IoT security: The foundation for growth beyond connectivity

Introduction

The European Union Agency for Cybersecurity (ENISA) defines the IoT as “a cyber-physical ecosystem of interconnected sensors and actuators, which enable intelligent decision making.” In this ecosystem, the information or data flows among the various components of the IoT enable informed decision making for machines, objects, and the spaces in which they operate. Through this web of tightly interconnected cyber-physical systems, the IoT underpins a variety of applications such as smart cities, smart factories, smart agriculture and so forth.

While these applications touch all the areas of our living and working activities, bringing enormous benefits and possibilities, they also exacerbate system complexities and, in turn, significantly enlarge the domain of threats and risks. As a result, securing the IoT is a very complex task, involving the implementation of highly specialised security measures. In market terms, this complexity translates into rich ecosystems of skills and expertise, where there is not one player in charge of securing the IoT, but it is both a responsibility and an opportunity for all players in the value chain.

Thinking about IoT security, the fundamental objective is ensuring the trust between the provider of an IoT solution and the IoT solution adopter. Microsoft IoT Signals, a well-known survey of 3,000 organisations adopting the IoT, emphasizes this in its 2021 edition, where 91% of the organisations surveyed have security concerns about adopting the IoT. 29% of those organisations do not scale their IoT solution due to security concerns. These concerns hamper the benefits enterprises can gain from IoT solutions. For instance, in the same survey, more than 55% of organisations said they were becoming more efficient adopting the IoT, and 23% claimed that their IoT solution has a direct impact on revenue growth. These benefits come from the variety and volume of data gathered through the IoT to drive better informed operational decisions. The result is that IoT data becomes a fundamental and necessary asset that must be protected.

While managing security risks in IoT is often perceived as a necessary burden, this report will instead highlight securing the IoT as an opportunity. For telecoms operators, this opportunity may not always be directly evident in new revenues, but it is fundamental to the creation of trust between provider and the adopter of IoT services. That trust, built through IoT security services, provides a stronger foundation from which to develop new revenue-generating services beyond connectivity.

This report also argues that by building more comprehensive data insights services into their existing IoT platforms mobile network operators are in a strong position to bring that trust to enterprises. As operators expand their security offers from well-known security functions provided at connectivity level – almost embedded in an operator – to more sophisticated security services across the IoT architecture, they can position themselves as a partner and guide to enterprises as they likewise become more sophisticated in their security needs.

The report is structured in three main parts:

  1. Discussion of the key vulnerabilities in the IoT and responses to those defined by regulators and security bodies such as ENISA, NIST, IoT Security Foundation and others.
  2. Analysis of the roles mobile network operators are playing in the IoTsecurity services market.
  3. Analysis of the opportunities for mobile network operators in security services for the IoT.

The research is based on the author’s extensive experience in IoT security, and enriched by interviews with IoT security experts close to the world of mobile network operators. Finally, an understanding of the most authoritative guidelines and analysis (ENISA, NIST, IoTSF, GSMA, OWASP) on IoT security supports the research.

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Why IoT security is rising up the agenda

In the fervent debates on the development of the IoT, the security aspect is often hidden or avoided. This stems from a common view among IoT solution companies and end-users that security is a heavy point of discussion that hampers business enthusiasm. This perspective is both unhelpful and dangerous, actively hindering greater scale and trust in the IoT. We strongly believe the argument should be flipped around. Although IoT security is a fundamental risk for the development of the IoT, it is also the means through which to develop robust, reliable, and lucrative IoT solutions. Therefore, IoT security should become a priority in IoT strategy and project development.

There are three considerations that are driving a fundamental shift in perceptions of security from a barrier to an enabler of IoT solutions, both among providers and adopters:

  1. Rising frequency and prevalence of avoidable large scale IoT security breaches.  There are plenty of examples of hacking of connected devices and large IoT systems that have dramatically compromised IoT solutions’ functioning, the business case linked to them, and relationships with customers. Recent examples include:
    • In May 2021, Colonial Pipe suffered a ransomware attack that impacted the computerised equipment monitoring the entire pipeline system from Texas to New Jersey, carrying 2.5 million barrel of oil a day. The entire system, based on a vast IoT solution of several sensors along the pipeline, was blocked. To re-boot the system, Colonial Pipeline paid 75 Bitcoin (the equivalent of $4.4 million at the time). (The solution to this type of breach is implementation of a remediation strategy.)
    • Consumer IoT devices are no less attractive than big corporations to hackers. In June 2021, the McAfee Advanced Threat Research identified a potential security vulnerability in the Peleton Bike+: “The ATR team recently disclosed a vulnerability (CVE-2021-3387) in the Peloton Bike+, which would allow a hacker with either physical access to the Bike+ or access during any point in the supply chain (from construction to delivery), to gain remote root access to the Peloton’s tablet. The hacker could install malicious software, intercept traffic and user’s personal data, and even gain control of the Bike’s camera and microphone over the internet.” The Peleton Bike+ vulnerability almost become a matter of national security in the US, considering that President Jo Biden is, apparently, a Peleton Bike+ user. (The security solution to this type of breach is software and system updates.)

2. Regulatory bodies are responding to the increasing incidence of IoT attacks with guidelines and regulations. Realising the danger of connected devices and systems developed with inappropriate security features, regulators worldwide are issuing specific procedures and policies in IoT security. In some cases these are mandatory and in other cases function as guidance and support.

    • Australia has created a voluntary code of practice, Securing the Internet of Things for Consumers, focussing on issues of authorisation, authentication, and access of IoTdata in consumer devices.
    • Singapore has issued the IoT Cyber Security Guide to support enterprises to develop secure IoT systems. Enterprises should also comply to IoT-related standards in sensors, sensor networks, and devices.
    • The United Kingdom has focussed on security around IoT devices with the first Code of Practice for Consumer IoT Security published in 2018.
    • The European Union is focussing on the development of an “IoT Trust” label for IoT consumer devices.
    • The United States launched legislation in 2020 – IoT Cybersecurity Improvements Act – which, through a combination of subsidies and project grants, incentivises companies that build and sell IoT solutions to develop them with a security-by-design

These initiatives are all specifically designed around IoT devices and systems. However, it is important to highlight that the relevant legal framework is wider. For example, in the European Union, the three key regulations applying to the sale and use of IoT devices and ecosystems are CE Marking (health and safety of products sold in the EU), GDPR, and the Network and Information Security Directive (NIS Directive). It is well known, but important to stress it, that violation of GDPR – data breaches and misuses of data – can cost up to EUR20 million. A similar legal framework exists in the United States, in which there are three Acts relevant for IoT devices: Federal Trade Commission Act (FTC Act), the Cyber Security Information Sharing Act (CISA), and the Children’s Online Privacy Protection Act (COPPA). Those who violate America’s Federal Trade Commission Act could face fines of $41,484 per violation, per day.

It is also worth noting that many of these regulations focus on the consumer IoT because it has been the weakest in terms of attention to security features, there is a direct link to data privacy (i.e. by hacking into IoT devices malicious actors can gain access to other digital profile data), and most consumers do not have the skill or resources to protect themselves.

3. The increasing business and economic impact of IoT data. Organisations of all kinds are increasingly relying on data for their strategy development, optimisation of processes, increasing engagement with customers and innovating their business models. The data needed for all these activities is increasingly machine generated by an IoT solution. To illustrate this value, there have been several studies on understanding the economic impact of IoT data. For example, in April 2019, GSMA Intelligence estimated that the economic impact of IoT on business productivity was in the order of $175bn, 0.2% of the global GDP. GSMA Intelligence also forecasted that by 2025 the economic impact would increase to $371bn, 0.34% of the global GDP, with IoT companies generating almost a trillion dollar in revenues. Ultimately, if a competitor or malicious actors gets hold of an organisation’s data, then they have accessed one of its most important assets. Therefore, as organisations become ever more data-driven in their strategic decision making, the importance of securing the systems gathering and storing that data will rise.

Defining IoT Security

The US NIST (National Institute for Standards and Technology) defines cyber-risk as “a function of the probability of a given threat source’s exercising any potential vulnerability and the resulting impact of that adverse event on the organisation.” The IoT security risk is one of many cyber-risks to any organisation and refers to the unforeseen exploitation of IoT system vulnerabilities to gain access to assets with the intent to cause harm.

