Telco 2.0 Transformation Index: Understanding Telefonica’s Markets and Market Position

Summary: This extract from the Telco 2.0 Transformation Index shows our analysis of Telefonica’s markets and market position, including economic and digital market maturity, regulation, customers, competition and pricing. It is one part of our overall analysis of Telefonica’s progress towards transformation to the Telco 2.0 business model. The other parts of the Telefonica analysis are: Service Proposition, Finances, Technology, Value Network, and an overall summary. Telefonica is one of the companies analysed and compared in the first tranche of analysis that also addresses Vodafone, AT&T, Verizon, Axiata, SingTel, Etisalat and Ooredoo (formerly Qtel). (August 2013, Executive Briefing Service, Transformation Stream.) Telefonica Telco 2.0 Transformation Index Small

Introduction


Details of the objectives and key benefits of the overall Telco 2.0 Transformation Index can be found here, and the methodology and approach here.

Telefonica is one of the first companies featured in our Transformation Index, and one that is viewed with great interest by others. With operating companies facing very different conditions in Europe and South America, Telefonica faces some interesting strategic challenges, and has attempted to stimulate growth through innovation with the development of Telefonica Digital.

The ‘Markets and Position’ section of the analysis puts Telefonica’s current global position, risks and opportunities in context, and is now available to download to members of the Telco 2.0 Executive Briefing Service. The rest of the analysis (covering Service Proposition, Value Network, Technology and Finances), and the analyses of the other seven companies initially covered (Vodafone, AT&T, Verizon, Etisalat, Ooredoo [formerly Qtel], Singtel and Axiata) will be published from September 2013.

Key Benefits

  • The report’s highly graphical format makes it extremely easy to digest and reach valuable insights quickly into both Telefonica’s current position and future strategic needs
  • The structure of the analysis allows the reader to rapidly and concisely assimilate the complex picture of Telefonica’s international businesses, risks and opportunities
  • It is underpinned with detailed and sourced numerical and qualitative data

 

Example charts from the report

The report analyses Telefonica’s market share position across markets against their regulatory strength.
Telco 2.0 Transformation Index - Market Positioning Detail

 

It also assesses the economic and demographic make-up of Telefonica’s markets.

Telco 2.0 Transformation Index - Market Analysis Detail Example, Telefonica

The market analyses are consolidated into an overall summary of market positioning by Operating Company, which is further refined into an assessment of strategic approach and operational performance.

Telco 2.0 Transformation Index - Market Share and Profitability Detail

 

Contents

To access the contents of the report, including…

  • Introduction and Methodology
  • Market Position Summary: Economic, Regulatory, Competitive and Customers
  • Summary analysis of growth, GDP, prices and economics of key markets
  • Comparison and contrasts between European and Latin American markets
  • Regulation vs EBITDA margins
  • Mobile revenue growth by market
  • Subscribers and revenues by region
  • Mari-Meko of Subscribers and Shares in key markets
  • Market Share Vs. Regulation
  • Market Vs. Telefonica Growth by national market
  • Telefonica’s commercial strategy
  • Strength of OTT entrants in Telefonica’s markets
  • Pre-Pay, Post-Pay and Churn by Market
  • Telefonica’s relative brand strength

 

Cloud 2.0: Network Functions Virtualisation (NFV) vs. Software Defined Networking (SDN)

Network Functions Virtualisation

What is Network Functions Virtualisation?

Network Functions Virtualisation (NFV)  is an ominous sounding term, but on examination relatively easy to understand what it is and why it is needed.

If you run a network whether as an enterprise customer or as a service provider you will end up a stack of dedicated hardware appliances performing a variety of functions needed to make the network work or to optimise its performance. Boxes like Routers, Application Load Balancers, Session Border Controllers (SBC), Network Address Translation (NAT), Deep Packet Inspection (DPI) and Firewalls to pick just a few. Each one of these hardware appliances needs space, power, cooling, configuration, backup, capital investment, replacement as they become obsolete and people who can deploy and manage them leading to on-going capex and opex. And with a few exceptions, each performs a single purpose, so a firewall is always a firewall or an SBC is always an SBC and neither can perform the function of the other.

Contrast this model with the virtualised server or cloud computing world where Virtual Machines run on standard PC/Server hardware, where you can add more compute power/storage on an elastic basis should you need it and where network cards are only required when you connect one physical device to another.

What problems does NFV solve?

NFV seeks to solve the problems of dedicated hardware by deploying the network functions on a virtualised PC/server environment. NFV started as a special interest group running under the auspices of the European Telecommunications Standards Institute (ETSI) by 7 of the world’s largest telecoms operators and has now been joined by additional telecoms companies, equipment vendors and a variety of technology providers.

While NFV can replace many dedicated hardware devices with a virtualised software platform, it is yet to be seen if this approach can deliver the sustained performance and low latency that is currently delivered by some specialised hardware appliances such as load balancing, real time encryption or deep packet inspection.

Figure 8 shows ETSI’s vision of NFV.

Figure 8 – ETSI’s vision for Network Functions Virtualisation
Network Virtualisation Approach June 2013

 Source ETSI

Report Contents

  • Network Functions Virtualisation
  • What is Network Functions Virtualisation?
  • What problems does NFV solve?
  • How does NFV relate to Software Defined Networking (SDN)?
  • Relative benefits of NFV and SDN
  • STL Partners and the Telco 2.0™ Initiative

Report Figures

  • Figure 8 – ETSI’s vision for Network Functions Virtualisation
  • Figure 9 – Network Functions Virtualised and managed by SDN
  • Figure 10 – Network Functions Virtualisation relationship with SDN

Software Defined Networking (SDN): A Potential ‘Game Changer’

Summary: Software Defined Networking is a technological approach to designing and managing networks that has the potential to increase operator agility, lower costs, and disrupt the vendor landscape. Its initial impact has been within leading-edge data centres, but it also has the potential to spread into many other network areas, including core public telecoms networks. This briefing analyses its potential benefits and use cases, outlines strategic scenarios and key action plans for telcos, summarises key vendor positions, and why it is so important for both the telco and vendor communities to adopt and exploit SDN capabilities now. (May 2013, Executive Briefing Service, Cloud & Enterprise ICT Stream, Future of the Network Stream). Potential Telco SDN/NFV Deployment Phases May 2013

Figure 1 – Potential Telco SDN/NFV Deployment Phases
Potential Telco SDN/NFV Deployment Phases May 2013

Source STL Partners

Introduction

Software Defined Networking or SDN is a technological approach to designing and managing networks that has the potential to increase operator agility, lower costs, and disrupt the vendor landscape. Its initial impact has been within leading-edge data centres, but it also has the potential to spread into many other network areas, including core public telecoms networks.

With SDN, networks no longer need to be point to point connections between operational centres; rather the network becomes a programmable fabric that can be manipulated in real time to meet the needs of the applications and systems that sit on top of it. SDN allows networks to operate more efficiently in the data centre as a LAN and potentially also in Wide Area Networks (WANs).

SDN is new and, like any new technology, this means that there is a degree of hype and a lot of market activity:

  • Venture capitalists are on the lookout for new opportunities;
  • There are plenty of start-ups all with “the next big thing”;
  • Incumbents are looking to quickly acquire new skills through acquisition;
  • And not surprisingly there is a degree of SDN “Washing” where existing products get a makeover or a software upgrade and are suddenly SDN compliant.

However there still isn’t widespread clarity of what SDN is and how it might be used outside of vendor papers and marketing materials, and there are plenty of important questions to be answered. For example:

  • SDN is open to interpretation and is not an industry standard, so what is it?
  • Is it better than what we have today?
  • What are the implications for your business, whether telcos, or vendors?
  • Could it simply be just a passing fad that will fade into the networking archives like IP Switching or X.25 and can you afford to ignore it?
  • What will be the impact on LAN and WAN design and for that matter data centres, telcos and enterprise customers? Could it be a threat to service providers?
  • Could we see a future where networking equipment becomes commoditised just like server hardware?
  • Will standards prevail?

Vendors are to a degree adding to the confusion. For example, Cisco argues that it already has an SDN-capable product portfolio with Cisco One. It says that its solution is more capable than solutions dominated by open-source based products, because these have limited functionality.

This executive briefing will explain what SDN is, why it is different to traditional networking, look at the emerging market with some likely use cases and then look at the implications and benefits for service providers and vendors.

How and why has SDN evolved?

SDN has been developed in response to the fact that basic networking hasn’t really evolved much over the last 30 plus years, and that new capabilities are required to further the development of virtualised computing to bring innovation and new business opportunities. From a business perspective the networking market is a prime candidate for disruption:

  • It is a mature market that has evolved steadily for many years
  • There are relatively few leading players who have a dominant market position
  • Technology developments have generally focussed in speed rather than cost reduction or innovation
  • Low cost silicon is available to compete with custom chips developed by the market leaders
  • There is a wealth of open source software plus plenty of low cost general purpose computing hardware on which to run it
  • Until SDN, no one really took a clean slate view on what might be possible

New features and capabilities have been added to traditional equipment, but have tended to bloat the software content increasing costs to both purchase and operate the devices. Nevertheless – IP Networking as we know it has performed the task of connecting two end points very well; it has been able to support the explosion of growth required by the Internet and of mobile and mass computing in general.

Traditionally each element in the network (typically a switch or a router) builds up a network map and makes routing decisions based on communication with its immediate neighbours. Once a connection through the network has been established, packets follow the same route for the duration of the connection. Voice, data and video have differing delivery requirements with respect to delay, jitter and latency, but in traditional networks there is no overall picture of the network – no single entity responsible for route planning, or ensuring that traffic is optimised, managed or even flows over the most appropriate path to suit its needs.

One of the significant things about SDN is that it takes away the independence or autonomy from every networking element in order to remove its ability to make network routing decisions. The responsibility for establishing paths through the network, their control and their routing is placed in the hands of one or more central network controllers. The controller is able to see the network as complete entity and manage its traffic flows, routing, policies and quality of service, in essence treating the network as a fabric and then attempting to get maximum utilisation from that fabric. SDN Controllers generally offer external interfaces through which external applications can control and set up network paths.

There has been a growing demand to make networks programmable by external applications – data centres and virtual computing are clear examples of where it would be desirable to deploy not just the virtual computing environment, but all the associated networking functions and network infrastructure from a single console. With no common control point the only way of providing interfaces to external systems and applications is to place agents in the networking devices and to ask external systems to manage each networking device. This kind of architecture has difficulty scaling, creates lots of control traffic that reduces overall efficiency, it may end up with multiple applications trying to control the same entity and is therefore fraught with problems.

Network Functions Virtualisation (NFV)

It is worth noting that an initiative complementary to SDN was started in 2012 called Network Functions Virtualisation (NFV). This complicated sounding term was started by the European Telecommunications Standards Institute (ETSI) in order to take functions that sit on dedicated hardware like load balancers, firewalls, routers and other network devices and run them on virtualised hardware platforms lowering capex, extending their useful life and reducing operating expenditures. You can read more about NFV later in the report on page 20.

In contrast, SDN makes it possible to program or change the network to meet a specific time dependant need and establish end-to-end connections that meet specific criteria. The SDN controller holds a map of the current network state and the requests that external applications are making on the network, this makes it easier to get best use from the network at any given moment, carry out meaningful traffic engineering and work more effectively with virtual computing environments.

What is driving the move to SDN?

The Internet and the world of IP communications have seen continuous development over the last 40 years. There has been huge innovation and strict control of standards through the Internet Engineering Task Force (IETF). Because of the ad-hoc nature of its development, there are many different functions catering for all sorts of use cases. Some overlap, some are obsolete, but all still have to be supported and more are being added all the time. This means that the devices that control IP networks and connect to the networks must understand a minimum subset of functions in order to communicate with each other successfully. This adds complexity and cost because every element in the network has to be able to process or understand these rules.

But the system works and it works well. For example when we open a web browser and a session to stlpartners.com, initially our browser and our PC have no knowledge of how to get to STL’s web server. But usually within half a second or so the STL Partners web site appears. What actually happens can be seen in Figure 1. Our PC uses a variety of protocols to connect first to a gateway (1) on our network and then to a public name server (2 & 3) in order to query the stlpartners.com IP address. The PC then sends a connection to that address (4) and assumes that the network will route packets of information to and from the destination server. The process is much the same whether using public WAN’s or private Local Area Networks.

