Stakeholder model: Turn growth killers into growth makers

Introduction: The stakeholder model

Telecoms operators’ attempts to build new sources of revenue have been a core focus of STL Partners’ research activities over the years. We’ve looked at many telecoms case studies, adjacent market examples, new business models and technologies and other routes to explore how operators might succeed. We believe the STL stakeholder model usefully and holistically describes telcos’ main stakeholder groups and the ideal relationships that telcos need to establish with each group to achieve valuable growth. It should be used in conjunction with other elements of STL’s portfolio which examine strategies needed within specific markets and industries (e.g., healthcare) and telcos’ operational areas (e.g., telco cloud, edge, leadership and culture).

This report outlines the stakeholder model at a high level, identifying seven groups and three factors within each group that summarise the ideal relationship. These stakeholder and influencer groups include:

  1. Management
  2. People
  3. Customer propositions
  4. Partner and technology ecosystems
  5. Investors
  6. Government and regulators
  7. Society

Enter your details below to download an extract of the report


 

1. Management

Growth may not always start at the top of an organisation, but to be successful, top management will be championing growth, have the capabilities to lead it, and aligning and protecting the resources needed to foster it. This is true in any organisation but especially so in those where there is a strong established business already in place, such as telecoms. The critical balance to be maintained is that the existing business must continue to succeed, and the new growth businesses be given the space, time, skills and support they need to grow. It sounds straightforward, but there are many challenges and pitfalls to making it work in practice.

For example, a minor wobble in the performance of a multi-billion-dollar business can easily eclipse the total value of a new business, so it is often tempting to switch resources back to the existing business and starve the fledgling growth. Equally, perceptions of how current businesses need to be run can wrongly influence what should happen in the new ones. Unsuitable choices of existing channels to market, familiar but ill-fitting technologies, or other business model prejudices are classic bias-led errors (see Telco innovation: Why it’s broken and how to fix it).

To be successful, we believe that management needs to exhibit three broad behaviours and capabilities.

  1. Stable and committed long term vision for growth aligned with the Coordination Age.
  2. Suitable knowledge, experience and openness.
  3. Effective two-way engagement with stakeholders. (N.B. We cover the board and most senior management in this group. Other management is covered in the People stakeholder group.)

Management: Key management enablers of growth

management-leadership-vision-growth-indicators

Source: STL Partners

Stable and committed long-term vision for growth

The companies that STL has seen making more successful growth plays typically exhibit a long-term commitment to growth and importantly, learning too.

Two examples we have studied closely are TELUS and Elisa. In both cases, the CEO has held tenure in the long-term, and the company has demonstrated a clear and well managed commitment to growth.

In TELUS’s case, the primary area of growth targeted has been healthcare, and the company now generates somewhere close to 10% of its revenue from the new areas (it does not publish a number). It has been working in healthcare for over 10 years, and Darren Entwistle, its CEO, has championed this cause with all stakeholders throughout.

In Elisa’s case, the innovation has been developed in a number of areas. For example, how it couples all you can use data plans and a flat sales/capex ratio; a new network automation business selling to other telcos; and an industrial IoT automation business.

Again, CEO Veli-Matti Mattila has a long tenure, and has championed the principle of Elisa’s competitive advantage being in its ability to learn and leverage its existing IP.

…aligned with the Coordination Age

STL argues that the future growth for telcos will come by addressing the needs of the Coordination Age, and this in turn is being accelerated by both the COVID-19 pandemic and growing realisation of climate change.

Why COVID-19 and Climate change are accelerating the Coordination Age

COVID-19-and-Climate-change-Coordination-Age-STL

 

Source: STL Partners

The Coordination Age is based on the insight that most stakeholder needs are driven by a global need to make better use of resources, whether in distribution (delivery of resources when and where needed), efficiency (return on resources, e.g. productivity), and sustainability (conservation and protection of resources, e.g. climate change).

This need will be served through multi-party business models, which use new technologies (e.g. better connectivity, AI, and automation) to deliver outcomes to their customers and business ecosystems.

We argue that both TELUS and Elisa are early innovators and pathfinders within these trends.

Suitable knowledge, experience and openness

Having the right experience, character and composition in the leadership team is an area of constant development by companies and experts of many types.

The dynamics of the leadership team matter too. There needs to be leadership and direction setting, but the team must be able to properly challenge itself and particularly its leader’s strongest opinions in a healthy way. There will of course be times when a CEO of any business unit needs to take the helm, but if the CEO or one of the C-team is overly attached to an idea or course of action and will not hear or truly consider alternatives this can be extremely risky.

AT&T / Time Warner – a salutary tale?

AT&T’s much discussed venture into entertainment with its acquisitions of DirecTV and Time Warner is an interesting case in point here. One of the conclusions of our recent analysis of this multi-billion-dollar acquisition plan was that AT&T’s management appeared to take a very telco-centric view throughout. It saw the media businesses primarily as a way to add value to its telecoms business, rather than as valuable business assets that needed to be nurtured in their own right.

Regardless of media executives leaving and other expert commentary suggesting it should not neglect the development of its wider distribution strategy for the content powerhouse for example, AT&T ploughed on with an approach that limited the value of its new assets. Given the high stakes, and the personalised descriptions of how the deal arose through the CEOs of the companies at the time, it is hard to escape the conclusion that there was a significant bias in the management team. We were struck by the observation that it seemed like “AT&T knew best”.

To be clear, there can be little doubt that AT&T is a formidable telecoms operator. Many of its strategies and approaches are world leading, for example in change management and Telco Cloud, as we also highlight in this report.

However, at the time those deals were done AT&T’s board did not hold significant entertainment expertise, and whoever else they spoke with from that industry did not manage to carry them to a more balanced position. So it appears to us that a key contributing factor to the significant loss of momentum and market value that the media deals ultimately inflicted on AT&T was that they did not engineer the dynamics or character in their board to properly challenge and validate their strategy.

