Reliance Jio: Learning from India’s problem solver

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Introduction

This year marks the 25th anniversary of mobile networks in India. The huge potential of the market has attracted many players (even as recently as 2016, there were 12 mobile operators in India). But most have had their fingers burned by the complexities of this market, as well as intense competition, particularly following the entry of Reliance Jio in September 2016.

In the past four years, Reliance Jio has gone from strength to strength, becoming the leading telco in terms of mobile subscriber numbers in December 2019, dramatically expanding internet access and driving adoption of digital services across the country. It is not an exaggeration to say that Jio played a major role in the digital transformation of India to date.

Evidence of Jio’s impact on the Indian market

Source: STL Partners

Jio leads Indian telecoms

By delivering broad societal progress and value, Jio has been able to overcome many of the regulatory and political challenges that have hindered other new entrants to the Indian telecoms market. Jio is in good standing as regards its future ambitions in the digital environment, helping it to attract over USD20 billion in investment between April and July 2020 from Facebook, Google and other international investors.

In India, Reliance Jio has trialled elements of a Coordination Age approach, setting out to solve various socio-economic problems by matching supply and demand, while moving up the value chain to unlock further sources of revenue growth.

At the time of Jio’s entry, India was still predominantly a 3G market, with voice calls being the main application. Although there were a multitude of plans on offer and the retail price per minute was among the lowest in the world, mobile communications remained out of reach for many (not helped by high license and spectrum fees that translated into upward pressure on pricing).

Reliance Industries recognised an opportunity to use the advent of 4G technology to build a data-first telecoms player that could support its wider aspirations to develop a globally competitive technology business in India. Accordingly, it obtained a nationwide license to operate a 4G network and encouraged take-up with a promotion that offered customers free voice calls forever.

The existing operators rushed to defend their market positions by dropping their prices resulting in a price war that destroyed value in the market and has led to consolidation and insolvencies such that, aside from Jio, only two privately-owned operators remain – with the real possibility that the market will shrink further and become a duopoly.

STL Partners covered the success of Jio’s disruptive market entry strategy in Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed? report in 2017. This report considers Jio’s strategy in the context of the Coordination Age. It looks at what this has meant for the market and highlights the implications for operators in other developing markets.

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Table of Contents

  • Executive Summary
  • Introduction
  • Interventionist government shapes market
    • Mobile market overview
    • The shifting sands of policy
  • Jio overtakes the incumbents
  • The rise of Reliance Jio
    • Leveraging the strength of a conglomerate
    • Restructuring and renewal
  • Major emphasis on partnerships
    • Start-ups
    • Global technology partners
  • Competitor positions
    • Bharti Airtel faring better than Vodafone Idea
    • Competitors’ relationship with the government
  • Conclusions
    • Lessons for telcos in developing markets
  • Index

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Telco ecosystems: How to make them work

The ecosystem business framework

The success of large businesses such as Microsoft, Amazon and Google as well as digital disrupters like Airbnb and Uber is attributed to their adoption of platform-enabled ecosystem business frameworks. Microsoft, Amazon and Google know how to make ecosystems work. It is their ecosystem approach that helped them to scale quickly, innovate and unlock value in opportunity areas where businesses that are vertically integrated, or have a linear value chain, would have struggled. Internet-enabled digital opportunity areas tend to be unsuited to the traditional business frameworks. These depend on having the time and the ability to anticipate needs, plan and execute accordingly.

As businesses in the telecommunications sector and beyond try to emulate the success of these companies and their ecosystem approach, it is necessary to clarify what is meant by the term “ecosystem” and how it can provide a framework for organising business.

The word “ecosystem” is borrowed from biology. It refers to a community of organisms – of any number of species – living within a defined physical environment.

A biological ecosystem

The components of a biological ecosystem

Source: STL Partners

A business ecosystem can therefore be thought of as a community of stakeholders (of different types) that exist within a defined business environment. The environment of a business ecosystem can be small or large.  This is also true in biology, where both a tree and a rainforest can equally be considered ecosystem environments.

The number of organisms within a biological community is dynamic. They coexist with others and are interdependent within the community and the environment. Environmental resources (i.e. energy and matter) flow through the system efficiently. This is how the ecosystem works.

Companies that adopt an ecosystem business framework identify a community of stakeholders to help them address an opportunity area, or drive business in that space. They then create a business environment (e.g. platforms, rules) to organise economic activity among those communities.  The environment integrates community activities in a complementary way. This model is consistent with STL Partners’ vision for a Coordination Age, where desired outcomes are delivered to customers by multiple parties acting together.

Characteristics of business ecosystems that work

In the case of Google, it adopted an ecosystem approach to tackle the search opportunity. Its search engine platform provides the environment for an external stakeholder community of businesses to reach consumers as they navigate the internet, based on what consumers are looking for.

  • Google does not directly participate in the business-consumer transaction, but its platform reduces friction for participants (providing a good customer experience) and captures information on the exchange.

While Google leverages a technical platform, this is not a requirement for an ecosystem framework. Nespresso built an ecosystem around its patented coffee pod. It needed to establish a user-base for the pods, so it developed a business environment that included licensing arrangements for coffee machine manufacturers.  In addition, it provided support for high-end homeware retailers to supply these machines to end-users. It also created the online Nespresso Club for coffee aficionados to maintain demand for its product (a previous vertically integrated strategy to address this premium coffee-drinking niche had failed).

Ecosystem relevance for telcos

Telcos are exploring new opportunities for revenue. In many of these opportunities, the needs of the customer are evolving or changeable, budgets are tight, and time-to-market is critical. Planning and executing traditional business frameworks can be difficult under these circumstances, so ecosystem business frameworks are understandably of interest.

Traditional business frameworks require companies to match their internal strengths and capabilities to those required to address an opportunity. An ecosystem framework requires companies to consider where those strengths and capabilities are (i.e. external stakeholder communities). An ecosystem orchestrator then creates an environment in which the stakeholders contribute their respective value to meet that end. Additional end-user value may also be derived by supporting stakeholder communities whose products and services use, or are used with, the end-product or service of the ecosystem (e.g. the availability of third party App Store apps add value for end customers and drives demand for high end Apple iPhones). It requires “outside-in” strategic thinking that goes beyond the bounds of the company – or even the industry (i.e. who has the assets and capabilities, who/what will support demand from end-users).

Many companies have rushed to implement ecosystem business frameworks, but have not attained the success of Microsoft, Amazon or Google, or in the telco arena, M-Pesa. Telcos require an understanding of the rationale behind ecosystem business frameworks, what makes them work and how this has played out in other telco ecosystem implementations. As a result, they should be better able to determine whether to leverage this approach more widely.

Table of Contents

  • Executive Summary
  • The ecosystem business framework
  • Why ecosystem business frameworks?
    • Benefits of ecosystem business frameworks
  • Identifying ecosystem business frameworks
  • Telco experience with ecosystem frameworks
    • AT&T Community
    • Deutsche Telekom Qivicon
    • Telecom Infra Project (TIP)
    • GSMA Mobile Connect
    • Android
    • Lessons from telco experience
  • Criteria for successful ecosystem businesses
    • “Destination” status
    • Strong assets and capabilities to share
    • Dynamic strategy
    • Deep end-user knowledge
    • Participant stakeholder experience excellence
    • Continuous innovation
    • Conclusions
  • Next steps
    • Index

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

Google’s core business is under pressure

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

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

Source: STL Partners, Google 10-K filing

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

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

Google remains massively dependent on a commoditising advertising business

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

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

Source: STL Partners, Google 10-K

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

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

Source: STL Partners, Google 10-K

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

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

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

Source: STL Partners, Google 10-K

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

 

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

 

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

 

Facebook: Telcos’ New Best Friend?

How Facebook is changing

A history of adaptation

One of the things that sets Facebook apart from its largely defunct predecessors, such as MySpace, Geocities and Friends Reunited, is its ability to adapt to the evolution of the Internet and consumer behaviour. In its decade-long history, Facebook has evolved from a text-heavy, PC-based experience used by American students into a world-leading digital communications and commerce platform used by people of all ages. The basic student matchmaking service Zuckerberg and his fellow Harvard students created in 2004 now matches buyers and sellers in competition with Google, Amazon and eBay (see Figure 1).

Figure 1: From student matchmaking service to a leading digital commerce platform

Source: Zuckerberg’s Facebook page and Facebook investor relations

Launched in early 2004, Facebook initially served as a relatively basic directory with photos and limited communications functionality for Harvard students only. In the spring of 2004, it began to expand to other universities, supported by seed funding from Peter Thiel (co-founder of Paypal). In September 2005, Facebook was opened up to the employees of some technology companies, including Apple and Microsoft. By the end of 2005, it had reached five million users.

Accel Partners invested US$12.7 million in the company in May 2005 and Greylock Partners and others followed this up with another US$27.5 million in March 2006. The additional investment enabled Facebook to expand rapidly. During 2006, it added the hugely popular newsfeed and the share functions and opened up the registration process to anyone. By December 2006, Facebook had 12 million users.

The Facebook Platform was launched in 2007, enabling affiliate sites and developers to interact and create applications for the social network. In a far-sighted move, Microsoft invested US$240 million in October 2007, taking a 1.6% stake and valuing Facebook at US$15 billion. By August 2008, Facebook had 100 million users.

Achieving the 100 million user milestone appears to have given Facebook ‘critical mass’ because at that point growth accelerated dramatically. The company doubled its user base to 200 million in nine months (May 2009) and has continued to grow at a similar rate since then.

As usage continue to grow rapidly, it was increasingly clear that Facebook could erode Google’s dominant position in the Internet advertising market. In June 2011, Google launched the Google + social network – the latest move in a series of efforts by the search giant to weaken Facebook’s dominance of the social networking market. But, like its predecessors, Google+ has had little impact on Facebook.

2012-2013 – the paranoid years

Although Facebook shrugged off the challenge from Google+, the rapid rise of the mobile Internet did cause the social network to wobble in 2012. The service, which had been designed for use on desktop PCs, didn’t work so well on mobile devices, both in terms of providing a compelling user experience and achieving monetisation. Realising Facebook could be disrupted by the rise of the mobile Internet, Zuckerberg belatedly called a mass staff meeting and announced a “mobile first” strategy in early 2012.

In an IPO filing in February 2012, Facebook acknowledged it wasn’t sure it could effectively monetize mobile usage without alienating users. “Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results,” it duly noted in the filing.

Although usage of Facebook continued to rise on both the desktop and the mobile, there was increasing speculation that it could be superseded by a more mobile-friendly service, such as fast-growing photo-sharing service Instagram. Zuckerberg’s reaction was to buy Instagram for US$1 billion in April 2012 (a bargain compared with the $21 billion plus Facebook paid for WhatsApp less than two years later).

Moreover, Facebook did figure out how to monetise its mobile usage. Cautiously at first, it began embedding adverts into consumers’ newsfeeds, so that they were difficult to ignore. Although Facebook and some commentators worried that consumers would find these adverts annoying, the newsfeed ads have proven to be highly effective and Facebook continued to grow. In October 2012, now a public company, Facebook triumphantly announced it had one billion active users, with 604 million of them using the mobile site.

Even so, Facebook spent much of 2013 tinkering and experimenting with changes to the user experience. For example, it altered the design of the newsfeed making the images bigger and adding in new features. But some commentators complained that the changes made the site more complicated and confusing, rather than simplifying it for mobile users equipped with a relatively small screen. In April 2013, Facebook tried a different tack, launching Facebook Home, a user interface layer for Android-compatible phones that provides a replacement home screen.

And Zuckerberg continued to worry about upstart mobile-orientated competitors. In November 2013, a number of news outlets reported that Facebook offered to buy Snapchat, which enables users to send messages that disappear after a set period, for US$3 billion. But the offer was turned down.

A few months later, Facebook announced it was acquiring the popular mobile messaging app WhatsApp for what amounted to more than US$21 billion at the time of completion.

In 2014 – going on the offensive

By acquiring WhatsApp at great expense, Facebook alleviated immediate concerns that the social network could be dislodged by another disruptor, freeing up Zuckerberg to turn his attention to new technologies and new markets. The acquisition also put to rest investors’ immediate fears that Facebook could be superseded by a more fashionable, dedicated mobile service, pushing up the share price (see the section on Facebook’s valuation). In May 2014, Facebook wrong-footed many industry watchers and some of its rivals by announcing it had agreed to acquire Oculus VR, Inc., a leading virtual reality company, for US$2 billion in cash and stock.

Zuckerberg has since described the WhatsApp and Oculus acquisitions as “big bets on the next generation of communication and computing platforms.” And Facebook is also investing heavily in organic expansion, increasing its headcount by 45% in 2014, while opening another data center in Altoona, Iowa.

Zuckerberg also continues to devote time and attention to Internet.org, a multi-company initiative to bring free basic Internet services to people who aren’t connected. Announced in August 2013, Internet.org has since launched free basic internet services in six developing countries. For example, in February 2015, Facebook and Reliance Communications launched Internet.org in India. As a result, Reliance customers in six Indian states (Tamil Nadu, Mahararashtra, Andhra Pradesh, Gujarat, Kerala, and Telangana) now have access to about 40 services ranging from news, maternal health, travel, local jobs, sports, communication, and local government information.

Zuckerberg said that more than 150 million people now have the option to connect to the internet using Internet.org, and the initiative had, so far, succeeded in connecting seven million people to the internet who didn’t before have access. “2015 is going to be an important year for our long term plans,” he noted.

The Facebook exception – no fear, more freedom

Although it is now listed, Facebook is clearly not a typical public company. Its massive lead in the social networking market has given it an unusual degree of freedom. Zuckerberg has a controlling stake in the social network (he is able to exercise voting rights with respect to a majority of the voting power of the outstanding capital stock) and the self-confidence to ignore any grumblings on Wall Street. Facebook is able to make acquisitions most other companies couldn’t contemplate and can continue to put Zuckerberg’s long-term objectives ahead of those of short-term shareholders. Like Amazon, Facebook frequently reminds investors that it isn’t trying to maximise short-term profitability. And unlike Amazon, Facebook may not even be trying to maximize long-term profitability.

On Facebook’s quarterly earning calls, Zuckerberg likes to talk about Facebook’s broad, long-term aims, without explaining clearly how fulfilling these objectives will make the company money. “In the next decade, Facebook is focused on our mission to connect the entire world, welcoming billions of people to our community and connecting many more people to the internet through Internet.org (see Figure 2),” he said in the January 2015 earnings call. “Similar to our transition to mobile over the last couple of years, now we want to really focus on serving everyone in the world.”

Figure 2: Zuckerberg is pushing hard for the provision of basic Internet services

Source: Facebook.com

Not all of the company’s investors are entirely comfortable with this mission. On that earnings call, one analyst asked Zuckerberg: “Mark, I think during your remarks in every earnings call, you talk to your investors for a considerable amount of time about Facebook’s efforts to connect the world, and specifically about Internet.org which suggest you think this is important to investors. Can you clarify why you think this matters to investors?”

Zuckerberg’s response: “It matters to the kind of investors that we want to have, because we are really a mission-focused company. We wake up every day and make decisions because we want to help connect the world. That’s what we’re doing here.

“Part of the subtext of your question is that, yes, if we were only focused on making money, we might put all of our energy on just increasing ads to people in the US and the other most developed countries. But that’s not the only thing that we care about here.

“I do think that over the long term, that focusing on helping connect everyone will be a good business opportunity for us, as well. We may not be able to tell you exactly how many years that’s going to happen in. But as these countries get more connected, the economies grow, the ad markets grow, and if Facebook and the other services in our community, or the number one, and number two, three, four, five services that people are using, then over time we will be compensated for some of the value that we’ve provided. This is why we’re here. We’re here because our mission is to connect the world. I just think it’s really important that investors know that.”

