Telefónica Industry Analyst & Customer Day’18

Posted on Monday, June 25, 2018

Roughly every 18 months or so, Telefonica holds a global analyst day. Because much of the focus is on enterprise solutions, customers are also invited. This is a “can’t miss” event: always well run, always interesting, always thought-provoking.

Benjamin Button

All of the execs gave presentations – some better than others – but they all linked back to José María Álvarez Pallete’s kickoff speech. It was by far the most visionary, the most far reaching of anything else on the program.

In fact, in some sense the purpose of the rest of the day-and-a-half event was to prove that the Chairman’s PowerPoint was reality.

The unifying theme for his presentation was ‘Benjamin Button’ – the idea of starting old and become younger as time passes. “All industrial companies are born old for this world,” he said. It takes so long to build infrastructure that by the time it is ready for service the world has passed on to other things.

This has long been the reason why telecos are presumed to eventually lose the fight with webscale companies, and eventually be ‘doomed’ to be merely the pipes of the new digital economy.

While Álvarez Pallete’s analogy recognizes the reality of this statement, Telefonica has never accepted this, neither before he became Chairman nor afterward. Among TEF’s peers, perhaps only AT&T strives as hard ‘against the light’ as I once wrote, to prevent becoming a pipe provider.

He – and so his company – places a lot of emphasis on what they call the “4th Platform” which is fundamentally Artificial Intelligence, including Analytics. All companies say they are doing this – both are buzzwords of the moment “BINGO!” – but TEF turns this into services, like the retail-oriented SmartSteps, and operational improvements, like the trouble-ticket analyzer it showed during breakout sessions.

The Chairman said he wanted his enterprise customers to be able to “run their own network” and later Hugo de los Santos, Head of B2B Products and Services showed a portal that did just that – at least within the limitations of a network that has not been 100% virtualized just yet.

Álvarez Pallete also said he wanted his consumer clients to “talk to the network and things will happen”. That goal is further off although the company is rolling out a Set Top Box in Spain for its TV service that goes a long way down that road.

Organizational Alignment

One of the most interesting – and heartening – things at the event was the high degree of organizational alignment, not only with corporate executives but with operating companies and even clients.

I would expect the executives’ presentations to pay at least lip-service if not more to the Chairman’s strategy but they clearly came across as believers and had programs in place to support it. Each had projects in all four ‘platforms’ that went beyond PowerPoint. They were investing in projects and had reallocated money between ‘platforms’ to do so. I would have expected less investment in the 4th Platform deep in the ‘engine house’ of the network but it was there.

More importantly, the two operating business presentations, Spain and Brazil, showed the same degree of organizational alignment, complete with credible initiatives in all four platforms.

Too often in past events, the link to revenue, as I call it, was missing. Corporate groups had given excellent presentations, excellent service ideas. But, except perhaps for Spain, there was not necessarily commitment by the operating companies to implementations. I had even asked operating companies about some of these ‘great ideas’ and received shrugs or ‘not this year’.

This was not the case at this year’s event. If something was not implemented, there was a clear and understandable ‘why’ (like regulatory resetrictions). If it made sense to implement something, it was implemented or in development with a clear timeline.

Brazil even demonstrated how one of its ideas for a self-service customer care application was being adopted by the mother-ship. That kind of thing helps cement the line organization’s commitment to a strategy.

Very impressive.

Unique investment strategies

Telefonica invests in things that I cannot imagine America Móvil (its chief rival in Latin America) even considering.

An example of this is the ‘overweighting’ that TEF has put on fiber deployment. It is number one in Latin America and Europe (according to the company’s calculations) and Spain is number three in the OECD behind South Korea and Japan.

True, fiber deployment is consistent with a pipes strategy, but TEF follows this up with investments in unique content for its TV services, and, in Spain, that AI interface for channel navigation. Its deep fiber strategy supports its enterprise and mobile broadband strategy but investing heavily in FTTH, especially in Latin America, is a bet on TV, the only service with sufficient ARPU to justify the investment (my humble opinion).

TEF also showed off its ‘SmartWifi’ portfolio, a home router designed in its own R&D labs and built for its exclusive use. As Brazil CEO Eduard Navaro said a customer’s WiFi performance is going to be their broadband provider’s responsibility anyway so might as well do it yourself and do it well.

I understand the logic but the business case must have been an interesting exercise, considering how commoditized WiFi routers have become.

(We were sent home with TEF’s own-designed WiFi extender. I will set it up and tell you how it performs in my Bogotá one-foot-thick interior-walled apartment.)

The company’s AI-enabled Set Top Box is a similar example. It looks like a great device but how many ‘telcos’, how many ‘telcos’ with a significant proportion of their revenues in Latin America, would get themselves into the consumer electronics business?

(TEF is also putting its voice and AI-enabled apps into Alexa and smartphones.)

I am not saying they are wrong

By no means am I saying that Telefonica is going the wrong way.

Yes, I am a firm believer that the end point of a telco – even a sophisticated one like Telefonica – is a pipe provider. I think investor and regulatory pressure will eventually create utility-like pipe providers and lightly-regulated higher-risk content and services companies that ride on the utility infrastructure. Too long to go into right now. Just accept that it is my point of view.

But with that point of view, I should be saying Telefonica’s strategy is wrong-headed. All that investment in content and unique broadband TV CPE is just money flushed down the drain. Only the fiber program makes sense and even then ‘build it and they will come’ is risky, especially in Latin America.

I do wonder to what extent these initiatives were ‘leaps of faith’ with very little supporting data and I wonder if investors will come along for the ride on some of these leaps.

But the projects make strategic sense for the value chain. They make sense for somebody in the industry. It may not be Telefonica’s investors but somebody’s investors. These are really good ideas that fit into a really well-thought-out strategic framework.

My pipes-and-services model does not assume that existing telcos go broke or wind up closing up their (to the model) ancillary operations at a loss. It says that assets will be rearranged until a sustainable industry structure is achieved.

To pick a US example, it appears that just as AT&T has obtained regulatory approval for its acquisition of Time-Warner, competitor Verizon is kicking the tires on spinning out its content business, Oath.

And doing so at a net profit for the shareholders.

Content is not a bad idea. It is, in fact, a great idea, a necessary idea to justify networks, the only reasonCPE consumers see value in networks at all. It just may be difficult to get shareholders expecting utility-like returns to come on that rollercoaster.

My guess is that CPE and Set Top Box companies are watching Telefonica’s performance with great interest. If these do well, there will be firms willing to invest in developing these products into global scale businesses.

I do not think that TEF should stop these investments. I just think Telefonica should listen to these companies when they knock on the door.


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