A3 for enterprise: Where should telcos focus?

A3 capabilities operators can offer enterprise customers

In this research we explore the potential enterprise solutions leveraging analytics, AI and automation (A3) that telcos can offer their enterprise customers. Our research builds on a previous STL Partners report Telco data monetisation: What’s it worth? which modelled the financial opportunity for telco data monetisation – i.e. purely the machine learning (ML) and analytics component of A3 – for 200+ use cases across 13 verticals.

In this report, we expand our analysis to include the importance of different types of AI and automation in implementing the 200+ use cases for enterprises and assess the feasibility for telcos to acquire and integrate those capabilities into their enterprise services.

We identified eight different types of A3 capabilities required to implement our 200+ use cases.

These capability types are organised below roughly in order of the number of use cases for which they are relevant (i.e. people analytics is required in the most use cases, and human learning is needed in the fewest).

The ninth category, Data provision, does not actually require any AI or automation skills beyond ML for data management, so we include it in the list primarily because it remains an opportunity for telcos that do not develop additional A3 capabilities for enterprise.

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Most relevant A3 capabilities across 200+ use cases

9-types-of-A3-analytics-AI-automation

Most relevant A3 capabilities for leveraging enterprise solutions

People analytics: This is the strongest opportunity for telcos as it uses their comprehensive customer data. Analytics and machine learning are required for segmentation and personalisation of messaging or action. Any telco with a statistically-relevant market share can create products – although specialist sales capabilities are still essential.

IoT analytics: Although telcos offering IoT products do not immediately have access to the payload data from devices, the largest telcos are offering a range of products which use analytics/ML to detect patterns or spot anomalies from connected sensors and other devices.

Other analytics: Similar to IoT, the majority of other analytics A3 use cases are around pattern or anomaly detection, where integration of telco data can increase the accuracy and success of A3 solutions. Many of the use cases here are very specific to the vertical. For example, risk management in financial services or tracking of electronic prescriptions in healthcare – which means that a telco will need to have existing products and sales capability in these verticals to make it worthwhile adding in new analytics or ML capabilities.

Real time: These use cases mainly need A3 to understand and act on triggers coming from customer behaviour and have mixed appeal to telcos. Telcos already play a significant role in a small number of uses cases, such as mobile marketing. Some telcos are also active in less mature use cases such as patient messaging in healthcare settings (e.g. real-time reminders to take medication or remote monitoring of vulnerable adults). Of the rest of the use cases that require real time automation, a subset could be enhanced with messaging. This would primarily be attractive to mobile operators, especially if they offer broader relevant enterprise solutions – for example, if a telco was involved in a connected public transport solution, then it could also offer passenger messaging.

Remote monitoring/control: Solutions track both things and people and use A3 to spot issues, do diagnostic analysis and prescribe solutions to the problems identified. The larger telcos already have solutions in some verticals, and 5G may bring more opportunities, such as monitoring of remote sites or traffic congestion monitoring.

Video analytics: Where telcos have CCTV implementations or video, there is opportunity to add in analytics solutions (potentially at the edge).

Human interactions: The majority of telco opportunities here relate to the provision of chatbots into enterprise contact centres.

Human learning: A group of low feasibility use cases around training (for example, an engineer on a manufacturing floor who uses a heads-up augmented/virtual reality (AR/VR) display to understand the resolution to a problem in front of them) or information provision (for example, providing retail customers with information via AR applications).

 

Table of Contents

  • Executive Summary
    • Which A3 capabilities should telcos prioritise?
    • What makes an investment worthwhile?
    • Next steps
  • Introduction
  • Vertical opportunities
    • Key takeaways
  • A3 technology: Where should telcos focus?
    • Key takeaways
    • Assessing the telco opportunity for nine A3 capabilities
  • Verizon case study
  • Details of vertical opportunities
  • Conclusion
  • Appendix 1 – full list of 200 use cases

 

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Telco data monetisation: What is it worth?

Data revenue opportunities are variable

Monetisation of telco data has been an area of activity for the last six years. However, telcos’ interest levels have varied over time due to the complexity of delivering and selling such a diverse range of products, as well as highly variable revenue opportunities depending on the vertical. Telcos’ appetite to pursue data monetisation has also been heavily impacted by the fortunes of other new telco products, in particular IoT, owing to the link between many data/analytics products and IoT solutions.

This report assesses the opportunity for telcos to monetise their data and provide associated data analytics products in two parts:

  1. First, we look at the range of products and services a telco needs to create in order to deliver financial value.
  2. Then, we explore the main use cases and actual financial value of telco data analytics products across 12 verticals, plus horizontal solutions that apply to multiple verticals.

Telco data monetisation: Calculation methodology

The methodology used to model the financial value of telco data analytics is outlined in the figure below.

  • The starting point for this analysis is 210 data or data analytics use cases, spread across 12 verticals and the horizontal solutions applicable to multiple verticals.
  • We then assess how difficult it is for a telco to address each use case, based on pre-requisite supporting platforms and solutions, regulatory constraints, etc. (shown in red). This evaluation enables us to assess how likely telcos are to develop products for each use case.
  • Thirdly, we assess which types of telco are able to develop the use case (in yellow). For example, telcos in a market with particularly restrictive regulation around use of personal data are simply not able to create certain products.
  • Finally, it is necessary to understand whether the data/analytics products created for a use case can be offered as an independent, standalone product, or more likely to be provided as a bolt-on service to another, pre-existing solution. This question is primarily pertinent in the IoT space where basic data/analytics are likely to be included in the price of the IoT service.
    • For products that we expect to be sold independently, we calculate the potential revenue based on estimated pricing for the type of data product, where known, and likely volumes that a telco will sell in a year.
    • For data analytics products closely linked to IoT, we attach no monetary value.

Calculation methodology for the feasibility and value of telco data monetisation use cases

Rationale behind data monetisation potential

Source: STL Partners, Charlotte Patrick Consult

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Viewing the data

Underlying the analysis in this report is a database tool including a detailed assessment of each of the 210 data monetisation use cases we have identified, with numerical analysis and charting capabilities. We know many of our readers will be interested to explore the detailed data, and so have made it available for download on the website in the form of an Excel spreadsheet.

Full use case database and analysis available on our website

Source: STL Partners

Table of Contents

  • Executive Summary
  • Introduction
    • Calculation methodology
  • What is this market worth to telcos?
  • Creating products for data monetisation
    • Telco products for the ecosystem
    • Data and analytics for IoT
    • Use of location in data monetisation
  • Maximising value in different verticals
    • Advertising and market research
    • Agriculture
    • Finance
    • Government
    • Insurance
    • Healthcare
    • Manufacturing
    • Real estate and construction
    • Retail
    • Telecom, media and technology
    • Transportation
    • Utilities
    • Horizontal solutions for all verticals
  • Conclusion and recommendations
    • How to pick a winning project
  • Index

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The IoT money problem: 3 options

Introduction

IoT has been a hot topic since 2010, but despite countless IoT initiatives being launched questions remain about how to monetise the opportunity.

This report presents:

  • A top-level summary of our thinking on IoT so far
  • Examples of 12 IoT verticals and over 40 use-cases
  • Case-studies of four telcos’ experimentation in IoT
  • Three potential roles that could help telcos monetise IoT

Overview

In the early days of the IoT (about five years ago) cellular connectivity was expected to play a major role – Ericsson predicted 50 billion connected devices by 2020, 20 billion of which would be cellular.

However, many IoT products have evolved without cellular connectivity, and lower cost connectivity solutions – such as SIGFOX – have had a considerable impact on the market.

Ericsson now forecasts that, although the headline number of around 50 billion connected devices by 2020 will remain the same, just over 1 billion will use cellular.

Despite these changes IoT is still a significant opportunity for telcos, but they need to change their IoT strategy to become more than connectivity providers as the value of this role in the ecosystem is likely to be modest.

Mapping the IoT ecosystem

The term IoT describes a diverse ecosystem covering a wide range of different connectivity types and use-cases. Therefore, to understand IoT better it is necessary to break it down into horizontal layers and vertical segments (see Figure 1).

Figure 1: A simplified map of the IoT ecosystem

Source: STL Partners

We are seeking input from our clients to shape our IoT research and have put together a short survey asking for your thoughts on:

  • What role telcos can play in the IoT ecosystem
  • Which verticals telcos can be successful in
  • What challenges telcos facing in IoT
  • How can STL support telcos developing their IoT strategy

To thank you for your time we will send you a summary of the survey results at the end of June 2017.

…to access the other 28 pages of this 31 page Telco 2.0 Report, including…

  • Introduction
  • Mapping the IoT ecosystem
  • Overview
  • Mapping the IoT ecosystem
  • IoT: A complicated and evolving market
  • Telcos are moving beyond connectivity
  • And use cases are increasing in complexity
  • IoT verticals – different end-customers with different needs
  • 12 examples of IoT verticals
  • What connectivity should telcos provide?
  • Four examples of IoT experimentation
  • Case study 1: AT&T: Vertically-integrated ecosystem architect
  • Case study 2: Vodafone: a ‘connectivity plus’ approach
  • Case study 3: SK Telecom: ecnouraging innovation through interoperability
  • Case study 4: Deutsche Telekom AG: the open platform integrator
  • Three potential monetisation strategies
  • Ecosystem orchestrator
  • Vertical champion
  • Trust broker
  • Conclusions

…and the following figures…   

  • Figure 1: A simplified map of the IoT ecosystem
  • Figure 2: Telcos moving beyond connectivity
  • Figure 3: IoT use cases are increasing in complexity
  • Figure 4: Use cases in manufacturing
  • Figure 5: Use cases in transportation
  • Figure 6: Use cases in utilities
  • Figure 7: Use cases in surveillance
  • Figure 8: Use cases in smart cities
  • Figure 9: Use cases in health & care
  • Figure 10: Use cases in agriculture
  • Figure 11: Use cases in extractive industries
  • Figure 12: Use cases in retail
  • Figure 13: Use cases in finance
  • Figure 14: Use cases in logistics
  • Figure 15: Use cases in smart home / building
  • Figure 16: Connectivity complexity profile for pay-as-you-drive insurance and rental services
  • Figure 17: Telco opportunity for deep learning pay-as-you-drive insurance and rental services

The Devil’s Advocate: SDN / NFV can never work, and here’s why!

Introduction

The Advocatus Diaboli (Latin for Devil’s Advocate), was formerly an official position within the Catholic Church; one who “argued against the canonization (sainthood) of a candidate in order to uncover any character flaws or misrepresentation evidence favouring canonization”.

In common parlance, the term a “devil’s advocate” describes someone who, given a certain point of view, takes a position they do not necessarily agree with (or simply an alternative position from the accepted norm), for the sake of debate or to explore the thought further.

SDN / NFV runs into problems: a ‘devil’s advocate’ assessment

The telco industry’s drive toward Network Functions Virtualization (NFV) got going in a major way in 2014, with high expectations that the technology – along with its sister technology SDN (Software-Defined Networking ) – would revolutionize operators’ abilities to deliver innovative communications and digital services, and transform the ways in which these services can be purchased and consumed.

Unsurprisingly, as with so many of these ‘revolutions’, early optimism has now given way to the realization that full-scope NFV deployment will be complex, time-consuming and expensive. Meanwhile, it has become apparent that the technology may not transform telcos’ operations and financial fortunes as much as originally expected.

The following is a presentation of the case against SDN / NFV from the perspective of the ‘devil’s advocate’. It is a combination of the types of criticism that have been voiced in recent times, but taken to the extreme so as to represent a ‘damning’ indictment of the industry effort around these technologies. This is not the official view of STL Partners but rather an attempt to explore the limits of the skeptical position.

We will respond to each of the devil’s advocate’s arguments in turn in the second half of this report; and, in keeping with good analytical practice, we will endeavor to present a balanced synthesis at the end.

‘It’ll never work’: the devil’s advocate speaks

And here’s why:

1. Questionable financial and operational benefits:

Will NFV ever deliver any real cost savings or capacity gains? Operators that have launched NFV-based services have not yet provided any hard evidence that they have achieved notable reductions in their opex and capex on the basis of the technology, or any evidence that the data-carrying capacity, performance or flexibility of their networks have significantly improved.

Operators talk a good talk, but where is the actual financial and operating data that supports the NFV business case? Are they refusing to disclose the figures because they are in fact negative or inconclusive? And if this is so, how can we have any confidence that NFV and SDN will deliver anything like the long-term cost and performance benefits that have been touted for them?

 

  • Executive Summary
  • Introduction
  • SDN / NFV runs into problems: a ‘devil’s advocate’ assessment
  • ‘It’ll never work’: the devil’s advocate speaks
  • 1. Questionable financial and operational benefits
  • 2. Wasted investments and built-in obsolescence
  • 3. Depreciation losses
  • 4. Difficulties in testing and deploying
  • 5. Telco cloud or pie in the sky?
  • 6. Losing focus on competitors because of focusing on networks:
  • 7. Change the culture and get agile?
  • 8.It’s too complicated
  • The case for the defense
  • 1. Clear financial and operational benefits:
  • 2. Strong short-term investment and business case
  • 3. Different depreciation and valuation models apply to virtualized assets
  • 4. Short-term pain for long-term gains
  • 5. Don’t cloud your vision of the technological future
  • 6. Telcos can compete in the present while building the future
  • 7. Operators both can and must transform their culture and skills base to become more agile
  • 8. It may be complicated, but is that a reason not to attempt it
  • A balanced view of NFV: ‘making a virtual out of necessity’ without making NFV a virtue in itself

Digital Economy: who will prosper in ‘The Great Compression’?

Summary: Value is squeezed out of industries as they become increasingly digital – i.e. accessed by mobile and online, driven by data and defined by software. We call the collective economic impact of this pressure ‘The Great Compression’. But which companies will survive and prosper – and how? 90% of the Execs at our Silicon Valley brainstorm identified ‘management mindset’ as a key factor in Telecoms, Media, Finance and Retail. (May 2013, Executive Briefing Service, Transformation Stream).

Scale of Transformation Needed April 2013

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Below are the high-level analysis and detailed contents from a 62 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Premium Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation Stream here. The Digital Economy, and the changes needed to ‘management mindset’, organisation, technology, and products, will also be explored further at the EMEA Executive Brainstorm in London, 5-6 June, 2013. Non-members can find out more about subscribing here, or find out more about this and/or the Brainstorm by emailing contact@telco2.net or calling +44 (0) 207 247 5003.

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Introduction

Part of the New Digital Economics Executive Brainstorm series, the Silicon Valley 2013 event took place at the InterContinental Hotel in San Francisco on the 19th and 20th of March, 2013. This report covers the Digital Economy track on the first day.

Summary Analysis: who will prosper in ‘The Great Compression’?

Telecoms, telco vendors, entertainment, device makers, financial services, retailers, entertainment services, and brands in developed economies are experiencing the ‘Digital Hunger Gap’ – a shortfall of revenues versus past levels as industries become increasingly digital i.e. accessed by mobile and online, driven by data and defined by software.

Other industries are also feeling pain from the process of becoming digitised which both changes the model and the dynamics of competition. Others, like consumer goods and car manufacturing, see opportunities to enhance services with digital connectivity to build loyalty and new value. Government services and healthcare face huge cost challenges. Digital services can be of huge value here, but the challenge for third parties is how to make money when money needs to be saved.

According to the participants in the Silicon Valley brainstorm, almost every industry faces massive changes in every area of its business model, with management mindsets most in need of a dramatic overhaul, and customer relationships marginally ahead in the total of partipants thinking a dramatic or significant change is needed.

Scale of Transformation Needed April 2013

New markets are emerging rapidly, particularly in Asia. However, many companies from North America and EMEA lack depth in local knowledge and face skills, cultural and political barriers to entry, and the mindset challenge of operating in a radically different economic environment.

As a result of the combined difficulties of growth in home markets and expansion abroad, there will be massive consolidation among traditional industry leaders in developed economies over the coming years. Those that are successful will continue to innovate as they consolidate, but it will be a huge struggle to survive for many.

We’re calling the collective economic impact of these pressures ‘The Great Compression’ as value is squeezed from existing industries. Those best positioned to profit through it have built defensible global or major regional strengths in horizontal areas with large-scale application and high barriers to entry, and/or that serve as ‘arms dealers’ to the rest of the digital economy. For example, chip makers and IP companies (e.g. ARM, Intel, Qualcomm), very large-scale / sophisticated IT manufacturers (e.g. Microsoft, Oracle, SAP), and ‘platforms’ (e.g. Apple, Google, Visa).

However, being well positioned is no guarantee of success, and all companies will face significant challenges requiring innovation and transformation. This in turn will require immediate and ongoing action by leadership teams in every company.

Digital innovation is increasingly itself becoming a little like the entertainment industry in that it is constantly seeking hits and highly vulnerable to hype. There are centres of innovation such as Silicon Valley and elsewhere, and there can only be a small number of highly successful ‘hits’ among the many thousands if not hundreds of thousands of attempts to make a hit. Finding, gaining a share in, nurturing, and ultimately profiting from these hits is a massive industry in itself. The recognised difficulty of doing this is a further barrier to success for many of the established players. Yet those that are to survive will need to overcome it.

Next steps for STL Partners

  • To define and detail the practical actions needed to drive cross-industry transformation and innovation (in terms of ‘management mindset’, organisation, technology, products, etc.) at our Executive Brainstorms in:
    • Europe, London, 5-6 June 2013; MENA, Dubai, 14-15 November 2013; APAC, Singapore, 5-6 December 2013; Silicon Valley, San Francisco, 19-10 March 2014.
  • To publish 150+ page ‘Strategy Reports’ on:
    • The detailed benchmarking of leading players’ Telco 2.0 strategies; Digital Commerce; The Future of voice and Messaging Services.
  • To publish c.15-30 page ‘Executive Briefings’ covering:
    • Software Defined Networks (SDN); The business case for personal data; ‘Show me the (mobile) money’ – an Executive Briefing on the business case for Digital Commerce.


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

  • Session 1: Digital Transformation
  • Strategic Growth Opportunities for a Hyper-Connected World
  • Stimulus presentations
  • Voting, feedback, discussions
  • Questionstorming: how to overcome the blockers?
  • Key takeaways
  • Session 2: Digital Consumer
  • The New Mobile Battleground
  • Stimulus presentations
  • Voting, feedback, discussions
  • STL Partners’ next steps
  • Session 3: Digital Infrastructure
  • The Impact of 4G, Software Defined Networks  & the Cloud
  • Stimulus presentations
  • Voting, feedback, discussions
  • Brainstorm Output: What new opportunities could new forms of digital infrastructure create? For whom? How?
  • STL Partners’ next steps
  • Session 4: The ‘Digital Me’
  • The role and value of ‘digital identity’
  • Stimulus presentations
  • Voting, feedback, discussions
  • STL Partners’ next steps

…and the following figures…

  • Figure 1 – Concurrent disruption in multiple lines of business
  • Figure 2 – Music since 1997, a case study
  • Figure 3 – Consolidation is a consequence of disruption
  • Figure 4 – Reviving the album format
  • Figure 5 – The future is brutal indeed
  • Figure 6 – The hunger gap, 2013-2017
  • Figure 7 – Measuring the impact of social…
  • Figure 8 – The bottom line impact of social at Bloomberg
  • Figure 9 – How realistic is the ‘Hunger Gap’?
  • Figure 10 – How accurate is the market sizing?
  • Figure 11 – How accurate is the forecast breakdown?
  • Figure 12 – What is the scale of the transformation needed?
  • Figure 13 – The ‘Telco 2.0’ opportunities for CSPs
  • Figure 14 – Learning about your customer from Amazon recommendations
  • Figure 15 – 80% are already engaged with BYOD
  • Figure 16 – Customer-centric commerce
  • Figure 17 – Mobile web user engagement takes off
  • Figure 18 – Are app stores that good for developers?
  • Figure 19 – Making mobile Web “more like apps”?
  • Figure 20 – What are the downsides of native apps?
  • Figure 21 – Would iOS users  benefit from alternative app stores?
  • Figure 22 – when should you give data back to customers?
  • Figure 23 – How long before the ‘data surveillance backlash’?
  • Figure 24 – Will voluntarily provided info be better than surveillance?
  • Figure 25 – The media industry is static, the Web/tech players gain at telcos’ expense
  • Figure 26 – The evolution of connectivity products
  • Figure 27 – Integration between industrial, enterprise, and public network domains
  • Figure 28 – Key issues for an “elastic operator”
  • Figure 29 – Verizon’s enterprise platform
  • Figure 30 – Defining SDN – with Star Trek!
  • Figure 31 – Strategic conclusions on SDN
  • Figure 32 – Impact of SDN?
  • Figure 33 – Digital feudalism, enlightenment, or something else?

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation Stream can download the full 62 page report in PDF format here. Non-Members, please subscribe here. The Digital Economy will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. For this or any other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Background & Further Information

Produced and facilitated by business innovation firm STL Partners, the Silicon Valley 2013 event overall brought together 150 specially-invited senior executives from across the communications, media, retail, banking and technology sectors, including:

  • AT&T, Bain & Co, Beecham Research, Bloomberg, Blumberg Capital, BMW, Buongiorno, Cablelabs, CenturyLink, Cisco, CITI Group, Cordys, Cox Communications, CSG International, EMC, Ericsson, Experian, GE, GI Partners, Group M, GSMA, IBM, Intel, Kore Telematics, MADE Holdings, Merchant Advisory Group, Microsoft, MIT Media Lab, Motorola, MTV, Nokia, Oracle, Orange, Panasonic, Placecast, Qualcomm, Rainmaker Capital, Reputation.com, SalesForce, Samsung, SAP, Sasktel, Sprint, Telus, The Weather Channel, T-Mobile USA, UnboundID, University of California Davis, US Cellular Corp, Verizon, Visa, Vodafone.

The Brainstorm used STL’s unique ‘Mindshare’ interactive format, including cutting-edge new research, case studies, use cases and a showcase of innovators, structured small group discussion on round-tables, panel debates and instant voting using on-site collaborative technology.

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

Finance: Optimising the Telco 2.0 revenue and cost model

Summary: Structuring finances is key for the success of innovations in general and Telco 2.0 projects in particular. In this detailed extract from our new strategy report ‘A Practical Guide to Implementing Telco 2.0’, we describe the best ways to approach the management of revenues and costs of new business models, and how to get the CFO and finance department onside with the new approaches required (February 2013, Executive Briefing Service, Transformation Stream). Small table on finances
  Read in Full (Members only)  To Subscribe click here

Below is an extract from this 15 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation Stream here. Non-members can subscribe here or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

We’ll also be discussing our findings at the New Digital Economics Brainstorms in Silicon Valley, 19-20 March, 2013 and in EMEA 2013 in London, June 5-6.

Telco 2.0 has a different financial model to Telco 1.0

Cash Returns On Invested Capital (CROIC) is a good measure of company performance because it demonstrates how much cash investors get back on the money they deploy in a business. It removes measures that can be open to interpretation or manipulation such as earnings, depreciation or amortisation. In simple terms CROIC is calculated as:

Figure 1: Cash Returns On Invested Capital (CROIC)
CROIC Definition

While it is simplistic, STL Partners broadly sees the benefits of a Telco 2.0 Happy Pipe strategy accruing to a CSP in the form of higher EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) margins (owing to lower costs) and lower capital expenditures. A Telco 2.0 Service Provider strategy will seek to also achieve this as well as generate sales growth. It is, therefore, easy to see why many operators are interested in pursuing a Telco 2.0 Service Provider strategy: if they can execute successfully then they will receive a double-whammy benefit on CROIC because lower opex and higher sales will result in more free cash flow being generated from lower levels of invested capital.

CROIC also demonstrates how the current financial metrics used by operators – particularly EBITDA margins – preclude operators from considering different operational and business models which may have lower EBITDA margins but higher overall cash returns on invested capital. Thus, as shown in Figure 2 (showing relative rather than actual financials), CSPs tend to focus on the existing capital-intensive business which currently generates CROIC of around 6% for most operators rather than investing in new business model areas which yield higher returns. The new business model areas require relatively low levels of incremental capital investment so, although they generate lower EBITDA margins than existing Telco 1.0 services, they can generate substantial CROIC margins and can ‘move the needle’ for operators.

Specifically, Figure 2 illustrates the way that different skills and operational models translate into different financial models by showing:

  • Telco 1.0 (Core Services + Vertical Industries Solutions (SI) + Infrastructure Services) requires high capital investment and generates relative low levels of revenue for each $1 of invested capital ($0.5-0.7) but at high EBITDA margin (30-50%). This results in healthy cash generation (EBITDA) but a large proportion of this cash needs to be reinvested as capital expenditure each year resulting in relatively modest levels of free cash flow and CROIC of 5.2-6.4% for a typical CSP.
  • Even if we exclude any capex and opex savings generated from becoming a Telco 2.0 Happy Pipe, the addition of additional revenues from Embedded Communications (see Strategy 2.0: The Six Key Telco 2.0 Opportunities) mean that a Happy Piper generates new revenues that require relatively low levels of capital investment. Although these ‘embedded communications’ revenues are at a lower margin than the core services (28% compared with 45%), they require little incremental capital expenditure. This means that free cash flow is healthy and CROIC for Embedded Communications is 10.7% lifting the Happy Piper overall CROIC percentage.
  • For the Telco 2.0 Service Provider, again setting aside any efficiency benefits from adopting Telco 2.0 principles, the two pure-play Telco 2.0 service areas – Third-party Business Enablers and Own-brand OTT – have very different financial characteristics. They generate much lower EBITDA margins (15-20%) but generate significantly higher sales relative to capital investment ($1.4-2.0) and so are able to generate substantially higher CROIC than the Telco 1.0 services.

In essence, the new ‘product innovation’ businesses associated with being a Telco 2.0 Service Provider are much closer to an internet player such as Amazon or the early Google business (prior to heavy capital investment in fibre and data centres) in the way they make money. Not convinced? Look at Figure 3 which demonstrates the return on total assets generated by CSPs and three key internet players – Microsoft, Google and Amazon. Microsoft, a software business, generates high margins on a relatively low capital base (and hence generates very strong returns) owing to its dominant position on the desktop. Microsoft’s issue is growth not profitability, hence the big investments it is making in its internet business and in mobile. The young

Google and Amazon are classic product innovation businesses – low margin and high sales generation relative to invested capital. The CSP group all generate sales of $0.3-0.7 per $1 of capital but generate higher margins than Amazon and Google before 2005.

So we can see that the new Telco 2.0 business model makes money in a different way to the traditional business and needs to be managed and measured in a new way. Let’s explore the implications of this in more detail.

Figure 2: Cash Returns on Invest Capital of different Telco 2.0 opportunity areas

This table demonstrates the relative, rather than absolute, financial metrics for different CSP opportunity areas. The starting point is a nominal $1,000 of invested capital in the CSP network that results in $500 of annualised ‘Core Services’ revenues. Levels of invested capital, sales, EBITDA, annual capex, tax and free cash flow are then shown for each of the opportunity areas.

Different returns of different business models

Figure 3: Different financial models illustrated – CSPs vs Internet Players

This chart shows how different businesses generate returns by plotting asset intensity (x-axis) against profitability (y-axis). Note that the profitability measure here (NOPAT margin) is not directly comparable to the EBITDA margin in Figure 2 as this is post-taxation.

Different returns at different stages of business development

Revenue model implications and guiding principles

The different types of revenue to be considered when developing a new Telco 2.0 service are outlined in detail in the A Practical Guide to Implementing Telco 2.0 in the section on the Telco 2.0 Service Development Process. These include different revenue types (such as single stream, multi-stream, interdependent), different revenue models (subscriptions, unit charges, advertising, licensing and commissions) and different sources (consumer, SME, enterprise as both end users and as third-party service providers – advertisers, merchants, etc.). It is clear that:

  • Telco 1.0 services are largely single stream, confined to a few models (subscription and per unit charging) and sourced from end users (consumers, SMEs and enterprises).
  • Telco 2.0 services typically have more revenue types, including interdependent (two-sided revenues), introduce more revenue models, including advertising and commission, and source revenues from third-parties as well as end-users.

But what about how these new revenue types, models and sources impact the overall CSP business? How should (finance) managers now evaluate services given the different financial models between Telco 1.0 and Telco 2.0? What constitutes ‘attractive’ now? What metrics are the right ones to use? What trade-offs between the Telco 1.0 and Telco 2.0 revenue models need to be considered?

Five guiding principles for revenue models

We lay out 5 revenue model guiding principles to help you address these knotty questions below:

1. Ensure your revenue model supports your overall strategy and need to build appropriate ecosystem control points.

In the Telco 1.0 world, the revenue model is simple and, although pricing is complex, decision- making is simplified by clear goals – to maximise the number of paying users and manage the price-volume trade-off (higher prices = lower volume of users or transactions) to maximise overall returns from communications services. The Telco 2.0 world is far more complex. As well as having ‘more revenue levers to pull’, management needs to consider the company’s overall digital strategy beyond communications.

CSPs need to consider where and how they will create one or more control points within the digital ecosystem. Revenue and pricing strategy is a core component of this. In some arenas – payments for example – CSPs may choose to price their services very low or make them free to build up a large number of mobile wallet users and a strong merchant network that can be monetised in another arena – mobile advertising perhaps. In other words, management cannot take a siloed approach to the CSP revenue model – there is a need to think horizontally across the CSP digital platform.

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

  • The rest of the five guiding principles for revenue models
  • Five guiding principles for cost models
  • Final thoughts on Telco 2.0 finances – how to work with the Finance team


…and the following figures

  • Figure 1: Cash Returns On Invested Capital (CROIC)
  • Figure 2: Cash Returns on Invest Capital of different Telco 2.0 opportunity areas
  • Figure 3: Different financial models illustrated – CSPs vs Internet Players
  • Figure 4: Revenue metrics – Telco 1.0 and Telco 2.0 examples
  • Figure 5: Product Innovation vs Infrastructure cost models – Unilever & Vodafone


Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation Stream can download the full 15 page report in PDF format hereNon-Members, please subscribe here or email contact@telco2.net / call +44 (0) 207 247 5003.

Full Article: Credit crunch – silver lining for telcos?

We’re delighted to welcome James Enck onto the Telco team. Reknowned financial analyst, hedge funder and blogger James will be helping us to make the Telco 2.0 vision more tangible for senior execs, specifically in the near term via a series of ‘use cases’ that show in more detail how Telco 2.0 thinking can work in practice. He’ll also help us engage more with the finance community.

We asked him to give his thoughts on what the credit crunch means for telcos:

Each passing day seems to bring some dire new revelation about the poor state of the financial markets. While life remains tough in Telcoland, in relative terms the financial strength of the industry generally remains enviable.

The current liquidity crisis in the financial markets may provide telcos with some unique opportunities for enhancement and transformation of business models, if they are open to deploying their capital in a manner consistent with Telco 2.0 thinking. Some of those are explored below, but there are no doubt others, and we’d be interested to hear of further examples from readers.

The U.S. government has clarified its stance on “moral hazard��? by allowing Lehman Bros, a major investment bank, to fail. The International Swaps and Derivatives Association is so focused on orchestrating an orderly unwind of Lehman’s positions that it held a special trading session on Sunday and has even canceled its own members conference, which should have taken place yesterday (perhaps they were afraid that the offer of a free lunch might trigger a riot).

AIG, which yesterday appeared to be on its knees, has been effectively nationalized. Apart from the human consequences for its 100,000 employees and consumers of its more conventional insurance and re-insurance products, its demise would have made the credit derivatives market significantly more complicated.

Sparing readers the tedious technical details, this is significant because: a) the market is huge – Moody’s estimated credit default swaps (CDS) at $62 trillion back in May (that’s the nominal, but replacement cost, which they think is more relevant, was a mere $2 trillion – in any event, as CDS has evolved to be a speculative trading, rather than commercial hedging, instrument, the contracts outstanding outstrip the underlying assets many times over, which may bring some problems of its own in time), and b) transactions are off-market, with limited visibility as to who’s doing what, and with whom.

So it’s only when the music stops that we learn which counterparties are exposed, and I assume an AIG implosion would have cascaded through similarly positioned insurers, hedge funds, and the remaining prop desks in a very ugly fashion. That nationalization was the final outcome is a symptom of just how dire things are, and does not fundamentally change the dynamic in the market, in my view. We dodged a bullet this time, but there will be more similar situations which do end badly, and my central thesis still holds.

We’re now more than $500bn down the road in the inappropriately named “credit crunch.��? I say inappropriately named because, to me, “crunch��? implies a sharp, ephemeral episode of pain or distress, but this is more akin to a pandemic wasting disease, and I think it represents a fundamental realignment of the way capital will be sourced and allocated in future.

Why should the denizens of Telcoland care? Well, because, as with most crises, there will be huge challenges and opportunities ahead.

First, the challenges.

1) Confidence, be it within the corporates (as we can see in the spike in inter-bank lending rates) or among consumers, is firmly in the toilet, ready to be flushed. Prepare for an aversion to spending, and for some of your customers to disappear.

2) Liquidity, where it exists at all, is going to be more scarce and costly. Given where LIBOR is at the moment, this could get very ugly indeed – in desperate cases, say where the margin over LIBOR is 1000 basis points or more, companies will be staring down the barrel of 17% annual interest rates. For the more creditworthy, things won’t be so dire, but it still will be a noticeable uptick.

Trawling through some Bloomberg data on debt maturities for six telcos (Vodafone, DT, FT, Telefonica, BT, and Telecom Italia), it is interesting to note that the average fixed coupon for this group’s current debt is just over 6%, i.e., below the level where banks are currently willing to lend to one another, let alone anyone else. However, these six companies combined have EUR37.5bn in debt maturing in 2009 – 2010. It will get refinanced, but every 100 basis point increment above where coupons are now adds EUR375m in interest payments. Not crippling, but not trivial either. Do you grow dividends at the expense of capex?

3) Speaking of capex, an industry contact yesterday described it as “the elephant in the room��?. If we assume that the industry globally needs a $1 trillion access overhaul, as some are already under competitive pressure to provide, then something’s got to give. Do you play “squeeze the vendor��? as your only card, defer certain projects, or find creative alternative structures to keep it off your balance sheet in the near term? Do you suddenly find that the municipal broadband “hippies��? are worth talking to afterall? Some of them might have access to cheaper finance…

4) Back to liquidity more generally. It seems clear that those investment banks which do survive are likely to be constrained by commercial and financial realities, and possibly by regulation, to a narrower mandate in future. So those with a business falling outside the “suitable for widows and orphans��? category probably won’t be able to reach out to the principal investing units of Wall Street nearly as easily as they could before.

Hedge funds with dry powder can always fill that gap, but it won’t be cheap money. And the hedge funds themselves aren’t exactly setting the world on fire as a group (keep in mind that this table may look different depending on when you read it, but at this writing, the Credit Suisse/Tremont AllHedge Index is down 6.07% year-to-date as of the week ending 8th September, i.e., before the most recent round of carnage).

There’s always private equity, but as per this analysis yesterday, we might actually find a bias towards disposal of assets here in some cases, and in any event, with the markets in the state they’re in currently, it is inconceivable that PE firms will achieve the kind of exit IRRs they might have envisaged two or three years back (I’m thinking here of some of the European cable deals which got done at eye-watering multiples – in some cases they’re very decent companies, but I can’t see an easy exit for any of them.).

And it’s probably really bad if you’re an early-stage company. There is not that much happening in early stage among the VC community, particularly in Europe, and those who are active can be extremely selective. We can expect a good number of the later-stage venture-backed companies may also struggle to attract fresh capital, especially if their funding is premised upon the promise of a traditional exit.

It ain’t gonna happen, at least not at 10x revenues, unless you’ve got something really special. The outlook is particularly poor for companies created to speculatively build large communities of users, in the hope of finding a revenue model down the road. These sites certainly create value and user benefit, but in a time of severe capital constraints, it’s going to be a hard story to sell. That pretty much leaves sovereign wealth funds ($3 trillion is a lot of money) and family offices, but they will know that they are in the driver’s seat and can be highly selective.

So, that’s a sufficient dose of pain on the challenges side. What about the opportunities?

Times may also seem hard in Telcoland, but let’s face it, telco margins are still at a level other industries would kill for, and it is not uncommon for even relatively small companies to produce EUR2 – 3bn in free cash flow annually. In the land of the broke, the man with one euro is king, so how might telcos deploy some of their relative wealth in a way that might really make a difference?

1) People – The collective stupidity of Wall Street should not obscure the real talent and intellect that rests with some of its individuals. As these firms implode, they will release some very bright people, some of whom have an intimate knowledge of their own industry and industries they have covered/invested in/done business with. Take this chance to diversify your telco DNA, particularly if you really have aspirations of competing with the likes of IBM.

2) Assets – Clearly, there is going to be a lot of distressed selling of assets. Fancy a Bulgarian incumbent or a Dutch cable company? There are deals available right now. But it won’t just be big iron assets. A lot of venture-backed companies are going to end up in distress, and some of them may possess technology platforms and/or communities that you as a telco actually can monetize.

However, you may need an outside perspective to do this (going back to the previous point), or you may need to radically change the way you think about where to take your business and how to get there. There will be huge opportunities, but it will require something other than conventional telco thinking, because the best answers will not be the obvious ones.

3) Engagement – Rather than simply waiting for companies to end up here before acting, why not partially fill the void left by the capital markets? This is not to suggest that telcos should play the pure VC role, but there is a great case for aligning strategic development goals with equity investment in companies that have something you can’t (or don’t want to) create yourself.

There is some of this going on in the industry, but not nearly enough today. Some of the companies which can help telcos reposition themselves are too small and young to be considered as suppliers – they typically can’t get in the door of corporate HQ. What might you be overlooking?

Encourage your workforce and your customers to find and evangelize interesting companies, and create a framework for vetting them, finding operational sponsorship for the suitable ones, and create a side-pocket for equity investments to let them develop.

All the evidence suggests that we’re all in for a fairly brutal couple of years, with the possible exception of talented distressed investors. Next spring may be short on roses, but they will come in time. Now go and start planting your garden.