The Telecom Operators VBE model : Part 1

This article is Part 1 of a series on VBE models (Value Model, Business Model, and Ecosystem). I will first clarify what a VBE model for a company is, VBE stands for (Value Model, Business Model, and Ecosystem) and describes the company’s business in terms of the Value it provides (V), called the Value Model, the way it provides the Value to its paying customers called the Business Model (B) and the ecosystem that supports the Value and Business model to keep the company in business (E) and it could include dealers or consultants who help customers get value from the company’s products, they form the ecosystem. VBE models have existed for the last 200 years and are used by companies to enter into a business they have no presence in and disrupt the existing players in the Market using a VBE model analysis. Apple used this very effectively to enter in the mobile space where it had no presence and bankrupted four companies in this space who were the Market leaders, namely, Nokia, Motorola, Blackberry and LG mobile and caused revenue loss for Samsung, Sony Ericsson. We now see clouds gathering over the existing players in this Market namely Ericsson, Nokia and Huawei. In these posts, I examine how telecommunications giants like Ericsson, Nokia, and Huawei face challenges from emerging players disrupting their traditional operator-based tower model. VBE models are useful for any company which wants to disrupt an existing incumbents Business and get an entry into a market where it has no presence and also for incumbents who want to protect their business in the future from competitors. The incumbents I would describe in this case as companies like Ericsson, Nokia and Huawei, who have been active in the telecommunication Industry for the last 100 years and the challengers like Data companies like Google, Facebook or Satellite companies like Starlink or Technology companies like Nividia and Mavenir. The series has 5 parts.

Part 1 covers how the Traditional Equipment manufacturers have sold their equipment to the Telco operators and why they were profitable till today with their VBE model.

Part 2 covers the Challengers to the traditional telecom equipment manufacturers VBE model and the different technologies they are trying to bring into communications.

Part 3: In this part I Explain why the Telecom operators need to change the Model from a data pipe operator equipment supplier model to an Identity and Data enabler supplier model. And a key enabler for this would be the incumbent companies who could protect their business from the challengers.

Part 4: In this part we look at what will happen to Ericsson, Nokia, and Huawei’s VBE model if they do not change the model to an Identity and Data Enabler Supplier model. Here I take an example of Optical tower communication which started in 1792 in France by Claude Chappe and its drift into irrelevance as technologies developed.

Part 5: In this part I present the options to the Telecom equipment providers of two paths, one path to irrelevance if they do not change their VBE model and make its business relevant to the ecosystem and the other path to staying relevant and be profitable in business. What is required here is a humility to understand the changes going on in its ecosystem and to figure that out with a cool head rather than going ahead without considering the changes in its VBE model and repeating the mistakes of Nokia Phone Bankruptcy and the Vonage value write off.

I have used some recent debacles as pointers in this story, one was the Vonage experiment of Ericsson, which was purchased for 6.2 billion all cash purchase and an impairment charge of $1.1 billion, booked months after a $2.9 billion hit, means Vonage is now worth a third of what Ericsson paid for it two years ago. And in addition, the 5G API market which Ericsson and Nokia hope will come is not developing.

Recent technologies, including Low earth Orbit LEO satellite networks (Starlink, Amazon Kuiper, OneWeb) and optical communication solutions (Google’s Taara), have come up and want to reshape the industry. In addition, companies in the Data space which the telecom operators call OTT are nibbling away at the communication providers profits and bottom line. These challengers could render traditional telecom infrastructure obsolete, much like digital cameras disrupted Kodak. We will also discuss the adherence of the companies like Ericsson, Nokia and Huawei to a Data Pipe Operator equipment supplier model when they need to change to the Identity and Data Services enabler supplier Model where they have an inherent advantage over the OTT players nibbling away at their business.

With recent layoffs at Ericsson in March 2024 and its Vonage write-down from 6.2 billion to 3 billion today, the warning signs are clear—adapt or face decline. If telecom incumbents fail to evolve their VBE models, they risk being outpaced by data-driven connectivity solutions from companies like Google and emerging satellite firms.

I will first clarify what a VBE model for a company is VBE stands for (Value Model, Business Model, and Ecosystem) is describes the company’s business in terms of the value it provides, called the Value Model, The way it provides the value to its paying customers called the business Model and the ecosystem that supports the Value and business model to keep the company in business and it could include dealers or consultants who help customers get value from the company’s products, they form the ecosystem. Using this VBE model in 2019, I predicted that Ericsson, Nokia, and Huawei would struggle to sell 5G equipment without a supporting VBE model—years before Ericsson’s 2024 layoffs confirmed this analysis.

