Tag: APIs

Apple’s pivot to services: What it means for telcos

Introduction

The latest report in STL’s Dealing with Disruption stream, this executive briefing considers Apple’s strategic dilemmas in its ongoing struggle for supremacy with the other major Internet ecosystems – Amazon, Facebook and Google. It explores how the likely shift from a mobile-first world to an artificial-intelligence first world will impact Apple, which owes much of its current status and financial success to the iPhone.

After outlining Apple’s strategic considerations, the report considers how much Apple earns from services today, before identifying Apple’s key services and how they may evolve. Finally, the report features a SWOT (strengths, weaknesses, opportunities and threats) analysis of Apple’s position in services, followed by a TOWS analysis that identifies possible next steps for Apple. It concludes by considering the potential implications for Apple’s main rivals, as well as two different kinds of telcos – those who are very active in the service layer and those focused on providing connectivity and enablers.

Several recent STL Partners’ research reports make detailed recommendations as to how telcos can compete effectively with the major Internet ecosystems in the consumer market for digital services. These include:

  • Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed? To find new revenues, some telcos are competing head-on with the major internet players in the digital communications, content and commerce markets. Although telcos’ track record in digital services is poor, some are gaining traction. AT&T, Axiata, Reliance Jio and Turkcell are each pursuing very different digital services strategies, and we believe these potentially disruptive moves offer valuable lessons for other telcos and their partners.
  • Consumer communications: Can telcos mount a comeback? The rapid growth of Facebook, WhatsApp, WeChat and other Internet-based services has prompted some commentators to write off telcos in the consumer communications market. But many mobile operators retain surprisingly large voice and messaging businesses and still have several strategic options. Indeed, there is much telcos can learn from the leading Internet players’ evolving communications propositions and their attempts to integrate them into broad commerce and content platforms.
  • Autonomous cars: Where’s the money for telcos? The connected car market is being seen as one of the most promising segments of the Internet of Things. Everyone from telcos to internet giants Google, and specialist service providers Uber are eyeing opportunities in the sector. This report analyses 10 potential connected car use-cases to assess which ones could offer the biggest revenue opportunities for operators and outline the business case for investment.
  • AI: How telcos can profit from deep learning Artificial intelligence (AI) is improving rapidly thanks to the growing use of deep neural networks to teach computers how to interpret the real world (deep learning). These networks use vast amounts of detailed data to enable machines to learn. What are the potential benefits for telcos, and what do they need to do to make this happen?
  • Amazon: Telcos’ Chameleon-King Ally? New digital platforms are emerging – the growing popularity of smart speakers, which rely on cloud-based artificial intelligence, could help Amazon, the original online chameleon, to bolster its fast-evolving ecosystem at the expense of Google and Facebook. As the digital food chain evolves, opportunities will open up for telcos, but only if the smart home market remains heterogeneous and very competitive.

Apple’s evolving strategy

Apple is first and foremost a hardware company: It sells physical products. But unlike most other hardware makers, it also has world-class expertise in software and services. These human resources and its formidable intellectual property, together with its cash pile of more than US$250 billion and one of the world’s must coveted brands, gives Apple’s strategic options that virtually no other company has. Apple has the resources and the know-how to disrupt entire industries. Apple’s decision to double the size of it’s already-impressive services business by 2021 has ramifications for companies in a wide range of industries – from financial services to entertainment to communications.

Throughout its existence, Apple’s strategy has been to use distinctive software and services to help sell its high-margin hardware, rather than compete head-on with Google, Facebook, Microsoft and Amazon in the wider digital services and content markets. As Apple’s primary goal is to create a compelling end-to-end solution, its software and services are tightly integrated into its hardware. Although there are some exceptions, notably iTunes and Apple Music, most of Apple’s services and software can only be accessed via Apple’s devices. But there are four inter-related reasons why Apple may rethink that strategy and extend Apple’s services beyond its hardware ecosystem:

      • Services are now Apple’s primary growth engine, as iPhone revenue appears to have peaked and new products, such as the Apple Watch, have failed to take up the slack. Moreover, services, particularly content-based services, need economies of scale to be cost-effective and profitable.
      • Upstream players, such as merchants, brands and content providers, want to be able to reach as many people as possible, as cost-effectively as possible. They would like Apple’s stores and marketplaces to be accessible from non-Apple devices, as that would enable them to reach a larger customer base through a single channel. Figure 1 shows that Apple’s iPhone ecosystem (which use the iOS operating system) is approximately one quarter of the size of rival Android in terms of volumes.
      • Artificial intelligence is becoming increasingly central to the propositions of the major Internet ecosystems, including that of Apple. The development of artificial intelligence requires vast amounts of real-world data that can be used to hone the algorithms computers use to make decisions. To collect the data necessary to detect patterns and subtle, but significant, differences in real-world conditions, the Internet players need services that are used by as many people as possible.
      • As computing power and connectivity proliferates, the smartphone won’t be as central to people’s lives as it is today. For Apple, that means having the best smartphone won’t be enough: Computing will eventually be everywhere and will probably be accessed by voice commands or gestures. As the hardware fades into the background and Apple’s design skills become less important, the Cupertino company may decide to unleash its services and allow them to run on other platforms, as it did with iTunes.

Content:

  • Executive Summary
  • Introduction
  • Apple’s evolving strategy
  • Playing catch-up in artificial intelligence
  • What does Apple earn from services?
  • What are Apple’s key services?
  • Communications – Apple iMessage and FaceTime
  • Commerce – Apple Pay and Apple Wallet
  • Content – iTunes, Apple Music, Apple TV
  • Software – the App Store, Apple Maps
  • Artificial intelligence and the role of Siri
  • Tools for developers
  • Conclusions and implications for rivals
  • Implications for rivals

Figures:

  • Figure 1: Installed base of smartphones by operating system
  • Figure 2: Apple’s artificial intelligence, as manifest in Siri, isn’t that smart
  • Figure 3: Apple’s services business is comparable in size to Facebook
  • Figure 4: The services business is Apple’s main growth engine
  • Figure 5: The strength of Apple’s online commerce ecosystem
  • Figure 6: iMessage is becoming a direct competitor to Instagram and WhatsApp
  • Figure 7: Various apps allow consumers to make payments via Apple Pay
  • Figure 8: Apple Pay is available in a limited number of markets
  • Figure 9: Unlike most Apple services, Apple Music is “available everywhere”
  • Figure 10: Apple’s App Store generates far more revenue than Google Play
  • Figure 11: Apple Maps’ navigation trailed well behind Google Maps in June 2016
  • Figure 12: SWOT analysis of Apple in the services sector
  • Figure 13: TOWS analysis for Apple in the service market

Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed?

Introduction

The latest report in STL’s Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the role of telcos in disrupting the digital economy. Building on the insights gleaned from the stream’s research, STL has analysed disruptive moves by four very different telcos and their prospects of success.

In the digital economy, start-ups and major Internet platforms, such as Alibaba, Amazon, Apple, Facebook, Google, Spotify, Tencent QQ and Uber, are generally considered to be the main agents of disruption. Start-ups tend to apply digital technologies in innovative new ways, while the major Internet platforms use their economies of scale and scope to disrupt markets and established businesses. These moves sometimes involve the deployment of new business models that can fundamentally change the modus operandi of entire industries, such as music, publishing and video gaming.

However, these digital natives don’t have a monopoly on disruption. So-called old economy companies do sometimes successfully disrupt either their own sector or adjacent sectors. In some cases, incumbents are actually well placed to drive disruption. As STL Partners has detailed in earlier reports, telcos, in particular, have many of the assets required to disrupt other industries, such as financial services, electronic commerce, healthcare and utilities. As well as owning the underlying infrastructure of the digital economy, telcos have extensive distribution networks and frequent interactions with large numbers of consumers and businesses.

Although established telcos have generally been cautious about pursuing disruption, several have created entirely new value propositions, effectively disrupting either their core business or adjacent industry sectors. In some cases, disruptive moves by telcos have primarily been defensive in that their main objective is to hang on to customers in their core business. In other cases, telcos have gone on the offensive, moving into new markets in search of new revenues.

Increasingly, these two strategies are becoming intertwined. As regulators use spectrum licensing and local loop unbundling to fuel competition in connectivity, telcos have found themselves embroiled in damaging and expensive price wars. One way out of this commoditisation trap is to enhance and enrich the core proposition in ways that can’t easily be replicated by rivals. For example, BT in the UK has demonstrated that one of the most effective ways to defend the core business can be to bundle connectivity with exclusive content that consumers value. This report analyses four very different variants of this basic strategy and their chances of success.

Note, the examples in this report are intended to be representative and instructive, but they are not exhaustive. Other telcos have also pursued disruptive strategies with varying degrees of success. Many of these strategies have been described and analysed in previous STL Partners’ research reports. Digital transformation is a phenomenon that is not just affecting the telco sector. Many industries have been through a transformation process far more severe than we have seen in telecoms, while others began the process much earlier in time. We believe that there are valuable lessons telcos can learn from these sectors, so we have decided to find and examine the most interesting/useful case studies.

Contents:

  • Executive Summary
  • Introduction
  • Strategy One: Aggressive Acquisitions
  • AT&T – how will engineering and entertainment mix?
  • Strategy Two: Fast and Fluid, build a portfolio
  • Axiata places many digital bets
  • Strategy Three: Leapfrogging the legacy
  • Reliance Jio – super-disruptor
  • Strategy Four: Building an elaborate ecosystem
  • Turkcell goes toe-to-toe with the big Internet ecosystems

Figures:

  • Figure 1: Figure 1: The largest pay TV providers in the US in September 2016
  • Figure 2: Fullscreen Entertainment – free to AT&T Wireless customers
  • Figure 3: AT&T’s television customer base is shrinking
  • Figure 4: But AT&T’s Entertainment Group has seen ARPU rise
  • Figure 5: Celcom Planet’s 11Street marketplace caters for all kinds of products
  • Figure 6: XL has integrated its commerce and payment propositions
  • Figure 7: The Tribe video-on-demand proposition majors on Korean content
  • Figure 8: 4G was designed to deliver major capacity gains over 3G
  • Figure 9: Vodafone’s view of spectrum holdings in India
  • Figure 10: Reliance Jio is offering an array of entertainment and utility apps
  • Figure 11: Reliance’s network is outperforming that of rivals by a large margin
  • Figure 12: Vodafone India has slashed the cost of its mobile data services
  • Figure 13: Vodafone, Airtel and Idea account for 72% of the Indian market
  • Figure 14: The performance required for Reliance to achieve a ROCE of 18%
  • Figure 15: Digital services have become a major growth engine for Turkcell
  • Figure 16: Downloads of Turkcell’s apps are growing rapidly
  • Figure 17: Turkcell TV+ is gaining traction both on and off network
  • Figure 18: Turkcell’s ARPU is growing steadily
  • Figure 19:Turkcell is seeing rapid growth in mobile data traffic

Consumer communications: Can telcos mount a comeback?

Introduction

Although they make extensive use of WhatsApp, Facebook Messenger, Snapchat and other Internet-based communications services, consumers still expect mobile operators to enable them to make voice calls and text messages. Indeed, communication services are widely regarded as a fundamental part of a telco’s proposition, but telcos’ telephony and messaging services are losing ground to the Internet-based competitors and are generating less and less revenue.

Should telcos allow this business to gradually melt away of should they attempt to rebuild a competitive communications proposition for consumers? How much strategic value is there in providing voice calls and messaging services?

This report explores telcos’ strategic options in the consumer communications market, building on previous STL Partners’ research reports, notably:

Google/Telcos’ RCS: Dark Horse or Dead Horse?

WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce

This report evaluates telcos’ current position in the consumer market for voice calls and messaging, before considering what they can learn from three leading Internet-based players: Tencent, Facebook and Snap. The report then lays out four strategic options for telcos and recommends which of these options particular types of telcos should pursue.

Content:

  • Introduction
  • Executive Summary
  • What do telcos have to lose?
  • Key takeaways
  • Learning from the competition
  • Tencent pushes into payments to monetise messaging
  • Facebook – nurturing network effects with fast footwork
  • Snapchat – highly-focused innovation
  • Telcos’ strategic options
  • Maximise data traffic
  • Embed communications into other services
  • Differentiate on reliability, security, privacy and reach
  • Compete head-on with Internet players
  • Recommendations

Figures:

  • Figure 1: Vodafone still makes large sums from incoming calls & messages
  • Figure 2: Usage of Vodafone’s voice services is rising in emerging markets
  • Figure 3: Vodafone Europe sees some growth in voice usage
  • Figure 4: Internet-based services are overtaking telco services in China
  • Figure 5: Usage of China Mobile’s voice services is sliding downwards
  • Figure 6: China Mobile’s SMS traffic shows signs of stabilising
  • Figure 7: Vodafone’s SMS volumes fall in Europe, but rise in AMAP
  • Figure 8: Voice & messaging account for 38% of China Mobile’s service revenues
  • Figure 9: Line is also seeing rapid growth in advertising revenue in Japan
  • Figure 10: More WeChat users are making purchases through the service
  • Figure 11: About 20% of WeChat official accounts act as online shops
  • Figure 12: Line’s new customer service platform harnesses AI
  • Figure 13: Snapchat’s user growth seems to be slowing down
  • Figure 14: Vodafone Spain is offering zero-rated access to rival services
  • Figure 15: Google is integrating communications services into Maps
  • Figure 16: Xbox Live users can interact with friends and other gamers
  • Figure 17: RCS is being touted as a business-friendly option
  • Figure 18: Turkcell’s broad and growing range of digital services

AI: How telcos can profit from deep learning

The enduring value of connected assets

In the digital economy, the old adage knowledge is power applies as much as ever. The ongoing advances in computing science mean that knowledge (in the form of insights gleaned from large volumes of detailed data) can increasingly be used to perform predictive analytics, enabling new services and cutting costs. At the same time, the widespread deployment of connected devices, appliances, machines and vehicles (the Internet of Things) now means enterprises can get their hands on granular real-time data, giving them a comprehensive and detailed picture of what is happening now and what is likely to happen next.

A handful of companies already have a very detailed picture of their markets thanks to far-sighted decisions to add connectivity to the products they sell. Komatsu, for example, uses its Komtrax system to track the activities of almost 430,000 bulldozers, dump-trucks and forklifts belonging to its customers. The Japan-based company has integrated monitoring technologies and connectivity into its construction and mining equipment since the late 1990s. Komatsu says the Komtrax system is standard equipment on “most Komatsu Tier-3 Construction machines” and on most small utility machines and backhoes.

Komatsu’s machines ship with GPS chips that can pinpoint their position, together with a unit that gathers engine data. They can then transmit the resulting data to a communication satellite, which relays that information to the Komtrax data centre.

The data captured by Komtrax (and other Internet of Things solutions) has value on multiple different levels:

  • It provides Komatsu with market intelligence
  • It enables Komatsu to offer value added services for customers
  • It gives detailed data on the global economy that can be used for computer modelling and to support the development of artificial intelligence

Market intelligence for Komatsu

For Komatsu, Komtrax provides valuable information about how its customers use its equipment, which can then be used to refine its R&D activities. Usage data can also help sales teams figure out which customers may need to upgrade or replace their equipment and when.

Komatsu’s sales and finance departments use the findings, for example, to offer trade-ins and sales of lighter machines where heavy ones are underused. Its leasing firm can also use the information to help find customers for its rental fleet.

Furthermore, Komatsu is linking market information directly with its production plants through Komtrax (see Figure 1). It says its factories “aggressively monitor and analyse the conditions of machine operation and abrasion of components” to enable Komatsu and its distributors to improve operations by better predicting the lifetime of parts and the best time for overhauls.

Figure 1: How Komatsu uses data captured by its customers’ equipment

Source: Komatsu slide adapted by STL Partners

Value added services for customers

The Komtrax system can also flag up useful information for Komatsu’s customers. Komatsu enables its customers to access the information captured by their machines’ onboard units, via an Internet connection to the Komtrax data centre.

Customers can use this data to monitor how their machines are being used by their employees. For example, it can show how long individual machines are sitting idle and how much fuel they are using. Komatsu Australia, for example, says Komtrax enables its customers to track a wide range of performance indicators, including:

  • Location
  • Operation map (times of day the engine was on/off)
  • Actual fuel consumptionAverage hourly fuel consumption
  • Residual fuel level
  • High water temperature during the day’s operation
  • Dashboard cautions
  • Maintenance reminders/notifications
  • “Night Time” lock
  • Calendar lock
  • Out of Area alerts
  • Movement generated position reports
  • Actual working hours (engine on time less idle time)
  • Operation hours in each work mode (economy, power, breaker, lifting)
  • Digging hours
  • Hoisting hours
  • Travel hours
  • Hydraulic relief hours
  • Eco-mode usage hours
  • Load frequency (hours spent in four different load levels determined by pump pressures or engine torque)

 

Content:

  • Introduction
  • Executive Summary
  • The enduring value of connected assets
  • Tapping telecoms networks
  • Enabling Deep Neural Networks
  • Real world data: the raw material
  • Learning from Tesla
  • The role of telcos
  • Conclusions and Recommendations

Figures:

  • Figure 1: How Komatsu uses data captured by its customers’ equipment
  • Figure 2: Interest in deep learning has risen rapidly in the past two years
  • Figure 3: Deep learning buzz has helped drive up Nvidia’s share price
  • Figure 4: The key players in the development of deep learning technology
  • Figure 5: Mainstream enterprises are exploring deep learning
  • Figure 6: The automotive sector is embracing Nvidia’s artificial intelligence
  • Figure 7: Google Photos learns when users correct mistakes
  • Figure 8: Tesla’s Autopilot system uses models to make decisions
  • Figure 9: Tesla is collecting very detailed data on how to drive the world’s roads

Amazon: Telcos’ Chameleon-King Ally?

Introduction

Amazon is using an array of innovative propositions to sidestep the Android-Apple duopoly in the smartphone market and Facebook’s rapidly expanding digital commerce ecosystem. Amazon’s vast selection, unparalleled logistics, innovative bundling, laser-like focus on the customer, rapidly improving entertainment proposition and leadership in voice-controlled in-home systems mean the Seattle-based e-commerce giant is fast becoming a omnipresent convenience store that always has what you want, when you want it.

Continually reinventing itself, Amazon’s restlessness could seriously disrupt the balance of power between the major global Internet ecosystems. Although the Amazon, Apple, Facebook and Google ecosystems all originate from the PC-era, they have each managed to successfully extend their digital platforms into the smartphone and tablet markets. But not without a dramatic change in the pecking order. In fact, the advent of touch-controlled smartphones enabled Apple to become a major force in the digital consumer market, while weakening the position of its long-standing foe Microsoft.

Now these ecosystems need to navigate the tricky transition to voice-controlled digital platforms, which depend heavily on advanced speech recognition, artificial intelligence and machine learning technologies. Amazon is leading the way, having created this new market with the rollout of its Echo speaker, underpinned by the cloud-based Alexa personal assistant system.

This report analyses Amazon’s financial firepower, the Amazon Prime bundle and strategy of bundling entertainment with retail, before considering Amazon’s areas of relative weakness – the smartphone and communications markets. In this section, the report also considers whether Amazon can sustain its lead in the nascent market for voice-controlled speakers for the home.

It concludes by exploring whether Amazon has sufficient economies of scope to build the expertise in artificial intelligence that will be required to ensure the Apple-Android duopoly that exists in the smartphone market won’t also dominate the emerging smart home sector. Finally, it considers the ramifications for telcos and makes several high level recommendations.

The global e-commerce market

Online commerce continues to grow rapidly. In 2016, global retail e-commerce sales (products and services ordered via the internet) will rise almost 24% to reach $1.915 trillion in 2016, according to research firm eMarketer. As that represents just 8.7% of total retail spending worldwide, there is plenty more growth to come. eMarketer expects retail ecommerce sales will increase to $4.058 trillion in 2020, making up 14.6% of total retail spending that year (see Figure 1).

Figure 1: Retail online commerce continues to grow rapidly

The major global Internet ecosystems – Amazon, Apple, Facebook and Google – all take a slice of this market. Within their ecosystems, they act as brokers bringing buyers and sellers together, earning a commission for facilitating interactions and transactions. Google and Facebook are the leading players in online advertising, while Apple is a leading distributor of digital content: Although Apple still generates most of its revenue from devices, its App Store and iTunes service are now major contributors to its top line. Still, in online commerce, Amazon rules the roost: Its online marketplace, which offers a vast selection of products and services from millions of merchants, continues to grow rapidly.

 

  • Introduction
  • Executive Summary
  • The global e-commerce market
  • Amazon’s financial firepower
  • Key takeaways
  • Amazon Prime: The Convenience Engine
  • Eroding Google Search
  • Key takeaways
  • Why Amazon wants to entertain us
  • A push into user-generated content
  • Key takeaways
  • Amazon’s Devices: Ups and Downs
  • Navigating Google’s mobile maze
  • Amazon’s Attempts to Develop Device Platforms
  • Key takeaways
  • Communications: Amazon’s Blind Spot?
  • Conclusions and Recommendations

Google/Telcos’ RCS: Dark Horse or Dead Horse?

Introduction

The strategic importance of digital communications services is rising fast, as these services now look set to become a major conduit for digital commerce. Messaging services are increasingly enabling interactions and transactions between consumers and businesses. Largely pioneered by WeChat in China, the growing integration of digital communications and commerce services looks like a multi-billion dollar boon for Facebook and a major headache for Amazon, eBay and Google, as outlined in the recent STL Partners report: WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce.

This report analyses Google’s and telcos’ strategic position in the digital communications market, before exploring the recent agreement between leading telcos, the GSMA and Google to use the Android operating system to distribute RCS (Rich Communications Service), which is designed to be a successor to SMS and MMS. Like SMS, RCS is intended to work across networks, be network-based and be the default mobile messaging service, but it also goes far beyond SMS, by supporting rich features, such as video calling, location sharing, group chat and file sharing.

The report then undertakes a SWOT (strengths, weaknesses, opportunities and threats) analysis on the new Google supported RCS proposition, before considering what telcos need to do next to give the service any chance of seeing widespread adoption.

Google’s strategic headache

To Google’s alarm, mobile messaging looks set to become the next major digital commerce platform. In some ways, this is a logical progression of what has come before. Although neither Google nor Amazon, two of the leading digital commerce incumbents, seem well prepared for the rise of “conversational commerce”, communications and commerce have always been interwoven – physical marketplaces, for example, serve both functions. In the digital era, new communications services, such as SMS, email and mobile calls, were quickly adopted by companies looking to contact consumers. Even now, businesses continue to rely very heavily on email to communicate with consumers, and with each other, and through Gmail, Google has a strong position in this segment.

But many consumers, particularly younger people, now prefer to use mobile messaging and social networking services to communicate with friends and family and are using email, which was developed in the PC era, less and less. People are spending more and more time on messaging apps – some industry executives estimate that consumers spend 40% of their time on a mobile phone purely in a messaging app. Understandably, businesses are looking to follow consumers on to mobile messaging and social networking services. Crucially, some of these services are now enabling businesses to transact, as well as interact, with customers, cutting the likes of Amazon and Google out of the loop entirely.

