Seven Tough CEO Questions – Telco 2.0 Update

Seven Tough Questions

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

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

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

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

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

Figure 1 – Four Illustrative Telecoms Market Scenarios

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

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

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

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

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

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

 

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

 

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

Cloud 2020: Telcos’ Role, Scenarios and Forecast

Introduction: The Cloud in 2016

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

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

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

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

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

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

STL’s cloud scenarios from 2012, revisited

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

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

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

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

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

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

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


 

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

 

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

Vertical Innovation Leaders: How Telstra’s Healthcare Jigsaw is Coming Together

Introduction

Over the course of 2013-2015, Australian operator Telstra has invested heavily in acquisitions, tapping into the A$11.2bn (US$8.52bn) it received from the Australian government for access to its legacy copper network required to connect the country’s National Broadband Network. Telstra spent $1.2bn on acquiring digital businesses during 2015  alone.

Telstra’s stated aims were: geographic expansion of its core telecoms offerings, as illustrated by its acquisition of Asian carrier and managed services provider Pacnet for US$697Mn, completed in April 2015; and growing its digital service offerings, as illustrated by its multiple acquisitions in the digital platforms and applications space.

The telco has taken a particularly innovative approach to building its offerings in the healthcare vertical, where its ‘new digital’ investments have focused.

Telstra’s approach to establishing its digital (and non-digital) healthcare business is a good indicator of its future overall digital strategy, at the core of which is a highly customer-centric approach and a commitment to bringing agile and lean business practices to all parts of its own business.

Telstra, is, of course, not an established healthcare brand, either in Australia or elsewhere. As we discuss below, this has created a number of challenges, both in engendering relevance with healthcare customers and in achieving Telstra’s particular aims in the health space. The operator has sought to collaborate with or acquire health service providers in order to overcome these challenges.

Telstra’s overall strategy in regard to its digital health care investments and partnerships has been aggressive and unusual, both in terms of the telco’s rapidity in developing such relationships, and in terms of the relatively large number of eHealth companies which it has invested in or partnered with. Perhaps unsurprisingly, many industry observers have questioned the approach.  Indeed, one could argue that the diversity of the acquisitions and partnerships points to a lack of clear direction, and that the sheer number of these may be difficult for the operator to manage effectively, let alone consolidate into a healthy and growing digital revenue stream.

This report addresses the following:

  • Telstra’s approach to eHealth, and the key drivers for this
  • How the Telstra Health acquisition strategy fits with Telstra’s larger digital strategy
  • Impact and evidence of success thus far
  • Key challenges and lessons learned

The Telstra approach to digital healthcare

The Telstra Health proposition

Telstra has targeted healthcare as the most important focus area for its move into broader digital economy activities, based on the ongoing societal and demographic shifts driving demand for healthcare services and spend on these, and on the high potential for digital technology to be transformative in the sector.

At high level, the primary objective of Telstra’s Health business is to address the central challenges or pain points facing the healthcare industry, and to combine the best features of the services and applications it acquires with the telco’s own core capabilities, to provide relevant digital healthcare solutions. Telstra has identified six healthcare challenge areas its offerings aim to address, shown in Figure 2:

Figure 2: Six Healthcare Pain Points Telstra Health Aims to Address

Source: Telstra Health

Telstra’s business model, its overall strategy in health and its objectives are all centred around using digital technologies to tackle these health pain points. In practical terms, its goal is to bring the advantages of the digital revolution to bear on the specific challenges facing the health industry – and to develop a profitable new revenue stream in the process.

 

  • Executive Summary
  • Introduction
  • The Telstra approach to digital healthcare
  • The Telstra Health proposition
  • The Telstra Health offering: ecosystem and target customer segments
  • Understanding Telstra’s healthcare acquisition strategy
  • Telstra’s eHealth acquisitions and partnerships
  • Other Telcos Have Been Far Less Acquisitive in eHealth
  • How Telstra Health Fits Into Telstra’s Larger Digital Strategy
  • Impact and Evidence of Success
  • Revenue impact – A$1 billion by 2020 for Telstra Health?
  • Impact on share price – a ‘digital bump’?
  • Other measures of success
  • Evaluating Telstra’s Objectives and Challenges for the Health Business
  • Telstra’s external market objectives
  • Telstra’s organisational objectives
  • General eHealth market challenges

 

  • Figure 1: Telstra Health’s key objectives and challenges
  • Figure 2: Six Healthcare Pain Points Telstra Health Aims to Address
  • Figure 3: The Telstra Health ecosystem
  • Figure 4: Telstra Health: Provider Apps Offerings and Target Market Segments
  • Figure 5: Telstra Health: Connected Care and Telehealth Offerings and Target Market Segments
  • Figure 6: Telstra Health: Intelligence (Analytics) Offerings and Target Market Segments
  • Figure 7: Telstra Health’s Spine Health Intelligence Ecosystem
  • Figure 8: Telstra’s digital health acquisitions, 2013-2016
  • Figure 9: Telstra’s digital health direct investments and key partnerships, 2009-2016
  • Figure 10: Selected digital health acquisitions and investments – Telefonica
  • Figure 11: Telstra Group Key Product Revenues: FY 2013-2015 (AUD billion)
  • Figure 12: Telstra Revenue by Business Segment, FY2013-2015 (A$ billions)
  • Figure 13: Telstra Share Price Performance – 2000-2016 (A$)
  • Figure 14: Telstra Health’s key objectives and challenges

Solution: Transforming to the Telco Cloud Service Provider (Part 2)

Introduction

Structural barriers preventing telecoms business model change

In our recent report, Problem: Telecoms technology inhibits operator business model change (Part 1), we explained how financial and operational processes that have been adopted in response to investor requirements and regulation have prevented operators from innovating.

