Why B2B marketplace sits at the heart of a thriving ecosystem

B2B Marketplaces: A key enabler for new growth

What is a B2B marketplace?

At its core, a marketplace is an entity through which buyers and sellers can effectively and efficiently transact. It provides a platform to reduce friction for the provisioning of products, services, and solutions: connecting a distributed ecosystem of suppliers with an equally distributed ecosystem of customers.

Think of Amazon, which orchestrates a B2C retail marketplace – Amazon’s marketplace has created a site in which a host of different vendors, whether regional or global, major corporate or small/medium enterprise (SME), can compete directly with one another (and in some cases directly with Amazon’s own products) to reach and serve a wide scale customer base. Using the example of Amazon, we can therefore describe four key actors within the marketplace:

Key actors in a marketplace

B2B marketplace

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  • Customers: Amazon’s marketplace creates a simple tool through which users can seamlessly identify, evaluate, and purchase products from a wider range of sellers. These suppliers, due to competition, must continuously innovate to create value for customers or risk competing solely on price. This provides a strong proposition combining ease, choice, and value for the customer. For smaller enterprises and for more simple services (e.g. cybersecurity, productivity software) a B2C-style marketplace works well. Amazon provides a good example of a B2C marketplace – however, for larger enterprises requiring more complex, verticalised solutions, the Amazon “one click purchasing” capability may be less appropriate.
    The marketplace still acts as an entity within which enterprises can identify new, innovative, solution providers and evaluate different components/vendors but may act more as a discovery mechanism – it generates a customer lead for suppliers and a vendor lead for customers. The customer will go on to engage directly with a sales team or representative within the vendor, rather than purchasing and spinning up the service directly through the marketplace. This is because the solution sales cycle is complex and requires a deep knowledge of the end customer and vertical specific expertise. To generate revenue, the orchestrator in this situation would have to create a comparative tool pricing for the use of these larger players.
    Particularly for more fragmented industries with a significant number of SMEs, offering pre-integrated, out-of-the-box solutions still offers the orchestrator a strong revenue opportunity.
  • Suppliers: In the context of B2B, suppliers in the marketplace may offer holistic vertical solutions including end devices, connectivity, applications, infrastructure etc. or sell those capabilities as individual components. Through participation in the marketplace, these vendors gain a strong distribution channel to sell their solution. Furthermore, they can get to market with solutions much faster than a more traditional, vertically integrated route, which would require longer cycles of integration and testing between partners, more investment in marketing & sales engines, and the need to repeat the process with each channel/solution partner identified.
    It also acts as a platform through which to learn more about competitors, identify or even engage potential partners, and understand more about their end customer needs and drivers. The marketplace can therefore act as a tangible entity around which the supply side ecosystem can innovate. This is through varying levels of data and insights, collected through the marketplace, which the orchestrator may allow certain suppliers to access.
  • Orchestrators: Orchestrators help coordinate the underlying community of suppliers and customers, defining the dimensions of the marketplace (which we will discuss further in a later section of the report). They set the parameters and objectives of the marketplace (e.g. which suppliers to onboard to the marketplace and how, which customers to target), and bring additional value to suppliers and customers through insights, supplier and customer experience, and marketing and sales engines to build scale.
    As the orchestrator of the ecosystem, Amazon has leveraged these supply and demand side benefits to grow into the retail giant that we know today. It has successfully driven a flywheel to build scale with suppliers and customers, and subsequently monetised this scale through a variety of different revenue streams – we will discuss these further later in the report.

The Amazon flywheel for marketplace success

B2B marketplace

  • Enablers: For a marketplace to function smoothly, a flexible but resilient backbone of support systems is required. This includes everything from billing, to authentication, onboarding, fulfilment, delivery, settlement, etc. A digital marketplace can automate many of these functions, diminishing the friction of interaction between partners, vendors, and customers.
    Oftentimes, these enablement services will be managed by an orchestrator who has complete oversight of the marketplace. Going back to the example of Amazon, Amazon not only orchestrates the marketplace but provides enablement services to capture additional value and revenue streams. This is in slight contrast, for example, to Ebay, which orchestrates the marketplace between different sellers, but is less involved in the delivery and fulfilment of the order. There is, therefore, nuance around how much of a role the orchestrator may take in the marketplace, and whether they partner to deliver enabling capabilities or completely outsource them to others. Enablers are, however, essential for a functioning marketplace and drive simplicity and stickiness for all actors. 

In summary, the marketplace brings opportunities to each of the actors within it and helps galvanise a diverse and fragmented ecosystem around a tangible construct. It enables customers to reach new suppliers, suppliers to reach new customers as well as engage new partners, and the orchestrators and enablers to drive new streams of revenue growth.

Table of Contents

  • Executive Summary
  • B2B Marketplaces: A key enabler for new growth
    • What is a B2B marketplace?
  • Marketplaces as a B2B growth driver
  • The dimensions of a successful B2B marketplace in healthcare
    • Due to the need for solution certification, a healthcare marketplace will remain more closed and centrally controlled
    • The healthcare marketplace will encourage participants to collaborate while excluding competitors…at first
    • Telcos should create value in the marketplace by driving biodiversity
    • Telcos have the capacity to collect valuable customer data insights but must first develop their capabilities
  • The guiding principles for building a marketplace: Where telcos should start
  • Index

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Lessons from AT&T’s bruising entertainment experience

How AT&T entered and exited the media business

AT&T enters the satellite market at its peak

In 2014, AT&T announced it was buying DirecTV. By that time, AT&T was already bundling DirecTV with its phone and internet service and had approximately 5.9 million linear pay-TV (U-Verse) video subscribers. However, this pay-TV business was already experiencing decline, to the extent that when the DirecTV merger completed in mid-2015, U-Verse subscribers had fallen to 5.6 million by the end of that year.

With the acquisition of DirecTV, AT&T went from a small player in the media and entertainment industry to one of the largest media players in the world adding 39.1 million (US and Latin American) subscribers and paying $48.5bn ($67bn including debt) to acquire the business. The rationale for this acquisition (the satellite business) was to compete with cable operators by being able to offer broadband, increasing AT&T’s addressable market beyond its fibre-based U-Verse proposition which was only available in certain locations/states.

AT&T and DirecTV enjoyed an initial honeymoon, period recording growth up until the end of 2016 when DirecTV subscribers peaked at just over 21 million in the US.

From this point onwards however, AT&T’s satellite subscribers went into decline as customers switched to cheaper competitor offers as well as online streaming services. The popularity of streaming services was reflected by moves among traditional media players to develop their own streaming services such as Time Warner’s HBO GO and HBO NOW. In 2015, DirectTV’s satellite competitor Dish TV likewise launched its own streaming service Sling TV.

Even though it was one of the largest TV distributors on a satellite platform, AT&T also believed online streaming was its ultimate destination. Prior to the launch of its streaming service in late 2016, Bloomberg reported that AT&T envisioned DirecTV NOW as its primary video platform by 2020.

A softwarised platform delivered lowered costs as the service could be self-installed by customers and didn’t rely on expensive truck roll installation or launching satellites. The improved margins would enable AT&T to promote TV packages at attractive price points which would balance inflation demands from broadcasters for the cost of TV programming. AT&T could also more easily bundle the softwarised TV service with its broadband, fibre and wireless propositions and earn more lucrative advertising revenue based on its own network and viewer insights.

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The beginnings of a bumpy journey in TV

AT&T’s foray into satellite and streaming TV can be characterised by a series of confusing service propositions for both consumers and AT&T staff, expensive promotional activity and overall pricing/product design misjudgements as well as troubled relations with TV broadcasters resulting in channel blackouts and ultimately churn.

Promotion, pull back and decline of DirecTV NOW

DirectTV NOW launched in November 2016, as AT&T’s first over the top (OTT) low cost online streaming service. Starting at $35 per month for 60+ channels with no contract period, analysts called the skinny TV package as a loss leader given the cost of programming rights and high subscriber acquisition costs (SACs). The loss leader strategy was aimed at acquiring wireless and broadband customers and included initiatives such as:

  • Promotional discounts to its monthly $60 mid-tier 100+ channel package reduced to $35 per month for life (subject to programming costs).
  • Device promotions and monthly waivers. The service eventually became available on popular streaming devices (Roku, Xbox and PlayStation) and included promotions such as an Apple TV 4K with a four month subscription waiver, a Roku Streaming Stick with a one month waiver or a $25 discount on the first month.
  • Customers could also add HBO or Cinemax for an additional $5 per month, which again was seen as a costly subsidy for AT&T to offer.

The service didn’t include DirecTV satellite’s popular NFL Sunday Ticket programming as Verizon held the smartphone rights to live NFL games, nor did it come with other popular shows from programme channels such as CBS. Features such as cloud DVR (digital video recording) functionality were also initially missing, but would follow as AT&T’s TV propositions and functionalities iterated and improved over time.

The DirecTV NOW streaming service enjoyed continuous quarterly growth through 2017 but peaked in Q3 2018 with net additions turning immediately negative in the final quarter of 2018 as management pulled back on costly promotions and discounted pricing.

The proposition became unsustainable financially in terms of its ability to cover rising programming costs and was positioned comparatively as a much less expensive service to its larger DirecTV satellite pay-TV propositions.

The DirecTV satellite service sold some of the most expensive TV propositions on the market and reported higher pay-TV ARPU ($131) than peers such as Dish ($89) and Comcast ($86) in Q4 2019.

  • The launch of a $35 DirecTV NOW streaming service with no contract and with a similar sounding name to the full linear service confused both new and existing DirecTV satellite customers and some would have viewed their satellite package as expensive compared to the cheaper steaming option.

Rising programming costs

AT&T’s low-cost skinny TV packages brought them into direct confrontation with TV programmers in terms of negotiating fees for content. When the streaming service launched, analysts highlighted the channels within AT&T’s base package were expected to rise in price annually by around 10% each year and this would eventually require AT&T to eventually balance programming costs with rising monthly package pricing.

Confrontations with programmers included a three-week dispute with CBS and an eight week dispute with Nexstar in 2019, which resulted in a blackout of both CBS and Nexstar channels across AT&T’s TV platforms such as Direct TV, U-Verse, DirectTV NOW. Commenting on the blackouts in Q3 2019, Randall Stephenson noted there were “a couple of significant blackouts in terms of content, and those blackouts drove some sizable subscriber losses”.

AT&T’s confrontation with content owners may have been a contributory reason to consider acquiring a content creation platform of its own in the form of Time Warner.

In mid-2018, as AT&T withdrew promotions and discounts for DirecTV NOW (later rebranded it to AT&T TV NOW), customers began to drop the OTT TV service.

  • AT&T TV NOW went from a peak of 1.86 million subscribers in Q3 2018 to 656,000 at the end of 2020.

DirecTV NOW subscriptions

DirecTV-subs-AT-T-stlpartners

Source: STL Partners, AT&T Q2 Earnings 2021

Name changes and new propositions create more confusion

In 2019, DirecTV NOW was re-branded to AT&T TV NOW , and continued to be promoted as a skinny bundle operating alongside AT&T TV, a new full fat live TV streaming version of the DirecTV satellite TV proposition. AT&T TV  was first piloted in August 2019 and soft launched in November 2019. The AT&T TV service included an Android set-top box with cloud DVR functionality and supported other apps such as Netflix.
AT&T TV required a contract period and offered pricing (once promotional discount periods ended) resembling a linear pay-TV service, i.e. $90+. This was, in effect, the very type of pay-TV proposition customers were abandoning.
AT&T TV was seen as an ultimate replacement for the satellite business based on the advantages a softwarised platform provided and the ability to bundle it with AT&T broadband, fibre and wireless services.

Confusion amongst staff and customers

The new AT&T TV proposition confused not only customers but also AT&T staff, as they were found mixing up the AT&T TV proposition with the skinny AT&T TV NOW proposition. By 2019 the company diverted its attention away from AT&T TV NOW  pulling back on promotional activity in order to focus on its core AT&T TV live TV service.

According to Cord Cutters News, both services used the same app but remained separate services. AT&T’s app store marketing incorrectly communicated the DirectTV NOW service was now AT&T TV when in fact it was AT&T TV NOW. Similarly, technical support was also incorrectly labelled with online navigation sending customers to the wrong support channels.

AT&T’s own customer facing teams misunderstood the new propositions

DirecTV-Cordcutter-news

Source: Cord Cutters News

Withdrawal of AT&T TV NOW

By January 2021, AT&T TV NOW was no longer available to new customers but continued to be available to existing customers. The AT&T TV proposition, which was supposed to offer “more value and simplicity” was updated to include some features of the skinny bundle such as the option to go without an annual contract requirement. Customers were also not required to own the set-top box but could instead stream over Amazon Fire TV or Apple TV.  In terms of pricing, AT&T TV was twice the price of the originally launched DirecTV NOW proposition costing $70 to $95 per month.

The short life of AT&T Watch TV

In April 2018, while giving testimony for AT&T’s merger with Time Warner, AT&T’s then CEO Randall Stephenson positioned AT&T Watch TV as a potential new low-cost service that would benefit consumers if the merger was successful. Days following AT&T’s merger approval in the courts, the low cost $15 per month, ultra-skinny bundle launched as a suitable low-cost cord-cutter/cord-never option for cable, broadband and mobile customers from any network. The service was also free to select AT&T Unlimited mobile customers.

By the end of 2018, the operator claimed it had 500,000 AT&T Watch TV“established accounts”. By the end of 2019 the operator had updated its mobile tariffs removing Watch TV for new customers subscribing to its updated Unlimited mobile tariffs. Some believed the company didn’t fully commit to the service, referring to the lack of roll out support for streaming devices such as Roku. The operator was now committed to rolling out its new service HBO Max in 2020. AT&T has informed Watch TV subscribers the service will close 30 November 2021.

