The development of the global telecom market has been historically unbalanced. So, what can current trends tell us about tomorrow's development opportunities?
By Li Changwei and Kang Rui , Huawei Carrier BG
In 2010, Huawei analyzed the dynamics of emerging markets (EMs), developed markets (DMs), and super-developed markets (SMs) in the global telecom industry. Our research delivered insights into the U-shaped evolution of the industry — insights that have supported the continued transformation and growth of our customers and partners over the past decade. As the industry approaches another U-shaped evolution cycle, will U2.0 have a strategic impact on the industry?
U1.0 evolution: From monetizing voice to monetizing data
Looking back at the history of the telecom industry, voice services peaked in 2010. Although 3G had already started reshaping the entire ICT ecosystem thanks to innovation by Apple, voice services still accounted for more than 70% of the industry's total revenue.
A typical telecom trend analysis at that time would have told the industry to continue to enjoying the benefits of the current voice-based monetization model. However, a potential industry surge brought crisis and disruption to traditional leaders. By analyzing carriers' strategies and pain points, Huawei proposed the "U theory", which depicts industry development dynamics and future trends along two axes: X representing the market and Y representing revenue and profit growth rates.
In 2010, EMs kept generating profits through the volume of voice service users, and leading carriers were experiencing peak revenue and profit growth based on increasing minutes of usage (MOU) each month.
Leading carriers in SMs, such as the US, Japan, and South Korea, started adapting to the emerging mobile Internet concept spearheaded by Apple, moving towards the new "mobile-first" era of 4G. They were also able to rapidly expand their new user bases by developing mobile Internet services. And they increased dataflow of usage (DOU) and ARPU, leading to growth in both revenues and profits.
As leaders in the voice era, carriers in European DMs, such as Vodafone, Orange, Deutsche Telekom, Telefonica, and BT, had all passed the sweet spot of voice services and began to stagnate. Due to a lack of leading Internet companies and smart device companies in the industry ecosystem that could act as guides, the development of mobile Internet services was slow and innovation was lacking. Up-front 3G investment resulted in huge debt burdens for carriers, limiting investment capabilities. The need to address both voice and data services in operations rapidly drove up costs, causing negative revenue and profit growth.
These factors resulted in the U-shaped evolution of the global telecom industry, with EMs on the left, DMs bottom center, and SMs on the right (Figure 1).
Figure 1: U1.0: From voice-based monetization in EMs to data-based monetization in SMs
Through U1.0, Huawei was able to gain insights into a major upward trend in the industry — the transition from voice dominance to mobile Internet. Through that transition, industry services, support, experiences, and business models all fundamentally changed and tremendous opportunities opened up. At that time, it was crucial for carriers to accurately transform towards the mobile Internet.
U2.0 evolution: From Mobile Internet to Industrial Internet
Currently, the industry is experiencing a new round of transformation, shifting from B2C and B2H scenarios to B2X and B2B scenarios. Leading US Internet companies (Figure 2) have evolved their strategies from "mobile first" to "AI first", and the industry is already expanding from mobile Internet to industrial Internet. Industry trends and the types of competition are undergoing dramatic changes, with revenue growth in the global telecom industry already showing signs of U2.0 evolution (Figure 3).
Figure 2: OTT vendors grew faster than the telecom industry over the past decade
Figure 3: U2.0: From the mobile Internet to industrial Internet
The monetization model used by EMs has evolved from voice user volume in the U1.0 era to data user volume in the mobile Internet era, with major carriers already seeing new revenue growth. Carriers that have completed digital transformation now have differentiated competitiveness through digital platforms, enabling them to innovate digital services and integrate traffic and digital service applications. Armed with such competitiveness, they can avoid homogeneous competition for user traffic, significantly improving both DOU and ARPU through traffic-based monetization. Market results show that the profit model based on user volume can support 4%-10% growth, while a model that also monetizes traffic can drive growth up to 20%-30%. Leadership in digital platforms and ecosystems can help carriers lead in market capitalization, with the Indian carrier Reliance Jio providing a great example.
Europe hit rock bottom during the mobile Internet era and is still failing to develop the innovative capabilities needed to make breakthroughs in the industrial Internet era. The user volume profit model, which relies on mobile Internet traffic, is now coming to an end. Major European carriers that failed to deploy 5G at scale or develop IoT and industrial Internet capabilities are now struggling with negative growth, finding themselves in the trough of the U-shaped evolution model.
The US, Japan, South Korea, and China are leading the 5G market, driving increases in traffic and amplifying the window of opportunity for the traffic-based profit model. Typical use cases that realize 5G business value are emerging in all major 5G markets. For example, Europe and the Middle East have formed a virtuous business cycle in the development of fixed wireless access (FWA) services. South Korea and Japan have made breakthroughs in AR/VR applications. And Europe and the US have made single-point breakthroughs in industrial Internet applications and solutions. Such breakthroughs have driven commercial 5G to a critical stage of adoption by industries. In terms of maturity, the extended reality (XR) value chain and 5GtoB are still being explored, during which the growth of leading carriers has remained below 6%.
The leading 5G carrier T-Mobile US has leveraged its leadership in digital platforms and ecosystems, achieving almost 20% growth. In contrast, AT&T in the US is struggling from negative growth as a result of failed transformation into the telecoms, media, and technology (TMT) domain. AT&T's sale of DirecTV and its digital network assets (Domain 2.0) in 2021 was an iconic moment for telecom transformation. By comparing the digital transformation practices of AT&T and T-Mobile US, it is clear that the key to successful transformation lies in understanding, identifying, and pursuing integrated collaboration in key services and applications.
