How to identify and meet new customer needs

Customer-led innovation at Telia and Elisa

In order to secure competitive advantage and long-term growth, telcos need to identify and meet new customer needs. The importance of this is confirmed by the STL Partner’s Telco investment priorities survey published in January 2021. Understanding customer needs and innovation, both essential for addressing new needs and driving growth, featured in the top ten priorities.

Telco top investment  priorities

top-telco-investment-priorities-stl

Source:  STL Partners, Telecoms priorities: Ready for the crunch?

This report seeks to identify best practice for telcos. Through in-depth interviews with senior managers in Elisa and Telia, and an expert in disruptive innovation, we identify the critical success factors and lessons learned in these organisations.

Telia created Division X in 2017, a separate business unit focused on commercialising and growing revenue from emerging businesses and technologies such as IoT (including 5G), data insights, and digital B2C services. Its focus is on customer needs and speed of execution, to spearhead and accelerate innovation, which it deems necessary in Telia’s drive to “reinvent better connected living”.

International Digital Services is Elisa’s third main business division, alongside Consumer and Corporate, which serve the domestic market. As International Digital Services has matured, it has focussed specifically on addressing new needs and developing new services, in both industrial and corporate domains.

Enter your details below to request an extract of the report


 

The report is based on interviews with:

  • Liisa Puurunen, Vice President, Brand, CX and start-ups, International Digital Services, Elisa — Liisa has a background in leading new businesses and start-ups in Elisa in the Consumer division and International Digital Services. Liisa’s role is to understand where there are new needs to be met, and to get best practise in place across the whole customer journey, within both industrial and corporate domains.
  • Annukka Matilainen, Development Director for Omnichannel and Smart Automation, Elisa —Annukka led the Consumer team’s response to COVID-19
  • Stephanie Huf, Head of Marketing, Division X, Telia — Stephanie’s role is to support the business lines in Division X to in engaging with customers to identify their needs. For example, her team identifies what customers want, defines the value propositions and works with product and business teams to test these in line with customer insight. (Since participating in this research Stephanie Huf has moved to a new role.)
  • Anette Bohman, Strategy Director, Division X, Telia  — Anette supports and guides Division X in defining Telia’s future.
  • John McDonald, FIRSTEP — John is a strategist in disruptive innovation in the health industry in Canada. He helps leaders create alignment around how the forces of disruption are unfolding and where to place the bets. FIRSTEP works with health organisations searching for fresh insights that spark new opportunities for growth.

Create a separate team to maximise new business opportunities

A separate team has many benefits

New business requires a separate, dedicated team. Its needs are different from day-to-day business and it needs its own focus.

One of the biggest learnings for Elisa in addressing new opportunities, is that there needs to be a ‘sandbox team’ with its own resources and budgets, rules, methods and mindset. It must have access to senior managers for decision making and funding, and strong leadership.

The sandbox team needs to be remote from the demands of day-to-day operations and implementation. If finding new needs is only part of someone’s job it is difficult to manage, as short-term demands will inevitably take precedence. Delivery and experimentation are different functions and they should be separate.

Liisa Puurunen’s team is a start-up in its own right. It is leaner than the usual Elisa approach and people are only brought into the team when there is a test to be done, keeping it flexible.

Rationale for a separate team

separate-team-rationale
Source: STL Partners

Contents

  • Executive Summary
    • Create a dedicated and separate team
    • Take a customer centric approach at all stages of innovation
    • Types of innovation will meet different new needs
  • Introduction
  • Create a separate team to maximise new business opportunities
    • A separate team has many benefits
    • Telia Smart Family: The case for a separate innovations team
    • Evaluate success in relevant ways that may be non-traditional
  • Take a customer centric approach to all stages of innovation
    • Ensure a customer centric culture
    • Start with a customer problem
  • Meeting needs and scaling bets
    • Co-create with customers, but choose them carefully
    • Elisa’s empowered teams enable a successful response to COVID-19
  • Types of innovation to meet different new needs
    • New needs in the core versus new businesses
    • Dedicate some resource to extreme innovation
    • Telia Data Insights: New Business innovation in response to COVID-19
    • The case for disruptive innovation
  • Plan exit strategies
    • Perseverance and pivoting can bring success
    • Be prepared to kill your darlings

Related research

Enter your details below to request an extract of the report


Private and vertical cellular networks: Threats and opportunities

For the report chart pack download the additional file on the left

5G is catalysing demand for customisation

The arrival of 5G has catalysed a huge amount of interest in enterprise, government and “vertical” use-cases for cellular networks. Cellular technology is becoming ever more important and applicable for businesses, for diverse use-cases from factory automation, to better hospitality guest-services, to replacement of legacy two-way radios.

Some of this fits in with STL’s view of the Coordination Age, and the shift towards connectivity becoming part of wider, society-level or economy-level applications and solutions. However, in many ways it is more of an evolution of traditional enterprise use of private wireless solutions, but updated with newer and more-performant 5G radios. The future battleground is whether such coordination requires external services (and thus SPs), or whether the capabilities are best-delivered in-house on private networks.

For various reasons of cost, performance, accountability or guaranteed coverage, there is a drive towards greater customisation and control, often beyond that currently deliverable by traditional MNOs.

However, there is significant confusion between three things:

  • Mobile network services and applications sold to, or used by, industrial and enterprise customers
  • Mobile networks optimised, extended or virtualised for industrial and enterprise requirements
  • Mobile networks built exclusively for, or owned by, industrial companies and other enterprises

This report is a joint exercise between STL Partners and affiliate Disruptive Analysis, which has covered this sector in depth for almost 20 years. Its founder Dean Bubley runs workshops on private cellular and neutral-host networks, as well as undertaking private projects and speaking engagements advising operators, vendors, regulators and investors on business models, spectrum policy and market dynamics.

What is a private mobile network?

This report primarily focuses on the third category – private mobile networks – although there is some overlap with the second, especially when techniques like network-slicing enter the discussion. There are different models of “private” too – from completely standalone networks that are entirely isolated from public mobile networks, to ones which use some dedicated infrastructure / management, alongside shared radio- or core-network elements provided by an MNO. They can be nationwide networks (for example, for utility grids), or highly localised, such as to a factory or hotel.

There are also various hybrids and nuances of all of this, such as private networks where certain functions are installed by, outsourced to, or managed by, telcos. It may be possible for users or devices to roam between private and public networks, for instance when a truck leaves a logistics facility with a local private network, and switches to the telco while it’s on the road.

Various government bodies – ranging from police forces to local council authorities – are also interested in creating private or shared 4G / 5G networks. Over the next 3-4 years, we can expect a wide diversity of approaches, and some very vague and fluid definitions from the industry.

Three building blocks for private networks

There are three main enablers (and numerous secondary drivers) behind the private network concept:

  • Availability of spectrum
  • Small cells and distributed radios
  • The move from 4G to 5G

A critical element in this is access to suitable spectrum for creating private networks. In recent years, many governments and regulatory authorities have started to make localised mobile licences available, suitable for covering enterprise sites, or wider areas such as cities. While private Wi-Fi and other networks have long been created with (free) unlicensed spectrum, this does not give the protections against contention and interference that more formal licensing enables. Other localised spectrum licenses have been given for point-to-point fixed links, temporary outside broadcast & events, or other purposes – but not cellular networks for normal mobile users. There are also discussions ongoing about making more national or wide-area spectrum available, suitable for mobile use in certain specialised verticals such as utilities.

Small cells and other types of enterprise-grade radio network (RAN) equipment are critical building- blocks for private mobile infrastructure, particularly indoors or on small/medium campus sites. They need to be low-cost, easy to install and operate, and ideally integrated with other IT and networking systems. While small cells have been around for 20 years or more, they have often been hard to deploy and manage. We are also seeing further innovation around distributed/cloud RAN which further increases the options for campus and in-building coverage systems.

5G – or more accurately the 5G era – changes the game in a number of ways. Firstly, IoT use-cases are becoming far more important, especially as analogue equipment and business processes become more connected and intelligent. Secondly, 5G brings new technical challenges, especially around the use of higher-frequency spectrum that struggles to go through walls – which highlights the paradox of telcos providing public network services on private property. Finally, with the advent of cloud-based and virtualised functions such as core networks, it is becoming easier to deploy and operate smaller infrastructures.

Some of the specialised skills requirements for building/running cellular networks can be reduced with automation, although this is still a significant obstacle for enterprises. This will drive significant demand for new tiers and types of managed services provider for private cellular – some of which will be satisfied by telcos, but which will also targeted by many others from towerco’s to systems integrators to cloud/Internet players.

It is worth stressing that this concept is not new. Private cellular networks have existed in small niches for 10-20 years. Railways have a dedicated version of 2G called GSM-R. Military squads and disaster- response teams can carry small localised base stations and controllers in their vehicles or even backpacks. Remote mines or oil-exploration sites have private wireless networks of various types. The author of this report first saw cellular small-cells in 2000, and worked on projects around enterprise adoption of private 2G as early as 2005.

Private and vertical cellular networks: Threats and opportunities aims to clarify the concept of “private” networks. It explores the domain of business-focused cellular networks, where the enterprise has some degree of ownership or control over the infrastructure – and, sometimes, the radio network itself. The report then sets out the motivations and use cases for private networks, as well as the challenges and obstacles faced.

This report is a joint exercise between STL Partners and affiliate Disruptive Analysis, which has covered this sector in depth for almost 20 years. Its founder Dean Bubley runs workshops on private cellular and neutral-host networks, as well as undertaking private projects and speaking engagements advising operators, vendors, regulators and investors on business models, spectrum policy and market dynamics. Please see deanbubley.com or @disruptivedean on Twitter for details and inquiries.

Table of contents

  • Executive Summary
  • Introduction
    • Public vs. non-public networks
    • Private network vs. private MVNO vs. slices
  • Motivations & use-cases for private networks
    • Business drivers for private cellular
    • Technical use-cases for private cellular
    • Industrial sites & IIoT
    • Enterprise/public in-building coverage
    • Neutral host networks (NHN)
    • Fixed 4G / 5G networks
  • Regulatory & spectrum issues
    • Other regulatory considerations
  • Building private networks – technology
    • Architectural choices, technology standards & industry bodies
  • The emerging private networks value chain
  • Conclusions & Recommendations
    • How large is the private network opportunity?
    • Challenges and obstacles for private networks
    • What is the implication for traditional telcos and MNOs?
    • Telcos’ relationship to project scope

Digital twins: A catalyst of disruption in the Coordination Age

Digital twins and the Coordination Age

Digital twins are an enabler of the Coordination Age, in which a global need to improve the efficiency of resource use, combined with supply-side technologies like the Internet of Things (IoT), 5G and AI, is driving a revolutionary change in the way that economies work.

In this change, the fundamental mechanism needed is coordination – the organisation of multiple parties and assets to deliver a desired end-goal. Examples of this need can be found in all sectors of the economy and all areas of life, such as healthcare, manufacturing, the smart home, smart transport, etc.

To make this happen in practice a number of practical challenges need to be addressed:

  • Physical and digital assets need to be able to work together more easily
  • Authorised users need better real-time remote insight on and control of distributed assets
  • Certain things and processes need to be able to act with greater autonomy (albeit within clear rules)
  • More realistic and reliable models/simulations are needed to test and evaluate different solutions and scenarios

Digital twins are a means towards all these ends, providing a mechanism whereby processes and things can become interoperable and intelligent on demand to authorised users.

