At a user group event hosted by Portuguese business assurance specialist WeDo Technologies in May, Portugal Telecom (PT) CEO Zeinal Bava spoke for an hour about the changing nature of the telco and the investments and strategic manoeuvres that he believes are necessary for success as the industry evolves.

This week it was announced that Bava is leaving PT to take the reins at Brazilian operator Oi, in which PT holds a 23.4 per cent stake. Such a move had been widely anticipated in Portgual, where Bava is one of the most popular CEOs, and at the WeDo event he himself spoke openly about the importance of Brazil and the opportunity it offers to make “big bucks”.

Bava’s presentation was not your typical operator CEO speech. He was far more forthright than many of his counterparts would have been and, in the context of this week’s announcement, a review of his comments offers some interesting insights into his plans for Oi (both in terms of technology and service innovation) and the reasons that the Brazilian operation is becoming increasingly important to its Southern European parent.

Bava held forth on everything from relationships between operators and vendors to the restructuring of the European telecoms sector, the restrictions of quarterly reporting and the arrival of true convergence in communications and entertainment.

He also offered insight into the PT strategy, which sees the company seeking to innovate across a diverse portfolio of platforms and relationships in a bid to lead the market in the provision of broadband, mobile and TV services. In Bava’s view, triple- and quadruple-play is the future of the telco; success will only come through diversification in service enabled by resolute investment across all network elements.

Size matters

Portugal is a small market, with just 17.4 million mobile users and a broadband base approaching three million subscriptions. But the ideas that Bava developed in Portugal—which he himself described as a “beta market” for testing products and strategies—will certainly be exported southwards across the Atlantic.

Scale is increasingly important for telcos, Bava said, and he voiced concerns that the European market could struggle to remain internationally competitive if its operators aren’t allowed—if not encouraged—to build greater scale. More than once, Bava held up the US as an example of a successful mobile market, and US enthusiasm for in-market consolidation has gone a long way to ensuring that success, he said.

“The US loves in-market consolidation and I think the US is right. If you don’t think about the European Union as one big market then we will always lag behind the US,” he said. “Unfortunately Europe has taken the view that in-market consolidation is not a priority and that means that it will be very difficult for European operators to aspire to the kind of efficiency that a market like the US is developing now.”

Earlier this week Neelie Kroes outlined her own desire to create a single European telecoms market but regulation at EU level has not always been well received by operators, especially when it has attacked lucrative revenue streams like international interconnect. Termination rates would, in time, have come down anyway, Bava suggested, but regulatory intervention accelerated the process to the extent that mobile operators did not have enough time to adjust their cost bases to absorb the hit.

This, coupled with what he describes as “irrational competitive behaviour based solely on pricing,” has driven European ARPU in the mobile sector down to a level that is unsustainable. The impact has passed on through margins to shareholder return, he said, adding: “If you do something at the expense of your shareholder’s money, guess what? He’s not going to give you capital to invest in your network.”

Network investment is key

Continued investment in the network is fundamental to success, Bava said. The network is the platform that enables improvements in customer experience, service innovation and diversification and—if these are managed properly—sustainable, commercially successful differentiation. Moreover, operators that have postponed network investment may already have left it too late, he suggested.

Portugal Telecom has “invested ahead of the curve,” he said. The firm has been running a capex to sales ratio of between 20 and 22 per cent, ploughing E2bn into its infrastructure over the past three and a half years. Considering the size and population of Portugal, this is  no trifle. PT now has 92 per cent population coverage with its LTE network, a 100Gbps transmission network and 1.6 million homes with FTTH. 90 per cent of its base stations have fibre backhaul connections.

“We have become very good at providing coverage, speed, reliability and security; which enables everything that you need to make your life better,” he said.

Bava conceded that the current economic climate makes large scale network investment difficult for operators (although he suggested that, in 18 months, things will look much rosier) and called for greater alignment between operators and vendors to take this into account. There is a disconnect, he said, between the five- and ten-year evolutionary paths that vendors set for themselves and the short term financial constraints of telcos. “There is some arbitrage here that we need to be very careful about in order to make sure that we are not going to mortgage the future for short term gains.”

For all his insistence on the importance of investment, Bava said that it is incumbent on network vendors to acknowledge the reality operators face. Maintenance of infrastructure alone requires capex to sales of ten per cent while customer-related capex and investment in future proof technologies increases the burden. Vendors must see the limitations in the market, ensuring that “their pipeline of innovation is aligned with the dynamic of our sector.”

