The Coordination Age Companies: The First Release

This is the first report in a series outlining companies that we think are lighting the path on the journey to the Coordination Age. Its goal is to deepen understanding of the Coordination Age and to inspire innovation and engagement in this crucial transition.

What is the Coordination Age?

The Coordination Age is STL Partners’ term for the new economic and technological era that the world is transitioning to. In the Coordination Age, the over-arching need of governments, companies and individuals is to make better use of the available resources to “make the world run better”. This means managing those resources to deliver better outcomes, better experiences, and less waste.

Connected technologies, including 5G, IoT, Artificial Intelligence, automation, Cloud and Edge Computing, are key tools to the efficient use, management and distribution of those resources. Resources include time, money, carbon, goods, water, land, buildings, raw materials, energy, and so on.

Why Coordination?

Managing resources better requires multiple partners to coordinate their actions and processes to deliver outcomes for maximum efficiency and effect. There does not need to be an all powerful, central ‘coordinator’. That is often neither desirable nor possible. Instead, there will be a multitude of interconnected processes and players that achieve coordination on demand to deliver the outcomes needed within the ecosystem overall.

Coordination, transformation and technology

Much of the action of coordination will be automated – processes or parties communicating with another automatically for the sake of speed, cost and efficiency, but the whole system will be under the control of people and organisations as it is now.

The Coordination Age is the master key to the puzzle of digital transformation. While the technologies have implied what is possible, the Coordination Age shows what it is for and why transformation is necessary, and what it will take to make it work in practice in real world ecosystems – the how.

Role of this report

This is the first report in a series outlining companies that we think are lighting the path on the journey to the Coordination Age. Its goal is to deepen understanding of the Coordination Age and to inspire innovation and engagement in this crucial transition.

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The Coordination Age 100: Inspiration for change

We aim to profile 100 companies across a number of industries as inspiration for new business models, how to transform a business to succeed in the Coordination Age; and/or as potential partners for the telecom industry. The Coordination Age is well underway and many companies have been built around driving this step change in our economy, or are transforming themselves to adapt to it. Some telcos have already started on the Coordination Age path as we have looked at this in Are telcos smart enough to make money work?, The roles of 5G & private networks and Can telcos create a compelling smart home?. However, for companies not already on this path, it’s hard to know where to start and what emerging technologies, business models and ecosystems driving that are Coordination Age.

What is a Coordination Age company?

  • A Coordination Age company delivers better use of resources to their customers by combining different technology resources such as connectivity (IoT, 4G, 5G, Wi-Fi, etc.)​, cloud/edge computing, AI and machine learning, and automation
  • It operates in a B2B2X environment, bringing together previously siloed data, processes, companies, and customers
  • A Coordination Age company usually operates across physical and digital worlds, but in some cases the resources can be predominantly digital too (e.g. in financial services or entertainment)

Benefits: better use of  / returns on resources

coordination age benefits

Table of content

  • Executive summary
  • Introduction – the Coordination Age and this report
  • What is the “Coordination Age 100”?
    • The Coordination Age 100: Inspiration for change
    • What is a Coordination Age company?
    • Coordination Age natives vs transformers
  • Ten company profiles
  • Coordination Age natives vs transformers
    • Coordination Age natives
      • Octopus Energy
      • Ocado
      • Booking.com
      • Babylon Health
      • Starling Bank
      • Upstart
    • Coordination Age transformers
      • Hitachi Rail
      • Rolls Royce
      • Orange Money/Orange Bank
      • Signify

 

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Culture, leadership and purpose in telcos: Four key actions

Understanding culture, leadership and purpose

STL Partners has surveyed 168 telco execs about leadership, culture and purpose in the telecoms industry.

This research is part of our overall programme to help understand and develop how telcos can optimise their performance and reinvigorate growth and innovation. Respondents were asked to think about the telco they knew best, and answer a series of questions relating to different drivers of success:

  • Culture: Values and behaviours and the telco’s employees
  • Leadership: The way in which leaders drive the organisation
  • Purpose: The reason that the telco exists and operates
  • Digital: The telco’s ‘digital’ goals, skills and capabilities

Respondents were a mix of senior executives from telecoms operators worldwide, across a variety of functions and geographies.

Findings include:

  • Half of respondents believe that it is harder to get things done in telecoms operators than elsewhere
  • Leadership vision, alignment and delivery are seen to be a significant enabler to success by 43% of respondents
  • There are mixed views of the impact of company culture on success: seen as a barrier by 57% and a significant enabler by 33%
  • Some telcos are outperforming others. For example, Elisa’s culture is perceived as significantly more effective than others
  • … and more.

We also explore correlation between answers to different questions to suggest four key actions to driving greater success.

Table of contents

  • Executive Summary
  • Introduction & methodology
  • Analysis of results
  • Full survey results
    • Culture
    • Leadership
    • Purpose
    • Digital
    • Correlation analysis
  • About STL Partners

 

Telco 2030: New purpose, strategy and business models for the Coordination Age

New age, new needs, new approaches

As the calendar turns to the second decade of the 21st century we outline a new purpose, strategy and business models for the telecoms industry. We first described The Coordination Age’, our vision of the market context, in our report The Coordination Age: A third age of telecoms in 2018.

The Coordination Age arises from the convergence of:

  • Global and near universal demands from businesses, governments and consumers for greater resource efficiency, availability and conservation, and
  • Technological advances that will allow near their real-time management.

Figure 1: Needs for efficient use of resources are driving economic and digital transformation

Resource availability, Resource efficiency, Resource conservation: Issues for governments, enterprises and consumers. Solutions must come from all constituents.

Source: STL Partners

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A new purpose for a new age

This new report outlines how telcos can succeed in the Coordination Age, including what their new purpose should be, the strategies, business models and investment approaches needed to deliver it.

It argues that faster networks which can connect tens of billions of sensors coupled with advances in analytics and process digitisation and automation means that there are opportunities for telecoms players to offer more than connectivity.

It also shows how a successful telecoms operator in the Coordination Age will profitably contribute to improving society by enabling governments, enterprises and consumers to collaborate in such a way that precious resources – labour, knowledge, energy, power, products, housing, and so forth – are managed and allocated more efficiently and effectively than ever before. This should have major positive economic and social benefits.

Moreover, we believe that the new purpose and strategies will help all stakeholders, including investors and employees, realign to deliver a motivating and rewarding new model. This is a critical role – and challenge – for all leaders in telecoms, on which the CEO and C-suite must align.

To do this, telecoms operators will need to move beyond providing core communications services. If they don’t choose this path, they are likely to be left fighting for a share of a shrinking ‘telecoms pie’.

A little history 2.0

Back in 2006, STL Partners came up with a first bold new vision for the telecoms industry to use its communications, connectivity, and other capabilities (such as billing, identity, authentication, security, analytics) to build a two-sided platform that enables enterprises to interact with each other and consumers more effectively.

We dubbed this Telco 2.0 and the last version of the Telco 2.0 manifesto we published can be found here – we feel it was prescient and that many of the points we made still resonate today. Indeed, many telecoms operators have embraced the Telco 2.0 two-sided business model over the last ten years.

This latest report builds on much of what we have learned in the previous fourteen years. We hope it will help carry the industry forwards into the next decade with renewed energy and success.

Other recent reports on the Coordination Age:

Table of contents

  • Executive Summary
  • Introduction
  • Industry context: End of the last cycle
    • The telecoms industry is seeking growth
    • Society is facing some major social and economic challenges
    • Addressing society’s (and the telecoms industry’s) challenges
  • The Coordination Age
    • Right here, right now
    • How would the Coordination Age work in healthcare, for example?
  • New opportunities for telcos?
    • The telecoms industry’s new role in the Coordination Age
    • Telcos need an updated purpose
    • This will help to realign stakeholders
    • A new purpose can be the foundation of new strategy too
    • Investment priorities need to reflect the purpose
    • New operational models will also follow
  • Conclusions: What will Telco 2030 look like?

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Personal data: Treasure or trash?

Introduction

This report analyses how the Telefónica Group is looking to reshape the digital services market so that both telcos and individuals play a greater role in the management of personal data. Today, most Internet users share large amounts of personal information with the major online platforms: Google, Facebook, Amazon, Apple, Tencent and Alibaba. In many cases, this process is implicit and somewhat opaque – the subject of the personal data isn’t fully aware of what information they have shared or how it is being used. For example, Facebook users may not be aware that the social network tracks their location and can, in some cases, trace a link between offline purchases and its online advertising.

Beyond the tactical deployment of personal data to personalise their services and advertising, the major Internet players increasingly use behavioural data captured by their services to train machine learning systems how to perform specific tasks, such as identify the subject of an image or the best response to an incoming message. Over time, the development of this kind of artificial intelligence will enable much greater levels of automation saving both consumers and companies time and money.

Like many players in the digital economy and some policymakers, Telefónica is concerned that artificial intelligence will be subject to a winner-takes-all dynamic, ultimately stifling competition and innovation. The danger is that the leading Internet platforms’ unparalleled access to behavioural data will enable them to develop the best artificial intelligence systems, giving them an unassailable advantage over newcomers to the digital economy.

This report analyses Telefónica’s response to this strategic threat, as well as examining the actions of NTT DOCOMO, another telco that has sought to break the stranglehold of the Internet platforms on personal data. Finally, it considers whether Mint, a web service that has succeeded in persuading millions of Americans to share very detailed financial information, could be a model for telco’s personal data propositions.

As well as revisiting some of the strategic themes raised in STL Partners’ 2013 digital commerce strategy report, this report builds on the analysis in three recent STL Partners’ executive briefings that explore the role of telcos in digital commerce:

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In pursuit of personal cloud services

For the best part of a decade, STL Partners has been calling for telcos to give customers greater control over their personal data. In doing so, telcos could differentiate themselves from most of the major Internet players in the eyes of both consumers and regulators. But now, the entire digital economy is moving in this direction, partly because the new General Data Protection Regulation (GDPR) requires companies operating in the EU to give consumers more control and partly because of the outcry over the cavalier data management practices of some Internet players, particularly Facebook.