Takeaways

Facebook may be a public company, but it doesn’t worry much about shareholders’ short-term aspirations. It often behaves like a private company that is focused first and foremost on fulfilling the goals of its founder. It is clear Zuckerberg is playing the long game. But it isn’t clear what yardsticks he is using to measure success. Although Zuckerberg knows Facebook needs to be profitable enough to ensure investors’ continued support, his primary goal may be to bring hundreds of millions more people online and secure his place in posterity. There is a danger that Zuckerberg’s focus on connecting people in Africa and developing Asia means that there won’t be sufficient top management attention on the multi-faceted digital commerce struggle with Google in North America and Western Europe.

Financials and business model

Network effects still strong

Within that wider mission to connect the world, Facebook continues to do a great job of connecting people to Facebook. Fuelled by network effects, Facebook says that 1.39 billion people now use Facebook each month (see Figure 3) and 890 million people use the service daily, an increase of 165 million monthly active users and 133 million daily active users in 2014. In developed markets, many consumers use Facebook as a primary medium for communications, relying on it to send messages, organize events and relay their news. As a result, in parts of Europe and North America, adults without a Facebook account are increasingly considered eccentric.

Figure 3: Facebook’s user base continues to grow rapidly

Source: Facebook and STL Partners analysis

Having said that, some active users are clearly more active and valuable than others. In a regulatory filing, Facebook admits that some active users may, in fact, be bots: “Some of our metrics have also been affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs. The impact of this automatic activity on our metrics varied by geography because mobile usage varies in different regions of the world.”

This automatic polling of Facebook’s servers by mobile devices makes it difficult to judge the true value of the social network’s user base. Anecdotal evidence suggests many people with Facebook profiles are kept active on Facebook primarily by their smartphone apps, rather than because they are actively choosing to use the service. Still, Facebook would argue that these people are seeing the notifications on their mobile devices and are, therefore, at least partially engaged.

 

  • Executive Summary
  • How Facebook is changing
  • A history of adaptation
  • The Facebook exception – no fear, more freedom
  • Financials and business model
  • Growth prospects for the core business
  • User growth
  • Monetisation – better targeting, higher prices
  • Mobile advertising spend lags behind usage
  • The Facebook Platform – Beyond the Walled Garden
  • Multimedia – taking on YouTube
  • Search – challenging Google’s core business
  • Enabling transactions – moving beyond advertising
  • Virtual reality – a long-term game
  • Takeaways
  • Threats and risks
  • Facebook fatigue
  • Google – Facebook enemy number one
  • Privacy concerns
  • Wearables and the Internet of Things
  • Local commerce – in need of a map
  • Facebook and communication services
  • Conclusions
  • Facebook is spread too thin
  • Partnering with Facebook – why and how
  • Competing with Facebook – why and how

 

  • Figure 1: From student matchmaking service to a leading digital commerce platform
  • Figure 2: Zuckerberg is pushing hard for the provision of basic Internet services
  • Figure 3: Facebook’s user base continues to grow rapidly
  • Figure 4: Facebook’s revenue growth has accelerated in the past two years
  • Figure 5: Facebook’s ARPU has risen sharply in the past two years
  • Figure 6: After wobbling in 2012, investors’ belief in Facebook has strengthened
  • Figure 7: Despite a rebound, Facebook’s valuation per user is still below its peak
  • Figure 8: Facebook could be serving 2.3 billion people by 2020
  • Figure 9: Share of digital advertising – Facebook is starting to close the gap on Google but remains a long way behind
  • Figure 10: The gap between click through rates for search and social remains substantial
  • Figure 11: Social networks’ revenue per click is rising but remains 40% of search
  • Figure 12: Facebook’s advertising has moved from the right column to centre stage
  • Figure 13: Facebook’s startling mobile advertising growth
  • Figure 14: Zynga’s share price reflects decline of Facebook.com as an app platform
  • Figure 15 – Facebook Connect – an integral part of the Facebook Platform
  • Figure 16: Leading Internet players’ share of social log-ins over time
  • Figure 17: Facebook’s personalised search proposition
  • Figure 18: Facebook’s new buy button – embedded in a newsfeed post
  • Figure 19: The rise and rise of Android – not good for Facebook
  • Figure 21: Facebook and Google are both heavily associated with privacy issues
  • Figure 22: Facebook wants to conquer the Wheel of Digital Commerce
  • Figure 23: Facebook’s cash flow is far behind that of Google and Apple
  • Figure 24: Facebook’s capital expenditure is relatively modest compared with peers
  • Figure 25: Facebook’s capex/revenue ratio has been high but is falling

 

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

Introduction 

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

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

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

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

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

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

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

 

Source: Company accounts, Morgan Stanley

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

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

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

 

Source: Google Finance

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

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

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

Figure 3: Selected acquisitions by Google, 2003-14

Source: Various

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

Three questions raised by Google’s acquisition of Nest

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

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

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

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

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

  • What does the Nest acquisition mean for telcos?

 

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

 

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

Launchers: a new relevance point for telcos?

Introduction

Improving engagement has many benefits for an operator. It can help change customers’ perceptions which in turn can reduce churn and increase customer acquisition as well as opening up new avenues for telcos to offer additional services.

In this note, we analyse the opportunity for mobile operators within a new control point in the digital ecosystem – the ‘launcher’ application for Android devices. We present an overview of the opportunity, assessing what the product is and what’s at stake as well as providing an overview of the key players in this space. The report then focuses on how telcos may choose to play in this area, analysing the different strategies and their suitability to different types of operators.

The Telco Dilemma

Telcos’ engagement with and knowledge of their customers has been marginalized in the smartphone world. Whilst telcos still understand how customers use the traditional components of their mobile device (voice calls; messaging; data usage), the main digital disruptors now determine how users primarily engage with their devices – they control:

  • App portals (Apple; Android)
  • Search (Google)
  • E/M-commerce (Amazon; eBay; PayPal)
  • Content services (YouTube; Yahoo)
  • OTT comms (Facebook; WhatsApp; Twitter)

For more analysis on how telcos can understand and deal with these disruptors please read Telco 2.0’s analysis on this topic (Digital Commerce 2.0: Disrupting the Californian Giants [Oct 2013]; Dealing with the ‘Disruptors’ [Nov 2011]).

Engagement in the digital ecosystem is clearly worth a significant amount of money, both in terms of direct revenue as well as the indirect revenue associated with additional customer insight and knowledge. The valuations of companies such as Facebook and WhatsApp show the value premium that user engagement attracts. As mobile devices become even more prevalent and important in consumers’ lives, this engagement will become even more valuable.

In order for telcos to capitalize on this, they need to change their engagement strategy and gain more visibility and understanding of their customers. The industry largely understands this concept and a number or attempts have been made by telcos to wrestle back control of the device. Operators with bold ambitions have tried to compete head on, offering competing platforms to the OTT players (e.g. Vodafone 360) whilst others have attempted to position themselves within a segment of the digital ecosystem. Despite best efforts, these initiatives have so far met with mixed success.

One new area of opportunity for those looking to regain relevance on the mobile device (and one that is proving very popular right now) is the Android launcher.

The Opportunity

What is a launcher?

A launcher is a customizable home screen for your Android device. It allows a user to arrange their apps in more creative ways, resulting in a more personalized, engaging mobile experience.

Launchers can range from sophisticated 3D menus, to themed displays, to simplified app categorization/ grouping. For example, Yahoo’s Aviate launcher changes the apps it displays based on the time of day and the location of the user (e.g. at work, on the go, at home) – meaning that the user can more easily access the right apps to match their current situation.

Figure 1: Popular launchers in the marketplace

Figure 1 Popular launchers - Telco

Left: The Next Launcher’s 3D display – Source: Google Play; Middle: Buzz’s multi-themed launcher – Source: Drippler; Right: Aviate’s app re-categorization launcher – Source: Android Community

 

Launchers are more than just new ‘skins’ for the device. They alter how users interact with their device through app organization as well as through additional tools & services, including:

  • Relevant content on nearby places (e.g. Aviate incorporates Foursquare)
  • Helpful information, including travel & traffic advice (e.g. Google Now)
  • Inbuilt app & content recommendation engines (e.g. EverythingMe)

This combination of customizable app organization and easily accessible additional services is proving to be a compelling proposition for Android users.

Will launchers really take off?

The concept of a customizable home screen is not new but with advancements in smartphone operating systems and device displays this customization is starting to take off. A recent report by Flurry found that there were over 4,500 of these launcher-type apps and that launcher usage in Q1 2014 was greater than the total for all of 2013.

Figure 2: Number of Launcher Application Sessions (Quarterly data)

Number of launcher application sessions

Source: Flurry Analytics

The evidence shows that launchers are beginning to take off. They are offering value to the customer, through customization and additional services, as well as providing a new tool for companies to engage with and understand the behavior of the user.

What’s at stake?

Launchers represent a new control point in the digital ecosystem, shaping how (and potentially what) information is presented to the user. Gaining insight into how a customer uses their phone combined with a contextual understanding of their situation has the potential to create significant value.

Different launcher applications provide different functionality, with some focusing more on themes and customization and others focusing more on developing customer insight to simplify display and discovery on the mobile device. These models have different methods of monetization, including:

  • Freemium models – where a more basic version is free and the premium version is a paid for download
  • App discovery – where apps are recommended to the user (and the recommendation may be paid for)
  • Sponsored search – where the first result(s) are paid for

Of these models and monetization methods we believe contextual search and discovery are the most interesting. Mobile has revolutionized how people find information and use digital services – however, mobile usage is built around apps (86% of time spent on mobile devices is spent inside applications – Source: Techcrunch). The difficulty with (discovering) apps is that they are largely standalone services – they cannot be crawled or indexed easily and there is little cross-app integration. This makes relevant apps (and the content within them) harder to find through search alone.

Launchers can attempt to organize apps in a similar way that search engines organize the web, providing a more user-friendly app discovery mechanism. Launchers can gain significant insight into user behaviour (e.g. the type of apps downloaded and time spent using apps) – this information can be used to recommend apps and other content and services to the user in an integrated way, allowing launchers to circumvent search within app portals and to make recommendations (for apps and content) to a user when they have demonstrated a preference for it. Indeed, EverythingMe, an innovative launcher company, have suggested that “users are searching less and less, but still expect results and discovery. We felt the best solution would be a contextual search product in the form of an Android launcher.”

As the mobile device becomes more important and central to the user’s life, controlling this interface and engagement has the potential to generate very valuable insight. This personalized discovery tool, as long it remains transparent and offers a tangible benefit to the customer, could revolutionize how value is derived from mobile applications.

The Players

This potential opportunity has not gone unnoticed with a number of the big digital players recently entering this space. However, as this technology and engagement strategy is in its infancy, no-one has taken a clear lead in the race.

Facebook

Facebook, in April of last year, released Facebook Home, a launcher dedicated to putting social communication above all other applications on the mobile device (through cover feed, always-on chat heads and improved notifications). Despite a lot of initial fanfare, its performance has not been overly strong (only 0.5% of Facebook’s 1 billion monthly active users have installed it and it has received negative user feedback). Notwithstanding this slow start the company still sees this platform as a critical opportunity, with Facebook’s engineering Director, Jocelyn Goldfein, saying earlier this year in an interview with Venturebeat, “we’re still very bullish on Home…we’re believers in Home; we believe it’s going to be valuable for users”. Facebook’s continued resilience and flexibility when adapting to mobile could lead to a redesigned launcher that (social media) users’ value.

We believe that the relative failure of Facebook Home shows an important lesson for would be Launcher owners: the goal should be to optimize the customer experience and not maximize the placement of services for your own or others’ brands. After all, who wants the first screen on their phone to be in someone else’s control? This represents an opportunity for telcos, who don’t necessarily have the imperative to dominate the home screen with ads or today’s feed, and can therefore entertain a more intuitive and customer-oriented design. [NB It is also important that telcos attempt to learn from their own past errors: the ‘walled garden’ is not a successful model for most.]

For a more detailed assessment of Facebook Home’s service please see Facebook Home: what is the impact? [April 2013]

 

  • Executive Summary
  • Introduction
  • The Telco Dilemma
  • The Opportunity
  • What is a launcher?
  • Will launchers really take off?
  • What’s at stake?
  • The Players
  • Facebook
  • Google
  • Yahoo
  • Twitter
  • Other Popular Launchers
  • The Answer (for Telcos)?
  • Why should Telco’s play?
  • How can Telco’s play?
  • Conclusion

 

  • Figure 1: Popular launchers in the marketplace
  • Figure 2: Number of Launcher Application Sessions (Quarterly data)
  • Figure 3: Assessing Telcos’ options to enter the launcher market

Facebook Home: what is the impact?

 

Summary: Facebook has launched ‘Facebook Home’, technically a shell around the Android OS, that in theory creates valuable new advertising inventory on the screens of users’ phones. What will its impact be in practice for Facebook, and on Google, mobile operators, and other device manufacturers? (April 2013, Foundation 2.0, Executive Briefing Service, Dealing with Disruption Stream.) Facebook Home 'Coverfeed' April 2013
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Below is an extract from this 15 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 Dealing with Disruption Stream here. We’ll also be discussing the impact of ‘OTT’ and internet player services on other industries at our Executive Brainstorms on London (5-6 June) and Dubai (12-13 Nov). Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Introduction

On April 4th 2013, Mark Zuckerberg, Facebook’s CEO, launched a new mobile service named Facebook Home. In this executive briefing we examine the new service especially in regard to the impact on Facebook and other players in the mobile value chain.

What is Facebook Home?

Facebook has essentially rewritten the Android user experience giving its services prominence. Technically, it is a shell around Android. In computing circles, this is nothing new. The first version of Windows was effectively a shell above MS-DOS and most versions of the open source Linux have various shells that can be installed.

Facebook Home consists of three main features:

‘Coverfeed’

Figure 1 – Facebook Home ‘Coverfeed’
Facebook Home 'Coverfeed' April 2013

Source: Facebook Home Marketing Material

This feature turns the phone’s home screen into a Facebook news feed, continually updated as friends advertise their status and advertisers promote their wares. Interestingly, none of images show the signal strength, battery life and network operator indicators features on traditional phones.

Chat Heads

Figure 2 – Facebook Home ‘Chat Heads’
Facebook Home ‘Chat Heads’ (April 2013)

Source: Facebook Home Marketing Material

The unimaginatively named ‘Chat Heads’ is basically a messaging service with very similar features to iMessage. ChatHead-to-Chathead messages are sent on the Facebook network free of charge and if a user is not on Chathead then a SMS message is sent. Presumably at some date in future, this feature will be integrated with the desktop version of Facebook, probably with Voice calling features. Basically, it is a competitor to both traditional MNO voice and messaging services and OTT players such as WhatsApp.

App Launcher

Figure 3 – Facebook Home ‘Applauncher’
Home ‘Applauncher’ (April 2013)

Source: Facebook Home Marketing Material

The ‘AppLauncher’ feature is pretty self explanatory and provides access to non-Facebook services. The feature is neither earth shattering in its beauty nor its UI innovation, but Facebook has chosen this approach for a reason.

The advantage for Facebook of AppLauncher is that it can collect more data on other companies’ applications, even those where the users do not use Facebook Login.

Facebook’s strategy

Strategic context

Our consistent view of Facebook is that justifying a sky-high valuation is its biggest problem. Significant actual or realistically anticipated revenue growth is essential to support even our maximum valuation of $30Bn. Facebook current enterprise valuation (EV) is US$54bn which is calculated from a market capitalisation of US$64Bn less US$10Bn in cash. Nothing has substantially changed to alter our view and therefore we still believe Facebook is overvalued.

