Creating a healthy culture

Introduction

Creating a healthy culture is a key component of success in any organisation. It is particularly important – and challenging – where a company is building a new business operating in a new industry that combines people steeped in an existing cultures. This was the case for TELUS Health in Canada, so we spoke to its then CEO to understand the approach it took.

Three components of ‘Culture’

Whenever we ask our clients what the biggest problem they face is, there’s an excellent chance they will say ‘changing the culture’.

Yet it’s a bit of a coverall statement: what exactly do they mean?

It’s often a bit of a mish-mash of processes, organisation, behaviours and incentives: ‘the way we do things around here’.

Some of this is formalised, through organisation, line-management, how projects are managed and so on. Other aspects are softer – how companies expect people to behave when they are at work: how much autonomy do they have, can they work from home, etc.

To put some structure to this catch-all idea, it can be useful to think about three fundamental components of culture:

  • Shared purpose: what are we all trying to achieve?
  • Common values: what do we believe we need to be like to get there?
  • Processes and behaviours: how do we do things round here?

Looking at these definitions makes it clear why change needs to be led from the top, and why culture change is so challenging.

It needs to be led from the top because you cannot have a credible common purpose that conflicts with what the leadership says it wants, what it values, or how the organisation acts.

Even if you have clear direction from the top, it’s still hard to change because:

  • Most of your organisation will start from a position of ‘this is how we previously learned to be – and now you’re asking us to be different from that?’
  • Culture essentially means a set of behaviours or characteristics that have been socialised, and thereby enmeshed in a complex human web of habits and expectations.

According to Paul Lepage, President of TELUS Health, “culture eats why for breakfast”, paraphrasing the quote “culture eats strategy for breakfast” in a fascinating conversation we had recently.

What Paul meant was that one of the key drivers to creating a great culture is to ensure that your team is truly engaged with your organisation’s meaning or purpose, or ‘why are we doing this?’ beyond making money.

In the case of TELUS Health, this is ‘delivering better healthcare outcomes’, and in Paul’s case at least, this idea comes over very strongly in every interaction I have had with him.

Author’s note: I was talking to Paul because I am fascinated by the role that culture plays in business success. I have known some of the team at TELUS Health for several years, and I am always struck by the quality and consistency of their culture across all the people I have met at TELUS. Andrew Collinson, Partner and Research Director, STL Partners.

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TELUS and TELUS Health: consistent internal and external KPIs

There is a notable consistency between TELUS’ results on internal measures of employee engagement, customer opinion, and commercial performance.

  • Employee engagement: TELUS’ overall employee engagement score consistently ranks within the top quartile and has risen steadily in recent years.  TELUS was also named as one of Canada’s Top 100 Employers and Achiever’s 50 Most Engaged Workplaces in 2017.
  • Customer recommendation: TELUS’ customers have given it improving ‘Likelihood to recommend’ scores since 2011.
  • Market valuation: TELUS’ share price has also grown steadily from 2011.

Figure: TELUS’ share price has also steadily grown

TELUS Annual share price chart
TELUS Annual share price, as at end August 2011-2018

Source: Google Finance, STL Partners

Is this a coincidence, or is there a link between these results? And if it is not a coincidence, how has it achieved this, and what can others learn?

TELUS and TELUS Health

Background

STL Partners has worked closely with TELUS and TELUS Health over the last few years, analysing the healthcare division’s progress in TELUS Health: Innovation leader case study. We’ve participated in its Healthcare Summits in Toronto and come to know several of its executives over the years. The following is a brief introduction to TELUS Health from our 2017 report.

Why TELUS got into healthcare: a viable growth opportunity

Starting in 2005, led by the CEO Darren Entwistle, TELUS executives came to a consensus that just focusing on connectivity would not be enough to sustain long term revenue growth for telecoms companies in Canada, so the telco began a search into adjacent areas where it felt there were strong synergies with its core assets and capabilities. TELUS initially considered options in many sectors with similar business environments to telecoms – i.e. high fixed costs, capex intensive, highly regulated – including financial services, healthcare and energy (mining, oil).

In contrast with other telcos in Canada and globally, TELUS made a conscious decision not to focus on entertainment, anticipating that regulatory moves to democratise access to content would gradually erode the differentiating value of exclusive rights.

By 2007, health had emerged as TELUS’ preferred option for a ‘content play’, supported by four key factors which remain crucial to TELUS’ ongoing commitment to the healthcare sector, nearly a decade later. These are:

  1. Strong correlation with TELUS’ socially responsible brand. TELUS has always prioritised social responsibility as a core company value, consistently being recognised by Canadian, North American and global organisations for its commitment to sustainability and philanthropy. For example, in 2010, the Association for Fundraising Professionals’ named it the most outstanding philanthropic corporation in the world. Thus, investing into the healthcare, with the aim of improving efficiency and health outcomes through digitisation of the sector, closely aligns with TELUS’ core values.
  2. Healthcare’s low digital base. Healthcare was and remains one of the least digitised sectors both in Canada and globally. This is due to a number of factors, including the complexity and fragmented nature of healthcare systems, the difficulty of identifying the right payer model for digital solutions, and cultural resistance among healthcare workers who are already stretched for time and resources.
  3. Personal commitment from Darren Entwistle, TELUS’ CEO since he joined the company in 2000. Based on personal experiences with the flaws in the Canadian healthcare system, Darren Entwistle forged his conviction that there was a business case for TELUS to drive adoption of digital health records and other ehealth solutions that could help minimise such errors, which was crucial in winning and maintaining shareholders’ support for investment into health IT.
  4. Healthcare is a growing sector. An ageing population means that the burden on Canada’s healthcare system has and will continue to grow for the foreseeable future. As people live longer, the demands on the healthcare system are also shifting from acute care to chronic care. For example, data from the OECD and the Canadian Institute for Health Information show that the rate of chronic disease among patients over 65 years old is double that of those aged 45-64. Meanwhile, funding is not increasing at the same rate as demand, convincing TELUS of the need for the type of digital disruption that has occurred in many other sectors.

That all four of TELUS’ reasons for investing in healthcare remain equally relevant in 2017/18 as in 2007 is key to its unwavering commitment to the sector. Darren Entwistle refers to healthcare as a ‘generational investment’, saying that over the long term, TELUS may shift into a healthcare company that offers telecoms services, rather than the other way around.

TELUS Health: On leadership and culture

To get insight for this report, I spoke at length with Paul Lepage, President-TELUS Health and Payment Solutions at TELUS, on the recommendation of his colleagues, who’d told me that ‘culture’ was of deep importance to Paul. He has been instrumental in setting up TELUS Health, and holds joint responsibility for TELUS Health on the international markets with Dave Sharma, President, TELUS Partner Solutions and Senior Vice-president, Business Solutions Sales. Paul runs the operation on the ground in Canada, while Dave spearheads partnerships and international activity.

I also requested additional support material from TELUS Health, which is included in the Appendix of this report.

This report would not have been possible without their kind collaboration and openness. Nonetheless, its contents represent the opinion of STL Partners, and were not sponsored or commissioned by TELUS.

Contents

  • Executive Summary: For telcos and others wanting to change culture
  • Introduction
  • Three components of ‘Culture’
  • Culture eats ‘why’ for breakfast
  • TELUS and TELUS Health: consistent internal and external KPIs
  • Background
  • Why TELUS got into healthcare: a viable growth opportunity
  • TELUS Health: On leadership and culture
  • Culture = Purpose and process
  • Culture creates a yardstick for performance
  • The importance of a compelling ‘why?’
  • Fair Process
  • Diversity and talent
  • Measuring culture and results
  • Communicating, listening and reflecting is at least 50% of the job
  • Recruitment, partnerships and culture
  • The ‘why?’ must be genuine
  • Conclusions: TELUS Health – A consistent and compelling culture
  • Appendix: Prepared by TELUS Health External Communications

Figures

  • TELUS’ share price has increased steadily
  • Why is ‘why?’ important?
  • TELUS’ ‘Fair process’

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Indoor wireless: A new frontier for IoT and 5G

Introduction to Indoor Wireless

A very large part of the usage of mobile devices – and mobile and other wireless networks – is indoors. Estimates vary but perhaps 70-80% of all wireless data is used while fixed or “nomadic”, inside a building. However, the availability and quality of indoor wireless connections (of all types) varies hugely. This impacts users, network operators, businesses and, ultimately, governments and society.

Whether the use-case is watching a YouTube video on a tablet from a sofa, booking an Uber from a phone in a company’s reception, or controlling a moving robot in a factory, the telecoms industry needs to give much more thought to the user-requirements, technologies and obstacles involved. This is becoming ever more critical as sensitive IoT applications emerge, which are dependent on good connectivity – and which don’t have the flexibility of humans. A sensor or piece of machinery cannot move and stand by a window for a better signal – and may well be in parts of a building that are inaccessible to both humans and many radio transmissions.

While mobile operators and other wireless service providers have important roles to play here, they cannot do everything, everywhere. They do not have the resources, and may lack site access. Planning, deploying and maintaining indoor coverage can be costly.

Indeed, the growing importance and complexity is such that a lot of indoor wireless infrastructure is owned by the building or user themselves – which then brings in further considerations for policymakers about spectrum, competition and more. There is a huge upsurge of interest in both improved Wi-Fi, and deployments of private cellular networks indoors, as some organisations recognise connectivity as so strategically-important they wish to control it directly, rather than relying on service providers. Various new classes of SP are emerging too, focused on particular verticals or use-cases.

In the home, wireless networks are also becoming a battleground for “ecosystem leverage”. Fixed and cable networks want to improve their existing Wi-Fi footprint to give “whole home” coverage worthy of gigabit fibre or cable connections. Cellular providers are hoping to swing some residential customers to mobile-only subscriptions. And technology firms like Google see home Wi-Fi as a pivotal element to anchor other smart-home services.

Large enterprise and “campus” sites like hospitals, chemical plants, airports, hotels and shopping malls each have complex on-site wireless characteristics and requirements. No two are alike – but all are increasingly dependent on wireless connections for employees, visitors and machines. Again, traditional “outdoors” cellular service-providers are not always best-placed to deliver this – but often, neither is anyone else. New skills and deployment models are needed, ideally backed with more cost—effective (and future-proofed) technology and tools.

In essence, there is a conflict between “public network service” and “private property” when it comes to wireless connectivity. For the fixed network, there is a well-defined “demarcation point” where a cable enters the building, and ownership and responsibilities switch from telco to building owner or end-user. For wireless, that demarcation is much harder to institutionalise, as signals propagate through walls and windows, often in unpredictable and variable fashion. Some large buildings even have their own local cellular base stations, and dedicated systems to “pipe the signal through the building” (distributed antenna systems, DAS).

