Uber and Tesla: What telcos should do

Introduction

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

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

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

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

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

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

Self-driving disruption

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

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

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

Contents:

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

Figures:

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

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Telco-Driven Disruption: Hits & Misses (Part 1)

Introduction

Part of STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the role of telcos in disrupting the digital economy. It analyses a variety of disruptive moves by telcos, some long-standing and well established, others relatively new. It covers telcos’ attempts to reinvent digital commerce in South Korea and Japan, the startling success of mobile money services in east Africa, BT’s huge outlay on sports content, AT&T’s multi-faceted smart home platform, Deutsche Telekom’s investments in online marketplaces and Orange’s innovative Libon communications service.

In each case, this briefing describes the underlying strategy, the implementation and the results, before setting out STL’s key takeaways. The conclusions section outlines the lessons other would-be disruptors can learn from telcos’ attempts to move into new markets and develop new value propositions.

Note, this report is not exhaustive. The examples it covers are intended to be representative. Part 2 of this report will analyse other telcos who have successfully disrupted adjacent markets or created new ones. In particular, it will take a close look at NTT DOCOMO, Japan’s leading mobile operator, which has built up a major revenue stream from new businesses. DOCOMO reported a 13% year-on-year increase in revenues from its new businesses in the six months to September 30th 2014 to 363 billion Japanese yen (more than US$3 billion). Its target for the full financial year is 770 billion yen (almost US$6.5 billion). Revenues from its Smart Life suite of businesses, which provide consumers with advice, information, security, cloud storage and other lifestyle services, rose 18% to 205 billion yen in the six months to September 30th 2014, while its dmarket content store now has 7.8 million subscribers. In the six months to September 30th, the total value of dmarket transactions rose 30% year-on-year to 34.6 billion yen.

In South Korea, leading telco KT is trying to use smartphone-based apps and services to disrupt the digital commerce market, as are the leading U.K. and U.S. mobile operators through their respective Weve and Softcard joint ventures. In the Philippines, Smart Communications and Globe Telecom have recast the financial services market by enabling people to send each other money using text messages.

Several major telcos are seeking to use their network infrastructure to change the game in the cloud services market. For example, U.S. telco Verizon has made a major push into cloud services, spending US$1.4 billion to acquire specialist Terremark in 2011. At the same time, Verizon and AT&T are having to respond to an aggressive play by T-Mobile USA to reshape the U.S. telecoms market with its Un-carrier strategy.

Some of these companies and their strategies are covered in other STL Partners reports, including:

The Telco 2.0 Transformation Index Benchmarking Report (covers Verizon)
Apple Pay & Weve Fail: A Wake Up Call (covers Weve joint venture)
Free-T-Mobile: Disruptive Revolution or a Bridge Too Far? (covers T-Mobile USA)
Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players (covers NTT DOCOMO)

Telcos can and do disrupt

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

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

Although established telcos have generally been cautious about pursuing disruption, several have succeeded in creating entirely new value propositions, effectively disrupting either their core business or adjacent industry sectors. In some cases, disruptive moves by telcos have primarily been defensive in that their main objective is to reduce churn in the core business. In other cases, telcos have gone on the offensive, moving into new markets in search of new revenues (see Figure 1).

Figure 1: Representative examples of disruptive plays driven by telcos

Source: STL Partners

The next section of this paper explores the disruptive moves in the top right hand corner of Figure 1 – those that have taken telcos into new markets and have had a significant financial impact on their businesses.

Offensive, major financial impact

A classic disruptive play is to use existing assets and customer relationships to move into an adjacent market, open up a new revenue stream and build a major business. This is what Apple did with the iPhone and what Amazon did with cloud services. Several telcos have also followed this playbook. This section looks at three examples – SK Telecom’s SK Planet, Safaricom’s M-Pesa and KDDI’s au Smart Pass – and what other companies in the digital economy can learn from these largely successful moves. Unlike many disruptive moves by telcos, the three businesses covered in this section have had sufficient impact to properly register on investors’ radar screens. They have moved the needle for their parent’s telcos and given their investors confidence in their ability to innovate.

SK Planet – an ambitious mobile commerce play

Owned by SK Telecom, SK Planet is a major broker in South Korea’s world-leading mobile commerce market. It has developed several two-sided online services that are similar in some respects to those offered by Google. SK Planet operates the T Map, a turn-by-turn navigation service, the T Store Android app store, the Smart Wallet payment, loyalty and couponing service, the OK Cashbag loyalty marketing programme and the 11th St online marketplace.

Strategy

Taking advantage of South Koreans’ appetite for new technologies, SK Telecom is using its home market as a test bed for mobile commerce solutions that could be deployed more widely. As well as seeking to generate revenues from enabling payments, advertising, loyalty, couponing and other forms of direct marketing in South Korea, it is aiming to become a leading mobile commerce player in other markets in Asia and North America.

SK Telecom’s approach has been to launch services early and then refine these services in response to feedback from the Korean market. It launched a mobile couponing service, for example, as early as 2008. To reduce the impact of corporate bureaucracy, in 2011, SK Telecom placed its digital commerce activities into a separate company, called SK Planet. The new entity has since focused on the development of a two-sided platform that aims to provide consumers with convenient shopping channels and merchants and brands with a wide range of marketing solutions both online and in the bricks and mortar arena. Although its services are over-the-top, in the sense that they don’t require consumers to use SK Telecom, SK Planet continues to work closely with SK Telecom – its sole owner.

Downstream, SK Planet is trying to differentiate itself by putting consumers’ interests first, giving them considerable control and transparency over the digital marketing they receive. Upstream, SK Planet is putting a lot of emphasis on helping traditional bricks and mortars stores go digital and reverse so-called showrooming, so that consumers research products online, but actually buy them from bricks and mortar retailers.

SK Planet CEO Jinwoo So talks about enabling “Next Commerce” by which he means the seamless integration of online and bricks and mortar commerce. “Just as Amazon became the global leader in e-commerce by revolutionizing the industry, SK Planet aims to become the global ‘Next Commerce’ leader in the offline market by driving mobile innovation that will eventually break down the walls which separate the online and offline worlds,” he says.

Estimating the offline commerce market in South Korea is worth 230 trillion won (more than 210 US billion dollars), SK Planet is aggressively adapting its existing digital commerce platforms, which are underpinned by SK Telecom’s network assets, for mobile commerce. It is also making extensive use of the big data generated by its existing platforms to hone its offerings.

At the 2014 Mobile World Congress, SK Planet CEO Jinwoo So outlined how SK Planet has worked closely with SK Telecom to develop algorithms that use customer data to predict churn and provide personalized recommendations and offers. “We combined the traditional data mining with text mining,” he said. “How people create the search criteria or the sites they visit, we came up with a very unique formula, which gives up much two times better performance than before. … In 11th street, we have achieved almost three times better performance by applying our recommendation engine, which we developed. Now we are trying to prove the ROI for marketing budgets for brands and merchants.”

Introduction
Executive Summary
Telcos can and do disrupt
Offensive, major financial impact (Strategy, Implementation, Results)
SK Planet – an ambitious mobile commerce play
M-Pesa – reinventing financial services
KDDI au Smart Pass – curating online commerce
Offensive, limited financial impact (Strategy, Implementation, Results)
Deutsche Telekom’s start-stop Scout 24 investments
AT&T Digital Life – slow burn for the smart home
Defensive, major financial impact (Strategy, Implementation, Results)
BT Sport and BT Wi-Fi – High perceived value
Defensive, minor financial impact (Strategy, Implementation, Results)
Orange Libon – disrupting the disruptors
Conclusions
STL Partners and Telco 2.0: Change the Game

Figure 1: Representative examples of disruptive plays driven by telcos
Figure 2: SK Planet’s Syrup Wallet stores loyalty cards, coupons and payment cards
Figure 3: Shopkick enables US retailers to interact with customers in store
Figure 4: SK Planet is an increasingly important part of SK Telecom’s business
Figure 5: The flywheel effect: how upstream partners can increase relevance
Figure 6: M-Pesa continues to grow in Kenya seven years after launch
Figure 7: Vodacom Tanzania has made it easy to register for M-Pesa
Figure 8: KDDI’s revenues and profits from value added services grow steadily
Figure 9: au Smart Pass is bolstering KDDI’s ARPU
Figure 10: Immobilienscout24 has seen a steady increase in traffic
Figure 11: AT&T Digital Life gives consumers remote control over their homes
Figure 12: Investors value BT Sport’s contribution
Figure 13: BT Sport has driven broadband net-adds, but at considerable expense
Figure 14: Orange’s multi-faceted positioning of Libon in the App Store

The M-Commerce ‘Land-Grab’: Telcos Vs. Apple & Google

Summary: The mobile commerce market is going through a critical ‘land-grab’ phase. This report reviews the strategies and tactics of the leading telcos and Internet players in Asia, Europe and North America as they seek to use the mobile medium to become an intermediary between buyers and sellers. It considers the pivotal role of the digital wallet, ‘big data’, the race to acquire merchants and the key alliances between telcos, banks, payment networks and Internet players (December 2012, Executive Briefing Service, Dealing with Disruption Stream).

Digital Commerce Flywheel December 2012

Below is an extract from this 33 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Dealing with Disruption Stream here. We’ll be publishing more on Digital Commerce in in 2013 and it will be a key theme at our Executive Brainstorms in Silicon Valley (March 2013), Europe (London, June 2013), Digital Arabia (Dubai, November 2013), and Digital Asia (Singapore, December 2012). Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Introduction

STL defines Digital Commerce 2.0 as the use of new digital and mobile technologies, such as smartphones, to bring buyers and sellers together more efficiently and effectively. Fast growing usage of mobile, social and local services is opening up opportunities to provide consumers with highly-relevant advertising and marketing services, underpinned by secure and easy-to-use payment services. By giving people easy access to information, vouchers, loyalty points and electronic payment services, smartphones can be used to make shopping in bricks and mortar stores as interactive as shopping through web sites and mobile apps.

Telcos and their partners could play a major role in enabling digital commerce 2.0 as intermediaries that create platforms that help to bring together buyers and sellers. But Internet companies, banks, payment networks and others are also seeking to act as digital intermediaries between merchants and consumers.

This executive briefing builds on STL Partners’ Strategy Report, Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon, which examines the mobile commerce strategies of the major Internet players, and STL’s Digital Commerce 2.0 Executive Brainstorm events in London, New York, San Francisco and Singapore.

This report reviews the strategies and tactics of the leading telcos and Internet players aiming to use the mobile medium to become an intermediary between buyers and sellers. It considers the pivotal role of the digital wallet, the race to acquire merchants and the key alliances in this space. It sets the scene for a forthcoming report that will make recommendations for how telcos and their partners should build a compelling mobile commerce proposition.

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Executive Summary

Smartphones are extending digital commerce out of the home and the office and on to the street and in to the store. With full web browsers and a host of apps, these handsets enable consumers to access information and interact with merchants and brands from anywhere and anytime.

The wallet land-grab

As smartphones go mass market, Internet companies, telcos, banks, payment networks and other companies are in land-grab mode – racing to sign up merchants and consumers for platforms that could enable them to secure a pivotal (and lucrative) position in the fast growing digital commerce market.

Across Europe, the Americas, Asia and parts of Africa, telcos, Internet players, payment networks and banks are looking to deploy their own digital wallets in the belief that these apps will become a key strategic platform. A digital wallet – software that stores debit and credit card information, loyalty points, electronic vouchers and cash – could be used to interact with consumers while they are actually shopping, brokering targeted offers and promotions. For marketers, the wallet offers a golden opportunity to reach a consumer on the cusp of making a purchase.

While Internet players, such as PayPal and Apple, tend to be focused on signing up users for their online wallets, telcos, such as AT&T and Vodafone, are developing a mobile app-centric solution that uses the SIM card for authentication.

In fact, you need both. To become a market leader, a digital wallet will have to be very easy to use both online and at point of sale. Most consumers will want to use the same digital wallet across a PC, a mobile handset and a tablet, so they can track all of their spending and offers easily. At the same time, wallets that are used both online and at point of sale will be able to generate a far more complete and comprehensive picture of the consumers’ shopping habits.

