Three new telco business models: Soft-net, Cloud-net, Compute-net

Introduction

This report outlines three new telecoms business models that builds on previous research where we have outlined our vision of an emerging third age of telecoms called the Coordination Age. This is based on a global need to improve the efficiency of resource utilisation is manifesting in industries and individuals as a desire to “make the world work better”. We discuss this concept in detail in the following reports:

We believe that three new business models for telcos are emerging as part of the Coordination Age.

  • The Soft-Net: the core business remains connectivity, but the softwarisation of the network through SDN / NFV enables the network to adapt and scale to support new, advanced connectivity services. This includes third-party digital and networked-compute services that depend on the physical network connectivity the Soft-Net provides.
  • The Cloud-Net: also connectivity-focused, but with the production, delivery and consumption of services increasingly effected via the cloud (i.e. cloud-native). SDN and virtualisation enable capacity and services to be spun up, managed and delivered on demand over any physical network and device.
  • The Compute-Net: the core business is to provide distributed, networked, compute- and software-based services, often for specific enterprise verticals. These depend on SDN and NFV to deliver the ultra-fast, low-latency compute, throughput and routing capabilities required.

The three new models represent distinct strategic options for telcos looking to either: optimise and evolve their existing connectivity business; create new value from cloud-based, ‘horizontal’ platforms; or expand into new vertical markets – or a combination of all three approaches. This is illustrated here:

Interdependence between the three future telco business models

Source: STL Partners

In other words:

  • The Soft-Net operates the physical and virtualised infrastructure that delivers flexible, advanced connectivity in support of Cloud-Net and Compute-Net services (as well as well as legacy communications and connectivity services, delivered in a more scalable and cost-effective way)
  • The Cloud-Net delivers flexible, on-demand connectivity over hybrid infrastructure (including that owned by multiple Soft-Nets) in support of the increasingly complex and variable networking requirements of globally distributed, digital enterprises
  • The Compute-Net delivers vertically focused, compute-enabled processes and outcomes across all areas of industry and society. In doing so, it relies on networking and cloud platform services supplied by the Soft-Net and Cloud-Net, which may or may not be vertically integrated as part of its own organisation.

The three telecoms business models link to NFV / SDN strategies

One of the distinguishing features of these models is the different modes of telco engagement in NFV and SDN they are potentially driven by. In previous analyses, we have identified three pathways towards NFV and SDN deployment. This is how they link to the three business models:

Figure 1: The three future telco business models and corresponding NFV pathways

Source: STL Partners, NFV / SDN deployment pathways: Three telco futures

In the rest of this report, we define these telecoms business models in more detail and illustrate how they present a pragmatic framework for telcos to focus their technology investments and develop valuable new Coordination Age services.

Contents:

  • Executive Summary
  • Introduction
  • Three telco futures and Telco 2.0
  • Chapter 1: Three telecoms business models for the Coordination Age
  • Three new business models: but why ‘telco’?
  • Business model analysis: Telcos’ vs competitors’ strengths
  • Relationship between the Soft-Net, Cloud-Net and Compute-Net business models
  • Chapter 2: Roles of the Soft-Net, Cloud-Net and Compute-Net in a ‘driverless car-as-a-service’ ecosystem
  • A driverless car-as-a-service business involves coordination of data, processes and events across a broad supply chain
  • Soft-Nets provide the mainly wireless connectivity
  • Cloud-Nets provide the hybrid, on-demand wide-area networking
  • Compute-Nets design and coordinate the ecosystem
  • Conclusions
  • The Coordination Age: A new purpose for telecoms, and three models for realising it
  • Key takeaways for telcos

Figures:

  1. The three future telco business models and corresponding NFV pathways
  2. The Telco 2.0 infrastructure and service stack
  3. Interdependence between the three future telco business models
  4. Two examples of the three new business models
  5. The three new business models overview
  6. Telcos face some fierce competition as they move up the stack
  7. Telco expansion across the three business models
  8. Advantages and disadvantages of vertical integration
  9. Mapping the Soft-Net, Cloud-Net and Compute-Net roles in a driverless car environment
  10. Types of data and corresponding compute-based services in a driverless car-as-a-service ecosystem

Uber and Tesla: What telcos should do

Introduction

This report analyses the market position and strategies of Tesla and Uber, two of four Internet-based disruptors that might be able to break into the top tier of consumer Internet players, which is made up of Amazon, Apple, Facebook or Google. The other two challengers – Spotify and Netflix – were the subject of the recent STL Partners report: Can Netflix and Spotify make the leap to the top tier?