Operator management teams make large investments over seven- or eight-year investment cycles and are responsible for deploying and managing the networks from which revenues flow.  As we show in Figure 1 below, operators therefore have much more of their costs tied up in capital expenditure than platform players or product innovators.  Furthermore, they need large quantities of operating expenditure to maintain and operate their networks.  The result is a rather small percentage of revenue – we estimate around 15% – which they devote to activities focused on innovation: marketing, sales, customer care, and product and service development (the green section of the bars).  This compares unfavourably to a platform player, such as Google, which we estimate devotes around 35% of revenue to these activities.  The difference is even more pronounced with a product innovator, such as Unilever, which minimises capital investment by outsourcing some of its manufacturing and all product distribution and so devotes nearly 70% of revenue to ‘innovation’ activities.

 

Figure 1: The telecoms cost structure inhibits innovation

Sources: Company accounts; STL Partners estimates and analysis

Seen in this context, how can anyone expect operators to be successful at developing new platforms, channels, or products?

 

  • Executive Summary
  • Introduction
  • Structural barriers preventing telecoms business model change
  • Digital service innovation is proving tough for operators
  • Structural barriers coming down?
  • Virtualisation + cloud business practices could transform the telecoms business model
  • The drive for virtualisation is underway
  • Cost reduction and a new cost structure
  • Cloud business practices are a critical component in the future telco
  • The Telco Cloud Service Provider (TCSP)
  • Two benefits from becoming a Telco Cloud Service Provider
  • Product and service creation in the Telco Cloud Service Provider
  • From incremental and slow innovation today…
  • …to radical and fast innovation in the TCSP of tomorrow

 

  • Figure 1: The telecoms cost structure inhibits innovation
  • Figure 2: Telcos have struggled to launch successful digital services
  • Figure 3: Cloud and virtualisation can allow a telco to transform its cost structure
  • Figure 4: Cloud business practices – key principles
  • Figure 5: Defining the Telco Cloud Service Provider
  • Figure 6: Telco Cloud can spur transformation across the entire telco business
  • Figure 7: Product development – telco today vs Telco Cloud Service Provider

Problem: Telecoms technology inhibits operator business model change (Part 1)

Introduction

Everyone loves to moan about telcos

‘I just can’t seem to get anything done, it is like running through treacle.’

‘We gave up trying to partner with operators – they are too slow.’

‘Why are telcos unable to make the most basic improvements in their service offerings?’

‘They are called operators for a reason: they operate networks. But they can’t innovate and don’t know the first thing about marketing or customer service.’

Anyone within the telecoms industry will have heard these or similar expressions of dissatisfaction from colleagues, partners and customers.  It seems that despite providing the connectivity and communications services that have truly changed the world in the last 20 years, operators are unloved.  Everyone, and I think we are all guilty of this, feels that operators could do so much better.  There is a feeling that these huge organisations are almost wilfully seeking to be slow and inflexible – as if there is malice in the way they do business.

But the telecoms industry employs millions of people globally. It pays quite well and so attracts talent. Many, for example, have already enjoyed success in other industries. But nobody has yet, it seems, been able to make a telco, let alone the industry, fast, agile, and innovative.

Why not?

A structural problem

In this report, we argue that nobody is at fault for the perceived woes of telecoms operators.  Indeed, the difficulty the industry is facing in changing its business model is a result of financial and operational processes that have been adopted and refined over years in response to investor requirements and regulation.  In turn, investors and regulators have created such requirements as a result of technological constraints that have applied, even with ongoing improvements, to fixed and mobile telecommunications for decades. In essence, operators are constrained by the very structures that were put in place to ensure their success.

So should we give up?

If the limitations of telecoms operators is structural then it is easy to assume that change and development is impossible.  Certainly sceptics have plenty of empirical evidence for this view.  But as we outline in this report and will cover in more detail in a follow up to be published in early February 2016 (Answer: How 5G + Cloud + NFV can create the ‘agile telco’), changes in technology should have a profound impact on telecoms operators ability to become more flexible and innovative and so thrive in the fast-paced digital world.

Customer satisfaction is proving elusive in mature markets

Telecoms operators perform materially worst on customer service than other players in the US and UK

Improving customer experience has become something of a mantra within telecoms in the last few years. Many operators use Net Promoter Scores (NPS) as a way of measuring their performance, and the concept of ‘putting the customer first’ has gained in popularity as the industry has matured and new customers have become harder to find. Yet customer satisfaction remains low.

The American Customer Satisfaction Index (ACSI) publishes annual figures for customer satisfaction based on extensive consumer surveys. Telecommunications companies consistently come out towards the bottom of the range (scoring 65-70 out of 100). By contrasts internet and content players such as Amazon, Google, Apple and Netflix have much more satisfied customers and score 80+ – see Figure 1.

Figure 1: Customers are generally dissatisfied with telecoms companies

 

Source: American Customer Satisfaction index (http://www.theacsi.org/the-american-customer-satisfaction-index); STL Partners analysis

The story in the UK is similar.  The UK Customer Satisfaction Index, using a similar methodology to its US counterpart, places the Telecommunications and Media industry as the second-worst performer across 13 industry sectors scoring 71.7 in 2015 compared to a UK average of 76.2 and the best-performing sector, Non-food Retail, on 81.6.

