so it's not a differentiator. But I do wonder whether there is perhaps something that operators are missing in terms of could they actually exploit their investments in ESG a little bit more to stand out in the market, rather than just be on the same level as everyone else.

Tom Rebbeck:

Yes, I wonder if they don't know how to express it yet as a differentiator.

Catherine Hammond:

Yes, exactly.

Tom Rebbeck:

Ok, very good. Thank you for that, Catherine. As we mentioned at the beginning this is based on some published research, we'll put links to that research in the show notes. 

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