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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Why the consumer IoT is stuck in the slow lane

A slow start for NB-IoT and LTE-M

For telcos around the world, the Internet of Things (IoT) has long represented one of the most promising growth opportunities. Yet for most telcos, the IoT still only accounts for a low single digit percentage of their overall revenue. One of the stumbling blocks has been relatively low demand for IoT solutions in the consumer market. This report considers why that is and whether low cost connectivity technologies specifically-designed for the IoT (such as NB-IoT and LTE-M) will ultimately change this dynamic.

NB-IoT and LTE-M are often referred to as Massive IoT technologies because they are designed to support large numbers of connections, which periodically transmit small amounts of data. They can be distinguished from broadband IoT connections, which carry more demanding applications, such as video content, and critical IoT connections that need to be always available and ultra-reliable.

The initial standards for both technologies were completed by 3GPP in 2016, but adoption has been relatively modest. This report considers the key B2C and B2B2C use cases for Massive IoT technologies and the prospects for widespread adoption. It also outlines how NB-IoT and LTE-M are evolving and the implications for telcos’ strategies.

This builds on previous STL Partners’ research, including LPWA: Which way to go for IoT? and Can telcos create a compelling smart home?. The LPWA report explained why IoT networks need to be considered across multiple generations, including coverage, reliability, power consumption, range and bandwidth. Cellular technologies tend to be best suited to wide area applications for which very reliable connectivity is required (see Figure below).

IoT networks should be considered across multiple dimensions

IoT-networks-disruptive-analysis-stl-2021
Source: Disruptive Analysis

 

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The smart home report outlined how consumers could use both cellular and short-range connectivity to bolster security, improve energy efficiency, charge electric cars and increasingly automate appliances. One of the biggest underlying drivers in the smart home sector is peace of mind – householders want to protect their properties and their assets, as rising population growth and inequality fuels fear of crime.

That report contended that householders might be prepared to pay for a simple and integrated way to monitor and remotely control all their assets, from door locks and televisions to solar panels and vehicles.  Ideally, a dashboard would show the status and location of everything an individual cares about. Such a dashboard could show the energy usage and running cost of each appliance in real-time, giving householders fingertip control over their possessions. They could use the resulting information to help them source appropriate insurance and utility supply.

Indeed, STL Partners believes telcos have a broad opportunity to help coordinate better use of the world’s resources and assets, as outlined in the report: The Coordination Age: A third age of telecoms. Reliable and ubiquitous connectivity is a key enabler of the emerging sharing economy in which people use digital technologies to easily rent the use of assets, such as properties and vehicles, to others. The data collected by connected appliances and sensors could be used to help safeguard a property against misuse and source appropriate insurance covering third party rentals.

Do consumers need Massive IoT?

Whereas some IoT applications, such as connected security cameras and drones, require high-speed and very responsive connectivity, most do not. Connected devices that are designed to collect and relay small amounts of data, such as location, temperature, power consumption or movement, don’t need a high-speed connection.

To support these devices, the cellular industry has developed two key technologies – LTE-M (LTE for Machines, sometimes referred to as Cat M) and NB-IoT (Narrowband IoT). In theory, they can be deployed through a straightforward upgrade to existing LTE base stations. Although these technologies don’t offer the capacity, throughput or responsiveness of conventional LTE, they do support the low power wide area connectivity required for what is known as Massive IoT – the deployment of large numbers of low cost sensors and actuators.

For mobile operators, the deployment of NB-IoT and LTE-M can be quite straightforward. If they have relatively modern LTE base stations, then NB-IoT can be enabled via a software upgrade. If their existing LTE network is reasonably dense, there is no need to deploy additional sites – NB-IoT, and to a lesser extent LTE-M, are designed to penetrate deep inside buildings. Still, individual base stations may need to be optimised on a site-by-site basis to ensure that they get the full benefit of NB-IoT’s low power levels, according to a report by The Mobile Network, which notes that operators also need to invest in systems that can provide third parties with visibility and control of IoT devices, usage and costs.

There are a number of potential use cases for Massive IoT in the consumer market:

  • Asset tracking: pets, bikes, scooters, vehicles, keys, wallets, passport, phones, laptops, tablets etc.
  • Vulnerable persontracking: children and the elderly
  • Health wearables: wristbands, smart watches
  • Metering and monitoring: power, water, garden,
  • Alarms and security: smoke alarms, carbon monoxide, intrusion
  • Digital homes: automation of temperature and lighting in line with occupancy

In the rest of this report we consider the key drivers and barriers to take-up of NB-IoT and LTE-M for these consumer use cases.

Table of Contents

  • Executive Summary
  • Introduction
  • Do consumers need Massive IoT?
    • The role of eSIMs
    • Takeaways
  • Market trends
    • IoT revenues: Small, but growing
  • Consumer use cases for cellular IoT
    • Amazon’s consumer IoT play
    • Asset tracking: Demand is growing
    • Connecting e-bikes and scooters
    • Slow progress in healthcare
    • Smart metering gains momentum
    • Supporting micro-generation and storage
    • Digital buildings: A regulatory play?
    • Managing household appliances
  • Technological advances
    • Network coverage
  • Conclusions: Strategic implications for telcos

 

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Are telcos smart enough to make money work?

Telco consumer financial services propositions

Telcos face a perplexing challenge in consumer markets. On the one hand, telcos’ standing with consumers has improved through the COVID-19 pandemic, and demand for connectivity is strong and continues to grow. On the other hand, most consumers are not spending more money with telcos because operators have yet to create compelling new propositions that they can charge more for. In the broadest sense, telcos need to (and can in our view) create more value for consumers and society more generally.

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As discussed in our previous research, we believe the world is now entering a “Coordination Age” in which multiple stakeholders will work together to maximize the potential of the planet’s natural and human resources. New technologies – 5G, analytics, AI, automation, cloud – are making it feasible to coordinate and optimise the allocation of resources in real-time. As providers of connectivity that generates vast amounts of relevant data, telcos can play an important role in enabling this coordination. Although some operators have found it difficult to expand beyond connectivity, the opportunity still exists and may actually be expanding.

In this report, we consider how telcos can support more efficient allocation of capital by playing in the financial services sector.  Financial services (banking) sits in a “sweet spot” for operators: economies of scale are available at a national level, connected technology can change the industry.

Financial Services in the Telecoms sweet spot

financial services

Source STL Partners

The financial services industry is undergoing major disruption brought about by a combination of digitisation and liberalisation – new legislation, such as the EU’s Payment Services Directive, is making it easier for new players to enter the banking market. And there is more disruption to come with the advent of digital currencies – China and the EU have both indicated that they will launch digital currencies, while the U.S. is mulling going down the same route.

A digital currency is intended to be a digital version of cash that is underpinned directly by the country’s central bank. Rather than owning notes or coins, you would own a deposit directly with the central bank. The idea is that a digital currency, in an increasingly cash-free society, would help ensure financial stability by enabling people to store at least some of their money with a trusted official platform, rather than a company or bank that might go bust. A digital currency could also make it easier to bring unbanked citizens (the majority of the world’s population) into the financial system, as central banks could issue digital currencies directly to individuals without them needing to have a commercial bank account. Telcos (and other online service providers) could help consumers to hold digital currency directly with a central bank.

Although the financial services industry has already experienced major upheaval, there is much more to come. “There’s no question that digital currencies and the underlying technology have the potential to drive the next wave in financial services,” Dan Schulman, the CEO of PayPal told investors in February 2021. “I think those technologies can help solve some of the fundamental problems of the system. The fact that there’s this huge prevalence and cost of cash, that there’s lack of access for so many parts of the population into the system, that there’s limited liquidity, there’s high friction in commerce and payments.”

In light of this ongoing disruption, this report reviews the efforts of various operators, such as Orange, Telefónica and Turkcell, to expand into consumer financial services, notably the provision of loans and insurance. A close analysis of their various initiatives offers pointers to the success criteria in this market, while also highlighting some of the potential pitfalls to avoid.

Table of contents

  • Executive Summary
  • Introduction
  • Potential business models
    • Who are you serving?
    • What are you doing for the people you serve?
    • M-Pesa – a springboard into an array of services
    • Docomo demonstrates what can be done
    • But the competition is fierce
  • Applying AI to lending and insurance
    • Analysing hundreds of data points
    • Upstart – one of the frontrunners in automated lending
    • Takeaways
  • From payments to financial portal
    • Takeaways
  • Turkcell goes broad and deep
    • Paycell has a foothold
    • Consumer finance takes a hit
    • Regulation moving in the right direction
    • Turkcell’s broader expansion plans
    • Takeaways
  • Telefónica targets quick loans
    • Growing competition
    • Elsewhere in Latin America
    • Takeaways
  • Momentum builds for Orange
    • The cost of Orange Bank
    • Takeaways
  • Conclusions and recommendations
  • Index

This report builds on earlier STL Partners research, including:

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Commerce and connectivity: A match made in heaven?