Poor customer services scores are a lead indicator for poor financial performance

Most concerning for the telecoms industry is the work that ACSI has undertaken showing that customer satisfaction is linked to the financial performance of the overall economy and the performance of individual sectors and companies. The organisation states:

  • Customer satisfaction is a leading indicator of company financial performance. Stocks of companies with high ACSI scores tend to do better than those of companies with low scores.
  • Changes in customer satisfaction affect the general willingness of households to buy. As such, price-adjusted ACSI is a leading indicator of consumer spending growth and has accounted for more of the variation in future spending growth than any other single factor.

Source: American Customer Satisfaction index (http://www.theacsi.org/about-acsi/key-acsi-findings)  

In other words, consistently poor performance by all major players in the telecoms industry in the US and UK suggests aspirations of growth may be wildly optimistic. Put simply, why would customers buy more services from companies they don’t like? This bodes ill for the financial performance of telecoms operators going forward.

Senior management within telecoms knows this. They want to improve customer satisfaction by offering new and better services and customer care. But change has proved incredibly difficult and other more agile players always seem to beat operators to the punch. The next section shows why.

 

  • Introduction
  • Everyone loves to moan about telcos
  • A structural problem
  • So should we give up?
  • Customer satisfaction is proving elusive in mature markets
  • Telecoms operators perform materially worst on customer service than other players in the US and UK
  • Poor customer services scores are a lead indicator for poor financial performance
  • ‘One-function’ telecommunications technology stymies innovation and growth
  • Telecoms has always been an ‘infrastructure play’
  • …which means inflexibility and lack of innovation is hard-wired into the operating model
  • Why ‘Telco 2.0’ is so important for operators
  • Telco 2.0 aspirations remain thwarted
  • Technology can truly ‘change the game’ for operators

 

  • Figure 1: Customers are generally dissatisfied with telecoms companies
  • Figure 2: Historically, capital deployment has driven telecoms revenue
  • Figure 3: Financial & operational metrics for Infrastructure player (Vodafone) vs Platform (Google) & Product Innovator (Unilever)

The Open Source Telco: Taking Control of Destiny

Preface

This report examines the approaches to open source software – broadly, software for which the source code is freely available for use, subject to certain licensing conditions – of telecoms operators globally. Several factors have come together in recent years to make the role of open source software an important and dynamic area of debate for operators, including:

  • Technological Progress: Advances in core networking technologies, especially network functions virtualisation (NFV) and software-defined networking (SDN), are closely associated with open source software and initiatives, such as OPNFV and OpenDaylight. Many operators are actively participating in these initiatives, as well as trialling their software and, in some cases, moving them into production. This represents a fundamental shift away from the industry’s traditional, proprietary, vendor-procured model.
    • Why are we now seeing more open source activities around core communications technologies?
  • Financial Pressure: However, over-the-top (OTT) disintermediation, regulation and adverse macroeconomic conditions have led to reduced core communications revenues for operators in both developed and emerging markets alike. As a result, operators are exploring opportunities to move away from their core, infrastructure business, and compete in the more software-centric services layer.
    • How do the Internet players use open source software, and what are the lessons for operators?
  • The Need for Agility: In general, there is recognition within the telecoms industry that operators need to become more ‘agile’ if they are to succeed in the new, rapidly-changing ICT world, and greater use of open source software is seen by many as a key enabler of this transformation.
    • How can the use of open source software increase operator agility?

The answers to these questions, and more, are the topic of this report, which is sponsored by Dialogic and independently produced by STL Partners. The report draws on a series of 21 interviews conducted by STL Partners with senior technologists, strategists and product managers from telecoms operators globally.

Figure 1: Split of Interviewees by Business Area

Source: STL Partners

Introduction

Open source is less optional than it once was – even for Apple and Microsoft

From the audience’s point of view, the most important announcement at Apple’s Worldwide Developer Conference (WWDC) this year was not the new versions of iOS and OS X, or even its Spotify-challenging Apple Music service. Instead, it was the announcement that Apple’s highly popular programming language ‘Swift’ was to be made open source, where open source software is broadly defined as software for which the source code is freely available for use – subject to certain licensing conditions.

On one level, therefore, this represents a clever engagement strategy with developers. Open source software uptake has increased rapidly during the last 15 years, most famously embodied by the Linux operating system (OS), and with this developers have demonstrated a growing preference for open source tools and platforms. Since Apple has generally pushed developers towards proprietary development tools, and away from third-party ones (such as Adobe Flash), this is significant in itself.

An indication of open source’s growth can be found in OS market shares in consumer electronics devices. As Figure 2 shows below, Android (open source) had a 49% share of shipments in 2014; if we include the various other open source OS’s in ‘other’, this increases to more than 50%.

Figure 2: Share of consumer electronics shipments* by OS, 2014

Source: Gartner
* Includes smartphones, tablets, laptops and desktop PCs

However, one of the components being open sourced is Swift’s (proprietary) compiler – a program that translates written code into an executable program that a computer system understands. The implication of this is that, in theory, we could even see Swift applications running on non-Apple devices in the future. In other words, Apple believes the risk of Swift being used on Android is outweighed by the reward of engaging with the developer community through open source.

Whilst some technology companies, especially the likes of Facebook, Google and Netflix, are well known for their activities in open source, Apple is a company famous for its proprietary approach to both hardware and software. This, combined with similar activities by Microsoft (who open sourced its .NET framework in 2014), suggest that open source is now less optional than it once was.

Open source is both an old and a new concept for operators

At first glance, open source also appears to now be less optional for telecoms operators, who traditionally procure proprietary software (and hardware) from third-party vendors. Whilst many (but not all) operators have been using open source software for some time, such as Linux and various open source databases in the IT domain (e.g. MySQL), we have in the last 2-3 years seen a step-change in operator interest in open source across multiple domains. The following quote, taken directly from the interviews, summarises the situation nicely:

“Open source is both an old and a new project for many operators: old in the sense that we have been using Linux, FreeBSD, and others for a number of years; new in the sense that open source is moving out of the IT domain and towards new areas of the industry.” 