Timeline of AT&T entertainment propositions

AT-T-Timeline-Entertainment

Source: STL Partners

The decline of DirecTV

As the graphic belowshows, in June 2021 there were 74.3 million pay-TV households in the US, reflecting continued contraction of the traditional pay-TV market supplied by multichannel video programming distributor (MVPD) players such as cable, satellite, and telco operators. According to nScreenMedia, traditional pay-TV or MVPD market lost 6.3 and 6.2 million customers over 2019 and 2020, but not all were cord-cutters. Cord-shifters dropped their pay-TV but shifted across to virtual MVPD (vMVPD) propositions such as Hulu Live, Sling TV, YouTube TV, AT&T TV NOW, Fubo TV and Philo. Based on current 2021 cord-cutting levels, nScreenMedia predicts 2021 will be the highest year of cord-cutting yet.

Decline in traditional pay-TV households

pay-tv-decline-nscreenmedia

Source: nScreenMedia, STL Partners

Satellite subscribers to Dish and DirecTV 2015-2020

Satellite-pay-tvdish-nscreenmedia

Source: nScreenMedia, STL Partners

When considering AT&T’s management of DirecTV, nScreenMedia research shows the market number of MVPD subscribers declined by over 20 million between 2016 and 2020. In that time, DirecTV lost eight million subscribers. While it represented 20% of the MVPD market in 2016, DirecTV accounted for 40% of the pay-TV losses in the market (40% of 20 million equals ~8 million). AT&T’s satellite rival Dish weathered the decline in pay-TV slightly better over the period.

  • In Q4 2020 the operator wrote down $15.5bn on its premium TV business, which included DirecTV decline, to reflect the cord cutting trend as customers found cheaper streaming alternatives online. The graphic (below) shows a loss of 8.76 million Premium TV subscribers between 2017 and 2020 with large losses of 3.4 million and 2.9 million subscribers in 2019 and 2020.

AT&T’s communications business has also been enduring losses in legacy voice and data (DSL) subscriptions in recent years. AT&T has used a bundling strategy for both products. As customers switched to AT&T fibre or competitor broadband offerings this also impacted the video subscription.

Table of contents

  • Executive Summary
    • What can others learn from AT&T’s experience?
  • How AT&T entered and exited the media business
    • AT&T enters the satellite market at its peak
    • The beginnings of a bumpy journey in TV
    • Vertical integration strategy: The culture clash
    • AT&T’s telco mindset drives its video strategy
    • HBO MAX performance
  • The financial impact of AT&T’s investments
    • Reversing six years of strategic change in three months
  • Lessons from AT&T’s foray into media

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A3 for enterprise: Where should telcos focus?

A3 capabilities operators can offer enterprise customers

In this research we explore the potential enterprise solutions leveraging analytics, AI and automation (A3) that telcos can offer their enterprise customers. Our research builds on a previous STL Partners report Telco data monetisation: What’s it worth? which modelled the financial opportunity for telco data monetisation – i.e. purely the machine learning (ML) and analytics component of A3 – for 200+ use cases across 13 verticals.

In this report, we expand our analysis to include the importance of different types of AI and automation in implementing the 200+ use cases for enterprises and assess the feasibility for telcos to acquire and integrate those capabilities into their enterprise services.

We identified eight different types of A3 capabilities required to implement our 200+ use cases.

These capability types are organised below roughly in order of the number of use cases for which they are relevant (i.e. people analytics is required in the most use cases, and human learning is needed in the fewest).

The ninth category, Data provision, does not actually require any AI or automation skills beyond ML for data management, so we include it in the list primarily because it remains an opportunity for telcos that do not develop additional A3 capabilities for enterprise.

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Most relevant A3 capabilities across 200+ use cases

9-types-of-A3-analytics-AI-automation

Most relevant A3 capabilities for leveraging enterprise solutions

People analytics: This is the strongest opportunity for telcos as it uses their comprehensive customer data. Analytics and machine learning are required for segmentation and personalisation of messaging or action. Any telco with a statistically-relevant market share can create products – although specialist sales capabilities are still essential.

IoT analytics: Although telcos offering IoT products do not immediately have access to the payload data from devices, the largest telcos are offering a range of products which use analytics/ML to detect patterns or spot anomalies from connected sensors and other devices.

Other analytics: Similar to IoT, the majority of other analytics A3 use cases are around pattern or anomaly detection, where integration of telco data can increase the accuracy and success of A3 solutions. Many of the use cases here are very specific to the vertical. For example, risk management in financial services or tracking of electronic prescriptions in healthcare – which means that a telco will need to have existing products and sales capability in these verticals to make it worthwhile adding in new analytics or ML capabilities.

Real time: These use cases mainly need A3 to understand and act on triggers coming from customer behaviour and have mixed appeal to telcos. Telcos already play a significant role in a small number of uses cases, such as mobile marketing. Some telcos are also active in less mature use cases such as patient messaging in healthcare settings (e.g. real-time reminders to take medication or remote monitoring of vulnerable adults). Of the rest of the use cases that require real time automation, a subset could be enhanced with messaging. This would primarily be attractive to mobile operators, especially if they offer broader relevant enterprise solutions – for example, if a telco was involved in a connected public transport solution, then it could also offer passenger messaging.

Remote monitoring/control: Solutions track both things and people and use A3 to spot issues, do diagnostic analysis and prescribe solutions to the problems identified. The larger telcos already have solutions in some verticals, and 5G may bring more opportunities, such as monitoring of remote sites or traffic congestion monitoring.

Video analytics: Where telcos have CCTV implementations or video, there is opportunity to add in analytics solutions (potentially at the edge).

Human interactions: The majority of telco opportunities here relate to the provision of chatbots into enterprise contact centres.

Human learning: A group of low feasibility use cases around training (for example, an engineer on a manufacturing floor who uses a heads-up augmented/virtual reality (AR/VR) display to understand the resolution to a problem in front of them) or information provision (for example, providing retail customers with information via AR applications).

 

Table of Contents

  • Executive Summary
    • Which A3 capabilities should telcos prioritise?
    • What makes an investment worthwhile?
    • Next steps
  • Introduction
  • Vertical opportunities
    • Key takeaways
  • A3 technology: Where should telcos focus?
    • Key takeaways
    • Assessing the telco opportunity for nine A3 capabilities
  • Verizon case study
  • Details of vertical opportunities
  • Conclusion
  • Appendix 1 – full list of 200 use cases

 

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DataSpark: Lessons on building a new telco (data) business

Data analytics as a new business

This case study looks at DataSpark, an autonomous business unit of Singtel (www.dsanalytics.com) and evaluates the benefits of creating a separate organisational structure within a telco to provide technology and support for the development of analytics, AI and automation as a new business. It is created after conversations with Shaowei Ying, Chief Operating Officer of DataSpark. The company’s activities include both the creation of internal capabilities and data monetisation capabilities for external customers.

DataSpark was formed in 2014 at a time when not many telcos were actively exploring new data business opportunities. The unit consisted of a small group of data professionals with skills around, particularly, location data. Singtel’s CEO was a strong supporter of leveraging telco data to establish competitive differentiation and therefore tasked them with looking at various location-related external monetisation opportunities. It was considered natural to create internal use cases for the data to defray the cost of the data preparation. In particular, the same mobility intelligence was of use to radio network planners optimising their network roll out using not just congestion, but now subscribers’ mobility patterns, too.

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DataSpark’s progress to date

Telcos’ external monetisation units, such as DataSpark, are not yet large enough to split out the revenues in their reports and accounts. However, in the 2018 and 2019 Management Discussion and Analysis DataSpark’s progress was reported to include:

  • Activity to bring mobility data to sectors such as transport and out-of-home media in Singapore and Australia
  • Partnership in out-of-home advertising with large players taking a data-as-a-service solution to optimise their assets
  • Provision of insights including first party enterprise data in the consumer goods sector to deliver new use cases in advertising and retail store inventory optimisation
  • Recent support for governments in predicting spread of Covid-19, including understanding the socio-economic impact of the virus.

Service example: COVID-19 insight for the Australian local government

COVID-19 data analytics innovation

Source: DataSpark

Table of Contents

  • Executive Summary
    • Two diverging strategies for a small, independent data unit
    • Scaling up the data business as an integrated unit
  • Introduction
    • DataSpark’s progress to date
  • DataSpark’s approach to building a data unit
    • What services does it offer?
    • Go-to-market: Different approaches for internal and external customers
    • Organisational structure: Where should a data unit go?
  • How to scale a data business?
    • The immediate growth opportunities
    • Following in others’ footsteps
    • Building new capabilities for external monetisation
  • Assessing future strategies for DataSpark
    • Scenario 1: Double down on internal data applications
    • Scenario 2: Continue building an independent business

 

Read more about STL Partners’ AI & automation research at stlpartners.com/ai-analytics-research/

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Consumer strategy: What should telcos do?

Globally, telcos are pursuing a wide variety of strategies in the consumer market, ranging from broad competition with the major Internet platforms to a narrow focus on delivering connectivity.

Some telcos, such as Orange France, Telefónica Spain, Reliance Jio and Rakuten Mobile, are combining connectivity with an array of services, such as messaging, entertainment, smart home, financial services and digital health propositions. Others, such as Three UK, focus almost entirely on delivering connectivity, while many sit somewhere in between, targeting a single vertical market, in addition to connectivity. AT&T is entertainment-orientated, while Safaricom is financial services-focused.

This report analyses the consumer strategies of the leading telcos in the UK and the Brazil – two very different markets. Whereas the UK is a densely populated, English-speaking country, Brazil has a highly-dispersed population that speaks Portuguese, making the barriers to entry higher for multinational telecoms and content companies.

By examining these two telecoms markets in detail, this report will consider which of these strategies is working, looking, in particular, at whether a halfway-house approach can be successful, given the economies of scope available to companies, such as Amazon and Google, that offer consumers a broad range of digital services. It also considers whether telcos need to be vertically-integrated in the consumer market to be successful. Or can they rely heavily on partnerships with third-parties? Do they need their own distinctive service layer developed in-house?

In light of the behavourial changes brought about by the pandemic, the report also considers whether telcos should be revamping their consumer propositions so that they are more focused on the provision of ultra-reliable connectivity, so people can be sure to work from home productively. Is residential connectivity really a commodity or can telcos now charge a premium for services that ensure a home office is reliably and securely connected throughout the day?

A future STL Partners report will explore telcos’ new working from home propositions in further detail.

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The UK market: Convergence is king

The UK is one of the most developed and competitive telecoms markets in the world. It has a high population density, with 84% of its 66 million people living in urban areas, according to the CIA Factbook. There are almost 272 people for every square kilometre, compared with an average of 103 across Europe. For every 100 people, there are 48 fixed lines and 41 broadband connections, while the vast majority of adults have a mobile phone. GDP per capita (on a purchasing power parity basis) is US$ 48,710, compared with US$ 65,118 in the US (according to the World Bank).

The strength of the state-funded public service broadcaster, the BBC, has made it harder for private sector players to make money in the content market. The BBC delivers a large amount of high-quality advertising-free content to anyone in the UK who pays the annual license fee, which is compulsory to watch television.

In the UK, the leading telcos have mostly eschewed expansion into the broader digital services market. That reflects the strong position of the leading global Internet platforms in the UK, as well as the quality of free-to-air television, and the highly competitive nature of the UK telecoms market – UK operators have relatively low margins, giving them little leeway to invest in the development of other digital services.

Figure 1 summarises where the five main network operators (and broadband/TV provider Sky) are positioned on a matrix mapping degree of vertical integration against the breadth of the proposition.

Most UK telcos have focused on the provision of connectivity

UK telco B2C strategies

Source: STL Partners

Brazil: Land of new opportunities

Almost as large as the US, Brazil has a population density is just 25 people per square kilometre – one tenth of the total UK average population density. Although 87% of Brazil’s 212 million people live in urban areas, according to the CIA Fact book, that means almost 28 million people are spread across the country’s rural communities.

By European standards, Brazil’s fixed-line infrastructure is relatively sparse. For every 100 people, Brazil has 16 fixed lines, 15 fixed broadband connections and 99 mobile connections. Its GDP per capita (on a purchasing power parity basis) is US$ 15,259 – about one third of that in the UK. About 70% of adults had a bank account in 2017, according to the latest World Bank data. However, only 58% of the adult population were actively using the account.

A vast middle-income country, Brazil has a very different telecoms market to that of the UK. In particular, network coverage and quality continue to be important purchasing criteria for consumers in many parts of the country. As a result, Oi, one of the four main network operators, became uncompetitive and entered a bankruptcy restructuring process in 2016. It is now hoping to to sell its sub-scale mobile unit for at least 15 billion reais (US$ 2.8 billion) to refocus the company on its fibre network. The other three major telcos, Vivo (part of Telefónica), Claro (part of América Móvil) and TIM Brazil, have made a joint bid to buy its mobile assets.

For this trio, opportunities may be opening up. They could, for example, play a key role in making financial services available across Brazil’s sprawling landmass, much of which is still served by inadequate road and rail infrastructure. If they can help Brazil’s increasingly cash-strapped consumers to save time and money, they will likely prosper. Even before COVID-19 struck, Brazil was struggling with the fall-out from an early economic crisis.

At the same time, Brazil’s home entertainment market is in a major state of flux. Demand for pay television, in particular, is falling away, as consumers seek out cheaper Internet-based streaming options.