In a world in which everyone is talking about protecting personal data and privacy, is there still scope for telcos to differentiate themselves and strengthen their relationships with consumers?

In a strategy report published in October 2013, STL Partners argued that there were two major strategic opportunities for telcos in the digital commerce space:

  1. Real-time commerce enablement: The use of mobile technologies and services to optimise all aspects of commerce. For example, mobile networks can deliver precisely targeted and timely marketing and advertising to consumer’s smartphones, tablets, computers and televisions.
  2. Personal cloud: Act as a trusted custodian for individuals’ data and an intermediary between individuals and organisations, providing authentication services, digital lockers and other services that reduce the risk and friction in every day interactions. An early example of this kind of service is financial services web site Mint.com (profiled in this report). As personal cloud services provide personalised recommendations based on individuals’ authorised data, they could potentially engage much more deeply with consumers than the generalised decision-support services, such as Google, TripAdvisor, moneysavingexpert.com and comparethemarket.com, in widespread use today.

Back in October 2013, STL Partners saw those two opportunities as inter-related — they could be combined in a single platform. The report argued that telcos should start with mobile commerce, where they have the strongest strategic position, and then use the resulting data, customer relationships and trusted brand to expand into personal cloud services, which will require high levels of investment.

Today, telcos’ traction in mobile commerce remains limited — only a handful of telcos, such as Safaricom, Turkcell, KDDI and NTT Docomo, have really carved out a significant position in this space. Although most telcos haven’t been able or willing to follow suit, they could still pursue the personal cloud value proposition outlined in the 2013 report. For consumers, effective personal cloud services will save time and money. The ongoing popularity of web comparison and review services, such as comparethemarket.com, moneysavingexpert.com and TripAdvisor, suggests that consumers continue to turn to intermediaries to help through them cut through the “marketing noise” on the Internet. But these existing services provide limited personalisation and can’t necessarily join the dots across different aspects of an individual’s lives. For example, TripAdvisor isn’t necessarily aware that a user is a teacher and can only take a vacation during a school holiday.

STL Partners believes there is latent demand for trusted and secure online services that act primarily on behalf of individuals, providing tailored advice, information and offers. This kind of personal cloud could evolve into a kind of vendor relationship management service, using information supplied by the individual to go and source the most appropriate products and services.

The broker could analyse a combination of declared, observed and inferred data in a way that is completely transparent to the individual. This data should be used primarily to save consumers time and give them relevant information that will enrich their lives. Instead of just putting the spotlight on the best price, as comparison web sites do, personal cloud services should put the spotlight on the ‘right’ product or service for the individual.

Ideally, a mature personal cloud service will enrich consumers’ lives by enabling them to quickly discover products, services and places that are near perfect or perfect for them. Rather than having to conduct hours of research or settle for second-best, the individual should be able to use the service to find exactly the right product or service in a few minutes. For example, an entertainment service might alert you to a concert by an upcoming band that fits closely with your taste in music, while a travel site will know you like quiet, peaceful hotels with sea views and recommend places that meet that criteria.

As a personal cloud service will need to be as useful as possible to consumers, it will need to attract as many merchants and brands as possible. In 2013, STL Partners argued that telcos could do that by offering merchants and brands a low risk proposition: they will be able to register to have their products and services included in the personal cloud for free and they will only have to pay commission if the consumer actually purchases one of their products and services. In the first few years, in order to persuade merchants and brands to actually use the site the personal cloud will have to charge a very low commission and, in some cases, none at all.

Since October 2013, much has changed. But the personal cloud opportunity is still valid and some telcos continue to explore how they can get closer to consumers. One of the most prominent of these is Madrid-based Telefónica, which has operations in much of Europe and across Latin America. The next chapter outlines Telefónica’s strategy in the personal data domain.

Contents:

  • Executive Summary
  • Recommendations for telcos
  • Introduction
  • In pursuit of personal cloud services
  • Telefonica’s personal data strategy
  • Questioning the status quo
  • Backing blockchains
  • Takeaways
  • What is Telefónica actually doing?
  • The Aura personal assistant
  • Takeaways
  • Telefonica’s external bets
  • Investment in Wibson
  • Partnership with People.io
  • The Data Transparency Lab
  • Takeaways
  • Will Telefónica see financial benefits?
  • Takeaways
  • What can Telefónica learn from DOCOMO?
  • DOCOMO’s Evolving Strategy
  • Takeaways
  • Mint – a model for a telco personal data play?
  • Takeaways

Figures:

  • Figure 1: Telefónica’s tally of active users of the major apps
  • Figure 2: Telefónica’s view of digital market openness in Brazil
  • Figure 3: Investors’ valuation of Internet platforms implies long-term dominance
  • Figure 4: Key metrics for Telefónica’s four platforms
  • Figure 5: How Wibson intends to allow individuals to trade their data
  • Figure 6: Telefónica’s digital services business is growing steadily
  • Figure 7: Telefónica’s pay TV business continues to expand
  • Figure 8: DOCOMO’s Smart Life division has struggle to grow
  • Figure 9: NTT DOCOMO’s new strategy puts more emphasis on enablers
  • Figure 10: DOCOMO continues to pursue the concept of a personal assistant
  • Figure 11: DOCOMO is using personal data to enable new financial services
  • Figure 12: Mint provides users with advice on how to manage their money
  • Figure 13: Intuit sees Mint as a strategically important engagement tool

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Telco M&A strategies: Global analysis

Introduction

Business beyond connectivity – this is the mantra of STL Partners’ vision of the future for telecoms operators, outlined in the recent revamp of our Telco 2.0 vision. Telcos are at a crossroads where they must determine where their businesses will fit into a world of disruptive, fast-moving technologies and uncertain futures.

This means that it is more important than ever to re-evaluate the tools available to telcos to generate growth, expand their business competencies and provide new service offerings outside the core.

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Traditionally, a key telco growth strategy has been to use mergers and acquisitions, particularly of (and with) other telcos, to build scale geographically and in core communications services. However, as operators strive to become more relevant in a changing business landscape, there has been a growing volume of investment in what might be termed ‘digital’ business – business services that leverage technology to build new capabilities and deliver new customer services, experiences and relationships. We distinguish between these two kinds of telecoms M&A as follows:

  • Traditional M&A – “Operators buying operators”
    • Traditional M&A is focused around traditional telecoms M&A where operators buy other operators to expand in new markets or consolidate existing markets.
  • Digital M&A – “Operators investing outside core”
    • Digital M&A refers to non-operator M&A, or all other purchases that telcos make to expand beyond their core connectivity services. Most often this includes investments in software capabilities or industry verticals.

This report examines the landscape of digital M&A from H2 2017 to H1 2018, highlights trends across previous time periods, and outlines strategies for and case studies of digital M&A to illustrate ways that telcos can utilise it in a focused and strategic manner to create long-term value and growth. It does not cover minority venture digital investments; however, these are tracked in our database and will be the subject of future analysis.

This report is the third iteration of STL Partners’ yearly digital M&A and investment report, which began in 2016 and was updated in 2017. It draws on data from our digital M&A tracker tool, which covers 23 operators over five regions from 2012 to H1 2018. A copy of the database is available with this report.

Previous editions of the telco M&A database

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AccorHotels: From hotelier to digital marketplace

Introduction

Why are we doing non-telco case studies?

Digital transformation is a phenomenon that is affecting every 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.

In this report, we look at French hotel chain AccorHotels, which has undertaken an ambition transformation from hotel owner and operator into a digital platform for independent hotels. While our previous case study, publisher Axel Springer, has completed its transformation, AccorHotels has achieved significant changes but remains some years away from reaching its longer-term ambitions. However, because hotel groups and telcos share many similarities, such as being in the service industry, owning physical infrastructure and having highly distributed assets, we can draw many useful lessons from AccorHotels’ experience.

Like in previous transformation case studies, the key takeaways from our analysis of AccorHotels’ strategy will be the lessons for telcos to help them make their own transformation process run more smoothly.

General outline of STL Partners’ case study transformation index

We intend to complete more case studies in the future from other industry verticals, with the goal of creating a ‘case study transformation index’, illustrating how selected companies have overcome the challenge of digital disruption. In these case studies we are examining five key areas of transformation, identifying which have been the most challenging, which have generated the most innovative solutions, and which can be considered successes or failures. These five areas are:

  • Market
  • Proposition
  • Value Network
  • Technology
  • Finances

For each section, supporting evidence of good or bad practice will be graded as a positive (tick), a negative (cross) or a work in progress (dash). These ticks, crosses and dashes will then be evaluated to create a “traffic light” rating for each section, which will then be tallied to provide an overall transformation rating for each case study.

We anticipate that some of these five sections will overlap, and some will be more pertinent to certain case studies than others. But central to the case studies will be analysis of how the transformation process is relevant to the telco industry and the lessons that can be learned to help operators on the path to change.

Contents:

  • Executive Summary
  • AccorHotels’ transformation experience – a summary of key lessons
  • The AccorHotels story in brief
  • AccorHotels in STL Partners’ transformation index
  • Introduction
  • Why are we doing non-telco case studies?
  • General outline of STL Partners’ case study transformation index
  • Drawing the parallels between hotels and telecoms
  • What does a hotel business look like?
  • How the Internet changed the hotel industry
  • Accor in context of leading global hotel chains
  • A successful transformation, so far
  • AccorHotels’ transformation strategy
  • Part 1: Separating property and services into distinct business lines
  • Part 2: From digital platform to marketplace
  • Part 3: Cultural transformation
  • Part 4: Invest in innovation
  • Conclusion
  • AccorHotels in STL Partners’ transformation index

Figures:

  • Figure 1: OTAs cut into hotels’ share of the hospitality industry
  • Figure 2: Comparison of leading global hotel chains
  • Figure 3: AccorHotels revenues and profitability are ticking up
  • Figure 4: Accor outperforms on growth of average revenue per room
  • Figure 5: AccorHotels property investments
  • Figure 6: Solid growth in profitability
  • Figure 7: AccorHotels eight digital hospitality programmes
  • Figure 8: Steady growth in loyalty programme subscribers
  • Figure 9: Accor acquires software expertise and reach to challenge OTAs
  • Figure 10: AccorHotels is gaining traction with digital services
  • Figure 11: AccorHotels still has some digital distance to go
  • Figure 12: AccorHotels digital services investment plan
  • Figure 13: AccorHotels acquisitions fuel business innovation
  • Figure 14: Digital M&A investment as a % of service revenue, 2012 – H1 2017
  • Figure 15: AccorHotels scores ‘Green’ on STL Partners’ transformation index

Telco Transformation: The 20 Metrics That Matter

Introduction: Why do metrics matter?