In our view the development of Facebook Home is effectively an admission that a mobile application alone will not deliver enough revenues. The stagnation of its share price indicates that the stock market is not really convinced at the moment by Facebook’s prospects.

Figure 4 – Facebook Vs Google Valuations

 

Facebook and Google Share Price April 2013
Souirce: Bigcharts.com

Mark Zuckerberg said in the Facebook Home launch event that Android users spent on average 23% of their time using the Facebook application. At first glance, this appears to be quite a large figure, and it deserves a little attention:

  • Does this figure include the huge base of Chinese Android users where Facebook is banned or is it just a USA figure? 
  • How does Facebook know time spent on other applications?
  • Is it actual traffic or service based? Does Facebook include more traditional phone applications such as voice and messaging in the figure? 

Despite these vagaries, Facebook with its Facebook Home service is effectively making the phone available 100% of the time to advertisers and thereby vastly increasing its inventory.

The value of this inventory is a completely different matter. Increasing supply without an associated increase in demand from brands will only depress unit pricing. Increased demand will only be brought about when the effectiveness of the advertising is proven to the brands. For Facebook, and the nascent mobile advertising industry overall, this is the greatest challenge: proving the effectiveness of mobile advertising to brands so that demand sharply increases.

Distribution

The other side of the equation is distribution – how can Facebook Home gather as many users as possible? We see three possible answers:

  1. By preloading on certain handsets. One of the launch partners is HTC and the Facebook Home shell will be available on some of their models in the USA on AT&T and in parts of Europe on the Orange network. This is the tried and tested ‘slowly but surely’ approach to distribution: convince OEM’s and MNO’s that the Facebook approach adds value and let them bundle the service with hardware and access packages. 
  2. By making the Facebook Home application available in the various App Stores. At the launch, Facebook indicated that the application would be rolled out gradually on a device-by-device basis. This is a major problem with Android fragmentation because developers effectively have to customise each Application for each individual device. Data from Google indicates the level of fragmentation. This data shows two axis of fragmentation: android version and screen size. But there is an additional axis which is the specific OEM API’s which vary by manufacturer and device. Of course, the user also has to be convinced to download the application. 
  3. By making Facebook Home the only way to access Facebook on Android. This was not mentioned at launch, but is the fastest way to ensure adoption. The big risk is of course that users do not like Facebook Home and prefer the old application. The more casual the Facebook user, the higher the risk of them not liking the persistent nature of Coverfeed and therefore Facebook risks alienating these users and driving them to consider alternate social networks. 

Overall, it is our view that Facebook have taken a conservative approach to distribution, but if the data from early adopters is positive then Facebook could shift to the far more aggressive third option.

Privacy concerns: a big issue or not?

Facebook was noticeably silent at the launch event around what data they would be collecting from the service and adding to their social graph or profile of their customers. There are significant privacy concerns with Facebook in some parts of the market that have been illustrated by Om Malik, for example. Facebook Home only strengthens the need for transparency around personal data which we will be exploring further at the EMEA Executive Brainstorm, 5-6 June 2013 in London.

Our view is that Facebook’s current privacy strategy of “Do it now, ask permission later” is fatally flawed and unsustainable. We are already seeing in the marketplace competitors, especially Apple and Microsoft, adopting different stances and the regulators are taking an interest. Change is coming to “Wild West of Internet Privacy” and both Google and Facebook may not like the new sheriffs.

Brendan Lynch, Chief Privacy Officer, Microsoft:

“Because consumers are telling us they care a lot about privacy, there are market forces at play. And we will see a lot more innovation in the privacy space. Our marketing campaign has become an evolution of that – consumers are telling us they are concerned about how data is being used online.” (See here.)

Nellie Kroes, Vice President of the European Commission:

“because of the high value attached to privacy, we are less shocked by default settings that are restrictive than by those which are wide open – especially as regards more vulnerable users. In line with this, we are working with industry to improve the ways default privacy settings can protect children.” (See here.)

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

  • How many users can Facebook Home acquire?
  • Cheap and Cheerful is a good way to experiment
  • Impact on other players
  • Google: how to manage the threat to Android?
  • Device Manufacturers: more difficult questions to address
  • Operators: must accelerate mobile advertising plans
  • Conclusions

…and the following figures…

  • Figure 1 – Facebook Home ‘Coverfeed’
  • Figure 2 – Facebook Home ‘Chat Heads’
  • Figure 3 – Facebook Home ‘Applauncher’
  • Figure 4 – Facebook Vs Google Valuations
  • Figure 5 – Facebook Active Users
  • Figure 6 – Facebook Mobile Users – distribution by OS
  • Figure 7 – The Rise and Fall of HTC Revenues

 

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

Mobile Broadband 2.0: The Top Disruptive Innovations

Summary: Key trends, tactics, and technologies for mobile broadband networks and services that will influence mid-term revenue opportunities, cost structures and competitive threats. Includes consideration of LTE, network sharing, WiFi, next-gen IP (EPC), small cells, CDNs, policy control, business model enablers and more.(March 2012, Executive Briefing Service, Future of the Networks Stream).

Trends in European data usage

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Below is an extract from this 44 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 Future Networks Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £795 (+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 Facebook at the Silicon Valley (27-28 March) and London (12-13 June) New Digital Economics Brainstorms.

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Introduction

Telco 2.0 has previously published a wide variety of documents and blog posts on mobile broadband topics – content delivery networks (CDNs), mobile CDNs, WiFi offloading, Public WiFi, network outsourcing (“‘Under-The-Floor’ (UTF) Players: threat or opportunity? ”) and so forth. Our conferences have featured speakers and panellists discussing operator data-plan pricing strategies, tablets, network policy and numerous other angles. We’ve also featured guest material such as Arete Research’s report LTE: Late, Tempting, and Elusive.

In our recent ‘Under the Floor (UTF) Players‘ Briefing we looked at strategies to deal with some of of the challenges facing operators’ resulting from market structure and outsourcing

Under The Floor (UTF) Players Telco 2.0

This Executive Briefing is intended to complement and extend those efforts, looking specifically at those technical and business trends which are truly “disruptive”, either immediately or in the medium-term future. In essence, the document can be thought of as a checklist for strategists – pointing out key technologies or trends around mobile broadband networks and services that will influence mid-term revenue opportunities and threats. Some of those checklist items are relatively well-known, others more obscure but nonetheless important. What this document doesn’t cover is more straightforward concepts around pricing, customer service, segmentation and so forth – all important to get right, but rarely disruptive in nature.

During 2012, Telco 2.0 will be rolling out a new MBB workshop concept, which will audit operators’ existing technology strategy and planning around mobile data services and infrastructure. This briefing document is a roundup of some of the critical issues we will be advising on, as well as our top-level thinking on the importance of each trend.

It starts by discussing some of the issues which determine the extent of any disruption:

  • Growth in mobile data usage – and whether the much-vaunted “tsunami” of traffic may be slowing down
  • The role of standardisation , and whether it is a facilitator or inhibitor of disruption
  • Whether the most important MBB disruptions are likely to be telco-driven, or will stem from other actors such as device suppliers, IT companies or Internet firms.

The report then drills into a few particular domains where technology is evolving, looking at some of the most interesting and far-reaching trends and innovations. These are split broadly between:

  • Network infrastructure evolution (radio and core)
  • Control and policy functions, and business-model enablers

It is not feasible for us to cover all these areas in huge depth in a briefing paper such as this. Some areas such as CDNs and LTE have already been subject to other Telco 2.0 analysis, and this will be linked to where appropriate. Instead, we have drilled down into certain aspects we feel are especially interesting, particularly where these are outside the mainstream of industry awareness and thinking – and tried to map technical evolution paths onto potential business model opportunities and threats.

This report cannot be truly exhaustive – it doesn’t look at the nitty-gritty of silicon components, or antenna design, for example. It also treads a fine line between technological accuracy and ease-of-understanding for the knowledgeable but business-focused reader. For more detail or clarification on any area, please get in touch with us – email mailto:contact@stlpartners.com or call +44 (0) 207 247 5003.

Telco-driven disruption vs. external trends

There are various potential sources of disruption for the mobile broadband marketplace:

  • New technologies and business models implemented by telcos, which increase revenues, decrease costs, improve performance or alter the competitive dynamics between service providers.
  • 3rd party developments that can either bolster or undermine the operators’ broadband strategies. This includes both direct MBB innovations (new uses of WiFi, for example), or bleed-over from adjacent related marketplaces such as device creation or content/application provision.
  • External, non-technology effects such as changing regulation, economic backdrop or consumer behaviour.

The majority of this report covers “official” telco-centric innovations – LTE networks, new forms of policy control and so on,

External disruptions to monitor

But the most dangerous form of innovation is that from third parties, which can undermine assumptions about the ways mobile broadband can be used, introducing new mechanisms for arbitrage, or somehow subvert operators’ pricing plans or network controls. 

In the voice communications world, there are often regulations in place to protect service providers – such as banning the use of “SIM boxes” to terminate calls and reduce interconnection payments. But in the data environment, it is far less obvious that many work-arounds can either be seen as illegal, or even outside the scope of fair-usage conditions. That said, we have already seen some attempts by telcos to manage these effects – such as charging extra for “tethering” on smartphones.

It is not really possible to predict all possible disruptions of this type – such is the nature of innovation. But by describing a few examples, market participants can gauge their level of awareness, as well as gain motivation for ongoing “scanning” of new developments.

Some of the areas being followed by Telco 2.0 include:

  • Connection-sharing. This is where users might link devices together locally, perhaps through WiFi or Bluetooth, and share multiple cellular data connections. This is essentially “multi-tethering” – for example, 3 smartphones discovering each other nearby, perhaps each with a different 3G/4G provider, and pooling their connections together for shared use. From the user’s point of view it could improve effective coverage and maximum/average throughput speed. But from the operators’ view it would break the link between user identity and subscription, and essentially offload traffic from poor-quality networks on to better ones.
  • SoftSIM or SIM-free wireless. Over the last five years, various attempts have been made to decouple mobile data connections from SIM-based authentication. In some ways this is not new – WiFi doesn’t need a SIM, while it’s optional for WiMAX, and CDMA devices have typically been “hard-coded” to just register on a specific operator network. But the GSM/UMTS/LTE world has always relied on subscriber identification through a physical card. At one level, it s very good – SIMs are distributed easily and have enabled a successful prepay ecosystem to evolve. They provide operator control points and the ability to host secure applications on the card itself. However, the need to obtain a physical card restricts business models, especially for transient/temporary use such as a “one day pass”. But the most dangerous potential change is a move to a “soft” SIM, embedded in the device software stack. Companies such as Apple have long dreamed of acting as a virtual network provider, brokering between user and multiple networks. There is even a patent for encouraging bidding per-call (or perhaps per data-connection) with telcos competing head to head on price/quality grounds. Telco 2.0 views this type of least-cost routing as a major potential risk for operators, especially for mobile data – although it also possible enables some new business models that have been difficult to achieve in the past.
  • Encryption. Various of the new business models and technology deployment intentions of operators, vendors and standards bodies are predicated on analysing data flows. Deep packet inspection (DPI) is expected to be used to identify applications or traffic types, enabling differential treatment in the network, or different charging models to be employed. Yet this is rendered largely useless (or at least severely limited) when various types of encryption are used. Various content and application types already secure data in this way – content DRM, BlackBerry traffic, corporate VPN connections and so on. But increasingly, we will see major Internet companies such as Apple, Google, Facebook and Microsoft using such techniques both for their own users’ security, but also because it hides precise indicators of usage from the network operators. If a future Android phone sends all its mobile data back via a VPN tunnel and breaks it out in Mountain View, California, operators will be unable to discern YouTube video from search of VoIP traffic. This is one of the reasons why application-based charging models – one- or two-sided – are difficult to implement.
  • Application evolution speed. One of the largest challenges for operators is the pace of change of mobile applications. The growing penetration of smartphones, appstores and ease of “viral” adoption of new services causes a fundamental problem – applications emerge and evolve on a month-by-month or even week-by-week basis. This is faster than any realistic internal telco processes for developing new pricing plans, or changing network policies. Worse, the nature of “applications” is itself changing, with the advent of HTML5 web-apps, and the ability to “mash up” multiple functions in one app “wrapper”. Is a YouTube video shared and embedded in a Facebook page a “video service”, or “social networking”?

It is also really important to recognise that certain procedures and technologies used in policy and traffic management will likely have some unanticipated side-effects. Users, devices and applications are likely to respond to controls that limit their actions, while other developments may result in “emergent behaviours” spontaneously. For instance, there is a risk that too-strict data caps might change usage models for smartphones and make users just connect to the network when absolutely necessary. This is likely to be at the same times and places when other users also feel it necessary, with the unfortunate implication that peaks of usage get “spikier” rather than being ironed-out.

There is no easy answer to addressing these type of external threats. Operator strategists and planners simply need to keep watch on emerging trends, and perhaps stress-test their assumptions and forecasts with market observers who keep tabs on such developments.

The mobile data explosion… or maybe not?

It is an undisputed fact that mobile data is growing exponentially around the world. Or is it?

A J-curve or an S-curve?

Telco 2.0 certainly thinks that growth in data usage is occurring, but is starting to see signs that the smooth curves that drive so many other decisions might not be so smooth – or so steep – after all. If this proves to be the case, it could be far more disruptive to operators and vendors than any of the individual technologies discussed later in the report. If operator strategists are not at least scenario-planning for lower data growth rates, they may find themselves in a very uncomfortable position in a year’s time.

In its most recent study of mobile operators’ traffic patterns, Ericsson concluded that Q2 2011 data growth was just 8% globally, quarter-on-quarter, a far cry from the 20%+ growths seen previously, and leaving a chart that looks distinctly like the beginning of an S-curve rather than a continued “hockey stick”. Given that the 8% includes a sizeable contribution from undoubted high-growth developing markets like China, it suggests that other markets are maturing quickly. (We are rather sceptical of Ericsson’s suggestion of seasonality in the data). Other data points come from O2 in the UK , which appears to have had essentially zero traffic growth for the past few quarters, or Vodafone which now cites European data traffic to be growing more slowly (19% year-on-year) than its data revenues (21%). Our view is that current global growth is c.60-70%, c.40% in mature markets and 100%+ in developing markets.

Figure 1 – Trends in European data usage

 Trends in European Data Usage
 

Now it is possible that various one-off factors are at play here – the shift from unlimited to tiered pricing plans, the stronger enforcement of “fair-use” plans and the removal of particularly egregious heavy users. Certainly, other operators are still reporting strong growth in traffic levels. We may see resumption in growth, for example if cellular-connected tablets start to be used widely for streaming video. 

But we should also consider the potential market disruption, if the picture is less straightforward than the famous exponential charts. Even if the chart looks like a 2-stage S, or a “kinked” exponential, the gap may have implications, like a short recession in the economy. Many of the technical and business model innovations in recent years have been responses to the expected continual upward spiral of demand – either controlling users’ access to network resources, pricing it more highly and with greater granularity, or building out extra capacity at a lower price. Even leaving aside the fact that raw, aggregated “traffic” levels are a poor indicator of cost or congestion, any interruption or slow-down of the growth will invalidate a lot of assumptions and plans.

Our view is that the scary forecasts of “explosions” and “tsunamis” have led virtually all parts of the industry to create solutions to the problem. We can probably list more than 20 approaches, most of them standalone “silos”.

Figure 2 – A plethora of mobile data traffic management solutions

A Plethora of Mobile Data Traffic Management Solutions

What seems to have happened is that at least 10 of those approaches have worked – caps/tiers, video optimisation, WiFi offload, network densification and optimisation, collaboration with application firms to create “network-friendly” software and so forth. Taken collectively, there is actually a risk that they have worked “too well”, to the extent that some previous forecasts have turned into “self-denying prophesies”.

