Preventing telecom brand commoditization in the digital age

Key Highlights Telecom operator brands are becoming increasingly commoditizedin their core business, making it difficult to sustain differentiatedpositioning Digital brands are emerging as direct competitors to telecom operatorsin more and more segments as a consequence of shifts in the digitalvalue chain Telecom operators should focus on strengthening their brands in theaccess space to sustain premium positioning and be recognized as thebest in class in their core business Delta Partners propose a roadmap that starts with strategic reflectionon the operators long-term business model and its intended role in thevalue chain, cascading down to customer experience definition andbrand strategyThe problem: Telecom brand commoditization in the digital ageAre classic telecom brands still relevant in the digital age? Definitely, but they have been unable to keep pace with the constant market changes. Evidence? A glance at the latest top 100 brands report from Interbrand reveals not a single telecom brand in the list a consequence of the digital age having shaped emerging culture and customer behavior drastically. In order to remain viable and relevant, telecom operators need to respond to these changes and continue playing a significant role in the consumers decision-making process.

Marketing guru Philip Kotler once said, If you are not a brand, you are a commodity. In todays competitive markets, the risk of commoditization has never been greater. In this digital age, telecom operators compete against an unprecedented volume of brands for limited share of mind among consumers - and there is no room for commodities.

However, certain warning signs are apparent that suggest that telecom brands are slowly but surely becoming commoditized:Telecom brands are becoming less relevant and meaningful to consumers. A recent study performed with one of Delta Partners clients suggested that telecom brands endure a much weaker positioning compared to other consumer brands to the point that consumers would not care if telecom brands disappeared. This is a consequence of customers lower attachment to operators brands and their limited overall relevance to consumers lives (See Exhibit 1).

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Telecom brands are becoming less differentiable. Telecom players face increasing difficulty in creating distinct brand attributes vis--vis their direct competitors. A comparison of the top two telecom players in selected European, APAC and LATAM markets shows minor or no statistically-relevant difference across brand attributes (see Exhibit 2). Therefore, it is becoming increasingly difficult to differentiate in the eyes of consumers.Telecom brands are lagging behind in brand value creation versus digital players. Delta Partners research into a clients customer base in key developed markets demonstrated that digital brands outscored telecom operators in the eyes of the consumer by a factor of four in overall brand strength. This is further supported by the slower growth of telecom brand valuations: between 2006 and 2013 the brand value of the leading digital players increased at a 24% CAGR compared to just 6% for telecom operators (see Exhibit 3).However, one caveat needs to be factored into the three trends identified. The degree and pace in which these trends are materializing is far from homogenous across markets at different stages of maturity. In developed markets these trends are already a reality, while in developing markets only the first signs are starting to appear. As a consequence, the top telecom brands1 in developed economies have lost on average 10% of their value over the last two years. However, the top telecom brands in emerging markets2 have done the opposite, increasing their brand value by approximately 10%^3.Although these warning signs are indicative of poor branding health, Delta Partners believes that branding is neither the only solution nor the sole cause of the commoditization trend. The overall definition of the business model and the delivery of the value proposition to the consumer is the underlying cause. This white paper therefore tackles the following key questions:

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What are the potential strategic options for an operator in the digital space? What are the key levers that an operator can use to prevent brand commoditization? How should an operator stretch its existing access brand into the digital space? How suitable is the current portfolio of brands to play in the digital space? Are new brands needed? Under what brand architecture?

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Delta Partners five-step approach to prevent brand commoditizationDefine your playing fieldThe first step involves selecting the telecom operators role in the digital value chain. Broadly speaking, there are three main roles that operators can choose to pursue (See Exhibit 4): Access provider: Providing connectivity both in voice and data across different technologies Enabler: Interfacing, enabling and commercializing new digital services leveraging the existing capabilities of the operator and reselling these capabilities to third parties Services creator: Exploring new digital business opportunities (content, apps and services) beyond the telecom operators footprint, customer base and touch-pointsThe business model will ultimately influence the value proposition to customers and hence the branding strategy.

