#119 Kearney's Zorawar Singh

This is Graham Lynch, CommStay Live, first episode for 2025.

I'm back, bright-eyed and more bushy-tailed than ever. And we're going to kick off the year by looking at something fundamental to the telecom industry, and that's literally how it structures itself. I'm joined in the studio by Sorawa Singh from Kearney. Sorawa is a joint author of a very interesting paper that came out at the end of last year.

Looking at whether the model of the big integrated vertically integrated horizontally integrated telco has that got staying power as we we hit into the second quarter of the 21st century welcome to the show sarah thank you graham for having me it's a pleasure okay so for those who haven't read the paper take us through your basic thesis and and sure graham i think piece number one is the infrastructure.

You can talk about the physical wires, you can talk about the telco towers and all of that infrastructure and the physical place where it's, that's number one. Number two is then all the equipment that actually runs the network, connects people, connects the phones to the network. And then the third aspect of it is what we call the service element of it that sells the connectivity to the customer, that services the customer, that this model has served the telco industry.

So there are a lot of synergies in one entity, which is deploying a network. Maximizing value for the customers. But that model right now, why is it being debated? Now, the core thesis of the paper is, if you think about these three separate elements and you start thinking that because the drivers are different, all three elements are financially self-sustainable and operationally independent, that actually throws up some pretty interesting insights.

But suddenly you can operate them as three entities and you can start creating mechanisms and you get out of a cross-subsidization conversation, you get out of governance challenges, and you get out of operational issues of managing such a distinct business together. The core thesis of the paper is if you go down that route, the efficiencies you create in this are greater than the costs of deploying this model and it creates more enterprise value.

That all said, it's quite a mindset shift, isn't it? Particularly for the older folk amongst us who have a lifetime of a certain type of management culture, a certain approach to how you look at synergy between a network component and a product, even how you look at a customer. How do you escape that mindset where there obviously is a preferred model of integration right now and I guess change the culture and change the mindset to embrace what you're talking about?

That's an interesting point. I think a few things there. There are certain set of unique circumstances where this would be valuable. Like extremely well-run operators who actually do not have an issue of overheads or inefficiencies or financial transparency, they may not get a lot of benefit from going down this. But where these are issues, it creates a very interesting CEO lever to create those efficiencies. Because it becomes a simple way to reorient the business on core outcomes.

And simple generally gets simple. Now, when you separate a telco into an infrico, a netco, and a servco, at least initially, they're all each other's biggest customers or suppliers. And they still need to talk to each other. They still need to interact with each other for processes to work on an end-to-end basis. So how do you work through some of those issues? One obvious one is pricing.

Does everyone get the same profit margin? Some people get better ones than others, depending on where they are in the structure. But also all the basic communication tasks. You know, would I have a problem? What's the hierarchy of communication in that type of scenario?

Know accountability or all those sorts of things that are taken for granted I guess in vertically integrated telcos because they have established systems you're breaking them all apart and in some cases there may even be rules but you know you've got to be a fair infrico which means you can't advantage your old servco colleague over an external customer how do you get around all those sorts of issues?

I think that's a great question. And the argument I would make is actually what we are proposing makes those interactions simpler. And that is the core thesis of what creates value. So let's talk about it one by one. So first and foremost, for clarity, I want to make sure that we're all on the same page that delayering does not necessarily mean end-to-end structural separation.

It's a concept that is a lot more about financially self-sustainable and operationally independent and being able to be operationally independent. In some cases, it may require structural separation, but in a lot of cases, it may not. But let's talk about it. So the interaction point between the Servco and the Netco, let's talk about it. At the core of that interaction point is basically a connectivity product with a set of features at a particular price point.

Above everything else, that is the interaction point between a Servco and a Netco. So what we are seeing in our paper and what our hypothesis is, if the Netco, the way a wholesaler behaves, can distill its business down to a certain set of SKUs in simple language, with a certain set of features around coverage, because coverage is super important in a mobile network, reliability and security, and then feature functionality of stuff like bandwidth on demand, boost speed, stuff like that.

If you can come down to a certain set of SKUs and have initial price points with it, the conversation that the Netco and Servco suddenly start happening is of customer value. The Servco will push back on the Netco on feature functionality. It cannot, that does not create value for the customers and it cannot go and sell in the market for repeat. It will start discounting for those. It will send the strongest signal back on what sells in the market versus what does not sell.

It will create real live feedback for the Netco. That interaction point if it comes down to a skew and a price which the Servco is willing to accept and negotiate with the Netco and take to the market, becomes the reason for the interaction. That is not necessarily how it works in a vertically integrated model. Because in that concept, the netco is working on a series of assumptions. And if you look at a lot of telcos globally, there are lots of allocation models in which cost is attributed.