More and better data

Akin to a search engine, the digital wallet could also enable companies to capture valuable data that can be used to improve the targeting of offers and promotions. For example, the transactional data captured by a digital wallet may show what kinds of restaurants the consumer likes to eat at, enabling the delivery of appropriate vouchers. The data generated by a digital wallet could be used to broker highly-targeted offers, thereby enabling the wallet supplier to secure a pivotal and lucrative position in the digital commerce value chain.

However, it will be important for wallet suppliers to give individuals a high degree of control over their data, enabling them to delete or amend information captured by the wallet and even take that data to with them to a new wallet. While that may seem counterintuitive, both individuals and regulators are more likely to trust and accept services that are transparent and put the consumer in control.

Fragmentation could equal failure

The large number of players targeting the mobile commerce market with a diverse range of approaches risks confusing both consumers and merchants. There is a danger that both groups will play a waiting game, preferring to see which solutions rise to the top and which flop. Many stakeholders, particularly upmarket retailers and brands, will be waiting for Apple to roll out a mobile commerce proposition they can use to target the many affluent owners of iPhones. In other words, the land-grab may end up being a very drawn out and expensive process for all involved.

The Digital Commerce 2.0 Gold Rush

The opportunity

Digital commerce is being reinvented for the post-PC era. The combination of Internet and mobile technologies is enabling new forms of digital marketing, retailing and payments which could dramatically improve the efficiency and effectiveness of all kinds of businesses. Internet companies, telcos, banks, payment networks and other companies are in land-grab mode – racing to sign up merchants and consumers for platforms that could enable them to secure a pivotal (and potentially lucrative) position in the fast growing digital commerce market. Although it is early days for Digital Commerce 2.0, the gold rush is in full swing.

The advent of mass-market smartphones, with touchscreens, full Internet browsers and an array of feature-rich apps, is a game changer that is profoundly impacting the way in which people and businesses buy and sell. Consumers are already using these smartphones to access social, local and mobile digital services and make smarter purchase decisions. As they shop, they can easily canvas opinion via Facebook, read product reviews on Amazon or compare prices across multiple stores.

STL Partners’ strategy report, Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon, identified authentication and payments and brokering online advertising and marketing as two of the key battlegrounds in the Great Game being played out by the Internet giants and the leading telcos.

Although hundreds of millions of people have already entrusted their credit or debit card details to eBay, Facebook, Apple, Google or Amazon and use these web giants’ online payment services to pay for goods, services or digital content online, telcos could yet become key players. Approximately three billion people worldwide have a billing relationship with one or more telco and carrier billing can be more secure and convenient that other payment mechanisms, particularly for people lacking debit and credit cards. Some Internet players, such as Google, would like to tap telcos’ assets and processes to help them authenticate consumers.

Brokering online advertising and marketing is clearly Google and Facebook’s core business, while Microsoft, Apple and Amazon see it as potential source of revenue growth. Different telcos have adopted different approaches to this market. While some, such as Telefonica O2, see advertising and marketing as a potential source of revenue growth, other telcos prefer to focus on providing enablers to specialists, such as Facebook. Figure 1 shows how Telefonica, an advanced telco, compares with the leading Internet players across key enablers of digital commerce. Green indicates a strong position, amber, a middling position and red, a weak position, while light blue indicates no position.

Figure 1 splits the enablers according to the two sides digital commerce platform – the blue set of enablers are aimed at downstream customers (typically consumers), while the red set of enablers are aimed at upstream customers (typically merchants and brands). Some of the Internet players, notably Google and Amazon, have a strong position on both sides of this platform.

As it stands, the online advertising and marketing market is Google’s and Facebook’s to lose. The more data and inventory you have, the more precise the targeting and the bigger the target audience. STL Partners believes only telcos with major in-market scale, such as China Mobile or NTT DOCOMO, should consider competing head-to-head with the web giants.

But, in developing countries, in particular, where most people don’t have smartphones, SMS and MMS remain a powerful marketing medium with plenty of scope to grow. There is also an opportunity for telcos to act as a trusted intermediary, helping consumers concerned about privacy to control and derive value from their personal data.

Figure 1: How a leading telco stacks up with Internet players on digital commerce

Telco vs Internet Players on Digital Commerce December 2012

Source: STL Partners

Perhaps the biggest growth opportunity in online marketing and advertising is to help merchants and brands use social, local and mobile services to stimulate demand, engage better with customers and potential customers and achieve a higher return on investment (ROI) from their marketing spend. Amazon, for example, is pursuing this market through its Amazon Local service, which emails offers from local merchants to consumers in specific geographic areas.

In theory, at least, targeting marketing at consumers in the right geography and the right demographic group should be far more effective than simply displaying adverts to anyone who conducts an Internet search using a specific term.

Highly-targeted direct marketing and loyalty programmes could be a much bigger opportunity than conventional advertising

In the U.S., the direct marketing market (US$ 139 billion) is worth more than three times the U.S. advertising market (US$39 billion), according to some estimates (see Figure 2).

Figure 2: A breakdown of the U.S. direct marketing and advertising market

U.S. Direct Marketing & Advertising Market December 2012

Source: STL Partners

The extensive data being generated by smartphones can give companies’ real-time information on where their customers are and what they are doing. That data can be used to improve merchants’ marketing, advertising, stock management, fulfilment and customer care. For example, a smartphone’s sensors can detect how fast the device is moving and in what direction, so a merchant could see if a potential customer is driving or walking past their store.

Moreover, mobile technologies also make it easier for merchants and brands to tell whether a specific marketing activity actually led to a sale. If a consumer uses their smartphone to research a product and then pay for the product, the retailer could gain a complete view of the whole commerce cycle, enabling it to see exactly what kind of marketing results in transactions.

With merchants looking to close the loop in this way, marketing and advertising brokers, such as Google, and some telcos, are increasingly moving into the payments space. In general, their approach is to roll out digital wallets that can be used to complete both online transactions and point of sale transactions (either using a contactless technology, such as NFC, or a mobile network-based solution).

Although payments itself is a low margin business, it could be an important pillar of a broader and much more lucrative digital commerce offering – American Express estimates that merchants in the US spend four to five times as much on marketing activities, such as loyalty programmes and offers, as they do on payments. In fact, transactions are just one element of a far bigger flywheel that drives the digital commerce market (see Figure 3).

Figure 3: The key elements of the digital commerce flywheel

Source: STL Partners

Actual deployments

With potentially hundreds of billions of dollars of business in play, an array of companies around the world are making significant investments in digital commerce services. They are generally experimenting with and testing different approaches and business models, particularly in the areas of mobile advertising, location-based marketing, payments and mobile money transfers.

In the following sections we outline examples of services we believe will have the most market impact, either because they have already gained market traction or because they have the backing of powerful companies. These examples illustrate the diversity of the players involved and the approaches they have adopted.

To read the note in full, including the following sections detailing support for the analysis…

Europe – experiments abound
The Weve joint venture
Cityzi
Moneta
Turkcell
WyWallet
Visa Europe
PayPal
The Mobile Money Network
CellPay
Pingit from Barclays
Asia – leading the world
South Korea
The Philippines
Bharti Airtel
SingTel
Japan
China
The U.S. – gang culture
The Merchant Customer Exchange
Starbucks and Square
American Express
PayPal
The Isis joint venture
Minutrade
Global players – grappling with glocal
Google
Apple
Vodafone and Visa
Telefonica and Visa
Deutsche Telekom and MasterCard
Conclusions and Key takeaways
Index

…and the following figures…

Figure 1: How a leading telco stacks up with Internet players on digital commerce
Figure 2: A breakdown of the U.S. direct marketing and advertising market
Figure 3: The key elements of the digital commerce flywheel
Figure 4: Examples of mobile commerce activity in the U.K.
Figure 5: Where the Weve joint venture fits into Telefonica’s strategy
Figure 6: Examples of online wallets moving into mobile
Figure 7: How Isis compares with other mobile wallets in the US market
Figure 8: Google Wallet no longer needs to work directly with banks
Figure 9: Telefonica O2’s two sided strategy
Figure 10: The mobile commerce strategy of leading telcos
Figure 11: The mobile commerce strategy of leading Internet players
Figure 12: Giving consumers control over personal data

…Members of the Telco 2.0 Executive Briefing Subscription Serviceand the Telco 2.0 Dealing with Disruption Stream can download the full 33 page report in PDF format here. Non-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Companies and technologies covered: Mobile wallets, localized commerce, location based services, personal data, telco strategy, big data, mobile commerce, APIs, business models, SoLoMo, mobile advertising, mobile marketing, mobile payments, digital wallets.

Strategy 2.0: Google’s Strategic Identity Crisis

Summary: Google’s shares have made little headway recently despite its dominance in search and advertising, and it faces increasing regulatory threats in this area. It either needs to find new sources of value growth or start paying out dividends, like Microsoft, Apple (or indeed, a telco). Overall, this is resulting in something of a strategic identity crisis. A review of Google’s strategy and implications for Telcos. (March 2012, Executive Briefing Service, Dealing with Disruption Stream).

Google's Advertising Revenues Cascade

Below is an extract from this 24 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Dealing with Disruption Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £595 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003. We’ll also be discussing our findings and more on Google at the Silicon Valley (27-28 March) and London (12-13 June) New Digital Economics Brainstorms.

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Executive Summary

Google appears to be suffering from a strategic identity crisis. It is the giant of search advertising but it also now owns a handset maker, fibre projects, an increasingly fragmented mobile operating system, a social network of questionable success, and a driverless car programme (among other things). It has a great reputation for innovation and creativity, but risks losing direction and value by trying to focus on too many strategies and initiatives.

We believe that Google needs to stop trying to copy what Apple and Facebook are doing, de-prioritise its ‘Hail Mary’ hunt for a strategy (e.g. driverless cars), and continue to build new solutions that serve better the customers who are already willing to pay – namely, advertisers.

It is our view that the companies who have created most value in the market have done so by solving a customer problem really well. Apple’s recent success derives from creating a simpler and more beautiful way (platform + products) for people to manage their digital lives. People pay because it’s appealing and it works.

Google initially solved how people could find relevant information online and then, critically, how to use this to help advertisers get more customers. They do this so well that Google’s $37bn revenues continue to grow at double digit pace, and there’s plenty of headroom in the market for now. While the TV strategy may not yet be paying off, it would seem sensible to keep working at it to try to keep extending the reach of Google’s platform.

While Android keeps Google in the mobile game to a degree, and has certainly helped to constrain certain rivals, we think Google should cast a hard eye over its other competing and distracting activities: Motorola, Payments, Google +, Driverless Cars etc. Its management team should look at the size of the opportunity, the strength of the competition, and their ability to execute in each.

Pruning the projects might also lose Google an adversary or two, and it might also afford some reward to shareholders too. After all, even Apple has recently decided to pay back some cash to investors.

This may be very difficult for Google’s current leadership. Larry Page seems to have the restless instincts of the stereotypical Valley venture capitalist, hunting the latest ideas, and constantly trying to create the next big beautiful thing. The trouble is that this is Google in 2012, not 1995, and it looks to us at least that a degree of ‘sticking to the knitting’ within Google’s huge, profitable and growing search advertising business may be a better bet than the highly speculative (and expensive) ‘Hail Mary’ strategy route.

This may sound surprising coming from us, the inveterate fans of innovation at Telco 2.0, so we’d like to point out some important differences between the situations that Google and the telcos are in:

Google’s core markets are growing, not flat or shrinking, and are at a different life-stage to the telecoms market;
Google is global, rather than being confined to any given geography. There are many opportunities still out there.
We are not saying that Google should stop innovating, but we are saying it should focus its innovative energy more clearly on activities that grow the core business.

Introduction

In January this year, Google achieved a first – it missed the consensus forecast for its quarterly earnings. There is of course no magic in the consensus, which is an average of highly conventionalised guesses from a bunch of City analysts, but it is as good a moment as ever to review Google’s strategic position. If you bought Google stock at the beginning, you may not need to read this, as you’re probably very rich (the return since then is of the order of 400%). The entirety of this return, however, is accounted for by the 2004-2007 bull run. On a five-year basis, Google stock is ahead 30%, which sounds pretty impressive (a 6% annual return), but again, all the growth is accounted for by the last surge upwards over the summer of 2007. The peak was achieved on the 2nd of November, 2007.

As this chart shows, Google stock is still down about 9% from the peak, and perhaps more importantly, its path tracks Microsoft very closely indeed. Plus Microsoft investors get a dividend, whereas Google investors do not.

Figure 1: Google, Microsoft 2.0?