Largely pioneered by Tencent’s WeChat/Weixin service in China, the growing integration of digital communications and commerce services could be a multi-billion dollar boon for Facebook, the leading provider of digital messaging services in much of the world. The proportion of WeChat users making purchases through the service leapt to 31% in 2016 up from 15% in 2015, according to Mary Meeker’s Global Internet Trends report 2016. Moreover, users of WeChat’s payment service now make more than 50 payments a month through the service (see Figure 1), highlighting the convenience of ordering everyday products and services through a messaging app. In March 2016, Tencent reported the combined monthly active users of the Weixin and WeChat messaging services reached 697 million at the end of 2015, representing annual growth of 39%. See WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce for more on this key trend in the digital economy.

Figure 1: WeChat users find it convenient to combine payments and messaging 

Source: Mary Meeker’s Global Internet Trends 2016

 

  • Executive summary
  • Contents
  • Introduction
  • Google’s strategic headache
  • Winner takes all?
  • Google’s attempts to crack communications
  • Telcos’ long goodbye
  • RCS – a very slow burn
  • VoLTE sees broader support
  • Google and telcos: a match made in heaven?
  • A new phase in the Google-telcos relationship?
  • Building a business case
  • Conclusions
  • Strengths
  • Weaknesses
  • Opportunities
  • Threats
  • Next steps
  • Lay the foundations
  • What will Google do next?

 

  • Figure 1: WeChat users find it convenient to combine payments and messaging
  • Figure 2: Using Weixin Pay to complete a transaction in a fast food outlet
  • Figure 3: Leading communications & media sharing apps by downloads
  • Figure 4: Deutsche Telekom’s RCS app’s features include location sharing
  • Figure 5: All-IP communications services are gaining some traction with operators
  • Figure 6: Google Places aims to connect businesses and consumers
  • Figure 7: SWOT analysis of operators’ IP communications proposition
  • Figure 8: TOWS analysis for telcos in all-IP communications

Telco Cloud: Translating New Capabilities into New Revenue

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Preface

The telecoms industry is embracing network virtualisation and software defined networking, which are designed to both cut costs and enable greater agility. Whilst most operators have focused on the operating and capital cost benefits of virtualisation, few have attempted to define the range of potential new services that could be enabled by these new technologies and even fewer have attempted to forecast the associated revenue growth.

This report outlines:

  • Why and how network functions virtualisation (NFV), software defined networking (SDN) and distributed compute capabilities could generate new revenue growth for telcos.
  • The potential new services enabled by these technologies.
  • The revenue growth that a telco might hope to achieve.

This report does not discuss the cost, technical, organisational, market or regulatory challenges operators will need to overcome in making the transition to SDN and NFV. STL Partners (STL) also acknowledges that operators are still a long way from developing and launching some of the new services discussed in this paper, not least because they require capabilities that do not exist today. Nevertheless, by mapping the opportunity landscape for operators, this report should help to pave the way to fully capturing the transformative potential of SDN and NFV.

To sense-check our findings, STL has tested the proposed service concepts with the industry. The new services identified and modelled by STL were shared with approximately 25 telecoms operators. Hewlett Packard Enterprise (HPE) kindly commissioned and supported this research and testing programme.

However, STL wrote this report independently, and the views and conclusions contained herein are those of STL.

Introduction

The end of growth in telecoms…?

Most telecoms operators are facing significant competitive pressure from rival operators and players in adjacent sectors. Increased competition among telcos and Internet players has driven down voice and messaging revenues. Whilst demand for data services is increasing, STL forecasts that revenue growth in this segment will not offset the decline in voice and messaging revenue (see Figure 5).

 Figure 5: Illustrative forecast: revenue decline for converged telco in advanced market

Source: STL Partners analysis

Figure 5 shows STL forecasts for revenues over a six-year horizon for an illustrative converged telco operating in an advanced market. The telco, its market characteristics and the modelling mechanics are described in detail later in this report.

We believe that existing ‘digital’ businesses (representing consumer digital services, such as IPTV and managed services for enterprises) will not grow significantly on an organic basis over the next six years (unless operators are able to radically transform their business). Note, this forecast is for a converged telco (mobile and fixed) addressing both enterprise and consumer segments; we anticipate that revenues could face a steeper decline for non-converged, consumer-only or enterprise-only players.

Given that telcos’ cost structures are quite rigid, with high capex and opex requirements to manage infrastructure, the ongoing decline in core service revenue will continue to put significant pressure on the core business. As revenues decline, margins fall and telcos’ ability to invest in innovation is curbed, making it even harder to find new sources of revenue.

New technologies can be a catalyst for telco transformation

However, STL believes that new technologies have the potential to both streamline the telco cost structure and spur growth. In particular, network functions virtualisation (NFV) and software-defined networking (SDN) offer many potential benefits for telcos.

Virtualisation has the potential to generate significant cost savings for telcos. Whilst the process of managing a transition to NFV and SDN may be fraught with challenges and be costly, it should eventually lead to:

  • A reduction in capex – NFV will lead to the adoption of generic common-off-the-shelf (COTS) hardware. This hardware will be lower cost, able to serve multiple functions and will be more readily re-usable. Furthermore, operators will be less tied to vendors’ proprietary platforms, as functions will be more openly interchangeable. This will increase competition in the hardware and software markets, leading to an overall reduction in capital investment.
  • Reduction of opex through automation. Again, as services will be delivered via software there will be less cost associated with the on-going management and maintenance of the network infrastructure. The network will be more-centrally managed, allowing more efficient sharing of resources, such as space, power and cooling systems.
  • Product lifecycle management improvements through more integrated development and operations (devops)

In addition to cost savings, virtualisation can also allow operators to become more agile. This agility arises from two factors:

  1. The nature of the new infrastructure
  2. The change in cost structure

As the new infrastructure will be software-centric, as opposed to hardware-centric, greater levels of automation will be possible. This new software-defined, programmable infrastructure could also increase flexibility in the creation, management and provisioning of services in a way that is not possible with today’s infrastructure, leading to greater agility.

Virtualisation will also change the telco cost structure, potentially allowing operators to be less risk-averse and thereby become more innovative. Figure 6 below shows how virtualisation can impact the operating model of a telco. Through virtualisation, an infrastructure player becomes more like a platform or product player, with less capital tied-up in infrastructure (and the management of that infrastructure) and more available to spend on marketing and innovation.

Redefining the cost structure could help spur transformation across the business, as processes and culture begin to revolve less around fixed infrastructure investment and more-around software and innovation.

Figure 6: Virtualisation can redefine the cost structure of a telco

Source: STL Partners analysis

This topic is explored in detail in the recent Executive Briefings: Problem: Telecoms technology inhibits operator business model change (Part 1) and Solution: Transforming to the Telco Cloud Service Provider (Part 2).

 

  • Preface
  • Executive Summary
  • Introduction
  • The end of growth in telecoms…?
  • New technologies can be a catalyst for telco transformation
  • Defining ‘Telco Cloud’
  • How Telco Cloud enables revenue-growth opportunities for telcos
  • Connect services
  • Perform services
  • Capture, Analyse & Control services
  • Digital Agility services
  • Telco Cloud Services
  • Service Overview: Revenue vs. Ease of Implementation
  • 15 Service types defined (section on each)
  • The Revenue Opportunity
  • Model overview
  • Sizing the revenue potential from Telco Cloud services
  • Timeline for new service launch
  • Breaking down the revenues
  • Customer experience benefits
  • Conclusions
  • Appendix
  • Modelling Assumptions & Mechanics
  • Service Descriptions: Index of Icons

 

  • Figure 1: Defining Telco Cloud
  • Figure 2: Overview of Telco Cloud categories and services
  • Figure 3: Telco Cloud could boost revenues X% higher than the base case
  • Figure 4: Breakdown of Telco Cloud revenues in 2021
  • Figure 5: Illustrative forecast: revenue decline for converged telco in advanced market
  • Figure 6: Virtualisation can redefine the cost structure of a telco
  • Figure 7: Defining Telco Cloud
  • Figure 8: Telco Cloud Service Categories
  • Figure 9: Telco Cloud will enable immersive live VR experiences
  • Figure 10: Telco Cloud can enable two-way communication in real-time
  • Figure 11: Overview of Telco Cloud categories and services
  • Figure 12: Telco Cloud Services: Revenue versus ease of implementation
  • Figure 13: Telco X – Base case shows declining revenues
  • Figure 14: Telco X – Telco Cloud services increase monthly revenues by X% on the base case by Dec 2021
  • Figure 15: Telco X – Timeline of Telco Cloud service launch dates
  • Figure 16: Telco X (converged) – Net new revenue by service category (Dec 2021)
  • Figure 17: Telco Y (mobile only) – Net new revenue by service category (Dec 2021)
  • Figure 18 Telco Z (fixed only) – Net new revenue by service category (Dec 2021)
  • Figure 19: Modelling Mechanics

WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce

Introduction

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the rise of conversational commerce – the use of messaging services to enable both interactions and transactions. It considers how WeChat/Weixin has developed this concept in China, the functionality the Tencent subsidiary offers consumers and merchants, and the lessons for other players.

The report then goes on to consider how Facebook is implementing conversational commerce in its popular Messenger app, before outlining the implications for Amazon, Google and Apple. Finally, it considers how telcos may be able to capitalise on this trend and makes a series of high-level recommendations to guide the implementation of a conversational commerce strategy. This report builds on three recent STL reports, Building Digital Trust: A Model for Telcos to Succeed in Commerce, Mobile Authentication: Telcos’ Key to the Digital World? and Authentication Mechanisms: The Digital Arms Race.

Communications and commerce: two sides of the same coin

For Facebook, advertising isn’t the only fruit. When it hired the former head of PayPal, David Marcus, to run Facebook Messenger in 2014, it was a clear signal of where the social network is heading. Facebook plans to go head to head with eBay and Amazon in the digital commerce market, generating revenues by enabling transactions, as well as brokering advertising and marketing. The ultimate goal is to transform communications services into end-to-end commerce platforms that enable consumers and brands to “close the loop” from initial interaction through transaction to after-sales care.

Facebook is not alone. In fact, it is following in the footsteps of Tencent’s WeChat service. In the STL Partners’ Wheel of Digital Commerce (see Figure 1), the remit of WeChat, Facebook Messenger, Twitter, SnapChat and other digital communications services is expanding to encompass the guide, the transact and satisfy segments (marked in blue, turquoise and green), as well as the retain, plan and promote segments: the traditional sweet spot for social networking services, email and instant messaging.

Figure 1: Communications services move to facilitate the whole wheel of commerce

Source: STL Partners

Facebook, in particular, is following in the footsteps of WeChat, Tencent’s messaging service, which is evolving into a major digital commerce platform in its home market of China. Whereas email, SMS and many other digital commerce services have long carried commercial messages, together with advertising and, inevitably, spam, WeChat goes much further – it also enables transactions and customer care. The central tenet behind this concept, which is sometimes called conversational commerce, is that consumers will become increasingly comfortable using a single service to converse with friends and businesses, and buy goods and services. In some markets, third parties are adding a commerce overlay to existing communications platforms. In India, for example, several startups, such as Joe Hukum, Niki and Lookup, are touting ways to use WhatsApp, SMS and other digital communications services to transact with consumers.

For telcos, the growing integration of communications and commerce exacerbates a key strategic dilemma. Through voice calls and text messaging, telcos led the digital communications market for two decades, but now face ceding that market to over-the-top players using communications as a loss leader to support digital commerce. The question for telcos is whether to compete head-on with these players in both digital communication and commerce (a major undertaking requiring major investments in product development and marketing) or whether to fall back to just providing enablers for other players.