So it creates a bit of fuzziness. And what's valuable versus what is perceived to be valuable is a distinction that's different. When you distill it down to a SKU, which the Servco pays for and demands and is clear on the price it can charge in the market, the feedback loop becomes clear. And if feedback becomes transparent and clear, the interactions become clear. No longer does a Servco need to talk to the Netco about, hey, I wish I have coverage here.

Oh, I wish the network resilience would be this. Oh, I wish I had this feature. That is embedded in the SKU's functionality. The servco can go back and say, hey, if you could improve X by 3%, I can go and charge a little bit more to the customers because they're demanding it. That creates a business case for the network to invest in that. And if that feedback is not coming from the market, the network does not need to invest in it.

So the feedback loop from the customer to the investments in the networks becomes very clear. That simplifies the conversation. Okay, that's really interesting. in terms of investment feedback loop.

How does it work from the point of view of an external financier who's looking at an entity and looking particularly at the risk profile of that entity? From the point of view, I'd much rather lend to someone who turns over $10 billion than turns over $2 billion because they've been separated from their retailer, right? So how does that work in terms of, I guess, the assessment of risk around investment? Yeah. Good point. I think the risk, it comes down to the investor classes as well, right?

Like now the risk models and one of the reasons of why InfraCo, NetCo and ServCo are talked about like this is from an investor's point of view, they are slightly different businesses in which risk is assessed in slightly different manners and in which the multiples available for investment are looked at separately. As an example, a NetCo model is only as valuable as its long-term contracts, right?

What contracts do you already have in the market are they 10-year contracts five-year contracts and what's the value of it and then what is the investment required to retain it it's like any wholesale business so the value of the contracts justifies the value in this instance these things will be written down because of that financial separation kind of thing a retail business is always valued on its brand value its customer its churn its its willingness

to price above the market and then the infrastructure business is like a real estate trust. It's like long-term cycles. So what this financial separation does and I keep coming back to it, financial separation is more important than structural, is it will give the investors very big clear signals and sets of numbers on these separate entities and their risk profile becomes more clearer.

And it goes back to the same point, more transparency, more clarity on the value drivers, the more the investors' risk profile becomes more manageable. So, again, it goes back to that same point about that the three parts are slightly separate businesses, slightly separate drivers, and the investors can look at them separately.

Now, there's another stakeholder, of course, in all of this, and that are governments, and particularly industry regulators, who take a great interest in the structure of the markets that they regulate. Now, on the surface, it would appear that this type of model would be quite attractive to them, Because the more transparency, the more granular breakdown you have of corporate function, the easier it is to regulate each part of that.

But it's not necessarily as easy as that, is it? Because if you're a regulatory agency that's been, you know, you've got the old trust buster mentality, you've been regulating vertically integrated behemoths for half a century or more, that's what your culture is. That's the academic training of your practitioners in your agency. This is something completely new. What do you mean I have to regulate a tower-only company now? And there's a lot of challenges that come with this, aren't there?

Exactly right. Now, there are a couple of developments in this which makes this conversation interesting, right? A lot of economies around the world are thinking about critical infrastructure separately. And there's a lot of conversation going around about it. Now, when you look at the delayed model, the critical infrastructure part of it becomes very self-apparent. It's the net core that's the critical infrastructure served by serve core.

The retail part of the business is not necessarily critical infrastructure. So the ability to create regulatory policies for critical infrastructure, It becomes more transparent in this nature, and the cost and burden of adhering to it also gets isolated into a part of it.

So I think that part of it is very good. The other part of the regulatory challenge, which will need careful thought, is whenever you change the fundamental structure of an industry, it has what is famously called the known knowns and the unknown unknown, right? The known knowns. General Rumsfeld thought there, yes. Exactly.

So the point about this, the known unknowns about this are pretty clear and prima facie look like will improve the ability for the industry and the regulators to work together. But there are unknown unknowns which will only materialize when a few companies start going down this model. Because what it does for competition, what happens when the network, Netco, potentially starts talking to other Netcos and we start looking at other ways and means.

An example of that is what happened in Malaysia with the 5G network of a national OneNet. There are considerations which will need to come out. So as this conversation develops more and emerges more, I think there are a lot of unknown unknowns which will come up for conversation.

Okay, and I guess there's a corollary of the regulatory response to such models would be more generally consumer concerns around what this means for pricing. You know, if you applied a reflex Marxist analysis to this, you'd be looking at, oh, okay, two companies instead of one, that's double marginalization. That's two hands in my pocket, not one. So how do you avoid some of those types of issues?