It is to the board’s credit that they have now recognised this and made plans for a change. Yet it is also notable that AT&T has not given any visible signal that it made a systemic error of judgement. Perhaps the huge amounts involved and highly litigious nature of the US market are behind this, and behind closed doors there is major change afoot. Yet the conveyed image is still that “AT&T knows best”. Hopefully, this external confidence is now balanced with more internal questioning and openness to external thoughts.

What capabilities should a management team possess?

In terms of telcos wishing to drive and nurture growth, STL believes there are criteria that are likely to signal that a company has a better chance of success. For example:

  • Insight into the realistic and differentiating capabilities of new and relevant markets, fields, applications and technologies is a valuable asset. The useful insight may exist in the form of experience (e.g. tenure in a relevant adjacent industry such as healthcare, or delivery of automation initiatives, working in relevant geographies, etc.), qualification (e.g. education in a relevant specialism such as AI), or longer term insight (which may be indicated by engagement with Research and Development or academic activities)

[The full range of management capabilities can be viewed in the report…..] 

 

2. People…

 

Table of Contents

  • Executive Summary
  • Introduction
  • Management
    • Stable and committed long-term vision for growth
    • …aligned with the Coordination Age
    • Suitable knowledge, experience and openness
    • Two-way engagement with stakeholders
  • People
    • Does the company have a suitable culture to enable growth?
    • Does the company have enough of the new skills and abilities needed?
    • Is the company’s general management collaborative, close to customers, and diverse?
  • Customer propositions
    • Nature of the current customer relationship
    • How far beyond telecoms the company has ventured
    • Investment in new sectors and needs
  • Partner and technology ecosystems
    • Successful adoption of disruptive technologies and business models
    • More resilient economics of scale in the core business
    • Technology and partners as an enabler of change
  • Investors
    • The stability of the investor base
    • Has the investor base been happy?
    • Current and forecast returns
  • Government and regulators
    • The tone of the government and regulatory environment
    • Current status of the regulatory situation
    • The company’s approach to government and regulatory relationships
  • Society
    • Brand presence, engagement and image
    • Company alignment with societal priorities
    • Media portrayal

Related research

Enter your details below to download an extract of the report


 

The Future Value of Voice and Messaging

Background – ‘Voice and Messaging 2.0’

This is the latest report in our analysis of developments and strategies in the field of voice and messaging services over the past seven years. In 2007/8 we predicted the current decline in telco provided services in Voice & Messaging 2.0 “What to learn from – and how to compete with – Internet Communications Services”, further articulated strategic options in Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon in 2011, and more recently published initial forecasts in European Mobile: The Future’s not Bright, it’s Brutal. We have also looked in depth at enterprise communications opportunities, for example in Enterprise Voice 2.0: Ecosystem, Species and Strategies, and trends in consumer behaviour, for example in The Digital Generation: Introducing the Participation Imperative Framework.  For more on these reports and all of our other research on this subject please see here.

The New Report


This report provides an independent and holistic view of voice and messaging market, looking in detail at trends, drivers and detailed forecasts, the latest developments, and the opportunities for all players involved. The analysis will save valuable time, effort and money by providing more realistic forecasts of future potential, and a fast-track to developing and / or benchmarking a leading-edge strategy and approach in digital communications. It contains

  • Our independent, external market-level forecasts of voice and messaging in 9 selected markets (US, Canada, France, Germany, Spain, UK, Italy, Singapore, Taiwan).
  • Best practice and leading-edge strategies in the design and delivery of new voice and messaging services (leading to higher customer satisfaction and lower churn).
  • The factors that will drive best and worst case performance.
  • The intentions, strategies, strengths and weaknesses of formerly adjacent players now taking an active role in the V&M market (e.g. Microsoft)
  • Case studies of Enterprise Voice applications including Twilio and Unified Communications solutions such as Microsoft Office 365
  • Case studies of Telco OTT Consumer Voice and Messaging services such as like Telefonica’s TuGo
  • Lessons from case studies of leading-edge new voice and messaging applications globally such as Whatsapp, KakaoTalk and other so-called ‘Over The Top’ (OTT) Players


It comprises a 18 page executive summary, 260 pages and 163 figures – full details below. Prices on application – please email contact@telco2.net or call +44 (0) 207 247 5003.

Benefits of the Report to Telcos, Technology Companies and Partners, and Investors


For a telco, this strategy report:

  • Describes and analyses the strategies that can make the difference between best and worst case performance, worth $80bn (or +/-20% revenues) in the 9 markets we analysed.
  • Externally benchmarks internal revenue forecasts for voice and messaging, leading to more realistic assumptions, targets, decisions, and better alignment of internal (e.g. board) and external (e.g. shareholder) expectations, and thereby potentially saving money and improving contributions.
  • Can help improve decisions on voice and messaging services investments, and provides valuable insight into the design of effective and attractive new services.
  • Enables more informed decisions on partner vs competitor status of non-traditional players in the V&M space with new business models, and thereby produce better / more sustainable future strategies.
  • Evaluates the attractiveness of developing and/or providing partner Unified Communication services in the Enterprise market, and ‘Telco OTT’ services for consumers.
  • Shows how to create a valuable and realistic new role for Voice and Messaging services in its portfolio, and thereby optimise its returns on assets and capabilities


For other players including technology and Internet companies, and telco technology vendors

  • The report provides independent market insight on how telcos and other players will be seeking to optimise $ multi-billion revenues from voice and messaging, including new revenue streams in some areas.
  • As a potential partner, the report will provide a fast-track to guide product and business development decisions to meet the needs of telcos (and others).
  • As a potential competitor, the report will save time and improve the quality of competitor insight by giving strategic insights into the objectives and strategies that telcos will be pursuing.