China boasts leading performance in monetizing 5GtoC traffic and innovating 5GtoB business models. Collaboration between 4G and 5G has led to convergent and intelligent communication services being adopted at scale, including enterprise and government videoconferencing, livestream shopping, mobile healthcare, education, and government services. These developments are unlocking newgrowth potential through innovative service forms other than TikTok and Kwai.
5GtoB innovation is flourishing in China, with more than 10,000 innovation projects underway by the end of 2021. The current maturity of 5GtoB technologies is particularly well suited to mid- and low-end industrial scenarios in China. This is likely to lead to breakthroughs in vertical solutions and the value realization from new business models in such scenarios. 5GtoB services will then enable the intelligent digital transformation of all industries, helping them gain global leadership.
By the end of 2021, China had deployed over 1,425,000 5G base stations, accounting for more than 60% of the world's total. Collaboration between 4G and 5G has driven a DOU increase of more than 11.7 GB, with 5G traffic accounting for over 20%. This has consolidated and improved the 4G experience and the digitalization market landscape. In the Chinese market, 5G has surpassed 4G to become the dominant force in the telecom market landscape in the mobile Internet era, driving the full adoption of a traffic-based profit model.
Shift in telecom industry leadership: Europe to the US to China
Over its 30-year history, the global telecom industry has seen a major upgrade roughly every 10 years, each of which has dramatically changed the industry and shifted industry leadership (Figure 4).
Figure 4: New opportunities for China: From follower to leader
Europe led the world in the voice era. BT, which dominated fixed network technology, and Vodafone, which dominated GSM technology, shaped the voice industry ecosystem in terms of network technology standards, system architecture, and O&M models. They also expanded the ecosystem throughout the world, obtaining tremendous commercial profits and gaining global leadership.
Later, 3G and 4G opened the door to the mobile Internet. During this "mobile first" mobile Internet era, the US surpassed Europe. Apple defined the architecture of the new mobile Internet industry as device-pipe-cloud. iOS, Apple's strategic control point that connects smart devices and the App Store, not only created new mobile Internet experiences, but greatly advanced both industry digitalization and the digital industry. 4G then shaped a new type of lifestyle powered by the ubiquitous mobile Internet, which rapidly spread to all corners of the globe, generating profits through digital technology in markets worldwide.
5G is now unlocking a blue ocean of the industrial Internet. At the threshold of an "AI-first" industrial Internet era, China is poised for the third industry upgrade and strategic leadership. The country's New Infrastructure initiative has driven the large-scale deployment of and investment in 5G. Up-front infrastructure projects laid the foundation for the emerging intelligent digital industry, while computing-network integration strengthened infrastructure. Carriers and industry leaders are also exploring and innovating on the new infrastructure platform, aiming to elevate their success to another level and bringing about new opportunities to lead industry Internet development. Leapfrog development requires opportunities, and more importantly, the courage, wisdom, and ability to innovate.
Challenges and opportunities for Chinese carriers
It is likely that the maturity and large-scale commercialization of 5G-powered XR and 5GtoB vertical solutions will first be realized in China. China leapfrogged from an EM in U1.0 to an SM2 in the U2.0 period, but it must still fully transition from its role as a follower in the voice and mobile Internet eras to that of leader in the industrial Internet era. Such changes come with both challenges and opportunities. The Chinese telecom industry's ability to make breakthroughs in the new domains will decisively impact the progress of the industry worldwide and the future role of China's telecom industry in the global market.
U1.0 drove digital transformation and U2.0 will drive strategies and breakthroughs in B2X and B2B vertical solutions. China's telecom industry followed Europe in the voice era and the US in the mobile Internet era. However, to become a leader in the industrial Internet era, it must challenge itself to lead the way in developing the global industry and overcome the constraints the industry currently faces. To this end, it is vital that Chinese telecom carriers develop three capabilities (Figure 5):
1. [0 to 0.1] Strategic insight and planning: From benchmarking against and rapid replicating world-leading companies to gaining insights into the industry and driving industry planning.
2. [0.1 to 1] Breakthroughs in solution innovation: From product and technological innovation to solution innovation.
3. [1 to N] Large-scale operation and business design: From low-cost competition to customer-centric value creation and business design innovation.
Figure 5: Building leadership in new domains and driving industry development in verticals
To overcome constraints in industry solutions and establish new leadership within the industry, carriers must utilize their differentiated resource advantages and the windows of opportunity presented in industry development. They must carefully verify action plans, focus on overall goals and smaller details, define phased roadmaps, innovate, iterate, and make breakthroughs.
During the U1.0 period, the telecom industry transitioned from the voice era to the mobile Internet era. During that transition, the US, Japan, and South Korea seized industry development opportunities, leapt ahead, and made substantial profits through the use of digital technology. The U2.0 period will present the trends, challenges, and opportunities of transitioning to the industrial Internet. As China evolves from an EM to an SM2, it is vital that Chinese carriers build leadership in new domains and use U2.0 as a guide to develop innovative B2X and B2B solutions. This will allow carriers to undertake leapfrog development and lead the world in terms of profiting from industry transformation.