I think very good question. the way I would answer that is our core thesis is in companies where such a model makes sense and is solving a fundamental challenge in the organization and helping improve it in terms of removing cost and making it easier to go to market the value the company is creating in the community will increase now how that value is allocated between the investor group the company and the employees itself and then how much of

it going to customers becomes a company-by-company decision. Where is that value attributed to? I think it's too early to say where that value will get attributed to. The market is a very price-sensitive market. So I think the history of the telco sector says whenever there's an improvement, it does go back to the customers.

I think the classic example of it is if we compare consumer price index with the telco pricing index, like telco pricing has actually gone backwards compared to CPI over the years. So the precedent in the industry is when value is created, it does get transferred to the customers. But again, that will become a company by company choice of how the value created is then allocated out into equal.

Now, it's probably important to emphasize that we're not talking about an abstract here. We're not talking about a hypothetical. It is not novel for the telecom industry to de-layer. It may be unusual in a lot of Western Hemisphere markets, but it so happens we're recording this interview in Sydney and Australia, and this particular little quadrant of the world has seen quite a lot of this de-layering take place over the past few years.

Some obvious examples in Australia, the separation of NBNCo, the fixed broadband provider, from Telstra, the vertically integrated former monopoly, and that was about 15 years ago, that was first initiated. More recently, we're seeing Telstra itself spin out its passives into an InfraCo. They stole your name in advance. There you go. New Zealand's done the same with Chorus being spun out of Telecom New Zealand and, of course, Spark, the retail arm.

And if we go a little to the northwest of Australia, we've seen the same in Malaysia with the kind of the collectivized 5G network that not all of the telcos, but several of the telcos they use. And, of course, in Singapore with the Netlink Trust, where all the major fixed operators use a common fiber telco. So we've got a few real world examples here of this concept in action. What are the lessons to be learned from what you've seen there?

I think the biggest lesson, and it's one of the things we iterate in the paper as well, is I think delaying is an interesting concept. What is paramount is to be absolutely clear on the problem we're solving for and then how the concept is deployed. So I'll give you a couple of more examples, like because that trend is ongoing a bit further.

Like the deal that happened what like six to seven months ago between Optus and Vodafone the mock-in deal on network sharing that becomes an example of a net course sort of a deal like it's a part of it but there so I think the lesson to be learned here is because in all the examples you've mentioned they've all had varying degrees of success they've all learned new information when they've been deployed that they have had to solve for so I think the biggest lesson

that's been learned is it needs to be very clear what value is being created what problem is being solved because what you cannot do is use this as a hammer and nail situation and you have a hammer looking for a nail because when separation is done at a financial and operational level it does come with a lot of work and effort and when that effort is done what generally happens in organizations is you bunker down and do the work and that year period that is required to

do the work and the investment made in it has to yield return.

So thoughtful execution and a very clear problem being solved is important. If you are unclear on that aspect of it, this road can lead to a lot of conflict. I think that's the biggest lesson. Be absolutely clear on the problem you're solving and then say, raise a focus. Yeah, that's interesting thoughts there. As someone who's reported very closely on some of these things in Australia, I draw a contrast.

There's delayering and then there's delayering. You're pulling NBN out of Telstra, but in a sense, actually creating a startup because you were building a new network was incredibly traumatic. I reckon I've written the best part of a million words about the trauma involved in that. But then I'd contrast that with something which just happened very recently. And that was the establishment of the Mokin, the multi-core network between TPG and Optus.

They only agreed to do that last April. And I think they didn't get their regulatory permission until September. And we're now sitting here in early February and that thing is operational. And it went smooth. It went very smooth. There'd be no issues. And I've talked to various people involved, both on the record and off the record. And it was a very harmonious execution. And there are reasons for that. Some of it was management buy-in.

Some of it was that from Optus' point of view, they're getting a great revenue flow from TPG. So it was like having a customer that you're just doing some new and different things for. So some of the aspects of that deal play to established mindsets, which I suspect may have been the secret to why it went pretty well. And would you concur with some of that analysis?

I think exactly right. What you mentioned here is like for Optus and TPG Vodafone in this case, the deal was solving a real problem for both of them.

There was absolutely no ambiguity and both the companies knew if they go down this road each gets something and it's valuable for each that clarity of thinking just pushes through so many roadblocks and it comes back to the same point i'll keep reiterating it this is about creating transparency and clarity like that's what delaying does at its core thesis so if you get into it for reasons that are unclear it can lead to issues and if you're clear about it it will generally generate value.

Okay, well, that's about the time we've got for this interview. If you want to read more about this thesis, go to the Kani website. It's kani.com. That's not hard to remember. Just go to the little search magnifying glass and type in delayering and you will find the article, I promise. Soroa, thank you very much for joining us today. Thank you. It's been a pleasure. We'll be right back.