Telefonica is an UnTelco Example to Follow

Telefonica is one of the largest mobile service providers in the world and was recently benchmarked in terms of innovation in our Telco Innovation Benchmark, along with other top-20 operators. We assessed these mobile service providers in terms of 3GPP involvement, patents, R&D spend, and open source contributions. Telefonica stood out: although it was not in the top-10 list for nearly all of these metrics, it was the top performer in terms of R&D spend. We interpreted this exceptional behavior as Telefonica investing heavily in its internal transformation, which rarely translates to external activities including patents and 3GPP contributions. However, we were not entirely certain this was the case.

Telefonica held its analyst conference this week and confirmed our assumptions: its CEO claimed that the operator now spends 10-15% of its revenue in R&D, which is several times higher than the industry average of 1-6%. The CEO also claimed that this internal digitization and transformation is now paying dividends, and more than 50% of its service revenues are coming from non-connectivity related services, what we call UnTelco. However, Telefonica’s strategy was more impressive than its financial performance.

Telefonica shared its updated network and business strategy which is now firmly grounded and in-line with vendor capabilities. In the past, Telefonica’s requirements were somewhat ambitious, and more than vendors could provide, leading to the operator realigning its plans and perhaps this was the reason that OpenMANO morphed into OpenSourceMANO (OSM). Telefonica claims that his objective is to virtualize 40% of the mobile data growth and 70% of VoIP growth. Telefonica launched a VNF testing lab that has already certified 22 VNFs over its UNICA telco cloud platform and has a roadmap to bring VNF certification to 60 VNFs. This is critical to ensure consistency and allow the many benefits NFV promises: quick onboarding of new network functions, common orchestration, and cloud infrastructure pooling. Telefonica also claims to have commoditized the hardware layer through its UNICA infrastructure and vendors will only provide software for network components, rather than hardware+software. Although this will likely create business challenges for larger vendors, it is a massive advantage for Telefonica and in fact, the operator community.

At the same time, Telefonica shared its plans to deploy OSM across its footprint, in what it calls an end to end orchestrator. It is not yet clear whether Telefonica will deploy this on its own, but it is likely it may commission a vendor or systems integrator to “industrialize OSM” and support it throughout its footprint. Overall, Telefonica understands what it means to deploy UnTelco technology for several reasons:

• Not afraid to take risks: deploying open source software for a critical function like MANO is certainly not legacy behavior and can be regarded as exploring an uncharted territory.
• Is patient: the UNICA project and its end to end orchestration approach are projects that will likely take more than 5 years to provide full returns. Telefonica management understands this is vital for the long-term viability of its business.
• Understands that everything should be a platform: its physical assets, UNICA, end to end orchestration, its IT & Systems, its Products & Services, its cognitive power or its B2B big data platform (LUCA) are all designed as platforms with open APIs.

For these reasons and more, we regard Telefonica as an innovator in UnTelco platforms and business models. The effect of these choices has already started to materialize in several parts of its business.

Telefonica's CEO claimed that the company now generates more than €5 billion a year from its digital services that include Big Data, Video, IoT, Security, and Cloud. The operator is also using its connectivity footprint to enter new areas, including the Smart Home market, where it has combined its new generation of CPE with AURA natural language processing to allow voice control for telephone, TV and content-related services. The combination of connectivity, voice control, telephony, and content is something only operators can offer and Telefonica – through its platform approach – is showing the world how to increase revenues in a highly competitive environment.

Telefonica has also created Novum, a customer service application that is now deployed in 4 opcos and expected to be deployed throughout Telefonica’s footprint during 2019 which is fully integrated with Aura’s voice control capabilities. The difference with other eCare applications is that Novum is a global and common app for all Telefonica opcos, rather than different local solutions, hence creating significant synergies, scale and time to market for innovations across its footprint. The generation of integrated user data allows the company to apply AI to personalize the app based on the subscriber behavior and generate a better user experience.

We expect Telefonica’s strategy will start to pay off significantly in the next few years and will give it a major competitive advantage in the market it operates, and this will be accentuated when its end to end orchestration and UNICA platforms are fully operational. Telefonica is an example to follow and shows that telecom service providers should take more risks, as they can successfully develop technologies in-house rather than rely on vendors for innovation.