For investors, it will:

  • Improve investment decisions and strategies returning shareholder value by improving the quality of insight on forecasts and the outlook for telcos and other technology players active in voice and messaging.
  • Save vital time and effort by accelerating decision making and investment decisions.
  • Help them better understand and evaluate the needs, goals and key strategies of key telcos and their partners / competitors


The Future Value of Voice: Report Content Summary

  • Executive Summary. (18 pages outlining the opportunity and key strategic options)
  • Introduction. Disruption and transformation, voice vs. telephony, and scope.
  • The Transition in User Behaviour. Global psychological, social, pricing and segment drivers, and the changing needs of consumer and enterprise markets.
  • What now makes a winning Value Proposition? The fall of telephony, the value of time vs telephony, presence, Online Service Provider (OSP) competition, operators’ responses, free telco offerings, re-imaging customer service, voice developers, the changing telephony business model.
  • Market Trends and other Forecast Drivers. Model and forecast methodology and assumptions, general observations and drivers, ‘Peak Telephony/SMS’, fragmentation, macro-economic issues, competitive and regulatory pressures, handset subsidies.
  • Country-by-Country Analysis. Overview of national markets. Forecast and analysis of: UK, Germany, France, Italy, Spain, Taiwan, Singapore, Canada, US, other markets, summary and conclusions.
  • Technology: Products and Vendors’ Approaches. Unified Comminications. Microsoft Office 365, Skype, Cisco, Google, WebRTC, Rich Communications Service (RCS), Broadsoft, Twilio, Tropo, Voxeo, Hypervoice, Calltrunk, Operator voice and messaging services, summary and conclusions.
  • Telco Case Studies. Vodafone 360, One Net and RED, Telefonica Digital, Tu Me, Tu Go, Bluvia and AT&T.
  • Summary and Conclusions. Consumer, enterprise, technology and Telco OTT.

Digital Entertainment: What Gets Measured Gets Money

Summary: For mobile entertainment services to generate revenues commensurate to the attention they receive, the industry needs to improve ‘discovery’ tools, create more effective creative inventory, and deliver proof of its effectiveness. A summary of the Digital Entertainment 2.0 session of the 2013 Silicon Valley Brainstorm. (April 2013)

Digital Entertainment 2.0: What Gets Measured Gets Money

  Read in Full (Members only)   To Subscribe click here

Below are the high-level analysis and detailed contents from a 27 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 here. The Digital Economy, Consumer Experience (including service ‘discovery’), Digital Commerce and the Internet of Things will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. Non-members can find out more about subscriptions here, or to find out more about this and other enquiries, please email contact@telco2.net or call +44 (0) 207 247 5003.

To share this article easily, please click:

 



Introduction

Part of the New Digital Economics Executive Brainstorm series, the Digital Entertainment 2.0 session took place at the Intercontinental Hotel, San Francisco, on the 20th March, 2013. The title and objective of the session was ‘How to Make Mobile Work’.

Analysis: What Gets Measured Gets Money

The key steps for mobile entertainment services to generate revenues commensurate to the attention it receives in North America are: to improve measurement of the success of ‘discovery’ tools, create more effective creative advertising inventory, and deliver proof of its effectiveness, not just the attention.

Mobile is a ‘break out’ entertainment media

Mobile has for some time been an entertainment media in the eyes of consumers, and particularly younger ones who soak up ‘dead time’ by playing games, using apps and even just communicating for fun, although to date not all these forms of entertainment have been connected.

In the past 3 years there has been a significant increase in ‘on demand’ and mobile consumption in North American and European markets, particularly in these younger segments, although a key challenge has been that monetisation has not followed the use of time spent on mobile.

Mobile entertainment itself can be defined as related to a context (e.g. ‘out and about’, ‘dead time’, ‘second screen’), devices (featurephone, smartphone or tablet), or type of connection (e.g. none, 3G, 4G, Wi-Fi). In general though, there are two main scenarios: mobile as a medium in its own right; and mobile as a ‘second screen’ experience. So in either scenario, we think the clearest answer to ‘what is the role of mobile?’ is that it is a ‘break out’ media, either extending the context of a form of entertainment, or extending the nature of entertainment in the existing context.

For video in North America, TV is still the dominant form of consumption, but mobile is growing rapidly as the ‘second screen’ that controls or supplements the main screen, especially with the explosive growth of tablets since the introduction of the Apple iPad.

Segmentation – there’s no single dominant business model

There has been much debate about the viability of different business models, broadly: advertising funded; consumer ownership; and subscription. While most participants believed that the ownership model would be most successful in music, where there is a higher likelihood that a consumer will want to listen to a track or album numerous times, ‘collectors’ or owners will still exist for videos, books and games.

Digital Collector Segment Size April 2013

Equally, demand exists for single ‘on demand’ services (e.g. pay per view), subscription (e.g. Spotify, cable), and advertising funded (e.g. YouTube). The balance is likely to change in video in particular with a move to increasing ‘on demand’ services in line with the current trend in consumer behaviour.

‘Discovery’: finding a model that proves it works

As the previously dominant channel-based model of curation in broadcast media gradually dissolves, and as the screen size, context and characteristics of consumption change, consumers face an increasing challenge finding out what they want to see, play or listen to.

Curation still exists through channel guides, taste-makers and review sites, and indeed through many offline sources, but is increasingly less the property of the content producer or distributor that it once was.