Enter your details below to request an extract of the report


What is a digital twin?

A digital twin is a digital representation of an existing physical or digital entity:

  • Examples of digital twins of physical entities include twins of simple sensors (such as a temperature sensor), machine components (such as a fan in a motor), a sub-system within a motor (such as a cooling system), the entire motor, or the whole vehicle containing the motor
  • Examples of digital twins of digital entities include digital twins of data, a digital process (such as an order process or an automation protocol), or an entire digital business value network (such as a centralised data warehouse).

Digital twinning is a method of designing information systems that enables:

  • First visualisation, then dynamic control and emulation/simulation of assets. This can be ‘offline’ from the actual asset in the sense of a model to predict behaviours in different scenarios, or in real-time as a means to control and monitor operations.
  • A more efficient way to manage large volumes of data, where instead of collecting ‘data lakes’ storing every data point, data is organised into more manageable datasets capturing only meaningful events. This can reduce the need for data storage by up to 90%, which can be highly significant. An aircraft’s jet engine can generate Terabytes of data in a few hours of operation, for example.

Customers often arrive at the need for digital twins with one or other of these needs in mind, and over time end up utilising both.

Archetypal customers are:

  • Organisations that want to share data and create value from numerous sensors and devices, such as weather stations, and connect consumer devices (e.g. washing machines, doorbells, cookers) to consumer / household app dashboards.
  • Organisations that want to make better use of complex assets by using the data they generate to help them operate more efficiently. Examples of such assets include large buildings, trains, jet engines, manufacturing processes, etc. The first step in this process is to organise the data so that it can be used.

The process may ultimately evolve to the point where the organisation possesses a highly sophisticated twin of the entire asset made with information from many component twins from multiple sensors and sources. The overall twin may comprise both historical data of past behaviour, and live real-time data from the thing.

Figure 1: Example of a composite digital twinComposite Digital Twin Example

Source: STL Partners

STL Partners sees digital twins as a key building block of the Internet for Things, and thereby part of the DNA of the Coordination Age in the way that websites and URLs are part of the DNA for the Information Age.

As well as these wider implications, they have potential applications within telcos, and for their customers and partners.

Digital twins: A catalyst of disruption in the Coordination Age explores why telecoms operators need to understand digital twins and their application. The report then sets out how operators and vendors can best take advantage of digital twins.

Table of contents

  • Executive Summary
  • Introduction
    • Digital twins and the Coordination Age
    • What is a digital twin?
  • What do digital twins do?
    • How is a digital twin different from a simulation?
    • Why else are digital twins exciting?
    • So where is the money?
    • What are the challenges?
    • The evolving impact of digital twins
  • Digital twins for telcos
    • Potential internal applications
    • Speaking customers’ language
    • Telcos as providers of digital twins
  • Dating services for digital twins
    • Civil engineering: Making all the pieces work together in real life

Enter your details below to request an extract of the report


BBVA: Traditional retail bank embraces digital disruption

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 and useful case studies.

Traditional banking is being disrupted by fintech. This disruption has not happened overnight, but its speed has accelerated in recent years as consumers and enterprises have become more confident using digital tools to manage their finances. Although the fintech market is currently highly fragmented, with fintech companies typically focussing on one or two specific financial products, this can still have an enormous impact on the traditional banking value chain, which relies on a diversified portfolio to create profit. In addition, there is the threat that a digital native company, such as Amazon or Google, will enter the mainstream banking market through a series of acquisitions.

BBVA’s chairman, Francisco Gonzalez, foresaw this threat early-on, and has worked tirelessly to restructure the bank to be competitive in the era of digital banking. This transformation has involved significant changes in leadership, technology, business processes, and the bank’s portfolio. Like telcos, traditional banks are large organisations with legacy technology and processes, and turning the ship around is challenging. Therefore, there are many ways that BBVA’s experience can inform telcos’ own digital transformation strategies.

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

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.

How digital disruption is threatening banking

Retail banks rely on a two-sided business model

Retail banks make money by using deposits in current or savings accounts made by one group of customers (depositors) to finance loans to other customers (borrowers). The borrower not only pays the bank back its loan, but also interest on top – in effect, paying the bank for the service of providing the loan. The bank pays the depositor a lower interest on savings, and makes money on the spread between the two rates of interest.

Retaining depositors is a vital part of retail banks’ business model

Source: STL Partners

While this is highly simplified, this is the fundamental business model of all traditional retail banks, whose main source of income is created through managing a diversified portfolio of financial products across savings and loans. Banks also make money from applying charges when customers use credit or debit cards, or charging its customers fees such as ATM fees, overdraft fees, late payment fees, penalty fees.

Societal changes have driven digital banking adoption

Digital disruption in banking has taken much longer than in other industries, for example, publishing and media, despite attempts from banks themselves to persuade more customers to use online services. For traditional banks, moving customers to digital channels for most of their banking needs could significantly cut the cost of maintaining and staffing a large network of physical branches. However, when online banking services were first launched in the 1980s and 90s, consumer concerns about security and a lack of confidence in managing accounts themselves online meant that adoption was slow.

Since then the market has changed: For example, in 2000, 80% of banks in the U.S. were offering internet banking services. The launch of the iPhone seven years later caused a paradigm shift, triggering a wave of enormous development and widespread adoption of digital services accessible online and via smartphone apps. Ten years on, consumers are much more confident using digital financial services, and, although younger consumers are leading adoption, older generations are also increasingly using these services.

To read on about how BBVA responded to a changing market, please login and download the report, or contact us to subscribe.

Contents:

  • Executive Summary
  • Six lessons telcos can learn from BBVA
  • BBVA in STL Partners’ transformation index
  • Introduction
  • Why are we doing non-telco case studies?
  • General outline of STL Partners’ case study transformation index
  • How digital disruption is threatening banking 
  • Retail banks rely on a two-sided business model
  • Societal changes have driven digital banking adoption
  • Challenger banks and fintechs are changing the game
  • BBVA’s story
  • Phase one: Investing in technology to catalyse change
  • Phase two: Organisational change
  • Conclusions
  • BBVA in STL Partners’ transformation index
  • Appendix

Figures:

  • Figure 1: BBVA is rated as “Green” (good) in the STL Partners’ Transformation Index
  • Figure 2: Retaining depositors is a vital part of retail banks’ business model
  • Figure 3: The digital banking generation gap is closing
  • Figure 4: The sharing economy has taken off
  • Figure 5: BBVA’s global presence
  • Figure 6: Telcos need to virtualise their core to deliver cloud business models
  • Figure 7: Digital experience needs to be distributed across the organisation for transformation to succeed
  • Figure 8: BBVA’s leadership team is structured to accelerate digital transformation
  • Figure 9: Traditional banks need to adopt agile processes to compete with digital-native competitors
  • Figure 10: Ecosystem markets need new business models
  • Figure 11: BBVA’s co-opetition strategy involves acquisitions, investments and open APIs
  • Figure 12: BBVA’s shares are performing well
  • Figure 13: More smart and mobile device owners in Turkey use their devices for digital banking services than any other country surveyed
  • Figure 14: Turkey leads the way in four out of seven digital banking services
  • Figure 15: Turkish respondents are the most open to automated digital banking services
  • Figure 16: Less than 60% of Turkish adults had a bank account in 2014
  • Figure 17: Turkey is an attractive emerging market for investment
  • Figure 18: BBVA is rated as “Green” (good) in the STL Partners’ Transformation Index

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

Music Lessons: How the music industry rediscovered its mojo

Introduction

The latest report in STL Partners’ Dealing with Disruption stream, this paper explores what telcos and their partners can learn from the music industry and its response to disruptive forces unleashed by the Internet.

Music was among the first industries to see its core product (compact discs) completely undermined by the Internet’s emergence as the primary distribution mechanism for content and software, throwing the record labels into a long standing struggle to maintain both relevance and revenues. After almost two decades of decline, sales of recorded music are growing again and, in developed markets, at least, the existential threat posed by piracy seems to have abated. Although the music industry still has problems aplenty, the success of streaming services has steadied the ship.

This report outlines how the music industry has regained its mojo, before considering the lessons for telcos and other digital service providers. The first section of the paper considers why music streaming has become so successful and whether the model will be sustainable. The second section of the paper explores the lessons companies from other sectors, notably telecoms, can draw from the ways in which the music industry responded to the Internet’s disruptive forces.

This paper builds on other entertainment-related reports published by STL Partners, including:

Apple’s pivot to services: What it means for telcos
Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed?
Amazon: Telcos’ Chameleon-King Ally?
Can Telcos Entertain You? Vodafone and MTN’s Emerging Market Strategies (Part 2)
Can Telcos Entertain You? (Part 1)

Music bounces back

Over the past 20 years, the rise of the Internet has shaken the music industry to the core, obsolescing its distribution model, undermining its business model and enabling new forms of piracy. Yet, the major record labels have survived, albeit in a consolidated form, and the sector is now showing some tentative signs of recovery. In 2013, the global music industry began to grow again for the first time since the turn of the Millennium. It continues to recover and will grow at a compound annual growth rate of 3.5% between now and 2021, according to research by PwC, fuelled by growth in both the recorded music and the live music sectors (see Figure 1).

Figure 1: The global music industry has returned to growth

The global music industry has returned to growth

Source: PWC and Ovum

For most of the past two decades, revenues from recorded music have been shrinking, leaving the industry increasingly reliant on ticket sales for live performances. Widespread piracy, together with the growing obsolesce of CDs, appeared to be turning recorded music into a form of advertising for concerts and tours.

But in 2015, global recorded music revenues began to grow again. In 2016, they rose a relatively healthy 5.9% to US$15.7 billion (about one third of the industry’s total revenue), according to a report by the International Federation of the Phonographic Industry (IFPI). For music industry executives, that growth marks an important milestone. “We got here through years of hard work,” Michael Nash, executive vice president of digital strategy at Universal records, told the Guardian in April 2017, adding that the music industry was still going through a “historical transformation. The only reason we saw growth in the past two years, after some 15 years of substantial decline, is that music has been one of the fastest adapting sectors in the digital world.”

Contents:

  • Executive Summary
  • Introduction
  • Music bounces back
  • What has changed?
  • Is streaming the final word in music distribution
  • Lessons to learn from music’s recovery

Figures:

  • Figure 1: The global music industry has returned to growth
  • Figure 2: The way people buy recorded music is changing dramatically
  • Figure 3: YouTube pays particularly low rates per stream
  • Figure 4: YouTube is a major destination for music lover
  • Figure 5: Music is one of the slowest growing entertainment segments
  • Figure 6: Spotify’s losses continue to grow despite the growth in revenues
  • Figure 7: Spotify’s subscription service is growing rapidly
  • Figure 8: Concert ticket revenues are up sevenfold since 1996 in North America
  • Figure 9: Major concert tickets sell for an average of $77 apiece

Transformation: Are telcos investing enough?

Introduction

Why are we doing non-telco case studies?

Digital transformation is a phenomenon that is not just affecting the telco sector. Many industries have been through a transformation process far more severe than we have seen in telecoms, while others began the process much earlier in time. We believe that there are valuable lessons telcos can learn from these sectors, so we have decided to find and examine the most interesting/useful case studies.

In this report, we look at German publisher Axel Springer, which has successfully transformed itself from a print-based publisher to an online multimedia platform.

While the focus of this report will be on Axel Springer’s transformation, the key takeaways will be the lessons for telcos to help them make their own transformation process run more smoothly.