Rakuten and Reliance: The exceptions or the rule?

Over the past decade, STL Partners has analysed how connectivity, commerce and content have become increasingly interdependent – as both shopping and entertainment go digital, telecoms networks have become key distribution channels for all kinds of consumer businesses. Equally, the growing availability of digital commerce and content are driving demand for connectivity both inside and outside the home.

To date, the top tier of consumer Internet players – Google, Apple, Amazon, Alibaba, Tencent and Facebook – have tended to focus on trying to dominate commerce and content, largely leaving the provision of connectivity to the conventional telecoms sector. But now some major players in the commerce market, such as Rakuten in Japan and Reliance in India, are pushing into connectivity, as well as content.

This report considers whether Rakuten’s and Reliance’s efforts to combine content, commerce and connectivity into a single package is a harbinger of things to come or the exceptions that will prove the longstanding rule that telecoms is a distinct activity with few synergies with adjacent sectors. The provision of connectivity has generally been regarded as a horizontal enabler for other forms of economic activity, rather than part of a vertically-integrated service stack.

This report also explores the extent to which new technologies, such as cloud-native networks and open radio access networks, and an increase in licence-exempt spectrum, are making it easier for companies in adjacent sectors to provide connectivity. Two chapters cover Google and Amazon’s connectivity strategies respectively, analysing the moves they have made to date and what they may do in future. The final section of this report draws some conclusions and then considers the implications for telcos.

This report builds on earlier STL Partners research, including:

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Mixing commerce and connectivity

Over the past decade, the smartphone has become an everyday shopping tool for billions of people, particularly in Asia. As a result, the smartphone display has become an important piece of real estate for the global players competing for supremacy in the digital commerce market. That real estate can be accessed via a number of avenues – through the handset’s operating system, a web browser, mobile app stores or through the connectivity layer itself.

As Google and Apple exercise a high degree of control over smartphone operating systems, popular web browsers and mobile app stores, other big digital commerce players, such as Amazon, Facebook and Walmart, risk being marginalised. One way to avoid that fate may be to play a bigger role in the provision of wireless connectivity as Reliance Industries is doing in India and Rakuten is doing in Japan.

For telcos, this is potentially a worrisome prospect. By rolling out its own greenfield mobile network, e-commerce, and financial services platform Rakuten has brought disruption and low prices to Japan’s mobile connectivity market, putting pressure on the incumbent operators. There is a clear danger that digital commerce platforms use the provision of mobile connectivity as a loss leader to drive to traffic to their other services.

Table of Contents

  • Executive Summary
  • Introduction
  • Mixing connectivity and commerce
    • Why Rakuten became a mobile network operator
    • Will Rakuten succeed in connectivity?
    • Why hasn’t Rakuten Mobile broken through?
    • Borrowing from the Amazon playbook
    • How will the hyperscalers react?
  • New technologies, new opportunities
    • Capacity expansion
    • Unlicensed and shared spectrum
    • Cloud-native networks and Open RAN attract new suppliers
    • Reprogrammable SIM cards
  • Google: Knee deep in connectivity waters
    • Google Fiber and Fi maintain a holding pattern
    • Google ramps up and ramps down public Wi-Fi
    • Google moves closer to (some) telcos
    • Google Cloud targets telcos
    • Big commitment to submarine/long distance infrastructure
    • Key takeaways: Vertical optimisation not integration
  • Amazon: A toe in the water
    • Amazon Sidewalk
    • Amazon and CBRS
    • Amazon’s long distance infrastructure
    • Takeaways: Control over connectivity has its attractions
  • Conclusions and implications for telcos in digital commerce/content
  • Index

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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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SK Telecom: Lessons in 5G, AI, and adjacent market growth

SK Telecom’s strategy

SK Telecom is the largest mobile operator in South Korea with a 42% share of the mobile market and is also a major fixed broadband operator. It’s growth strategy is focused on 5G, AI and a small number of related business areas where it sees the potential for revenue to replace that lost from its core mobile business.

By developing applications based on 5G and AI it hopes to create additional revenue streams both for its mobile business and for new areas, as it has done in smart home and is starting to do for a variety of smart business applications. In 5G it is placing an emphasis on indoor coverage and edge computing as basis for vertical industry applications. Its AI business is centred around NUGU, a smart speaker and a platform for business applications.

Its other main areas of business focus are media, security, ecommerce and mobility, but it is also active in other fields including healthcare and gaming.

The company takes an active role internationally in standards organisations and commercially, both in its own right and through many partnerships with other industry players.

It is a subsidiary of SK Group, one of the largest chaebols in Korea, which has interests in energy and oil. Chaebols are large family-controlled conglomerates which display a high level and concentration of management power and control. The ownership structures of chaebols are often complex owing to the many crossholdings between companies owned by chaebols and by family members. SK Telecom uses its connections within SK Group to set up ‘friendly user’ trials of new services, such as edge and AI

While the largest part of the business remains in mobile telecoms, SK Telecom also owns a number of subsidiaries, mostly active in its main business areas, for example:

  • SK Broadband which provides fixed broadband (ADSL and wireless), IPTV and mobile OTT services
  • ADT Caps, a securitybusiness
  • IDQ, which specialises in quantum cryptography (security)
  • 11st, an open market platform for ecommerce
  • SK Hynixwhich manufactures memory semiconductors

Few of the subsidiaries are owned outright by SKT; it believes the presence of other shareholders can provide a useful source of further investment and, in some cases, expertise.

SKT was originally the mobile arm of KT, the national operator. It was privatised soon after establishing a cellular mobile network and subsequently acquired by SK Group, a major chaebol with interests in energy and oil, which now has a 27% shareholding. The government pension service owns a 11% share in SKT, Citibank 10%, and 9% is held by SKT itself. The chairman of SK Group has a personal holding in SK Telecom.

Following this introduction, the report comprises three main sections:

  • SK Telecom’s business strategy: range of activities, services, promotions, alliances, joint ventures, investments, which covers:
    • Mobile 5G, Edge and vertical industry applications, 6G
    • AIand applications, including NUGU and Smart Homes
    • New strategic business areas, comprising Media, Security, eCommerce, and other areas such as mobility
  • Business performance
  • Industrial and national context.

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Overview of SKT’s activities

Network coverage

SK Telecom has been one of the earliest and most active telcos to deploy a 5G network. It initially created 70 5G clusters in key commercial districts and densely populated areas to ensure a level of coverage suitable for augmented reality (AR) and virtual reality (VR) and plans to increase the number to 240 in 2020. It has paid particular attention to mobile (or multi-access) edge computing (MEC) applications for different vertical industry sectors and plans to build 5G MEC centres in 12 different locations across Korea. For its nationwide 5G Edge cloud service it is working with AWS and Microsoft.

In recognition of the constraints imposed by the spectrum used by 5G, it is also working on ensuring good indoor 5G coverage in some 2,000 buildings, including airports, department stores and large shopping malls as well as small-to-medium-sized buildings using distributed antenna systems (DAS) or its in-house developed indoor 5G repeaters. It also is working with Deutsche Telekom on trials of the repeaters in Germany. In addition, it has already initiated activities in 6G, an indication of the seriousness with which it is addressing the mobile market.

NUGU, the AI platform

It launched its own AI driven smart speaker, NUGU in 2016/7, which SKT is using to support consumer applications such as Smart Home and IPTV. There are now eight versions of NUGU for consumers and it also serves as a platform for other applications. More recently it has developed several NUGU/AI applications for businesses and civil authorities in conjunction with 5G deployments. It also has an AI based network management system named Tango.

Although NUGU initially performed well in the market, it seems likely that the subsequent launch of smart speakers by major global players such as Amazon and Google has had a strong negative impact on the product’s recent growth. The absence of published data supports this view, since the company often only reports good news, unless required by law. SK Telecom has responded by developing variants of NUGU for children and other specialist markets and making use of the NUGU AI platform for a variety of smart applications. In the absence of published information, it is not possible to form a view on the success of the NUGU variants, although the intent appears to be to attract young users and build on their brand loyalty.

It has offered smart home products and services since 2015/6. Its smart home portfolio has continually developed in conjunction with an increasing range of partners and is widely recognised as one of the two most comprehensive offerings globally. The other being Deutsche Telekom’s Qivicon. The service appears to be most successful in penetrating the new build market through the property developers.