Where is indoor coverage required?

There are numerous sub-divisions of “indoors”, each of which brings its own challenges, opportunities and market dynamics:

• Residential properties: houses & apartment blocks
• Enterprise “carpeted offices”, either owned/occupied, or multi-tenant
• Public buildings, where visitors are more numerous than staff (e.g. shopping malls, sports stadia, schools), and which may also have companies as tenants or concessions.
• Inside vehicles (trains, buses, boats, etc.) and across transport networks like metro systems or inside tunnels
• Industrial sites such as factories or oil refineries, which may blend “indoors” with “onsite”

In addition to these broad categories are assorted other niches, plus overlaps between the sectors. There are also other dimensions around scale of building, single-occupant vs. shared tenancy, whether the majority of “users” are humans or IoT devices, and so on.

In a nutshell: indoor wireless is complex, heterogeneous, multi-stakeholder and often expensive to deal with. It is no wonder that most mobile operators – and most regulators – focus on outdoor, wide-area networks both for investment, and for license rules on coverage. It is unreasonable to force a telco to provide coverage that reaches a subterranean, concrete-and-steel bank vault, when their engineers wouldn’t even be allowed access to it.

How much of a problem is indoor coverage?

Anecdotally, many locations have problems with indoor coverage – cellular networks are patchy, Wi- Fi can be cumbersome to access and slow, and GPS satellite location signals don’t work without line- of-sight to several satellites. We have all complained about poor connectivity in our homes or offices, or about needing to stand next to a window. With growing dependency on mobile devices, plus the advent of IoT devices everywhere, for increasingly important applications, good wireless connectivity is becoming more essential.

Yet hard data about indoor wireless coverage is also very patchy. UK regulator Ofcom is one of the few that reports on availability / usability of cellular signals, and few regulators (Japan’s is another) enforce it as part of spectrum licenses. Fairly clearly, it is hard to measure, as operators cannot do systematic “drive tests” indoors, while on-device measurements usually cannot determine if they are inside or outside without being invasive of the user’s privacy. Most operators and regulators estimate coverage, based on some samples plus knowledge of outdoor signal strength and typical building construction practices. The accuracy (and up-to-date assumptions) is highly questionable.

Indoor coverage data is hard to find

Contents:

  • Executive Summary
  • Likely outcomes
  • What telcos need to do
  • Introduction to Indoor Wireless
  • Overview
  • Where is indoor coverage required?
  • How much of a problem is indoor coverage?
  • The key science lesson of indoor coverage
  • The economics of indoor wireless
  • Not just cellular coverage indoors
  • Yet more complications are on the horizon…
  • The role of regulators and policymakers
  • Systems and stakeholders for indoor wireless
  • Technical approaches to indoor wireless
  • Stakeholders for indoor wireless
  • Home networking: is Mesh Wi-Fi the answer?
  • Is outside-in cellular good enough for the home on its own?
  • Home Wi-Fi has complexities and challenges
  • Wi-Fi innovations will perpetuate its dominance
  • Enterprise/public buildings and the rise of private cellular and neutral host models
  • Who pays?
  • Single-operator vs. multi-operator: enabling “neutral hosts”
  • Industrial sites and IoT
  • Conclusions
  • Can technology solve MNO’s “indoor problem”?
  • Recommendations

Figures:

  • Indoor coverage data is hard to find
  • Insulation impacts indoor penetration significantly
  • 3.5GHz 5G might give acceptable indoor coverage
  • Indoor wireless costs and revenues
  • In-Building Wireless face a dynamic backdrop
  • Key indoor wireless architectures
  • Different building types, different stakeholders
  • Whole-home meshes allow Wi-Fi to reach all corners of the building
  • Commercial premises now find good wireless essential
  • Neutral Hosts can offer multi-network coverage to smaller sites than DAS
  • Every industrial sector has unique requirements for wireless

Telcos and GAFA: Dancing with the disruptors

Introduction

Across much of the world, the competing Internet ecosystems led by Amazon, Apple, Facebook and Google have come to dominate the consumer market for digital services. Even though most telcos continue to compete with these players in the service layer, it is now almost a necessity for operators to partner with one or more of these ecosystems in some shape or form.

This report begins by pinpointing the areas where telcos are most likely to partner with these players, drawing on examples as appropriate. In each case, it considers the nature of the partnership and the resulting value to the telco and to the Internet ecosystem. It also considers the longer-term, strategic implications of these partnerships and makes recommendations on how telcos can try to strengthen their negotiating position.

This research builds on the findings of the Digital Partnerships Benchmarking Study conducted between 26th September and 4th November 2016 by STL Partners and sponsored by AsiaInfo. That study involved a survey of 34 operators in Europe and Asia Pacific. It revealed that whereas almost all operators expected to grow their partnerships business in the future, they differed on how they expected to pursue this growth.

Approximately half (46%) of the operator respondents wanted to scale up and partner with a large number of digital players, while the other half (49%) wanted to focus in on a few strategic partnerships.  Those looking to partner with a large number of companies were primarily interested in generating new revenue streams or increasing customer relevance, while many of those who wanted to focus on a small number of partnerships also regarded increasing revenues from the core business as a main objective (see Figure 1).

Figure 1: The business objectives differ somewhat by partnership strategy

Source: Digital Partnerships Benchmarking Study conducted in late 2016 by STL Partners and sponsored by AsiaInfo

Respondents were also asked to rank the assets that an operator can bring to a partnership, both today and in the future. These ranks were converted into a normalized score (see Figure 2): A score of 100% in Figure 2 would indicate that all respondents placed that option in the top rank.

Figure 2: Operators regard their customer base as their biggest asset

Source: Digital Partnerships Benchmarking Study conducted in late 2016 by STL Partners and sponsored by AsiaInfo

Clearly, operators are aware that the size of their customer base is a significant asset, and they are optimistic that it is likely to remain so: it is overall the highest scoring asset both today and in the future.

In the future, the options around customer data (customer profiling, analytics and insights) are given higher scores (they move up the ranks). This suggests that operators believe that they will become better at exploiting their data-centric assets and – most significantly – that they will be able to monetize this in partnerships, and that these data-centric assets will have significant value.

The findings of the study confirm that most telcos believe they can bring significant and valuable assets to partnerships. This report considers how those assets can be used to strike mutually beneficial deals with the major Internet ecosystems. The next chapter explains why telcos and the leading Internet players need to co-operate with each other, despite their competition for consumers’ attention.

Contents:

  • Executive Summary
  • Strategic considerations
  • Delivering bigger, better entertainment
  • Improving customer experience
  • Extending and enhancing connectivity
  • Developing the networks of the future
  • Delivering cloud computing to enterprises
  • Introduction
  • Telcos and lnternet giants need each other
  • Delivering bigger, better entertainment
  • Content delivery networks
  • Bundling content and connectivity
  • Zero-rating content
  • Carrier billing
  • Content promotion
  • Apple and EE in harmony
  • Value exchange and takeaways
  • Improving the customer experience
  • Making mobile data stretch further
  • Off-peak downloads, offline viewing
  • Data plan awareness for apps
  • Fine-grained control for consumers
  • Value exchange and takeaways
  • Extending and enhancing connectivity
  • Subsea cable consortiums
  • Free public Wi-Fi services
  • MVNO Project Fi – branded by Google, enabled by telcos
  • Value exchange and takeaways
  • Developing the networks of the future
  • Software-defined networks: Google and the CORD project
  • Opening up network hardware: Facebook’s Telecom Infra Project
  • Value exchange and takeaways
  • Delivering cloud computing to enterprises
  • Reselling cloud-based apps
  • Secure cloud computing – AWS and AT&T join forces
  • Value exchange and takeaways
  • Conclusions and Recommendations
  • Google is top of mind
  • Whose brand benefits?

Figures:

  • Figure 1: The business objectives differ somewhat by partnership strategy
  • Figure 2: Operators regard their customer base as their biggest asset
  • Figure 3: US Internet giants generate about 40% of mobile traffic in Asia-Pacific
  • Figure 4: Google and Facebook are now major players in mobile in Africa
  • Figure 5: Examples of telco-Internet platform partnerships in entertainment
  • Figure 6: BT Sport uses YouTube to promote its premium content
  • Figure 7: Apple Music appears to have helped EE’s performance
  • Figure 8: Amazon is challenging Apple and Spotify in the global music market
  • Figure 9: Examples of telco-Google co-operation around transparency
  • Figure 10: YouTube Smart Offline could alleviate peak pressure on networks
  • Figure 11: Google’s Triangle app gives consumers fine-grained control over apps
  • Figure 12: Examples of telco-Internet platform partnerships to deliver connectivity
  • Figure 13: Project Fi’s operator partners provide extensive 4G coverage
  • Figure 14: Both T-Mobile US and Sprint need to improve their financial returns
  • Figure 15: Examples of telco-Internet platform partnerships on network innovation
  • Figure 16: AWS has a big lead in the cloud computing market
  • Figure 17: Examples of telco-Internet platform partnerships in enterprise cloud
  • Figure 18: AT&T provides private and secure connectivity to public clouds
  • Figure 19: Amazon and Alphabet lead corporate America in R&D
  • Figure 20: Telcos need to be wary of bolstering already powerful brands
  • Figure 21: Balancing immediate value of partnerships against strategic implications
  • Figure 22: Different telcos should adopt different strategies

Facebook’s Telecom Infra Project: What is it good for?

Introduction

In early 2016, Facebook launched the Telecom Infra Project (TIP). It was set up as an open industry initiative, to reduce costs in creating telecoms network equipment, and associated processes and operations, primarily through open-source concepts applied to network hardware, interfaces and related software.

One of the key objectives was to split existing proprietary vendor “black boxes” (such as cellular base stations, or optical multiplexers) into sub-components with standard interfaces. This should enable competition for each constituent part, and allow the creation of lower-cost “white box” designs from a wider range of suppliers than today’s typical oligopoly. Critically, this is expected to enable much-broader adoption of networks in developing markets, where costs – especially for radio networks – remain too high for full deployments. Other outcomes may be around cheaper 5G infrastructure, or specialised networks for indoor use or vertical niches.

TIP’s emergence parallels a variety of open-source initiatives elsewhere in telecoms, notably ONAP – the merger of two NFV projects being developed by AT&T (ECOMP) and the Linux Foundation (Open-O). It also parallels many other approaches to improving network affordability for developing markets.