AT&T, for example, has been speaking widely about its ‘Domain 2.0’ programme. Domain 2.0 has the objectives to transform AT&T’s technical infrastructure to incorporate network functions virtualisation (NFV) and software-defined networking (SDN), to mandate a higher degree of interoperability, and to broaden the range of alternative suppliers available across its core business. By 2020, AT&T hopes to virtualise 75% of its network functions, and it sees open source as accounting for up to 50% of this. AT&T, like many other operators, is also a member of various recently-formed initiatives and foundations around NFV and SDN, such as OPNFV – Figure 3 lists some below.

Figure 3: OPNFV Platinum Members

Source: OPNFV website

However, based on publicly-available information, other operators might appear to have lesser ambitions in this space. As ever, the situation is more complex than it first appears: other operators do have significant ambitions in open source and, despite the headlines NFV and SDN draw, there are many other business areas in which open source is playing (or will play) an important role. Figure 4 below includes three quotes from the interviews which highlight this broad spectrum of opinion:

Figure 4: Different attitudes of operators to open source – selected interview quotes

Source: STL Partners interviews

Key Questions to be Addressed

We therefore have many questions which need to be addressed concerning operator attitudes to open source software, adoption (by area of business), and more:

  1. What is open source software, what are its major initiatives, and who uses it most widely today?
  2. What are the most important advantages and disadvantages of open source software? 
  3. To what extent are telecoms operators using open source software today? Why, and where?
  4. What are the key barriers to operator adoption of open source software?
  5. Prospects: How will this situation change?

These are now addressed in turn.

  • Preface
  • Executive Summary
  • Introduction
  • Open source is less optional than it once was – even for Apple and Microsoft
  • Open source is both an old and a new concept for operators
  • Key Questions to be Addressed
  • Understanding Open Source Software
  • The Theory: Freely available, licensed source code
  • The Industry: Dominated by key initiatives and contributors
  • Research Findings: Evaluating Open Source
  • Open source has both advantages and disadvantages
  • Debunking Myths: Open source’s performance and security
  • Where are telcos using open source today?
  • Transformation of telcos’ service portfolios is making open source more relevant than ever…
  • … and three key factors determine where operators are using open source software today
  • Open Source Adoption: Business Critical vs. Service Area
  • Barriers to Telco Adoption of Open Source
  • Two ‘external’ barriers by the industry’s nature
  • Three ‘internal’ barriers which can (and must) change
  • Prospects and Recommendations
  • Prospects: An open source evolution, not revolution
  • Open Source, Transformation, and Six Key Recommendations
  • About STL Partners and Telco 2.0
  • About Dialogic

 

  • Figure 1: Split of Interviewees by Business Area
  • Figure 2: Share of consumer electronics shipments* by OS, 2014
  • Figure 3: OPNFV Platinum Members
  • Figure 4: Different attitudes of operators to open source – selected interview quotes
  • Figure 5: The Open IT Ecosystem (incl. key industry bodies)
  • Figure 6: Three Forms of Governance in Open Source Software Projects
  • Figure 7: Three Classes of Open Source Software License
  • Figure 8: Web Server Share of Active Sites by Developer, 2000-2015
  • Figure 9: Leading software companies vs. Red Hat, market capitalisation, Oct. 2015
  • Figure 10: The Key Advantages and Disadvantages of Open Source Software
  • Figure 11: How Google Works – Failing Well
  • Figure 12: Performance gains from an open source activation (OSS) platform
  • Figure 13: Intel Hardware Performance, 2010-13
  • Figure 14: Open source is more likely to be found today in areas which are…
  • Figure 15: Framework mapping current telco uptake of open source software
  • Figure 16: Five key barriers to telco adoption of open source software
  • Figure 17: % of employees with ‘software’ in their LinkedIn job title, Oct. 2015
  • Figure 18: ‘Waterfall’ and ‘Agile’ Software Development Methodologies Compared
  • Figure 19: Four key cultural attributes for successful telco transformation

Fast-Tracking Operator Plans to Win in the $5bn Location Insights Market

If you don’t subscribe to our research yet, you can download the free report as part of our sample report series.

Preface

Subscriber location information is a much-heralded asset of the telecoms operator. Operators have generally understood the importance of this asset but have typically struggled to monetize their position. Some operators have used location information to enable third party services whilst others have attempted to address the opportunity more holistically, with mixed success.

This report updates and expands on a previous STL Partners study: “Making Money from Location Insights” (2013). It outlines how to address the potential opportunity around Location Services. It draws on interviews conducted amongst key stakeholders within the emerging ecosystem, supplemented by STL Partners’ research and analysis, with the objective of determining how operators can release the value from their unique position in the location value chain.

This report focuses on what we have defined as Location Insight Services. The report argues that operators should first seek to offer Location Insight Services before evolving to cover Location Based Services. This strategic approach allows operators to better understand their data and to build location services for enterprise customers rather than starting with consumer-orientated location services that require additional capabilities. This approach provides the most upside with the least associated risk, offering the potential for incremental learning.

This report was commissioned and supported by Viavi Solutions (formerly JDSU). The research, analysis and the writing of the report itself were carried out independently by STL Partners. The views and conclusions contained herein are those of STL Partners.

Location Based Services vs. Location Insight Services

In the 2013 report, STL made a clear distinction between different types of location services.