Content Discovery, one of the great buzz phrases of the industry, is therefore an ongoing challenge, and the application of networked computing power provide some advantages to connected and interactive devices like smartphones and tablets. Approaches used include:

  • 3rd party classification (e.g. by genre, subject), enabling more structured self-selection through menu choices etc.;
  • Recommendation engines (the Amazon/Netflix model), that can be based on a ‘Big Data’ approach (‘other people who bought this also bought that’) and/or semantic association (‘here’s another sentimental family comedy you might like’);
  • Social approaches, based on what your friends like or are watching, either through generic social media like Facebook, and specialised social media such as Zeebox.com (for video) and Goodread.com (for books);
  • Search – although this is non-trivial due to the volume of material in existence, and the ever-changing art of Search Engine Optimisation (SEO) – getting the right items at the top of the list.
  • Hybrid approaches that combine ‘Big Data’ with ‘semantic association’ (e.g. see Jinni.com) and/or other forms e.g. Social (e.g. see this intriguing article on the $1m recommendations challenge from Netflix).

For all methods, the inconsistencies of the metadata recorded (e.g. is the media described accurately using your terms) is frequently a challenging limitation.

To a degree though, content discovery has always been a process of ‘trial and error’. Consumers read, hear or see a load of ideas, try a few out, stick to the ones they like, and grow to trust the means of discovery that is most successful for them.

To this end, an element that appears to be missing in many discovery processes today is the measurement of success rate for the user – “was this a good recommendation for you”? In our view, discovery applications that accurately track success well (easily, with a good UI, and with a tangibly good and improving success rate) will ultimately prove successful. All of the above techniques could and to a greater or lesser extent do adopt this approach, although it isn’t yet clear which will perform the best in the market.

Delivering the goods

The challenges of delivering content, particularly large volume (e.g. HD Video) and/or latency sensitive content (such as multi-player virtual gaming), were not addressed in the Digital Entertainment session, though Software Defined Networking (SDN), which offers the promise of more efficient routing through networks for certain traffic, was discussed in the Digital Economy session. Content Delivery Networks and other Broadband design techniques have also been addressed at length in other STL Partners research and brainstorms

However, ‘Bandwidth’ was one of the key determinants of success according to the ‘BBC’ heuristic offered from Mitch Berman’s experience as a guide to how mobile entertainment will operate in different markets: Bandwidth; Business Model; and Culture. (NB We think this can also be seen as a shorthand variant of our business model framework, with culture being a key driver of the content proposition, bandwidth of the technical capability, and business model as the value proposition.) 

Getting money commensurate with the time spent on mobile

A major challenge for advertising funded mobile entertainment is that there is a significant gap between the ratio of the amount of time spent viewing mobile and the money spent on it, and other forms of media. This is illustrated by the stats that:

  • For The Weather Channel, mobile is 1.5 X the traffic but less than 50% of the revenue;
  • 10% of media consumption occurs online Vs. 1% media spend (from the presentation by Cary Tild, CIO GroupM in subsequent Marketing and Advertising session).

While this imbalance is genuine, there are important advantages and limitations to mobile as a medium that haven’t yet been fully exploited or overcome, respectively.

One of the major limitations has been the need for more effective commercial inventory on mobile. At the Brainstorm there was, for example, much discussion on the limitations of banner type ads in a mobile environment. Many more innovative forms are now evolving, illustrated by:

  • The Weather Channel’s experimental creative commercial content within its app, in which instead of a rectangular banner at the top of the screen, appropriate commercial content is embedded on background of the weather screen (e.g. a cloud-wrapped image from a mystery film on a cloudy day’s forecast screen);
  • New trial applications that insert products virtually in existing content (e.g. a soft-drink on a table in an old TV show, as demonstrated in test form by ReinCloud);
  • And subsequently, the launch of Facebook Home, designed to increase the commercial inventory available to Facebook by taking over the screen of a user’s smartphone.

In the same way that advertising has always evolved (from print to radio, radio to TV, etc.), there is still much to be learned through innovation and experimentation – and of course the related measurements of success.

Charging differently for content rights by content owners, e.g. by the use of content rather than as an upfront fee, was also discussed, although many content owners are reluctant to move to or even test this model as they see it representing a significant risk to existing revenue streams.

The digital economy core themes of ‘big data’ and ‘localisation’ were also raised, and an example given by the Weather Company of a highly effective promotion of grass seeds based on locality and the detection of key seasonal weather changes.

Finally, a key theme in common with the subsequent advertising session was that proving the effectiveness of models to consumers, brands, and investors was the key step for most mobile entertainment concepts. We see thoughtful design, coupled with trial and experimentation, effective measurement and the ongoing application of learning processes to be central to achieving that proof.

Next Steps

Effectiveness in the ‘discovery’ phase of digital service is a key success criterion, particularly in Digital Entertainment. We will continue to research and explore this area in our Executive Brainstorms in Europe, the Middle East, and Asia-Pacific.

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

  • Brainstorm: Stimulus Presentations – summary and key points
  • Brainstorm: Table Discussions
  • Verbatim delegate questions & comments
  • Brainstorm: Panel Session in summary

…and the following figures…

  • Figure 1 – Traditional linear TV model is facing multiple disruptions
  • Figure 2 – Non-linear forms of TV becoming a massmarket requirement
  • Figure 3 – Tablets are changing the TV/video landscape
  • Figure 4 – The mobile problem
  • Figure 5 – Whither digital collectors?
  • Figure 6 – Shine on you crazy diamond?
  • Figure 7 – Sharing the locker?
  • Figure 8 – Do we all want libraries?

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 27 page report in PDF format here. Non-Members, please subscribe here. The Digital Economy, Consumer Experience (including service ‘discovery’), Digital Commerce and the Internet of Things will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. For this or any other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Background & Further Information

The 2013 Silicon Valley Brainstorm used STL’s unique ‘Mindshare’ interactive format, including cutting-edge new research, case studies, use cases and a showcase of innovators, structured small group discussion on round-tables, panel debates and instant voting using on-site collaborative technology. Around 30 executives from entertainment, media, telecoms and technology companies participated in this session in total.

The focus was on looking at “the true role for mobile” in the digital entertainment industry. Opening the session informally, various attendees were canvassed about their intentions & hopes for the day. This yielded a desire for information to assist in business modelling, to learn about the realities of the US entertainment market – or just to experience “inspiration and surprise” from a diverse set of speakers.

