Telcos and GAFA: Dancing with the disruptors

Introduction

Across much of the world, the competing Internet ecosystems led by Amazon, Apple, Facebook and Google have come to dominate the consumer market for digital services. Even though most telcos continue to compete with these players in the service layer, it is now almost a necessity for operators to partner with one or more of these ecosystems in some shape or form.

This report begins by pinpointing the areas where telcos are most likely to partner with these players, drawing on examples as appropriate. In each case, it considers the nature of the partnership and the resulting value to the telco and to the Internet ecosystem. It also considers the longer-term, strategic implications of these partnerships and makes recommendations on how telcos can try to strengthen their negotiating position.

This research builds on the findings of the Digital Partnerships Benchmarking Study conducted between 26th September and 4th November 2016 by STL Partners and sponsored by AsiaInfo. That study involved a survey of 34 operators in Europe and Asia Pacific. It revealed that whereas almost all operators expected to grow their partnerships business in the future, they differed on how they expected to pursue this growth.

Approximately half (46%) of the operator respondents wanted to scale up and partner with a large number of digital players, while the other half (49%) wanted to focus in on a few strategic partnerships.  Those looking to partner with a large number of companies were primarily interested in generating new revenue streams or increasing customer relevance, while many of those who wanted to focus on a small number of partnerships also regarded increasing revenues from the core business as a main objective (see Figure 1).

Figure 1: The business objectives differ somewhat by partnership strategy

Source: Digital Partnerships Benchmarking Study conducted in late 2016 by STL Partners and sponsored by AsiaInfo

Respondents were also asked to rank the assets that an operator can bring to a partnership, both today and in the future. These ranks were converted into a normalized score (see Figure 2): A score of 100% in Figure 2 would indicate that all respondents placed that option in the top rank.

Figure 2: Operators regard their customer base as their biggest asset

Source: Digital Partnerships Benchmarking Study conducted in late 2016 by STL Partners and sponsored by AsiaInfo

Clearly, operators are aware that the size of their customer base is a significant asset, and they are optimistic that it is likely to remain so: it is overall the highest scoring asset both today and in the future.

In the future, the options around customer data (customer profiling, analytics and insights) are given higher scores (they move up the ranks). This suggests that operators believe that they will become better at exploiting their data-centric assets and – most significantly – that they will be able to monetize this in partnerships, and that these data-centric assets will have significant value.

The findings of the study confirm that most telcos believe they can bring significant and valuable assets to partnerships. This report considers how those assets can be used to strike mutually beneficial deals with the major Internet ecosystems. The next chapter explains why telcos and the leading Internet players need to co-operate with each other, despite their competition for consumers’ attention.

Contents:

  • Executive Summary
  • Strategic considerations
  • Delivering bigger, better entertainment
  • Improving customer experience
  • Extending and enhancing connectivity
  • Developing the networks of the future
  • Delivering cloud computing to enterprises
  • Introduction
  • Telcos and lnternet giants need each other
  • Delivering bigger, better entertainment
  • Content delivery networks
  • Bundling content and connectivity
  • Zero-rating content
  • Carrier billing
  • Content promotion
  • Apple and EE in harmony
  • Value exchange and takeaways
  • Improving the customer experience
  • Making mobile data stretch further
  • Off-peak downloads, offline viewing
  • Data plan awareness for apps
  • Fine-grained control for consumers
  • Value exchange and takeaways
  • Extending and enhancing connectivity
  • Subsea cable consortiums
  • Free public Wi-Fi services
  • MVNO Project Fi – branded by Google, enabled by telcos
  • Value exchange and takeaways
  • Developing the networks of the future
  • Software-defined networks: Google and the CORD project
  • Opening up network hardware: Facebook’s Telecom Infra Project
  • Value exchange and takeaways
  • Delivering cloud computing to enterprises
  • Reselling cloud-based apps
  • Secure cloud computing – AWS and AT&T join forces
  • Value exchange and takeaways
  • Conclusions and Recommendations
  • Google is top of mind
  • Whose brand benefits?

Figures:

  • Figure 1: The business objectives differ somewhat by partnership strategy
  • Figure 2: Operators regard their customer base as their biggest asset
  • Figure 3: US Internet giants generate about 40% of mobile traffic in Asia-Pacific
  • Figure 4: Google and Facebook are now major players in mobile in Africa
  • Figure 5: Examples of telco-Internet platform partnerships in entertainment
  • Figure 6: BT Sport uses YouTube to promote its premium content
  • Figure 7: Apple Music appears to have helped EE’s performance
  • Figure 8: Amazon is challenging Apple and Spotify in the global music market
  • Figure 9: Examples of telco-Google co-operation around transparency
  • Figure 10: YouTube Smart Offline could alleviate peak pressure on networks
  • Figure 11: Google’s Triangle app gives consumers fine-grained control over apps
  • Figure 12: Examples of telco-Internet platform partnerships to deliver connectivity
  • Figure 13: Project Fi’s operator partners provide extensive 4G coverage
  • Figure 14: Both T-Mobile US and Sprint need to improve their financial returns
  • Figure 15: Examples of telco-Internet platform partnerships on network innovation
  • Figure 16: AWS has a big lead in the cloud computing market
  • Figure 17: Examples of telco-Internet platform partnerships in enterprise cloud
  • Figure 18: AT&T provides private and secure connectivity to public clouds
  • Figure 19: Amazon and Alphabet lead corporate America in R&D
  • Figure 20: Telcos need to be wary of bolstering already powerful brands
  • Figure 21: Balancing immediate value of partnerships against strategic implications
  • Figure 22: Different telcos should adopt different strategies

Telco digital customer engagement: What makes a winning strategy?

Introduction

Customer experience is at the centre of telcos’ digital transformation efforts

Telecoms is one of many industries that are transitioning towards becoming more digitalised businesses. More specifically within digital transformation, the need to be customer-centric, and improve customer engagement, has been a crucial theme in telco digital transformation efforts. This is exemplified by Orange’s CEO Stèphane Richard who recently claimed that users needed to be “at the core of systems”.

As revenue growth in the industry continues to decline and telecom operators’ core services become commoditised, customer experience remains as one of the few areas operators can differentiate themselves from their competitors and maintain relevance with consumers. This places greater need for operators to make customer engagement a priority.

The way in which telcos engage customers has changed dramatically in recent years through the growth of different channels and touch-points a customer has access to. This is often contributed to the rapid adoption of smartphones and tablets, initiated by the launch of the iPhone in 2007, and the speedy adoption of social media platforms like Facebook (launched 2004) and Twitter (launched in 2006). Customers now expect businesses to be digitally savvy, knowledgeable and “joined-up” in their interactions with them.

There is no shortage of commentators and technology providers extolling the virtues of a more customercentric focus, urging operators adopt an omnichannel approach. By integrating online, call centre and bricks-and-mortar store customer experiences – through omnichannel capabilities – the promise to operators is that they can deliver joined-up customer experiences: simultaneously improving the effectiveness of telecoms marketing by building a ‘single-view’ of the customer, reducing time spent on resolving customer service issues, and preventing data from getting stuck in specific siloes.

But are these investments in technology (and the considerable internal resource implications) really a priority for operators or just another example of technology vendors pushing operators to spend more on expensive capabilities that they will never benefit from? Our survey suggests that those operators who have built omnichannel capabilities are reaping the rewards. However, operators also appreciate that success is not just down to implementing fancy systems: it’s also about what you do with them and having the right skills.

Telcos’ benchmarks come from within and outside the industry

Although most telcos are investing in their efforts to digitise the customer experience, it may not be obvious where they should be concentrating their efforts and what targets they should be aiming for. For this, there is a need to determine what the relevant benchmarks are when it comes to best-practice for digital engagement, how well they stack up and how they should seek to close the gap.

Telcos are looking to learn from outside their industry as customer engagement is a domain that all businesses constantly seek to improve. Digital natives, companies such as Google, Facebook and Netflix that started off as digital businesses and did not have to make a transition from legacy practices, are often leading the way when it comes to offering customers a truly digitized experience. However, for a telco, it may seem like an unrealistic dream to replicate their efforts, therefore telcos often look for best-practice examples from other industries, which are undergoing a digital transformation and still have the burden of legacy services, systems, processes, people and infrastructure. These industries include finance, retail and media.

Nonetheless, when comparing telcos’ digital customer engagement to these industries, many different measures suggest that telcos are lagging behind. When looking at cross-industry Net Promoter Scores (NPS), telecoms operators come out at an average of 11% compared to an average of 50% for retail (which leads all industries). The next worst industry, insurance, has an average score of 23%, just over twice that of telecoms.

These statistics suggest there is room for improvement, but in which specific areas do the most critical gaps exist and how should telcos go about changing this?

So, STL Partners has attempted to answer two questions:

  1. What should telcos be aiming for?
  2. How well are telcos measuring up to their ambitions in digital customer engagement?

To address this, we created an online tool to benchmark telcos across various metrics in three domains related to digital customer engagement: commerce, marketing and sales & service.

The Digital Customer Engagement Benchmarking Study5 took place in two phases. The first phase was focused on commerce and took place over July and August 2016. In the second phase, the scope was expanded to include marketing and sales & service and took place in April and May 2017. In total, 70 respondents from 47 telecoms operators took part in the study.

For the purposes of this study, operators are categorised into 2 ‘peer groups’:

  • Mature Market: Medium-high income per user, predominantly post-pay, developed fixed infrastructure
  • Mobile First: Low-Medium income per user, predominantly pre-pay with limited fixed infrastructure

Figure 1: Respondents by region and peer group

chart on global customer experience survey

Source: STL Partners

Contents:

  • Preface
  • Executive Summary
  • Introduction
  • Characterising operators’ digital customer engagement strategies
  • Commerce: selling more digitally and selling digitally more
  • Telcos’ online channels are still not being used enough by customers and prospects
  • Revenue benefits from online channels are relatively lower
  • Leveraging digital channels to upsell customers is one way to help drive online revenue
  • Data use is the key differentiator for a successful digital commerce approach
  • What is best practice for commerce?
  • Commerce Case Studies
  • Marketing: this time it’s personal
  • A (good) personalised marketing approach is more likely to secure returns…
  • …but most telcos’ marketing still uses traditional customer segmentation
  • What is best practice for marketing?
  • Marketing Case Studies
  • Sales & Service: Delivering the promise
  • Customers of the Omnichannel operator group are most actively engaged on digital channels
  • Online service engagement requires adequate channels and functionality
  • Omnichannel operators add value to customer service by ensuring complete visibility of customers
  • What is best practice for sales & service?
  • Sales & Service Case Study
  • Conclusions

Figures:

  • Figure 1: Respondents by region and peer group
  • Figure 2: Mapping operator digital customer engagement strategies
  • Figure 3: On average, less than 20% of total sales are from online channels
  • Figure 4: Variation between average telco and best performer across online sales
  • Figure 5: ARPU tends to be higher for customers who purchase their core package on offline channels
  • Figure 6: Mature Market operators have higher online attachment rates than Mobile First
  • Figure 7: Most operators are offering at least one online channel for upgrades
  • Figure 8: Omnichannel operators out-perform in digital commerce
  • Figure 9: Our research shows a link between the levels of personalised marketing and online marketing conversion rate
  • Figure 10: Most operators are not using personalised marketing techniques
  • Figure 11: On average, most customer interactions are not contextual
  • Figure 12: Online marketing conversion rates are at 31% across operators
  • Figure 13: A minority of purchases are being scaled up
  • Figure 14: Omnichannel operators excel in app-based customer engagementrst
  • Figure 15: Omnichannel operators are ahead in the number of channels a customer can use to raise a ticket
  • Figure 16: Omnichannel operators excel in the functionality of their channel offerings
  • Figure 17: Omnichannel operators lead converged billing capabilities
  • Figure 18: Omnichannel operators are on average twice as likely to have complete and partial visibility of customers compared to Digital Nascent operators

Music Lessons: How the music industry rediscovered its mojo

Introduction

The latest report in STL Partners’ Dealing with Disruption stream, this paper explores what telcos and their partners can learn from the music industry and its response to disruptive forces unleashed by the Internet.

Music was among the first industries to see its core product (compact discs) completely undermined by the Internet’s emergence as the primary distribution mechanism for content and software, throwing the record labels into a long standing struggle to maintain both relevance and revenues. After almost two decades of decline, sales of recorded music are growing again and, in developed markets, at least, the existential threat posed by piracy seems to have abated. Although the music industry still has problems aplenty, the success of streaming services has steadied the ship.

This report outlines how the music industry has regained its mojo, before considering the lessons for telcos and other digital service providers. The first section of the paper considers why music streaming has become so successful and whether the model will be sustainable. The second section of the paper explores the lessons companies from other sectors, notably telecoms, can draw from the ways in which the music industry responded to the Internet’s disruptive forces.