Source: Google Finance

Larry Page is reported to have said that “Google is no longer a “search company.” He says its model is now

“invent wild things that will help humanity, get them adopted by users, profit, and then use the corporate structure to keep inventing new things.”

No longer a search company? Take a look at the revenues. Out of Google’s $37.9bn in revenues in 2011, $36bn came from advertising, aka the flip side of Google Search. Despite a whole string of mammoth product launches since 2007, Google’s business is essentially what it was in 2007 – a massive search-based advertising machine.

Google’s Challenges

Our last Google coverage – Android: An Anti-Apple Virus ? and the Dealing with the Disruptors Strategy Report suggested that the search giant was suffering from a lack of direction, although some of this was accounted for by a deliberate policy of experimenting and shutting down failed initiatives.

Since then, Google has launched Google +, closed Google Buzz, and closed Google Wave while releasing it into a second life as an open-source project. It has been involved in major litigation over patents and in regulatory inquiries. It has seen an enormous boom in Android shipments but not necessarily much revenue. It is about to become a major hardware manufacturer by acquiring Motorola. And it has embarked on extensive changes to the core search product and to company-wide UI design.

In this note, we will explore Google’s activities since our last note, summarise key threats to the business and strategies to counter them, and consider if a bearish view of the company is appropriate.

We’ve found it convenient to organise Google’s business into several themed groups as follows:

1: Questionable Victories

Pyrrhic victory is defined as a victory so costly it is indistinguishable from defeat. Although there is nothing so bad at Google, it seems to have a knack of creating products that are hugely successful without necessarily generating cash. Android is exhibit A.

The obvious point here is surging, soaring growth – forecasts for Android shipments have repeatedly been made, beaten on the upside, adjusted upwards, and then beaten again. Android has hugely expanded the market for smartphones overall, caused seismic change in the vendor industry, and triggered an intellectual property war. It has found its way into an awe-inspiring variety of devices and device classes.

But questions are still hanging over how much actual money is involved. During the Q4 results call, a figure for “mobile” revenues of $2.5bn was quoted. This turns out to consist of advertising served to browsers that present a mobile device user-agent string. However, Google lawyer Susan Creighton is on record as saying that 66% of Google mobile web traffic originates from Apple iOS devices. It is hard to see how this can be accounted for as Android revenue.

Further, the much-trailed “fragmentation” began in 2011 with a vengeance. “Forkdroids”, devices using an operating system based on Android but extensively adapted (“forked” from the main development line), appeared in China and elsewhere. Amazon’s Kindle Fire tablet is an example closer to home.

And the intellectual property fights with Oracle, Apple, and others are a constant source of disruption and a potentially sizable leakage of revenue. In so far as Google’s motivation in acquiring Motorola Mobility was to get hold of its patent portfolio, this has already involved very large sums of money. Another counter-strategy is the partnership with Intel and Lenovo to produce x86-based Android devices, which cannot be cheap either and will probably mean even more fragmentation.

This is not the only example, though – think of Google Books, an extremely expensive product which caused a great deal of litigation, eventually got its way (although not all the issues are resolved), and is now an excellent free tool for searching in old books but no kind of profit centre. Further, Google’s patented automatic scanning has the unfortunate feature of pulling in marginalia, etc. from the original text that its rivals (such as Amazon Kindle) don’t.
Further, Google has recently been trying to monetise one of its classic products, the Google Maps API that essentially started the Web 2.0 phenomenon, with the result that several heavy users (notably Apple and Foursquare) have migrated to the free OpenStreetMap project and its OpenLayers API.

2: Telco-isation

Like a telco, Google is dependent on one key source of revenue that cross-subsidises the rest of the company – search-based advertising.

Figure 2: Google’s advertising revenues cascade into all other divisions

[NB TAC = Traffic Acquisition Cost, CoNR = Cost of Net Revenues]

Having proven to be a category killer for search and advertising across the whole of the Internet, the twins (search and ads) are hugely critical for Google and also for millions of web sites, content creators, and applications developers. As a result, just like a telco, they are increasingly subject to regulation and political risk.

Google search rankings have always been subject to an arms race between the black art of search-engine optimisation and Google engineers’ efforts to ensure the integrity of their results, but the whole issue has taken a more serious twist with the arrival of a Federal Trade Commission inquiry into Google’s business practices. The potential problems were dramatised by the so-called “white lady from Google” incident at Google Kenya, where Google employees scraped a rival directory website’s customers and cold-called them, misrepresenting their competitors’ services, and further by the $500 million online pharmacy settlement. Similarly, the case of the Spanish camp site that wants to be disassociated from horrific photographs of a disaster demonstrates both that there is a demand for regulation and that sooner or later, a regulator or legislator will be tempted to supply it.

The decision to stream Google search quality meetings online should be seen in this light, as an effort to cover this political flank.

As well as the FTC, there is also substantial regulatory risk in the EU. The European Commission, in giving permission for the Motorola acquisition, also stated that it would consider further transactions involving Google and Motorola’s intellectual property on a case-by-case basis. To put it another way, after the Motorola deal, the Commission has set up a Google Alert for M&A activity involving Google.

3: Look & Feel Problems

Google is in the process of a far-reaching refresh of its user interfaces, graphic design, and core search product. The new look affects Search, GMail, and Google + so far, but is presumably going to roll out across the entire company. At the same time, they have begun to integrate Google + content into the search results.

This is, unsurprisingly, controversial and has attracted much criticism, so far only from the early adopter crowd. There is a need for real data to evaluate it. However, there are some reasons to think that Search is looking in the wrong place.

Since the major release codenamed Caffeine in 2008, Google Search engineers have been optimising the system for speed and for first-hit relevance, while also indexing rapidly-changing content faster by redesigning the process of “spidering” web sites to work in parallel. Since then, Google Instant has further concentrated on speed to the first result. In the Q4 results, it was suggested that mobile users are less valuable to Google than desktop ones. One reason for this may be that “obvious” search – Wikipedia in the first two hits – is well served by mobile apps. Some users find that Google’s “deep web” search has suffered.

Under “Google and your world”, recommendations drawn from Google + are being injected into search results. This is especially controversial for a mixture of privacy and user-experience reasons. Danny Sullivan’s SearchEngineLand, for example, argues that it harms relevance without adding enough private results to be of value. Further, doubt has been cast on Google’s numbers regarding the new policy of integrating Google accounts into G+ and G+ content into search.

Another, cogent criticism is that it introduces an element of personality that will render regulatory issues more troublesome. When Google’s results were visibly the output of an algorithm, it was easier for Google to claim that they were the work of impartial machines. If they are given agency and associated with individuals, it may be harder to deny that there is an element of editorial judgment and hence the possibility of bias involved.

Social search has been repeatedly mooted since the mid-2000s as the next-big-thing, but it seems hard to implement. Yahoo!, Facebook, and several others have tried and failed.

Figure 3: Google + on Google Trends: fading into the noise?

Source: Google Trends

It is possible that Google may have a structural weakness in design as opposed to engineering (which is as excellent as ever). This may explain why a succession of design-focused initiatives have failed – Wave and Buzz have been shut down, Google TV hasn’t gained traction (there are less than one million active devices), and feedback on the developer APIs is poor.

4: Palpable Project Proliferation

Google’s tendency to launch new products is as intimidating as ever. However, there is a strong argument that its tireless creativity lacks focus, and the hit-rate is worrying low. Does Google really need two cut-down OSs for ultra-mobile devices? It has both Android, and ChromeOS, and if the first was intended for mobile phones and the second for netbooks, you can now buy a netbook-like (but rather more powerful) Asus PC that runs Android. Further, Google supports a third operating system for its own internal purposes – the highly customised version of Linux that powers the Google Platform – and could be said to support a fourth, as it pays the Mozilla Foundation substantial amounts of money under the terms of their distribution agreement and their Boot to Gecko project is essentially a mobile OS. IBM also supported four operating systems at its historic peak in the 1980s.

Also, does Google really need to operate an FTTH network, or own a smartphone vendor? The Larry Page quote we opened with tends to suggest that Google’s historical tendency to do experiments is at work, but both Google’s revenue raisers (Ads and YouTube, which from an economic point of view is part of the advertising business) date from the first three years as a public company. The only real hit Google has had for some time is Android, and as we have seen, it’s not clear that it makes serious money.

Google Wallet, for example, was launched with a blaze of publicity, but failed to attract support from either the financial or the telecoms industry, rather like its predecessor Google Checkout. It also failed to gain user adoption, but it has this in common with all NFC-based payments initiatives. Recently, a major security bug was discovered, and key staff have been leaving steadily, including the head of consumer payments. Another shutdown is probably on the cards.

Meanwhile, a whole range of minor applications have been shuttered.

Another heavily hyped project which does not seem to be gaining traction is the Chromebook, the hardware-as-a-service IT offering aimed at enterprises. This has been criticised on the basis that its $28/seat/month pricing is actually rather high. Over a typical 3 year depreciation cycle for IT equipment, it’s on a par with Apple laptops, and has the restriction that all the applications must work in a Web browser on netbook-class hardware. Google management has been promoting small contract wins in US school districts . Meanwhile, it is frequently observed that Google’s own PC fleet consists mostly of Apple hardware. If Google won’t use them itself, why should any other enterprise IT shop do so? The Google Search meeting linked above contains 2 Lenovo ThinkPads and 13 Apple MacBooks of various models and zero Chromebooks, while none other than Eric Schmidt used a Mac for his MWC 2012 keynote. Traditionally, Google insisted on “dogfooding” its products by using them internally.

The Google Fibre project in Kansas City, for its part, has been struggling with regulatory problems related to its access to city-owned civil infrastructure. Kansas City’s utility poles have reserved areas for different services, for example telecoms and electrical power. Google was given the concession to string the fibre in the more spacious electrical section – however, this requires high voltage electricians rather than telecoms installers to do the job and costs substantially more. Google has been trying to change the terms, and use the telecoms section, but (unsurprisingly) local cable and Bell operators are objecting. As with the muni-WLAN projects of the mid-2000s, the abortive attempt to market the Nexus One without the carriers, and Google Voice, Google has had to learn the hard way that telecoms is difficult.

And while all this has been going on, you might wonder where Google Enterprise 2.0 or Google Ads 2.0 are.

5. Google Play – a Collection of Challenges?

Google recently announced its “new ecosystem”, Google Play. This consists of what was historically known as the Android Market, plus Google Books, Google Music, and the web-based elements of Google Wallet (aka Google Checkout). All of these products are more or less challenged. Although the Android Market has been a success in distributing apps to the growing fleets of Android devices, it continues to contain an unusually high percentage of free apps, developer payouts tend to be lower than on its rivals, and it has had repeated problems with malware. Google Books has been an expensive hobby, involving substantial engineering work and litigation, and seems unlikely to be a profit centre. Google Music – as opposed to YouTube – is also no great success, and it is worth asking why both projects continue.

However, it will be the existing manager of Google Music who takes charge, with Android Market management moving out. It is worth noting that in fact there were two heads of the Android Market – Eric Chu for developer relations and David Conway for product management. This is not ideal in itself.

Further, an effort is being made to force app developers to use the ex-Google Checkout system for in-app billing. This obviously reflects an increased concern for monetisation, but it also suggests a degree of “arguing with the customers”.