A major challenge in assessing the IoT system vulnerabilities and threats comes from the technological complexity of an IoT solution and the diversity of applications and environments the IoT solution serves. Therefore, IoT security can be assessed in two levels. The first level regards the IoT architectural stack, which is common to different domains and applications. The second level is solution-specific and requires specialised services depending on the domain of applications.

The starting point of the analysis is a model of IoT architecture, illustrated in a simplified format in the diagram below.

Simplified IoT  architecture

Simplified-IoT-architecture-STL-Partners

Source: STL Partners

 

Table of contents

  • Executive Summary
    • Security can enable MNOs to build beyond connectivity in IoT
    • Next steps: Building on security in the Coordination Age
  • Introduction
    • Why IoT security is rising up the agenda
  • Defining IoT security
    • Key IoT vulnerabilities
    • Enterprises’ view on securing IoT
    • How to meet enterprise needs: Delivering security across three dimensions
  • Mobile operators’ roles in IoT security
    • Telco strategy comparison: IoT security offers vs dedicated business units
    • Assessing operators’ security services by function
    • Takeaways
  • Future growth trends for operators to capitalise on
    • eSIM and integrated eSIM (iSIM) capabilities
    • 5G private network security services
    • Managing encryption requirements
    • Blockchain in telecommunications
    • Secure communication through quantum information and communication technology

Related research

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Are telcos smart enough to make money work?

Telco consumer financial services propositions

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

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

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

Financial Services in the Telecoms sweet spot

financial services

Source STL Partners

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

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

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

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

Table of contents

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

This report builds on earlier STL Partners research, including:

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DataSpark: Lessons on building a new telco (data) business

Data analytics as a new business

This case study looks at DataSpark, an autonomous business unit of Singtel (www.dsanalytics.com) and evaluates the benefits of creating a separate organisational structure within a telco to provide technology and support for the development of analytics, AI and automation as a new business. It is created after conversations with Shaowei Ying, Chief Operating Officer of DataSpark. The company’s activities include both the creation of internal capabilities and data monetisation capabilities for external customers.

DataSpark was formed in 2014 at a time when not many telcos were actively exploring new data business opportunities. The unit consisted of a small group of data professionals with skills around, particularly, location data. Singtel’s CEO was a strong supporter of leveraging telco data to establish competitive differentiation and therefore tasked them with looking at various location-related external monetisation opportunities. It was considered natural to create internal use cases for the data to defray the cost of the data preparation. In particular, the same mobility intelligence was of use to radio network planners optimising their network roll out using not just congestion, but now subscribers’ mobility patterns, too.

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DataSpark’s progress to date

Telcos’ external monetisation units, such as DataSpark, are not yet large enough to split out the revenues in their reports and accounts. However, in the 2018 and 2019 Management Discussion and Analysis DataSpark’s progress was reported to include:

  • Activity to bring mobility data to sectors such as transport and out-of-home media in Singapore and Australia
  • Partnership in out-of-home advertising with large players taking a data-as-a-service solution to optimise their assets
  • Provision of insights including first party enterprise data in the consumer goods sector to deliver new use cases in advertising and retail store inventory optimisation
  • Recent support for governments in predicting spread of Covid-19, including understanding the socio-economic impact of the virus.

Service example: COVID-19 insight for the Australian local government

COVID-19 data analytics innovation

Source: DataSpark

Table of Contents

  • Executive Summary
    • Two diverging strategies for a small, independent data unit
    • Scaling up the data business as an integrated unit
  • Introduction
    • DataSpark’s progress to date
  • DataSpark’s approach to building a data unit
    • What services does it offer?
    • Go-to-market: Different approaches for internal and external customers
    • Organisational structure: Where should a data unit go?
  • How to scale a data business?
    • The immediate growth opportunities
    • Following in others’ footsteps
    • Building new capabilities for external monetisation
  • Assessing future strategies for DataSpark
    • Scenario 1: Double down on internal data applications
    • Scenario 2: Continue building an independent business

 

Read more about STL Partners’ AI & automation research at stlpartners.com/ai-analytics-research/

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Fighting the fakes: How telcos can help

Internet platforms need a frictionless solution to fight the fakes

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

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

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

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

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

In come telcos

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

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

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Using big data to combat fraud

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

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

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

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

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

Adapting telco authentication for Amazon, Uber and Airbnb

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

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

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

Table of contents

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

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Coordinating the care of the elderly

Are telcos ready to enable digital health?

The world has been talking about connected healthcare – the use of in-home and wearable systems to monitor people’s condition – for a long time. Although adoption to date has been piecemeal and limited, the rapid rise in the number of elderly people is fuelling demand for in-home and wearable monitoring systems. The rapid spread of the Covid-19 virus is putting the world’s healthcare systems under huge strain, further underlining the need to reform the way in which many medical conditions are diagnosed and treated.

This report explores whether telcos now have the appetite and the tools they need to serve this very challenging, but potentially rewarding market. With the advent of the Coordination Age (see STL Partners report: Telco 2030: New purpose, strategy and business models for the Coordination Age), telcos could play a pivotal role in enabling the world’s healthcare systems to become more sustainable and effective.

This report considers demographic trends, the forces changing healthcare and the case for greater use of digital technologies to monitor chronic conditions and elderly people. It explores various implementation options and some of the healthcare-related activities of Tele2, Vodafone, Telefónica and AT&T, before drawing conclusions and recommending some high-level actions for telcos looking to support healthcare for the elderly.

This executive briefing builds on previous STL Partners reports including:

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Why healthcare needs to change

During the twentieth century, life expectancy in most countries in the world rose dramatically.  This was down to advances in medical science and diagnostic technology, as well as rising awareness about personal and environmental hygiene, health, nutrition, and education. Average global life expectancy continues to rise, increasing from 65.3 years in 1990 to 71.5 years in 2013.  In some countries, the increase in lifespans has been dramatic. The life expectancy for a Chilean female has risen to 82 years today from 33 years in 1910, according to the World Health Organization (WHO).

Figure 1: Across the world, average life expectancy is rising towards 80

raising lift expectancy to 2050

Source: The UN

Clearly, the increase in the average lifespan is a good thing. But longer life expectancy, together with falling birth rates, means the population overall is aging rapidly, posing a major challenge for the world’s healthcare systems. According to the WHO, the proportion of the world’s population over 60 years old will double from about 11% to 22% between 2000 and 2050, equivalent to a rise in the absolute number of people over 60 from 605 million to an extraordinary two billion. Between 2012 and 2050, the number of people over 80 will almost quadruple to 395 million, according to the WHO. That represents a huge increase in the number of elderly people, many of whom will require frequent care and medical attention. For both policymakers and the healthcare industry, this demographic time bomb represents a huge challenge.

Rising demand for continuous healthcare

Of particular concern is the number of people that need continuous healthcare. About 15% of the world’s population suffers from various disabilities, with between 110 million and 190 million adults having significant functional difficulties, according to the WHO. With limited mobility and independence, it can be hard for these people to get the healthcare they need.

As the population ages, this number will rise and rise. For example, the number of Americans living with Alzheimer’s disease, which results in memory loss and other symptoms of dementia, is set to rise to 16 million by 2050 from five million today, according to the Alzheimer’s Association.

The growth in the number of older people, combined with an increase in sedentary lifestyles and diets high in sugars and fats, also means many more people are now living with heart disease, obesity, diabetes and asthma. Furthermore, poor air quality in many industrial and big cities is giving rise to cancer, cardiovascular and respiratory diseases such as asthma, and lung diseases. Around 235 million people are currently suffering from asthma and about 383,000 people died from asthma in 2015, according to the WHO.

Half of all American adults have at least one chronic condition with one in three adults suffering from multiple chronic conditions, according to the National Institutes of Health (NIH). Most other rich countries are experiencing similar trends, while middle-income countries are heading in the same direction. In cases where a patient requires medical interventions, they may have to travel to a hospital and occupy a bed, at great expense. With the growing prevalence of chronic conditions, a rising proportion of GDP is being devoted to healthcare. Only low-income countries are bucking this trend (see Figure 2).