Driving business model change

This report discusses the key metrics that telcos are using and developing to track the progress and success of their transformation initiatives. The report builds on a substantial body of work by STL Partners on the role that metrics can play in driving operators’ efforts to develop digital-service businesses. This previous work has taken the form of reports and case studies, as well as a number of bespoke consulting projects designed to support operators with their digital transformation strategies.[1]

In essence, our work and expertise in this area leads us to the conclusion that metrics and an associated governance process are an integral component of telcos’ digital and overall transformation. This is not just because metrics help to gauge the progress of operators’ initiatives throughout the period when the metrics are recorded, but because they define and embody the very purpose of telco transformation: to drive and manage activity on operator networks, and maximize the potential for that activity to be monetised, whether on- or off-net.

In this introduction, we outline how:

  • The focus of performance metrics is different between new and existing business models
  • Telcos need new measures to track organisational, operational, process and culture transformation in the face of a new focus on service innovation and flexibility, and a changing competitive landscape
  • The report addresses these issues

A shift from financial to customer enagement (and potential opportunity)

This essential function of Telco 2.0 metrics is markedly different from that of the financial and operational metrics that operators have traditionally employed which focus on revenues, costs, number of customers, and volume and price of megabytes and voice minutes carried and consumed. The business model these metrics correspond to is relatively simple and static: value is generated from monetising as much as possible the consumption of voice minutes and data packets, while reducing the cost to produce them. The metrics allow you to analyse past trends, and project future production capacity and earnings; but they are not a forward-looking tool enabling operators to respond dynamically to changing market conditions, to evolve the product offering, or transform the business model.

By contrast, digital services derive value from the specific content or application functionality they deliver to the user, and the ability to monetise that in a variety of ways: not always through direct, usage-based fees and billing.  And, although digital services can of course enhance existing products (as in the case of entertainment bundled with connectivity, for instance), they often treat network and connectivity services merely as the enabling infrastructure or asset, rather than the product itself. This means that for the digital telco, the emphasis of metrics changes to measuring usage of its digital services and the quality of the user experience, along with other indicators of future direct or indirect revenue growth.

Digital businesses often go through different stages of progress toward monetisation, and metrics are important in driving this development. The key idea is that if you drive usage and customer satisfaction, you create more opportunities to monetise the services involved. So you need a new, flexible set of metrics to capture the success, and inherent value, of the new business models as they evolve. The same is true of new telco services enabled by SDN and NFV (as discussed further below): there is not always an immediate direct revenue uptick; but the new capabilities and services are designed to attract new customers, and to generate usage and customer loyalty, which can be monetised in a variety of new ways at some future point. So it is critical to capture the revenue potential as well as revenue already achieved; and other metrics, which we discuss further below, should provide a measure of how fast or effectively a telco is evolving from the classic telco business model to the new state.

The contrast between the kind of metrics employed by the traditional and digital telco, along with those of digital start-ups and potential investors in digital services, is illustrated by the following table, taken from one of STL Partners’ previous studies on the question[2]:

We will discuss some of the Telco 2.0 metrics further below. However, what this table illustrates is how the focus in Telco 2.0 metrics shifts from usage-based revenues (as in the case of the Telco 1.0) to usage per se, and the impact of that usage on customer loyalty, brand, partners and revenue opportunity, as opposed to revenue already banked. The metrics – around usage and customer engagement – encapsulate the business model, which we could express in the form of an equation: number of users (or site visits, downloads, etc.) + frequency / length of use = revenue (opportunity). So driving the metrics in the right direction is tantamount to steering the business as a whole toward becoming a digital brand capable of generating customer enagagement in a crowded marketplace.

A new focus on service innovation and flexibility…

Presently, the focus of telco transformation efforts has shifted to the drive to virtualize networking functionality through Software Defined Networking (SDN: the centralization and virtualisation of control functionality previously provided by dedicated routers) and Network Functions Virtualisation (NFV: the virtualisation of a whole array of functionality in the edge and core networks hitherto provided by dedicated hardware appliances).

One of the primary aims of this transformation is to enable operators’ primary network and connectivity services to also be created, delivered and consumed in the manner of digital services: in and from the cloud / over the Internet; on demand; and as a software-based service. In the enterprise market, for example, leading SDN / NFV players are already rolling out Network as a Service (NaaS) and virtual CPE (vCPE) offerings that enable clients to customize their WAN connectivity and network features on demand via web portals, and pay for services on an ‘as-ordered’ basis as they scale bandwidth and networking parameters up or down.[3] In the consumer market, SDN / NFV similarly offers the prospect of enabling users to customize their connectivity and communications services more extensively and instantaneously than has hitherto been possible.

These characteristics of virtualised networks present a massive opportunity to telcos, as well as an enormous risk. On the one hand, SDN and NFV create the potential for operators to develop innovative, flexible combinations of communications and digital services in a more agile and cost-efficient manner, enabling them to compete more effectively with OTT players and accommodate massive growth in network usage generated by digital services.

…and new competition

On the other hand, as service and value creation is migrated away from dedicated physical facilities and hardware to software that can in theory be deployed over any physical network, this creates the possibility for third parties to develop OTT, virtual, on-demand network services from the cloud. This could result in telcos being disintermediated from their very core networking and connectivity services, as well as from the digital-service value chain. Software-Defined WAN (SD-WAN) is a practical example of this: third-party service providers install their own CPE and virtual network functions at enterprise sites, and connect them up to an SDN controller; they can then deliver flexible WAN connectivity services over networks of different types, and from different suppliers, relegating telcos potentially to the role of mere wholesale connectivity providers.[4]

In this way, virtualisation creates a dynamic whereby, as services are migrated to virtual functions, value creation will also increasingly depend on these, while the value of physical networking and connectivity services will decline as virtualised service providers and customers alike pick from a range of alternative connectivity providers. Consequently, telcos’ ownership and provision of the physical networks that support virtualised services may become equally if not more important as a means to own the customer relationship than as a revenue driver in their own right. Retaining the customer relationship means operators hold on to the opportunity to deliver increasingly more valuable virtualised services to those customers.

Increased emphasis on offensive and defensive moves

More service flexibility for both operators and for new competitors means that telcos find themselves in both an offensive and defensive position in relation to virtualisation. Offensively, virtualisation presents the opportunity to drive revenue growth and market share from new services, while also reducing the costs, resources and time required to deliver, manage and update both new and existing services. Defensively, virtualisation offers telcos a means to bolster revenues from core connectivity and communications services (including by managing more efficiently the incremental traffic generated by virtualised services over their networks), while defending their existing customer base from competitive players’ virtualised service offerings. This in turn protects the platform that ownership of the customer provides to up- and cross-sell further value-added (and value-adding) virtualised services.

In this context, metrics can play a vital role in helping to monitor progress with the different offensive and defensive components of telcos’ virtualisation strategies, in particular:

  • Offensive:
    • Tracking growth in revenues and number of customers attributable to new, virtualisation-enabled services.
    • Assessing the impact of virtualisation on costs and profitability.
  • Defensive:
    • Evaluating the impact of the new services on customer loyalty (particularly given the additional strategic importance of retaining the existing connectivity customer base)[5].
    • Measuring revenues and number of customers for the existing, core business (and so determining whether the new services are helping offset the decline in these).

In addition to these finance- and market-focused metrics, others around the production, performance and user experience of the new virtualised services become more important. This is in the light of the above remarks about the different operating model that applies to a digital services business, where the ability to quickly innovate and launch services that match changing and growing customer expectations and usage is key.

Organisational, operational, process and culture transformation

To achieve these gains, a considerable transformation of operators’ internal organisation, processes and indeed culture is required, and not merely a transformation of the network and the business model. To be successful, digital transformation – and transformation SDN, NFV and edge computing – requires the telco to become a different sort of organisation, more like that of other successful web and digital businesses.  Specifically, the telco must be founded on agile, DevOps principles, and cross-functional product and project teams.[6] Accordingly, new metrics are also required to monitor the progress of this overarching telco transformation.

In the remainder of this report, we will:

  1. Explain why operators seem so reluctant to talk about new metrics.
  2. Present and analyse the metrics we have uncovered through discussions with AT&T, Telstra and an European incumbent.
  3. Set out our view of the 20 most critical, top-level metrics for operators engaged in SDN / NFV-led transformation in its current phase.

[5] The drive to increase customer loyalty can also be part of an offensive strategy in that stickier services attract more usage and traffic, and hence have more long-term revenue potential

[6] This topic has been discussed in numerous previous STL discussions of telco transformation and will also form the focus of a forthcoming executive briefing on the topic of skills development and culture change. It is also discussed in further detail below.

 

  • Executive Summary
  • A reluctance to talk metrics
  • Why metrics matter for the virtualised telco
  • Conclusions and recommendations
  • Next Steps
  • Introduction: Why do metrics matter?
  • Driving business model change
  • A shift from financial to customer enagement (and potential opportunity)
  • A new focus on service innovation and flexibility…
  • …and new competition
  • Increased emphasis on offensive and defensive moves
  • Organisational, operational, process and culture transformation
  • Why most operators hate to talk metrics
  • Key transformation metrics of AT&T, Telstra and a major Western European incumbent
  • The transformation metrics explained
  • Evaluating the metrics used by European Incumbent (EI), AT&T & Telstra
  • Transformation: The 20 Metrics That Matter
  • Overview
  • The 20 Metrics that Matter: Description and analysis
  • Conclusion: New metrics define the new model

 

  • Figure 1: Different players’ metric requirements
  • Figure 2: Phasing of transformation metrics
  • Figure 3: Transformation metrics of AT&T, Telstra and a European incumbent (EI)
  • Figure 4: Instant pricing on Telstra’s PEN platform
  • Figure 5: The 20 types of metric that matter for successful telco transformation

The STL Partners Digital Investment Database: August 2016 Update

The STL Partners Digital Investment Database

We published our Digital Investment Database in early July, together with a report titled Digital M&A and Investment Strategies. Given recent high profile activities, we’ve now issued an updated version.