The final section of this report discusses this question further. But first, let’s consider the arguments as to why digital communications and digital commerce are natural bedfellows:

Markets have always combined commerce and conversations

Markets – essentially a concentration of vendors in one physical location – have been a feature of most societies and cultures throughout recorded history. They fulfil two key functions: One is to enable buyers and sellers to find each other easily. The second is to enable the exchange of information, news and gossip: the communications required to help human societies to function smoothly. For many shoppers, a visit to a physical market is as much about socialising, as shopping. In other words, communications and commerce have been intertwined for centuries. Messaging apps could extend this concept into the digital age.

Conversations help build trust

Communication is often a prelude for commerce. In both a personal and professional capacity, people often seek word-of-mouth recommendations or they canvas friends’ opinions on potential products and services. As consumers increasingly use communications apps for this purpose, these platforms are already playing a key role in purchasing decisions across both services and products. The obvious next step is to enable the actual transaction to also take place within the app.

Conversations can drive commerce

People use messaging apps to organise their social lives. They chat with friends about which bars to go to, which restaurants to dine at, which films to see, which concerts to attend and other entertainment possibilities. Once the decision is made, one of the group may want to book tickets, a table or a taxi. If such a booking can be made within the messaging app, all of the group will be able to see the details and act accordingly.

Convenient customer service

After a transaction is completed, customer service kicks in. The buyer may want to change an order, check on delivery dates or make a related purchase. The seller may want feedback. For younger generations growing up with the Internet, messaging apps represent a natural way to interact with customer service representatives.

Messaging has consumers’ attention

Although most smartphones host dozens of apps, few are used regularly. Messaging apps are among this chosen few. In fact, communications apps (social networks/messaging apps) soak up a huge amount of consumers’ time and attention. Data from comScore, for example, shows that social networks accounts for between one fifth and one quarter of all the time that consumers spend on digital services (see Figure 2).

Figure 2: Share of digital time of different categories of apps

Source:comScore

Merchants and brands need to go where their customers are and one of those places is messaging. Messaging apps are typically always running, frequently generating notifications. That means, for many consumers, a messaging app could be a convenient place from which to make purchases – it saves them the hassle of switching to another app or using a web browser. In an interview with Tech in Asia, Joe Hukum co-founder Ajeet Kushwaha noted: “Conversational commerce is going to offer Convenience 2.0 – better and bigger than Convenience 1.0 offered by e-commerce,” adding that Joe Hukum plans to make API (application program interface) integrations with a range of partners in order to enable quick transactions. “We’re at a point where the way we consume and transact is going to change drastically,” he contended.

The success of WeChat and the lessons it holds for other communications players suggests Kushwaha could well be right.

 

  • Executive Summary*
  • Communications and commerce: two sides of the same coin
  • WeChat – the conversational commerce trailblazer*
  • The merchant experience*
  • Muted monetisation*
  • Lessons to learn from WeChat/Weixin*
  • Facebook now following fast*
  • How much money can Messenger make from commerce?*
  • WhatsApp also targets commerce*
  • Takeaways: Facebook needs to work with the medium, not against it*
  • Implications for Amazon, Apple and Google*
  • Amazon – in danger of disruption*
  • Google – down, but not out*
  • Apple – already has the assets*
  • Conclusions and lessons for telcos*
  • How can telcos differentiate?*

(* = not shown here)

 

  • Figure 1: Communications services move to facilitate the whole wheel of commerce
  • Figure 2: Share of digital time of different categories of apps
  • Figure 3: The world’s most widely used mobile messaging services*
  • Figure 4: An example of a WeChat Subscription Account*
  • Figure 5: An example of a WeChat Service Account*
  • Figure 6: The key features of WeChat’s official accounts*
  • Figure 7: The main developer tools available to WeChat verified service accounts*
  • Figure 8: WeChat enables merchants to create a distinctive look and feel*
  • Figure 9: Some Chinese nurseries use WeChat to communicate with parents*
  • Figure 10: The WeChat Wallet offers easy access to a suite of services*
  • Figure 11: Tencent’s Red Envelope promotion was hugely successful*
  • Figure 12: WeChat’s depiction of a typical day for one of its users*
  • Figure 13: Tencent remains heavily reliant on online gaming revenues*
  • Figure 14: Facebook Messenger seeks to fill the gap in digital commerce*
  • Figure 15: Facebook follows in Tencent’s footsteps*
  • Figure 16: Hailing a taxi from within a conversation on Facebook Messenger*
  • Figure 17: Facebook Messenger will increasingly compete with Amazon Prime Now*
  • Figure 18: Telcos’ mobile money apps are becoming increasingly sophisticated*

(* = not shown here)

AT&T: Fast Pivot to the NFV Future

Objectives, methods and strategic rationale

AT&T publicly launched its plan to transform its network to a cloud-, SDN- and NFV-based architecture at the Mobile World Congress in February 2014. The program was designated as the ‘User-Defined Network Cloud’ (UDNC).

The initial branding, which has receded somewhat as the program has advanced, reflected the origins of AT&T’s strategic vision in cloud computing and the idea of a software-defined network (SDN) where users can flexibly modify and scale their services according to their changing needs, just as they can with cloud-based IT. This model also contributed to an early bias toward enterprise networking, with AT&T’s first major SDN-based service being ‘Network on Demand’: an Ethernet offering allowing enterprises to rapidly modify their inter-site bandwidth and make other service alterations via a self-service portal, first trialed in June 2014.

Data center-based infrastructure and SDN architectural principles have remained at the heart of AT&T’s vision, although the focus has shifted increasingly toward network functions virtualization (NFV). In December 2014, the operator announced it had set itself the target of virtualizing (NFV) and controlling (SDN) 75% of its network via software by 2020.  What this actually means was spelled out only in mid-2015, by which time AT&T also indicated that it expected to have virtualized around 5% out of the targeted 75% by the end of 2015.

What the 75% target relates to specifically are the 200 most vital network functions that AT&T believes it will need to take forward in the long term; so this is not an exhaustive list of every network component. The list comprises network elements and service platforms supporting IP-based data and voice services, and content delivery, ranging from CPE to the optical long-haul network and everything in between. What the list does not include is functions supporting legacy services such as TDM voice, frame relay or ATM; so the UDNC involves a definitive break with AT&T’s history as one of the largest and oldest PSTN operators in the world.

Correspondingly, this involves huge changes in AT&T’s culture and organization. The operator uses the term ‘pivot’ to describe its transformation into a software-centric network company. The word is intended to evoke a sort of 180o inversion of AT&T’s whole mode of operation: a transition from a hardware-centric operator that deploys and operates equipment designed to support specific services – and so builds and scales networks literally from the ground up – to a ‘top-down’, software-centric, ‘web-scale’ service provider that builds and scales services via software, and uses flexible, resource-efficient commodity IT hardware to deliver those services when and where needed.

AT&T has described the culture change needed to effect this pivot as one of the toughest challenges it faces. It involves replacing a so-called ‘NetOps’ (network-operations) mentality and team structure with a ‘DevOps’ (collaborative, iterative operations-focused software development) approach, with multi-disciplinary teams working across established operational siloes, and focusing on developing and implementing software-based solutions that address particular customer needs. According to AT&T Business Solutions’ Chief Marketing Officer, Steve McGaw, the clear parameters that the operator has set around the SDN architecture and customer-centricity are now driving team motivation and creativity: “A product that is going to fit into the SDN architecture becomes a self-fulfilling prophecy . . . . Because we have declared that that is the way we are going to do things, then there is friction to funding that doesn’t fit within that framework. And so everyone wants to get [their] project funded, everyone wants to move the ball forward with the customer and meet the customer’s needs and expectations.”

Allowing for some degree of marketing gloss, this description nonetheless portrays a considerable change in established ways of working, with hundreds of network engineers being retrained as software developers and systems managers. The same can be said for AT&T’s collaboration with third parties in developing the SDN architecture and virtualizing so many crucial network functions. AT&T is partnering with 11 vendors – both established and challengers – on the UDNC project, co-opting them into its dedicated Domain 2.0 supplier program. These vendors are:

  • Ericsson (multiple network functions, and also integration and transformation services);
  • Tail-F Systems (service orchestration: added to the Domain 2.0 program from February 2014 and then acquired by Cisco in July 2014);
  • Metaswitch Networks (virtualized IP multimedia functions, e.g. routers and SBCs);
  • Affirmed Networks (virtualized Enhanced Packet Core (EPC));
  • Amdocs (BSS / OSS functionality);
  • Juniper (routers, SDN technology, etc.);
  • Alcatel-Lucent (range of network functions);
  • Fujitsu (IT services);
  • Brocade (virtualized routers);
  • Ciena (optical networking and service orchestration);
  • Cisco (routers and IP networking)

In addition, in another challenge to AT&T’s traditionally proprietary mode of operation, the operator is collaborating extensively with a range of open source and academic initiatives working on various pieces of the SDN / NFV jigsaw. These include:

  • ON.Lab (a non-profit organization founded by SDN innovators, and specialists from Stanford University and Berkeley) – working on the virtualization of Central Office functionality (the so-called Central Office Re-architected as a Datacenter, or CORD) and the Open Network Operating System (ONOS) carrier-grade SDN platform. ON.Lab announced in October 2015 that it would partner with the Linux Foundation on open development of ONOS.
  • OpenDaylight (collaborative open source project hosted by the Linux Foundation, and dedicated to developing SDN and NFV technologies – various projects, including a tool based on the YANG data modeling language for configuring devices in the SDN)
  • OPNFV (another Linux Foundation-hosted open source project, focused on developing an open standard NFV platform – works mostly on the ARNO NFV platform).

AT&T’s Architecture – a technical summary

If you want to understand how this all fits together, consider the CORD project’s architecture as shown in Figure 1. CORD is an AT&T research project which aims to transform its local exchanges, Central Offices in US parlance, into small data centres hosting a wide range of virtualized software applications. As well as virtualizing the core telco functions based there, they will eventually also provide edge hosting for new products and services. The structure of CORD is the template for how AT&T intends to virtualize its network and how it intends to work with the three open-source groups ON.Lab, OpenDaylight, and OPNFV. Figure 1 shows how services are created in the XOS orchestration platform out of OpenStack virtual machines, OpenDaylight network apps, and ONOS flow rules.

Figure 1: How the Central Office Re-architected as a Datacenter project works

Source: ON.Lab

What’s the benefit?

This means that AT&T can …

 

  • Executive Summary* 
  • Objectives, methods and strategic rationale (shown in part here)
  • Progress and key milestones*
  • Analysis: proceeding on all fronts*
  • Next steps: getting it done*

(* = not shown here)

 

  • Figure 1: How the Central Office Re-architected as a Datacenter project works
  • Figure 2: NFV means re-organising your product bundles, which is one of the main reasons it’s worth doing*
  • Figure 3: AT&T’s publicly disclosed virtualized network functions (VNFs) as at October 2015*
  • Figure 4: What AT&T is concentrating on versus Telefonica*
  • Figure 5: Functions in line for virtualization by AT&T*
  • Figure 6: How AT&T is doing versus its primary competitor, Verizon in this space*

(* = not shown here)

Building Digital Trust: A Model for Telcos to Succeed in Commerce

Introduction

This executive briefing considers how telcos can reduce fragmentation in the digital commerce market and create value for merchants and consumers alike. It outlines how inconsistent and clunky experiences for consumers, together with incompatible and sub-scale platforms for merchants, continue to hamper the development of the digital commerce market both online and in bricks and mortar outlets.