  • Location Based Services (LBS) are geared towards supporting business processes (typically marketing-oriented) that are dependent on the instant availability of real-time or near real-time data about an individually identifiable subscriber. These are provided on the reasonable assumption that knowing an individual’s location enables a company to deliver a service or make an offer that is more relevant, there and then. Typically these services require explicit consent and an interaction with the customer (e.g. push marketing) and therefore require compelling user interfaces and permissions.
  • Additionally there is an opportunity to derive and deliver Location Insight Services (LIS) from connected consumers’ mobile location data. This opportunity does not necessarily require real-time data and where insights are aggregated and anonymized, can safeguard individuals’ privacy. The underlying premise is that identification of repetitive patterns in location activity over time not only enables a much deeper understanding of the consumer in terms of behavior and motivation, but also builds a clearer picture of the visitor profile of the location. Additionally LIS has the potential to provide data that is not available via other routes (e.g. understanding the footfall within a competitor’s store).

Figure 7:  Mapping the Telco Opportunity Landscape

Source: STL Partners

The framework in Figure 7 has been developed by STL Partners specifically with the mobile operator’s perspective in mind. We have split out operator location opportunities along two dimensions:

  • Real-time vs. Non-real-time data acquisition
  • Individual vs. Aggregated data analysis and action

Choosing the Right Strategy

Where are we now?

Most operators understand the potential value of their location asset and have attempted to monetize their data. Some operators have used location to enable 3rd party services whilst others have attempted to address the opportunity more holistically. Both have achieved mixed success for a number of reasons.

Most operators who are attempting to monetize location data have been drawn towards Location Based Services, namely push-marketing and advertising. Whilst some operators have achieved moderate success here (e.g. O2 Priority Moments), most are acting as enablers for other services. They are therefore addressing a limited part of the value chain and subsequently are not realizing significant value from their data. We do not consider those that pursue this strategy to be Location Based Services Providers, rather they are simply enablers.

Similarly a number of operators are addressing Location Insights, albeit with different approaches. Some are partnering with analytics and insight companies (e.g. Telefonica and GfK), others are developing services mostly on their own (e.g. SingTel’s DataSpark), whilst others are simply launching pilots.

In order to maximize the value that operators can secure through Location Services, we believe that operators need to address the whole Location ‘Stack’, not simply enabling new services or providing raw data. STL believe that the best way to do this is to start with Location Insight Services.

Start with Location Insight Services

When considering how to develop and monetize their location assets we recommend that operator’s select to start with LIS. Whilst many operators are already engaged in LBS (e.g. enabling push-marketing) the majority are not actually providing the service but are simply sharing data and enabling a 3rd party service provider.
Starting with LIS has a number of strategic advantages:

  • It’s a big opportunity in its own right
  • Telcos (should) have a data capture/technology advantage for LIS over OTT players
  • LIS provides an opportunity to build & learn incrementally, proving value
  • Privacy risks are reduced (particularly with aggregated data)
  • LIS does not require 100% coverage of the population, unlike a number of LBS use cases
  • LIS can provide internal benefits and can bolster the Go-to-Market strategy for vertical specific offerings

These advantages are explored in more detail further in this report.

 

  • Location, Location, Location
  • The Importance of Information
  • Location Based Services vs. Location Insight Services
  • Choosing the Right Strategy
  • Where are we now?
  • Start with Location Insight Services
  • Improve your LIS offering, transition towards LBS & position yourself as a Trusted Data Provider
  • Location Insights – Marketplace Overview
  • Where is the Opportunity for Location Insight Services?
  • Which Sectors are most addressable?
  • Sizing the Opportunity
  • Why haven’t forecasts developed as quickly as expected?
  • Location Insights potentially worth $5bn globally by 2020
  • Benchmarks
  • Where does the value come from – the Location Insights ‘Stack’
  • Understanding the Technology Options
  • The Technology Options for Location Data Acquisition
  • Technology Advantages for Telcos
  • The Right Degree of Location Precision
  • Other Advantages of Starting with LIS
  • Incremental Learning
  • Addressing the Privacy Question
  • Market Coverage
  • LIS can provide internal benefits and can bolster the Go-to-Market strategy for vertical specific offerings
  • Expanding Beyond Insights
  • Addressing Location Based Services
  • Becoming a Trusted Data Provider
  • Practical Guidance to Launch Location Services
  • Market Strategy
  • Data Management
  • An agile approach, partnering, orchestration and governance
  • Conclusions
  • Appendices
  • Appendix 1: Location Acquisition Technologies in Detail
  • Appendix 2: Opportunity Sizing Methodology
  • Appendix 3: About STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Location Insight vs. Location Based Services
  • Figure 2: STL Partners’ Analysis of the value of Global Location Insight Services (by 2020)
  • Figure 3: Analysis of location data acquisition technologies suitability for Location Insight Services
  • Figure 4: The Strategy Beyond Location Insights
  • Figure 5: The Explosion of Smartphones (2007-2014)
  • Figure 6: ‘Non-Smart’ Data Insights Become More Important as More ‘Things’ are Connected
  • Figure 7: Mapping the Telco Opportunity Landscape
  • Figure 8: Four opportunity domains for operators
  • Figure 9: Turkcell’s Smart Map Tool
  • Figure 10: TomTom’s Fusion Engine to Analyze Real-Time Traffic Information
  • Figure 11: Tado’s Proximity Based Thermostat
  • Figure 12: Expanding Beyond LIS
  • Figure 13: Location Insights – Market Taxonomy
  • Figure 14: Telefónica Smart Steps Location Analytics Tool
  • Figure 15: Motionlogic’s Location Analytics Tool
  • Figure 16: The value of Global Location Insight Services by industry and sector (by 2020)
  • Figure 17: The Location Insights ‘Stack’
  • Figure 18: How well do different location data acquisition technologies support Location Insight Services needs?
  • Figure 19: Real-Time vs. Near Real-Time Location Information
  • Figure 20: Deveryware’s Dynamic Permissions Tool
  • Figure 21: Become a Trusted Data Provider
  • Figure 22: Analysis of App/OS based real-time location Technology
  • Figure 23: Analysis of App/OS based data stored on device Technology
  • Figure 24: Analysis of Emergency Services Location Technology
  • Figure 25: Analysis of Granular (building level) network based Technology
  • Figure 26: Analysis of Coarse (cell-level) network based Technology
  • Figure 27: Analysis of Indoor Technologies