All of Brazil’s major telcos are building a broad consumer play

Brazil telco consumer market strategy overview

Source: STL Partners

Table of contents

  • Executive Summary
  • Introduction
    • The UK market: Convergence is king
    • BT: Trying to be broad and deep
    • Virgin Media: An aggregation play
    • O2 UK: Changing course again
    • Vodafone: A belated convergence play
    • Three UK: Small and focused
    • Takeaways from the UK market: Triple play gridlock
  • Brazil: Land of new opportunities
    • The Brazilian mobile market
    • The Brazilian fixed-line market
    • The Brazilian pay TV market
    • The travails of Oi
    • Vivo: Playing catch-up in fibre
    • Telefónica’s financial performance
    • América Móvil goes broad in Brazil
    • TIM: Small, but perfectly formed?
    • Takeaways from the Brazilian market: A potentially treacherous transition
  • Index

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Telco data monetisation: What is it worth?

Data revenue opportunities are variable

Monetisation of telco data has been an area of activity for the last six years. However, telcos’ interest levels have varied over time due to the complexity of delivering and selling such a diverse range of products, as well as highly variable revenue opportunities depending on the vertical. Telcos’ appetite to pursue data monetisation has also been heavily impacted by the fortunes of other new telco products, in particular IoT, owing to the link between many data/analytics products and IoT solutions.

This report assesses the opportunity for telcos to monetise their data and provide associated data analytics products in two parts:

  1. First, we look at the range of products and services a telco needs to create in order to deliver financial value.
  2. Then, we explore the main use cases and actual financial value of telco data analytics products across 12 verticals, plus horizontal solutions that apply to multiple verticals.

Telco data monetisation: Calculation methodology

The methodology used to model the financial value of telco data analytics is outlined in the figure below.

  • The starting point for this analysis is 210 data or data analytics use cases, spread across 12 verticals and the horizontal solutions applicable to multiple verticals.
  • We then assess how difficult it is for a telco to address each use case, based on pre-requisite supporting platforms and solutions, regulatory constraints, etc. (shown in red). This evaluation enables us to assess how likely telcos are to develop products for each use case.
  • Thirdly, we assess which types of telco are able to develop the use case (in yellow). For example, telcos in a market with particularly restrictive regulation around use of personal data are simply not able to create certain products.
  • Finally, it is necessary to understand whether the data/analytics products created for a use case can be offered as an independent, standalone product, or more likely to be provided as a bolt-on service to another, pre-existing solution. This question is primarily pertinent in the IoT space where basic data/analytics are likely to be included in the price of the IoT service.
    • For products that we expect to be sold independently, we calculate the potential revenue based on estimated pricing for the type of data product, where known, and likely volumes that a telco will sell in a year.
    • For data analytics products closely linked to IoT, we attach no monetary value.

Calculation methodology for the feasibility and value of telco data monetisation use cases

Rationale behind data monetisation potential

Source: STL Partners, Charlotte Patrick Consult

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Viewing the data

Underlying the analysis in this report is a database tool including a detailed assessment of each of the 210 data monetisation use cases we have identified, with numerical analysis and charting capabilities. We know many of our readers will be interested to explore the detailed data, and so have made it available for download on the website in the form of an Excel spreadsheet.

Full use case database and analysis available on our website

Source: STL Partners

Table of Contents

  • Executive Summary
  • Introduction
    • Calculation methodology
  • What is this market worth to telcos?
  • Creating products for data monetisation
    • Telco products for the ecosystem
    • Data and analytics for IoT
    • Use of location in data monetisation
  • Maximising value in different verticals
    • Advertising and market research
    • Agriculture
    • Finance
    • Government
    • Insurance
    • Healthcare
    • Manufacturing
    • Real estate and construction
    • Retail
    • Telecom, media and technology
    • Transportation
    • Utilities
    • Horizontal solutions for all verticals
  • Conclusion and recommendations
    • How to pick a winning project
  • Index

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Investing in original content: Is it worth it?

Introduction

An in-depth analysis of whether telcos can make money from original content, this executive briefing builds on previous STL reports exploring the role of telcos in entertainment and advertising:

This new report evaluates the success of AT&T, BT and Swisscom’s original content and related distribution strategies, as well as identifying lessons to be learnt. It also appraises their investment in original content, exclusive content (e.g. sport) and buying content creators (e.g. Time Warner).

Following the acquisition of Time Warner, AT&T is a content owner and content distribution colossus. What is its underlying objective for providing a wide range of over-the-top (OTT) services, including DTV Now (satellite TV service delivered over-the-top) and AT&T Watch (live and on demand content)? How will content from Time Warner’s acquisition in June 2018 be incorporated into its products?

Has BT’s head on clash with Sky in the market with live sports met expectations? Has its heavy investment in football grown its revenue take, broadband subscriptions and attracted eyeballs?

Swisscom has grown to become Switzerland’s largest TV provider, using live sports as its differentiator. What other initiatives have contributed to its market leadership and can it maintain its dominance?

The case for investing in original content

Telcos typically invest in original content to achieve three objectives:

  • to open up new sources of revenue (direct subscription sales, wholesale distribution and ads sales)
  • to increase sales of core telco services/products (e.g. fixed broadband)
  • to raise their profile, increase their relevance and build brand loyalty.

But trying to pursue all these objectives simultaneously requires some difficult compromises – maximising content revenues means distributing the content as widely as possible, which means it no longer becomes a competitive differentiator through which to sell connectivity and build loyalty to the core proposition. In any case, regulators may require telcos to make some original content, notably the rights to live sport, available to competitors.

Therefore, achieving all of these objectives requires telcos to perform a delicate balancing act between making their content widely available and integrating it with the core connectivity proposition from both a technical perspective (using a cloud-based or physical set-top box) and a commercial perspective (attractive bundles and/or zero-rating the content). They need to perform this balancing act at a time when the digital entertainment market is in upheaval – customers in many markets are migrating from traditional pay TV (one or two year contracts) to video-on-demand subscriptions (month-by-month).

Not all content is equal

Ownership of sports rights should guarantee an audience linked to the size of the fanbase. Investing in original content, such as dramas, is far riskier. For every series of The Crown, a Netflix hit airing its third series in 2019, there is Marco Polo that cost US$200 million, cancelled after two series and an abject failure. Telco shareholders would baulk at taking such risks, given many have qualms about BT’s investment in Premier League rights (32 matches a season, 2019-22), which are equivalent to £9.2 million per game.

Alternatively, telcos could purchase a content developer/media company with a back catalogue of proven programming, as AT&T has done by buying Time Warner in June 2018. Investment in original content is a differentiator for pay TV providers (e.g. Sky) as well as over-the-top players (e.g. Netflix). Netflix has dramatically increased its investment in original content from its early foray with the House of Cards. During 2018 Netflix invested about US$6.8 billion in original content, including films, simultaneously screening some films at cinemas (e.g. Coen brothers’ The Ballad of Buster Scruggs).

However, the audience for expensively-created content is finite. They are binge watching fewer shows. In the USA, according to Hub Entertain Research, viewers watched an average of 4.4 favourite shows in 2018, compared to 5.2 in 2016. These viewers increasingly find out about favourite shows through advertisements and watch them on an video-on-demand service.

More and more competition

Although they benefit from economies of scale and scope, the major global online players are not oblivious to the risks of creating original content. Amazon somewhat mitigates the risk by using co-production. Amazon is working with pay TV companies (e.g. Sky / Sky Atlantic) as well as public service broadcasters (BBC). The co-production of content with Sky provides Amazon with the rights to show series outside Sky’s footprint. For the BBC, a junior partner in the relationship, it gets to air the co-produced programmes after Amazon has shown them (e.g. the final three series of Ripper Street). Apple is also investing US$1 billion in original content, which will be distributed by its new streaming service[1]. The new service, business model unknown, will also be accessible on non-Apple products. New Samsung, Sony, LG and Vizio TVs will support Apple iTunes movies and TV shows[2].

It is not just the major Internet platforms that are competing with telcos for eyeballs. Major content rights owners are also taking their first steps to launch direct-to-consumer services. The Disney Play streaming service will launch in late 2019, once its existing distribution agreement with Netflix comes to an end. New sports streaming services are vying for attention, e.g. DAZN owns the rights to English Premier League (EPL) in Germany, Switzerland, Austria and Japan, as well as combat sports (e.g. Matchroom Boxing and UFC) and other sports. Many sports federations also provide direct-to-consumer streaming services, alongside the sale of linear TV sports rights. These include The National Hockey League’s NHL.TV and National Football League’s GamePass in the USA, and the English Football League (EFL)’s iFollow service in the UK. Consumers outside the UK can also pay to stream EFL matches.

The importance of multiple content distribution models

But it is not just about having the right content: consumers also want the right commercial proposition. Pay TV providers recognise that not all consumers are willing to sign-up to 12- or 18-month contracts. Falling pay TV subscription rates, and a realisation that one-size doesn’t fit all has seen the emergence of month-to-month skinny pay TV packages. These offers may or may not be packaged with broadband connectivity.

Those that do subscribe to traditional pay TV will not subscribe to a second pay TV subscription, but many households are willing to subscribe to more than one additional over-the-top service. Half of the video-on-demand (SVOD) subscribers in the UK subscribe to more than one VOD service (Amazon, Netflix, NOW TV), and 71% of households with a VOD service also have a pay TV subscription (according to GfK SVOD Tracker).

There are essentially four key roles in the content value chain, identified and discussed by STL partners in previous reports. These roles are programme, package, platform and pipe. Traditionally, telcos’ primary objective is to sell as many pipes as possible. To that end, they offer packages of content (generally TV channels), which are sold on a subscription basis or offered for no fee, supported by advertising. A platform is used to distribute the channels, films and other content created and curated by another entity.

Telco content distribution models

four ways to monetise original content: pay TV, bundling and OTT

Source: STL Partners

Telco revenue from content and related services

An in-depth analysis of telcos’ return on investment in sports or film rights or original content is tricky. Telcos are not in the habit of revealing content revenue data. Figure 5 summarises the main metrics that need to be considered to evaluate the effectiveness of telcos’ investment in content.

The revenues that telcos can generate from content consist primarily of:

  1. Sale of the content to consumers
  2. Sale of banner, video and TV ads that sit / roll alongside the content
  3. Wholesale of content via third-party platforms
  4. Net additions of broadband / mobile pipes, increased ARPU/C and reduction in user/connection churn, increase in broadband / mobile pipe revenue.

Measuring return on investments in content

measuring original content ROI through direct sales, advertisement, wholesale and connectivity

Source: STL Partners

In the rest of this report, we evaluate AT&T, BT and Swisscom against these criteria.

Contents:

  • Executive Summary
  • Introduction
  • The case for investing in original content
  • More and more competition
  • The importance of multiple content distribution models
  • Telco revenue from content and related services
  • Swisscom sells content with strings attached
  • Investing in rights holders to secure original content
  • It is about the packaging, as well as the content
  • Limited advertising
  • Enriching the viewer experience
  • Mixed financial results
  • BT and its big bet on live sport
  • BT TV reaches an inflexion point
  • BT TV – getting more expensive
  • Is BT Sport changing direction?
  • BT’s broader branding strategy
  • BT as a content aggregator
  • BT Sport is available to rivals’ pay TV customers
  • Is BT making a financial return?
  • Is there a case for continued investment?
  • AT&T takes on Netflix
  • King of content?
  • DirecTV Now: A lackluster start
  • Takeaways: Walking a tightrope between old and new
  • A shaky financial performance to date
  • Conclusions

Figures:

  1. The differing strategies of Swisscom, BT and AT&T
  2. AT&T’s Entertainment Group is dragging down the broader business
  3. Rating the different elements of telcos’ original content strategy
  4. Telco content distribution models
  5. Measuring return on investments in content
  6. Swisscom’s TV subscriptions and market share
  7. Summary of Swisscom’s TV products
  8. Cost and availability of Teleclub Sport
  9. The growth in Swisscom’s TV Connections and Bundles
  10. Swisscom’s content strategy hasn’t arrested the decline in wireline revenues
  11. Swisscom’s ballpark annual revenue run rate from TV
  12. BT TV packages, February 2019 compared to end 2015
  13. BT has bought more low-grade matches and is paying less per game
  14. How BT tries to monetise its sports content
  15. A breakdown of BT’s brands and target segments
  16. BT Sport App packages across its multiple brands
  17. How BT is using content partnerships to broaden its offering
  18. BT Sport has helped to drive a major uplift in annual revenue
  19. BT’s Consumer Division has struggled to increase profitability
  20. BT’s TV and broadband customers are now flatlining
  21. Growth in BT TV and BT Sport connections has tailed off
  22. BT’s consumer fixed line revenue has been fairly flat
  23. BT Sport residential and commercial revenue estimates 2018 and 2022
  24. AT&T’s telecom, media and entertainment businesses (February 2019)
  25. AT&T’s pay TV and SVOD services (as of February 2019)
  26. The Entertainment Group’s revenues are slipping
  27. AT&T’s traditional pay TV business is in decline
  28. AT&T’s broadband connections are fairly flat
  29. AT&T’s Entertainment Group is seeing its top line squeezed
  30. AT&T is combining inventory to help increase ad spend

[1] Apple TV will be launched in 2019 https://www.fool.com/investing/2018/12/15/apples-original-content-ambitions-are-growing.aspx,  https://www.macworld.co.uk/news/apple/apple-streaming-service-3610603/

[2] Content can be streamed from an Apple device using Apple’s AirPlay wireless streaming protocol stack, which will be integrated into TVs.

How telcos can get ahead in advertising

Introduction

Why is AT&T doubling down on becoming a new media company, while Verizon Media is retrenching? With divergent strategies at play in the U.S. telecoms market, is there a path or multiple paths to success in the advertising market that other telcos can follow, or is it too soon to tell?