To read the note in full, including the following additional analysis…

On the Other Hand…
Strengths of the Core Business
“Apple vs. Google”
Content acquisition
Summary Key Product Review
Search & Advertising
YouTube and Google TV
Communications Products
Android
Enterprise
Developer Products
Summary: Google Dashboard
Conclusion
Recommendations for Operators
The Telco 2.0™ Initiative
Index

…and the following figures…

Figure 1: Google, Microsoft 2.0?
Figure 2: Google’s advertising revenues cascade into all other divisions
Figure 3: Google + on Google Trends: fading into the noise?
Figure 4: Google’s Diverse Advertiser Base
Figure 5: Google’s Content Acquisition. 2008-2009, the missing data point
Figure 6: Google Product Dashboard

…Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 24 page report in PDF format here. Non-Members, please subscribe here, buy a Single User license for this report online here for £595 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, geographies, people and products referenced: AdSense, AdWords, Amazon, Android, Apple, Asus, AT&T, Australia, BBVA, Bell Labs, Boot to Gecko, Caffeine, CES, China, Chromebook, ChromeOS, ContentID, David Conway, Eric Chu, Eric Schmidt, European Commission, Facebook, Federal Trade Commission, GMail, Google, Google +, Google Books, Google Buzz, Google Checkout, Google Maps, Google Music, Google Play, Google TV, Google Voice, Google Wave, GSM, IBM, Intel, Kenya, Keyhole Software, Kindle Fire, Larry Page, Lenovo, Linux, MacBooks, Microsoft, Motorola, Mozilla Foundation, Netflix, Nexus, Office 365, OneNet, OpenLayers API, OpenStreetMap, Oracle, Susan Creighton, ThinkPads, VMWare, Vodafone, Western Electric, Wikipedia, Yahoo!, Your World, YouTube, Zynga

Technologies and industry terms referenced: advertisers, API, content acquisition costs, driverless car, Fibre, Forkdroids, M&A, mobile apps, muni-WLAN, NFC, Search, smart TV, spectrum, UI, VoIP, Wallet

OS Wars, part of the ‘Great Game’ (STL Partners Presentation)

In Amazon, Apple, Facebook, Google, Skype – the Great Game.
Presentation by Horace Dediu, Senior Analyst, STL Partners, covering
OS market shares, dynamics, and catalysts of change. Presented at EMEA
Brainstorm, November 2011.

OS Wars small STL Partners Nov 2011

Download presentation here.

Links here for more on New Digital Economics brainstorms and Adjacent Players and Disruptors research, or call +44 (0) 207 247 5003.

Extracted example slide:

Slide on Patent Wars, STL Partners, Telco 2.0, Google, Apple, Facebook, Amazon, Skype, Microsoft Nov 2011

Patent Wars, part of the ‘Great Game’ (STL Partners Presentation)

In Amazon, Apple, Facebook, Google, Skype – the Great Game. Presentation by Keith McMahon, Senior Analyst, STL Partners, covering key patent wars between the leading technology players and telcos. Presented at EMEA Brainstorm, November 2011.

Cloud EMEA Nov 2011 BT Financial Sector

Download presentation here.

Links here for more on New Digital Economics brainstorms and Adjacent Players and Disruptors research, or call +44 (0) 207 247 5003.

Extracted example slide:

The ‘Great Game’ – Google, Apple, Facebook, Skype, Amazon (STL Presentation)

In Amazon, Apple, Facebook, Google, Skype – the Great Game. Presentation by Chris Barraclough, Chiref Strategist and MD STL Partners, covering some of the key insights from the Telco 2.0 Strategy Report Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon. Presented at EMEA Brainstorm, November 2011.

Cloud EMEA Nov 2011 BT Financial Sector

Download presentation here.

Links here for more on New Digital Economics brainstorms and Adjacent Players and Disruptors research, or call +44 (0) 207 247 5003.

Extracted example slide (NB revenue values shown are ‘orders of magnitude’:

Slide on great game, STL Partners, Telco 2.0, Google, Apple, Facebook, Amazon, Skype, Microsoft Nov 2011nancial Services Nov 2011

Strategy 2.0: What Skype + Microsoft means for telcos

Summary: in theory, Microsoft and Skype have the resources, the brands, the customer base and the know-how to shape the future of telecoms and become a strategic counterweight to Apple and Google. Can they do it – and what should telcos’ strategy be? (June 2011, Executive Briefing Service, Dealing with Disruption Stream).

This page contains an excerpt from the report, plus detailed contents, figures and tables, and a summary of the companies, products, technologies and issues covered.

(The 35 page PDF format report is available in full to Members of the Telco 2.0 Executive Briefing Service and the Telco 2.0 Dealing with Disruption Stream here. Non-members can buy a Single User license for this report online here for £995 (+VAT) or subscribe here. For multiple user licenses or other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.)

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Introduction: Skype, the Original ‘Voice 2.0’

Everyone knows Skype as the original Voice 2.0 company – providing free phone calls, free video, status updates, all delivered using an innovative peer-to-peer architecture, and with the unique selling point of VoIP that just worked. This report describes its business model, technology strategy, its acquisition by Microsoft, and the consequences for the telecoms industry.

A little history

Founded in 2003 by Janus Friis and Niklas Zennström, Skype was acquired by eBay in 2005 for $2.6bn. eBay ownership was a period of stagnation – although eBay also owns PayPal, it only made half-hearted efforts to integrate the two. In November 2009, eBay sold 65% of Skype to an investor group led by Silver Lake for approximately $1.9bn in cash, valuing Skype at $2.75bn.

With Skype preparing for an IPO, Microsoft announced in May 2011 that it had agreed to buy the company for $8.5bn, giving the investor group a massive return and ensuring future potentially-disruptive start-ups will also attract plenty of funding. Many commentators have suggested that Microsoft is paying too much for the VOIP company, although the price-earnings ratio is actually no higher than that of Cisco’s acquisition of WebEx. So, what exactly is Microsoft getting for its billions? Let’s take a closer look.

A Dive into Skype’s Accounts

Microsoft has acquired what is essentially a global telephony company with 663 million registered users and very significant gross profitability. Skype contributed more net new minutes of international voice than the rest of the industry put together in 2010, according to Telegeography. Skype has never struggled to achieve growth, but its profitability has often been criticised, as has its ability to generate growth in ARPU. The following chart (figure 1) summarises Skype’s operational key performance indicators (KPIs) since 2006.

Figure 1: Skype’s KPIs: users, usage, and ARPU

Source: Skype’s S-1, May 2011

Questions have been raised about Skype’s performance in converting registered or even active users into paying users. This is critical, as ARPU is relatively flat. However, a monthly ARPU for paying users of $8 would be considered very reasonable for an emerging-market GSM operator and such an operator would tie up far more capital than Skype does. As all Skype users contribute to the system’s peer-to-peer (P2P) infrastructure, the marginal cost of serving non-paying users is essentially nothing.

Another way of looking at the KPIs is to consider their growth rates, as we have done in the following chart (figure 2). Although the growth of paying users is nowhere near as fast as that of free minutes of use, 40% growth per annum in revenue-generating subscribers is still very impressive.

Figure 2: Growth rates of Skype KPIs.

Source: Skype’s S-1, May 2011

In fact, there is very little wrong with Skype at the operating level. The following chart (figure 3) shows that, if we consider the primary challenge for Skype to be converting free users into paying users, it is actually doing rather well. Revenue and EBITDA are advancing and margins are holding up well.

Figure 3: Revenue and EBITDA growth is strong

Source: Skype S-1, May 2011

With 509 million active users available for conversion, ARPU may not be that relevant – just converting users of the free service into paying users has so far provided strong growth in gross profits and could do for the foreseeable future.

Figure 4: Conversion of free users at steady ARPU drives gross profit.

Source: Skype S-1, May 2011

Skype doesn’t make money on free calls (not even from advertising or customer analytics/insights, yet), and has to pay interconnection fees and operate some infrastructure in order to provide SkypeOut (calls to conventional telephone numbers, rather than other Skype clients), and SkypeIn (calls from the PSTN to Skype users).

Skype sceptics have argued that eventually termination charges will catch up with the company and destroy its profitability. It is true that most of Skype’s revenues are generated (over 80%) by SkypeOut call charges and that Skype’s cost of net revenue is dominated (over 60%) by the cost of terminating these calls. However, termination as a percentage of Skype’s cost of net revenue is falling and Skype’s gross margin is rising, as its enormous volume growth enables it to extract better bulk pricing from interconnect operators (see Figure 5).

To see Figure 5, the conclusion of our analysis of Skype’s finances, and…

Is Skype Accumulating “Technical Debt”?
Future Plans: The Core Business, The Enterprise & Facebook
Telcos and Skype
Enter Microsoft
Windows Phone 7: Relevant again?
Microsoft’s other mobile allies: Nokia, RIM
How Microsoft will deploy Skype
Developers, developers, developers
Key Risks and Questions: execution, regulatory, partners, advertisers & payments
Answers: How Telcos should deal with Skype…and Microsoft

…plus these additional figures & fables…

Figure 5: How Skype’s spending is changing
Figure 6: Why Skype is making a loss
Figure 7: Commoditisation is for everybody!
Figure 8: 3UK benefits from its deal with Skype
Figure 9: Skype’s Deals with Carriers
Figure 10: Skype is a good fit for many Microsoft products
Figure 11: A unifying Skype API is critical for integration into the Microsoft empire
Figure 12: Telco strategy options matrix

…Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 35 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for for £995, or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations, products and people referenced in the report: 3UK, AdSense, Android, Apple, AT&T, Au, Avaya, Ben Horowitz, BlackBerry Messenger, Cisco, Dynamics CRM, EasyBits, eBay, Exchange Server, Facebook, Facetime, Google, Google Talk, Google Voice, GSMA, Happy Pipe, Hutchison, iOS, iPhone, Jajah, Janus Friis, KDDI Mobile, Kinect, KPN, Lync, Mango, Marchex, Microsoft, Microsoft-Nokia deal, MXit, MySpace, Niklas Zennström, Nokia, Ofcom, Office Live, Outlook, PayPal, PowerPoint, Qik, RIM, Silver Lake, Skype, SkypeConnect, SkypeIn, SkypeKit, SkypeOut, SkypePhone, Steve Ballmer, Telefonica, Teredo, Tony Jacobs, Tropo, Twitter, Verizon Wireless, Virgin, Visual Studio, WebEx, WhatsApp, Windows Mobile, Windows Phone 7, WP7, Xbox, X-Series.

Technologies referenced: GSM, HD voice, HTTP/S, IM, IMS MMTel, IP networks, IPv4, IPv6, LTE, Mobile, NAT, P2P, PSTN, RCS, SILK V3, SIP, SMS, SS7, super node, URI, video telephony, Voice 2.0, VoIP, XMPP.

Appstore 2.0: Amazon Vs Apple & Google

Summary: Amazon is probably the Internet’s best retailer. As it launches its own AppStore, we provide a detailed analysis of its digital media business and pick out the key opportunities it offers to content owners, network service providers and manufacturers.

Below is a major extract from this 18 page Telco 2.0 Analyst Note that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Dealing with Disruption Stream using the links below.

‘Growing the Mobile Internet’ and ‘Fostering Vibrant Ecosystems: Lessons from Apple’ are also key session themes at our upcoming ‘New Digital Economics’ Brainstorms (Palo Alto, 4-7 April and London, 11-13 May). Please use the links or email contact@telco2.net or call +44 (0) 207 247 5003 to find out more.

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Introduction

For Amazon, the world of downloading and streaming brings both threats and opportunities: threats in that a large proportion of its current business is at risk of being cannibalised; and opportunities in that a significant element of its cost base associated with the storing, shipping, picking and packing of physical goods could be automated and reduced further.

Amazon’s key strengths are the size of its customer base; its ongoing relationships with all the major content owners in all the key categories (Books, Music, Movies/TV and Games); and most importantly, Amazon is the most highly skilled retailer on the Internet. Amazon’s Achilles heel is that it has very little control over next generation devices, apart from the Kindle, whether Tablet or Mobile phone.

In this note, we examine:

Amazon’s current performance;
The rising costs of physical distribution;
The attraction of online distribution (streaming and downloading) to Amazon;
The success of the Kindle;
Why Amazon has failed to gain significant market share in music;
The rationale behind the move into movie streaming;
How Amazon will shake up the AppStore market;
Whether the success of the Kindle means a move into more own-brand devices;
Amazon’s potential impact on the digital value ecosystem and how content owners, networks and device manufacturers should interact with Amazon.

Amazon’s Current Performance

Amazon’s Operating Income in 2010 was $1.4bn with a typically low retail sector margin of 4.1%. This is a far lower margin than usually sought by the content industry, networks or the device industry and one of Amazon’s key strategic advantages – its investors do not expect huge margins. However, they do expect revenue growth and this it has delivered so far (see below) through the development of the most advanced retail platform on the Internet, fierce price competition, tight control over costs and increasing product diversification.

Figure 1: Amazon Operates with the Low Margins Typical of Retail

Source: Amazon, STL Partners

Amazon is now the world’s largest e-commerce site selling over US$34bn worth of goods and services in 2010. The Amazon main website attracts more unique visitors in a month than either eBay or Apple (see below).