This paper builds on other entertainment-related reports published by STL Partners, including:

Apple’s pivot to services: What it means for telcos
Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed?
Amazon: Telcos’ Chameleon-King Ally?
Can Telcos Entertain You? Vodafone and MTN’s Emerging Market Strategies (Part 2)
Can Telcos Entertain You? (Part 1)

Music bounces back

Over the past 20 years, the rise of the Internet has shaken the music industry to the core, obsolescing its distribution model, undermining its business model and enabling new forms of piracy. Yet, the major record labels have survived, albeit in a consolidated form, and the sector is now showing some tentative signs of recovery. In 2013, the global music industry began to grow again for the first time since the turn of the Millennium. It continues to recover and will grow at a compound annual growth rate of 3.5% between now and 2021, according to research by PwC, fuelled by growth in both the recorded music and the live music sectors (see Figure 1).

Figure 1: The global music industry has returned to growth

The global music industry has returned to growth

Source: PWC and Ovum

For most of the past two decades, revenues from recorded music have been shrinking, leaving the industry increasingly reliant on ticket sales for live performances. Widespread piracy, together with the growing obsolesce of CDs, appeared to be turning recorded music into a form of advertising for concerts and tours.

But in 2015, global recorded music revenues began to grow again. In 2016, they rose a relatively healthy 5.9% to US$15.7 billion (about one third of the industry’s total revenue), according to a report by the International Federation of the Phonographic Industry (IFPI). For music industry executives, that growth marks an important milestone. “We got here through years of hard work,” Michael Nash, executive vice president of digital strategy at Universal records, told the Guardian in April 2017, adding that the music industry was still going through a “historical transformation. The only reason we saw growth in the past two years, after some 15 years of substantial decline, is that music has been one of the fastest adapting sectors in the digital world.”

Contents:

  • Executive Summary
  • Introduction
  • Music bounces back
  • What has changed?
  • Is streaming the final word in music distribution
  • Lessons to learn from music’s recovery

Figures:

  • Figure 1: The global music industry has returned to growth
  • Figure 2: The way people buy recorded music is changing dramatically
  • Figure 3: YouTube pays particularly low rates per stream
  • Figure 4: YouTube is a major destination for music lover
  • Figure 5: Music is one of the slowest growing entertainment segments
  • Figure 6: Spotify’s losses continue to grow despite the growth in revenues
  • Figure 7: Spotify’s subscription service is growing rapidly
  • Figure 8: Concert ticket revenues are up sevenfold since 1996 in North America
  • Figure 9: Major concert tickets sell for an average of $77 apiece

Problem: Telecoms technology inhibits operator business model change (Part 1)

Introduction

Everyone loves to moan about telcos

‘I just can’t seem to get anything done, it is like running through treacle.’

‘We gave up trying to partner with operators – they are too slow.’

‘Why are telcos unable to make the most basic improvements in their service offerings?’

‘They are called operators for a reason: they operate networks. But they can’t innovate and don’t know the first thing about marketing or customer service.’

Anyone within the telecoms industry will have heard these or similar expressions of dissatisfaction from colleagues, partners and customers.  It seems that despite providing the connectivity and communications services that have truly changed the world in the last 20 years, operators are unloved.  Everyone, and I think we are all guilty of this, feels that operators could do so much better.  There is a feeling that these huge organisations are almost wilfully seeking to be slow and inflexible – as if there is malice in the way they do business.

But the telecoms industry employs millions of people globally. It pays quite well and so attracts talent. Many, for example, have already enjoyed success in other industries. But nobody has yet, it seems, been able to make a telco, let alone the industry, fast, agile, and innovative.

Why not?

A structural problem

In this report, we argue that nobody is at fault for the perceived woes of telecoms operators.  Indeed, the difficulty the industry is facing in changing its business model is a result of financial and operational processes that have been adopted and refined over years in response to investor requirements and regulation.  In turn, investors and regulators have created such requirements as a result of technological constraints that have applied, even with ongoing improvements, to fixed and mobile telecommunications for decades. In essence, operators are constrained by the very structures that were put in place to ensure their success.

So should we give up?

If the limitations of telecoms operators is structural then it is easy to assume that change and development is impossible.  Certainly sceptics have plenty of empirical evidence for this view.  But as we outline in this report and will cover in more detail in a follow up to be published in early February 2016 (Answer: How 5G + Cloud + NFV can create the ‘agile telco’), changes in technology should have a profound impact on telecoms operators ability to become more flexible and innovative and so thrive in the fast-paced digital world.

Customer satisfaction is proving elusive in mature markets

Telecoms operators perform materially worst on customer service than other players in the US and UK

Improving customer experience has become something of a mantra within telecoms in the last few years. Many operators use Net Promoter Scores (NPS) as a way of measuring their performance, and the concept of ‘putting the customer first’ has gained in popularity as the industry has matured and new customers have become harder to find. Yet customer satisfaction remains low.

The American Customer Satisfaction Index (ACSI) publishes annual figures for customer satisfaction based on extensive consumer surveys. Telecommunications companies consistently come out towards the bottom of the range (scoring 65-70 out of 100). By contrasts internet and content players such as Amazon, Google, Apple and Netflix have much more satisfied customers and score 80+ – see Figure 1.

Figure 1: Customers are generally dissatisfied with telecoms companies

 

Source: American Customer Satisfaction index (http://www.theacsi.org/the-american-customer-satisfaction-index); STL Partners analysis

The story in the UK is similar.  The UK Customer Satisfaction Index, using a similar methodology to its US counterpart, places the Telecommunications and Media industry as the second-worst performer across 13 industry sectors scoring 71.7 in 2015 compared to a UK average of 76.2 and the best-performing sector, Non-food Retail, on 81.6.

Poor customer services scores are a lead indicator for poor financial performance

Most concerning for the telecoms industry is the work that ACSI has undertaken showing that customer satisfaction is linked to the financial performance of the overall economy and the performance of individual sectors and companies. The organisation states:

  • Customer satisfaction is a leading indicator of company financial performance. Stocks of companies with high ACSI scores tend to do better than those of companies with low scores.
  • Changes in customer satisfaction affect the general willingness of households to buy. As such, price-adjusted ACSI is a leading indicator of consumer spending growth and has accounted for more of the variation in future spending growth than any other single factor.

Source: American Customer Satisfaction index (http://www.theacsi.org/about-acsi/key-acsi-findings)  

In other words, consistently poor performance by all major players in the telecoms industry in the US and UK suggests aspirations of growth may be wildly optimistic. Put simply, why would customers buy more services from companies they don’t like? This bodes ill for the financial performance of telecoms operators going forward.

Senior management within telecoms knows this. They want to improve customer satisfaction by offering new and better services and customer care. But change has proved incredibly difficult and other more agile players always seem to beat operators to the punch. The next section shows why.

 

  • Introduction
  • Everyone loves to moan about telcos
  • A structural problem
  • So should we give up?
  • Customer satisfaction is proving elusive in mature markets
  • Telecoms operators perform materially worst on customer service than other players in the US and UK
  • Poor customer services scores are a lead indicator for poor financial performance
  • ‘One-function’ telecommunications technology stymies innovation and growth
  • Telecoms has always been an ‘infrastructure play’
  • …which means inflexibility and lack of innovation is hard-wired into the operating model
  • Why ‘Telco 2.0’ is so important for operators
  • Telco 2.0 aspirations remain thwarted
  • Technology can truly ‘change the game’ for operators

 

  • Figure 1: Customers are generally dissatisfied with telecoms companies
  • Figure 2: Historically, capital deployment has driven telecoms revenue
  • Figure 3: Financial & operational metrics for Infrastructure player (Vodafone) vs Platform (Google) & Product Innovator (Unilever)

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

Introduction

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

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

The rise and rise of online entertainment

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

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

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

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

Source: ZenithOptimedia, May 2015/STL Partners

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

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

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

Increasing vertical integration

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

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

Source: STL Partners

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

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

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

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

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

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

 

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

Telstra: Battling Disruption and Growing Enterprise Cloud & ICT

Introduction

A Quick Background on the Australian Market

Australia’s incumbent telco is experiencing the same disruptive forces as others, just not necessarily in the same way. Political upheaval around the National Broadband Network (NBN) project is one example. Others are the special challenges of operating in the outback, in pursuit of their universal service obligation, and in the Asian enterprise market, at the same time. Telstra’s area of operations include both some of the sparsest and some of the densest territories on earth.

Australian customers are typically as digitally-literate as those in western Europe or North America, and as likely to use big-name global Web services, while they live at the opposite end of the longest submarine cable runs in the world from those services. For many years, Telstra had something of a head start, and the cloud and data centre ecosystem was relatively undeveloped in Australia, until Amazon Web Services, Microsoft Azure, and Rackspace deployed in the space of a few months presenting a first major challenge. Yet Telstra is coping.

Telstra: doing pretty well

Between H2 2009 and H2 2014 – half-yearly reporting for H1 2015 is yet to land – top-line revenue grew 1% annually, and pre-tax profits 3%. As that suggests, margins have held up, but they have only held up. – Net margin was 16% in 2014, while EBITDA margin was 43% in 2009 and 41% in 2014, having gone as low as 37% in H2 2010. This may sound lacklustre, but it is worth pointing that Verizon typically achieves EBITDA margins in this range from its wireless operation alone, excluding the commoditised and capital-intensive landline business. Company-wide EBITDA margins in the 40s are a sound performance for a heavily regulated incumbent. Figure 1 shows sales, EBITDA and net margins, and VZW’s last three halves for comparison.

Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s

Source: STL Partners, Telstra filings

Looking at Telstra’s major operating segments, we see a familiar pattern. Fixed voice is sliding, while the mobile business has taken over as the core business. Fixed data is growing slowly, as is the global carrier operation, while enterprise fixed is declining slowly as the traditional voice element and older TDM services shrink. On the other hand, “Network Applications & Services” – Telstra’s strategic services group capturing new-wave enterprise products and the cloud – is growing strongly, and we believe that success in Unified Communications and Microsoft Office 365 underpins that growth in particular. A one-off decrease since 2009 is that CSL New World, a mobile network operator in Hong Kong, was sold at the end of 2014.

Figure 2: Mobile and cloud lead the way

Source: STL Partners, Telstra filings

Telstra is growing some new Telco 2.0 revenue streams

Another way of looking at this is to consider the segments in terms of their size, and growth. In Figure 2, we plot these together and also isolate the ‘Telco 2.0’ elements of Telstra from the rest. We include the enterprise IP access, Network Applications & Services, Pay-TV, IPTV, and M2M revenue lines in Telco 2.0 here, following the Telco 2.0 Transformation Index categorisations.

Figure 3: Telco 2.0 is a growing force within Telstra

Source: STL Partners, Telstra filings

The surge of mobile and the decline of fixed voice are evident. So is the decline of the non-Telco 2.0 media businesses – essentially directories. This stands out even more so in the context of the media business unit.

Figure 4: Telstra’s media businesses, though promising, aren’t enough to replace the directories line of business

Source: STL Partners, Telstra filings

“Content” here refers to “classified and advertising”, aka the directory and White Pages business. The Telco 2.0 businesses, by contrast, are both the strongest growth area and a very significant segment in terms of revenue – the second biggest after mobile, bigger even than fixed voice, as we can see in Figure 5.

Figure 5: Telco 2.0 businesses overtook fixed voice in H2 2014

Source: STL Partners, Telstra filings

To reiterate what is in the Telco 2.0 box, we identified 5 sources of Telco 2.0 revenue at Telstra – pay-TV, IPTV, M2M, business IP access, and the cloud-focused Network Applications & Services (NA&S) sub-segment. Their performance is shown in Figure 6. NA&S is both the biggest and by far the fastest growing.

 

  • Executive Summary
  • Introduction
  • A quick background on the Australian Market
  • Telstra: doing pretty well
  • Telstra is growing some new Telco 2.0 revenue streams
  • Cloud and Enterprise ICT are key parts of Telstra’s story
  • Mobile is getting more competitive
  • Understanding Australia’s Cloud Market
  • Australia is a relatively advanced market
  • Although it has some unique distinguishing features
  • The Australian Cloud Price Disruption Target
  • The Healthcare Investments: A Big Ask
  • Conclusions and Recommendations

 

  • Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s
  • Figure 2: Mobile and cloud lead the way
  • Figure 3: Telco 2.0 is a growing force within Telstra
  • Figure 4: Telstra’s media businesses, though promising, aren’t enough to replace the directories line of business
  • Figure 5: Telco 2.0 businesses overtook fixed voice in H2 2014
  • Figure 6: Cloud is the key element in Telstra’s Telco 2.0 strategy
  • Figure 7: NA&S is by far the strongest enterprise business at Telstra
  • Figure 8: Enterprise fixed is under real competitive pressure
  • Figure 9: Telstra Mobile subscriber KPIs
  • Figure 10: Telstra Mobile is strong all round, but M2M ARPU is a problem, just as it is for everyone
  • Figure 11: Australia is a high-penetration digital market
  • Figure 12: Australia is a long way from most places, and links to the Asia Pacific Cable Network (APCN) could still be better
  • Figure 13: The key Asia Pacific Cable Network (APCN) cables
  • Figure 14: Telstra expects rapid growth in intra-Asian trade in cloud services
  • Figure 15: How much?
  • Figure 16: A relationship, but a weak one – don’t count on data sovereignty

Five Principles for Disruptive Strategy

Introduction

Disruption has become a popular theme, and there are some excellent studies and theories, notably the work of Clayton Christensen on disruptive innovation.