Tesla, Uber, Spotify and Netflix are defined by three key factors, which set them aside from their fellow challengers:

  • Rapid rise: They have become major mainstream players in a short space of time, building world-leading brands that rival those of much older and more established companies.
  • New thinking: Each of the four have challenged the conventions of the industries in which they operate, driving disruption and forcing incumbents to re-evaluate their business models.
  • Potential to challenge the dominance of Amazon, Apple, Facebook or Google: This rapid success has allowed the companies to gain dominant positions in their relative sectors, which they could use as a springboard to diversify their business models into parallel verticals. By pursuing these economies of scope, they are treading the path taken by the big four Internet companies.


This report explores how improvements in digital technologies and consumer electronics are changing the automotive market, enabling Tesla and Uber to rethink personal transport almost from the bottom up. In particular, it considers how self-driving vehicles could become a key platform within the digital economy, offering a range of commerce services linked to transportation and logistics. The report also explores how the high level of regulation in transportation, as in telecoms, is complicating Uber’s efforts to build economies of scale and scope.

The final section provides a high-level overview of the opportunities for telcos as the automobile becomes a major computing and connectivity platform, including partnership strategies, and the implications for telcos if Uber or Tesla were able to make the jump to become a tier one player.

The report builds on the analysis in two previous STL Partners’ executive briefings that explore how artificial intelligence is changing the automotive sector:

Self-driving disruption

Uber, the world’s leading ride-hailing app, and Tesla, the world’s leading producer of all-electric vehicles, could evolve to become tier one players in the digital economy, as the car could eventually become a major control point in the digital value chain. Both companies could use the disruption caused by the arrival of self-driving cars to become a broad digital commerce platform akin to that of Amazon or Google.  As well as matching individuals with journeys, Uber is gearing up to use self-driving vehicles to connect people with shops, restaurants, bars and many other merchants and service providers.  With a strong brand, Tesla could potentially play a similar role in the premium end of the market as Apple has done in the PC, tablet and smartphone sectors.

However, Uber and Tesla are just two of the scores of technology and automotive companies jostling for a preeminent position in a future in which the car is a major computing and connectivity platform. As well as investing heavily in the development of self-driving technologies, many of these companies are splurging on M&A to get the skills and competences they will need in the personal transportation market of the future.  For example, Intel bought Mobileye, a maker of autonomous-driving systems, for US$15.3 billion in March 2017. Delphi, a big auto parts maker, bought nuTonomy, an autonomous vehicle start-up, for US$450 million, and has since reinvented itself as an autonomous vehicle company called Aptiv.

Self-driving vehicles will change the world and the way people live in a myriad of different ways, just as cars themselves transformed society during the 20th century. Some shops, hotels and restaurants could become mobile, while car parks, garages and even traffic lights could eventually become obsolete, potentially heralding new business opportunities for many kinds of companies, including telcos. But the most important change for Uber and Tesla will be a widespread shift from owning cars to sharing cars.

Contents:

  • Executive Summary
  • How Uber and Tesla are creating new opportunities for telcos
  • Uber’s and Tesla’s future prospects
  • Lessons for telcos
  • Introduction
  • Self-driving disruption
  • Making car ownership obsolete
  • From here to autonomy
  • The convergence of car rental, taxi-hailing and car making
  • Business models beyond transport
  • Opportunities for telcos
  • Uber: At the bleeding edge
  • Uber’s chequered history
  • Uber looks beyond the car
  • Uber’s strengths and weaknesses: From fame to notoriety
  • Tesla: All electric dreams
  • Tesla’s strengths and weaknesses: Beautiful but small
  • Conclusions and lessons for telcos
  • The future of Uber and Tesla
  • The future of connected cars
  • Lessons from Uber and Tesla

Figures:

  • Figure 1: Self-driving vehicles will become commonplace by 2030
  • Figure 2: The two different routes to self-driving vehicles
  • Figure 3: The first self-driving cars could appear within two years
  • Figure 4: Money is pouring into ride hailing and self-driving companies
  • Figure 5: Waymo is way ahead with respect to self-driving disengagements
  • Figure 6: Uber’s vision of a “vertiport” serving a highway intersection
  • Figure 7: Uber believes VTOL can be much cheaper than helicopters
  • Figure 8: Uber’s strengths, weaknesses, opportunities and threats (SWOT) analysis
  • Figure 9: Growth in Tesla’s automotive revenues has been subdued
  • Figure 10: Tesla’s strengths, weaknesses, opportunities and threats
  • Figure 11: Tesla loses money most quarters
  • Figure 12: Tesla is having to cut back on capex

Digital Partnering: Success Factors and AT&T Drive Case Study

Introduction

As communications services providers continue their push to develop and monetise digital services, partnering is proving a critical element of strategy, and a key enabler for telco agility. While some telco-digital player partnerships have been successful in achieving their objectives, many have languished, and failed to deliver value to one or both parties within the partnership.

