Tag: APIs

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

 

The M-Commerce ‘Land-Grab’: Telcos Vs. Apple & Google

Summary: The mobile commerce market is going through a critical ‘land-grab’ phase. This report reviews the strategies and tactics of the leading telcos and Internet players in Asia, Europe and North America as they seek to use the mobile medium to become an intermediary between buyers and sellers. It considers the pivotal role of the digital wallet, ‘big data’, the race to acquire merchants and the key alliances between telcos, banks, payment networks and Internet players (December 2012, Executive Briefing Service, Dealing with Disruption Stream).

Digital Commerce Flywheel December 2012
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Below is an extract from this 33 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Dealing with Disruption Stream here. We’ll be publishing more on Digital Commerce in in 2013 and it will be a key theme at our Executive Brainstorms in Silicon Valley (March 2013), Europe (London, June 2013), Digital Arabia (Dubai, November 2013), and Digital Asia (Singapore, December 2012). Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Introduction

STL defines Digital Commerce 2.0 as the use of new digital and mobile technologies, such as smartphones, to bring buyers and sellers together more efficiently and effectively.  Fast growing usage 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.

Telcos and their partners could play a major role in enabling digital commerce 2.0 as intermediaries that create platforms that help to bring together buyers and sellers. But Internet companies, banks, payment networks and others are also seeking to act as digital intermediaries between merchants and consumers.

This executive briefing builds on STL Partners’ Strategy Report, Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon, which examines the mobile commerce strategies of the major Internet players, and STL’s Digital Commerce 2.0 Executive Brainstorm events in London, New York, San Francisco and Singapore.

This report reviews the strategies and tactics of the leading telcos and Internet players aiming to use the mobile medium to become an intermediary between buyers and sellers. It considers the pivotal role of the digital wallet, the race to acquire merchants and the key alliances in this space. It sets the scene for a forthcoming report that will make recommendations for how telcos and their partners should build a compelling mobile commerce proposition.

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Executive Summary

Smartphones are extending digital commerce out of the home and the office and on to the street and in to the store. With full web browsers and a host of apps, these handsets enable consumers to access information and interact with merchants and brands from anywhere and anytime.  

The wallet land-grab

As smartphones go mass market, Internet companies, telcos, banks, payment networks and other companies are in land-grab mode – racing to sign up merchants and consumers for platforms that could enable them to secure a pivotal (and lucrative) position in the fast growing digital commerce market.

Across Europe, the Americas, Asia and parts of Africa, telcos, Internet players, payment networks and banks are looking to deploy their own digital wallets in the belief that these apps will become a key strategic platform. A digital wallet – software that stores debit and credit card information, loyalty points, electronic vouchers and cash – could be used  to interact with consumers while they are actually shopping, brokering targeted offers and promotions. For marketers, the wallet offers a golden opportunity to reach a consumer on the cusp of making a purchase.

While Internet players, such as PayPal and Apple, tend to be focused on signing up users for their online wallets, telcos, such as AT&T and Vodafone, are developing a mobile app-centric solution that uses the SIM card for authentication.

In fact, you need both. To become a market leader, a digital wallet will have to be very easy to use both online and at point of sale. Most consumers will want to use the same digital wallet across a PC, a mobile handset and a tablet, so they can track all of their spending and offers easily. At the same time, wallets that are used both online and at point of sale will be able to generate a far more complete and comprehensive picture of the consumers’ shopping habits.

More and better data

Akin to a search engine, the digital wallet could also enable companies to capture valuable data that can be used to improve the targeting of offers and promotions. For example, the transactional data captured by a digital wallet may show what kinds of restaurants the consumer likes to eat at, enabling the delivery of appropriate vouchers. The data generated by a digital wallet could be used to broker highly-targeted offers, thereby enabling the wallet supplier to secure a pivotal and lucrative position in the digital commerce value chain.

However, it will be important for wallet suppliers to give individuals a high degree of control over their data, enabling them to delete or amend information captured by the wallet and even take that data to with them to a new wallet. While that may seem counterintuitive, both individuals and regulators are more likely to trust and accept services that are transparent and put the consumer in control. 

Fragmentation could equal failure

The large number of players targeting the mobile commerce market with a diverse range of approaches risks confusing both consumers and merchants. There is a danger that both groups will play a waiting game, preferring to see which solutions rise to the top and which flop. Many stakeholders, particularly upmarket retailers and brands, will be waiting for Apple to roll out a mobile commerce proposition they can use to target the many affluent owners of iPhones. In other words, the land-grab may end up being a very drawn out and expensive process for all involved.

The Digital Commerce 2.0 Gold Rush

The opportunity

Digital commerce is being reinvented for the post-PC era. The combination of Internet and mobile technologies is enabling new forms of digital marketing, retailing and payments which could dramatically improve the efficiency and effectiveness of all kinds of businesses. Internet companies, telcos, banks, payment networks and other companies are in land-grab mode – racing to sign up merchants and consumers for platforms that could enable them to secure a pivotal (and potentially lucrative) position in the fast growing digital commerce market. Although it is early days for Digital Commerce 2.0, the gold rush is in full swing.   

The advent of mass-market smartphones, with touchscreens, full Internet browsers and an array of feature-rich apps, is a game changer that is profoundly impacting the way in which people and businesses buy and sell. Consumers are already using these smartphones to access social, local and mobile digital services and make smarter purchase decisions. As they shop, they can easily canvas opinion via Facebook, read product reviews on Amazon or compare prices across multiple stores. 

STL Partners’ strategy report, Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon, identified authentication and payments and  brokering online advertising and marketing as two of the key battlegrounds in the Great Game being played out by the Internet giants and the leading telcos. 

Although hundreds of millions of people have already entrusted their credit or debit card details to eBay, Facebook, Apple, Google or Amazon and use these web giants’ online payment services to pay for goods, services or digital content online, telcos could yet become key players. Approximately three billion people worldwide have a billing relationship with one or more telco and carrier billing can be more secure and convenient that other payment mechanisms, particularly for people lacking debit and credit cards. Some Internet players, such as Google, would like to tap telcos’ assets and processes to help them authenticate consumers.

Brokering online advertising and marketing is clearly Google and Facebook’s core business, while Microsoft, Apple and Amazon see it as potential source of revenue growth. Different telcos have adopted different approaches to this market. While some, such as Telefonica O2, see advertising and marketing as a potential source of revenue growth, other telcos prefer to focus on providing enablers to specialists, such as Facebook. Figure 1 shows how Telefonica, an advanced telco, compares with the leading Internet players across key enablers of digital commerce. Green indicates a strong position, amber, a middling position and red, a weak position, while light blue indicates no position.

Figure 1 splits the enablers according to the two sides digital commerce platform – the blue set of enablers are aimed at downstream customers (typically consumers), while the red set of enablers are aimed at upstream customers (typically merchants and brands). Some of the Internet players, notably Google and Amazon, have a strong position on both sides of this platform.

As it stands, the online advertising and marketing market is Google’s and Facebook’s to lose. The more data and inventory you have, the more precise the targeting and the bigger the target audience. STL Partners believes only telcos with major in-market scale, such as China Mobile or NTT DOCOMO, should consider competing head-to-head with the web giants.  

But, in developing countries, in particular, where most people don’t have smartphones, SMS and MMS remain a powerful marketing medium with plenty of scope to grow. There is also an opportunity for telcos to act as a trusted intermediary, helping consumers concerned about privacy to control and derive value from their personal data.

Figure 1: How a leading telco stacks up with Internet players on digital commerce

Telco vs Internet Players on Digital Commerce December 2012

Source: STL Partners

Perhaps the biggest growth opportunity in online marketing and advertising is to help merchants and brands use social, local and mobile services to stimulate demand, engage better with customers and potential customers and achieve a higher return on investment (ROI) from their marketing spend.  Amazon, for example, is pursuing this market through its Amazon Local service, which emails offers from local merchants to consumers in specific geographic areas.  

In theory, at least, targeting marketing at consumers in the right geography and the right demographic group should be far more effective than simply displaying adverts to anyone who conducts an Internet search using a specific term.

Highly-targeted direct marketing and loyalty programmes could be a much bigger opportunity than conventional advertising 

In the U.S., the direct marketing market (US$ 139 billion) is worth more than three times the U.S. advertising market (US$39 billion), according to some estimates (see Figure 2).  

Figure 2: A breakdown of the U.S. direct marketing and advertising market

U.S. Direct Marketing & Advertising Market December 2012
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. 

Moreover, mobile technologies also make it easier for merchants and brands to tell whether a specific marketing activity actually led to a sale. If a consumer uses their smartphone to research a product and then pay for the product, the retailer could gain a complete view of the whole commerce cycle, enabling it to see exactly what kind of marketing results in transactions.

With merchants looking to close the loop in this way, marketing and advertising brokers, such as Google, and some telcos, are increasingly moving into the payments space. 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).

Although payments itself is a low margin business, it could be an important pillar of a broader and much more lucrative digital commerce offering – American Express estimates that merchants in the US spend four to five times as much on marketing activities, such as loyalty programmes and offers, as they do on payments. In fact, transactions are just one element of a far bigger flywheel that drives the digital commerce market (see Figure 3).

Figure 3: The key elements of the digital commerce flywheel

Digital Commerce Flywheel December 2012

Source: STL Partners

Actual deployments

With potentially hundreds of billions of dollars of business in play, an array of companies around the world are making significant investments in digital commerce services. They are generally experimenting with and testing different approaches and business models, particularly in the areas of mobile advertising, location-based marketing, payments and mobile money transfers. 

In the following sections we outline examples of services we believe will have the most market impact, either because they have already gained market traction or because they have the backing of powerful companies. These examples illustrate the diversity of the players involved and the approaches they have adopted.

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

  • Europe – experiments abound
  • The Weve joint venture
  • Cityzi
  • Moneta
  • Turkcell
  • WyWallet
  • Visa Europe
  • PayPal
  • The Mobile Money Network
  • CellPay
  • Pingit from Barclays
  • Asia – leading the world
  • South Korea
  • The Philippines
  • Bharti Airtel
  • SingTel
  • Japan
  • China
  • The U.S. – gang culture
  • The Merchant Customer Exchange
  • Starbucks and Square
  • American Express
  • PayPal
  • The Isis joint venture
  • Minutrade
  • Global players – grappling with glocal
  • Google
  • Apple
  • Vodafone and Visa
  • Telefonica and Visa
  • Deutsche Telekom and MasterCard
  • Conclusions and Key takeaways
  • Index

…and the following figures…

  • Figure 1: How a leading telco stacks up with Internet players on digital commerce
  • Figure 2: A breakdown of the U.S. direct marketing and advertising market
  • Figure 3: The key elements of the digital commerce flywheel
  • Figure 4: Examples of mobile commerce activity in the U.K.
  • Figure 5: Where the Weve joint venture fits into Telefonica’s strategy
  • Figure 6: Examples of online wallets moving into mobile
  • Figure 7: How Isis compares with other mobile wallets in the US market
  • Figure 8: Google Wallet no longer needs to work directly with banks
  • Figure 9: Telefonica O2’s two sided strategy
  • Figure 10: The mobile commerce strategy of leading telcos
  • Figure 11: The mobile commerce strategy of leading Internet players
  • Figure 12: Giving consumers control over personal data

 

…Members of the Telco 2.0 Executive Briefing Subscription Serviceand the Telco 2.0 Dealing with Disruption Stream can download the full 33 page report in PDF format here. Non-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Companies and technologies covered: Mobile wallets, localized commerce, location based services, personal data, telco strategy, big data, mobile commerce, APIs, business models, SoLoMo, mobile advertising, mobile marketing, mobile payments, digital wallets.

The value of “Smart Pipes” to mobile network operators

Preface

Rationale and hypothesis for this report

It is over fourteen years since David Isenberg wrote his seminal paper The Rise of the Stupid Network in which he outlined the view that telephony networks would increasingly become dumb pipes as intelligent endpoints came to control how and where data was transported. Many of his predictions have come to fruition. Cheaper computing technology has resulted in powerful ‘smartphones’ in the hands of millions of people and new powerful internet players are using data centres to distribute applications and services ‘over the top’ to users over fixed and mobile networks.

The hypothesis behind this piece of research is that endpoints cannot completely control the network. STL Partners believes that the network itself needs to retain intelligence so it can interpret the information it is transporting between the endpoints. Mobile network operators, quite rightly, will not be able to control how the network is used but must retain the ability within the network to facilitate a better experience for the endpoints. The hypothesis being tested in this research is that ‘smart pipes’ are needed to:

  1. Ensure that data is transported efficiently so that capital and operating costs are minimised and the internet and other networks remain cheap methods of distribution.
  2. Improve user experience by matching the performance of the network to the nature of the application or service being used. ‘Best effort’ is fine for asynchronous communication, such as email or text, but unacceptable for voice. A video call or streamed movie requires guaranteed bandwidth, and real-time gaming demands ultra-low latency;
  3. Charge appropriately for use of the network. It is becoming increasingly clear that the Telco 1.0 business model – that of charging the end-user per minute or per Megabyte – is under pressure as new business models for the distribution of content and transportation of data are being developed. Operators will need to be capable of charging different players – end-users, service providers, third-parties (such as advertisers) – on a real-time basis for provision of broadband and guaranteed quality of service (QoS);
  4. Facilitate interactions within the digital economy. Operators can compete and partner with other players, such as the internet companies, in helping businesses and consumers transact over the internet. Networks are no longer confined to communications but are used to identify and market to prospects, complete transactions, make and receive payments and remittances, and care for customers. The knowledge that operators have about their customers coupled with their skills and assets in identity and authentication, payments, device management, customer care etc. mean that ‘the networks’ can be ‘enablers’ in digital transactions between third-parties – helping them to happen more efficiently and effectively.