NUGU is also an AI platform, which is used to support business applications. SK Telecom has also supported the SK Group by providing new AI/5G solutions and opening APIs to other subsidiaries including SK Hynix. Within the SK Group, SK Planet, a subsidiary of SK Telecom, is active in internet platform development and offers development of applications based on NUGU as a service.

Smart solutions for enterprises

SKT continues to experiment with and trial new applications which build on its 5G and AI applications for individuals (B2C), businesses and the public sector. During 2019 it established B2B applications, making use of 5G, on-prem edge computing, and AI, including:

  • Smart factory(real time process control and quality control)
  • Smart distribution and robot control
  • Smart office (security/access control, virtual docking, AR/VRconferencing)
  • Smart hospital (NUGUfor voice command for patients, AR-based indoor navigation, facial recognition technology for medical workers to improve security, and investigating possible use of quantum cryptography in hospital network)
  • Smart cities; e.g. an intelligent transportation system in Seoul, with links to vehicles via 5Gor SK Telecom’s T-Map navigation service for non-5G users.

It is too early to judge whether these B2B smart applications are a success, and we will continue to monitor progress.

Acquisition strategy

SK Telecom has been growing these new business areas over the past few years, both organically and by acquisition. Its entry into the security business has been entirely by acquisition, where it has bought new revenue to compensate for that lost in the core mobile business. It is too early to assess what the ongoing impact and success of these businesses will be as part of SK Telecom.

Acquisitions in general have a mixed record of success. SK Telecom’s usual approach of acquiring a controlling interest and investing in its acquisitions, but keeping them as separate businesses, is one which often, together with the right management approach from the parent, causes the least disruption to the acquired business and therefore increases the likelihood of longer-term success. It also allows for investment from other sources, reducing the cost and risk to SK Telecom as the acquiring company. Yet as a counterpoint to this, M&A in this style doesn’t help change practices in the rest of the business.

However, it has also shown willingness to change its position as and when appropriate, either by sale, or by a change in investment strategy. For example, through its subsidiary SK Planet, it acquired Shopkick, a shopping loyalty rewards business in 2014, but sold it in 2019, for the price it paid for it. It took a different approach to its activity in quantum technologies, originally set up in-house in 2011, which it rolled into IDQ following its acquisition in 2018.

SKT has also recently entered into partnerships and agreements concerning the following areas of business:

 

Table of Contents

  • Executive Summary
  • Introduction and overview
    • Overview of SKT’s activities
  • Business strategy and structure
    • Strategy and lessons
    • 5G deployment
    • Vertical industry applications
    • AI
    • SK Telecom ‘New Business’ and other areas
  • Business performance
    • Financial results
    • Competitive environment
  • Industry and national context
    • International context

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Fixed wireless access growth: To 20% homes by 2025

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Fixed wireless access growth forecast

Fixed Wireless Access (FWA) networks use a wireless “last mile” link for the final connection of a broadband service to homes and businesses, rather than a copper, fibre or coaxial cable into the building. Provided mostly by WISPs (Wireless Internet Service Providers) or mobile network operators (MNOs), these services come in a wide range of speeds, prices and technology architectures.

Some FWA services are just a short “drop” from a nearby pole or fibre-fed hub, while others can work over distances of several kilometres or more in rural and remote areas, sometimes with base station sites backhauled by additional wireless links. WISPs can either be independent specialists, or traditional fixed/cable operators extending reach into areas they cannot economically cover with wired broadband.

There is a fair amount of definitional vagueness about FWA. The most expansive definitions include cheap mobile hotspots (“Mi-Fi” devices) used in homes, or various types of enterprise IoT gateway, both of which could easily be classified in other market segments. Most service providers don’t give separate breakouts of deployments, while regulators and other industry bodies report patchy and largely inconsistent data.

Our view is that FWA is firstly about providing permanent broadband access to a specific location or premises. Primarily, this is for residential wireless access to the Internet and sometimes typical telco-provided services such as IPTV and voice telephony. In a business context, there may be a mix of wireless Internet access and connectivity to corporate networks such as VPNs, again provided to a specific location or building.

A subset of FWA relates to M2M usage, for instance private networks run by utility companies for controlling grid assets in the field. These are typically not Internet-connected at all, and so don’t fit most observers’ general definition of “broadband access”.

Usually, FWA will be marketed as a specific service and package by some sort of network provider, usually including the terminal equipment (“CPE” – customer premise equipment), rather than allowing the user to “bring their own” device. That said, lower-end (especially 4G) offers may be SIM-only deals intended to be used with generic (and unmanaged) portable hotspots.
There are some examples of private network FWA, such as a large caravan or trailer park with wireless access provided from a central point, and perhaps in future municipal or enterprise cellular networks giving fixed access to particular tenant structures on-site – for instance to hangars at an airport.

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FWA today

Today, fixed-wireless access (FWA) is used for perhaps 8-9% of broadband connections globally, although this varies significantly by definition, country and region. There are various use cases (see below), but generally FWA is deployed in areas without good fixed broadband options, or by mobile-only operators trying to add an additional fixed revenue stream, where they have spare capacity.

Fixed wireless internet access fits specific sectors and uses, rather than the overall market

FWA Use Cases

Source: STL Partners

FWA has traditionally been used in sparsely populated rural areas, where the economics of fixed broadband are untenable, especially in developing markets without existing fibre transport to towns and villages, or even copper in residential areas. Such networks have typically used unlicensed frequency bands, as there is limited interference – and little financial justification for expensive spectrum purchases. In most cases, such deployments use proprietary variants of Wi-Fi, or its ill-fated 2010-era sibling WiMAX.

Increasingly however, FWA is being used in more urban settings, and in more developed market scenarios – for example during the phase-out of older xDSL broadband, or in places with limited or no competition between fixed-network providers. Some cellular networks primarily intended for mobile broadband (MBB) have been used for fixed usage as well, especially if spare capacity has been available. 4G has already catalysed rapid growth of FWA in numerous markets, such as South Africa, Japan, Sri Lanka, Italy and the Philippines – and 5G is likely to make a further big difference in coming years. These mostly rely on licensed spectrum, typically the national bands owned by major MNOs. In some cases, specific bands are used for FWA use, rather than sharing with normal mobile broadband. This allows appropriate “dimensioning” of network elements, and clearer cost-accounting for management.

Historically, most FWA has required an external antenna and professional installation on each individual house, although it also gets deployed for multi-dwelling units (MDUs, i.e. apartment blocks) as well as some non-residential premises like shops and schools. More recently, self-installed indoor CPE with varying levels of price and sophistication has helped broaden the market, enabling customers to get terminals at retail stores or delivered direct to their home for immediate use.

Looking forward, the arrival of 5G mass-market equipment and larger swathes of mmWave and new mid-band spectrum – both licensed and unlicensed – is changing the landscape again, with the potential for fibre-rivalling speeds, sometimes at gigabit-grade.

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Table of contents

  • Executive Summary
  • Introduction
    • FWA today
    • Universal broadband as a goal
    • What’s changed in recent years?
    • What’s changed because of the pandemic?
  • The FWA market and use cases
    • Niche or mainstream? National or local?
    • Targeting key applications / user groups
  • FWA technology evolution
    • A broad array of options
    • Wi-Fi, WiMAX and close relatives
    • Using a mobile-primary network for FWA
    • 4G and 5G for WISPs
    • Other FWA options
    • Customer premise equipment: indoor or outdoor?
    • Spectrum implications and options
  • The new FWA value chain
    • Can MNOs use FWA to enter the fixed broadband market?
    • Reinventing the WISPs
    • Other value chain participants
    • Is satellite a rival waiting in the wings?
  • Commercial models and packages
    • Typical pricing and packages
    • Example FWA operators and plans
  • STL’s FWA market forecasts
    • Quantitative market sizing and forecast
    • High level market forecast
  • Conclusions
    • What will 5G deliver – and when and where?
  • Index

Apple Glass: An iPhone moment for 5G?

Augmented reality supports many use cases across industries

Revisiting the themes explored in the AR/VR: Won’t move the 5G needle report STL Partners published in January 2018, this report explores whether augmented reality (AR) could become a catalyst for widespread adoption of 5G, as leading chip supplier Qualcomm and some telcos hope.

It considers how this technology is developing, its relationship with virtual reality (VR), and the implications for telcos trying to find compelling reasons for customers to use low latency 5G networks.

This report draws the following distinction between VR and AR

  • Virtual reality: use of an enclosed headset for total immersion in a digital3D
  • Augmented reality: superimposition of digital graphics onto images of the real world via a camera viewfinder, a pair of glasses or onto a screen fixed in real world.