The report then looks at attempts by individual telcos to carve out a role in this market, as well as exploring how the GSMA’s Digital Commerce and Mobile Connect programmes are trying to make mobile operators’ propositions more consistent with each other. Finally, it considers how the telecoms sector might develop a single consistent framework – a trusted digital infrastructure – that would enable consumers and merchants to exchange information and value in a consistent and interoperable way. This final section draws on research and development work by Deutsche Telekom’s Labs.

This executive briefing also builds on previous reports by STL Partners exploring the need for better authentication, identification, data management and payment mechanisms. These reports include:

Telcos’ role in digital commerce

Two years ago, STL Partners published a strategy report outlining two major opportunities in the digital commerce market for telcos:

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

As these two opportunities are inter-related and could be combined in a single platform, STL Partners recommended that telcos start with mobile commerce, where they have the strongest strategic position, and then use the resulting data, customer relationships and trusted brand to expand into personal cloud services, which will require high levels of investment.

However, since that report was published, in developed markets, telcos’ efforts to pursue the mobile commerce market have suffered several setbacks. Over the past two years, the Weve mobile commerce joint venture in the UK has unravelled, the SoftCard joint venture in the US has collapsed and Apple has rolled out a relatively advanced and holistic proposition, now known as Apple Wallet, which effectively cuts telcos out of the action. Moreover, Google and Samsung are seeking to emulate Apple’s widely-lauded Apple Pay solution for completing transactions online and in-person. STL Partners explained the significance of these events in an executive briefing entitled Apple Pay & Weve Fail: A Wake Up Call.

These developments have led many commentators to question whether telcos can really compete with the major Internet ecosystems in digital commerce.

In emerging markets, telcos increasingly enable commerce

While telcos in developed markets are often racked with doubt, their counterparts in emerging markets continue to make headway. In developing Asia, Africa and much of Latin America, most people lack credit cards, debit cards, bank accounts, driving licenses, passports and most of the other collateral that people in developed countries use to authenticate themselves, identify themselves and conduct transactions. As many of these people have mobile phones and SIM cards, telcos are increasingly acting as intermediaries between consumers and service providers in emerging markets.

Mobile money services, which enable consumers and businesses to transfer money via mobile networks, continue to proliferate and are increasingly achieving scale. For example, Orange Money, which is available in parts of Africa and Middle East, reported a 37% year-on-year rise in customers to 15.5 million at the end of the third quarter of 2015. It also reported that revenues were up 71% year-on-year.

In some cases, mobile money services are evolving into broader digital commerce platforms. In Kenya, Safaricom, for example, has reported that the number of merchants accepting payments via its Lipa na MPesa platform more than doubled to 49,413 in the year to March 2015. In the month of March 2015, Kshs 11.6 billion was handled by the Lipa na MPesa platform, which enables consumers to use the well-established M-Pesa mobile money transfer service to pay for goods and services.

In emerging markets, mobile operators are increasingly using their distribution networks (both digital and physical) and their extensive customer data to move into financial services. As they know how much consumers are spending on airtime and are able to infer other relevant information, such as whether a subscriber has a job, mobile operators can gauge how affluent an individual is and what size of loan they can afford. If the customer is a regular user of a mobile money transfer service, the operator may also be able to assess how much disposable income they have.

In Kenya, mobile operator Safaricom reported its M-Shwari joint venture with the Commercial Bank of Africa M-Shwari had 2.1 billion Kenyan shillings (almost US$ 20 million) out on loan to customers as of March 31, 2015, up 75% from 1.2 billion shillings a year earlier. In Sri Lanka, mobile operator Dialog claims it now sells more insurance policies than all the traditional insurance companies.

In developed markets, fragmentation persists

Although developed markets are very different beasts, telcos could still play a key enabling role, which addresses various pain points in the digital economy. Although most people in North America and Western Europe have bank accounts, credit ratings and at least one digital wallet (be that PayPal, Amazon Payments or Apple iTunes), digital interaction can still be fraught with friction and mistrust. Telcos could help by enabling simple and secure authentication services as outlined in Mobile Authentication: Telcos’ Key to the Digital World?. Moreover, there is still an opportunity for telcos to become trusted custodians of personal data as explained in the aforementioned strategy report: Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players.

Even the real-time commerce enablement opportunity, explained in that Strategy Report, still exists, despite the launch of Apple Pay, and the subsequent arrival of Samsung Pay and Android Pay. Industry executives say usage of Apple Pay so far has been modest. One problem is that relatively few people have one of the latest iPhones (the iPhone 6 or iPhone 6 Plus) needed to use the service. Another barrier is the limited number of stores in the US (the initial launch market) that can accept payments via Apple Pay. The net result is that only 14% of US households with credit cards have signed up for Apple Pay, according to Phoenix Marketing International, and less than one fifth of people who can use the system do so habitually, according to a report in the Financial Times, which cited banking sources.

Usage will rise, however, as Apple persuades more consumers to buy its latest iPhones and more merchants add their loyalty cards to the new Apple Wallet (formerly Apple Passbook), while installing point of sale terminals that can support contactless transactions. In STL Partners’ view, Apple Wallet, which is designed to hold digital representations of payment cards, loyalty cards, tickets and boarding passes, does address a genuine consumer need by providing a convenient way to organise all this collateral (see Figure 1).

But Apple Wallet isn’t a panacea for merchants. As iPhones will only ever be used by a fraction of a merchant’s customer base, they may prefer to rely on their own loyalty apps, rather than Apple Wallet. John Fisher, Costa’s head of mobile and loyalty, told Macworld that while the company believed Apple Pay would make the in-store experience “even more seamless,” Costa already has its own mobile loyalty app, which customers can scan at the till. “There is probably a role for mobile payments to be integrated into that in the future and we’re looking at that,” Fisher said. “The product that Apple has will really help to provide a simple solution around in-app payments and payments in store. That’s potentially where the market is going to head, so we need to have all options on the table.”

Figure 1: The new Apple Wallet can hold a wide range of digital commerce collateral

Source: Apple.com

Merchants are also seeking ways to improve the online shopping experience for people using mobile phones. The proportion of potential shoppers who complete an online transaction on a mobile device remains much lower than on a PC. That suggests many consumers still find it cumbersome to make a purchase on a mobile phone and/or are worried about security and/or privacy.

PayPal, which remains one of the leading digital wallets, continues to experiment with various mobile offerings. For example, its new One Touch service enables a consumer to register a device so that they don’t need to enter their login details when paying with PayPal. The service seeks to emulate Amazon’s famous one click purchasing experience, but both companies run the risk that consumers’ devices fall into the wrong hands and are used to make fraudulent purchases.

At the same time, the leading social networks are making a major push to merge online communications and commerce. For example, Facebook now offers advertisers the opportunity to add a buy button to an ad, which enables the user to purchase the relevant item without leaving Facebook. Google is also experimenting with this kind of functionality, enabling developers to place buy buttons in Android apps and in adverts, Meanwhile Amazon continues to push into the mobile commerce market through its keenly-priced Kindle Fire tablet range and its physical Dash Buttons (see Figure 2), which enable people to quickly purchase specific items, such as detergent or pet food.

Figure 2: Amazon Dash button supports one-touch ordering of a specific product

Source: Amazon.com

The US is acting as a test-bed for many of these new propositions, creating a fiercely competitive and cut-throat environment, from which telcos are increasingly excluded. US mobile operators have abandoned their elaborate and expensive SoftCard mobile commerce joint venture after it failed to gain significant traction. They are now providing support for third party solutions, such as Android Pay and Samsung Pay.

As the major US Internet players wrestle over the mobile commerce space, developing their own distinctive propositions and largely eschewing interoperability, consumers have to use different apps in different ecosystems. You can’t use Apple Pay to buy goods from Amazon, while iTunes doesn’t accept PayPal.

Exacerbating this fragmentation, some major merchants are still determined to sidestep the big Internet ecosystems altogether. Despite the widespread support for Apple Pay from US banks, many major US merchants, including Wal-Mart, Sears and CVS Pharmacy, continue to promote their own CurrentC solution, which was developed by the merchant consortium MCX. JPMorgan Chase is planning to launch a wallet, Chase Pay, which can be used in conjunction with the MCX solution. If anything, the fragmentation is getting greater, rather than less.

In summary, many incompatible and partial digital identification/authentication/payment solutions have been developed and deployed. Many of these solutions only work on one platform and are unable to share information with other solutions, resulting in frustration and confusion for consumers and digital service providers alike. As a result, service providers lack economies of scale, damaging the business case for more marginal digital services.

Telcos could make a big difference

One of the fundamental premises of the STL Partners’ Strategy Report, published in 2013, still holds true: Individuals are still looking for a simple and secure way to store the array of collateral required to interact with an increasingly digital world. As organisations embrace electronic authentication, identification and payment solutions, people are increasingly going to need digital versions of professional ID cards, house keys, car keys, payment cards, loyalty cards, membership cards, tickets, coupons, entitlements and receipts.

Telcos can help address that need. But instead of exacerbating the existing fragmentation by developing proprietary wallets that aren’t interoperable, telcos need to consider how they can play an enabling role for the wider ecosystem.

Although there are opportunities for telcos to fill gaps in the financial services market in developing countries, the role of telcos in developed markets needs to be more akin to that of a trusted infrastructure provider (as they are with the Internet), that provides a consistent digital framework for the existing financial services industry.

Some telcos are edging in this direction, while others continue to develop relatively rigid digital commerce and authentication propositions. The next section outlines some of these initiatives and gives STL Partners’ key takeaways in each case.

 

  • Introduction
  • Executive Summary
  • Telcos’ role in digital commerce
  • Telcos’ track record in digital commerce
  • Vodafone Wallet
  • Deutsche Telekom’s MyWallet
  • KDDI’s Digital Commerce suite
  • GSMA Mobile Connect
  • The case for a consistent user-centric framework
  • Core vision – put consumers first
  • Core principles – cross-platform, open and interoperable
  • Are telcos up to the task?
  • How could a framework be standardised?
  • How would telcos make money?
  • Would the wider ecosystem embrace a telco-led framework?
  • Conclusions and next steps

 

  • A flexible framework supporting different transmission and security tech
  • Figure 1: The new Apple Wallet can hold a wide range of digital commerce collateral
  • Figure 2: Amazon Dash button supports one-touch ordering of a specific product
  • Figure 3: The self-reinforcing flywheel Vodafone is aiming for
  • Figure 4: In the UK, Vodafone Wallet requires consumers to top up a prepaid card
  • Figure 5: Vodafone Wallet has polarised opinion on Google Play.
  • Figure 6: Deutsche Telekom’s MyWallet app has drawn few reviews
  • Figure 8: The ARPA of KDDI’s digital commerce business is on the rise
  • Figure 9: au Smart Pass subs are rising helping to lift ARPA
  • Figure 10: KDDI’s revenues and profits from value added services grow steadily
  • Figure 11: Mobile Connect Roadmap – Authentication, Identity and Attributes
  • Figure 12: The GSMA’s is looking to integrate Mobile Connect with mobile payments
  • Figure 13: The transactional services supported by the eZ Cash wallet
  • Figure 14: Axiata’s API Gateway supports a range of commerce and other services
  • Figure 15: Axiata’s vision of a consistent global platform for telco enablers
  • Figure 16: Apple Wallet is a repository for a growing array of digital collateral
  • Figure 17: Telekom Labs Has developed a prototype cross-platform wallet in HMTL5
  • Figure 18: Each piece of collateral could be represented by a digital card
  • Figure 19: A flexible framework supporting different transmission and security tech
  • Figure 20: Telekom Labs sees telcos as more trusted than other intermediaries

Baidu, Xiaomi & DJI: China’s Fast Growing Digital Disruptors

Introduction

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing analyses China’s leading digital disruptors and their likely impact outside their home country. The report explores whether the global leaders in digital commerce – Amazon, Apple, Facebook and Google – might soon face a serious challenge from a company built in China.