While there have been a number of smaller investments and acquisitions, two major acquisitions have hit the headlines since we published our report. On 18 July, it was announced that SoftBank was buying the UK chip manufacturer ARM Holdings for £24.3bn. Then, on 24 July, Verizon bought Yahoo! for $4.8bn. Here, we take a quick look at these two acquisitions.

SoftBank and ARM: (big) business as usual?

Why ARM? For its £24.3bn, SoftBank has gained one of the world’s leading processor manufacturers, with a strong existing business designing processors for smartphones and tablets, and an excellent opportunity to develop new revenues from the IoT. The attraction is clear, but the sums involved are huge.

Yet in some ways, this acquisition is the progression of business as usual. Our analysis based on v1.0 of our database suggests that SoftBank has long been one of the most active telcos in digital M&A. Among the 31 investments and acquisitions we tracked from 2012-1H2016, SoftBank was outstripped only by Deutsche Telekom, Singtel, and Telstra.

However, while the ARM deal fits with this prior interest in digital businesses, the bulk of SoftBank’s recent purchases have had a software focus: ARM marks a shift towards hardware. Moreover, the size of the transaction dwarfs SoftBank’s previous efforts.

Much media coverage has suggested that the ARM deal might be closely associated with the recent return of CEO Masayoshi Son, an adventurous, ambitious leader with a history of bold purchases. Looking at our database, the ARM deal certainly breaks the mould of telco acquisitions, as SoftBank’s £24.3bn deal for ARM is by far the biggest non-core-business acquisition tracked by our database.[1] But £24.3bn rarely changes hands on a whim, and we intend to publish further in-depth analysis on this in future.

Verizon and Yahoo!: Can a telco challenge Google and Facebook on advertising?

Verizon’s purchase of Yahoo! for $4.8bn was, in financial terms, far smaller than the SoftBank/ARM deal. Yet it received a great deal of media attention, partly, of course, because Yahoo! remains a significant household name in the US in particular, and a salient reminder of how the corporate landscape of the internet has changed.

At its peak in 2000, Yahoo! was worth $125bn. So there are clear questions: have Verizon snapped up an undervalued business, or has it splashed cash on a dinosaur?

Verizon has been very clear that its intention with Yahoo! is to join the advertising business with its 2015 purchase of AOL for $4.4bn, and become the third player in digital advertising behind Google and Facebook. CEO Lowell McAdam made no bones about the business’s ambitions in oft-repeated comments shortly after the deal was announced: ‘Are we going to challenge Google and Facebook? I just say, look, we’re planning on being a significant player here. The market is going to grow exponentially.’[2]

Currently, Google and Facebook together have over 50% of the US digital advertising market. AOL and Yahoo! combined have 6%. 1bn users view Yahoo! content each month, and Verizon only therefore needs to persuade a few advertisers to switch to them in order to grow market share.

From a telco point of view, one key facet of this argument is that potential synergies between Yahoo! and Verizon’s network do not appear to be essential. While telcos have classically searched for M&A opportunities that directly complemented their core business, Verizon might be understood as using its market value to finance deals that have independent value – not unlike Softbank and ARM. However, there are questions around the true value of Yahoo!’s share of digital advertising.

At the moment of Facebook’s IPO in 2012, Yahoo! had greater revenue. But since then. Google and Facebook have transformed digital advertising by making it targetable. Google knows what you want, when you want it (a search for ‘buy blue jeans’, for instance), and Facebook knows what you like (as users are encouraged to document their preferences). It can use this data to give advertisers access to the most relevant sections of a vast potential online audience.

This is a strong business model that has proved more valuable as these companies have refined it. Yahoo!’s digital advertising is not quite as sophisticated, and it remains to be seen if Verizon will be able to develop the revenue it envisages.

Verizon and Fleetmatics: Under the radar

Yahoo! garnered the majority of media attention, but Verizon also spent $2.4bn on Fleetmatics, a digital business that provides SaaS for fleet management. M2M fleet tracking is nothing new, but as well as its core software business, the company has the potential to play an important role in the industrial IoT as connected vehicles become more common.

Together, the two acquisitions might suggest a drive to develop profitable plays in markets beyond core telco revenue: from Fleetmatics, the IoT, and from AOL-Yahoo, digital advertising. Moreover, for strategists and practitioners placing the two together may have greater significance than viewing them separately.

Highlighting such deals and longer term trends behind them are two of the key goals of our M&A database.

Accessing the database

Our Digital Investment Database documents key digital investments and acquisitions for twenty-two operators during the period 2012 – August 2016.

An illustrative snapshot of part of the database

[1] To be precise, ‘non-core-business’ excludes telcos buying businesses involved in delivering the quadruple play of fixed, mobile, internet, and TV – for example, BT’s purchase of EE, or AT&T’s purchase of DirecTV.

[2] Financial Times, 26 July 2016.

Digital M&A and Investment Strategies

Introduction

Communications services providers have long used M&A as a key element of strategy. By far the most common approach has been to acquire other operators to build scale in core communications services. For the vendor operator, selling off assets has been as a way of raising cash to reduce debt or enable further investment in core markets. As telecommunications growth has slowed and technological developments and user behaviour have swung towards mobile, so M&A activity has increased as players have strived for market consolidation, integration of fixed-mobile capabilities, or geographic expansion as a source of growth. BT-EE in the UK, Orange-Jazztel in Spain, and Etisalat-Maroc Telecom provide respective examples.

However, as operators continue to build digital capabilities and strive to deliver digital services, M&A and investment beyond ‘traditional telecoms’ is picking up. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one that focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation rather than continuity. For more details, see our recent report Solution: Transforming to the Telco Cloud Service Provider (Part 2). Making such a change is not without its challenges, and many operators now see M&A and investments as an important part of the Telco 2.0/digital transformation journey.

This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of SingTel, Telstra and Verizon. There is an accompanying database with key digital acquisitions and investments for twenty-two operators during the period 2012 – 1H 2016 inclusive.

Drivers for operator M&A and majority investment

Figure 1: Drivers for operator M&A and majority investment – traditional and digital

Source: STL Partners

Traditional/Telco 1.0 drivers: reach and scale

As illustrated above, drivers that refer to ‘traditional’ or ‘Telco 1.0’ M&A and investment are well-established:

1. Extending geographic footprint is often a key driver…

  • …to new markets that are adjacent geographically (e.g., DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
  • …or to those that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
  • …or simply offer good opportunities for expanded footprint and increased efficiencies of operation in emerging regions where demand for mobile services is still growing strongly (e.g., SingTel and Etisalat’s numerous investments in operators in Asia and Africa, respectively).

2. Extending traditional communications offerings, is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, in order to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the U.K. is one example.

3. Consolidation has slowed to some extent, as regulators and competitors fight against acquisitions that remove players from the market or concentrate too much market power in the hands of stronger service providers. This has been a particular issue in the European Union (E.U.), where E.U. regulators have refused to approve several proposed telecoms M&A deals recently, including TeliaSonera and Telenor in Denmark, and the proposed Hutchison acquisition of O2 to merge with its subsidiary Three, in the UK. Other deals, such as the proposed Orange-Bouygues Telecom merger in France which was abandoned in April 2016, have failed due to the parties involved failing to reach agreement. However, our research shows continued interest in operator M&A for consolidation, with recent successful examples including TeliaSonera’s acquisition of Tele2 Norway in 2015.

4. The acquisition of service partners – primarily channel partners, or partner companies providing systems integration and consultancy capabilities, typically for enterprise customers – has proved an important driver of M&A for many (mainly converged) operators. For the purpose of our analysis, we are counting the SI and consulting M&A activity as ‘digital/Telco 2.0’ rather than ‘traditional/Telco 1.0’, where it focuses on a specific digital area (e.g., cloud services, analytics).

5. Finally, operator M&A is also being driven by the enthusiasm of sellers. Many operators are looking to sell off assets outside of their home markets, pulling back from markets that have proven too competitive, too small or simply too complicated, as part of a strategy to pay down debt and/or free up assets for investment in other higher-growth areas:

  • TeliaSonera’s pullback from its Eurasian markets has seen it sell off a 60% stake in Nepalese operator Ncell to Axiata, and it is also planning to divest its majority stake in Kazakhstan’s Kcell through a sale to Turkcell.
  • Telefonica’s attempt to sell its O2 UK unit to Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its large debt (at EUR 49.7m as of January 2016, the company’s debts actually exceeded its market value) and to fund its ambitions to build out its media empire.

 

  • Executive Summary
  • Introduction
  • Drivers for operator M&A and majority investment
  • Telco digital M&A constraints – why take the risk?
  • Evaluating operator digital investment strategies
  • 22 players across 5 regions: US and Asia most aggressive
  • Which sectors are attracting the most interest?
  • Operator M&A strategies in detail: SingTel, Telstra and Verizon
  • SingTel: focusing on digital marketing, media and security
  • Telstra: Spreading Its Digital Bets across Health, Cloud and Video
  • Verizon: acquisition to support digital advertising and media dominance
  • Recommendations

 

  • Figure 1: Drivers for operator M&A and majority investment – traditional and digital
  • Figure 2: Telco cost and operational models inhibit innovation and discourage investments in unfamiliar digital businesses
  • Figure 3: Number of operator digital acquisitions and majority investments, 2012 – 1H2016
  • Figure 4: Largest 10 telco digital M&A and majority investments, 2012 – 1H2016
  • Figure 5: Mapping of operator digital M&A strategies
  • Figure 6: Number of digital M&A and majority investments by sector/category 2012 – 1H2016
  • Figure 7: SingTel – digital investment overview
  • Figure 8: Amobee’s proposition focuses on cross-platform advertising and analytics
  • Figure 9: Telstra’s Digital Acquisitions and Majority Investments, 2012 – 1H 2016
  • Figure 10: Ooyala’s proposition
  • Figure 11: Cloud is the key element in Telstra’s Telco 2.0 strategy
  • Figure 12: Verizon’s Digital Acquisitions and Majority Investments, 2012 – 1H 2016

Vertical Innovation Leaders: How Telstra’s Healthcare Jigsaw is Coming Together

Introduction

Over the course of 2013-2015, Australian operator Telstra has invested heavily in acquisitions, tapping into the A$11.2bn (US$8.52bn) it received from the Australian government for access to its legacy copper network required to connect the country’s National Broadband Network. Telstra spent $1.2bn on acquiring digital businesses during 2015  alone.