In other words, AR is used both indoors and outdoors and on a variety of devices. Whereas Wi-Fi/fibre connectivity will be the preferred connectivity option in many scenarios, 5G will be required in locations lacking high-speed Wi-Fi coverage.  Many AR applications rely on responsive connectivity to enable them to interact with the real world. To be compelling, animated images superimposed on those of the real world need to change in a way that is consistent with changes in the real world and changes in the viewing angle.

AR can be used to create innovative games, such as the 2016 phenomena Pokemon Go, and educational and informational tools, such as travel guides that give you information about the monument you are looking at.  At live sports events, spectators could use AR software to identify players, see how fast they are running, check their heart rates and call up their career statistics.

Note, an advanced form of AR is sometimes referred to as mixed reality or extended reality (XR). In this case, fully interactive digital 3D objects are superimposed on the real world, effectively mixing virtual objects and people with physical objects and people into a seamless interactive scene. For example, an advanced telepresence service could project a live hologram of the person you are talking to into the same room as you. Note, this could be an avatar representing the person or, where the connectivity allows, an actual 3D video stream of the actual person.

Widespread usage of AR services will be a hallmark of the Coordination Age, in the sense that they will bring valuable information to people as and when they need it. First responders, for example, could use smart glasses to help work their way through smoke inside a building, while police officers could be immediately fed information about the owner of a car registration plate. Office workers may use smart glasses to live stream a hologram of a colleague from the other side of the world or a 3D model of a new product or building.

In the home, both AR and VR could be used to generate new entertainment experiences, ranging from highly immersive games to live holograms of sports events or music concerts. Some people may even use these services as a form of escapism, virtually inhabiting alternative realities for several hours a day.

Given sufficient time to develop, STL Partners believes mixed-reality services will ultimately become widely adopted in the developed world. They will become a valuable aid to everyday living, providing the user with information about whatever they are looking at, either on a transparent screen on a pair of glasses or through a wireless earpiece. If you had a device that could give you notifications, such as an alert about a fast approaching car or a delay to your train, in your ear or eyeline, why wouldn’t you want to use it?

How different AR applications affect mobile networks

One of the key questions for the telecoms industry is how many of these applications will require very low latency, high-speed connectivity. The transmission of high-definition holographic images from one place to another in real time could place enormous demands on telecoms networks, opening up opportunities for telcos to earn additional revenues by providing dedicated/managed connectivity at a premium price. But many AR applications, such as displaying reviews of the restaurant a consumer is looking at, are unlikely to generate much data traffic. the figure below lists some potential AR use cases and indicates how demanding they will be to support.

Examples of AR use cases and the demands they make on connectivity


Source: STL Partners

Although telcos have always struggled to convince people to pay a premium for premium connectivity, some of the most advanced AR applications may be sufficiently compelling to bring about this kind of behavioural shift, just as people are prepared to pay more for a better seat at the theatre or in a sports stadium. This could be on a pay-as-you-go or a subscription basis.

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The pioneers of augmented reality

Augmented reality (AR) is essentially a catch-all term for any application that seeks to overlay digital information and images on the real-world. Applications of AR can range from a simple digital label to a live 3D holographic projection of a person or event.

AR really rose to prominence at the start of the last decade with the launch of smartphone apps, such as Layar, Junaio, and Wikitude, which gave you information about what you were looking at through the smartphone viewfinder. These apps drew on data from the handset’s GPS chip, its compass and, in some cases, image recognition software to try and figure out what was being displayed in the viewfinder. Although they attracted a lot of media attention, these apps were too clunky to break through into the mass-market. However, the underlying concept persists – the reasonably popular Google Lens app enables people to identify a product, plant or animal they are looking at or translate a menu into their own language.

Perhaps the most high profile AR application to date is Niantic’s Pokemon Go, a smartphone game that superimposes cartoon monsters on images of the real world captured by the user’s smartphone camera. Pokemon Go generated $1 billion in revenue globally just seven months after its release in mid 2016, faster than any other mobile game, according to App Annie. It has also shown remarkable staying power. Four years later, in May 2020, Pokemon Go continued to be one of the top 10 grossing games worldwide, according to SensorTower.

In November 2017, Niantic, which has also had another major AR hit with sci-fi game Ingress, raised $200 million to boost its AR efforts. In 2019, it released another AR game based on the Harry Potter franchise.

Niantic is now looking to use its AR expertise to create a new kind of marketing platform. The idea is that brands will be able to post digital adverts and content in real-world locations, essentially creating digital billboards that are viewable to consumers using the Niantic platform. At the online AWE event in May 2020, Niantic executives claimed “AR gamification and location-based context” can help businesses increase their reach, boost user sentiment, and drive foot traffic to bricks-and-mortar stores. Niantic says it is working with major brands, such as AT&T, Simon Malls, Starbucks, Mcdonalds, and Samsung, to develop AR marketing that “is non-intrusive, organic, and engaging.”

The sustained success of Pokemon Go has made an impression on the major Internet platforms. By 2018, the immediate focus of both Apple and Google had clearly shifted from VR to AR. Apple CEO Tim Cook has been particularly vocal about the potential of AR. And he continues to sing the praises of the technology in public.

In January 2020, for example, during a visit to Ireland, Cook described augmented reality as the “next big thing.”  In an earnings call later that month, Cook added:When you look at AR today, you would see that there are consumer applications, there are enterprise applications. … it’s going to pervade your life…, because it’s going to go across both business and your whole life. And I think these things will happen in parallel.”

Both Apple and Google have released AR developer tools, helping AR apps to proliferate in both Apple’s App Store and on Google Play.  One of the most popular early use cases for AR is to check how potential new furniture would look inside a living room or a bedroom. Furniture stores and home design companies, such as Ikea, Wayfair and Houzz, have launched their own AR apps using Apple’s ARKit. Once the app is familiar with its surroundings, it allows the user to overlay digital models of furniture anywhere in a room to see how it will fit. The technology can work in outdoor spaces as well.

In a similar vein, there are various AR apps, such as MeasureKit, that allow you to measure any object of your choosing. After the user picks a starting point with a screen tap, a straight line will measure the length until a second tap marks the end. MeasureKit also claims to be able to calculate trajectory distances of moving objects, angle degrees, the square footage of a three-dimensional cube and a person’s height.

Table of contents

  • Executive Summary
    • More mainstream models from late 2022
    • Implications and opportunities for telcos
  • Introduction
  • Progress and Immediate Prospects
    • The pioneers of augmented reality
    • Impact of the pandemic
    • Snap – seeing the world differently
    • Facebook – the keeper of the VR flame
    • Google – the leader in image recognition
    • Apple – patiently playing the long game
    • Microsoft – expensive offerings for the enterprise
    • Amazon – teaming up with telcos to enable AR/VR
    • Market forecasts being revised down
  • Telcos Get Active in AR
    • South Korea’s telcos keep trying
    • The global picture
  • What comes next?
    • Live 3D holograms of events
    • Enhancing live venues with holograms
    • 4K HD – Simple, but effective
  • Technical requirements
    • Extreme image processing
    • An array of sensors and cameras
    • Artificial intelligence plays a role
    • Bandwidth and latency
    • Costs: energy, weight and financial
  • Timelines for Better VR and AR
    • When might mass-market models become available?
    • Implications for telcos
    • Opportunities for telcos
  • Appendix: Societal Challenges
    • AR: Is it acceptable in a public place?
    • VR: health issues
    • VR and AR: moral and ethical challenges
    • AR and VR: What do consumers really want?
  • Index

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Fighting the fakes: How telcos can help

Internet platforms need a frictionless solution to fight the fakes

On the Internet, the old adage, nobody knows you are a dog, can still ring true. All of the major Internet platforms, with the partial exception of Apple, are fighting frauds and fakes. That’s generally because these platforms either allow users to remain anonymous or because they use lax authentication systems that prioritise ease-of-use over rigour. Some people then use the cloak of anonymity in many different ways, such as writing glowing reviews of products they have never used on Amazon (in return for a payment) or enthusiastic reviews of restaurants owned by friends on Tripadvisor. Even the platforms that require users to register financial details are open to abuse. There have been reports of multiple scams on eBay, while regulators have alleged there has been widespread sharing of Uber accounts among drivers in London and other cities.

At the same time, Facebook/WhatsApp, Google/YouTube, Twitter and other social media services are experiencing a deluge of fake news, some of which can be very damaging for society. There has been a mountain of misinformation relating to COVID-19 circulating on social media, such as the notion that if you can hold your breath for 10 seconds, you don’t have the virus. Fake news is alleged to have distorted the outcome of the U.S. presidential election and the Brexit referendum in the U.K.

In essence, the popularity of the major Internet platforms has made them a target for unscrupulous people who want to propagate their world views, promote their products and services, discredit rivals and have ulterior (and potentially criminal) motives for participating in the gig economy.