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Listen to your customer

The core asset of a brand is its ability to represent and amplify a set of values and attributes that are intended by the brand and sought by the customers. Accordingly, customers expectations will serve as an appropriate starting point to determine these intended brand attributes and focus of the customer experience. For each role that a telecom operator can play, these can be summarized as follows: As an access provider: Functionality and service reliability are the key expectations from customers. The brand will need to support these by building on attributes such as reliability, quality and customer attention. In this model, customer touch-points are entirely owned by the operatorAs an enabler: Expectations will Differ significantly if addressing business customers (B2B) or residential customers (B2C). In B2B, customer expectations and hence the brand attributes will focus mainly on functionality and customer service. In B2C, consumer expectations will be more demanding as they will additionally seek emotional and innovative attributes. This will require incorporating a new set of attributes into brand equity that in most cases are currently not (yet) owned by operators. In both cases, the customer touch-points and hence brand delivery are still entirely owned by the operator As a services creator: Expectations are driven mainly by the emotional and innovation components of the experience; brand attributes will therefore need to focus on building emotion, innovation and performance equity into the brand. In this model, the customer touch-points can be owned by the telecom operator (e.g. proprietary apps sold via the operators app store with direct billing and integrated customer care), but can extend beyond the telecom operators control into the over-the-top (OTT) market (e.g. OTT applications sold via third parties app stores reaching customers beyond the telecom operators footprint)Deliver on the promise in access provision by providing impeccable and segmented customer experience providing access and connectivity services remains the key customer promise for telecom operators. Vodafones CEO Vittorio Colao recently pointed out that, the threat of reducing the gap between operators to zero is real and this is why I am making relevant investments in order to offer a better customer experience than my competitors.4 Other operators including Verizon in the US and Swisscom in Switzerland have moved in the same direction over recent months. Hence, the priority is to position their brand as the best-in-class access provider which helps to further reinforce key functional attributes.To achieve this brand promise, telecom operators need to distinguish themselves from two key players: 1) other telecom operators by offering better-quality access and connectivity services, and; 2) digital players (e.g. VoIP and OTT) by mastering the fundamentals of customer touch-points.With this objective, the traditional customer journey analysis combined with competitive benchmarks can help to shed light on this area. Three challenges, however, need to be considered: Customer satisfaction assessments need to go beyond the telecom industry. Measuring satisfaction evolution across the customer journey against other telecom operator competitors might be the wrong measure as customers now factor in other elements and experiences. Recent research at a Delta Partners client showed an inverse relationship betweenmarket sophistication and the general level of consumer satisfaction with an operators service quality. In other words, the customer satisfaction index in developing markets exceeds developed markets by more than 15% on average. This can be attributed to the more advanced digital landscape beyond the traditional telecom industry and higher consumer sophistication and hence expectations in developed markets New digital touch-points have changed the formula to maximize brand equity. The advent of the digital age has dramatically altered the overall customer journey and relative importance of touch-points in driving customer satisfaction. Currently, digital platforms make up 70% and 60% of the most influential pre- and post-purchase touch-points respectively. Operators need to have a deep understanding of the new process, identify the key touch-points (digital and traditional) and ensure differentiated delivery The importance and relevance of customer touch-points and experience drivers varies significantly based on customer segment, particularly in more sophisticated markets. A tailored customer experience for each segment is therefore required to maximize ROIC. This ensures that the best quality of service is reserved for the highest-value customers, instead of over-delivering across the customer base (e.g. differentiated network quality, in-store shopping experience, payment and delivery facilities, etc.)Build new brand attributes by stretching brands into the digital spaceThose operators intending to expand into the digital space will need to stretch their current brands.Brand stretch involves taking the brand beyond its current core space into new and untapped categories. Most telecom operators have identified this need in order to meet customer demand, drive growth and counteract the threat from OTTs.However, there are four key success factors to consider when stretching the telecom operator brand into the digital space: Operators will need to nurture their brand equity with innovation supported by breakthrough launches Only a handful of initiatives will have the potential to stretch the telecom operators brand and will likely be in the Enablement role. Innovations in the Services Creator role are unlikely to carry the existing access brand given the unconnected customer touch-pointsThe B2C space will need to produce the silver bullet initiatives to stretch the brand. Innovations in the B2B space are unlikely to escape the business segment, limiting their potential for mainstream adoption Successful B2C initiatives are likely to be in e-payments, M2M, music and video given their greater chance of achieving the critical mass necessary to develop the required brand attributes (Refer to our white paper Darwinism in the Digital Age for more on this topic) Define an effective go-to-market process. Telecom operators will also need to ensure that innovation receives the appropriate level of focus. The main challenges for operators to overcome are the frequent day-to-day focus on short-term results (i.e. on the access business), the lack of communication budget and varying realities across markets (only for large groups with a multinational footprint) Exploit the existing access brand. Stretching the existing brand equity avoids the proliferation of new, non-strategic brands that will further dilute the product portfolio. Selective launch of new brands should therefore only be considered when there is a clear leadership ambition in the category and the launch has the required resources to be sustained over the short and medium-term (as detailed in the next sub-chapter) Maximise equity transfer to the access brand. Telecom operators need to ensure that new products are not launched in isolation to avoid creating silos of brand equity and limiting equity transfer between company brands. The new brand should instead form part of an ecosystem that allows brand equity to be fully exploited. For instance, Apples visual identity and i presence in its productNomenclature is a powerful and simple tool for catalysing an ecosystem of equity transfer between sub-brands Selectively launch new digital brands