TIP got early support from a number of operators (including SK Telecom, Deutsche Telekom, BT/EE and Globe), hosting/cloud players like Equinix and Bandwidth, semiconductor suppliers including Intel, and various (mostly radio-oriented) network vendors like Radisys, Vanu, IP Access, Quortus and – conspicuously – Nokia. It has subsequently expanded its project scope, governance structure and member base, with projects on optical transmission and core-network functions as well as cellular radios.

More recently, it has signalled that not all its output will be open-source, but that it will also support RAND (reasonable and non-discriminatory) intellectual property rights (IPR) licensing as well. This reflected push-back from some vendors on completely relinquishing revenues from their (R&D-heavy) IPR. While services, integration and maintenance offered around open-source projects have potential, it is less clear that they will attract early-stage investment necessary for continued deep innovation in cutting-edge network technology.

At first sight, it is not obvious why Facebook should be the leading light here. But contrary to popular belief, Facebook – like Google and Amazon and Alibaba – is not really just a “web” company. They all design or build physical hardware as well – servers, network gear, storage, chips, data-centres and so on. They all optimise the entire computing / network chain to serve their needs, with as much efficiency as possible in terms of power consumption, physical space requirements and so on. They all have huge hardware teams and commit substantial R&D resources to the messy, expensive business of inventing new kit. Facebook in particular has set up Internet.org to help get millions online in the developing world, and is still working on its Aquila communications drones. It also set up OCP (Open Computing Platform) as a very successful open-source project for data-centre design; in many ways TIP is OCP’s newer and more telco-oriented cousin.

Many in the telecom industry often overlook the fact that their Internet peers now have more true “technology” investment – and especially networking innovation – than most operators. Some operators – notably DT and SKT – are pushing back against the vendor “establishment”, which they see as stifling network innovation by continuing to push monolithic, proprietary black boxes.

Contents:

  • Executive Summary
  • Introduction
  • What does Open-Source mean, applied to hardware?
  • Focus areas for TIP
  • Overview
  • Voyager
  • OpenCellular
  • Strategic considerations and implications
  • Operator involvement with TIP
  • A different IPR model to other open-source domains
  • Fit with other Facebook initiatives
  • Who are the winners?
  • Who are the losers?
  • Conclusions and Recommendations

Figures:

  • Figure 1: A core TIP philosophy is “unbundling” components of vendor “black boxes”
  • Figure 2: OpenCellular functional architecture and external design
  • Figure 3: SKT sees open-source, including TIP, as fundamental to 5G

Digital M&A and Investment Strategies – July 2017 update

Introduction

Digital M&A as a telco strategy

In June 2016 STL Partners published our inaugural Digital M&A and Investment Strategies report and accompanying database, focussing on key digital acquisitions and investments for 22 operators during the period 2012 – H1 2016. We have now updated this report to cover the following 12 months (H2 2016 – H1 2017), to examine new developments in telco digital M&A and a comparison with previous activities.

Communications service providers have long used M&A as a key growth strategy, with the most common approach being to acquire other operators to build scale organically. As growth in telecommunications slowed and user behaviour swung towards mobile, so M&A activity in the mobile sector has increased. However, acquisition opportunities in mature markets are becoming limited as consolidation reduces the number of telcos, whilst in Europe and North America the regulatory environment has made M&A consolidation strategies less viable.

As operators continue to build digital capabilities and strive to deliver digital services and content, M&A and investment beyond ‘traditional telecoms’ is increasing. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation as well as operational excellence. This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of Verizon, AT&T and SoftBank. There is an accompanying database which tracks telco M&A activity for the period.

Drivers for operator M&A and majority investment

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

digital M&A graphic

Source: STL Partners

Traditional/Telco 1.0 drivers: reach and scale

As illustrated in Figure 1, what we refer to as ‘traditional’ or ‘Telco 1.0’ drivers for M&A and investment are well-established:

  1. Extending geographic footprint is a common trend, as many operator groups look to:
    • Enter new markets that are adjacent geographically (e.g. DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
    • Enter markets that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
    • Enter markets that simply offer good opportunities for expanded footprint and increased efficiencies of operation in emerging regions where demand for mobile services is still growing strongly (e.g., SingTel and Etisalat’s numerous investments in operators in Asia and Africa, respectively).
  2. Extending traditional communications offerings is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the UK is one example.
  3. Consolidation has slowed to some extent, as regulators and competitors fight against mergers or acquisitions that remove players from the market or concentrate too much market power in the hands of stronger service providers. This has been a particular issue in the European Union, where regulators have refused to approve several proposed telecoms M&A deals recently, including Telia and Telenor in Denmark in 2015, and the proposed Hutchison acquisition of Telefónica’s O2 to merge with its subsidiary 3 UK in 2016. Other deals, such as the proposed Orange-Bouygues Telecom merger in France which was abandoned in April 2016, have failed due to the parties involved failing to reach agreement. However, our research shows continued interest in operator M&A for consolidation, with recent examples including Orange’s acquisition of Sun Communications in Moldova in 2016, and Vodafone’s merger with Indian rival Idea in 2017.
  4. The acquisition of service partners – primarily channel partners, or partner companies providing systems integration and consultancy capabilities, typically for enterprise customers – has proved an important driver of M&A for many (mainly converged) operators.
  5. Finally, operator M&A is also being driven by the enthusiasm of sellers. Many operators are looking to sell off assets outside of their home markets, pulling back from markets that have proven too competitive, too small or simply too complicated, as part of a strategy to pay down debt and/or free up assets for investment in other higher-growth areas:
    • Telia’s pullback from its non-core markets has seen it sell off its majority stakes in Spanish operator Yoigo to Masmovil and in Kazakhstan’s Kcell to Turkcell in 2016
    • Telefonica’s attempt to sell its O2 UK mobile unit to CK Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its debt, including a planned IPO of O2 UK.

Contents:

  • Executive Summary
  • Evaluating operator digital investment strategies
  • Key findings
  • Recommendations
  • Introduction
  • Drivers for operator M&A and majority investment
  • Evaluating operator digital investment strategies
  • 22 players across 5 regions: US shows the most aggressive M&A activity
  • Comparison with previous period (H1 2012 – H1 2016)
  • European telcos remain largely focussed on Telco 1.0 M&A
  • Which sectors are attracting the most interest?
  • Telco M&A investment is falling behind other verticals
  • What are the cultural challenges to digital M&A in the boardroom?
  • Operator M&A Strategies in detail: Consolidation, content and technology
  • M&A as a telco growth strategy
  • Adapting telco culture to ensure digital M&A success
  • Recommendations

Figures:

  • Figure 1: Drivers for operator M&A and majority investment – traditional and digital
  • Figure 2: Number of operator digital acquisitions and majority investments, H2 2016-H1 2017
  • Figure 3: Largest 7 telco digital M&A and majority investments, H2 2016-H1 2017
  • Figure 4: Number of operator digital acquisitions and majority investments, H1 2012 – H1 2016
  • Figure 5: Operator digital acquisitions and majority investments, H1 2012-H1 2017
  • Figure 6: Largest 10 telco digital M&A and majority investments, H1 2012 – H1 2016
  • Figure 7: Mapping of operator digital M&A strategies
  • Figure 8: Number of digital M&A and majority investments by sector/category, H2 2016-H1 2017
  • Figure 9: Comparison of investment in digital M&A as a percentage of service revenues, 2012-H1 2017

TELUS Health: Innovation leader case study

Introduction

Why healthcare?

Healthcare is one of the few sectors where, in every country, there is a huge and ongoing need. This demand will only rise as populations age and grow, exacerbating significant pain points relating to costs and funding models, and unmet needs. Meanwhile, the combination of cost pressures, the sensitive nature of health data and the complexity of healthcare systems have left it as one of the least digitised sectors. Thus, many telcos have identified healthcare as a sector where there is significant opportunity to drive efficiency through new services leveraging their network infrastructure and customer reach.

In some respects, telcos are well positioned to fill the healthcare sector’s needs. For example, enabling doctors to offer virtual care to patients through secure messaging or video chats, and to share electronic health records with patients and other doctors more easily, seem like low hanging fruit. However, in practice this is much more complicated; hospitals, primary care providers (general practitioners, family doctors), specialised clinics (e.g. mental health, physiotherapy) and pharmacies all store patient records in different systems (that are not necessarily digitised), and have different views on how to securely share data between each other. Every healthcare system also has a unique funding model, ranging from predominantly privately funded through insurance providers or out of pocket payments, like the United States, to single payer models like the UK, where the National Health Service accounts for more than 80% of healthcare spending, and budgets – including IT solutions – are closely tied to electoral and economic cycles.

These synergies have prompted a number of telcos to launch consumer health services or to pursue opportunities in the health IT market. Besides TELUS, AT&T, Verizon, Vodafone, Telefónica, NTT DoCoMo, Telstra, Deutsche Telekom AG and BT have all been active in healthcare. We explore their strategies and differences in comparison with TELUS’ approach on page 33. Why TELUS? This report focuses on TELUS Health, which has one of the longest and the most committed investment into the healthcare sector by a telco that we are aware of. We see it as a leading example of how telcos can build a business in healthcare, as well as in other sectors that are not instinctively linked to telecoms.

To put the Canadian healthcare market, which TELUS entered ten years ago, into context:

  • Canada’s healthcare system is fragmented between 13 provincial/territorial systems and the federal level.
  • The payer model is split between the government (70%) for necessary hospital and physician services and private insurers (30%) for supplemental care and drug prescriptions.
  • Healthcare spending accounted for 11.1% of GDP in 2016, on par with other developed countries globally.
  • The huge geographical distances mean that the 19% of Canadians living in rural areas have very limited access to specialist care.
  • Adoption of electronic medical record (EMR) systems among family doctors and specialised clinics started from a low base of 20% in 2006, rising to 62% in 2013 and 80% by 2017.

Why TELUS got into healthcare: a viable growth opportunity

Starting in 2005, led by the CEO Darren Entwistle, TELUS executives came to a consensus that just focusing on connectivity would not be enough to sustain long term revenue growth for telecoms companies in Canada, so the telco began a search into adjacent areas where it felt there were strong synergies with its core assets and capabilities. TELUS initially considered options in many sectors with similar business environments to telecoms – i.e. high fixed costs, capex intensive, highly regulated – including financial services, healthcare and energy (mining, oil).

In contrast with other telcos in Canada and globally, TELUS made a conscious decision not to focus on entertainment, anticipating that regulatory moves to democratise access to content would gradually erode the differentiating value of exclusive rights.