Figure 2: Spending on healthcare is rising except in low income countries

Public health as % of government spending WHO

Public health spending as % of GDP WHO

Source: The WHO

However, there is a huge difference in absolute spending levels between high-income countries and the rest of the world (see Figure 3). High-income countries, such as the U.S., spend almost ten times as much per capita as upper middle-income countries, such as Brazil. At first glance, this suggests the potential healthcare market for telcos is going to be much bigger in Europe, North America and developed Asia, than for telcos in Latin America, developing Asia and sub-Saharan Africa. Yet these emerging economies could leapfrog their developed counterparts to adopt connected self-managed healthcare systems, as the only affordable alternative.

Figure 3: Absolute health spending in high income countries is far ahead of the rest

per capita health spending by country income levelSource: The WHO

The cost associated with healthcare services continues to rise due to the increasing prices of prescription drugs, diagnostic tools and in-clinic care. According to the U.S. Centers for Disease Control and Prevention, 90% of the nation’s US$3.3 trillion annual healthcare expenditure is spent on individuals with chronic and mental health conditions.

On top of that figure, the management of chronic conditions consumes an enormous amount of informal resources. As formal paid care services are expensive, many older people rely on the support of family, friends or volunteers calling at their homes to check on them and help them with tasks, such as laundry and shopping. In short, the societal cost of managing chronic conditions is enormous.

The particular needs of the elderly

Despite the time and money being spent on healthcare, people with chronic and age-related conditions can be vulnerable. While most elderly people want to live in their own home, there are significant risks attached to this decision, particularly if they live alone. The biggest danger is a fall, which can lead to fractures and, sometimes, lethal medical complications. In the U.S., more than one in four older people fall each year due to illness or loss of balance, according to the U.S. Centers for Disease Control and Prevention. But less than half tell their doctor. One out of five falls causes a serious injury, such as broken bones or a head injury. In 2015, the total medical costs for falls was more than US$50 billion in the U.S. Beyond falls, another key risk is that older people neglect their own health. A 2016 survey of 1,000 U.K. consumers by IT solutions company Plextek, found that 42% of 35- to 44-year-olds are concerned that their relatives aren’t telling them they feel ill.

Such concerns are driving demand for in-home and wearable systems that can monitor people in real-time and then relay real-time location and mobility information to relatives or carers. If they are perceived to be reliable and comprehensive, such systems can provide peace of mind, making home-based care a more palatable alternative for both patients and their families.

Table of contents

  • Executive Summary
    • Barriers to more in-home healthcare
  • Introduction
  • Why healthcare needs to change
    • Rising demand for continuous healthcare
    • The particular needs of the elderly
    • Shift to value-based care
    • Demands for personalised healthcare and convenience
  • How healthcare is changing
    • Barriers to more in-home healthcare
  • Implementation options
    • Working with wearables
    • Cameras and motion sensors
    • The connectivity
    • Analysing the data
  • How telcos are tackling healthcare
    • KPN: Covering most of the bases
    • Tele2 and Cuviva: Working through healthcare centres
    • Vodafone and Vision: An expensive system for Alzheimer’s
    • Telefónica’s Health Moonshot
    • AT&T: Leveraging a long-standing brand
  • Conclusions and recommendations
    • Recommendations

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Repremiumization: The dangerous self-deception at work in European Telcos

What is ‘Repremiumization’?

Promoted as a viable strategy recently at STL Partners’ Senior Executive Strategy Seminar in London…

Last week STL Partners held an event for senior strategists, marketers, and digital unit leaders across Europe.  The event was attended by 24 executives from 13 operators and 5 executives from Cisco, Intel and CSG International.  All except a handful of people held senior positions within the European telecoms industry – they were not junior staff but instrumental in shaping the thinking at some of the leading European operators.

The event covered several strategic issues facing the European and, in many cases, wider global telecoms industry including:

  1. What will the structure of the European market look like in 2020?  STL Partners presented four scenarios and asked attendees to vote on the most likely scenario as well as facilitating discussions.  The scenarios will be presented in a report published this month (June 2015), Reading the Crystal Ball: The European Telecoms market in 2020.
  2. Where and how should operators build value in the digital ecosystem?  STL Partners presented the case for four strategic options for operators to compete (we will cover these in a forthcoming report in July 2015, Four strategic pathways to Telco 2.0:
    • Piper:  An infrastructure-led, network-oriented strategy focused on moving bits and bytes efficiently and effectively while leaving service development and delivery to other players.  Accept that Telco 2.0 equates to speedy and smart data pipes and focus on cost leadership now.
    • Content: Couple infrastructure capabilities with content distribution (especially video).  Explore options that range from sophisticated content delivery networks all the way to content creation either via commissioning (Netflix model) or exclusive rights.
    • Enterprise:  Accept that differentiation in the consumer segment is impossible but that operators have the skills and relationships to build an expanded role in the large and growing Enterprise ICT market.
    • Authentication: Building digital services has proved challenging for operators but authentication potentially presents a real opportunity to establish a new digital ‘control point’ for operators from which a viable services strategy –for B2B2C enablers and end-user services – can be established.
  3. Winning approaches to building scaled telecoms digital initiatives.  Operators from Europe and beyond presented case studies on their digital activities – focusing on what had worked well and what less well – and attendees discussed the merits and demerits of different approaches.

It was in the second session on how to build value in future that the notion of ‘repremiumization’ was articulated (although nobody used this term). In essence, participants from at least two Tier 1 telcos felt that STL Partners’ description of the Piper strategy as one of competing hard in a commodity market – a market characterised by lack of differentiation in services – was wrong and that in future they would be able to ‘reframe the value of the network in the minds of consumers’ by differentiating against other players based on network quality. This differentiation would enable them to attract premium prices and grow ARPUs. The well-trodden path of ‘network APIs’ were cited as a key way of driving additional volumes (and revenue) through a premium-quality network.

Indeed, attendees were so insistent that this ‘repremiumization’ strategy was viable that when STL Partners asked attendees to vote on the four strategic options (2.1-2.4 above), they asked for it to be added as a fifth option which we have termed ‘Premium Piper’ in Figure 1 below. The chart reflecting the votes of attendees, below, is interesting for a number of reasons:

  • Nearly two-thirds of attendees felt that a ‘Pipe’ strategy of some sort was the best for European operators.  In other words, competing in the services layer was regarded as extremely challenging by many.   This, one suspects, is due to the challenges European operators have had in launching digital services having pursued the strategy late (from 2009 onwards after the market for core voice, messaging and data services had already peaked) and, in most cases, in a half-hearted fashion.
  • Exactly half of those that selected a ‘Pipe’ strategy felt that STL Partners’ Piper was the better approach and the focus should be building great pipes while striving for cost leadership.  The other half felt that a ‘Premium Piper’ strategy was more attractive and that differentiation could be achieve on a sustainable basis through network quality.
  • Those that did support a Europe-wide digital services (non-Piper) strategy were quite evenly split between Content, Enterprise and Authentication (with one person selecting ‘Other’) suggesting that a single non-Piper strategy for the whole European telecoms market is not obvious. (NB We presented the Service Options as single choices rather than ‘do all’ in order to crystallise the debate at the event.)

Figure 1: Where should the European telecoms industry place its bets for future success?

Source: STL Partners Senior Executive Strategy Seminar, June 11th 2015, n=28

…and put forward by a leading strategy house

The notion of a superior network resulting in superior revenues and returns is one that has, for example, been put forward in a paper by Bain and Company’s European office – the argument is set out here and can be summarised thus:

  1. Operators have chosen to compete on price and have thus ‘trained’ consumers to make price the main criteria for choosing an operator.
  2. As prices have fallen, consumers have started to think of operators as mere providers of connectivity and networks as a commodity.
  3. The focus on price has led to lower returns on investment in Europe and, consequently, less network investment.
  4. Fortunately, there are markets (including the US) where customers pay a premium for great connectivity because they appreciate how important the network is to their digital lifestyle.
  5. Therefore, operators must educate customers about how important their networks are and invest in them to realise a price premium as illustrated by this chart:

Figure 2: ARPU levels of 7 customer segments with and without better network services and digital ‘life experience’ offers

Source: http://www.bain.com/publications/articles/repremiumization-the-way-up-for-europes-telcos.aspx

  1. NFV and SDN will be key drivers of premium networks by enabling operators to, for example, dynamically increase speed or bandwidth.
  2. Unlike the past when tier 2 competitors have easily been able to copy market leaders network improvements and so have commoditised the network, market leaders can now use their scale and marketing skills to establish a ‘perceptual shift’ in consumers.
  3. There must be cross-functional developments at operators to deliver on the new ‘premium product’ market promise.