Overall, smarter networks will benefit network users – upstream service providers and end users – as well as the mobile network operators and their vendors and partners. Operators will also be competing to be smarter than their peers as, by differentiating here, they gain cost, revenue and performance advantages that will ultimately transform in to higher shareholder returns.

Sponsorship and editorial independence

This report has kindly been sponsored by Tellabs and is freely available. Tellabs developed the initial concepts, and provided STL Partners with the primary input and scope for the report. Research, analysis and the writing of the report itself was carried out independently by STL Partners. The views and conclusions contained herein are those of STL Partners.

About Tellabs

Tellabs logo

Tellabs innovations advance the mobile Internet and help our customers succeed. That’s why 43 of the top 50 global communications service providers choose our mobile, optical, business and services solutions. We help them get ahead by adding revenue, reducing expenses and optimizing networks.

Tellabs (Nasdaq: TLAB) is part of the NASDAQ Global Select Market, Ocean Tomo 300® Patent Index, the S&P 500 and several corporate responsibility indexes including the Maplecroft Climate Innovation Index, FTSE4Good and eight FTSE KLD indexes. http://www.tellabs.com

Executive Summary

Mobile operators no longer growth stocks

Mobile network operators are now valued as utility companies in US and Europe (less so APAC). Investors are not expecting future growth to be higher than GDP and so are demanding money to be returned in the form of high dividends.

Two ‘smart pipes’ strategies available to operators

In his seminal book, Michael Porter identified three generic strategies for companies – ‘Cost leadership’, ‘Differentiation’ and ‘Focus’. Two of these are viable in the mobile telecommunications industry – Cost leadership, or Happy Pipe in STL Partners parlance, and Differentiation, or Full-service Telco 2.0. No network operators have found a Focus strategy to work as limiting the customer base to a segment of the market has not yielded sufficient returns on the high capital investment of building a network. Even MVNOs that have pursued this strategy, such as Helio which targeted Korean nationals in the US, have struggled.

Underpinning the two business strategies are related ‘smart pipe’ approaches – smart network and smart services:

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Porter

Strategy

Telco 2.0 strategy

Nature of smartness

Characteristics

Cost leadership

Happy Pipe

Smart network

Cost efficiency – minimal network, IT and commercial costs.  Simple utility offering.

Differentiation

Full-service Telco 2.0

Smart services

Technical and commercial flexibility: improve customer experience by integrating network capabilities with own and third-party services and charging either end user or service provider (or both).

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Source: STL Partners

It is important to note that, currently at least, having a smart network is a precursor of smart services.  It would be impossible for an operator to implement a Full-service Telco 2.0 strategy without having significant network intelligence.  Full-service Telco 2.0 is, therefore, an addition to a Happy Pipe strategy.

Smart network strategy good, smart services strategy better

In a survey conducted for this report, it was clear that operators are pursuing ‘smart’ strategies, whether at the network level or extending beyond this into smart services, for three reasons:

  • Revenue growth: protecting existing revenue sources and finding new ones.  This is seen as the single most important driver of building more intelligence.
  • Cost savings: reducing capital and operating costs.
  • Performance improvement: providing customers with an improved customer experience.

Assuming that most mobile operators currently have limited smartness in either network or services, our analysis suggests significant upside in financial performance from successfully implementing either a Happy Pipe or Full-service Telco 2.0 strategy.  Most mobile operators generate Cash Returns on Invested Capital of between 5 and 7%.  For the purposes of our analysis, we have a assumed a baseline of 5.8%.  The lower capital and operator costs of a Happy Pipe strategy could increase this to 7.4% and the successful implementation of a Full-service Telco 2.0 strategy would increase this to a handsome 13.3%:

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Telco 2.0 strategy

Nature of smartness

Cash Returns on Invested Capital

As-is – Telco 1.0

Low – relatively dumb

5.8%

Happy Pipe

Smart network

7.4%

Full-service Telco 2.0

Smart services

13.3%

Source: STL Partners

STL Partners has identified six opportunity areas for mobile operators to exploit with a Full-service Telco 2.0 strategy.  Summarised here, these are outlined in detail in the report:

Opportunity Type

Approach

Typical Services

Core Services

Improving revenues and customer loyalty by better design, analytics, and smart use of data in existing services.

Access, Voice and Messaging, Broadband, Standard Wholesale, Generic Enterprise ICT Services (inc. SaaS)

Vertical industry solutions (SI)

Delivery of ICT projects and support to vertical enterprise sectors.

Systems Integration (SI), Vertical CEBP solutions, Vertical ICT, Vertical M2M solutions, and Private Cloud.

Infrastructure services

Optimising cost and revenue structures by buying and selling core telco ICT asset capacity.

Bitstream ADSL, Unbundled Local Loop, MVNOs, Wholesale Wireless, Network Sharing, Cloud – IaaS.

Embedded communications

Enabling wider use of voice, messaging, and data by facilitating access to them and embedding them in new products.

Comes with data, Sender pays delivery, Horizontal M2M Platforms, Voice, Messaging and Data APIs for 3rd Parties.

Third-pary business enablers

Enabling new telco assets (e.g. Customer data) to be leveraged in support of 3rd party business processes.

Telco enabled Identity and Authorisation, Advertising and Marketing, Payments. APIs to non-core services and assets.

Own-brand OTT services

Building value through Telco-owned online properties and ‘Over-the-Top’ services.

Online Media, Enterprise Web Services, Own Brand VOIP services.


Source: STL Partners

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Regional approaches to smartness vary

As operators globally experience a slow-down in revenue growth, they are pursuing ways of maintaining margins by reducing costs.  Unsurprisingly therefore, most operators in North America, Europe and Asia-Pacific appear to be pursuing a Happy Pipe/smart network strategy.  Squeezing capital and operating costs and improving network performance is being sought through such approaches as:

  • Physical network sharing – usually involving passive elements such as towers, air-conditioning equipment, generators, technical premises and pylons.
  • Peering data traffic rather than charging (and being charged) for transit.
  • Wi-Fi offload – moving data traffic from the mobile network on to cheaper fixed networks.
  • Distributing content more efficiently through the use of multicast and CDNs.
  • Efficient network configuration and provisioning.
  • Traffic shaping/management via deep-packet inspection (DPI) and policy controls.
  • Network protection – implementing security procedures for abuse/fraud/spam so that network performance is maximised.
  • Device management to ameliorate device impact on network and improve customer experience

Vodafone Asia-Pacific is a good example of an operator pursuing these activities aggressively and as an end in itself rather than as a basis for a Telco 2.0 strategy.  Yota in Russia and Lightsquared in the US are similarly content with being Happy Pipers.

In general, Asia-Pacific has the most disparate set of markets and operators.  Markets vary radically in terms of maturity, structure and regulation and operators seem to polarise into extreme Happy Pipers (Vodafone APAC, China Mobile, Bharti) and Full-Service Telco 2.0 players (NTT Docomo, SK Telecom, SingTel, Globe).

In Telefonica, Europe is the home of the operator with the most complete Telco 2.0 vision globally.  Telefonica has built and acquired a number of ‘smart services’ which appear to be gaining traction including O2 Priority Moments, Jajah, Tuenti and Terra.  Recent structural changes at the company, in which Telefonica Digital was created to focus on opportunities in the digital economy, further indicate the company’s focus on Telco 2.0 and smart services.  Europe too appears to be the most collaborative market.  Vodafone, Telefonica, Orange, Telecom Italia and T-Mobile are all working together on a number of Telco 2.0 projects and, in so doing, seek to generate enough scale to attract upstream developers and downstream end-users.

The sheer scale of the two leading mobile operators in the US, AT&T and Verizon, which have over 100 million subscribers each, means that they are taking a different approach to Telco 2.0.  They are collaborating on one or two opportunities, notably with ISIS, a near-field communications payments solution for mobile, which is a joint offer from AT&T, Verizon and T-Mobile.  However, in the main, there is a high degree of what one interviewee described as ‘Big Bell dogma’ – the view that their company is big enough and powerful enough to take on the OTT players and ‘control’ the experiences of end users in the digital economy.  The US market is more consolidated than Europe (giving the big players more power) but, even so, it seems unlikely that either AT&T or Verizon can keep customers using only their services – the lamented wall garden approach.

Implementing a Telco 2.0 strategy is important but challenging

STL Partners explored both how important and how difficult it is to implement the changes required to deliver a Happy Pipe strategy (outlined in the bullets above) and those needed for Full-service Telco 2.0 strategy, via industry interviews with operators and a quantitative survey.  The key findings of this analysis were:

  • Overall, respondents felt that many activities were important as part of a smart strategy.  In our survey, all except two activity areas – Femto/pico underlay and Enhanced switches (vs. routers) – were rated by more than 50% of respondents as either ‘Quite important’ or ‘Very important’ (see chart below).
  • Activities associated with a Full-service Telco 2.0 strategy were rated as particularly important:
  • Making operator assets available via APIs, Differentiated pricing and charging and Personalised and differentiated services were ranked 1, 2 and 3 out of the thirteen activities.
  • Few considered that any of the actions were dangerous and could destroy value, although Physical network sharing and Traffic shaping/DPI were most often cited here.
Smart Networks - important implementation factors to MNOs
Source: STL Partners/Telco 2.0 & Tellabs ‘Smart pipes’ survey, July 2011, n=107

NOTE: Overall ranking was based on a weighted scoring policy of Very important +4, Quite important +3, Not that important +2, Unimportant +1, Dangerous -4.

Overall, most respondents to the survey and people we spoke with felt that operators had more chance in delivering a Happy Pipe strategy and that only a few Tier 1 operators would be successful with a Full-Service Telco 2.0 strategy.  For both strategies, they were surprisingly sceptical about operators’ ability to implement the necessary changes.  Five reasons were cited as major barriers to success and were particularly big when considering a Full-Service Telco 2.0 strategy:

  1. Competition from internet players.  Google, Apple, Facebook et al preventing operators from expanding their role in the digital economy.
  2. Difficulty in building a viable ecosystem. Bringing together the required players for such things as near-field communications (NFC) mobile payments and sharing value among them.
  3. Lack of mobile operators skills.  The failure of operators to develop or exploit key skills required for facilitating transactions such as customer data management and privacy.
  4. Culture.  Being too wedded to existing products, services and business models to alter the direction of the super-tanker.
  5. Organisation structure. Putting in place the people and processes to manage the change.

Looking at the specific activities required to build smartness, it was clear that those required for a Full-service Telco 2.0/smart services strategy are considered the hardest to implement (see chart below):

  • Personalised and differentiated services via use of customer data – content, advertising, etc.
  • Making operator assets available to end users and other service providers – location, presence, ID, payments
  • Differentiated pricing and charging based on customer segment, service, QoS
Smart Networks - how challenging are the changes?
Source: STL Partners/Telco 2.0 & Tellabs ‘Smart pipes’ survey, July 2011, n=100

NOTE: Overall ranking was based on a weighted scoring policy of Very easy +5, Relatively straightforward +4, Manageable +3, Quite difficult +2, Very difficult -2.

Conclusions and recommendations

By comparing the relative importance of specific activities against how easy they are to implement, we were able to classify them into four categories:

Category

Importance for delivering smart strategy

Relative ease of implementation

Must get right

High

Easy

Strive for new role

High

Difficult

Housekeeping

Low

Easy

Forget

Low

Difficult
Rating of factors needed for Telco 2.0 'Smart Pipes' and 'Full Services' Strategies
Source: STL Partners/Telco 2.0 & Tellabs ‘Smart pipes’ survey, July 2011, n=100

Unfortunately, as the chart above shows, no activities fall clearly into the ‘Forget’ categories but there are some clear priorities:

  • A Full-service Telco 2.0 strategy is about striving for a new role in the digital economy and is probably most appropriate for Tier 1 MNOs, since it is going to require substantial scale and investment in new skills such as software and application development and customer data.  It will also require the development of new partnerships and ecosystems and complex commercial arrangements with players from other industries (e.g. banking). 
  • There is a cluster of smart network activities that are individually relatively straightforward to implement and will yield a big bang for the buck if investments are made – the ‘Must get right’ group:
  • More efficient network configuration and provisioning;
  • Strengthen network security to cope with abuse and fraud;
  • Improve device management (and cooperation with handset manufacturers and content players) to reduce the impact of smartphone burden on the network;

Although deemed more marginal in our survey, we would include as equally important:

  • Traffic shaping and DPI which, in many cases, underpins various smart services opportunities such as differentiated pricing based on QoS and Multicast and CDNs which are proven in the fixed world and likely to be equally beneficial in a video-dominated mobile one.

