Mobile Broadband 2.0: The Top Disruptive Innovations

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

Trends in European data usage

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Below is an extract from this 44 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and Future Networks Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £795 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003. We’ll also be discussing our findings and more on Facebook at the Silicon Valley (27-28 March) and London (12-13 June) New Digital Economics Brainstorms.

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Introduction

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

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

Under The Floor (UTF) Players Telco 2.0

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

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

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

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

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

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

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

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

Telco-driven disruption vs. external trends

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

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

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

External disruptions to monitor

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

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

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

Some of the areas being followed by Telco 2.0 include:

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

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

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

The mobile data explosion… or maybe not?

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

A J-curve or an S-curve?

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

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

Figure 1 – Trends in European data usage

 Trends in European Data Usage
 

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

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

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

Figure 2 – A plethora of mobile data traffic management solutions

A Plethora of Mobile Data Traffic Management Solutions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

…and the following figures…

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

Members of the Telco 2.0 Executive Briefing Subscription Service and Future Networks Stream can download the full 44 page report in PDF format hereNon-Members, please subscribe here, buy a Single User license for this report online here for £795 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, geographies, people and products referenced: 3GPP, Aero2, Alcatel Lucent, AllJoyn, ALU, Amazon, Amdocs, Android, Apple, AT&T, ATIS, BBC, BlackBerry, Bridgewater, CarrierIQ, China, China Mobile, China Unicom, Clearwire, Conex, DoCoMo, Ericsson, Europe, EverythingEverywhere, Facebook, Femto Forum, FlashLinq, Free, Germany, Google, GSMA, H3G, Huawei, IETF, IMEI, IMSI, InterDigital, iPhones,Kenya, Kindle, Light Radio, LightSquared, Los Angeles, MBNL, Microsoft, Mobily, Netflix, NGMN, Norway, NSN, O2, WiFi, Openet, Qualcomm, Radisys, Russia, Saudi Arabia, SoftBank, Sony, Stoke, Telefonica, Telenor, Time Warner Cable, T-Mobile, UK, US, Verizon, Vita, Vodafone, WhatsApp, Yota, YouTube, ZTE.

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

The value of “Smart Pipes” to mobile network operators

Preface

Rationale and hypothesis for this report

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

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

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

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

Sponsorship and editorial independence

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

About Tellabs

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

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

Executive Summary

Mobile operators no longer growth stocks

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

Two ‘smart pipes’ strategies available to operators

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

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

Porter

Strategy

Telco 2.0 strategy

Nature of smartness

Characteristics

Cost leadership

Happy Pipe

Smart network

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

Differentiation

Full-service Telco 2.0

Smart services

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

Source: STL Partners

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

Smart network strategy good, smart services strategy better

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

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

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

Telco 2.0 strategy

Nature of smartness

Cash Returns on Invested Capital

As-is – Telco 1.0

Low – relatively dumb

5.8%

Happy Pipe

Smart network

7.4%

Full-service Telco 2.0

Smart services

13.3%

Source: STL Partners

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

Opportunity Type

Approach

Typical Services

Core Services

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

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

Vertical industry solutions (SI)

Delivery of ICT projects and support to vertical enterprise sectors.

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

Infrastructure services

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

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

Embedded communications

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

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

Third-pary business enablers

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

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

Own-brand OTT services

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

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


Source: STL Partners

Regional approaches to smartness vary

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

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

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

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

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

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

Implementing a Telco 2.0 strategy is important but challenging

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

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

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

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

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

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

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

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

Conclusions and recommendations

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

Category

Importance for delivering smart strategy

Relative ease of implementation

Must get right

High

Easy

Strive for new role

High

Difficult

Housekeeping

Low

Easy

Forget

Low

Difficult

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

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

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

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

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

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

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

 

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

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

 

Report Contents

 

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

Report Figures

 

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

 

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

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

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

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

DECE UltraViolet explained

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

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

Source: Telco 2.0

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

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

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

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

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

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

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

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

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

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

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

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

Entertainment: A market too large and valuable to ignore

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

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

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

  

Source: STL Partners Estimates, OFCOM – UK Regulator

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

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

 

Source: Telco 2.0

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

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

Sizing the market

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

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

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

 

Source: PriceWaterhouseCoopers, Apple, Netflix, Telco 2.0

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

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

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

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

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

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

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

 

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

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

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

Entertainment’s primary role in securing consumer attention

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

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

Source: STL Partners Estimates, OFCOM – UK Regulator

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

DECE UltraViolet has a recipe for success

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

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

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

UltraViolet is getting the proposition right

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

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

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

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

All the right backers…

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

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

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

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

…with a common and urgent motivation

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

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

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

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

…and additional figures…

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

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