Objective: How to Make Mobile Work

The session covered three presentations and a demo, spanning the width of the entertainment business from TV to books, and from user behaviour to advertising. Its principle focus was around how content and telecom companies could generate sustainable businesses by leveraging the trend towards mobility – both devices and networks.

  • Designing compelling mobile entertainment experiences
  • 4G: The impact on video distribution and consumption economics
  • Latest models for monetisation

The session included three Stimulus Speakers:

  • Andre James, Partner, Bain & Co
  • Alex Linde, Vice President, Mobile & Digital Apps,The Weather Channel
  • Keith McMahon, Senior Analyst, STL Partners/Telco 2.0

In addition, Dan Reitan, CEO, Reincloud gave an Innovation Showcase demo, after which these four were joined on the debate panel by two other industry luminaries:

  • David Gale, EVP New Media, MTV
  • Mitchell Berman, Principal, Blend Digital

We’d like to thank the sponsors of the Brainstorm:
Silicon Valley 2013 Sponsors

The Great Compression: surviving the ‘Digital Hunger Gap’

Introduction

The Silicon Valley Brainstorm took place on 19-20 March 2013, at the Intercontinental Hotel, San Francisco.

Part of the New Digital Economics Executive Brainstorm & Innovation Series, it built on output from previous events in Singapore, Dubai, London and New York, and new market research and analysis, and focused on new business models and growth opportunities in digital commerce, content and the Internet of Things.

Summary Analysis: ‘The Great Compression’

In the next 10 years, many industries face the ‘Great Compression’ in which, in addition to the pressures of ongoing global economic uncertainty, there is also a major digital transformation that is destroying traditional value and moving it ‘disruptively’ to new areas and geographies, albeit at diminished levels.

In previous analyses (e.g. Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon) we have shown how key technology players in particular compete with different objectives in different parts of the digital value chain. Figure 1 below shows via crossed dollar signs (‘New Non-Profit’) the areas in which companies are competing without the primary intention of driving profits, which means that traditional competitors in those areas can expect ‘disruptive’ competition from new business models.

Figure 1 – Digital disruption
Digital disruption occurring in many industries Mar 2013

Source: STL Partners ‘Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon’

 

The Digital Hunger Gap

For the incumbent industry players we call the near-term results of this disruption ‘The Digital Hunger Gap’ – the widening deficit between past and projected revenues. Chris Barraclough, Chief Strategist STL Partners presented the classic Music Industry case study of the ‘Hunger Gap’ effects of digital disruption.

Figure 2 – The Music Industry’s ‘Hunger Gap’
The Music Industry's ‘Hunger Gap’ Mar 2013

Source: STL Partners

 

In a vote, 95% of participants agreed that something similar would happen in other industries.

Chris then presented our initial analysis of the ‘Hunger Gap’ for telcos (to be published in full shortly), and asked the participants where they thought the telco industry would be relative to its 2012 position in 2020.

Figure 3 – Participants’ views on forecasts for the telecoms industry
Participants' views on forecasts for the telecoms industry Mar 2013

Source: Silicon Valley 2013 Participants / STL Partners

 

As can be seen, participants’ views were widely spread, with a slight bias towards a more pessimistic outlook than that presented of a recovery to 2012 levels.

Chris argued that as the ‘hunger gap’ widens, and before new revenues are developed, there will be massive consolidation and cost-reduction among incumbent players, and opportunities for innovation in services, but the chances of success in the latter are very low and require a portfolio approach and either deep pockets, exceptional insight, or considerable good fortune.

Richard Kramer, Managing Partner of Arete Research, also presented a deflationary outlook for all but the leading consumer technology players in the handset and tablet arena.

Participants then voted on which areas needed the most significant changes in their business – and existing managements’ ‘mindset’ was voted as the top priority.

Figure 4 – ‘Mindset’ is the biggest barrier to transformation
'Mindset' is the biggest barrier to transformation Mar 2013

Source: Silicon Valley 2013 Participants / STL Partners

 

It is also notable that all categories averaged 3.0 or over – or needing ‘Significant Change’. This points to a significant transformation across all industries.

Content:

  • Opportunities
  • Telco 2.0 Strategies
  • Big Data and Personal Data
  • Digital Commerce
  • Digital Entertainment
  • Mobile Advertising & Marketing
  • The Internet of Things
  • Outlook by Industry
  • Next Steps

 

  • Figure 1 – Digital disruption
  • Figure 2 – The Music Industry’s ‘Hunger Gap’
  • Figure 3 – Participants’ views on forecasts for the telecoms industry
  • Figure 4 – ‘Mindset’ is the biggest barrier to transformation
  • Figure 5 – The ‘Telco 2.0’ opportunities for CSPs
  • Figure 6 – The impact of ‘Software Defined Networks’ (SDN)
  • Figure 7 – Will ‘Personal Data’ be more useful than ‘Big Data’?
  • Figure 8 – STL Partners’ ‘Wheel of Digital Commerce’
  • Figure 9 – Who will in ‘SoMoLo’?
  • Figure 10 – Significant changes in viewing habits
  • Figure 11 – Transformation needed in the advertising industry
  • Figure 12 – Growth projections for M2M ‘mobile’ (e.g. 3G/4G) connected devices

Full Article: The Long Tail, Debunked?

The fifth Telco 2.0 Executive Brainstorm November 2008 continued its theme of business model innovation at the intersection of telecoms, media and technology by welcoming back Will Page, Chief Economist at the MCPS PRS Alliance, a copyright collection society that represents over 50,000 songwriters and 5,000 publishers.