Figure 2 – Process of connecting to an Internet web address
Process of connecting to an Internet web address May 2013

Source STL Partners

The Internet is also highly resilient; it was developed to survive a variety of network outages including the complete loss of sub networks. Popular myth has it that the US Department of Defence wanted it to be able to survive a nuclear attack, but while it probably could, nuclear survivability wasn’t a design goal. The Internet has the ability to route around failed networking elements and it does this by giving network devices the autonomy to make their own decisions about the state of the network and how to get data from one point to any other.

While this is of great value in unreliable networks, which is what the Internet looked like during its evolution in the late 70’s or early 80’s, networks of today comprise far more robust elements and more reliable network links. The upshot is that networks typically operate at a sub optimum level, unless there is a network outage, routes and traffic paths are mostly static and last for the duration of the connection. If an outage occurs, the routers in the network decide amongst themselves how best to re-route the traffic, with each of them making their own decisions about traffic flow and prioritisation given their individual view of the network. In actual fact most routers and switches are not aware of the network in its entirety, just the adjacent devices they are connected to and the information they get from them about the networks and devices they in turn are connected to. Therefore, it can take some time for a converged network to stabilise as we saw in the Internet outages that affected Amazon, Facebook, Google and Dropbox last October.

The diagram in Figure 2 shows a simple router network, Router A knows about the networks on routers B and C because it is connected directly to them and they have informed A about their networks. B and C have also informed A that they can get to the networks or devices on router D. You can see from this model that there is no overall picture of the network and no one device is able to make network wide decisions. In order to connect a device on a network attached to A, to a device on a network attached to D, A must make a decision based on what B or C tell it.

Figure 3 – Simple router network
Simple router network May 2013

Source STL Partners

This model makes it difficult to build large data centres with thousands of Virtual Machines (VMs) and offer customers dynamic service creation when the network only understands physical devices and does not easily allow each VM to have its own range of IP addresses and other IP services. Ideally you would configure a complete virtual system consisting of virtual machines, load balancing, security, network control elements and network configuration from a single management console and then these abstract functions are mapped to physical hardware for computing and networking resources. VMWare have coined the term ‘Software Defined Data Centre’ or SDDC, which describes a system that allows all of these elements and more to be controlled by a single suite of management software.

Moreover, returning to the fact that every networking device needs to understand a raft of Internet Request For Comments (or RFC’s), all the clever code supporting these RFC’s in switches and routers costs money. High performance processing systems and memory are required in traditional routers and switches in order to inspect and process traffic, even in MPLS networks. Cisco IOS supports over 600 RFC’s and other standards. This adds to cost, complexity, compatibility, future obsolescence and power/cooling needs.

SDN takes a fresh approach to building networks based on the technologies that are available today, it places the intelligence centrally using scalable compute platforms and leaves the switches and routers as relatively dumb packet forwarding engines. The control platforms still have to support all the standards, but the platforms the controllers run on are infinitely more powerful than the processors in traditional networking devices and more importantly, the controllers can manage the network as a fabric rather than each element making its own potentially sub optimum decisions.

As one proof point that SDN works, in early 2012 Google announced that it had migrated its live data centres to a Software Defined Network using switches it designed and developed using off-the-shelf silicon and OpenFlow for the control path to a Google-designed Controller. Google claims many benefits including better utilisation of its compute power after implementing this system. At the time Google stated it would have liked to have been able to purchase OpenFlow-compliant switches but none were available that suited its needs. Since then, new vendors have entered the market such as BigSwitch and Pica8, delivering relatively low cost OpenFlow-compliant switches.

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

  • Executive Summary including detailed recommendations for telcos and vendors
  • Introduction (reproduced above)
  • How and why has SDN evolved? (reproduced above)
  • What is driving the move to SDN? (reproduced above)
  • SDN: Definitions and Advantages
  • What is OpenFlow?
  • SDN Control Platforms
  • SDN advantages
  • Market Forecast
  • STL Partners’ Definition of SDN
  • SDN use cases
  • Network Functions Virtualisation
  • What are the implications for telcos?
  • Telcos’ strategic options
  • Telco Action Plans
  • What should telcos be doing now?
  • Vendor Support for OpenFlow
  • Big switch networks
  • Cisco
  • Citrix
  • Ericssson
  • FlowForwarding
  • HP
  • IBM
  • Nicira
  • OpenDaylight Project
  • Open Networking Foundation
  • Open vSwitch (OVS)
  • Pertino
  • Pica8
  • Plexxi
  • Tellabs
  • Conclusions & Recommendations

…and the following figures…

  • Figure 1 – Potential Telco SDN/NFV Deployment Phases
  • Figure 2 – Process of connecting to an Internet web address
  • Figure 3 – Simple router network
  • Figure 4 – Traditional Switches with combined Control/Data Planes
  • Figure 5 – SDN approach with separate control and data planes
  • Figure 6 – ETSI’s vision for Network Functions Virtualisation
  • Figure 7 – Network Functions Virtualised and managed by SDN
  • Figure 8 – Network Functions Virtualisation relationship with SDN
  • Table 1 – Telco SDN Strategies
  • Figure 9 – Potential Telco SDN/NFV Deployment Phases
  • Figure 10 – SDN used to apply policy to Internet traffic
  • Figure 11 – SDN Congestion Control Application

 

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 Economy: who will prosper in ‘The Great Compression’?

Summary: Value is squeezed out of industries as they become increasingly digital – i.e. accessed by mobile and online, driven by data and defined by software. We call the collective economic impact of this pressure ‘The Great Compression’. But which companies will survive and prosper – and how? 90% of the Execs at our Silicon Valley brainstorm identified ‘management mindset’ as a key factor in Telecoms, Media, Finance and Retail. (May 2013, Executive Briefing Service, Transformation Stream).

Scale of Transformation Needed April 2013

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Below are the high-level analysis and detailed contents from a 62 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Premium Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation Stream here. The Digital Economy, and the changes needed to ‘management mindset’, organisation, technology, and products, will also be explored further at the EMEA Executive Brainstorm in London, 5-6 June, 2013. Non-members can find out more about subscribing here, or 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 series, the Silicon Valley 2013 event took place at the InterContinental Hotel in San Francisco on the 19th and 20th of March, 2013. This report covers the Digital Economy track on the first day.

Summary Analysis: who will prosper in ‘The Great Compression’?

Telecoms, telco vendors, entertainment, device makers, financial services, retailers, entertainment services, and brands in developed economies are experiencing the ‘Digital Hunger Gap’ – a shortfall of revenues versus past levels as industries become increasingly digital i.e. accessed by mobile and online, driven by data and defined by software.

Other industries are also feeling pain from the process of becoming digitised which both changes the model and the dynamics of competition. Others, like consumer goods and car manufacturing, see opportunities to enhance services with digital connectivity to build loyalty and new value. Government services and healthcare face huge cost challenges. Digital services can be of huge value here, but the challenge for third parties is how to make money when money needs to be saved.

According to the participants in the Silicon Valley brainstorm, almost every industry faces massive changes in every area of its business model, with management mindsets most in need of a dramatic overhaul, and customer relationships marginally ahead in the total of partipants thinking a dramatic or significant change is needed.

Scale of Transformation Needed April 2013

New markets are emerging rapidly, particularly in Asia. However, many companies from North America and EMEA lack depth in local knowledge and face skills, cultural and political barriers to entry, and the mindset challenge of operating in a radically different economic environment.

As a result of the combined difficulties of growth in home markets and expansion abroad, there will be massive consolidation among traditional industry leaders in developed economies over the coming years. Those that are successful will continue to innovate as they consolidate, but it will be a huge struggle to survive for many.

We’re calling the collective economic impact of these pressures ‘The Great Compression’ as value is squeezed from existing industries. Those best positioned to profit through it have built defensible global or major regional strengths in horizontal areas with large-scale application and high barriers to entry, and/or that serve as ‘arms dealers’ to the rest of the digital economy. For example, chip makers and IP companies (e.g. ARM, Intel, Qualcomm), very large-scale / sophisticated IT manufacturers (e.g. Microsoft, Oracle, SAP), and ‘platforms’ (e.g. Apple, Google, Visa).

However, being well positioned is no guarantee of success, and all companies will face significant challenges requiring innovation and transformation. This in turn will require immediate and ongoing action by leadership teams in every company.

Digital innovation is increasingly itself becoming a little like the entertainment industry in that it is constantly seeking hits and highly vulnerable to hype. There are centres of innovation such as Silicon Valley and elsewhere, and there can only be a small number of highly successful ‘hits’ among the many thousands if not hundreds of thousands of attempts to make a hit. Finding, gaining a share in, nurturing, and ultimately profiting from these hits is a massive industry in itself. The recognised difficulty of doing this is a further barrier to success for many of the established players. Yet those that are to survive will need to overcome it.

Next steps for STL Partners

  • To define and detail the practical actions needed to drive cross-industry transformation and innovation (in terms of ‘management mindset’, organisation, technology, products, etc.) at our Executive Brainstorms in:
    • Europe, London, 5-6 June 2013; MENA, Dubai, 14-15 November 2013; APAC, Singapore, 5-6 December 2013; Silicon Valley, San Francisco, 19-10 March 2014.
  • To publish 150+ page ‘Strategy Reports’ on:
    • The detailed benchmarking of leading players’ Telco 2.0 strategies; Digital Commerce; The Future of voice and Messaging Services.
  • To publish c.15-30 page ‘Executive Briefings’ covering:
    • Software Defined Networks (SDN); The business case for personal data; ‘Show me the (mobile) money’ – an Executive Briefing on the business case for Digital Commerce.


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

  • Session 1: Digital Transformation
  • Strategic Growth Opportunities for a Hyper-Connected World
  • Stimulus presentations
  • Voting, feedback, discussions
  • Questionstorming: how to overcome the blockers?
  • Key takeaways
  • Session 2: Digital Consumer
  • The New Mobile Battleground
  • Stimulus presentations
  • Voting, feedback, discussions
  • STL Partners’ next steps
  • Session 3: Digital Infrastructure
  • The Impact of 4G, Software Defined Networks  & the Cloud
  • Stimulus presentations
  • Voting, feedback, discussions
  • Brainstorm Output: What new opportunities could new forms of digital infrastructure create? For whom? How?
  • STL Partners’ next steps
  • Session 4: The ‘Digital Me’
  • The role and value of ‘digital identity’
  • Stimulus presentations
  • Voting, feedback, discussions
  • STL Partners’ next steps

…and the following figures…

  • Figure 1 – Concurrent disruption in multiple lines of business
  • Figure 2 – Music since 1997, a case study
  • Figure 3 – Consolidation is a consequence of disruption
  • Figure 4 – Reviving the album format
  • Figure 5 – The future is brutal indeed
  • Figure 6 – The hunger gap, 2013-2017
  • Figure 7 – Measuring the impact of social…
  • Figure 8 – The bottom line impact of social at Bloomberg
  • Figure 9 – How realistic is the ‘Hunger Gap’?
  • Figure 10 – How accurate is the market sizing?
  • Figure 11 – How accurate is the forecast breakdown?
  • Figure 12 – What is the scale of the transformation needed?
  • Figure 13 – The ‘Telco 2.0’ opportunities for CSPs
  • Figure 14 – Learning about your customer from Amazon recommendations
  • Figure 15 – 80% are already engaged with BYOD
  • Figure 16 – Customer-centric commerce
  • Figure 17 – Mobile web user engagement takes off
  • Figure 18 – Are app stores that good for developers?
  • Figure 19 – Making mobile Web “more like apps”?
  • Figure 20 – What are the downsides of native apps?
  • Figure 21 – Would iOS users  benefit from alternative app stores?
  • Figure 22 – when should you give data back to customers?
  • Figure 23 – How long before the ‘data surveillance backlash’?
  • Figure 24 – Will voluntarily provided info be better than surveillance?
  • Figure 25 – The media industry is static, the Web/tech players gain at telcos’ expense
  • Figure 26 – The evolution of connectivity products
  • Figure 27 – Integration between industrial, enterprise, and public network domains
  • Figure 28 – Key issues for an “elastic operator”
  • Figure 29 – Verizon’s enterprise platform
  • Figure 30 – Defining SDN – with Star Trek!
  • Figure 31 – Strategic conclusions on SDN
  • Figure 32 – Impact of SDN?
  • Figure 33 – Digital feudalism, enlightenment, or something else?