STL Partners has done extensive research into the challenge of telco transformation and how to implement effective business model change, most recently in our reports Five telcos changing culture: Lessons from neuroscience, Changing Culture: The Great Barrier and Which operator growth strategies will remain viable in 2017 and beyond?

General outline of STL Partners’ case study transformation index

We intend to complete similar 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 will examine 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) or a negative (cross). These ticks and crosses 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.

Axel Springer’s transformation – a success story

German publishing house Axel Springer began to suffer from declining revenues in the mid-2000’s as changes in consumer behaviour and disruption from new digital rivals such as Google and Yahoo! led to falling readership. Axel Springer identified this threat immediately and reacted swiftly, making the bold move to cannibalise its core printed newspaper and magazine business by repositioning most of its existing content onto online and digital platforms. The company has continued this transformation with an aggressive acquisition strategy, enabling it to expand its footprint into new geographies and content areas.

Even though Axel Springer’s transformation required sweeping technological, strategic and cultural change, it has been a success. Since the disposal of several non-core regional publications in 2012, both revenues and EBITDA have grown on average nearly 5% per year, while the percentage of revenues from digital streams grew to 67% in 2016 from just 42% in 2012.

Why is the Axel Springer case study relevant for telcos?

Much of Axel Springer’s transformation has consisted of (and been driven by) the change from traditional (print) to digital (online) publishing. While telcos have grown up in the digital era, with much of their transformation being driven by changes in consumer behaviour, there are many parallels between Axel Springer and the telco sector. We will look at the key lessons that can be learnt in the following areas:

  • Advances in technology
  • Changes in consumption and customer habits
  • The risk of cannibalisation
  • New opportunities in content
  • Working with social media
  • Platform and partnership opportunities
  • Culture change
  • The importance of data

Content:

  • Executive Summary
  • Axel Springer’s transformation success – a summary of key lessons
  • Axel Springer in STL Partners case study transformation index
  • Introduction
  • Why are we doing non-telco case studies?
  • Axel Springer – background to transformation
  • What was Axel Springer’s business model pre-transformation?
  • Drivers of change – how the market developed and Axel Springer’s reaction
  • Conclusions
  • Axel Springer in STL Partners transformation index
  • Appendices
  • Appendix 1: Axel Springer – company timeline
  • Appendix 2: Axel Springer – recent acquisitions
  • Appendix 3: Axel Springer – recent investments

Figures:

  • Figure 1: Total global internet users
  • Figure 2: Traditional publishing company business model
  • Figure 3: Post-digital publishing company business model
  • Figure 4: Axel Springer total revenues 2003-2016
  • Figure 5: Axel Springer total EBITDA and EBITDA margin 2003-2016
  • Figure 6: The development of news and media consumption
  • Figure 7: Axel Springer 2016 revenues by sector (€ million)
  • Figure 8: Axel Springer percentage of revenues from digital streams
  • Figure 9: Axel Springer revenues by sector 2012-2016
  • Figure 9: Axel Springer investment in acquisitions 2012-H1 2016 in comparison to selected telcos

Sense check: Can data growth save telco revenues?

Introduction

A recent STL Partners report – Which operator growth strategies will remain viable in 2017 and beyond? – looked at the growth strategies of 68 operator groups, and identified eight different growth strategies employed over this sample. The eighth strategy was to expect mobile data growth to start to reverse the decline in revenues once the decline in voice and messaging revenues is complete. In the previous report, we argued that data revenue growth would not rapidly counterbalance the losses of voice and messaging due to the forces outlined in Figure 2 below:

Figure 2: Trust in the increasing value of (and spend in) broadband data 

Source: STL Partners

In that report, we showed a number of examples, including NTT Docomo in Japan, which has been experiencing voice and messaging declines for the longest period of telcos we are aware of, and the UK market, which is competitive with relatively good availability of market data (See Figure 3):

Figure 3: STL Partners can find no evidence of long term revenue growth driven by increased mobile broadband demand in mature markets (outside duopolies)

Source: Company accounts, STL Partners

Despite the clarity of our own convictions on this matter, we are aware that some telcos are growing their revenues, and also that a minority of our clients (perhaps one in ten based on a number of informal surveys we have run in workshops etc.) believe that data could start to regrow the market in certain conditions.

Given how attractive this idea is to the industry, and how difficult and lengthy the path of transformation and creating digital services is proving for telcos, we decided that it would be useful to revisit our assertions, to dig deeper to see what signs of growth we could find and what might be learned from them. This report contains our findings from this further analysis.

Background: The telco ‘hunger gap’

This decline is not a new story, and STL Partners has been warning about this phenomenon and the need for business model change since 2006.

Back in 2013, STL Partners estimated that digital business would need to represent 25+% of Telco revenue by 2020 to avoid long-term industry decline. However, to date we have not taken the view that data revenues will to grow enough to make up for the decline in traditional services, meaning that “hunger gap” will not be filled this way (see Figure 4).

Figure 4: The telco ‘hunger gap’ between the decline in traditional and data revenues

Source: STL Partners

However, making the transition to new business models is challenging for telcos, who have traditionally relied on an infrastructure-based business model. Digital businesses are very different, and the astronomical growth in demand for mobile data services over the past decade is placing severe strain on networks and resources.

We have argued that telcos now need to make a fundamental shift from their traditional infrastructure-based business model to a complex amalgam of infrastructure, platform, and product innovation businesses.

Alternatively, growing data would be an innately attractive prospect for the telecoms industry. It would not require all the hard work, risk, change and investment of transformation. Hard-pressed executives would love nothing better than the ‘do little’ strategy to work out. It’s an idea that can easily find traction and supporters.

But is it a realistic prospect to grow data revenues faster than voice and messaging are shrinking?

To sense-check our original assertion that data will not grow overall revenues, this report takes a new look at the available evidence. We picked six different telcos appearing to exhibit representative or outlier strategies to see whether there may currently be grounds to change our view that data revenue growth will not grow the overall telecoms market.

Content:

  • Executive Summary
  • Introduction
  • Background: the telco ‘hunger gap’
  • Methodology
  • Review of global trends in data growth
  • The explosion in mobile data growth
  • The link between data consumption and ARPU
  • The rise of 4G
  • Data tariff bundles increase in volume
  • Mobile data offloading
  • Multiplay bundling and the fixed network advantage
  • International data roaming
  • Zero rating and net neutrality
  • Case studies – different data strategies
  • Four data growth strategies
  • The traditional growth model
  • The disruptor/challenger model
  • The innovator model
  • The OTT proposition
  • Case studies comparison: Investment vs risk in summary
  • Case study: Innovator: DNA (Finland)
  • Case study: Disruptor/Innovator: T-Mobile US
  • Case study: Super-disruptor: Reliance Jio (India)
  • Case study: Disruptor: Free (France)
  • Case study: Traditional/Innovator: Vodafone UK
  • Case study: Traditional: Cosmote (Greece)
  • Conclusions
  • Case studies comparison: Investment vs risk in summary
  • Telcos need to seek fresh business models
  • Network investment will need to be even more intelligently targeted than with 3G/4G
  • New growth opportunities are emerging
  • A little thoughtful innovation goes a long way
  • Recommendations

Figures:

  • Figure 1: Trust in the increasing value of (and spend) in broadband data
  • Figure 2: Trust in the increasing value of (and spend) in broadband data
  • Figure 3: STL Partners can find no evidence of long-term revenue growth driven by increased mobile broadband demand in mature markets (outside duopolies)
  • Figure 4: The telco “hunger gap” between the decline in traditional and data revenues
  • Figure 5: Cisco global data growth 2016-2021
  • Figure 6: Total estimated UK mobile retail revenues
  • Figure 7: SMS and MMS sent in the UK, 2007-2015
  • Figure 8: Selected telco data growth strategies
  • Figure 9: Analysis of mobile operator growth strategies
  • Figure 10: DNA revenues and churn 2012-2016
  • Figure 11: DNA mobile data growth 2010-2016
  • Figure 12: DNA mobile data growth forecast
  • Figure 13: USA average monthly data use, 2010-2015
  • Figure 14: Deutsche Telekom non-voice % of ARPU, 2009-2016
  • Figure 15: T-Mobile US total revenues and non-voice ARPU, 2009-2016
  • Figure 16: Reliance Jio subscription growth
  • Figure 17: Free Mobile 4G subscriptions and 4G data, 2015-2016
  • Figure 18: Iliad Free revenue growth 2012-2016
  • Figure 19: France average mobile data use per SIM, 2009-2015
  • Figure 20: France mobile value added service revenues, 2009-2015
  • Figure 21: Vodafone UK data use and total mobile ARPU, 2011-2016
  • Figure 22: UK mobile retail ARPU, 2010-2016
  • Figure 23: UK estimated mobile retail revenues, 2010-2015
  • Figure 24: Vodafone UK total mobile revenue 2013-2016
  • Figure 25: Greece data use and total mobile revenues

B2B growth: How can telcos win in ICT?

Introduction

The telecom industry’s growth profile over the last few years is a sobering sight. As we have shown in our recent report Which operator growth strategies will remain viable in 2017 and beyond?, yearly revenue growth rates have been clearly slowing down globally since 2009 (see Figure 1). In three major regions (North America, Europe, Middle East) compound annual growth rates have even been behind GDP growth.

 

Figure 1: Telcos’ growth performance is flattening out (Sample of sixty-eight operators)

Source: Company accounts; STL Partners analysis

To break out of this decline telcos are constantly searching for new sources of revenue, for example, by expanding into adjacent, digital service areas which are largely placed within mass consumer markets (e.g. content, advertising, commerce).

However, in our ongoing conversations with telecoms operators, we increasingly come across the notion that a large part of future growth potential might actually lie in B2B (business-to-business) markets and that this customer segment will have an increasing impact of overall revenue growth.

This report investigates the rationale behind this thinking in detail and tries to answer the following key questions:

  1. What is the current state of telco’s B2B business?
  2. Where are the telco growth opportunities in the wider enterprise ICT arena?
  3. What makes an enterprise ICT growth strategy difficult for telcos to execute?
  4. What are the pillars of a successful strategy for future B2B growth?

 

  • Executive Summary
  • Introduction
  • Telcos may have different B2B strategies, but suffer similar problems
  • Finding growth opportunities within the wider enterprise ICT arena could help
  • Three complications for revenue growth in enterprise ICT
  • Complication 1: Despite their potential, telcos struggle to marshal their capabilities effectively
  • Complication 2: Telcos are not alone in targeting enterprise ICT for growth
  • Complication 3: Telcos’ core services are being disrupted by OTT players – this time in B2B
  • STL Partners’ recommendations: strategic pillars for future B2B growth
  • Conclusion

 

  • Figure 1: Telcos’ growth performance is flattening out (Sample of sixty-eight operators)
  • Figure 2: Telcos’ B2B businesses vary significantly by scale and performance (selected operators)
  • Figure 3: High-level structure of the telecom industry’s revenue pool (2015) – the consumer segment dominates
  • Figure 4: Orange aims to expand the share of “IT & integration services” in OBS’s revenue mix
  • Figure 5: Global enterprise ICT expenditures are projected to growth 7% p.a.
  • Figure 6: Telcos and Microsoft are moving in opposite directions
  • Figure 7: SD-WAN value chain
  • Figure 8: Within AT&T Business Solutions’ revenue mix, growth in fixed strategic services cannot yet offset the decline in legacy services

Understanding Fintech: Why Interest and Investment Has Exploded

Introduction

Why should telcos care about fintech? Telecoms operators have long been interested in financial services, especially consumer-facing financial services. STL Partners has discussed the relationship between telecoms and financial services in a range of prior reports, from Digital Commerce: Show Me the (Mobile) Money, to Apple Pay and Weve Fail: A Wake Up Call, and from Telco-driven Disruption: What NTT DoCoMo, KT, and Globe Got Right, to Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Companies.