Figure 2: Amazon is the busiest online store in the world

At the end of 2010, Amazon had over 130m ‘active’ customer accounts, a healthy increase of over 25 million in the year. In comparison Apple has over 200m accounts with credit cards stored – but does not break-out the percentage of these that are actually buying goods and services from it. It is therefore difficult to determine whether Amazon or Apple have the most paying customers passing through their stores. Whichever is the larger, Amazon’s retail prowess cannot be ignored, especially in entertainment media where its revenues continue to grow year-on-year.

Amazon’s Media Sales

Amazon’s roots are in selling books but over the years its portfolio has been extended successfully to other type of physical media so that its media category now comprises Books, Music, Movies, Video Games and Consoles, Software and Digital Downloads in most territories (USA, Canada, UK, Germany, France, Italy, Japan and China). The sales associated with its media business are still growing by over 10% per annum and, although declining as a percentage of total sales, still represented over 43% of total net sales in 2010. The reduction in percentage of total sales is therefore more a reflection of Amazon’s success in its diversified product range than any drop off in media.

Figure 3: Amazon’s media sales are still growing at over 10% per annum

Source: Amazon, STL Partners

It is noteworthy that Amazon doesn’t provide any further detail on the media category and therefore little is known outside of Amazon about how their customers’ habits are changing from physical media consumption to digital. However, Amazon has been very clear that it sees a future where media is consumed both physically and digitally. In short, it wants to grow the entire pie and Amazon is not abandoning the physical world in much the same way that Netflix is not abandoning the mailing of DVDs.

Amazon promotes itself to investors as growing the absolute level of Operating Income and therefore is less worried about margins than overall growth. This is important for content owners as it aligns with their priorities and means that Amazon is as concerned with cannibalisation of physical product revenues as they are. However, that does not mean Amazon is in anyway anti-online distribution.

Amazon is also highly focussed on growing Free Cash Flow per share which implies strict management of working capital and balance sheet expenditure and to understand the appeal of online business in this context, we first have to understand the costs and cost trends associated with physical products.

Counting the Cost of Physical Distribution

Amazon currently spends about US$1.4bn or 4% of revenues on the physical shipping of goods to its customers. Despite Amazon’s famed distribution efficiency, this percentage has increased over the last couple of years, eating ever further beyond the associated shipping revenues, as illustrated below.

Figure 4: Amazon’s Net Shipping Costs Continue to Rise Over and Above P&P Charges to Consumers

Source: Amazon, STL Partners

This is probably down to two factors:

Amazon offers an annual “Prime” shipping service where for a fixed annual shipping commitment, customers receive “free” shipping for each purchase. It is estimated that 15% of Amazon customers are “Prime” subscribers. It is assumed that “Prime” customers are more loyal to Amazon and are their heavier spenders; and
Amazon has moved into selling more bulky goods over the years, such as PCs, which are far more expensive to ship than books.

Furthermore, there are additional costs associated with physical distribution.

Figure 5: Physical fulfilment costs Remain Stable as a Percentage of Net Sales

Source: Amazon, STL Partners

Amazon spent around US$2.9bn or 8.5% of revenues in 2010 on fulfilment costs (or the picking and packing) of goods. Amazon doesn’t break-out how much it spends on payment processing (included within cost of goods sold) or maintaining the technology (elements include Technology and Content, Depreciation and Amortisation) for its various e-commerce sites.

The Attraction of Online Distribution

With Amazon’s ability to manage the combined physical costs of shipping and fulfilment to 12.5% of revenues in 2010, we believe that Amazon should be able to deliver online distribution for less than the 30% benchmark ‘agency fee’ revenue share typical in the online distribution model. And, that is before the additional efficiencies that Digital distribution offers over Physical. Therefore the margins offered up by the digital environment are highly attractive to Amazon.

Furthermore digital goods, in the main, fit perfectly into Amazon’s Operating Income growth model as the carrying cost of inventory is minimal and cash for goods is received immediately from customers, while the payment to content owners is typically dispersed 30-days after purchase. The major exception to this rule is when content owners demand large upfront fees for either access to content libraries or for exclusive deals. This is a major feature of both the Movies/TV and Music industry and may account at least in part for the differing levels of take up Amazon has experienced between these and e-books.

So, where does Amazon sit in online distribution – streaming and downloading? Is it a major player that needs to be actively worked with or against or can it be left out of the strategic thinking of the others in the digital online ecosystem – content owners, network service providers and device manufacturers? A closer examination of the position of Amazon in each of the major digital content categories – publishing, music, video and apps, provides valuable insight.

The success of the Kindle: more eBooks than Paperbacks

Amazon launched the Kindle in 2007 as an e-ink book reader for an introductory price of US$399, which in its first iteration had connectivity exclusively provided through the Sprint CDMA network. However, Amazon developed more than a hardware device with the Kindle, it built the whole surrounding ecosystem for sale, delivery and management of mainly electronic books but also other publishing media such as newspapers.

Figure 6: The Amazon Kindle

Today, the hardware price of the Kindle has come down to US$139 (WiFi only) to US$189 (WiFi+3G) and Amazon has launched Kindle readers across all the major platforms from Apple (Mac, iPhone and iPad), Google Android, RIM Blackberry and Microsoft (Windows and Windows Phone7). If a customer buys a book from the Kindle store, it can be read on most of the major platforms for a single fee.

Amazon doesn’t break out sales data for either Kindle or eBooks, but the following extract from Amazon’s 4Q 2010 earnings release provides just an indication of progress being made.

Amazon.com is now selling more Kindle books than paperback books. Since the beginning of the year, for every 100 paperback books Amazon has sold, the Company has sold 115 Kindle books. Additionally, during this same time period the Company has sold three times as many Kindle books as hardcover books. This is across Amazon.com’s entire U.S. book business and includes sales of books where there is no Kindle edition. Free Kindle books are excluded and if included would make the numbers even higher.

The Company sold millions of third-generation Kindle devices with the new advanced paper-like Pearl e-ink display in the fourth quarter and the third-generation Kindle eclipsed ―Harry Potter and the Deathly Hallows – as the best selling product in Amazon’s history.

The U.S. Kindle Store now has more than 810,000 books including New Releases and 107 of 112 New York Times Bestsellers. Over 670,000 of these books are $9.99 or less, including 74 New York Times Bestsellers. Millions of free, out-of-copyright, pre-1923 books are also available to read on Kindle.

January 2011’s sales figures from the American Association of Publishers also point to the growing success of eBooks – US$70m – a 116% increase year-on-year – despite a small, 1.8% (US$805m), fall in the overall market. eBook market share figures are hard to verify. Apple recently claimed 20% of the market, Barnes and Noble (US-only) also claimed 20% of the market and Amazon claims between 70% and 80% of the market – obviously not all can be true.

Wild market claims are to be expected in this high growth stage of the market development and there is uncertainty whether a 20% market share is by downloads or value and whether downloads include free, out of copyright eBooks which generate no revenue. All estimates that the STL team have seen indicate that Amazon is the market leader with a market share in the 50%-75% range. This CNET interview with Ian Freed, an Amazon vice president in charge of the Kindle, provides more detail on where Amazon sees itself in the market.

Although detailed data isn’t available about whether Amazon is yet making a contribution to operating profit from the Kindle and eBooks generally, all the indications are that Amazon is happy with the results and the continued investment speaks for itself.

The STL team believes Amazon’s success can be put down to five key factors:

Amazon probably has the highest concentration of book reader users as its customers;
Reading books on the Kindle is a very pleasurable experience and much better than some non-dedicated devices, especially the PC and the phone;
Amazon has developed a very easy-to-use platform which removes the friction of purchase and delivery of eBooks to a wide choice of platforms;
Amazon has tried to deliver great prices to its customers with new eBooks typically priced cheaper than their hardback alternatives. The Kindle Store has always included a wide selection of free out of copyright books; and
Amazon has built a store with access to material from the largest publishers to the smallest self-publishers. Self publishers are driving innovation with low-pricing for smaller episodic books.

The STL team believes that this last point is extremely important. Currently, Amazon has over two million sellers on its stores most of which are small businesses selling physical goods with the help of Amazon tools and services. This volume is far in excess of most developer schemes and almost certainly far larger than the combined total of content sellers across all developer platforms. Amazon will have little problem building and managing an even larger community as the developer community has largely adopted ‘Amazon Web Services’ as their cloud platform of choice, and sellers are already familiar and happy with Amazon tools and services.

Amazon and Music: Downloads not moving the needle

In the UK for example, Amazon share of the overall music retail market was a healthy 13.4% in 2009. Overall, the internet players have the largest share of the music market with 39%, compared to specialist retailers, such as HMV, with 33% and Supermarkets, such as Tesco and Sainsbury’s, with 23.6%. In a decade, the internet as an e-commerce channel has overtaken all of the UK’s high street. The download only Apple iTunes service with share of 10.6% clearly dominates the online distribution market.

Figure 7: Amazon’s Music Share is Healthy but not Dominant

Source: BPI Yearbook 2009

In the USA, Billboard estimated that in 2009 iTunes had 26.7% retail market share, which translated into 65.5% online market share. For a la carte download sales, the iTunes U.S. presence is overwhelming, with an estimated 93% market share.

In contrast, Amazon’s MP3 store had an overall 1.3% market share, which translates into about 5% share for a la carte downloads. Amazon commenced digital downloads in 2007 and has been a constant innovator.
The service launched with DRM-free tracks which were therefore portable between devices and with higher bitrate encoding, providing higher quality to the discerning ear. In the USA, the catalogue has continually grown and from an initial 2m tracks have grown to today having 1.4m albums and 15.2m tracks. But, as befits its corporate strategy of “everyday low pricing”, Amazon has put most effort into price innovation.

Figure 8: Amazon’s Smart Targeting & Competitive Pricing

Normally, Amazon has the lowest price for its chosen Album of the week. For instance, The Strokes new album is currently available for £4 compared to iTunes pricing of £8 in the UK. This is typical behaviour of a master retailer driving customers to their stores through headline offers and promotions to their customers. Apple has a very different approach relying on an agency model where the content owner has limited choice in setting retail prices.

In the USA, Amazon’s Daily Deal launched in June 2008 and it became the subject of a Department of Justice (DOJ) inquiry in May 2010 after iTunes began grumbling about Amazon promotions to the major labels. No comment has been released by the DOJ, but it seems clear that with Apple’s huge iTunes share that any attempt to discourage labels from participating in the Amazon promotions might be construed as price fixing. Amazon has continued to play its strongest card – differentiation though price competition.

Amazon has built an MP3 application for Android phones which allows the immediate purchase and playing of songs. It is noticeable that they haven’t built the same tools for Apple. In fact, the Amazon WindowShop application for the iPad actually displays download prices (and the playing of short clips), but doesn’t allow the direct purchase or download. Given, Apple’s domination of the music download market and the fact that Apple have allowed the Kindle store to operate on the iPad/iPhone, the STL team predict it will not be long before the DOJ launch another inquiry into Apple’s music practices.

In contrast to eBooks, Amazon does not seem to have built significant music share and the STL team puts this down to three main reasons:

The Amazon experience of buying music is not as good as Apple iTunes. This is made especially difficult to match as Apple control the device – the mass market seems to prefer convenience over price on low unit price items;
Amazon is not associated with the music market in the same way as Apple is; and
There are plenty of alternatives to paid music downloads. Spotify in Europe and Rhapsody in the USA, although of questionable profitability, have achieved success on other platforms with different business models, providing both paid-for and advertiser funded unlimited music streaming.

The move into Movie streaming

Amazon has taken a different approach to Movies than to either Books or Music.

In the UK and Germany, Amazon has recently acquired full ownership of a DVD and streaming service, called LoveFilm. This operates primarily under a subscription model providing access to a library of films. It is the UK and German equivalent of Netflix.

A subscription business operates under a vastly model than a retailer. It requires a much larger investment in both customer acquisition and retention and in content libraries. There is also reasonable investment required in gaining access and building clients for the plethora of devices coming onto the market to connect TVs to the internet. It also starts to compete with powerful payTV companies that have very deep pockets, large customer bases and similar ambitions.

In the USA, Netflix has managed to build a strong base of customers, a large market capitalization and is currently a darling of both the press and the investor community. The STL team has written extensively in the past about Netflix, its business model and prospects (see: The Impact of Netflix: Can Telcos Help Hollywood; Entertainment 2.0: New Sources of Revenu for Telcos?)

