Winning Strategies: Differentiated Mobile Data Services

Introduction

Verizon’s performance in the US

Our work on the US cellular market – for example, in the Disruptive Strategy: “Uncarrier” T-Mobile vs VZW, AT&T, and Free.fr  and Free-T-Mobile: Disruptive Revolution or a Bridge Too Far?  Executive Briefings – has identified that US carrier strategies are diverging. The signature of a price-disruption event we identified with regard to France was that industry-wide ARPU was falling, subscriber growth was unexpectedly strong (amounting to a substantial increase in penetration), and there was a shakeout of minor operators and MVNOs.

Although there are strong signs of a price war – for example, falling ARPU industry-wide, resumed subscriber growth, minor operators exiting, and subscriber-acquisition initiatives such as those at T-Mobile USA, worth as much as $400-600 in handset subsidy and service credit – it seems that Verizon Wireless is succeeding while staying out of the mire, while T-Mobile, Sprint, and minor operators are plunged into it, and AT&T may be going that way too. Figure 1 shows monthly ARPU, converted to Euros for comparison purposes.

Figure 1: Strategic divergence in the US

Figure 1 Strategic Divergence in the US
Source: STL Partners, themobileworld.com

We can also look at this in terms of subscribers and in terms of profitability, bringing in the cost side. The following chart, Figure 2, plots margins against subscriber growth, with the bubbles set proportional to ARPU. The base year 2011 is set to 100 and the axes are set to the average values. We’ve named the four quadrants that result appropriately.

Figure 2: Four carriers, four fates

Figure 2 Four carriers four fate
Source: STL Partners

Clearly, you’d want to be in the top-right, top-performer quadrant, showing subscriber growth and growing profitability. Ideally, you’d also want to be growing ARPU. Verizon Wireless is achieving all three, moving steadily north-west and climbing the ARPU curve.

At the same time, AT&T is gradually being drawn into the price war, getting closer to the lower-right “volume first” quadrant. Deep within that one, we find T-Mobile, which slid from a defensive crouch in the upper-left into the hopeless lower-left zone and then escaped via its price-slashing strategy. (Note that the last lot of T-Mobile USA results were artificially improved by a one-off spectrum swap.) And Sprint is thrashing around, losing profitability and going nowhere fast.

The usual description for VZW’s success is “network differentiation”. They’re just better than the rest, and as a result they’re reaping the benefits. (ABI, for example, reckons that they’re the world’s second most profitable operator on a per-subscriber basis  and the world’s most profitable in absolute terms.) We can restate this in economic terms, saying that they are the most efficient producer of mobile service capacity. This productive capacity can be used either to cut prices and gain share, or to increase quality (for example, data rates, geographic coverage, and voice mean-opinion score) at higher prices. This leads us to an important conclusion: network differentiation is primarily a cost concept, not a price concept.

If there are technical or operational choices that make network differentiation possible, they can be deployed anywhere. It’s also possible, though, that VZW is benefiting from structural factors, perhaps its ex-incumbent status, or its strong position in the market for backbone and backhaul fibre, or perhaps just its scale (although in that case, why is AT&T doing so much worse?). And another possibility often mooted is that the US is somehow a better kind of mobile market. Less competitive (although this doesn’t necessarily show up in metrics like the Herfindahl index of concentration), supposedly less regulated, and undoubtedly more profitable, it’s often held up by European operators as an example. Give us the terms, they argue, and we will catch up to the US in LTE deployment.

As a result, it is often argued in lobbying circles that European markets are “too competitive” or in need of “market repair”, and therefore, the argument runs, the regulator ought to turn a blind eye to more consolidation or at least accept a hollowing out of national operating companies. More formally, the prices (i.e. ARPUs) prevailing do not provide a sufficient margin over operators’ fixed costs to fund discretionary investment. If this was true, we would expect to find little scope for successful differentiation in Europe.

Further, if the “incumbent advantage” story was true of VZW over and above the strategic moves that it has made, we might expect to find that ex-incumbent, converged operators were pulling into the lead across Europe, benefiting from their wealth of access and backhaul assets. In this note, we will try to test these statements, and then assess what the answer might be.