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation Stream can download the full 62 page report in PDF format here. Non-Members, please subscribe here. The Digital Economy 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 overall brought together 150 specially-invited senior executives from across the communications, media, retail, banking and technology sectors, including:

  • AT&T, Bain & Co, Beecham Research, Bloomberg, Blumberg Capital, BMW, Buongiorno, Cablelabs, CenturyLink, Cisco, CITI Group, Cordys, Cox Communications, CSG International, EMC, Ericsson, Experian, GE, GI Partners, Group M, GSMA, IBM, Intel, Kore Telematics, MADE Holdings, Merchant Advisory Group, Microsoft, MIT Media Lab, Motorola, MTV, Nokia, Oracle, Orange, Panasonic, Placecast, Qualcomm, Rainmaker Capital, Reputation.com, SalesForce, Samsung, SAP, Sasktel, Sprint, Telus, The Weather Channel, T-Mobile USA, UnboundID, University of California Davis, US Cellular Corp, Verizon, Visa, Vodafone.

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

The Internet of Things (IoT): What’s Hot, and How?

Summary: ‘The Internet of Things’ (IoT) is one of the big ideas of the moment. But what are the areas in which value is being created now, and what is still technological hype? A summary of the findings of the Digital Things session at the 2013 Silicon Valley Brainstorm. (April 2013)

Building Blocks Urgently Needed for IoT April 2013

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Below are the high-level analysis and detailed contents from a 47 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 here. The Internet of Things will also be explored further at the EMEA Executive Brainstorm in London, 5-6 June, 2013, and we also run dedicated IoT Strategy Workshops. Non-members can find out more about subscriptions here or to find out more about any of these services, please email contact@telco2.net or call +44 (0) 207 247 5003.

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Introduction

Part of the New Digital Economics Executive Brainstorm series, the 19th Telco 2.0 event took place at the InterContinental Hotel in San Francisco on the 19th and 20th of March, 2013. This report covers the Digital Things track on the second day, which was developed in partnership between STL Partners and Beecham Research.

Analysis: What’s Hot in the IoT?

‘The Internet of Things’ (IoT) or ‘The Internet of Everything’ is one of the big ideas of the moment. But how much is technological hype and how much is value-creating reality?

Its close relative and precursor ‘Machine-To-Machine’ (M2M) had until relatively recently evolved as a telco-centric concept. Unlike the personality, publicity and hype driven world of smartphones and the Internet, M2M has been deeply embedded in industry processes, and generally siloed in industry verticals. ‘Industrial M2M’ is not going away: indeed it’s gathering pace and taking on new directions.

But recently the idea of ‘The Internet of Things’ has become something of a meme. It is certainly a hot topic amongst Silicon Valley technologists and investors, and this was reflected in the enthusiasm shown by the participants at our Executive Brainstorm in March 2013.

Definitions of the IoT vs. M2M are not yet standardised, although some of the common themes that are emerging are that the IoT is frequently cited as:

  • More consumer-oriented than M2M. IoT is often B2B2C, and with the second ‘B’ sometimes meaning ‘Government’;
  • Dependent on cross-application data (data generated by or for one application being repurposed for another);
  • More like the Web – discoverable, ‘mashable’, self-registering… with all the potential hazards associated with the Web;
  • Bringing added value through revenue growth and/or enhanced customer experiences as well as reduced costs.

Some of the wider excitement has also been underpinned by futuristic predictions of 50bn connected devices, an idea which appeals to chip manufacturers, vendors, and telcos alike as they seek new avenues of growth. However, the questions of ‘but what will they be used for, why, and who will pay for it?’ have to date stood their ground, mostly unanswered.

Economic necessity: the mother of innovation

Now, though, a combination of pressing economic necessities, improving economics of delivery, and increasing technical capabilities is forcing these questions up the agenda. In the North American market, the areas that are progressing fastest have clear economic rationales:

  • In US healthcare, which spends 17% of GDP on health and accounts for 47% of the world’s total healthcare spending) there is the urgent need to make healthcare more efficient before it literally bankrupts the economy;
  • In the automotive industry, car makers desperately need new sources of differentiation and revenues (from in-life servicing) to survive, and this is driving widespread innovation;
  • In heavy Industries, it is estimated that a 1% improvement in productivity equals a 20-30% improvement in profitability, so there are clear incentives in what GE CEO Jeffrey Immelt calls the “Industrial Internet” too.

New blocks means new enablers are needed

With new opportunities come new challenges, and one of the biggest new challenges, arising from healthcare applications in particular, is how to manage the complexities of collecting, transmitting, storing and analysing highly personal and personalised health data safely, securely, and legitimately. The safety-critical control systems of the “Industrial Internet” are no less sensitive.

Evidently, effective security and trust networks are urgently required if the IoT’s potential is to be achieved, as the following chart shows.

Building Blocks Urgently Needed for IoT April 2013

In a world where people (and also jet engines) are having their health monitored automatically by numerous connected sensors, a lot of data is being amassed and needs to be monitored and analysed. Hence ‘Big Data’ is also a closely related topic to the IoT.

Hope, spectacle and speculation

There are several other areas that are sometimes included under the banner of the ‘IoT’, for example:

  • Clothing / ‘wearables’ – this covers a rapidly developing set of application areas, enabling technologies and related devices, including as Google Glass, Pebble Watch, Nike Fuel band and Adidas connected shoes.
  • Connected Media. There is a growing field of experimentation into and practice with connected signage that can show different messages and adverts, etc.
  • Experiments connecting virtually anything. Someone, somewhere is experimenting with a connected version of almost every object available. As just one example, in the Silicon Valley session, Centurylink said that they had asked school children to brainstorm what might be connected and why, and examples the students came up with included a connected tooth that senses the amount of sugar eaten. Another example, launched as a final product at CES, is the connected fork.
  • Tracking items. An example was given of the idea that many objects, including say a pothole in the road, could be given an identity and tracked thereafter so the fact that the pothole had been reported, and that work was scheduled, could be reviewed by anyone. Related ideas of the usefulness of being able to track goods of one sort or another, from understanding the road-miles of recycling individual objects through to tracking the whereabouts of virtually any object, have also been discussed.

There may indeed be opportunities in many of these areas, but the pressing economic, practical or social needs are not yet clear.

It is also not clear whether the definition of the ‘Internet of Things’ encompasses all of these ideas – although at present it would seem that anything that can be covered by this idea will be in someone’s world view.

What is clear is that the pace and diversity is increasing, and that new areas will continue to cross over from experiment to trial to mainstream development.

Next steps for STL Partners

We will continue to research and explore the ‘Internet of Things’ at our Executive Brainstorms, with particular emphasis on the areas that are most likely to ‘flip over’ from speculation to application.

We will also 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.

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

  • Session 1: Market Evolution towards Internet of Things – Strategies and Business Models
  • Stimulus presentations
  • Voting, feedback, discussions
  • Brainstorm Output: IoT Opportunities
  • Session 2: IOT Platform Requirements
  • Stimulus Speakers and Panellists
  • Stimulus presentations
  • Voting, feedback, and discussions
  • Brainstorm: building blocks for IoT
  • Panel Discussion
  • Session 3: Big Data – Exploiting the New Oil for the New Economy
  • Stimulus Speakers and Panellists
  • Stimulus presentations
  • Voting, feedback, discussions

…and the following figures…

  • Figure 1 – Key considerations in M2M projects
  • Figure 2 – Vendor priorities in M2M/IoT
  • Figure 3 – From “M2M Now” to “Industrial Internet” and “IoT”
  • Figure 4 – The future M2M value chain
  • Figure 5 – Connected device growth forecast
  • Figure 6 – SmartThings.com
  • Figure 7 – M2M 1.0 = “save money”, M2M 2.0 = “make money”
  • Figure 8 – The Gap – What Else is Out There?
  • Figure 9 – Focus areas for M2M initiatives
  • Figure 10 – Focus areas in the M2M value chain
  • Figure 11 – The key questions in IoT
  • Figure 12 – Elements of IoT
  • Figure 13 – The challenges – power, IPv6, and privacy
  • Figure 14 – The US is enormous, but also very unusual
  • Figure 15 – Health – the ultimate channel business
  • Figure 16 – What is the scale of the IoT opportunity?
  • Figure 17 – IoT: what type of business models?
  • Figure 18 – Panasonic’s innovation priorities
  • Figure 19 – Panasonic’s new businesses in the US
  • Figure 20 – “Content mobility” is crucial to the connected car
  • Figure 21 – Cisco – focus on the industrial potential of IoT
  • Figure 22 – How this relates to service providers
  • Figure 23 – Which technical building blocks are most needed?
  • Figure 24 – Which business infrastructure components are most needed?
  • Figure 25 – Why personal data isn’t like oil
  • Figure 26 – A strawman process for personal data
  • Figure 27 – A decentralised architecture for the Internet of My Things
  • Figure 28 – Kynetx: companies can connect through ‘things’

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 47 page report in PDF format here. Non-Members, please subscribe here. The Internet of Things 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 2013 Silicon Valley event overall 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 50 of these executives participated in the ‘Internet of Things’ 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: What Gets Measured Gets Money

Summary: For mobile entertainment services to generate revenues commensurate to the attention they receive, the industry needs to improve ‘discovery’ tools, create more effective creative inventory, and deliver proof of its effectiveness. A summary of the Digital Entertainment 2.0 session of the 2013 Silicon Valley Brainstorm. (April 2013)

Digital Entertainment 2.0: What Gets Measured Gets Money

  Read in Full (Members only)   To Subscribe click here

Below are the high-level analysis and detailed contents from a 27 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 here. The Digital Economy, Consumer Experience (including service ‘discovery’), Digital Commerce and the Internet of Things will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. Non-members can find out more about subscriptions here, or to find out more about this and other enquiries, please email contact@telco2.net or call +44 (0) 207 247 5003.

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Introduction

Part of the New Digital Economics Executive Brainstorm series, the Digital Entertainment 2.0 session took place at the Intercontinental Hotel, San Francisco, on the 20th March, 2013. The title and objective of the session was ‘How to Make Mobile Work’.

Analysis: What Gets Measured Gets Money

The key steps for mobile entertainment services to generate revenues commensurate to the attention it receives in North America are: to improve measurement of the success of ‘discovery’ tools, create more effective creative advertising inventory, and deliver proof of its effectiveness, not just the attention.

Mobile is a ‘break out’ entertainment media

Mobile has for some time been an entertainment media in the eyes of consumers, and particularly younger ones who soak up ‘dead time’ by playing games, using apps and even just communicating for fun, although to date not all these forms of entertainment have been connected.

In the past 3 years there has been a significant increase in ‘on demand’ and mobile consumption in North American and European markets, particularly in these younger segments, although a key challenge has been that monetisation has not followed the use of time spent on mobile.

Mobile entertainment itself can be defined as related to a context (e.g. ‘out and about’, ‘dead time’, ‘second screen’), devices (featurephone, smartphone or tablet), or type of connection (e.g. none, 3G, 4G, Wi-Fi). In general though, there are two main scenarios: mobile as a medium in its own right; and mobile as a ‘second screen’ experience. So in either scenario, we think the clearest answer to ‘what is the role of mobile?’ is that it is a ‘break out’ media, either extending the context of a form of entertainment, or extending the nature of entertainment in the existing context.

For video in North America, TV is still the dominant form of consumption, but mobile is growing rapidly as the ‘second screen’ that controls or supplements the main screen, especially with the explosive growth of tablets since the introduction of the Apple iPad.

Segmentation – there’s no single dominant business model

There has been much debate about the viability of different business models, broadly: advertising funded; consumer ownership; and subscription. While most participants believed that the ownership model would be most successful in music, where there is a higher likelihood that a consumer will want to listen to a track or album numerous times, ‘collectors’ or owners will still exist for videos, books and games.

Digital Collector Segment Size April 2013

Equally, demand exists for single ‘on demand’ services (e.g. pay per view), subscription (e.g. Spotify, cable), and advertising funded (e.g. YouTube). The balance is likely to change in video in particular with a move to increasing ‘on demand’ services in line with the current trend in consumer behaviour.

‘Discovery’: finding a model that proves it works

As the previously dominant channel-based model of curation in broadcast media gradually dissolves, and as the screen size, context and characteristics of consumption change, consumers face an increasing challenge finding out what they want to see, play or listen to.

Curation still exists through channel guides, taste-makers and review sites, and indeed through many offline sources, but is increasingly less the property of the content producer or distributor that it once was.