Why is repremiumization 100% hogwash?

STL Partners is convinced that repremiumization is wrong.

Let’s explain why.

The repremiumization argument simply does not stand up to scrutiny

Here is our challenge to the 8 point argument outlined above for repremiumization.

  1. Operators have not chosen to compete on price.  In fact, they have spent significant efforts trying to build and market differentiated brands and services.  Going all the way back to 2002, mobile operators were building digital lifestyle offerings under brands such as Vizzavi, Vodafone Live!, Orange Dot, Genie, and so forth.  Attempts to build differentiated services and brands that would enable them to attract more customers and/or achieve premium prices has been the main focus of marketing departments at every operator in Europe since they started out.
  2. The attempts to differentiate have largely failed despite operators’ best efforts.  The fact that operators are seen as ‘merely providing connectivity’ is  illustrative of this failure and they have been forced, rather than chosen, to compete on price – falling prices are a product of a failed differentiation strategy that…
  3. …has indeed resulted in gradually lower returns on investment as ‘excess profits’ have been competed away – something that happens in most markets and particularly in ones where there is healthy competition and differentiation is difficult to achieve – think commodities, utilities…
  4. There are several reasons why customers pay premium for services in some markets.  These include:
    • Market structure: a consolidated market with a high Herfindahl Index (an economists’ measure of market competitiveness) will tend to have higher prices than fragmented markets with a low Herfindahl Index as one or two large operators are able to exert pricing power.
    • Higher growth markets tend to have higher prices because operators do not need to compete so hard to grow.  Winning customers is easier as new customers take the product for the first time.  Conversely, saturated markets tend to display greater price pressure as operators are forced to drop prices to retain or win customers.
    • Regulation.  In some markets the regulator creates a benign environment for operators by, for example, blocking VOIP which reduces the degree of substitution for traditional telephony.  Markets like this again tend to ‘enjoy’ premium pricing.The US market, cited by Bain, has enjoyed all three benefits compared with Europe. It has 4 mobile operators serving 300m subscribers (with two very large players in AT&T and Verizon and two much smaller ones in T-Mobile and Sprint) compared with 50+ in Europe serving a similar number of customers in total and with most individual European markets having more balanced and, therefore, competitive market shares. Mobile took off later in the US than Europe so the market has continued to grow over recent years while Europe has stalled. The FCC has, until recently, been relatively benign towards telcos despite the hoo-ha over the last 10 years’ around ‘network neutrality’. The European regulator has, by contrast, been pretty harsh on telecoms operators and, among several measures, mandated fixed and mobile price decreases and effectively abolished voice and data roaming charges.What is interesting now is that prices in the US are in freefall. The US price premium is rapidly on its way out. The reason for this is more aggressive behaviour from T-Mobile and Sprint combined with lack of underlying market growth (the market has peaked) and a less supportive regulator. Repremiumization has been tried by Verizon and by AT&T but it simply will not work if competitors charge significantly less for a satisfactory data service.
  5. The Bain chart does indeed suggest that price premium is possible in telecoms but this is for services not for bandwidth, prioritisation, and other network capabilities.  ‘Better network offers’ suggest a negligible ARPU uplift so it would be a much better in point 6 to argue that…
  6. …NFV and SDN will enable operators to cut operating expenses and capex and, potentially, speed up the delivery of new services.  Yes, dynamically adapting the network to support services may enable service differentiation for some segments but the value will be associated with the service itself not the network delivering it so the ability for operators to differentiate solely via the characteristics of the network will be minimal.
  7. Challengers cannot beat market leaders in terms of perceptions of quality? Huh?  Are you serious?  Why?  What is different now?  Tier 1 operators have always enjoyed scale and marketing spend advantages.  If they have failed to differentiate their networks and brands in the past, then a ‘repremiumization’ marketing message won’t make the slightest difference.
  8. We agree(!) that operators need cross-functional developments at operators to deliver new propositions and transform the core of their businesses.

Better networks are a source of advantage for operators by enabling cost leadership

3UK’s value-for-money strategy…

STL Partners does believe that operators with a network advantage do enjoy a competitive advantage.  3 in the UK illustrates this point nicely. It has gone from being a joke among consumers between 2003 and around 2010 owing to poor handsets and network quality, to being the network of choice for, as Bain’s survey puts it, the ‘Digitally Powered’. Indeed it heavily markets its network based on its quality:

‘Big-boned’ ‘Designed for the Internet’  ‘More capacity than any other’

 

The message is that the 3 network is bigger, faster and better than rivals.  So is this an example of differentiation and price premium based on network quality?

No.

3UK’s network, being younger than its peers, is more efficient – the company has a 3G and 4G network only and is not hamstrung by the expensive and complex patchwork of 2G networks that Vodafone, O2 and EE (T-Mobile and Orange) have to manage.  This cost advantage has been further increased by an outsourcing strategy that has been in force for at least a decade – 3 was the first UK operator to outsource its network as well as most product development and management functions.

An efficient network has enabled 3UK to focus on offering better value than its peers to consumers. Its strategy of connecting over 90% of its base stations with fibre backhaul rather than microwave and its dubious ‘advantage ‘of having lots of spectrum for each subscriber compared with other players (owing to its historical low market share) also means that it is not capacity-constrained. Because it is has a lower cost base and lots of excess capacity, it can offer more data and speed for the same price as peers and still make more money than them.

This is not differentiation based on network capabilities – APIs, dynamically delivered bandwidth, etc. but simply a cost advantage that means that 3UK can deliver data more efficiently than others enabling it to offer better value to consumers and so pull away from its peers in terms of volume and margin growth (see Figure 3). It is interesting to note that 3UK is, like the cost-leader Free in France and Play in Poland, a late entrant not a big Tier 1 incumbent at all – quite the reverse of the argument put forward in Bain’s paper.

Figure 3: 3UK winning market share and growing margins against the three bigger players

Source: Company accounts, STL Partners/Telco 2.0 analysis

..does not equate to repremiumization…

Readers may be thinking that if 3UK is able to offer a better data service, then surely it could, if it chose to, price this at a premium and so lift ARPU and margins that way – surely network-based differentiation is alive and kicking?

No, STL Partners thinks that higher access and data prices for 3UK would be highly unlikely on a sustainable basis for two reasons:

  1. Cost leadership does not equate to price leadership.  In a price sensitive (commoditised) market like telecoms, having a lower cost base may enable you provide a marginally better product or service than competitors but this does not necessarily enable you to price it higher (see Lessons from the steel industry: Network quality is unlikely to provide sustainable differentiation below).  3UK may be able to offer more data to a subscriber than competitors (and so achieve a higher ARPU) but it will struggle to convert, for example, lower latency into a higher price.
  2. Cost advantages are likely to be competed away.  The other operators in the UK will be competing hard to lower their cost base to ensure that 3UK does not continue to enjoy an advantage.  EE (itself a result of the need for lower costs by T-Mobile UK and Orange UK), for example, has agreed a deal to be acquired by BT (subject to regulatory approval) which will dramatically lower its backhaul costs. O2 looks likely to be snapped up by 3UK itself – the resulting entity is likely to have a cost base, at least for a few years, that is somewhere between the two companies’.  These two moves alone may wipe out 3UK’s cost advantage and so jeopardise the value-for-money strategy.  That is before we consider the financial impact on Vodafone UK’s recent £1billion investment in its network and potential partner/merger/acquisition of Liberty Global (owner of Virgin Media UK) or Sky.