He continued: “We cannot be investing continuously in technology upgrades that are not absolutely necessary, not bringing returns or not creating value. If a new technology improves the customer experience, or reduces energy costs, or allows me to pay less rental if I’m putting equipment in somebody else’s premises then fine; I’m interested. But if vendors continue to roll out new technologies just because we have cash flow that they think we should be spending with them, soon they will find out that there won’t be enough cash flow. We are the reason they exist; and if we stop existing they’ll stop existing.”

Of course quite a few vendors have stopped existing already and if there was any contradiction in Bava’s presentation it was the concern he voiced about market power on the supply side. With the handset market controlled by Apple and Samsung—and Huawei and Ericsson “increasingly dominating” the network sector—he said, “this is not a very comfortable position to be in.” Nokia Siemens Networks and Alcatel Lucent might take offence at this characterisation, and it is not clear how an increasingly consolidated operator market could be expected to support greater diversity among vendors.

But the network is only as valuable as the services it enables. It is not fibre that differentiates PT in the TV market, for example, it is the quality of interactive experience that the fibre allows PT to offer its customers. “We have built the necessary infrastructure,” he said. “So now the future of our company depends only on our ability to imagine new services that we can develop for our customers, be they individuals or companies,” he said.

Diversify or die

Much of this—the scale of the emerging market holding and the diversification at home—sounds a world away from the reality of life for many telcos, fixed or mobile. But this is how operators are going to have to evolve, he said. Bava described service diversification as “the only free lunch” and suggested that life for standalone mobile or fixed players is going to get very difficult indeed. Customers are tiring of having to buy a range of services from a range of organisations, he said, and operators that can provide the cost efficiency and convenience of a single point of provision—and of customer service—are the ones that are going to win out.

“This is how the sector is going to get organised,” he said. “Look at what’s happening in Spain, in Belgium and Germany. It’s all going in the same direction. We will be quadruple-play markets; this is the inconvenient truth for operators, especially if they are pure mobile.”

If there is a thorn in Bava’s side when it comes to his unified service offering, it is one with which many operators will be familiar. While PT has driven IT transformation in terms of CRM and workflow management it has stopped short of creating a single, centralised billing platform. Bava openly admitted, albeit light-heartedly, to being “scared” of billing and having “given up” on it. “When it comes to billing I’m hoping that the next CEO will do it,” he said, lining up a project for incoming CEO Henrique Granadeiro.

His comments suggest that transformational billing projects are every bit as disruptive as their rarity indicates. One might also infer that, if PT’s business is not being intolerably affected by not having pushed such a project through, then it might not actually be necessary. This is a balance with which BSS vendors are constantly confronted; operators never want to take the pain of transformation up front and are prepared to shoulder less intense discomfort for long periods of time.

As with any discussion of the industry, Bava’s remarks were set in the context of the increasing reach of internet and OS players. He cited a recent brand awareness survey carried out in Spain that returned recognition of 86 per cent for Google and  29 per cent for the highest ranking local fixed operator. While that operator probably spends 15 per cent of sales on capex and three per cent on advertising, he said, Google spends hardly anything driving greater awareness of its brand. It simply offers a best in class and highly relevant service.

Bava said that telcos must move into the same kind of services as Google in order to stay relevant to the consumer. PT has expanded into advertising, payments, IT and cloud services, alongside its core communications and TV offerings. It is constructing what Bava claimed will be one of the largest data centres in Europe, with twelve square kilometres housing 12,500 servers offering 50PB of capacity. “We are clearly positioning ourselves to start this journey with our corporate customers into the cloud, to help them become a lot more efficient in the way they deploy their own capital,” he said.

The biggest challenge at the outset of this journey is commercial rather than technical, he suggested, echoing comments made at the recent Telco Cloud World Forum event in April this year. “The big challenge that we have is to educate our own sales force to be able to sell this proposition to our customers so that they can take full advantage of what it offers them.”

PT has also launched its own consumer cloud, offering everyone in Portugal 16GB of personal storage. Consumers want access to their content everywhere they go, Bava said, and telcos “can’t let Apple just walk away with iCloud and do the whole thing themselves.”

Television and the network effect

As a quad-play operator (PT added mobility to its triple play offer in January this year) PT has a great deal invested in multi-screen content consumption—and it is in the area of Television that the firm seems to be really trying to reshape the offering. The firm ran a cable TV operation for 14 years before spinning that business off to focus instead on delivering television services over its FTTH network. It uses the Microsoft Mediaroom platform (recently sold to Ericsson) on top of which it runs a range of in-house developed services and applications.