Telstra’s stated aims were: geographic expansion of its core telecoms offerings, as illustrated by its acquisition of Asian carrier and managed services provider Pacnet for US$697Mn, completed in April 2015; and growing its digital service offerings, as illustrated by its multiple acquisitions in the digital platforms and applications space.

The telco has taken a particularly innovative approach to building its offerings in the healthcare vertical, where its ‘new digital’ investments have focused.

Telstra’s approach to establishing its digital (and non-digital) healthcare business is a good indicator of its future overall digital strategy, at the core of which is a highly customer-centric approach and a commitment to bringing agile and lean business practices to all parts of its own business.

Telstra, is, of course, not an established healthcare brand, either in Australia or elsewhere. As we discuss below, this has created a number of challenges, both in engendering relevance with healthcare customers and in achieving Telstra’s particular aims in the health space. The operator has sought to collaborate with or acquire health service providers in order to overcome these challenges.

Telstra’s overall strategy in regard to its digital health care investments and partnerships has been aggressive and unusual, both in terms of the telco’s rapidity in developing such relationships, and in terms of the relatively large number of eHealth companies which it has invested in or partnered with. Perhaps unsurprisingly, many industry observers have questioned the approach.  Indeed, one could argue that the diversity of the acquisitions and partnerships points to a lack of clear direction, and that the sheer number of these may be difficult for the operator to manage effectively, let alone consolidate into a healthy and growing digital revenue stream.

This report addresses the following:

  • Telstra’s approach to eHealth, and the key drivers for this
  • How the Telstra Health acquisition strategy fits with Telstra’s larger digital strategy
  • Impact and evidence of success thus far
  • Key challenges and lessons learned

The Telstra approach to digital healthcare

The Telstra Health proposition

Telstra has targeted healthcare as the most important focus area for its move into broader digital economy activities, based on the ongoing societal and demographic shifts driving demand for healthcare services and spend on these, and on the high potential for digital technology to be transformative in the sector.

At high level, the primary objective of Telstra’s Health business is to address the central challenges or pain points facing the healthcare industry, and to combine the best features of the services and applications it acquires with the telco’s own core capabilities, to provide relevant digital healthcare solutions. Telstra has identified six healthcare challenge areas its offerings aim to address, shown in Figure 2:

Figure 2: Six Healthcare Pain Points Telstra Health Aims to Address

Source: Telstra Health

Telstra’s business model, its overall strategy in health and its objectives are all centred around using digital technologies to tackle these health pain points. In practical terms, its goal is to bring the advantages of the digital revolution to bear on the specific challenges facing the health industry – and to develop a profitable new revenue stream in the process.

 

  • Executive Summary
  • Introduction
  • The Telstra approach to digital healthcare
  • The Telstra Health proposition
  • The Telstra Health offering: ecosystem and target customer segments
  • Understanding Telstra’s healthcare acquisition strategy
  • Telstra’s eHealth acquisitions and partnerships
  • Other Telcos Have Been Far Less Acquisitive in eHealth
  • How Telstra Health Fits Into Telstra’s Larger Digital Strategy
  • Impact and Evidence of Success
  • Revenue impact – A$1 billion by 2020 for Telstra Health?
  • Impact on share price – a ‘digital bump’?
  • Other measures of success
  • Evaluating Telstra’s Objectives and Challenges for the Health Business
  • Telstra’s external market objectives
  • Telstra’s organisational objectives
  • General eHealth market challenges

 

  • Figure 1: Telstra Health’s key objectives and challenges
  • Figure 2: Six Healthcare Pain Points Telstra Health Aims to Address
  • Figure 3: The Telstra Health ecosystem
  • Figure 4: Telstra Health: Provider Apps Offerings and Target Market Segments
  • Figure 5: Telstra Health: Connected Care and Telehealth Offerings and Target Market Segments
  • Figure 6: Telstra Health: Intelligence (Analytics) Offerings and Target Market Segments
  • Figure 7: Telstra Health’s Spine Health Intelligence Ecosystem
  • Figure 8: Telstra’s digital health acquisitions, 2013-2016
  • Figure 9: Telstra’s digital health direct investments and key partnerships, 2009-2016
  • Figure 10: Selected digital health acquisitions and investments – Telefonica
  • Figure 11: Telstra Group Key Product Revenues: FY 2013-2015 (AUD billion)
  • Figure 12: Telstra Revenue by Business Segment, FY2013-2015 (A$ billions)
  • Figure 13: Telstra Share Price Performance – 2000-2016 (A$)
  • Figure 14: Telstra Health’s key objectives and challenges

Solution: Transforming to the Telco Cloud Service Provider (Part 2)

Introduction

Structural barriers preventing telecoms business model change

In our recent report, Problem: Telecoms technology inhibits operator business model change (Part 1), we explained how financial and operational processes that have been adopted in response to investor requirements and regulation have prevented operators from innovating.

Operator management teams make large investments over seven- or eight-year investment cycles and are responsible for deploying and managing the networks from which revenues flow.  As we show in Figure 1 below, operators therefore have much more of their costs tied up in capital expenditure than platform players or product innovators.  Furthermore, they need large quantities of operating expenditure to maintain and operate their networks.  The result is a rather small percentage of revenue – we estimate around 15% – which they devote to activities focused on innovation: marketing, sales, customer care, and product and service development (the green section of the bars).  This compares unfavourably to a platform player, such as Google, which we estimate devotes around 35% of revenue to these activities.  The difference is even more pronounced with a product innovator, such as Unilever, which minimises capital investment by outsourcing some of its manufacturing and all product distribution and so devotes nearly 70% of revenue to ‘innovation’ activities.

 

Figure 1: The telecoms cost structure inhibits innovation

Sources: Company accounts; STL Partners estimates and analysis

Seen in this context, how can anyone expect operators to be successful at developing new platforms, channels, or products?

 

  • Executive Summary
  • Introduction
  • Structural barriers preventing telecoms business model change
  • Digital service innovation is proving tough for operators
  • Structural barriers coming down?
  • Virtualisation + cloud business practices could transform the telecoms business model
  • The drive for virtualisation is underway
  • Cost reduction and a new cost structure
  • Cloud business practices are a critical component in the future telco
  • The Telco Cloud Service Provider (TCSP)
  • Two benefits from becoming a Telco Cloud Service Provider
  • Product and service creation in the Telco Cloud Service Provider
  • From incremental and slow innovation today…
  • …to radical and fast innovation in the TCSP of tomorrow

 

  • Figure 1: The telecoms cost structure inhibits innovation
  • Figure 2: Telcos have struggled to launch successful digital services
  • Figure 3: Cloud and virtualisation can allow a telco to transform its cost structure
  • Figure 4: Cloud business practices – key principles
  • Figure 5: Defining the Telco Cloud Service Provider
  • Figure 6: Telco Cloud can spur transformation across the entire telco business
  • Figure 7: Product development – telco today vs Telco Cloud Service Provider

Partnering 2.0 – How TeliaSonera Makes Beautiful Music with Spotify

Introduction

An agile approach to building and managing complex partnerships is one of the key elements of becoming a Telco 2.0 organisation. As discussed in our previous report on Digital Partnering Strategies, we see two new trends in telco approaches to digital services partnerships:

  1. The focus on partnering as a core competency of the telco organisation;, and
  2. The increasing complexity of telco partnership ecosystems, as digital services, enabling technologies, and service delivery value chains continue to evolve.

The increasing complexity of digital services partnerships, and the related trend for larger partnership ecosystems with many partners participating from different levels of the value chain, require telcos to take a different and more flexible approach. To be effective, this approach needs to take into account, and support, the particular characteristics of digital businesses:

  • Need for scale: A potential digital services partner will usually want to build global scale and so is likely to have several telco partners.
  • Need for speed: Digital services partners will in many cases move at very different speeds from telcos in terms of decision-making and processes,
  • Need for flexibility: particularly for channels and business models. Digital services partners (especially those with consumer propositions) 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.

Based on our observations from TeliaSonera’s long-term relationship with Spotify, and from our earlier analysis of AT&T’s successful Drive connected car ecosystem, we have identified a set of key success factors, and major barriers, for effective digital services partnerships between operators and third parties.

In this report, we evaluate the TeliaSonera-Spotify partnership against this framework, as well as looking at the drivers for the partnership, the quality of execution, and the evidence of its success.

 

  • Executive Summary
  • Introduction
  • TeliaSonera’s partnership with Spotify: Overview
  • A B2C single-focus partnership
  • TeliaSonera’s rationale for the deal: Part of being a ‘New Generation Telco’
  • Evidence of the partnership’s success
  • Drivers and key success factors for the TeliaSonera-Spotify partnership
  • Drivers and objectives for TeliaSonera
  • Benefits of the TeliaSonera partnership for Spotify
  • Key success factors for TeliaSonera’s partnership with Spotify
  • External/Market-Driven (demand-side) factors
  • Internal / organisation (supply-side) factors
  • Organisation structure and the approach to managing joint activities have been important
  • Challenges to successful digital services partnering – lessons from other music partnerships
  • Barriers to successful partnering: framework
  • Spotify vs Deezer: the tale of tape

 

  • Figure 1: Characteristics of single-focus digital services partnership models
  • Figure 2: Spotify Key Metrics, 2014-2016
  • Figure 3: TeliaSonera-Spotify 7-year partnership timeline
  • Figure 4: Spotify Global Monthly Active Users and Premium (Paid) Subscribers, 2009-2015
  • Figure 5: Telia Denmark Mobile and Multiplay Packages With Spotify Premium Options, February 2016
  • Figure 6: Spotify Business (Soundtrack Your Brand) promotion, Feb. 2016
  • Figure 7: Drivers and key objectives for TeliaSonera-Spotify Partnership
  • Figure 8: Key success factors and barriers for TeliaSonera-Spotify Partnership

Problem: Telecoms technology inhibits operator business model change (Part 1)

Introduction

Everyone loves to moan about telcos

‘I just can’t seem to get anything done, it is like running through treacle.’