Amazon has decided to enter the fray in the USA with its Instant Video service. This service offers a limited selection of free streaming movies to subscribers of the Amazon Prime service. The Amazon Prime service is priced at US$79/per annum, compared to the Netflix streaming cost of US$8/month ($96/annum). Although, the annual fee may put some off, Amazon seems to have solved the problem of expensive customer acquisition. However, it is questionable whether Amazon under a licensing structure can afford similar levels of investment in content as Netflix.

A key factor in deciding this will be the support of studios for its model and their willingness to provide premium content and in this Amazon is gaining traction.

Figure 9: New Releases are Going to Amazon First

It is noticeable in the USA that Amazon are heavily promoting download-to-rent and download-to-own options which brings new releases to the library and are favoured by the Movie Industry.

Amazon is also an UltraViolet member which again we have written extensively about (see Telcos Risk Missing the UltraViolet Online Opportunity) and it is likely in the near future that Amazon will sell physical DVDs with the right to stream to multiple devices.

In Movies, STL Partners believes Amazon is uncertain which of the options will win in the future and is willing to invest in a wide range of options; effectively, it’s hedging its bets. But as in Music, Amazon has a long way to catch up with early platforms, whether that’s Apple, which leads the download-to-rent and own market, or Netflix which leads the subscription business. Again, this makes it an interesting target for partnerships, particularly for content owners looking to establish models that work better for them than Apple or Netflix.

Amazon shaking up the AppStore market

Amazon also has a significant business selling both physical electronic games and consoles. It was therefore hardly surprising that it launched Android AppStore heavily populated with games and featuring Angry Birds Rio as its launch game.

Figure 10: Amazon’s Appstore

The Amazon AppStore offers some very interesting features, including:

The ability to sample the game on a PC before committing to a purchase;
Amazon setting the retail price of the game with the developer only suggesting a retail price;
Free Daily Promotions of leading applications; and
Amazon performing a limited curation role, checking the applications are free of viruses

There are also teething problems with the service. For example, the Amazon AppStore is impossible to install on some “locked-down” Android handsets.

But Amazon has entered the market and the STL team believes it will be a serious player for years to come. It is also our belief that Amazon will want to develop AppStores for all major platforms, which will bring them into considerable conflict with certain platform owners, not just Apple.

To read the report in full, including the conclusions and recommendations…

Lessons for other players in the Digital Entertainment Value Chain
Content Owners
Network Services Providers
Device Manufacturers

…Members of the Telco 2.0^TM Executive Briefing Subscription Service and the Dealing with Disruption Stream can access and download a PDF of the full report here. Non-Members, please see here for how to subscribe. Alternatively, please email contact@telco2.net or call +44 (0) 207 247 5003 for further details. ‘Growing the Mobile Internet’ and ‘Lessons from Apple: Fostering vibrant content ecosystems’ are also featured at our AMERICAS and EMEA Executive Brainstorms and Best Practice Live! virtual events.

Telcos vs. Internet Players: Act before it’s too late

Summary: There’s less than 3 years for telcos to take advantage of key strategic ‘control points’ in their battle for sustainable growth in the communications and e-commerce markets, concluded delegates at the Telco 2.0 EMEA Brainstorm in November. How should they think differently about their value and where do they need to (re)focus their attention? Full report from the Brainstorm..

40 page PDF format report, summary and except below.

Alternatively, please email contact@telco2.net or call +44 (0) 207 247 5003 for further details. There’s also more on adjacent player strategies at our AMERICAS, EMEA and APAC Executive Brainstorms and Best Practice Live! virtual events.

Executive Summary

There’s little time left to take new opportunities

A new framework for thinking about growth opportunities in the communications sector and the value that telcos can add to other industries in the wider ‘digital economy’ was presented by analysts from the Telco 2.0 Initiative and debated by senior strategy execs from the Telecoms, Media and Technology sectors at the 11th Telco 2.0 Executive Brainstorm, EMEA, on 9-10 November 2010, incorporating Digital Entertainment 2.0. The six key telecoms growth opportunity areas are:

Delegates concluded that two in particular, B2B Enabling Services and B2B Distribution Platforms, are being particularly underinvested in compared to their potential future value. The big concern was that time is running out for the slow-moving telco industry to take advantage of some key strategic ‘control points’ in the communications and e-commerce value chains, beyond pure data transportation. In a vote participants rated the time remaining for telcos to retain or build a strong position versus internet players and other competitors as follows (see Fig 1 below):

Less than three years for ‘Identity and Authentication’ (part of ‘B2B Enabling Services’);
Less than two years for ‘Transactions – Advertising & Payments’
Less than two years for ‘Address Book and Communications Initiation’
Less than two years for ‘Home Devices’
Less than one year for the ‘Mobile Device and OS’ (although nearly half thought the opportunity has already gone).

In contrast, other players are not waiting. Telco 2.0’s analysis of Facebook’s ambitions in communications added to the sense of urgency required by telcos.

Doing the core job better

Part of Telco 2.0’s argument discussed at the brainstorm is that, in parallel with ensuring telcos don’t lose strategic control points, there are certain core areas of business in which telcos need to make specific improvements in order to position them effectively to take advantage of new growth opportunities. Two important areas are:

Broadband access, for which it is important for telcos to establish more sophisticated business models, particularly those in which new ‘upstream’ (3rd party) customer revenues are generated;

Being a better digital retailer (part of ‘Enhanced Telco Retail’), in order to maximise loyalty, trust and relevance, not just for the clear business benefits that this provides, but also because many of the new ‘two-sided’ market opportunities require a scale and quality of customer base that this will enable. Participants clearly recognised the value of this, but also saw that much more needs to be done here.

Seeking viable roles beyond connectivity and ‘one-sided’ retail

The Brainstorm examined a number of emerging growth areas in depth, each a subset of one of the Six ‘Telco 2.0’ Opportunity Areas.

Cloud Services 2.0 (part of ‘Infrastructure Services): With technology developing fast and customer case studies of cloud usage becoming compelling, IBM forecasts a public cloud market of $85bn by 2015, growing at around 25% CAGR, with telcos having the opportunity to take anywhere between 30-70% of it. After a presentation by Oracle on potential use cases for telcos, the participants voted that ‘network-as-service’ (public IT cloud but including key telco network capabilities) offered the greatest opportunity for telcos to add value and differentiate. It’s still early days but this is a market that must be grabbed fast. . Telco 2.0 has set up a new Cloud Services Research stream.
Machine-to-Machine 2.0 (M2M – straddling ‘Own Brand OTT’ and ‘B2B enabling Services’): M2M may be coming of age at last, though whether telcos will play a profitable role in the opportunity depends on whether they can deliver a combination of low-cost economics connectivity, added-value enabling solutions, and horizontal platforms that enable developers and ultimately end-users to connect and manage devices easily and innovate on top of. Telco 2.0 has been asked by the industry for more analysis of the opportunities in this space ‘beyond connectivity’.
Personal Data 2.0 (a key underpinning of ‘B2B Enabling Services’ and ‘Enhanced Telco Retail’): 2011 may turn out to be the year that the Personal Information Economy was born, with high-level focus on the enabling commercial and legal structures for building trust networks for personal data being developed and promoted by the World Economic Forum (WEF). While the precise business models and roles of different players are emerging, it is clear that most of the major Information Technology players, including telcos, recognise ‘Personal Data’ as an important market to play in even if, at the same time, it fills them with trepidation. Further Telco 2.0 research and analysis here.
Digital Entertainment 2.0 (cutting across multiple categories, from ‘Enhanced Telco Retail’ to ‘Vertical Industry Solutions’ to ‘B2B Distribution and Enabling Services’): while the online share of the entertainment industry is today relatively small, the impact of online behaviours has not been. The anticipated disruption in the video market is significant. Telcos have a range of latent capabilities that are (theoretically at least) very valuable to the entertainment sector concept. A key starting point for a new level of strategic collaboration between the industries is in the area of “Digital Content Lockers” such as developed by the DECE/UltraViolet Hollywood consortium. Telco 2.0 will be working to catalyse Industry engagement with this in 2011, and looking at the economics of ‘on-demand’ TV and online gaming as part of its Digital Entertainment 2.0 Research programme.
Augmented Reality (part of ‘B2B Enabling Services’): ‘AR’ is a fast growing phenomenon outside the telco sector but relatively neglected within. Telcos could take on a stronger intermediary role, adding value by tracking the end-to-end performance and delivery of services. But more detailed analysis is needed to identify precise roles and market opportunities.

The rest of this report provides detailed analysis of all the brainstorming from the event. STL Partners, the analyst firm behind the Telco 2.0 and Digital Entertainment 2.0 Initiatives, will continue to research these and other related new business model opportunities and provide a forum for high quality debate at our online and physical events in 2011:

2nd Telco 2.0 Best Practice Live!, Online, 2-3 February 2011;
12th Telco 2.0 Exec Brainstorm, San Francisco, 5-6 April 2011;
13th Telco 2.0 Exec Brainstorm, London, 10-11 May 2011;
14th Telco 2.0 Exec Brainstorm, Singapore, 22-23 June 2011.

The following is an excerpt from the body of the report

There are opportunities, but can telcos take them?

“The level of dividend payments being taken means the Capital Markets are in effect saying to telcos ‘give us the money before you blow it on something stupid’.” Richard Kramer, Arete Research.
“Telcos did have an opportunity in the 6 opportunity areas but have been too slow and will find it difficult to oust others who are now securing valuable positions in the ecosystem.” 49% of Telco 2.0 EMEA Brainstorm Delegates.

Viable opportunities and strategies to innovate and develop new sources of value exist, yet there are also doubts about the telecom’s industry to exploit them in time. At the Brainstorm, Chris Barraclough, MD & Chief Strategist, Telco 2.0, presented 10 of the 17 ‘Principles for Success in a Disrupted Markets’ and outlined the six new Telco 2.0 Opportunity Areas described in the forthcoming ‘Roadmap to New Telco 2.0 Business Models’ Strategy Report (see diagram above).

Overall, despite their concerns on the urgency of action, delegates considered that all of the outlined opportunities had merit, and that some key areas are currently relatively underinvested in compared to their perceived potential. While Enhanced Retail and Infrastructure Services (i.e. enhanced wholesale) were understandably rated most highly, B2B Enabling Services and Distribution Platform showed the biggest gap between potential and investment.

Figure 1 – B2B Enabling Services and Distribution Platform Need Investment

Source: Delegate Vote, 11th Telco 2.0 EMEA Brainstorm

How much time do telcos have left?

Figure 2 – Other than “being a pipe”, Telcos have the most time and Opportunity to address Identity & Authentication Capabilities

[Q. What is your opinion of the amount of time that telecoms operators have to either retain OR build a strong position (versus internet or other players) in each of these ‘ecosystem control points’?]

Delegates broadly viewed telcos opportunities to hold the control points in the ecosystem in three groups: “the pipe”, which whether “dumb” or “happy” will be the domain of telcos for the foreseeable future; mobile devices and OS which they have already lost; and a middle-range comprising home devices, advertising and payments, address book, and identity and authentication. Of these, telcos are perceived to be in a significantly better position on identity and authentication.

Is there a danger of telcos repeating bad old habits?

“All you need to do to make the enablers opportunity go away is wait.” Andrew Budd, Chairman, MEF.

A similar chart to Figure 3 drawn up 5 to 10 years ago would have shown “Location Services” as an equal or better prospect than “Identity & Authentication”. Yet location today no longer registers as an opportunity because of the success of other players finding alternative ways to provide this information. In their eventual efforts to enable location, Telcos were late to the market, disjointed in that they did not offer common solutions across the industry, and overpriced.

It is intriguing to look at two other examples that may reflect this trait.

First, in the case of mobile Apps, operators have now created the Wholesale Applications Community (WAC), which is, at least, a common approach to the market, but which will struggle to establish operator control in this area if the delegate vote and evident strength of the Apple and Android ecosystems is anything to go by However, Telco 2.0 believes that WAC may succeed in enabling a second tier of appstores or segmented “app malls”.

Secondly, Vodafone presented its closed, vertically integrated M2M strategy at the event, which as smart and well-conceived as it is in many ways, still lacks the level of openness that customers will ultimately want from M2M applications.

In the area of Personal Information, Identity, and Authentication, operators do have a chance to do something, and there were suggestions from Vodafone in EMEA, and AT&T in the US, that telcos may act. But will it be enough, and sufficiently aligned and open to create a new role for the industry?