There is second cluster of smart network activities which appear to be equally easy (or difficult) to implement but are deemed by respondents to be lower value and therefore fall into a lower ‘Housekeeping’ category:

  • Wi-Fi offload – we were surprised by this given the emphasis placed on this by NTT Docomo, China Mobile, AT&T, O2 and others;
  • Peering (vs. transit) and Enhanced switches  – this is surely business-as-usual for all MNOs;
  • Femto/Pico underlay – generally felt to be of limited importance by respondents although a few cited its importance in pushing network intelligence to the edge which would enable MNOs to more easily deliver differentiated QoS and more innovative retail and wholesale revenue models;
  • Physical network sharing – again, a surprising result given the keenness of the capital markets on this strategy. 

 

Overall, it appears that mobile network operators need to continue to invest resources in developing smart networks but that a clear prioritisation of efforts is needed given the multitude of ‘moving parts’ required to develop a smart network that will deliver a successful Happy Pipe strategy.

A successful Full-Service Telco 2.0 strategy is likely to be extremely profitable for a mobile network operator and would result in a substantial increase in share price.  But delivering this remains a major challenge and investors are sceptical.  Collaboration, experimentation and investment are important facets of a Telco 2.0 implementation strategy as they drive scale, learning and innovation respectively.  Given the demands of investors for dividend yields, investment is only likely to be available if an operator becomes more efficient, so implementing a Happy Pipe strategy which reduces capital and operating costs is critical.

 

Report Contents

 

  • Executive Summary
  • Mobile network operator challenges
  • The future could still be bright
  • Defining a ‘smart’ network
  • Understanding operator strategies
  • Video: Case study in delivering differentiation and cost leadership
  • The benefits of Smart on CROIC
  • Implementing a ‘smart’ strategy
  • Conclusions and recommendations

Report Figures

 

  • Figure 1: Pressure from all sides for operators
  • Figure 2: Vodafone historical dividend yield – from growth to income
  • Figure 3: Unimpressed capital markets and falling employment levels
  • Figure 4: Porter and Telco 2.0 competitive strategies
  • Figure 5: Defining Differentiation/Telco 2.0
  • Figure 6 – The Six Opportunity Areas – Approach, Typical Services and Examples
  • Figure 7: Defining Cost Leadership/Happy Pipe
  • Figure 8: Defining ‘smartness’
  • Figure 9: Telco 2.0 survey – Defining smartness
  • Figure 10: NTT’s smart content delivery system – a prelude to mobile CDNs?
  • Figure 11: Vodafone India’s ARPU levels are now below $4/month, illustrating the need for a ‘smart network’ approach
  • Figure 12: China Mobile’s WLAN strategy for coverage, capacity and cost control
  • Figure 13: GCash – Globe’s text-based payments service
  • Figure 14: PowerOn – SingTel’s on-demand business services
  • Figure 15: Telefonica’s Full-service Telco 2.0 strategy
  • Figure 16: Vodafone – main messages are about being an efficient data pipe
  • Figure 17: Collaboration with other operators key to smart services strategy
  • Figure 18: Verizon Wireless and Skype offering
  • Figure 19: Content delivery with and without a CDN
  • Figure 20: CDN benefits to consumers are substantial
  • Figure 21: Cash Returns on Invest Capital of different Telco 2.0 opportunity areas
  • Figure 22: The benefits of smart to a MNO are tangible and significant
  • Figure 23: Telco 2.0 Survey – benefits of smart to MNOs
  • Figure 24: Telco 2.0 survey – MNO chances of success with smart strategies
  • Figure 25: Telco 2.0 survey – lots of moving parts required for ‘smartness’
  • Figure 26: Telco 2.0 survey – Differentiation via smart services is particularly challenging
  • Figure 27: Telco 2.0 survey – Implementing changes is challenging
  • Figure 28: Telco 2.0 survey – Prioritising smart implementation activities

 

Strategy 2.0: The Six Key Telco 2.0 Opportunities

A summary of the six Telco 2.0 opportunities to transform telco’s business models for success in an IP-based, post PSTN world: Core Services, Vertical Solutions, Infrastructure Services, Embedded Communications, 3rd Party Enablers, and Own Brand OTT Services. It includes an extract from the Roadmap to New Telco 2.0 Business Models, updates on latest developments, and feedback from over 500 senior TMT industry execs. (July 2011, Executive Briefing Service, Transformation Stream). Telco 2.0 Six Key Opportunity Types Chart July 2011
  Read in Full (Members only)    Buy This Report    To Subscribe

Below is an extract from this 50 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation Stream here. Non-members can buy a Single User license for this report online here for £795 (+VAT) or subscribe here. For multiple user licenses, package deals to buy this report and the Roadmap report together, or to find out about interactive strategy workshops on this topic, please email contact@telco2.net or call +44 (0) 207 247 5003.

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Background – The Roadmap to New Telco 2.0 Business Models

The Telco 2.0 Strategy Report ’The Roadmap to New Telco 2.0 Business Models’ published in April 2011 examines ways in which operators can extend and solidify their roles in the future ecosystem, making themselves a cornerstone of a new structure. This Executive Briefing contains extracts from the full Strategy Report, and updates and validates it with feedback from recent Telco 2.0 and New Digital Economics Executive Brainstorms in EMEA and the Americas.

Updating the Telecoms Business Model

For the past four years, STL Partners has been using an iconic diagram (see Figure 1, below) to illustrate our views about the role of ‘two-sided’ business models in the telecoms industry. It highlights the critical role of a telecom operator in enabling interactions between its traditional end-user (“downstream”) customers and a variety of new “upstream” parties, such as application developers and media companies. In 2007, we also introduced the concept of “distribution” of Telcos’ core services through these upstream channels, with the addition of a range of value-added B2B services based around the inherent capabilities of the network and service platform.

This concept of two-sided business models originally introduced in the Telco 2.0 Strategy Report The $125Bn ‘Two-Sided’ Telecoms Market Opportunity has to a degree become synonymous with Telco 2.0, and has been widely embraced by the industry. We have now decided it is time to update our definition of “Telco 2.0” to reflect both business model evolution and fundamental changes in the telecoms industry structure itself. While these trends are indeed driving adoption of multi-sided business models, we have also observed that that are redefining the landscape for ‘traditional’ one-sided telecom model as well.

Figure 1: The high-level Telco 2.0 Business Model diagram

Telco 2.0 Roadmap Two-Sided Business Model Schematic Chart

Source: STL Partners / Telco 2.0

Pressure on All Sides

In particular, it is critical to understand the increasing pressure on Telcos’ traditional markets and value propositions, on all sides – not just by Internet/media companies (so-called “over-the-top” players), but also by third-party infrastructure operators and wholesalers, network and device vendors, governments, and even end-users themselves. In addition, there have been delays and organisational complexities in exploiting the true potential of some “upstream” opportunities.

Newcomers such as Apple have developed their own communications/content ecosystems, regulators have pushed for structural separation, Governments have funded wholesale networks and application developers have cherry-picked lucrative domains such as social networking. Network equipment vendors are helping operators convert capex to opex – but in the process are themselves capturing more industry value through outsourcing. End-users have developed work-arounds to reduce their expenditure on telco services (e.g. “missed calls”).

Figure 2 – Telcos squeezed from all sides

Telco 2.0 Roadmap Report Telecoms Industry Squeeze Competitve Forces Chart

Source: Telco 2.0, The Roadmap to New Telco 2.0 Business Models

Taken together, the impact of these trends has led Telco 2.0 to expand its framework to embrace and refine its target market domains for telcos, especially in terms of innovation around advanced new “retail” services. We feel that it is becoming even more difficult for operators to navigate through this minefield – and if they are to succeed, they will need to develop and sell more appropriate, integrated and well-designed offerings. While defensive moves have their place, there is also an urgent need to innovate – but with well-focused efforts and resources.

Originally, we spoke of three business model elements for telcos: Improved retail telecoms services; ‘Distribution’ of core telecom products and services through alternate upstream channels; and delivery to upstream customers of value-added enablers. (In the past, we did not explicitly address wholesale telco-telco services, as they were essentially “internal machinery” of the day-to-day retail business).

Figure 3 – The three opportunity areas in the original Telco 2.0 business model

Telco 2.0 3 Original Business Model Opportunities Chart

Source: Telco 2.0, The $125Bn ‘Two-Sided’ Telecoms Market Opportunity

Introducing the New Telco 2.0 Framework

A long-term, strategic framework for is needed for telcos, both in fixed and mobile sectors. While the industry has strong cash flows, it needs to redefine its own space, exploit its strengths, and seek out areas of revenue growth and strong differentiation. Telcos also need to look for sources of their own profit in areas such as managed services, rather than just exploiting the cost savings offered by vendors and outsourcers.

Figure 4 – The New Telco 2.0 Industry Framework

Telco 2.0 Roadmap Report Telecoms Industry New Industry Framework Chart

Source: Telco 2.0, The Roadmap to New Telco 2.0 Business Models

Our new framework is an evolution of the old, incorporating the two-sided model, and defining six opportunity types, comprising three existing types previously defined by Telco 2.0:

  • Core services (previously ‘Enhanced retail’), which encompasses structural and strategic improvements to existing wholesale and retail services;
  • Embedded Communications (previously ‘Distribution platform’);
  • Third-party business enablers (previously ‘B2B VAS platform’);

and extending it in three main directions:

  • A separated and richer tier of Infrastructure services;
  • Explicitly identifying the integration of telecoms, IT and networking being undertaken by operators in the corporate space – Vertical industry solutions (SI)
  • Own-brand OTT services.

The Six Telco 2.0 Opportunity Types

We have grouped the opportunities into six types shown in the following diagram and discussed further in the rest of this report.

Figure 5 – the Six Telco 2.0 Opportunity Types

Telco 2.0 Roadmap Report Telecoms Industry Six Opportunities Chart

Source: Telco 2.0, The Roadmap to New Telco 2.0 Business Models

1. Core services (previously Retail Services), which encompasses transformational structural and strategic improvements to existing mainstream “Telco 1.0” offerings such as subscriptions, telephony and broadband access. These will remain at the core of telco revenues irrespective of other shifts, enhanced by the smart and targeted delivery of improved offers, manifesting in benefits via revenue addition, up-sell, and customer satisfaction. Our research identifies a portfolio of approaches here, such as:

  • Incremental improvements to basic products’ quality or speed;
  • Exploitation of new device categories driving service adoption and usage;
  • Supply of added-value content and services;
  • Better segmentation and customisation;
  • More targeted, personalised and granular pricing;
  • Better channels to market;
  • Efforts to gain improved (and genuine) loyalty and value perception;
  • Innovative ways to drive incremental usage and spending, for example through incentives and promotions.

In parallel with the revenue drivers, operators are also focusing on cost savings, throughout network operations and other areas such as retail channel costs and commissions, device subsidies and so forth.

2. Vertical industry solutions have been developed by fixed operators over the last decade and now starting to be demanded by customers for mobile solutions too. They comprise telephony services (voice and data) being integrated with IT with the operator acting in a systems integrator role to provide a complete solution. These solutions are tailored and packaged for specific vertical industries – transport, logistics, banking, government, manufacturing, utilities, etc. Companies such as BT (with BT Global Services), Orange (with Business Services) and Deutsche Telekom (with T-Systems) are examples of companies that have moved aggressively into this area.

3. A separated and richer tier of Infrastructure services, which includes telecom capacity “bulk” wholesale, as well as more granular “distribution” two-sided business models and aspects of hosting/cloud services. Some of these offerings have been around for a long time – bitstream ADSL, unbundled local loop sales and so forth. Others (data MVNOs, wholesale wireless networks) are relatively new. At the same time, operators are cutting new deals with each other for network sharing, backhaul provision, national roaming and so forth. We are splitting the new services out in this category, as a reflection of their impact on the cost side of operators’ business models, and new regulatory regimes (such as open access) that are redefining industry structure in many markets.

4. Embedded communications (previously Distribution Platform) – essentially the delivery to consumers of basic telecom services, primarily voice telephony, SMS and broadband data access, through new routes such as application-embedded functions or devices which “come with data” pre-provisioned.

5. Third-party Enablers (previously B2B VAS Platform) – the provision of extra capabilities derived from the operator’s ’platform’ rather than just network transport. This includes functions such as billing-on-behalf, location, authentication and call-control, provided as basic building blocks to developers and businesses, or abstracted to more complex and full-featured enablers (for example, a location-enabled appointment reminder service). Another class of third-party enablers originates in the huge customer databases that Telcos maintain – in theory, it should be possible to monetise these through advertising or provision of aggregated data to 3rd parties – subject to privacy constraints.