2019 Prediction Video: YouTube
2024 LinkedIn Post on Ericsson Layoffs: LinkedIn

A VBE model is applicable to any Industry and company. It can be in the AI field or Electric cars or Hydrogen fuel or Cloud. To get a detailed video on what a VBE model is for companies look at this Video https://youtu.be/2f5FXiRkAuc?si=fzanPls_3Tuq8Nlv

The basic is that every company has a VBE model and if the VBE model is robust the company is profitable and if it is weak the company goes into Bankruptcy.

Why had the telecom companies not figured out the VBE model when I could do it using the information available to all. And this was because the Telecom companies focused on technology, not business dynamics. While my focus was analysing three areas:
1️. How telecom operators decide to upgrade equipment
2️. How past upgrades impacted revenue
3️. Whether consumers would pay more for 5G

For the first question

How do you evaluate G upgrade?

I spoke to a retired Telecom executive who had overseen the transition from 1G to 4G. When asked how they decided to upgrade networks, his answer was surprising.

The process was a fika break in Sweden. Equipment makers like Ericsson or Nokia dropped over for a coffee and simply informed telecom operators that the next-generation (G) network was ready, prompting them to begin upgrades. There was no financial evaluation—operators upgraded because governments had auctioned spectrum licenses, expecting them to roll out new infrastructure to recoup their bids.

This system tied network expansion to government spectrum sales, not actual demand, or business viability.

Now I asked why it had worked till 4G upgrading. The answer was upgrading to the next G was an easy decision—each transition brought clear benefits. 1G to 2G introduced SMS, GPRS, and encryption, while 2G to 3G enabled faster internet, GPS, and video calls. However, 3G to 4G improved data speeds with MIMO technology, fuelling platforms like YouTube (2005), Skype (2003), and Facebook (2004). The consumers were clear of the benefits they got with each G transition upto 4G, though the benefits decreased with each G transition.

The second question was:

Did 4G upgrade telecom revenues? For this I plotted the financials of TeliaSonera a Nordic Telecom operator. After they had adopted 4G network in 2009 and they were the first company globally to deploy 4G.

The TeliaSonera chart (2009–2016) shows a 22% revenue drop, 29% EBITDA decline, and a 69% net income plunge, while margins fell just 2.9%. This meant that the companies had removed out all the excess costs to their business to maintain only a 2.9% margin decline when the revenue fell by 22% and EBITDA fell by 29%, pointing to a limit to more cuts to their business costs.

And this brought me to the next question to analyse if the customers of the telecom operators saw value with the upgrade to the new G and would pay more money for it.

Would you pay more for a G upgrade?

The average person represented 70% of a telecom operators’ business and 30% was industry so a person was a good representation of the value they saw with 5G and the money they would pay for it. I asked consumers about 5G's faster speeds, and one replied, "I use Wi-Fi—does 20ms faster video loading matter?" This, along with other insights, made it clear that 5G sales would struggle without a strong VBE model.

Based on these three inputs I made the video in 2019 which the equipment companies found out in 2024. And they have still not worked on the VBE model when they sell 5G or they plan to sell 6G and 7G and there are competitors who are trying to build better VBE models that will make their VBE models obsolete. The issue was why was I able to make a prediction that the telecom companies would have challenges selling the 5G equipment in 2019 without a accompanying VBE model and why had the telecom equipment companies not found out about it till they hit a barrier in 2024, nearly 5 years after I had predicted that in 2019. The video I posted in 2019 is seen here https://youtu.be/zMK9nrwmYaU?si=1BCtKmdUzmOLIRht and the news of ericsson layoffs in the 5G network area are seen in 2024 https://www.reuters.com/business/media-telecom/ericsson-lay-off-1200-people-sweden-2024-03-25/#:~:text=Ericsson%20to%20lay%20off%201%2C200%20staff%20in%20Sweden%20as%205G%20spending%20slows,-By%20Reuters&text=COPENHAGEN%2C%20March%2025%20(Reuters),their%20spending%20on%205G%20gear. The irony was that the Companies had not evaluated the VBE model to sell 5G and for me that was an indication that the companies had not understood the Market dynamics of introducing new products into the market with a VBE model. The same effect happened again in 2024 when Ericsson had purchased Vonage for 6.2 Billion USD in cash accquisition in 2022 and had to lowere its market valuation in 2024 to one third of the value for which it was purchased because of an impairment charge of $1.1 billion, booked months after a $2.9 billion hit. This was a clear indication that the companies had not evaluated the VBE models for their 5G deployments. And according to me, if they had concidered the VBE Model for 5G deployments the companies would have sold 5G equipment like Hot cakes.

…it was clear 5G and later 6G and 7G would not sell without a strong VBE model. And add to that the cloud of competitors to their existing VBE model gathering over their existing VBE model. If telecom equipment providers fail to adapt, they risk becoming the next Kodak.

In the concluding part, I will share more on VBE models and strategies for adaptation.