Telcos’ pursuit of the digital advertising market is not a new phenomenon. Early telco-led mobile marketing and advertising initiatives pre-date the mid-2007 launch of the iPhone. The journey began with pre-iPhone primitive text-messaging marketing, moved through display advertising to an increasingly sophisticated data-driven approach. What is new is the flurry of investments the leading U.S. telcos and some others, notably SingTel, have been making over the past few years to compete more holistically and effectively in the advertising/media space.

While their core communications/connectivity services businesses are maturing and being disrupted, U.S. telcos now face the prospect of investing heavily in building out next-generation 5G networks. They are placing bets on new, potentially lucrative and high-growth opportunities in the Internet-of-things (IoT), media/content and fixed wireless, among others. Among these opportunities, brokering digital advertising offers potentially the highest operating margins. AT&T’s Xandr advertising unit reported an operating margin of 68% for the fourth quarter of 2018, compared with 33% in its core communications business.

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Going on the offensive

Telecoms networks have long been the conduits for Google, Facebook, and Amazon, among others, to deliver innovative and disruptive (and mostly free) services, which generate billions in advertising revenues. Many of these same players have also introduced services, such as messaging, voice calls and video-on-demand, which have siphoned off revenues from the telcos that provide the networks they are riding on.

It is against this backdrop that distinct and evolving telco advertising strategies are emerging. And, from a U.S. market perspective, what a difference a year makes. In 2017, it looked like Verizon and AT&T were both doubling down on their advertising/media business strategies, with the aim of growing their piece of the total advertising pie and in turn attempting to siphon off advertising revenues from Google and Facebook, among others. But 2018 proved a watershed year, and now Verizon is pulling back, while AT&T continues full steam ahead.

This report focuses on the U.S. market and specifically how the big two telcos – Verizon and AT&T – have fared in the digital advertising market and what lessons other telcos can take away from their divergent market strategies. The report builds on past STL Partners research including:

The advertising opportunity for telcos

The future of advertising is digital. While spending on traditional advertising may have peaked, investment in digital advertising continues to fuel growth in the overall market. In 2018, global digital advertising revenues reached US$273 billion, and represented 44% of total advertising spend, according to eMarketer. By 2020, the specialist research firm expects digital to represent half of total global advertising spend, and by 2021 to eclipse traditional media spend – reaching US$427 billion globally in 2022. Note, eMarketer’s definition of digital advertising excludes SMS, MMS and P2P messaging-based advertising.

The global advertising opportunity – the future is digital

advertising is moving to digital

Source: eMarketer, May 2018

Within digital advertising, the mobile medium is taking over from the desktop as smartphones ship with larger screens and faster connectivity. Advertising agency Zenith, part of the Publicis Media Group, forecasts mobile advertising will account for 30.5% of global advertising expenditure in 2020, up from 19.2% in 2017. It reckons expenditure on mobile advertising will total US$187 billion by 2020, more than twice the US$88 billion spent on desktop advertising, and not far behind the US$192 billion spent on television advertising. At the current rate of growth, mobile advertising will comfortably overtake television in 2021, Zenith believes.

Mobile and cinematic advertising are growing faster than other segments

mobile and cinematic advertising growing fast

Source: Zenith

Singtel – a pioneering advertising play

Globally, one of the most advanced telcos in the advertising sector is Singtel, which has made a series of acquisitions to build out its adtech proposition, following its first deal in 2012, which saw it acquire Amobee, an early player in mobile advertising.

By some measures, Singtel is the largest telecoms group in south east Asia. The company and its affiliates serve 700 million mobile customers in 27 countries, including its wholly-owned subsidiary in Australia (Optus) and minority stakes in India, South Asia and Africa (Bharti Airtel, 40% effective stake); Indonesia (Telkomsel, 35% effective stake); Philippines (Globe Telecom, 47% ordinary shares); and mi Thailand (Advanced Info Service, 23% ordinary shares). With that extensive reach, which extends beyond mobile and includes Internet and video/TV customers, Singtel sees advertising as a high-growth opportunity and a way to leverage its customer data assets.

Singtel’s adtech play sits in its Group Digital Life (“GDL”) unit, which focuses on using the latest Internet technologies and assets of the operating companies to develop new revenue and growth engines by entering adjacent businesses where it has a competitive advantage. GDL focuses on three key businesses – digital marketing, regional premium OTT video and advanced analytics and intelligence capabilities, while acting as Singtel’s digital innovation engine through Innov8.

Singtel has spent about a billion dollars on adtech capabilities

Singtel spends a billion dollars on advertising companies

*Purchase price not available. Source: Company reports

In the fourth quarter of 2018, GDL contributed 8% (up from 7% in the previous quarter) to the Singtel group’s operating revenue. GDL’s operating revenue for the quarter grew 17%, lifted by a full quarter’s contribution from Videology and growth in Amobee’s programmatic platform business, partially offset by lower media revenues. At an EBITDA level, GDL lost S$16 million after inclusion of Videology’s losses.

Singtel said that Amobee’s programmatic platform business continues to gain traction, while the integration of Videology will further strengthen Amobee’s capabilities in TV and video advertising. Although its advertising business isn’t yet making a major financial contribution, Singtel’s continued investments in this market suggest the Singapore-based operator remains committed and convinced that there are synergies between the telecoms and advertising sectors.

The rest of this report looks at U.S. telcos’ advertising strategies in depth, drawing conclusions and recommendations for other telcos globally.

Contents:

  • Executive Summary
  • Introduction
  • The advertising opportunity for telcos
  • Singtel – a pioneering advertising play
  • U.S. mobile market shift in full swing
  • Telcos’ strategic fits and starts
  • Google and Facebook strong, but Amazon makes gains
  • Amazon pulls commerce levers in advertising
  • Privacy, identity and security challenges and mandates
  • GDPR: A harbinger of things to come to the U.S.
  • U.S. telcos’ advertising assets
  • AT&T goes all-in on advanced advertising
  • More inventory, stronger monetisation
  • Balancing advertising and subscriptions
  • Takeaways
  • Verizon cuts its losses
  • The obstacles in the way of Oath
  • Takeaways
  • Conclusions and recommendations
  • Recommendations
  • Recommendations for major telcos

Figures:

  1. Recommendations for how AT&T can get ahead in advertising
  2. Why Verizon didn’t get ahead in advertising
  3. The global advertising opportunity – the future is digital
  4. Mobile and cinematic advertising are growing faster than other segments
  5. Singtel has spent about a billion dollars on adtech capabilities
  6. US online advertising spend – shift to mobile has already happened
  7. Examples of telcos’ investments/divestments in adtech and content
  8. Amazon gains, but still significant opportunities for telcos
  9. AT&T, Verizon and Comcast’s content and advertising assets
  10. AT&T’s advertising revenues are rising rapidly
  11. Xandr is growing rapidly, but its high margins are sliding downwards
  12. AT&T reaps rewards from Xandr, WarnerMedia, but pay TV is still a drag
  13. Verizon Media (previously Oath) fails to hit revenue growth targets
  14. As Verizon’s ad business struggles, it doubles down on 5G
  15. SWOT analysis and recommendations for big telcos in advertising

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Personal data: Treasure or trash?

Introduction

This report analyses how the Telefónica Group is looking to reshape the digital services market so that both telcos and individuals play a greater role in the management of personal data. Today, most Internet users share large amounts of personal information with the major online platforms: Google, Facebook, Amazon, Apple, Tencent and Alibaba. In many cases, this process is implicit and somewhat opaque – the subject of the personal data isn’t fully aware of what information they have shared or how it is being used. For example, Facebook users may not be aware that the social network tracks their location and can, in some cases, trace a link between offline purchases and its online advertising.

Beyond the tactical deployment of personal data to personalise their services and advertising, the major Internet players increasingly use behavioural data captured by their services to train machine learning systems how to perform specific tasks, such as identify the subject of an image or the best response to an incoming message. Over time, the development of this kind of artificial intelligence will enable much greater levels of automation saving both consumers and companies time and money.

Like many players in the digital economy and some policymakers, Telefónica is concerned that artificial intelligence will be subject to a winner-takes-all dynamic, ultimately stifling competition and innovation. The danger is that the leading Internet platforms’ unparalleled access to behavioural data will enable them to develop the best artificial intelligence systems, giving them an unassailable advantage over newcomers to the digital economy.

This report analyses Telefónica’s response to this strategic threat, as well as examining the actions of NTT DOCOMO, another telco that has sought to break the stranglehold of the Internet platforms on personal data. Finally, it considers whether Mint, a web service that has succeeded in persuading millions of Americans to share very detailed financial information, could be a model for telco’s personal data propositions.

As well as revisiting some of the strategic themes raised in STL Partners’ 2013 digital commerce strategy report, this report builds on the analysis in three recent STL Partners’ executive briefings that explore the role of telcos in digital commerce:

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In pursuit of personal cloud services

For the best part of a decade, STL Partners has been calling for telcos to give customers greater control over their personal data. In doing so, telcos could differentiate themselves from most of the major Internet players in the eyes of both consumers and regulators. But now, the entire digital economy is moving in this direction, partly because the new General Data Protection Regulation (GDPR) requires companies operating in the EU to give consumers more control and partly because of the outcry over the cavalier data management practices of some Internet players, particularly Facebook.

In a world in which everyone is talking about protecting personal data and privacy, is there still scope for telcos to differentiate themselves and strengthen their relationships with consumers?

In a strategy report published in October 2013, STL Partners argued that there were two major strategic opportunities for telcos in the digital commerce space:

  1. Real-time commerce enablement: The use of mobile technologies and services to optimise all aspects of commerce. For example, mobile networks can deliver precisely targeted and timely marketing and advertising to consumer’s smartphones, tablets, computers and televisions.
  2. Personal cloud: Act as a trusted custodian for individuals’ data and an intermediary between individuals and organisations, providing authentication services, digital lockers and other services that reduce the risk and friction in every day interactions. An early example of this kind of service is financial services web site Mint.com (profiled in this report). As personal cloud services provide personalised recommendations based on individuals’ authorised data, they could potentially engage much more deeply with consumers than the generalised decision-support services, such as Google, TripAdvisor, moneysavingexpert.com and comparethemarket.com, in widespread use today.

Back in October 2013, STL Partners saw those two opportunities as inter-related — they could be combined in a single platform. The report argued that telcos should start with mobile commerce, where they have the strongest strategic position, and then use the resulting data, customer relationships and trusted brand to expand into personal cloud services, which will require high levels of investment.

Today, telcos’ traction in mobile commerce remains limited — only a handful of telcos, such as Safaricom, Turkcell, KDDI and NTT Docomo, have really carved out a significant position in this space. Although most telcos haven’t been able or willing to follow suit, they could still pursue the personal cloud value proposition outlined in the 2013 report. For consumers, effective personal cloud services will save time and money. The ongoing popularity of web comparison and review services, such as comparethemarket.com, moneysavingexpert.com and TripAdvisor, suggests that consumers continue to turn to intermediaries to help through them cut through the “marketing noise” on the Internet. But these existing services provide limited personalisation and can’t necessarily join the dots across different aspects of an individual’s lives. For example, TripAdvisor isn’t necessarily aware that a user is a teacher and can only take a vacation during a school holiday.

STL Partners believes there is latent demand for trusted and secure online services that act primarily on behalf of individuals, providing tailored advice, information and offers. This kind of personal cloud could evolve into a kind of vendor relationship management service, using information supplied by the individual to go and source the most appropriate products and services.

The broker could analyse a combination of declared, observed and inferred data in a way that is completely transparent to the individual. This data should be used primarily to save consumers time and give them relevant information that will enrich their lives. Instead of just putting the spotlight on the best price, as comparison web sites do, personal cloud services should put the spotlight on the ‘right’ product or service for the individual.

Ideally, a mature personal cloud service will enrich consumers’ lives by enabling them to quickly discover products, services and places that are near perfect or perfect for them. Rather than having to conduct hours of research or settle for second-best, the individual should be able to use the service to find exactly the right product or service in a few minutes. For example, an entertainment service might alert you to a concert by an upcoming band that fits closely with your taste in music, while a travel site will know you like quiet, peaceful hotels with sea views and recommend places that meet that criteria.

As a personal cloud service will need to be as useful as possible to consumers, it will need to attract as many merchants and brands as possible. In 2013, STL Partners argued that telcos could do that by offering merchants and brands a low risk proposition: they will be able to register to have their products and services included in the personal cloud for free and they will only have to pay commission if the consumer actually purchases one of their products and services. In the first few years, in order to persuade merchants and brands to actually use the site the personal cloud will have to charge a very low commission and, in some cases, none at all.

Since October 2013, much has changed. But the personal cloud opportunity is still valid and some telcos continue to explore how they can get closer to consumers. One of the most prominent of these is Madrid-based Telefónica, which has operations in much of Europe and across Latin America. The next chapter outlines Telefónica’s strategy in the personal data domain.