By 2007, health had emerged as TELUS’ preferred option for a ‘content play’, supported by four key factors which remain crucial to TELUS’ ongoing commitment to the healthcare sector, nearly a decade later. These are:

  1. Strong correlation with TELUS’ socially responsible brand. TELUS has always prioritised social responsibility as a core company value, consistently being recognised by Canadian, North American and global organisations for its commitment to sustainability and philanthropy. For example, in 2010, the Association for Fundraising Professionals’ named it the most outstanding philanthropic corporation in the world. Thus, investing into the healthcare, with the aim of improving efficiency and health outcomes through digitisation of the sector, closely aligns with TELUS’ core values.
  2. Healthcare’s low digital base. Healthcare was and remains one of the least digitised sectors both in Canada and globally. This is due to a number of factors, including the complexity and fragmented nature of healthcare systems, the difficulty of identifying the right payer model for digital solutions, and cultural resistance among healthcare workers who are already stretched for time and resources.
  3. Personal commitment from the CEO, Darren Entwistle. TELUS’ CEO since he joined the company in 2000, Based on personal experiences with the flaws in the Canadian healthcare system, Darren Entwistle forged his conviction that there was a business case for TELUS to drive adoption of digital health records and other ehealth solutions that could help minimise such errors, which was crucial in winning and maintaining shareholders’ support for investment into health IT.
  4. Healthcare is a growing sector. An ageing population means that the burden on Canada’s healthcare system has and will continue to grow for the foreseeable future. As people live longer, the demands on the healthcare system are also shifting from acute care to chronic care. For example, data from the OECD and the Canadian Institute for Health Information show that the rate of chronic disease among patients over 65 years old is double that of those aged 45-64 (see figure 3). Meanwhile, funding is not increasing at the same rate as demand, convincing TELUS of the need for the type of digital disruption that has occurred in many other sectors.

That all four of TELUS’ reasons for investing in healthcare remain equally relevant in 2017 as in 2007 is key to its unwavering commitment to the sector. Darren Entwistle refers to healthcare as a ‘generational investment’, saying that over the long term, TELUS may shift into a healthcare company that offers telecoms services, rather than the other way around.

Contents:

  • Executive Summary
  • Healthcare can be a viable investment opportunity…
  • …But there are risks
  • Introduction
  • Why TELUS got into healthcare: a viable growth opportunity
  • How TELUS got into healthcare: buying a way in
  • Overview of the Canadian healthcare system
  • The payer model
  • Access to healthcare and demographics
  • TELUS’ objectives and evidence of success in healthcare
  • Build a new revenue stream
  • Synergy: supporting telecoms revenues
  • Differentiate brand among consumers
  • Drive better health outcomes
  • Understanding TELUS Health’s strategy
  • TELUS Health’s three step strategy
  • eHealth market challenges: how is TELUS responding?
  • Comparing TELUS with other telcos: a deeper dive
  • Lessons for other telcos
  • Challenges of the digital health market
  • Healthcare is a long-term play
  • Healthcare matrix: mapping the healthcare sector for telcos

Figures:

  • Figure 1: Snapshot of TELUS Health business
  • Figure 2: Public vs. private healthcare services in Canada
  • Figure 3: Rate of chronic disease rises dramatically among seniors
  • Figure 4: TELUS Health’s reach in the healthcare market
  • Figure 5: TELUS Health is outpacing TELUS in revenue growth
  • Figure 6: TELUS Health’s contribution to TELUS revenues
  • Figure 7: Healthcare investment contributes to improving customer loyalty
  • Figure 8: How do consumers feel about TELUS?
  • Figure 9: TELUS vs. other Canadian telcos’ consumer brand score and rank
  • Figure 10: BC pilot of HHM shows reduction in hospital admissions
  • Figure 11: TELUS acquisitions
  • Figure 12: Methodology for building collaborative solutions
  • Figure 13: List of collaborative solutions and end-users
  • Figure 14: Roadmap for eClaims solution
  • Figure 15: Roadmap for PharmaSpace solution
  • Figure 16: Roadmap for Mobile EMR solution
  • Figure 17: Patient engagement is central to TELUS Health’s target growth opportunities
  • Figure 18: Home health monitoring overview
  • Figure 19: Results of HHM trials across two health authorities in British Colombia
  • Figure 20: Healthcare in TELUS ad campaigns
  • Figure 21: Sample of TELUS Health investments and partnerships
  • Figure 22: Telco digital health strategies
  • Figure 23: Healthcare Matrix scoring criteria
  • Figure 24: Where are telcos’ strengths in digital health?

Mobile/Multi-Access Edge Computing: How can telcos monetise this cloud?

Introduction

A formal definition of MEC is that it enables IT, NFV and cloud-computing capabilities within the access network, in close proximity to subscribers. Those edge-based capabilities can be provided to internal network functions, in-house applications run by the operator, or potentially third-party partners / developers.

There has long been a vision in the telecoms industry to put computing functions at local sites. In fixed networks, operators have often worked with CDN and other partners on distributed network capabilities, for example. In mobile, various attempts have been made to put computing or storage functions alongside base stations – both big “macro” cells and in-building small/pico-cells. Part of the hope has been the creation of services tailored to a particular geography or building.

But besides content-cacheing, none of these historic concepts and initiatives have gained much traction. It turns out that “location-specific” services can be easily delivered from central facilities, as long as the endpoint knows its own location (e.g. using GPS) and communicates this to the server.

This is now starting to change. In the last three years, various market and technical trends have re-established the desire for localised computing. Standards have started to evolve, and early examples have emerged. Multiple groups of stakeholders – telcos and their network vendors, application developers, cloud providers, IoT specialists and various others have (broadly) aligned to drive the emergence of edge/fog computing. While there are numerous competing architectures and philosophies, there is clearly some scope for telco-oriented approaches.

While the origins of MEC (and the original “M”) come from the mobile industry, driven by visions of IoT, NFV and network-slicing, the pitch has become more nuanced, and now embraces fixed/cable networks as well – hence the renaming to “multi-access”.

Figure 1: A taxonomy of mobile edge computing

Source: IEEE Conference Paper, Ahmed & Ahmed, https://www.researchgate.net/publication/285765997

Background market drivers for MEC

Before discussing specific technologies and use-cases for MEC, it is important to contextualise some other trends in telecoms that are helping build a foundation for it:

  • Telcos need to reduce costs & increase revenues: This is a bit “obvious” but bears repeating. Most initiatives around telco cloud and virtualisation are driven by these two fundamental economic drivers. Here, they relate to a desire to (a) reduce network capex/opex by shifting from proprietary boxes to standardised servers, and (b) increase “programmability” of the network to host new functions and services, and allow them to be deployed/updated/scaled rapidly. These underpin broader trends in NFV and SDN, and then indirectly to MEC and edge-computing.
  • New telco services may be inherently “edge-oriented”: IoT, 5G, vertical enterprise applications, plus new consumer services like IPTV also fit into both the virtualisation story and the need for distributed capabilities. For example, industrial IoT connectivity may need realtime control functions for machinery, housed extremely close by, for millisecond (or less) latency. Connected vehicles may need roadside infrastructure. Enterprises might demand on-premise secure data storage, even for cloud-delivered services, for compliance reasons. Various forms of AI (such as machine vision and deep learning) involve particular needs and new ways of handling data.
  • The “edge” has its own context data: Some applications are not just latency-sensitive in terms of response between user and server, but also need other local, fast-changing data such as cell congestion or radio-interference metrics. Going all the way to a platform in the core of the network, to query that status, may take longer than it takes the status to change. The length of the “control loop” may mean that old/wrong contextual data is given, and the wrong action taken by the application. Locally-delivered information, via “edge APIs” could be more timely.
  • Not all virtual functions can be hosted centrally: While a lot of the discussion around NFV involves consolidated data-centres and the “telco cloud”, this does not apply to all network functions. Certain things can indeed be centralised (e.g. billing systems, border/gateway functions between core network and public Internet), but other things make more sense to distribute. For example, Virtual CPE (customer premises equipment) and CDN caches need to be nearer to the edge of the network, as do some 5G functions such as mobility management. No telco wants to transport millions of separate video streams to homes, all the way from one central facility, for instance.
  • There will therefore be localised telco compute sites anyway: Since some telco network functions have to be located in a distributed fashion, there will need to be some data-centres either at aggregation points / central offices or final delivery nodes (base stations, street cabinets etc.). Given this requirement, it is understandable that vendors and operators are looking at ways to extend such sites from the “necessary” to the “possible” – such as creating more generalised APIs for a broader base of developers.
  • Radio virtualisation is slightly different to NFV/SDN: While most virtualisation focus in telecoms goes into developments in the core network, or routers/switches, various other relevant changes are taking place. In particular, the concept of C-RAN (cloud-RAN) has taken hold in recent years, where traditional mobile base stations (usually called eNodeB’s) are sometimes being split into the electronics “baseband” units (BBUs) and the actual radio transmit/receive components, called the remote “radio head”, RRH. A number of eNodeB’s BBUs can be clustered together at one site (sometimes called a “hotel”), with fibre “front-haul” connecting the RRHs. This improves the efficiency of both power and space utilisation, and also means the BBUs can be combined and virtualised – and perhaps have extra compute functions added.
  • Property business interests: Telcos have often sold or rented physical space in their facilities – colocation of equipment racks for competitive carriers, or servers in hosting sites and data-centres. In turn, they also rely on renting space for their own infrastructure, especially for siting mobile cell-towers on roofs or walls. This two-way trade continues today – and the idea of mobile edge computing as a way to sell “virtual” space in distributed compute facilities maps well to this philosophy.

Contents:

  • Executive Summary
  • Introduction
  • Background market drivers for MEC
  • Why Edge Computing matters
  • The ever-wider definition of “Edge”
  • Wider market trends in edge-computing
  • Use-cases & deployment scenarios for MEC
  • Horizontal use-cases
  • Addressing vertical markets – the hard realities
  • MEC involves extra costs as well as revenues
  • Current status & direction of MEC
  • Standards path and operator involvement
  • Integration challenges
  • Conclusions & Recommendations

Figures:

  • Figure 1: A taxonomy of mobile edge computing
  • Figure 2: Even within “low latency” there are many different sets of requirements
  • Figure 3: The “network edge” is only a slice of the overall cloud/computing space
  • Figure 4: Telcos can implement MEC at various points in their infrastructure
  • Figure 5: Networks, Cloud and IoT all have different starting-points for the edge
  • Figure 6: Network-centric use-cases for MEC suggested by ETSI
  • Figure 7: MEC needs to integrate well with many adjacent technologies and trends

B2B growth: How can telcos win in ICT?