To read the report in full, covering in addition to the above…

Facebook is not waiting (full Briefing here)
Mobile Broadband: booming, but what is the best business model?
Cloud 2.0: Clearing Fog, Sunshine Forecast
M2M: A Late Developer?
Being a Better Retailer: Two Innovative Consumer Services
Personal Information: “The Meaning of PIE”?
Digital Entertainment 2.0: Changing Consumer Behaviours and “Digital Lockers”
Augmented Reality: telcos as intermediaries

…and including…

Figure 1 – The Six Telco 2.0 Opportunity Types
Figure 2 – B2B Enabling Services and Distribution Platform Need Investment
Figure 3 – Other than “being a pipe”, Telcos have the most time and Opportunity to address Identity & Authentication Capabilities
Figure 4 – Facebook’s Communications Ambitions?
Figure 5 – Deutsche Telekom’s View on Mobile Broadband Growth
Figure 6 – 3D TV ‘Use Case’
Figure 7 – IBM’s Cloud Services Forecast, 2010-2015
Figure 8 – Oracle’s Seven Steps to Cloud Heaven
Figure 9 – EMEA Delegates favoured the ‘Network-as-a-Service’ Opportunity
Figure 10 – T-Mobile’s Forecast of European M2M Markets
Figure 11 – Vodafone’s Global M2M Platform
Figure 12 – The Key Challenge for M2M Growth is to Create a Broad, Open Market
Figure 13 – Orange’s Innovative PromoTonos Service
Figure 14 – Movistar Argentina: Customer Centric Identity Management (IDM)
Figure 15 – How the ‘Two Sided’ Telco Business Model Can Help the Digital Entertainment Industry
Figure 16 – What Will Happen to the Global Entertainment Market?
Figure 17 – Delegates: Pay TV Will Lose Out (Share of Votes)
Figure 18 – “Digital Lockers”: The Way Forward?
Figure 19 – Tesco Connect: The UK’s Top Retailer’s Digital Locker
Figure 20 – Ericsson: the Impact of Tablets on the Consumption of Personal Entertainment
Figure 21 – Telcos can sit at the centre of a new ecosystem without controlling the development of apps
Figure 22 – AR connects the things around us with a mass of personal and public information from the Internet

……Members of the Telco 2.0^TM Executive Briefing Subscription Service and the Dealing with Disruption Stream can read the Executive Summary and download the full 40 page report in PDF format here. Non-Members, please see here for how to subscribe. Please email contact@telco2.net or call +44 (0) 207 247 5003 for further details.

Report Background

This report includes a summary analysis of all the brainstorming and voting from the 11th Telco 2.0 Executive Brainstorm (EMEA), held in London on 9-10 November 2010 with over 150 execs from the Telecoms, Media and Technology sector, and incorporating the 3rd Digital Entertainment 2.0 Executive Brainstorm. It was organised and facilitated by analyst firm STL Partners – founders of the Telco 2.0 and Digital Entertainment 2.0 Initiatives – using their interactive ‘Mindshare’ format.

The aim of the event was to review and debate new business model concepts and current best practice related to the upcoming Telco 2.0 strategy report, ‘From Theory to Practice: the Roadmap to ‘two-sided’ Telecoms Business Models’. This analysis centres around a new framework for thinking about growth opportunities in the communications sector and the value that telcos can add to other industries in the ‘digital economy’. The Executive Brainstorm looked at:

Day One: Telco 2.0 Growth Strategies: Disruptive Strategies and Business Models; Net Neutrality and its Impact on new Business Models; Cloud Services: Show Me The Money (and Profits); Sweating the Asset Base to Deliver More Value; and Managing the Co-opetition: Facing up to Facebook.
Day Two (am): Digital Entertainment 2.0 – Multi-platform distribution: Online Video – new disruptive strategies and business models; Defining the Next TV Experience; Optimising online content distribution.
Day Two (am): Consumer 2.0: Becoming a better Telco retailer; Using Personal Data Outside the Firewall – the emergence of a new asset class; Securing a Piece of the PIE – what role for telcos in the Personal Information Economy.
Day Two (am): M2M and Embedded Mobility 2.0: Opportunities, challenges, business models; Adding value to connectivity – Horizontal strategies for service enablement; Overcoming customers’ practical issues to creating the ‘internet of things’.
Day Two (pm): Digital Entertainment Meets Consumer 2.0 & M2M 2.0: The Connected Home; Augmented Reality and Mobile Apps.

This report is ordered by event session, and includes an analysis overview, a short summary of the objectives of the relevant session and a list of the stimulus speakers. The brainstormed comments, ideas and questions and the votes have been included verbatim, and organised under a colour-coding to make them more digestible.

Many thanks to everyone who contributed to the brainstorm, the output of which will inform our ongoing research programme for the Telco 2.0 (on this site) and Digital Entertainment 2.0 (www.digitalentertainment2.com) initiatives, along with two new programmes for 2011: Mobile Apps 2.0 and Personal Data 2.0.

In particular we would like to thank the event sponsors without whom the event would not have been possible: Platinum – Ericsson; Gold – Aepona, Aito, Aricent, Blyk, IBM, Intel, Nokia Siemens Networks, Oracle and Ubiqisys; and Bronze – Huawei, Juniper, Martin Dawes Systems, Metaswitch and Wipro. And to our collaborators: Analysys Mason, Arete Research and the World Economic Forum.

The next Telco 2.0/Digital Entertainment 2.0 EMEA Brainstorm will be held on the 17-18 May in London. In the meantime, there is a FREE global ‘virtual event’, online on 2-3 February 2011 and the 12th Telco 2.0/Digital Entertainment 2.0 AMERICAS Executive Brainstorm on 5-6 April 2011 in San Francisco (more here).

The ‘Roadmap to New Telco 2.0 Telecoms Business Models’ report will be published in early 2011.

Full Article: Amazon 2.0: Four Levels of Strategic Business Model Transformation

Download a PDF copy here.

Summary: Amazon’s stock continues to beat the bull market. Its success is based on a four level transformation to a ‘two-sided’ strategy. What are the lessons for would-be platform players in all parts of the Telecoms, Media, Technology sector?

Introduction

Amazon is a company Telco 2.0 studies closely. Their achievements in terms of logistics, cloud computing, open APIs, and two-sided business models provide great examples of business model innovation. We thought it would be useful to analyse the lessons from their strategy and performance in the build up to our AMERICAS event in Orlando, 9th-10th December 2009.

In this note, we review Amazon Marketplace and Amazon Web Services as successful examples of transition from one-sided to two-sided business models.

Amazon’s Stock Performance

The chart below shows Amazon’s performance against Vodafone, one of the better performing Telecoms stocks since 2005

Amazon, Vodafone Stocks and the S&P 500, and Amazon’s ‘Two-Sided’ Activities 2005-2009

amazon%20stock%20charts%20nov%202009.jpg

Since mid-2007, Vodafone’s stock value has broadly followed the S&P500. In contrast, Amazon’s stock has seen a massive increase in the last three years in particular despite the crunch-crash in 2008.

Of course, stock graphs are immensely volatile, driven by both internal and external factors, and ultimately few trends are permanent. However there can be little doubt that Amazon has built a very strong business, and key to their success has been a transition from a one-sided “retailer” model, to a ‘two-sided’ business model. Amazon’s Marketplace service produces 5% of revenues and 30% of profits according to the Harvard Business Review.

The Trading Hub Strategy

Amazon’s success is based on a fundamental economic insight; two-sided businesses are common whenever there is a role for a trading hub, a business which helps bridge the gaps of asymmetric information and facilitate trade by creating liquidity. In this role, they tend to exhibit increasing returns to scale – the more people use a stock exchange, the better the prices are likely to be – and therefore tend to become both big, and lasting.

Paul Krugman won the Nobel Prize for Economics by applying the logic of increasing returns to scale to economic geography; in a famous example, he concluded that the Erie Canal was responsible for the emergence of New York as the metropolis of the eastern US. Although the canal was only briefly used before the railways rendered it obsolete, it meant that New York was the only port with a direct connection to the Great Lakes and therefore the Midwest – and therefore, that the railway would go to New York.

Transient changes can therefore have very lasting effects on the map of the economy. Similar processes are visible in the development of stock exchanges, container ports, and Internet exchange points. Amazon CTO Werner Vogels describes the business as a “flywheel”, driven by two factors – selection, and low prices.

Amazon’s “Flywheel” for Platform / ‘Two-Sided’ Business Models

Telco%202_NSN_Mktg_Forum_presentation_longform%20amazon%202009.jpg

Source: Werner Vogel’s Amazon presentation to the Telco 2.0 Executive Brainstorm, 2009

Levels of Strategic Transformation

In this note, we describe Amazon’s transition from a pure retailer to a ‘two-sided’ business model through four ‘levels’. Part of the Amazon’s success is that they continue to improve at each ‘level’ rather than remaining fixed in competence achieved at a certain point in time.

Level One: Building Scale and Excellence in One Market

Amazon is best known to everyone, except for very hardcore cloud developers, as a bookshop. The story of how it created an industry-beating logistics system to fulfil orders is beyond the scope of this note, but it’s worth noting that there’s a circular, reciprocal relationship between two-sidedness and scale – one of those “flywheels”. Being the biggest bookshop on the Internet obviously made them a much more interesting proposition for upstream partners, and gave them bargaining strength with the existing wholesale industry.

A Screenshot of Amazon’s Early Home Page, c 1994

amazon%20early%20screen%20shot%20nov%202009.jpg

Source: Infonova Presentation to EMEA Telco 2.0 Brainstorm, Nov 2009

The key element here was Vogels’ notion of “selection” – the ability to find the products you wanted among a bigger and easier to navigate range of products. Economies of scale in Amazon’s distribution and its operational technology meant that the marginal cost of stocking another title was drastically lower than it was for the competition. Holding more titles meant that readers are more likely to find what they are looking for. It also means that there was more scope for fancy recommendation mechanisms, to help readers find and buy other relevant products.

This was Amazon’s 1.0 period – the keys to its success were scale and investment in logistics, a simple but effective operational excellence strategy. That goes for digital logistics as well.

Level Two: Users Sell and Recommend Amazon Products

The next step, however, would represent a real change in the business model. This was the affiliate program. Amazon users were invited to sign up for a service in which they would be rewarded for promoting books (and other products). They could do this by linking to the product’s page, using a crafted URI so that Amazon could track the source of the referral, by incorporating Amazon-branded adverts for the product into a Web page, or by putting out a wish list of products on a Web page. In a more sophisticated version of the same model, they provided an API for other e-commerce sites to integrate Amazon products into their own processes.

In exchange for this, they would get a percentage commission every time Amazon made a sale. This bears a considerable resemblance to Google’s advertising model; a low-impact, quick signup service that uses the Web’s grammar of links to access an inventory of advertising space that was both gigantic, cheap, and of high quality.

Qualitative improvements in distribution came from the fact that readers tend to share books with people they think will appreciate them. So rather than struggle to target groups of people with advertising, the affiliate model gets the customers to seek out people they know to be possible prospects. Rather than Amazon struggling to work out how to reach the home-rocketry community, instead, the home rocketeers would bring Amazon to their community.

We’ve often recommended this model to Telco 2.0 clients. As organisations get bigger, it becomes harder for them to maintain customer intimacy. To some extent, they can compensate for this by gathering large volumes of data and analysing it, in order to identify demographic groups in the customer base. Amazon invests heavily in this, and uses this analysis to provide the recommendations its users get every time they call in, but recognizes that there are limitations to the benefits of behavioural marketing. Amazon’s strategy thus uses a mix of its own analysis and the deeper knowledge of the affiliate community to tread a line that is both effective and careful to respect customers’ sensitivities and permissions.

A major Web2.0 trend across many industries is the resulting ‘mass self-customisation’. Rather than try to guess the needs of many small user groups, re-configure your processes so that the users can specify their own needs, tastes and recommendations. In this case, Amazon used an open API to enable such mass customisation and gain access to tens of thousands of audiences self-selected to be possible customers for whatever products were being promoted. This is effectively a customer participation strategy.