Contents:

  • Executive Summary
  • Recommendations for telcos
  • Introduction
  • In pursuit of personal cloud services
  • Telefonica’s personal data strategy
  • Questioning the status quo
  • Backing blockchains
  • Takeaways
  • What is Telefónica actually doing?
  • The Aura personal assistant
  • Takeaways
  • Telefonica’s external bets
  • Investment in Wibson
  • Partnership with People.io
  • The Data Transparency Lab
  • Takeaways
  • Will Telefónica see financial benefits?
  • Takeaways
  • What can Telefónica learn from DOCOMO?
  • DOCOMO’s Evolving Strategy
  • Takeaways
  • Mint – a model for a telco personal data play?
  • Takeaways

Figures:

  • Figure 1: Telefónica’s tally of active users of the major apps
  • Figure 2: Telefónica’s view of digital market openness in Brazil
  • Figure 3: Investors’ valuation of Internet platforms implies long-term dominance
  • Figure 4: Key metrics for Telefónica’s four platforms
  • Figure 5: How Wibson intends to allow individuals to trade their data
  • Figure 6: Telefónica’s digital services business is growing steadily
  • Figure 7: Telefónica’s pay TV business continues to expand
  • Figure 8: DOCOMO’s Smart Life division has struggle to grow
  • Figure 9: NTT DOCOMO’s new strategy puts more emphasis on enablers
  • Figure 10: DOCOMO continues to pursue the concept of a personal assistant
  • Figure 11: DOCOMO is using personal data to enable new financial services
  • Figure 12: Mint provides users with advice on how to manage their money
  • Figure 13: Intuit sees Mint as a strategically important engagement tool

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Digital M&A and Investment Strategies – July 2017 update

Introduction

Digital M&A as a telco strategy

In June 2016 STL Partners published our inaugural Digital M&A and Investment Strategies report and accompanying database, focussing on key digital acquisitions and investments for 22 operators during the period 2012 – H1 2016. We have now updated this report to cover the following 12 months (H2 2016 – H1 2017), to examine new developments in telco digital M&A and a comparison with previous activities.

Communications service providers have long used M&A as a key growth strategy, with the most common approach being to acquire other operators to build scale organically. As growth in telecommunications slowed and user behaviour swung towards mobile, so M&A activity in the mobile sector has increased. However, acquisition opportunities in mature markets are becoming limited as consolidation reduces the number of telcos, whilst in Europe and North America the regulatory environment has made M&A consolidation strategies less viable.

As operators continue to build digital capabilities and strive to deliver digital services and content, M&A and investment beyond ‘traditional telecoms’ is increasing. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation as well as operational excellence. This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of Verizon, AT&T and SoftBank. There is an accompanying database which tracks telco M&A activity for the period.

Drivers for operator M&A and majority investment

Figure 1: Drivers for operator M&A and majority investment – traditional and digital

digital M&A graphic

Source: STL Partners

Traditional/Telco 1.0 drivers: reach and scale

As illustrated in Figure 1, what we refer to as ‘traditional’ or ‘Telco 1.0’ drivers for M&A and investment are well-established:

  1. Extending geographic footprint is a common trend, as many operator groups look to:
    • Enter new markets that are adjacent geographically (e.g. DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
    • Enter markets that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
    • Enter markets that simply offer good opportunities for expanded footprint and increased efficiencies of operation in emerging regions where demand for mobile services is still growing strongly (e.g., SingTel and Etisalat’s numerous investments in operators in Asia and Africa, respectively).
  2. Extending traditional communications offerings is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the UK is one example.
  3. Consolidation has slowed to some extent, as regulators and competitors fight against mergers or acquisitions that remove players from the market or concentrate too much market power in the hands of stronger service providers. This has been a particular issue in the European Union, where regulators have refused to approve several proposed telecoms M&A deals recently, including Telia and Telenor in Denmark in 2015, and the proposed Hutchison acquisition of Telefónica’s O2 to merge with its subsidiary 3 UK in 2016. Other deals, such as the proposed Orange-Bouygues Telecom merger in France which was abandoned in April 2016, have failed due to the parties involved failing to reach agreement. However, our research shows continued interest in operator M&A for consolidation, with recent examples including Orange’s acquisition of Sun Communications in Moldova in 2016, and Vodafone’s merger with Indian rival Idea in 2017.
  4. The acquisition of service partners – primarily channel partners, or partner companies providing systems integration and consultancy capabilities, typically for enterprise customers – has proved an important driver of M&A for many (mainly converged) operators.
  5. Finally, operator M&A is also being driven by the enthusiasm of sellers. Many operators are looking to sell off assets outside of their home markets, pulling back from markets that have proven too competitive, too small or simply too complicated, as part of a strategy to pay down debt and/or free up assets for investment in other higher-growth areas:
    • Telia’s pullback from its non-core markets has seen it sell off its majority stakes in Spanish operator Yoigo to Masmovil and in Kazakhstan’s Kcell to Turkcell in 2016
    • Telefonica’s attempt to sell its O2 UK mobile unit to CK Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its debt, including a planned IPO of O2 UK.

Contents:

  • Executive Summary
  • Evaluating operator digital investment strategies
  • Key findings
  • Recommendations
  • Introduction
  • Drivers for operator M&A and majority investment
  • Evaluating operator digital investment strategies
  • 22 players across 5 regions: US shows the most aggressive M&A activity
  • Comparison with previous period (H1 2012 – H1 2016)
  • European telcos remain largely focussed on Telco 1.0 M&A
  • Which sectors are attracting the most interest?
  • Telco M&A investment is falling behind other verticals
  • What are the cultural challenges to digital M&A in the boardroom?
  • Operator M&A Strategies in detail: Consolidation, content and technology
  • M&A as a telco growth strategy
  • Adapting telco culture to ensure digital M&A success
  • Recommendations

Figures:

  • Figure 1: Drivers for operator M&A and majority investment – traditional and digital
  • Figure 2: Number of operator digital acquisitions and majority investments, H2 2016-H1 2017
  • Figure 3: Largest 7 telco digital M&A and majority investments, H2 2016-H1 2017
  • Figure 4: Number of operator digital acquisitions and majority investments, H1 2012 – H1 2016
  • Figure 5: Operator digital acquisitions and majority investments, H1 2012-H1 2017
  • Figure 6: Largest 10 telco digital M&A and majority investments, H1 2012 – H1 2016
  • Figure 7: Mapping of operator digital M&A strategies
  • Figure 8: Number of digital M&A and majority investments by sector/category, H2 2016-H1 2017
  • Figure 9: Comparison of investment in digital M&A as a percentage of service revenues, 2012-H1 2017

Can Telcos Entertain You? Vodafone and MTN’s Emerging Market Strategies (Part 2)

Telcos and the entertainment opportunity

In most emerging markets, which are the focus of this report, mobile networks are fast becoming the primary distribution channel for entertainment content. Although television is popular all over the world, in much of sub-Saharan Africa and developing Asia, terrestrial television coverage is patchy, while cable TV is rare. Satellite television is broadly available, but fewer than half of households can afford to buy a television, meaning many people only watch TV in bars, cafes or in the houses of friends.

In Kenya, for example, only 28% of households have a television, according to the World Bank development indicators, while in Tanzania that figure is just 15%. In some major developing markets, television has a stronger grip – in Nigeria, 40% of households have a TV and 47% of households in India. For sub-Saharan Africa, as a whole, television penetration is about 25% and in South Asia, 36%.

For many people in these regions, purchasing a versatile smartphone, which can be used for communications, information access, commerce and entertainment, is a higher priority than acquiring a television. The advent of sub US$40 smartphones means more and more people can now afford mobile devices with decent screens capable of displaying multimedia and processors that can run apps and full Internet browsers. In India, 220 million smartphones were in use at the end of 2015, according to one estimate , while Ericsson has forecast that the number of smartphones in use in Sub-Saharan Africa will leap to 690 million in 2021 from 170 million at the end of 2015 (see Figure 1).

 Figure 1: Predicted smartphone growth in developing regions

 Source: Ericsson Mobility Report, November 2015

In emerging markets, most Internet users don’t own a television (see Figure 2) and many rely entirely on a smartphone for digital entertainment. Moreover, a scarcity of fixed line infrastructure means much of the entertainment content is delivered over mobile networks. Mobile trade group the GSMA estimates that 3G networks, which are typically fast enough to transmit reasonable video images, reach about three quarters of the planet’s people. Mobile network supplier Ericsson has forecast that mobile broadband networks (3G and/or 4G) will cover more than 90% of the world’s population by 2021.

 Figure 2: Device ownership among Internet users in selected markets

 Source: Ericsson

The reliance on cellular infrastructure in developing countries has enabled mobile operators to take on a central role in the provision of online entertainment. The fact that many people rely almost solely on mobile networks for entertainment is presenting mobile operators with a major opportunity to boost their relevance and revenues. Given the capacity constraints on mobile networks and the implications for cellular tariffs, entertainment services need to be optimised to ensure that the costs of bandwidth don’t become prohibitive for consumers. Mobile operators’ understanding and real-time knowledge of their networks means they are in a good position to both manage the optimisation and package connectivity and content (regulation permitting) into one service bundle with a predictable and transparent tariff.

Although the network effects and economies of scale and scope enjoyed by YouTube and Facebook mean that both these players have strong positions in much of developing Asia, Latin America, the Middle East and Africa, some emerging market telcos have also built a solid foundation in the fast growing online entertainment sector. In Africa and India, for example, the leading telcos enable third party content providers to reach new customers through the telcos’ dedicated entertainment platforms, including web portals, individual apps and app stores selling music, TV and games. In return for supporting content offerings with their brands, networks, messaging, billing and payment systems, these telcos typically earn commission and capture valuable behavioural data.

 

  • Introduction
  • Executive Summary
  • Telcos and the entertainment opportunity
  • Roles in the online entertainment value chain
  • Further disruption ahead
  • Vodafone India faces up to new competition
  • The land-grab in India’s online entertainment market
  • Vodafone India combines content and connectivity
  • Takeaways – greater differentiation required
  • Music Gives MTN an Edge
  • Takeaways – music could be a springboard
  • Conclusions

 

  • Figure 1: Predicted smartphone growth in developing regions
  • Figure 2: Device ownership among Internet users in selected markets
  • Figure 3: How the key roles in online content are changing
  • Figure 4: How future-proof are telcos’ entertainment portfolios?
  • Figure 5: Vodafone India curates a wide range of infotainment content
  • Figure 6: Smartphone adoption in India will more than double in the next five years
  • Figure 7: Vodafone Mobile TV enables customers to subscribe to channels
  • Figure 8: The new Vodafone Play app combines TV, films and music
  • Figure 9: Vodafone India offers an app that makes it easy to track data usage
  • Figure 10: Vodafone’s Mobile TV app hasn’t attracted a strong following
  • Figure 11: Competitive and regulatory pressures are pushing down prices
  • Figure 12: In 3G, Vodafone India has kept pace with market leader Airtel
  • Figure 13: Vodafone India’s growth in data traffic compared with that of other telcos
  • Figure 14: Vodafone’s performance in India this decade
  • Figure 15: MTN’s Telco 2.0 strategy is focused on digital services
  • Figure 16: MTN’s growing array of digital services
  • Figure 17: MTN Play has been localised for each of MTN’s operations
  • Figure 18: The Ugandan version of MTN Play caters for local tastes
  • Figure 19: MTN bundles in some data traffic with each music plan
  • Figure 20: MTN’s digital services are particularly strong in Nigeria
  • Figure 21: MTN tops a list of most admired brands in Africa in 2015

Can Telcos Entertain You? (Part 1)

Telcos and the entertainment opportunity

As telecoms networks are the primary distribution channels for the digital economy, all telcos are in the entertainment business to a certain extent. With more than 3.2 billion people worldwide now connected to the Internet, according to the ITU, entertainment is increasingly delivered online and on-demand over telecoms and cable networks. The major Internet ecosystems – Amazon, Apple, Facebook and Google – are looking to dominate this market. But telcos could also play a pivotal role in an emerging new world order, either by providing enablers or by delivering their own differentiated entertainment offerings.

Many telcos have long flirted with offering their own entertainment services, typically as a retaliatory response to cable television providers’ push into communications. But these flings are now morphing into something more serious: connectivity and entertainment are becoming increasingly intertwined in telcos’ portfolios. Television, in particular, is shifting from the periphery, both in terms of telcos’ revenues and top management focus, onto centre stage. Some of the world’s largest telcos are beginning to invest in securing exclusive drama and sports content, even going as far as developing their own programming. This push is part of telcos’ broader search for ways to remain relevant in the consumer market, as usage of telcos’ voice and messaging services is curbed by over-the-top alternatives.

The central strategic dilemma for telcos is whether they should be selling services directly to the consumer or whether they should be providing enablers to other players (such as Amazon, Google, Netflix and Spotify) who might be prepared to pay for the use of dedicated content delivery networks, messaging, distribution, authentication, billing and payments. In many respects, this is not a new dilemma: Operators have tried to become content developers and distributors in the past, building portals, selling ringtones and games, and establishing app stores. What is new is the size of the table stakes: The expansion of broadband coverage and capacity has put the focus very much on increasingly high definition and immersive television and video. Creating this kind of content can be very expensive, prompting some of the largest telcos to invest billions of dollars, rather than tens of millions, in their entertainment proposition.

It isn’t just telcos undergoing a strategic rethink. The spread of broadband, the proliferation of connected digital devices and the shift to a multimedia Internet are shaking up the entertainment industry itself. Mobile and online entertainment accounts for US$195 billion (almost 11%) of the US$1.8 trillion global entertainment market today . And that proportion is growing. By some estimates, that figure is on course to rise to more than 13% of the global entertainment market, which could be worth US$2.2 trillion in 2019.

For incumbents in the media industry, this is a seismic shift. Cable television companies, for example, have had to rethink their longstanding business model, which involved selling big bundles of television channels encompassing the good, the bad and the ugly. Individual customers typically only watch a small fraction of the cable TV channels they are paying for, prompting a growing number of them to seek out more cost-effective and more targeted propositions from over-the-top players.