Introduction

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

 

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

Source: Company accounts; STL Partners analysis

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

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

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

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

 

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

 

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

SDN / NFV: Early Telco Leaders in the Enterprise Market

Introduction

This report builds on a number of previous analyses of the progress and impact of SDN (Software-Defined Networking) and NFV (Network Functions Virtualization), both in the enterprise market and in telecoms more generally. In particular, this briefing aims to explore in more detail the market potential and dynamics of two new SDN / NFV-based enterprise services that were discussed as part of an analysis of revenue opportunities presented by ‘telco cloud’ services.

These two services are ‘Network as a Service’ (NaaS) and ‘enterprise virtual CPE’ (vCPE). ‘Network as a Service’ refers to any service that enables enterprise customers to directly configure the parameters of their corporate network, including via a user-friendly portal or APIs. This particularly involves the facility to scale up or down the bandwidth available on network links – either on a near-real-time or scheduled basis – and to establish new network connections on demand, e.g. between business sites and / or data centers. Examples of NaaS include AT&T’s Network On Demand portfolio and Telstra’s PEN service, both of which are discussed further below.

‘Enterprise virtual CPE’, as the name suggests, involves virtualizing dedicated networking equipment sited traditionally at the enterprise premises, so as to offer equivalent functionality in the form of virtual network appliances in the cloud, delivered over COTS hardware. Virtual network functions (VNFs) offered in this form typically include routing, firewalls, VPN, WAN optimization, and others; and the benefit to telcos of offering vCPE is that it provides a platform to easily cross- and upsell additional functionality, particularly in the areas of application and network performance and security.

The abbreviation ‘vCPE’ is also used for consumer virtual CPE, which involves replacing complicated routers, TV set-top boxes and gateway equipment used in the home with simplified devices running equivalent functions from the cloud. For the purposes of this report, when we use the term ‘vCPE’, we refer to the enterprise version of the term, unless otherwise stated.

The reason why this report focuses on NaaS and vCPE is that more commercial services of these types have been launched or are planned than is the case with any other SDN / NFV-dependent enterprise service. Consequently, the business models are becoming more evident, and it is possible to make an assessment of the revenue potential of these services.

Our briefing ‘New Revenue Growth from Telco Cloud’ (published in April 2016) modeled the potential impact of SDN / NFV-based services on the revenues of a large illustrative telco with a significant presence in both fixed and mobile, and enterprise and consumer, segments in a developed market similar to the UK. This concluded that such a telco introducing all of the SDN / NFV services that are expected to become commercially mature over the period 2017 to 2021 could expect to generate a monthly revenue uplift of some X% (actual figures available in full report) by the end of 2021 compared with the base case of failing to launch any such service.

Including only revenues directly attributable to the new services (as opposed to ‘core revenues’ – e.g. from traditional voice and data services – that are boosted by reduced churn and net customer additions deriving from the new services), vCPE and NaaS represent the two largest sources of new revenue: Y and Z percentage points respectively out of the total X% net revenue increase deriving from SDN / NFV, as illustrated in Figure 1 (Figure not shown – actual figures available in full report).

Figure 1: Telco X – Net new revenue by service category (Dec 2021)

Figure not shown – available in full report

Source: STL Partners analysis

In terms of NaaS and vCPE specifically, the model assumes that Telco X will begin to roll out these services commercially in January and February 2017 respectively. This is a realistic timetable for some in our view, as several commercial NaaS and vCPE offerings have already been launched, and future launches have been announced, by telcos across North America, Europe and the Asia-Pacific region.

In the rest of this briefing, we will:

  • present the main current and planned NaaS and vCPE services
  • analyze the market opportunities and competitive threats they are responding to
  • analyze in more detail the different types and combinations of NaaS and vCPE offerings, and their business models
  • assess these services’ potential to grow telco revenues and market share
  • and review how these offerings fit within operators’ overall virtualization journeys.

We will conclude with an overall assessment of the prospects for NaaS and vCPE: the opportunities, and also the risks of inaction.

  • Executive Summary
  • Introduction
  • Current and planned NaaS and vCPE products
  • Opportunities and threats addressed by NaaS and vCPE
  • NaaS and vCPE: emerging offers and business models
  • Revenue growth potential of NaaS and vCPE
  • Relationship between SDN / NFV deployment strategy and operator type
  • Conclusion: NaaS and vCPE – a short-term window of opportunity to a long-term virtual future

 

  • Figure 1: Telco X – Net new revenue by service category (Dec 2021)
  • Figure 2: Leading current and planned commercial NaaS and vCPE services
  • Figure 3: Cumulative NaaS and vCPE launches, 2013-16
  • Figure 4: Verizon SD-WAN as part of Virtual Network Services vCPE offering
  • Figure 5: COLT’s cloud-native VPN and vCPE
  • Figure 6: Evolution of vCPE delivery modes
  • Figure 7: SD-WAN-like NaaS versus SD-WAN
  • Figure 8: Base case shows declining revenues
  • Figure 9: Telco X – Telco Cloud services increase monthly revenues by X% on the base case by Dec 2021
  • Figure 10: NaaS and vCPE deployments by operator type and overall SDN / NFV strategy
  • Figure 11: Progression from more to less hybrid deployment of NaaS and vCPE across the telco WAN

SD-WAN: New Enterprise Opportunity for Telcos, or a Threat to MPLS, SDN & NFV?

Rapid growth in SD-Wan networks

Software-defined Wide Area Networks (SD-WAN) have catapulted to prominence in the enterprise networking world in the last 12 months. They allow businesses to manage their connections between sites, data-centres, the Internet and external cloud services much more cost-effectively and flexibly than in the past.

Driven by the growth of enterprise demand for access to cloud applications, and businesses’ desire to control WAN costs, various start-ups and existing network-optimisation vendors have catalysed SD-WAN’s emergence. Its rapid growth as a new “intermediary” layer in the network has the potential to disrupt telcos’ enterprise aspirations, especially around NFV/SDN.

In essence, SD-WAN allows the creation of an “OTT intelligent network infrastructure”, as an overlay on top of one or more providers’ physical connections. SD-WANs allow combinations of multiple types of access network – and multiple network providers. This can improve QoS in certain areas, reliability and security of corporate networks, while simultaneously reducing costs.  SD-WANs also enable greater flexibility and agility in allocating enterprise network resources.

Why SD-WAN is at least in in part a threat

However, SD-WAN potentially poses major risks to traditional telcos’ enterprise offerings. It allows enterprise customers to deploy least-cost-routing more easily, or highest-quality-routing, by arbitraging differences in price or performance between multiple providers. It enables high-margin MPLS connections to be (at least partly) replaced with commodity Internet connectivity. And it reduces loyalty / lock-in by establishing an “abstraction” layer above the network, controlled by in-house IT teams or competing managed service providers.

SD-WAN has another, medium-term, set of implications for telcos, when considered through the lens of the emerging world of NFV/SDN and “telco cloud” – a topic on which STL Partners has written widely. By disconnecting the physical provision of corporate networks and a business’s data/application assets or clouds, SD-WAN may make it harder for telcos to move up the value chain in serving enterprise customers. Capabilities such as security systems, or unified communications services, may become associated with the SD-WAN, rather than the underlying connection(s); and would thus be provisioned by the SD-WAN provider, rather than by the telco that is providing basic connectivity.

In other words, SD-WAN represents three distinct threats for telcos:

  • Potential reduction in MPLS & other WAN services revenues
  • Potential reduction in today’s enterprise solution value-adds such as UCaaS & managed security services
  • Potential restriction of future telco enterprise SDN/NFV services opportunities to basic Network as a Service (NaaS) offers, with lower scope for upsell.

The current global market for WAN services is $60-100bn annually, depending on how it is defined; therefore, any risk of significant change is central to many operators’ strategic concerns.
Table of Contents

  • Executive Summary
  • Introduction
  • Background: Enterprise WANs
  • Shifting trends in WAN usage
  • The rise of SD-WAN
  • Overview – the holy grail of ‘good/fast/cheap’ in the WAN
  • SD-WAN technology and use-cases
  • SD-WAN vendors include start-ups and established enterprise market players
  • The role of service providers in SD-WAN
  • Bundling hosted voice/UCaaS and SD-WAN
  • Telcos Should take a Proactive Approach to SD-WAN
  • SD-WAN vs. SDN & NFV: Timing and Positioning
  • Future of SD-WAN and Recommendations
  • Recommendations

 

  • Figure 1: SD-WAN architecture example
  • Figure 2: SD-WAN & NaaS may help telcos maintain revenues in enterprise WAN
  • Figure 3: SD-WAN may reduce telco opportunities for SDN/NFV/cloud services
  • Figure 4: Different paths for SD-WAN service offer provision & procurement

MWC 2016: IoT & Enterprise

IoT Enthusiasm Hits a Peak…

MWC demonstrated beyond a doubt that the IoT merits its recently-awarded reigning spot at the top of the Gartner hype cycle. The vendors present at MWC were more than keen to demonstrate their IoT solutions, using the full range of established and emerging network standards. Notable IoT announcements from operators at the show included AT&T announcing another round of lucrative connected-car deals; and Deutsche Telekom and SKT announcing a major IoT-focused strategic alliance (the Next Generation Enterprise Network Alliance). SKT even showed a range of Android-based devices for dogs, although it couldn’t run to an actual dog to demonstrate them.

There were significant announcements from ARM about low-power chips, from the Linux Foundation about device operating systems, and from Actility, Jasper, Gemalto, and Cisco about service platforms. We also noted that the special relationship between Nokia and Intel touches on the IoT – the two tech vendors took part in a (Narrow Band) NB-IoT trial with Vodafone.

According to one analyst firm, we’re now up to 300 identifiable IoT “platforms” – a testament both to the creative energy being applied to IoT development, and to the potentially crippling degree of fragmentation affecting it. For the industry to progress on IoT, a shakeout – and clearer winners on the standardisation of technologies and platforms – must be coming up somewhere along the line.

The fight between the platforms, however, is not the only important story. There’s also a big question about the level of the IoT stack at which the most value will accrue. The candidates: IoT devices, the network, the service-enablement platform, the data layer, or individual apps? This cuts across the question of which vendor’s platform will ‘win’. There will certainly be multiple IoT platforms that find traction, with some particularly suited to specific verticals and use cases, but understanding where operators and others can most effectively monetise the IoT opportunity is a fundamental question that most players still seem unclear on.

 

  • Executive Summary
  • IoT Enthusiasm Hits a Peak…
  • Identifying IoT value – IT vendor strategies, cognitive computing
  • NB-IoT: the LPWAN option that suits telcos, but does it suit customers?
  • …But the ’50 Billion Connected Device by 2020′ Dream Is Over

 

  • Figure 1: Selected telco involvement in key LPWAN projects
  • Figure 2: This used to say “50bn connected devices”. Now it doesn’t.