Strategic Overview: Time for a New Telco 2.0 Vision

Introduction

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

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

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

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

Background

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

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

Source: STL Partners

Core Competitiveness: Research Highlights

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

Next Steps on Core Competitiveness

STL Partners is planning analysis including:

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

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

Background

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

Figure 2 – The Telco 2.0 Agility Framework

Source: STL Partners, Agility Report

Transformation: Research Highlights

Next Steps on Telco 2.0 Transformation

STL Partners is planning analysis including:

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

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

Background

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

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

Source: Intel, STL Partners NFV Report

Core Innovation: Research Highlights

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

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

STL Partners is planning analysis including:

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

Theme #4: Disruption – Addressing Adjacent Threats and Opportunities

Background

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

Research Highlights: Disruption

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

Next Steps on Disruption

STL Partners is planning analysis including:

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

Conclusion: time for a new ‘Telco 2.0’ vision

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

New business models are starting to deliver

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

A new virtualised technological platform will enable new ways of working

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

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

It is becoming clearer how to organise and manage the change

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

Time for a new ‘Telco 2.0’ vision

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

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

The European Telecoms market in 2020, Report 2: 4 scenarios and 7 predictions

Introduction

The second report in The European Telecoms market in 2020, this document uses the framework introduced in Report 1 to develop four discrete scenarios for the European telecoms market in 2020.  Although this report can be read on its own, STL Partners suggests that more value will be derived from reading Report 1 first.

The role of this report

Strategists (and investors) are finding it very difficult to understand the many and varied forces affecting the telecoms industry (Report 1), and predict the structure of, and returns from, the European telecoms market in 2020 (the focus of this Report 2).  This, in turn, makes it challenging to determine how operators should seek to compete in the future (the focus of a STL Partners report in July, Four strategic pathways to Telco 2.0).

In summary, The European Telecoms market in 2020 reports therefore seek to:

  • Identify the key forces of change in Europe and provide a useful means of classifying them within a simple and logical 2×2 framework (Report 1);
  • Help readers refine their thoughts on how Europe might develop by outlining four alternative ‘futures’ that are both sufficiently different from each other to be meaningful and internally consistent enough to be realistic (Report 2);
  • Provide a ‘prediction’ for the future European telecoms market based on our own insights plus two ‘wisdom of crowds’ votes conducted at a recent STL Partners event for senior managers from European telcos (Report 2).

Four European telecoms market scenarios for 2020

The second report in The European Telecoms market in 2020, this document uses the framework introduced in Report 1 to develop four discrete scenarios for the European telecoms market in 2020.  Although this report can be read on its own, STL Partners suggests that more value will be derived from reading Report 1 first.

Overview

STL Partners has identified the following scenarios for the European market in 2020:

  1. Back to the Future. This scenario is likely to be the result of a structurally attractive telecoms market and one where operators focus on infrastructure-led ‘piping’ ambition and skills.
  2. Consolidated Utility. This might be the result of the same ‘piping’ ambition in a structurally unattractive market.
  3. Digital Renaissance. A utopian world resulting from new digital ambitions and skills developed by operators coupled with an attractive market.
  4. Telco Trainwreck. As the name suggests, a disaster stemming from lofty digital ambitions being pursued in the face of an unattractive telco market.

The four scenarios are shown on the framework in Figure 1 and are discussed in detail below.

Figure 1: Four European telecoms market scenarios for 2020

Source: STL Partners/Telco 2.0

How each scenario is described

In addition to a short overview, each scenario will be examined by exploring 8 key characteristics which seek to reflect the combined impact of the internal and external forces laid out in the previous section:

  1. Market Structure. The absolute and relative size and overall number of operators in national markets and across the wider EU region.
  2. Operator service pricing and profits. The price levels and profit performance of telecoms operators (and the overall industry) and the underlying direction (stable, moving up, moving down).
  3. The role of content in operators’ service portfolios. The importance of IPTV, games and applications within operators’ consumer offering and the importance of content, software and applications within operators’ enterprise portfolio.
  4. The degree to which operators can offer differentiated services. How able operators are to offer differentiated network services to end users and, most importantly, upstream service providers based on such things as network QoS, guaranteed maximum latency, speed, etc.
  5. The relationships between operators and NEP/IT players. Whether NEP and IT players continue to predominantly sell their services to and through operators (to other enterprises) or whether they become ‘Under the Floor’ competitors offering network services directly to enterprises.
  6. Where service innovation occurs – in the network/via the operator vs at the edge/via OTT players. The extent to which services continue to be created ‘at the edge’ – with little input from the network – or are ‘network-reliant’ or, even, integrated directly into the network. The former clearly suggests continued dominance by OTT players and the latter a swing towards operators and the telecoms industry.
  7. The attitude of the capital markets (and the availability of capital). The willingness of investors to have their capital reinvested for growth by telecoms operators as opposed to returned to them in the form of dividends. Prospects of sustained growth from operators will lead to the former whereas profit stasis or contraction will result in higher yields.
  8. Key industry statistics. Comparison between 2020 and 2015 for revenue and employees – tangible numbers that demonstrate how the industry has changed.