…and will not yield ever-increasing ARPU

If 3UK is unlikely to achieve sustainably higher prices than competitors, surely rising demand from video and other consumer services and the Internet of Things will ensure that ARPU will continue rising at 3UK as it delivers higher tonnages to customers?

No, again, for two reasons:

  1. As mentioned above, other operators will both increase their network capacity and lower their cost bases so that they too can supply data at a lower price – in other words subscribers will continue to pay the same amount for more (as they have always tended to do).  More data supplied will not translate into more revenue.
  2. Data usage growth will slow.  Just as voice minutes across fixed and mobile peaked (and then declined owing to substitution of other services), so data growth will reduce.  Networks may be able to simultaneously supply the Smart Home with 7 different HD films, 8 different HD online games, 9 different news and information reports as well as carry the data from hundreds of home and personal sensors through virtualised network functions but humans only have one brain and can only cope with so much data.  Greater speeds and bigger tonnages will suffer from diminishing marginal returns because human evolution won’t keep up with technology.  And many of the machines that will be communicating with each other and carrying sensor information will not need huge quantities bandwidth and other network capabilities on a real-time basis – the demands on the network will stabilise compared with the massive growth we are currently experiencing just as the demand for steel girders, for example, has flattened.

Lessons from the steel industry: Network quality is unlikely to provide sustainable differentiation

High-cost US (and European) steel producers challenged by cheap foreign imports

The US (and European) steel industry suffered major disruption during the 1970s and 1980s as large quantities of steel started to be produced by economies with lower labour costs such as China, India and Korea.  The major US steel producers – US Steel, National Steel and Bethlehem Steel – were massive companies which, in their heyday had each employed 100,000 people or more.  They operated integrated steel mills.  That is they mined the raw iron ore from their quarries, smelted it in a blast furnace and then refined the pig iron to produce steel which was cast into different products.  The rationale for integration was that costs could be minimised by ensuring that low-value iron ore did not have to be transported long distances to the plant (which was built next to the quarry).  However, even though they introduced efficiencies, they still employed large quantities of expensive labour during the process which pushed up their production costs relative to that in the emerging economies.

A low-cost start-up with a new business model

In the mid-1960s, Nucor, a medium-sized company with an extremely chequered history up to that point, purchased a steel joist manufacturer called Vulcraft.  Unable to get favourable prices from American companies and concerned about the quality of imported steel, Nucor integrated backwards into steel production.  Iverson, the Nucor CEO, established a new form of steel production in smaller plants, mini-mills, which melted scrap metal down to produce steel.  These modern plants, which were located closer to destination markets to minimise shipping costs of the finished product were far more efficient than the old integrated mills.  They used a fraction of the labour, producing a tonne of steel in around 45 minutes of labour time versus 3 hours at the integrated mills.   This difference meant that by the mid-1980s Nucor could produce steel around 25% cheaper than the integrated mills.  This, in turn, meant that not only could it beat its domestic rivals, but that it could also compete with competitors based in the cheap labour markets.

Quality (Repremiumization) does not result in higher prices

The companies with integrated steel mills were slow to react to the foreign threat and that of Nucor.  Why?  Because they believed in a form of ‘Repremiumization’ – that the quality of their steel was higher than Nucor’s and foreign competitors.  Your author was an equity analyst in the 1990s for JP Morgan covering steel stocks and consistently heard the message from senior managers at US (and European steel operators such as British Steel, Usinor Sacilor and others) that their steel had higher tensile strength and was much higher quality than the cheap imports and steel produced by mini-mills.  So, although they chipped away at costs they did not fundamentally re-engineer their businesses to match the cost base of the overseas players.  The problem, of course, was that the steel provided by the foreign companies (and Nucor) was ‘good enough’ – it met the specifications required for the vast majority of applications.  One customer put it like this when talking about the higher cost players, “They go on about the quality of their steel but it’s still carbon steel, it still rusts, so why should I pay so much more for so-called quality I don’t need?”

Low-cost wins

Today Bethlehem Steel and National Steel have gone (bankrupted in both cases) and US Steel, the biggest of the three, is grimly hanging on but producing less steel now than it did in 1900.  Nucor, meanwhile, has grown to become a Fortune 300 company (see below).  And as for the cheap foreign players?   They have also thrived and Tata Steel and Mittal Steel together now own most of the European steel giants.  The lesson here is clear: telcos cannot rely network quality alone as a means of differentiation, premium pricing and growth.

Figure 4: The importance of cost reduction in disrupted industries – The US Steel Industry

Source: Strategic Management: Competitiveness and Globalization, 4th edition, Hitt, M.A., Ireland, R.D., & Hoskisson, R.E; STL Partners/Telco 2.0 analysis

Conclusions

At best ‘repremiumization’ is misguided; at worst it is pandering to the hopes of some operators that they can somehow return to the ‘good old days’ of high margins and high market shares. Even the name suggests a return to nirvana. But the only time when European operators enjoyed premium pricing was before the market was liberalised – when the incumbents were state monopolies or duopolies. The moment that markets were opened up and competition ensued, so costs and prices were driven down. Higher ARPUs stemmed from higher volumes and premium services.

If operators want to differentiate and achieve higher ARPUs, revenues and margins in the increasingly tough saturated telecoms market of 2015 then service innovation – content services, enterprise services, enabling services – is the only solution. Otherwise the focus should be on cost reduction – building efficient and effective pipes.

If operators want to try to raise prices on the back of a repremiumization marketing message, that’s fine but they will enjoy as much success as King Canute had in ordering the tide back. One thing though, please don’t dress a misguided marketing pitch up as strategy – you’re fooling nobody but yourself.

So that’s our view, but what’s yours? There’s a snap poll below – we’ll share the results on 16th July.

 

As at 15th July 2015, 79% of Respondents Agreed that Repremiumization is not a viable strategy for European Telcos

Source: STL Partners, n = 52

 

 

  • What is ‘Repremiumization’?
  • Promoted as a viable strategy recently at STL Partners’ Senior Executive Strategy Seminar in London…
  • …and put forward by a leading strategy house
  • Why is repremiumization 100% hogwash?
  • The argument simply does not stand up to scrutiny
  • Better networks are a source of advantage for operators by enabling cost leadership
  • Lessons from the steel industry: Network quality is unlikely to provide sustainable differentiation
  • Conclusions

 

  • Figure 1: Where should the European telecoms industry place its bets for future success?
  • Figure 2: ARPU levels of 7 customer segments with and without better network services and digital ‘life experience’ offers
  • Figure 3: Sky UK winning market share and growing margins against the three bigger players
  • Figure 4: The importance of cost reduction in disrupted industries – The US Steel Industry

Digital Commerce: Time to redefine the Mobile Wallet

Summary: The ‘Mobile/Digital Wallet’ needs to evolve to support authentication, search and discovery, as well as payments, vouchers, tickets and loyalty programmes. Moreover, consumers will want to be able to tailor the functionality of this “commerce assistant” or “commerce agent” to fit with their own interests and preferences. Key findings and next steps from the Digital Commerce stream of our Silicon Valley 2013 brainstorm. (April 2013, Executive Briefing Service, Dealing with Disruption Stream.)

Who is best placed to win in local commerce April 2013

  Read in Full (Members only)   To Subscribe click here

Below are the high-level analysis and detailed contents from a 35 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Dealing with Disruption Stream  here. Digital Commerce strategies and the findings of this report will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. Non-members can find out more about subscribing here, or to find out more about this and/or the brainstorm by emailing contact@telco2.net or calling +44 (0) 207 247 5003.

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Introduction

Part of the New Digital Economics Executive Brainstorm 2013 series, the Digital Commerce 2.0 event took place at the InterContinental Hotel, San Francisco on the 20th March and looked at how to get the mobile commerce flywheel moving, how to digitise local commerce, how to improve digital advertising and how to effectively leverage customer data and personal data. The Brainstorm considered how to harness telco assets and capabilities, as well as those of banks and payment networks, to deliver Digital Commerce 2.0.

Analysis: Time to redefine the wallet?

The Executive Brainstorm uncovered widespread confusion and dissatisfaction with the concept of a digital or mobile wallet. Some executives feel that a wallet, with its connotations of a highly personal item that is controlled entirely by the consumer and used primarily for transactions, may be the wrong term. There is a view that the concept of a digital wallet may have to evolve into a more multi-faceted application that supports authentication, search and discovery, as well as payments, vouchers, tickets and loyalty programmes.