In this report, we examine the different types of digital services partnerships that operators are engaged in; discuss the key success factors for the various partnering approaches and strategies; and look more deeply at a successful partnership strategy: AT&T’s Drive connected car initiative, which is an example of a broad vertical-focused partnership ecosystem. Our follow-on report will provide a case study of TeliaSonera’s successful digital music partnership with Spotify, an example of a single-focus collaboration for digital services.

Telcos are increasingly recognising the importance of partnerships for achieving their potential as true digital services companies. Partnering between telcos and third parties to deliver new services or target new markets is, of course, not a new phenomenon. Two things are new, however: the focus on partnering as a core competency of the telco organisation, and the increasing complexity of telco partnership ecosystems, as digital services, enabling technologies and service delivery value chains continue to evolve. An agile approach to building and managing complex partnerships is one of the key elements of becoming a Telco 2.0 organisation.

Figure 1: The Telco 2.0 Agility Framework

Source: STL Partners

Partnering is being defined as a telco ‘core competence’

A number of operators have now enshrined the objective of successful partnering in their corporate strategy. Deutsche Telekom, for example, has made partnering one of its ‘four pillars’. The clearly-stated objective in DTAG’s case is to attract (and learn from) companies that have adopted the agile, rapid-response, high-energy approach found in Silicon Valley and other global tech hubs such as Israel. DTAG hopes to offer these partners, access to its customers and channels across the twelve DTAG European markets, as well as the ability to leverage DTAG’s network and corporate resources:

“The list of companies we have been working with for many years is long. But how we cooperate, that has changed. We are more open and faster. We focus on our core competence – our best net – and add specific offers of the partners. Take for example the eReader tolino: We not only provide the eReader, but also the technical platform on which Bertelsmann, Hugendubel, Thalia and Libri are able to distribute their eBooks. Together with the German book trade, we established the tolino as a model of success in the eReader market.

In the area Smart Home, we work together with Miele, Samsung, EON and EnBw, amongst others. We have started the system platform QIVICON, which our product DT Smart Home is based on. Together with our partners, we develop the vision of a connected house.”

Thomas Kiesling, Former Chief Product and Innovation Officer, Deutsche Telekom AG1

Partnering and partnerships are becoming more complex

The DTAG example highlights our second point about new aspects of partnering. The increasing complexity of digital services partnerships, and the growing trend for larger partnership ecosystems with many partners participating from different levels of the value chain, requires telcos to take a different and more flexible approach.

A potential digital services partner will usually want to build global scale and so is likely to have several telco partners. Digital services partners will in many cases move at very different speeds from telcos in terms of decision-making and processes, and are likely to use a variety of distribution channels, some of which will bypass, or compete with, the telco partner (particularly for OTT B2C content services such as Spotify). For both B2B and B2C partnerships, business models and revenue sharing arrangements are likely to be fluid and to involve multiple parties.

B2B (and B2B2C) services are increasingly being supported by more extensive and complex partnership ecosystems, rather than single partnerships. Telcos may lead the development of such ecosystems – as AT&T does in the case of Drive – or simply participate. The growth of wider ecosystem partnering relationships has been especially prevalent in the development of M2M/IoT propositions. These may require a variety of platforms, applications, devices and integration elements, as well as a high level of openness in terms of open-source and accessible platforms, APIs, analytics etc.

These trends present challenges for traditional telco approaches to partnering, which have favoured exclusive relationships and ‘what’s-in-it-for-me’ approaches to building joint revenue streams. Many telcos have set up digital or innovation arms with the goal of developing new digital propositions together with third parties in a more flexible manner. However, for such propositions to succeed, they need clear buy-in from one or more of the main divisions of the telco. In the case of AT&T, the successful partnering effort we profile here was ultimately rolled back into a main division of the operator, rather than continuing to sit within an innovation division.

Based on our observations from AT&T’s success and the partnership case study we cover in our follow-up report (TeliaSonera’s long-term relationship with Spotify), we have identified a set of key success factors, and major barriers, for effective digital services partnerships between operators and third parties (see Figure 2).

Figure 2: Key success factors and barriers for successful digital services partnering

Source: STL Partners

While it isn’t the case that all of the key success factors above must be present in successful operator partnering initiatives, our analysis suggests that several external and internal ones should be present in any digital services partnership.