Will_Page_Long_Tail%20%28Small%29.JPG

Will took the opportunity to present, exclusively to Telco 2.0, new research – based on an unprecedented analysis of digital music sales data gathered over a year – that opens to question the recieved wisdom around the ‘Long Tail’ theory, and helps to re-define what it actually means and for whom. The presentation created quite a stir at the event, in the media and blogosphere. Here, Telco 2.0 discusses at length the presentation and the reaction to it with Will Page.

Telco 2.0: At previous Telco 2.0 executive brainstoms you’ve covered file sharing, the economics of two-sided markets and now the long tail. Coming from outside the Telco world, how useful do you find the events?

Will: Very! It’s ironic that we live in a world of convergence yet too many of the disparate camps like to remain in their pigeon holes and preach to the converted. What Telco 2.0 events do, by allowing someone from a copyright collecting society to speak openly to an audience predominately made up of ISPs and Telco operators, is invaluable to both content and connectivity businesses.

You can see the importance of this more and more now. We have an truly awesome CEO of UK Music (the newly formed music industry trade body) in place now – Feargal Sharkey – and he’s spending an increasing amount of time at OfCom. Two years ago, that simply would not be happening. So, in many ways, what the Telco 2.0 Initiative does in terms of brining different industries together is ahead of the curve.

Last week’s Long Tail presentation was a good example of this. I first met Andrew Bud, Executive Chairman of MBlox (and now Chair of the Mobile Entertainment Forum) and a key collaborator on my analysis, at a Telco 2.0 event back in October 2007. I can’t think of another ‘platform’ where our paths would have crossed, even though both our businesses share surprisingly similar characteristics.

Telco 2.0: For those who follow Telco 2.0 but missed the presentation, could you bring them up to speed on what exactly you, your colleague Gary Eggleton and Andrew Bud have been working on over the past few months?

Will: Sure, it’s worth going back to the beginning as it’s been an interesting journey. Firstly, like so many others, I read the original Wired article on the Long Tail in December 2004 and was genuinely inspired by it. For the next two years I was active in the blog-to-a-book website and have to credit the concept as being one of the principal reasons behind moving to London to work in the music industry in the Summer of 2006, ironically when the book came out.

I guess the presentation I gave last week reflects what I’ve learnt in the two years since from working in a collecting society, an organisation which by default is in the long tail business. Indeed, the Performing Right Society (PRS) has been dealing with long tail markets since 1914. The whole purpose of constructing and offering a collective licence is that it doesn’t matter if it’s a song is a hit or a niche, all the tracks have been licensed under a blanket agreement.

Given the clear relevance of collecting societies to the ‘long tail’ debate, I was surprised to see so little mention of them in Chris’s book – or the blogs that followed. For example, our US equivalents’ ASCAP and BMI don’t appear once in the book’s index.

For those who weren’t there, let me break the presentation down into three parts. It began by looking at the evidence in terms of actual historical data. I drew upon a great expression that I learned whilst in the Government Economic Service, which is to always strive for ‘evidence-based policy making’ and resist the temptation of ‘policy-based evidence making’. Increasingly, when I hear those words “here’s another great example of the long tail at work��?, I’m inclined to expect that claim to lean towards the latter of the two.

I made the point that looking at volume-based Rhapsody data, which much of the long tail application to music has been ‘built’ around, is like a glass half empty – at best. We need to also consider value, and by that I mean not just retail spend, but marginal profitability in terms of what gets back to the artist and songwriter, and also ‘displacement’.

One achievement of my two years at the MCPS PRS Alliance is to get ‘displacement’ into the everyday lexicon of the UK music industry. Is every digital track sold to be celebrated (a P2P user now gone legitimate)? Or regretted (a £9.95 album sale lost)? The reality of the the long tail is now being uncovered by many stakeholders in the music industry’s head (hitmakers) and tail (poor sellers).

The second part revisited ‘histograms’ as a way of plotting the long tail. Andrew Bud, who’s been like a Professor to me throughout this project, put me onto a fantastic book published in 1956 by Brown, entitled ‘Statistical Forecasting for Inventory Control’, and which described the importance of log normal distribution as an analysis method.

This concept is not radically new and is still discussed today (for example, Chris Anderson refers to log normal distributions in his speeches and blog too). But for me this book was fifty years ahead of its time.

Using this approach our team constructed log normal intervals and plotted an unprecedented amount of digital music data over a significant time period. The basic shape of consumer demand for digital music clearly fits the log normal distribution…��?with eye-watering accuracy��?. It was really striking. There are many new schools of thought, but the old rules seem to hold truest.

The difference between a Pareto-style distribution and a log normal is neatly summarised by Chris Anderson in his recent response to my analysis, below:

��? …The two distributions look similar at first glance, and you have to plot them log-log (or fit them with a statistical package) to tell the difference. Long Tails are “heavy-tailed��? distributions, where a lot of the total volume is the tail, while lognormals are more like the classic top-heavy hit distribution…��?

The third part of my presentation at Telco 2.0 last week concluded with two important slides. The first one plotted two heads. The first ‘head’ was the concentration of tracks which sold very little or none at all. It questioned whether the net revenue generated from these tracks cover the real sunk and commission-based costs for a.) getting the song there and b.) getting money back out of the system.

The second ‘head’ was to show the effective average revenue per track in each ‘bin’ (or statistical grouping of data). This was a crude averaging method but it proved highly illustrative. The inequality in revenue between hits and niches was jaw-droppingly stark, justifying Andrew’s observation that “in this tail, you starve��?.

For example, we found that only 20% of tracks in our sample were ‘active’, that is to say they sold at least one copy, and hence, 80% of the tracks sold nothing at all. Moreover, approximately 80% of sales revenue came from around 3% of the active tracks. Factor in the dormant tail and you’re looking at a 80/0.38% rule for all the inventory on the digital shelf.