6. Own-brand OTT services. Many operators are starting to exploit the scale of the wider Internet or smartphone universe, by offering content, communications and connectivity services outside the perimeter of their own access subscriber base. With a target market of 1-2bn people, it is (in theory) much easier to lower per-unit production costs for new offerings and gain “viral” adoption. It avoids the politics and bureaucracy of partnerships and industry-wide consortia – and potentially has the ‘pot-of-gold’ of creating huge value from minimal capital investment. On the downside, the execution risks are significant – as is the potential for self-cannibalisation of existing services.

Figure 6 – The Six Opportunity Areas – Strategy, Typical Services and Examples

Telco 2.0 Roadmap Six Opportunities Examples Table

Source: Telco 2.0, The Six Opportunity Types Executive Briefing

To read the report in full, including the following contents…

  • Introduction & Background
  • The Roadmap to New Telco 2.0 Business Models
  • Updating the Telecoms Business Model
  • Executive Summary
  • Introducing the New Telco 2.0 Framework
  • Summary: The Six Telco 2.0 Opportunity Types
  • New Developments and Feedback from Telco 2.0 and New Digital Economics Brainstorms
  • Relative Attractiveness of Opportunity Areas
  • Different Opportunities need Different Business Models
  • The Unwelcome Need to Increase Investment in Innovation
  • New Metrics to Unlock New Investment
  • A Common Theme: Time is Short
  • Next Steps – M-Commerce 2.0: how Personal Data will Revolutionise Customer Engagement
  • The Six Opportunity Types Described
  • Opportunity Type 1: Core services
  • Opportunity Type 2: Vertical industry solutions (SI)
  • Opportunity Type 3: Infrastructure services
  • Opportunity Type 4: Embedded communications
  • Opportunity Type 5: Third-party business enablers
  • Opportunity Type 6: Own-brand “OTT”
  • Index

…with the following figures, charts and tables…

  • Figure 1 – The high-level Telco 2.0 Business Model diagram
  • Figure 2 – Telcos squeezed from all sides
  • Figure 3 – The three opportunity areas in the original Telco 2.0 business model
  • Figure 4 – The New Telco 2.0 Industry Framework
  • Figure 5 – the Six Telco 2.0 Opportunity Types
  • Figure 6 – The Six Opportunity Areas – Strategy, Typical Services and Examples
  • Figure 7 – Americas 2011: What will be the impact of Telco 2.0 Growth Opportunities?
  • Figure 8 – EMEA Nov 2010: B2B Enabling Services and Distribution Platform Need Investment
  • Figure 9 – Each Opportunity Area will have Different Revenue Splits
  • Figure 10 – Operators must invest more in services
  • Figure 11 – Different Business Models Need Different Metrics
  • Figure 12 – Impact of New Business Models on CROIC
  • Figure 13 – Other than “being a pipe”, Telcos have the most time and Opportunity to address Identity & Authentication Control Points
  • Figure 14 – Customer Data and Mobile Money are CSP’s most under exploited Assets?
  • Figure 15 – 100% campaign gain from personalisation
  • Figure 16 – Closed-loop of customer relationships & loyalty
  • Figure 17 – Ericsson’s Mobile Broadband ‘Fuel Gauge’
  • Figure 18 – BT Global Services vertical industry approach
  • Figure 19 – Many regulators see wholesale as key to NGA success
  • Figure 20 – Three Different Types of Embedded Communications
  • Figure 21 – Broadband access market forecast 2005-2015
  • Figure 22 – ‘Comes with Connectivity’
  • Figure 23 – Distribution and Enablers Vs Ontology of Telco wholesale and VAS offerings
  • Figure 24 – What is the best revenue model for Telco API programmes?
  • Figure 25 – Skype is a good fit for many Microsoft products
  • Figure 26 – Telco strategy options for co-opetition with Skype
  • Figure 27 – The Seven ‘VAS Platform’ Applications / 3rd Party Business Enabler Areas
  • Figure 28 – 5 Strategic Options for Developing OTT Services

……Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation Stream can download the full 50 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for £795 (+VAT), or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations and products referenced: 3UK, Alcatel-Lucent, Amazon, Amazon Kindle, Android, Apple, AT&T, BlackBerry, BT, BT Global Services, Carphone Warehouse, Cisco, Clearwire, Deutsche Telekom, Equant, Facebook, FCC, Gamesload, Google, Harbinger/SkyTerra network, iPad, iPhone, Jajah, KDDI, LightSquared, LinkedIn, Microsoft, Musicload, O2, Ofcom, Openzone, Optism, Orange, ProgrammableWeb, Qualcomm, Revoo, Scout24 family, Skype, smartphones, SMS, Softwareload, Telefonica, T-Mobile, UQ, Verizon, Videoparty, Vodafone, W3C, Xiam, YouTube.

Technologies and industry terms referenced: 3G, 4G, ADSL, API, appstore, authentication, B2B VAS platform, backhaul, billing-on-behalf, bitstream ADSL, broadband data access, Bulk wholesale, cable, cloud, Comes with data, Core services, CRM, data centres, Embedded Communications, femtocells, fibre, freemium, GSM, healthcare, Identity, Infrastructure services, location, LTE, M2M, managed services, messaging, MiFi, MVNO, MVNOs, Net Neutrality, NGA, NGN, own-brand OTT, Own-brand OTT, pipe, platforms, QoS, R&D, Retail, Sender pays, SIM, slice and dice, smart grids, Third-party business enablers, two-sided, unbundled local loop, Vertical industry solutions, voice telephony, VoIP, wholesale wireless networks, WiFi, WiMAX.

Full Article: Telenor’s Voice 2.0 Strategy – ‘Mobilt Bedriftsnett’ Case Study

Summary: Telenor’s new ‘Mobile Business Network’ integrates SME’s mobile and fixed phone systems via managed APIs, providing added functionality and delivering greater business efficiency. It uses a ‘two-sided’ business model strategy and targets the market via developers.

Members can download a PDF of this Note here.

Introduction

The enterprise is the key field for new forms of voice and messaging; it’s where the social and economic value of bits exceeds their quantity by the greatest margin, and where the problems of bad voice & messaging are most severe.

People spend hours answering phone calls and typing information into computers – calls they take from people sitting behind computers that are internetworked with the ones they sit behind. Quite often, the answer is to send the caller on to someone else. Meanwhile, other people struggle to avoid calls from enterprises.

mb%20screenshot.jpg

It’s got to change, and here’s a start: Mobilt Bedriftsnett or the ‘Mobile Business Network’ from Telenor.

‘Telenor 2.0’

Telenor are a large, Norwegian integrated telecoms operator, and a pioneer and early adopter of some Telco 2.0 ideas. As long ago as 2001, their head of strategy Lars Godell, was working on an early implementation of some of the ideas we’ve been promoting. They also have an active ‘Telenor 2.0′ strategic transformation programme.

Content Provider Access – CPA – established a standard interface for the ingestion, delivery, billing, and settlement of mobile content of any description that would be delivered to Telenor subscribers, and was the first service of this kind to share revenue from content sales with third parties and to interwork with other mobile and fixed line operators, years before the iPhone or even NTT’s pioneering i-Mode. Later, they added a developer sandbox (Playground) as well.

So, what would they do when they encountered the need for better voice & messaging? The importance of this line of business, and its focus on enterprises, has been part and parcel of Telco 2.0 since its inception (here’s a note on “digital workers” from the spring of 2007, and another on better telephony from the same period), and we’ve only become more convinced of its importance as a wave of disruptive innovators have entered the field.

We spoke to Telenor’s product manager for charging APIs, Elisabeth Falck, and strategy director Frank Elter; they think MB is “our latest move towards Telco 2.0”.

Voice 2.0: despite the changing value proposition…

In the Voice & Messaging 2.0 strategy report, we identified a fundamental shift in the value proposition of telephony; in the past, telephony was scarce relative to labour. That stopped being true between 1986 and 2001 in the US, when the price per minute of telephony fell below that of people’s time (the exact crossover points are 1986 for unskilled workers and landline calls, 1998 for graduates and mobile calls, and finally 2001 for unskilled workers and mobile calls).

Now, telephony is relatively plentiful; this is why there are now call-centre help desks and repair centres rather than service engineers and local repair shops. It’s no longer worth employing workers to avoid telephone calls; rather, it’s worth delivering services to the customer by phone rather than having a field sales or service force. The chart below visualises this relationship.

mb%20mins%20change%20value%20dec%202009.jpg

…and changing position in the value chain…

We also identified two other major trends in voice – commoditisation and fragmentation.

Voice is increasingly commoditised – that is to say, it’s a bulk product, cheap, and largely homeogenous. These are also the classic conditions of a product in perfect competition; despite the name and the ideological baggage, this isn’t a good thing, as in this situation economic theory predicts that profit margins will be competed away down to the absolute minimum required to keep the participants from giving up.

The provision of Voice is also increasingly fragmented and diverse – there are more and more producers, and more and more different applications, networks, and hardware devices incorporate some form of telephony. For example, games consoles like the Xbox have a voice chat capability, and CRM systems like Salesforce.com can be integrated with click-to-call services.

As a result, there’s less and less value in the telephone call itself – the period between the ringing tone and the click, when the circuit is established and bearer traffic is flowing. This bit is now cheap or free, and although Skype hasn’t eaten the world as it seemed it might in 2005, this is largely because the industry has reacted by bundling – i.e. slashing prices. Of course, neither the disruptors nor the traditional telcos can base a business on a permanent price war – eventually, prices go to zero. We’ve seen the results of this; several VoIP carriers whose business was based on offering the same features as the PSTN, but cheaper, have already gone under.

The outlook of Telco 2.0 Executive Brainstorm delegates as far back as 2007 demonstrates the widespread acceptance of these trends in the industry, and the increasing proliferation of diverse means of delivery of voice as show in the following chart.

call%20mins%20mb%20dec%202009.jpg

… Voice is still the biggest game in Telcotown…

So why bother with voice? The short answer is that there are three communications products the public gladly pays for – voice, SMS, and IP access.

Telenor’s CPA, one of the most successful and longest-running mobile content plays, is proud of $100m in revenues. In comparison, the business voice market in Norway is NOK6.9bn – $1.22bn. Even in 10 years’ time, voice will comprise the bulk of Telco revenue streams. However grim the prospects, defending Voice is only optional in the sense that survival is optional.

Moreover the emergence of the first wave of internet voice players – Skype, Vonage, etc., and the subsequent fight back by Operators, demonstrates that there is still much scope for innovation in voice and messaging, and that the option of better voice and messaging is still open.

…although the rules are changing…

Specifically, the possible zone of value is now adjacent to the call – features like presence-and-availability, dynamic call routing, speech-to-text, collaboration, history, and integration with the field of CEBP (Communications-Enabled Business Processes). There may also be some scope for improving the bearer quality – HD voice is currently gaining buzz – although the challenge there is that the Internet Players can use better voice codecs as well (Skype already does).

…and the Enterprise market is where the smart money is

The crucial market for better voice & messaging is the enterprise, because that’s where the money is. Nowhere else does the economic value of bits exceed their quantity and cost so much.

For large enterprises, the answer will almost certainly come from custom developments. They are already extensive users of VoIP internally, and increasingly externally as well. They tend to have large customised IT and unified communications installations, and the money and infrastructure to either do their own development or hire software/systems integration firms to do it for them. The appropriate telco play is something like BT Global Services – the systems integration/managed services wing of BT.

But using the toolkit of Voice 2.0 is technically challenging. It’s been said that free software is usually only free if you value your time at zero; small and medium-sized businesses can never afford to do that.

Telenor’s ‘Mobile Enterprise Network’: Mobilt Bedriftsnett

Mobilt Bedriftsnett (MB) is Telenor’s response to this situation, aimed at Small and Medium Enterprises (SMEs). Its primary benefit is to improve business efficiency by extending the functions of an internal PBX and/or unified communications system to include all the companies’ mobile phones.

Telenor’s internal business modelling estimates the cost of CRM failures – missed appointments, rework of mistakes, complaints, lost sales – to a potential SME customer at between $500 and $2,000 a year. This is the economic ‘friction’ that the product is designed to address.

telefonkonferanse.jpg

The Core Product is based on Telenor APIs…

The product is based on a suite of APIs into Telenor infrastructure, one of which replicates a hosted IP-PBX, i.e. IP Centrex, solution. It’s aimed at SMEs, and in particular, at integrating with their existing PBX, unified communications, and CRM installations. There’s a browser-based end user interface, which lets nontechnical customers manage their services.

There is also considerable scope for further development, and MB also provides four other APIs, which provide a click-to-call capability, bulk or programmatic SMS, location information, and “Status Push”. This last one provides information on whether a user is currently in coverage, power level, bandwidth, etc, and will be extended to carry presence-and-availability information and integrate with groupware and CRM systems in Q1 2010.

…and integrated with PBX/UC Vendor Client Solutions

Extensive work has been carried out with PBX/UC vendors, notably Alcatel-Lucent and Microsoft, to ensure integration. For example, one of the current use cases for the click-to-call API permits a user to launch a conference call from within MS Outlook or a CRM application. The voice switch receives an event from the SOAP API, initiates a call to the user’s mobile device, then bridges in the target number.