Although all the leading Internet platforms use tools and reporting mechanisms to combat misuse, they are still beset with problems. In reality, these platforms are walking a tightrope – if they make authentication procedures too cumbersome, they risk losing users to rival platforms, while also incurring additional costs. But if they allow a free-for-all in which anonymity reigns, they risk a major loss of trust in their services.

In STL Partners’ view, the best way to walk this tightrope is to use invisible authentication – the background monitoring of behavioural data to detect suspicious activities. In other words, you keep the Internet platform very open and easy-to-use, but algorithms process the incoming data and learn to detect the patterns that signal potential frauds or fakes. If this idea were taken to an extreme, online interactions and transactions could become completely frictionless. Rather than asking a person to enter a username and password to access a service, they can be identified through the device they are using, their location, the pattern of keystrokes and which features they access once they are logged in. However, the effectiveness of such systems depends heavily on the quality and quantity of data they are feeding on.

In come telcos

This report explores how telcos could use their existing systems and data to help the major Internet companies to build better systems to protect the integrity of their platforms.

It also considers the extent to which telcos will need to work together to effectively fight fraud, just as they do to combat telecoms-related fraud and prevent stolen phones from being used across networks. For most use cases, the telcos in each national market will generally need to provide a common gateway through which a third party could check attributes of the user of a specific mobile phone number. As they plot their way out of the current pandemic, governments are increasingly likely to call for such gateways to help them track the spread of COVID-19 and identify people who may have become infected.

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Using big data to combat fraud

In the financial services sector, artificial intelligence (AI) is now widely used to help detect potentially fraudulent financial transactions. Learning from real-world examples, neural networks can detect the behavioural patterns associated with fraud and how they are changing over time. They can then create a dynamic set of thresholds that can be used to trigger alarms, which could prompt a bank to decline a transaction.

In a white paper published in 2019, IBM claimed its AI and cognitive solutions are having a major impact on transaction monitoring and payment fraud modelling. In one of several case studies, the paper describes how the National Payment Switch in France (STET) is using behavioural information to reduce fraud losses by US$100 million annually. Owned by a consortium of financial institutions, STET processes more than 30 billion credit and debit card, cross-border, domestic and on-us payments annually.

STET now assesses the fraud risk for every authorisation request in real time. The white paper says IBM’s Safer Payments system generates a risk score, which is then passed to banks, issuers and acquirers, which combine it with customer information to make a decision on whether to clear or decline the transaction. IBM claims the system can process up to 1,200 transactions per second, and can compute a risk score in less than 10 milliseconds. While STET itself doesn’t have any customer data or data from other payment channels, the IBM system looks across all transactions, countrywide, as well as creating “deep behavioural profiles for millions of cards and merchants.”

Telcos, or at least the connectivity they provide, are also helping banks combat fraud. If they think a transaction is suspicious, banks will increasingly send a text message or call a customer’s phone to check whether they have actually initiated the transaction. Now, some telcos, such as O2 in the UK, are making this process more robust by enabling banks to check whether the user’s SIM card has been swapped between devices recently or if any call diverts are active – criminals sometimes pose as a specific customer to request a new SIM. All calls and texts to the number are then routed to the SIM in the fraudster’s control, enabling them to activate codes or authorisations needed for online bank transfers, such as a one-time PINs or passwords.

As described below, this is one of the use cases supported by Mobile Connect, a specification developed by the GSMA, to enable mobile operators to take a consistent approach to providing third parties with identification, authentication and attribute-sharing services. The idea behind Mobile Connect is that a third party, such as a bank, can access these services regardless of which operator their customer subscribes to.

Adapting telco authentication for Amazon, Uber and Airbnb

Telcos could also provide Internet platforms, such as Amazon, Uber and Airbnb, with identification, authentication and attribute-sharing services that will help to shore up trust in their services. Building on their nascent anti-fraud offerings for the financial services industry, telcos could act as intermediaries, authenticating specific attributes of an individual without actually sharing personal data with the platform.

STL Partners has identified four broad data sets telcos could use to help combat fraud:

  1. Account activity – checking which individual owns which SIM card and that the SIM hasn’t been swapped recently;
  2. Movement patterns – tracking where people are and where they travel frequently to help identify if they are who they say they are;
  3. Contact patterns – establishing which individuals come into contact with each other regularly;
  4. Spending patterns – monitoring how much money an individual spends on telecoms services.

Table of contents

  • Executive Summary
  • Introduction
  • Using big data to combat fraud
    • Account activity
    • Movement patterns
    • Contact patterns
    • Spending patterns
    • Caveats and considerations
  • Limited progress so far
    • Patchy adoption of Mobile Connect
    • Mobile identification in the UK
    • Turkcell employs machine learning
  • Big Internet use cases
    • Amazon – grappling with fake product reviews
    • Facebook and eBay – also need to clampdown
    • Google Maps and Tripadvisor – targets for fake reviews
    • Uber – serious safety concerns
    • Airbnb – balancing the interests of hosts and guests
  • Conclusions
  • Index

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Cloud gaming: What is the telco play?

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Drivers for cloud gaming services

Although many people still think of PlayStation and Xbox when they think about gaming, the console market represents only a third of the global games market. From its arcade and console-based beginnings, the gaming industry has come a long way. Over the past 20 years, one of the most significant market trends has been growth of casual gamers. Whereas hardcore gamers are passionate about frequent play and will pay more to play premium games, casual gamers play to pass the time. With the rapid adoption of smartphones capable of supporting gaming applications over the past decade, the population of casual/occasional gamers has risen dramatically.

This trend has seen the advent of free-to-play business models for games, further expanding the industry’s reach. In our earlier report, STL estimated that 45% of the population in the U.S. are either casual gamers (between 2 and 5 hours a week) or occasional gamers (up to 2 hours a week). By contrast, we estimated that hardcore gamers (more than 15 hours a week) make up 5% of the U.S. population, while regular players (5 to 15 hours a week) account for a further 15% of the population.

The expansion in the number of players is driving interest in ‘cloud gaming’. Instead of games running on a console or PC, cloud gaming involves streaming games onto a device from remote servers. The actual game is stored and run on a remote compute with the results being live streamed to the player’s device. This has the important advantage of eliminating the need for players to purchase dedicated gaming hardware. Now, the quality of the internet connection becomes the most important contributor to the gaming experience. While this type of gaming is still in its infancy, and faces a number of challenges, many companies are now entering the cloud gaming fold in an effort to capitalise on the new opportunity.

5G can support cloud gaming traffic growth

Cloud gaming requires not just high bandwidth and low latency, but also a stable connection and consistent low latency (jitter). In theory, 5G promises to deliver stable ultra-low latency. In practice, an enormous amount of infrastructure investment will be required in order to enable a fully loaded 5G network to perform as well as end-to-end fibre5G networks operating in the lower frequency bands would likely buckle under the load if lots of gamers in a cell needed a continuous 25Mbps stream. While 5G in millimetre-wave spectrum would have more capacity, it would require small cells and other mechanisms to ensure indoor penetration, given the spectrum is short range and could be blocked by obstacles such as walls.

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A complicated ecosystem

As explained in our earlier report, Cloud gaming: New opportunities for telcos?, the cloud gaming ecosystem is beginning to take shape. This is being accelerated by the growing availability of fibre and high-speed broadband, which is now being augmented by 5G and, in some cases, edge data centres. Early movers in cloud gaming are offering a range of services, from gaming rigs, to game development platforms, cloud computing infrastructure, or an amalgamation of these.

One of the main attractions of cloud gaming is the potential hardware savings for gamers. High-end PC gaming can be an extremely expensive hobby: gaming PCs range from £500 for the very cheapest to over £5,000 for the very top end. They also require frequent hardware upgrades in order to meet the increasing processing demands of new gaming titles. With cloud gaming, you can access the latest graphics processing unit at a much lower cost.

By some estimates, cloud gaming could deliver a high-end gaming environment at a quarter of the cost of a traditional console-based approach, as it would eliminate the need for retailing, packaging and delivering hardware and software to consumers, while also tapping the economies of scale inherent in the cloud. However, in STL Partners’ view that is a best-case scenario and a 50% reduction in costs is probably more realistic.

STL Partners believes adoption of cloud gaming will be gradual and piecemeal for the next few years, as console gamers work their way through another generation of consoles and casual gamers are reluctant to commit to a monthly subscription. However, from 2022, adoption is likely to grow rapidly as cloud gaming propositions improve.

