Recently, while at a telecom industry event, I was sitting next to another analyst who reacted to somebody using the term “Digital Transformation” in a technology marketing presentation. “Does anybody even know what Digital Transformation is?” he asked. Good question.

Like many marketing buzz phrases, such as "IoT" or "Internet of Everything," Digital Transformation is a loaded term – an attempt to take a complex ecosystem comprising billions (if not trillions) of dollars of technology and services and reduce it into a single sound bite. While the soundbite itself can be superficial and misleading, it does hold some key truths for the telecom industry, which we’ll try to break down here.

In the end, it's about business – and how consumers migrating to digital products have changed the game. One of the implied questions of Digital Transformation for the telecom market is: “How did Apple take all our money?”

By and large, Apple leveraged the telecom infrastructure – pipes, bits, and mobile connections – to build a spectacularly profitable hardware and software business around enabling consumers to more easily access connected, digital applications. The innovation around the iPhone influenced a generation of mobile developers and took the mobile experience (and business) to the next level.

But where did the value accrue in this consumer mobile and digital revolution? To a certain extent, the mobile telecom carriers have done pretty well – much better than the fixed-line guys. But even the mobile telecoms remain in the utility model, extracting a price-per-bit, while their costs for these bits refuse to decline as fast as the consumption increases. This is the overarching challenge of telecom land. At the same time, Apple's profits exploded, and valued accrued to its stock faster than it did for any telecom stock.

The chart below demonstrates this. The iPhone was launched in 2007. Since that time, Apple shares have appreciated many multiples of the telecom carriers. Since January 1, 2007, Apple shares have appreciated 716 percent, while Verizon shares have appreciated 44 percent, and AT&T shares have appreciated a mere 14 percent.

I make this comparison because Apple’s business was fundamentally enabled by the communications networks – which distribute, sell, and connect the phones. Yet the providers of the connections clearly saw less of the spoils from the boom in mobile growth.

Of course, Apple wasn't the only company to benefit from the mobile revolution. App providers, most notably gaming companies and social networks, exploded out of nowhere. Facebook became one of the 50 most valuable companies in the world in less than a decade.

The implication here is that somehow Apple and Facebook understood the Digital Transformation of the consumer better than the service providers, which, to a certain extent, may be true.

There are many reasons for this. Technology companies have a particular DNA, and they are programmed to innovate or die. The telecoms are utilities that operate in a heavily regulated industry that requires massive capital investment to maintain a legacy infrastructure. But still: Why couldn't the telecoms capture more of the growth in Digital Transformation? This seems to be the question they are asking themselves today as their existential crisis continues.

The Digital Transformation marketing meme seems to be somewhat of a reaction to this vast wealth creation. The telecoms say: Where’s our piece? And after breaking down the veneer of the marketing catchphrase, “Digital Transformation,” there can be one core conclusion: They didn't understand their customers enough. I for one can attest to that, after many years of cold, unresponsive relationships with telecom providers.

All of the best mobile apps, tools, and technology seem to have one value in common: They have an intimate connection with the customer. Try to take away a teenager's mobile device and you will see exactly what I mean. That could be the core tenant of Digital Transformation for the major telecom providers: Figuring out how to better understand and serve the customer, using digital tools.

Historically, the connection that most telecoms have with customers is basically binary – it's either on or off, like the water company. What happened to my service?

Can that be changed? Can the telecoms get less binary and more digitally sophisticated? What might Digital Transformation do for telecoms – and how do they get there?

It’s a big task: It starts with technology and needs to be executed with leadership and cultural change. There will be four key layers to the Digital Transformation of telecom. Here’s how I see them.

• Cloud architecture: The first step is to move to a cloud architecture, or what we have defined here at SDxCentral as software-defined anything (SDx). This represents a cultural shift for how telecoms build and manage infrastructure. The key benefit of this is that a cloud architecture, based on network functions virtualization (NFV), is more open, more flexible, and has tools for data analytics and automation – features that aren't available in the hard-wired, legacy network.
• Data analytics and customer experience: Cloud companies such as Amazon, Facebook, Google, and Netflix are obsessive about data and the customer. They know everything about the customer and try to serve up a personalized experience – known in the marketing business as "customer experience." Telecoms are trying to move there. The telecoms are years behind but are starting to catch on. For example, my carrier recently started sending me texts alerting me that the vast consumption of my family members was leading to potential data overages, and it allowed me to change my data plan in real-time by text. This relatively new feature (which really should have been available five years ago) is real customer experience revolution in telecom land.
• Better quality of service: QoS does not just mean having different levels or tiers of service, but also building intelligence into the network so that it can predict and manage problems, service needs, and instantaneously respond to consumer demands. The network needs to be less binary, and more incremental.
• Security: We all know how hard it is to secure the network. But what about also alerting the customers about security hazards and steps they can take to secure their connections and applications? The telecom industry could play a huge role in making their customers feel more secure about their applications and their data.

You can see, as we define these four layers of Digital Transformation, that this is no minor project. It's a major overall of how the telecom industry deals with the network and its customers. Maybe this is why so much noise is being made about it.

Upgrading these four layers of telecom technology will take a huge amount of technological investment and work. Will that provide the business opportunities that the telecom industry is looking for? It should, but upgrading the technology is only the first step – delivering a new, digital platform for communicating with the customer. The next challenge will be how the telecoms use these new connections to launch new businesses. We'll cover that in the future.