This briefing is intended to add some of our observations, ideas and analysis from looking at disruptive forces in play in the telecoms market and the adjacent areas of commerce and content that have had and will have significant consequences for telecoms.

Our analysis centres on the concept of a business model: a relatively simple structure that can be used to describe and analyse a business and its strategy holistically. The structure we typically use is shown below in Figure 1, and comprises 5 key domains: The Marketplace; Service Offering; Value Network; Finance; and Technology.

Figure 1 – A business model is the commercial architecture of a business: how it makes money

Telco 2.0: STL Partners standard business model analysis Framework

Source: STL Partners

This structure is well suited to analysis of disruption, because disruptive competition is generally a case of conflict between companies with different business models, rather than competition between similarly configured businesses.

A disruptive competitor, such as Facebook for telecoms operators, may be in a completely different core business (advertising and marketing services) seeking to further that business model by disrupting an existing telecoms service (voice and messaging communications). Or it may be a broadly similar player, such as Free in France whose primary business is recognisably telecoms, using a radically different operational model to gain share from direct competitors.

We will look at some of these examples in more depth in this report, and also call on analysis of Google, Apple, Facebook and Amazon to illustrate principles

Digital value is often transient

KPN: a brief case study in disruption

KPN, a mobile operator in the Netherlands, started to report a gradual reduction in SMS / user statistics in early 2011, after a long period of near continuous growth.

Figure 2 – KPN’s SMS stats per user started to change at the end of 2010

Telco 2.0 Figure 2 KPNs SMS stats per user stated to change at the end of 2010

Source: STL Partners, Mobile World Database

KPN linked this change to the rapid rise of the use of WhatsApp, a so-called over-the-top (OTT) messaging application it had noticed among ‘advanced users’ – a set of younger Android customers, as shown in Figure 3.

Figure 3 – WhatsApp took off in certain segments at the end of 2010

Telco 2.0 Figure 3 WhatsApp took off in certain segments at the end of 2010

Source: KPN Corporate Briefing, May 2011

There was some debate at the time about the causality of the link, but the longer term picture of use and app penetration certainly supports the connection between the rise of WhatsApp take-up among KPN’s broader base (as opposed to ‘advanced users’ in Figure 3) and the rapid decline of SMS volumes as Figure 4 shows.

Figure 4 – KPN’s SMS volumes have continued to decline since 2010

Telco 2.0 Figure 4 KPN’s SMS volumes have continued to decline since 2010

Source: STL Partners estimates, Mobile World, Telecomspaper, Statista, Comscore, KPN.

How did that happen then?

KPN’s position was particularly suited to a disruptive attack by WhatsApp (and other messaging apps) in the Netherlands because:

  • It had relatively high unit prices per SMS.
  • KPN had not ‘bundled’ many SMSs into its packages compared to other operators, and usage was very much ‘pay as you go’ – so using WhatsApp offered immediate savings to users.
  • Its market of c.17 million people is technologically savvy with high early smartphone penetration, and densely populated for such a wealthy country, so well suited to the rapid viral growth of such apps.

KPN responded by increasing the number of SMSs in bundles and attempting to ‘sell up’ users to packages with bigger bundles. It has also embarked on more recent programmes of cost reduction and simplification. But as far as SMS was concerned, the ‘horse had bolted the stable’ and the decline continues as consumers gravitate away from a service perceived as losing relevance and value.

We will look in more depth at disruptive pricing and product design strategies in the section on ‘Free is not enough, nor is it the real issue’ later in this report. This case study also presents another challenge for strategists: why did the company not act sooner and more effectively?

Denial is not a good defence

One might be forgiven for thinking that the impact of WhatsApp on KPN was all a big surprise. And perhaps to some it was. But there were plenty of people that expected significant erosion of core revenues from such disruption. In a survey we conducted in 2011, the average forecast among 300 senior global telecoms execs was that OTT services would lead to a 38% decline in SMS over the next 3-5 years, and earlier surveys had shown similar pessimism.

Having said that, it is also true that there was some shock in the market at the time over KPN’s results, and subsequent findings in other markets in Latin America and elsewhere. It is only recently that it has become more of an accepted ‘norm’ in the industry that its core revenues are subject to attack and decline.

Perhaps the best narrative explanation is one of ‘corporate denial’, akin to the human process of grief. Before we reach acceptance of a loss, individuals (and consequently teams and organisations by this theory) go through various stages of emotional response before reaching ‘acceptance’ – a series of stages sometimes characterised as ‘denial, anger, negotiation and acceptance’. This takes time, and is generally considered healthy for people’s emotional health, if not necessarily organisations’ commercial wellbeing.

So what can be done about this? It’s hard to change nature, but it is possible to recognise circumstances and prepare forward plans differently. In the digital era, leaders, strategists, marketers, and product managers need to recognise that profit pools are increasingly transient, and if you are skilful or lucky enough to have one in your portfolio, it is critical to anticipate that someone is probably working on how to disrupt it, and to gather and act quickly on intelligence on realistic threats. There are also steps that can be taken to improve defensive positions against disruption, and we look at some of these in this report. It isn’t always possible because sometimes the start point is not ideal – but then again, part of the art is to avoid that position.

 

  • Executive Summary: five principles
  • Introduction
  • Digital value is often transient
  • KPN: a brief case study in disruption
  • How did that happen then?
  • Denial is not a good defence
  • Timing a disruptive move is critical
  • Disruption visibly destroys value
  • So when should strategists choose disruption?
  • Free is not enough, nor is it the real issue
  • How market winners meet needs better
  • How to compete with ‘free’?
  • Build the platform, feed the flywheel
  • Nurture the ecosystem
  • …don’t price it to death

 

  • Figure 1 – A business model is the commercial architecture of a business: how it makes money
  • Figure 2 – KPN’s SMS stats per user started to change at the end of 2010
  • Figure 3 – WhatsApp took off in certain segments at the end of 2010
  • Figure 4 – KPN’s SMS volumes have continued to decline since 2010
  • Figure 5 – Free’s disruptive play is destroying value in the French Market, Q1 2012-Q3 2014
  • Figure 6 – Verizon is winning in the US – but most players are still growing too, Q1 2011-Q1 2014
  • Figure 7 – How ‘OTT’ apps meet certain needs better than core telco services
  • Figure 8 – US and Spain: different approaches to disruptive defence
  • Figure 9 – The Amazon platform ‘flywheel’ of success

Mobile Marketing and Commerce: the technology battle between NFC, BLE, SIM, & Cloud

Introduction

In this briefing, we analyse the bewildering array of technologies being deployed in the on-going mobile marketing and commerce land-grab. With different digital commerce brokers backing different technologies, confusion reigns among merchants and consumers, holding back uptake. Moreover, the technological fragmentation is limiting economies of scale, keeping costs too high.

This paper is designed to help telcos and other digital commerce players make the right technological bets. Will bricks and mortar merchants embrace NFC or Bluetooth Low Energy or cloud-based solutions? If NFC does take off, will SIM cards or trusted execution environments be used to secure services? Should digital commerce brokers use SMS, in-app notifications or IP-based messaging services to interact with consumers?

STL defines Digital Commerce 2.0 as the use of new digital and mobile technologies to bring buyers and sellers together more efficiently and effectively (see Digital Commerce 2.0: New $Bn Disruptive Opportunities for Telcos, Banks and Technology Players).  Fast growing adoption of mobile, social and local services is opening up opportunities to provide consumers with highly-relevant advertising and marketing services, underpinned by secure and easy-to-use payment services. By giving people easy access to information, vouchers, loyalty points and electronic payment services, smartphones can be used to make shopping in bricks and mortar stores as interactive as shopping through web sites and mobile apps.

This executive briefing weighs the pros and cons of the different technologies being used to enable mobile commerce and identifies the likely winners and losers.

A new dawn for digital commerce

This section explains the driving forces behind the mobile commerce land-grab and the associated technology battle.

Digital commerce is evolving fast, moving out of the home and the office and onto the street and into the store. The advent of mass-market smartphones with touchscreens, full Internet browsers and an array of feature-rich apps, is turning out to be a game changer that profoundly impacts the way in which people and businesses buy and sell.  As they move around, many consumers are now using smartphones to access social, local and mobile (SoLoMo) digital services and make smarter purchase decisions. As they shop, they can easily canvas opinion via Facebook, read product reviews on Amazon or compare prices across multiple stores. In developed markets, this phenomenon is now well established. Two thirds of 400 Americans surveyed in November 2013 reported that they used smartphones in stores to compare prices, look for offers or deals, consult friends and search for product reviews.

At the same time, the combination of Internet and mobile technologies, embodied in the smartphone, is enabling businesses to adopt new forms of digital marketing, retailing and payments that could dramatically improve their efficiency and effectiveness. The smartphones and the data they generate can be used to optimise and enable every part of the entire ‘wheel of commerce’ (see Figure 4).

Figure 4: The elements that make up the wheel of commerce

The elements that make up the wheel of commerce Feb 2014

Source: STL Partners

The extensive data being generated by smartphones can give companies’ real-time information on where their customers are and what they are doing. That data can be used to improve merchants’ marketing, advertising, stock management, fulfilment and customer care. For example, a smartphone’s sensors can detect how fast the device is moving and in what direction, so a merchant could see if a potential customer is driving or walking past their store.

Marketing that makes use of real-time smartphone data should also be more effective than other forms of digital marketing. In theory, at least, targeting marketing at consumers in the right geography at a specific time should be far more effective than simply displaying adverts to anyone who conducts an Internet search using a specific term.

Similarly, local businesses should find sending targeted vouchers, promotions and information, delivered via smartphones, to be much more effective than junk mail at engaging with customers and potential customers. Instead of paying someone to put paper-based vouchers through the letterbox of every house in the entire neighbourhood, an Indian restaurant could, for example, send digital vouchers to the handsets of anyone who has said they are interested in Indian food as they arrive at the local train station between 7pm and 9pm in the evening. As it can be precisely targeted and timed, mobile marketing should achieve a much higher return on investment (ROI) than a traditional analogue approach.

In our recent Strategy Report, STL Partners argued that the disruption in the digital commerce market has opened up two major opportunities for telcos:

  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 the appendix of 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.

These two opportunities are inter-related and could be combined in a single platform. In both cases, the telco is acting as a broker – matching buyers and sellers as efficiently as possible, competing with incumbent digital commerce brokers, such as Google, Amazon, eBay and Apple. The Strategy Report explains in detail how telcos could pursue these opportunities and potentially compete with the giant Internet players that dominate digital commerce today.

For most telcos, the best approach is to 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. This is essentially NTT DOCOMO’s strategy.

However, in the mobile commerce market, telcos are having to compete with Internet players, banks, payment networks and other companies in land-grab mode – racing to sign up merchants and consumers for platforms that could enable them to secure a pivotal (and potentially lucrative) position in the fast growing mobile commerce market. Amazon, for example, is pursuing this market through its Amazon Local service, which emails offers from local merchants to consumers in specific geographic areas.

Moreover, a bewildering array of technologies are being used to pursue this land-grab, creating confusion for merchants and consumers, while fuelling fragmentation and limiting economies of scale.

In this paper, we weigh the pros and cons of the different technologies being used in each segment of the wheel of commerce, before identifying the most likely winners and losers. Note, the appendix of the Strategy Report profiles many of the key innovators in this space, such as Placecast, Shopkick and Square.

What’s at stake

This section considers the relative importance of the different segments of the wheel of commerce and explains why the key technological battles are taking place in the promote and transact segments.

Carving up the wheel of commerce

STL Partners’ recent Strategy Report models in detail the potential revenues telcos could earn from pursuing the real-time commerce and personal cloud opportunities. That is beyond the scope of this technology-focused paper, but suffice to say that the digital commerce market is large and is growing rapidly: Merchants and brands spend hundreds of billions of dollars across the various elements of the wheel of commerce. In the U.S., the direct marketing market alone is worth about $155 billion per annum, according to the Direct Marketing Association. In 2012, $62 billion of that total was spent on digital marketing, while about $93 billion was spent on traditional direct mail.

In the context of the STL Wheel of Commerce (see Figure 3), the promote segment (ads, direct marketing and coupons) is the most valuable of the six segments. Our analysis of middle-income markets for clients suggests that the promote segment accounts for approximately 40% of the value in the wheel of digital commerce today, while the transact segment (payments) accounts for 20% and planning (market research etc.) 16% (see Figure 5). These estimates draw on data released by WPP and American Express.

Note, that payments itself is a low margin business – American Express estimates that merchants in the U.S. spend four to five times as much on marketing activities, such as loyalty programmes and offers, as they do on payments.