The European macro-economy – a key assumption

The health and structure of all industries in Europe is dependent, to a large degree, on the European macro-economy. Grexit or Brexit, for example, would have a material impact on growth throughout Europe over the next five years.  Our assumption in these scenarios is that Europe experiences a stable period of low-growth and that the economic positions of the stretched Southern European markets, particularly Italy and Spain, improves steadily.  If the European economic position deteriorates then opportunities for telecoms growth of any sort is likely to disappear.

 

  • Executive Summary
  • Introduction
  • The role of this report
  • Four European telecoms market scenarios for 2020
  • Overview
  • How each scenario is described
  • The European macro-economy – a key assumption
  • Back to the Future
  • Consolidated Utility
  • Digital Renaissance
  • Telco Trainwreck
  • Risk and returns in the scenarios
  • Making predictions
  • Wisdom of crowds: 2 approaches
  • Approach 1: Aggregating individual forces – ‘Sum-of-the-parts’
  • Approach 2: Picking a scenario
  • STL Partners’ prediction for the European telecoms market in 2020
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Four European telecoms market scenarios for 2020
  • Figure 2: Back to the Future – key characteristics
  • Figure 3: Consolidated Utility – key characteristics
  • Figure 4: Digital Renaissance – key characteristics
  • Figure 5: Telco Trainwreck – key characteristics
  • Figure 6: Risk and returns in the four scenarios
  • Figure 7: Europe’s future based on aggregating individual forces – ‘Sum-of-the-parts’
  • Figure 8: Europe’s future – results of the two approaches compared

How to be Agile: Agility by Design and Information Intensity

Background: The Telco 2.0 Agility Challenge

Agility is a highly desirable capability for telecoms operators seeking to compete and succeed in their core businesses and the digital economy in general. In our latest industry research, we found that most telco executives that responded rated their organisations as ‘moderately agile’, and identified a number of practical steps that telco management could and should take to improve agility.

The Definition and Value of Agility

In the Telco 2.0 Agility Challenge, STL Partners first researched with 29 senior telecoms operator executives a framework to define agility in the industry’s own terms, and then gathered quantitative input to benchmark the industry’s agility from 74 further executives via an online self-diagnosis tool. The analysis in this report examines the aggregate quantitative input of those executives.

The Telco 2.0 Agility framework comprises the five agility domains illustrated below.

Figure 4: The Telco 2.0 Agility Framework

Source: STL Partners, The ‘Agile Operator’: 5 Key Ways to Meet the Agility Challenge

  • Organisational Agility: Establish a more agile culture and mindset, allowing you to move at faster speeds and to innovate more effectively
  • Network Agility: Embrace new networking technologies/approaches to ensure that you provide the best experience for customers and manage your resources and investment more efficiently
  • Service Agility: Develop the capability to create products and services in a much more iterative manner, resulting in products that are developed faster, with less investment and better serve customer needs
  • Customer Agility: Provide customers with the tools to manage their service and use analytics to gain insight into customer behaviour to develop and refine services
  • Partnering Agility: Become a more effective partner by developing the right skills to understand and assess potential partnerships and ensure that the right processes/technologies are in place to make partnering as easy as possible

A key finding of the first stage was that all of the executives we spoke to considered achieving agility as very important or critical to their organisations’ success, as exemplified by this quote.

“It is fundamental to be agile. For me it is much more important than being lean – it is more than just efficiency.”

European Telco CTO

This research project was kindly sponsored by Ericsson. STL Partners independently created the methodology, questions, findings, analysis and conclusions.

Purpose of this report

This report details:

  • The headline findings of the Telco 2.0 Agility Challenge
  • The category winners
  • What are the lessons revealed about telco agility overall?
  • What do telcos need to address to improve their overall agility?
  • What can others do to help?

Key Findings

The Majority of Operators were ‘Moderately Agile’

Just over two thirds of respondents achieved a total score between 50%-75%. All of the twenty questions had 4 choices, so a score in this range means that for most of the questions these respondents were choosing the second or third option out of four choices increasing from the least to the most agile. The mean score achieved was 63% and the median 61%. This shows that most telcos believe they have some way to go before they would realistically consider themselves truly Agile by the definition set out in the benchmark.

Figure 5: Distribution of Total Agility Scores

Source: STL Partners Telco 2.0 Agility Challenge, n =74

Agility Champions

A further part of the Agility Challenge was to identify Agility Champions, who were recognised through Agility Domain Awards at TM Forum Live! in Nice in June. The winners of these prizes were additionally interviewed by STL Partners to check the evidence of their claims, and the winners were:

  • Telus, which won the Customer Agility Challenge Award. Telus adopted a Customer First initiative across the whole organization; this commitment to customers has led to both a significant increase in the ‘likelihood to recommend’ metric and a substantial reduction in customer complaints.
  • Zain Jordan, which won the Service Agility Challenge. Zain Jordan has achieved the speed and flexibility needed to differentiate itself in the marketplace through deployment of state-of-the-art, real time service enablement platforms and solutions. These are managed and operated by professional, specialized, and qualified teams, and are driving an increase in profitability and customer satisfaction.
  • Telecom Italia Digital Solutions, (TIDS) which won the Partnering Agility Challenge. TIDS have partnered effectively to deliver innovative digital services, including establishing and launching an IoT platform from scratch within 6 months. It is also developing and coordinating all the digital presence at the Expo Milan 2015.