How do European Operators compare?

We selected a clutch of European mobile operators and applied the same screen to identify what might be happening. In doing so we chose to review the UK, German, French, Swedish, and Italian markets jointly with the US, in an effort to avoid a purely European crisis-driven comparison.

Figure 3: Applying the screen to European carriers

Figure 3 Applying the screen to European carriers

Source: STL Partners

Our first observation is that the difference between European and American carriers has been more about subscriber growth than about profitability. The axes are set to the same values as in Figure 2, and the data points are concentrated to their left (showing less subscriber growth in Europe) not below them (less profitability growth).

Our second observation is that yes, there certainly are operators who are delivering differentiated performance in the EU. But they’re not the ones you might expect. Although the big converged incumbents, like T-Mobile Germany, have strong margins, they’re not increasing them and on the whole their performance is average only. Nor is scale a panacea, which brings us to our next observation.

Our third observation is that something is visible at this level that isn’t in the US: major opcos that are shrinking. Vodafone, not a company that is short of scale, gets no fewer than three of its OpCos into the lower-left quadrant. We might say that Vodafone Italy was bound to suffer in the context of the Italian macro-economy, as was TIM, but Vodafone UK is in there, and Vodafone Germany is moving steadily further left and down.

And our fourth observation is the opposite, significant growth. Hutchison OpCo 3UK shows strong performance growth, despite being a fourth operator with no fixed assets and starting with LTE after first-mover EE. Their sibling 3 Sweden is also doing well, while even 3 Italy was climbing up until the last quarter and it remains a valid price warrior. They are joined in the power quadrant with VZW by Telenor’s Swedish OpCo, Telia Mobile, and O2 UK (in the last two cases, only marginally). EE, for its part, has only marginally gained subscribers, but it has strongly increased its margins, and it may yet make it.

But if you want really dramatic success, or if you doubt that Hutchison could do it, what about Free? The answer is that they’re literally off the chart. In Figure 4, we add Free Mobile, but we can only plot the first few quarters. (Interestingly, since then, Free seems to be targeting a mobile EBITDA margin of exactly 9%.)

The distinction here is between the pure-play, T-Mobile-like price warriors in the lower right quadrant, who are sacrificing profitability for growth, and the group we’ve identified, who are improving their margins even as they gain subscribers. This is the signature of significant operational improvement, an operator that can move traffic more efficiently than its competitors. Because the data traffic keeps coming, ever growing at the typical 40% annual clip, it is necessary for any operator to keep improving in order to survive. Therefore, the pace of improvement marks operational excellence, not just improvement.

Figure 4: Free Mobile, a disruptive force that’s literally off the charts

Figure 4 Free Mobile a disruptive force thats literally off the charts

Source: STL Partners

We can also look at this at the level of the major multinational groups. Again, Free’s very success presents a problem to clarity in this analysis – even as part of a virtual group of independents, the ‘Indies’ in Figure 5, it’s difficult to visualise. T-Mobile USA’s savage price cutting, though, gets averaged out and the inclusion of EE boosts the result for Orange and DTAG. It also becomes apparent that the “market repair” story has a problem in that there isn’t a major group committed to hard discounting. But Hutchison, Telenor, and Free’s excellence, and Vodafone’s pain, stand out.

Figure 5: The differences are if anything more pronounced within Europe at the level of the major multinationals

Figure 5 The differences are if anything more pronounced within Europe at the level of the major multinationals

Source: STL Partners

In the rest of this report we analyse why and how these operators (3UK, Telenor Sweden and Free Mobile) are managing to achieve such differentiated performance, identify the common themes in their strategic approaches and the lessons from comparison to their peers, and the important wider consequences for the market.