It is fair to say that telcos have found only mixed success in financial services. While certain operators have had great success in recent years providing mobile money services, there have also been many examples of telco incursions into financial services that have not paid off. On the other hand, there have been many instances of successful disruption in financial services – even technology-led digital disruption. PayPal is the foremost example of a digital business that originally found a niche doing something that banks had made quite laborious – online payments for goods between private individuals – and making it easier. But these disruptions have, to date, been limited and individual. Why, then, should telcos pay attention now?

In the last two years, the wider landscape of financial services has begun to change, as the established players have faced disruption on multiple fronts from a large number of new businesses. This has become known as fintech, and interest and investment are taking off:

Figure 1: Google Trends search on ‘fintech’, 2011 – 2016

Source: Google Trends

Fintech therefore represents a potentially huge shift in the status quo in financial services: this short report provides an overview of this shift. STL Partners will follow up with a report that considers options for telecoms operators, and makes some strategic recommendations.

 

  • Executive Summary
  • Introduction
  • Disrupting the Financial Services Industry
  • Defining fintech
  • Why fintech’s time has come
  • The state of the ecosystem: investment is accelerating
  • Key Capabilities and Service Areas
  • Fintech specific capabilities: doing the same, but differently
  • Fintech service areas: Diverse and developing
  • The Future of Fintech
  • Growth ahead
  • …but there are uncertainties around the future evolution
  • The uncertainties could still play out well for start-ups
  • Conclusion and Outlook

 

  • Figure 1: Google Trends search on ‘fintech’, 2011 – 2016
  • Figure 2: Fintech companies are disrupting financial services
  • Figure 3: Global Investment in Fintech
  • Figure 4: VC-backed Investment in Fintech, by Region
  • Figure 5: A framework for understanding fintech
  • Figure 6: Fintech start-ups within each service area

Seven Tough CEO Questions – Telco 2.0 Update

Seven Tough Questions

In the process of refreshing our 2016-2017 research agenda, STL Partners has identified seven ‘meta’ themes in our recent research that can be thought of as part of a contemporary checklist for telecoms strategy.

These are some of the questions that we believe boards and executives should be asking themselves as they assess their own strategies and decide what further actions and initiatives to investigate and initiate. In the following brief article, we point our customers to our latest findings in these areas. [NB If you’re not a customer, you’ll be able to see some, but not all of the analysis.]

We do not claim that this is a full and exclusive list, and indeed we’d welcome your input via contact@stlpartners.com to set up a call with our research team or share your thoughts and questions directly.

1. Do you have a compelling vision based on an evolving, competitive digital customer experience?

There are a number of scenarios facing telecoms operators in which any compelling vision must apply. Our initial scenario analysis was directed to European operators, and we have subsequently also conducted workshops and seminars with operators in other parts of the world that identified and developed similar relevant groupings in their markets.

Figure 1 – Four Illustrative Telecoms Market Scenarios

We then identified the fundamental problems with telecoms transformations in Problem: Telecoms technology inhibits operator business model change, and subsequently proposed a vision and solution to this in Transforming to the Telco Cloud Service Provider.

Much of our other analysis integrates with these ideas, exploring the themes in more specific domains, such as how to transform, relevant strategies in adjacent and disrupted/disrupting industries, developments in advanced enterprise cloud and ICT, and the future of the network, and we outline some of this analysis in summary below.

A critical foundation stone of any future strategy is how competitive the digital experience that your company delivers to its clients. In this regard, we have published the first iteration of MobiNEX: The Mobile Network Customer Experience Index which looked at 27 operators in seven markets, and compared the relative performance of operators’ mobile data networks in terms of how they deliver customer app-use experience. We are also working on further a global analysis in this domain which will be published soon.

Another foundation stone for telcos is that becoming a truly digital business is not just about technology, IT, marketing, or even HR for that matter. It is an approach that requires the engagement, re-thinking and adaptation / evolution of the whole business.

Looking at other aspects of operators’ digital competence, and following on from our research into operator agility, we are also now working on research into how well operators are transforming their customer-facing digital activities in marketing and sales, and also into other areas of digital maturity and transformation.

In addition, we continue to frame and update the strategic picture in the context of industry analyses such as Brexit: Telecoms Strategy Implications and US Wireless Market: Early Warning Signs of Change, and identify leading case studies of telco innovation in reports such as this one on Dialog’s surprisingly successful API programme, and this on Telstra’s ambitious healthcare investment programme.

 

  • Seven Questions (and pointers to our answers)
  • 1. Do you have a compelling vision based on an evolving, competitive digital customer experience?
  • 2. NFV/SDN: tools of business transformation or toys of the technology department?
  • 3. IoT/5G/Cloud: the Holy Trinity of Hope – or Hype?
  • 4. Can/does your business work well with others in new ways to deliver?
  • 5. Are you tuned into innovation in Communications, Commerce and Content?
  • 6. Is your Enterprise/SMB strategy keeping pace with the market?
  • 7. Is your network holding you back or taking you forward?
  • What’s next?

 

  • Figure 1: Four Illustrative Telecoms Market Scenarios
  • Figure 2: Cloud business practices – key principles
  • Figure 3: Challenges for Telco Digital Services Partnering
  • Figure 4: Six Healthcare Pain Points Telstra Health Aims to Address

Cloud 2020: Telcos’ Role, Scenarios and Forecast

Introduction: The Cloud in 2016

STL Partners developed our comprehensive ‘forward-view scenarios’ on the evolving cloud services market, and the role of telcos within this market, back in 2012[1].  Times have certainly moved on.  In 2016, the cloud has become an established part of the IT industry. The key cloud providers – Amazon.com, Microsoft, Google, Facebook – are seeing dramatic revenue growth and (at least in Amazon Web Services’ case) unexpectedly strong margins in the 25-30% range.

Estimates of server shipments and revenue suggest that, so far, the growth of the cloud is a blue-ocean phenomenon.  In other words, rather than cloud services supplanting on-premises data centres, the market for computing power is growing fast enough that the cloud is mostly additional to them. Enterprises’ consumption of computing has risen dramatically, as its price has fallen – and cloud is the preferred delivery method for the delivery of these additional data services.

Since our last major cloud report in 2012, there have been some major shifts in the market.

  • Public cloud – think Amazon Elastic Compute Cloud (EC2) – has grown enormously, and to some extent subsumed part of the private cloud segment, as the public clouds have added more and more features. For example, Amazon EC2 offers “Reserved Instances”, rather like a dedicated server – these “allow you to reserve Amazon EC2 computing capacity for 1 or 3 years, in exchange for a significant discount (up to 75%) compared to On-Demand instance pricing”[2]. EC2 also offers extensive “virtual private cloud” support, as does Microsoft Azure. This support has essentially put an end to the virtual private cloud as an industry segment.
  • Platform-as-a-service (PaaS) has, as we predicted, become less important compared with infrastructure-as-a-service (IaaS), as the latter has added more and more PaaS-like convenience.
  • Traditional managed-hosting providers, for their part, have begun to deliver managed hosting services in a “cloud-like”, programmatic, on-demand fashion, via the so-called “bare metal cloud”. Iliad’s Scaleway product is a notable example here.
  • Meanwhile, enterprise IT departments who choose to retain their own infrastructure are increasingly likely to do it by creating their own private clouds. Open-source software, like OpenStack, and open hardware like the Open Compute Project and OpenFlow, make this an increasingly attractive option.

The upshot for telcos has in general been pretty bleak.  In the volume-dominated public cloud market, they’ve failed to achieve significant scale; while the various niche cloud services markets have largely either been subsumed by the public cloud, or been served better by the open-source ecosystem. Telcos’ focus on enterprise cloud and (in most cases) on reselling VMWare’s technology as their core PaaS offering has rendered them vulnerable to severe competition. Enterprises could serve themselves better thanks to open source, while the public clouds’ engineering excellence and use of open source projects has allowed them to progress faster and address developers’ (the key buyers’) needs better.

However, as we discuss below, the big four cloud companies still only account for about half the total spending. The niche opportunities in cloud remain very real, and there are still potential opportunities for telcos who offer compelling technical and product differentiation.

STL’s cloud scenarios from 2012, revisited

In 2012, STL Partners identified three scenarios for the future of cloud, in our market overview report.

“Menacing Stormcloud”: this scenario essentially envisioned a world in which hyperscale data centre infrastructure just kept getting better. As a result, the cloud majors would eventually take over, probably also cannibalising the on-premises and private cloud markets. This would require cloud customers to bite the bullet and trust the cloud, whatever security and privacy issues might arise. Prices, but also margins, would be hammered into the ground by sheer scale economics.  In “Menacing Stormcloud”, AWS and its rivals would dominate the cloud market, and little would be left in terms of telco opportunities.

 “Cloudburst”: our second scenario postulated that the cloud was a technology bubble and the bubble would do what all bubbles do – burst. Some triggering event – perhaps a security crisis, or a major cloud customer deciding to scale out – would bring home the downside risks to the investing public and the customer base. Investors would dump the sector, bankruptcies would ensue, and interest would move on, whether to a new generation of on-premises solutions or to a revived interest in P2P systems.  In “Cloudburst”, both the cloud and the data centre in its current form would end up being much less relevant, and cloud opportunities for telcos (as well as other players) would accordingly be very limited.

“Cloud Layers”: this scenario foresaw a division between a hard core of hyperscale public cloud providers – dominated by AWS and its closest competitors – and a periphery of special-purpose, regional, private, and otherwise differentiated cloud providers.  This latter group would include telcos, CDNs, software-as-a-service providers, and enterprise in-house IT departments. We noted that this was the option that had the best chance of offering telcos a significant opportunity to address the cloud market.

Looking at the market in 2016, “Cloud Layers” has turned out to be closest to the current reality. The cloud has certainly not burst, as we postulated in our second scenario.  As far as the first “Menacing Stormcloud” scenario, public cloud majors have indeed become very dominant, but the resulting price drops this scenario envisioned have not necessarily ensued.  Even the price leader, AWS, has only returned about half the cost-savings derived from technical advances (what we would call the annual ‘Moore’s law increment’) to its customers through its pricing, capturing the rest into margin.

Further, although there have been exits from the market, the exiting providers have not been niche cloud providers or traditional managed hosting providers.  Rather, we have seen exits by players who have made unsuccessful attempts to compete in hyperscale. HP’s closure of its Helion Public Cloud product, Facebook’s closure of its Parse mobile developer PaaS, and the resounding lack of results for Verizon’s $1.4bn spent on Terremark, are cases in point.

Looking at the operators who managed to find a niche in the “Cloud Layers” scenario – such as AT&T[3], Telstra[4], or Iliad[5] – an important common factor has been their commitment to owning their technology and building in-house expertise, and using this to differentiate themselves from “big cloud”. AT&T’s network-integrated cloud strategy is driven by both using open-source software as far as possible, and investing in the key open-source projects by contributing code back to them. Iliad introduced the first full bare-metal cloud, using a highly innovative ARM-based microserver it developed in-house. Telstra is bringing much more engineering back in-house, in support of its distinctive role as the preferred partner for all the major clouds in Australia.