The ‘two-sided’ Enterprise ‘App Store’

MB is also the gateway to a business-focused app store, which markets the work of third-party software developers using the MB API to their base of SME customers. This element qualifies it as a two-sided business model. Telenor is thereby facilitating trade that wouldn’t otherwise occur, by sharing revenue from its customers with upstream producers and also by bringing SMEs that might not otherwise attract any interest from the developer community into contact with it. Developers either pay per use or receive a 70% revenue share depending on the APIs in use.

Telenor are using the existing infrastructure created for CPA to pay out the revenue share and carry out the digital logistics, and targeting the developer community they’re already building under their iLabs project. So far, third-party applications include integration with Microsoft’s Office Communication Server line of products, integration with Alcatel-Lucent and some other proprietary IP-PBXs, and a mobile-based CRM solution, WebOfficeOne.

Route to Market: Enterprise ICT Specialists

In a twist on the two-sided business model, MB services are primarily marketed to systems integrators, independent software developers, and CRM and IP telephony vendors, who act as a channel to market for core Telenor products such as voice, messaging, presence & availability, and location. This differs quite sharply from their experience with CPA, whose business is dominated by content providers.

Pricing is based on a freemium model; some API usage is free, businesses that choose to use the CPA payments system pay through the revenue sharing mechanism, and ones that don’t but do use the APIs heavily pay by usage.

Technical Architecture: migrating to industry standards

Telco 2.0 has previously articulated the seven questions concept – seven key customer questions that can be answered using telecom’s operator’s data assets as shown in the following diagram.

seven_questions_dec_2009.jpg

Telenor’s API layer consists of Simple Object Access Protocol (SOAP) and Web service interfaces between the customer needs on the left of the diagram, and a bank of service gateways which communicate with various elements of in the core network on the right.

At the moment, the click-to-call and status push interfaces are implemented using the proprietary Computer-Support Telecoms Applications (CSTA) standard, in order to integrate more easily with the Alcatel-Lucent range of PBXs. So far, they don’t implement Parlay-X (or OneAPI as the GSMA calls it), but they intend to migrate to the standard in the future. Like Microsoft OCS, Asterisk, and much else, the industry standard IETF SIP is used for the core voice, messaging, and availability functions.

MB_systems_dec%202009.jpg.png

Early days, high hopes…

Telenor is unwilling to describe what it would consider to constitute success with Mobilt Bedriftsnett; however, they do say that they expect it to be a “great source of income”. MB has only been live since June 2009, and traffic to CPA inevitably dwarfs that to the MB APIs at present.

…and part of a bigger strategic plan

Mobilt Bedriftsnett makes up the Voice & Messaging 2.0 element of Telenor’s transformation towards Telco 2.0. The other components of ‘Telenor 2.0’ are:

  • CPA, the platform enabling 3rd party mobile content transactions
  • the iLabs/Playground developer community
  • increasing strategic interest in M2M applications
  • a recently launched Content Delivery Network (or CDN – a subject gaining salience again, after the recent Arbor Networks study that showed them accounting for 10-15% of global Internet traffic )
  • Mobile Payments, Money transfer and Banking at Grameenphone in Bangladesh.

Lessons from Telenor 2.0

With Mobilt Bedriftsnett, Telenor has carried on its tradition of pioneering Telco 2.0 style business model innovations, though it is relatively early to judge the success of the ‘Telenor 2.0′ strategy.

At this stage of market development, Telenor’s approach therefore shows three important lessons to other industry players.

1)     They are taking serious steps to create and try ‘two-sided’ telecoms business models.

2)     The repeated mentions of CPA’s role in MB point to an important truth about Telco 2.0 – the elements of it are mutually supporting. It becomes dramatically easier to create a developer community, bill for sender-pays data, operate an app store, etc, if you already have an effective payments and revenue-sharing solution. Similarly, an effective identification/authorisation capability underlies billing and payments. Telenor understands and is acting on this network principle.

Full Article: 7 Strategic Priority Areas for new Telecoms Business Models

This 30+ page article can be downloaded in PDF format here.  The Executive Summary is reproduced below.

Executive Summary

Following the brainstorming sessions in Nice, we have set out below what we consider to be the most important takeaways on high-level telco strategy and each of the seven hot topics in business model innovation covered in dedicated sessions at the event:

Telco Strategy – New Revenue from New Business Models

  • There is almost universal agreement among telco executives that their industry needs to find new sources of revenue.
  • Despite the current gloomy economic climate, 93% of the delegates in Nice agreed that exploring new business models that generate new revenue is just as important in the near term as achieving operational efficiency and retaining customers
  • Three-quarters of the delegates characterised existing business and technical transformation efforts by their company or industry as either “not very effective” or “very poor”.
  • The delegates voted top 3 strategic actions for the industry as “Creating new levels of collaboration between service providers”, “Understanding the needs of upstream industries much better” and “Understanding the needs of end users much better”.  

Open APIs – Where’s the joined-up commercial strategy?

  • There is a great deal of work being done on APIs by the operator and vendor community, but there is a real risk of this activity being derailed by the emergence of numerous independent “islands” of APIs and developer programmes.
  • It is still early days for the commercial model for APIs, but it is already becoming apparent that a one-size-fits-all solution will be difficult to achieve. It is important for operators to ensure that API platforms (and the associated revenue mechanisms) can service two distinct classes of customer:
  • Broad adoption by thousands, perhaps millions, of developers via automated web interfaces (similar to signing up for Google Adwords or Amazon’s cloud storage & computing services);
  • Large-scale one-off projects and collaborations, which may require custom or bespoke capabilities, such as being linked to subscriber data management systems or “semi-closed” or “private” APIs, for example with governments or major media companies.

Retail Services 2.0 – ‘Supermarket strategy’ not enough

  • The most attractive options around retail services involve turning the operator’s network (and possibly devices) into a platform of “enablers” for third party services and applications. These assets and capabilities may not be easy to deliver, but once in place, should provide a defensible source of value.
  • Whether a telco should also sell “enabled” services at retail depends upon their existing customer relationships, portfolio of existing in-house services and ease of developing retail partnerships.

  • Some applications simply cannot be “sold” through an operator’s retail store, as they will be integral parts of much larger services. Although Amazon can enable the sale of a huge variety of products, delivering fresh food or fuels, for example, would not fit with its logistics business. But suppliers of such goods might still exploit Amazon’s various online commerce enablers.

Devices 2.0 – Still no consistent industry strategy

  • Few fixed or mobile operators have successfully created new types of devices on their own. Few consumers, for example, would view their broadband “box” as a central hub of a home network – despite more than 10 years of discussion of interconnection with consumer electronics, utility meters and home automation.
  • In the mobile space, probably the most important customisation has been the configuration of the telco’s own portal as the default browser home page. If anything, the shift towards smartphones and PC-based mobile broadband has further weakened telcos’ role – the majority of 3G data traffic goes straight to and from the Internet from “vanilla” devices.
  • The future possibly holds some more hope. Delegates were strongly in favour of pushing for telco “control points” in otherwise open devices, which fits well with the heritage of SIM cards (which are expanding in capability) as well as standardisation in areas like the browser and widget frameworks (e.g. OMTP BONDI). Software pre-loaded with PC dongles or embedded 3G modems is another option.
  • In the converged triple/quadplay space, femtocells offer another point of control and service delivery, close to the customer, but delegates viewed the notion of a separate “gateway” product with less enthusiasm. New classes of devices such as mobile Internet devices (MIDs), operator-enabled consumer electronics (Internet TVs, 3G music players, in-car systems etc.) also hold promise, but are seen more as low-risk experiments at this point.

Online Video Distribution – Time to sort out the “Net Neutrality” Issue

  • Those pushing the ‘network neutrality’ issue are (deliberately or otherwise) causing confusion over differential pricing which creates public relations and regulatory risks for operators that need to be addressed.
  • Operators need to develop a suite of value-added products and services for third-parties sending digital goods over their networks so they can generate incremental revenues that will enable continued network investment.
  • Sending-party pays models may or may not work – this is an area where more experiments need to be tried. Distributors need to be working on disentangling bits that are able to be free from those that have to pay, not letting anyone get a free ride.

Enterprise Services 2.0 – A broader suite of platform services needed

  • Telcos need to learn how to develop, sell and support services which are customised, as well as mass-market “basic” applications and APIs. Ideally, the technical platform will be made up of underlying components (e.g. the API interface “machinery” and the associated back-office support systems) designed to cope with both ‘off the shelf’ and ‘bespoke’ go-to-market models for new services.
  • Especially in the two-sided model, there are very few opportunities to gain millions – or even tens of thousands – of B2B customers buying the same basic “product”. Google has managed it for advertising, while Amazon has large numbers of hosting and “cloud computing” customers – but these are the exceptions.
  • Perhaps the easiest and most universal horizontal markets will be enhancements to voice and messaging capabilities – after all, these are the ubiquitous cross-sector services today.
  • To really exploit unique assets and take friction out of business processes, there is a need to understand specific companies’ (or sectors’) processes in detail – and offer customised or integrated solutions. Despite the lower scale, the aggregated value may be even higher.

Technical Architecture 2.0 – Good Start, but Significant Gaps

  • Operators are in a unique position in that they have a fuller picture of customers than any single website or retailer or service provider. Several have already recognised this, and a number of vendors are offering scalable platforms which claim to be in line with the current EU legislation on data protection.
  • But as well as user profile data, the 2-sided business model requires on-demand response from the network infrastructure. Both the network and IT elements must work together to deliver this, implementing new control & monitoring systems such as Resource & Service Control Systems (RSC).
  • Most new applications are centred around apps stores, mash-up environments, XaaS environments, and smartphone Web browsers, etc. which do not demand a traditional service delivery platform (SDP). In addition, enabling services are becoming an essential element in operators’ core products.
  • These enabling services need a framework, which is highly flexible, agile and responsive, and integrated with the features defined by the Next Generation Mobile Networks (NGMN) alliance.

Telco 2.0 Pilots – How to trial Telco 2.0 business models

  • There is insufficient time to pursue the usual protracted telco timescales for research and deliberation. Moreover, projects with long lead times – such as those involving governments – are typically unsuitable. Some target industries are also experiencing lengthening sales/decision cycles in the recession, which are also not optimal conditions for pilots.
  • Web-based companies are often the most flexible, as are some academic institutions. There may also be a geographic dimension to this – countries with low regulatory burdens, or where it is unusual to have projects stuck for months with lawyers, are attractive for pilots.
  • Working alone may be fastest, but collaborating with other operators is likely to be more effective in demonstrating the validity of the Telco 2.0 concept. 

© Copyright 2009. STL Partners. All rights reserved.
STL Partners published this content for the sole use of STL Partners’ customers and Telco 2.0™ subscribers. It may not be duplicated, reproduced or retransmitted in whole or in part without the express permission of STL Partners, Elmwood Road, London SE24 9NU (UK). Phone: +44 (0) 20 3239 7530. E-mail: contact@telco2.net. All rights reserved. All opinions and estimates herein constitute our judgment as of this date and are subject to change without notice.

Full Article: Technical Architecture 2.0 – On-Demand Networks & OSS-BSS, User Profiles, Enabling Services

NB A full PDF copy of this briefing can be downloaded here.

This special Executive Briefing report summarises the brainstorming output from the Technical Architecture 2.0 section of the 6th Telco 2.0 Executive Brainstorm, held on 6-7 May in Nice, France, with over 200 senior participants from across the Telecoms, Media and Technology sectors. See: www.telco2.net/event/may2009.

It forms part of our effort to stimulate a structured, ongoing debate within the context of our ‘Telco 2.0′ business model framework (see www.telco2research.com).

Each section of the Executive Brainstorm involved short stimulus presentations from leading figures in the industry, group brainstorming using our ‘Mindshare’ interactive technology and method, a panel discussion, and a vote on the best industry strategy for moving forward.

There are 5 other reports in this post-event series, covering the other sections of the event: Retail Services 2.0, Content Distribution 2.0, Enterprise Services 2.0, Piloting 2.0, Open APIs 2.0, and Devices 2.0. In addition there will be an overall ‘Executive Summary’ report highlighting the overall messages from the event.

Each report contains:

  • Our independent summary of some of the key points from the stimulus presentations
  • An analysis of the brainstorming output, including a large selection of verbatim comments
  • The ‘next steps’ vote by the participants
  • Our conclusions of the key lessons learnt and our suggestions for industry next steps.

 

The brainstorm method generated many questions in real-time. Some were covered at the event itself and others we have responded to in each report. In addition we have asked the presenters and other experts to respond to some more specific points.

 

Background to this report

The implementation of new ‘Two-Sided’ Telecoms Business Models has major consequences on telco network architecture. Perhaps most importantly, data from separate internal silos needs to be aggregated and synthesised to provide valuable information on a real-time basis. Key process interfaces that enable new services must be made available to external parties securely and on-demand. Network and IT functions must start collaborating and function as a single entity. Operators need to migrate to a workable architecture quickly and efficiently; vendors have to support this direction with relevant new product offerings and strategies.