‘We gave up trying to partner with operators – they are too slow.’

‘Why are telcos unable to make the most basic improvements in their service offerings?’

‘They are called operators for a reason: they operate networks. But they can’t innovate and don’t know the first thing about marketing or customer service.’

Anyone within the telecoms industry will have heard these or similar expressions of dissatisfaction from colleagues, partners and customers.  It seems that despite providing the connectivity and communications services that have truly changed the world in the last 20 years, operators are unloved.  Everyone, and I think we are all guilty of this, feels that operators could do so much better.  There is a feeling that these huge organisations are almost wilfully seeking to be slow and inflexible – as if there is malice in the way they do business.

But the telecoms industry employs millions of people globally. It pays quite well and so attracts talent. Many, for example, have already enjoyed success in other industries. But nobody has yet, it seems, been able to make a telco, let alone the industry, fast, agile, and innovative.

Why not?

A structural problem

In this report, we argue that nobody is at fault for the perceived woes of telecoms operators.  Indeed, the difficulty the industry is facing in changing its business model is a result of financial and operational processes that have been adopted and refined over years in response to investor requirements and regulation.  In turn, investors and regulators have created such requirements as a result of technological constraints that have applied, even with ongoing improvements, to fixed and mobile telecommunications for decades. In essence, operators are constrained by the very structures that were put in place to ensure their success.

So should we give up?

If the limitations of telecoms operators is structural then it is easy to assume that change and development is impossible.  Certainly sceptics have plenty of empirical evidence for this view.  But as we outline in this report and will cover in more detail in a follow up to be published in early February 2016 (Answer: How 5G + Cloud + NFV can create the ‘agile telco’), changes in technology should have a profound impact on telecoms operators ability to become more flexible and innovative and so thrive in the fast-paced digital world.

Customer satisfaction is proving elusive in mature markets

Telecoms operators perform materially worst on customer service than other players in the US and UK

Improving customer experience has become something of a mantra within telecoms in the last few years. Many operators use Net Promoter Scores (NPS) as a way of measuring their performance, and the concept of ‘putting the customer first’ has gained in popularity as the industry has matured and new customers have become harder to find. Yet customer satisfaction remains low.

The American Customer Satisfaction Index (ACSI) publishes annual figures for customer satisfaction based on extensive consumer surveys. Telecommunications companies consistently come out towards the bottom of the range (scoring 65-70 out of 100). By contrasts internet and content players such as Amazon, Google, Apple and Netflix have much more satisfied customers and score 80+ – see Figure 1.

Figure 1: Customers are generally dissatisfied with telecoms companies

 

Source: American Customer Satisfaction index (http://www.theacsi.org/the-american-customer-satisfaction-index); STL Partners analysis

The story in the UK is similar.  The UK Customer Satisfaction Index, using a similar methodology to its US counterpart, places the Telecommunications and Media industry as the second-worst performer across 13 industry sectors scoring 71.7 in 2015 compared to a UK average of 76.2 and the best-performing sector, Non-food Retail, on 81.6.

Poor customer services scores are a lead indicator for poor financial performance

Most concerning for the telecoms industry is the work that ACSI has undertaken showing that customer satisfaction is linked to the financial performance of the overall economy and the performance of individual sectors and companies. The organisation states:

  • Customer satisfaction is a leading indicator of company financial performance. Stocks of companies with high ACSI scores tend to do better than those of companies with low scores.
  • Changes in customer satisfaction affect the general willingness of households to buy. As such, price-adjusted ACSI is a leading indicator of consumer spending growth and has accounted for more of the variation in future spending growth than any other single factor.

Source: American Customer Satisfaction index (http://www.theacsi.org/about-acsi/key-acsi-findings)  

In other words, consistently poor performance by all major players in the telecoms industry in the US and UK suggests aspirations of growth may be wildly optimistic. Put simply, why would customers buy more services from companies they don’t like? This bodes ill for the financial performance of telecoms operators going forward.

Senior management within telecoms knows this. They want to improve customer satisfaction by offering new and better services and customer care. But change has proved incredibly difficult and other more agile players always seem to beat operators to the punch. The next section shows why.

 

  • Introduction
  • Everyone loves to moan about telcos
  • A structural problem
  • So should we give up?
  • Customer satisfaction is proving elusive in mature markets
  • Telecoms operators perform materially worst on customer service than other players in the US and UK
  • Poor customer services scores are a lead indicator for poor financial performance
  • ‘One-function’ telecommunications technology stymies innovation and growth
  • Telecoms has always been an ‘infrastructure play’
  • …which means inflexibility and lack of innovation is hard-wired into the operating model
  • Why ‘Telco 2.0’ is so important for operators
  • Telco 2.0 aspirations remain thwarted
  • Technology can truly ‘change the game’ for operators

 

  • Figure 1: Customers are generally dissatisfied with telecoms companies
  • Figure 2: Historically, capital deployment has driven telecoms revenue
  • Figure 3: Financial & operational metrics for Infrastructure player (Vodafone) vs Platform (Google) & Product Innovator (Unilever)

Connecting Brands with Customers: How leading operators are building sustainable advertising businesses

Executive Summary

2015 has witnessed the turning point at which internet access on mobile devices exceeds desktops and laptops combined for the first time and, worldwide, digital advertising has followed the audience migration from desktop to smartphone and tablet.  A new ecosystem has evolved to service the needs of the mobile advertising industry. Ad exchanges and ad networks have adapted to facilitate access by brands to an ever-wider range of content on multiple devices, whilst DMPs (Data Management Platforms), DSPs & SSPs (Demand Side and Supply Side Platforms respectively) are fuelling the growth of ‘programmatic buying’ by enabling the flow of data within the ecosystem.

There is an opportunity for telcos to establish a sustainable and profitable role as an enabler within this rapidly developing market

Advertising should be an important diversification strategy for telcos as income from core communications continues to decline because they can make use of existing assets (e.g. audience reach, inventory, data), whilst maintaining subscriber trust. Telecoms operators’ ability to use their own customers’ data (with consent) to improve their own service offerings is a key advantage that provides a strong basis for developing advertising and marketing solutions for third-parties.

Walking in the footsteps of giants does not kill the opportunity for telcos

Facebook and Google will represent more than half of the $69 billion worldwide mobile-advertising market in 2015. This dominance has led some operators to question whether they can build a viable advertising business. However STL Partners believes that there has never been a better time for many operators to consider ramping-up their efforts to secure a sustainable practice through leveraging the value of their own customer data. In fact, many telcos are actively working with OTT players such as Google and Facebook to assist them in understanding territory-specific mobile behaviour.

Three telcos lead the way in advertising – Sprint, Turkcell and SingTel – and provide important lessons for others

In the main body of this report, STL Partners identifies the role that each telco has chosen to perform within the advertising ecosystem, assesses their strategy and execution, and identifies the core reasons for their success. The three case studies display several common characteristics and point to six Key Success Factors (KSFs) for a telco advertising business. The first is a ‘start-up mindset’ pre-requisite for establishing such a business and the other five are core actions and capabilities which mutually strengthen each other to produce a ‘flywheel’ that drives growth (see Figure 1).  As a telco exec, whether your organisation is just embarking on the advertising journey, if it has tried to build an advertising business and withdrawn or, indeed, if you are well on the way to building a successful business, we outline how to deliver the following six KSFs in the downloadable report:

  1. How to secure senior management support
  2. How to develop a semi-independent organisation with advertising skills and a start-up culture
  3. How to build or buy best-in-class technical capability and continuously improve
  4. Demand-side: How to build value for subscribers
  5. Supply-side: How to build value for media buyers and sellers
  6. How to pursue opportunities to scale aggressively
Figure 1: The Telco Advertising Business Flywheel

Why now is the right time for telcos to take a more prominent role within mobile advertising

After years of hype, mobile advertising is now starting to mature in terms of technical solutions, business models, and customer acceptance. The catalyst for this growing awareness of the potential of mobile advertising is the increasing demand for first-party (own customer) data to personalize and contextualize marketing communications both within telcos and more widely among enterprises as a way of improving on coarse-grained segmentation. Telcos hold more and better data than most organisations and have wonderful distribution networks (the network itself) for managing information flows, as well as delivering marketing messages and services.

 

For those within and outside telcos that are developing marketing and advertising solutions, we would love to hear your stories and facilitate discussions with your peers, so please do get in touch: contact@stlpartners.com

 

  • Executive Summary
  • Introduction
  • Why is advertising important for Telcos?
  • Walking in the footsteps of Giants?
  • Case study 1: Sprint
  • Summary: Reasons for Sprint’s success
  • A track record in innovation
  • Making data matter
  • How successful is Sprint’s strategy?
  • What does the future hold for Sprint?
  • Case study 2: Turkcell
  • Summary: Reasons for Turkcell’s success
  • A heritage in mobile marketing
  • Retaining control, enabling access
  • Co-opetition from a position of strength
  • How successful is Turkcell’s strategy?
  • What does the future hold for Turkcell?
  • Case study 3: SingTel
  • Summary: Reasons for SingTel’s success
  • Assembling a digital marketing capability through acquisition
  • Retaining revenue within the value chain
  • Providing technology at scale
  • How successful is SingTel’s strategy?
  • What does the future hold for SingTel?
  • Conclusion and recommendations

 

  • Figure 1: The Telco Advertising Business Flywheel
  • Figure 2: Time Spent per Adult per Day with Digital Media, USA, 2008-2015
  • Figure 3: Mobile Internet Ad Spending, Worldwide, 2013 – 2019
  • Figure 4: Mobile Marketing Ecosystem (extract)
  • Figure 5: The “Wheel of Commerce”
  • Figure 6: The Digital Gameboard – an OTT view of the world
  • Figure 6: Sprint’s data asset overview
  • Figure 7: Sprint’s role in the mobile advertising ecosystem
  • Figure 9: Top App Widget
  • Figure 10: Visual voicemail
  • Figure 11: Turkcell’s role in the mobile advertising ecosystem
  • Figure 12: Turkcell’s mobile marketing solution portfolio
  • Figure 13: Turkcell’s permission database overview
  • Figure 14: SingTel’s role in the mobile advertising ecosystem
  • Figure 15: SingTel’s digital portfolio prioritisation
  • Figure 16: The role of first-party data
  • Figure 17: The promise of first-party data
  • Figure 18: The Telco Advertising Business Flywheel

Telstra: Battling Disruption and Growing Enterprise Cloud & ICT

Introduction

A Quick Background on the Australian Market

Australia’s incumbent telco is experiencing the same disruptive forces as others, just not necessarily in the same way. Political upheaval around the National Broadband Network (NBN) project is one example. Others are the special challenges of operating in the outback, in pursuit of their universal service obligation, and in the Asian enterprise market, at the same time. Telstra’s area of operations include both some of the sparsest and some of the densest territories on earth.