Figure 5: The relative size of the segments of the wheel of commerce

The relative size of the segments of the wheel of commerce Feb 2014

Source: STL Partners

 

  • Introduction
  • Executive Summary
  • A new dawn for digital commerce
  • What’s at stake
  • Carving up the wheel of commerce
  • The importance of tracking transactions
  • It’s all about data
  • Different industries, different strategies
  • Tough technology choices
  • Planning
  • Promoting
  • Guiding
  • Transacting
  • Satisfying
  • Retaining
  • Conclusions
  • Key considerations
  • Likely winners and losers
  • The commercial implications
  • About STL Partners

 

  • Figure 1: App notifications are in pole position in the promotion segment
  • Figure 2: There isn’t a perfect point of sale solution
  • Figure 3: Different tech adoption scenarios and their commercial implications
  • Figure 4: The elements that make up the wheel of commerce
  • Figure 5: The relative size of the segments of the wheel of commerce
  • Figure 6: Examples of financial services-led digital wallets
  • Figure 7: Examples of Mobile-centric wallets in the U.S.
  • Figure 8: The mobile commerce strategy of leading Internet players
  • Figure 9: Telcos can combine data from different domains
  • Figure 10: How to reach consumers: The technology options
  • Figure 11: Balancing cost and consumer experience
  • Figure 12: An example of an easy-to-use tool for merchants
  • Figure 13: Drag and drop marketing collateral into Google Wallet
  • Figure 14: Contrasting a secure element with host-based card emulation
  • Figure 15: There isn’t a perfect point of sale solution
  • Figure 16: The proportion of mobile transactions to be enabled by NFC in 2017
  • Figure 17: Integrated platforms and point solutions both come with risks attached
  • Figure 18: Different tech adoption scenarios and their commercial implications

Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players

Introduction – Digital Commerce 2.0

Digital commerce is centred on the better use of the vast amounts of data created and captured in the digital world. Businesses want to use this data to make better strategic and operational decisions, and to trade more efficiently and effectively, while consumers want more convenience, better service, greater value and personalised offerings. To address these needs, Internet and technology players, payment networks, banks and telcos are vying to become digital commerce intermediaries and win a share of the tens of billions of dollars that merchants and brands spend finding and serving customers.

Mobile commerce is frequently considered in isolation from other aspects of digital commerce, yet it should be seen as a springboard to a wider digital commerce proposition based on an enduring and trusted relationship with consumers. Moreover, there are major potential benefits to giving individuals direct control over the vast amount of personal data their smartphones are generating.

We have been developing strategies in these fields for a number of years, including our engagement with the World Economic Forum’s (WEF) Rethinking Personal Data project, and ongoing research into user data and privacy, digital money and payments, and digital advertising and marketing.

This report brings all of these themes together and is the first comprehensive strategic playbook on how smartphones and authenticated personal data can be combined to deliver a compelling digital commerce proposition for both merchants and consumers. It will save customers valuable time, effort and money by providing a fast-track to developing and / or benchmarking a leading edge strategy and approach in the fast-evolving new world of digital commerce.

Benefits of the Report to Telcos, Other Players, Investors and Merchants


For telcos, this strategy report:

  • Shows how to evaluate and implement a comprehensive and successful digital commerce strategy worth up to c.$50bn (5% of core revenues in 5 years)
  • Saves time and money by providing a fast-track for decision making and an outline business case
  • Rapidly challenges / validates existing strategy and services against relevant ‘best in class’, including their peers, ‘OTT players’ and other leading edge players.


For other players including Internet companies, technology vendors, banks and payment networks:

  • The report provides independent market insight on how telcos and other players will be seeking to generate $ multi-billion revenues from digital commerce
  • As a potential partner, the report will provide a fast-track to guide product and business development decisions to meet the needs of telcos (and others) that will need to make commensurate investment in technologies and partnerships to achieve their value creation goals
  • As a potential competitor, the report will save time and improve the quality of competitor insight by giving a detailed and independent picture of the rationale and strategic approach you and your competitors will need to take


For merchants building digital commerce strategies, it will:

 

  • Help to improve revenue outlook, return on investment and shareholder value by improving the quality of insight to strategic decisions, opportunities and threats lying ahead in digital commerce
  • Save vital time and effort by accelerating internal decision making and speed to market


For investors, it will:

  • Improve investment decisions and strategies returning shareholder value by improving the quality of insight on the outlook of telcos and other digital commerce players
  • Save vital time and effort by accelerating decision making and investment decisions
  • Help them better understand and evaluate the needs, goals and key strategies of key telcos and their partners / competitors

Digital Commerce 2.0: Report Content Summary

  • Executive Summary. (9 pages outlining the opportunity and key strategic options)
  • Strategy. The shape and scope of the opportunities, the convergence of personal data, mobile, digital payments and advertising, and personal cloud. The importance of giving consumers control. and the nature of the opportunity, including Amazon and Vodafone case studies.
  • The Marketplace. Cultural, commercial and regulatory factors, and strategies of the market leading players. Further analysis of Google, Facebook, Apple, eBay and PayPal, telco and financial services market plays.
  • The Value Proposition. How to build attractive customer propositions in mobile commerce and personal cloud. Solutions for banked and unbanked markets, including how to address consumers and merchants.
  • The Internal Value Network. The need for change in organisational structure in telcos and banks, including an analysis of Telefonica and Vodafone case studies.
  • The External Value Network. Where to collaborate, partner and compete in the value chain – working with telcos, retailers, banks and payment networks. Building platforms and relationships with Internet players. Case studies include Weve, Isis, and the Merchant Customer Exchange.
  • Technology. Making appropriate use of personal data in different contexts. Tools for merchants and point-of-sale transactions. Building a flexible, user-friendly digital wallet.
  • Finance. Potential revenue streams from mobile commerce, personal cloud, raw big data, professional services, and internal use.
  • Appendix – the cutting edge. An analysis of fourteen best practice and potentially disruptive plays in various areas of the market.

 

Customer Experience: Is it Time for the Mobile CDN?

Summary: Changing consumer behaviours and the transition to 4G are likely to bring about a fresh surge of video traffic on many networks. Fortunately, mobile content delivery networks (CDNs), which should deliver both better customer experience and lower costs, are now potentially an option for carriers using a combination of technical advances and new strategic approaches to network design. This briefing examines why, how, and what operators should do, and includes lessons from Akamai, Level 3, Amazon, and Google. (May 2013, Executive Briefing Service). CDN Traffic as Percentage of Backbone May 2013

Introduction

Content delivery networks (CDNs) are by now a proven pattern for the efficient delivery of heavy content, such as video, and for better user experience in Web applications. Extensively deployed worldwide, they can be optimised to save bandwidth, to provide greater resilience, or to help scale up front-end applications. In the autumn of 2012, it was estimated that CDN providers accounted for 40% of the traffic entering residential ISP networks from the Internet core. This is likely to be an underestimate if anything, as a major use case for CDN is to reduce the volume of traffic that has to transit the Internet and to localise traffic within ISP networks. Craig Labovitz of DeepField Networks, formerly the head of Arbor’s ATLAS instrumentation project, estimates that from 35-45% of interdomain Internet traffic is accounted for by CDNs, rising to 60% for some smaller networks, and 85% of this is video.

Figure 1: CDNs, the supertankers of the Internet, are growing
CDN Traffic as Percentage of Backbone May 2013

Source: DeepField, STL

In the past, we have argued that mobile networks could benefit from deploying CDN, both in order to provide CDN services to content providers and in order to reduce their Internet transit and internal backhaul costs. We have also looked at the question of whether telcos should try to compete with major Internet CDN providers directly. In this note, we will review the CDN business model and consider whether the time has come for mobile CDN, in the light of developments at the market leader, Akamai.

The CDN Business Model

Although CDNs account for a very large proportion of Internet traffic and are indispensable to many content and applications providers, they are relatively small businesses. Dan Rayburn of Frost & Sullivan estimates that the video CDN market, not counting services provided by telcos internally, is around $1bn annually. In 2011, Cisco put it at $2bn with a 20% CAGR.

This is largely because much of the economic value created by CDNs accrues to the operators in whose networks they deploy their servers, in the form of efficiency savings, and to the content providers, in the form of improved sales conversions, less downtime, savings on hosting and transit, and generally, as an improvement in the quality of their product. It’s possible to see this as a two-sided business model – although the effective customer is the content provider, whose decisions determine the results of competition, much of the economic value created accrues to the operator and the content provider’s customer.

On top of this, it’s often suggested that margins in the core CDN product, video delivery, are poor and it would be worth moving to supposedly more lucrative “media services”, products like transcoding (converting original video files into the various formats served out of the CDN for networks with more or less bandwidth, mobile versus fixed devices, Apple HLS versus Adobe Flash, etc) and analytics aimed at content creators and rightsholders, or to lower-scale but higher-margin enterprise products. We are not necessarily convinced of this, and we will discuss the point further on page 9. For the time being, note that it is relatively easy to enter the CDN market, and it is influenced by Moore’s law.  Therefore, as with most electronic, computing, and telecoms products, there is structural pressure on prices.

The Problem: The Traffic Keeps Coming

A major 4G operator recently released data on the composition of traffic over their new network. As much as 40% of the total, it turned out, was music or video streaming. The great majority of this will attract precisely no revenue for the operator, unless by chance it turns out to represent the marginal byte that induces a user to spend money on out-of-bundle data. However, it all consumes spectrum and needs backhauling and therefore costs money.

The good news is that most, or even all, of this could potentially be distributed via a CDN, and in many cases probably will be distributed by a CDN as far as the mobile operator’s Internet point of presence. Some of this traffic will be uplink, a segment likely to grow fast with better radios and better device cameras, but there are technical options related to CDN that can benefit uplink applications as well.

Figure 2: Video, music, and photos are filling up a 4G mobile network

EE traffic by category and source Percentage May 2013

Source: EE, STL

Another 36.5% of the traffic is accounted for by Web browsing and e-mail. A large proportion of the Web activity could theoretically come from a CDN, too – even if the content itself has to be generated dynamically by application logic, things like images, fonts, and JavaScript libraries are a quick win in terms of performance. Estimates of how much Internet traffic in general could be served from a CDN range from 35% (AT&T) to 98% (Analysys Mason).

As 29% of their traffic originates from the top 3 point sources – YouTube, Facebook, and iTunes – it’s also observable that signing-up a relatively small subset of content providers as customers will provide considerable benefit. Out of those three, all of them use a CDN, and two of those – Facebook and iTunes – are customers of Akamai, while YouTube relies on Google’s own solution.

We can re-arrange the last chart to illustrate this more fully. (Note that Skype, as a peer-to-peer application that is also live, is unsuitable for CDN as usually understood.)

Figure 3: The top 9 CDN-able point sources represent 40% of EE’s traffic
Key Point Sources and Others May 2013

Source: EE, STL

Looking further afield, the next chart shows the traffic breakdown by application from DeepField’s observations in North American ISP networks.

Figure 4: The Web giants ride on the CDNs
Percentage Peak Hour Traffic May 2013

Source: DeepField

Clearly, the traffic sources and traffic types that are served from CDNs are both the heaviest to transport and also the ones that contribute most to the busy hour; note that these are peak measurements, and the total of the CDN traffic here (Netflix, YouTube, CDN other, Facebook) is substantially more than it is on average.

To read the Software Defined Networking in full, including the following sections detailing additional analysis…

  • Akamai: the World’s No.1 CDN
  • Financial and KPI review
  • The Choice for CDN Customers: Akamai, Amazon, or DIY like Google?
  • CDN depth: the key question
  • CDN depth and mobile networks
  • Akamai’s guidelines for deployment
  • Why has mobile CDN’s time come?
  • What has held mobile CDN back?
  • But the world has changed…
  • …Networks are much less centralised…
  • …and IP penetrates much more deeply into the network
  • Licensed or Virtual CDN – a (relatively) new business model
  • SDN: a disruptive opportunity
  • So, why right now?
  • Conclusions
  • It may be time for telcos to move on mobile CDN
  • The CDN industry is exhibiting familiar category killer dynamics
  • Regional point sources remain important
  • CDN internals are changing the structure of the Internet
  • Recommendations for action

…and the following figures…

  • Figure 1: CDNs, the supertankers of the Internet, are growing
  • Figure 2: Video, music, and photos are filling up a 4G mobile network
  • Figure 3: The top 9 CDN-able point sources represent 40% of EE’s traffic
  • Figure 4: The Web giants ride on the CDNs
  • Figure 5: Akamai’s revenues by line of business
  • Figure 6: Observed traffic share for major CDNs

 

Digital Commerce: Show me the (Mobile) Money

Introduction

STL defines Digital Commerce 2.0 as the use of new digital and mobile technologies to bring buyers and sellers together more efficiently and effectively. Fast growing adoption of mobile, social and local services is opening up opportunities to provide consumers with highly-relevant advertising and marketing services, underpinned by secure and easy-to-use payment services. By giving people easy access to information, vouchers, loyalty points and electronic payment services, smartphones can be used to make shopping in bricks and mortar stores as interactive as shopping through web sites and mobile apps.