 

  • Executive Summary
  • Introduction: The Cloud in 2016
  • STL’s cloud scenarios from 2012, revisited
  • How much are we talking here?
  • Competitive Developments in Cloud Services, 2012-2016
  • Understanding the strategies of the non-telco cloud players
  • Most Telcos’ Cloud Initiatives Haven’t Worked
  • The Dash-for-Scale failed (because it wasn’t ‘hyperscale’)
  • Only the disruptors made any money
  • Too little investment in cloud innovation resources, and too much belief in marketing reach as a differentiator
  • Cloud innovation is demanding: the case of AT&T
  • Cloud 2.0 Scenarios 2016-2020
  • Scenario 1: Cumulonimbus – tech and Internet players’ global cloud oligopoly
  • Scenario 2: Cirro-cumulus – a core of big cloud players, plus specialists and DIY enterprises
  • Scenario 3: Disruptive 5G lightning storm fuses the Cloud with the Network
  • Conclusion

 

Figure 1: 2016 Forecasts of cloud market size through 2020
Figure 2: Forecasting the adoption of cloud
Figure 3: Our revised cloud services spending forecast: still a near-trillion dollar opportunity, even though IT spending slows
Figure 4: Our forecast in context
Figure 5: Public IaaS leads the way, with AWS and Microsoft
Figure 6: IaaS is forecast to grow as a share of the total Cloud opportunity
Figure 7: All the profit at Amazon is in AWS
Figure 8: Moore’s law runs ahead of AWS pricing, and Amazon grows margins
Figure 9: Cloud is the new driver of growth at Microsoft
Figure 10: Google is still the fourth company in the cloud
Figure 11: AT&T’s cloud line-item is pulling further and further ahead of Verizon’s
Figure 12: STL world cloud spending forecast (recap)
Figure 13: Driver/indicator/barrier matrix for Cloud 2.0 scenarios

Brexit: Telecoms Strategy Implications – #1 Prioritise Transformation

Published here is our outline of what has happened in the UK, what still has to happen, and the near-term consequences.

The full report further outlines scenarios for how the saga may play out, and explores opportunities and threats for operators and technology partners in the UK, the EU and beyond.

Introduction: What actually happened in the UK?

Why was a vote called?

British Prime Minister David Cameron first considered a referendum on European Union membership in 2012, with the idea that it might be a way to generate support from Eurosceptic members of his own Conservative Party. In January 2013, Cameron made a two-fold promise that, should his party win a majority at the 2015 general election, the Government would attempt to negotiate more favourable arrangements for Britain’s EU membership, and subsequently hold a referendum to decide whether the UK should leave or remain part of the EU.

In May 2015, the Conservative Party won the general election, and David Cameron reaffirmed his pledge. By February this year, Cameron had announced the outcome of a renegotiation of the UK’s EU membership, and confirmed that a referendum would take place on 23 June. The question chosen to appear on the ballot paper was: “Should the United Kingdom remain a member of the European Union or leave the European Union?”

The result

Figure 2: The EU referendum – how Britain voted

Source: Lord Ashcroft Polls, BBC

46.5 million voters were eligible to vote in the referendum, of which 33.6 million voted. At 72%, this represents a high turnout.

Of those voting, 17.41 million (52%) voted to ‘Leave’ and 16.14m (48%) voted to ‘Remain’ in the European Union, a majority of 1.27m in favour of leaving. Immediately after the result, Prime Minister David Cameron announced his resignation, to be effective once a new Conservative party leader was chosen.

Polling reports by voting constituency show a relatively consistent pattern of a ‘Leave’ majority in most of England and Wales, with a ‘Remain’ majority in London, Scotland, major university cities, and Northern Ireland. Surveys suggest that the ‘Remain’ voters were on average younger and better educated.

Why did the UK ‘Leave’ campaign win?

The reasons behind the victory of the ‘Leave’ campaign are complex and probably not yet fully understood – the result was as much of a shock in the UK as the rest of the world.

Nonetheless, to help set the outcome in context, we shall carefully try to piece together some insight into the ­­main drivers combining our understanding of the events, supported by findings from one published post-vote survey, hopefully without touching still sensitive nerves in the UK and elsewhere.

The primary reason given by ‘Leave’ voters was “the principle that decisions about the UK should be made in the UK”. More qualitatively, there are concerns too about the future intent of the EU to integrate even more deeply, and even many ‘Remain’ voters dislike the perceived distance and inefficiency of the EU itself.

Migration was also cited as the second most important reason to vote ‘Leave’, and there has recently been a significant increase in EU migrants coming to work in the UK. While some areas have felt the impact of the inflow of migrants more than others, net EU immigration amounted to 0.3% of the population last year. The voters’ concern was of ‘uncontrolled’ future migration.

The ‘Leave’ campaign tapped into and amplified into both democratic and migration concerns deftly with the clear and emotional central promise to ‘take back control’, and spoke in everyday language. Boris Johnson, the former Mayor of London joined the campaign in February, and gave it a better known and well liked face.

In contrast, the ‘Remain’ campaign lacked clarity and cohesion among its leaders and messages, particularly around controlling immigration. It was also neutralised on the issue of the likely economic damage of Brexit by the accusation of running ‘Project Fear’ – claims of impending disaster to scare voters onto its side.

The Labour half of the ‘Remain’ campaign was accused of lacking conviction.  The Labour party leader, Jeremy Corbyn is now facing his own “Jexit”, as 172 Labour Members of Parliament (c.75%) delivered a non-binding “no confidence” vote on his leadership.   It has even been suggested that Mr Corbyn voted for Leave. (Ironically, a similar rumour suggests Boris Johnson voted ‘Remain’.)

While the overall tone of the campaign became rather toxic and facts became a casualty to both sides, the ‘Leave’ campaign cut through with its clearer message, emotional appeal, and better-worked rhetoric.

Many surveyed said they had come to the decision to support ‘Leave’ before all the campaigning of the last few weeks, based on the view that the benefits of taking back control of decisions and migration would be worth the (hotly disputed) risks of whatever economic consequences there may be. The argument is that in the medium term, the UK will be able to negotiate better trade deals outside Europe, no longer held back by the less agile EU, with its 27 different national interests to complicate every deal.

There is also a sizeable body of disaffected and disenfranchised voters in the UK, more typically (but not exclusively) less affluent and living in rural areas and small towns, who feel they have been talked down to and left behind by the metropolitan, educated elite, including politicians, business leaders, economists and other experts. The EU vote was an opportunity to protest, and the warnings of economic ruin by ‘the elite’ simply strengthened their resolve to give ‘the establishment’ – and ‘the elite’ – a metaphorical ‘kick’.

What are the consequences – in the UK and beyond?

UK politics will be in a muddle for a while, and it is far from clear what will happen

You might think that the vote has been cast, and that would be that: the UK is out of the EU. This is far from the case. There is considerable opposition to leaving, and many procedural opportunities for further twists and turns which we outline in this section. Our aim is to help explain why there may be a long delay before anything much more tangible happens, and some of the factors that might drive the emergence of different scenarios.

Before anything much more can be resolved, Britain needs a prime minister. Constitutionally, David Cameron remains in office until his successor takes over, but there are obvious limits to his authority as a ‘lame duck’. The logic of the constitution is such that the Conservative Party first needs to choose a new leader, who would automatically become prime minister by virtue of the Conservative majority in the House of Commons.

For exit to actually happen, the UK government must send the European Council a notification under Article 50 of the Lisbon Treaty. Once the notification is received, a clock is set running on the withdrawal process – the parties then have 2 years to negotiate terms. If there is no agreement within that time, the European treaties cease to apply to the withdrawing state in a so-called “hard exit”.

Cameron has stated that he will not give this notification, leaving this for his successor on the grounds that having resigned, he no longer has the legitimacy to take such a historic step. This means that the situation is currently on hold. Some lawyers argue that the Article 50 notification would need a vote in the House of Commons, which has a substantial majority in favour of remaining in the European Union, in a further complication. It may also be covered by the principle that the Westminster parliament only acts on Scottish affairs with the Scottish government’s consent, which is very unlikely to be given. This interpretation, however, is controversial.

Meanwhile, the opposition Labour Party is in a similar state of crisis, as its MPs try to remove the party leader. Because that party’s rules require a full party conference to sack the leader, and then an election by the members, it is possible that they might not be able to remove him before the conference in September, unless he chooses to resign. Even then, he might stand for election as his own successor.

As a result, it is unlikely that much can be decided until the parties have resolved their own internal crises. Once this has happened, though, the UK will have an unelected prime minister and a parliament largely elected on a platform of staying in the EU. Therefore, it may be necessary to call a general election (since 2011, this needs a 2/3 majority of Parliament, so could be problematic in itself).

A prime minister unwilling to leave the EU might use this as a way to back down from the referendum, on the basis that the electorate had spoken once again and had evidently changed its mind. Alternatively, he or she could use it to seek a mandate to implement their chosen version of Brexit. In the event that the Article 50 notification is issued, it is almost certain that the Scottish Nationalist Party would seek a second referendum on independence from the UK.

The UK in general: a state of shock

It is hard to gauge the knock-on impact of the vote on the wider population, other than to say that the STL Partners team has never experienced such an emotive and divisive political issue. There are disagreements within families, between friends, within communities, and across the nation.

There have been increases in reported racist crimes and confrontations, and the vote and its political fall-out dominates the news coverage.

There is not rioting on the streets, but there is a sense of shock, anger and disbelief among many on all sides. Perhaps the ongoing drama of the political fall-out in Westminster and Brussels, and a general weariness with the whole situation, are diverting the tensions.

We hope that things will calm down quickly, but there may well be months of more stress ahead. In the long term, the divisions between the predominantly ‘Remain’ areas like London and Scotland, and strongly ‘Leave’ rural areas and towns need to be addressed, but the solutions are not obvious. This vote has merely highlighted and amplified the differences, and Brexit itself does not offer a solution.

Economic Uncertainty: threat and opportunity

The primary macro-economic impact so far has been a deep devaluation in sterling. This will move the balance of payments on current account, heavily in deficit (i.e. imports exceed exports) at the moment, towards balance, as UK exports get cheaper and imports dearer. The consequences of moving towards balance will depend on how this happens.

One possibility is that British exports might be quite price-elastic. In this case, export volumes would rise more than import prices, and the devaluation would therefore increase aggregate demand and GDP. However, if they are less price-elastic, the increase in export volumes might not be enough to outweigh the rise in import prices, and the impact would be negative.

It is historically quite common that economies going through a major devaluation experience both, in the so-called J-curve effect. In the short term, import prices rise immediately, but it takes time to increase export volumes, and there is a recession. In the medium term, exporters adjust to the new exchange rate and there is a recovery. Service exporters – a very important category – cannot simply sell more units (nobody consumes more corporate lawyering because it is cheap), but have to gain new customers or sell more complicated services to existing ones.

If exit itself is disruptive to trade with the EU because of ill-feeling on either side (as might seem likely) or regulatory/non-tariff barrier issues, this would also make for such a scenario. Another, much more negative possibility, would be a recession in the domestic economy that reduces demand for imports and drives the current account into balance that way.

A third, even worse possibility would be a financial markets-driven “sudden stop”, in which the inflow of financing into the UK (the capital account surplus) would slow down dramatically. The current account would move into balance because importers became credit-rationed, resulting in a deep and rapid recession. Much depends on what the actual UK-Europe trade relationship turns out to be, and on the price elasticity of demand for UK exports.