In our previous report, Alibaba & Tencent: China’s Digital Disruptors, we analysed China’s two largest digital ecosystems – Alibaba, which shares many similarities with Amazon, and Tencent, which is somewhat similar to Facebook. It explored the intensifying arms race between these two groups in China, their international ambitions and the support they might need from telcos and other digital players.

This executive briefing covers Baidu, China’s answer to Google and the anchor for a third digital ecosystem, and the fast-growing smartphone maker, Xiaomi, which has the potential to build a fourth major ecosystem. It also takes a close look at DJI, the world-leading drone manufacturer, which is well worth watching for its mid-to-long term potential to create another major ecosystem around consumer robotics.

Context: sizing up China’s disruptors

As U.S. companies have demonstrated time and time again, a large and dynamic domestic market can be a springboard to global dominance. Can China’s leading digital disruptors, which also benefit from a large and dynamic domestic market, also become major players on the global stage?

Alibaba, Tencent and Baidu, which run China’s leading digital ecosystems, have all developed in a digital economy that has been partially protected by cultural and linguistic characteristics, together with government policies and regulations. As a result, Google, Facebook and Amazon haven’t been able to replicate their global dominance in China. Of the big four global disruptors, only Apple can be said to be have a major presence in China.

Thanks to their strong position in China, Alibaba, Tencent and Baidu are among the leading Internet companies globally, as measured by market capitalisation (see Figure 2). As China’s economy slows (although it will still grow about 7% this year, according to government figures), many of China’s digital players are putting more focus on international growth. Alibaba & Tencent: China’s Digital Disruptors of this report outlined how Alibaba is gaining traction in other major middle income countries, notably Russia, whereas Tencent is trying, with limited success, to expand outside of China

Figure 2:  China is home to four of the world’s most valuable publicly-listed Internet companies

Source: Source: Morgan Stanley, Capital IQ, Bloomberg via KPCB

Of the five companies covered in the two parts of this report, search specialist Baidu is the least international – its revenues are almost all generated in China and its services aren’t much used outside its home country. Innovative and fast growing handset maker Xiaomi is still heavily dependent on China, but is seeing strong sales in other developing markets. The most international of the three is DJI, the world’s leading drone maker, which is making major inroads into the U.S. and Western Europe – the heartland of Apple, Google, Amazon and Facebook.

As discussed in Alibaba & Tencent: China’s Digital Disruptors, international telcos, media companies and banks all have a strategic interest in encouraging more digital competition globally. Today, the big four U.S.-based disruptors dominate the digital economy in North America, Western Europe, Latin America and much of the developing world, limiting the mindshare and market share available to other players.

Many telcos are particularly concerned about Apple’s and Facebook’s ever-strengthening position in digital communications – a core telecoms service. They also fret about Google’s and Amazon’s power in digital commerce and content. On the basis that my enemy’s enemy is my friend, telcos might want to support Xiaomi’s challenge to Apple, while backing Tencent’s efforts to make messaging app WeChat an international service and Alibaba’s growing rivalry with Amazon (both aspects are covered in the previous report).

  • Introduction
  • Executive Summary
  • Context: sizing up China’s disruptors
  • Baidu – China’s low cost Google
  • Why Baidu is important
  • Baidu’s business models
  • How big an impact will Baidu have outside China?
  • Threats to Baidu
  • Xiaomi – Apple without the margins?
  • Why Xiaomi is important
  • Business model
  • Xiaomi’s likely International impact
  • Threats to Xiaomi
  • DJI – more than a flight of fancy
  • Why DJI is important
  • DJI’s business model
  • Threats to DJI
  • Conclusions and implications for telcos
  • Baidu, Xiaomi and DJI could all build major ecosystems
  • Implications for telcos and other digital players

 

  • Figure 1: Baidu is significantly smaller than Tencent, Alibaba and Facebook
  • Figure 2: China is home to four of the world’s most valuable publically-listed Internet companies
  • Figure 3: Baidu is in the world’s top 15 media owners
  • Figure 4: Baidu is one of the world’s leading app developers
  • Figure 5: Baidu’s clean and uncluttered home page resembles that of Google
  • Figure 6: Baidu is beginning to monetise its millions of mobile users
  • Figure 7: IQiyi has broken into the top ten iOS apps worldwide
  • Figure 8: 2014 was a banner year for Baidu’s top line
  • Figure 9: Mobile now generates almost 50% of Baidu’s revenues
  • Figure 10: Baidu says its mobile browser is popular in Indonesia
  • Figure 11: Xiaomi is a rising star in the smartphone market
  • Figure 12: The slimline Mi Note has won plaudits for its design
  • Figure 13: The $15 Mi Band: A lot of technology for not a lot of money
  • Figure 14: One of Ninebot’s products – an electric unicycle
  • Figure 15: Xiaomi is turning its MIUI into a digital commerce platform
  • Figure 16: Xiaomi even has fan sites in markets where its handsets aren’t readily available
  • Figure 17: Drones’ primary job today is aerial photography
  • Figure 18: DJI majors on ease-of-use
  • Figure 18: DJI claims its Inspire One can transmit video pictures over 2km
  • Figure 20: DJI’s Go app delivers a real-time video feed to a smartphone or tablet
  • Figure 21: Baidu’s frugal innovation

Alibaba & Tencent: China’s Digital Disruptors (Part 1)

Introduction

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing is the first part of a two part report analysing China’s leading digital disruptors and their likely impact outside their home country. The report explores whether the global leaders in digital commerce – Amazon, Apple, Facebook and Google – might soon face a serious challenge from a company built in China.

Part 1 analyses China’s two largest digital ecosystems – Alibaba, which shares many similarities with Amazon, and Tencent, which is somewhat similar to Facebook. This executive briefing considers the intensifying arms race between these two groups in China, their international ambitions and the support they might need from telcos and other digital players.

Both Alibaba and Tencent are potential competitors for telcos in some markets and potential partners in others. For example, like Amazon, Alibaba has a fast growing cloud computing business. (STL recently analysed why Amazon Web Services is so much more successful than many telcos’ cloud offerings, see: Amazon Web Services: Colossal, but Invincible?).

Like Facebook, Tencent has become a leading provider of digital communications in direct competition with telcos’ voice and messaging services. STL explored how telcos could respond to the rise and rise of Facebook in our recent report: Facebook: Telcos’ New Best Friend?

Part 2 of our report on China’s digital disruptors will cover Baidu, China’s answer to Google and the anchor for a third digital ecosystem, and the fast-growing smartphone maker, Xiaomi, which has the potential to build a fourth major ecosystem. Part 2 will also take a close look at DJI, the drone manufacturer, which is well worth watching for its mid-to-long term potential to create another major ecosystem.

Sizing up China’s disruptors

When it comes to disruption, China is a special case. Offering an enormous domestic market largely insulated by regulation, this vast country is proving to be fertile ground for Internet companies that may ultimately be able to mount a credible challenge to the big four globally – Amazon, Apple, Facebook and Google.

These four U.S.-based disruptors have used the scale and talent available in their home market to become leading digital commerce players globally, limiting the mindshare and market share available to other players. Moreover, Apple and Facebook, in particular, are carving out a strong position in digital communications, challenging telcos’ traditional dominance of this sector.

Greater competition among the Internet ecosystems would be in the strategic interests of many telcos, media companies and banks, as they seek to shore up their revenues and relevance. To that end, they could selectively encourage digital commerce and content companies that have gained sufficient scale in China to go global and compete with the U.S. giants.

In an ideal world, there might be a dozen or so major Internet ecosystems competing for a share of the worldwide digital commerce market. That would put individual telcos and other specialist players in the digital ecosystem, such as banks and media companies, in a stronger negotiating position, potentially enabling them to capture more of the value being created in the fast growing digital economy. For example, if Tencent were to mount a serious challenge to Facebook, telcos could potentially earn a commission for promoting one service over the other. Telcos could preload Facebook’s WhatsApp messaging service or Tencent’s WeChat on the handsets they distribute or they might zero-rate access (not charge for data traffic) to either service in their markets.

Similarly, if Baidu could build effective international search and content services in competition with Google, the latter may have to pay higher commission to companies that supply it with traffic. If Google faced more competition in the digital advertising market, media companies’ sites may have to pay less commission to advertising brokers. In the smartphone market, if Xiaomi were to weaken Apple’s grip on the high-end, telcos’ might be able to negotiate better margins for distributing Apple’s handsets or enabling iPhone users to temporarily subscribe to their networks when travelling abroad.

Greater incentives to expand outside China

China’s economy is on course to grow about 7% this year, according to government figures, down from the double-digit growth at the turn of the decade. As a result, its leading disruptors are increasingly treading on each other’s toes in China and have a greater incentive to expand internationally. Although the obvious move for China’s domestic Internet companies it to initially target Greater China, nearby Asian markets and the Chinese diaspora, some have much broader ambitions. Alibaba, in particular, has significant traction in other major middle income countries, notably Russia. And the world’s leading drone maker DJI is making major inroads into the U.S. and Western Europe – the heartland of Apple, Google, Amazon and Facebook.

Today, there are three major Internet ecosystems in China, headed by Alibaba, Tencent and Baidu respectively. Globally, these three players are in the top ten public Internet companies in terms of market capitalisation (see Figure 1). Moreover, Tencent has forged an alliance with JD.com, the fourth largest publicly-listed Chinese Internet company.

The first part of this report covers Alibaba and Tencent, asking whether either company is strong enough to pose a serious threat to Amazon, Facebook or Google on the global stage.

Figure 1: China is home to four of the world’s most valuable publicly-listed Internet companies

Source: Morgan Stanley, Capital IQ, Bloomberg via KPCB

Alibaba – digital commerce behemoth

Whereas most consumers in Western Europe and North America have heard of Amazon.com, many might associate Alibaba with folklore, rather than digital commerce. Yet Alibaba Group Holding Ltd. claims to be the world’s largest online and mobile commerce company in terms of gross merchandise volume (the value in US dollars of the products and services sold through its marketplaces). Although it is incorporated in the Cayman Islands, the Alibaba Group’s principal executive offices are in Hangzhou in China.

Founded in 1999 by its charismatic, combative and somewhat unpredictable executive chairman Jack Ma, Alibaba undertook the world’s largest initial public offering in September 2014. It raised USD 25 billion, which it has used to fund an ongoing acquisition spree.