To read the note in full, including the following sections detailing additional analysis…

  • Executive Summary
  • Overcoming the Barriers
  • 1. Understand the marketplace you are operating in
  • 2. Develop compelling service offerings
  • 3. The value network
  • 4. Technology
  • 5. Finance – the high-level business model
  • Conclusions and next steps
  • About STL Partners

…and the following figures…

  • Figure 1 – The Cycle and Functions of Digital Commerce
  • Figure 2 – Mobile wallets will take time to gain traction
  • Figure 3 – The mobile commerce flywheel
  • Figure 4 – The STL Partners Business Model Framework
  • Figure 5 – For banked consumers, digital wallets mainly offer convenience
  • Figure 6 – For the unbanked, digital wallets offer convenience and some savings
  • Figure 7 – For merchants, digital wallets help build deeper customer relationships
  • Figure 8 – Telcos’ potential revenue streams from a digital commerce service
  • Figure 9 – Telcos’ potential major costs in launching a digital commerce service
  • Figure 10 – Telcos’ mobile commerce revenues are likely to be modest
  • Figure 11 – Telcos have regular customer contact and real-time data
  • Figure 12 – Potential strategic actions for telcos
  • Figure 13 – Leading Internet companies have global reach and scale
  • Figure 14 – Potential strategic actions for Internet players
  • Figure 15 – Banks have local knowledge, payment networks trusted brands
  • Figure 16 – Potential strategic actions for banks and payment networks

Cloud 2.0: Telstra, Singtel, China Mobile Strategies

Summary: In this extract from our forthcoming report ‘Cloud 2.0: Telco Strategies in the Cloud’ we outline the key components of Telstra, Singtel and China Mobile’s cloud strategies, and how they compare to the major ‘Big Technology’ players (such as Microsoft, VMWare, IBM, HP, etc.) and ‘Web Giants’ such as Google and Amazon. (November 2012, Executive Briefing Service, Cloud & Enterprise ICT Stream.) Vodafone results Nov 2012
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Below is an extract from this 14 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Cloud and Enterprise ICT Stream here. Non-members can subscribe here or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

We’ll also be discussing our findings at the New Digital Economics Brainstorms in Singapore (3-5 December, 2012).

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Introduction

This is an edited extract of Cloud 2.0: Telco Strategies in the Cloud, a new Telco 2.0 Strategy Report to be published next week. The report examines the evolution of cloud services; the current opportunities for vendors and Telcos in the Cloud market, plus a penetrating analysis on the positioning Telcos need to adopt in order to take advantage of the global $200Bn Cloud services market opportunity.

The report shows how CSP’s can create sustainable differentiated positions in Enterprise Cloud. It contains a concise and comprehensive analysis of key vendor and telco strategies, market forecasts (including our own for both the market and telcos), and key technologies.

Led by Robert Brace (formerly Global Head of Cloud Services for Vodafone), it leverages the knowledge and experience of Telco 2.0 analyst team, senior global brainstorm participants, and targeted industry research and interviews. Robert will also be presenting at Digital Asia, 4-5 Dec, Singapore 2012.

Methodology

In the full report, we reviewed both telcos and technology companies using a list of 30 criteria organised in six groups (Market, Vision, Finance, Proposition, Value Network, and Technology). We aimed to cover their objectives, strategy, market areas addressed, target customers, proposition strategy, routes to market, operational approach, buy / build partner approach, and technology choices.

We based our analysis on a combination of desk research, expert interviews, and output from our Executive Brainstorms.

Among the leading cloud technology companies we identify two groups, which we characterise as “Big Tech” and the “Web Giants”. The first of these are the traditional enterprise IT vendors, while the second are the players originating in the consumer web 2.0 space (hence the name).

  • Big Tech: Microsoft (Azure), Google (Dev & Enterprise), VMWare, Parallels, Rackspace, HP, IBM.
  • Web Giants: Microsoft (Office 365), Amazon, Google (Apps & Consumer), Salesforce, Akamai.

In the report and our analyses below, we use averages for each of these groups to give a key comparator for telco strategies. The full strategy report contains individual analyses for each of these companies and the following telcos: AT&T, Orange, Telefonica, Deutsche Telekom, Vodafone, Verizon, China Telecom, SFR, Belgacom, Elisa, Telenor, Telstra, BT, Cable and Wireless.

Summary

The ‘heatmap’ table below shows the summary results of a 4-box scoring against our key criteria for the four APAC telcos enterprise cloud product intentions (i.e. what they intend to do in the market), where 1 (light blue) is weakest, 4 (bright red) stronger.

Figure 1: Cloud ‘heatmap’ for selected APAC telcos
Cloud APAC Heatmap
Source: STL Partners / Telco 2.0

In the full report are similar tables and comparisons for capabilities and used these results to compare telco to vendor strategies and telco to telco strategies where they compete in the same markets.

In this briefing we summarise results for Telstra, Singtel, China Mobile, and China Telecom.

Telstra – building regional leadership

 

Operating in the somewhat special circumstances of Australia, Telstra is pursuing both an SMB SaaS strategy (typical of mobile operators) and an enterprise IaaS strategy (see Figure 2). Under the first, it resells a suite of business applications centred on Microsoft Office 365, for which it has exclusivity in Australia.

Under the second, it is trying to develop a cloud computing business out of its managed hosting business. VMWare is the main technology provider, with some Microsoft Hyper-V. Unlike many telcos, Telstra benefits from the fact that the major IaaS players are only just beginning to develop data centres in Australia, and therefore cloud applications hosted with Amazon etc. are subject to a considerable latency penalty.

 

Figure 2: Telstra: A local leader

Cloud Telstra Radar Map

Source: STL Partners / Telco 2.0

However, data sovereignty concerns in Australia will force other cloud providers to develop at least some presence if they wish to address a variety of important markets (finance, government, and perhaps even mining), and this will eventually bring greater competition.

So far, Telstra has a web portal for the reseller SaaS products, and relies on a mixture of its direct sales force and a partnership with Accenture as a channel for IaaS.

Figure 3: Telstra benefits from geography

Telstra Cloud Radar Map 2

Source: STL Partners / Telco 2.0

To read the note in full, including the following analysis…

  • Introduction
  • Methodology
  • Summary
  • Telstra – building regional leadership
  • SingTel – aiming to be a regional hub
  • China Mobile – the Great Cloud?
  • China Telecom – making a start
  • Conclusions
  • Next steps

…and the following figures…

  • Figure 1: Cloud ‘heatmap’ for selected APAC telcos
  • Figure 2: Telstra: A local leader
  • Figure 3: Telstra benefits from geography
  • Figure 4: SingTel’s strategy is typical, but well executed
  • Figure 5: China Mobile: A less average telco
  • Figure 6: China Mobile has a distinctly different technology strategy
  • Figure 7: China Mobile has some key differentiators (“spikes”) versus its rivals
  • Figure 8: Comparing the APAC Giants
  • Figure 9: Cluster analysis: Telco operators

 

Members of the Telco 2.0 Executive Briefing Subscription Service and the Cloud and Enterprise ICT Stream can download the full 14 page report in PDF format hereNon-Members, please subscribe here or email contact@telco2.net / call +44 (0) 207 247 5003.

 

Technologies and industry terms referenced: strategy, cloud, business model, APAC, Singtel, Telstra, China Mobile, China Telecom, VMWare, Amazon, Google, IBM, HP.

The Cloud 2.0 Programme

This research report is a part of the ‘Cloud 2.0’ programme. The report was independently commissioned, written, edited and produced by STL Partners.

The Cloud 2.0 programme is a new initiative that brings together STL Partners’ research and senior thought-leaders and decision makers in the fast evolving Cloud ecosystem to develop new propositions and new partnerships. We’d like to thank the sponsors of the programme listed below for their support. To find out more or to join the Cloud 2.0 programme, please email contact@telco2.net or call +44 (0) 207 247 5003.

Stratus Partners:

Cordys Logo

 

Cloud 2.0: the fight for the next wave of customers

Summary: The fight for the Cloud Services market is about to move into new segments and territories. In the build up to the launch of our new strategy report, ‘Telco strategies in the Cloud’, we review perspectives on this shared at the 2012 EMEA and Silicon Valley Executive Brainstorms by strategists from major telcos and tech players, including: Orange, Telefonica, Verizon, Vodafone, Amazon, Bain, Cisco, and Ericsson (September 2012, , Executive Briefing Service, Cloud & Enterprise ICT Stream). Cloud Growth Groups September 2012
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Below is an extract from this 33 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Cloud and Enterprise ICT Stream here. Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Introduction

As part of the New Digital Economics Executive Brainstorm series, future strategies in Cloud Services were explored at the New Digital Economics Silicon Valley event at the Marriott Hotel, San Francisco, on the 27th March, 2012, and the second EMEA Cloud 2.0 event at the Grange St. Pauls Hotel on the 13th June 2012.

At the events, over 200 specially-invited senior executives from across the communications, media, retail, finance and technology sectors looked at how to make money from cloud services and the role and strategies of telcos in this industry, using a widely acclaimed interactive format called ‘Mindshare’.

This briefing summarises key points, participant votes, and our high-level take-outs from across the events, and focuses on the common theme that the cloud market is evolving to address new customers, and the consequence of this change on strategy and implementation. We are also publishing a comprehensive report on Cloud 2.0: Telco Strategies in the Cloud.

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Executive Summary

The end of the beginning

The first phase of enterprise cloud services has been dominated by the ‘big tech’ and web players like Amazon, Google, and Microsoft, who have developed highly sophisticated cloud operations at enormous scale. The customers in this first round are the classic ‘early adopters’ of enterprise ICT – players with a high proportion of IT genes in their corporate DNA such as Netflix, NASA, Silicon Valley start ups, some of the world’s largest industrial and marketing companies, and the IT industry itself. There is little doubt that these leading customers and major suppliers will retain their leading edge status in the market.

The next phase of cloud market development is the move into new segments in the broader market. Participants at the EMEA brainstorm thought that a combination of new customers and new propositions would drive the most growth in the next 3 years.

UK Services Revenues: Actual and Forecast (index)

These new segments comprise both industries and companies outside the early adopters in developed markets, and companies in new territories in emerging and developing markets. These customers are typically less technology oriented, more focused on business requirements, and need a combination of de-mystification of cloud and support to develop and run such systems.

Closer to the customer

There are opportunities for telcos in this evolving landscape. While the major players’ scale will be hard to beat, there are opportunities in the new segments in being ‘closer to the customer’. This involves telcos leveraging potential advantages of:

  • existing customer relationships, existing enterprise IT assets, and channels to markets (where they exist);
  • geographical proximity, where telcos can build, locate and connect more directly to overcome data sovereignty and latency issues.

Offering unique, differentiated services

Telcos should also be able to leverage existing assets and capabilities through APIs in the cloud to create distinctive offerings to enterprise and SME customers:

  • Network assets will enable better management of cloud services by allowing greater control of the network components;
  • Data assets will enable a wider range of potential applications for cloud services that use telco data (such as identification services);
  • And communications assets (such as APIs to voice and messaging) will allow communications services to be built in to cloud applications.

Next steps for telcos

  • Telcos need to move fast to leverage their existing relationships with customers both large and small and optimise their cloud offerings in line with new trends in the enterprise ICT market, such as bring-your-own-device (BYOD).
  • Customers are increasingly looking to outsource business processes to cut costs, and telcos are well-placed to take advantage of this opportunity.
  • Telcos need to continue to partner with independent software vendors, in order to build new products and services. Telcos should also focus on tight integration between their core services and cloud services or cloud service providers (either delivered by themselves or by third parties.) During the events, we saw examples from Vodafone, Verizon and Orange amongst others.
  • Telcos should also look at the opportunity to act as cloud service brokers. For example, delivering a mash up of Google Apps, Workday and other services that are tightly integrated with telco products, such as billing, support, voice and data services. The telco could ensure that the applications work well together and deliver a fully supported, managed and billed suite of products.
  • Identity management and security also came through as strong themes and there is a natural role for telcos to play here. Telcos already have a trusted billing relationship and hold personal customer information. Extending this capability to offer pre-population of forms, acting as an authentication broker on behalf of other services and integrating information about location and context through APIs would represent additional business and revenue generating opportunities.
  • Most telcos are already exploring opportunities to exploit APIs, which will enable them to start offering network-as-a-service, voice-as-a-service, device management, billing integration and other services. Depending on platform and network capability, there are literally hundreds of APIs that telcos could offer to external developers. These APIs could be used to develop applications that are integrated with telcos’ network product or service, which in turn makes the telco more relevant to their customers.

We will be exploring these strategies in depth in Cloud 2.0: Telco Strategies in the Cloud and at the invitation only New Digital Economics Executive Brainstorms in Digital Arabia in Dubai, 6-7 November, and Digital Asia in Singapore, 3-5 December, 2012.

Key questions explored at the brainstorms and in this briefing:

  • How will the Cloud Services market evolve?
  • Which customer and service segments are growing fastest (Iaas, PaaS, SaaS)?
  • What are the critical success factors to market adoption?
  • Who will be the leading players, and how will it impact different sectors?
  • What are the telcos’ strengths and who are the most advanced telcos today?
  • Which aspects of the cloud services market should they pursue first?
  • Where should telcos compete with IT companies and where should they cooperate?
  • What must telcos do to secure their share of the cloud and how much time do they have?