What is very likely is that at least 2 years of intense uncertainty are in prospect, and during this time we expect many UK (and some EU) investment decisions to go on hold. It may be more likely that the UK experiences a classical recession, led by investment decisions in cyclical sectors like construction, and that this leads to a smaller current account deficit, rather than a change in the current account leading to a recession. Heavy selling on the stock market has focused on cyclical and consumer stocks like banks, airlines, housebuilders, and supermarkets. This implies the market is pricing in such a scenario.

In the telecoms sector, the UK would feel the effect on sales of flagship smartphones in mobile and big TV bundles in fixed – i.e. big ticket discretionary spending, the sort of thing that is likely to go first. Virgin Media’s £3bn Project Lightning fibre roll-out is an investment that might be affected, as owners Liberty Global have other markets they could deploy the CAPEX in.

As for investment into the UK, the devaluation renders UK assets significantly cheaper, and permits buyers who finance themselves in the UK to lever up more – a given amount of foreign-denominated equity is now worth more in sterling, so a larger loan can be floated at the same leverage ratio. The fundamental decision is therefore whether this advantage is worth the macro risk. The possibility of a nasty shock – such as the failure of a systemically important financial firm – can’t be ruled out.

For telcos in particular, a crucial issue is that their infrastructure is almost exclusively sourced from markets that trade in dollars or euros, so capital spending will be under significant pressure. Infrastructure sourced from China is paid for in dollars. Ericsson reports significant exchange rate adjustments in its accounts, suggesting that it gets paid in dollars and converts to Swedish kroner, while Nokia (plus ex-Alcatel) is of course in the eurozone. As a result, capital investments in the UK are financed in foreign currency and repaid out of sterling cashflows, so they will be significantly more expensive in future.

Longer-term impact will be overwhelmingly determined by the future shape of UK-European trade. This ranges from neutral – in the case where the UK stays, or shifts to a “Norwegian” relationship under the EEA Treaty – to seriously negative – in the “no deal” case where the UK ends up operating under WTO most-favoured nation tariffs. These are as high as 16% in the automotive sector, one of the biggest UK export lines of business (this Wall Street Journal app is invaluable here). We explore these scenarios in greater detail in the Scenarios section below.

Any upside for the UK is dependent on a substantial re-orientation of trade to extra-European markets; two of the biggest, China and Brazil, have their own problems in the short term.

 

  • Executive summary (not published here)
  • Introduction: What happened?
  • Why was a vote called?
  • The result
  • Why did the UK ‘Leave’ campaign win?
  • What are the consequences?
  • UK politics will be in a muddle for a while
  • The UK in general: a state of shock
  • Economic Uncertainty: threat and opportunity
  • Possible scenarios (not published here)
  • Scenario 1 – Hard Exit
  • Scenario 2 – Boris Johnson’s Norway
  • Scenario 3 – No Exit
  • Scenario 4 – Rolling Crisis
  • Consequences for telecoms – in the UK, the EU, and beyond (not published here)
  • Regulation
  • Customers: Finserv
  • Customers: Automotive and Industrial
  • Customers: Media and TV
  • What should TMT leaders do? (not published here)
  • Don’t give up on transformation
  • It could happen to EU
  • The least disruptive possible outcome is a de-escalation
  • The danger of a run on the skills bank
  • Don’t catch a falling knife

 

  • Figure 1: Summary Scenario Impacts for the Telco Industry
  • Figure 2: The EU referendum – how Britain voted
  • Figure 3: BT slides, Equinix soars

How BT beat Apple and Google over 5 years

BT Group outperformed Apple and Google

Over the last five years, the share price of BT Group, the UK’s ex-incumbent telecoms operator, has outperformed those of Apple and Google, as well as a raft of other telecoms shares. The following chart shows BT’s share price in red and Apple’s in in blue for comparison.

Figure 1:  BT’s Share Price over 5 Years

Source: www.stockcharts.com

Now of course, over a longer period, Apple and Google have raced way ahead of BT in terms of market capitalisation, with Apple’s capital worth $654bn and Google $429bn USD compared to BT’s £35bn (c$53bn USD).

And, with any such analysis, where you start the comparison matters. Nonetheless, BT’s share price performance during this period has been pretty impressive – and it has delivered dividends too.

The total shareholder returns (capital growth plus all dividends) of shares in BT bought in September 2010 are over 200% despite its revenues going down in the period.

So what has happened at BT, then?

Sound basic financials despite falling revenues

Over this 5 year period, BT’s total revenues fell by 12%. However, in this period BT has also managed to grow EBITDA from £5.9bn to £6.3bn – an impressive margin expansion.   This clearly cannot go on for ever (a company cannot endlessly shrink its way to higher profits) but this has contributed to positive capital markets sentiment.

Figure 2: BT Group Revenue and EBITDA 2010/11 – 2014/15

[Figure 2]

Source: BT company accounts, STL Partners

BT pays off its debts

BT has also managed to reduce its debt significantly, from £8.8bn to £5.1bn over this period.

Figure 3: BT has reduced its debts by more than a third (£billions)

 

Source: BT company accounts, STL Partners

Margin expansion and debt reduction suggests good financial management but this does not explain the dramatic growth in firm value (market capitalisation plus net debt) from just over £20bn in March 2011 to circa £40bn today (based on a mid-September 2015 share price).

Figure 4: BT Group’s Firm Value has doubled in 5 Years

Source: BT company accounts, STL Partners

  • Introduction: BT’s Share Price Miracle
  • So what has happened at BT, then?
  • Sound basic financials despite falling revenues
  • Paying off its debts
  • BT Sport: a phenomenal halo effect?
  • Will BT Sport continue to shine?
  • Take-Outs from BT’s Success

 

  • Figure 1: BT’s Share Price over 5 Years
  • Figure 2: 5-Year Total Shareholder Returns Vs Revenue Growth for leading telecoms players
  • Figure 3: BT Group Revenue and EBITDA 2010/11-2014/15
  • Figure 4: BT has reduced its debts by more than a third (£billions)
  • Figure 5: BT Group’s Firm Value has doubled in 5 Years
  • Figure 6: BT Group has improved key market valuation ratios
  • Figure 7: BT ‘broadband and TV’ compared to BT Consumer Division
  • Figure 8: Comparing Firm Values / Revenue Ratios
  • Figure 9: BT Sport’s impact on broadband

Strategic Overview: Time for a New Telco 2.0 Vision

Introduction

Telecoms operators worldwide are pursuing strategies to achieve four general goals:

  • Core Competitiveness – to enhance and grow their success in established telecoms markets
  • Achieving Transformation – to lower costs and enable greater agility in their core business
  • Implementing Innovation – to employ key innovations in the core business and grow new types of revenues
  • Disruption – addressing disruptive threats and opportunities arising from and in adjacent markets and industries

The following is a summary of highlights of our recent analysis and an outline of further research planned against each of these themes. It is intended to provide readers with a summary, starting point and guide to our research as they address the themes, and includes a preamble for our latest vision of ‘Telco 2.0’ – the shape of future telcos.

Theme #1: Core Competitiveness – Telecoms Markets and Competitive Strategies

Background

STL Partners has covered the changing context of global telecoms markets for the last nine years. The broad story is that voice and messaging revenues are in decline, and that while data revenues are generally growing, they aren’t growing fast enough to replace the lost revenues.

Figure 1 – The pressure to defend existing telecoms revenues and build new ones

Source: STL Partners

Core Competitiveness: Research Highlights

In addition to slowing the decline in voice and messaging, operators need the best strategies to grow data, as well as new approaches to manage costs and deliver new value (covered in the subsequent sections of this paper). On this front:

Next Steps on Core Competitiveness

STL Partners is planning analysis including:

  • The impact of digital customer experience on customer behaviours and value creation
  • What strategies have demonstrably added value to telecoms operators?

Theme #2: Achieving Transformation – Re-organising the Core and Building Innovative Businesses

Background

Following on from our work on the Telco 2.0 Transformation Index, benchmarking the strategies of five major operators, in 2015 STL Partners has researched ‘Agility’, a key objective of change in the core business, and how to build innovative new businesses.

Figure 2 – The Telco 2.0 Agility Framework

Source: STL Partners, Agility Report

Transformation: Research Highlights

Next Steps on Telco 2.0 Transformation

STL Partners is planning analysis including:

  • What does ‘Telco 2.0’ mean today – what should a future telco look like?
  • How do recent developments in the application of new business models, technology, and organisational change unlock faster transition to new Telco 2.0 businesses?

Theme #3: Implementing Innovation in the Core – IoT, 5G and the Cloud, NFV and Future Networks

Background

IoT (the Internet of Things), 5G, and NFV (Network Functions Virtualisation) are three acronyms that at first glance seem unrelated. Yet underlying all three is that the boundaries between IT and network technologies in telecoms are starting to blur at an increasing rate. This is a highly significant trend in the industry.

Figure 3 – Improvements in the performance of generic hardware and software are starting to blur the IT/Network boundary

Source: Intel, STL Partners NFV Report

Core Innovation: Research Highlights

All in all, we see this underlying change as highly significant in terms of the structure and strategy of the telecoms industry. It will both more effectively enable new business models for telcos, enable new competition for them, and disrupt existing industry structures among telcos. It will also disrupt technology and software players partnering with telcos. It is therefore a critical strategic need to understand how this is likely to play out, and the strategies most likely to lead to success in this new world.

Next Steps on IoT, Cloud and the Future of the Network

STL Partners is planning analysis including:

  • The role of Cellular networks in the IoT
  • How the network revolution will unlock business model change
  • The impact of new software-based approaches on future of telecoms 

Theme #4: Disruption – Addressing Adjacent Threats and Opportunities

Background

Regular readers of our research are likely to be familiar with our original and market leading analysis of the internet players and major disruptors of the telecoms market, such as Dealing with the Disruptors: Google, Apple, Facebook, Amazon and Microsoft (2011) and our ongoing Dealing With Disruption in-depth research stream.

Research Highlights: Disruption

Although our article on the implications of Google’s MVNO attracted significant interest among our readers, disruption is no longer perceived as solely a threat to telcos, as evidenced by interest in analysis on:

Next Steps on Disruption

STL Partners is planning analysis including:

  • Further detailed case studies on leading telcos acting as disruptors, including new success stories in advertising and location services
  • China’s other disruptors (e.g.s Baidu, Xiaomi) and rising stars
  • Ongoing analysis of the strategies of Microsoft, Google, Apple, Amazon and Facebook

Conclusion: time for a new ‘Telco 2.0’ vision

STL Partners believes that three major practical outcomes resulting from progress across these themes are now combining to create a unique opportunity for telcos to evolve and take advantage of new markets.

New business models are starting to deliver

It is increasingly clear which new business models can be successful for telcos, and the pressure on the existing business model is no longer theoretical, it is a matter of substantial reality for most if not all telcos. The most advanced telcos have been trying out new models and some winning examples are emerging in the areas of content, enterprise ICT and B2B2C enablers.

A new virtualised technological platform will enable new ways of working

The emergence of SDN and NFV is creating a technological platform that is much more capable of delivering and supporting the agility required to deliver and sustain new businesses and new network propositions at speed than the traditional network/IT split. This will radically change both the operator and vendor industry landscape over the next few years.

In addition, and combined with the likely shape of 5G as a technology to further reduce mobile network latency, the future technological ‘shape’ of telcos looks like a highly distributed ICT infrastructure placing huge and computing resources very close to most customers. This will create many different business opportunities for telcos and not least in the delivery of content, enterprise ICT, and digital commerce.