Finally, only 40 tracks sold more than 100,000 copies, accounting for 8% of the business. Think about that – back in the physical world, forty tracks could be just 4 albums, or the top slice of the best-selling “Now That’s What I Call Music, Volume 70��? which bundles up 43 ‘hits’ into one perennially popular customer offering!

This chart really drove home the theme of the presentation: what does the ‘long tail’ actually mean, and for whom?

If you’re a for-profit aggregator, it means one thing, if you’re an individual copyright holder, it means another. Again, this is something the debate has largely overlooked to date, yet everyone ‘down here on the ground’ increasingly recognises it.

As a not-for-profit membership governed collecting society, I’m extremely fortunate to be in unique position to make a balanced interpretation about the facts, and what they mean to both sides – individuals and firms. My interpretation is in no way gospel, but I can at least build an argument that’s based on evidence from the coal face.

My argument, in summary, was that the future of business is definitely not selling ‘less of more’. Scale matters. To tee up the interactive debate with the brainstorm participants I concluded with a final slide posing the dilemma facing firms in the content value chain as regards their investment strategies. Thanks to the way Telco 2.0 allows the participants to ‘blog live’ with the presenters using lap tops and special software [Ed. – we call the format ‘Mindshare’], a mountain of comments and questions flooded in.

Telco 2.0: Of the (literally) hundreds of questions the audience threw at yourself, your colleague Gary Eggleton and Andrew Bud, which would like to answer in more detail here?

Will: Firstly, I’m genuinely grateful for that ‘blogging facility’ you have at Telco 2.0. The day after the presentation, your CEO emailed me every question, idea and challenge your audience threw at me – that’s a fantastic facility, a “free lunch��? of excellent feedback and advice. My thanks to everyone who posted.

Now, I think there are three themes which I can draw from your excellent interactive facility at the conference and expand on here: (i) the black market, (ii) digital inventory costs and (iii) scarcity.

1.) The Black Market (P2P)
There were lots of really insightful questions on this topic which can be summarised by this one: ‘is the P2P market more or less concentrated around hits than the legal one?’

To help answer it I would direct readers to a now infamous paper I published with Eric Garland, CEO of Big Champagne, titled ‘In Rainbows, On Torrents’ (pdf).

My hunch, based on the evidence we presented in that paper (pointing out the 2.3 million illegal downloads of Raidohead’s new album when it was also available ‘for free’ on their own website), is that the black market is even more hit-centric.

As Eric would argue, popular music is popular wherever it is popular, in that you can’t be a hit on iTunes without being a hit on Bit Torrent …and vice versa. For further reading, I’d suggest the sociologist William McPhee’s groundbreaking theory of exposure, found in his 1963 book ‘Formal Theories of Mass Behavior’.

2.) Digital Inventory Costs
These costs are often overlooked by those claiming the long tail is a ‘panacea’ for artists. Making recorded music has many independent costs, some have gone down, others have gone up (what economists call ‘cost disease’).

Similarly, there are administrative costs to uploading tracks onto digital sales platforms and getting the money back to the creator. For example, indie ‘niche’ labels need ‘aggregators’ before they can join the main digital music platforms, which is a wholesale market, just like in any other business, digital or bricks and mortar. The same old rules of transaction costs and economies of scale apply there too.

I wanted the audience last week to consider another old rule of economics – cost-benefit analysis. Do the net benefits outweigh the costs (both upfront and commission based) of joining the long tail? It’s a simple question to ask which few bother to do and hence it’s infuriating when you read propositions like ‘all you need is 1,000 true fans’.

3.) Scarcity
There was a wonderful comment from one anonymous participant in the room who said:
“…Scarcity forces a ‘competition’-like structure to pass the cut-off point, which paradoxically creates value by increasing the effort of content suppliers to win….��?

This really sums up the point of my presentation. What I said was not particularly new, in fact its basic common economic sense, about which we sometimes need a reminder. This quote points to where I’m going to take the research next. Not the ‘head’, nor the ‘tail’ – but what happens to the ‘body’?

My hunch is that without scarcity, the body is underexploited. The quote provides context for a point I made on stage and in an article in The Register: “Is the ‘future of business’ really selling less of more? Absolutely not. If Top of the Pops still existed, it would feature the Top 14, not Top 40.��?

Telco 2.0: You’ve definitely got the debate started as there’s been significant press coverage since the publication. How have you found the reaction in the media by those who were and weren’t there?

Will: Tricky. Many journalists have agendas – some you agree with, some you don’t. Sometimes the meaning of your work gets lost in the differences within those agendas. My agenda is an academic one, like the great Scottish philosopher Hume would of wanted, one of conjectures and refutations. Let’s take a theory and put it to an impartial evidence-based test.

Firstly. it was great to see Eric Schmidt, CEO of Google, putting forward a strikingly similar argument to myself on McKinsey’s website recently.

In addition, I was pleased to see The Register picked up on the role of a collecting society, an institution that receives surprisingly little coverage in Long Tail debate, yet has pioneered the creation of long tail markets for musical copyright through patent pooling and blanket licensing for almost a century.

It was great to finally get a mention on Chris Anderson’s blog – given that I published my first set of long tail statistics (pdf) back in November 2006!

Given that the source of my data cannot be disclosed at this stage and the slide deck from the Telco 2.0 event cannot be circulated (and I’m genuinely grateful to those in the audience for understanding this point), I thought he did a pretty good job at blogging about a presentation he wasn’t present at. Hopefully this interview will help him fill the gaps.

However, I still think he’s focusing his arguments on the less-relevant volume-based data, and not looking at value in all of its definitions, Or, as an impatient CEO might say ‘show me the money!’ Volume-based discounting has, is and always will be prevalent in any market, be it online or offline. It is a simple and widely accepted fact, and once you accept that it becomes increasingly difficult to hold a conversation about why the future of businesses is selling less of more.