 

  • Executive Summary
  • Introduction
  • Applying the Screen to European Mobile
  • Case study 1: Vodafone vs. 3UK
  • 3UK has substantially more spectrum per subscriber than Vodafone
  • 3UK has much more fibre-optic backhaul than Vodafone
  • How 3UK prices its service
  • Case study 2: Sweden – Telenor and its competitors
  • The network sharing issue
  • Telenor Sweden: heavy on the 1800MHz
  • Telenor Sweden was an early adopter of Gigabit Ethernet backhaul
  • How Telenor prices its service
  • Case study 3: Free Mobile
  • Free: a narrow sliver of spectrum, or is it?
  • Free Mobile: backhaul excellence through extreme fixed-mobile integration
  • Free: the ultimate in simple pricing
  • Discussion
  • IP networking metrics: not yet predictive of operator performance
  • Network sharing does not obviate differentiation
  • What is Vodafone’s strategy for fibre in the backhaul?
  • Conclusions

 

  • Figure 1: Strategic divergence in the US
  • Figure 2: Four carriers, four fates
  • Figure 3: Applying the screen to European carriers
  • Figure 4: Free Mobile, a disruptive force that’s literally off the charts
  • Figure 5: The differences are if anything more pronounced within Europe at the level of the major multinationals
  • Figure 6: Although Vodafone UK and O2 UK share a physical network, O2 is heading for VZW-like territory while VF UK is going nowhere fast
  • Figure 7: Strategic divergence in the UK
  • Figure 8: 3UK, also something of an ARPU star
  • Figure 9: 3UK is very different from Hutchison in Italy or even Sweden
  • Figure 10: 3UK has more spectrum on a per-subscriber basis than Vodafone
  • Figure 11: Vodafone’s backhaul upgrades are essentially microwave; 3UK’s are fibre
  • Figure 12: 3 Europe is more than coping with surging data traffic
  • Figure 13: 3UK service pricing
  • Figure 14: The Swedish market shows a clear winner…
  • Figure 15: Telenor.se is leading on all measures
  • Figure 16: How Swedish network sharing works
  • Figure 17: Network sharing does not equal identical performance in the UK
  • Figure 18: Although extensive network sharing complicates the picture, Telenor Sweden has a strong position, especially in the key 1800MHz band
  • Figure 19: If the customers want more data, why not sell them more data?
  • Figure 20: Free Mobile, network differentiator?
  • Figure 21: Free Mobile, the price leader as always
  • Figure 22: Free Mobile succeeds with remarkably little spectrum, until you look at the allocations that are actually relevant to its network
  • Figure 23: Free’s fixed-line network plans
  • Figure 24: Free leverages its FTTH for outstanding backhaul density
  • Figure 25: Free: value on 3G, bumper bundler on 4G
  • Figure 26: The carrier with the most IPv4 addresses per subscriber is…
  • Figure 27: AS_PATH length – not particularly predictive either
  • Figure 28: The buzzword count. “Fibre” beats “backhaul” as a concern
  • Figure 29: Are Project Spring’s targets slipping?

 

Telco 2.0: The $50bn Enterprise Mobility Opportunity: What’s stopping telcos winning 500% more business?

Overview of Key Findings

STL Partners believe that mobility – the use of mobile data, new devices, new applications and communications services – is one of the most disruptive forces in today’s enterprise market. We think that a business philosophy to embrace mobility as a strategic asset and opportunity, rather than simply a technical challenge, will be a critical success factor for all businesses moving forward. Telcos can be a key enabler and business partner in this transformation, but to do so they will need to significantly change their approaches to working with enterprise customers.Key findings

Our new global research, independently produced by STL Partners and kindly sponsored by SAP, shows that many telcos are both ideally positioned but underprepared to exploit this fast emerging and evolving opportunity. We found that among the 101 global enterprise and 44 telco executives we surveyed:

  • Mobility works – 80% of enterprise execs thought their mobile app based initiatives had met or exceeded expectations
  • There’s big latent demand for telcos – 5 times as many enterprises (i.e. over half the total) would buy services and solutions from telcos than currently do
  • But telcos need to address credible capability issues such as security, product portfolio, app development, and process and industry expertise
  • And most telcos are underprepared – only 16% have a defined market offer or strategy, and internal adoption of mobility lags many other industries, with only 45% of telcos we surveyed offering internal apps compared to 61% in the enterprise sample.

Figure 1:  What would enterprises consider buying from a telco?
Figure 1: What would enterprises consider buying from a telco?

Source: STL Partners, On-line research, Enterprise >250 employees, Feb 2014(n=101)

Introduction

Background – the Business Context of Enterprise Mobility

Four major trends in demand are transforming the Enterprise Information and Communication Technology (ICT) market today:

  1. In pursuit of greater agility, new sources of revenue, improved efficiency, and closer customer relationships, enterprises are exploring opportunities to mobilise strategic aspects of their business.
  2. Enterprises are increasingly exploiting big-data, cloud, and mobile strategies to innovate and transform.
  3. To focus on their core businesses, they are outsourcing IT infrastructure and technology services.
  4. As employees increasingly use new digital technologies and services, enterprises have started to reduce spend on traditional telecoms services.

In response, telcos are looking to identify alternative ways to grow revenues from enterprise customers. This includes tools for the development, deployment, and management of enterprise apps, and managed infrastructure and technology services that offer flexibility and economies of scale.

In December 2013, STL Partners conducted a sizing study of the Enterprise Mobility market and identified a global opportunity of $50 billion (see Telco 2.0™ Executive Briefing: “The $50Bn Enterprise Mobility Opportunity: four steps for telcos to take today”).  This precipitated further exploration into:

  • Enterprises’ opportunities and priorities for mobile solutions
  • Their drivers and expectations vis-à-vis Enterprise Mobility, and their attitudes towards telcos as a prospective partner
  • The practical and perceptual inhibitors causing telcos to arrive comparatively late to the Enterprise Mobility party
  • How telcos can achieve the greatest value for their customers – and themselves – by developing or assimilating the Enterprise Mobility capabilities they lack today

New Research

In the first quarter of 2014, STL Partners carried out a combined research programme consisting of:

  • a survey of 101 enterprises worldwide (organisations with 250+ employees)
  • a quantitative study of 44 telcos
  • in-depth qualitative interviews with strategists and proposition owners representing 11 telcos

Figure 2: Enterprise customers – on-line survey respondents, per region

Figure 2: Enterprise customers - on-line survey respondents, per region

Figure 3: Telco – on-line survey respondents, per region

Figure 3: Telco - on-line survey respondents, per region

Table 1: In-depth qualitative interviews – contributing companies

Table 1: In-depth qualitative intervews - contributing companies

 

All the interviews were conducted on a confidential basis. Information and insights shared by the interviewees have therefore been anonymised.  Names and titles have also been withheld.

The findings – which suggest telcos are even further adrift of a robust Enterprise Mobility proposition than initially thought – are detailed in this report, together with recommendations on steps telcos can take to accelerate their go-to-market strategy and make up for the early momentum they have lost.

Overview – the enterprise perspective 

As demand for access to information on the go via mobile platforms is increasing, Enterprise Mobility is one of the hottest topics in IT. Mobile apps are fast becoming a business imperative to support better ways of working and business transformation. Enterprises must react quickly to harness the potential of mobile apps, while satisfying themselves that security, governance, and compliance across data, applications, and devices are fit for purpose.

Most Enterprises have started mobilising 

Our study revealed that most enterprises have already mobilised at least some of their organisation’s processes and interactions, generally starting from the inside out by prioritising internal initiatives over customer-facing ones.

Figure 4: Business processes already mobilised by enterprises

Figure 4: Business processes already mobilised by enterprises

Though we observed variations in adoption by sector and country that may indicate relevant differences (see Appendix – Industry and Regional Splits, page 48), the commonality of fundamental demand across regions and sectors is more significant.

Sales is the current lead application – but there’s more to come

Findings: field sales has always been a natural candidate area for mobilisation, borne out by the fact that more than half of enterprises in the study already had some form of sales app.  While the Shop Floor currently has experienced the lowest adoption of enterprise apps, it is also one of the areas of greatest potential for mobilisation, with 41% of enterprises contemplating mobilising their production facilities, concourse, or retail environment.  The highest levels of mobilisation or intent to mobilise were seen in Aftermarket Field Service, Transportation & Delivery, and Equipment Maintenance.

Figure 5: Internal / B2E mobile apps enterprises already have or are considering

Figure 4: Internal / B2E mobile apps enterprises already have or are considering

Opportunity: administrative apps are now a relatively mature, horizontal process market. Some telcos have had success selling these and it is an important area in which to have a compelling offering. However, such apps have lower price points and margins, whereas other sales and operational apps offer the potential for higher growth and greater business impact. Moreover, there is also potential for a new generation of intelligent sales apps to change sales performance in a more fundamental fashion.

Key Question: how can telcos best develop the agility and depth of ICT skills to sell and support both horizontal process apps and deeper vertical / operational needs?

Options: telcos have broad options to develop this internally, partner, or choose not to support these segments and their needs. See Four key enterprise mobility competencies for telcos, page 42.

In B2C: information first, marketing next

Findings: the customer-facing processes that had most typically been already mobilised were identified as Information & Reference (53%) and Paying Bills/Checking Balances (52%). The areas of greatest untapped interest in mobilisation were Social Media Sharing (33%), Marketing Offers (32%), and Scanning Barcodes/QR Codes (31%).

Figure 6: Customer-facing processes enterprises have mobilised or are planning to mobilise?

Figure 6: Customer-facing processes enterprises have mobilised or are planning to mobilise?

Opportunity: as an increasing volume of purchases are researched or made via mobile devices, traditional mobile marketing and shopping experiences in developed economies are likely to continue to evolve significantly.

Key Question: how can telcos develop and support the next generation of customer-facing mobile apps?

Options: again, telcos have broad options to develop this internally, partner, or choose not to support these segments and their needs. See Four key enterprise mobility competencies for telcos, page 42.

 

  • Executive Summary
  • Introduction
  • Overview: the enterprise perspective
  • Most Enterprises have started mobilising
  • Issues for Enterprises managing Enterprise Mobility
  • The results: 80 % of initiatives met or beat expectations
  • More than half the enterprise market would buy from telcos: 500% more than today
  • So why don’t enterprises buy from telcos now?
  • The telco perspective
  • Stages of mobile maturity among telcos
  • 70% of telco execs found EM a ‘very attractive’ opportunity
  • Telcos are not ‘drinking their own champagne’
  • Only 16% of telcos have a defined strategy or market offer
  • Enterprises want apps, but are telcos listening?
  • Shifting culture: new markets needs new mind-sets, models and metrics
  • What sort of strategy to balance speed and risk/reward?
  • Enterprise Mobility success factors
  • Four key enterprise mobility competencies for telcos
  • Should telcos partner – and what are the criteria?
  • Steps to defining the strategy for telcos
  • Appendix – Industry and Regional Splits
  • Adoption and barriers by Sector and Region

 

  • Figure 1: Enterprise customers – On-line survey respondents, per region
  • Figure 2: Telco – On-line survey respondents, per region
  • Figure 3: Business processes already mobilised by enterprises
  • Figure 4: Internal / B2E mobile apps enterprises already have or are actively considering
  • Figure 5: Customer-facing processes enterprises have mobilised or are planning to mobilise?
  • Figure 6: Capabilities enterprise employees and customers are using
  • Figure 7: BYOD – Prevalence of corporate and employee devices
  • Figure 8: Number of devices across the surveyed enterprises’ workforces 16
  • Figure 9: Top challenges and obstacles in Enterprise Mobility
  • Figure 10: How do Enterprises manage app development?
  • Figure 11: How many enterprises use platform-based applications?
  • Figure 12: Strategic mobility enablers currently in place in enterprises
  • Figure 13: Presence of a formal enterprise mobility strategy vs. number of devices across the workforce
  • Figure 14: Success of Enterprise Mobility deployment(s) to date
  • Figure 15: Success of Enterprise Mobility deployment(s) to date – per role
  • Figure 16: What would enterprises consider buying from a telco?
  • Figure 17: What would enterprises consider buying from a telco – by role
  • Figure 18: Enterprises which would consider buying from a telco or already have
  • Figure 19: Why wouldn’t enterprises buy from a telco?
  • Figure 20: Enterprise Mobility maturity stages in telcos
  • Figure 21: Telcos’ concerns about core revenue declines
  • Figure 22: How attractive an opportunity is Enterprise Mobility to telcos?
  • Figure 23: Telcos are somewhat well-informed around Enterprise Mobility trends and development in mobile applications
  • Figure 24: Types of apps currently used within telcos
  • Figure 25: Processes / workflows telcos have mobilised or plan to mobilise with apps
  • Figure 26: Maturity of telcos’ own mobility programme
  • Figure 27: Telcos’ Internal enterprise app store deployment
  • Figure 28: Mobile portfolio management
  • Figure 29: Telcos’ biggest challenges or obstacles to internal mobilisation
  • Figure 30: Products and services telcos are currently offering, or plan to offer
  • Figure 31: Comparison between services enterprises would consider buying from telcos vs. services telcos are currently offering, or plan to offer
  • Figure 32: Telcos’ target market
  • Figure 33: Telco Barriers to taking Enterprise Mobility offerings to market
  • Figure 34: A hybrid approach can enable Telcos to achieve multiple concurrent stages of mobility evolution
  • Figure 35: Potential ‘Roadmap’ decisions for telcos addressing Enterprise Mobility
  • Figure 36: Business processes already mobilised by enterprises by industry sector
  • Figure 37: Internal mobile apps the utilities sector already have or are actively considering
  • Figure 38: Enterprise device landscape
  • Figure 39: Enterprise device landscape by region
  • Figure 40: Top THREE biggest challenges and obstacles in Enterprise Mobility by region
  • Figure 41: Enterprise mobile apps development / acquisition – per region
  • Figure 42: Enterprise mobile apps development / acquisition per industry
  • Figure 43: Platform-based applications per region
  • Figure 44: Enterprise app store penetration
  • Figure 45: Reasons Enterprises would not consider obtaining Enterprise Mobility services from a telecoms provider – per region
  • Figure 46: Reasons Enterprises would not consider obtaining Enterprise Mobility services from a telecoms provider – per industry

Cloud 2.0: Securing Trust to Survive the ‘One-In-Five’ CSP Shake-Out

Summary: The Cloud market is on the verge of the next wave of market penetration, yet it’s likely that only one in five Cloud Service Providers (CSPs) in today’s marketplace will still be around by 2018, as providers fail or are swallowed up by aggressive competitors. So what do CSPs need to do to survive and prosper? (October 2013, Foundation 2.0, Executive Briefing Service, Cloud & Enterprise ICT Stream.) Technology adoption rates Sept 2013


Introduction: one in five Cloud providers will survive 

The Cloud market is on the verge of the next wave of market penetration, yet it’s likely that only one in five Cloud Service Providers (CSPs) in today’s marketplace will still be around by 2018, as providers fail or are swallowed up by aggressive competitors. So what do CSPs need to do to survive and prosper?

This research was sponsored by Trend Micro but the analysis and recommendations represent STL Partners’ independent view. STL Partners carried out an independent study based on in-depth interviews with 27 senior decision makers representing Cloud Service Providers and enterprises across Europe. These discussions explored from both perspectives cloud maturity, the barriers to adoption and how these might be overcome. The findings and observations are detailed in this three-part report, together with practical recommendations on how CSPs can address enterprise security concerns and ensure the sustainability of the cloud model itself.

Part 1: Cloud – coming of age or troubled adolescent?

While the concept of organising computing as a utility dates back to the 1960s, the cloud computing model as we know it today is built on the sub-classifications of Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS).

We’ve covered telcos’ role in Cloud Services in depth in our Cloud research stream, and found that hype, hope and uncertainty have been notable features of the early stages of development of the market, with many optimistic forecasts of adoption being somewhat premature.

In terms of the adoption cycle adoption today, our analysis is that Cloud Services are on the brink of ‘the chasm’: well established among early adopters but less well known, trusted and used by the mass market segment of the enterprise market.

Building trust among new customer segments is the key to bridging this gap. For the industry it is a make or break point in terms of achieving scale. For CSPs, trust will be a key to survival and prosperity in the next phase of the market, enabling them to open up new opportunities and expand the amenable market, as well as to compete to retain and grow their individual market shares.

Many of the obstacles to and inhibitors of cloud adoption stem from customers’ perceptions of product immaturity – “will it be safe and work how we want without too much hassle and commitment?” In this report we examine findings on the general inhibitors and drivers of adoption, and then those related to the main inhibitor, data security, and how they might be addressed.

Overcoming the obstacles

Enterprise decision-makers in the study admitted to being deterred from the cloud by the prospect of migration, with the “enterprise/cloud barrier” perceived as a significant technical hurdle. While CSPs with enterprise-grade propositions have in place the business model, margins and consultative resources to offer customers an assisted journey to the cloud, standard public offerings are provided on a Do-It-Yourself basis.

However, data privacy and security remain the biggest inhibitors to cloud adoption among enterprises, due in no small part to a perceived loss of visibility and control.  Recent headline-grabbing events relating to mass surveillance programmes such as PRISM have only served to feed these fears.  As will be seen in this report, a lack of consistent industry standards, governance and even terminology heightens the confusion. Internal compliance procedures, often rooted in an out-dated “physical” mind-set, fail to reflect today’s technological realty and the nature of potential threats.

According to the UK Department for Business Innovation & Skills, the direct cost of a security breach (any unauthorised access of data, applications, services, networks or devices) is around £65,000 for SMEs and £850,000 for larger enterprises. However, add to this financial penalties for failure to protect customer data, reputational damage, diminished goodwill and lost business, and the consequential losses can be enough to put a company out of business.  It’s little wonder some enterprises still regard cloud as a risk too far.

In reality, CSPs with a heritage in managed services and favourable economies of scale can typically match or better the security provisions of on-premise data centres.  However, as “super enterprises” they present a larger and therefore more attractive target for malicious activity than a single business.  There is simply no room for complacency.

CSPs must shift their view of security from a business inhibitor to a business enabler: crucial to maintaining and expanding the overall cloud market and confidence in the model by winning customer trust.  This requires a fundamental rethink of compliance – both on the part of CSPs and enterprises – from a tick-box exercise to achieve lowest-cost perimeter protection to cost effectively meeting the rigorous demands of today’s information-reliant enterprises.

Cloud services cannot be considered mature until enterprises en masse are prepared to entrust anything more than low-sensitivity data to third party CSPs.  The more customer security breaches that occur, the more trust will be undermined, and the greater the risk of the cloud model imploding altogether.

State of the nation

The journey to the cloud is often presented in the media as a matter of “when” rather than “if”.  However, while several CSPs in our study believed that the cloud model was starting to approach maturity, enterprise participants were more likely to contend that cloud was still at an experimental or “early adopter” stage.

The requirements of certain vertical markets were perceived by some respondents to make cloud a non-starter, for example, broadcasters that need to upload and download multi-terabyte sized media files, or low-latency trading environments in the financial sector.  Similarly, the value of intellectual property was cited by pharmaceutical companies as justifying the retention of data in a private cloud or internal data centre at any cost.

CSPs universally acknowledged that their toughest competitor continues to be enterprises’ own in-house data centres.  IT departments are accustomed to having control over their applications, services, servers, storage, network and security. While notionally, they accept they will have to be less “hands on” in the cloud, a lack of trust persists among many. This reticence was typically seen by CSPs as unwarranted fear and parochialism, yet many are still finding it a challenge to educate prospective customers and correct misconceptions. CSPs suggested that IT professionals may be as likely to voice support for the cloud as turkeys voting for Christmas. However, more enlightened IT functions have embraced the opportunity to evolve their remit to working with their CSP to monitor services against SLAs, enforce compliance requirements and investigate new technologies rather than maintaining the old.

For tentative enterprises, security is still seen as a barrier to, rather than an accelerant of, cloud adoption, and one of the most technically challenging issues for both IT and compliance owners. Enterprises that had advanced their cloud strategy testified that successful adoption relies on effective risk management when evaluating and engaging a cloud partner. Proponents of cloud solutions will need compelling proof points to win over their CISO, security team or compliance officer.  However, due diligence is a lengthy and often convoluted process that should be taken into account by those drawn to the cloud model for the agility it promises.

The majority of CSPs interviewed were relatively dismissive of customer security concerns, making the valid argument that their security provisions were at least equal to, if not better than, that of most enterprise data centres.  However, as multiple companies concentrate their data into the hands of a few CSPs, the larger and more attractive those providers become to hackers as an attack target. Nonetheless, CSPs rarely offer any indemnification against hacking (aside from financial compensation for a breach of SLA) and SaaS providers tend to be more obscure than IaaS/PaaS providers in terms of the security of their operations.  Further commercial concerns explored in this report relate to migration and punitive contractual lock-in. Enterprises need to feel that they can easily relocate services and data across the cloud boundary, whether back in house or to another provider.  This creates the added challenge of being able to provide end-to-end audit continuity as well as in transit.

There are currently around 800 cloud service providers (CSPs) in Europe.  Something of a land grab is taking place as organisations whose heritage lies in software, telecoms and managed hosting are launching cloud-enabled services, primarily IaaS and SaaS.

However, “cloudwashing” – a combination of vendor obfuscation and hyperbole – is already slowing down the sales cycles at a time when greater transparency would be likely to lead to more proofs of concept, accelerated uptake and expansion of the overall market.

Turbulence in the macro economy is exacerbating the problem: business creation and destruction are among the most telling indicators of economic vitality.  A landmark report from RSM shows that the net rate of business creation (business births minus deaths) for the G7 countries was just 0.8% on a compound annual basis over the five-year period of the study. The BRICs, by contrast, show a net rate of business creation of 6.2% per annum – approximately eight times the G7 rate.

In parallel, the pace of technology success is accelerating.  Technologies are considered to have become “mainstream” once they have achieved 25% penetration. As cloud follows this same trajectory, with a rash of telcos, cable operators, data centre specialists and colocation providers entering the market, significant consolidation will be inevitable, since cloud economics are inextricably linked to scale.

Figure 1 – Technology adoption rates
Technology Adoption Rates Sept 2013

Source: STL Partners

Lastly, customers are adapting and evolving faster than ever, due in no small part to the advent of social media and digital marketing practices, creating a hyper-competitive environment.  As a by-product, the rate of business failure is rising.  In the 1950s, two-thirds of the Fortune 500 companies failed. Throughout the 1980s, almost nine out of ten of the so-called “Excellent” companies went to the wall, and 98% of firms borne out of the “Dot Com” revolution in the late 1990s are not expected to survive.

As a result, STL Partners anticipates that by 2018, a combination of consolidation and natural wastage will leave only 160 CSPs in the marketplace – a survival rate of one in five.

Drivers of cloud adoption

The business benefits of the cloud are well documented, so the main value drivers cited by participants in the study can be briefly summarised as follows:

Figure 2 – Business and IT Drivers of cloud adoption
Business and IT Drivers of cloud adoption Sept 2013

Report Contents

  • Introduction: one in five Cloud providers will survive
  • Part 1: Cloud – coming of age or troubled adolescent?
  •    Overcoming the obstacles
  •    State of the nation
  •    Drivers of cloud adoption
  •    Inhibitors to cloud adoption
  •       Cloud migration and integration with internal systems
  •       Vendor lock-in and exit strategies
  •       Governance and compliance issues
  •       Supplier credibility and longevity
  •       Testing and assurance
  • Part 2: Cloud security and data privacy challenges
  •    Physical security
  •    Data residency and jurisdiction
  •    Compliance and audit
  •    Encryption
  •    Identity and Access Management
  •    Shared resources and data segregation
  •    Security incident management
  •    Continuity services
  •    Data disposal
  •    Cloud provider assessment
  •    Industry standards and codes of practice
  •    Migration strategy
  •    Customer visibility
  • Part 3: Improving your ‘security posture’
  •    The ethos, tools and know-how needed to win customers’ trust
  •    The Four Levels of Cloud Security
  • Key take-aways for Cloud Services Providers
  • About STL Partners
  • About Trend Micro

Table of Figures

  • Figure 1 – Technology adoption rates
  • Figure 2 – Business and IT Drivers of cloud adoption
  • Figure 3 – Information security breaches 2013
  • Figure 4 – The four levels of Cloud security
  • Figure 5 – A 360 Degree Framework for Cloud Security