Content Discovery, one of the great buzz phrases of the industry, is therefore an ongoing challenge, and the application of networked computing power provide some advantages to connected and interactive devices like smartphones and tablets. Approaches used include:

  • 3rd party classification (e.g. by genre, subject), enabling more structured self-selection through menu choices etc.;
  • Recommendation engines (the Amazon/Netflix model), that can be based on a ‘Big Data’ approach (‘other people who bought this also bought that’) and/or semantic association (‘here’s another sentimental family comedy you might like’);
  • Social approaches, based on what your friends like or are watching, either through generic social media like Facebook, and specialised social media such as Zeebox.com (for video) and Goodread.com (for books);
  • Search – although this is non-trivial due to the volume of material in existence, and the ever-changing art of Search Engine Optimisation (SEO) – getting the right items at the top of the list.
  • Hybrid approaches that combine ‘Big Data’ with ‘semantic association’ (e.g. see Jinni.com) and/or other forms e.g. Social (e.g. see this intriguing article on the $1m recommendations challenge from Netflix).

For all methods, the inconsistencies of the metadata recorded (e.g. is the media described accurately using your terms) is frequently a challenging limitation.

To a degree though, content discovery has always been a process of ‘trial and error’. Consumers read, hear or see a load of ideas, try a few out, stick to the ones they like, and grow to trust the means of discovery that is most successful for them.

To this end, an element that appears to be missing in many discovery processes today is the measurement of success rate for the user – “was this a good recommendation for you”? In our view, discovery applications that accurately track success well (easily, with a good UI, and with a tangibly good and improving success rate) will ultimately prove successful. All of the above techniques could and to a greater or lesser extent do adopt this approach, although it isn’t yet clear which will perform the best in the market.

Delivering the goods

The challenges of delivering content, particularly large volume (e.g. HD Video) and/or latency sensitive content (such as multi-player virtual gaming), were not addressed in the Digital Entertainment session, though Software Defined Networking (SDN), which offers the promise of more efficient routing through networks for certain traffic, was discussed in the Digital Economy session. Content Delivery Networks and other Broadband design techniques have also been addressed at length in other STL Partners research and brainstorms

However, ‘Bandwidth’ was one of the key determinants of success according to the ‘BBC’ heuristic offered from Mitch Berman’s experience as a guide to how mobile entertainment will operate in different markets: Bandwidth; Business Model; and Culture. (NB We think this can also be seen as a shorthand variant of our business model framework, with culture being a key driver of the content proposition, bandwidth of the technical capability, and business model as the value proposition.) 

Getting money commensurate with the time spent on mobile

A major challenge for advertising funded mobile entertainment is that there is a significant gap between the ratio of the amount of time spent viewing mobile and the money spent on it, and other forms of media. This is illustrated by the stats that:

  • For The Weather Channel, mobile is 1.5 X the traffic but less than 50% of the revenue;
  • 10% of media consumption occurs online Vs. 1% media spend (from the presentation by Cary Tild, CIO GroupM in subsequent Marketing and Advertising session).

While this imbalance is genuine, there are important advantages and limitations to mobile as a medium that haven’t yet been fully exploited or overcome, respectively.

One of the major limitations has been the need for more effective commercial inventory on mobile. At the Brainstorm there was, for example, much discussion on the limitations of banner type ads in a mobile environment. Many more innovative forms are now evolving, illustrated by:

  • The Weather Channel’s experimental creative commercial content within its app, in which instead of a rectangular banner at the top of the screen, appropriate commercial content is embedded on background of the weather screen (e.g. a cloud-wrapped image from a mystery film on a cloudy day’s forecast screen);
  • New trial applications that insert products virtually in existing content (e.g. a soft-drink on a table in an old TV show, as demonstrated in test form by ReinCloud);
  • And subsequently, the launch of Facebook Home, designed to increase the commercial inventory available to Facebook by taking over the screen of a user’s smartphone.

In the same way that advertising has always evolved (from print to radio, radio to TV, etc.), there is still much to be learned through innovation and experimentation – and of course the related measurements of success.

Charging differently for content rights by content owners, e.g. by the use of content rather than as an upfront fee, was also discussed, although many content owners are reluctant to move to or even test this model as they see it representing a significant risk to existing revenue streams.

The digital economy core themes of ‘big data’ and ‘localisation’ were also raised, and an example given by the Weather Company of a highly effective promotion of grass seeds based on locality and the detection of key seasonal weather changes.

Finally, a key theme in common with the subsequent advertising session was that proving the effectiveness of models to consumers, brands, and investors was the key step for most mobile entertainment concepts. We see thoughtful design, coupled with trial and experimentation, effective measurement and the ongoing application of learning processes to be central to achieving that proof.

Next Steps

Effectiveness in the ‘discovery’ phase of digital service is a key success criterion, particularly in Digital Entertainment. We will continue to research and explore this area in our Executive Brainstorms in Europe, the Middle East, and Asia-Pacific.

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

  • Brainstorm: Stimulus Presentations – summary and key points
  • Brainstorm: Table Discussions
  • Verbatim delegate questions & comments
  • Brainstorm: Panel Session in summary

…and the following figures…

  • Figure 1 – Traditional linear TV model is facing multiple disruptions
  • Figure 2 – Non-linear forms of TV becoming a massmarket requirement
  • Figure 3 – Tablets are changing the TV/video landscape
  • Figure 4 – The mobile problem
  • Figure 5 – Whither digital collectors?
  • Figure 6 – Shine on you crazy diamond?
  • Figure 7 – Sharing the locker?
  • Figure 8 – Do we all want libraries?

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 27 page report in PDF format here. Non-Members, please subscribe here. The Digital Economy, Consumer Experience (including service ‘discovery’), Digital Commerce and the Internet of Things 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

The 2013 Silicon Valley 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. Around 30 executives from entertainment, media, telecoms and technology companies participated in this session in total.

The focus was on looking at “the true role for mobile” in the digital entertainment industry. Opening the session informally, various attendees were canvassed about their intentions & hopes for the day. This yielded a desire for information to assist in business modelling, to learn about the realities of the US entertainment market – or just to experience “inspiration and surprise” from a diverse set of speakers.

Objective: How to Make Mobile Work

The session covered three presentations and a demo, spanning the width of the entertainment business from TV to books, and from user behaviour to advertising. Its principle focus was around how content and telecom companies could generate sustainable businesses by leveraging the trend towards mobility – both devices and networks.

  • Designing compelling mobile entertainment experiences
  • 4G: The impact on video distribution and consumption economics
  • Latest models for monetisation

The session included three Stimulus Speakers:

  • Andre James, Partner, Bain & Co
  • Alex Linde, Vice President, Mobile & Digital Apps,The Weather Channel
  • Keith McMahon, Senior Analyst, STL Partners/Telco 2.0

In addition, Dan Reitan, CEO, Reincloud gave an Innovation Showcase demo, after which these four were joined on the debate panel by two other industry luminaries:

  • David Gale, EVP New Media, MTV
  • Mitchell Berman, Principal, Blend Digital

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

The Great Compression: surviving the ‘Digital Hunger Gap’

Introduction

The Silicon Valley Brainstorm took place on 19-20 March 2013, at the Intercontinental Hotel, San Francisco.

Part of the New Digital Economics Executive Brainstorm & Innovation Series, it built on output from previous events in Singapore, Dubai, London and New York, and new market research and analysis, and focused on new business models and growth opportunities in digital commerce, content and the Internet of Things.

Summary Analysis: ‘The Great Compression’

In the next 10 years, many industries face the ‘Great Compression’ in which, in addition to the pressures of ongoing global economic uncertainty, there is also a major digital transformation that is destroying traditional value and moving it ‘disruptively’ to new areas and geographies, albeit at diminished levels.

In previous analyses (e.g. Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon) we have shown how key technology players in particular compete with different objectives in different parts of the digital value chain. Figure 1 below shows via crossed dollar signs (‘New Non-Profit’) the areas in which companies are competing without the primary intention of driving profits, which means that traditional competitors in those areas can expect ‘disruptive’ competition from new business models.

Figure 1 – Digital disruption
Digital disruption occurring in many industries Mar 2013

Source: STL Partners ‘Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon’

 

The Digital Hunger Gap

For the incumbent industry players we call the near-term results of this disruption ‘The Digital Hunger Gap’ – the widening deficit between past and projected revenues. Chris Barraclough, Chief Strategist STL Partners presented the classic Music Industry case study of the ‘Hunger Gap’ effects of digital disruption.

Figure 2 – The Music Industry’s ‘Hunger Gap’
The Music Industry's ‘Hunger Gap’ Mar 2013

Source: STL Partners

 

In a vote, 95% of participants agreed that something similar would happen in other industries.

Chris then presented our initial analysis of the ‘Hunger Gap’ for telcos (to be published in full shortly), and asked the participants where they thought the telco industry would be relative to its 2012 position in 2020.

Figure 3 – Participants’ views on forecasts for the telecoms industry
Participants' views on forecasts for the telecoms industry Mar 2013

Source: Silicon Valley 2013 Participants / STL Partners

 

As can be seen, participants’ views were widely spread, with a slight bias towards a more pessimistic outlook than that presented of a recovery to 2012 levels.

Chris argued that as the ‘hunger gap’ widens, and before new revenues are developed, there will be massive consolidation and cost-reduction among incumbent players, and opportunities for innovation in services, but the chances of success in the latter are very low and require a portfolio approach and either deep pockets, exceptional insight, or considerable good fortune.

Richard Kramer, Managing Partner of Arete Research, also presented a deflationary outlook for all but the leading consumer technology players in the handset and tablet arena.

Participants then voted on which areas needed the most significant changes in their business – and existing managements’ ‘mindset’ was voted as the top priority.

Figure 4 – ‘Mindset’ is the biggest barrier to transformation
'Mindset' is the biggest barrier to transformation Mar 2013

Source: Silicon Valley 2013 Participants / STL Partners

 

It is also notable that all categories averaged 3.0 or over – or needing ‘Significant Change’. This points to a significant transformation across all industries.

Content:

  • Opportunities
  • Telco 2.0 Strategies
  • Big Data and Personal Data
  • Digital Commerce
  • Digital Entertainment
  • Mobile Advertising & Marketing
  • The Internet of Things
  • Outlook by Industry
  • Next Steps

 

  • Figure 1 – Digital disruption
  • Figure 2 – The Music Industry’s ‘Hunger Gap’
  • Figure 3 – Participants’ views on forecasts for the telecoms industry
  • Figure 4 – ‘Mindset’ is the biggest barrier to transformation
  • Figure 5 – The ‘Telco 2.0’ opportunities for CSPs
  • Figure 6 – The impact of ‘Software Defined Networks’ (SDN)
  • Figure 7 – Will ‘Personal Data’ be more useful than ‘Big Data’?
  • Figure 8 – STL Partners’ ‘Wheel of Digital Commerce’
  • Figure 9 – Who will in ‘SoMoLo’?
  • Figure 10 – Significant changes in viewing habits
  • Figure 11 – Transformation needed in the advertising industry
  • Figure 12 – Growth projections for M2M ‘mobile’ (e.g. 3G/4G) connected devices

Finance: Optimising the Telco 2.0 revenue and cost model

Summary: Structuring finances is key for the success of innovations in general and Telco 2.0 projects in particular. In this detailed extract from our new strategy report ‘A Practical Guide to Implementing Telco 2.0’, we describe the best ways to approach the management of revenues and costs of new business models, and how to get the CFO and finance department onside with the new approaches required (February 2013, Executive Briefing Service, Transformation Stream). Small table on finances
  Read in Full (Members only)  To Subscribe click here

Below is an extract from this 15 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation Stream here. Non-members can subscribe here or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

We’ll also be discussing our findings at the New Digital Economics Brainstorms in Silicon Valley, 19-20 March, 2013 and in EMEA 2013 in London, June 5-6.

Telco 2.0 has a different financial model to Telco 1.0

Cash Returns On Invested Capital (CROIC) is a good measure of company performance because it demonstrates how much cash investors get back on the money they deploy in a business. It removes measures that can be open to interpretation or manipulation such as earnings, depreciation or amortisation. In simple terms CROIC is calculated as:

Figure 1: Cash Returns On Invested Capital (CROIC)
CROIC Definition

While it is simplistic, STL Partners broadly sees the benefits of a Telco 2.0 Happy Pipe strategy accruing to a CSP in the form of higher EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) margins (owing to lower costs) and lower capital expenditures. A Telco 2.0 Service Provider strategy will seek to also achieve this as well as generate sales growth. It is, therefore, easy to see why many operators are interested in pursuing a Telco 2.0 Service Provider strategy: if they can execute successfully then they will receive a double-whammy benefit on CROIC because lower opex and higher sales will result in more free cash flow being generated from lower levels of invested capital.