It is becoming clearer how to organise and manage the change

The management and organisational techniques to create and sustain digital businesses are no longer a complete mystery, even though they are still evolving. And there is an increasing body, if not yet a ‘critical mass’, of people in the telecoms industry willing and able to embrace these approaches.

Time for a new ‘Telco 2.0’ vision

We believe that telcos (and their partners) that harness these insights will be best placed to maximise value creation in the future, and our research and consulting services are designed to help telecoms industry clients achieve success faster and more effectively in this future. To this end, we will shortly be setting out a new vision for ‘Telco 2.0’ – what a telecoms operator should be to create maximum value in the future, and how to get there.

How 5G is Disrupting Cloud and Network Strategy Today

5G – cutting through the hype

As with 3G and 4G, the approach of 5G has been heralded by vast quantities of debate and hyperbole. We contemplated reviewing some of the more outlandish statements we’ve seen and heard, but for the sake of brevity and progress we’ll concentrate in this report on the genuine progress that has also occurred.

A stronger definition: a collection of related technologies

Let’s start by defining terms. For us, 5G is a collection of related technologies that will eventually be incorporated in a 3GPP standard replacing the current LTE-A. NGMN, the forum that is meant to coordinate the mobile operators’ requirements vis-à-vis the vendors, recently issued a useful document setting out what technologies they wanted to see in the eventual solution or at least have considered in the standards process.

Incremental progress: ‘4.5G’

For a start, NGMN includes a variety of incremental improvements that promise substantially more capacity. These are things like higher modulation, developing the carrier-aggregation features in LTE-A to share spectrum between cells as well as within them, and improving interference coordination between cells. These are uncontroversial and are very likely to be deployed as incremental upgrades to existing LTE networks long before 5G is rolled out or even finished. This is what some vendors, notably Huawei, refer to as 4.5G.

Better antennas, beamforming, etc.

More excitingly, NGMN envisages some advanced radio features. These include beamforming, in which the shape of the radio beam between a base station and a mobile station is adjusted, taking advantage of the diversity of users in space to re-use the available radio spectrum more intensely, and both multi-user and massive MIMO (Multiple Input/Multiple Output). Massive MIMO simply means using many more antennas – at the moment the latest equipment uses 8 transmitter and 8 receiver antennas (8T*8R), whereas 5G might use 64. Multi-user MIMO uses the variety of antennas to serve more users concurrently, rather than just serving them faster individually. These promise quite dramatic capacity gains, at the cost of more computationally intensive software-defined radio systems and more complex antenna designs.Although they are cutting-edge, it’s worth pointing that 802.11ac Wave 2 WiFi devices shipping now have these features, and it is likely that the WiFi ecosystem will hold a lead in these for some considerable length of time.

New spectrum

NGMN also sees evolution towards 5G in terms of spectrum. We can divide this into a conservative and a radical phase – in the first, conservative phase, 5G is expected to start using bands below 6GHz, while in the second, radical phase, the centimetre/millimetre-wave bands up to and above 30GHz are in discussion. These promise vastly more bandwidth, but as usual will demand a higher density of smaller cells and lower transmitter power levels. It’s worth pointing out that it’s still unclear whether 6GHz will make the agenda for this year’s WRC-15 conference, and 60GHz may or may not be taken up in 2019 at WRC-19, so spectrum policy is a critical path for the whole project of 5G.

Full duplex radio – doubling capacity in one stroke

Moving on, we come to some much more radical proposals and exotic technologies. 5G may use the emerging technology of full-duplex radio, which leverages advances in hardware signal processing to get rid of self-interference and make it possible for radio devices to send and receive at the same time on the same frequency, something hitherto thought impossible and a fundamental issue in radio. This area has seen a lot of progress recently and is moving from an academic research project towards industrial status. If it works, it promises to double the capacity provided by all the other technologies together.

A new, flatter network architecture?

A major redesign of the network architecture is being studied. This is highly controversial. A new architecture would likely be much “flatter” with fewer levels of abstraction (such as the encapsulation of Internet traffic in the GTP protocol) or centralised functions. This, however, would be a very radical break with the GSM-inspired practice that worked in 2G, 3G, and in an adapted form in 4G. However, the very demanding latency targets we will discuss in a moment will be very difficult to satisfy with a centralised architecture.

Content-centric networking

Finally, serious consideration is being given to what the NGMN calls information-based networking, better known to the wider community as either name-based networking, named-data networking, or content-centric networking, as TCP-Reno inventor Van Jacobsen called it when he introduced the concept in a now-classic lecture. The idea here is that the Internet currently works by mapping content to domain names to machines. In content-centric networking, users request some item of content, uniquely identified by a name, and the network finds the nearest source for it, thus keeping traffic localised and facilitating scalable, distributed systems. This would represent a radical break with both GSM-inspired and most Internet practice, and is currently very much a research project. However, code does exist and has even beenimplemented using the OpenFlow NFV platform, and IETF standardisation is under way.

The mother of all stretch targets

5G is already a term associated with implausibly grand theoretical maxima, like every G before it. However, the NGMN has the advantage that it is a body that serves first of all the interests of the operators, the customers, rather than the vendors. Its expectations are therefore substantially more interesting than some of the vendors’ propaganda material. It has also recently started to reach out to other stakeholders, such as manufacturing companies involved in the Internet of Things.

Reading the NGMN document raises some interesting issues about the definition of 5G. Rather than set targets in an absolute sense, it puts forward parameters for a wide range of different use cases. A common criticism of the 5G project is that it is over-ambitious in trying to serve, for example, low bandwidth ultra-low power M2M monitoring networks and ultra-HD multicast video streaming with the same network. The range of use cases and performance requirements NGMN has defined are so diverse they might indeed be served by different radio interfaces within a 5G infrastructure, or even by fully independent radio networks. Whether 5G ends up as “one radio network to rule them all”, an interconnection standard for several radically different systems, or something in between (for example, a radio standard with options, or a common core network and specialised radios) is very much up for debate.

In terms of speed, NGMN is looking for 50Mbps user throughput “everywhere”, with half that speed available uplink. Success is defined here at the 95th percentile, so this means 50Mbps to 95% geographical coverage, 95% of the time. This should support handoff up to 120Km/h. In terms of density, this should support 100 users/square kilometre in rural areas and 400 in suburban areas, with 10 and 20 Gbps/square km capacity respectively. This seems to be intended as the baseline cellular service in the 5G context.

In the urban core, downlink of 300Mbps and uplink of 50Mbps is required, with 100Km/h handoff, and up to 2,500 concurrent users per square kilometre. Note that the density targets are per-operator, so that would be 10,000 concurrent users/sq km when four MNOs are present. Capacity of 750Gbps/sq km downlink and 125Gbps/sq km uplink is required.

An extreme high-density scenario is included as “broadband in a crowd”. This requires the same speeds as the “50Mbps anywhere” scenario, with vastly greater density (150,000 concurrent users/sq km or 30,000 “per stadium”) and commensurately higher capacity. However, the capacity planning assumes that this use case is uplink-heavy – 7.5Tbps/sq km uplink compared to 3.75Tbps downlink. That’s a lot of selfies, even in 4K! The fast handoff requirement, though, is relaxed to support only pedestrian speeds.

There is also a femtocell/WLAN-like scenario for indoor and enterprise networks, which pushes speed and capacity to their limits, with 1Gbps downlink and 500Mbps uplink, 75,000 concurrent users/sq km or 75 users per 1000 square metres of floor space, and no significant mobility. Finally, there is an “ultra-low cost broadband” requirement with 10Mbps symmetrical, 16 concurrent users and 16Mbps/sq km, and 50Km/h handoff. (There are also some niche cases, such as broadcast, in-car, and aeronautical applications, which we propose to gloss over for now.)

Clearly, the solution will have to either be very flexible, or else be a federation of very different networks with dramatically different radio properties. It would, for example, probably be possible to aggregate the 50Mbps everywhere and ultra-low cost solutions – arguably the low-cost option is just the 50Mbps option done on the cheap, with fewer sites and low-band spectrum. The “broadband in a crowd” option might be an alternative operating mode for the “urban core” option, turning off handoff, pulling in more aggregated spectrum, and reallocating downlink and uplink channels or timeslots. But this does begin to look like at least three networks.

Latency: the X factor

Another big stretch, and perhaps the most controversial issue here, is the latency requirement. NGMN draws a clear distinction between what it calls end-to-end latency, aka the familiar round-trip time measurement from the Internet, and user-plane latency, defined thus:

Measures the time it takes to transfer a small data packet from user terminal to the Layer 2 / Layer 3 interface of the 5G system destination node, plus the equivalent time needed to carry the response back.

That is to say, the user-plane latency is a measurement of how long it takes the 5G network, strictly speaking, to respond to user requests, and how long it takes for packets to traverse it. NGMN points out that the two metrics are equivalent if the target server is located within the 5G network. NGMN defines both using small packets, and therefore negligible serialisation delay, and assuming zero processing delay at the target server. The target is 10ms end-to-end, 1ms for special use cases requiring low latency, or 50ms end-to-end for the “ultra-low cost broadband” use case. The low-latency use cases tend to be things like communication between connected cars, which will probably fall under the direct device-to-device (D2D) element of 5G, but nevertheless some vendors seem to think it refers to infrastructure as well as D2D. Therefore, this requirement should be read as one for which the 5G user plane latency is the relevant metric.

This last target is arguably the biggest stretch of all, but also perhaps the most valuable.

The lower bound on any measurement of latency is very simple – it’s the time it takes to physically reach the target server at the speed of light. Latency is therefore intimately connected with distance. Latency is also intimately connected with speed – protocols like TCP use it to determine how many bytes it can risk “in flight” before getting an acknowledgement, and hence how much useful throughput can be derived from a given theoretical bandwidth. Also, with faster data rates, more of the total time it takes to deliver something is taken up by latency rather than transfer.

And the way we build applications now tends to make latency, and especially the variance in latency known as jitter, more important. In order to handle the scale demanded by the global Internet, it is usually necessary to scale out by breaking up the load across many, many servers. In order to make this work, it is usually also necessary to disaggregate the application itself into numerous, specialised, and independent microservices. (We strongly recommend Mary Poppendieck’s presentation at the link.)

The result of this is that a popular app or Web page might involve calls to dozens to hundreds of different services. Google.com includes 31 HTTP requests these days and Amazon.com 190. If the variation in latency is not carefully controlled, it becomes statistically more likely than not that a typical user will encounter at least one server’s 99th percentile performance. (EBay tries to identify users getting slow service and serve them a deliberately cut-down version of the site – see slide 17 here.)

We discuss this in depth in a Telco 2.0 Blog entry here.

Latency: the challenge of distance

It’s worth pointing out here that the 5G targets can literally be translated into kilometres. The rule of thumb for speed-of-light delay is 4.9 microseconds for each kilometre of fibre with a refractive index of 1.47. 1ms – 1000 microseconds – equals about 204km in a straight line, assuming no routing delay. A response back is needed too, so divide that distance in half. As a result, in order to be compliant with the NGMN 5G requirements, all the network functions required to process a data call must be physically located within 100km, i.e. 1ms, of the user. And if f the end-to-end requirement is taken seriously, the applications or content that they want must also be hosted within 1000km, i.e. 10ms, of the user. (In practice, there will be some delay contributed by serialisation, routing, and processing at the target server, so this would actually be somewhat more demanding.)