Telcos’ Last Chance in Cloud? New $18bn Sovereign Cloud Opportunity

Preface

As we predicted in our 2012 report Cloud 2.0: Telco Strategies in the Cloud, operators have struggled to provide generically competitive cloud services, with those looking to provide infrastructure-as-a-service (IaaS) losing out to the larger hyperscale players (e.g. Amazon Web Services, Microsoft Azure). The majority of telcos have therefore reduced their focus and ambition within cloud (infrastructure) services over the last number of years.

However, recent legal and market developments and the emergence of new technologies are changing the cloud delivery model. The rescinding of the US-EU Safe Harbour agreement and the sovereign data trustee solution launched by Microsoft & Deutsche Telekom have put a spotlight on the need for sovereign cloud solutions that are better equipped to protect data. Operators are well-positioned to deliver and support these solutions but will need to act fast to ensure their role in the value chain.

Furthermore, new technologies (e.g. 5G, SDN/NFV) and requirements (e.g. low latency) may lead to the decentralisation of the current hyperscale data centre model, moving more computing power to the edge of the network (see How 5G is Disrupting Cloud and Network Strategy Today). This change in the architecture may lead to a long-term advantage for telcos.

In order to better understand data sovereignty requirements around the world and the potential opportunity for ‘sovereign’ cloud services, STL Partners (STL) conducted industry research. This research consisted of c.30 interviews with software-as-a-service (SaaS) providers, software companies, enterprises, public sector bodies, telecom operators and cloud service providers. This report presents and discusses the findings of this research.

The research programme was sponsored by Ericsson. This report and analysis was independently produced by STL Partners.

Introduction: The Return of Telco Cloud…

The telecoms industry has been undergoing a transformation process for much of the last decade. The threat from new players has marginalized the core communications business and operators have looked to gain traction and grow revenues through the provision of new services in adjacent areas, with one such area being cloud computing.

Cloud computing has ripped through the traditional IT infrastructure model, providing greater flexibility, enabling the pooling of resources and potentially reducing both capex and opex. This new delivery model has led to the development of new services and business models (e.g. ‘as-a-service’ models), disrupting how individuals consume services and how organisations do business.

The rise of cloud computing is a trend set to continue; indeed, STL Partners forecast that cloud IT infrastructure spending will equal spend on traditional IT infrastructure by 2020 (Figure 3).

Figure 3: Cloud IT infrastructure is rapidly gaining on traditional IT infrastructure

Source: IDC base figures; STL Partners analysis

Telcos have not remained oblivious to this industry transformation. Some (principally fixed-line) operators have a legacy providing IT outsourcing services and have looked to build on this footing, providing and managing infrastructure for cloud services, whilst others have partnered with cloud software providers to deliver new services to customers.

So far operators’ experiences offering cloud services have been mixed, with operators typically finding more success through partnerships. Rather than attempting to build their own cloud solutions operators have typically partnered with SaaS providers, such as Microsoft (e.g. Office 365) and Google (e.g. Google Apps for Work), acting as resellers of the software, potentially creating appealing bundles for enterprise customers.

On the other hand telcos attempting to provide IaaS, which one might intuitively think is more closely aligned to a telco’s core capabilities, have typically found that they have not been able to compete head-on with the larger IaaS providers (e.g. Amazon Web Services). Simply speaking, it has become a game of scale, with single operators or even telco groups unable to match the resources and investment of the hyperscale players. Indeed in our November 2014 report, Cloud: What is the role of telcos in cloud services in 2015?, we highlighted the challenge with telcos competing against the larger IaaS players:

“Pushing for pureplay IaaS solutions (Compute, Memory, Storage etc) is not going to be a sensible option for the majority of telcos. As an example of how hard it is to compete here, RackSpace came from a managed hosting/co location background and moved into IaaS, even collaborating on a virtualisation initiative that became OpenStack. But earlier in 2014, after spending less on IaaS investment than Microsoft or Google spend on infrastructure in a quarter, it announced it was going to refocus its efforts on its earlier product success with managed hosting and colocation because it was more able to differentiate itself from the other vendors who have significantly lower pricing.”

Telcos competing in infrastructure have therefore typically shifted their focus away from public cloud IaaS (competing against the larger providers) to more private cloud infrastructure and traditional managed hosting services. Despite mixed performance with IaaS services, albeit with exceptions in regions where the big IaaS players are not well established and where telcos can differentiate their offering (e.g. Telstra), there perhaps remains a still sizable opportunity, particularly as telcos begin to transform their networks.

This transformation involves the virtualisation of the network, embracing software defined-networking (SDN) and network functions virtualisation (NFV). As operators harness the power of these new technologies and associated business practices they will develop and implement the infrastructure, software and capabilities to deliver more advanced services through more efficient, automated and programmable networks. Operators in turn will be able to draw on these assets and associated skills to improve how they run and manage their cloud infrastructure.

Furthermore, as the industry develops and implements more advanced networks (i.e. 5G), there exists a potential advantage for telco infrastructure services due to the need for more localised delivery of service. The Next Generation Mobile Networks (NGMN) Alliance highlights that 5G should provide, “much greater throughput, much lower latency, ultra-high reliability, much higher connectivity density, and higher mobility range.”

STL Partners laid out a potential vision for 5G and network transformation in the report, How 5G is Disrupting Cloud and Network Strategy Today. To summarise the report, latency targets/requirements (how long it takes the network to respond to user requests) for 5G are very low; the target is 10ms end-to-end, 1ms for special use cases requiring low latency, or 50ms end-to-end for the “ultra-low cost broadband” use case. An example use case where low-latency could be very important could be communication between self-driving cars.

In order to meet these lofty requirements for latency the current delivery model may need to be rethought. Latency is limited by the time it takes to travel to the server and back at the speed of light; latency is therefore inherently linked to distance. In the 5G report, we explored the impact of these latency targets on the required distance of servers from users:

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

To deliver these latency requirements a radical change to the architecture of the network is needed as well as a change in how compute and storage infrastructure is managed. Content and applications that are within the 100km contour will have a competitive advantage over those that don’t take account of latency. The impact of this could lead to the decentralisation of the current hyperscale data centre model, moving more computing power to the edge of the network. This change in the architecture and delivery model may lend telcos an advantage in the infrastructure marketplace.

Figure 4: Shifting the balance in favour of more localised infrastructure

Source: STL Partners

Whilst telcos will not wrestle control of the infrastructure marketplace overnight, telcos, as they embark on their transformation process, should look to make inroads towards this vision. Indeed there are current market challenges that telcos could immediately address (and are addressing) through their localised infrastructure, creating a stepped/phased approach towards the future vision of a localised cloud delivery model.

Into this rapidly evolving context steps the long-standing challenge of data sovereignty. Data sovereignty requirements are regulations that consider the implications of geographical location of data and place restrictions on the movement of certain types of data across borders. The recent ruling rescinding the US-EU Safe Harbour Agreement has put a spotlight on the issue of data privacy and data sovereignty and new approaches taken by technology players are highlighting that this is a problem that needs to and is being solved (i.e. Microsoft’s decision to create a German sovereign version of Azure). Operators are natural candidates to play a role here and should look to better understand how they can form part of the value chain in the provision of locally trusted IaaS solutions.

This report analyses data sovereignty requirements around the world and explores the potential opportunity for ‘sovereign’ cloud services as a further ‘nudge’ towards a more localised cloud delivery model.

 

  • Preface
  • Executive Summary
  • The Return of Telco Cloud…
  • Understanding Data Sovereignty
  • Which Sectors Have the Strongest Sovereignty Requirements?
  • A Range of (Cloud) Solutions can Address Sovereignty Needs
  • 75% of Interviewees were Interested in Sovereign Cloud Solutions
  • Where is Data Sovereignty Important?
  • How could this Evolve?
  • Market Sizing: Sovereign Cloud could be Worth between $7-18bn in 2020
  • Why Telcos are Well Positioned to Address the ‘Sovereign’ Opportunity
  • Conclusions

 

  • Figure 1: A shift in the cloud delivery model may be occurring
  • Figure 2: Sovereign cloud has the potential to represent over X% of the cloud infrastructure marketplace
  • Figure 3: Cloud IT infrastructure is rapidly gaining on traditional IT infrastructure
  • Figure 4: Shifting the balance in favour of more localised infrastructure
  • Figure 5: How much data does Facebook store about you?
  • Figure 6: STL Industry Research Programme – Breakdown of interviewees
  • Figure 7: The significant majority of interviewees have encountered sovereignty requirements
  • Figure 8: More-regulated sectors are more likely to encounter restrictions
  • Figure 9: Infrastructure Deployment Models
  • Figure 10: The applicability of cloud deployment models to meet sovereignty requirements
  • Figure 11: The majority of Interviewees saw demand for sovereign cloud
  • Figure 12: More strictly regulated sectors are more interested in sovereign cloud solutions
  • Figure 13: Indicative map of data sovereignty requirements across the globe
  • Figure 14: Overview of data sovereignty requirements across regions
  • Figure 15: The rise of IoT could lead to increased demand for sovereign cloud
  • Figure 16: Sovereign cloud could be worth between $7-18bn in 2020
  • Figure 17: North America represents the biggest market for sovereign cloud
  • Figure 18: Sovereign cloud in the Middle East & Africa potentially represents the greatest proportion of cloud infrastructure spending
  • Figure 19: Government represents the largest market for sovereign cloud for existing services and Healthcare for sovereign cloud incl. IoT services
  • Figure 20: Healthcare is the largest sector for sovereign cloud as a percentage of spend on IT infrastructure

Telstra: Battling Disruption and Growing Enterprise Cloud & ICT

Introduction

A Quick Background on the Australian Market

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

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

Telstra: doing pretty well

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

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

Source: STL Partners, Telstra filings

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

Figure 2: Mobile and cloud lead the way

Source: STL Partners, Telstra filings

Telstra is growing some new Telco 2.0 revenue streams

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

Figure 3: Telco 2.0 is a growing force within Telstra

Source: STL Partners, Telstra filings

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

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

Source: STL Partners, Telstra filings

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

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

Source: STL Partners, Telstra filings

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

 

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

 

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

Telco 2.0: The $50bn Enterprise Mobility Opportunity: What’s stopping telcos winning 500% more business?

Overview of Key Findings

STL Partners believe that mobility – the use of mobile data, new devices, new applications and communications services – is one of the most disruptive forces in today’s enterprise market. We think that a business philosophy to embrace mobility as a strategic asset and opportunity, rather than simply a technical challenge, will be a critical success factor for all businesses moving forward. Telcos can be a key enabler and business partner in this transformation, but to do so they will need to significantly change their approaches to working with enterprise customers.Key findings

Our new global research, independently produced by STL Partners and kindly sponsored by SAP, shows that many telcos are both ideally positioned but underprepared to exploit this fast emerging and evolving opportunity. We found that among the 101 global enterprise and 44 telco executives we surveyed:

  • Mobility works – 80% of enterprise execs thought their mobile app based initiatives had met or exceeded expectations
  • There’s big latent demand for telcos – 5 times as many enterprises (i.e. over half the total) would buy services and solutions from telcos than currently do
  • But telcos need to address credible capability issues such as security, product portfolio, app development, and process and industry expertise
  • And most telcos are underprepared – only 16% have a defined market offer or strategy, and internal adoption of mobility lags many other industries, with only 45% of telcos we surveyed offering internal apps compared to 61% in the enterprise sample.

Figure 1:  What would enterprises consider buying from a telco?
Figure 1: What would enterprises consider buying from a telco?

Source: STL Partners, On-line research, Enterprise >250 employees, Feb 2014(n=101)

Introduction

Background – the Business Context of Enterprise Mobility

Four major trends in demand are transforming the Enterprise Information and Communication Technology (ICT) market today:

  1. In pursuit of greater agility, new sources of revenue, improved efficiency, and closer customer relationships, enterprises are exploring opportunities to mobilise strategic aspects of their business.
  2. Enterprises are increasingly exploiting big-data, cloud, and mobile strategies to innovate and transform.
  3. To focus on their core businesses, they are outsourcing IT infrastructure and technology services.
  4. As employees increasingly use new digital technologies and services, enterprises have started to reduce spend on traditional telecoms services.

In response, telcos are looking to identify alternative ways to grow revenues from enterprise customers. This includes tools for the development, deployment, and management of enterprise apps, and managed infrastructure and technology services that offer flexibility and economies of scale.

In December 2013, STL Partners conducted a sizing study of the Enterprise Mobility market and identified a global opportunity of $50 billion (see Telco 2.0™ Executive Briefing: “The $50Bn Enterprise Mobility Opportunity: four steps for telcos to take today”).  This precipitated further exploration into:

  • Enterprises’ opportunities and priorities for mobile solutions
  • Their drivers and expectations vis-à-vis Enterprise Mobility, and their attitudes towards telcos as a prospective partner
  • The practical and perceptual inhibitors causing telcos to arrive comparatively late to the Enterprise Mobility party
  • How telcos can achieve the greatest value for their customers – and themselves – by developing or assimilating the Enterprise Mobility capabilities they lack today

New Research

In the first quarter of 2014, STL Partners carried out a combined research programme consisting of:

  • a survey of 101 enterprises worldwide (organisations with 250+ employees)
  • a quantitative study of 44 telcos
  • in-depth qualitative interviews with strategists and proposition owners representing 11 telcos

Figure 2: Enterprise customers – on-line survey respondents, per region

Figure 2: Enterprise customers - on-line survey respondents, per region

Figure 3: Telco – on-line survey respondents, per region

Figure 3: Telco - on-line survey respondents, per region

Table 1: In-depth qualitative interviews – contributing companies

Table 1: In-depth qualitative intervews - contributing companies

 

All the interviews were conducted on a confidential basis. Information and insights shared by the interviewees have therefore been anonymised.  Names and titles have also been withheld.

The findings – which suggest telcos are even further adrift of a robust Enterprise Mobility proposition than initially thought – are detailed in this report, together with recommendations on steps telcos can take to accelerate their go-to-market strategy and make up for the early momentum they have lost.

Overview – the enterprise perspective 

As demand for access to information on the go via mobile platforms is increasing, Enterprise Mobility is one of the hottest topics in IT. Mobile apps are fast becoming a business imperative to support better ways of working and business transformation. Enterprises must react quickly to harness the potential of mobile apps, while satisfying themselves that security, governance, and compliance across data, applications, and devices are fit for purpose.

Most Enterprises have started mobilising 

Our study revealed that most enterprises have already mobilised at least some of their organisation’s processes and interactions, generally starting from the inside out by prioritising internal initiatives over customer-facing ones.

Figure 4: Business processes already mobilised by enterprises

Figure 4: Business processes already mobilised by enterprises

Though we observed variations in adoption by sector and country that may indicate relevant differences (see Appendix – Industry and Regional Splits, page 48), the commonality of fundamental demand across regions and sectors is more significant.

Sales is the current lead application – but there’s more to come

Findings: field sales has always been a natural candidate area for mobilisation, borne out by the fact that more than half of enterprises in the study already had some form of sales app.  While the Shop Floor currently has experienced the lowest adoption of enterprise apps, it is also one of the areas of greatest potential for mobilisation, with 41% of enterprises contemplating mobilising their production facilities, concourse, or retail environment.  The highest levels of mobilisation or intent to mobilise were seen in Aftermarket Field Service, Transportation & Delivery, and Equipment Maintenance.

Figure 5: Internal / B2E mobile apps enterprises already have or are considering

Figure 4: Internal / B2E mobile apps enterprises already have or are considering

Opportunity: administrative apps are now a relatively mature, horizontal process market. Some telcos have had success selling these and it is an important area in which to have a compelling offering. However, such apps have lower price points and margins, whereas other sales and operational apps offer the potential for higher growth and greater business impact. Moreover, there is also potential for a new generation of intelligent sales apps to change sales performance in a more fundamental fashion.

Key Question: how can telcos best develop the agility and depth of ICT skills to sell and support both horizontal process apps and deeper vertical / operational needs?

Options: telcos have broad options to develop this internally, partner, or choose not to support these segments and their needs. See Four key enterprise mobility competencies for telcos, page 42.

In B2C: information first, marketing next

Findings: the customer-facing processes that had most typically been already mobilised were identified as Information & Reference (53%) and Paying Bills/Checking Balances (52%). The areas of greatest untapped interest in mobilisation were Social Media Sharing (33%), Marketing Offers (32%), and Scanning Barcodes/QR Codes (31%).

Figure 6: Customer-facing processes enterprises have mobilised or are planning to mobilise?

Figure 6: Customer-facing processes enterprises have mobilised or are planning to mobilise?

Opportunity: as an increasing volume of purchases are researched or made via mobile devices, traditional mobile marketing and shopping experiences in developed economies are likely to continue to evolve significantly.

Key Question: how can telcos develop and support the next generation of customer-facing mobile apps?

Options: again, telcos have broad options to develop this internally, partner, or choose not to support these segments and their needs. See Four key enterprise mobility competencies for telcos, page 42.

 

  • Executive Summary
  • Introduction
  • Overview: the enterprise perspective
  • Most Enterprises have started mobilising
  • Issues for Enterprises managing Enterprise Mobility
  • The results: 80 % of initiatives met or beat expectations
  • More than half the enterprise market would buy from telcos: 500% more than today
  • So why don’t enterprises buy from telcos now?
  • The telco perspective
  • Stages of mobile maturity among telcos
  • 70% of telco execs found EM a ‘very attractive’ opportunity
  • Telcos are not ‘drinking their own champagne’
  • Only 16% of telcos have a defined strategy or market offer
  • Enterprises want apps, but are telcos listening?
  • Shifting culture: new markets needs new mind-sets, models and metrics
  • What sort of strategy to balance speed and risk/reward?
  • Enterprise Mobility success factors
  • Four key enterprise mobility competencies for telcos
  • Should telcos partner – and what are the criteria?
  • Steps to defining the strategy for telcos
  • Appendix – Industry and Regional Splits
  • Adoption and barriers by Sector and Region

 

  • Figure 1: Enterprise customers – On-line survey respondents, per region
  • Figure 2: Telco – On-line survey respondents, per region
  • Figure 3: Business processes already mobilised by enterprises
  • Figure 4: Internal / B2E mobile apps enterprises already have or are actively considering
  • Figure 5: Customer-facing processes enterprises have mobilised or are planning to mobilise?
  • Figure 6: Capabilities enterprise employees and customers are using
  • Figure 7: BYOD – Prevalence of corporate and employee devices
  • Figure 8: Number of devices across the surveyed enterprises’ workforces 16
  • Figure 9: Top challenges and obstacles in Enterprise Mobility
  • Figure 10: How do Enterprises manage app development?
  • Figure 11: How many enterprises use platform-based applications?
  • Figure 12: Strategic mobility enablers currently in place in enterprises
  • Figure 13: Presence of a formal enterprise mobility strategy vs. number of devices across the workforce
  • Figure 14: Success of Enterprise Mobility deployment(s) to date
  • Figure 15: Success of Enterprise Mobility deployment(s) to date – per role
  • Figure 16: What would enterprises consider buying from a telco?
  • Figure 17: What would enterprises consider buying from a telco – by role
  • Figure 18: Enterprises which would consider buying from a telco or already have
  • Figure 19: Why wouldn’t enterprises buy from a telco?
  • Figure 20: Enterprise Mobility maturity stages in telcos
  • Figure 21: Telcos’ concerns about core revenue declines
  • Figure 22: How attractive an opportunity is Enterprise Mobility to telcos?
  • Figure 23: Telcos are somewhat well-informed around Enterprise Mobility trends and development in mobile applications
  • Figure 24: Types of apps currently used within telcos
  • Figure 25: Processes / workflows telcos have mobilised or plan to mobilise with apps
  • Figure 26: Maturity of telcos’ own mobility programme
  • Figure 27: Telcos’ Internal enterprise app store deployment
  • Figure 28: Mobile portfolio management
  • Figure 29: Telcos’ biggest challenges or obstacles to internal mobilisation
  • Figure 30: Products and services telcos are currently offering, or plan to offer
  • Figure 31: Comparison between services enterprises would consider buying from telcos vs. services telcos are currently offering, or plan to offer
  • Figure 32: Telcos’ target market
  • Figure 33: Telco Barriers to taking Enterprise Mobility offerings to market
  • Figure 34: A hybrid approach can enable Telcos to achieve multiple concurrent stages of mobility evolution
  • Figure 35: Potential ‘Roadmap’ decisions for telcos addressing Enterprise Mobility
  • Figure 36: Business processes already mobilised by enterprises by industry sector
  • Figure 37: Internal mobile apps the utilities sector already have or are actively considering
  • Figure 38: Enterprise device landscape
  • Figure 39: Enterprise device landscape by region
  • Figure 40: Top THREE biggest challenges and obstacles in Enterprise Mobility by region
  • Figure 41: Enterprise mobile apps development / acquisition – per region
  • Figure 42: Enterprise mobile apps development / acquisition per industry
  • Figure 43: Platform-based applications per region
  • Figure 44: Enterprise app store penetration
  • Figure 45: Reasons Enterprises would not consider obtaining Enterprise Mobility services from a telecoms provider – per region
  • Figure 46: Reasons Enterprises would not consider obtaining Enterprise Mobility services from a telecoms provider – per industry

Telco 1.0: Death Slide Starts in Europe

Telefonica results confirm that global telecoms revenue decline is on the way

Very weak Q1 2014 results from Telefonica and other European players 

Telefonica’s efforts to transition to a new Telco 2.0 business model are well-regarded at STL Partners.  The company, together with SingTel, topped our recent Telco 2.0 Transformation Index which explored six major Communication Service Providers (AT&T, Verizon, Telefonica, SingTel, Vodafone and Ooredoo) in depth to determine their relative strengths and weaknesses and provide specific recommendations for them, their partners and the industry overall.