Australian customers are typically as digitally-literate as those in western Europe or North America, and as likely to use big-name global Web services, while they live at the opposite end of the longest submarine cable runs in the world from those services. For many years, Telstra had something of a head start, and the cloud and data centre ecosystem was relatively undeveloped in Australia, until Amazon Web Services, Microsoft Azure, and Rackspace deployed in the space of a few months presenting a first major challenge. Yet Telstra is coping.

Telstra: doing pretty well

Between H2 2009 and H2 2014 – half-yearly reporting for H1 2015 is yet to land – top-line revenue grew 1% annually, and pre-tax profits 3%. As that suggests, margins have held up, but they have only held up. – Net margin was 16% in 2014, while EBITDA margin was 43% in 2009 and 41% in 2014, having gone as low as 37% in H2 2010. This may sound lacklustre, but it is worth pointing that Verizon typically achieves EBITDA margins in this range from its wireless operation alone, excluding the commoditised and capital-intensive landline business. Company-wide EBITDA margins in the 40s are a sound performance for a heavily regulated incumbent. Figure 1 shows sales, EBITDA and net margins, and VZW’s last three halves for comparison.

Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s

Source: STL Partners, Telstra filings

Looking at Telstra’s major operating segments, we see a familiar pattern. Fixed voice is sliding, while the mobile business has taken over as the core business. Fixed data is growing slowly, as is the global carrier operation, while enterprise fixed is declining slowly as the traditional voice element and older TDM services shrink. On the other hand, “Network Applications & Services” – Telstra’s strategic services group capturing new-wave enterprise products and the cloud – is growing strongly, and we believe that success in Unified Communications and Microsoft Office 365 underpins that growth in particular. A one-off decrease since 2009 is that CSL New World, a mobile network operator in Hong Kong, was sold at the end of 2014.

Figure 2: Mobile and cloud lead the way

Source: STL Partners, Telstra filings

Telstra is growing some new Telco 2.0 revenue streams

Another way of looking at this is to consider the segments in terms of their size, and growth. In Figure 2, we plot these together and also isolate the ‘Telco 2.0’ elements of Telstra from the rest. We include the enterprise IP access, Network Applications & Services, Pay-TV, IPTV, and M2M revenue lines in Telco 2.0 here, following the Telco 2.0 Transformation Index categorisations.

Figure 3: Telco 2.0 is a growing force within Telstra

Source: STL Partners, Telstra filings

The surge of mobile and the decline of fixed voice are evident. So is the decline of the non-Telco 2.0 media businesses – essentially directories. This stands out even more so in the context of the media business unit.

Figure 4: Telstra’s media businesses, though promising, aren’t enough to replace the directories line of business

Source: STL Partners, Telstra filings

“Content” here refers to “classified and advertising”, aka the directory and White Pages business. The Telco 2.0 businesses, by contrast, are both the strongest growth area and a very significant segment in terms of revenue – the second biggest after mobile, bigger even than fixed voice, as we can see in Figure 5.

Figure 5: Telco 2.0 businesses overtook fixed voice in H2 2014

Source: STL Partners, Telstra filings

To reiterate what is in the Telco 2.0 box, we identified 5 sources of Telco 2.0 revenue at Telstra – pay-TV, IPTV, M2M, business IP access, and the cloud-focused Network Applications & Services (NA&S) sub-segment. Their performance is shown in Figure 6. NA&S is both the biggest and by far the fastest growing.

 

  • Executive Summary
  • Introduction
  • A quick background on the Australian Market
  • Telstra: doing pretty well
  • Telstra is growing some new Telco 2.0 revenue streams
  • Cloud and Enterprise ICT are key parts of Telstra’s story
  • Mobile is getting more competitive
  • Understanding Australia’s Cloud Market
  • Australia is a relatively advanced market
  • Although it has some unique distinguishing features
  • The Australian Cloud Price Disruption Target
  • The Healthcare Investments: A Big Ask
  • Conclusions and Recommendations

 

  • Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s
  • Figure 2: Mobile and cloud lead the way
  • Figure 3: Telco 2.0 is a growing force within Telstra
  • Figure 4: Telstra’s media businesses, though promising, aren’t enough to replace the directories line of business
  • Figure 5: Telco 2.0 businesses overtook fixed voice in H2 2014
  • Figure 6: Cloud is the key element in Telstra’s Telco 2.0 strategy
  • Figure 7: NA&S is by far the strongest enterprise business at Telstra
  • Figure 8: Enterprise fixed is under real competitive pressure
  • Figure 9: Telstra Mobile subscriber KPIs
  • Figure 10: Telstra Mobile is strong all round, but M2M ARPU is a problem, just as it is for everyone
  • Figure 11: Australia is a high-penetration digital market
  • Figure 12: Australia is a long way from most places, and links to the Asia Pacific Cable Network (APCN) could still be better
  • Figure 13: The key Asia Pacific Cable Network (APCN) cables
  • Figure 14: Telstra expects rapid growth in intra-Asian trade in cloud services
  • Figure 15: How much?
  • Figure 16: A relationship, but a weak one – don’t count on data sovereignty

The European Telecoms market in 2020, Report 2: 4 scenarios and 7 predictions

Introduction

The second report in The European Telecoms market in 2020, this document uses the framework introduced in Report 1 to develop four discrete scenarios for the European telecoms market in 2020.  Although this report can be read on its own, STL Partners suggests that more value will be derived from reading Report 1 first.

The role of this report

Strategists (and investors) are finding it very difficult to understand the many and varied forces affecting the telecoms industry (Report 1), and predict the structure of, and returns from, the European telecoms market in 2020 (the focus of this Report 2).  This, in turn, makes it challenging to determine how operators should seek to compete in the future (the focus of a STL Partners report in July, Four strategic pathways to Telco 2.0).

In summary, The European Telecoms market in 2020 reports therefore seek to:

  • Identify the key forces of change in Europe and provide a useful means of classifying them within a simple and logical 2×2 framework (Report 1);
  • Help readers refine their thoughts on how Europe might develop by outlining four alternative ‘futures’ that are both sufficiently different from each other to be meaningful and internally consistent enough to be realistic (Report 2);
  • Provide a ‘prediction’ for the future European telecoms market based on our own insights plus two ‘wisdom of crowds’ votes conducted at a recent STL Partners event for senior managers from European telcos (Report 2).

Four European telecoms market scenarios for 2020

The second report in The European Telecoms market in 2020, this document uses the framework introduced in Report 1 to develop four discrete scenarios for the European telecoms market in 2020.  Although this report can be read on its own, STL Partners suggests that more value will be derived from reading Report 1 first.

Overview

STL Partners has identified the following scenarios for the European market in 2020:

  1. Back to the Future. This scenario is likely to be the result of a structurally attractive telecoms market and one where operators focus on infrastructure-led ‘piping’ ambition and skills.
  2. Consolidated Utility. This might be the result of the same ‘piping’ ambition in a structurally unattractive market.
  3. Digital Renaissance. A utopian world resulting from new digital ambitions and skills developed by operators coupled with an attractive market.
  4. Telco Trainwreck. As the name suggests, a disaster stemming from lofty digital ambitions being pursued in the face of an unattractive telco market.

The four scenarios are shown on the framework in Figure 1 and are discussed in detail below.

Figure 1: Four European telecoms market scenarios for 2020

Source: STL Partners/Telco 2.0

How each scenario is described

In addition to a short overview, each scenario will be examined by exploring 8 key characteristics which seek to reflect the combined impact of the internal and external forces laid out in the previous section:

  1. Market Structure. The absolute and relative size and overall number of operators in national markets and across the wider EU region.
  2. Operator service pricing and profits. The price levels and profit performance of telecoms operators (and the overall industry) and the underlying direction (stable, moving up, moving down).
  3. The role of content in operators’ service portfolios. The importance of IPTV, games and applications within operators’ consumer offering and the importance of content, software and applications within operators’ enterprise portfolio.
  4. The degree to which operators can offer differentiated services. How able operators are to offer differentiated network services to end users and, most importantly, upstream service providers based on such things as network QoS, guaranteed maximum latency, speed, etc.
  5. The relationships between operators and NEP/IT players. Whether NEP and IT players continue to predominantly sell their services to and through operators (to other enterprises) or whether they become ‘Under the Floor’ competitors offering network services directly to enterprises.
  6. Where service innovation occurs – in the network/via the operator vs at the edge/via OTT players. The extent to which services continue to be created ‘at the edge’ – with little input from the network – or are ‘network-reliant’ or, even, integrated directly into the network. The former clearly suggests continued dominance by OTT players and the latter a swing towards operators and the telecoms industry.
  7. The attitude of the capital markets (and the availability of capital). The willingness of investors to have their capital reinvested for growth by telecoms operators as opposed to returned to them in the form of dividends. Prospects of sustained growth from operators will lead to the former whereas profit stasis or contraction will result in higher yields.
  8. Key industry statistics. Comparison between 2020 and 2015 for revenue and employees – tangible numbers that demonstrate how the industry has changed.