There will be cases, though, where the launch of new brands is needed to complement telecom operators existing brand portfolios and support new product launches or acquisitions in the Enablement and Service Creator roles. This process, therefore, requires stringent selection to filter out products and acquisitions that may cause brand dilution or negative brand equity.There are three potential branding models that operators can employ to launch a new product: New brand - standalone: The new brand plays a primary role without the presence of the access brand. This model conveys a strong message of leadership ambition and innovation, allowing the product to expand beyond the operators footprint and touch-points. However, it requires a genuinely-innovative breakthrough, significant resources to support the brand and will create limited digital equity for the telecom operator brand. The launch of the Libon communication app by Orange in 2012 is one such example of the standalone model New brand - endorsed: The new brand plays a primary role leaving the access brand as the endorser, albeit in a secondary role. This model conveys a message of innovation and leadership in the category that is transferred to the access (mother) brand. This will, however, require significant resources, transfer of brand equity from the telecom operator brand to the new brand (which may not be desirable) and carries the risk of failure which may backfire on the telecom operator brand. In the digital space, the launch of Surface (endorsed by Microsoft) is one such example of the endorsement model

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Line extension: The new brand plays a secondary role as the product is launched as an extension of the existing access brand. This model allows the creation of digital equity for the access brand and requires few resources but has the limitation of sending a message of no relevant innovation to the consumer. A good number of the television ventures by telecom operators have followed this model (e.g. Claro TV, Orange TV and T-Mobile TV)The different models illustrated in Exhibit 5 can and probably will coexist in organizations as the industry and need for different brands evolve. Companies, and in this specific case telecom operators, will need to manage increasing complexity across their brand portfolio.As a reference point, in-depth analysis of the evolution of the brand portfolio and architecture of digital players reveals huge transformation of their business models and how their brands have had to adapt.The brand portfolio and architecture of Microsoft is a prime example of such huge transformation (See Exhibit 6). Although the company started consistently with a traditional endorser model (Microsoft Windows, Microsoft Excel, Microsoft Hotmail, etc.), it has been forced to evolve over recent years to a company with multiple examples across each brand model, given specific events: App explosion: Demands brands that are neutral to the mobile operating system (e.g. Hotmail) Expansion beyond software: Necessitates brands that appeal to different needs and segments (e.g. Xbox) Recent acquisitions: Requires protection and continuity of acquired assets brand equity (e.g. Skype)