CROIC also demonstrates how the current financial metrics used by operators – particularly EBITDA margins – preclude operators from considering different operational and business models which may have lower EBITDA margins but higher overall cash returns on invested capital. Thus, as shown in Figure 2 (showing relative rather than actual financials), CSPs tend to focus on the existing capital-intensive business which currently generates CROIC of around 6% for most operators rather than investing in new business model areas which yield higher returns. The new business model areas require relatively low levels of incremental capital investment so, although they generate lower EBITDA margins than existing Telco 1.0 services, they can generate substantial CROIC margins and can ‘move the needle’ for operators.

Specifically, Figure 2 illustrates the way that different skills and operational models translate into different financial models by showing:

  • Telco 1.0 (Core Services + Vertical Industries Solutions (SI) + Infrastructure Services) requires high capital investment and generates relative low levels of revenue for each $1 of invested capital ($0.5-0.7) but at high EBITDA margin (30-50%). This results in healthy cash generation (EBITDA) but a large proportion of this cash needs to be reinvested as capital expenditure each year resulting in relatively modest levels of free cash flow and CROIC of 5.2-6.4% for a typical CSP.
  • Even if we exclude any capex and opex savings generated from becoming a Telco 2.0 Happy Pipe, the addition of additional revenues from Embedded Communications (see Strategy 2.0: The Six Key Telco 2.0 Opportunities) mean that a Happy Piper generates new revenues that require relatively low levels of capital investment. Although these ‘embedded communications’ revenues are at a lower margin than the core services (28% compared with 45%), they require little incremental capital expenditure. This means that free cash flow is healthy and CROIC for Embedded Communications is 10.7% lifting the Happy Piper overall CROIC percentage.
  • For the Telco 2.0 Service Provider, again setting aside any efficiency benefits from adopting Telco 2.0 principles, the two pure-play Telco 2.0 service areas – Third-party Business Enablers and Own-brand OTT – have very different financial characteristics. They generate much lower EBITDA margins (15-20%) but generate significantly higher sales relative to capital investment ($1.4-2.0) and so are able to generate substantially higher CROIC than the Telco 1.0 services.

In essence, the new ‘product innovation’ businesses associated with being a Telco 2.0 Service Provider are much closer to an internet player such as Amazon or the early Google business (prior to heavy capital investment in fibre and data centres) in the way they make money. Not convinced? Look at Figure 3 which demonstrates the return on total assets generated by CSPs and three key internet players – Microsoft, Google and Amazon. Microsoft, a software business, generates high margins on a relatively low capital base (and hence generates very strong returns) owing to its dominant position on the desktop. Microsoft’s issue is growth not profitability, hence the big investments it is making in its internet business and in mobile. The young

Google and Amazon are classic product innovation businesses – low margin and high sales generation relative to invested capital. The CSP group all generate sales of $0.3-0.7 per $1 of capital but generate higher margins than Amazon and Google before 2005.

So we can see that the new Telco 2.0 business model makes money in a different way to the traditional business and needs to be managed and measured in a new way. Let’s explore the implications of this in more detail.

Figure 2: Cash Returns on Invest Capital of different Telco 2.0 opportunity areas

This table demonstrates the relative, rather than absolute, financial metrics for different CSP opportunity areas. The starting point is a nominal $1,000 of invested capital in the CSP network that results in $500 of annualised ‘Core Services’ revenues. Levels of invested capital, sales, EBITDA, annual capex, tax and free cash flow are then shown for each of the opportunity areas.

Different returns of different business models

Figure 3: Different financial models illustrated – CSPs vs Internet Players

This chart shows how different businesses generate returns by plotting asset intensity (x-axis) against profitability (y-axis). Note that the profitability measure here (NOPAT margin) is not directly comparable to the EBITDA margin in Figure 2 as this is post-taxation.

Different returns at different stages of business development

Revenue model implications and guiding principles

The different types of revenue to be considered when developing a new Telco 2.0 service are outlined in detail in the A Practical Guide to Implementing Telco 2.0 in the section on the Telco 2.0 Service Development Process. These include different revenue types (such as single stream, multi-stream, interdependent), different revenue models (subscriptions, unit charges, advertising, licensing and commissions) and different sources (consumer, SME, enterprise as both end users and as third-party service providers – advertisers, merchants, etc.). It is clear that:

  • Telco 1.0 services are largely single stream, confined to a few models (subscription and per unit charging) and sourced from end users (consumers, SMEs and enterprises).
  • Telco 2.0 services typically have more revenue types, including interdependent (two-sided revenues), introduce more revenue models, including advertising and commission, and source revenues from third-parties as well as end-users.

But what about how these new revenue types, models and sources impact the overall CSP business? How should (finance) managers now evaluate services given the different financial models between Telco 1.0 and Telco 2.0? What constitutes ‘attractive’ now? What metrics are the right ones to use? What trade-offs between the Telco 1.0 and Telco 2.0 revenue models need to be considered?

Five guiding principles for revenue models

We lay out 5 revenue model guiding principles to help you address these knotty questions below:

1. Ensure your revenue model supports your overall strategy and need to build appropriate ecosystem control points.

In the Telco 1.0 world, the revenue model is simple and, although pricing is complex, decision- making is simplified by clear goals – to maximise the number of paying users and manage the price-volume trade-off (higher prices = lower volume of users or transactions) to maximise overall returns from communications services. The Telco 2.0 world is far more complex. As well as having ‘more revenue levers to pull’, management needs to consider the company’s overall digital strategy beyond communications.

CSPs need to consider where and how they will create one or more control points within the digital ecosystem. Revenue and pricing strategy is a core component of this. In some arenas – payments for example – CSPs may choose to price their services very low or make them free to build up a large number of mobile wallet users and a strong merchant network that can be monetised in another arena – mobile advertising perhaps. In other words, management cannot take a siloed approach to the CSP revenue model – there is a need to think horizontally across the CSP digital platform.

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

  • The rest of the five guiding principles for revenue models
  • Five guiding principles for cost models
  • Final thoughts on Telco 2.0 finances – how to work with the Finance team


…and the following figures

  • Figure 1: Cash Returns On Invested Capital (CROIC)
  • Figure 2: Cash Returns on Invest Capital of different Telco 2.0 opportunity areas
  • Figure 3: Different financial models illustrated – CSPs vs Internet Players
  • Figure 4: Revenue metrics – Telco 1.0 and Telco 2.0 examples
  • Figure 5: Product Innovation vs Infrastructure cost models – Unilever & Vodafone


Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation Stream can download the full 15 page report in PDF format hereNon-Members, please subscribe here or email contact@telco2.net / call +44 (0) 207 247 5003.

A Practical Guide to Implementing Telco 2.0

 

Detailed table of contents

Section

Sub-sections

Part One: Identifying Telco 2.0 Opportunities

Developing the Right Telco 2.0 Strategy

  • Applying Porter’s thinking to the current telecoms market
  • Generic Telco 2.0 strategic options
  • Telco 2.0 strategies: how they drive shareholder returns
  • Which Telco 2.0 strategy for your organisation
  • Strategy comparison case studies: A Telco 2.0 Happy Piper (Vodafone UK) versus Telco 2.0 Service Player (O2)

Identifying & Prioritising Telco 2.0 Innovations

  • A taxonomy of Telco 2.0 opportunities
  • From isolated innovations to an integrated platform
  • Two approaches to identifying Telco 2.0 innovations
  • Approaches
  • Case study:  The STL Partners Innovation Scouting Service
  • Evaluating the potential opportunities: a structured approach to screening

Part Two: Implementing Telco 2.0 Opportunities

Introduction

  • A framework for innovation and business model transformation for telecoms

Service Offerings: Bringing Telco 2.0 Propositions to Market

  • A 12-stage end-to-end process for service development
    1. 1. Customer intentions and draft press release
    2. 2. Detailed value proposition and use cases
    3. 3. Fast validation with users
    4. 4. Capabilities assessment and own/partner role definitions
    5. 5. Revenue and cost models
    6. 6. Evaluation and business case
    7. 7. Competition and regulation
    8. 8. Technology and build process
    9. 9. Proof of Concept and final build
    10. 10. Sales and marketing
    11. 11. Launch
    12. 12. Evaluation and continuous development
  • Case studies: Vodafone 360, O2 Priority Moments
  • Checklists and templates for each stage

Value Network: Internal – Getting the Organisation Right to Deliver Telco 2.0 Innovation

  • Centralised versus decentralized organization structures
  • Integrating Telco 2.0 into the core organisation versus creating an independent unit
  • Case studies on different approaches: Telefonica and KPN

Value Network: External – Partnering to Grow the Pie

  • Evaluating closed versus open business models
  • Collaborating with other operators – when and how to do it
  • Working with other service providers – start-ups, established vendors and ‘OTT players’
  • Determining when to collaborate and when to compete

Technology: Prioritising Activities to Support Business Transformation

  • Understanding the developing demands on IT resources
  • Priority new functional area: Customer data
  • Approaches to IT transformation: Big Bang versus Continuous Improvement
  • Evaluating IT transformation approaches: a structured screening methodology
  • Case studies on IT transformation approaches: Vodafone and Telefonica

Finance: Optimising the Telco 2.0 Revenue & Cost Model

  • Revenue drivers: key revenue models and sources of revenue
  • Cost drivers: key types of cost and cost models
  • A framework for guiding decisions about revenue and cost management
  • Implications of new business models on financial and operational metrics

Marketplace: Managing the Regulatory Environment

  • Making the case against net neutrality…
  • …and for the ability to collaborate with other telecoms players to build value
  • Recommended next steps for CEOs

Cloud 2.0: Telco Strategies in the Cloud

Will Telcos be left behind?

Introduction

Cloud services are emerging as a key strategic imperative for Telcos as revenues from traditional services such as voice, messaging and data come under attack from Over The Top Players, regulators and other Telcos. A majority of these new products are delivered from the Cloud on a “pay for consumption” basis and many business customers are increasingly looking to migrate from traditional in house IT systems to Cloud-based or virtualized services to reduce costs, increase agility and decrease deployment times. Gartner recently estimated that the Cloud services market would be worth over $200 billion by 2016, roughly double the value of 2012 and with a CAGR of around 17% whereas traditional IT products and services will see just 3% growth.

It is clear that some Telcos have gained a greater understanding of the Cloud market, and are acting on that understanding, offering increasingly rich Cloud-based products and services, paving the way for Cloud 2.0. But for most Telcos, Cloud services remain secondary to their core business of voice and data delivery. Telcos are wrestling with issues of reduced margin on Cloud and how to stay relevant to their business customers.

This report looks at the development of the Cloud market providing clarity around the different types of cloud products and the impact that they have on business users. Cloud value propositions are examined along with criticisms of cloud products and services. We show that the current risks for Cloud customers represent an opportunity for Telcos and Cloud vendors because….

The report also looks at the development of Cloud 2.0 – a second generation or a more ‘intelligent’ evolution of Cloud products and services. Cloud 2.0 offers key additional benefits/capabilities to consumers, vendors, businesses and Telco/Service providers. These can be typified by cost reductions in the delivery and consumption of cloud services through working with scale players to provide basic compute services, ease of acquisition and most importantly the ability to deliver “mash-up” products and services by using API’s to provide integration between cloud services and products and Telco/service provider products such as Bandwidth, Voice, Management, Support and Billing. Cloud 2.0 is gaining rapid momentum and we show how there is still time for Telcos to play a key role in Cloud 2.0.

Who should read this report?

The report is a ‘must-have’ for all strategy decision makers, Cloud specialists and influencers across the TMT (Telecoms, Media and Technology) sector; in particular, CxOs, strategists, technologists, marketers, product managers, and legal and regulatory leaders in telecoms operators, vendors, consultants, and analyst companies. It will also be invaluable to those managing or considering medium to long-term investment specifically in Telco Cloud services, but also more broadly those involved within telecoms and adjacent industries, and to regulators and legislators.

Contents

Executive Summary

Introduction

  • What is Cloud?
  • What is the Cloud Value Proposition?
  • Types of Cloud
  • Key criticisms of the Cloud
  • What is ‘Cloud 2.0’ and why does it matter?
    • Enterprise vs Consumer cloud, Fit with Telco 2.0 strategies

Market Structure & Opportunity

  • What is the shape and size of the market (revenues and profit)?
    • Total size, definitions of SaaS, PaaS, IaaS, VPC + forecasts
    • Advantages and limitations of XaaS definitions
  • What are the key customer segments and their needs?
    • SMBs vs Enterprise
    • Early adopters vs mass adopters
  • What is the opportunity for Telcos (market size and revenues)?
    • Share forecasts / ranges for Telcos
  • What are the most relevant cloud services for Telcos?
  • What are the key barriers?
    • Overall and by segment
  • Future Scenarios
  • What is the competitive landscape and who are the key players in Cloud Services?
    • Detailed competitor analysis, groupings by type and strategy Strategy review: Analysis of 6-10 key players, covering
      • Objectives, strategy, areas addressed, target customers, proposition strategy, routes to market, operational approach, buy / build partner approach
    • Key strategies of other players
    • Role of the network / operators to Vendor/partner strategies

Telco Strategies

  • Which strategies are Telcos adopting and what else could they do
    • Review of Telco attitudes and approaches based on following analysis
    • Grouping of Telcos by approach (if valid)
  • Which are the leading Telcos and what are they doing?
    • Case studies on 6-10 leading Telcos, covering:
      • Objectives, strategy, areas addressed, target customers, proposition strategy, routes to market, operational approach, buy / build partner approach
  • Outlines of 10 additional Telco strategies
  • What relationships should Telcos establish with other ecosystem players?

Conclusions and recommendations

 

Digital platform strategy: how Google, Apple and Amazon keep winning

From isolated innovations to an integrated platform

For the last six years, STL Partners has been working with telcos and their partners on the development of a new telecoms business model – ‘Telco 2.0’.  We have undertaken a significant amount of research into what Telco 2.0 could look like and explored in ‘The 2-Sided Telecoms Market Opportunity’ and ‘The Roadmap to New Telco 2.0 Business Models’, and other key research, how telcos can:

We have now published Part 1 of A Practical Guide to Implementing Telco 2.0 which focuses principally on how to implement Telco 2.0.  It gathers some of the techniques and lessons that STL Partners has been deploying with clients that are now implementing Telco 2.0.

The following edited extract, available in full to members of the Executive Briefing Service, explains the danger of considering each of the six Telco 2.0 opportunity areas as a separate value source by exploring the platform strategies of the internet players such as Google, Apple, Facebook, Amazon and Microsoft.  It illustrates how some areas lose money and how this ‘loss-lead’ approach makes sense as long as the overall value of the platform rises, and concludes that telcos must think about opportunities in an integrated ‘joined up’ way.

Telcos’ strategic environment is tough

In a tough global economy, with many telco markets rapidly reaching maturity, and facing competition from so-called ‘Over-The-Top’ (OTT) communications services, telcos face some difficult trading conditions.

In Euro telcos: fiddling while the platform burns? we shared an early sight of forecasts we’re working on of core services revenues, showing a fairly pessimistic snapshot of long term revenue decline (in this instance, based on UK revenues). In research conducted for the strategy report Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon we found that many industry senior execs believe that a major cause of the revenue decline were so-called ‘Over-The-Top’ (OTT) players.

Figure 1 – The predicted impact of ‘OTT’ players on telcos’ core business

OTT Players Impact
Source: Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon

 

Against this tough background, most telco CEOs appreciate that they cannot just cut their businesses to growth (or even maintenance for some) – they need new sources of value creation.

(NB. The concept of ‘Telco 2.0’ is not confined to the potential growth areas, but about enabling the telco business model to adapt and survive overall, as described in detail in Telco 2.0: Killing Ten Misleading Myths and The Roadmap to New Telco 2.0 Business Models.)

Figure 2 – Generic telco strategies

Generic Telco Strategies
Source: A Practical Guide to Implementing Telco 2.0

 

In this article we focus on new service strategies, and the six coloured columns on the right of the chart above refer to the six Telco 2.0 Opportunity Areas, which as a reminder are:
  • Extending and enhancing existing core services – voice, messaging, data, content – to deliver more value to customers.
  • Developing bespoke communications and IT solutions for specific vertical industries.
  • Leveraging infrastructure more effectively to improve the customer experience (offer greater speed and responsiveness) while reducing cost (offloading traffic onto cheaper networks) and generating new revenue (‘onloading’ traffic from more expensive networks).
  • Distributing existing products and services via new channels and to new customers such as embedding voice and other communications services within enterprise business processes or bundling connectivity in with consumer products (this includes some M2M applications).
  • Deploying assets including identity and authentication capabilities and customer data to both improve customers’ experience of existing core services and develop valuable new enabling services for third-party enterprises and consumers.
  • Developing products and services that are largely own brand ‘OTT’ – independent of the network.

 

Current telco approach: silos of growth

As we have also illustrated previously, there are many new services within the six Telco 2.0 opportunity areas which can generate value for telcos.

Figure 3 – Examples of the six Telco 2.0 Opportunity Types

Examples of the six Telco 2.0 Opportunity Types
Source: The Roadmap to New Telco 2.0 Business Models

But it is highly unlikely that every service, even if ‘successful’ in terms of becoming big and popular, will directly generate revenue.  Indeed, some services should be designed from the outset to be free and loss-making for the telco. Why?  Because by doing this the telco can generate more value in other areas. Google does this with free search for consumers – it makes more money from advertisers owing to high search volumes.

Many telco managers simply do not appreciate this point.  In telcos, each and every service tends to evaluated independently and if it does not meet stringent business case benchmarks, it is not progressed.  This tends to lead to some creative use of pricing and volume assumptions in many business cases to ensure that services get over the hurdle.

To see why this is misguided, it is helpful to think of current and future telco services as part of a digital value chain (as in Figure 4 below). There are devices, operating systems and applications (first segment of the value chain) that use data connectivity (second segment) for a range of applications and services such as advertising and marketing, the sale of physical goods and digital content, making payments and delivering enterprise solutions.  Voice and messaging too is increasingly become another data service and this is set to increase as IP networks become end-to-end on fixed and mobile.

As already noted, each of the telco opportunity areas contain services that can be offered in different segments of the value chain:

  • Voice and messaging are the traditional Core Services and digital content is the area into which many telcos have sought to extend.
  • Vertical Industry Solutions seek to mash-up data and voice and messaging with enterprise IT systems to develop bespoke services.
  • In Infrastructure Services, telcos will seek to make their data networks and voice and messaging capabilities available to other telcos on a wholesale basis.
  • Data and voice and messaging, as well as enterprise applications will similarly be made available to businesses seeking to integrate them into their core offerings in Embedded Communications.
  • Telcos are seeking to leverage their customer data and media inventory to offer advertising  and marketing solutions and their authentication and collection capabilities to deliver payment services as Third-party Business Enablers.
  • Finally, software skills will be required to offer a range of digital solutions similar to those from the OTT players in Own-brand OTT Services.

Essentially, telcos can theoretically offer a one-stop shop for consumers and enterprises across the digital value chain.  The challenge at the moment is that telcos think of each service, and each stage of the value chain, as a profitable new revenue source.  Services are thus created in silos with little thought given to the customer experience across the value chain and, importantly, to the creation of value across all stages of the chain.

As Figure 4 shows, telcos see opportunities for value creation in every single value chain segment (although not every opportunity area covers every segment).

Figure 4 – Telcos see opportunities to create value in every value chain segment

Telcos see opportunities to create value in every value chain segment
Source: A Practical Guide to Implementing Telco 2.0

1. Devices, OS, apps & software have been placed in brackets because the handset subsidies that telcos offer for devices could be construed as a source of profitable revenue or as an enabler of data and voice and messaging revenues depending how they are priced and accounted for.

Why does it matter that telcos are seeking to generate profitable growth in each segment of the value chain?  After all, profit for shareholders is the ultimate goal.  The problem with this strategy stems from the integrated platform strategies of the internet players – and the challenges of competing with them.

Content:
  • From isolated innovations to an integrated platform
  • Telcos’ strategic environment is tough
  • Current telco approach: silos of growth
  • The integrated platforms of the internet co-opetition
  • Conclusions – key lessons for telcos

  • Figure 1 – The predicted impact of ‘OTT’ players on telcos’ core business
  • Figure 2 – Generic telco strategies
  • Figure 3 – Examples of the six Telco 2.0 Opportunity Types
  • Figure 4 – Telcos see opportunities to create value in every value chain segment
  • Figure 5 – Internet giants are pursuing platform strategies
  • Figure 6 – Time is running out for telcos

Telco 2.0: Killing Ten Misleading Myths

Summary: ‘Telco 2.0’ has evolved considerably since we put forward the original concept for telcos’ future success in 2006. Here we dispel ten myths and misunderstandings that have also evolved that can misdirect strategy. (August 2012, Executive Briefing Service, Transformation Stream.)

impact of 2sbm aug 2012

  Read in Full (Members only)   To Subscribe click here

Below is an extract from this 24 page Telco 2.0 report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation stream here. Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

We are about to publish a new strategy report ‘A Practical Guide to Implementing Telco 2.0‘ and will be previewing findings at the invitation only Executive Brainstorms in Dubai (November 5-7, 2012), Singapore (3-5 December, 2012), Silicon Valley (19-20 March 2013), and London (23-24 April, 2013). Email contact@stlpartners.com or call +44 (0) 207 243 5003 to order the report or find out more.

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Executive Summary – Killing Ten Myths

As an organisation devoted to driving innovation, Telco 2.0’s thinking has continually evolved. Today, most of our work is focused on how to implement new business models, and helping industry players develop strategies and activities to address new threats and opportunities presented by adjacent players.

We have also learned that as the thinking has evolved it has spawned some myths and misconceptions. (NB. This is not an attempt to stifle insightful criticism or debate, as intelligent challenges and critiques are essential to the development of sound strategy and well informed decision making, and we welcome such challenges.)

What matters about these myths is that they can inject a misleading or distracting idea capable of derailing balanced strategic consideration. The propagandists’ favourite weapons of ‘fear, uncertainty and doubt’ can easily and accidentally be triggered in this way. To counter this, here in summary are our ‘Telco 2.0 realities’ to what we’ve found to be the most prevalent and injurious misconceptions of Telco 2.0.

Figure 1 – Telco 2.0: Misleading Myths Vs. Realities

Misleading Myths and Realities of Telco 2.0

Source: STL Partners / Telco 2.0

Background: Telco 2.0 – then and now

When we first started the Telco 2.0 Initiative in 2006, the decline of the traditional telecoms industry business model based on voice and messaging seemed a long way off to most. ‘Broadband’ and ‘mobile data’ were still relatively immature propositions with great prospects for growing the industry further. ‘Smartphone’ was barely even a word, let alone a global phenomenon, and ‘tablets’ were what you took for a headache.

Most of our initial concepts have stood the tests of time and hindsight well. We drove for radical change in how the telecoms industry looked at:

  • Voice and messaging communications services;
  • The separation of services and network;
  • How networks would be increasingly powerful and intelligent ‘at the edge’;
  • The ongoing empowerment and participation of consumers;
  • Platforms’ that enabled new business to consumer services by re-purposing telco assets.

Subsequently, we looked at:

Next Steps

Our next action on the overall Telco 2.0 strategy agenda will to be to publish a new report: ‘A Practical Guide to Implementing Telco 2.0’. We will also presenting key findings at the Digital Arabia (Dubai, 5-7 November 2012) and Digital Asia (Singapore, 3-5 December 2012) Executive Brainstorms.

We are also launching two new services:

  • The Telco 2.0 Benchmarking Index, starting with a major report on the strategies of the top and most innovative telcos, and showing how the world’s telcos measure up to the leading standards of innovation;
  • The Telco 2.0 Innovation Scouting Service, designed to identify and evaluate, in a structured but flexible process, the best innovations for client members.  The service focuses on a full suite of revenue-generating products and services but can encompass other initiatives such as process improvements in customer care, operations etc.

To find out more about these or apply for an invitation to the Brainstorms, please email contact@stlpartners.com or call +44 (0) 207 247 5003. Additionally, we’ll be publishing major new research into Strategies in Voice and Messaging, ‘Telco Strategies in the Cloud’, and the impact and opportunities of combining personal data and digital and mobile commerce.

The rest of this report outlines the myths and their antidote realities in more depth (first two sections previewed below).