Why Alibaba is important

With a market capitalisation comparable to that of Amazon and Facebook, investors clearly believe Alibaba is set to be a major player in the global economy. That belief is fuelled by the fact that Alibaba:

  • Runs several world-leading digital marketplaces
  • Is growing fast at home and abroad
  • Is assembling a major digital entertainment portfolio
  • Has acquired dozens of promising Internet companies
  • Is affiliated with one of China’s leading online payment services

 

  • Introduction
  • Executive Summary
  • Sizing up China’s disruptors
  • Alibaba – digital commerce behemoth
  • Why Alibaba is important
  • Alibaba’s business models
  • Likely impact outside China
  • Threats facing Alibaba
  • Tencent – a playbook for Facebook?
  • Why Tencent is important
  • Tencent’s business models
  • Tencent’s likely impact outside China
  • Threats to Tencent
  • Conclusions and implications for telcos
  • Alibaba and Tencent are very strong companies…
  • … but they both need strategic partners
  • Implications for telcos
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: China is home to four of the world’s most valuable publicly-listed Internet companies
  • Figure 2: Alibaba’s six major digital marketplaces
  • Figure 3: Alibaba has seen heady growth this decade
  • Figure 4: One of Alibaba’s recent investments was in MomentCam
  • Figure 5: Alipay helps Chinese consumers buy from overseas merchants
  • Figure 6: AliExpress sells a wide range of Chinese goods to the world
  • Figure 7: Alibaba’s UC Browser is widely used on Android smartphones
  • Figure 8: Comparing Alibaba and Amazon R&D over time
  • Figure 9: Alibaba’s mobile sales are rising rapidly
  • Figure 10: Almost half of Alibaba’s revenues are now generated by mobile services
  • Figure 11: Alibaba’s overall monetisation rate is slipping
  • Figure 12: Tencent runs three of the top five OTT communications services
  • Figure 13: Tencent claims leadership in digital content in China
  • Figure 14: Tencent sometimes leads Facebook
  • Figure 15: Tencent’s investment and partnership strategy
  • Figure 16: Tencent’s five years of fast growth
  • Figure 17: Tencent remains heavily reliant on online gaming revenues
  • Figure 18: Some of the use cases targeted by Tencent’s online payment portfolio
  • Figure 19: Tencent’s Red Envelope promotion was hugely successful
  • Figure 20: Both Alibaba and Tencent have seen strong growth in net income

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

Google’s Big, Big Data Battle

The challenges to Google’s core business 

Although Google is the world’s leading search engine by some distance, its pre-eminence is more fragile than its first appears. As Google likes to remind anti-trust authorities, its competitors are just a click away. And its primary competitors are some of the most powerful and well-financed companies in the world – Apple, Amazon, Facebook and Microsoft. As these companies, as well as specialist service providers, accumulate more and more data on consumers, Google’s position as the leading broker of online advertising is under threat in several, inter-related, ways:

  1. Google’s margins are being squeezed, as competition intensifies. Increasingly experienced web users are using specialist search engines, such as Amazon (shopping), Expedia (travel) and moneysupermarket.com (financial services), or going direct to the sites they need, thereby circumventing Google’s search engine and the advertising brokered by Google. This trend is exacerbated by Google’s ongoing lockout from the vast amount of content being generated by Facebook’s social network. As the Internet matures, general-purpose web search may become yesterday’s business.
  2. The rise of the app-based Internet: As consumers increasingly access the Internet via mobile devices, they are making greater use of apps and less use of browsers and, by extension, conventional search engines. Apps are popular on mobile devices because they are designed to take the consumer straight to the content they are looking for, rather than requiring them to navigate around the web using small and fiddly on-screen keyboards. Moreover, Apple, the leading provider of smartphones and tablets to the affluent, is seeking to relegate, and where feasible, remove, Google’s apps and services in its ecosystem.
  3. Android forks: Android, an extraordinarily successful ‘Trojan Horse’ for Google’s apps and services, is the market leading operating system for mobile devices, but Google’s control of Android is patchy. Some device makers are integrating their own apps into a forked variant of this open-source platform. Amazon and Nokia are among those who have stripped Google’s search, maps, mail and store apps from their variants of the Android operating system, reducing the data that Google can gather on their customers. At the same time, Samsung, the world’s largest handset vendor, is straining at Google’s Android leash.
  4. Quality dilution: As Google is the world’s dominant search engine, it is the prime target for so-called content farms that produce large volumes of low quality content in an effort to rank highly in Google’s search results and thereby attract traffic and advertising.
  5. Regulatory scrutiny: Despite a February 2014 settlement with the European Commission concerning its search practices, Google remains in the regulatory spotlight. Competition authorities across the world continue to fret about Google’s market power and its ability to influence what people look at on the Internet.

1. Google’s margin squeeze

Price deflation

Google, the company that facilitated massive deflation across advertising, content, e-commerce, and mobile operating systems, is itself suffering from the deflationary environment of the Internet. Although revenue and net income are still growing, margins are shrinking (see Figure 2). Google is still growing because it is adding volume. However, there is strong evidence that its pricing power is being eroded.

Figure 2: Google margins are steadily falling as volumes continue to rise

Telco 2 Figure 2: Google margins are steadily falling as volumes continue to rise

Source: Google filings

To put this in the context of its Silicon Valley peers, Figure 3 shows the same data for Google, Facebook, and Apple using a trend line covering the 2009 to 2013 period for each company. Note, that we have used a log scale to compare three companies of very different size. Apple saw growth in both revenue and operating margins until 2013, when it hit a difficult patch, although a big product launch might fix that at any time. Facebook has grown revenues enormously, but went through a traumatic 2012 as the shift to mobile hit it. While all this drama went on, Google has grown steadily, while seeing its margins eroded.

Figure 3: Google’s operating margins are now below those of Apple and Facebook

Telco 2 Figure 3 googles operating mar

Source: SEC filings

What are the factors behind Google’s declining operating margin? We believe the main drivers are:

  • The amount Google can charge per click is falling – buyers get more ads per buck.
  • The cost of acquiring ad inventory is increasing.

Cheaper ads

As Figure 4 shows, Google continues to drive ad volume (paid clicks), but ad rates (cost per click) are falling steadily. The average cost-per-click on Google websites and Google Network Members’ websites decreased approximately 8% from 2012 to 2013.  We think this is primarily due to intensifying competition, particularly from Facebook. However, Google attributes the decline to “various factors, such as the introduction of new products as well as changes in property mix, platform mix and geographical mix, and the general strengthening of the U.S. dollar compared to certain foreign currencies.” The second quarter of 2014 saw paid clicks rise 2% quarter-on-quarter, while the cost per click was flat.

Figure 4: The cost per click is declining in lockstep with rising volume

Telco 2 Figure 4 The cost per click is declining in lockstep with rising volume

Source: Google filings

 

  • Introduction
  • Executive Summary
  • The challenges to Google’s core business
  • 1. Google’s margin squeeze
  • 2. The rising importance of mobile apps
  • 3. Android forks
  • 4. Quality dilution
  • 5. Regulatory scrutiny
  • Google’s strategy – get on the front foot
  • Google Now – turning search on its head
  • Reactive search becomes more proactive
  • Voice input
  • Anticipating wearables, connected cars and the Internet of Things
  • Searching inside apps
  • Evaluating Google Now
  • 1. The marketplace
  • 2. Develop compelling service offerings
  • 3. The value network
  • 4. Technology
  • 5. Finance – the high-level business model

 

  • Figure 1: How Google is neutralising threats and pursuing opportunities
  • Figure 2: Google margins are steadily falling as volumes continue to rise
  • Figure 3: Google’s operating mar gins are now below those of Apple and Facebook
  • Figure 4: The cost per click is declining in lockstep with rising volume
  • Figure 5: Rising distribution costs are driving Google’s TAC upwards
  • Figure 6: Google’s revenues are increasingly coming from in-house sites and apps
  • Figure 7: R&D is the fastest-growing ad-acquisition cost in absolute terms
  • Figure 8: Daily active users of Facebook generating content out of Google’s reach
  • Figure 9: Google is still the most popular destination on the Internet
  • Figure 10: In the U.S., usage of desktop web sites is falling
  • Figure 11: Google’s declining share of mobile search advertising in the U.S.
  • Figure 12: Google’s lead on the mobile web is narrower than on the desktop web
  • Figure 13: Top smartphone apps in the U.S. by average unique monthly users
  • Figure 14: For Google, its removal from the default iOS Maps app is a major blow
  • Figure 15: On Android, Google owns four of the five most used apps in the U.S.
  • Figure 16: The resources Google needs to devote to web spam are rising over time
  • Figure 17: Google, now genuinely global.
  • Figure 18: A gap in the market: Timely proactive recommendations
  • Figure 19: Google’s search engine is becoming proactive
  • Figure 20: The ongoing evolution of Google Search into a proactive, recommendations service
  • Figure 21: The Telco 2.0 Business Model Framework
  • Figure 22: Amazon Local asks you to set preferences
  • Figure 23: Google Now’s cards and the information they use
  • Figure 24: Android dominates the global smartphone market
  • Figure 25: Samsung has about 30% of the global smartphone market
  • Figure 26: Google – not quite the complete Internet company
  • Figure 27: Google’s strategic response

The Future Value of Voice and Messaging

Background – ‘Voice and Messaging 2.0’

This is the latest report in our analysis of developments and strategies in the field of voice and messaging services over the past seven years. In 2007/8 we predicted the current decline in telco provided services in Voice & Messaging 2.0 “What to learn from – and how to compete with – Internet Communications Services”, further articulated strategic options in Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon in 2011, and more recently published initial forecasts in European Mobile: The Future’s not Bright, it’s Brutal. We have also looked in depth at enterprise communications opportunities, for example in Enterprise Voice 2.0: Ecosystem, Species and Strategies, and trends in consumer behaviour, for example in The Digital Generation: Introducing the Participation Imperative Framework.  For more on these reports and all of our other research on this subject please see here.

The New Report


This report provides an independent and holistic view of voice and messaging market, looking in detail at trends, drivers and detailed forecasts, the latest developments, and the opportunities for all players involved. The analysis will save valuable time, effort and money by providing more realistic forecasts of future potential, and a fast-track to developing and / or benchmarking a leading-edge strategy and approach in digital communications. It contains

  • Our independent, external market-level forecasts of voice and messaging in 9 selected markets (US, Canada, France, Germany, Spain, UK, Italy, Singapore, Taiwan).
  • Best practice and leading-edge strategies in the design and delivery of new voice and messaging services (leading to higher customer satisfaction and lower churn).
  • The factors that will drive best and worst case performance.
  • The intentions, strategies, strengths and weaknesses of formerly adjacent players now taking an active role in the V&M market (e.g. Microsoft)
  • Case studies of Enterprise Voice applications including Twilio and Unified Communications solutions such as Microsoft Office 365
  • Case studies of Telco OTT Consumer Voice and Messaging services such as like Telefonica’s TuGo
  • Lessons from case studies of leading-edge new voice and messaging applications globally such as Whatsapp, KakaoTalk and other so-called ‘Over The Top’ (OTT) Players


It comprises a 18 page executive summary, 260 pages and 163 figures – full details below. Prices on application – please email contact@telco2.net or call +44 (0) 207 247 5003.

Benefits of the Report to Telcos, Technology Companies and Partners, and Investors


For a telco, this strategy report:

  • Describes and analyses the strategies that can make the difference between best and worst case performance, worth $80bn (or +/-20% revenues) in the 9 markets we analysed.
  • Externally benchmarks internal revenue forecasts for voice and messaging, leading to more realistic assumptions, targets, decisions, and better alignment of internal (e.g. board) and external (e.g. shareholder) expectations, and thereby potentially saving money and improving contributions.
  • Can help improve decisions on voice and messaging services investments, and provides valuable insight into the design of effective and attractive new services.
  • Enables more informed decisions on partner vs competitor status of non-traditional players in the V&M space with new business models, and thereby produce better / more sustainable future strategies.
  • Evaluates the attractiveness of developing and/or providing partner Unified Communication services in the Enterprise market, and ‘Telco OTT’ services for consumers.
  • Shows how to create a valuable and realistic new role for Voice and Messaging services in its portfolio, and thereby optimise its returns on assets and capabilities


For other players including technology and Internet companies, and telco technology vendors

  • The report provides independent market insight on how telcos and other players will be seeking to optimise $ multi-billion revenues from voice and messaging, including new revenue streams in some areas.
  • As a potential partner, the report will provide a fast-track to guide product and business development decisions to meet the needs of telcos (and others).
  • As a potential competitor, the report will save time and improve the quality of competitor insight by giving strategic insights into the objectives and strategies that telcos will be pursuing.