Brainstorm Topics

  • What are the implications of adopting 2-sided business models on telco technical architecture?
  • What does the roadmap to a Telco 2.0 architecture look like?
  • As the network becomes more intelligent to support smart phones and App Stores, what are the most important investments for telcos?
  • What are the priority areas for transformation to enable new services?
  • Why are user profiles so important for telcos?

 

Stimulus Presenters and Panellists

  • Werner Vogels, CTO, Amazon.com
  • Richard Mishra, Director, Strategy and Standards, Amdocs
  • Alireza Mahmoodshahi, CTO, COLT
  • Paul Magelli, Head, Subscriber Data Management, Nokia Siemens Networks
  • Michel Burger, Head, Service Architecture, Vodafone Group

 

Facilitator

  • Thomas Rambold, CEO, DESS, Associate, Telco 2.0

 

Analysts

  • Chris Barraclough, Managing Director, Telco 2.0 Initiative
  • Dean Bubley, Senior Associate, Telco 2.0 Initiative
  • Alex Harrowell, Analyst, Telco 2.0 Initiative

 

Stimulus Presentation Summaries

Technical Architecture 2.0

Thomas Rambold, Associate, Telco 2.0, presented on the end of clearly defined services – we now face thousands of segments, and no distinction between ”just voice” and ”just data”. Broadband means that I can simultaneously be an Amazon user, a father, and many other things. Distinctions between enterprise and consumer services, private and public, have changed.

This implies much greater complexity in the customer relationships; the Over-The-Top (OTT) players have struggled to get their arms around the total relationships. Carriers have identified Fort Knox on the diagram (customer and network data management) as somewhere they can excel.

The walled garden is no longer sustainable. OTT offerings are already growing fast and, when they start using Telco APIs in earnest, this will accelerate. We need to link these services with customers – the carriers are the only actor capable of acting as a broker between the API users on the one hand, and the full suite of customer data (residing in ‘Fort Knox’) on the other. It is vital to be on-demand, if not necessarily truly real time. You can’t make people fill in forms to start a service – authentication, sign-on and billing and payment need to be automated.

Paul Magelli, Head, Subscriber Data Management, NSN: ”Would you be happy letting a Telco do data mining on you that you wouldn’t tolerate from the Government?”

Currently we are struggling to bridge the gap between the network and the OSS/BSS systems.  We simply can’t get the on-demand response we need.  So now we’re merging telco and IT organisations together, analysing the telco and IT environments, trying to get them to work together, in concert, and react faster.

The service delivery environment; a year ago, this would have been a big SDP from a traditional telco vendor. But now the services have moved out to the network – into the cloud, into mash-up environments, on to native applications on devices. It’s increasingly challenging to make these services useful and timely and to guarantee security and privacy across all these domains.

 

Service Value Management, Amdocs’ vision for next-generation services

Richard Mishra, Director, Strategy and Standards, Amdocs, said we are living in interesting times: We face sophisticated customers, exotic delivery platforms, and a recession!  Perhaps we need to revisit core values, get back in the box and think more deeply. Revisit the core strengths and disciplines of operating a carrier-grade telecoms network (but not retain the bad attributes).

There is constant talk of service, even by the TM Forum back-office people, who are never seen from outside the Telco. But the next step after resource deployment is, inescapably, fulfilment. And with all this talk of service, what about the shareholders?  Finally, having created the service, spent the capex, and deployed, you need assurance – monitoring service performance against the performance you offered the customers.

We’re working with ever-increasing interdependence between infrastructure, service, consumer and enterprise applications, and devices. This needs diagnostics and monitoring for all these levels, and careful management of the consumer experience.

Our Full Service Provider Integration Framework provides tools for continuous improvement as defined in the left half of eTOM; covered by contracts designed to match. In our deployment in Atlanta, we used this and special tools we developed for the carrier Ethernet network. We didn’t try to recreate the special capabilities there; but we did subject it to the traditional disciplines of managing a carrier network.

As a rule, Telcos no longer customise stuff; we can’t make our own SDH management tools any more, notably for reasons of intellectual property. So it’s now a question of assembling agile value chains from many other vendors, components and sources.

 

Building Trusted Relationships

Paul Magelli, Head, Subscriber Data Management, Nokia Siemens Networks said that customer data plays a key role in Telco 2.0…but does it exist? Is there enough available in our networks?

Nokia Siemens is working on the following assumptions:

1.     A multitude of business models;

2.     Broadband connectivity everywhere;

3.     5 billion subscribers;

4.     Applications all migrated onto the Internet.

This implies that successful applications and services will be information- and subscriber-centric.

Richard Mishra, Head, OSS Strategy and Standards, Amdocs: ”Data will become a treasured part of the business model.”

We really need rich profile information – profiles are what we say about ourselves. It’s clear that there is enough information, but can we get at it? 76% of respondents in our survey think it’s the most important issue; 86% think it’s important for network development.

Consider a use case in banking. To improve contact with customers, we need to know things like: is the customer available? Interested? Is it a good time to reach me? Is this the best way to reach me? Is this the right language? For this, we need the ability to do real-time subscriber profiling as well as historical data analysis.

But it’s more complicated than that. Current data isn’t enough – time series is really important. It is surprising that operators recognise this but haven’t done very much to solve it. Only 14% have real-time data analysis. And identity is more complicated than that – people have multiple devices, multiple SIMs, and multiple identities. Privacy is another big issue. Permission is frequently abused; there is a huge generation gap in attitudes around what constitutes privacy, and the legislation is very different between different jurisdictions (and usually lags the market).

If we could provide a single point of access for managing your identity…huge opportunities await. But it’s crucial to resolve the privacy issue by giving customers control of their own data.

 

Building the business-grade cloud

Alireza Mahmoodshahi, CTO, Colt asked how much do our customers know about cloud computing? Not much, he said, we’ve done well in clouding their minds. He gave a short brief on COLT; its origins in the City of London, its European fibre network, its large enterprise customers.

There is a framework for ICT; the Telco at the bottom, providing dark fibre, bulk data and voice. Then, above that, data centres and IT infrastructure like hosting, co-location, network operation. Then a vast range of applications specific to tasks run on top of that.

Not many operators are enamoured with their position at the bottom of the stack…

…on the other hand, it’s hard to find anyone who can replace the things that Telcos can do. Most clouds don’t offer any kind of SLA, so critical transactional services can’t use them. Traditional clouds are on the left of the diagram, similar to IT infrastructure. Operators don’t want to be penned into the low-value bottom right: they need to push up and left to escape. Meanwhile, clouds tend to have no SLA for the sector from the cloud to the end-user, and not necessarily between the enterprise and the cloud: there are too many participants to provide an SLA covering the whole thing. So the opportunity for the Telco cloud is to provide end-to-end SLAs.

The crucial development to enable business-grade clouds is to virtualise all elements of the system. Then, control priority for applications running on them. This is achieved by queuing them through a COLT-patented policy scheduler; this despatches tasks to a pool of virtualised servers, themselves providing a pool of threads.

Then we set up the API/SDK third-party access to the platform to empower the applications developers. If you want to do this you need to control QoS and also application-layer dispatching across the entire system; carriers are probably the only actors who can offer this.

 

Participant Feedback

Introduction

The fragmented and sometimes opposing views of the audience in the feedback (and voting) are not new or surprising. It is a key indication for service providers and operators that changes are overdue and must be taken seriously. It also demonstrates the complexity of current silo’d approaches, and the inability of a single company to change this. Despite this complexity, operators will have to focus investment on strategically important projects, particularly during these difficult financial times. Such an approach will give us the chance to reduce complexity and reduce operating costs. Most importantly it will enable operators to produce agile technical architectures with the required flexibility to meet customer demands.

 

Feedback: grounds for optimism

The technical architecture session produced some significant levels of optimism from the audience….

·         Promise of new future. [#5]

·         Some real applications of Telco 2.0 model. [#6]

·         Good ideas for large enterprise and government segments. [#12]

·         Triggers my thinking and confirms my assumption. [#15]

 

Feedback: …and cynicism

…albeit tempered with a degree of cynicism about the validity of the examples cited

·         We don’t know when we will get there. [#9]

·         Still industry jargon driven. [#17]

·         All seemed to be a bit ‘defensive’ of legacy models and were more oriented to Telco 1.0. [#18]

o    Re 18 good point. 90% of large carrier environments could not move to Telco 2.0 due to restrictive contracting structures with their existing OSS vendors. To add to the pain, they usually don’t have their source code so they don’t really control their destiny (especially if outsourced). [#43]

·         Mostly still talk, no examples on the ground yet. [#20]

·         Still very much 1.0 and technology driven, to view user and real new business model. [#44]

·         Unfortunately human beings are not compliant to marketers Telco use cases ;-). [#46]

o    46; Telco use cases are uninformed by real data. [#49]

·         Would it be better to define what to do and where to go, before arguing potential obstacles and potential regulatory matter before the idea has started? [#62]

 

Feedback: Customer data issues

In particular, the subscriber data management model seems aspirational, if trust issues can be resolved. However, there were a lot of questions wondering whether Telcos’ use of customer data would be either as accomplished – or consumer-friendly – as Internet-based players like Amazon’s. There also appears to be a debate brewing over whether or not Telcos’ customer data is “better” than that of web players’.

·         Single customer data ‘vault’ from Nokia/Siemens is a great idea; doubtful any carrier brand has the consumer trust to pull this off-more likely for VeriSign, Symantec or someone else. [#25]

o    25 – I agree. There also needs to be reciprocity. I want to be able to authenticate on an operator network with my Facebook ID or similar – or with another operator’s identity. [#33]

·         Very illustrative presentation about profile, profiling and identity. [#39]

·         Nokia Siemens idea seems good, but how can they guarantee that the customer data go to a trustworthy person? The bank manager of today could be the disgruntled laid-off employee of tomorrow selling the data illegally to somebody else. For my part, I rather trust my voice mail box for everybody to leave a message. [#48]

o    48 no business has succeeded by arguing that innovation were dangerous to its established business paradigm. [#51]

·         Give customers even little incentives and they willingly hand over their data. [#63]

·         In France this week a guy spent a night in jail for receiving a SMS whose content was considered ‘security threat’ ….trust????? [#60]

·         Any examples of where operators have offered services using the subscriber profile mgt capabilities discussed by NSN? [#10]

·         In the NSN subscriber profile example, to which extend are the subscriber data exposed to 3rd parties, and by which standardised approach? [#35]

·         For the NSN concept, do we first need a regulatory framework for ‘identity portability’ so that we can churn ID providers? [#37]

·         Why as a user can I not hold my data and share it with who I want, if it is so valuable why don’t I charge for it as well? [#47]

o    Re: 47 THAT IS THE IDEA! The idea of the 2 sided biz model (IMHO) is that your data is valuable. You should sell it by allowing the operator to monetize it with 3rd parties then ‘pay’ you through reduced service charges and greater service coverage/offerings. [#55]

o    47, in a sense you do. You get better products 0n Amazon by giving product feedback; on Blyk you get free minutes and data in exchange for insight and data. Payment from users is not always monetary (it is sometimes data and information) and, likewise, payment to users for their ‘data’ will not be monetary but through increased value. [#61]

·         Further to Werner’s question of who owns the data — who do operators give access to sensitive data? Would customers like it if they know that the carrier may allow their BSS vendors to manage call information or data event records? Do carriers have access to the source code to verify integrity of mission critical apps? [#52]

·         Private information is valuable. Why do not think share the value of private date with the consumer? [#56]

·         Today – what percentage of Amazon’s data it collects is used to improve user experienced and increased engagement + purchasing? [#59]

·         Access to data for Telco 2.0 is regional/legal/societal dependent. Operators need a good PR effort to allow opt in for customers to fuel the two sided revenue model. [#66]

·         Maybe there could be a bureau operator that can abstract the customer and all related data on behalf of the operators … where people that are willing to be Telco2.0 involved can opt in. [#68]

·         Bravo Werner. Telcos need to think about the customer first. What Telcos facilitate the option for customers to send data to 3rd party for monetization opportunities? [#69]

·         Isn’t Telco 3.0 a free connection to the network in exchange for shared consumer behaviour data? [#71]

o    71 could see Google trying this in 5 years time if the cost of Telco network is driven down sufficiently. [#75]

·         People are scared by poor data sunk into Telcos that they have no control over. When is data opening up to cleansing going to happen? [#73]

o    Re: 73 the data is already there. [#76]

 

Feedback: the cloud

There was plenty of interest in the COLT presentation on the Cloud…. but also plenty of cynicism again

·         Colt just showed what Telco 2.0 is all about. That model enables innovation thru cost reduction and state of the art architectures. Why don’t operators run their back office in a similar approach? [#13]

·         Is Colt’s cloud real yet and have COLT sold anything yet? [#16]

·         Bravo Colt. If it exists it is a model as it should be. They sign up for the SLA and they lay forth a bed of enablement. [#19]

·         If Colt has that architecture in operation, they should be running the back office for other Telco operators. [#34]

·         Relative to Colt’s view – what about Salesforce.com who seems to have pulled this off on their own. [#29]

·         Does COLT use its own cloud services? [#38]

·         Where the incentive is for existing OSS vendors who have long terms managed services contracts to innovate and move to Telco 2.0 architectures (e.g. SaaS) like Colt? [#28]

 

Feedback: COLT vs Amazon

… although whether COLT’s vision (or Amdocs’) is as advanced as that presented by Amazon was doubted

·         Amazon ‘eats’ their own cooking (their cloud) and COLT? [#14]

·         What is colt’s business model (price structure) and how does this differ from Amazon? [#8]

·         How does Werner really feel about legacy telecom operator back office Telco environments? [#30]

·         How does Amdocs view Colt’s model? [#23]

·         How would Amdocs view Colt and Amazon models? Seems much difference with their approach. [#7] 

 

Feedback: Carrier-grade – what is it worth?