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Therefore, there are no clear rules to obey in selecting the branding model and telecom operators continue to test the suitability of each model for their portfolio. There are, however, three considerations that will drive the final decision: Is the new digital initiative commercialized via the operators touch-points only or beyond?New and successful products serve as great tools to transfer innovation equity to the access brand. Therefore, launching products via endorsed brands or line extensions should be a priority. The customer experience model and brand model, however, must be clearly aligned to avoid inconsistencies along the customer journey. For example, operators may choose to extend beyond their traditional touch-points or customer base by launching OTT products. In this case, the presence of an access brand might not only limit the addressable market, but also generate customer confusion (i.e. OTT customers calling the telecom operators contact center or visiting its own shops) Is the new digital initiative targeted at B2B or B2C?Depending on the segment addressed, the role of the brand will differ according to the relevant customer expectations. In B2B, the brand still needs to deliver a message of innovation, but the components of reliability, quality and customer attention remain the key drivers. Therefore, the equity of the access brand will be required through an endorsed brand or line extension. In contrast, innovation and emotion will be the key drivers in a B2C context, where a stronger and more distinct brand identity will be required Is there clear leadership ambition and appropriate resources behind the brand?A new, standalone brand can be the catalyst to achieve leadership in a specific category but requires significant resources to support it. On the contrary, the use of line extensions can provide a quick and efficient take-off at the cost of limited longer-term potential. Operators will need to factor in the opportunity ahead and the business plan in order to optimize the model for each opportunity

ConclusionThe digital age is quickly changing players, positions and perceptions. Telecom operator brands are becoming increasingly commoditized in their core business, making it difficult to sustain differentiated positioning. Meanwhile, digital brands are becoming progressively stronger in the eyes of consumers and emerging as direct competitors to telecom operators in more and more segments as a consequence of shifts in the digital value chain.This white paper is a call to action for operators to place branding at the center of their strategic decisions in order to stay relevant in the post-digital age. Telecom operators should focus on strengthening their brands in the access space to sustain premium positioning and be recognized as the best in class in their core business. At the same time, they need to digitalize their brands and build on the required attributes.However, while the symptoms are related to the branding strategy, the underlying causes and eventual solutions lie in the overall value proposition to the consumer. Delta Partners proposes a five-step brand roadmap that starts with strategic reflection on the operators long-term business model and its intended role in the value chain. This cascades down to customer experience definition and brand strategy, namely the brand positioning and architecture. This approach can be summarized as follows: Define your playing field. Clearly define the operators strategy and role in the value chain: play solely as an access provider; expand into enablement, or; become a services creator to evolve into a true telecom operator 2.0 Listen to your customer. Fully understand customer expectations across each role to define the priorities for product, service and brand attributes Deliver on the promise in access provision by providing impeccable and segmented customer experience. Position the access brand as best in class by mastering the fundamentals in a segmented fashion to optimize customer experience and maximize ROIC Build new brand attributes by stretching brands into the digital space. Nurture existing brand equity with a solid array of innovative P&S, maximize the go-to-market process to ensure that innovation reaches end users; exploit the access brand when launching new digital P&S, and; create a brand ecosystem that maximizes brand equity transfers between brands Selectively launch new digital brands. Select the optimal brand architecture on a case-by-case basis to complement the existing portfolio with new brands to support digital product launchesIt is paramount to understand that there is no one-size-fits-all solution. The specific challenges that each telecom operator faces in its own market require a customized understanding of the current situation and development of the strategic direction. Nonetheless, this five-step approach provides a sound framework for telecom operators to avoid the looming commodity trap in the post-digital age.