Cable companies have responded by offering more choice and expanding across the entertainment value chain. For example, Comcast, a leading US cableco, offers an increasingly broad range of TV packages, ranging from US$16 a month (for about 10 local channels) to US$80 a month (for about 140 channels bundled with high speed Internet access). Moreover, Comcast is making its TV services more flexible, enabling customers to download/record video content to watch on mobile devices and PCs at their convenience. Even so, Comcast has been shedding cable TV subscriptions for most of the past decade. But the cableco’s vertical-integration strategy has more than compensated. Growth in Comcast’s NBCUniversal television and film group, which owns a major Hollywood studio, together with rising demand for high-speed Internet access, has kept the top line growing.

Roles in the online entertainment value chain

Other cablecos and telcos are following a similar playbook to Comcast, increasingly involving themselves in all four of the key roles in the online content value chain, identified by STL Partners. These four key roles are:

  1. Programme: Content creation: producing drama series, movies or live sports programmes.
  2. Package: Packaging programmes into channels or music into playlists and then selling these packages on a subscription basis or providing them free, supported by advertising.
  3. Platform: Distributing TV channels, films or music created and curated by another entity.
  4. Pipe: Providing connectivity, either to the Internet or to a walled content garden.

Clearly, virtually all telcos and cablecos play the pipe role, providing connectivity for online content. Many also operate platforms, essentially reselling television on behalf of others. But now a growing number, including BT, Telefónica and Verizon, are creating packages and even developing their own programming. The pipe and package roles present opportunities to capture behavioural data that can then be used to further hone the entertainment proposition and make personalised recommendations and offers. At the same time, the package and programme roles are becoming increasingly important as the platforms with the best content, the best channels and the best recommendations are likely to attract the most traffic.

Figure 1 illustrates how the package and platform roles, in particular, are increasingly converging, as consumers seek out services that can help them find and discover entertainment that suits their particular tastes. Google’s YouTube platform, for example, increasingly promotes its many channels (packages) to better engage consumers, help them discover content and help viewers navigate their way through the vast amount of video on offer.

By venturing into packaging and programming, telcos are hoping to differentiate their platforms from those of the major global online players – Amazon, Apple, Facebook, Google and Netflix – which benefit from substantial economies of scale and scope. But pursuing such a strategy can involve compromises.
In many cases, regulators force telcos to also make their programming and packaging available on third party TV platforms, including those of direct competitors. In the UK, for example, BT has to wholesale its BT Sports channels to other TV platforms, including that of arch rival Sky. Figure 2 shows how BT’s platform, packaging and programming is intertwined with that of third parties, creating a complex, multi-faceted market in which BT content is available through BT TV/BT Broadband and through other platforms and pipes.

 Figure 1: How the key roles in online content are changing

 Source: STL Partners analysis

Figure 2: BT has to provide standalone packaging & programming, as well as a platform

 Source: STL Partners analysis

 

  • Introduction
  • Executive Summary
  • Telcos and the entertainment opportunity
  • Roles in the online entertainment value chain
  • Further disruption ahead
  • BT – betting big on sport
  • Takeaways – sport gives BT a broad springboard
  • Telefónica – leveraging languages
  • Takeaways – Telefónica could lead Hispanic entertainment
  • Verizon – acquiring and accumulating expertise
  • Takeaways – Verizon needs bigger and better content
  • Conclusions
  • Annex: Recommendations for telcos & cablecos in entertainment

 

  • Figure 1: How the key roles in online content are changing
  • Figure 2: BT has to provide standalone packaging & programming, as well as a platform
  • Figure 3: How future-proof are telcos’ entertainment portfolios?
  • Figure 4: The extras and upgrades to the free BT TV and BT Sports offer
  • Figure 5: The differences between BT TV’s free and premium packages
  • Figure 6: BT’s app enables consumers to watch premium content on handsets
  • Figure 7: BT Sport has driven broadband net-adds, but the rights bill is also rising
  • Figure 8: In the UK, BT is still behind the Sky TV platform but on a par with YouTube
  • Figure 9: How BT Sport creates value for BT
  • Figure 10: Telefónica offers a selection of bolt-ons to cater for different tastes
  • Figure 11: Acquisitions boosted Telefónica’s pay TV business in 2015
  • Figure 12: Pay TV and fibre broadband are the growth engines in Spain
  • Figure 13: Telefónica TV’s position versus that of Netflix and YouTube in Spain
  • Figure 14: Verizon’s three-tier strategy envisages providing platforms and solutions
  • Figure 15: Verizon was attracted by AOL’s growing platforms business
  • Figure 16: Verizon’s go90 is designed to be a content and social hybrid
  • Figure 17: AOL ranks sixth in terms of online visitors in the US
  • Figure 18: Verizon’s new go90 app has had a fairly positive response from users
  • Figure 19: AOL video trails far behind Internet rivals YouTube and Netflix in terms of usage
  • Figure 20: How future-proof are telcos’ entertainment portfolios?

Connecting Brands with Customers: How leading operators are building sustainable advertising businesses

Executive Summary

2015 has witnessed the turning point at which internet access on mobile devices exceeds desktops and laptops combined for the first time and, worldwide, digital advertising has followed the audience migration from desktop to smartphone and tablet.  A new ecosystem has evolved to service the needs of the mobile advertising industry. Ad exchanges and ad networks have adapted to facilitate access by brands to an ever-wider range of content on multiple devices, whilst DMPs (Data Management Platforms), DSPs & SSPs (Demand Side and Supply Side Platforms respectively) are fuelling the growth of ‘programmatic buying’ by enabling the flow of data within the ecosystem.

There is an opportunity for telcos to establish a sustainable and profitable role as an enabler within this rapidly developing market

Advertising should be an important diversification strategy for telcos as income from core communications continues to decline because they can make use of existing assets (e.g. audience reach, inventory, data), whilst maintaining subscriber trust. Telecoms operators’ ability to use their own customers’ data (with consent) to improve their own service offerings is a key advantage that provides a strong basis for developing advertising and marketing solutions for third-parties.

Walking in the footsteps of giants does not kill the opportunity for telcos

Facebook and Google will represent more than half of the $69 billion worldwide mobile-advertising market in 2015. This dominance has led some operators to question whether they can build a viable advertising business. However STL Partners believes that there has never been a better time for many operators to consider ramping-up their efforts to secure a sustainable practice through leveraging the value of their own customer data. In fact, many telcos are actively working with OTT players such as Google and Facebook to assist them in understanding territory-specific mobile behaviour.

Three telcos lead the way in advertising – Sprint, Turkcell and SingTel – and provide important lessons for others

In the main body of this report, STL Partners identifies the role that each telco has chosen to perform within the advertising ecosystem, assesses their strategy and execution, and identifies the core reasons for their success. The three case studies display several common characteristics and point to six Key Success Factors (KSFs) for a telco advertising business. The first is a ‘start-up mindset’ pre-requisite for establishing such a business and the other five are core actions and capabilities which mutually strengthen each other to produce a ‘flywheel’ that drives growth (see Figure 1).  As a telco exec, whether your organisation is just embarking on the advertising journey, if it has tried to build an advertising business and withdrawn or, indeed, if you are well on the way to building a successful business, we outline how to deliver the following six KSFs in the downloadable report:

  1. How to secure senior management support
  2. How to develop a semi-independent organisation with advertising skills and a start-up culture
  3. How to build or buy best-in-class technical capability and continuously improve
  4. Demand-side: How to build value for subscribers
  5. Supply-side: How to build value for media buyers and sellers
  6. How to pursue opportunities to scale aggressively
Figure 1: The Telco Advertising Business Flywheel

Why now is the right time for telcos to take a more prominent role within mobile advertising

After years of hype, mobile advertising is now starting to mature in terms of technical solutions, business models, and customer acceptance. The catalyst for this growing awareness of the potential of mobile advertising is the increasing demand for first-party (own customer) data to personalize and contextualize marketing communications both within telcos and more widely among enterprises as a way of improving on coarse-grained segmentation. Telcos hold more and better data than most organisations and have wonderful distribution networks (the network itself) for managing information flows, as well as delivering marketing messages and services.

 

For those within and outside telcos that are developing marketing and advertising solutions, we would love to hear your stories and facilitate discussions with your peers, so please do get in touch: contact@stlpartners.com

 

  • Executive Summary
  • Introduction
  • Why is advertising important for Telcos?
  • Walking in the footsteps of Giants?
  • Case study 1: Sprint
  • Summary: Reasons for Sprint’s success
  • A track record in innovation
  • Making data matter
  • How successful is Sprint’s strategy?
  • What does the future hold for Sprint?
  • Case study 2: Turkcell
  • Summary: Reasons for Turkcell’s success
  • A heritage in mobile marketing
  • Retaining control, enabling access
  • Co-opetition from a position of strength
  • How successful is Turkcell’s strategy?
  • What does the future hold for Turkcell?
  • Case study 3: SingTel
  • Summary: Reasons for SingTel’s success
  • Assembling a digital marketing capability through acquisition
  • Retaining revenue within the value chain
  • Providing technology at scale
  • How successful is SingTel’s strategy?
  • What does the future hold for SingTel?
  • Conclusion and recommendations

 

  • Figure 1: The Telco Advertising Business Flywheel
  • Figure 2: Time Spent per Adult per Day with Digital Media, USA, 2008-2015
  • Figure 3: Mobile Internet Ad Spending, Worldwide, 2013 – 2019
  • Figure 4: Mobile Marketing Ecosystem (extract)
  • Figure 5: The “Wheel of Commerce”
  • Figure 6: The Digital Gameboard – an OTT view of the world
  • Figure 6: Sprint’s data asset overview
  • Figure 7: Sprint’s role in the mobile advertising ecosystem
  • Figure 9: Top App Widget
  • Figure 10: Visual voicemail
  • Figure 11: Turkcell’s role in the mobile advertising ecosystem
  • Figure 12: Turkcell’s mobile marketing solution portfolio
  • Figure 13: Turkcell’s permission database overview
  • Figure 14: SingTel’s role in the mobile advertising ecosystem
  • Figure 15: SingTel’s digital portfolio prioritisation
  • Figure 16: The role of first-party data
  • Figure 17: The promise of first-party data
  • Figure 18: The Telco Advertising Business Flywheel

Amazon, Apple, Facebook, Google, Netflix: Whose digital content is king?

Introduction

This report analyses the market position and strategies of five global online entertainment platforms – Amazon, Apple, Facebook, Google and Netflix.

It also explores how improvements in digital technologies, consumer electronics and bandwidth are changing the online entertainment market, while explaining the ongoing uncertainty around net neutrality. The report then considers how well each of the five major entertainment platforms is prepared for the likely technological and regulatory changes in this market. Finally, it provides a high level overview of the implications for telco, paving the way for a forthcoming STL Partners report going into more detail about potential strategies for telcos in online entertainment.

The rise and rise of online entertainment

As in many other sectors, digital technologies are shaking up the global entertainment industry, giving rise to a new world order. Now that 3.2 billion people around the world have Internet access, according to the ITU, entertainment is increasingly delivered online and on-demand.

Mobile and online entertainment accounts for US$195 million (almost 11%) of the US$1.8 trillion global entertainment market today. By some estimates, that figure is on course to rise to more than 13% of the global entertainment market, which could be worth US$2.2 trillion in 2019.

Two leading distributors of online content – Google and Facebook – have infiltrated the top ten media owners in the world as defined by ZenithOptimedia (see Figure 1). ZenithOptimedia ranks media companies according to all the revenues they derive from businesses that support advertising – television broadcasting, newspaper publishing, Internet search, social media, and so on. As well as advertising revenues, it includes all revenues generated by these businesses, such as circulation revenues for newspapers or magazines. However, for pay-TV providers, only revenues from content in which the company sells advertising are included.

Figure 1 – How Google and Facebook differ from other leading media owners

Source: ZenithOptimedia, May 2015/STL Partners

ZenithOptimedia says this approach provides a clear picture of the size and negotiating power of the biggest global media owners that advertisers and agencies have to deal with. Note, Figure 1 draws on data from the financial year 2013, which is the latest year for which ZenithOptimedia had consistent revenue figures from all of the publicly listed companies. Facebook, which is growing fast, will almost certainly have climbed up the table since then.

Figure 1 also shows STL Partners’ view of the extent to which each of the top ten media owners is involved in the four key roles in the online content value chain. These four key roles are:

  1. Programme: Content creation. E.g. producing drama series, movies or live sports programmes.
  2. Package: Content curation. E.g. packaging programmes into channels or music into playlists and then selling these packages on a subscription basis or providing them free, supported by advertising.
  3. Platform: Content distribution. E.g. Distributing TV channels, films or music created and curated by another entity.
  4. Pipe: Providing connectivity. E.g. providing Internet access

Increasing vertical integration

Most of the world’s top ten media owners have traditionally focused on programming and packaging, but the rise of the Internet with its global reach has brought unprecedented economies of scale and scope to the platform players, enabling Google and now Facebook to break into the top ten. These digital disruptors earn advertising revenues by providing expansive two-sided platforms that link creators with viewers. However, intensifying competition from other major ecosystems, such as Amazon, and specialists, such as Netflix, is prompting Google, in particular, to seek new sources of differentiation. The search giant is increasingly investing in creating and packaging its own content.  The need to support an expanding range of digital devices and multiple distribution networks is also blurring the boundaries between the packaging and platform roles (see Figure 2, below) – platforms increasingly need to package content in different ways for different devices and for different devices.

Figure 2 – How the key roles in online content are changing

Source: STL Partners

These forces are prompting most of the major media groups, including Google and, to a lesser extent, Facebook, to expand across the value chain. Some of the largest telcos, including Verizon and BT, are also investing heavily in programming and packaging, as they seek to fend off competition from vertically-integrated media groups, such as Comcast and Sky (part of 21st Century Fox), who are selling broadband connectivity, as well as content.