There is also another common forecasting problem occurring – the assumption that later adopters of a technology will have similar behaviour to earlier users. In many markets we are now reaching 30-50% smartphone penetration. That means that all the most enthusiastic users are already connected, and we’re left with those that are (largely) ambivalent and probably quite light users of data. That will bring the averages down, even if each individual user is still increasing their consumption over time. But even that assumption may be flawed, as caps have made people concentrate much more on their usage, offloading to WiFi and restricting their data flows. There is also some evidence that the growing numbers of free WiFi points is also reducing laptop use of mobile data, which accounts for 70-80% of the total in some markets, while the much-hyped shift to tablets isn’t driving much extra mobile data as most are WiFi-only.

So has the industry over-reacted to the threat of a “capacity crunch”? What might be the implications?

The problem is that focusing on a single, narrow metric “GB of data across the network” ignores some important nuances and finer detail. From an economics standpoint, network costs tend to be driven by two main criteria:

  • Network coverage in terms of area or population
  • Network capacity at the busiest places/times

Coverage is (generally) therefore driven by factors other than data traffic volumes. Many cells have to be built and run anyway, irrespective of whether there’s actually much load – the operators all want to claim good footprints and may be subject to regulatory rollout requirements. Peak capacity in the most popular locations, however, is a different matter. That is where issues such as spectrum availability, cell site locations and the latest high-speed networks become much more important – and hence costs do indeed rise. However, it is far from obvious that the problems at those “busy hours” are always caused by “data hogs” rather than sheer numbers of people each using a small amount of data. (There is also another issue around signalling traffic, discussed later). 

Yes, there is a generally positive correlation between network-wide volume growth and costs, but it is far from perfect, and certainly not a direct causal relationship.

So let’s hypothesise briefly about what might occur if data traffic growth does tail off, at least in mature markets.

  • Delays to LTE rollout – if 3G networks are filling up less quickly than expected, the urgency of 4G deployment is reduced.
  • The focus of policy and pricing for mobile data may switch back to encouraging use rather than discouraging/controlling it. Capacity utilisation may become an important metric, given the high fixed costs and low marginal ones. Expect more loyalty-type schemes, plus various methods to drive more usage in quiet cells or off-peak times.
  • Regulators may start to take different views of traffic management or predicted spectrum requirements.
  • Prices for mobile data might start to fall again, after a period where we have seen them rise. Some operators might be tempted back to unlimited plans, for example if they offer “unlimited off-peak” or similar options.
  • Many of the more complex and commercially-risky approaches to tariffing mobile data might be deprioritised. For example, application-specific pricing involving packet-inspection and filtering might get pushed back down the agenda.
  • In some cases, we may even end up with overcapacity on cellular data networks – not to the degree we saw in fibre in 2001-2004, but there might still be an “overhang” in some places, especially if there are multiple 4G networks.
  • Steady growth of (say) 20-30% peak data per annum should be manageable with the current trends in price/performance improvement. It should be possible to deploy and run networks to meet that demand with reducing unit “production cost”, for example through use of small cells. That may reduce the pressure to fill the “revenue gap” on the infamous scissors-diagram chart.

Overall, it is still a little too early to declare shifting growth patterns for mobile data as a “disruption”. There is a lack of clarity on what is happening, especially in terms of responses to the new controls, pricing and management technologies put recently in place. But operators need to watch extremely closely what is going on – and plan for multiple scenarios.

Specific recommendations will depend on an individual operator’s circumstances – user base, market maturity, spectrum assets, competition and so on. But broadly, we see three scenarios and implications for operators:

  • “All hands on deck!”: Continued strong growth (perhaps with a small “blip”) which maintains the pressure on networks, threatens congestion, and drives the need for additional capacity, spectrum and capex.
    • Operators should continue with current multiple strategies for dealing with data traffic – acquiring new spectrum, upgrading backhaul, exploring massive capacity enhancement with small cells and examining a variety of offload and optimisation techniques. Where possible, they should explore two-sided models for charging and use advanced pricing, policy or segmentation techniques to rein in abusers and reward those customers and applications that are parsimonious with their data use. Vigorous lobbying activities will be needed, for gaining more spectrum, relaxing Net Neutrality rules and perhaps “taxing” content/Internet companies for traffic injected onto networks.
  • “Panic over”: Moderating and patchy growth, which settles to a manageable rate – comparable with the patterns seen in the fixed broadband marketplace
    • This will mean that operators can “relax” a little, with the respite in explosive growth meaning that the continued capex cycles should be more modest and predictable. Extension of today’s pricing and segmentation strategies should improve margins, with continued innovation in business models able to proceed without rush, and without risking confrontation with Internet/content companies over traffic management techniques. Focus can shift towards monetising customer insight, ensuring that LTE rollouts are strategic rather than tactical, and exploring new content and communications services that exploit the improving capabilities of the network.
  • “Hangover”: Growth flattens off rapidly, leaving operators with unused capacity and threatening brutal price competition between telcos.
    • This scenario could prove painful, reminiscent of early-2000s experience in the fixed-broadband marketplace. Wholesale business models could help generate incremental traffic and revenue, while the emphasis will be on fixed-cost minimisation. Some operators will scale back 4G rollouts until cost and maturity go past the tipping-point for outright replacement of 3G. Restrictive policies on bandwidth use will be lifted, as operators compete to give customers the fastest / most-open access to the Internet on mobile devices. Consolidation – and perhaps bankruptcies – may ensure as declining data prices may coincide with substitution of core voice and messaging business

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

  • Introduction
  • Telco-driven disruption vs. external trends
  • External disruptions to monitor
  • The mobile data explosion… or maybe not?
  • A J-curve or an S-curve?
  • Evolving the mobile network
  • Overview
  • LTE
  • Network sharing, wholesale and outsourcing
  • WiFi
  • Next-gen IP core networks (EPC)
  • Femtocells / small cells / “cloud RANs”
  • HetNets
  • Advanced offload: LIPA, SIPTO & others
  • Peer-to-peer connectivity
  • Self optimising networks (SON)
  • M2M-specific broadband innovations
  • Policy, control & business model enablers
  • The internal politics of mobile broadband & policy
  • Two sided business-model enablement
  • Congestion exposure
  • Mobile video networking and CDNs
  • Controlling signalling traffic
  • Device intelligence
  • Analytics & QoE awareness
  • Conclusions & recommendations
  • Index

…and the following figures…

  • Figure 1 – Trends in European data usage
  • Figure 2 – A plethora of mobile data traffic management solutions
  • Figure 3 – Not all operator WiFi is “offload” – other use cases include “onload”
  • Figure 4 – Internal ‘power tensions’ over managing mobile broadband
  • Figure 5 – How a congestion API could work
  • Figure 6 – Relative Maturity of MBB Management Solutions
  • Figure 7 – Laptops generate traffic volume, smartphones create signalling load
  • Figure 8 – Measuring Quality of Experience
  • Figure 9 – Summary of disruptive network innovations

Members of the Telco 2.0 Executive Briefing Subscription Service and Future Networks Stream can download the full 44 page report in PDF format hereNon-Members, please subscribe here, buy a Single User license for this report online here for £795 (+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: 3GPP, Aero2, Alcatel Lucent, AllJoyn, ALU, Amazon, Amdocs, Android, Apple, AT&T, ATIS, BBC, BlackBerry, Bridgewater, CarrierIQ, China, China Mobile, China Unicom, Clearwire, Conex, DoCoMo, Ericsson, Europe, EverythingEverywhere, Facebook, Femto Forum, FlashLinq, Free, Germany, Google, GSMA, H3G, Huawei, IETF, IMEI, IMSI, InterDigital, iPhones,Kenya, Kindle, Light Radio, LightSquared, Los Angeles, MBNL, Microsoft, Mobily, Netflix, NGMN, Norway, NSN, O2, WiFi, Openet, Qualcomm, Radisys, Russia, Saudi Arabia, SoftBank, Sony, Stoke, Telefonica, Telenor, Time Warner Cable, T-Mobile, UK, US, Verizon, Vita, Vodafone, WhatsApp, Yota, YouTube, ZTE.

Technologies and industry terms referenced: 2G, 3G, 4.5G, 4G, Adaptive bitrate streaming, ANDSF (Access Network Discovery and Selection Function), API, backhaul, Bluetooth, BSS, capacity crunch, capex, caps/tiers, CDMA, CDN, CDNs, Cloud RAN, content delivery networks (CDNs), Continuous Computing, Deep packet inspection (DPI), DPI, DRM, Encryption, Enhanced video, EPC, ePDG (Evolved Packet Data Gateway), Evolved Packet System, Femtocells, GGSN, GPS, GSM, Heterogeneous Network (HetNet), Heterogeneous Networks (HetNets), HLRs, hotspots, HSPA, HSS (Home Subscriber Server), HTML5, HTTP Live Streaming, IFOM (IP Flow Mobility and Seamless Offload), IMS, IPR, IPv4, IPv6, LIPA (Local IP Access), LTE, M2M, M2M network enhancements, metro-cells, MiFi, MIMO (multiple in, MME (Mobility Management Entity), mobile CDNs, mobile data, MOSAP, MSISDN, MVNAs (mobile virtual network aggregators)., MVNO, Net Neutrality, network outsourcing, Network sharing, Next-generation core networks, NFC, NodeBs, offload, OSS, outsourcing, P2P, Peer-to-peer connectivity, PGW (PDN Gateway), picocells, policy, Policy and Charging Rules Function (PCRF), Pre-cached video, pricing, Proximity networks, Public WiFi, QoE, QoS, RAN optimisation, RCS, remote radio heads, RFID, self-optimising network technology (SON), Self-optimising networks (SON), SGW (Serving Gateway), SIM-free wireless, single RANs, SIPTO (Selective IP Traffic Offload), SMS, SoftSIM, spectrum, super-femtos, Telco 2.0 Happy Pipe, Transparent optimisation, UMTS, ‘Under-The-Floor’ (UTF) Players, video optimisation, VoIP, VoLTE, VPN, White space, WiFi, WiFi Direct, WiFi offloading, WiMAX, WLAN.

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]

 

RIM: R.I.P. or ‘Reports of my death are greatly exaggerated’?

Summary: RIM’s shares have plummeted in value over the last four months, prompting an eruption of finger-pointing in the media and speculation of its demise or acquisition. In this analysis we examine whether the doom-mongers are right and what RIM’s recovery strategy might be. (July 2011, Executive Briefing Service)

Apple iCloud logo in analysis of impact of iCloud/iOS on digital ecosystem

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Below is an extract from this 12 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Non-members can buy a Single User license for this report online here for £295 (+VAT) or subscribe here. For multiple user licenses or other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

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Background – RIM’s share price disaster

RIM’s shares have plummeted in value over the last four months, prompting an eruption of finger-pointing in the media and speculation of its demise or acquisition. In this analysis we examine whether the doom-mongers are right and what RIM’s recovery strategy might be.

‘Reports of my death are greatly exaggerated’ – US writer Mark Twain, 1907, when he failed to return to New York City as scheduled and The New York Times speculated that he might have been “lost at sea.”

Figure 1 – RIM has obviously underperformed Apple, but incredibly it has also underperformed Nokia.

RIM, Apple, Nokia Share Prices July 2011 Telco 2.0

With its iconic Blackberry devices, RIM led the way in the mobile messaging era – first in corporate and then in consumer markets. But the transition to the mobile web has seen it surpassed by Apple and Google in consumer developed markets. In this respect RIM faces the same challenge as Nokia. And yet, despite facing the same challenge, RIM and Nokia have taken completely different strategic options for their future. When Nokia announced its partnership with Microsoft it pointedly talked about the creation of the third platform for the mobile web alongside Apple and Google – Nokia effectively discounted RIM from the game.

Previous Telco 2.0 analysis on RIM includes: RIM: how does the BlackBerry fit with Telco 2.0 strategies?; Mobile Software Platforms: Rapid Consolidation Forecast; and Nokia’s Strange Services Strategy – Lessons from Apple iPhone and RIM.

Current Position – on the surface, OK, but…

At first glance, RIM looks in a healthy position and its recent results show that both handset shipments (13.2m vs 11.2m) and revenues (US$4.9bn vs US$4.2bn) were up on the previous year. RIM is making reasonable profits (US$695m) and has a healthy cash position (US$2.9bn). But under the hood, life is not looking as rosy.

Profits: Under Pressure

RIM’s accounts show that its absolute profits are declining as growth in R&D and S&M costs are exceeding the slowing growth in revenues.

Figure 2 – RIM’s Profits are down against growth in R&D and S&M costs

RIM Profits, R&D Costs, Sales and Marketing Costs, July 2011 Telco 2.0

Of course, rising R&D and S&M costs may ultimately result in new revenues, although at present the effects of this spending are not yet evident in overall performance.

Revenues: Squeezed out of Key Markets

RIM’s revenues are dropping in key markets, particularly the USA, and its growth in revenues is coming from emerging markets.

Figure 3 – RIM’s Changing Market Revenues

Table of RIM Worldwide Sources of Revenue and changes, July 2011, Telco 2.0

Market Share: Declining

RIM’s share of the overall smartphone market is declining.

Figure 4 – RIM’s Declining Worldwide Market Share

Table of RIM, Apple, Nokia, Android Smartphone Market Share May 2011, Telco 2.0 (Gartner)

Core Product Advantages: Eroded

Core product advantages (e.g. Blackberry Messenger) are being eroded and surpassed as the competition (e.g. Apple iMessage) improves.

New Products: Late

New devices such as the updated Bold 9900 have missed planned release dates.

To read the rest of this report, including…

  • Outlook – a time of transition?
  • QNX & TAT – RIM’s saviours?
  • Playbook – A disappointing start
  • Coming: the Android / Emerging Market Crunch
  • Corporate Strength
  • Telco 2.0 Conclusions & Recommendations – Is there a recovery strategy?

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 14 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for £295, or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Companies, technologies and products referenced: 7digital, Adobe Flash, Amazon, Android, Apple, Blackberry, BlackberryOS 8, Bold 9900, Carphone Warehouse, Google, Huawei, iMessage, iPad, iPhone, Microsoft, Nokia, Phones4U, Playbook, QNX Software Systems, RIM, The Astonishing Tribe (TAT).

 

 

Apple iCloud/iOS: Killing SMS Softly?

Summary: Our analysis of how Apple’s iCloud, iOS5, and MacOS developments build value and control for Apple’s digital platform, and their consequences on other parts of the digital ecosystem, including the impact of iMessage on text messaging. (June 2011, Executive Briefing Service)

Apple iCloud logo in analysis of impact of iCloud/iOS on digital ecosystem

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Below is an extract from this 32 page Telco 2.0 Executive Briefing that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Non-members can buy a Single User license for this report online here for £995 (+VAT) or subscribe here. For multiple user licenses or other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Creating effective commercial strategies in the digital ecosystem, including learning from and dealing with major players like Apple and Google, is a key theme of Telco 2.0’s ‘Best Practice Live!, a free global online event on 28-29 June 2011, as well as of other Telco 2.0 research and analysis.

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Introduction

icloudious 1 - WWDC June 2011.pngApple provided a glimpse into some of the upcoming new features of its key software platforms iOS and MacOS at its WorldWide Developer Conference (WWDC) in June 2011. It also announced its much anticipated move into providing cloud based services and away from using the PC as the controlling hub.

iOS and MacOS are Apple’s key software assets – the assets which add soul to Apple’s key money spinning devices (iPhone, iPad and Mac). iCloud is the first iteration of the missing third leg – the software that ties all the devices together seamlessly. Together iOS, MacOS and iCloud are both the differentiator for the consumer and the barrier-to-entry for competitors. They are the soul of the Apple overall platform.