At the time it was introduced, the Amazon Customer Review was a Revolutionary Innovation – even now few retailers do it as well

amazon%20customer%20review%20nov%202009.jpg

Source: Amazon.com

Level Three: Amazon Sells Users’ and Others’ Products

The next step was to do the inverse of Phase Two. Having pushed Amazon products into other e-commerce properties and recruited its users as a salesforce to grow the consumer base, Amazon now started pulling other businesses’ products into its logistics, sales, marketing, and reporting system. This was the beginning of Amazon Marketplace and yet another set of APIs were provided to hook up other businesses’ workflow into Amazon’s.

To a nontrivial extent, this involved blurring the distinction between consumer and producer – another major driver in Telco 2.0 scenarios. Small businesses could now benefit from a massive IT and distribution system they could never have imagined developing themselves and couldn’t have afforded to buy into. The pricing model was the direct inverse of the affiliate program; Amazon got free advertising from the affiliates until a sale occurred, then they paid out a percentage commission. Now, the Marketplace upstream customers got free advertising, marketing, reporting, and warehousing until a sale occurred; then they paid a percentage commission to Amazon.

Amazon Marketplace Expands “Selection” – the range of Inventory Choice – especially valuable in “long tail” retail items

amazon%20marketplace%20illustration%20nov%202009.jpg

Source: Amazon.com

In a sense, this is analogous to the developer community and revenue-sharing in Telco 2.0.

Level Four: Amazon creates new products and services by leveraging core assets in new ways

Having created the IT infrastructure to support their own and others directly compatible retail services, Amazon have gone a step further to create new IT based products and services based on their immense and powerful IT infrastructure.

Examples include S3 the simple storage service, the Cloudfront CDN (Content Delivery Network), and EC² the Elastic Compute Cloud.

S3, for Simple Storage Service, was the first of Amazon’s IT products. It provides online data storage – essentially a huge virtual hard disk – through a Web service API, at prices which reflected their immense economies of scale and which worked on a pay-as-you-go basis. It was an immediate hit, especially with the growing community of Web-video sites – suddenly, Web sites that became popular didn’t immediately get replaced by “Bandwidth Exceeded” pages. It also had the advantage that the data was distributed across Amazon’s network of data centres, which offered a degree of redundancy; although like all cloud computing, it requires a lot of confidence in the operator.

Cloudfront is a basic content-delivery network, which provides geo-localised caching of heavy media files stored in S3. Its pricing is targeted at fairly low-volume users like image hosting or software distributions; its technical strategy is that of a “macro-CDN” with servers located at major Internet exchanges, rather than an Akamai-like deployment into ISPs’ own networks.

But the most important of these products for the future was EC², for Elastic Compute Cloud, which provides computing power on similar terms to those under which S3 provides storage. This was the first of the public clouds, and Amazon rapidly developed other products based on it, such as the SimpleDB cloud database, the VPC private cloud, and Elastic MapReduce, which provides the Hadoop system for analysing massive datasets in cloud form. EC² has rapidly become a preferred option for rapid development and scaling of Web applications.

Better Wholesale

All this had the effect of generalising Amazon from a bookshop to a huge transaction-processing and logistics operation. As a side-effect, the IT infrastructure expanded to the point where it became a line of business in itself, enabling the AWS cloud computing services.

With this capability available, the next step was to offer it as a service to other transactional Web sites and businesses; it is one of the company’s proudest achievements that a large proportion of sales through EBay are actually shipped through Amazon’s transport system. Perhaps less well known is that some very significant retailers possessing their own logistics, web presence, and stores, are using Amazon Web Services to manage it all. This is why the system has an API for cash registers although Amazon.com obviously doesn’t deal in cash.

Again, the importance of better wholesale is something we frequently stress.

Conclusion and Lessons for Would-be Platform Players

Amazon’s evolution from 1.0 to 2.0 has taken place through a succession of waves, which roughly match key concepts in Telco 2.0. Building the logistics and IT systems drove down costs and created a systems architecture that provided for future innovation, and specifically for user-driven innovation. The affiliate, review, and recommendation systems are valid responses to fragmentation, commoditisation, and mass customisation, and they are powered by customer participation.

Amazon Marketplace essentially creates the economic element of an external developer community for Amazon and the cloud computing products create the technical element. The final confirmation of their excellence is that other major retailers are using their systems as wholesale services.

Amazon’s strategy can be seen as a blueprint for any retail lead business (such as a Telco) to transform itself from a pure retailer to a ‘two-sided platform player’.

Strategic Transformation Level	Key steps and lessons for Would-Be Platform Players (e.g. Telcos, Software Platforms)
Level One: Building Scale and Excellence in One Market	A strategic focus on ‘flywheels’ – cycles that enhance value creation Design to serve both existing and newly recognised needs with your offering (e.g. search, recommendation, participation) Sufficient scale gives a leading advantage in customer choice Scale, and operational excellence build a low cost, flexible core platform
Level Two: Users Sell and Recommend Your Products	Strategic focus on increasing customer participation, e.g.in recommending and selling your products Investment in data analysis to maximise intelligent retailing APIs are opened to allow customers and others to distribute your offerings to new markets in new ways Commercial arrangements and service enablers allow 3^rd parties to lubricate and catalyse the process
Level Three: You Sell Users’ and Others’ Products	Strategic focus on building transaction volume More transactions add immediate margin More transactions drive strategic unit costs down More inventory provides more choice More choice attracts and keeps more customers
Level Four: Create new products and services by leveraging core assets in new ways	Re-assessment of strategic assets Create new products and services leveraging market value and defraying costs of core assets

Full Article: Where to Co-operate, Where to Compete

You can download the full 25 page Briefing in PDF format here. The Executive Summary and Table of Contents are reproduced below.

Summary: An in-depth analysis of Google’s strategy and objectives overall and in particular in relation to the Telecoms industry, with recommendations of where to compete and where to cooperate.

Executive Summary

Google is not just a search engine, nor is it just a media or a software company. It is, first and foremost, a massive advertising brokerage, which uses two-sided business models to maximise both the creation of ad inventory and the accuracy with which it matches targeted ads to content.

A major driver of Google’s success is its investment in infrastructure – it spends almost twice as much CAPEX as its closest competitor, Yahoo! The combination of two-sidedness and infrastructure has led to the creation of a business with immense market share, stable and sizeable margins, and strong cash flow.

Like many successful ‘two-sided’ business models, Google employs two out of three generic approaches to charging described further in the report – charging merchants for transactions and services. Its success is enhanced by synergies with its free enabling services for merchants such as Google Adwords and Google Analytics, and by the growing end-user market reach of new and acquired applications such as Google Maps, Google Voice, Gmail, YouTube and the Chrome browser.

The frequent criticism that Google is unfocused is dismissed. Instead, we argue, Google’s investments reflect:

Google’s aims to increase the share of time that people spend on its sites, and the total time people spend on the Internet overall (at the expense of other media)
a conscious strategy of experimentation
a policy of creating capabilities for future development as a deterrent to competitors from entering businesses vital to Google’s success. We characterise these deterrents as ”submarines”.

We see two major areas of conflict between Telcos and Google: communication services and advertising. In particular, Google is probably the largest single strategic threat to operator voice and messaging businesses. Its ability to reinvent its own versions of operators’ supposedly “unique” capabilities should not be underestimated. Right now, Telcos’ have unrivalled raw data on consumer behaviour, but Google is seeking to build its own direct relationship with consumers as it makes a play for the mobile advertising brokerage business.

Even so, Google is the Telcos’ friend in the sense that its portfolio of user-friendly services is driving mobile Internet usage and new sales of mobile data tariffs. We conclude that Telcos should adopt a policy of ‘co-opetition’, fighting fiercely in some areas and partnering in others.

We recommend that Telcos should co-operate with Google in these areas:

Adopt, but customise, Android. Android is essentially an aircraft carrier for Google’s communications services, but Telcos can neutralise the short-to-medium term threat by customising this highly open platform. Android smartphones will also drive sales of mobile data tariffs and act as a counterweight to Apple and Nokia. But Telcos should be alert to any moves by Google to exert tighter control over Android.
Telcos should work with Google to combine the impressive and hard to replicate Google Maps and Street View apps with Telcos’ location data and Call Detail Records (CDR) to produce compelling, personalised services.
As its revenue growth slows, Google may start trying to sell more services to consumers, which would help the whole Internet ecosystem move to a more sustainable business model. Telcos should encourage such a move, perhaps by providing white-label authentication and billing systems.

We recommend that Telcos should compete with Google in these areas:

Telcos’ voice and messaging services need to at least match the ease-of-use and rich functionality of Google Voice.
Telcos are well positioned to claim a major share of the mobile advertising brokerage business, but Google is unlikely to let that happen without a fight, so Telcos may be forced into head-on competition.
Unless Telcos can provide faster and more accurate location information than Google, much of the value could be sucked out of the promising market for location-based services.
Telcos need to ensure their networks and billing systems, rather than the Internet or a Google platform, underpin the nascent mobile payments and mobile banking markets.
Telcos’ ‘Golden Asset’ underpinning many of the potential future business models is the wealth of customer data available through their Call Detail Records (CDR) and billing systems. Understanding consumers’ behaviour will be the key to victory in the voice, messaging and advertising brokerage markets. It is vital that Telcos recognise and value this data, and do not inadvertently permit Google to accumulate it.
Neither should Google be allowed to attract a disproportionate share of the time and attention of mobile apps developers and thereby dominate the mobile apps market in the way that Microsoft came to win the PC software market.

Understanding Google’s business

Google – the infrastructure company

Google: A Classic Two-Sided Business Model

Strategies for Two-Sided Markets

Approach One: making money out of transactions

Approach Two: sell services to the crowd

Approach Three: charge for access

The power of combinations

Criticisms of Google’s Strategy

Social Networking: Has Google missed the boat?

What about the dark fibre, Google Checkout, radio spectrum bids?

Google Changes Sides?

Google versus Telcos: SWOT Analysis

Who Knows What About Consumers

Location: Searching for an Edge

Google’s Communication Services

Google Talk: Softly, Softly

Google Voice of Doom?

Wave goodbye to push email?

Android: An Aircraft Carrier for Google Services

More of a threat than an opportunity

Google – The Extraterrestrial

The Advertising War of 2011

Recommendations for Action

Ignore, Fight, Partner?

Conclusion: Co-Optition is the way forward

Introduction

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Self-driving disruption

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Introduction

Telcos can and do disrupt

Figure 1: Representative examples of disruptive plays driven by telcos

Offensive, major financial impact

SK Planet – an ambitious mobile commerce play

Strategy

Introduction

Executive Summary

The wallet land-grab

More and better data

Fragmentation could equal failure

The Digital Commerce 2.0 Gold Rush

The opportunity

Figure 1: How a leading telco stacks up with Internet players on digital commerce

Highly-targeted direct marketing and loyalty programmes could be a much bigger opportunity than conventional advertising

Figure 2: A breakdown of the U.S. direct marketing and advertising market

Figure 3: The key elements of the digital commerce flywheel

Actual deployments

Executive Summary

Introduction

Figure 1: Google, Microsoft 2.0?

Google’s Challenges

1: Questionable Victories

2: Telco-isation

Figure 2: Google’s advertising revenues cascade into all other divisions

3: Look & Feel Problems

Figure 3: Google + on Google Trends: fading into the noise?

4: Palpable Project Proliferation

5. Google Play – a Collection of Challenges?

Introduction: Skype, the Original ‘Voice 2.0’

A little history

A Dive into Skype’s Accounts

Introduction

Amazon’s Current Performance

Amazon’s Media Sales

Counting the Cost of Physical Distribution

The Attraction of Online Distribution

The success of the Kindle: more eBooks than Paperbacks

Amazon and Music: Downloads not moving the needle

The move into Movie streaming

Amazon shaking up the AppStore market

Executive Summary

There’s little time left to take new opportunities

Doing the core job better

Seeking viable roles beyond connectivity and ‘one-sided’ retail

There are opportunities, but can telcos take them?

How much time do telcos have left?

Is there a danger of telcos repeating bad old habits?

Report Background

Introduction

Amazon’s Stock Performance

The Trading Hub Strategy

Levels of Strategic Transformation

Level One: Building Scale and Excellence in One Market

Level Two: Users Sell and Recommend Amazon Products

Level Three: Amazon Sells Users’ and Others’ Products

Level Four: Amazon creates new products and services by leveraging core assets in new ways

Better Wholesale

Conclusion and Lessons for Would-be Platform Players

Executive Summary

Table of Contents

Sample Reports