For investors, it will:

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


The Future Value of Voice: Report Content Summary

  • Executive Summary. (18 pages outlining the opportunity and key strategic options)
  • Introduction. Disruption and transformation, voice vs. telephony, and scope.
  • The Transition in User Behaviour. Global psychological, social, pricing and segment drivers, and the changing needs of consumer and enterprise markets.
  • What now makes a winning Value Proposition? The fall of telephony, the value of time vs telephony, presence, Online Service Provider (OSP) competition, operators’ responses, free telco offerings, re-imaging customer service, voice developers, the changing telephony business model.
  • Market Trends and other Forecast Drivers. Model and forecast methodology and assumptions, general observations and drivers, ‘Peak Telephony/SMS’, fragmentation, macro-economic issues, competitive and regulatory pressures, handset subsidies.
  • Country-by-Country Analysis. Overview of national markets. Forecast and analysis of: UK, Germany, France, Italy, Spain, Taiwan, Singapore, Canada, US, other markets, summary and conclusions.
  • Technology: Products and Vendors’ Approaches. Unified Comminications. Microsoft Office 365, Skype, Cisco, Google, WebRTC, Rich Communications Service (RCS), Broadsoft, Twilio, Tropo, Voxeo, Hypervoice, Calltrunk, Operator voice and messaging services, summary and conclusions.
  • Telco Case Studies. Vodafone 360, One Net and RED, Telefonica Digital, Tu Me, Tu Go, Bluvia and AT&T.
  • Summary and Conclusions. Consumer, enterprise, technology and Telco OTT.

Digital Commerce 2.0: Disrupting the Californian Giants

Introduction

In this briefing, we analyse the Digital Commerce 2.0 strategy and progress of the incumbents – the big five Internet players in this market – Amazon, Apple, eBay/PayPal, Facebook and Google.

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

This executive briefing considers how the rise of smartphones and the personal data they generate is disrupting digital commerce, and explores the mobile commerce strategies of the big five, their strengths and weaknesses and their areas of vulnerability.

Digital Commerce Disruption

Today, California is undoubtedly the epicentre of digital commerce. Amazon, Google, eBay/PayPal, Facebook and Apple are the leading brokers of digital commerce between businesses and consumers in most of the world’s developed economies. Each one of them has used the Internet to carve out a unique and lucrative role matching online buyers and sellers.

But digital commerce is changing fast, forcing these incumbents to innovate rapidly both to keep pace with each other and fend off a new wave of challengers seeking to take advantage of the disruption resulting from the widespread adoption of smartphones, and the vast quantities of real-time personal data they generate. Smartphones with touchscreens, full Internet browsers and an array of feature-rich apps, are turning out to be a game changer that profoundly impacts the way in which people and businesses buy and sell: Digital commerce is moving out of the home and the office and on to the street and in to the store.

As they move around, many consumers are now using smartphones to access social, local and mobile (SoLoMo) digital services and make smarter purchase decisions. This is not a gradual shift – it is happening extraordinarily quickly. Almost 70% of Americans used their mobile devices to look up information while in retail stores between Thanksgiving and Christmas 2012, according to a survey of 6,200 people by customer experience analytics firm ForeSee.

At the same time, the combination of Internet and mobile technologies, embodied in the smartphone, is enabling bricks and mortar businesses to adopt new forms of digital marketing, retailing and payments that could dramatically improve their efficiency and effectiveness. The smartphones and the data they generate can be used to optimise and enable every part of the entire ‘wheel of commerce’ (see Figure 3).

Figure 3: The elements that make up the wheel of commerce

Digital Commerce 2.0 Wheel of Commerce

Source: STL Partners

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

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

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

Although the big five – Amazon, Google, eBay/PayPal, Facebook and Apple – are the leading brokers of “traditional” online commerce, they play a far smaller role in brokering bricks and mortar commerce: Their services are typically used to provide just once element of the wheel of commerce. Consumers shopping in the physical world tend to use a mix of services from the leading Internet players, flitting between the different ecosystems. As they shop, they might use Google Maps to locate a store, Facebook to canvas the opinion of friends and Amazon to read product reviews or compare in-store prices with those online. They might even use Apple’s Passbook to redeem a voucher or PayPal to complete a transaction at point of sale.

Although they are all involved to a greater or lesser extent, none of the big five has yet secured a strong strategic position in this new form of digital commerce. Each of them risks seeing their position in the broader digital commerce market being disrupted by the rise of SoLoMo services that seek to meld merchants online and offline sites into a coherent proposition. As the digital commerce pie grows to encompass more and more bricks and mortar commerce, the big five may see their power and influence wane.

As it becomes clear that smartphones and personal data will transform the consumer experience of bricks and mortar shopping, the leading internet companies are being challenged by telcos, banks, payment networks and other companies racing to sign up merchants and consumers for nascent commerce platforms. In most cases, these new entrants are focusing on digitising traditional commerce, but will inevitably also have to compete with Amazon, Google, eBay/PayPal, Facebook and Apple in the online commerce space – consumers will want to use the same tools and platforms regardless of whether they are in the armchair or walking down a street. Similarly, a merchant will want to use the same platform to support its marketing online and in-store, so their customers can redeem vouchers, for example, digitally or in person.

The internet giants are, of course, expanding their SoLoMo propositions to cover more of the wheel of commerce. Amazon, for example, is pursuing this market through its Amazon Local service, which emails offers from local merchants to consumers in specific geographic areas. Google is combining its Search, Maps, Places, Offers and Wallet services into a local commerce platform for merchants and consumers. But global Internet companies based on economies of scale can find it hard to develop commerce services that take into the account the vagaries of local markets.

There is much at stake: Merchants and brands spend hundreds of billions of dollars across the various elements of the wheel of commerce. In the U.S., the direct marketing market alone is worth US$ 139 billion (more than three times the U.S. online advertising market, according to some estimates (see Figure 4).

Figure 4: A breakdown of the U.S. direct marketing and advertising market

Digital Commerce 2.0 US Direct Marketing and Advertising Market

Source: STL Partners

Another way to view the strategic opportunity is to consider the vast amount of money that is still spent on paper-based marketing in local commerce – householders still receive large numbers of flyers through their door, advertising local businesses. Moreover, many merchants still operate crude loyalty schemes that involve stamping a paper card.

Closing the loop: The importance of payments

One of the most important battlegrounds for the big five is the transact segment of the wheel of commerce. Although this segment is only half the size of the promote segment in terms of revenues, according to STL’s estimates (see Figure 5), it is strategically important. Merchants and brands want to know whether a specific marketing activity actually led to a sale. By bridging the online and offline worlds, mobile technologies can close that loop. If a consumer uses their smartphone to research a product and then pay at point of sale, the retailer can see exactly what kind of marketing results in transactions.

Note that payments itself is a low margin business – American Express estimates that merchants in the U.S. spend four to five times as much on marketing activities, such as loyalty programmes and offers, as they do on payments. But Google and Facebook, as leading marketing and advertising brokers, and some telcos, are moving into the payments space to provide merchants with visibility across the whole wheel of commerce.

In general their approach is to roll out digital wallets that can be used to complete both online transactions and point of sale transactions (either using a contactless technology, such as NFC, or a mobile network-based solution). The term digital wallet or mobile wallet generally refers to an application that can store debit and credit card information, loyalty points, electronic vouchers and value. A digital wallet can reside in the cloud or on a specific device or a combination of the two. The big five each have their own digital wallet.

Although Apple and Facebook have only enabled the use of their wallets within their online walled gardens, they are both gradually extending their transact propositions into bricks and mortar commerce.

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

Digital Commerce 2.0: Segments and Sizes

Source: STL Partners research drawing on WPP and American Express data

Digital wallets could be the key to unlock a broader and much more lucrative digital commerce proposition. Instead of asking merchants to pay per click, a digital commerce broker could ask them to pay per transaction – a no-risk and, therefore, very attractive proposition for the merchant.

Typically designed to support approximately half of the wheel of commerce (the promote, guide and transact segments), the digital wallet is widely-regarded as an important strategic platform. The theory is that digital wallet suppliers will be well-positioned to interact with consumers while they are shopping, brokering targeted offers and promotions.

Three of the big five – PayPal, Amazon and Apple – have each already signed up tens of millions of users for their online wallets, primarily because they reduce the number of keystrokes and clicks required to complete a transaction online. These Internet players are now weighing up how best to deploy these wallets at point of sale in physical stores. The leading online digital wallet, PayPal, faces increasing competition from leading players in the financial services industry, including Amex and MasterCard (see Figure 6), as well as innovative start-ups, such as Square.

Each of these players is taking a different approach, using different technologies to enabling transactions in store. They are also having to compete with other wallets from companies outside the financial services sector, such as Google, telcos and even retailers.

Figure 6: Examples of financial services-led digital wallets

Digital Commerce 2.0: Financial Services Wallet Examples

Source: STL Partners

In the transact segment, Google, the leading broker of search-related advertising, is scrambling to catch up, rolling out Google Wallet both to compete with PayPal online and enable payments at point of sale using Near Field Communications (NFC) technology. But the software has been through several iterations without gaining significant traction. At the same time, telcos, such as AT&T, Verizon and T-Mobile in the U.S. (the partners in the Isis mobile commerce joint venture), are developing mobile-centric wallets that use NFC to enable payments at point of sale, supported by the SIM card for authentication. Major retailers are also rolling out digital wallets either individually or as part of a consortium. Figure 7 compares three of the mobile-centric wallets available in the U.S. market.

Figure 7: Examples of Mobile-centric wallets in the U.S.

Digital Commerce 2.0: Mobile Centric Wallets

Source: STL Partners

Contents

  • Executive Summary
  • Introduction: Digital commerce disruption
  • Closing the loop: The importance of payments
  • Internet players’ mobile commerce strategies
  • Amazon – impressive interconnected flywheels
  • Apple – slowly assembling the pieces
  • eBay and PayPal – trying to get mobile
  • Facebook – the rising star of mobile commerce
  • Google – try, try and try again in transactions
  • Conclusions
  • Mobile commerce is still up for grabs
  • Competition from telcos and banks
  • Areas of vulnerability

 

  • Figure 1: The mobile commerce strengths and weaknesses of the Internet players
  • Figure 2: The unfulfilled gap in the digital commerce market
  • Figure 3: The elements that make up the wheel of commerce
  • Figure 4: A breakdown of the U.S. direct marketing and advertising market
  • Figure 5: The relative size of the segments of the wheel of commerce
  • Figure 6: Examples of financial services-led digital wallets
  • Figure 7: Examples of Mobile-centric wallets in the U.S.
  • Figure 8: Google’s big lead in mobile Internet ad spending
  • Figure 9: Google handles one third of all digital advertising
  • Figure 10: The mobile commerce strategy of leading Internet players
  • Figure 11: How the fundamental Amazon flywheel increases working capital
  • Figure 12: How the Amazon Payments flywheel has evolved
  • Figure 13: Deals on display in the Amazon Local app
  • Figure 14: Apple’s Passbook app stores vouchers and loyalty cards
  • Figure 15: Facebook’s daily active users continue to grow
  • Figure 16: Facebook’s mobile daily active users
  • Figure 17: How consumers can redeem a Google Offer
  • Figure 18: Who is best placed to win in facilitating local commerce?
  • Figure 19: Google Wallet no longer needs to work directly with banks
  • Figure 20: The mobile commerce strengths and weaknesses of the Internet players
  • Figure 21: The unfulfilled gap in the digital commerce market
  • Figure 22: Internet giants and start-ups best placed to be infomediaries
  • Figure 23: How Telefónica compares with leading Internet players