Stimulus Speakers/Panelists

Telcos

  • Peter Martin, Head of Strategy, Cloud Computing, Orange Group
  • Moisés Navarro Marín, Director, Strategy Global Cloud Services, Telefonica Digital
  • Alex Jinivizian, Head of Enterprise Strategy, Verizon Enterprise Solutions
  • Robert Brace, Head of Cloud Services, Vodafone Group

Technology Companies

  • Mohan Sadashiva, VP & GM, Cloud Services, Aepona
  • Gustavo Reyna, Solutions Marketing Manager, Aepona
  • Iain Gavin, Head of EMEA Web Services, Amazon
  • Pat Adamiak, Senior Director, Cloud Solutions, Cisco
  • Charles J. Meyers, President, Equinix Americas
  • Arun Bhikshesvaran, CMO, Ericsson
  • John Zanni, VP of Service Provider Marketing & Alliances, Parallels

Consulting & Industry Analysis

  • Chris Brahm, Partner, Head of Americas Technology Practices, Bain
  • Andrew Collinson, Research Director, STL Partners

With thanks to our Silicon Valley 2012 event sponsors and partners:

Silicon Valley 2012 Event Sponsors

And our EMEA 2012 event sponsors:

EMEA 2012 Event Sponsors

To read the note in full, including the following sections detailing support for the analysis…

  • Round 2 of the Cloud Fight
  • Selling to new customers
  • What channels are needed?
  • How will telcos perform in cloud?
  • With which services will telcos succeed?
  • How can telcos differentiate?
  • Comments on telcos’ role, objectives and opportunities
  • Four telcos’ perspectives
  • Telefonica Digital – focusing on business requirements
  • Verizon – Cloud as a key Platform
  • Orange Business Services – communications related cloud
  • Vodafone – future cloud vision
  • Techco’s Perspectives
  • Amazon – A history of Amazon Web Services (AWS)
  • Cisco – a world of many clouds
  • Ericsson – the networked society and telco cloud
  • Aepona – Cloud Brokerage & ‘Network as a Service’ (NaaS)
  • The Telco 2.0™ Initiative

…and the following figures…

  • Figure 1 – Bain forecasts for business cloud market size
  • Figure 2 – Key barriers to cloud adoption
  • Figure 3 – Identifying the cloud growth markets
  • Figure 4 – Requirements for success
  • Figure 5 – New customers to drive cloud growth
  • Figure 6 – How to increase revenues from cloud services
  • Figure 7 – How to move cloud services forward
  • Figure 8 – Enterprise cloud channels
  • Figure 9 – Small businesses cloud channels
  • Figure 10 – Vote on Telco Cloud Market Share
  • Figure 11 – Telcos’ top differentiators in the cloud
  • Figure 12 – The global reach of Orange Business
  • Figure 13 – The telco as an intermediary
  • Figure 14 – Vodafone’s vision of the cloud
  • Figure 15 – Amazon Web Services’ cloud infrastructure
  • Figure 16 – Cisco’s world of many clouds
  • Figure 17 – Cloud traffic in the data centre
  • Figure 18 – Ericsson’s vision for telco cloud
  • Figure 19 – Summary of Ericsson cloud functions
  • Figure 20 – Aepona Cloud Services Broker
  • Figure 21 – How to deliver network-enhanced cloud services

Members of the Telco 2.0 Executive Briefing Subscription Service and the Cloud and Enterprise ICT Stream can download the full 33 page report in PDF format hereNon-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Companies and technologies covered: Telefonica, Vodafone, Verizon, Orange, Cloud, Amazon, Google, Ericsson, Cisco, Aepona, Equinix, Parallels, Bain, Telco 2.0, IaaS, PaaS, SaaS, private cloud, public cloud, telecom, strategy, innovation, ICT, enterprise.

Strategy 2.0: Google’s Strategic Identity Crisis

Summary: Google’s shares have made little headway recently despite its dominance in search and advertising, and it faces increasing regulatory threats in this area. It either needs to find new sources of value growth or start paying out dividends, like Microsoft, Apple (or indeed, a telco). Overall, this is resulting in something of a strategic identity crisis. A review of Google’s strategy and implications for Telcos. (March 2012, Executive Briefing Service, Dealing with Disruption Stream).

Google's Advertising Revenues Cascade

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Below is an extract from this 24 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Dealing with Disruption Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £595 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003. We’ll also be discussing our findings and more on Google at the Silicon Valley (27-28 March) and London (12-13 June) New Digital Economics Brainstorms.

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Executive Summary

Google appears to be suffering from a strategic identity crisis. It is the giant of search advertising but it also now owns a handset maker, fibre projects, an increasingly fragmented mobile operating system, a social network of questionable success, and a driverless car programme (among other things). It has a great reputation for innovation and creativity, but risks losing direction and value by trying to focus on too many strategies and initiatives.

We believe that Google needs to stop trying to copy what Apple and Facebook are doing, de-prioritise its ‘Hail Mary’ hunt for a strategy (e.g. driverless cars), and continue to build new solutions that serve better the customers who are already willing to pay – namely, advertisers.

It is our view that the companies who have created most value in the market have done so by solving a customer problem really well. Apple’s recent success derives from creating a simpler and more beautiful way (platform + products) for people to manage their digital lives. People pay because it’s appealing and it works.

Google initially solved how people could find relevant information online and then, critically, how to use this to help advertisers get more customers. They do this so well that Google’s $37bn revenues continue to grow at double digit pace, and there’s plenty of headroom in the market for now. While the TV strategy may not yet be paying off, it would seem sensible to keep working at it to try to keep extending the reach of Google’s platform. 

While Android keeps Google in the mobile game to a degree, and has certainly helped to constrain certain rivals, we think Google should cast a hard eye over its other competing and distracting activities: Motorola, Payments, Google +, Driverless Cars etc. Its management team should look at the size of the opportunity, the strength of the competition, and their ability to execute in each. 

Pruning the projects might also lose Google an adversary or two, and it might also afford some reward to shareholders too. After all, even Apple has recently decided to pay back some cash to investors.

This may be very difficult for Google’s current leadership. Larry Page seems to have the restless instincts of the stereotypical Valley venture capitalist, hunting the latest ideas, and constantly trying to create the next big beautiful thing. The trouble is that this is Google in 2012, not 1995, and it looks to us at least that a degree of ‘sticking to the knitting’ within Google’s huge, profitable and growing search advertising business may be a better bet than the highly speculative (and expensive) ‘Hail Mary’ strategy route. 

This may sound surprising coming from us, the inveterate fans of innovation at Telco 2.0, so we’d like to point out some important differences between the situations that Google and the telcos are in:

  • Google’s core markets are growing, not flat or shrinking, and are at a different life-stage to the telecoms market;
  • Google is global, rather than being confined to any given geography. There are many opportunities still out there.
  • We are not saying that Google should stop innovating, but we are saying it should focus its innovative energy more clearly on activities that grow the core business.

Introduction

In January this year, Google achieved a first – it missed the consensus forecast for its quarterly earnings. There is of course no magic in the consensus, which is an average of highly conventionalised guesses from a bunch of City analysts, but it is as good a moment as ever to review Google’s strategic position. If you bought Google stock at the beginning, you may not need to read this, as you’re probably very rich (the return since then is of the order of 400%). The entirety of this return, however, is accounted for by the 2004-2007 bull run. On a five-year basis, Google stock is ahead 30%, which sounds pretty impressive (a 6% annual return), but again, all the growth is accounted for by the last surge upwards over the summer of 2007. The peak was achieved on the 2nd of November, 2007. 

As this chart shows, Google stock is still down about 9% from the peak, and perhaps more importantly, its path tracks Microsoft very closely indeed. Plus Microsoft investors get a dividend, whereas Google investors do not.

Figure 1: Google, Microsoft 2.0?

Google, Microsoft 2.0?
Source: Google Finance

Larry Page is reported to have said that “Google is no longer a “search company.” He says its model is now 

“invent wild things that will help humanity, get them adopted by users, profit, and then use the corporate structure to keep inventing new things.”

No longer a search company? Take a look at the revenues. Out of Google’s $37.9bn in revenues in 2011, $36bn came from advertising, aka the flip side of Google Search. Despite a whole string of mammoth product launches since 2007, Google’s business is essentially what it was in 2007 – a massive search-based advertising machine.

Google’s Challenges

Our last Google coverage – Android: An Anti-Apple Virus ? and the Dealing with the Disruptors Strategy Report   suggested that the search giant was suffering from a lack of direction, although some of this was accounted for by a deliberate policy of experimenting and shutting down failed initiatives.

Since then, Google has launched Google +, closed Google Buzz, and closed Google Wave while releasing it into a second life as an open-source project. It has been involved in major litigation over patents and in regulatory inquiries. It has seen an enormous boom in Android shipments but not necessarily much revenue. It is about to become a major hardware manufacturer by acquiring Motorola. And it has embarked on extensive changes to the core search product and to company-wide UI design.

In this note, we will explore Google’s activities since our last note, summarise key threats to the business and strategies to counter them, and consider if a bearish view of the company is appropriate.

We’ve found it convenient to organise Google’s business  into several themed groups as follows:

1: Questionable Victories

Pyrrhic victory is defined as a victory so costly it is indistinguishable from defeat. Although there is nothing so bad at Google, it seems to have a knack of creating products that are hugely successful without necessarily generating cash. Android is exhibit A. 

The obvious point here is surging, soaring growth – forecasts for Android shipments have repeatedly been made, beaten on the upside, adjusted upwards, and then beaten again. Android has hugely expanded the market for smartphones overall, caused seismic change in the vendor industry, and triggered an intellectual property war. It has found its way into an awe-inspiring variety of devices and device classes.

But questions are still hanging over how much actual money is involved. During the Q4 results call, a figure for “mobile” revenues of $2.5bn was quoted. This turns out to consist of advertising served to browsers that present a mobile device user-agent string. However, Google lawyer Susan Creighton is on record as saying  that 66% of Google mobile web traffic originates from Apple iOS devices. It is hard to see how this can be accounted for as Android revenue.

Further, the much-trailed “fragmentation” began in 2011 with a vengeance. “Forkdroids”, devices using an operating system based on Android but extensively adapted (“forked” from the main development line), appeared in China and elsewhere. Amazon’s Kindle Fire tablet is an example closer to home.

And the intellectual property fights with Oracle, Apple, and others are a constant source of disruption and a potentially sizable leakage of revenue. In so far as Google’s motivation in acquiring Motorola Mobility was to get hold of its patent portfolio, this has already involved very large sums of money. Another counter-strategy is the partnership with Intel and Lenovo to produce x86-based Android devices, which cannot be cheap either and will probably mean even more fragmentation.

This is not the only example, though – think of Google Books, an extremely expensive product which caused a great deal of litigation, eventually got its way (although not all the issues are resolved), and is now an excellent free tool for searching in old books but no kind of profit centre. Further, Google’s patented automatic scanning has the unfortunate feature of pulling in marginalia, etc. from the original text that its rivals (such as Amazon Kindle) don’t.
Further, Google has recently been trying to monetise one of its classic products, the Google Maps API that essentially started the Web 2.0 phenomenon, with the result that several heavy users (notably Apple and Foursquare)  have migrated to the free OpenStreetMap project and its OpenLayers API.

2: Telco-isation

Like a telco, Google is dependent on one key source of revenue that cross-subsidises the rest of the company – search-based advertising. 

Figure 2: Google’s advertising revenues cascade into all other divisions

Google's Advertising Revenues Cascade

[NB TAC = Traffic Acquisition Cost, CoNR = Cost of Net Revenues]

Having proven to be a category killer for search and advertising across the  whole of the Internet, the twins (search and ads) are hugely critical for Google and also for millions of web sites, content creators, and applications developers. As a result, just like a telco, they are increasingly subject to regulation and political risk. 

Google search rankings have always been subject to an arms race between the black art of search-engine optimisation and Google engineers’ efforts to ensure the integrity of their results, but the whole issue has taken a more serious twist with the arrival of a Federal Trade Commission inquiry into Google’s business practices. The potential problems were dramatised by the so-called “white lady from Google”  incident at Google Kenya, where Google employees scraped a rival directory website’s customers and cold-called them, misrepresenting their competitors’ services, and further by the $500 million online pharmacy settlement. Similarly, the case of the Spanish camp site that wants to be disassociated from horrific photographs of a disaster demonstrates both that there is a demand for regulation and that sooner or later, a regulator or legislator will be tempted to supply it.

The decision to stream Google search quality meetings online should be seen in this light, as an effort to cover this political flank.

As well as the FTC, there is also substantial regulatory risk in the EU. The European Commission, in giving permission for the Motorola acquisition, also stated that it would consider further transactions involving Google and Motorola’s intellectual property on a case-by-case basis. To put it another way, after the Motorola deal, the Commission has set up a Google Alert for M&A activity involving Google.

3: Look & Feel Problems

Google is in the process of a far-reaching refresh of its user interfaces, graphic design, and core search product. The new look affects Search, GMail, and Google + so far, but is presumably going to roll out across the entire company. At the same time, they have begun to integrate Google + content into the search results.