The Apple platform is evolving, and its new features will impact on many players in the value chain: namely the various distributors including mobile operators, aggregators, content creators and of course end consumers.

Nearly every main feature launched seems to support our general theory that Apple is squeezing value from the aggregators and distributors and pushing that value into the device manufacturers (i.e. them). 

Contents

The rest of this webpage covers:

  • iMessage – killing SMS softly? [NB There is additional analysis of this in the full Briefing]
  • iTunes in the Cloud – getting one up on Amazon
  • Notifications – Apple robs Windows Phone and Android advantage 


The full Briefing, which contains the complete section on iMessage, also includes the following sections:

  • The impact of iMessage on SMS revenues, and telco defence strategies
  • MacOS Software – Apple shuts out other retailers
  • Newsstand – Appeasing Publishers (to a degree)
  • MobileMe – just ‘making it work’ …and building the moat
  • iCloud and Video Services – holding fire for now
  • Activation – Cutting the PC cord
  • Photo Stream – yes, but why?
  • Data Centre Economics – making a start
  • Conclusions – Lessons from Apple’s Strategy


1. iMessage – killing SMS softly?

icloudious 1a - iMessage iCloud June 2011.png iMessage, which is the primary mechanism for SMS and MMS features, has been radically reengineered with messages between Apple platform consumers no longer being carried on the mobile network SMS and MMS infrastructure. All of this happens transparently to the consumer and they don’t need to know if their recipients are also using Apple devices – the message routing is determined by the Apple platform.

iMessage is great for consumers as these onnet messages are free, but dreadful for MNOs as they all will probably take a hit on messaging revenues. Apple is competing with the MNO’s core services, and they have even made it easier for consumers to see the value proposition by colouring the bubbles for onnet and offnet messages differently.

Apple has been quite clever in the timing of the release of this feature. Applications such as WhatsApp have already been blamed by some MNOs for declining messaging revenues – in particular KPN that has recently experienced a very significant impact on revenues. Apple effectively is doing nothing differently to them, just improving the consumer experience by making it easier to send and receive offnet messages.

In terms of platform economics, Apple is adding value to the consumer via the device and squeezing value from the mobile network distributors. We believe it is only a matter of time before Apple start offering voice features. This, together with their video conferencing application Facetime, leaves mobile operators staring into the future where they will only be selling data access services.

[NB There’s further analysis of these impacts and defences against them in the full Briefing.]

2. iTunes in the Cloud – getting one up on Amazon

 icloudious 2 - iTunes iCloud June 2011.png The key value proposition of “iTunes in the Cloud” is that all songs historically purchased through iTunes are available for download to any Apple device at no extra cost wirelessly either through a WiFi or 3G connection as long as the consumer remains within their data tier. The user has control over which songs he wants to download to what devices thus avoiding a situation where all storage on an iPhone or iPad is consumed by a vast collection.

The level of consumer control is such that a consumer can even download a previously purchased album for a specific journey and then remove it after listening to save space. New purchases can immediately downloaded to all devices or selectively as with the case of historical purchases. This feature definitely improves the Apple platform, and especially compared to alternate music retailers such as Amazon.

Currently, Apple users can purchase songs or albums from Amazon and they will be automatically added to iTunes on the laptop, then on synchronization the songs transfer to the iPhone or iPad. Previously, buying songs through the Amazon store on the PC was as simple as buying through the Apple iTunes store, and Amazon has been slowly gaining market share in music downloads, because it competes on price and often offers songs cheaper than in the Apple iTunes store. Now, with “iTunes in the Cloud”, Amazon may still be able to beat Apple iTunes Store on price, but the user experience is now deficient.

We seriously doubt that Apple will allow 3rd party retailers access to their iTunes in the Cloud service, and argue that Apple is using their platform to improve the position of their retail arm compared to 3rd parties.

iCloudios 4 - iTunes Match June 2011.jpgThe other service offered, iTunes Match, also adds incredible value to the platform. Apple has negotiated a deal with the major record labels to offer the opportunity to consumers to add tracks from their collections not purchased via the Apple store to the iTunes in the Cloud service for a cost of $25/year. Reputedly, Apple is sharing this revenue 70:30 with the record labels and as a paid a huge advance of US$100m-US$150m for the USA rights alone. Apple has set the benchmark price for cloud music licensing and has set the bar so high that it is hard to see new entrants having sufficient funding to gain similar licenses. Even Amazon or Google will be questioning whether they can generate enough money from music to justify the price of the licenses.

At the launch event, Steve Jobs presented the use-case of customers who had ripped their physical CDs. The more discussed use-case in the media is those people who have obtained their songs from illegal means, either via P2P networks or friend sharing, who effectively now have a US$25/annum service which legitimizes not only their past behaviour, but potentially also their future behaviour. The third use-case is people who buy cheaper digital music from other digital retailers, e.g. Amazon, and now have an option to pay an ongoing fee to add the simplicity of the iTunes in the Cloud service. Effectively, the usability advantage of the Apple platform is priced at US$25/annum which means this use-case only makes sense to heavy ongoing purchasers of music.

Apple didn’t face the same licensing issue from the publishers and has added a very similar service for all Books bought from the iBookstore with the added feature of bookmarks are synchronized and shared across devices. Overall, Apple has built very compelling cloud services for music, books and magazines and erected larger barriers for its competitors. If iMessage show Apple leveraging interconnected with other networks when it suits them, iTunes and iBookstore show Apple adding features which not only make interconnect more difficult for other companies, but firmly closing previously open doors.

3. Notifications – Apple robs Windows Phone and Android advantage

 

iCloudios 5 - notifications June 2011.pngA notification is the mechanism that consumers are alerted to events – for instance, an incoming email or sms. It is the key mechanism that 3rd party developers communicate with their users – for instance, in a sports application a notification can alert the user that their football team has scored a goal. Apple has completely revamped their notifications user experience with the addition of a notifications centre.

Apple have pushed over 100 billion notifications to iPhone and iPad which presumably partly accounts for the high consumption of signaling capacity which many mobile operators have been complaining about.

It also shows that Apple is quick to address deficiencies in their platform compared to others. This is a key feature of platform economics; you have to invest sometimes to play catch-up. It also highlights the risks for developers of building solutions which address platform weaknesses – yesterday’s successful application is tomorrow inbuilt into the platform.

Interestingly, an alternate notification application was never approved by Apple in their AppStore and instead went into the wilds of only being available on jailbroken iPhones. Apple new notification centre bears a striking resemblance to the non-approved one. iCloudios 6 - notifications June 2011.png Another example of this approach is with the feature for reminders, where a plethora of applications were already being sold in the Application store. Apple added a feature called Reminders which is part of the initial application load, and which effectively destroys the market for 3rd party applications. This in some ways looks like a repeat of the Microsoft strategy with Windows and Internet Explorer which got them in such trouble with regulators across the globe.

To read the full Briefing, members of the Telco 2.0 Executive Briefing Subscription Service can download the full 32 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for for £995, or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations, company types, areas, people and industry models referenced: Apple, platform, Amazon, Cloud, Google, strategy, Vodafone, WhatsApp, O2, Orange, publishers, Steve Jobs, WWDC, ARPU, Blackberry, Carphone Warehouse, Everything Everywhere, MNO, Prepay, record labels, Telefonica, T-Mobile, Viber.

Technologies and products referenced: iPad, iPhone, PC, Windows, iCloud, iTunes, iMessage, Android, iOS, messaging, MMS, MobileMe, SMS, voice, WiFi, Windows Phone, 3G, Activation, AppStore, Data Centre, NewsStand, Notifications, Photo Stream, Video, BlackBerry Messenger, Facetime, Freebee, Gmail, GSM, HTML5, iBookstore, Internet Explorer, Microsoft Live, P2P, Photostream, RCS-e, Snow Leopard, UltraViolet, VoIP, Windows7.

Strategy 2.0: What Skype + Microsoft means for telcos

Summary: in theory, Microsoft and Skype have the resources, the brands, the customer base and the know-how to shape the future of telecoms and become a strategic counterweight to Apple and Google. Can they do it – and what should telcos’ strategy be? (June 2011, Executive Briefing Service, Dealing with Disruption Stream).

Microsoft Skype Logo Image Medium


This page contains an excerpt from the report, plus detailed contents, figures and tables, and a summary of the companies, products, technologies and issues covered.

 

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Introduction: Skype, the Original ‘Voice 2.0’

Everyone knows Skype as the original Voice 2.0 company – providing free phone calls, free video, status updates, all delivered using an innovative peer-to-peer architecture, and with the unique selling point of VoIP that just worked. This report describes its business model, technology strategy, its acquisition by Microsoft, and the consequences for the telecoms industry.

A little history

Founded in 2003 by Janus Friis and Niklas Zennström, Skype was acquired by eBay in 2005 for $2.6bn. eBay ownership was a period of stagnation – although eBay also owns PayPal, it only made half-hearted efforts to integrate the two. In November 2009, eBay sold 65% of Skype to an investor group led by Silver Lake for approximately $1.9bn in cash, valuing Skype at $2.75bn.

With Skype preparing for an IPO, Microsoft announced in May 2011 that it had agreed to buy the company for $8.5bn, giving the investor group a massive return and ensuring future potentially-disruptive start-ups will also attract plenty of funding. Many commentators have suggested that Microsoft is paying too much for the VOIP company, although the price-earnings ratio is actually no higher than that of Cisco’s acquisition of WebEx. So, what exactly is Microsoft getting for its billions? Let’s take a closer look.

A Dive into Skype’s Accounts

Microsoft has acquired what is essentially a global telephony company with 663 million registered users and very significant gross profitability. Skype contributed more net new minutes of international voice than the rest of the industry put together in 2010, according to Telegeography. Skype has never struggled to achieve growth, but its profitability has often been criticised, as has its ability to generate growth in ARPU. The following chart (figure 1) summarises Skype’s operational key performance indicators (KPIs) since 2006.

Figure 1: Skype’s KPIs: users, usage, and ARPU

Telco 2.0 Skype KPIs Users and ARPU June 2011 Graph Chart v1

Source: Skype’s S-1, May 2011

Questions have been raised about Skype’s performance in converting registered or even active users into paying users. This is critical, as ARPU is relatively flat. However, a monthly ARPU for paying users of $8 would be considered very reasonable for an emerging-market GSM operator and such an operator would tie up far more capital than Skype does. As all Skype users contribute to the system’s peer-to-peer (P2P) infrastructure, the marginal cost of serving non-paying users is essentially nothing.

Another way of looking at the KPIs is to consider their growth rates, as we have done in the following chart (figure 2). Although the growth of paying users is nowhere near as fast as that of free minutes of use, 40% growth per annum in revenue-generating subscribers is still very impressive.

Figure 2: Growth rates of Skype KPIs.

Telco 2.0 Skype KPIs Growth June 2011 Graph Chart

Source: Skype’s S-1, May 2011

In fact, there is very little wrong with Skype at the operating level. The following chart (figure 3) shows that, if we consider the primary challenge for Skype to be converting free users into paying users, it is actually doing rather well. Revenue and EBITDA are advancing and margins are holding up well.

Figure 3: Revenue and EBITDA growth is strong

Telco 2.0 Skype KPIs 5 Years Revenue and EBITDA June 2011 Graph Chart

Source: Skype S-1, May 2011

With 509 million active users available for conversion, ARPU may not be that relevant – just converting users of the free service into paying users has so far provided strong growth in gross profits and could do for the foreseeable future.

Figure 4: Conversion of free users at steady ARPU drives gross profit.

Telco 2.0 Skype Gross Profits June 2011 Graph Chart

Source: Skype S-1, May 2011

Skype doesn’t make money on free calls (not even from advertising or customer analytics/insights, yet), and has to pay interconnection fees and operate some infrastructure in order to provide SkypeOut (calls to conventional telephone numbers, rather than other Skype clients), and SkypeIn (calls from the PSTN to Skype users).

Skype sceptics have argued that eventually termination charges will catch up with the company and destroy its profitability. It is true that most of Skype’s revenues are generated (over 80%) by SkypeOut call charges and that Skype’s cost of net revenue is dominated (over 60%) by the cost of terminating these calls. However, termination as a percentage of Skype’s cost of net revenue is falling and Skype’s gross margin is rising, as its enormous volume growth enables it to extract better bulk pricing from interconnect operators (see Figure 5).

To see Figure 5, the conclusion of our analysis of Skype’s finances, and…

  • Is Skype Accumulating “Technical Debt”?
  • Future Plans: The Core Business, The Enterprise & Facebook
  • Telcos and Skype
  • Enter Microsoft
  • Windows Phone 7: Relevant again? 
  • Microsoft’s other mobile allies: Nokia, RIM
  • How Microsoft will deploy Skype 
  • Developers, developers, developers
  • Key Risks and Questions: execution, regulatory, partners, advertisers & payments
  • Answers: How Telcos should deal with Skype…and Microsoft

…plus these additional figures & fables…

  • Figure 5: How Skype’s spending is changing
  • Figure 6: Why Skype is making a loss
  • Figure 7: Commoditisation is for everybody!
  • Figure 8: 3UK benefits from its deal with Skype
  • Figure 9: Skype’s Deals with Carriers
  • Figure 10: Skype is a good fit for many Microsoft products
  • Figure 11: A unifying Skype API is critical for integration into the Microsoft empire
  • Figure 12: Telco strategy options matrix

 

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 35 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for for £995, or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations, products and people referenced in the report: 3UK, AdSense, Android, Apple, AT&T, Au, Avaya, Ben Horowitz, BlackBerry Messenger, Cisco, Dynamics CRM, EasyBits, eBay, Exchange Server, Facebook, Facetime, Google, Google Talk, Google Voice, GSMA, Happy Pipe, Hutchison, iOS, iPhone, Jajah, Janus Friis, KDDI Mobile, Kinect, KPN, Lync, Mango, Marchex, Microsoft, Microsoft-Nokia deal, MXit, MySpace, Niklas Zennström, Nokia, Ofcom, Office Live, Outlook, PayPal, PowerPoint, Qik, RIM, Silver Lake, Skype, SkypeConnect, SkypeIn, SkypeKit, SkypeOut, SkypePhone, Steve Ballmer, Telefonica, Teredo, Tony Jacobs, Tropo, Twitter, Verizon Wireless, Virgin, Visual Studio, WebEx, WhatsApp, Windows Mobile, Windows Phone 7, WP7, Xbox, X-Series.

Technologies referenced: GSM, HD voice, HTTP/S, IM, IMS MMTel, IP networks, IPv4, IPv6, LTE, Mobile, NAT, P2P, PSTN, RCS, SILK V3, SIP, SMS, SS7, super node, URI, video telephony, Voice 2.0, VoIP, XMPP.

Tablet Frenzy: Network Poison or Economic Palliative?

Summary: The success of the iPad2 has been seen by some as a sign of a paradigm shift in computing. With their theoretical appeal as a new portable medium for online video consumption could tablets have a significant impact on communications networks and economics? Here is Telco 2.0’s market outlook.

Below is an extract from this 18 page Telco 2.0 Analyst Note that can
be downloaded in full in PDF format by members of the Telco 2.0
Executive Briefing service using the links below.

                            Read in Full (Members only)        To Subscribe

‘Growing the Mobile Internet’ and ‘Fostering Vibrant Ecosystems: Lessons from Apple’ are also key session
themes at our upcoming ‘New Digital Economics’ Brainstorms (Palo Alto, 4-7 April and London, 11-13 May). Please use the links or email contact@telco2.net or call +44 (0) 207 247 5003 to find out more.

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Introduction: fearing the tablets’ effects?

The mobile device industry is currently awash with tablets. Catalysed by the iPad’s meteoric rise to prominence in 2010, the market has since been saturated with a broad range of similar devices such as Samsung’s Galaxy Tab. In early 2011, trade shows at CES in Las Vegas, and Mobile World Congress in Barcelona both saw the launch of countless Android-powered tablets, as well as others featuring RIM’s and HP’s own operating systems.

With the subsequent huge success and publicity of the iPad 2 launch (see iPad2: how Apple plans to dominate the ‘post PC era’), many in the technology industry are convinced that we are witnessing a new paradigm shift in computing. While the majority of debate has concerned itself with apps, content-publisher business models and the possible advent of the “post-PC era”, it is also worth stepping back and looking at the network-side implications of these new devices.

Some observers are expecting the advent of mobile-connected tablets to continue the assault on 3G and 4G network capacity, taking over where smartphones and laptops left off. Observing that tablets’ large screens are ideal for heavy-duty web and video consumption, there are certainly some doom-sayers predicting the imminent collapse of networks already suffering from congestion. For example, in July 2010, OpenWave’s CEO claimed that “There is no doubt that the iPad will be part of the data overload story when the wireless industry looks back in a few years time” . Even the FCC has used the potential tablet data threat in its efforts to gain additional spectrum rights for mobile broadband , saying “With the iPad pointing to even greater demand for mobile broadband on the horizon, we must ensure that network congestion doesn’t choke off a service that consumers clearly find so appealing or frustrate mobile broadband’s ability to keep us competitive in the global broadband economy.”

Other observers are more cautious. There are still some dissenters regarding the overall tablet story – will they really oust the netbook and laptop as the main mobile computing platforms? And even if they are game-changers, will they predominantly be used while connected to cellular networks, rather than WiFi?

While Telco 2.0 feels that tablets are indeed important in the medium term, we are concerned that 2011 may see the hype bubble pricked a bit, as the world’s gadget-enthusiast segment gets saturated before the mass-market really grasps what to do with a touchscreen device that isn’t pocketable. The rhetoric about the imminent death of the PC seems to fit poorly with data points such as Apple’s own rising laptop sales, paralleling the iPad’s growth.

The bitter pill of mobile data traffic

Telco 2.0 has talked about the mobile broadband “capacity crunch” and the challenging economics of 3G/4G networks on numerous occasions over the past few years. We have considered the role of offload, traffic management, two-sided approaches to “slicing and dicing” network capacity in both fixed and mobile domains, and the need for sensible pricing plans for mobile data. We have watched the explosion of smartphones and the typical data volumes grow to 100’s of megabytes per month per user – even 1GB+ for certain devices such as high-end Android phones.

In 2010, we identified a variety of new mobile broadband business models involving new device categories, evolution of the wholesaling/MVNO concept, and “priority connectivity” for certain applications, plus new non-subscription revenues from sponsored or third-party paid wireless data sessions in Mobile, Fixed and Wholesale Broadband Business Models. While all these are attractive, we also identified likely pricing pressure on mobile data plans – despite some offerings such as 3G dongle modem tariffs already being positioned often at too-low rates.

The net conclusion is that mobile capacity will need massive enhancement anyway – likely through a combination of both a move to more-efficient networks (HSPA+ and LTE, especially), and ways of moving to smaller cells and offload (WiFi and femtocells) – adding capacity by “densifying” the networks. All this is pretty much “baked in”, irrespective of the growth of additional new device categories.

Figure 1: Mobile networks need much more capacity, despite new revenue models

Global Mobile Broadband Access Revenues

Source: Telco 2.0 EMEA Brainstorm, April 2010

The last two years have seen increasing concern – and in some cases panic – among mobile operators about the effects of exploding data traffic on their networks. The emergence of tablets is adding to the sense of worry. Although some of the existing problems can be attributed to the extra signalling load, in other cases congestion is indeed being driven by sheer volumes of traffic, especially in “busy hours” or “busy cells”. For example, 4-10pm in regions with a lot of mobile laptop dongles tends to be a peak period. A growing shift to video traffic, driven by web TV streaming sites, social networks and adult content, has arisen as a particular point of concern. Various analyses have put video at 50-70% of total mobile data traffic already, consumed both on smartphones but also especially laptops with larger screens and batteries. Again, tablets are looked at as potential accelerators of this trend – with the vision of iPads being used to watch live TV via cellular networks while users are “out and about” a stereotypical fear.

Some operators have already tried to head off the problem with phones, with for example T-Mobile UK suggesting to its smartphone users that “If you want to download, stream and watch video clips, save that stuff for your home broadband.” as part of its fair-use policy. However, many recognise that much of the problem has been brought by operators on themselves – especially through the mis-selling and mis-pricing of laptop data plans as being direct substitutes for home DSL and cable broadband, which clearly cannot have the same restrictions on video.

Tablets are potentially something of a quandary for operators – as a new category, there is no pre-existing expectation about exactly how data plans should be priced and managed – and few clear points on how much traffic they might be expected to generate. But conversely, if tablets are to be truly mobilised products rather than just WiFi-centric nomadic ones, they need to be usable without arbitrary restrictions or off-putting contract pricing.

(A quick note on signalling traffic: at the moment, it seems unlikely that tablets are going to major generators of load in this regard. Unlike smartphones, they are not “always-on”, running background tasks over the cellular network, or creating massive problems at the radio level through “fast dormancy” for power control. Irrespective of the precise applications used, they are likely to be similar to laptops/dongles, being online for lengthier sessions rather than ultra-frequent “pings” of servers.)

To work out whether or not tablets are a genuine source of concern for operators, Telco 2.0 has developed a simple analytical framework, bringing together sales volumes, operators’ role, traffic demands, data plans and the means for mitigation of network congestion. The following sections discuss each of these in turn.

Figure 2: Assessing tablets’ impact on mobile data networks

Tablet Forecast Schematic

Source: Telco 2.0

Tablet demand

Telco 2.0 does not itself forecast shipments of specific computing product categories. However, we are in agreement that the overall tablet sector will grow strongly through 2011 and beyond, although we are slightly more bearish than some observers who proclaim “the death of the PC”, asserting that tablets will inevitably become the main portable computing format. Our view is that tablets will (largely) complement smartphones and notebooks, rather than massively substituting for either – although the smaller netbook PC format is more threatened. Research firm Disruptive Analysis has noted that typical tablet battery capacity – a proxy for processing or display, capability and therefore ability to “do stuff” – is mid-way between the two other device categories, reflecting a distinct role and market-space for tablets.

Figure 3: Device battery power diversity suggests different use cases for tablets, smartphones & laptops rather than outright substitution

Tablet, Smartphone, PC Battery Capaciity

Source: Telco 2.0, Disruptive Analysis

Depending on the exact definition of “tablet” (itself an imprecise term), around 17-20m devices shipped in 2010, of which about 15-16m were Apple iPads. Android-powered devices started making significant in-roads in Q4, gaining perhaps a 20% market share.

  • In January 2011, research firm IDC reported shipments of 17m tablets in 2010, forecasting 45m and 71m unit sales in 2011 and 2012 respectively.
  • Investment bank Goldman Sachs expects shipments of tablets such as the Apple iPad to more than double over the next year, going from 16m in 2010 to 35m in 2011. It expects 40% of that 35m to cannibalise PC shipments, with 20% cannibalising notebook sales and 80% cannibalising netbooks.
  • Research firm Ovum has forecast 150m tablet shipments in 2015
  • A more bullish prediction from iSuppli puts 2015 sales of tablets at 242m, although 39m of these will be full PCs in capability terms, masquerading in a tablet-style form-factor.
  • Apple is believed to have sold around one million iPad2’s on its opening weekend.

To read the rest of the article, including:

  • Telco 2.0’s Tablet Market Outlook for 2011 and 2015
  • Network Capacity Impact of Tablets
  • Forecast Global Traffic from tablets
  • Tablet Data Plan Pricing
  • Conclusion


…and the figures…

  • Figure 1: Mobile networks need much more capacity, despite new revenue models
  • Figure 2: Assessing tablets’ impact on mobile data networks
  • Figure 3: Device battery power diversity suggests different use cases for tablets, smartphones & laptops rather than outright substitution
  • Figure 4: High growth for tablets to 2015, but not all will be cellular-connected
  • Figure 5: Forecast global mobile data traffic from tablets, 2010-2015
  • Figure 6: Forecast mobile data traffic by device type, 2010-15 (Cisco VNI)
  • Figure 7: Selected mobile operator-supplied tablet 24-month contracts

Members of the Telco 2.0TM Executive Briefing Subscription Service can access and download a PDF of the full report here.
Non-Members, please see here for how to subscribe. Alternatively, please email
contact@telco2.net or call +44 (0) 207 247 5003 for further details.
‘Growing the Mobile Internet’ and ‘Lessons from Apple: Fostering vibrant content ecosystems’ are also featured at our AMERICAS and EMEA Executive Brainstorms and Best Practice Live! virtual events.

iPad2: how Apple plans to dominate the ‘post PC era’

Summary: Apple’s new ‘PC-killer’ tablet is intended to significantly expand the Apple ecosystem, with long-term impacts on many players including telcos, giving Apple an even stronger hold on the market. What strategies should telcos adopt?

This is an extract from this 14 page Telco 2.0 Analyst Note, 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 using the links below.

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‘Lessons from Apple: Fostering vibrant content ecosystems’ is also a key session theme at our upcoming ‘New Digital Economics’ Brainstorms (Palo Alto, 4-7 April, London, 11-13 May, and Singapore 22-23 June). Please use the links or email contact@telco2.net or call +44 (0) 207 247 5003 to find out more.

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Introduction

While Apple’s new tablet has some interesting developments to its content and software ecosystems, the key business model move is that by extremely aggressive market positioning on price, weight and design, it will establish a new dominant platform position for Apple in the ‘post PC era’.

How far should telcos go in supporting Apple’s latest innovation? In this article we outline:

  • the iPad’s significantly enhanced features and consumer positioning;
  • important upcoming developments in the ‘upstream’ content publishing ecosystems;
  • market forecasts and our view of the impact of the new iPad;
  • and explore strategic alternatives for industry players, especially telcos.

It’s Faster, Lighter, Smaller…

At the heart of the iPad2 is a new dual-core processor internally developed by the Apple chip team. Apple claims the new A5 is twice as fast the A4 processor in the original iPad for normal tasks. Graphic intensive tasks are now up to nine times faster. The nullifies an advantage of other tablets which are due to come onto the market during 2011, the majority of which are based on dual processors from either Qualcomm (Snapdragon) or Nvidia (Tegra 2)

The iPad2 is also 33% thinner and 15% lighter which is a significant improvement that Apple sees as having an important impact on the overall user experience. The Telco 2.0 team agrees: the original iPad was already of a higher build quality and ergonomically feels much better than the competition. We also suspect that the iPad2 battery life of 10 hours will also be a big differentiator.

…with more built-in hardware…

The addition of a front and rear camera not only catches up with competition but offers a brand new set of capabilities for third parties developers to build into their applications (see below).

Other notable hardware features are: the additional of a gyroscope, which is already in the iPhone and IPod touch, which gives extra location features especially to the games developer community; and a multi-mode modem, supporting both EVDO and GSM networks. The incremental cost for the dual core modem is retained at US$130, which seems high and the Telco 2.0 team feels shows Apple’s inclination to promote public WiFi over mobile operators 3G networks.

…better accessories…

Apple showcased two new accessories – a new cover and a new cable.

Apple iPad Smartcover

The Smartcover is an intriguing piece of design which relies on magnets to align itself to the iPad and snap into place. It is a radical improvement on the cover for original iPad. The Smartcover comes in multiple colours and in polyurethane (US$39) or leather (US$79). The potential profit from this accessory is worth considering: we would be surprised if the margin is less than 100% for what is after all a piece of plastic with some magnets in.

The other accessory is a HDMI cable which allows the iPad2 to hook up to HDTV’s and play the media contained, whether music, films or TV shows. Apple claimed in the launch presentation that this was a feature requested by the educational sector to aide classroom teaching. But, it obviously has a far more wide reaching application in the hands of the mass market in the living room. 

For non-wired connections to the TV, Apple has upgraded its Airplay protocol to include synching of photo’s and video via an AppleTV box. It is rumoured that Apple is currently offering licensing of the Airplay technology to TV and Audio manufacturers which obviously presents a threat to the alternative, which is DNLA technology.

…and cheaper!

Apple iPad Price

Despite the extra hardware, Apple has retained the existing pricing structure – US$499 for the basic model. Apple is pursuing a very aggressive pricing strategy and obviously is planning to capture a huge share of tablet market.
In comparison, the Motorola Xoom with a similar hardware specification is priced at US$799. Even subsidized, the Xoom is priced at US$599 with a two-year, minimum 1GB data contract for US$20/month from Verizon.

This aggressive price will be a major problem for tablet competitors. It is also noticeable that contained within the Apple Q4 2010 results, the ASP for the iPhone was US$626 compared to an ASP for the iPad of US$667. Given the larger form factor of the iPad, we suspectthat Apple aretaking a lower margin on the iPad than the iPhone.

FaceTime – another move into communications

Apple iPad FaceTime

We think the iPad2 is a much better form factor for videoconferencing that the iPhone. Apple has bundled their FaceTime application with the operating system. FaceTime on the iPad2 highlights how Apple continually increases the value of their overall platform with incremental features. iPad users can now video conference with iPhone, iPod Touch and Mac users – all for free over WiFi connections. This immediately threatens not only Skype, but other social networking tools that are keen to add voice and messaging features and usage, such as Facebook and Google. More importantly for the mobile operators, FaceTime represents a clear and present danger to their voice and messaging revenues.

No MobileMe – yet

Before the launch event, there was a lot of speculation that Apple would be offering an upgrade to its MobileMe cloud services. The speculation was that Apple would allow synchronizing of content, whether audio, video or pictures to an Apple cloud which could then be accessed on any device – whether computer, phone or tablet. These rumours have been around since Apple acquired the LaLa team which had built a similar product for music digital lockers.

We did not expect an announcement at this point, mainly because Apple and the rest of the industry are awaiting a key legal ruling which could enable digital lockers without the need for the licences from the rights holders. This case is MP3tunes v EMI and is currently under consideration by a judge in New York and a decision is due within six months.

Michael Robertson is behind mp3tunes and has been a perennial thorn in rights holders’ paws since the days of mp3.com. He is adopting the DCMA defence, so successfully used by Google/YouTube in their case against Viacom, which is essentially that the web service is not responsible for content uploaded by a 3rd party to their service as long as they take it down when notified by copyright holders of infringement. If Michael Robertson wins, we expect a raft of digital locker services to be launched by the major internet players in the second half of 2011 which will not only be cheap, but also ruin many start-ups, such as Spotify, which have built a premium paid-for model around streaming of content on multiple devices.

Important Changes in the Publishing Model

Apple iPad Publishers

The other big news related to the publishing industry and eBooks in general. Random House wasn’t originally sure about the whole Apple agency pricing agreement and that left them as the holdout at the original iPad launch among the so-called “big six” publishers (including HarperCollins, Penguin Group, Simon & Schuster, Hachette, and Macmillian), but it seems that Apple has managed to convince them to join.

The ‘agency model’, where the publisher sets the retail price of the eBook, and in Apple’s case reaps 70% of the final selling price, is still to be tested in the courts. This model is different to the typical publishing arrangement where the publisher sets a wholesale price and the retailer prices at whatever they feel with whatever margin it yields them. This has allowed retailers, such as Amazon and the Supermarkets, to aggressively price bestsellers earning money on other items in the shopping basket.

The validity of the agency model will be tested throughout 2011 with the EU and several USA states already looking into price fixing. The outcomes of which will have a fundamental effect on the way digital content is brought to market and retailed.

The Post PC Era

Apple iPad Evolution

At the launch event Steve Jobs proudly proclaimed the birth of a new ‘Post PC era’. An era where people are not obsessed with GB and MHz of a single machine, but instead the overall customer experience across a range of devices. We would argue that Apple products have always attracted people that valued overall user experience as superior to the cheaper Wintel computer experience – even in the dark days when the Apple share of the PC market was shrinking and seemingly restricted to content creators, whether desktop publishers or audiovisual creators.

In the recent past, the iPod introduced Apple products to a whole new generation of users – with upside for its computer business. Similar waves of knock-on benefits can be seen with the introduction of the iPhone and iPad – more and more people are joining the Apple platform and there are significant benefits across the whole range of products.

Whatever consumers want, there is a range of products to suit their tastes, from the entertainment focused iPods through to the complete range of work-horse Mac products. It is also noticeable that iOS features such as the Appstore are also being added to the more industrial MacOS.

So we think the strategic message carried in Jobs’ words is that Apple wants to dominate the Post PC era, and it’s means of doing so is to continue to build out and interlink its ecosystem.

‘Apple DNA’ and the ‘Apple Platform’

Apple iPad DNA

Steve Jobs most memorable quote at the launch event was “It’s in Apple’s DNA that technology alone is not enough, that it is technology married with liberal arts, married with the humanities that yield us the result that makes our hearts sing.”

The demo of the iMovie and GarageBand iPad2 applications highlighted Apple tools for video-editing and music creation at unbelievable price points of US$5 for each. It stretches the imagination to see Samsung, Nokia, RIM, Microsoft or even Google to launch similar products. These are perfect tools for someone to experiment with. The professional content creators might need to upgrade to Mac’s and professional grade software: the Coen Brothers used Final Cut Studio is edit their latest movie, True Grit.

Apple’s strategy in the ‘Post PC era’ is an attempt to corner the market in content creation and consumption across a range of devices – again something that individual OEMS even with the software magic of Google and Microsoft will find difficult to beat.

To read the rest of the article, including…

  • Market Forecasts
  • Conclusions – what should mobile operators do?

Members of the Telco 2.0TM Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 14 page report in PDF format here. Non-Members, please see here for how to subscribe. Alternatively, please email contact@telco2.net or call +44 (0) 207 247 5003 for further details. There’s also more on ‘Lessons from Apple: Fostering vibrant content ecosystems’ at our AMERICAS, EMEA and APAC Executive Brainstorms and Best Practice Live! virtual events.

 

Full Article – Vodafone 360 on Android, iTunes: Now Getting it Right?

Summary: Vodafone 360 was meant to be a new, social-network centred approach to managing the customer interface. Unfortunately, it was also bug-ridden and dogged by a lack of clarity of purpose. Now, its availability on Android Market and iTunes may create a strategic opportunity for Vodafone to access more customers.

NB You can download a PDF copy of this 15 page note here.

Introduction

Vodafone 360, one of the currently trendy “all your social networks in one app” products, launched in 2009 to considerable publicity and enthusiasm – not least from us. However, thanks to a variety of problems at the tactical and technical levels, it has failed to achieve the scale required for a successful platform. Vodafone is now trying to resolve this, notably by integrating 360 into the Android Market and iTunes as an app in its own right.

In this note, we discuss this move, and the possibilities opened up by repackaging operator and partner products into a pure software user experience that can be distributed to the user bases of very large app stores. This, we argue, creates a horizontal service layer that reaches across devices and connectivity providers, essentially implementing the vision laid out here by Giles Corbett of Orange’s innovation group.

This may also be an innovative way of generating relevant customer data, an alternative to the extremely complex processes of data federation and database systems integration typically seen in customer-data projects. Turning Vodafone into an app may be the answer.

Initial Enthusiasm…

At the 7th Telco 2.0 Executive Brainstorm, held in London in November 2009, Vodafone’s director of new media, Bobby Rao, presented their new social network product – Vodafone 360. We were enthusiastic. Why?

  • It was good to see an operator innovating

Rather than trying to bar users from going to their favourite Web services, or extract a tax from Google, Vodafone was trying to improve its users’ mobile Web experience and facilitate their interactions with Facebook, YouTube and friends. The technology approach was sensible, using Web 2.0 rather than RCS clients and such things. The Linux-based handsets had a truly impressive user interface.

  • It was an open development platform

Vodafone was embracing developers, making use of open-source technology, and doing things like integrating carrier billing into the content and app-store elements of the service so that their upstream customers could get paid. Using the OMTP’s BONDI standard for access to device capabilities was sensible.

  • It was good to see an operator focusing on communications, rather than dollops of “content”

The applications for Vodafone 360 were all about communication of one kind or another – instant-messaging, status-updating, sharing location, photos, and other media. It was even suggested that it might grow into voice at some point.

  • It was a positive proposal

Rather than just barricading themselves in the telco bunker, or reaching for the symptomatic relief of more handset subsidy, Vodafone was actually trying something new and interesting. And that’s always worth watching.

A False Start…

8 months on, it would be unfair to call Vodafone 360 a flop, or call out the Telco 2.0 Crash Investigator, but it is hard to say that it’s been a success. Perhaps, at this point, it’s more of a case for Telco 2.0 Safety Event Reporting rather than Crash Investigation. But user adoption has been slow, there has been much negative comment, and the developer community has hardly caught fire.

Vodafone’s own actions speak volumes; they rapidly downsized the space in their retail outlets that was devoted to 360 in order to make more room for iPhones. Actually, there were signs very early on that the company’s senior management might not have been fully committed – despite the huge Vodafone UK ad budget, the initial push for 360 was hardly impressive.

Negative comment piled up; there were reports of very high returns, a buggy user experience, and a number of odd decisions. For example, the photo-sharing element didn’t support Flickr, the world’s most popular photo-sharing site, because “nobody used it”. Contacts ingestion, a key feature for any social application, was heavily criticised.

 This is what racked me off the most. After getting all my contacts merged and sorted I found that at random times I would log back on to the 360 website and find either duplicated contacts appear or the list gets shorted and a load have been deleted. Now this is grass roots basics for a contacts management program. It stores them safely and accurately and 360 does not. I therefore cannot trust it with my information. It’s a good job I keep my contacts backed up in Outlook…”

There was no support for Twitter at launch – this is telling, as the process of posting a status update to Twitter can be implemented in one line of code on a Linux/Unix system like the Samsung H1s. It’s not rocket science:

curl -u username:password -d status=”your message here” http://api.twitter.com/1/statuses/update.json

Now, Vodafone is looking elsewhere.

Strategic Issues: The Vital Importance of Scale

The most tangible sign of this is the decision to integrate the appstore element of 360 with Android Market. With 90,000 application SKUs in the Market as opposed to 8,000 in 360, this is no surprise. It could also be read as an admission of defeat. Wasn’t part of the point of 360 that it would be the commercial spearhead for JIL, BONDI, LiMo, and the related telco-sponsored TLAs like WAC?

Regarding the alphabet soup, it’s worth noting that there are renewed moves towards consolidation.  For example, the OMTP is now closed, with its BONDI project and its chief Tim Raby integrating  into WAC, and the remaining standardisation activities being rolled into OMA. Android is essentially a mobile-optimised Linux distribution bundled with a set of Java libraries implementing access to its mobile-specific features – this is close to the original vision of OMTP. Similarly, the LiMo/BONDI combination is a mobile-optimised Linux distribution that exposes mobile-specific features in JavaScript libraries. There is clearly at least the possibility of a meeting of the minds here, and standardisation of the APIs between distributions, access software layers, and organisational TLAs (Three-Letter Acronyms).

Obviously, the prospect of adding some 90,000 new apps with a stroke of the pen is attractive. Werner Vogels, CTO of Amazon.com, considers “selection” – that is to say, choice or variety – to be one of the critical “flywheels” that drives the growth of platform businesses. That is to say, it’s a source of increasing returns to scale, as the network effect between many buyers and sellers comes into play.

More apps - more activity.

The market leader, Apple’s App Store, counts some 225,000 SKUs as of 7th June, 2010. Android Market had reached 90,000 by the 11th of July; the white-label app store provider Getjar offers 60,000. As Amazon’s experience would suggest, there appear to be increasing returns to scale – Apple has so far counted 5 billion transactions through the App Store in two-and-a-half years, while Getjar reports 900 million downloads over a significantly longer period of time. In its Q210 results, Nokia reported that the Ovi Store showed 13,000 SKUs and a run rate of 1.7m downloads/day one year after launch; assuming a linear trend, we estimate that this equals 310,250,000 downloads since launch.

Tactical Execution: There Is No Such Word as “Unlaunch”

But the Android integration is just as important from the point of view of hardware. To the end user, mobile is all about hardware – one of the numerous lessons from Apple is the enduring centrality of shiny gadgets in any mobile marketing effort. Arguably, there are two models for success here.

  • Apple- or RIM-like – the superstar device

If your service (including the core telco services) is going to be tied to one specific device, it is obviously vital that the device be outstanding. Close coupling between the device and the service means that you can control more of the value chain, and also that you can control the user experience more closely. It also means that the rest of the value chain – specifically the hardware and device software elements – controls you.

If the devices are subpar, or simply drowned out in the iHubbub, the service will be too. This has consequences for tactics as well as strategy. The marketing, advertising, and retail effort has to push the device as much as it does the service. The supply chain, activation, and support infrastructure must be ready. And most of all, the device has to be ready on launch day – you can’t afford a slow start.

  • Android-like – the teeming bazaar

Alternatively, you can concentrate your effort on service, software, and tariffs, and go for the largest possible range of devices. This is the Android (and also Nokia) strategy.

It permits you to hedge your bets, creates more scope for adjustment to changing circumstances, and avoids getting into a creepy clinch with any particular vendor. It also precludes the sort of close control of the user experience that the BlackBerry-like strategy provides, unless this can be done entirely in software.

These two approaches intersect with two models of go-to-market tactics:

1.     The big bang!

We’ve all seen it – Steve Jobs strides onto the podium at MacWorld as the cameras click and produces the new shiny from his pocket. Big-budget videos. Publicity stunts. Basically, it’s a huge pre-planned event, backed up by an integrated media operation cued to peak at that moment and linked behind the scenes with a carefully prepared supply chain. The advantage is, of course, concentration of effort in space and time.

The disadvantage is that once the retailers fill their stocks, and the production servers are fired up, you’re committed to going through with the launch. The flop will be all the bigger for all the concentrated effort if anything goes wrong.

2.     Permanent beta

This is the anti-launch; rather than trying to seize everyone’s attention, the idea is to recruit a select band of early adopters, gradually build scale, and carry out kaizen over the medium term. Google is famous for it, as are games companies in general and the open-source world. It allows a maximum of flexibility, and permits adaptation as you go along. There is a risk that the product will never catch on, but that risk is always there.

There is, to a rough approximation, a mapping between these pairs – the superstar device option tends to require a big bang, big day go-to-market plan. It’s possible to integrate the two in that you start with the beta, and move on to a full launch when it passes some project milestone; we could call that scenario the “rolling start”. However, it’s impossible to do the opposite and move from a launch to a beta.

Go-to-market tactics

Unfortunately, Vodafone 360 didn’t really succeed in going for either a big bang or permanent beta approach; rather than launching 360 with one superstar device (perhaps one of the top-end Androids, or even the iPhone), or else pushing it out across the board, they chose two rather specialised devices. If Vodafone made a major publicity push, it didn’t succeed in getting the public’s attention; it did, however, succeed in generating enough publicity that everyone noticed the bugs.

Integrating into Android Market has the effect of definitively plumping for a teeming bazaar strategy, going for device diversity. It also means that Vodafone 360 will have to rely on implementing its features and user experience as a software client on the device.

But this could be a major strategic opportunity.

What if we were to turn 360 through 180 degrees?

If you can distribute 360 applications through the Android Market, you can also productise 360 itself as a software application, and then distribute it through the Market.

This would give Vodafone an access route to the global Android user base. A detail of 360 we liked originally was that it isn’t restricted to Vodafone customers – distributing it as an application on the Android Market would take this and go further. So far, the separation of access, enablers, and services – the horizontalisation of telecoms – has mostly benefited vendors, content providers, and software developers. But this doesn’t have to be true. Converting its customer-facing product into a software application would let Vodafone play at that game, too.

This is very similar, in some ways, to our view of Google’s strategy. Google is trying to extend into the middle of interactions across a wide range of markets, taking a thin layer of value between buyer and seller; Vodafone 360 could capture a similar thin layer of value from other operators, by providing a better interface for a wide range of online services.

Google - expanding the core business horizontally

As well as creating a Vodafone access route onto devices that don’t live on its network, 360 might also have important consequences in terms of customer data. It is well placed to capture information on how users interact with the services it talks to; it will be only more so on Android with the range of interfaces it provides for collecting social-graph and location data. In fact, it’s fairly trivial to have an Android app receive notifications when the network signal strength changes – it could even be a way of capturing real-world network quality data.

Applying the same strategy to 360

Operators are still struggling to get a grip on the piles of data they collect – the stereotype example is the operator with dozens of billing systems, some of which are 20 years old. Federating data across these hugely complex legacy systems-of-systems amounts to a major systems integration project as well as a significant software development and data-management challenge. There is a strong argument that it might be easier to solve this at the mobile application level, creating a new edge interface at which customer data is generated, and possibly also gaining data created by customers you don’t yet have for the core services.

After all, that’s precisely what Google did with Google Ads – rather than trying to, say, extract information from tens of thousands of websites’ server logs, they simply got their users to declare their interests as search strings and matched ads to them. So there’s a possible play for data-enriched advertising, especially as in-application ads become more common.

With this “Vodafone bridgehead” onto Android devices, there are many other opportunities. Back at the inception of 360, we noted that Vodafone was suggesting that it might eventually include a voice element. In our recent Ribbit note, we quoted one Ribbit Mobile user as saying that he wanted it to “take over the entire dialler function” of his iPhone. It is entirely possible to do this in Android. As well as providing call management, better voicemail, and integration with other social networks and contacts lists, this could use something along the lines of carrier preselection, rather as Google Voice does, to offer competing call rates.

Applying GAN - linking apps and Voice 2.0

Android devices are highly effective WLAN finders; another option would be to make use of the GAN standard and route SIP calls via Vodafone while a WLAN hotspot is available. This would make it possible to create an application that grabs the user, creates a new source of customer data, captures minutes of use, or at the very least, denies them to the enemy. We referred to Ribbit Mobile; in fact, the service could actually be implemented with Ribbit’s technology under licence.

But Vodafone could do better than that; they already have a hosted unified-comms product, Vodafone One. Just as Ribbit, being a cloud service, fits into BT’s existing sales and provisioning processes for SMBs and enterprises, so an Android-based Vodafone app would neatly fit the mobile features of Vodafone One into an effective package for distribution to individual customers. We’ve already seen that a wide variety of businesses and functions can be effectively distributed to the individual user base through app stores. Wrapping Vodafone in an app would allow them to leverage this.

There are other options in this line – self-care features could be embedded in the app, for example. Vodafone has already dabbled at this with its MyVodafone app; YouFon’s “manage your account through Facebook” is another pointer (see Figure 6, below). Or the carrier could use the app and its service back-end as the underlying technology for a range of niche MVNO propositions.

FonYou - an example

Another key capability that Vodafone could make use of is its existing pre-pay infrastructure, both the OSS and other IT resources behind the scenes and its networks of reseller agents. At the moment, prepay users need a credit card to take part in the app/content ecosystem – or at least, they need to go to the trouble of entering details on a non-keyboard device or risk having them stored on an easy-to-lose, easy-to-steal device.

But Vodafone 360 already ingests credit through the existing VF pre-pay system, so it could also pay out rewards, revenue shares, or peer-to-peer transfers through the same mechanism. And, of course, they have the M-PESA system available.