Moreover, consumers will likely want to be able to tailor the functionality of this “commerce assistant” or “commerce agent” to fit with their own interests and preferences, rather than having to use an inflexible off-the-shelf application. This gateway application may also act as a personal cloud/locker service, providing access to the individual’s media and content, as well as enabling them to control their privacy settings. In other words, ultimately, consumers may want an assistant or agent that amalgamates the personalised discovery services offered by apps, such as Google Now, online media services, such as iCloud, and the traditional functions of a wallet, such as payments, receipts, coupons and loyalty programmes.

Business model battles

The Brainstorm confirmed that the digital commerce market continues to be held back by the slow and familiar dance between the established interests of banks/payment networks, telcos, and retailers. Designing business models that sufficiently incentivise each partner is tough: big retailers, for example, are likely to resist digital commerce solutions that don’t address their dissatisfaction about transaction fees – there was some excitement about digital commerce solutions that workaround the major payment networks’ interchange systems.

Some of the participants in the Brainstorm held strongly entrenched views about which players can contribute to growth in digital commerce and should therefore benefit most from that growth. The arguments boiled down to:

  • The banking ecosystem believes it is well placed because of the requirement for transactions to be processed by entities with banking licenses and that comply with know your customer (KYC) regulations.
  • Telcos believe that, as digital commerce-related data travels over their networks, they will understand the market better than other players.
  • Retailers believe that they have the customer relationships and that digital commerce offers opportunities to strengthen those relationships and reduce the costs of transactions.

The length and complexity of the digital commerce value chain raises significant questions about whether one entity could and should own the customer relationship and manage customer care across the whole experience. Moreover, there may be a disconnect between elements of the value chain and the overall value proposition. For example, individual retailers may wish to offer fully-customised digital commerce experiences delivered through their own branded apps, but consumers may not want to see the complexity of the existing marketplace, in which they are asked to register and carry multiple loyalty cards, continue in an increasingly digitised world.

While the traditional players jostle for the best positions in the value chain, the door is wide open for market entrants to come with radically disruptive business models. Although telcos have the customer data to be play a pivotal role in digital commerce, other players will work around them unless telcos are prepared to move quickly and partner on equitable terms. In many cases, telcos (and other would-be digital commerce) brokers may have to compromise on margins to seed the market and ultimately gain scale – small merchants (the long tail), which have highly inefficient marketing today, have a greater incentive than large retailers to adopt such solutions. Participants in the Silicon Valley Brainstorm thought that either established Internet players or a start up would ultimately win over the banks and telcos in local commerce.

Who is best placed to win in local commerce April 2013

Consumers are most likely to adopt digital commerce services that offer convenience and breadth. Therefore, such services need to act as open and flexible brokers, which enable a wide range of merchants to use application programming interfaces (APIs) to plug in vouchers and loyalty schemes quickly and easily.

Mobile advertising – still very immature

Immature and messy, the mobile advertising market is still a long way from being as structured as, for instance, television advertising, in terms of standardising metrics for buyers and creating an efficient procurement process. The Brainstorm highlighted the profusion of different technologies and platforms that is making the mobile advertising market highly-fragmented and very resource-intensive for media buyers. In many cases, the advertising industry may be struggling to differentiate between mobile networks, mobile users and mobile devices. For example, a consumer using a tablet on a sofa may be seeing the same adverts as a smartphone user travelling to work on a train.

In essence, the creatives working in advertising agencies are not certain what messages and formats work on a mobile screen, as buyers don’t have reliable ROI data and the advertising networks continue to struggle to deliver precise targeting, stymied by multiple barriers, such as privacy fears, walled gardens and bandwidth constraints. As a result, there is widespread dissatisfaction among both media buyers and consumers with mobile advertising. The mobile advertising market needs robust tools and processes – standardised, proven formats and reliable, trusted metrics – to will enable brands to purchase advertising at scale and with confidence.

Some media buyers are looking for solutions that make the delivery of digital advertising more transparent to consumers, so they have a clearer understanding of why they are seeing a particular advert.

To address these issues, telcos, looking to broker advertising, need to create better platforms that are easy for media buyers to access, offer precise targeting and provide transparent metrics that are straightforward to monitor. Despite the formation of telco marketing and advertising joint ventures in some markets, such as the U.K., some advertising executives believe telcos don’t see a big enough revenue opportunity to build these platforms.

Instead of brand building and customer acquisition, which is the traditional use of mass advertising, it seems likely that the mobile channel will be used primarily for customer loyalty and retention. So-called active advertising (advertising that is designed to enable the individual to complete a specific task) may be well suited to mobile devices, which people typically use to get something done. As attention spans are short and screen space is limited in the mobile medium, the advertising value chain will need to change its mindset to put the needs of the consumer, rather than the brand, front and centre.

Big data – how to monetize?

The Brainstorm reinforced the sense that big data/personal data has the potential to create exceptional insights and disruptive new business models. But most people working in this space only have a high-level, theoretical view of how this might happen, rather than a collection of compelling case studies and use cases. Finding big data projects offering a respectable return on investment is going to be a hit and miss affair, requiring an open mind and the patience to experiment.

Although self-authenticated data could potentially make advertising and marketing more efficient, it may also increase transparency for consumers: The Internet has given consumers more control and is driving deflation in many sectors. The rise of personal data could have negative implications for companies’ profit margins as consumers use vendor relationship management systems to systematically secure the best price.

Many start-ups seem to still be pursuing advertising-funded business models, but big data and personal data business models may depend on a different approach. They should be asking: “How do you fund a search engine that is not ad-funded and can social networks not be ad-funded?” Computational contracts, which machines can execute and people can actually understand, could be part of the answer. Rather than trying to infer interests and movements, a social network might explicitly ask the following question. “If you give me your location and the brands you like, I’ll give you two coupons a day.” This is basically the Placecast model, which seems to be gaining traction in some markets. In any case, telcos and banks could and should use transparent and user-friendly privacy policies as a competitive weapon against Facebook and Google, which currently dominate the online advertising market.

The concept of companies interacting with individuals through the web presence of their objects, such as their car, their bike or their pet, seems sound. Both individuals and companies could benefit from a two-way flow of information around these objects. For example, a consumer with a specific make of printer or camera could benefit from personalised and timely discounts on accessories, such as cartridges and lenses.

Next steps for STL Partners

We will:

  • Continue to research and explore ‘Digital Commerce’ at our Executive Brainstorms, with particular emphasis on practical steps to create the Digital Wallet, enable ‘SoMoLo’, and the key role of personal data and trust frameworks;
  • Look further into the needs and applications of ‘Big Data’ into the field, as well as continuing our involvement in the World Economic Forum’s (WEF) work on Trust Networks for personal data;
  • Publish further research on the business case for personal data, and a full Strategy Report on the Digital Commerce area.