In summary, the strongest media groups will increasingly create their own exclusive programming, package it for different devices and sell it through expansive distribution platforms that also re-sell third party content. These three elements feed of each other – the behavioural data captured by the platform can be used to improve the programming and packaging, creating a virtuous circle that attracts more customers and advertisers, generating economies of scale.

Although some leading media groups also own pipes, providing connectivity is less strategically important – consumers are increasingly happy to source their entertainment from over-the-top propositions. Instead of investing in networks, the leading media and Internet groups lobby regulators and run public relations campaigns to ensure telcos and cablecos don’t discriminate against over-the-top services. As long as these pipes are delivering adequate bandwidth and are sufficiently responsive, there is little need for the major media groups to become pipes.

The flip-side of this is that if telcos can convince the regulator and the media owners that there is a consumer and business benefit to differentiated network services (or discrimination to use the pejorative term), then the value of the pipe role increases. Guaranteed bandwidth or low-latency are a couple of the potential areas that telcos could potentially pursue here but they will need to do a significantly better job in lobbying the regulator and in marketing the benefits to consumers and the content owner/distributor if this strategy is to be successful.

To be sure, Google has deployed some fibre networks in the US and is now acting as an MVNO, reselling airtime on mobile networks in the US. But these efforts are part of its public relations effort – they are primarily designed to showcase what is possible and put pressure on telcos to improve connectivity rather than mount a serious competitive challenge.

  • Introduction
  • Executive Summary
  • The rise and rise of online entertainment
  • Increasing vertical integration
  • The world’s leading online entertainment platforms
  • A regional breakdown
  • The future of online entertainment market
  • 1. Rising investment in exclusive content
  • 2. Back to the future: Live programming
  • 3. The changing face of user generated content
  • 4. Increasingly immersive games and interactive videos
  • 5. The rise of ad blockers & the threat of a privacy backlash
  • 6. Net neutrality uncertainty
  • How the online platforms are responding
  • Conclusions and implications for telcos
  • STL Partners and Telco 2.0: Change the Game

 

  • Google is the leading generator of online entertainment traffic in most regions
  • How future-proof are the major online platforms?
  • Figure 1: How Google and Facebook differ from other leading media owners
  • Figure 2: How the key roles in online content are changing
  • Figure 3: Google leads in most regions in terms of entertainment traffic
  • Figure 4: YouTube serves up an eclectic mix of music videos, reality TV and animals
  • Figure 5: Facebook users recommend videos to one another
  • Figure 6: Apple introduces apps for television
  • Figure 7: Netflix, Google, Facebook and Amazon all gaining share in North America
  • Figure 8: YouTube & Facebook increasingly about entertainment, not interaction
  • Figure 9: YouTube maintains lead over Facebook on American mobile networks
  • Figure 10: US smartphones may be posting fewer images and videos to Facebook
  • Figure 11: Over-the-top entertainment is a three-way fight in North America
  • Figure 12: YouTube, Facebook & Netflix erode BitTorrent usage in Europe
  • Figure 13: File sharing falling back in Europe
  • Figure 14: iTunes cedes mobile share to YouTube and Facebook in Europe
  • Figure 15: Facebook consolidates strong upstream lead on mobile in Europe
  • Figure 16: YouTube accounts for about one fifth of traffic on Europe’s networks
  • Figure 17: YouTube & BitTorrent dominate downstream fixed-line traffic in Asia-Pac
  • Figure 18: Filesharing and peercasting apps dominate the upstream segment
  • Figure 19: YouTube stretches lead on mobile networks in Asia-Pacific
  • Figure 20: YouTube neck & neck with Facebook on upstream mobile in Asia-Pac
  • Figure 21: YouTube has a large lead in the Asia-Pacific region
  • Figure 22: YouTube fends off Facebook, as Netflix gains traction in Latam
  • Figure 23: How future-proof are the major online platforms?
  • Figure 24: YouTube’s live programming tends to be very niche
  • Figure 25: Netflix’s ranking of UK Internet service providers by bandwidth delivered
  • Figure 26: After striking a deal with Netflix, Verizon moved to top of speed rankings

Google’s MVNO: What’s Behind it and What are the Implications?

Google’s core business is under pressure

Google, the undisputed leader in online advertising and tech industry icon, has more problems than you might think. The grand narrative is captured in the following chart, showing basic annual financial metrics for Google, Inc. between 2009 and 2014.

Figure 1: Google’s margins have eroded substantially over time

Source: STL Partners, Google 10-K filing

This is essentially the classic problem of commoditisation. The IT industry has been structurally deflationary throughout its existence, which has always posed problems for its biggest successes – how do you maintain profitability in a business where prices only ever fall? Google is growing in terms of volume, but its margins are sliding, and as a result, profitability is growing much more slowly than revenue. Since 2010, the operating margin has shrunk from around 35% to around 25%, a period during which a major competitor emerged (Facebook) and Google initiated a variety of major investments, research projects, and flirted with manufacturing hardware (through the Motorola acquisition).

And it could get worse. In its most recent 10-K filing, Google says: “We anticipate downward pressure on our operating margin in the future.” It cites increasing competition and increased expenditures, while noting that it is becoming more reliant on lower margin products: “The margin on the sale of digital content and apps, advertising revenues from mobile devices and newer advertising formats are generally less than the margin on revenues we generate from advertising on our websites on traditional formats.”

Google remains massively dependent on a commoditising advertising business

Google is very, very dependent on selling advertising for revenue. It does earn some revenue from content, but most of this is generated from the ContentID program, which places adverts on copyrighted material and shares revenue with the rightsholder, and therefore, amounts to much the same thing. Over the past two years, Google has actually become more advert-dominated, as Figure 2 shows. Advertising revenues are not only vastly greater than non-advertising revenues, they are growing much faster and increasing as a share of the total. Over- reliance on the fickle and fast changing advertising market is obviously risky. Also, while ad brokering is considered a high-margin business, Google’s margins are now at the same level as AT&T’s.

Figure 2: Not only is Google overwhelmingly dependent on advertising, advertising revenue is growing faster than non-advertising

Source: STL Partners, Google 10-K

The growth rate of non-advertising revenue at Google has slowed sharply since last year. It is now growing more slowly than either advertising on Google properties, or in the Google affiliate network (see Figure 3).

Figure 3: Google’s new-line businesses are growing slower than the core business

Source: STL Partners, Google 10-K

At the same time, the balance has shifted a little between Google’s own properties (such as Google.com) and its affiliate network. Historically, more and more Google revenue has come from its own inventory and less from placing ads on partner sites. Costs arise from the affiliate network because Google pays out revenue share to the partner sites, known as traffic-acquisition costs or TACs. Own-account ad inventory, however, isn’t free – Google has to create products to place advertising in, and this causes it to incur R&D expenditures.

In a real sense, R&D is the equivalent to TAC for the 60-odd per cent of Google’s business that occurs on its own web sites. Google engineering excellence, and perhaps economies of scale, mean that generating ad inventory via product creation might be a better deal than paying out revenue share to hordes of bloggers or app developers, and Figure 4 shows this is indeed the case. R&D makes up a much smaller percentage of revenue from Google properties than TAC does of revenue from the affiliate network.

Figure 4: R&D is a more efficient means of generating ad inventory than affiliate payouts

Source: STL Partners, Google 10-K

Note, that although TAC might well be rising, the spike for Q4 2014 is probably a seasonal effect – Q4 is likely to be a month when a lot of adverts get clicked across the web.

 

  • Executive Summary
  • Google’s core business is under pressure
  • Google remains massively dependent on a commoditising advertising business
  • Google spends far more on R&D and capex than Apple
  • But while costs soar, Google ad pricing is falling
  • Google also has very high running costs
  • The threats from Facebook and Apple are real
  • Google MVNO: a strategic initiative
  • What do you need to make a mini-carrier?
  • The Google MVNO will launch into a state of price war
  • How low could the Google MVNO’s prices be?
  • Google’s MVNO: The Strategic Rationale
  • Option 1: Ads
  • Option 2: Straightforward carrier business model
  • Option 3: Android-style strategic initiative vs MNOs
  • Option 4: Anti-Apple virus, 2.0
  • Conclusions

 

  • Figure 1: Google’s margins have eroded substantially over time
  • Figure 2: Not only is Google overwhelmingly dependent on advertising, advertising revenue is growing faster than non-advertising
  • Figure 3: Growth in Google’s new-line businesses is now slower than in the core business
  • Figure 4: R&D is a more efficient means of generating ad inventory than affiliate payouts
  • Figure 5: Google spends a lot of money on research
  • Figure 6: Proportionately, Google research spending is even higher
  • Figure 7: Google’s dollar capex is almost identical to vastly bigger Apple’s
  • Figure 8: Google is startlingly capex-intensive compared to Apple, especially for an ad broker versus a global manufacturing titan
  • Figure 9: Google’s ad pricing is declining, and volume growth paused for most of 2014
  • Figure 10: Google is a more expensive company to run than Apple
  • Figure 11: The aircraft hangar Google leases from NASA
  • Figure 12: Facebook is pursuing quality over quantity in ad placement
  • Figure 12: Facebook is gradually closing the gap on Google in digital advertising
  • Figure 14: Despite a huge revenue quarter, Facebook’s Q4 saw a sharp hit to margin
  • Figure 15: Facebook’s margin hit is explained by the rise in R&D spending
  • Figure 16: Apple’s triumph – a terrible Q4 for the Android ecosystem
  • Figure 17: Price disruption in France and in the United States
  • Figure 18: Price disruption in the US – this is only the beginning
  • Figure 19: Defending AT&T and Verizon Wireless’ ARPU comes at a price
  • Figure 20: Modelling the service price of a mini-carrier
  • Figure 21: A high WiFi offload rate could make Google’s pricing aggressive
  • Figure 21: Handset subsidies are alive and well at T-Mobile

 

Apple Pay & Weve Fail: A Wake Up Call

Mobile payments: Now is the time

After many years of trials, pilots and uncertainty, the mobile industry is now making a major push to enable consumers to use their mobile phones to complete transactions in stores and other merchant venues. This year is shaping up to be a pivotal year with a number of major launches of commercial mobile payment services involving device makers, mobile operators, the payment networks and retailers.

Crucially, Apple’s move to add Near Field Communications (NFC) – a short-range communications technology – to iPhone 6 has vindicated the telecoms industry’s ongoing push to make NFC a de facto standard for mobile proximity payments. Although sceptics (including Apple executives) have previously derided the cost and complexity of the technology, Vodafone, Orange, China Mobile and other major telcos have continued to develop digital commerce propositions based on the technology.

Apple’s U-turn on NFC has changed the sentiment around the technology dramatically and given the industry a clear sense of direction. Just a year ago, research firms, such as Gartner and Juniper, scaled back their forecasts for the use of mobile handsets to complete transactions in-store, primarily because Apple didn’t include a NFC chip in the iPhone 5.

The widespread use of NFC in stores will add fuel to the mobile payments market which is already growing rapidly.  Some analysts are predicting mobile phones will be used to make transactions totalling more than US$721 billion worldwide by 2017 up from US$235 billion in 2013 (see Figure 1). Note, these figures include both remote/online and proximity/in-store transactions.

Figure 1: Global mobile payment transaction forecasts

Figure 1 - Global mobile payment transaction forecasts

Source: Gartner; Goldman Sachs (via Statista)

Although most consumers are happy paying in store using either cash or payment cards, there are two major reasons why mobile payments are gaining momentum in an increasingly digital economy:

  • Consumers will want to be able to receive and redeem offers, vouchers and loyalty points using their smartphones. A mobile payment service would enable them to do this in a straightforward way.
  • Mobile payments will generate valuable transaction data that could and should (with the consumer’s permission) be used to make highly personalised recommendations and offers.

In other words, mobile payments are an essential element of a compelling integrated digital commerce proposition.

The role of telcos

Although the big picture for mobile payments is improving, telcos are in danger of being side-lined in developed countries in this strategically important sector. (NB See the STL Partners Strategy Report, Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players for a detailed study of how telcos could disrupt the key digital commerce brokers: Amazon, Google, Apple and Facebook.) In recent weeks, telcos’ efforts to lead the development of the mobile payments market suffered two major setbacks. Firstly, Apple’s fully formed mobile payments solution, called Apple Pay, effectively cuts telcos out of the mobile payments business in the Apple ecosystem.

Secondly, it emerged that Weve, the ground-breaking mobile commerce joint venture between U.K. mobile operators, has pulled back from plans to facilitate payments (in addition to its existing role of delivering targeted offers to UK mobile users).  As a rare example of a well thought through collaborative venture between mobile operators, Weve had been a promising initiative that could provide a playbook for collaboration among mobile operators in other developed markets. But Weve’s change of course suggests that mobile operators are still struggling to collaborate effectively in the digital commerce market.

Rewriting the Mobile Payments Playbook

The Apple Pay proposition

Unveiled along with the iPhone 6 and the Apple Watch in September, Apple Pay is an end-to-end mobile payments proposition developed by Apple. On the device side, the basic technical architecture is similar to that advocated by major telcos via the industry group the GSMA – the short-range wireless technology Near Field Communications (NFC) is used to transfer payment data from the device to the point of sale terminal, while a secure element (a segregated memory chip) is used to protect sensitive information from being hacked or corrupted by third-party apps. However, rather than using telcos’ SIM cards as a secure element, Apple has added its own dedicated piece of hardware to the iPhone 6 and bolstered security further with a fingerprint scanner.