To achieve this, the architecture of 5G networks will need to change quite dramatically. Centralisation suddenly looks like the enemy, and middleboxes providing video optimisation, deep packet inspection, policy enforcement, and the like will have no place. At the same time, protocol designers will have to think seriously about localising traffic – this is where the content-centric networking concept comes in. Given the number of interested parties in the subject overall, it is likely that there will be a significant period of ‘horse-trading’ over the detail.

It will also need nothing more or less than a CDN and data-centre revolution. Content, apps, or commerce hosted within this 1000km contour will have a very substantial competitive advantage over those sites that don’t move their hosting strategy to take advantage of lower latency. Telecoms operators, by the same token, will have to radically decentralise their networks to get their systems within the 100km contour. Those content, apps, or commerce sites that move closer in still, to the 5ms/500km contour or further, will benefit further. The idea of centralising everything into shared services and global cloud platforms suddenly looks dated. So might the enormous hyperscale data centres one day look like the IT equivalent of sprawling, gas-guzzling suburbia? And will mobile operators become a key actor in the data-centre economy?

  • Executive Summary
  • Introduction
  • 5G – cutting through the hype
  • A stronger definition: a collection of related technologies
  • The mother of all stretch targets
  • Latency: the X factor
  • Latency: the challenge of distance
  • The economic value of snappier networks
  • Only Half The Application Latency Comes from the Network
  • Disrupt the cloud
  • The cloud is the data centre
  • Have the biggest data centres stopped getting bigger?
  • Mobile Edge Computing: moving the servers to the people
  • Conclusions and recommendations
  • Regulatory and political impact: the Opportunity and the Threat
  • Telco-Cloud or Multi-Cloud?
  • 5G vs C-RAN
  • Shaping the 5G backhaul network
  • Gigabit WiFi: the bear may blow first
  • Distributed systems: it’s everyone’s future

 

  • Figure 1: Latency = money in search
  • Figure 2: Latency = money in retailing
  • Figure 3: Latency = money in financial services
  • Figure 4: Networking accounts for 40-60 per cent of Facebook’s load times
  • Figure 5: A data centre module
  • Figure 6: Hyperscale data centre evolution, 1999-2015
  • Figure 7: Hyperscale data centre evolution 2. Power density
  • Figure 8: Only Facebook is pushing on with ever bigger data centres
  • Figure 9: Equinix – satisfied with 40k sq ft
  • Figure 10: ETSI architecture for Mobile Edge Computing

 

Gigabit Cable Attacks This Year

Introduction

Since at least May, 2014 and the Triple Play in the USA Executive Briefing, we have been warning that the cable industry’s continuous improvement of its DOCSIS 3 technology threatens fixed operators with a succession of relatively cheap (in terms of CAPEX) but dramatic speed jumps. Gigabit chipsets have been available for some time, with the actual timing of the roll-out being therefore set by cable operators’ commercial choices.

With the arrival of DOCSIS 3.1, multi-gigabit cable has also become available. As a result, cable operators have become the best value providers in the broadband mass markets: typically, we found in the Triple Play briefing, they were the cheapest in terms of price/megabit in the most common speed tiers, at the time between 50 and 100Mbps. They were sometimes also the leaders for outright speed, and this has had an effect. In Q3 2014, for the first time, Comcast had more high-speed Internet subscribers than it had TV subscribers, on a comparable basis. Furthermore, in Europe, cable industry revenues grew 4.6% in 2014 while the TV component grew 1.8%. In other words, cable operators are now broadband operators above all.

Figure 1: Comcast now has more broadband than TV customers

Source: STL Partners, Comcast Q1 2015 trending schedule 

In the December, 2014 Will AT&T shed copper, fibre-up, or buy more content – and what are the lessons? Executive Briefing, we covered the impact on AT&T’s consumer wireline business, and pointed out that its strategy of concentrating on content as opposed to broadband has not really delivered. In the context of ever more competition from streaming video, it was necessary to have an outstanding broadband product before trying to add content revenues. This was something which their DSL infrastructure couldn’t deliver in the context of cable or fibre competitors. The cable competition concentrated on winning whole households’ spending with broadband, with content as an upsell, and has undermined the wireline base to the point where AT&T might well exit a large proportion of it or perhaps sell off the division, refocusing on wireless, DirecTV satellite TV, and enterprise. At the moment, Comcast sees about 2 broadband net-adds for each triple-play net-add, although the increasing numbers of business ISP customers complicate the picture.

Figure 2: Sell the broadband and you get the whole bundle. About half Comcast’s broadband growth is associated with triple-play signups

Source: STL, Comcast Q1 trending schedule

Since Christmas, the trend has picked up speed. Comcast announced a 2Gbps deployment to 1.5 million homes in the Atlanta metropolitan area, with a national deployment to follow. Time Warner Cable has announced a wave of upgrades in Charlotte, North Carolina that ups their current 30Mbps tier to 200Mbps and their 50Mbps tier to 300Mbps, after Google Fiber announced plans to deploy in the area. In the UK, Virgin Media users have been reporting unusually high speeds, apparently because the operator is trialling a 300Mbps speed tier, not long after it upgraded 50Mbps users to 152Mbps.

It is very much worth noting that these deployments are at scale. The Comcast and TWC rollouts are in the millions of premises. When the Virgin Media one reaches production status, it will be multi-million too. Vodafone-owned KDG in Germany is currently deploying 200Mbps, and it will likely go further as soon as it feels the need from a tactical point of view. This is the advantage of an upgrade path that doesn’t require much trenching. Not only can the upgrades be incremental and continuous, they can also be deployed at scale without enormous disruption.

Technology is driving the cable surge

This year’s CES saw the announcement, by Broadcom, of a new system-on-a-chip (SoC) for cable modems/STBs that integrates the new DOCSIS 3.1 cable standard. This provides for even more speeds, theoretically up to 7Gbps downlink, while still providing a broadcast path for pure TV. The SoC also, however, includes a WLAN radio with the newest 802.11ac technology, including beamforming and 4×4 multiple-input and multiple-output (MIMO), which is rated for gigabit speeds in the local network.

Even taking into account the usual level of exaggeration, this is an impressive package, offering telco-hammering broadband speeds, support for broadcast TV, and in-home distribution at speeds that can keep up with 4K streaming video. These are the SoCs that Comcast will be using for its gigabit cable rollouts. STMicroelectronics demonstrated its own multigigabit solution at CES, and although Intel has yet to show a DOCSIS 3.1 SoC, the most recent version of its Puma platform offers up to 1.6Gbps in a DOCSIS 3 network. DOCSIS 3 and 3.1 are designed to be interoperable, so this product has a future even after the head-ends are upgraded.

Figure 3: This is your enemy. Broadcom’s DOCSIS3.1/802.11ac chipset

Source: RCRWireless 

With multiple chipset vendors shipping products, CableLabs running regular interoperability tests, and large regional deployments beginning, we conclude that the big cable upgrade is now here. Even if cable operators succeed in virtualising their set-top box software, you can’t provide the customer-end modem nor the WiFi router from the cloud. It’s important to realise that FTTH operators can upgrade in a similarly painless way by replacing their optical network terminals (ONTs), but DSL operators need to replace infrastructure. Also, ONTs are often independent from the WLAN router or other customer equipment , so the upgrade won’t necessarily improve the WiFi.

WiFi is also getting a major upgrade

The Broadcom device is so significant, though, because of the very strong WiFi support built in with the cable modem. Like the cable industry, the WiFi ecosystem has succeeded in keeping up a steady cycle of continuous improvements that are usually backwards compatible, from 802.11b through to 802.11ac, thanks to a major standards effort, the scale that Intel and Apple’s support gives us, and its relatively light intellectual property encumbrance.

802.11ac adds a number of advanced radio features, notably multiple-user MIMO, beamforming, and higher-density modulation, that are only expected to arrive in the cellular network as part of 5G some time after 2020, as well as some incremental improvements over 802.11n, like additional MIMO streams, wider channels, and 5GHz spectrum by default. As a result, the industry refers to it as “gigabit WiFi”, although the gigabit is a per-station rather than per-user throughput.

The standard has been settled since January 2014, and support is available in most flagship-class devices and laptop chipsets since then, so this is now a reality. The upgrade of the cable networks to 802.11ac WiFi backed with DOCSIS3.1 will have major strategic consequences for telcos, as it enables the cable operators and any strategic partners of theirs to go in even harder on the fixed broadband business and also launch a WiFi-plus-MVNO mobile service at the same time. The beamforming element of 802.11ac should help them to support higher user densities, as it makes use of the spatial diversity among different stations to reduce interference. Cablevision already launched a mobile service just before Christmas. We know Comcast is planning to launch one sometime this year, as they have been hiring a variety of mobile professionals quite aggressively. And, of course, the CableWiFi roaming alliance greatly facilitates scaling up such a service. The economics of a mini-carrier, as we pointed out in the Google MVNO: What’s Behind It and What Are the Implications? Executive Briefing, hinge on how much traffic can be offloaded to WiFi or small cells.

Figure 4: Modelling a mini-carrier shows that the WiFi is critical

Source: STL Partners

Traffic carried on WiFi costs nothing in terms of spectrum and much less in terms of CAPEX (due to the lower intellectual property tax and the very high production runs of WiFi equipment). In a cable context, it will often be backhauled in the spare capacity of the fixed access network, and therefore will account for very little additional cost on this score. As a result, the percentage of data traffic transferred to WiFi, or absorbed by it, is a crucial variable. KDDI, for example, carries 57% of its mobile data traffic on WiFi and hopes to reach 65% by the end of this year. Increasing the fraction from 30% to 57% roughly halved their CAPEX on LTE.

A major regulatory issue at the moment is the deployment of LTE-LAA (Licensed-Assisted Access), which aggregates unlicensed radio spectrum with a channel from licensed spectrum in order to increase the available bandwidth. The 5GHz WiFi band is the most likely candidate for this, as it is widely available, contains a lot of capacity, and is well-supported in hardware.

We should expect the cable industry to push back very hard against efforts to rush deployment of LTE-LAA cellular networks through the regulatory process, as they have a great deal to lose if the cellular networks start to take up a large proportion of the 5GHz band. From their point of view, a major purpose of LTE-LAA might be to occupy the 5GHz and deny it to their WiFi operations.

  • Executive Summary
  • Introduction
  • Technology is driving the cable surge
  • WiFi is also getting a major upgrade
  • Wholesale and enterprise markets are threatened as well
  • The Cable Surge Is Disrupting Wireline
  • Conclusions
  • STL Partners and Telco 2.0: Change the Game 
  • Figure 1: Comcast now has more broadband than TV customers
  • Figure 2: Sell the broadband and you get the whole bundle. About half Comcast’s broadband growth is associated with triple-play signups
  • Figure 3: This is your enemy. Broadcom’s DOCSIS3.1/802.11ac chipset
  • Figure 4: Modelling a mini-carrier shows that the WiFi is critical
  • Figure 5: Comcast’s growth is mostly driven by business services and broadband
  • Figure 6: Comcast Business is its growth start with a 27% CAGR
  • Figure 7: Major cablecos even outdo AT&T’s stellar performance in the enterprise
  • Figure 8: 3 major cable operators’ business services are now close to AT&T or Verizon’s scale
  • Figure 9: Summary of gigabit deployments
  • Figure 10: CAPEX as a % of revenue has been falling for some time…