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

  • Closing the loop between advertising and payments
  • First stimulus presentation
  • Second stimulus presentation
  • Innovation showcase
  • Brainstorm
  • Key takeaways
  • Advertising & Marketing: Radical Game Change Ahead
  • First and Second stimulus presentations
  • Final stimulus presentation
  • Brainstorm
  • Key takeaways
  • Session 3: Big Data – Exploiting the New Oil for the New Economy
  • Stimulus Speakers and Panellists
  • Stimulus presentations
  • Voting, feedback, discussions
  • Key takeaways

…and the following figures…

  • Figure 1 – Customer Data is at the centre of Digital Commerce
  • Figure 2 – What will North American consumers value most from digital commerce?
  • Figure 3- Leading players’ strengths and weaknesses upstream and downstream
  • Figure 4 – The key elements of the digital commerce flywheel
  • Figure 5 – Vast majority of commerce is still offline
  • Figure 6 – Linking location-based offers to payment cards
  • Figure 7 – Participants’ views on likely winners in ‘local’ digital commerce
  • Figure 8 – Mobile ad spend doesn’t reflect the time people spend in this medium
  • Figure 9 – What does the advertising industry need to do to stay relevant?
  • Figure 10 – Why personal data isn’t like oil
  • Figure 11 – A strawman process for personal data
  • Figure 12 – A decentralised architecture for the Internet of My Things
  • Figure 13 – Kynetx: companies can connect through ‘things’

Members of the Telco 2.0 Executive Briefing Subscription Service and the Dealing with Disruption Stream can download the full 35 page report in PDF format here. Non-Members, please subscribe here. Digital Commerce strategies and the findings of this report will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. For this or any other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Background & Further Information

Produced and facilitated by business innovation firm STL Partners, the Silicon Valley 2013 event brought together 150 specially-invited senior executives from across the communications, media, retail, banking and technology sectors, including:

  • Apigee, Arete Research, AT&T,ATG, Bain & Co, Beecham Research, Blend Digital Group, Bloomberg, Blumberg Capital, BMW, Brandforce, Buongiorno, Cablelabs, CenturyLink, Cisco, CITI Group, Concours Ventures, Cordys, Cox Communications, Cox Mobile, CSG International, Cycle Gear, Discovery, DoSomething.Org, Electronic Transactions Association, EMC Corporation, Epic, Ericsson, Experian, Fraun Hofer USA, GE, GI Partners, Group M, GSMA, Hawaiian Telecom, Huge Inc, IBM, ILS Technology, IMI Mobile Europe, Insight Enterprises, Intel, Ketchum Digital, Kore Telematics, Kynetx, MADE Holdings, MAGNA Global, Merchant Advisory Group, Message Systems, Microsoft, Milestone Group, Mimecast, MIT Media Lab, Motorola, MTV, Nagra, Nokia, Oracle, Orange, Panasonic, Placecast, Qualcomm, Rainmaker Capital, ReinCloud, Reputation.com, SalesForce, Samsung, SAP, Sasktel, Searls Group, Sesame Communications, SK Telecom Americas, Sprint, Steadfast Financial, STL Partners/Telco 2.0, SystemicLogic Ltd., Telephone & Data Systems, Telus, The Weather Channel, TheFind Inc, T-Mobile USA, Trujillo Group LLC, UnboundID, University of California Davis, US Cellular Corp, USC Entertainment Technology Center, Verizon, Virtustream, Visa, Vodafone, Wavefront, WindRiver, Xtreme Labs.

Around 40 of these executives participated in the ‘Digital Commerce’ session.

The Brainstorm used STL’s unique ‘Mindshare’ interactive format, including cutting-edge new research, case studies, use cases and a showcase of innovators, structured small group discussion on round-tables, panel debates and instant voting using on-site collaborative technology.

We’d like to thank the sponsors of the Brainstorm:
Silicon Valley 2013 Sponsors

Digital Entertainment 2.0: Telcos risk missing the UltraViolet online video opportunity

Summary: 2011 sees the introduction of the UltraViolet digital locker platform by DECE, a consortium led by 6 of the 7 top Hollywood studios and backed by 50 more cross-industry heavyweights. This anticipates and supports the transition of film and TV to online distribution. Here we analyse the opportunities telcos will miss out on if they fail to engage with DECE.

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Alternatively, please email contact@telco2.net or call +44 (0) 207 247 5003 for further details. There’s also more on DECE UltraViolet strategies at our AMERICAS, EMEA and APAC Executive Brainstorms and Best Practice Live! virtual events.

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In our Executive Briefing entitled, Entertainment 2.0: New Sources of Revenue for Telcos we laid out a series of trends that are changing the video market and the opportunities and challenges this poses for telcos. In this Analyst Note, we examine the ways in which DECE’s UltraViolet will impact the market and explain why telcos can’t afford to adopt a ‘wait, see and proctect approach to its introduction.

DECE UltraViolet explained

DECE UltraViolet has been created in anticipation and support of the switch-over of video content from physical to online distribution. It aims to offer consumers an ultimate level of flexibility as they can not only own, store and manage their content through a digital locker but also share it with family members and view it anywhere through a wide range of devices from TVs and PCs to tablets and mobile phones.

Figure 1 – The UltraViolet proposition: buy once, play everywhere, forever, for the whole family 

Source: Telco 2.0

Furthermore, it provides the video industry with a real alternative to piracy based on an open platform with licensable specifications, not a proprietary system such as Apple’s. The platform is set up to support multiple business models and rentals are expected to follow relatively quickly, which explains the interest of Netflix and LoveFilm (now part of Amazon) in the initiative, but at launch it will offer only online purchase.

Finally, the digital locker meta-data will provide a single view of customer buying and viewing preferences on which future planning can be based.

It is not surprising therefore that the initiative has attracted a powerful and active membership comprising in excess of 50 companies including 6 of the 7 major studios, network equipment and consumer electronics vendors, service providers and retailers. Notable exceptions to the current membership are Disney, which has its own digital locker, and WalMart, which has a deal with Apple. Both, however, are free to join at a later date as it is an open platform.

UltraViolet is due to launch in the US in the middle of 2011, with Canada and the UK following towards the end of the year before a full international rollout begins in 2012.

Virtually all the players involved in the video distribution ecosystem from content owners to retailers have their own plays in online video distribution but they are still heavily involved in DECE because they understand that it has the potential to impact on their existing and future business plans. This is not the case with telcos, with a few notable exceptions such as BT which is a member of DECE.

Telco’s adopt a “wait, see and protect my network” strategy

Most telcos seem to be cautious and sceptical about UltraViolet and digital content lockers in general. Rightly or wrongly, they perceive that UltraViolet faces major challenges and represents a headache for them rather than an opportunity.

They appear to doubt that they need digital locker content to drive use of their services and see little margin in retailing movies. Furthermore, mobile network operators in particular are concerned about the impact of video streaming on network congestion and will not hesitate to institute network policy rules that will curtail this perceived “damage”.

Without a clear opportunity for “delivery” income for telcos (for x-plan MBs, QoS, guaranteed bandwidth), or clear business models for moving to this, there is limited incentive for them to step up their interest. We have therefore observed three general telco responses to DECE. For clarity, we have described these as three discreet positions but, in reality, telcos can and do pursue combinations of these.

Telco2.0 believes that there is a potential opportunity for telcos to adopt a more pro-active approach to DECE through an early-adopter strategy as:

  • The entertainment market is large and premium entertainment key
  • Entertainment plays a key role in securing consumer attention
  • DECE UltraViolet has the ingredients for success
  • UltraViolet represents an opportunity for telcos as suppliers to the ecosystem
  • Telcos share a common interest with DECE

Each of these reasons is discussed in detail in the sections that follow.

Entertainment: A market too large and valuable to ignore

The global entertainment market is huge and as such is obviously attractive to telcos looking to counter falling ARPUs. It accounts for a considerable share of disposable income and overall entertainment spending is much higher than that on telecoms.

In the UK, which as the leading western European market is to a degree indicative of most developed markets, the average household monthly spend on entertainment is more than double that for communications. Furthermore, the decline in communications spend has been faster than that for entertainment over the last five years and this is despite the rapid decline in music sales revenues.

Figure 2 – Comparative monthly spend on telecoms and entertainment in the UK

 

Source: STL Partners Estimates, OFCOM – UK Regulator

Of course UltraViolet is not yet targeting entertainment in its entirety or even all of the home entertainment video market. Instead it is initially setting its sights on the retail market through online sell-through and that is currently very small, accounting for a mere $590 million in 2009 and the lowest contributor of all entertainment sectors to online revenues.

Figure 3 – Digital film downloads are so far the lowest revenue generators in online entertainment

 

Source: Telco 2.0

It is perhaps not surprising therefore, that telcos have not seen this as a particularly inspiring target segment. However, online sell-through is a nascent market and one we believe has exponential growth potential.

This is certainly proving the case for online rentals. According to Bain’s figures presented at the 9th Telco 2.0 Executive Brainstorm in Santa Monica, 80% of US consumers already view video online and Netflix streaming services now account for 20% of total US internet traffic, twice YouTube’s share. Furthermore, by 2014, 60% of TVs will be connected to the Internet, addressing the major remaining barrier to take up by connecting the primary viewing device to online video content.