Telco 2.0 is about transforming telecoms business models

Myth 1: Telco 2.0 is just about two-sided business models

The concept of the two-sided telecoms business model has certainly had an impact on the industry, as can be seen for example in the illustrations below from Vodafone and Telefonica investor presentations.

Figure 2 – The impact of the Telco 2.0 Two-Sided Telecoms Business Model

Impact of Telco 2.0 on Investor Presentations

Source: STL Partners / Telco 2.0

While we’re pleased to see the idea of the two-sided business model propagated, there is a degree to which the idea has been a victim of its own success. It appears that some people now think that the two ideas of ‘Telco 2.0’ and ‘Two-Sided Telco Business Models’ are one and the same, and that the two-sided model is the totality of Telco 2.0.

This is not correct. While we still use the concept of the two-sided telco business model as a tool to explain how operators need to consider how they add value to consumer and enterprises and show that revenues can flow from multiple sources, ‘Telco 2.0’ is much more than this and includes:

  • Extending and enhancing existing core services – voice, messaging, data, content – to deliver more value to customers.
  • Developing bespoke communications and IT solutions for specific vertical industries.
  • Leveraging infrastructure more effectively to improve the customer experience (offer greater speed and responsiveness) while reducing cost (offloading traffic onto cheaper networks) and generating new revenue (‘onloading’ traffic from more expensive networks).
  • Distributing existing products and services via new channels and to new customers such as embedding voice within enterprise business processes or bundling connectivity in with consumer products.
  • Deploying assets including identity and authentication capabilities and customer data to both improve customers’ experience of existing core services and develop valuable new services for third-party enterprises and consumers.
  • Developing products and services that are largely ‘OTT’ – independent of the network.

STL Partners believes that business model innovation equates to business transformation.  Innovation can occur or be originated in many different ways and that each of these can have a knock-on effect through an organisation and beyond it to other organisations and industries.  Our analytical framework for business model innovation covers 5 domains (see Figure 3).

Figure 3 – Analytical framework for business model innovation

STL Partners Business Model Framework

Source: Source: Faber et al; Designing business models for mobile ICT services, 2001; adapted and developed by STL Partners

Redesigning Telco 1.0 really matters

Myth 2: Telco 1.1 isn’t part of it

Figure 4 – Existing service revenues in the UK market

Current Data Revenue Growth EMEA June 12

 

Source: STL Partners / Telco 2.0

To illustrate the challenges facing the existing business model, Chris Barraclough, MD and Chief Strategist, Telco 2.0 / STL Partners, presented the above example analysis of voice and data revenues from the UK market at the EMEA Brainstorm in June 2012 as a preview of analysis we are conducting across the main markets in Europe. Two-thirds of the delegates supported this analysis, with over half saying they thought this was ‘about right’ – although just under a third thought it too pessimistic. Whatever the eventual outcome in the market, there is little doubt that the existing business model is under increasing pressure across many regions and for many operators.

There is a natural temptation when presented with forecasts like this for executives to just seek out the nearest red pen and start to cut their way to profits. While a degree of cost reduction is clearly required, this cannot be the sole strategy or commoditisation and a total lack of flexibility is the only possible outcome.

It is obviously important to extend the life of the core business model, and telcos have long been adept at lobbying the regulator as a primary strategy. Further to this, both continuing to re-price data and bundle in new services are also proven strategies. But this really cannot change the game enough and telcos need to fundamentally improve the interactions they have with their customers to retain any relevance as consumer-facing entities.

We have looked at many ways in which telcos can learn how to improve their customers’ experience from the leading web and physical retailers, with Amazon as a particular case in point. This is critical both to telcos existing business and to their prospects for building new businesses. Better service / product experience design and delivery, and the use of customer data to drive personalisation and intelligence in their experiences, are key opportunities to improve customer interactions for telcos, as shown in Figure 5 – The ‘Telco 2.0 Flywheel’.

Figure 5 – The ‘Telco 2.0 Flywheel’

Telco 2 Customer Experience Flywheel

Source: STL Partners / Telco 2.0

And quality is not the only issue: the quantity of customer interactions matters too, and for many telcos the quantity is now declining. For customers it is a simple equation: experience = relevance, so if your customers start using you less, you become less relevant.  Telcos need to find new ways to interact with customers.  

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

  • All telcos need to innovate
  • New Digital Business Models impact all global marketsTelcos need to act now
  • Some new models will create value
  • There’s more to strategy than ‘OTT’
  • Collaboration and Innovation both have roles
  • Strategy, platforms, people, and skills are the priorities
  • It’s not just a ‘Pipe Dream’

…and the following figures…

  • Figure 1 – Telco 2.0: Misleading Myths Vs. Realities
  • Figure 2 – The impact of the Telco 2.0 Two-Sided Telecoms Business Model
  • Figure 3 – Analytical framework for business model innovation
  • Figure 4 – Existing service revenues in the UK market
  • Figure 5 – The ‘Telco 2.0 Flywheel’
  • Figure 6 – Optimism in APAC
  • Figure 7 – Time remaining on key strategic control points
  • Figure 8 – Different Business Models need Different Metrics
  • Figure 9 – The six opportunity areas have different models
  • Figure 10 – ‘Under The Floor’ Pressures
  • Figure 11 – Six Telco 2.0 implementation strategies
  • Figure 12 – Telcos need new skills, systems, structures and incentives
  • Figure 13: The STL Partners 12-stage innovation development and launch process
  • Figure 14: A non-exhaustive collection of Telefonica’s Telco 2.0 projects
  • Figure 15: Vodafone – from splendid isolation in 2005 to local collaborator in 2011

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation stream can download the full 24 page report in PDF format hereNon-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Companies and Technologies Featured: ISIS, E5, Oscar, 4T Sverige, Vodafone, Telenor, Telefonica, Singtel, O2, Priority Moments, Top-Up Surprises.

LTE: APAC and US ‘Leading The Experience’

Summary: LTE is gaining traction in Asia Pacific and the US, despite challenges with spectrum, voice, and handsets. In South Korea, for example, penetration is expected to exceed 50% within 18 months. Our report on the lessons learned at the 2012 NGMN conference. (July 2012, Executive Briefing Service, Future of the Networks Stream).

LTE in Korea

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Below is an extract from this 14 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and Future Networks here. Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

We will be looking further at the role of LTE as an element of the strategic transformation of the telco industry at the invitation only Executive Brainstorms in Dubai (November 6-7, 2012), Singapore (4-5 December, 2012), Silicon Valley (19-20 March 2013), and London (23-24 April, 2013). Email contact@stlpartners.com or call +44 (0) 207 243 5003 to find out more.

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Taking the pulse of LTE

Introduction – NGMN 2012

In June, Telco 2.0 attended the main annual conference of NGMN in San Francisco. NGMN is the “Next Generation Mobile Network” alliance, the industry group tasked with defining the requirements for 4G networks and beyond. (It is then up to 3GPP and – historically at least – other standards bodies, to define the actual technologies which meet those requirements). Set up in 2006, it evaluated a number of candidate technologies, it eventually settled on LTE as its preferred “next-gen” technology, after a brief flirtation including WiMAX as well.

The conference was an interesting mix of American and Asian companies, operators (with quite a CTO-heavy representation), major vendors and some niche technology specialists. Coincidentally, the event also took place at the same time as Apple’s flagship annual developer conference at the Moscone Center across the road.

Although it was primarily about current LTE networks, quite a lot of the features that feature in the next stage, “LTE-Advanced” were discussed too, as well as updates on the roles of HSPA+ and WiFi. Some of the material was outside Telco 2.0’s normal beat (for example the innards of base station antennas), but there were also quite a lot of references to evolving broadband business models, APIs and the broader Internet value chain.

Key Take-Outs

In some countries, LTE adoption is happening very quickly – in fact, faster than expected. This is impressive, and a testament to the NGMN process and 3GPP getting the basic radio technology standards right. However, rollout and uptake is very patchy, especially outside the US, Korea and Japan. They are still problems around the fragmentation of suitable spectrum bands, expensive devices, supporting IT systems and the thorny issue of how to deal with voice. In addition, many operators’ capex budgets are being constrained by macroeconomic uncertainty. What also seems true is that LTE has not (yet) resulted in any substantive new telco business models, although there is clearly a lot of work behind the scenes on APIs and new pricing and data-bundling approaches.  

We are also impressed by the continued focus of the NGMN itself on further evolution of 4G+ networks, in resolving the outstanding technical issues (e.g. helping to drive towards multiband-capable devices, working on mobilised versions of adaptive video streaming), continuing the evolution to ever-better network speeds and efficiencies, and helping to minimise operators’ capex and opex through programmes such as SON (self-optimising networks).

ngmm: the engine of broadband wireless innovation

LTE adoption: accelerating – but patchy

One key conclusion from the event was the surprisingly rapid switch-over of users from 3G to 4G where it is available, especially with a decent range of handsets and aggressive marketing. In particular, US, South Korean and Japanese operators are leading the way. The US probably has the largest absolute number of subscribers – almost certainly more than 10m by the end of Q2 2012 (Verizon had 8m by end-Q1, with MetroPCS and AT&T also having launched). But in terms of penetration, it looks like South Korea is going to be the prize-winner. SKTelecom already has more than 3m subscribers, and is expecting 6m by the end of the year. More meaningfully, the various Korean presenters at the event seemed to agree the penetration of LTE could be as high as 50% of mobile users by the end of next year. NTT DoCoMo’s LTE service (branded Xi) is also accelerating rapidly, recently crossing the 3m user threshold, with a broad range of LTE smartphones coming out this summer, in an attempt to take the wind out of Softbank’s iPhone hegemony.

Figure 1: South Korea will have 30m LTE subs at end-2013, vs 49m population

LTE in Korea
Source: Samsung Electronics

This growth is not really being mirrored elsewhere, however. At the end of Q1, TeliaSonera had just 100k subscribers (mostly USB dongles) across a 7-country footprint of LTE networks, despite being the first to launch at the end of 2009. This probably reflects the fact that smartphones suitable for European frequency bands (and supporting voice) have been slow in arriving, something that should change rapidly from now onwards. It is also notable that TeliaSonera has attempted to position LTE as a premium, higher-priced option compared to 3G, while operators such as Verizon have really just used 4G as a marketing ploy, offering faster speeds as a counter to AT&T – and also perhaps to give Android devices an edge against the more expensive-to-subsidise iPhone.

Once European and Chinese markets really start to market LTE smartphones in anger (which will likely be around the 2012 Xmas season), we should see another ramp-up in demand – although that will partly be determined by whether the next iPhone (likely due around September-October) finally supports LTE or not.

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

  • New business models, or more of the same?
  • Are the new models working?
  • Wholesale LTE
  • Other hurdles for LTE
  • Spectrum fragmentation blues
  • Handsets and spectrum
  • Roaming and spectrum
  • But what about voice and messaging?
  • HetNets & WiFi – part of “Next-gen networks” or not?
  • LTE Apps?
  • Conclusions

…and the following figures…

  • Figure 1: South Korea will have 30m LTE subs at end-2013, vs 49m population
  • Figure 2 – Juniper: exposing network APIs to apps
  • Figure 3 – Yota is wholesaling LTE capacity, while acting as a 2G/3G MVNO
  • Figure 4 – A compelling argument to replace old public-safety radios with LTE
  • Figure 5 – NTT DoCoMo made a colourful argument about LTE spectrum fragmentation

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

Euro telcos: fiddling while the platform burns?

Summary: Most executives across the European telecoms industry accept that the current telco business model is in decline (the ‘burning platform’), but wholehearted action to create sustainable new models is not in place. We identify the key barriers and next steps to overcome them in this top-level analysis of findings from our recent EMEA Executive Brainstorm. (July 2012, Executive Briefing Service, Transformation Stream.)

UK Services Revenues: Actual and Forecast (index)

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Below is an extract from this 16 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation stream here. Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

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Executive Summary

The Burning Platform

It was clear at the Telco 2.0/New Digital Economics Brainstorm in London a few weeks ago that most executives across the European telecoms industry accept that the current telco business model is in decline (the ‘burning platform’), but wholehearted action to create sustainable new models is not in place. 

Figure 1 – The burning platform illustrated: e.g. forecast decline in UK revenues

UK Services Revenues: Actual and Forecast (index)

Source: Presentation by Chris Barraclough, Chief Strategist and MD Telco 2.0

Two thirds of delegates thought this leading indicator forecast ‘about right’ or ‘too optimistic’.