Conclusions and Recommendations

The Vodafone 360 experience demonstrates the opportunities and pitfalls of moving from a traditional telco model towards one oriented towards the Internet and based on software. Initial failures, and the recent fiasco when Vodafone decided to impose a variety of 360-branded apps on its HTC Desire users as an unannounced software update, show how difficult it can be for our organisations to adapt to these challenges.

However, we can also see how this presents an opportunity to compete on the Web majors’ and Voice 2.0 players’ own terms. If operators can develop compelling new applications and services, the vendor app store/smartphone model is a valid way of distributing them and gaining access to a wider user base. Operators have specific assets, notably their PAYG and/or Mobile Money Transfer (MMT) infrastructure, that such a move can leverage, notably by opening up the app/content store to the PAYG subscribers. At the same time, MMT operators can use this to deploy their product more widely by packaging it as an app.

Further, it seems to be a good general forecasting principle that major customer-data projects are harder, more expensive, and more complicated than expected. There is no reason to expect this to change, as the reasons are structural and rooted in the existing infrastructure and the politics and economics of privacy. As a result, it may be a good idea to seek new and additional ways of acquiring this data – Google, after all, didn’t start off by integrating a variety of legacy databases, but rather by creating a new user base. The Web 2.0 experience demonstrates that it is possible to derive useful data profiles from very low-touch customers.

The greatest opportunities appear to be in integrating such an approach with existing MMT, content, channel marketing, and Voice 2.0 ideas – using the app store paradigm to repackage the rest of your Telco 2.0 activities in the consumer and SMB sectors.

However, it is critical that operators master the tactical problems of execution in a space which is fundamentally different to traditional mobile. Customers’ ability to churn is significantly higher, and the fall-out from missteps will arrive much faster than most of us are used to.

Full Article: Mobile Software Platforms – Rapid Consolidation is Forecast

Summary: New analysis suggests that only only three or four mobile handset software platforms will remain by 2012. 

AreteThis is a Guest Briefing from Arete Research, a Telco 2.0™ partner specialising in investment analysis.

The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete’s Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.

Mobile Software Home Truths

Wireless Devices

famer%20and%20wife.jpg

Amidst all the swirl of excitement around mobile software, some dull realities are setting in.  As the barn gets crowded with ever more exotic breeds (in alphabetical order: Android, Apple OSX, Blackberry, LiMo, Maemo, Moblin, Symbian, WebOS, WindowsMobile), there is a growing risk of fragmentation and consumer confusion.  We see some unglamorous “home truths” about mobile software getting lost in the weeds.

 

Few, if any, vendors make money from mobile software.  Microsoft makes $160 of gross profit per PC while mobile software is moving royalty-free. The few pure plays (like Opera) rely on sales of services around their software.  Mobile software only gets leverage from related services (often a single one).  These must be tightly linked to devices, e.g., e-mail (Blackberry), e-books (Kindle), music (iTunes) or gaming (XBoxLive), with resulting communities controlled by their choice of software; few services work equally well on all devices (e.g., search, YouTube).

 

AppStores are not (yet) content stores. OEMs must link themselves with cloud services (like Motorola’s new BLUR platform) or offer their own (e.g., ITunes, Ovi, etc.).  Individual developers find it hard to make money through AppStores: if even one were making $10m in sales, it would be widely publicised.  Exclusive or “sponsored” applications like navigation or content-like games should fare much better.

 

We see room for only three to four platforms by 2012.  The pace of innovation, R&D cost, and need for customisation (for hardware, operators and languages) invites consolidation.  Supporting OEMs and reaching out to developers is costly and labour-intensive; only over time might HTML5 browsers supplant device-specific applications.  No platform is so productised as to simply hand over to licensees (be they OEMs or operators).

 

Every smartphone will support one (or more) AppStores.  We do not know how many services or what content AppStores 2.0 might offer, or how they will be made relevant to consumers.  The most popular applications should work on every smartphone, even as some devices (like INQ) are optimised for versions of Facebook, Amazon, Twitter, Skype and other popular digital brands and services. AppStores may help OEMs build relationships with users of those services, though both vendors and operators will try to control billing.

 

All phones are becoming smart.  So-called smartphones get attention as a growth segment in a declining handset market, but “dumbphones” (using proprietary software like Nokia’s S40, Samsung SHP/TouchWiz or LG’s S-Class) are getting more sophisticated.  The costs of the two are converging. Featurephones will soon also support AppStores and Internet services.

 

Table 1: Platform Penetration

 

’09E

’11E

 

Symb. v9.3+/S60

~110m

~240m

S60 goes mid-range

Apple OSX

~30m

~120m

Incl. iPod Touch

B’berry OS 4.5+

~40m

~80m

Doubling OS base

Android

<10m

~80m

From >10 OEMs

WinMo 6+

~10m

~50m

Transition to Win7

Palm WebOS

<5m

~15m

Limits w/o licensing

LiMo

<5m

~20m

Platform for LCHs

Source:  Arete Research estimates. 

 

Hard Graft

The costs for developing and maintaining complex software platforms are increasing.  There are no shortcuts to the sheer volume of work, especially in building on legacy code bases and supporting operator requirements, or developing language packs.  Every platform faces significant roadmap issues. Some handset OEMs are building adaptation layers to port a range of applications to their own branded UIs.  Just supporting multi-core chipsets for handling streaming or managing financial transactions needs additional processing power to deal with security and viruses.  Yet it requires software re-writes and poses power management challenges (i.e., tripling or quadrupling processing will drain batteries faster).

 

We long predicted video would become as ubiquitous as voice, i.e., with devices designed around handling video traffic.  There are a wide range of solutions to cope with streaming video, including in software (i.e., Flash or Silverlight) rather than via hardware optimisations. Apple patented technology around adaptive bit rate codecs to handle streaming in its forthcoming iPhones.  All platforms need to support over the air (OTA) updates, embrace graphics-rich applications, handle HD content, and comply with an array of USB drivers and accessories.

 

It is also not clear whether application downloads are a novelty or a mass market phenomenon. Discovery and recommendation engines need to be improved on most platforms, and marketing must focus on what applications offer. The gap between legacy platforms and an over-the-air customisable user experience is a wide one, and will not be resolved by AppStores, fresh UIs, or moves to go open source. Widget and webkit technologies could bring similar UXs across multiple devices.  Most developers will not need access to lower layers or optimise applications for specific hardware.  Over time, HTML5 browsers could supplant device-specific applications (e.g., GMail runs on an iPhone as a web application, as does WebOutlook on Android), but OEMs are unlikely to embrace this approach.  This also does nothing to extend billing or allow for collection of detailed customer analytics.

 

At the same time, operators’ selection criteria are moving from form factors to user experiences.  Operator UX teams now number in the 100s of staff, even if they fake a fragmented approach: Vodafone-subsidised devices currently support Android Market, Blackberry AppsWorld, OviStore and iPhone AppStore, and runs its own developer programme (Betavine). Few telcos develop native applications, but mostly use ones that run in Java, Webkit, Widgets, etc. Only a few (e.g., Verizon Wireless) offer customised UI.

 

While Apple and Google get the most attention (as pioneers of the AppStore concept, and for providing a shop-front for the open source community), Nokia and Microsoft have pivotal roles to play.  Both offer unprecedented scale (in handsets and computing software), even if both are fast followers.  We do not see Nokia’s commitment to Ovi or Symbian wavering. Though Microsoft’s successive versions of WindowsMobile failed to get traction beyond 10-15m units p.a., we expect a renewed push around Windows7 in 2H10. The MSFT/Yahoo search deal could be a blueprint for closer collaboration with Nokia. With its resources (a $9.5bn R&D budget) and assets (enterprise installed base, XBox, HotMail, and Bing), Microsoft could offer handset OEMs revenue share deals. LGE already committed to ship 50+ Windows models by 2012.

 

Figure 1: Product Differentiation?

arete%20mob%20soft%203%20nov%202009.jpgSource: Arete Research.

Content, Not Applications

An AppStore is not a content store, yet.  The next battle will be to add intelligence and filtering to AppStores, and tightly integrate content with platforms (as with iTunes, Kindle, Zune HD, or Comes With Music).  There are limits to how many applications consumers are likely to use, whereas there is a wide range of content to access via mobile devices.  To handle this, mobile devices also need integration with home CE/PC products. Samsung, for one, aims to provide “three screen” offerings spanning TVs, PCs, cameras, and handsets. There will be efforts by Sony, Apple, Samsung and others to make a single harmonised software platform that spans a wide range of video-capable devices.

 

Figure 2: Putting Software at the Centre of a CE “User Experience”

arete%20mob%20soft%202a.jpg

Source:  Arete Research.

 

With multi-radio (e.g., 3G, WiFi and Bluetooth) integration and voice recognition, mobile devices could become a control point to reach “virtualised” content.  This is a longer-term “cloud computing” angle to mobile software, handling access to and storage of personal content.  OEMs will need to offer tight integration with cloud services, or offer their own “stores of content.”

 

Apple and Google designed platforms with PCs in mind, and drew developers from the vastly larger desktop world.  They benefit from programming in AJAX, whereas Symbian uses a range of older object-oriented languages.  Yet in both handset and PC worlds, OEMs, not developers, create devices.  They are the gatekeepers for software and AppStores, managing the flow of any OTA updates that might alter the UX.  Adobe has provided a good model, with regular updates of its popular Flash and Acrobat software.  Yet user expectations of handset stability will get re-set if devices regularly need updates like PCs do.

Too Much Choice?

The number of companies vying to become the platform of choice is staggering, and itself a problem. Beyond the ones we discuss below, we can add Intel (with its Moblin effort), Palm’s WebOS (which remains device-specific) and the range of Linux variants (like the Nokia-sponsored Maemo, LiMO, and components developed under the OMTP).  The latter shows how limited group initiatives have been: OMTP involves VOD, TMOB, TI, TEF, AT&T, and others, but all of these compete for exclusivity with operator-subsidised devices that will never be OMTP-compliant.  None of the above options are yet mass market (i.e., likely to top 10m+ units in ’10).  Just to confuse matters further, there are other applications environments (e.g., BREW) as well as “component” vendors like Opera, Access, and Adobe.  We look at leading platforms below:

 

Apple’s OSX

Apple excelled at innovating around the UX and using animation to mask some of the iPhone’s early weaknesses (lack of multi-threading, slow image processing).  Apple’s marketing anticipated the market’s direction with its focus on applications, and Apple’s PA Semi unit will help it be first to market with multi-core processing (supporting streaming video).  Apple is still attracting developers with the clarity and simplicity of its SDK, and by testing and proving in each layer of stack via PC products.  We expect OSX to be extended to CE products, and also for Apple to bring AppStores to the PC.

Google’s Android

For a two-year-old platform, Android got ample OEM support, following up its G1 (a.k.a. the Android Developer Phone) with subsequent releases Cupcake/Android v1.1, with the Éclair release being v2.0. Android aims to be binary forward compatible, i.e., existing applications written for G1s will run on new devices without modifications.  Developers create Android Virtual Devices with the SDK to run applications for a range of devices. Development and emulator debug time is far shorter in Android compared with Symbian.

Despite OEM support, Android’s governance remains fuzzy.  Android is open-sourced licensed, but not an open source project: a small (~300 staff) team controls the developer ecosystem and Android Market distribution. It has not productised source code or offered post-sales software management tools, and has limited support for operator-compliant packs, libraries of hardware drivers, and language variants. Some developers say Android is slow to respond to change requests and to accept code modifications.  In exchange for access to Android Market, Google requires OEMs to bundle Google Apps and supply usage analytics from devices.  One key commercialisation partner, WindRiver, was bought by Intel, while another, Teleca, started an Android Feature Club to resolve common integration issues.  Android’s end-game is unclear: is it a hedge against Microsoft or Apple controlling end-devices?  A Trojan Horse for Google services?  Or will it become an independent company with license fees?  If operators don’t need devices “with Google,” then Android may fragment into many custom UIs.

 

Nokia’s Symbian

After a decade under a shifting set of parents, the rump of Symbian was bought by Nokia and made an open source project, including Nokia’s own S60 UI.  Symbian/S60 was initially developed for phone functions, and saw limited traction for downloads under cumbersome tree and branch menu structures. Many developers feel Nokia/Symbian offers too many choices (native Symbian code, J2ME, FlashLite, Web runtime and Python), each with limitations and compatibility issues. The S60 browser is based on webkit, but lacks HTML5 support.  Nokia’s decision to open source Symbian/S60 has stalled its development, as Symbian re-writes and tests third-party software in its 40m line code base.  It will be difficult to make major improvements to Symbian (i.e., to support multi-core processors) during this process.

 

When Nokia ships Direct UI in mid ’10, Symbian will effectively break its backwards compatibility.  Whether it also moves to a completely new release (v.10 from v.9.6) is still open. This may alienate developers that have to re-develop for a new platform and comply with Nokia’s new Direct UI (based on QT).  They also must resolve whether Symbian horizon is sufficient as a publishing tool, or if Nokia can get other OEMs to use OviStore, which still lags rivals on many fronts.  Nokia hopes Symbian will present a credible alternative to Android in mid-2010 when it is fully open source/EPL licensed, with Nokia assuring a large market.

 

Microsoft’s Windows

Windows Mobile 6.5 traced a long evolution from the Pocket PC OS, but still uses an older WinCE 5 kernel.  Microsoft recognised its failings by bringing in new management for Mobile, acquiring Danger (designers of the Sidekick device), and engaging LG as a mass market OEM alongside long-term supporter HTC.  We see 6.5 as simply a stopgap solution until Microsoft brings the innovation seen with its ZuneHD UI and leaner Win7 platforms to mobile.  Microsoft is also offering its software in a reference design called Pink, and may tweak its long-held license fee model with PC-like terms (rebates, discounts and marketing support). This may gain traction among Chinese OEMs, after Taiwanese and US OEMs failed to ramp WinMo to volume.  It is too early to rule out a now-dormant Microsoft, given its scale in computing and revival with Win7.

RIM’s Blackberry OS

In a world moving more “open,” RIM keeps its OS development in-house, stressing the need for security and compression. Yet RIM must evolve the BlackBerry’s UI and bring more developers to its AppsWorld platform, as well as open up its charging model beyond PayPal to embrace operator billing. BlackBerry’s application environment works on a J2ME framework with proprietary extensions, which adds fragmentation and compatibility issues. However, the security and bandwidth compression so valued by enterprises may limit performance for consumers, as applications traverse its NOCs via RIM’s proprietary browser.  RIM’s premium pricing still relies on its messaging franchise, which faces challenges from ActiveSync and efforts to bring push e-mail to mass market price levels. Rivals may not match Blackberry’s UX, but some segments may be less sensitive to RIM’s security and delivery than the price of handsets.  While RIM stresses incremental upgrades for its AppsWorld, we hear they are undertaking an extensive OS re-write to support new multi-core chipsets.

 

Down to Earth

This space gets too much attention for the revenue it directly generates.  Mobile software is a means to an end, and the end is selling devices and Internet services.  The cost of development will narrow the number of platforms by 2013, but not before the sheer number of options bewilder consumers who know about them and frustrate others wishing to get simple access to specific content. Given how rapidly key hardware costs are falling, and how sophisticated mid-range software platforms are becoming, all phones will become smartphones of some sort. Who wants to own a dumbphone?

 

AppStores will evolve to offer a range of content and services, with a major battle brewing over billing and data on consumer usage.  Every device will support some AppStores and work with a range of Internet brands and services.  Some content will be packaged and tightly linked to specific devices.  The Holy Grail in all this mobile software will be its extension to ranges of other CE products.  There is ample reason to scoff at the hype around mobile software — for its marginal economics and inevitable fragmentation — but no doubt as to its future role as a control point for more valuable content and Internet-based services and brands.

 

 

 

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