At this stage, it is not yet clear who will dominate the value chain, if anyone. Will the “hyperscalers” be successful in creating a ‘Netflix’ for games? Google is certainly trying to do this with its Stadia platform, which has yet to gain any real traction, due to both its limited games library and its perceived technological immaturity. The established players in the games industry, such as EA, Microsoft (Xbox) and Sony (PlayStation), have launched cloud gaming offerings, or are, at least, in the process of doing so. Some telcos, such as Deutsche Telekom and Sunrise, are developing their own cloud gaming services, while SK Telecom is partnering with Microsoft.

What telcos can learn from Shadow’s cloud gaming proposition

The rest of this report explores the business models being pursued by cloud gaming providers. Specifically, it looks at cloud gaming company Shadow and how it fits into the wider ecosystem, before evaluating how its distinct approach compares with that of the major players in online entertainment, such as Sony and Google. The second half of the report considers the implications for telcos.

Table of Contents

  • Executive Summary
  • Introduction
  • Cloud gaming: a complicated ecosystem
    • The battle of the business models
    • The economics of cloud gaming and pricing models
    • Content offering will trump price
    • Cloud gaming is well positioned for casual gamers
    • The future cloud gaming landscape
  • 5G and fixed wireless
  • The role of edge computing
  • How and where can telcos add value?
  • Conclusions

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How telcos can flex their physical strength

Telcos can learn from Amazon

This executive briefing explores how and why Amazon is expanding its physical footprint in its home market of North America. Although Amazon was born on the Internet, physical assets from lockers and retail stores to fulfilment centres and airplanes are absolutely fundamental to its mission to provide the most convenient means of accessing as many physical and digital products and services as possible.

Flagging the many parallels with telecoms, this report analyses the way in which Amazon is melding its physical and digital propositions to generate as many economies of scale and economies of scope as possible. For each example, the report considers the potential lessons for telcos.

Like Amazon, telcos have an extensive range of physical and digital assets and capabilities. But unlike Amazon, telcos tend to focus these assets on a single purpose, rather than serving multiple purposes and multiple groups of customers.

This report gives a high level overview of how telcos could do much more with their remaining data centres, their core and access networks, their retail stores, vehicle fleets, devices and apps. Indeed, each of these assets could help telcos to secure a major role in the Coordination Age – a new era in which telcos and their partners could move beyond providing connectivity to help the public and private sector better coordinate the use of key resources and assets, such as road space, fresh water, energy and farm land.

Finally, the report also flags the potential for telcos outside of North America to partner with Amazon. Beyond its home market, Amazon still has little in the way of physical assets, whereas telcos in Europe and Asia have large physical footprints that could be better utilised.

Note, this high-level report will be supplemented by future reports that will analyse in-depth how telcos can make better use of each category of asset, as STL Partners did in this report exploring best practice in the rollout of apps: Telcos’ apps: What works?

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Amazon: Coordinating convenience

As telcos explore new opportunities emerging in the Coordination Age, they could learn a lot from Amazon, a company that has mastered the coordination of complex digital and physical supply chains. Born on the Internet, Amazon is associated in most people’s minds with the rise of online shopping – buying goods with a click of a button from the comfort of your armchair. Although one might assume that Amazon keeps costs down by minimising its capital spending and its physical footprint, its approach is far more nuanced than that. Indeed, Amazon is building out a broad physical presence across North America that belies the notion that success in digital commerce is all about data, algorithms and slick software. Despite its relentless pursuit of automation, Amazon employs approximately 647,500 full-time and part-time staff, most of them working in fulfilment centres and other logistical facilities.

Rather than minimising costs, Amazon is looking to maximise convenience. Indeed, Amazon is gradually increasing its spending on fulfilment, which has climbed from 13% of sales in 2016 to 14% in 2017 and 15% in 2018.

Figure 1: Amazon’s fulfilment costs are rising

Amazon's fulfilment costs by segment

Source: Amazon

Amazon’s physical assets

In the Coordination Age, digital technologies are being used to coordinate the efficient use of physical assets and resources. While Google is focused on using its world-class software expertise to coordinate the use of physical assets owned by others, Amazon is betting that its expertise in managing physical assets (as well as developing software) will give it a competitive edge over its rival. As telecoms operators also own a broad mix of digital and physical assets, Amazon’s strategy provides a potential playbook for telcos. By straddling the physical and digital worlds, Amazon believes it can bring greater value to both consumers and companies.

One of the ways in which Amazon is increasing convenience for customers is by reducing the latency in its distribution network – it is building out an increasingly dense network of physical assets to reduce delivery times, so that consumers regard Amazon as first port of call for an even wider range of products and services. Amazon wants to sell people what they want, exactly when they want it. For Amazon, as with telcos, high quality coverage of major population centres is vital.

To that end, Amazon is building up a major physical presence in North America – its home market. Amazon’s balance sheet now shows US$45 billion of property and equipment in the U.S. with a further US$16.7 billion in the rest of the world. That compares with US$27.5 billion of property and equipment on the balance sheet of Target Corp., a retailer with more than 1,800 stores across the U.S. Figure 2 shows the value of the property and equipment assets in Amazon’s North America division is growing far faster than those in its International division. That suggests Amazon can’t afford to pursue an asset-heavy strategy across the world and could be open to partnerships with telcos with data centres, retail stores and phone boxes in markets beyond North America.

Figure 2: Amazon’s physical asset base in North America is growing fast

Value of Amazons physical assets by segment

Source: Amazon annual reports

As Figure 2 shows, the physical footprint of Amazon Web Services is also growing rapidly, underlining Amazon’s relentless expansion in online entertainment and cloud computing, as well as retail and logistics (see Figure 3). Indeed, Amazon is highly active in the six distinct market segments shown in Figure 3, underlining how Amazon is comfortable handling a vast range of physical goods and digital bits and bytes. It also operates its own network infrastructure, including undersea cables, and wind farms.

Figure 3 might suggest Amazon is a conglomerate, but it has integrated its propositions across multiple markets in a way that traditional conglomerates wouldn’t contemplate, building extraordinary synergies across six distinct markets over the past 20 years.

Amazon has built these synergies by moving fluidly between B2B2C propositions, B2B propositions and B2C propositions. Amazon is both a retailer and a marketplace for physical goods, and a supplier of cloud services and apps to both consumers and businesses.  As a result, it sometimes competes directly with is customers, but in a way that its customers seem to accept. Most famously, Amazon competes with Netflix in the video-on-demand market, while hosting Netflix on Amazon Web Services (telcos do something similar by serving third party MVNOs).

Figure 3: The milestones of Amazon’s expansion across six segments

Table of Amazon's milestones across six segments

Source: STL Partners

The rest of this report compares Amazon’s physical assets against those of telecoms operators, to draw some parallels on how telcos could make better use of their vast physical assets.

Table of Contents

  • Executive Summary
  • Introduction
  • Amazon: Coordinating convenience
    • Amazon’s physical footprint
    • Comparing Amazon with telcos
    • Whatever you want, however you want it
    • Exploiting end-user devices
    • Better consumer apps
  • How telcos can better harness their assets
    • Partnerships with Amazon

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New age, new control points?

Why control points matter

This executive briefing explores the evolution of control points – products, services or roles that give a company disproportionate power within a particular digital value chain. Historically, such control points have included Microsoft’s Windows operating system and Intel’s processor architecture for personal computers (PCs), Google’s search engine and Apple’s iPhone. In each case, these control points have been a reliable source of revenues and a springboard into other lucrative new markets, such as productivity software (Microsoft) server chips (Intel), display advertising (Google) and app retailing (Apple).

Although technical and regulatory constraints mean that most telcos are unlikely to be able to build out their own control points, there are exceptions, such as the central role of Safaricom’s M-Pesa service in Kenya’s digital economy. In any case, a thorough understanding of where new control points are emerging will help telcos identify what their customers most value in the digital ecosystem. Moreover, if they move early enough to encourage competition and/or appropriate regulatory intervention, telcos could prevent themselves, their partners and their customers from becoming too dependent on particular companies.

The emergence of Microsoft’s operating system as the dominant platform in the PC market left many of its “partners” struggling to eke out a profit from the sale of computer hardware. Looking forward, there is a similar risk that a company that creates a dominant artificial intelligence platform could leave other players in various digital value chains, including telcos, at their beck and call.

This report explores how control points are evolving beyond simple components, such as a piece of software or a microprocessor, to become elaborate vertically-integrated stacks of hardware, software and services that work towards a specific goal, such as developing the best self-driving car on the planet or the most accurate image recognition system in the cloud. It then outlines what telcos and their partners can do to help maintain a balance of power in the Coordination Age, where, crucially, no one really wants to be at the mercy of a “master coordinator”.

The report focuses primarily on the consumer market, but the arguments it makes are also applicable in the enterprise space, where machine learning is being applied to optimise specialist solutions, such as production lines, industrial processes and drug development. In each case, there is a danger that a single company will build an unassailable position in a specific niche, ultimately eliminating the competition on which effective capitalism depends.

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Control points evolve and shift

A control point can be defined as a product, service or solution on which every other player in a value chain is heavily dependent. Their reliance on this component means the other players in the value chain generally have to accept the terms and conditions imposed by the entity that owns the control point. A good contemporary example is Apple’s App Store – owners of Apple’s devices depend on the App Store to get access to software they need/want, while app developers depend on the App Store to distribute their software to the 1.4 billion Apple devices in active use. This pivotal position allows Apple to levy a controversial commission of 30% on software and digital content sold through the App Store.

But few control points last forever: the App Store will only continue to be a control point if consumers continue to download a wide range of apps, rather than interacting with online services through a web browser or another software platform, such as a messaging app. Recent history shows that as technology evolves, control points can be sidestepped or marginalised. For example, Microsoft’s Windows operating system and Internet Explorer browser were once regarded as key control points in the personal computing ecosystem, but neither piece of software is still at the heart of most consumers’ online experience.

Similarly, the gateway role of Apple’s App Store looks set to be eroded over time. Towards the end of 2018, Netflix — the App Store’s top grossing app — no longer allowed new customers to sign up and subscribe to the streaming service within the Netflix app for iOS across all global markets, according to a report by TechCrunch. That move is designed to cut out the expensive intermediary — Apple. Citing data compiled by Sensor Tower, the report said Netflix would have paid Apple US$256 million of the US$853 million grossed by its 2018 the Netflix iOS app, assuming a 30% commission for Apple (however, after the first year, Apple’s cut on subscription renewals is lowered to 15%).

TechCrunch noted that Netflix is following in the footsteps of Amazon, which has historically restricted movie and TV rentals and purchases to its own website or other “compatible” apps, instead of allowing them to take place through its Prime Video app for iOS or Android. In so doing, Amazon is preventing Apple or Google from taking a slice of its content revenues. Amazon takes the same approach with Kindle e-books, which also aren’t offered in the Kindle mobile app. Spotify has also discontinued the option to pay for its Premium service using Apple’s in-app payment system.

Skating ahead of the puck

As control points evolve and shift, some of today’s Internet giants, notably Alphabet, Amazon and Facebook, are skating where the puck is heading, acquiring the new players that might disrupt their existing control points. In fact, the willingness of today’s Internet platforms to spend big money on small companies suggests they are much more alert to this dynamic than their predecessors were. Facebook’s US$19 billion acquisition of messaging app WhatsApp, which has generated very little in the way of revenues, is perhaps the best example of the perceived value of strategic control points – consumers’ time and attention appears to be gradually shifting from traditional social into messaging apps, such as WhatsApp, or hybrid-services, such as Instagram, which Facebook also acquired.

In fact, the financial and regulatory leeway Alphabet, Amazon, Facebook and Apple enjoy (granted by long-sighted investors) almost constitutes another control point. Whereas deals by telcos and media companies tend to come under much tougher scrutiny and be restricted by rigorous financial modelling, the Internet giants are generally trusted to buy whoever they like.

The decision by Alphabet, the owner of Google, to establish its “Other Bets” division is another example of how today’s tech giants have learnt from the complacency of their predecessors. Whereas Microsoft failed to anticipate the rise of tablets and smart TVs, weakening its grip on the consumer computing market, Google has zealously explored the potential of new computing platforms, such as connected glasses, self-driving cars and smart speakers.

In essence, the current generation of tech leaders have taken Intel founder Andy Grove’s famous “only the paranoid survive” mantra to heart. Having swept away the old order, they realise their companies could also easily be side-lined by new players with new ways of doing things. Underlining this point, Larry Page, founder of Google, wrote in 2014:Many companies get comfortable doing what they have always done, making only incremental changes. This incrementalism leads to irrelevance over time, especially in technology, where change tends to be revolutionary, not evolutionary. People thought we were crazy when we acquired YouTube and Android and when we launched Chrome, but those efforts have matured into major platforms for digital video and mobile devices and a safer, popular browser.”

Table of contents

  • Executive Summary
  • Introduction
  • What constitutes a control point?
    • Control points evolve and shift
    • New kinds of control points
  • The big data dividend
    • Can incumbents’ big data advantage be overcome?
    • Data has drawbacks – dangers of distraction
    • How does machine learning change the data game?
  • The power of network effects
    • The importance of the ecosystem
    • Cloud computing capacity and capabilities
    • Digital identity and digital payments
  • The value of vertical integration
    • The machine learning super cycle
    • The machine learning cycle in action – image recognition
  • Tesla’s journey towards self-driving vehicles
    • Custom-made computing architecture
    • Training the self-driving software
    • But does Tesla have a sustainable advantage?
  • Regulatory checks and balances
  • Conclusions and recommendations

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Telcos in healthcare: Winning in a long game, Babylon, and the impact of 5G

Introduction: telcos in healthcare

This is a summary of some of the learnings from another fascinating session at the TELUS Carrier Health Summit in Toronto, May 22nd 2019. This is an annual gathering that was hosted by TELUS Global Solutions for telcos and their partners in healthcare.

Of the hosts, Fawad Shaikh, VP TELUS Global Solutions, said it ran this years’ session because it wants “to develop an alliance of like-minded telcos in health”. David Thomas, VP TELUS Health Solutions, added that “healthcare has to be delivered locally, which is a real plus for telcos. Yet we all need to gain global scale to compete, so it is a great opportunity for non-competitive collaboration.”

About sixty people from telcos and health tech companies were there this year, and the audience was global, with representatives from Latin America, N America, Europe, the Middle East, Asia and Australasia.

STL Partners presented its research on nine telco healthcare studies, and caught up with participants, including Dr Ali Parsa, CEO and founder of Babylon Health, and Mairi Johnson, its Global Partnerships Director.

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Healthcare: the problem to be solved

Healthcare is one of our favourite examples of the drive behind the Coordination Age. The explanation is simple:

The problem with healthcare in most economies is not that there isn’t great medicine and healthcare professionals. It’s getting it all delivered to the patients at the right time and at a cost that’s affordable.

This is fundamentally a coordination problem: bringing the right assets (whether physical or digital – a nurse, a treatment, or the patients’ records) together for the patient. Then maintaining the order throughout the patients’ treatment, and indeed, their lives.

All healthcare systems face multiple mounting pressures: growing and ageing populations, greater costs, skills challenges, and more pressure on funding from other sources to name a few.

There’s money in health

It’s also an area of HUGE expenditure. PWC’s Tara McCarville shared figures showing that:

  • Global healthcare spend is forecast to grow from $9.7 Trillion in 2014, to $18 Trillion in 2040, growing at 21% CAGR over the next 5 years.
  • Even so, it’s perhaps surprising that 84% of Fortune 50 companies are engaged in healthcare in some way.

Given this, it’s less surprising to note that the big tech players are seriously engaged in digital health too, with Amazon’s recent tie up with JP Morgan and Berkshire Hathaway to create the Haven Group being the most eye-catching. Others between CVS and Aetna, and Sanofi and Click Therapies involve less broadly familiar names, but are weighty nonetheless.

From a government perspective the numbers are big too. In the UK for example, which is one of the EU’s lower healthcare spenders per capita, the NHS’s annual bill is currently £154 billion, and it’s forecast to rise to £188 billion in 15 years (to 2033).

A 5% tax rise?

Without borrowing, this would lead to something like a 5% increase in overall taxation. Over 98% of UK tax funding is from ‘general taxation and national insurance’ – so mainly income tax, VAT and ongoing employment contributions.  In other words, people would have to pay.

Despite the UK’s love of the NHS, a permanent 5% tax rise would draw many concerned breaths from both politicians and the public. The need to find better solutions is genuinely pressing.

(NB Try out this calculator made by the Institute of Fiscal Studies if you fancy yourself as a policy guru. To fund healthcare, would you raise taxes, cut pensions, defence, or education?)

Figure 2: The Institute of Fiscal Studies’ (IFS) Health Budget Calculator

IFS NHS Budget Calculator
Meeting the NHS’s future funding needs would mean a 5% UK tax rise

Source: https://explore.ifs.org.uk/tools/nhs_funding/tool NB At £154bn, the Health spending category is already bigger than all those above.