Today PT has 40 per cent of the domestic pay TV market, Bava said, and he claimed that Portugal is the “only market in the world” where leadership in triple play has been wrested from cable companies. Fibre offers a superior experience, he said, and “that experience has made a big difference in the performance of our company. I think telecom companies will increasingly move in this direction.”

TV offers telcos the opportunity to greatly improve customer lifecycles, he suggested. “If your offering is underpinned by broadband then churn will continue to be very high. But if you differentiate using television your churn will be very low—and churn is what this whole business model is about. We need to be operating with churn of 10 – 12 per cent. If we cannot have a relationship with customers of seven or eight years then we are not able to earn enough returns on those customers,” he said.

Differentiation has to be at the service layer and, with television, that means interactivity, he said. PT is trying to “create the network effect” in television, delivering compelling reasons for people to choose the same television provider as their friends and family. The answer for Bava is user-generated content and, in building services around UGC, PT is exploiting true convergence.

Many people will be familiar with the “red button” on today’s TV remotes but the remotes supplied with PT’s settop boxes also feature a green button. This pulls up a stable of some 25,000 user generated content channels. Customers can upload their own video content, straight from their device to their PT cloud. They can then drag and drop this into their own TV channel, which can be made accessible to the public, or password protected so that access is restricted to a circle of friends and family.

Of course this kind of service has been available online for years. “But there are lots of TVs out there and we can’t forget that the TV still sits in the living room and tends to be the best screen in the home,” Bava said. Today, he added, 70 per cent of PTs TV customers use interactive services, he said.

“Younger people are becoming huge producers of content themselves,” he said. “This is going to change the TV experience and if you don’t find a way to get people to use their own content on the TV screen then the chances are you will not be successful.”

Telcos should drive interactivity in television, he said. “We work with the [commercial] content producers because we want them to adapt the line-up of channels to the likings of our customers. It’s not a passive relationship where we buy a channel and they just provide the feed. We need to tell them that we want to make the TV experience non-linear; you’ve got to be prepared to work with these guys as partners.” This might be easier for the telcos than the content providers, he said, some of which find it “difficult to work as partners because egos get out of control.”

One area in which PT was unable to turn its ideas into reality is gaming on demand (GoD). The firm developed an offering with a specialist vendor in a bid to tap into the following wave of gamers who might not want to buy a game as soon as it comes out but are happy to pay on a per-use basis six months down the line. The business model was not flawed, Bava said; rather, the service was effectively blocked by Microsoft.

“Our Mediaroom set top boxes have a buffering capacity that you need to be able to switch off to do GoD because latency is an issue,” Bava said. “But Microsoft got in the way.” Microsoft was worried about PT’s Mediaroom-based GoD service cannibalising traffic from its xBox service, and so would not allow the buffering to be switchable, Bava said. “But we think it will be possible to do that in another 24 motnhs. Microsoft sold Mediaroom to Ericsson and I think Ericsson will have a far more progressive approach to this business.”

Moving on

Portugal Telecom lacks the capital to drive consolidation in Europe, as Bava readily conceded, so Brazil is clearly the firm’s future in terms of revenue growth and expansion. Five years ago, he said, PT’s international footprint was managed like a holding company. But today there is a lot more integration across the portfolio, which includes a number of African operations. Operators will have to build greater reach through in-market consolidation, international expansion and service diversification in order to stay relevant in the internet age, he said.

“We have to be players in this market. If we do nothing, and if we continue to be held hostage to the quarterly announcements that we have to make to the markets, then i think we will have no perpetuity. 50 per cent of the value of a company is perpetuity and if we do not lead this process of change the chances are we will have no perpetuity, which means that our companies will be worth half of what they are today.

“What this industry needs to understand is that it needs to grow its share of wallet. We need to invest a lot and generate returns for our shareholders but we cannot do this with irrational competitive behaviour based solely on pricing. We need to be able to look Apple and Google in the eye and have a game plan.”

At the WeDo event in May, Bava’s monologue stimulated a great deal of conversation; much of it revolving around the likelihood of an eventual move to Brazil. How quickly this has happened may well have surprised even the locals but this move will bring Bava, historically not as widely known as other operator CEOs, well and truly into the industry’s consciousness.

It now remains to be seen how easily he can apply the lessons learned in a small European market where he led the incumbent to one of the largest, fastest growing markets in the world, where he is ranked fourth—some way behind third—and competition comes from the likes of America Movil and Telefónica. With the 2014 FIFA World Cup and the 2016 Olympics, we’ll be seeing a great deal of Brazil in the next few years and, if Oi is going to shine, it will have to do so against the backdrop of these global events. Zeinal Bava’s progress is going to be interesting to watch.