The European macro-economy – a key assumption

The health and structure of all industries in Europe is dependent, to a large degree, on the European macro-economy. Grexit or Brexit, for example, would have a material impact on growth throughout Europe over the next five years.  Our assumption in these scenarios is that Europe experiences a stable period of low-growth and that the economic positions of the stretched Southern European markets, particularly Italy and Spain, improves steadily.  If the European economic position deteriorates then opportunities for telecoms growth of any sort is likely to disappear.

 

  • Executive Summary
  • Introduction
  • The role of this report
  • Four European telecoms market scenarios for 2020
  • Overview
  • How each scenario is described
  • The European macro-economy – a key assumption
  • Back to the Future
  • Consolidated Utility
  • Digital Renaissance
  • Telco Trainwreck
  • Risk and returns in the scenarios
  • Making predictions
  • Wisdom of crowds: 2 approaches
  • Approach 1: Aggregating individual forces – ‘Sum-of-the-parts’
  • Approach 2: Picking a scenario
  • STL Partners’ prediction for the European telecoms market in 2020
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Four European telecoms market scenarios for 2020
  • Figure 2: Back to the Future – key characteristics
  • Figure 3: Consolidated Utility – key characteristics
  • Figure 4: Digital Renaissance – key characteristics
  • Figure 5: Telco Trainwreck – key characteristics
  • Figure 6: Risk and returns in the four scenarios
  • Figure 7: Europe’s future based on aggregating individual forces – ‘Sum-of-the-parts’
  • Figure 8: Europe’s future – results of the two approaches compared

The Digital Dashboard: How new metrics drive success in telco digital initiatives

Introduction

As core services revenues, margins and cash generation decline quickly, Communications Service Providers (CSPs) are seeking to invest in and grow new (digital) services. STL Partners estimates that digital business should represent 25+% of Telco revenue by 2020 to avoid long-term industry decline. The move to digital is challenging for CSPs.  It will require large established organisations to define and implement new sustainable business models with new services delivered to existing and new customers via new channels and partners underpinned by new technology and supported by new operating, revenue and cost models. This requires a fundamental shift from a traditional infrastructure-based business to a complex amalgam of infrastructure, platform and product innovation businesses:

  • Historically, the telecoms industry has been an infrastructure business. It has invested large amounts of capital on things such as spectrum purchases, fibre and tower deployments. The result has been three largely undifferentiated services and revenue streams that have been ‘bundled in’ with the networks – voice, messaging and data. In the past, being a good communications service provider involved:
    • Making effective capital investment decisions, and then
    • Operating the network efficiently and affectively.
  • The Internet has changed everything by fracturing the integration between the network and services so that voice and messaging are no longer the sole domain of CSPs. CSPs now need to continue to hone their infrastructure business skills (in a world where every dollar of revenue is competed for hard by other operators and by ‘OTT’ players), and must also develop a range of new skills, assets, partnerships, customer relationships and operating and financial models if they are to compete in the new digital service areas.

In our recent survey (see Reality Check: Are operators’ lofty digital ambitions unrealistic given slow progress to date?), Telco practitioners were asked to comment on the importance of nine things that needed to be addressed to complete their digital business model transformation and the progress made to tackle them (see Figure 1).

Figure 1: Digital metrics should be driving change at CSPs but are themselves proving difficult to implement

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

Measurement using new digital operational/financial metrics was highlighted in the global survey as one of the ‘big 6’ challenges that need to be addressed for CSPs to be successful in future. However, to date, it has often been neglected by CSPs (metrics are often an after-thought and not an integral part of the digital transformation process).

In this report, we argue that the reverse is true: effective metrics lie at the heart of change. Without measurement, it is impossible to make decisions and engender change: an organisation continues on its existing path even if that ultimately leads to decline. We will:

  1. Look at why it is important to capture, synthesise and act upon appropriate metrics.
  2. Examine traditional and new approaches to the use of performance metrics and identify the factors that contribute to success and failure.
  3. Highlight ‘telco best-practice’ via a case-study from a leading Asian CSP, Telkom Indonesia.

Why metrics matter

There is a common misconception that start-ups and digital companies do not – and do not need to – measure and report the performance of their businesses and initiatives. Digital start-ups are often portrayed as small creative teams working on ‘exciting stuff’ with no sense of business rigour or control. This could not be further from the truth. Most start-ups follow a LEAN & agile approach to product ideation and development are steered by one motto… “What you cannot measure, you cannot manage”.  This is even more true if they are VC-backed and therefore reliant on hitting specific targets to receive their next round of funding.

Start-ups rely on operational and actionable metrics to measure progress, identify when to pivot as an organisation and translate strategic objectives into daily activities. By applying the “Build – Measure – Learn” concept (see Figure 2), innovators create something (Build), evaluate how well it is received (Measure), and adjust it in response to the feedback they receive (Learn).

Figure 2: “Build – Measure – Learn” concept

Source: LEAN Analytics – Use Data to Build a Better Startup Faster

Metrics evolve over time. Start-ups are continuously searching for the ‘right’ metrics at any given stage of their development because their businesses are constantly evolving – either because they have just started on their journey or because they may have recently changed direction (or ‘pivoted’ from their original value proposition). Metrics are perceived as an operational toolset to quickly iterate to the right product and market before the money runs out. This ‘sword of Damocles’ hanging over entrepreneurs’ heads is a world away from the world inhabited by telcos’ employees.

Indeed, CSPs’ current approach to business targets & funding allocation is unlikely to create a sense of urgency that will drive and stimulate the success of digital initiatives. Based on extensive interviews with CSPs, digital start-ups and VCs, STL Partners concludes that CSPs should focus on:

  • Removing the Telco ‘safety net’. To succeed in creating truly compelling customer experiences CSPs need to mimic a VC-like environment and create a culture of higher-reward in return for higher risk by targeting employees more tightly on their digital initiative’s performance:

    • Reward success more heavily: this could be ‘shadow’ share options in the venture which yield value in the form of shares or cash bonus for hitting targets which would takes an employee’s overall package way beyond what could be earned in the core business.

    • Create risk for individuals: the quid pro quo of a big upside could be a reduced salary to, say, 60% of normal Telco pay (i.e. similar to what might be earned in a typical start-up) or offer contracts that only renew if an initiative hits its targets – if you fall short, you leave the business and are not simply moved elsewhere in the organisation.

  • Adopting ‘start-up culture’ and ways of thinking. For example, when negotiating for funds, employees should be negotiating for their survival, not for a budget or a budget increase. Also, Telcos should start using the vocabulary / parlance commonly used in the digital space as such burn rate, time before cash runs out, cash break-even date, etc.

  • Establishing new processes to manage KPIs and performance metrics. In the fast-paced digital environment, it usually does not make sense to use 18-24 month targets derived from a detailed business case backed by financial metrics (such as revenue, EBITDA, etc.) – particularly for early-stage start-ups.  Google actually identified a move away from this approach to one focused on a stable strategic foundation (make sure the initial proposition is viable by defining a clear problem we are trying to solve and how the solution will differentiate from alternative solutions) + fluid plans as one of the pillars of its success (see Figure 3)

Figure 3: Business plan and financial metrics are out-of-date in a digital world

Source: How Google works, Eric Schmidt, Jonathan Rosenberg and Alan Eagle

Metrics are a powerful tool that CSPs should use to foster sustainable commercial growth through validated learning. Unfortunately, metrics are often an “after-thought” and very few CSPs have implemented a consistent approach to metrics.  From a series of interviews, undertaken by STL for this research, it became apparent that most initiatives failed to develop regular reporting that engages (or is even understood by) other stakeholders. At best, operators are inconsistent in tracking digital innovation, at worst, negligent.

 

  • Executive Summary
  • Introduction
  • Why metrics matter
  • Metrics make a difference: 3 case studies from telecoms operators
  • 3 additional reasons why Telcos need digital metrics
  • Alternative approaches to digital metrics for telecoms operators
  • Introduction
  • The corporate approach – the Balanced Scorecard
  • The start-up approach – LEAN & AARRR methodology
  • Telkom Indonesia’s approach to digital metrics
  • Background
  • Telkom’s current digital strengths
  • Telkom Indonesia’s digital metrics system
  • Benefits of the digital metrics system to Telkom Indonesia
  • Conclusions
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Digital metrics should be driving change at CSPs but are themselves proving difficult to implement

  • Figure 2: “Build – Measure – Learn” concept

  • Figure 3: Business plan and financial metrics are out-of-date in a digital world

  • Figure 4: Near perfect correlation between number of agents and number of M-Pesa subscribers, R2 = 0.96

  • Figure 5: Metrics reporting by M-Pesa, December 2012

  • Figure 6: Turkcell’s Mobile Marketing Platform Overview

  • Figure 7: Turkcell’s continuous development of it Mobile Marketing portfolio

  • Figure 8: Libon single roadmap enables rapid evolution and rich features

  • Figure 9: Libon – Cost per Monthly Active Users (M)

  • Figure 10: Illustrative Net Synergy Make up (Hypothetical case)

  • Figure 11: Facebook vs. Yield Businesses: Revenue and Enterprise Value (EV)

  • Figure 12: Facebook: Monthly Active Users vs. Valuation

  • Figure 13: Different players’ metrics requirements

  • Figure 14: Balance Scorecard concept

  • Figure 15: AARRR model

  • Figure 16: Pros & Cons – Summary table

  • Figure 17: Telkom Indonesia’s Metrics Approach – Characteristics

  • Figure 18: Telkom Indonesia’s digital strengths

  • Figure 19: Telcos – slow by design?

  • Figure 20: Telkom Indonesia’s TIMES service portfolio

  • Figure 21: LEAN start-up approach

  • Figure 22: Delivering Innovation – Telkom’s internal organisation

  • Figure 23: Telco 2.0 Domain Framework

  • Figure 24: Metrics Prioritisation & Outcomes Example

  • Figure 25: Governance process – Phase 1 & 2

  • Figure 26: Innovation Governance – Case studies examples