This is, unsurprisingly, controversial and has attracted much criticism, so far only from the early adopter crowd. There is a need for real data to evaluate it. However, there are some reasons to think that Search is looking in the wrong place.

Since the major release codenamed Caffeine in 2008, Google Search engineers have been optimising the system for speed and for first-hit relevance, while also indexing rapidly-changing content faster by redesigning the process of “spidering” web sites to work in parallel. Since then, Google Instant has further concentrated on speed to the first result. In the Q4 results, it was suggested that mobile users are less valuable to Google than desktop ones. One reason for this may be that “obvious” search – Wikipedia in the first two hits – is well served by mobile apps. Some users find that Google’s “deep web” search has suffered.

Under “Google and your world”, recommendations drawn from Google + are being injected into search results. This is especially controversial for a mixture of privacy and user-experience reasons. Danny Sullivan’s SearchEngineLand, for example, argues that it harms relevance without adding enough private results to be of value. Further, doubt has been cast on Google’s numbers regarding the new policy of integrating Google accounts into G+ and G+ content into search.

Another, cogent criticism is that it introduces an element of personality that will render regulatory issues more troublesome. When Google’s results were visibly the output of an algorithm, it was easier for Google to claim that they were the work of impartial machines. If they are given agency and associated with individuals, it may be harder to deny that there is an element of editorial judgment and hence the possibility of bias involved.

Social search has been repeatedly mooted since the mid-2000s as the next-big-thing, but it seems hard to implement. Yahoo!, Facebook, and several others have tried and failed.

Figure 3: Google + on Google Trends: fading into the noise?

 Google + on Google Trends: Fading Into the Noise?
Source: Google Trends

It is possible that Google may have a structural weakness in design as opposed to engineering (which is as excellent as ever). This may explain why a succession of design-focused initiatives have failed – Wave and Buzz have been shut down, Google TV hasn’t gained traction (there are less than one million active devices), and feedback on the developer APIs is poor.

4: Palpable Project Proliferation

Google’s tendency to launch new products is as intimidating as ever. However, there is a strong argument that its tireless creativity lacks focus, and the hit-rate is worrying low. Does Google really need two cut-down OSs for ultra-mobile devices? It has both Android, and ChromeOS, and if the first was intended for mobile phones and the second for netbooks, you can now buy a netbook-like (but rather more powerful) Asus PC that runs Android. Further, Google supports a third operating system for its own internal purposes – the highly customised version of Linux that powers the Google Platform – and could be said to support a fourth, as it pays the Mozilla Foundation substantial amounts of money under the terms of their distribution agreement and their Boot to Gecko project is essentially a mobile OS. IBM also supported four operating systems at its historic peak in the 1980s.  

Also, does Google really need to operate an FTTH network, or own a smartphone vendor? The Larry Page quote we opened with tends to suggest that Google’s historical tendency to do experiments is at work, but both Google’s revenue raisers (Ads and YouTube, which from an economic point of view is part of the advertising business) date from the first three years as a public company. The only real hit Google has had for some time is Android, and as we have seen, it’s not clear that it makes serious money.

Google Wallet, for example, was launched with a blaze of publicity, but failed to attract support from either the financial or the telecoms industry, rather like its predecessor Google Checkout. It also failed to gain user adoption, but it has this in common with all NFC-based payments initiatives. Recently, a major security bug was discovered, and key staff have been leaving steadily, including the head of consumer payments. Another shutdown is probably on the cards. 

Meanwhile, a whole range of minor applications have been shuttered

Another heavily hyped project which does not seem to be gaining traction is the Chromebook, the hardware-as-a-service IT offering aimed at enterprises. This has been criticised on the basis that its $28/seat/month pricing is actually rather high. Over a typical 3 year depreciation cycle for IT equipment, it’s on a par with Apple laptops, and has the restriction that all the applications must work in a Web browser on netbook-class hardware. Google management has been promoting small contract wins in US school districts . Meanwhile, it is frequently observed that Google’s own PC fleet consists mostly of Apple hardware. If Google won’t use them itself, why should any other enterprise IT shop do so? The Google Search meeting linked above contains 2 Lenovo ThinkPads and 13 Apple MacBooks of various models and zero Chromebooks, while none other than Eric Schmidt used a Mac for his MWC 2012 keynote. Traditionally, Google insisted on “dogfooding” its products by using them internally.

The Google Fibre project in Kansas City, for its part, has been struggling with regulatory problems related to its access to city-owned civil infrastructure. Kansas City’s utility poles have reserved areas for different services, for example telecoms and electrical power. Google was given the concession to string the fibre in the more spacious electrical section – however, this requires high voltage electricians rather than telecoms installers to do the job and costs substantially more. Google has been trying to change the terms, and use the telecoms section, but (unsurprisingly) local cable and Bell operators are objecting. As with the muni-WLAN projects of the mid-2000s, the abortive attempt to market the Nexus One without the carriers, and Google Voice, Google has had to learn the hard way that telecoms is difficult.

And while all this has been going on, you might wonder where Google Enterprise 2.0 or Google Ads 2.0 are.

5. Google Play – a Collection of Challenges?

Google recently announced its “new ecosystem”, Google Play. This consists of what was historically known as the Android Market, plus Google Books, Google Music, and the web-based elements of Google Wallet (aka Google Checkout). All of these products are more or less challenged. Although the Android Market has been a success in distributing apps to the growing fleets of Android devices, it continues to contain an unusually high percentage of free apps, developer payouts tend to be lower than on its rivals, and it has had repeated problems with malware. Google Books has been an expensive hobby, involving substantial engineering work and litigation, and seems unlikely to be a profit centre. Google Music – as opposed to YouTube – is also no great success, and it is worth asking why both projects continue.

However, it will be the existing manager of Google Music who takes charge, with Android Market management moving out. It is worth noting that in fact there were two heads of the Android Market – Eric Chu for developer relations and David Conway for product management. This is not ideal in itself.

Further, an effort is being made to force app developers to use the ex-Google Checkout system for in-app billing. This obviously reflects an increased concern for monetisation, but it also suggests a degree of “arguing with the customers”.

To read the note in full, including the following additional analysis…

  • On the Other Hand…
  • Strengths of the Core Business
  • “Apple vs. Google”
  • Content acquisition
  • Summary Key Product Review
  • Search & Advertising
  • YouTube and Google TV
  • Communications Products
  • Android
  • Enterprise
  • Developer Products
  • Summary: Google Dashboard
  • Conclusion
  • Recommendations for Operators
  • The Telco 2.0™ Initiative
  • Index

…and the following figures…

  • Figure 1: Google, Microsoft 2.0?
  • Figure 2: Google’s advertising revenues cascade into all other divisions
  • Figure 3: Google + on Google Trends: fading into the noise?
  • Figure 4: Google’s Diverse Advertiser Base
  • Figure 5: Google’s Content Acquisition. 2008-2009, the missing data point
  • Figure 6: Google Product Dashboard

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 24 page report in PDF format hereNon-Members, please subscribe here, buy a Single User license for this report online here for £595 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, geographies, people and products referenced: AdSense, AdWords, Amazon, Android, Apple, Asus, AT&T, Australia, BBVA, Bell Labs, Boot to Gecko, Caffeine, CES, China, Chromebook, ChromeOS, ContentID, David Conway, Eric Chu, Eric Schmidt, European Commission, Facebook, Federal Trade Commission, GMail, Google, Google +, Google Books, Google Buzz, Google Checkout, Google Maps, Google Music, Google Play, Google TV, Google Voice, Google Wave, GSM, IBM, Intel, Kenya, Keyhole Software, Kindle Fire, Larry Page, Lenovo, Linux, MacBooks, Microsoft, Motorola, Mozilla Foundation, Netflix, Nexus, Office 365, OneNet, OpenLayers API, OpenStreetMap, Oracle, Susan Creighton, ThinkPads, VMWare, Vodafone, Western Electric, Wikipedia, Yahoo!, Your World, YouTube, Zynga

Technologies and industry terms referenced: advertisers, API, content acquisition costs, driverless car, Fibre, Forkdroids, M&A, mobile apps, muni-WLAN, NFC, Search, smart TV, spectrum, UI, VoIP, Wallet

Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon (Updated Extract)

Executive Summary (Extract)

This report analyses the strategies behind the success of Amazon, Apple, Facebook, Google and Skype, before going on to consider the key risks they face and how telcos and their partners should deal with these highly-disruptive Internet giants.

As the global economy increasingly goes digital, these five companies are using the Internet to create global brands with much broader followings than those of the traditional telecoms elite, such as Vodafone, AT&T and Nokia. However, the five have markedly different business models that offer important insights into how to create world-beating companies in the digital economy:

  • Amazon: Amazon’s business-to-business Marketplace and Cloud offerings are text-book examples of how to repurpose assets and infrastructure developed to serve consumers to open up new upstream markets. As the digital economy goes mobile, Amazon’s highly-efficient two-sided commerce platform is enabling it to compete effectively with rivals that control the leading smartphone and tablet platforms – Apple and Google.
  • Apple: Apple has demonstrated that, with enough vision and staying power, an individual company can single-handedly build an entire ecosystem. By combining intuitive and very desirable products, with a highly-standardised platform for software developers, Apple has managed to create an overall customer experience that is significantly better than that offered by more open ecosystems. But Apple’s strategy depends heavily on it continuing to produce the very best devices on the market, which will be difficult to sustain over the long-term.
  • Facebook: A compelling example of how to build a business on network effects. It took Facebook four years of hard work to reach a tipping point of 100 million users, but the social networking service has been growing easily and rapidly ever since. Facebook has the potential to attract 1.4 billion users worldwide, but only if it continues to sidestep rising privacy concerns, consumer fatigue or a sudden shift to a more fashionable service.
  • Google: The search giant’s virtuous circle keeps on spinning to great effect – Google develops scores of free, and often-compelling, Internet services, software platforms and apps, which attract consumers and advertisers, enabling it to create yet more free services. But Google’s acquisition of Motorola Mobility risks destabilising the Android ecosystem on which a big chunk of its future growth depends.
  • Skype: Like Facebook and Google, Skype sought users first and revenues second. By creating a low-cost, yet feature-rich, product, Skype has attracted more than 660 million users and created sufficient strategic value to persuade Microsoft to hand over $8.5bn. Skype’s share of telephony traffic is rising inexorably, but Google and Apple may go to great lengths to prevent a Microsoft asset gaining a dominant position in peer-to-peer communications.

The strategic challenge

There is a clear and growing risk that consumers’ fixation on the products and services provided by the five leading disruptors could leave telcos providing commoditised connectivity and struggling to make a respectable return on their massive investment in network infrastructure and spectrum.

In developed countries, telcos’ longstanding cash-cows – mobile voice calls and SMS – are already being undermined by Internet-based alternatives offered by Skype, Google, Facebook and others. Competition from these services could see telcos lose as much as one third of their messaging and voice revenues within five years (see Figure 1) based on projections from our global survey, carried out in September 2011.

Figure 1 – The potential combined impact of the disruptors on telcos’ core services

Impact of Google, Apple, Facebook, Microsoft/Skype, Amaxon on telco services

Source: Telco 2.0 online survey, September 2011, 301 respondents

Moreover, most individual telcos lack the scale and the software savvy to compete effectively in other key emerging mobile Internet segments, such as local search, location-based services, digital content, apps distribution/retailing and social-networking.

The challenge for telecoms and media companies is to figure out how to deal with the Internet giants in a strategic manner that both protects their core revenues and enables them to expand into new markets. Realistically, that means a complex, and sometimes nuanced, co-opetition strategy, which we characterise as the “Great Game”.

In Figure 3 below, we’ve mapped the players’ roles and objectives against the markets they operate in, giving an indication of the potential market revenue at stake, and telcos’ generic strategies.

Figure 3- The Great Game – Positions, Roles and Strategies

The Great Game - Telcos, Amazon, Apple, Google, Facebook, Skype/Microsoft

Our in-depth analysis, presented in this report, describes the ‘Great Game’ and the strategies that we recommend telcos and others can adopt in summary and in detail. [END OF FIRST EXTRACT]

Report contents

  • Executive Summary [5 pages – including partial extract above]
  • Key Recommendations for telcos and others [20 pages]
  • Introduction [10 pages – including further extract below]


The report then contains c.50 page sections with detailed analysis of objectives, business model, strategy, and options for co-opetition for:

  • Google
  • Apple
  • Facebook
  • Microsoft/Skype
  • Amazon

Followed by:

  • Conclusions and recommendations [10 pages]
  • Index

The report includes 124 charts and tables.

The rest of this page comprises an extract from the report’s introduction, covering the ‘new world order’, investor views, the impact of disruptors on telcos, and how telcos are currently fighting back (including pricing, RCS and WAC), and further details of the report’s contents. 

 

Introduction

The new world order

The onward march of the Internet into daily life, aided and abetted by the phenomenal demand for smartphones since the launch of the first iPhone in 2007, has created a new world order in the telecoms, media and technology (TMT) industry.