On the downside, one of your participants published a blog article that was so far off the mark, it made me wonder if he was actually paying attention (or more likely, understood the complexity of the music industry). For example, he describes my focus on individual sales as very ‘old economy’. Yet the erosion of the unit value of musical copyright is the biggest issue facing the membership of the MCPS PRS Alliance.

Why? Because we’re a membership-governed not-for-profit organisation that licenses, collects, processes and pays out royalties for our 50,000 individual song writers. He also goes on to say I used a data set where the concept of margin is irrelevant, which is the completely reverse of what I actually did. I presented data and then introduced the concepts of marginal costs (the real costs of managing and processing digital inventory) and marginal benefits (how much of that unit value actually gets back to the creator) from the outset.

Trying to have a balanced debate about the long tail, and avoiding knee jerk reactions and hysterical claims, is hard, very hard! Everyone immediately becomes an expert in a specific market or a statistical rule that they actually know relatively little about.

I feel for Chris on this who pioneered this concept, as he must have had to stare this problem in the face for a lot longer than me. In the music industry, which has experienced the force majeure of disruptive technologies like no other, and for over a decade now, you get a little tired of arm chair critics telling you what to do with the benefit of hindsight, and little understanding of what options were available at the time.

Nevertheless, as the legendary Peter Jenner would always say every time meetings between the content and connectivity industries collapsed into disagreement and disarray the important thing is that we keep all the parties talking, exchanging ideas, evidence and advice.

Telco 2.0: Finally, how transferable is your work? What does it mean for other areas which Telco companies are looking to get involved in, such as Television, Film and Books as well as applications?

Will: Very! Discovering a log normal distribution in one area of media provides a template for evidence-based gathering, interpretation and decision making in others.

I’d stress caution though – you need to order the questions correctly. Just as when you look at international comparisons in order to learn lessons for domestic issues, you need to ask ‘what works over there’ and ONLY then ask ‘of what works over there, and what could work here?’.

There’s been far too much decision-based evidence making to date along the lines of “the long tail must work so find me a great example of it working��?. That’s in no way the fault of Chris Anderson. He (like myself) goes to great pains to correct people’s knee jerk reactions, but it’s standard fare when a new economic theory comes along, people get a wee bit hysterical about it.

I think that the most important lesson to come out of this work is a real back-to-basics question: is scarcity a constraint or is it a discipline? I think that you can ask this question from the outset, regardless of what type (and what size) of media inventory you intend to carry across your network.

Finally, I’d like to reemphasise the importance of impartial evidence-based analysis. My work is not about trying to prove anyone wrong. I’m looking at how well their case stands up when presented with evidence. On that note, perhaps it would be apt to end with a suggestion to those proponents of the long tail theory, by drawing upon a quote from the late great John Maynard Keynes: “When the facts change, I change my mind. What do you do, sir?��?

[Ed. – After the interview we asked the Telco 2.0 analysts to comment on the transferability of Will’s analysis and the ‘so what’ for telcos:

Chris Barraclough, Consulting Director: Value comes from: catalogue breadth/depth + distribution (which includes searchability and multiple customer touchpoints, including affiliates) + evaluation. Amazon has market power because it works hard on both distribution and evaluation. You can exploit a longer tail than your competitors if you can a.) lower your cost base further than them (ie afford to carry more inventory than them) and b.) price cleverly (link price to volume so that lower volume items are priced higher).

Martin Geddes, Chief Analyst: We must appreciate the uniqueness of different content types and distribution networks. On the latter, for example, iTunes differs from last.fm due to pricing policies and content recommendation systems. In terms of content types music is weak in metadata (people don’t write much about individual songs), unlike richer media like movies (where there are lots of reviews and information on the participants), games, software apps, and TV shows. So, my advice is be careful about extrapolating lessons between different media and indeed even between sub-genres within the same medium. Sport, porn, and news video all have very different dynamics, for example.

The big ‘so what?’ for telcos is that a lot of ‘long tail’ content may have no commercial value, but may have considerable social value to users (e.g. photos of your kids). It still needs to be transported. This makes it all the more important to cater not just for ‘high QoS’ material like streaming HD movies, but also to be able to dynamically subload other content. Watch this space for interesting developments in this latter category…!

James Enck, Senior Associate Analyst: It would be useful to analyse how the value of content changes over time. Van Gogh didn’t sell much during his lifetime, Grateful Dead fans favor bootlegs rather than studio recordings, and we all know the story of the Arctic Monkeys. In other words, it’s conceivable that content moves from the tail to the head over time, and those who don’t spend time in the tail will always be surprised at what appears in the head.

The depressing truth for telcos is that replicating the head does nothing for differentiation. Moreover, if content strategies are geared to churn reduction rather than incremental revenue, then what disincentive to churn is there if all competitors have the same 4,000 film library? Long tail content can be highly appealing as a differentiator if it maintains a local flavor. www.pod3.tv is one example in the UK, which to my knowledge, no telco has sought to engage with. I’m baffled as to why Telekom Austria seems to have stopped the Buntes Fernsehen project, which to my mind was a very interesting way to differentiate on long-tail content in a way that’s highly relevant to a local customer base.

Keith McMahon, Senior Analyst, Content Distribution 2.0: The key message for me is that there is no silver bullet in merely loading content onto the net. The challenge is beyond simply distribution. The promotional aspects will be a really hard skill for telcos to replicate over a wide range of content. They are probably much better partnering, developing ‘two-sided’ enabling business models and shifting the demand risk to parties who know better.

Alan Patrick, Senior Associate Analyst, Content Distribution 2.0: I did Mechanical Engineering at University and studied inventory management theory. The thing I recall is that nearly every inventory based demand curve was Log Normal. The big issue in the online world is the lower transaction costs which supports a “positive returns��? power law dynamic, ie. the big get bigger. This drives an increased rush to the ‘Hit Head’. In other words any service which had a long tail distribution would rapidly move to a bigger hit head in any online world.]