Already used to organise boarding passes, tickets, coupons and other collateral, Apple’s Passbook acts as the primary interface for the Apple Pay service. In other words, Passbook is now a fully-fledged mobile wallet. Thanks to its iTunes service, Apple already has hundreds of millions of consumers’ credit and debit card details on file. These consumers can add a compatible payment card stored on iTunes to Passbook simply by entering the card security code. Alternatively, they can use the iPhone camera to scan a payment card into a handset or type in the details manually. If the consumer stores more than one card, Passbook allows them to change the default payment card that appears when they are about to make a transaction.

 

Figure 2: Apple has made it easy to add payment cards to Passbook

Figure 2 - Apple has made it easy to add payment cards to Passbook

Source: Apple

To make a payment in a store, the consumer simply holds their iPhone next to a NFC-enabled reader (attached to a point of sale terminal) with their finger on the handset’s Touch ID – the fingerprint reader embedded into the latest iPhones (see Figure 3). Unlike some mobile payment solutions, the consumer doesn’t need to open an app or enter a PIN code. The iPhone vibrates and beeps once the payment information has been sent. In this case, the payment information is protected by three layers of security: More than any existing mainstream mobile payments solution, including the SIM-secured NFC payments touted by telcos. These three layers are

  • Rather than transferring actual payment card details, Apple Pay transfers so-called tokens: a device-specific account number, together with a one-time security code.
  • These tokens are encrypted and stored on a secure element inside the iPhone – memory that is ring-fenced from access by any app other than Passbook. They aren’t stored on Apple’s servers, so are protected from online hacking.
  • The payment only happens if the Touch ID system recognises the consumer’s fingerprint, proving the consumer’s was in the store.

Figure 3: The consumer is authenticated via iPhone’s fingerprint scanner

Figure 3: The consumer is authenticated via the iPhone's fingerprint scanner

Source: Apple

If the consumer is using an Apple Watch, which also has a NFC chip and a secure element, they hold the face of the watch near the reader and double-click a button on the side of the watch. As the range of NFC is just a few centimetres, consumers will have to hold the face of their watch against the reader. This step doesn’t sound very intuitive and may cause confusion in stores.

Again, a vibration and beep confirm the transfer of the payment information. Note, the watch needs to have been linked to an iPhone with a compatible payment card stored in a Passbook app. Although Apple Watch isn’t equipped with the Touch ID fingerprint scanner in the iPhone, it does have alternative security mechanisms built in. Apple Watch is equipped with a biosensor that can detect when the watch is taken off and lock its payment function, according to a report by NFC World. Apparently, consumers will have to enter a code to re-enable the payment function when they put the handset back on.  These extra steps suggest making payments using Apple Watch will be more cumbersome and potentially less secure than using an iPhone 6 to make a payment.

 

Figure 4: You double-click a button to confirm a payment with Apple Watch

Figure 4 - You double-click a button to confirm a payment with Apple Watch

Source: Apple

Apple Pay can also be used to make online payments in compatible apps and this is how many consumers are likely to try the service initially. Apple said that several merchants, including Disney, Starbucks, Target and Uber, have adapted their apps to accept Apple Pay transactions (see Figure 5). In this case, the consumer selects Apple Pay and then places their finger on the Touch ID interface. Note, enabling online payments is an area that has been neglected by many telcos in developed countries targeting this market, but support for remote payments is an essential component of any holistic digital commerce solution  – consumers won’t want to use different digital wallets online and offline.

 

Figure 4: Various apps allow consumers to make payments via Apple Pay

 

Figure 5 - Various apps allow consumers to make payments via Apple Pay

 Source: Apple

If a consumer loses their iPhone, then they can use the Find My iPhone service to put their device into “lost mode” or they can opt to wipe the handset. The next time the iPhone goes online, it will be frozen or wiped, depending on the option the consumer selected. Note, this feature negates one of the advantages of using a SIM card, which can also be wiped remotely by a telco, as a secure element.

Although the consumer’s most recent purchases will be viewable in Passbook, Apple says it won’t save consumer’s transaction information. This is in stark contrast to the approach taken by Apple’s own iTunes service and Amazon, for example, which uses a consumer’s transaction history to make personalised product and service recommendations. With Apple Pay, it seems a consumer will only be able to check historic transactions by looking at their bank statements.

The big guns in the U.S. financial services industry are supporting Apple Pay – consumers can use credit and debit cards from the three major payment networks, American Express, MasterCard and Visa, issued by a range of leading banks, including Bank of America, Capital One Bank, Chase, Citi and Wells Fargo, representing 83% of credit card purchase volume in the US, according to Apple, which says additional banks, including Barclaycard, Navy Federal Credit Union, PNC Bank, USAA and U.S. Bank, are also planning to sign up. This is a much greater level of participation than that achieved by Softcard (formerly known as Isis), the mobile commerce joint venture between U.S. telcos AT&T Mobile, Verizon Wireless and T-Mobile USA (see next section for more on Softcard).

Apple says that more than 220,000 bricks and mortar stores will accept Apple Pay transactions. Some of the participating retailers include leading brands, such as McDonalds, Stables, Subway, ToysRUs and Walgreens. However, the retailers in the Merchant Customer Exchange (MCX) consortium, which is developing its own mobile commerce proposition, have not signed up to accept Apple Pay. These retailers include major players, such as WalMart, Best-Buy, 7-11, Gap and Sears. (See next section for more on MCX). Although only a handful of apps are supporting Apple Pay today, that number is likely to grow rapidly, as many consumers will find it easier to press the Touch ID than to type in a password.

To access the rest of this 28 page Telco 2.0 Report in full, including…

  • Introduction
  • Executive Summary
  • Mobile payments: Now is the time
  • Rewriting the Mobile Payments Playbook
  • The Apple Pay proposition
  • Will Apple Pay be a success? 
  • The implications of Apple Pay for telcos
  • The Weve U-Turn
  • How Weve broke new ground
  • Weve’s shareholders break ranks
  • Weve pulls back
  • Conclusions and recommendations

…and the following report figures…

  • Figure 1: Forecasts for the value of mobile proximity payments in the U.S 
  • Figure 2: Apple has made it easy to add payment cards to Passbook
  • Figure 3: The consumer is authenticated via the iPhone’s fingerprint scanner
  • Figure 4: You double-click a button to confirm a payment with Apple Watch
  • Figure 5: Various apps allow consumers to make payments via Apple Pay
  • Figure 6: MCX’s approach to security
  • Figure 7: Apple’s shrinking share of the global smartphone market
  • Figure 8: The Softcard wallet enables consumers to filter offers by their location
  • Figure 9: The virtuous circle Weve was aiming to create
  • Figure 10: Everything Everywhere’s Cash on Tap app is clunky to use

 

Connected Home: Telcos vs Google (Nest, Apple, Samsung, +…)

Introduction 

On January 13th 2014, Google announced its acquisition of Nest Labs for $3.2bn in cash consideration. Nest Labs, or ‘Nest’ for short, is a home automation company founded in 2010 and based in California which manufactures ‘smart’ thermostats and smoke/carbon monoxide detectors. Prior to this announcement, Google already had an approximately 12% equity stake in Nest following its Series B funding round in 2011.

Google is known as a prolific investor and acquirer of companies: during 2012 and 2013 it spent $17bn on acquisitions alone, which was more than Apple, Microsoft, Facebook and Yahoo combined (at $13bn) . Google has even been known to average one acquisition per week for extended periods of time. Nest, however, was not just any acquisition. For one, whilst the details of the acquisition were being ironed out Nest was separately in the process of raising a new round of investment which implicitly valued it at c. $2bn. Google, therefore, appears to have paid a premium of over 50%.

This analysis can be extended by examining the transaction under three different, but complementary, lights.

Google + Nest: why it’s an interesting and important deal

  • Firstly, looking at Nest’s market capitalisation relative to its established competitors suggests that its long-run growth prospects are seen to be very strong

At the time of the acquisition, estimates placed Nest as selling 100k of its flagship product (the ‘Nest Thermostat’) per month . With each thermostat retailing at c. $250 each, this put its revenue at approximately $300m per annum. Now, looking at the ratio of Nest’s market capitalisation to revenue compared to two of its established competitors (Lennox and Honeywell) tells an interesting story:

Figure 1: Nest vs. competitors’ market capitalisation to revenue

 

Source: Company accounts, Morgan Stanley

Such a disparity suggests that Nest’s long-run growth prospects, in terms of both revenue and free cash flow, are believed to be substantially higher than the industry average. 
  • Secondly, looking at Google’s own market capitalisation suggests that the capital markets see considerable value in (and synergies from) its acquisition of Nest

Prior to the deal’s announcement, Google’s share price was oscillating around the $560 mark. Following the acquisition, Google’s share price began averaging closer to $580. On the day of the announcement itself, Google’s share price increased from $561 to $574 which, crucially, reflected a $9bn increase in market capitalisation . In other words, the value placed on Google by the capital markets increased by nearly 300% of the deal’s value. This is shown in Figure 2 below:

Figure 2: Google’s share price pre- and post-Nest acquisition

 

Source: Google Finance

This implies that the capital markets either see Google as being well positioned to add unique value to Nest, Nest as being able to strongly complement Google’s existing activities, or both.

  • Thirdly, viewing the Nest acquisition in the context of Google’s historic and recent M&A activity shows both its own specific financial significance and the changing face of Google’s acquisitions more generally

At $3.2bn, the acquisition of Nest represents Google’s second largest acquisition of all time. The largest was its purchase of Motorola Mobility in 2011 for $12.5bn, but Google has since reached a deal to sell the majority of its assets (excluding its patent portfolio) to Lenovo for $2.9bn. In other words, Nest is soon to become Google’s largest active, inorganic investment. Google’s ten largest acquisitions, as well as some smaller but important ones, are shown in Figure 3 below:

Figure 3: Selected acquisitions by Google, 2003-14

Source: Various

Beyond its size, the Nest acquisition also continues Google’s recent trend of acquiring companies seemingly less directly related to its core business. For example, it has been investing in artificial intelligence (DeepMind Technologies), robotics (Boston Dynamics, Industrial Perception, Redwood Robotics) and satellite imagery (Skybox Imaging).

Three questions raised by Google’s acquisition of Nest

George Geis, a professor at UCLA, claims that Google develops a series of metrics at an early stage which it later uses to judge whether or not the acquisition has been successful. He further claims that, according to these metrics, Google on average rates two-thirds of its acquisitions as successful. This positive track record, combined with the sheer size of the Nest deal, suggests that the obvious question here is also an important one:

  • What is Nest’s business model? Why did Google spend $3.2bn on Nest?

Nest’s products, the Nest Thermostat and the Nest Protect (smoke/carbon monoxide detector), sit within the relatively young space referred to as the ‘connected home’, which is defined and discussed in more detail here. One natural question following the Nest deal is whether Google’s high-profile involvement and backing of a (leading) company in the connected home space will accelerate its adoption. This suggests the following, more general, question:

  • What does the Nest acquisition mean for the broader connected home market?

Finally, there is a question to be asked around the implications of this deal for Telcos and their partners. Many Telcos are now active in this space, but they are not alone: internet players (e.g. Google and Apple), big technology companies (e.g. Samsung), utilities (e.g. British Gas) and security companies (e.g. ADT) are all increasing their involvement too. With different strategies being adopted by different players, the following question follows naturally:

  • What does the Nest acquisition mean for telcos?

 

  • Executive Summary
  • Introduction
  • Google + Nest: why it’s an interesting and important deal
  • Three questions raised by Google’s acquisition of Nest
  • Understanding Nest and Connected Homes
  • Nest: reinventing everyday objects to make them ‘smart’
  • Nest’s future: more products, more markets
  • A general framework for connected home services
  • Nest’s business model, and how Google plans to get a return on its $3.2bn investment 
  • Domain #1: Revenue from selling Nest devices is of only limited importance to Google
  • Domain #2: Energy demand response is a potentially lucrative opportunity in the connected home
  • Domain #3: Data for advertising is important, but primarily within Google’s broader IoT ambitions
  • Domain #4: Google also sees Nest as partial insurance against IoT-driven disruption
  • Domain #5: Google is pushing into the IoT to enhance its advertising business and explore new monetisation models
  • Implications for Telcos and the Connected Home
  • The connected home is happening now, but customer experience must not be overlooked
  • Telcos can employ a variety of monetisation strategies in the connected home
  • Conclusions

 

  • Figure 1: Nest vs. competitors’ market capitalisation relative to revenue
  • Figure 2: Google’s share price, pre- and post-Nest acquisition
  • Figure 3: Selected acquisitions by Google, 2003-14
  • Figure 4: The Nest Thermostat and Protect
  • Figure 5: Consumer Electronics vs. Electricity Spending by Market
  • Figure 6: A connected home services framework
  • Figure 7: Nest and Google Summary Motivation Matrix
  • Figure 8: Nest hardware revenue and free cash flow forecasts, 2014-23
  • Figure 9: PJM West Wholesale Electricity Prices, 2013
  • Figure 10: Cooling profile during a Rush Hour Rewards episode
  • Figure 11: Nest is attempting to position itself at the centre of the connected home
  • Figure 12: US smartphone market share by operating system (OS), 2005-13
  • Figure 13: Google revenue breakdown, 2013
  • Figure 14: Google – Generic IoT Strategy Map
  • Figure 15: Connected device forecasts, 2010-20
  • Figure 16: Connected home timeline, 1999-Present
  • Figure 17: OnFuture EMEA 2014: The recent surge in interest in the connected home is due to?
  • Figure 18: A spectrum of connected home strategies between B2C and B2B2C (examples)
  • Figure 19: Building, buying or partnering in the connected home (examples)
  • Figure 20: Telco 2.0™ ‘two-sided’ telecoms business model