Apple, Google and Facebook are making their way to the top of that order, pushing aside some of the world’s biggest telcos, equipment makers and media companies. This trio, together with Amazon and Skype (soon to be a unit of Microsoft), are fundamentally changing consumers’ behaviour and dismantling longstanding TMT value chains, while opening up new markets and building new ecosystems.

Supported by hundreds of thousands of software developers, Apple, Google and Facebook’s platforms are fuelling innovation in consumer and, increasingly, business services on both the fixed and mobile Internet. Amazon has set the benchmark for online retailing and cloud computing services, while Skype is reinventing telephony, using IP technology to provide compelling new functionality and features, as well as low-cost calls.

On their current trajectory, these five companies are set to suck much of the value out of the telecoms services market, substituting relatively expensive and traditional voice and messaging services with low-cost, feature-rich alternatives and leaving telcos simply providing data connectivity. At the same time, Apple, Amazon, Google and Facebook have become major conduits for software applications, games, music and other digital content, rewriting the rules of engagement for the media industry.

In a Telco2.0 online survey of industry executives conducted in September 2011, respondents said they expect Apple, Google, Facebook and Skype together to have a major impact on telcos’ voice and messaging revenues in the next three to five years . Although these declines will be partially compensated for by rising revenues from mobile data services, the respondents in the survey anticipate that telcos will see a major rise in data carriage costs (see Figure 1 – The potential combined impact of the disruptors on telcos’ core services).

In essence, we consider Amazon, Apple, Facebook, Google and Skype-Microsoft to be the most disruptive players in the TMT ecosystem right now and, to keep this report manageable, we have focused on these five giants. Still, we acknowledge that other companies, such as RIM, Twitter and Baidu, are also shaping consumers’ online behaviour and we will cover these players in more depth in future research.

The Internet is, of course, evolving rapidly and we fully expect new disruptors to emerge, taking advantage of the so-called Social, Local, Mobile (SoLoMo) forces, sweeping through the TMT landscape. At the same time, the big five will surely disrupt each other. Google is increasingly in head-to-head competition with Facebook, as well as Microsoft, in the online advertising market, while squaring up to Apple and Microsoft in the smartphone platform segment. In the digital entertainment space, Amazon and Google are trying to challenge Apple’s supremacy, while also attacking the cloud services market.

Investor trust

Unlike telcos, the disruptors are generally growing quickly and are under little, or no, pressure from shareholders to pay dividends. That means they can accumulate large war chests and reinvest their profits in new staff, R&D, more data centres and acquisitions without any major constraints. Investors’ confidence and trust enables the disruptors to spend money freely, keep innovating and outflank dividend-paying telcos, media companies and telecoms equipment suppliers.

By contrast, investors generally don’t expect telcos to reinvest all their profits in their businesses, as they don’t believe telcos can earn a sufficiently high return on capital. Figure 16 shows the dividend yields of the leading telcos (marked in blue). Of the disruptors, only Microsoft (marked in green) pays a dividend to shareholders.

Figure 16: Investors expect dividends, not growth, from telcos

Figure 1 Chart Google Apple Facebook Microsoft Skype Amazon Sep 2011 Telco 2.0

Source: Google Finance 2/9/2011

The top telcos’ turnover and net income is comparable, or superior, to that of the leading disruptors, but this isn’t reflected in their respective market capitalisations. AT&T’s turnover is approximately four times that of Google and its net income twice as great, yet their market cap is similar. Even accounting for their different capital structures, investors clearly expect Google to grow much faster than AT&T and syphon off more of the value in the TMT sector.

More broadly, the disparity in the market value between the leading disruptors and the leading telcos’ market capitalisations suggest that investors expect Apple, Microsoft and Google’s revenues and profits to keep rising, while they believe telcos’ will be stable or go into decline. Figure 17 shows how the market capitalisation of the disruptors (marked in green) compares with that of the most valuable telcos (marked in blue) at the beginning of September 2011.

Figure 17: Investors value the disruptors highly

Figure 2 Chart Google Apple Facebook Microsoft Skype Amazon Market Capitalisation Sep 2011 Telco 2.0

Source: Google Finance 2/9/2011 (Facebook valued at Facebook $66bn based on IPG sale in August 2011)

Impact of disruptors on telcos

It has taken longer than many commentators expected, but Internet-based messaging and social networking services are finally eroding telcos’ SMS revenues in developed markets. KPN, for example, has admitted that smartphones, equipped with data communications apps (and Whatsapp in particular), are impacting its voice and SMS revenues in its consumer wireless business in its home market of The Netherlands (see Figure 18). Reporting its Q2 2011 results, KPN said that changing consumer behaviour cut its consumer wireless service revenues in Holland by 2% year-on-year.

Figure 18: KPN reveals falling SMS usage

Figure 3 Chart Google Apple Facebook Microsoft Skype Amazon KPN Trends Sep 2011 Telco 2.0

Source: KPN Q2 results

In the second quarter, Vodafone also reported a fall in messaging revenue in Spain and southern Africa, while Orange saw its average revenue per user from data and SMS services fall in Poland.

How telcos are fighting back

Big bundles

Carefully-designed bundles are the most common tactic telcos are using to try and protect their voice and messaging business. Most postpaid monthly contracts now come with hundreds of SMS messages and voice minutes, along with a limited volume of data, bundled into the overall tariff package. This mix encourages consumers to keep using the telcos’ voice and SMS services, which they are paying for anyway, rather than having Skype or another VOIP service soak up their precious data allowance.

To further deter usage of VOIP services, KPN and some other telcos are also creating tiered data tariffs offering different throughput speeds. The lower-priced tariffs tend to have slow uplink speeds, making them unsuitable for VOIP (see Figure 19 below). If consumers want to use VOIP, they will need to purchase a higher-priced data tariff, earning the telco back the lost voice revenue.

Figure 19: How KPN is trying to defend its revenues

Figure 4 Chart Google Apple Facebook Microsoft Skype Amazon KPN Defence Sep 2011 Telco 2.0

Source: KPN’s Q2 results presentation

Of course, such tactics can be undermined by competition – if one mobile operator in a market begins offering generous data-only tariffs, consumers may well gravitate towards that operator, forcing the others to adjust their tariff plans.

Moreover, bundling voice, SMS and data will generally only work for contract customers. Prepaid customers, who only want to pay for what they are use, are naturally charged for each minute of calls they make and each message they send. These customers, therefore, have a stronger financial incentive to find a free WiFi network and use that to send messages via Facebook or make calls via Skype.

The Rich Communications Suite (RCS)

To fend off the threat posed by Skype, Facebook, Google and Apple’s multimedia communications services, telcos are also trying to improve their own voice and messaging offerings. Overseen by mobile operator trade association the GSMA, the Rich Communications Suite is a set of standards and protocols designed to enable mobile phones to exchange presence information, instant messages, live video footage and files across any mobile network.

In an echo of social networks, the GSMA says RCS will enable consumers to create their own personal community and share content in real time using their mobile device.

From a technical perspective, RCS uses the Session Initiation Protocol (SIP) to manage presence information and relay real-time information to the consumer about which service features they can use with a specific contact. The actual RCS services are carried over an IP-Multimedia Subsystem (IMS), which telcos are using to support a shift to all-IP fixed and mobile networks.

Deutsche Telekom, Orange, Telecom Italia, Telefonica and Vodafone have publically committed to deploy RCS services, indicating that the concept has momentum in Europe, in particular. The GSMA says that interoperable RCS services will initially be launched by these operators in Spain, Germany, France and Italy in late 2011 and 2012. [NB We’ll be discussing RCSe with some of the operators at our EMEA event in London in November 2011.]

In theory, at least, RCS will have some advantages over many of the communications services offered by the disruptors. Firstly, it will be interoperable across networks, so you’ll be able to reach people using different service providers. Secondly, the GSMA says RCS service features will be automatically available on mobile devices from late 2011 without the need to download and install software or create an account (by contrast, Apple’s iMessage service, for example, will only be installed on Apple devices).

But questions remain over whether RCS devices will arrive in commercial quantities fast enough, whether RCS services will be priced in an attractive way and will be packaged and marketed effectively. Moreover, it isn’t yet clear whether IMS will be able to handle the huge signalling load that would arise from widespread usage of RCS.

Internet messaging protocols, such as XMPP, require the data channel to remain active continuously. Tearing down and reconnecting generates lots of signalling traffic, but the alternative – maintaining a packet data session – will quickly drain the device’s battery.
By 2012, Facebook and Skype may be even more entrenched than they are today and their fans may see no need to use telcos’ RCS services.

Competing head-on

Some of the largest mobile operators have tried, and mostly failed, to take on the disruptors at their own game. Vodafone 360, for example, was Vodafone’s much-promoted, but ultimately, unsuccessful €500 million attempt to insert itself between its customers and social networking and messaging services from the likes of Facebook, Windows Live, Google and Twitter.

As well as aggregating contacts and feeds from several social networks, Vodafone 360 also served as a gateway to the telco’s app and music store. But most Vodafone customers didn’t appear to see the need to have an aggregator sit between them and their Facebook feed. During 2011, the service was stripped back to be just the app and music store. In essence, Vodafone 360 didn’t add enough value to what the disruptors are already offering. We understand, from discussions with executives at Vodafone, that the service is now being mothballed.

A small number of large telcos, mostly in emerging markets where smartphones are not yet commonplace, have successfully built up a portfolio of value-added consumer services that go far beyond voice and messaging. One of the best examples is China Mobile, which claims more than 82 million users for its Fetion instant messaging service, for example (see Figure 20 – China Mobile’s Internet Services).

Figure 20 – China Mobile’s Internet Services

China Mobile Services, Google, Apple, Facebook Report, Telco 2.0

Source: China Mobile’s Q2 2011 results

However, it remains to be seen whether China Mobile will be able to continue to attract so many customers for its (mostly paid-for) Internet services once smartphones with full web access go mass-market in China, making it easier for consumers to access third-parties’ services, such as the popular QQ social network.

Some telcos have tried to compete with the disruptors by buying innovative start-ups. A good example is Telefonica’s acquisition of VOIP provider Jajah for US$207 million in January 2010. Telefonica has since used Jajah’s systems and expertise to launch low-cost international calling services in competition with Skype and companies offering calling cards. Telefonica expects Jajah’s products to generate $280 million of revenue in 2011, primarily from low-cost international calls offered by its German and UK mobile businesses, according to a report in the FT.

The Wholesale Applications Community (WAC)

Concerned about their growing dependence on the leading smartphone platforms, such as Android and Apple’s iOS, many of the world’s leading telcos have banded together to form the Wholesale Applications Community (WAC).

WAC’s goal is to create a platform developers can use to create apps that will run across different device operating systems, while tapping the capabilities of telcos’ networks and messaging and billing systems.

At the Mobile World Congress in February 2011, WAC said that China Mobile, MTS, Orange, Smart, Telefónica, Telenor, Verizon and Vodafone are “connected to the WAC platform”, while adding that Samsung and LG will ensure “that all devices produced by the two companies that are capable of supporting the WAC runtime will do so.”

It also announced the availability of the WAC 2.0 specification, which supports HTML5 web applications, while WAC 3.0, which is designed to enable developers to tap network assets, such as in-app billing and user authentication, is scheduled to be available in September 2011.

Ericsson, the leading supplier of mobile networks, is a particularly active supporter of WAC, which also counts leading Alcatel-Lucent, Huawei, LG Electronics, Qualcomm, Research in Motion, Samsung and ZTE, among its members.

In theory, at least, apps developers should also throw their weight behind WAC, which promises the so far unrealised dream of “write once, run anywhere.” But, in reality, games developers, in particular, will probably still want to build specific apps for specific platforms, to give their software a performance and functionality edge over rivals.

Still, the ultimate success or failure of WAC will likely depend on how enthusiastically Apple and Google, in particular, embrace HTML5 and actively support it in their respective smartphone platforms. We discuss this question further in the Apple and Google chapters of this report.

Summarising current telcos’ response to disruptors

 

Telcos, and their close allies in the equipment market, are clearly alert to the threat posed by the major disruptors, but they have yet to develop a comprehensive game plan that will enable them to protect their voice and messaging revenue, while expanding into new markets.

Collective activities, such as RCS and WAC, are certainly necessary and worthwhile, but are not enough. Telcos, and companies across the broader TMT ecosystem, need to also adapt their individual strategies to the rise of Amazon, Apple, Facebook, Google and Skype-Microsoft. This report is designed to help them do that.

[END OF EXTRACT]

 

Customer Experience 2.0: Learning from Amazon? (STL Presentation)

Customer Experience 2.0: Learning from Amazon?, Presentation by Phil Laidler, Director, Consulting, STL Partners. Can we learn from Amazon, or are we facing the fall of the Telco Empire at the hands of the OTT Invaders? Presented at EMEA Brainstorm, November 2011. Fall of the Telco Empire?

Download presentation here.

Links here for more on New Digital Economics brainstorms and Strategy 2.0 research, or call +44 (0) 207 247 5003.

Example slide from the presentation: