Telefonica is seeking investors for T.Tech, its new high-growth unit formed as part of a sweeping restructure in November 2019, which focuses on three key B2B areas: Cybersecurity, IoT and Big Data, and Cloud.
The unit integrates the global capabilities currently dedicated to the development and provision of these services, in order to deepen management focus and achieve greater scale. It will leverage the muscle and local reach of commercial teams where Telefonica currently sells them, and export the value proposition to countries in which the company is not currently present through alliances.
The idea of bringing these three practices together is that they are growing by more than 30% per year. CEO Jose Maria Alvarez-Pallete hopes to up sales even further, adding an additional EUR2 billion per year to Telefonica’s bottom line by 2022. The unit is also expected to be a vehicle for acquiring related technology to boost Telefonica’s B2B offering even further and, according to Alvarez-Pallete, it will “serve to continue attracting new technological talent and potential partners”.
To this end, Telefonica – which currently serves 340 million customers, including 6.5 million businesses – has appointed Morgan Stanley to find a buyer for a minority stake (though this could be up to 49%) in its newly-formed T.Tech division. This comes alongside news that the company is looking to sell a stake in its Latin America division, which was spun-off as part of the same business reorganisation, as the company reorients around its key markets of Spain, Brazil, the UK and Germany.
But let’s get down to basics here. Selling its Latin American properties and part of T.Tech is really motivated by Telefonica’s biggest problem – its debt mountain. The company is valued at EUR96 billion, but has net debt of EUR51 billion. While this type of ‘gearing’ was seen as acceptable during the telecoms boom days, it has turned into a huge albatross around its neck now the rosy coloured spectacles have come off. Debt repayment and CAPEX for new network build-out are set to use up most of the company’s cash flow for the foreseeable future.
All of this has forced Telefonica to double down on ‘core’. The truth is that it has huge amounts of capital tied up in a Latin American division that has shown weak and volatile growth. Telefonica has been hanging on waiting for the LATAM boom days to start, but now has to reluctantly admit that it needs the cash more than it needs the future potential as it has neither the time, nor maybe even the requisite skills, to grow that market to its full potential.
According to El Mundo, however, the answer to the company’s prayers (at least in this area) may be coming in the form of a motley consortium of Latin America oligarchs, who have placed an initial EUR10 billion bid for 51% of Telefonica’s LATAM properties, valuing the unit at around EUR20 billion.
So much for the LATAM unit, but where does that leave T.Tech?
Omnisperience engages with B2B service providers as they contemplate how they can address their individual business challenges for growth and innovation across cybersecurity, IoT, Big Data and cloud. The market may be promising but it is fraught with difficulties for major telecoms service providers, because it is essentially the bringing together of two disparate worlds and requires the overcoming of substantial legacy structures, mindsets and organisations.
Alvarez-Pallete has acknowledged this difficulty, writing in a public letter: “It is hard and it is full of challenges. And for this reason, few dare to do it in a decisive way.”
The Telefonica approach is now apparently essentially one of collaboration. It recognises that even major B2B service providers cannot do everything themselves – partly because it is simply too expensive. But pragmatically, they can gain virtually as much value simply by acting as a conduit of innovation to their customers, rather than trying to own everything end-to-end.
But is any of this new? Coupling cybersecurity with other capabilities is a similar move to that taken by NTT Ltd. It underlines the growing importance of securing the digital enterprise, as well as connecting it. The critical need to protect both business and consumer data will be the difference between success or failure during the 4th industrial revolution and the emergence of global digital business. By collaborating, Telefonica can incorporate proven and innovative security technologies into its solutions – opening up the innovation funnel so that customers can gain access to such technologies more quickly and more reliably. At least on paper this move is a win-win.
IoT will be a high-growth area for B2B service providers going forward – even though the market has been slower to take off than predicted. By the end of 2020 there will be over 20 billion connected things in use worldwide, with a new Business Insider Intelligence study forecasting that the IoT market will grow to over $3 trillion annually by 2026. B2B service providers should be at the core of this growth, enabling them to engage more deeply and profitably with industries such as healthcare, manufacturing, transportation and utilities that previously were simply buyers of connectivity.
IoT will drive the collection of large volumes of data, as will other digital activities. But this data only becomes valuable to an organisation when it is analysed – with machine and deep learning algorithms, and AI, squeezing more value out of companies’ data assets than ever before. Combining Cloud, IoT, Security and Big Data has the potential to enable Telefonica to establish leadership in new categories such as predictive security, predictive maintenance, smart buildings, and fully managed digital operations.
As more services move to the Cloud, T.Tech also has an opportunity to create a virtuous circle of increased business value – connecting organisations, providing key IT capabilities, storing and analysing data, and thereby delivering an entire solution to customers rather than just constituent parts. It is not alone in recognising this opportunity – as stated, many B2B service providers have tried to address it, with varying results.
The opportunity – but also urgency – for Telefonica to reorganise around new business realities and to make this all work, was recently underlined by Alvarez-Pallete, who said: “Companies that do not understand that the world is changing, socially, technologically and economically, are destined to disappear”.
It is to be hoped that this does not turn out to be a comment on Telefonica’s own fate, and that the company’s actions are not ‘too little, too late’, as it continues to act on its 5-point plan to deliver ‘The New Telefonica’.