But do end users really think “carrier grade” is important as the operators? Will they pay a premium for it?

·         I’ll believe in ‘carrier grade’ when enterprises can get SLAs for mobile coverage. [#45]

·         Is carrier grade not shifting now that many users have several alternative means to perform a communication? [#57]

·         Seems the industry still have major problems in freeing themselves from network drives. [#22]

·         Carrier interoperability and collaboration could solve many network issues. [#24]

·         From what I can gather there has been talk about all this for some time. Based on this the Telcos have failed to transform while other companies have. Surely Telcos will change too late to take any true advantage of the possible opportunities that exist today and other companies will take advantage. Why don’t Telcos focus on their core competence – the network? [#36]

o    36, for the simple reason that the value of the network itself is in continuous decline. Got to look elsewhere – make money because they own network not through the network itself. [#42]

·         These arguments are the same ‘net head’ vs. ‘bell head’ arguments that occurred in the late 90’s. How do we resolve the issues? Telcos clearly are behind and are insisting on making everything ‘carrier grade’ at extraordinary costs? Doesn’t seem very 2.0, does it? [#41]

 

Feedback: crucial enablers

There were also various other comments about the enablers of the two-sided platform, and the consequences of personal device proliferation:

·         Cascading SLA’s is old stuff, nothing new. [#50]

·         XaaS is very valid a concept, and so is cloud computing/storage/network, but these are two different things – XaaS may or may not be using cloud principles and technologies. [#65

·         Simplification of capabilities available for third parties. [#27]

·         What is the highest priority issue for Telco 2.0 enabling architectures that does not exist today? [#21]

·         OPEN standards vs. licensed software? [#32]

·         5 B user…. 5o B devices….customer data from all these!! [#26]

·         How many people have more than one mobile device? 5 are extreme. [#31]

o    re31 – in Europe, probably about 1.4 mobile devices per person, and >2 in Italy. Verizon in the US has suggested that ultimately 4+ is not implausible. [#40]

 

Participants’ “Next Steps” Vote

Participants were asked “How well current industry activity around technical architectures supports the development of Telco 2.0 business models?”

  • Very well – the industry is shaping up well for delivery and new business models.
  • Good start but more needs to be done – major building blocks are missing.
  • Lost cause – the industry will never deploy the capabilities for new business models

Lessons learnt & next steps

Since the development of broadband access, the Internet world has recognised that customers can have many, dramatically different roles and attributes, needing specific functionality, preferences, and user profiles. Operators are in a unique position in that they have a fuller picture of customers than any single website or retailer or service provider. Several have already recognised this, and a number of vendors are offering scalable platforms which claim to be in line with the current EU legislation on data protection.

Marc Davis, Chief Scientist, Yahoo! Mobile: ”Data is to the information economy as money is to the economy. But there is a missing infrastructure – because there’s no user interface for this data and what is the equivalent of a bank for this data – who looks after it?”

But as well as user profile data, the 2-sided business model requires on-demand response from the network infrastructure. It will not matter whether it is the network or OSS/BSS/IT element that is breaking down – customers won’t care, they will just find the situation unacceptable. Both the network and IT elements must work together to deliver this. Operators are moving in that direction organisationally and structurally.

Telco 2.0 expects that this will result in new implementations of control & monitoring systems such as Resource & Service Control Systems (RSC). As services are the key business drivers, the opening up of the walled gardens is changing the service delivery platforms quite rapidly, as most new applications are centred around apps stores, mash-up environments, XaaS environments, and smartphone Web browsers, etc. which do not demand a traditional SDP or SDF. In addition, enabling services are becoming an essential element in operators’ core products. These enabling services will, in the future, allow operators to monetize their network assets.

These enabling services need a framework, which is highly flexible, agile and responsive, and integrated with the features defined by NGMN. While not all these points are implemented yet, there is increasing understanding at the operators, upstream service providers, and regulators that this new phase, opened up through the 2-sided business model, represents a historic opportunity for all members of this ecosystem.

Marc Davis, Chief Scientist, Yahoo! Mobile: ”What if we had new, industry standard terms of service under which users owned their data?”

Before the technical details can be finalised, of course, business models need to be scoped. However, the major technical areas discussed above are focal points for technology development. In the short term, Telcos should:

  • Build up a logical semantic database as preparation for database integration;
  • Include migration from 2G and 3G and backwards compatibility in LTE tenders;
  • Prepare a user profile database;
  • Reduce the number of OSS/BSS systems;
  • Develop real-time responsiveness in OSS/BSS systems;
  • Separate the control and data planes, separate services from transport;
  • Implement and deploy an RSC system as a multivendor abstraction layer. 

In the longer term, operators will need to:

  • Integrate the network and IT elements of the on-demand infrastructure;
  • Set up a full user profile with privacy protection and more granular information;
  • Integrate provisioning, activation, network and bandwidth management, and policy enforcement;
  • Recognise that Web-based service environments will overtake the SDP;
  • Develop a collaborative approach to multi-vendor app stores.

Full Article: Open APIs 2.0 – A new commercial model for devices, networks, back offices and third parties

NB A full PDF copy of this briefing can be downloaded here.

This special Executive Briefing report summarises the brainstorming output from the Open APIs 2.0 section of the 6th Telco 2.0 Executive Brainstorm, held on 6-7 May in Nice, France, with over 200 senior participants from across the Telecoms, Media and Technology sectors. See: www.telco2.net/event/may2009.

It forms part of our effort to stimulate a structured, ongoing debate within the context of our ‘Telco 2.0′ business model framework (see www.telco2research.com).

Each section of the Executive Brainstorm involved short stimulus presentations from leading figures in the industry, group brainstorming using our ‘Mindshare’ interactive technology and method, a panel discussion, and a vote on the best industry strategy for moving forward.

There are 5 other reports in this post-event series, covering the other sections of the event: Retail Services 2.0, Content Distribution 2.0, Enterprise Services 2.0, Piloting 2.0, Technical Architecture 2.0, and Devices 2.0. In addition there is an overall ‘Executive Summary’ report highlighting the overall messages from the event.

Each report contains:

  • Our independent summary of some of the key points from the stimulus presentations
  • An analysis of the brainstorming output, including a large selection of verbatim comments
  • The ‘next steps’ vote by the participants
  • Our conclusions of the key lessons learnt and our suggestions for industry next steps.

 

The brainstorm method generated many questions in real-time. Some were covered at the event itself and others we have responded to in each report. In addition we have asked the presenters and other experts to respond to some more specific points.

  

Background to this report

Platform-based 2-sided business models need APIs to enable upstream customers to use telco assets and processes. There are a huge variety of APIs and enablers being developed in the market by industry bodies (GSMA, TM Forum, OMTP, MEF), by individual operators (Vodafone Betavine, Orange Partner, O2 Litmus), and by ad hoc consortia (such as Vodafone, China Mobile, and Softbank’s JIL). But what is the commercial strategy that underpins these programmes? What needs to be done to ensure that APIs are valuable for upstream customers (developers, merchants, advertisers, and government) and profitable for operators?

 

Brainstorm Topics

  • Preview of a new Telco 2.0 market study: A Draft Commercial Framework for industry-wide Telco APIs
  • What are the real needs of key upstream organisations and industries?
  • What is the best approach to implement a unified set of telco industry APIs?
  • How can developer communities be best served by operators – what sort of ecosystem is needed?
  • What can we learn from the success of developer programmes in the IT industry?

 

Stimulus Presenters and Panellists

  • Karl Bream, Head, Corporate Strategic Marketing, Alcatel-Lucent
  • Richard D. Titus, Controller, Future Media, BBC
  • Andrew Bud, Chairman, Mobile Entertainment Forum
  • Nicolas de Cordes, SVP Corporate Strategy, Orange-FranceTelecom
  • Keith Willetts, Chairman, TM Forum
  • Kevin Smith, Project Leader, GSMA OneAPI, Vodafone Group R&D 

 

Facilitator

  • Simon Torrance, CEO, Telco 2.0 Initiative

 

Analysts

  • Chris Barraclough, Managing Director, Telco 2.0 Initiative
  • Dean Bubley, Senior Associate, Telco 2.0 Initiative
  • Alex Harrowell, Analyst, Telco 2.0 Initiative

 

Stimulus Presentation Summaries

Commercialising Telco APIs

Chris Barraclough, MD, Telco 2.0 asked what the relevance of APIs was? This is terribly technical – why should I care? But history shows it’s a great way of generating volume on platforms. Amazon realised that easy third-party access creates more selection, which creates footfall. So merchants can squirt their catalogue into Amazon. Similarly Betfair successfully increased liquidity on its betting platform, resulting in better prices and more transactions, by allowing independent bookies to post their whole book into the market via an API.

There’s a lot of activity just now in the industry, mostly technical so far. What are the commercial implications?

Andrew Bud, Chairman, MEF: ”Too many projects are led by the engineering function; these things must provide a business kicker for the content community.”

There are several strategic options for operators for APIs:

1.     Expose a resource to third parties as a Web service. This is fairly low value – also, it has scary security/privacy implications, and there is the possibility that someone might scrape the entire database and use it for their own unspeakable ends.

2.     Expose real-time data in an aggregated form. The aggregation process provides some protection from the privacy problems; real-time data rapidly becomes stale and individual data is hidden. For example, like Vodafone, you could provide TomTom with the locations of concentrations of users who are not moving, or traffic jams as we call them.

3.     You can also use APIs to drive traffic through the core services. You require the use of your voice and messaging in conjunction with it, like BT does with Ribbit. There’s a problem, though – the price of these services is declining rapidly, and it is becoming much easier to provide them outside the telcos.

4.     And then, there are new CEBPs. Instead of pulling data out of the telco, the upstream customers push queries or rules up into the telco, and use the result rather than processing data returned by a Web service. This permits value-based pricing and revenue sharing business models.

Questions of pricing follow from this; part of a bigger platform pricing strategy. There are two possible levers to pull – the cost to join and the cost per transaction. Both can go to zero. There is also a third dimension – the share of pricing between upstream and downstream.

Keith Willetts, Chairman, TM Forum: ”B2B activity is fundamental to the 2-sided business model. It involves lots of transactions, and lots of money.”

Examples:

  • MS Windows – has a high entry cost for end users (buy a computer), zero incremental cost, and zero entry cost for application developers;
  • Ebay – charges a listing fee, plus a 10% transaction commission;
  • Amazon – flat rate joining fee, then a commission on transactions;
  • Google – access free, variable transaction fee on upstream customers;
  • Premium SMS – access and management fees are usually rather more than Amazon or Ebay, plus a fee per transaction of minimum 40% to the company issuing the SMS.

Our chart here identifies the Zone of Death – fragmentation means joining costs so high that there is no scale, hence transaction fees have to be really high to make money, and therefore scale remains low and joining costs high!

 

Orange Partner Programme, from 2004 to today

Nicolas de Cordes, SVP Corporate Strategy, Orange said that the customer is core to Orange’s business.  The business grows through customer interactions. But what happens after Telco 1.0? Without knowing it we’ve built major assets; network; operations; information resources; and trust. Trust is vital for commerce. It’s an unconscious element; which bank would I put information in? Operators need to consider how to be trusted partners for customers:

As a result, Orange has established three lines of business:

1.     Content Services; content distribution and management

2.     Vertical Services – notably healthcare. Also developing applications for specific business processes using, for example, M2M.

3.     Service Management – wholesale, enterprise, and perhaps home networks.

We recognised that we couldn’t innovate at the speed of the Internet. So we created Orange Partner. There were some embryonic initiatives in the UK and France – these were rolled together into the new organisation. Its early aims were to help suppliers interact with Orange mobile, then to aid suppliers to interact with Orange across all platforms. Now, we’re aiming for developers in general – so far we’ve got 65,000 registrations.

Orange Partner has three focuses:

1.     Getting the API out of the door;

2.     Open Innovation (which links new businesses to stakeholders in Orange and its internal VC group);

3.     App Shop, the app store.

So far, we’ve opened 30 APIs in four categories; as an example, you can meet members of AlloSortir near you using SMS and location, or call a taxi using click-to-call, SMS, and location. We want to see major brands like DHL and FedEx using these APIs this year.

We now have 50 million subscribers with access to certified, filtered apps through the Application Shop.