In the next section, we discuss drivers for digital services partnering, approaches operators have used in partnering, key success factors and barriers; and evaluate the approach that AT&T has taken to partnering with the connected car.

Motivations for partnering in digital services

There are several compelling reasons for telcos to partner when exploring and growing digital services opportunities. The most important of these drivers are shown below in Figure 3. Each driver supports a set of higher-level objectives for telcos, comprising revenue growth, revenue retention, branding and positioning, and organisation transformation and/or agility.

Figure 3: Major drivers for telco digital services partnering initiatives

Source: STL Partners

Drivers linked to the objectives of revenue growth and retention may appear to be most compelling to telcos, given their obvious short-term impact; but those linked to transformation/agility and branding/positioning have been at the forefront of the AT&T partnership initiative we profile here as well as the TeliaSonera-Spotify partnership we profile in our follow-on report. The most successful partnerships support several telco objectives: part of their success is thus attributable to the support they engender from across the telco organisation.

As discussed in the following sections, beyond clearly defining the objectives of the partnership, and the assets that both parties bring to the table, there are a number of other soft elements that contribute to (or hinder) the success of telco digital services partnerships. The existence of clear market demand for the partnership’s products and services is also a key, though sometimes overlooked, element of success.

 

  • Executive Summary
  • Introduction
  • Partnering is being defined as a telco ‘core competence’
  • Partnering and partnerships are becoming more complex
  • Motivations for partnering in digital services
  • 4 digital services partnership approaches
  • Single-focus collaboration is easiest to manage and has best track record but impact is likely to be limited
  • Broader vertical focus requires greater commitment and has a greater market and implementation risk but can yield big benefits
  • General strategic partnerships appear to have had limited success
  • Key success factors for digital services partnerships
  • External/Market-Driven (demand-side) factors
  • Internal / organisation (supply-side) factors
  • Challenges to successful digital services partnering
  • External (demand side) challenges
  • Internal (supply-side) challenges
  • AT&T’s Drive Connected Car Ecosystem – A B2B2C Vertical Area Partnership
  • Background and context for the partnership
  • AT&T’s Drive Ecosystem
  • Key objectives and fit with the operator’s digital services strategy
  • Partnership approach and evolution
  • Organisation structure and framework for the partnership
  • Evidence of success
  • Key success factors and challenges
  • Barriers to successful partnering: challenges for Sprint and Verizon’s connected car initiatives

 

  • Figure 1: The Telco 2.0 Agility Framework
  • Figure 2: Key success factors and barriers for successful digital services partnering
  • Figure 3: Major drivers for telco digital services partnering initiatives
  • Figure 4: Telco Digital Services Partnership Models
  • Figure 5: US Connected Car Shipments, 2014-2020
  • Figure 6: AT&T Drive: Key End User Applications
  • Figure 7: AT&T Drive Studio, 2015
  • Figure 8: Drivers and objectives for AT&T’s connected car partnerships
  • Figure 9: AT&T Drive Platform Core Functionality and Applications
  • Figure 10: Opel OnStar Service Features, 2016
  • Figure 11: AT&T Drive Partnerships, Dec. 2015
  • Figure 12: AT&T connected car net adds are accelerating
  • Figure 13: Key Success Factors for AT&T Drive Partnerships (GM)

Connected Car: Key Trends, Players and Battlegrounds

Introduction: Putting the Car in Context

A growing mythology around M2M and the Internet of Things

The ‘Internet of Things’, which is sometimes used interchangeably with ‘machine-to-machine’ communication (M2M), is not a new idea: as a term, it was coined by Kevin Ashton as early as 1999. Although initially focused on industrial applications, such as the use of RFID for tagging items in the supply chain, usage of the term has now evolved to more broadly describe the embedding of sensors, connectivity and (to varying degrees) intelligence into traditionally ‘dumb’ environments. Figure 1 below outlines some of the service areas potentially disrupted, enabled or enhanced by the Internet of Things (IoT):

Figure 1: Selected Internet of Things service areas

Source: STL Partners

To put the IoT in context, one can conceive of the Internet as having experienced three key generations to date. The first generation dates back to the 1970s, which involved ARPANET and the interconnection of various military, government and educational institutions around the United States. The second, beginning in the 1990s, can be thought of as the ‘AOL phase’, with email and web browsing becoming mainstream. Today’s generation is dominated by ‘mobile’ and ‘social’, with the two inextricably linked. The fourth generation will be signified by the arrival of the Internet of Things, in which the majority of internet traffic is generated by ‘things’ rather than humans.

The enormous growth of networks, cheaper connectivity, proliferation of smart devices, more efficient wireless protocols (e.g. ZigBee) and various government incentives/regulations have led many to confidently predict that the fourth generation of the Internet – the Internet of Things – will soon be upon us. Visions include the “Internet of Everything” (Cisco) or a “connected future” with 50 billion connected devices by 2020 (Ericsson). Similarly rapid growth is also forecasted by the MIT Technology Review, as detailed below:

Figure 2: Representative connected devices forecast, 2010-20

Source: MIT Technology Review

This optimism is reflected in broader market excitement, which has been intensified by such headline-grabbing announcements as Google’s $3.2bn acquisition of Nest Labs (discussed in depth in the Connected Home EB) and Apple’s recently announced Watch. Data extracted from Google Trends (Figure 3) shows that the popularity of ‘Internet of Things’ as a search term has increased fivefold since 2012:

Figure 3: The popularity of ‘Internet of Things’ as a search term on Google since 2004

Source: Google Trends

However, the IoT to date has predominantly been a case study in hype vs. reality. Technologists have argued for more than a decade about when the army of connected devices will arrive, as well as what we should be calling this phenomenon, and with this a mythology has grown around the Internet of Things: widespread disruption was promised, but it has not yet materialised. To many consumers the IoT can sound all too far-fetched: do I really need a refrigerator with a web browser?

Yet for every ‘killer app’ that wasn’t we are now seeing inroads being made elsewhere. Smart meters are being deployed in large numbers around the world, wearable technology is rapidly increasing in popularity, and many are hailing the connected car as the ‘next big thing’. Looking at the connected car, for example, 2013 saw a dramatic increase in the amount of VC funding it received:

Figure 4: Connected car VC activity, 2010-13

Source: CB Insights Venture Capital Database

The Internet of Things is potentially an important phenomenon for all, but it is of particular relevance to mobile network operators (MNOs) and network equipment providers. Beyond providing cellular connectivity to many of these devices, the theory is that MNOs can expand across the value chain and generate material and sustainable new revenues as their core business continues to decline (for more, see the ‘M2M 2.0: New Approaches Needed’ Executive Briefing).

Nevertheless, the temptation is always to focus on the grandiose but less well-defined opportunities of the future (e.g. smart grids, smart cities) rather than the less expansive but more easily monetised ones of today. It is easy to forget that MNOs have been active to varying degrees in this space for some time: for example, O2 UK had a surprisingly large business serving fleet operators with the 9.6Kbps Mobitex data network for much of the 2000s. To further substantiate this context, we will address three initial questions:

  1. Is there a difference between M2M and the Internet of Things?
  2. Which geographies are currently seeing the most traction?
  3. Which verticals are currently seeing the most traction?

These are now addressed in turn…

 

  • Executive Summary
  • Introduction: Putting the Car in Context
  • A growing mythology around M2M and the Internet of Things
  • The Internet of Things: a vision of what M2M can become
  • M2M today: driven by specific geographies and verticals
  • Background: History and Growth Drivers
  • History: from luxury models to mass market deployment
  • Growth drivers: macroeconomics, regulation, technology and the ‘connected consumer’
  • Ecosystem: Services and Value Chain
  • Service areas: data flows vs. consumer value proposition
  • Value chain: increasingly complex with two key battlegrounds
  • Markets: Key Geographies Today
  • Conclusions

 

  • Figure 1: Selected Internet of Things service areas
  • Figure 2: Representative connected devices forecast, 2010-20
  • Figure 3: The popularity of ‘Internet of Things’ as a search term on Google since 2004
  • Figure 4: Connected car VC activity, 2010-13
  • Figure 5: Candidate differences between M2M and the Internet of Things
  • Figure 6: Selected leading MNOs by M2M connections globally
  • Figure 7: M2M market maturity vs. growth by geographic region
  • Figure 8: Global M2M connections by vertical, 2013-20
  • Figure 9: Global passenger car profit by geography, 2007-12
  • Figure 10: A connected car services framework
  • Figure 11: Ericsson’s vision of the connected car’s integration with the IoT
  • Figure 12: The emerging connected car value chain
  • Figure 13: Different sources of in-car connectivity
  • Figure 14: New passenger car sales vs. consumer electronics spending by market
  • Figure 15: Index of digital content spending (aggregate and per capita), 2013
  • Figure 16: OEM embedded modem shipments by region, 2014-20
  • Figure 17: Telco 2.0™ ‘two-sided’ telecoms business model