Sizing the market

Attempts to accurately size future markets are always fraught with inaccuracy, and none more so than punts on film and TV entertainment, as the outcome will always be dependent on the quality and appeal of the content as well as many other factors.

That aside, we are convinced that the market can grow much faster than currently predicted. In fact, we see DECE UltraViolet as capable of stimulating market growth for digital sell-through similar to that of Apple (depicted below). We expect it to grow its share of the home entertainment market from 1% to 13.5%, providing a sizable target market and one that will continue to grow for some time.

Figure 4 – An Apple-style growth is possible for online sell through with UltraViolet

 

Source: PriceWaterhouseCoopers, Apple, Netflix, Telco 2.0

UltraViolet’s growth potential should at least put it on telco’s ‘strategic interest radar’, especially as it has been designed to accommodate multiple business models, including the rental models in the future.

However, we would argue that waiting for the growth to happen is missing more than one opportunity. The first is to influence in the platform’s development and, perhaps even more importantly, the second is to fit it into and around other strategies that are currently developing in silos, namely video services, customer retention and digital shopping malls.

Low margins put off telcos – but they miss its attention value

There is a set of telcos that believe that TV and film content neither offers the kind of margins they require, nor differentiation, as content owners have proven that they are unwilling to negotiate exclusive deals with telcos that can usually only reach a minority proportion of any national market.

Again, we believe this is missing a point for any telco looking to develop a significant retail play. Certainly it is true that margins are low. Tesco, the world’s third largest retailer by revenue, has revealed that it is currently making next to no margin on its physical video business and there is no reason to assume it will be significantly better online. However, the business case for entertainment products developed by what we consider a ‘master retailer’ is not based on sales but instead on footfall and the overall size of the shopping basket. Indeed, it is going all out to develop the same relationship online between entertainment product sales and fuller baskets.

Tesco is developing a digital Locker platform that works across multiple devices to deliver a joined up experience and drive impulse buying. It is a staunch supporter of DECE/Ultraviolet and plans on using it, rebranded as InvisiDisc, as a central part of its entertainment platform.

Figure 5 – Tesco puts digital locker at heart of portal proposition

 

Source: Tesco Presentation, 11th Telco 2.0 Brainstorm, EMEA

As the Tesco example proves, while margins on the products themselves can be small or non-existant, there may be significant other benefits. Tesco see that the overall basket spend is significantly higher when it involves an entertainment product, and entertainment is a both an impulse buy and an attention draw.

Furthermore, the investments that have been made in infrastructure by the DECE group means the entry costs are lower. For the few telcos that don’t have an entertainment platform, UltraViolet offers an opportunity to join the party and use that infrastructure to access what is expected to be premium content which they can offer to customers through their own retail portals. For the majority that already have their own platforms consideration should be given to adding UntraViolet into the mix for what is lost in duplicating infrastructures could be gained with premium content.

Entertainment’s primary role in securing consumer attention

Many upstream services rely on the ability to secure consumer attention and sell this on to third parties in some form. This is the basis of the advertising-based business models, including the one that dominates the Internet. Entertainment is a major tool in attracting and maintaining consumer attention as it has such a high profile in the minds and lives of consumers (as exemplified by the UK figures in the chart below).

Figure 6 – Comparative daily usage of entertainment and telecoms in the UK (2009)

Source: STL Partners Estimates, OFCOM – UK Regulator

The difference in the time spent by consumers on communications services and entertainment is stark and reflects the fact that while communication is a vital part of everyday life, entertainment holds their attention more. This is particularly important and valuable when developing portal and other upstream strategies. as exemplified by the value retailers such as Tesco that are using it as a key part of their online strategy.

DECE UltraViolet has a recipe for success

The ability of online entertainment delivery platforms to move the needle should not be in question. Netflix and LoveFilm have already made an impact with online rentals, while Apple’s success is indisputable. To do this they have introduced services that have a utility value combined with innovative and disruptive business and pricing models. Using these experiences as a base reference, we have identified the following as important success factors for online distribution platforms:

  • Offering new and premium content in a timely way and from many owners;
  • Creating a substantial back catalogue quickly;
  • Delivering to all devices that consumers wish to use and that are in the market;
  • Supporting the legal transfer of content between devices and people;
  • Creating a differentiated value proposition;
  • Introducing services with a disruptive model and pricing;
  • Creating multiple channels to market;
  • Future-proofing so that consumers don’t lose their content as devices and technologies develop;
  • Providing links between physical and online products to ease the transition.

In theory at least, UltraViolet has strengths across all these.

UltraViolet is getting the proposition right

UltraViolet’s basic proposition of ‘buy once, play everywhere, forever, for the whole family’ is a new and valuable one that overcomes many of the frustrations consumers have with online video content as it offers:

  • A single point of access to content from multiple content owners;
  • The ability to buy once and view content on up to 12 devices;
  • The ability for up to 6 family members to view the same content.

This creates a new and differentiated value proposition and supports the legal transfer of content between people and devices, as well as the capability to view on a full range of devices now and in the future.

It is an open platform based on interoperable standards and licensable technology specifications. So far DECE has laid out some the technical framework for a Common File Format which means video files are encoded and encrypted just once, as well as the technical design specifications for each of the six major categories of company – content providers, retailers, streaming service providers, device and application providers and digital distribution infrastructure providers. These ensure that all players are working in the same way and services will be interoperable. (See Can Telcos Help Save the Video Distribution Industry for more details).

All the right backers…

This is a unique and highly valuable proposition and one that has attracted a great deal of support and attention from those currently active in the value chain with the exception of telcos. All the major Hollywood studios bar Disney, which has its own digital locker solution, are behind the initiative which should ensure high quality and desirable content from the start and gives potential access to a huge back catalogue. Indeed, it is widely accepted that the studios will promote new content through UltraViolet first, providing an online alternative to the DVD/Blu-ray sales window.

This is highly significant for telcos that have so far been satisfied to stick to delivering their own content services through VoD, IPTV and mobile believing they have an advantage in providing a multi-screen service as they have the potential to control the delivery quality and have understanding of the user’s device.

However, they are still reliant on content deals with studios to secure the types of films and TV programmes that consumers want. These are usually based around the fourth pay TV window, meaning that consumers would get to new content earlier through UltraViolet than telco VoD services. For this reason we believe that telcos ignoring DECE as part of their downstream consumer entertainment services are missing an important plank in their strategic portfolio.

Furthermore, online service providers are well represented, as are device manufacturers, while traditional retailers, with the notable exception of WalMart which has an existing relationship with Apple, are also putting their weight behind it, providing multiple channels to market.

…with a common and urgent motivation

Beyond the appeal of the consumer proposition, DECE UltraViolet is also appealing because it offers a credible alternative to both piracy and Apple that have dominated the transition of music content distribution online.

As we’ve previously discussed in Digital Hollywood: How to out-Apple Apple, Apple dominates online music and is constantly adding more TV and film content. With over 150 million account holders it is the biggest music retailer in the world and has created the first and so far the dominant business model for digital online retail with its 30/70 revenue share deals. It no longer includes optical drives in any of its current product portfolio as it hopes to drive more film and TV content to its digital store, expanding its content range and reinforcing its existing business model.

To read the Analyst Note in full, including in addition to the above analysis of:

  • Apple, piracy and the motivations of the DECE membership
  • The continuing importance of the physical product
  • UltraViolet’s upstream potential
  • Recommendations for telco entertainment strategy development to include DECE/UltraViolet

…and additional figures…

  • Figure 7 – Apple’s 5-screen Strategy
  • Figure 8 – BD Live proposition provides link between physical and online
  • Figure 9 – Generic 2-sided model for entertainment
  • Figure 10 – US: Traditional video distributors and cable companies are most under threat, as online viewing continues to increase
  • Figure 11 – Potential roles for telcos in digital lockers

Members of the Telco 2.0TM Executive Briefing Subscription Service can download the full 19 page report in PDF format here. Non-Members, please see here for how to subscribe. Please email contact@telco2.net or call +44 (0) 207 247 5003 for further details. There’s also more on DECE UltraViolet strategies at our AMERICAS, EMEA and APAC Executive Brainstorms and Best Practice Live! virtual events.