 

Commercialising APIs

Karl Bream, Head, Corporate Strategic Marketing, Alcatel-Lucent introduced some problems from online games. He showed a screenshot of a tool identifying how well the network is performing.  The value of each games player joining a game is assessed according to this so that it is more attractive to play opponents with higher quality connections. More than 200ms latency, and you’ve got trouble – you’ll get shot before you can duck.

There are 90 million online gamers; 14% of our sample was willing to pay for a better service:  one which would guarantee quality of service to support their passion.  If this could be exposed as a product, we could place a value on it of about €5-10 per month. We think there’s an alternative model here, as well; an advertiser could pay to boost the QoS, sponsoring a game or a group of gamers, or putting up a logo saying ”quality boosted by…”

Other possible APIs: ”Share the Moment” (video-sharing), which requires QoS and could earn about €0.15-0.20 per use, ”My Media Vault” (storage in the cloud), which requires content and context and might attract €7-9 a month per user, ”Put Me In Control” (remote-desktop) which requires context, security/privacy. There’s lots of value out there to capture, and somebody will do it.

”Video will break the bank”; the application and content providers do understand that there is a problem. But they need simple developer platforms – and new business models. Revenue sharing is acceptable, but they are concerned about the terms. There is a serious gap in their awareness of operators’ capabilities.

Keith Willetts, Chairman, TM Forum: ”1,000 operators and 30 APIs each – that is no standard. Look at USB – there’s only one of it.”

 

Participant Feedback

Introduction

The final session at the event was essentially a “battle of the APIs”, as well as the commercial models that might be used to exploit them. Over the last two years, various companies and groups from the Telco industry have started moving towards “exposable” open platforms, sometime individually, and sometimes through concerted action by groups of operators. We have seen network platform APIs, device APIs, billing APIs and many others – and these are just the ones controlled by the Telcos themselves, excluding the manufacturers’ and software vendors’ own initiatives. The future will see even more emerge – for example, even femtocells might be “programmable” for new services.

This creates a number of problems. First is the overall noise and confusion from a set of uncoordinated Telco initiatives, perhaps even from multiple parts of the same organisations. Another huge issue comes when one considers that many new applications or services could be developed in a number of different ways. Take the provision of location of a mobile user to an application, as an example. This could be performed in the network (in a variety of ways, such as triangulation or Cell ID), on the device through access to a GPS chip or by mapping against a database of cell-tower locations.

So this session brought together a number of Telco-based “API-mongers” from across the value chain, with the hope of getting either alignment or clear water between them. They included the GSMA, OMTP, TMF and MEF, plus a notional upstream customer, the BBC and a “solo” operator, Orange. 

Feedback: over-the-top vs via the Telco

There remains a healthy measure of indignation and jealousy at Internet players (often vilified as “over the top players”), and how they are pushing their own APIs to developers, often with more success.

·         Do I trust my ISP / mobile provider or an OTT such as Google, Yahoo! and Amazon. [#9]

·         Hmmm…so if I want to reach the whole world via Telco APIs I’m going to need to code in interfaces in my OTT app to support each operator’s flavour. Don’t you think that this will inhibit the creation of truly mass market services? There’s a clear need for standardization here and better collaboration to build interoperability. [#21]

·         I can’t believe that people in this room are still referring to their future customers as ‘OTT Players’ which is as derogatory as calling Telco’s ‘pipe salesmen’, or ‘under the floor players’. Unless you show some respect to these companies, do you really think they will prefer to do business with you, rather than destroy you? [#22]

 Feedback: Orange, closed or open?

Orange’s comparison of its platform with a bank’s were perceived more as walled-garden than open.

·         Orange: I can take my money out of a bank’s safe deposit box and put it somewhere else if I want. Will you

do the same with your customers’ stored data and content? [#12]

o    12, do you know any customer that has asked their Telco for the CDRs when they port their number? Aren’t you making an issue when there isn’t one? [#14]

·         The bank also borrows my money and loans it out to make money/interest. that relationship is based on trust. [#13]

o    Re 13 unlike a bank, a Telco quite often doesn’t control the application which manages the asset, but rather outsources it, so the trust may be diminished if the customer has transparency into who has access to their customer data. [#15]

o    Re 13: And banks are regulated on repaying my money [#24]

 Feedback: telcos vs developers?

There is also scepticism about whether many operators (or industry groups) really understand developers.

·         The Telco can get value from the third party for the location API via a % of the transaction that result. [#7]

o    7, only if the market will pay for this. not always easy to measure the value of a transaction in which location API plays a part – it is not like a product sale! [#10] [Telco 2.0 view – this is very true. If someone uses a location API to find their closest ATM machine, would the operator’s payment really be dependent on how much cash was withdrawn?]

·         Which developer do you target for simple APIs? Enterprise, Telco,’2 AM stoner’? [#23]

·         Developing an application against a REST API is truly trivial. The assumption that developing against a telecom API is super difficult sounds like it’s coming from somebody who hasn’t lived in the Web world in the past three years. [#25]

·         I want to know if any of the people on the stage have actually written a program using a telecom API in the past year. [#26]

Feedback: building an ecosystem

There still remains considerable doubt that the Telcos can achieve all the requirements of developers on their own – and if not, how they might integrate and align their API offering with those elsewhere in the ecosystem.

·         Should the Telco provide vertical apps or provide APIs on which these apps can be built. [#11]

·         There are so many other business applications that work on APIs, not sure why those three from Orange were selected. For instance, why not talk about credit card fraud protection using SMS for validation? [#17]

·         How can one expect to discuss a new ecosystem with many different animals and have only one kind of them (Telco’s) on stage? Where are the Sony, Disney, Time Warner, Philips, CA vendors etc? [#18]

o    RE: 18 you are exactly right. [#19]

o    Re 18, this is true but it is a chicken and egg. Why would they bother turning up if Telco’s can’t show them any value? Advertisers have pitched up at Telco events and found Telco’s don’t offer them anything of value. We have to get our thoughts/ideas aligned to some degree before we go to these potential customers. [#20]

Feedback: handset vs network APIs

The actual business models behind the Telcos’ API exposure are still primitive – and sometimes contradictory, as the lively debate between OMTP (handset browser/widgets) and MEF (sender-pays data) representatives revealed.

·         Needing to understand the business process of commercialising APIs merely replaces the problem at another level: why do people think that operators who have shown a distinct lack of imagination in how to innovate on top of their assets will now innovate in business or commercial models? The problem seems to be the replication of the same lack of imagination and innovation is now being displaced into the need for understanding. [#27]

·         Surely APIs need to be developed as open standards so that anyone can innovate using them, like app development on the Web? This sounds like giving with one hand while taking away with another… [#28]

o    Re 18 and 26, you are on track. We need more outside the ecosystem players like Apple coming in to cross pollinate with our gene pool. My guess is that apple doesn’t attend Telco events because they are worried about damaging their own gene pool with our status quo. Give some kids full artistic license at a reference acct/operator to build their playground. Lock them in a room with caffeine and pizza and a big pipe. Carriers have great toys they would like to build with. Output = Telco 2.0 [#29]

Participants’ “Next Steps” Vote

Participants were asked: Which of the following statements best reflects your views on the API efforts of the Telco industry?

  • Individual operators and cross-industry bodies are getting things about right and current API programmes will yield significant value to the Telco industry in the next 3 – 5 years.
  • Individual operators and cross industry bodies have made a good start with their developer and API programmes but more needs to be done to standardise approaches and to bring commercial thinking to the fore if APIs are going to generate significant value to the Telco industry in the next 3 – 5 years.
  • The current developer and API activity by individual operators and cross industry bodies are totally inadequate and are unlikely to create value in the next 3 – 5 years.


 

Lessons learnt & next steps

APIs are a hot topic in the industry at present and this lively session highlighted three things very clearly:

1.     There is a great deal of work being done on APIs by the operator and vendor community.  There is a real sense of urgency in the Industry to make a set of cross-operator/platform/bearer/device APIs available to developers quickly.

2.     There is a real risk of this API activity being derailed by the emergence of numerous independent “islands” of APIs and developer programmes. It is not uncommon for operators to have 3 or more separate initiatives around “openness” – in the network, on handsets or on home fixed-broadband devices, in the billing system and so on. Various industry bodies have taken prominent roles, usually at the level of setting requirements, rather than developing detailed standards.

Thomas Howe, CEO, Jaduka: ”Standards aren’t something we have to wait for! In the web sphere standards were something we did which worked so well that everyone said ‘that’s the standard’ and started using it. This is what happened with AJAX.”

3.     It is still extremely early days for the commercial model for APIs. This is an area that the Telco 2.0 Initiative is concentrating hard on at present. It is already becoming apparent that a one-size-fits-all solution will be difficult. In line with the previous discussion about piloting Telco 2.0 services, it is important for operators to ensure that API platforms (and the associated revenue mechanisms) can service two distinct classes of user/customer:

  • Broad adoption by thousands/millions of developers via automated web interfaces (similar to signing up for Google Adwords or Amazon’s cloud storage & computing services);
  • Large-scale one-off projects and collaborations, which may require custom or bespoke capabilities (e.g. linked to subscriber data management systems or “semi-closed” / “private” APIs), for example with governments or major media companies.

It seems that certain sets of APIs are quite standalone and perhaps have simpler monetisation models – e.g. location lookups or well-defined authentication tasks. Others, such as granting 3rd-party access to specific “cuts” of subscriber data, may be more difficult to automate.

The fireworks between various panellists also illustrated an important point – there remains considerable tension between those advocating business models which are ‘content’-driven, involving the delivery of packaged entertainment and information to consumers and enterprise customers, versus those which are aimed at facilitating large numbers of new and (mostly) unknown developers who may use the platform to create ‘the next big thing’. Both business models have merit – while there is certainly value in using packaged approaches like “sender-pays data” for well-defined content types, there is also huge potential in becoming the platform of choice for unexpected ‘viral’ web applications that exploit unique Telco assets.

Dean Bubley, Telco 2.0: “I can’t believe that people in this room are still referring to their future customers as ‘OTT Players’ which is as derogatory as calling Telcos ‘pipe salesmen’, or ‘under the floor players’. Unless you show some respect to these companies, do you really think they will prefer to do business with you, rather than destroy you? ‘

In the short term, work needs to continue on developing the API platform, but also on evolving the attitudes and processes within the operator to support successful future business models:

  • Avoid pre-conceptions about the commercial model for APIs. In particular, revenue-shares and flatrate % commissions are extremely difficult to justify, except for the most commoditised capabilities like payment, or large-scale individually-negotiated contracts;
  • Develop thinking around the commercial model for APIs as getting this right will drive the success of existing industry-wide API initiatives – these technical programmes will fail without input from strategists and marketers on the required frameworks;
  • Most operators are undergoing major programmes of transformation – e.g. around outsourcing or IP network deployment. It is critical that these actions are constantly reviewed for fit against API-type initiatives to ensure they ease their creation, and don’t create new bottlenecks or structural silos;
  • Recognise that individual propositions about openness often make sense when viewed in isolation – but need to be seen in a wider strategic context, including all interface points between the operator domain and the Internet/apps world;
  • Non-handset specialists should make an effort to understand the implications of OMTP’s BONDI, as it can support a broad set of innovative applications and business models – and may well also appeal to third party developers;
  • Be aware that many developers will not want to have dozens of separate relationships with individual operators – do not force them to duplicate effort. Instead, work with industry-wide groups to address their core needs;
  • Develop a checklist of open API “hygiene factors” that are critical for developers, such as easy app testing mechanisms, transparency in application approval/signing, clear API pricing and so forth;
  • Consider “eating your own dogfood” and use elements of third-party web services and APIs as part of your own offering, at least in the early stages. In particular, this could reduce time-to-market and enhance flexibility.

Longer term actions should include:

  • Adopt a clear strategy for API “supermarkets” or clearing-houses. Developers will ultimately want to “shop around” for APIs and capabilities – or buy bulk “packages” across multiple operators. Individual telcos will need to decide how their relationships with such API wholesale providers will evolve – or if they want to take that role for themselves;
  • At present, it is highly unclear about how APIs will be marketed and sold. Most potential customers are not even aware that operators have something to offer them – would a software developer for utility meter-reading even consider how Telcos could add value, for example? Today’s developer programmes are insufficient, as they only tend to reach existing telco-minded companies. There will need to be much broader outreach and evangelism, perhaps piggy-backing on the developer programmes of larger IT firms like Microsoft or Oracle;
  • Consider the issue of openness when applied to other (possibly competing) Telcos. What happens when another operator becomes one of your developers? Or when you choose to exploit your peers’ capabilities?
  • Adopting a “semi-open” policy such as Apple’s with its uncertainties over application acceptance, is high risk. It potentially mitigates the risk of “damaging” or “cannibal” apps, but also risks alienating well-intentioned developers. Think very carefully about whether you have the same “pull” as Apple (especially its monopoly on its own platform) before employing a similar strategy – being seen as a “benevolent dictator” is not common amongst Telcos;
  • To service the “mass-market” API segment it will be absolutely crucial to provide an easy interface and simplified payment options. A newcomer can sign up for Google Adwords, or some of Amazon’s Web Services APIs, in minutes – Telcos need to offer the same capability.