The rest of the report contains:

  • The road to Babylon – one of the ways ahead?
  • Some telcos are scared by health, others are serious about it
  • 5G, Healthcare – or both?
  • Conclusions: telcos in healthcare – making a long game a good one

And includes the following figures:

  • Figure 1: How to succeed in telco health – key learnings from the Summit
  • Figure 2: The Institute of Fiscal Studies’ (IFS) Health Budget Calculator
  • Figure 3: Babyl has particular strength in Rwanda’s rural areas
  • Figure 4: A flavour of Babylon’s UK online offering
  • Figure 5: Pros and cons of telcos in healthcare
  • Figure 6: Telstra’s National Cervical Cancer Screening programme benefits
  • Figure 7: Telcos face a serious choice in Capex / Opex investments

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Telcos in health – Part 1: Where is the opportunity?

Why is healthcare an attractive sector?

  • Healthcare systems – particularly in developed markets – must find ways to treat ageing populations with chronic illnesses in a more cost effective way.
  • Resource strained health providers have very limited internal IT expertise. This means healthcare is among the least digitised sectors, with high demand for end-to-end solutions.
  • The sensitive nature of health data means locally-regulated telcos may be able to build on positions of trust in their markets.
  • In emerging markets, there are huge populations with limited access to health insurance, information and treatment. Telcos may be able to leverage their brands and distribution networks to address these needs.
  • This report outlines how the digital health landscape is addressing these challenges, and how telcos can help

Four tech trends are supporting healthcare transformation – all underpinned by connectivity and integration for data sharing

These four trends are not separate – they all interrelate. The true value lies in enabling secure data transfer across the four areas, and presenting data and insights in a useful way for end-users, e.g. GPs don’t have the time to look at ten pages of a patient’s wearable data, in part because they may be liable to act on additional information.

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Digital health solutions break down into three layers

Digital health solutions in 3 layers

This report explores how telcos can address opportunities across these three layers, as well as how they can partner or compete with other players seeking to support healthcare providers in their digital transformation.

Our follow up report looks at nine case studies of telcos’ healthcare propositions: Telcos in health – Part 2: How to crack the healthcare opportunity

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Can telcos create a compelling smart home?

Telcos role in smart homes

Part of STL Partners’ (Re)connecting with Consumers stream, this report analyses the role of telcos in the smart home market, which is now growing steadily in many developed countries, as consumers seek to bolster security, improve energy efficiency, adopt electric cars and further automate appliances. In most developed markets, there are scores of companies pitching often incompatible smart home products and services to householders, resulting in a fragmented mess in which consumers are often left to figure out what might work with what.

This fragmentation spells opportunity for both telcos and the major Internet platforms – both sets of companies can use their role as a supplier of a key part of the smart home proposition (connectivity and computing devices respectively) as a springboard into the smart home solutions space.

In the case of Apple, Amazon and Google that means using the smartphone, the tablet and/or smart speakers as a segue into this market, while telcos can build on their connectivity offering, which is a fundament to the concept of a smart home that can be monitored and controlled from anywhere.

The challenge facing both sets of players is essentially delivering the systems-level integration required to simplify the consumer proposition into a seamless end-to-end offering that will appeal to the mass market. Without coherent coordination, the smart home will continue to characterised by of point solutions.

This report begins with an overview of the smart home sector and the competitive landscape, paying particular attention to the strategies of the major Internet platforms – Amazon, Apple and Google. It then goes on to discuss Deutsche Telekom’s and A&T’s contrasting strategies in this space, before making some recommendations for telcos.

This report builds on previous STL research, notably:

This report is the first in a series looking at smart home/connected consumer propositions from telcos. Future reports will analyse how the leading Asian telcos are targeting this market, while exploring related propositions, such as connected bikes and scooters, pet tracking and asset monitoring and insurance.

The smart home market

In an ideal world, a householder would be able to remotely monitor and control all the systems in their home, simply by pressing a button to activate and deactivate heating, air conditioning, alarms, locks, cameras and appliances, such as washing machines and automated vacuum cleaners. Although this concept, known as a smart home, has been around for many years, it is only now beginning to come of age. The smart home could also become an enabler for the sharing economy, making it easier for people to rent out their homes, monitor energy usage and take out appropriate insurance cover.

Up until very recently, most so-called smart home implementations amounted to partial solutions, enabling a householder to check their energy usage or a CCTV camera, rather than get a complete picture of what is happening in their property. In other words, most suppliers have focused on discrete point solutions designed for a fairly narrow use case.

While homes in developed markets have a growing number of connected devices (such as televisions, sound systems, printers, smart meters and burglar alarms), they rarely exchange information and typically can’t be managed through a single app or desktop interface.

This lack of coordination is a result of the diversity of the many different players supplying consumers with connected equipment and services for their homes, ranging from utilities and security companies to equipment makers and tech companies.

The smart home value chain

Indeed, a smart home value chain can be very complex and diverse. To make a home really smart, you would typically need:

  • A central hub that can aggregate and analyse related data, such as energy usage and room occupancy. This hub could be in the cloud or a device in the home.
  • Middleware that enables connected things to exchange data with each other and the hub.
  • A large number of connected appliances, devices and sensors, ranging from boilers and washing machines to door locks and smoke detectors.
  • Suitable connectivity for all the components, which could be WiFi, Zigbee, Bluetooth or a cellular technology.
  • A user interface or interfaces, such as a voice-activated speaker or a touchscreen tablet or smartphone, the householder can use to monitor and control their home.

Today, most telco-led smart home implementations take an ‘inside out’ approach in which the hub is located in the home: short range wireless technologies collect data from connected devices, which are aggregated in the hub and are then made available to the consumer via a smartphone app. In this scenario, the hub is generally connected to a fixed-line network via WiFi. However, 4G and 5G technologies, such as NB-IoT and LTE-M, could make it feasible to connect more devices directly to a cloud-based hub, which could ultimately allow smart homes to emerge in the many communities not served by fixed-line networks.

In some markets, these two approaches may be combined: cellular connectivity may be used to back-up WiFi, while some data and services will reside in both the cloud and on a local device in case the wide area connectivity fails or is tampered with.

For telcos providing the underlying fixed-line or cellular connectivity, the sheer variety of players touting smart home products and services makes the market both complex and challenging. Figure 1, an overview of the smart home ecosystem produced by the GSMA, highlights how many different angles there are on the smart home concept. However, even this chart is an over-simplification – the smart home market also overlaps with the personal transport market to some extent. Some of the potential use cases, such as charging electric vehicles, require coordination between the consumer’s home and vehicle.

Figure 1: The smart home ecosystem is complex and fragmented

smart home market

Source: GSMA Intelligence

Size of smart home market

Given the breadth of the smart home market and the blurred lines between it and other segments, sizing it in dollar terms is difficult. Research firm Strategy Analytics estimates worldwide consumer spending on smart home devices, systems and services totalled US$84 billion in 2017 and will reach almost US$96 billion in 2018.

However, ABI Research is more conservative, pegging the global smart home market at US$56 billion in 2018. The actual number will be down to what products and services are included and whether analysts are counting the total value of an appliance or just the embedded connectivity and processing power.

For example, should the total sale price of a washing machine with built-in WiFi be included? Or should analysts just count the value of the connectivity module? What if the WiFi is never activated? In any case, it is clear that the market is growing steadily as the cost of adding connectivity to consumer appliances and devices falls. The cost of adding a WiFi or cellular module to an appliance is in the region of US$10 to US$20, depending how many frequencies it supports and which radio technology is used.

Contents:

  • Executive Summary 
  • Introduction
  • The smart home market
  • Sizing the smart home space
  • How important are smart speakers?
  • The Internet players and their strategies
  • The Internet platforms jostle for position
  • Amazon bets big on Alexa
  • Google plays aggressive defence
  • Apple plays the premium game
  • Facebook struggles to differentiate
  • Utilities/security companies
  • Consumer electronics/appliances
  • The role of telcos in the smart home
  • Deutsche Telekom offers data protection
  • Does DT need its own voice?
  • Differentiation through data protection?
  • AT&T changes course
  • Conclusions
  • A major opportunity to cut complexity
  • Internet players don’t have a stranglehold

Figures:

  • Figure 1: The smart home ecosystem is complex and fragmented
  • Figure 2: Amazon and Google face growing competition in the smart speaker market
  • Figure 3: Alexa is integrated into the control panel of Amazon’s new microwave
  • Figure 4: The new Google Home Hub is designed to be fairly proactive
  • Figure 5: Facebook’s premium Portal has a rotating screen and a video camera
  • Figure 6: The Magenta Smarthome app can manage temperature, security and lighting
  • Figure 7: Deutsche Telekom’s growing smart home service
  • Figure 8: DT’s new smart speaker
  • Figure 9: Some of the functionality available from AT&T’s Digital Life service
  • Figure 10: AT&T’s LTE-M enabled button works with AWS to perform a specific task

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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