Telcos need to act more decisively

The core message to the leaders of the European telecoms industry is that they must make a more concerted effort to change direction now or will have much less control over their future destinies.

Some telcos are taking steps, but even the most advanced are still in experimental mode, and the rest somewhere between strategic slide-ware and tacit acceptance of a future as a ‘pipe’.

As well as prudent re-pricing of data and diligence in cost and efficiency management, the primary opportunities for telcos are to re-conceive the core communications proposition, re-define the overall experience of being a telco customer and ultimately to create interoperable multi-sided business models that help 3rd parties and end-users (people, organisations and devices) connect in more efficient and effective ways. These actions will create a more valuable and defensible role for telcos in the emerging digital economy.

Overcoming industry inhibitions

To progress, the industry needs to overcome the following challenges:

  • Time is short. Delegates perceived that telcos had significantly less time to secure strategic control points in the digital economy than at previous brainstorms. Telcos need to act more decisively now in payments, advertising, creating new forms of ‘OTT’ communications, identity and cloud services.
  • Money is hard to find. The business cases for some of the new models are complex and the economics are different from traditional telco business models. We know because we have been working on many recently, and have also been recommending important new evaluation metrics. It’s not straightforward, nor is it easy to fill the gap left by the predicted decline in the current model, but it is possible to create new value.
  • Technology is a tool, not a strategy. The business case for LTE, for example, is hard to make without new service revenues in addition to access, which somewhat begs the question of who and what is leading this major industry investment. 
  • The right people are hard to find. 95% of delegates thought there is a serious shortage of the internal skills needed to manage, innovate and deliver very different types of propositions. Understanding, addressing and filling this gap is a vital priority.
  • Customers will not solve the industry’s problems. Most customers – upstream and downstream – do not understand how telcos could help them in new ways. Our research shows a range in comprehension and belief in telcos’ abilities, so telcos need to work harder to create and sell new solutions.
  • It’s tricky to organise innovation and change at scale. The operators that are starting to take action face a complex organisational challenge: should innovation be built into the core business or established in a new unit? In the core it is closer to the heart but also more vulnerable to the organisation’s white blood cells (the ones that attack unrecognised intruders). In a separate unit it’s easier to grant more freedoms but it’s much more difficult to integrate and change the core. 
  • Collaboration: the Prisoners’ Dilemma. Many of the new business models will only work effectively if telcos cooperate on a common approach. This is usually slow and difficult (witness the slow progress of RCS-e and the demise of WAC). There is also regulatory uncertainty around industry collaboration, and fear of the regulator is quite reasonably a powerful internal inhibitor in telcos. Additionally, some players perceive they could achieve competitive advantage by ‘going it alone’. A way through this dilemma needs to be navigated, and our recent analysis suggests some new ways to think about this.
  • It’s hard to change a winning formula (even when you are losing). Financial markets have been keen on telcos’ relative stability and cash flows in turbulent economic times. At the same time there are also those high up in telco organisations who have known nothing but success with the existing model and who will argue to defend the status quo. Yet the financial markets, well known as fickle and irrational beasts, will at some point start to be much more sensitive to the structural change in the telco industry and seek a new direction. Unreasonably perhaps, they will expect change to happen quickly, and if this is not apparent, they will demand new leaders but by then it may be too late.

Next steps for STL Partners and Telco 2.0

Telco 2.0 first described the core challenges facing the industry six years ago in ‘How to make money in an IP world‘, and proposed the ‘two-sided telecoms business model‘ as a key part of the solution four years ago. Over the last year we have published the ‘Roadmap to New Telco 2.0 Business Models‘ describing core innovations needed, and ‘Dealing with the Disruptors – Google, Apple, Facebook, Skype and Amazon‘ outlining strategies in the adjacent competitive landscape.

We’re now driving a range of implementation projects with individual players and collaborative consortiums and will be publishing a further detailed Telco 2.0 implementation guide later this year. Through our research we will also be benchmarking telcos’ strategies, to help the capital markets better understand how to make investment choices in the industry, and looking in-depth at creative strategies in voice and messaging, m-commerce, cloud services and M2M, as well as continuing our work with the World Economic Forum on one of the biggest prizes, how telcos can play a pivotal role in enabling the emergence of a new class of economic asset, ‘Personal Data‘.

We will also be running further invitation only Executive Brainstorms in Dubai (November 6-7, 2012), Singapore (4-5 December, 2012), Silicon Valley (19-20 March 2013), and London (23-24 April, 2013). Email contact@stlpartners.com or call +44 (0) 207 243 5003 to find out more.    

Support for Key Findings

The Platform is burning

Figure 2 – Delegates broadly agreed with STL’s UK Revenue forecast

STL Partners UK Revenue Forecast (June 2012)

Chris Barraclough, MD and Chief Strategist, Telco 2.0 / STL Partners, presented an example analysis of voice and data revenues from the UK market, and predicted a 24% decline from the peak in 2009 to 2018.

Delegates broadly supported this analysis, with over half saying they thought this was ‘about right’. We will be conducting and publishing further analysis in the top 5 European markets over the next few months.

NB The original ‘burning platform’ reference comes from this article describing a choice between certain death and possible death, and is now used to describe a situation where people are forced to act by dint of the alternative being somewhat worse. Nokia recently made ‘burning platform’ a famous phrase in the handset part of the telecoms sector, but it’s now relevant to telcos themselves as they face significant declines in their core revenues.

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

  • Time is short
  • Money is hard to find
  • The right people are hard to find
  • Customers will not solve the industry’s problems
  • It’s tricky to organise innovation and change at scale
  • Collaboration: the Prisoners’ Dilemma
  • It’s hard to change a winning formula (even when you are losing)
  • Next steps

…and the following figures…

  • Figure 1 – The burning platform illustrated: e.g. forecast decline in UK revenues
  • Figure 2 – Delegates broadly agreed with STL’s UK Revenue forecast
  • Figure 3 – Time is running out for telcos
  • Figure 4 – The business case for Telco OTT Voice and Messaging is complex
  • Figure 5 – Telcos need to transform skills, systems, structures and incentives
  • Figure 6 – Upstream customers’ views on telco capabilities
  • Figure 7 – KPN is building innovation into the core rather than a separate business unit
  • Figure 8 – The Prisoners’ Dilemma
  • Figure 9 – It’s difficult to get the timing of new investments right 

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation stream can download the full 16 page report in PDF format hereNon-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Personal Data: how to make it a viable, customer-centred industry

Content:

  • Guiding Principles
  • The Market: evolving use cases
  • Industry Structure: the Personal Data Landscape
  • Legal: creating a bridging framework
  • Technical Stream: creating a universal language
  • Personal Data Rights Language (PDRL)
  • Next Steps

 

  • Figure 1 – A Selection of Other Legal Principles and Guidelines Examined
  • Figure 2 – Updated draft of the WEF Personal Data Principles
  • Figure 3 – The emerging landscape of uses
  • Figure 4 – The Personal Data Landscape
  • Figure 5 – The ‘BLT’ Approach – Business, Legal, Technical Mapping
  • Figure 7- ’System Rules Architecture’ for Legal Frameworks
  • Figure 7 – Rough Example of PDRL ‘Mark Up’ Language
  • Figure 8 – WEF Personal Data Milestone Roadmap

How to Spot a “Business Model Problem”

Introduction

This short introductory paper provides a brief overview of:

  • What a ‘business model’ is;
  • How to spot a ‘business model problem’;
  • Why business model innovation is important;
  • The challenges to the telco business model, and how business model innovation helps;
  • How STL Partners, the New Digital Economics Executive Brainstorms, and Telco 2.0 Research help to address these challenges.

NB. STL Partners focuses on ‘business model innovation’ in the digital
economy, outlining the theory, opportunities and best practice in the
field, and developing new strategies for clients. It also runs the Telco 2.0 and Digital Entertainment 2.0
Initiatives to research and promote new business models in those
sectors.

What is a business model?

A ‘business model’ is a structured articulation of a company’s strategic approach to making money.

Building on academic research into business model design, STL Partners has developed a five-part Business Model Framework as a core analytical tool (see Figure 1). STL Partners uses this framework to help consider all the implications of changes made to a business model. As well as considering the activity of a single organisation, it analyses how companies interact to deliver value and the specific roles played by different players.

Figure 1 – STL Partners’ Five Part Business Model Framework

STL Partners' Five Part Business Model Framework

Essentially, a service offering is delivered to customers in the marketplace (in competition with alternative products and services, and within the context of legislation and regulation). The value network is the collection of companies that together deliver the service offering – so, for example, a value network may include content partners or network infrastructure providers. They are supported in their activities by technology, which provides the specific functionality required to deliver the service offering. The whole ecosystem lives or dies according to its ability to make money (finance), which also determines the capital investment flowing into the ecosystem.

What is a ‘business model problem’?

A ‘business model problem’ can present a structural challenge to the sustainability of a company’s or an industry’s core approach to making money. In many cases, threats – and opportunities – are created by new business models coming into competition with existing ones.

Business model problems typically can’t be solved simply by employing a better sales manager, a price cut, or incremental cost cutting. Lateral solutions are needed which may involve new utilisation of existing assets or capabilities. The Roadmap to New Telco 2.0 Business Models report describes the strategic business model innovation opportunities we see for telcos.

How to spot a business model problem

Business model problems often manifest themselves as an insidious decline in business performance even in the absence of an obvious economic, operational or directly competitive threat. Further signs of a ‘business model problem’ include:

  • New kinds of competition. Business model challenges are often posed by new entrants, either from adjacent markets or start-ups unconcerned by the erosion of core revenues. For example, telcos’ business models are being disrupted by Internet companies, as described in Telco 2.0’s latest research on Google, Apple, Facebook, Microsoft/Skype and Amazon.
  • A surprising competitive proposition that addresses a need your business already serves, but in a new way. The nastiest type of surprise is someone else providing something for free to your customers that you charge for. Examples include Skype’s free VOIP calls, which compete with traditional PSTN telephony, and free newspapers (ad-funded) competing with paid-for papers.
  • Step changes in technology (e.g. LTE) and regulation which change the ‘rules of the game’, enabling new players to come into a market using new business models.
  • Unmatchable execution. Some business model innovators succeed in creating operations and value networks of such scale and/or complexity that it becomes very difficult to compete directly with them. Examples include the scale of major retailers’ buying power (e.g. Wal-Mart, Tesco), Apple’s highly-integrated digital value network and Google’s dominance of the web search market.

Why is changing your business model so difficult?

Figure 2 below summarises why many companies get caught out even if they know they face an issue with their business models.

Fundamentally, it is very difficult to embark on change when a business has been set on one successful business model for many years, has many assets wrapped up in this endeavour, and is still making substantial revenues and profits from this business – even if the need for change is obvious.

Figure 2 – Why is business model change so difficult?

Rabbit in Headlights

Why is digital business model innovation so important?

The underlying digitalisation of products, services, information and communications is creating a commonality of skills and capabilities across many previously disparate players in the new hyper-connected digital economy. IT companies, technology vendors, telecoms companies, internet players, retailers and entertainment companies are starting to possess increasingly overlapping skills and assets and this leads them into more competition with each other.

Furthermore, new technologies e.g. smartphones, tablets, LTE / Fibre, Cloud Services, Apps, M2M are continually shaking up the digital economy and enabling radical business model innovations. Both consumer and enterprise end-users are responding by behaving in new ways that take advantage of increasingly mobile, on-demand, multi-device services.

Hence the ‘New Digital Economy’ is evolving at a pace and level of complexity that continually offers both threats and opportunities…

Content

  • Apple, Google, Facebook – classic business model innovators
  • The ‘Great Game’
  • Disrupting the telcos
  • ‘Under-The-Floor’ (UTF) Players
  • Disruptions in Digital Entertainment and Commerce
  • Driving – or defending against – disruptive innovations

 

  • Figure 1 – STL Partners’ Five Part Business Model Framework
  • Figure 2 – Why is business model change so difficult?
  • Figure 3 – The ‘Great Game’
  • Figure 4 – Telco Business Model Innovation Challenges
  • Figure 5 – The impact of ‘OTT’ players on telcos’ business model
  • Figure 6 – Other ecosystem players, including potential ‘Under-The-Floor’ (UTF) Players
  • Figure 7 – The Telco 2.0™ ‘two-sided’ telecoms business model
  • Figure 8 – EMEA and APAC New Digital Economics delegates’ views of Telco 2.0 Strategies