But Telefonica’s Q1 2014 results were even worse than recent ones from two other European players, Deutsche Telekom and Orange, which both posted revenue declines of 4%.  Telefonica’s Group revenue came in at €12.2 billion which was down 12% on Q1 2013.  Part of this was a result of the disposal of the Czech subsidiary and weaker currencies in Latin America, in which around 50% of revenue is generated.  Nevertheless, the negative trend for Telefonica and other European players is clear.

As the first chart in Figure 1 shows, Telefonica’s revenues have followed a gentle parabola over the last eight years.  They rose from 2006 to 2010, reaching a peak in Q4 of that year, before declining steadily to leave the company in Q1 2014 back where it started in Q1 2006.

The second chart, however, adds more insight.  It shows the year-on-year percentage growth or decline in revenue for each quarter.  It is clear that between 2006 and 2008 revenue growth was already slowing down and, following the 2008 economic crisis in which Spain (which generates around quarter of Telefonica’s revenue) was hit particularly hard, the company’s revenue declined in 2009.  The economic recovery that followed enabled Telefonica to report growth again in 2010 and 2011 before the underlying structural challenges of the telecoms industry – the decline of voice and messaging – kicked in, resulting in revenue decline since 2012.

Figure 1: Telefonica’s growth and decline over the last 8 years

Telco 2.0 Telefonica Group Revenue

Source: Telefonica, STL Partners analysis

One thing is clear: the only way is down for most CSPs and for the industry overall

The biggest concern for Telefonica and something that STL Partners believes will be replicated in other CSPs over the next few years is the accelerating nature of the decline since the peak.  It seems clear that Telco 1.0 revenues are not going to decline in a steady fashion but, once they reach a tipping point, to tumble away quickly as:

  • Substitute voice and messaging products and alternate forms of communication scale;
  • CSPs fight hard to maintain customers, revenue and share in voice, messaging and data products, via attractive bundles

The results of the European CSPs confirms STL Partners belief that the outlook for the global industry in the next few years is negative overall.  It is clear that telecoms industry maturity is at different stages globally:

  • Europe: in decline
  • US: still growing but very close to the peak
  • Africa, Middle East, Latin America: slowing growth but still 2(?) years before peak
  • Asia: mixed, some markets growing, others in decline

Given these different mixes, STL Partners reaffirms its forecast of 2012 that overall the industry will contract by up to 10% between 2013 and 2017 as core Telco 1.0 service revenue decline accelerates once more and more countries get beyond the peak.  This is illustrated for the mobile industry in Figure 2, below.

Figure 2: Near-term global telecoms decline is assured; longer-term growth is dependent on management actions now

Global mobile telcoms revenue

Source: STL Partners

Upturn in telecoms industry fortunes after 2016 dependent on current activities

If the downturn to 2016 is a virtual certainty, the shape of the recovery beyond this, which STL Partners (tentatively) forecasts, is not. The industry’s fortunes could be much better or worse than the forecast owing to the importance of transformation activities which all players (CSPs, Network Equipment Providers, IT players, etc.) need to make now.

The growth of what we have termed Human Data (personal data for consumers and business customers, including some aspects of Enterprise Mobility), Non-Human Data (connection of devices and applications – Internet of Things, Machine2Machine, Infrastructure as a Service, and some Enterprise Mobility) and Digital Services (end-user and B2B2X enabling applications and services) requires CSPs and their partners to develop new skills, assets, partnerships, customer relationships and operating and financial models – a new business model.

As IBM found in moving from being hardware manufacturer to a services player during the 1990’s, transforming the business model is hard.  IBM was very close to bankruptcy in the early 90’s before disrupting itself and re-emerging as a dominant force again in recent years.  CSPs and NEPs, in particular, are now seeking to do the same and must act decisively from 2013-2016 if they are to enjoy a rebirth rather than continued and sustained decline.

Telco 2.0: The $50bn Enterprise Mobility Opportunity: four steps for telcos to take today

Executive Summary

In pursuit of agility, efficiency, new revenue sources and closer customer relationships, enterprises are turning to mobility to transform the way employees work with engaging mobile apps that harness device-specific functions and capabilities. These apps generally need to connect to and exchange data with back-office systems, many of which pre-date the mobile era. As a result, organisations are looking to partners to provide the tools, technologies and skills to customise and develop apps, do the heavy lifting of deployment and lifecycle management, and accelerate business value. STL Partners estimates the value of this opportunity to be around $50 billion worldwide.

As enterprises reduce spend on traditional telecom services, telcos have a timely opening to take an enterprise mobility proposition to market. However, to date, deployments have been niche and opportunistic rather than part of a long-term strategy. STL Partners has identified a four-step structured approach that telcos can embark on today, and gain competence and confidence as they move up the enterprise mobility stack to higher value offerings. The four levels of evolution involve:

  • Level 1 – mobilising their own operations and internal processes
  • Level 2 – offering a managed environment to enterprises for their apps, whether on premise or in the cloud
  • Level 3 – providing hosted mobility together with off-the-shelf enterprise apps, with the option to add “last mile” customisation to the enterprise’s specific requirements and provide an enterprise app store
  • Level 4 – providing hosted mobility and developing bespoke, highly differentiated apps that solve customers’ unique business challenges

However, building out these capabilities will require substantial commitment and investment – not only in platforms and tools but also in people, via a transfusion of talent from related industries.

What next?

The purpose of this paper is to stimulate telcos’ thinking around the development of a structured, short-term approach to enterprise mobility opportunities that can be transitioned to a more sustainable, higher-yield strategy.

Having highlighted the stark choices available, STL Partners are inviting telcos to participate in a research study which will delve deeper into telcos’ appetite for, and the practical considerations of, establishing a foothold in the enterprise mobility market. Among the big questions for exploration will be:

  • Why are telcos arriving relatively late to the enterprise mobility party?
  • What do they need to keep pace with enterprise mobility trends?
  • What successes have telcos achieved to date – but at what cost and effort, and what could be done differently or better to create a repeatable framework and reusable approach?
  • What are the shortest, most effective routes into specific markets and segments and what use cases should telcos be targeting?
  • What are the barriers to success in the app market and how can they be overcome?
  • Where, along the four-stage evolution, do telcos want to end up and why?
  • What can and should mobility vendors be doing to support telcos’ efforts to commercialise their enterprise mobility propositions?

Our forthcoming paper will reveal the findings and outline the “recipe” for advancing through each of the four levels of enterprise mobility maturity.

 

  • Joining the enterprise mobility revolution
  • The enterprise opportunity
  • The telco opportunity
  • Level 1 – ‘Drink your own Champagne’
  • Level 2 – Offer a managed environment for enterprise apps
  • Level 3 – Provide hosted mobility plus off-the-shelf apps
  • Level 4 – Hosted mobility plus development of proprietary enterprise apps
  • Barriers and inhibitors
  • What next?
  • About SAP
  • About STL Partners

 

  • Figure 1 – The enterprise mobility framework
  • Figure 2 – The four levels of enterprise mobility evolution
  • Figure 3 – Key opportunities for internal applications of mobility
  • Figure 4 – Example Use Cases of Off-the-shelf enterprise apps

Cloud 2.0: Network Functions Virtualisation (NFV) vs. Software Defined Networking (SDN)

Network Functions Virtualisation

What is Network Functions Virtualisation?

Network Functions Virtualisation (NFV)  is an ominous sounding term, but on examination relatively easy to understand what it is and why it is needed.

If you run a network whether as an enterprise customer or as a service provider you will end up a stack of dedicated hardware appliances performing a variety of functions needed to make the network work or to optimise its performance. Boxes like Routers, Application Load Balancers, Session Border Controllers (SBC), Network Address Translation (NAT), Deep Packet Inspection (DPI) and Firewalls to pick just a few. Each one of these hardware appliances needs space, power, cooling, configuration, backup, capital investment, replacement as they become obsolete and people who can deploy and manage them leading to on-going capex and opex. And with a few exceptions, each performs a single purpose, so a firewall is always a firewall or an SBC is always an SBC and neither can perform the function of the other.

Contrast this model with the virtualised server or cloud computing world where Virtual Machines run on standard PC/Server hardware, where you can add more compute power/storage on an elastic basis should you need it and where network cards are only required when you connect one physical device to another.

What problems does NFV solve?

NFV seeks to solve the problems of dedicated hardware by deploying the network functions on a virtualised PC/server environment. NFV started as a special interest group running under the auspices of the European Telecommunications Standards Institute (ETSI) by 7 of the world’s largest telecoms operators and has now been joined by additional telecoms companies, equipment vendors and a variety of technology providers.

While NFV can replace many dedicated hardware devices with a virtualised software platform, it is yet to be seen if this approach can deliver the sustained performance and low latency that is currently delivered by some specialised hardware appliances such as load balancing, real time encryption or deep packet inspection.

Figure 8 shows ETSI’s vision of NFV.

Figure 8 – ETSI’s vision for Network Functions Virtualisation
Network Virtualisation Approach June 2013

 Source ETSI

Report Contents

  • Network Functions Virtualisation
  • What is Network Functions Virtualisation?
  • What problems does NFV solve?
  • How does NFV relate to Software Defined Networking (SDN)?
  • Relative benefits of NFV and SDN
  • STL Partners and the Telco 2.0™ Initiative

Report Figures

  • Figure 8 – ETSI’s vision for Network Functions Virtualisation
  • Figure 9 – Network Functions Virtualised and managed by SDN
  • Figure 10 – Network Functions Virtualisation relationship with SDN