Elisa: Telco leadership excellence – and how to do it

Elisa stands out among telcos

As digital services are reshaping our world, many different players are creating new and disruptive services, while telcos’ traditional revenue streams are plateauing and, in some cases, in decline. While many telcos have embarked on the journey to diversify their offerings and establish themselves as serious players in the digital services space, many are struggling to make business model adjustments that are critical to success as operators move into adjacent growth segments. Few telcos have figured out how to keep the wheels turning on their core business, while also building new businesses and embedding agile working practices across their organisation.

In our evaluation of new digital services propositions from Finnish telco, Elisa, STL Partners discovered a contender that punches significantly above its weight. (See our earlier case studies on Elisa Automate and Smart Factory.) Elisa’s successes in pioneering new services, maintaining customer relevance and delivering impressive financial results are not an overnight sensation but the product of long-term, systematic transformation and hard-won lessons.

We were curious to find out what combination of attributes make Elisa an exemplar of how to win in the digital revolution, and how other telcos can take a leaf out of the Elisa playbook to create a similarly agile, adaptable environment for innovation within their own organisations.

Through a series of in-depth interviews with key members of Elisa’s senior management, we set out to explore the company’s recent history of evolution and the culture, practices and processes that are positioning Elisa to co-operate as well as compete with digitally-minded telcos worldwide.

For this research we interviewed six members of Elisa’s executive management:

Veli-Matti Mattila, CEO
Henri Korpi, Executive Vice President, International Digital Services, including Elisa Automate and Elisa Smart Factory
Vesa-Pekka Nikula, at the time of the interviews Executive Vice President, Production – the Production team is responsible for networks, IT and software underpinning all of Elisa’s operations in Finland, Estonia and new international digital services. Currently Executive Vice President, Consumer Customers.
Merja Ranta-aho, Executive Vice President, HR – Elisa’s HR team plays a key role in developing processes and practices that encourage continuous learning across the organisation.
Liisa Puurunen, Vice President, International Digital Services, International Entertainment – this team is tasked with ideation and development of new business propositions built out from Elisa’s core capabilities in the area of entertainment.
Tapio Turunen, at the time of the interview, Director, Business Development – this team is responsible for strategy development across Elisa. Currently Vice President, Business Development, Corporate Customers.

The figure below shows a high-level view of Elisa’s operational structure, with additional notes on how those interviewed for this research fit into the organisation.

Elisa operational model and interviewee overview

Source: Elisa, with STL Partners notes

Comparing Elisa’s culture with other telcos

In parallel with our research into the Elisa’s critical success factors, STL Partners has been running a survey on culture, leadership and purpose in telecoms operators. The goal of the survey is to understand how important these factors are to telcos’ success, and what types of behaviours contribute to a working environment that motivates and enables people to learn new skills and innovate.

As of November 2019, we received 19 responses from Elisa out of a total of nearly 170 respondents overall, primarily from other European operators, as well as some from North America, Asia Pacific, and the Middle East. The results illustrated in the graphic below show a stark difference between how people in Elisa perceive their culture and leadership compared to their peers.

Elisa’s culture is perceived as significantly more effective than other telcos’

Source: STL Partners

The fact that people within Elisa feel as though the company culture is significantly more supportive to its success than in the average telco validates STL Partners’ view that it has a unique approach that others can learn from.

Elisa similarly stands out against its peers across other areas covered in the survey, such as how the organisation responds to mistakes, leadership and management styles and maturity of digital capabilities.

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Is it just a Finnish thing?

There are elements of Finnish culture and the regulatory environment that have benefitted Elisa:

Sisu, a Finnish word which can be translated as the spirit of determination and grit, which is considered by some to be at the heart of Finnish character.
Early deregulation of the telecoms industry meant that Finnish operators were further ahead than telcos in many other countries in adapting to commoditisation of telecoms services when global internet players disrupted the market
Unlike other European countries, the Finnish regulator never introduced a fourth mobile player, possibly because there was already strong price competition between Elisa, DNA and Telia. This has likely given the market more stability than others in Europe, as the telecoms industry has adapted to growing demand for data.

Although these circumstances have certainly helped Elisa, we believe that the position it is in today is the result of deliberate actions and processes implemented in response to its weak performance in the early 2000s, when falling revenues and curtailed dividends saw its share price plummet by 75% between January 2001 and December 2002.

Sixteen years later, Elisa has started to establish a healthy track record of pioneering digital services built on its core competences, scaling businesses in its domestic market, and expanding its international reach at pace through carefully selected acquisitions, and its share price has returned to previous highs.

Executive Summary
- Key success factors other telcos can emulate
- Next steps
Elisa stands out among telcos
- Comparing Elisa’s culture with other telcos
- Is it just a Finnish thing?
How Elisa transitioned to a digital operating model
- A long history of innovation
- Developing the business case for innovation the Elisa way
- The shift to a software-defined enterprise
- A phased approach to turning an idea or opportunity into a business
Critical success factors
- Leadership: Earning shareholders’ trust
- Vision and strategy: Striving for excellence
- Culture and practices: Embedding systematic learning
- An unswerving customer focus
- Talent strategy: Giving people the autonomy to experiment
- Partnerships
The long-term outlook for Elisa

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Apple’s pivot to services: What it means for telcos

Introduction

The latest report in STL’s Dealing with Disruption stream, this executive briefing considers Apple’s strategic dilemmas in its ongoing struggle for supremacy with the other major Internet ecosystems – Amazon, Facebook and Google. It explores how the likely shift from a mobile-first world to an artificial-intelligence first world will impact Apple, which owes much of its current status and financial success to the iPhone.

After outlining Apple’s strategic considerations, the report considers how much Apple earns from services today, before identifying Apple’s key services and how they may evolve. Finally, the report features a SWOT (strengths, weaknesses, opportunities and threats) analysis of Apple’s position in services, followed by a TOWS analysis that identifies possible next steps for Apple. It concludes by considering the potential implications for Apple’s main rivals, as well as two different kinds of telcos – those who are very active in the service layer and those focused on providing connectivity and enablers.

Several recent STL Partners’ research reports make detailed recommendations as to how telcos can compete effectively with the major Internet ecosystems in the consumer market for digital services. These include:

Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed? To find new revenues, some telcos are competing head-on with the major internet players in the digital communications, content and commerce markets. Although telcos’ track record in digital services is poor, some are gaining traction. AT&T, Axiata, Reliance Jio and Turkcell are each pursuing very different digital services strategies, and we believe these potentially disruptive moves offer valuable lessons for other telcos and their partners.
Consumer communications: Can telcos mount a comeback? The rapid growth of Facebook, WhatsApp, WeChat and other Internet-based services has prompted some commentators to write off telcos in the consumer communications market. But many mobile operators retain surprisingly large voice and messaging businesses and still have several strategic options. Indeed, there is much telcos can learn from the leading Internet players’ evolving communications propositions and their attempts to integrate them into broad commerce and content platforms.
Autonomous cars: Where’s the money for telcos? The connected car market is being seen as one of the most promising segments of the Internet of Things. Everyone from telcos to internet giants Google, and specialist service providers Uber are eyeing opportunities in the sector. This report analyses 10 potential connected car use-cases to assess which ones could offer the biggest revenue opportunities for operators and outline the business case for investment.
AI: How telcos can profit from deep learning Artificial intelligence (AI) is improving rapidly thanks to the growing use of deep neural networks to teach computers how to interpret the real world (deep learning). These networks use vast amounts of detailed data to enable machines to learn. What are the potential benefits for telcos, and what do they need to do to make this happen?
Amazon: Telcos’ Chameleon-King Ally? New digital platforms are emerging – the growing popularity of smart speakers, which rely on cloud-based artificial intelligence, could help Amazon, the original online chameleon, to bolster its fast-evolving ecosystem at the expense of Google and Facebook. As the digital food chain evolves, opportunities will open up for telcos, but only if the smart home market remains heterogeneous and very competitive.

Apple’s evolving strategy

Apple is first and foremost a hardware company: It sells physical products. But unlike most other hardware makers, it also has world-class expertise in software and services. These human resources and its formidable intellectual property, together with its cash pile of more than US$250 billion and one of the world’s must coveted brands, gives Apple’s strategic options that virtually no other company has. Apple has the resources and the know-how to disrupt entire industries. Apple’s decision to double the size of it’s already-impressive services business by 2021 has ramifications for companies in a wide range of industries – from financial services to entertainment to communications.

Throughout its existence, Apple’s strategy has been to use distinctive software and services to help sell its high-margin hardware, rather than compete head-on with Google, Facebook, Microsoft and Amazon in the wider digital services and content markets. As Apple’s primary goal is to create a compelling end-to-end solution, its software and services are tightly integrated into its hardware. Although there are some exceptions, notably iTunes and Apple Music, most of Apple’s services and software can only be accessed via Apple’s devices. But there are four inter-related reasons why Apple may rethink that strategy and extend Apple’s services beyond its hardware ecosystem:

- - Services are now Apple’s primary growth engine, as iPhone revenue appears to have peaked and new products, such as the Apple Watch, have failed to take up the slack. Moreover, services, particularly content-based services, need economies of scale to be cost-effective and profitable.
  - Upstream players, such as merchants, brands and content providers, want to be able to reach as many people as possible, as cost-effectively as possible. They would like Apple’s stores and marketplaces to be accessible from non-Apple devices, as that would enable them to reach a larger customer base through a single channel. Figure 1 shows that Apple’s iPhone ecosystem (which use the iOS operating system) is approximately one quarter of the size of rival Android in terms of volumes.
  - Artificial intelligence is becoming increasingly central to the propositions of the major Internet ecosystems, including that of Apple. The development of artificial intelligence requires vast amounts of real-world data that can be used to hone the algorithms computers use to make decisions. To collect the data necessary to detect patterns and subtle, but significant, differences in real-world conditions, the Internet players need services that are used by as many people as possible.
  - As computing power and connectivity proliferates, the smartphone won’t be as central to people’s lives as it is today. For Apple, that means having the best smartphone won’t be enough: Computing will eventually be everywhere and will probably be accessed by voice commands or gestures. As the hardware fades into the background and Apple’s design skills become less important, the Cupertino company may decide to unleash its services and allow them to run on other platforms, as it did with iTunes.

Content:

Executive Summary
Introduction
Apple’s evolving strategy
Playing catch-up in artificial intelligence
What does Apple earn from services?
What are Apple’s key services?
Communications – Apple iMessage and FaceTime
Commerce – Apple Pay and Apple Wallet
Content – iTunes, Apple Music, Apple TV
Software – the App Store, Apple Maps
Artificial intelligence and the role of Siri
Tools for developers
Conclusions and implications for rivals
Implications for rivals

Figures:

Figure 1: Installed base of smartphones by operating system
Figure 2: Apple’s artificial intelligence, as manifest in Siri, isn’t that smart
Figure 3: Apple’s services business is comparable in size to Facebook
Figure 4: The services business is Apple’s main growth engine
Figure 5: The strength of Apple’s online commerce ecosystem
Figure 6: iMessage is becoming a direct competitor to Instagram and WhatsApp
Figure 7: Various apps allow consumers to make payments via Apple Pay
Figure 8: Apple Pay is available in a limited number of markets
Figure 9: Unlike most Apple services, Apple Music is “available everywhere”
Figure 10: Apple’s App Store generates far more revenue than Google Play
Figure 11: Apple Maps’ navigation trailed well behind Google Maps in June 2016
Figure 12: SWOT analysis of Apple in the services sector
Figure 13: TOWS analysis for Apple in the service market

Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed?

Introduction

The latest report in STL’s Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the role of telcos in disrupting the digital economy. Building on the insights gleaned from the stream’s research, STL has analysed disruptive moves by four very different telcos and their prospects of success.

In the digital economy, start-ups and major Internet platforms, such as Alibaba, Amazon, Apple, Facebook, Google, Spotify, Tencent QQ and Uber, are generally considered to be the main agents of disruption. Start-ups tend to apply digital technologies in innovative new ways, while the major Internet platforms use their economies of scale and scope to disrupt markets and established businesses. These moves sometimes involve the deployment of new business models that can fundamentally change the modus operandi of entire industries, such as music, publishing and video gaming.

However, these digital natives don’t have a monopoly on disruption. So-called old economy companies do sometimes successfully disrupt either their own sector or adjacent sectors. In some cases, incumbents are actually well placed to drive disruption. As STL Partners has detailed in earlier reports, telcos, in particular, have many of the assets required to disrupt other industries, such as financial services, electronic commerce, healthcare and utilities. As well as owning the underlying infrastructure of the digital economy, telcos have extensive distribution networks and frequent interactions with large numbers of consumers and businesses.

Although established telcos have generally been cautious about pursuing disruption, several have created entirely new value propositions, effectively disrupting either their core business or adjacent industry sectors. In some cases, disruptive moves by telcos have primarily been defensive in that their main objective is to hang on to customers in their core business. In other cases, telcos have gone on the offensive, moving into new markets in search of new revenues.

Increasingly, these two strategies are becoming intertwined. As regulators use spectrum licensing and local loop unbundling to fuel competition in connectivity, telcos have found themselves embroiled in damaging and expensive price wars. One way out of this commoditisation trap is to enhance and enrich the core proposition in ways that can’t easily be replicated by rivals. For example, BT in the UK has demonstrated that one of the most effective ways to defend the core business can be to bundle connectivity with exclusive content that consumers value. This report analyses four very different variants of this basic strategy and their chances of success.

Note, the examples in this report are intended to be representative and instructive, but they are not exhaustive. Other telcos have also pursued disruptive strategies with varying degrees of success. Many of these strategies have been described and analysed in previous STL Partners’ research reports. Digital transformation is a phenomenon that is not just affecting the telco sector. Many industries have been through a transformation process far more severe than we have seen in telecoms, while others began the process much earlier in time. We believe that there are valuable lessons telcos can learn from these sectors, so we have decided to find and examine the most interesting/useful case studies.

Contents:

Executive Summary
Introduction
Strategy One: Aggressive Acquisitions
AT&T – how will engineering and entertainment mix?
Strategy Two: Fast and Fluid, build a portfolio
Axiata places many digital bets
Strategy Three: Leapfrogging the legacy
Reliance Jio – super-disruptor
Strategy Four: Building an elaborate ecosystem
Turkcell goes toe-to-toe with the big Internet ecosystems

Figures:

Figure 1: Figure 1: The largest pay TV providers in the US in September 2016
Figure 2: Fullscreen Entertainment – free to AT&T Wireless customers
Figure 3: AT&T’s television customer base is shrinking
Figure 4: But AT&T’s Entertainment Group has seen ARPU rise
Figure 5: Celcom Planet’s 11Street marketplace caters for all kinds of products
Figure 6: XL has integrated its commerce and payment propositions
Figure 7: The Tribe video-on-demand proposition majors on Korean content
Figure 8: 4G was designed to deliver major capacity gains over 3G
Figure 9: Vodafone’s view of spectrum holdings in India
Figure 10: Reliance Jio is offering an array of entertainment and utility apps
Figure 11: Reliance’s network is outperforming that of rivals by a large margin
Figure 12: Vodafone India has slashed the cost of its mobile data services
Figure 13: Vodafone, Airtel and Idea account for 72% of the Indian market
Figure 14: The performance required for Reliance to achieve a ROCE of 18%
Figure 15: Digital services have become a major growth engine for Turkcell
Figure 16: Downloads of Turkcell’s apps are growing rapidly
Figure 17: Turkcell TV+ is gaining traction both on and off network
Figure 18: Turkcell’s ARPU is growing steadily
Figure 19:Turkcell is seeing rapid growth in mobile data traffic

Innovation Leaders: A Surprisingly Successful Telco API Programme

Introduction

The value of APIs

Application programming interfaces (APIs) are a central part of the mobile and cloud-based app economy. On the web, APIs serve to connect back-end and front-end applications (and their data) to one another. While often treated as a technical topic, APIs also have tremendous economic value. This was illustrated very recently when Oracle sued Google for copyright infringement over the use of Oracle-owned Java APIs during the development of Google’s Android operating system. Even though Google won the case, Oracle’s quest for around $9 billion showed the huge potential value associated with widely-adopted APIs.

The API challenge facing telcos…

For telcos, APIs represent an opportunity to monetise their unique network and IT assets by making them available to third-parties. This is particularly important in the context of declining ‘core’ revenues caused by cloud and content providers bypassing telco services. This so-called “over the top” (OTT) threat forces telcos to both partner with third-parties as well as create their own competing offerings in order to dampen the decline in revenues and profits. With mobile app ecosystems maturing and, increasingly, extending beyond smartphones into wearables, cars, TVs, virtual reality, productivity devices and so forth, telcos need to embrace these developments to avoid being a ‘plain vanilla’ connectivity provider – a low-margin low-growth business.

However, thriving in this co-opetitive environment is challenging for telcos because major digital players such as Google, Amazon, Netflix and Baidu, and a raft of smaller developers have an operating model and culture of agility and fast innovation. Telcos need to become easier to collaborate with and a systematic approach to API management and API exposure should be central to any telco partnership strategy and wider ‘transformation programme’.

…and Dialog’s best-practice approach

In this report, we will analyse how Dialog, Sri Lanka’s largest operator, has adopted a two-pronged API implementation strategy. Dialog has systematically exposed APIs:

Externally in order to monetise in partnership with third-parties;
Internally in order to foster agile service creation and reduce operational costs.

STL Partners believes that this two-pronged strategy has been instrumental in Dialog’s API success and that other operators should explore a similar strategy when seeking to launch or expand their API activities.

Dialog Axiata has steadily increased the number of API calls (indexed)

Source: Dialog Axiata

In this report, we will first cover the core lessons that can be drawn from Dialog’s approach and success and then we will outline in detail how Dialog’s Group CIO and Axiata Digital’s CTO, Anthony Rodrigo, and his team implemented APIs within the company and, subsequently, the wider Axiata Group.

Executive summary
Introduction
The value of APIs
The API challenge facing telcos…
…and Dialog’s best-practice approach
5 key ‘telco API programme’ lessons
Background: What are APIs and why are they relevant to telcos?
API basics
API growth
The telecoms industry’s API track record is underwhelming
The Dialog API Programme (DAP)
Overview
Ideamart: A flexible approach to long-tail developer engagement
Axiata MIFE – building a multipurpose API platform
Drinking your own champagne : Dialog’s use of APIs internally
Expanding MIFE across Axiata opcos and beyond
Conclusion and outlook

Figure 1: APIs link backend infrastructure with applications
Figure 2: The explosive growth of open APIs
Figure 3: How a REST API works its magic
Figure 4: DAP service layers
Figure 5: Five APIs are available for Idea Pro apps
Figure 6: Idea Apps – pre-configured API templates
Figure 7: Ideadroid/Apptizer allows restaurants to specify food items they want to offer through the app
Figure 8: Ideamart’s developer engagement stats compare favourably to AT&T, Orange, and Vodafone
Figure 9: Steady increase in the number of API calls (indexed)
Figure 10: Dialog Allapps on Android
Figure 11: Ideabiz API platform for enterprise third-parties
Figure 12: Dialog Selfcare app user interface
Figure 13: Dialog Selfcare app functions – share in total number of hits
Figure 14: Apple App Store – Dialog Selfcare app ratings
Figure 15: Google Play Store – Dialog Selfcare app ratings
Figure 16: MIFE enables the creation of a variety of digital services – both internally and externally

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)

Do network investments drive creation & sale of truly novel services?

Introduction

History: The network is the service

Before looking at how current network investments might drive future generations of telco-delivered services, it is worth considering some of the history, and examining how we got where we are today.

Most obviously, the original network build-outs were synonymous with the services they were designed to support. Both fixed and mobile operators started life as “phone networks”, with analogue or electro-mechanical switches. (Earlier descendants were designed to service telegraph and pagers, respectively). Cable operators began as conduits for analogue TV signals. These evolved to support digital switches of various types, as well as using IP connections internally.

From the 1980s onwards, it was hoped that future generations of telecom services would be enabled by, and delivered from, the network itself – hence acronyms like ISDN (Integrated Services Digital Network) and IN (Intelligent Network).

But the earliest signs that “digital services” might come from outside the telecom network were evident even at that point. Large companies built up private networks to support their own phone systems (PBXs). Various 3rd-party “value-added networks” (VAN) and “electronic data interchange” (EDI) services emerged in industries such as the automotive sector, finance and airlines. And from the early 1990s, consumers started to get access to bulletin boards and early online services like AOL and CompuServe, accessed using dial-up modems.

And then, around 1994, the first web browsers were introduced, and the model of Internet access and ISPs took off, initially with narrowband connections using modems, but then swiftly evolving to ADSL-based broadband. From 1990 onwards, the bulk of new consumer “digital services” were web-based, or using other Internet protocols such as email and private messaging. At the same time, businesses evolved their own private data networks (using telco “pipes” such as leased-lines, frame-relay and the like), supporting their growing client/server computing and networked-application needs.

Figure 1: In recent years, most digital services have been “non-network” based

Source: STL Partners

For fixed broadband, Internet access and corporate data connections have mostly dominated ever since, with rare exceptions such as Centrex phone and web-hosting services for businesses, or alarm-monitoring for consumers. The first VoIP-based carrier telephony service only emerged in 2003, and uptake has been slow and patchy – there is still a dominance of old, circuit-based fixed phone connections in many countries.

More recently, a few more “fixed network-integrated” offers have evolved – cloud platforms for businesses’ voice, UC and SaaS applications, content delivery networks, and assorted consumer-oriented entertainment/IPTV platforms. And in the last couple of years, operators have started to use their broadband access for a wider array of offers such as home-automation, or “on-boarding” Internet content sources into set-top box platforms.

The mobile world started evolving later – mainstream cellular adoption only really started around 1995. In the mobile world, most services prior to 2005 were either integrated directly into the network (e.g. telephony, SMS, MMS) or provided by operators through dedicated service delivery platforms (e.g. DoCoMo iMode, and Verizon’s BREW store). Some early digital services such as custom ringtones were available via 3rd-party channels, but even they were typically charged and delivered via SMS. The “mobile Internet” between 1999-2004 was delivered via specialised WAP gateways and servers, implemented in carrier networks. The huge 3G spectrum licence awards around 2000-2002 were made on the assumption that telcos would continue to act as creators or gatekeepers for the majority of mobile-delivered services.

It was only around 2005-6 that “full Internet access” started to become available for mobile users, both for those with early smartphones such as Nokia/Symbian devices, and via (quite expensive) external modems for laptops. In 2007 we saw two game-changers emerge – the first-generation Apple iPhone, and Huawei’s USB 3G modem. Both catalysed the wide adoption of the consumer “data plan”- hitherto almost unknown. By 2010, there were virtually no new network-based services, while the “app economy” and “vanilla” Internet access started to dominate mobile users’ behaviour and spending. Even non-Internet mobile services such as BlackBerry BES were offered via alternative non-telco infrastructure.

Figure 2: Mobile data services only shifted to “open Internet” plans around 2006-7

Source: Disruptive Analysis

By 2013, there had still been very few successful mobile digital-services offers that were actually anchored in cellular operators’ infrastructure. There have been a few positive signs in the M2M sphere and wholesaled SMS APIs, but other integrated propositions such as mobile network-based TV have largely failed. Once again the transition to IP-based carrier telephony has been slow – VoLTE is gaining grudging acceptance more from necessity than desire, while “official” telco messaging services like RCS have been abject failures. Neither can be described as “digital innovation”, either – there is little new in them.

The last two years, however, have seen the emergence of some “green shoots” for mobile services. Some new partnering / charging models have borne fruit, with zero-rated content/apps becoming quite prevalent, and a handful of developer platforms finally starting to gain traction, offering network-based features such as location awareness. Various M2M sectors such as automotive connectivity and some smart-metering has evolved. But the bulk of mobile “digital services” have been geared around iOS and Android apps, anchored in the cloud, rather than telcos’ networks.

So in 2015, we are currently in a situation where the majority of “cool” or “corporate” services in both mobile and fixed worlds owe little to “the network” beyond fast IP connectivity: the feared mythical (and factually-incorrect) “dumb pipe”. Connected “general-purpose” devices like PCs and smartphones are optimised for service delivery via the web and mobile apps. Broadband-connected TVs are partly used for operator-provided IPTV, but also for so-called “OTT” services such as Netflix.

And future networks and novel services? As discussed below, there are some positive signs stemming from virtualisation and some new organisational trends at operators to encourage innovative services – but it is not yet clear that they will be enough to overcome the open Internet’s sustained momentum.

What are so-called “digital services”?

It is impossible to visit a telecoms conference, or read a vendor press-release, without being bombarded by the word “digital” in a telecom context. Digital services, digital platforms, digital partnerships, digital agencies, digital processes, digital transformation – and so on.

It seems that despite the first digital telephone exchanges being installed in the 1980s and digital computing being de-rigeur since the 1950s, the telecoms industry’s marketing people have decided that 2015 is when the transition really occurs. But when the chaff is stripped away, what does it really mean, especially in the context of service innovation and the network?

Often, it seems that “digital” is just a convenient cover, to avoid admitting that a lot of services are based on the Internet and provided over generic data connections. But there is more to it than that. Some “digital services” are distinctly non-Internet in nature (for example, if delivered “on-net” from set-top boxes). New IoT and M2M propositions may never involve any interaction with the web as we know it. Hybrids where apps use some telco network-delivered ingredients (via APIs), such as identity or one-time SMS passwords are becoming important.

And in other instances the “digital” phrases relate to relatively normal services – but deployed and managed in a much more efficient and automated fashion. This is quite important, as a lot of older services still rely on “analogue” processes – manual configuration, physical “truck rolls” to install and commission, and high “touch” from sales or technical support people to sell and operate, rather than self-provisioning and self-care through a web portal. Here, the correct term is perhaps “digital transformation” (or even more prosaically simply “automation”), representing a mix of updated IP-based networks, and more modern and flexible OSS/BSS systems to drive and bill them.

STL identifies three separate mechanisms by which network investments can impact creation and delivery of services:

New networks directly enable the supply of wholly new services. For example, some IoT services or mobile gaming applications would be impossible without low-latency 4G/5G connections, more comprehensive coverage, or automated provisioning systems.
Network investment changes the economics of existing services, for example by removing costly manual processes, or radically reducing the cost of service delivery (e.g. fibre backhaul to cell sites)
Network investment occurs hand-in-hand with other changes, thus indirectly helping drive new service evolution – such as development of “partner on-boarding” capabilities or API platforms, which themselves require network “hooks”.

While the future will involve a broader set of content/application revenue streams for telcos, it will also need to support more, faster and differentiated types of data connections. Top of the “opportunity list” is the support for “Connected Everything” – the so-called Internet of Things, smart homes, connected cars, mobile healthcare and so on. Many of these will not involve connection via the “public Internet” and therefore there is a possibility for new forms of connectivity proposition or business model – faster- or lower-powered networks, or perhaps even the much-discussed but rarely-seen monetisation of “QoS” (Quality of Service). Even if not paid for directly, QoS could perhaps be integrated into compelling packages and data-service bundles.

There is also the potential for more “in-network” value to be added through SDN and NFV – for example, via distributed servers close to the edge of the network and “orchestrated” appropriately by the operator. (We covered this area in depth in the recent Telco 2.0 brief on Mobile Edge Computing How 5G is Disrupting Cloud and Network Strategy Today.)

In other words, virtualisation and the “software network” might allow truly new services, not just providing existing services more easily. That said, even if the answer is that the network could make a large-enough difference, there are still many extra questions about timelines, technology choices, business models, competitive and regulatory dynamics – and the practicalities and risks of making it happen.

Part of the complexity is that many of these putative new services will face additional sources of competition and/or substitution by other means. A designer of a new communications service or application has many choices about how to turn the concept into reality. Basing network investments on specific predictions of narrow services has a huge amount of risk, unless they are agreed clearly upfront.

But there is also another latent truth here: without ever-better (and more efficient) networks, the telecom industry is going to get further squeezed anyway. The network part of telcos needs to run just to stand still. Consumers will adopt more and faster devices, better cameras and displays, and expect network performance to keep up with their 4K videos and real-time games, without paying more. Businesses and governments will look to manage their networking and communications costs – and may get access to dark fibre or spectrum to build their own networks, if commercial services don’t continue to improve in terms of price-performance. New connectivity options are springing up too, from WiFi to drones to device-to-device connections.

In other words: some network investment will be “table stakes” for telcos, irrespective of any new digital services. In many senses, the new propositions are “upside” rather than the fundamental basis justifying capex.

Executive Summary
Introduction
History: The network is the service
What are so-called “digital services”?
Service categories
Network domains
Enabler, pre-requisite or inhibitor?
Overview
Virtualisation
Agility & service enablement
More than just the network: lead actor & supporting cast
Case-studies, examples & counter-examples
Successful network-based novel services
Network-driven services: learning from past failures
The mobile network paradox
Conclusion: Services, agility & the network
How do so-called “digital” services link to the network?
Which network domains can make a difference?
STL Partners and Telco 2.0: Change the Game

Figure 1: In recent years, most digital services have been “non-network” based
Figure 2: Mobile data services only shifted to “open Internet” plans around 2006-7
Figure 3: Network spend both “enables” & “prevents inhibition” of new services
Figure 4: Virtualisation brings classic telco “Network” & “IT” functions together
Figure 5: Virtualisation-driven services: Cloud or Network anchored?
Figure 6: Service agility is multi-faceted. Network agility is a core element
Figure 7: Using Big Data Analytics to Predictively Cache Content
Figure 8: Major cablecos even outdo AT&T’s stellar performance in the enterprise
Figure 9: Mapping network investment areas to service opportunities

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

What is ‘Repremiumization’?

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

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

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

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

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

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

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

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

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

…and put forward by a leading strategy house

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

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

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

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

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

Why is repremiumization 100% hogwash?

STL Partners is convinced that repremiumization is wrong.

Let’s explain why.

The repremiumization argument simply does not stand up to scrutiny

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

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

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

3UK’s value-for-money strategy…

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

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

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

No.

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

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

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

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

Source: Company accounts, STL Partners/Telco 2.0 analysis

..does not equate to repremiumization…

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

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

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

…and will not yield ever-increasing ARPU

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

No, again, for two reasons:

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

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

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

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

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

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

Quality (Repremiumization) does not result in higher prices

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

Low-cost wins

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

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

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

Conclusions

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

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

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

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

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

Source: STL Partners, n = 52

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

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

The Internet of Things: Impact on M2M, where it’s going, and what to do about it?

Introduction

From RFID in the supply chain to M2M today

The ‘Internet of Things’ first appeared as a marketing term in 1999 when it was applied to improved supply-chain strategies, leveraging the then hot-topics of RFID and the Internet.

Industrial engineers planned to use miniaturised, RFID tags to track many different types of asset, especially relatively low cost ones. However, their dependency on accessible RFID readers constrained their zonal range. This also constrained many such applications to the enterprise sector and within a well-defined geographic footprint.

Modern versions of RFID labelling have expanded the addressable market through barcode and digital watermarking approaches, for example, while mobile has largely removed the zonal constraint. In fact, mobile’s economies of scale have ushered in a relatively low-cost technology building block in the form of radio modules with local processing capability. These modules allow machines and sensors to be monitored and remotely managed over mobile networks. This is essentially the M2M market today.

M2M remained a specialist, enterprise sector application for a long time. It relied on niche, systems integration and hardware development companies, often delivering one-off or small-scale deployments. For many years, growth in the M2M market did not meet expectations for faster adoption, and this is visible in analyst forecasts which repeatedly time-shifted the adoption forecast curve. Figure 1 below, for example, illustrates successive M2M forecasts for the 2005-08 period (before M2M began to take off) as analysts tried to forecast when M2M module shipment volumes would breach the 100m units/year hurdle:

Figure 1: Historical analyst forecasts of annual M2M module shipment volumes

Source: STL Partners, More With Mobile

Although the potential of remote connectivity was recognised, it did not become a high-volume market until the GSMA brought about an alignment of interests, across mobile operators, chip- and module-vendors, and enterprise users by targeting mobile applications in adjacent markets.

The GSMA’s original Embedded Mobile market development campaign made the case that connecting devices and sensors to (Internet) applications would drive significant new use cases and sources of value. However, in order to supply economically viable connected devices, the cost of embedding connectivity had to drop. This meant:

Educating the market about new opportunities in order to stimulate latent demand
Streamlining design practices to eliminate many layers of implementation costs
Promoting adoption in high-volume markets such as automotive, consumer health and smart utilities, for example, to drive economies of scale in the same manner that led to the mass-adoption of mobile phones

The late 2000’s proved to be a turning point for M2M, with the market now achieving scale (c. 189m connections globally as of January 2014) and growing at an impressive rate (c. 40% per annum).

From M2M to the Internet of Things?

Over the past 5 years, companies such as Cisco, Ericsson and Huawei have begun promoting radically different market visions to those of ‘traditional M2M’. These include the ‘Internet of Everything’ (that’s Cisco), a ‘Networked Society’ with 50 billion cellular devices (that’s Ericsson), and a ‘Cellular IoT’ with 100 billion devices (that’s Huawei).

Figure 2: Ericsson’s Promise: 50 billion connected ‘things’ by 2020

Source: Ericsson

Ericsson’s calculation builds on the idea that there will be 3 billion “middle class consumers”, each with 10 M2M devices, plus personal smartphones, industrial, and enterprise devices. In promoting such visions, the different market evangelists have shifted market terminology away from M2M and towards the Internet of Things (‘IoT’).

The transition towards IoT has also had consequences beyond terminology. Whereas M2M applications were previously associated with internal-to-business, operational improvements, IoT offers far more external market prospects. In other words, connected devices allow a company to interact with its customers beyond its strict operational boundaries. In addition, standalone products can now deliver one or more connected services: for example, a connected bus can report on its mechanical status, for maintenance purposes, as well as its location to deliver a higher quality, transit service.

Another consequence of the rise of IoT relates to the way that projects are evaluated. In the past, M2M applications tended to be justified on RoI criteria. Nowadays, there is a broader, commercial recognition that IoT opens up new avenues of innovation, efficiency gains and alternative sources of revenue: it was this recognition, for example, that drove Google’s $3.2 billion valuation of Nest (see the Connected Home EB).

In contrast to RFID, the M2M market required companies in different parts of the value chain to share a common vision of a lower cost, higher volume future across many different industry verticals. The mobile industry’s success in scaling the M2M market now needs to adjust for an IoT world. Before examining what these changes imply, let us first review the M2M market today, how M2M service providers have adapted their business models and where this positions them for future IoT opportunities.

M2M Today: Geographies, Verticals and New Business Models

Headline: M2M is now an important growth area for MNOs

The M2M market has now evolved into a high volume and highly competitive business, with leading telecoms operators and other service providers (so-called ‘M2M MVNOs’ e.g. KORE, Wyless) providing millions of cellular (and fixed) M2M connections across numerous verticals and applications.

Specifically, 428 MNOs were offering M2M services across 187 countries by January 2014 – 40% of mobile network operators – and providing 189 million cellular connections. The GSMA estimates the number of global connections to be growing by about 40% per annum. Figure 3 below shows that as of Q4 2013 China Mobile was the largest player by connections (32 million), with AT&T second largest but only half the size.

Figure 3: Selected leading service providers by cellular M2M connections, Q4 2013

Source: Various, including GSMA and company accounts, STL Partners, More With Mobile

Unsurprisingly, these millions of connections have also translated into material revenues for service providers. Although MNOs typically do not report M2M revenues (and many do not even report connections), Verizon reported $586m in ‘M2M and telematics’ revenues for 2014, growing 47% year-on-year, during its most recent earnings call. Moreover, analysis from the Telco 2.0 Transformation Index also estimates that Vodafone Group generated $420m in revenues from M2M during its 2013/14 March-March financial year.

However, these numbers need to be put in context: whilst $500m growing 40% YoY is encouraging, this still represents only a small percentage of these telcos’ revenues – c. 0.5% in the case of Vodafone, for example.

Figure 4: Vodafone Group enterprise revenues, implied forecast, FY 2012-18

Source: Company accounts, STL Partners, More With Mobile

Figure 4 uses data provided by Vodafone during 2013 on the breakdown of its enterprise line of business and grows these at the rates which Vodafone forecasts the market (within its footprint) to grow over the next five years – 20% YoY revenue growth for M2M, for example. Whilst only indicative, Figure 4 demonstrates that telcos need to sustain high levels of growth over the medium- to long-term and offer complementary, value added services if M2M is to have a significant impact on their headline revenues.

To do this, telcos essentially have three ways to refine or change their business model:

Improve their existing M2M operations: e.g. new organisational structures and processes
Move into new areas of M2M: e.g. expansion along the value chain; new verticals/geographies
Explore the Internet of Things: e.g. new service innovation across verticals and including consumer-intensive segments (e.g. the connected home)

To provide further context, the following section examines where M2M has focused to date (geographically and by vertical). This is followed by an analysis of specific telco activities in 1, 2 and 3.

Executive Summary
Introduction
From RFID in the supply chain to M2M today
From M2M to the Internet of Things?
M2M Today: Geographies, Verticals and New Business Models
Headline: M2M is now an important growth area for MNOs
In-depth: M2M is being driven by specific geographies and verticals
New Business Models: Value network innovation and new service offerings
The Emerging IoT: Outsiders are raising the opportunity stakes
The business models and profitability potentials of M2M and IoT are radically different
IoT shifts the focus from devices and connectivity to data and its use in applications
New service opportunities drive IoT value chain innovation
New entrants recognise the IoT-M2M distinction
IoT is not the end-game
‘Digital’ and IoT convergence will drive further innovation and new business models
Implications for Operators
About STL Partners and Telco 2.0: Change the Game
About More With Mobile

Figure 1: Historical analyst forecasts of annual M2M module shipment volumes
Figure 2: Ericsson’s Promise: 50 billion connected ‘things’ by 2020
Figure 3: Selected leading service providers by cellular M2M connections, Q4 2013
Figure 4: Vodafone Group enterprise revenues, implied forecast, FY 2012-18
Figure 5: M2M market penetration vs. growth by geographic region
Figure 6: Vodafone Group organisational chart highlighting Telco 2.0 activity areas
Figure 7: Vodafone’s central M2M unit is structured across five areas
Figure 8: The M2M Value Chain
Figure 9: ‘New entrant’ investments outstripped those of M2M incumbents in 2014
Figure 10: Characterising the difference between M2M and IoT across six domains
Figure 11: New business models to enable cross-silo IoT services
Figure 12: ‘Digital’ and IoT convergence

Reality Check: Are operators’ lofty digital ambitions unrealistic given slow progress to date?

Growing telco ambitions in new (digital) business models

Telco execs are bullish about long-term prospects for new digital business models

Respondents believe new business model revenues should reach nearly 25% of total telecom revenue by 2020

Despite recent evidence in Europe of material revenue decline from telecoms operators, the executives that STL Partners canvassed in its recent global survey were relatively optimistic about the opportunities for revenue growth from new business models. On average, executives felt that revenue from new digital business models should reach 9% of total revenue in 2015 and this should rise to 24% by 2020 (see Figure 1).

In the case of 2015, 9% is way beyond what will be achieved by most players and probably represents respondents’ theoretical target that their organisation should have achieved by the end of this year if management had invested more effort in building new revenue sources earlier: it is where their organisation should be in an ideal world. One of the few operators in the world that is at this level of digital revenues is NTT DoCoMo. We explore its digital activities later in this report.

24% of telecoms revenue coming from new business models in 2020 is also ambitious but STL Partners considers this a realistic target and one which would probably result in the overall telecoms market being no bigger than it was in 2013 – see the forecast on page 15.

Two drivers of digital business model importance to operators: digital revenue growth and core business revenue decline

A key question for the industry is whether the 2020 target can be achieved by growing material new business model revenues in tandem with limited voice, messaging and connectivity decline or whether it could result from an implosion of these Telco 1.0 revenues. In other words, modest new business model revenue could be 24% of a very much smaller overall telecoms market if voice, messaging and connectivity revenues suffer a precipitous decline.

Figure 2 charts the quarterly revenue for six European markets and illustrates a range of trajectories for telecoms revenues. At one extreme is Denmark where telecoms revenue in Q3 2014 was nearly 40% lower than Q1 2008. At the other extreme are the UK and French markets where the figure is 3% and 7% lower respectively. Clearly, if most telecoms markets follow the Danish route then the opportunity for modest digital revenues to become important to operators grows substantially. Interestingly, in most of the six markets, 2013 and 2014 has seen revenues stabilising (at least among operators that publish accounts which split out those markets over the time period) and in some cases, such as the UK and Netherlands, growth has been achieved from the lows of 2012.

STL Partners’ global forecast lies somewhere between the two extremes outlined in Figure 2: we believe that core telecoms revenues will decline by around 25% between 2013 and 2020. If this is indeed the case then for digital revenues to represent 24% of telecoms revenue, they will need to be very material – around $250 billion for mobile telecoms alone!

Figure 1: Digital business model revenue ambition, 2015 and 2020

Source: STL Partners/Telco 2.0 Operator Survey, November 2014, n=55

Figure 2: Telecoms quarterly revenue in 6 European markets

Source: Telecoms company accounts, STL Partners analysis
Note: Revenue is for operators reporting quarterly figures for each market. As a result, not all market revenue is captured.

Belief in the importance of future telecoms business models varies greatly by business function and by geography

Respondents from Network functions were most bullish; IT respondents most pessimistic

Where there were 10 or more respondents in a functional or geographic group, we examined the responses for that group. As Figure 3 shows, there were wide differences in ambition for digital services by functional area with respondents from Network being far more bullish than those in IT: the former suggesting 30% of 2020 revenue should come from digital services compared with only 14% from IT.

North American respondents seem to anticipate unrealistic digital business growth

There was a consistency among functional groups in their ambitions for digital services: those that were more bullish for 2015 remained more so for 2020. This contrasted with the regional split in which North American respondents believed the ‘correct’ proportion of revenue from digital services in 2015 is 7% (compared with 10% for Europe and Asia) rising to a formidable 26% in 2020. This suggests that North American executives remain confident that their organisations can compete effectively in consumer and enterprise digital markets despite the US, in particular, being the home market of many formidable digital players: Google, Facebook, Amazon, Microsoft, Salesforce, Twitter, and so forth.

To put the North American perspective in perspective: if STL Partners’ global forecast for core telecoms services holds true in the US then a $120bn revenue telecoms company, such as Verizon, will lose around $30 billion in core service revenues by 2020. In this scenario, for Verizon to end up the same size as it is now in 2020, it will have to replace this $30 billion with new digital business revenues (which would equate roughly to the 26% proposed by North American respondents). In our deep-dive analysis of Verizon for the Telco 2.0 Transformation Index, STL Partners estimated that Verizon generated around $2.9 billion in Telco 2.0 digital business model revenues (around 2.4% of total revenue) in 2013. For that $2.9 billion to grow to $30 billion by 2020 requires compound annual growth of a whopping 40% per year: a tall order indeed and one that is almost certainly unrealistic.

Middle Eastern respondents least ambitious: signs of complacency?

Unsurprisingly, the Middle Eastern respondents whose companies are enjoying continued growth in core telecoms services and, in many countries advantageous regulatory environments, were least bullish about digital services in the near and longer term. The danger for this region is complacency: operators are in a similar position to those in Europe in 2007. European operators failed to prepare early enough for core service decline – most digital activities were not kicked off until 2012 by which time aggregate revenue from voice, messaging and connectivity was either flat or in decline in most markets.

Figure 3: Average digital business model revenue ambition, 2015 and 2020 by function and geography

Source: STL Partners/Telco 2.0 Operator Survey, November 2014, n=55

Executive Summary
Growing telco ambitions in new (digital) business models
Telco execs are bullish about long-term prospects for new digital business models
Belief in the importance of future telecoms business models varies greatly by business function and by geography
Telco execs’ views on digital business Opex and Capex investment are closely correlated with their views on revenue growth
Calculating a telecoms digital business P&L: Moving from investment in 2015 to (unrealistically?) strong returns in 2020
STL Partners’ forecast suggests that new digital business should be 25+% of revenue by 2020 to avoid long-term industry decline
The outlook for Telco 1.0 business models is not positive and Telco 2.0 business models are required to fill the gap
Investment in new business models is increasing but results from the Telco 2.0 Transformation Index suggest it is still inadequate to engender success
Scale of NTT DoCoMo’s ‘new digital business’ suggests bold vision is realistic for some players
Long-term downward trend in Telco 1.0 core services in Japan with digital services a ‘gap-filler’
Smart Life: A cloud-based (OTT) consumer-centric approach to digital services
A digital business has fundamentally different characteristics to a telecoms business
9 challenges to overcome and all are important
Overall, operator progress on all 9 challenges remains slow
Too little progress on core challenges from most operators
What next? Forthcoming STL Partners’ Telco 2.0 research supporting telecoms transformation
Appendix 1: Survey details
Appendix 2: Telco 2.0 Transformation Index overview

Figure 1: Digital business model revenue ambition, 2015 and 2020
Figure 2: Telecoms quarterly revenue in 6 European markets
Figure 3: Average digital business model revenue ambition, 2015 and 2020 by function and geography
Figure 4: Average required Digital Business Opex and Capex, 2015 & 2020
Figure 5: Digital Business P&L for a $100 billion revenue telecoms operator, 2015 vs 2020, $ Billions
Figure 6: STL Partners’ global mobile telecoms forecast by opportunity area
Figure 7: STL Partners Telco 2.0 Transformation Index summary results, December 2014
Figure 8: NTT DoCoMo quarterly voice, data and ‘other’ revenue, Mar 2007-Sep 2014
Figure 9: Smart Life – NTT DoCoMo’s customer-centric approach to transformation
Figure 10: Different companies…different business models – the change that telecoms operators are trying to make
Figure 11: 9 challenges scored by ‘importance for operator digital transformation and future success’
Figure 12: The degree to which operators have addressed the 9 challenges
Figure 13: Strategists are much more bullish than other functions about their organisation’s transformation progress
Figure 14: Lots to change…and its taking too long
Figure 15: Operators appear to be at very different stages of resolving the ‘Big 6’ challenges
Figure 16: Defining Digital Services

Launchers: a new relevance point for telcos?

Introduction

Improving engagement has many benefits for an operator. It can help change customers’ perceptions which in turn can reduce churn and increase customer acquisition as well as opening up new avenues for telcos to offer additional services.

In this note, we analyse the opportunity for mobile operators within a new control point in the digital ecosystem – the ‘launcher’ application for Android devices. We present an overview of the opportunity, assessing what the product is and what’s at stake as well as providing an overview of the key players in this space. The report then focuses on how telcos may choose to play in this area, analysing the different strategies and their suitability to different types of operators.

The Telco Dilemma

Telcos’ engagement with and knowledge of their customers has been marginalized in the smartphone world. Whilst telcos still understand how customers use the traditional components of their mobile device (voice calls; messaging; data usage), the main digital disruptors now determine how users primarily engage with their devices – they control:

App portals (Apple; Android)
Search (Google)
E/M-commerce (Amazon; eBay; PayPal)
Content services (YouTube; Yahoo)
OTT comms (Facebook; WhatsApp; Twitter)

For more analysis on how telcos can understand and deal with these disruptors please read Telco 2.0’s analysis on this topic (Digital Commerce 2.0: Disrupting the Californian Giants [Oct 2013]; Dealing with the ‘Disruptors’ [Nov 2011]).

Engagement in the digital ecosystem is clearly worth a significant amount of money, both in terms of direct revenue as well as the indirect revenue associated with additional customer insight and knowledge. The valuations of companies such as Facebook and WhatsApp show the value premium that user engagement attracts. As mobile devices become even more prevalent and important in consumers’ lives, this engagement will become even more valuable.

In order for telcos to capitalize on this, they need to change their engagement strategy and gain more visibility and understanding of their customers. The industry largely understands this concept and a number or attempts have been made by telcos to wrestle back control of the device. Operators with bold ambitions have tried to compete head on, offering competing platforms to the OTT players (e.g. Vodafone 360) whilst others have attempted to position themselves within a segment of the digital ecosystem. Despite best efforts, these initiatives have so far met with mixed success.

One new area of opportunity for those looking to regain relevance on the mobile device (and one that is proving very popular right now) is the Android launcher.

The Opportunity

What is a launcher?

A launcher is a customizable home screen for your Android device. It allows a user to arrange their apps in more creative ways, resulting in a more personalized, engaging mobile experience.

Launchers can range from sophisticated 3D menus, to themed displays, to simplified app categorization/ grouping. For example, Yahoo’s Aviate launcher changes the apps it displays based on the time of day and the location of the user (e.g. at work, on the go, at home) – meaning that the user can more easily access the right apps to match their current situation.

Figure 1: Popular launchers in the marketplace

Left: The Next Launcher’s 3D display – Source: Google Play; Middle: Buzz’s multi-themed launcher – Source: Drippler; Right: Aviate’s app re-categorization launcher – Source: Android Community

Launchers are more than just new ‘skins’ for the device. They alter how users interact with their device through app organization as well as through additional tools & services, including:

Relevant content on nearby places (e.g. Aviate incorporates Foursquare)
Helpful information, including travel & traffic advice (e.g. Google Now)
Inbuilt app & content recommendation engines (e.g. EverythingMe)

This combination of customizable app organization and easily accessible additional services is proving to be a compelling proposition for Android users.

Will launchers really take off?

The concept of a customizable home screen is not new but with advancements in smartphone operating systems and device displays this customization is starting to take off. A recent report by Flurry found that there were over 4,500 of these launcher-type apps and that launcher usage in Q1 2014 was greater than the total for all of 2013.

Figure 2: Number of Launcher Application Sessions (Quarterly data)

Source: Flurry Analytics

The evidence shows that launchers are beginning to take off. They are offering value to the customer, through customization and additional services, as well as providing a new tool for companies to engage with and understand the behavior of the user.

What’s at stake?

Launchers represent a new control point in the digital ecosystem, shaping how (and potentially what) information is presented to the user. Gaining insight into how a customer uses their phone combined with a contextual understanding of their situation has the potential to create significant value.

Different launcher applications provide different functionality, with some focusing more on themes and customization and others focusing more on developing customer insight to simplify display and discovery on the mobile device. These models have different methods of monetization, including:

Freemium models – where a more basic version is free and the premium version is a paid for download
App discovery – where apps are recommended to the user (and the recommendation may be paid for)
Sponsored search – where the first result(s) are paid for

Of these models and monetization methods we believe contextual search and discovery are the most interesting. Mobile has revolutionized how people find information and use digital services – however, mobile usage is built around apps (86% of time spent on mobile devices is spent inside applications – Source: Techcrunch). The difficulty with (discovering) apps is that they are largely standalone services – they cannot be crawled or indexed easily and there is little cross-app integration. This makes relevant apps (and the content within them) harder to find through search alone.

Launchers can attempt to organize apps in a similar way that search engines organize the web, providing a more user-friendly app discovery mechanism. Launchers can gain significant insight into user behaviour (e.g. the type of apps downloaded and time spent using apps) – this information can be used to recommend apps and other content and services to the user in an integrated way, allowing launchers to circumvent search within app portals and to make recommendations (for apps and content) to a user when they have demonstrated a preference for it. Indeed, EverythingMe, an innovative launcher company, have suggested that “users are searching less and less, but still expect results and discovery. We felt the best solution would be a contextual search product in the form of an Android launcher.”

As the mobile device becomes more important and central to the user’s life, controlling this interface and engagement has the potential to generate very valuable insight. This personalized discovery tool, as long it remains transparent and offers a tangible benefit to the customer, could revolutionize how value is derived from mobile applications.

The Players

This potential opportunity has not gone unnoticed with a number of the big digital players recently entering this space. However, as this technology and engagement strategy is in its infancy, no-one has taken a clear lead in the race.

Facebook

Facebook, in April of last year, released Facebook Home, a launcher dedicated to putting social communication above all other applications on the mobile device (through cover feed, always-on chat heads and improved notifications). Despite a lot of initial fanfare, its performance has not been overly strong (only 0.5% of Facebook’s 1 billion monthly active users have installed it and it has received negative user feedback). Notwithstanding this slow start the company still sees this platform as a critical opportunity, with Facebook’s engineering Director, Jocelyn Goldfein, saying earlier this year in an interview with Venturebeat, “we’re still very bullish on Home…we’re believers in Home; we believe it’s going to be valuable for users”. Facebook’s continued resilience and flexibility when adapting to mobile could lead to a redesigned launcher that (social media) users’ value.

We believe that the relative failure of Facebook Home shows an important lesson for would be Launcher owners: the goal should be to optimize the customer experience and not maximize the placement of services for your own or others’ brands. After all, who wants the first screen on their phone to be in someone else’s control? This represents an opportunity for telcos, who don’t necessarily have the imperative to dominate the home screen with ads or today’s feed, and can therefore entertain a more intuitive and customer-oriented design. [NB It is also important that telcos attempt to learn from their own past errors: the ‘walled garden’ is not a successful model for most.]

For a more detailed assessment of Facebook Home’s service please see Facebook Home: what is the impact? [April 2013]

Executive Summary
Introduction
The Telco Dilemma
The Opportunity
What is a launcher?
Will launchers really take off?
What’s at stake?
The Players
Facebook
Google
Yahoo
Twitter
Other Popular Launchers
The Answer (for Telcos)?
Why should Telco’s play?
How can Telco’s play?
Conclusion

Figure 1: Popular launchers in the marketplace
Figure 2: Number of Launcher Application Sessions (Quarterly data)
Figure 3: Assessing Telcos’ options to enter the launcher market

Why closing Telefonica Digital should make Telefonica more digital (and innovative)

Several different CSP organisation designs for Telco 2.0 Service Innovation

Telefonica is one of the companies that we have analysed in depth in the Telco 2.0 Transformation Index research. In this report, we analyse Telefonica’s recent announcement that it is restructuring its Digital Business unit. We’ll also be exploring strategies for transformation at the OnFuture EMEA 2014 Brainstorm, June 11-12, London.

Telco 2.0 strategy is a key driver of organisation design

We have defined Telco 2.0 and, specifically, Telco 2.0 Happy Piper and Telco 2.0 Service Provider strategies in other reports so will not focus on the implications of each on service offerings and customer segments here. It is, however, important to understand the implications each strategy has on the organisation in terms of capability requirements and, by definition, on organisation design – structure, processes, skills and so forth.

As Figure 1 shows, the old Telco 1.0 world required CSPs to focus on infrastructure-oriented capabilities – cost, service assurance, provisioning, network quality of service, and congestion management.

For a Telco 2.0 Happy Piper, these capabilities are even more important:

Being low-cost in a growing telecoms market gives a company an advantage; being low-cost in a shrinking telecoms market, such as Europe, can mean the difference between surviving and going under.
Congestion management was important in the voice-oriented telecoms market of yesteryear but is even more so in the data-centric market in which different applications (including voice) co-exist on different networks – 2G, 3G, 4G, Wi-Fi, Fibre, Copper, etc.

Telco 2.0 Happy Pipers also need to expand their addressable market in order to thrive – into Infrastructure Services, M2M, Embedded Connectivity and, in some cases, into Enterprise ICT including bespoke vertical industry solutions. For sure this requires some new Service Development capabilities but, perhaps more importantly, also new partnerships – both in terms of service development and delivery – and a greater focus on Customer Experience Management and ‘Customer data/Big data’ in order to deliver valuable solutions to demanding enterprise customers.

For a Telco 2.0 Service Provider, the range of new capabilities required is even greater:

The ability to develop new platform and end-user (consumer and enterprise) services.
Brand management – not just creating a stolid telecoms brand but a vibrant end-user one.
New partners in other industries – financial services, media, advertising, start-ups, developers and so forth.

Figure 1: Capabilities needed for different Telco 2.0 strategies

Fig1 Capabilities need for different Telco 2.0 Strategies

Source: STL Partners/Telco 2.0

Most leading CSPs are pursuing a Telco 2.0 ‘Service Provider’ strategy

STL Partners analysis suggests that the majority of CSPs (and certainly all the tier 1 and 2 players) have at least some aspirations as a Telco 2.0 Service Provider. Several, such as AT&T, Deutsche Telekom Orange, SingTel, Telefonica and Telenor, have been public with their ‘digital services’ aspirations.

But even more circumspect players such as Verizon and Vodafone which have to date largely focused on core telecommunications services have aspirations to move beyond this. Verizon, for example, is participating in the ISIS joint venture on payments, albeit something of a slow burn at present. Vodafone has also pushed into payments in developing markets via its successes with mPesa in Kenya and is (perhaps a slightly reluctant) partner in the WEVE JV in the UK on digital commerce.

Further back in their Telco 2.0 development owing to the attractiveness of their markets from a Telco 1.0 perspective are the players in the rapidly developing Middle Eastern and Asian markets such as Axiata, Etisalat, Mobily, Ooredoo, and Zain. These players too aspire to achieve more than Happy Piper status and are already pushing into advertising, content and payments for consumers and M2M and Cloud for enterprises.

Telco 2.0 Service Providers are adopting different organisation designs

It is clear that there is no consensus among management about how to implement Telco 2.0 services. This is not surprising given how new it is for telecoms operators to develop and deliver new services – innovation is not something associated with telcos. Everyone is learning how to take their first tentative steps into the wonderful but worrisome world of innovation – like toddlers stepping into the shallow beach waters of the ocean.

There is no tried and tested formula for setting up an organisation that delivers innovation but there is consensus (among STL Partners’ contacts at least) that a different organisation structure is needed to the one that manages the core infrastructure business. Most also agree that the new skills, partnerships, operational and financial model associated with Telco 2.0 innovation needs to be ring-fenced and protected from its mature Telco 1.0 counterpart.

The degree of separation between the old and new is the key area of debate. We lay out the broad options in Figure 2.

Fig 2 Organisation design models for Telco 2.0 Service Innovation

Fig 2 Organisation design models for Telco 2.0 Service Innovation

Source: STL Partners/Telco 2.0

For some, a central independent strategy unit that identifies potential innovations and undertakes an initial evaluation is a sufficient degree of separation. AT&T and Verizon in the US have gone down this route – see Figure 3.

Fig 3 Organisation design approaches of 9 CSPs across 4 regions

Fig 3 Organisation design approaches of 9 CSPs across 4 regions

Source: STL Partners/Telco 2.0

In this model, ideas that are deemed promising are handed over the operating units to develop and deliver where, frankly, many are ignored or wallow in what one executive described to us as ‘Telco goo’ – the slow processes associated with the 20-year investment cycles of an infrastructure business.

Players such as Etisalat, Mobily and Ooredoo that are taking their first steps into Telco 2.0 services, but harbouring great aspirations, have gone a step further than this and set up Central Innovation Units. In additional to innovation ideation and evaluation, these units typically undertake piloting, investment and, in some cases, some modest product development. This approach is a sensible ‘first step’ into innovation and echoes the earlier attempts by many multi-national European players in the early 2000’s that had central group marketing functions that undertook proposition development for several countries. The benefit is that the company can focus most resources on growth in existing Telco 1.0 services and Telco 2.0 solutions do not become a major distraction. The downside is that Telco 2.0 services are seen as small and distant are always far less important than voice, messaging and connectivity services or devices ranges that can make a big impact in the next 3-6 months.

Finally, the most ambitious Telco 2.0 Service Providers – Deutsche Telekom, SingTel, Telenor, Telefonica and others – have developed separate New Business Units The Telco 2.0 New Business Unit is given end-to-end responsibility for Telco 2.0 services. The units find, develop, launch and manage new digital services and have full P&L responsibility.

STL Partners has long been a fan of this approach. Innovation is given room to develop and grow under the guidance of senior management. It has a high profile within the organisation but different targets, processes, people and partnerships to the core business which, left unchecked, would intentionally or unintentionally kill the new ‘rival’ off.

Five Principles for developing a Telco 2.0 New Business Unit

Full control and responsibility. The unit must have the independence from the core business to be able to control its own destiny and not be advertently or inadvertently impeded by the core business. Telefonica, for example, went as far as to give its unit a separate physical location in central London.
Senior management support. While the unit is largely independent, it must be part of the corporate strategy and decisions about it must be made at the highest level. In other words, the unit must be tied to the core business right at the top of the organisation – it is not completely free and decisions must be made for the overall good of the company. Sometimes those decisions will be to the benefit or detriment of either the core business or the new business unit. This is inevitable and not a cause for alarm – but these decisions need to be considered carefully and rationally by the senior team.
Go OTT to start with. One of the challenges faced by senior managers is how to leverage the capabilities of the core business – the network, customer data, retail outlets, brand, etc. – in the digital services offered by the new unit. Clearly, it makes sense to use these assets to differentiate against the OTT players. However, STL Partners recommends not trying to do this initially as the complexity of building successful interfaces between the new unit and the core business will prove too challenging. Instead, establish some momentum with OTT services that the new unit can develop and deliver independently, without drawing on the core business, before then adding some specific core business capabilities such as location data, customer preference data or network QoS.
Don’t forget to change management incentives …There is no point in filling the new business unit with senior management and fresh talent imbued with new skills and undertaking new business processes and practices unless they are clearly incentivised to make the right decisions! It seems an obvious point but CSPs have a long and successful infrastructure legacy which means that management incentives are typically suitable for this type of business. Managers typically have to hit high EBITDA margins, revenue targets that equate to around 50% of the capital base being generated a year, strong on-going capital investment – things that are at odds with a product innovation business (lower EBITDA margins, much lower capital intensity). Management incentives need to change to reflect this and the fact that they business is a start-up not a bolt-on the core business. These incentives need to be specific and can affect those in the core business as well as new unit.For example, if collaboration between the new unit and the core business units is a key requirement for long-term success (to build Telco 2.0 services that leverage core assets), then instigate a 360º feedback programme for all managers that measures how effectively they collaborate with their counter-parties in the other business units. Scores here could be used to determine bonuses, share options or promotion – a sure way to instigate the required behaviour!
…and investor metrics. As mentioned above, a product innovation business has a different financial model to an infrastructure business. Because of this, a new set of investor metrics is required focusing on lower margins and capital intensity. Furthermore, users will often be a key metric rather than subscribers. In other words, many users will not directly generate revenue (just as they do not for Google or Facebook) but remain an important driver of third-party sponsorship and advertising revenues. Linked to this, ARPU will become a less important metric for the new business unit because the end user will be one of several revenue sources.

Many of the leading telecoms players have, therefore, done the right thing with the development of their digital units. So why have they struggled so much with culture clashes between the core telecoms business and the new digital innovations? The answer lies in the way the units have been set up – their scope and role, the people that reside within them, and the processes and metrics that are used to develop and deliver services. This is covered in the next section of this report.

Even the boldest players are too Telco-centric with their digital business units
Defining traditional and new Telco 2.0 services
Current digital business units cover all the new Telco 2.0 services but should they?
Option: Reduce the scope of the Digital Business Units
Telefonica’s recent closure of Telefonica Digital
How might Telefonica’s innovation and ‘digital services’ strategy play out?

Figure 4: Defining Telco 2.0 new services
Figure 5: The mixed bag of services found in current digital business units
Figure 6: Separate new Telco 2.0 Services from traditional telecoms ones
Figure 8: The organisation structure at Telefonica
Figure 9: Telefonica’s strategic options for implementing ‘digital services’

Elisa stands out among telcos

Elisa operational model and interviewee overview

Comparing Elisa’s culture with other telcos

Elisa’s culture is perceived as significantly more effective than other telcos’

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Is it just a Finnish thing?

Table of contents

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Introduction

Apple’s evolving strategy

Introduction

Introduction

The value of APIs

The API challenge facing telcos…

…and Dialog’s best-practice approach

Introduction

Figure 1: The Telco 2.0 Agility Framework

Partnering is being defined as a telco ‘core competence’

Partnering and partnerships are becoming more complex

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

Motivations for partnering in digital services

Figure 3: Major drivers for telco digital services partnering initiatives

Introduction

History: The network is the service

What are so-called “digital services”?

What is ‘Repremiumization’?

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

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

…and put forward by a leading strategy house

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

Why is repremiumization 100% hogwash?

The repremiumization argument simply does not stand up to scrutiny

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

3UK’s value-for-money strategy…

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

..does not equate to repremiumization…

…and will not yield ever-increasing ARPU

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

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

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

Quality (Repremiumization) does not result in higher prices

Low-cost wins

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

Conclusions

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

Introduction

From RFID in the supply chain to M2M today

Figure 1: Historical analyst forecasts of annual M2M module shipment volumes

From M2M to the Internet of Things?

Figure 2: Ericsson’s Promise: 50 billion connected ‘things’ by 2020

M2M Today: Geographies, Verticals and New Business Models

Growing telco ambitions in new (digital) business models

Telco execs are bullish about long-term prospects for new digital business models

Two drivers of digital business model importance to operators: digital revenue growth and core business revenue decline

Figure 1: Digital business model revenue ambition, 2015 and 2020

Figure 2: Telecoms quarterly revenue in 6 European markets

Belief in the importance of future telecoms business models varies greatly by business function and by geography

Respondents from Network functions were most bullish; IT respondents most pessimistic

North American respondents seem to anticipate unrealistic digital business growth

Middle Eastern respondents least ambitious: signs of complacency?

Figure 3: Average digital business model revenue ambition, 2015 and 2020 by function and geography

Introduction

The Telco Dilemma

The Opportunity

What is a launcher?

Figure 1: Popular launchers in the marketplace

Will launchers really take off?

Figure 2: Number of Launcher Application Sessions (Quarterly data)

What’s at stake?

The Players

Facebook

Several different CSP organisation designs for Telco 2.0 Service Innovation

Telco 2.0 strategy is a key driver of organisation design

Most leading CSPs are pursuing a Telco 2.0 ‘Service Provider’ strategy

Telco 2.0 Service Providers are adopting different organisation designs

Five Principles for developing a Telco 2.0 New Business Unit

Sample Reports