Network Agility is hardest to achieve

Most respondents scored lower on Network Agility than the other domains, and we believe this is partly because the network criteria were harder to achieve (e.g. configuring networks in real time) but also that achieving meaningful agility in a network is as a rule harder than in the other areas.

Figure 6: Average Score by Agility Domain

Note: The maximum score was 4 and the minimum 1, with 4 = Strongly Agile, 3 = Mostly Agile, 2 = Somewhat Agile, and 1 = Not Agile.

Source: STL Partners, n = 74

Next Section: Looking Deeper

 

  • Executive Summary
  • Introduction
  • Background: The Telco 2.0 Agility Challenge
  • Purpose of this report
  • Key Findings
  • The Majority of Operators were ‘Moderately Agile’
  • Agility Champions
  • Network Agility is hardest to achieve
  • Looking Deeper
  • Organisational Agility: ‘Mindset’ is not enough
  • Information Agility is an important factor
  • If you had to choose One Metric that Matters (OMTM) it would be…
  • Conclusions

 

  • Figure 1: The Telco 2.0 Agility Framework
  • Figure 2: Respondents can be grouped into 3 types based on the level and nature of their organisational agility
  • Figure 3: Information Agility Sub-Segments
  • Figure 4: The Telco 2.0 Agility Framework
  • Figure 5: Distribution of Total Agility Scores
  • Figure 6: Average Score by Agility Domain
  • Figure 7: We were surprised that Organisational Agility was not a stronger indicator of Total Agility
  • Figure 8: Differences in Responses to Organisational Agility Questions
  • Figure 9: Organisational Agility a priori Segments and Scores
  • Figure 10: ‘Agile by Design’ Organisations Scored higher than others
  • Figure 11: Defining Information Agility Segments
  • Figure 12: The Information Agile Segment scored higher than the others

How 5G is Disrupting Cloud and Network Strategy Today

5G – cutting through the hype

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

A stronger definition: a collection of related technologies

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

Incremental progress: ‘4.5G’

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

Better antennas, beamforming, etc.

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

New spectrum

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

Full duplex radio – doubling capacity in one stroke

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

A new, flatter network architecture?

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

Content-centric networking

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

The mother of all stretch targets

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

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

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

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

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

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

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

Latency: the X factor

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

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

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

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

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

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

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

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

Latency: the challenge of distance

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

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

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

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

 

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

 

The ‘Agile Operator’: 5 Key Ways to Meet the Agility Challenge

Understanding Agility

What does ‘Agility’ mean? 

A number of business strategies and industries spring to mind when considering the term ‘agility’ but the telecoms industry is not front and centre… 

Agility describes the ability to change direction and move at speed, whilst maintaining control and balance. This innate flexibility and adaptability aptly describes an athlete, a boxer or a cheetah, yet this description can be (and is) readily applied in a business context. Whilst the telecoms industry is not usually referenced as a model of agility (and is often described as the opposite), a number of business strategies and industries have adopted more ‘agile’ approaches, attempting to simultaneously reduce inefficiencies, maximise the deployment of resources, learn though testing and stimulate innovation. It is worthwhile recapping some of the key ‘agile’ approaches as they inform our and the interviewees’ vision of agility for the telecoms operator.

When introduced, these approaches have helped redefine their respective industries. One of the first business strategies that popularised a more ‘agile’ approach was the infamous ‘lean-production’ and related ‘just-in-time’ methodologies, principally developed by Toyota in the mid-1900s. Toyota placed their focus on reducing waste and streamlining the production process with the mindset of “only what is needed, when it is needed, and in the amount needed,” reshaping the manufacturing industry.

The methodology that perhaps springs to many people’s minds when they hear the word agility is ‘agile software development’. This methodology relies on iterative cycles of rapid prototyping followed by customer validation with increasing cross-functional involvement to develop software products that are tested, evolved and improved repeatedly throughout the development process. This iterative and continuous improvement directly contrasts the waterfall development model where a scripted user acceptance testing phase typically occurs towards the end of the process. The agile approach to development speeds up the process and results in software that meets the end users’ needs more effectively due to continual testing throughout the process.

Figure 5: Agile Software Development

Source: Marinertek.com

More recently the ‘lean startup’ methodology has become increasingly popular as an innovation strategy. Similarly to agile development, this methodology also focuses on iterative testing (replacing the testing of software with business-hypotheses and new products). Through iterative testing and learning a startup is able to better understand and meet the needs of its users or customers, reducing the inherent risk of failure whilst keeping the required investment to a minimum. The success of high-tech startups has popularised this approach; however the key principles and lessons are not solely applicable to startups but also to established companies.

Despite the fact that (most of) these methodologies or philosophies have existed for a long time, they have not been adopted consistently across all industries. The digital or internet industry was built on these ‘agile’ principles, whereas the telecoms industry has sought to emulate this by adopting agile models and methods. Of course these two industries differ in nature and there will inevitably be constraints that affect the ability to be agile across different industries (e.g. the long planning and investment cycles required to build network infrastructure) yet these principles can broadly be applied more universally, underwriting a more effective way of working.

This report highlights the benefits and challenges of becoming more ‘agile’ and sets out the operator’s perspective of ‘agility’ across a number of key domains. This vision of the ‘Agile Operator’ was captured through 29 interviews with senior telecoms executives and is supplemented by STL analysis and research.

Barriers to (telco) agility 

…The telecoms industry is hindered by legacy systems, rigid organisational structures and cultural issues…

It is well known that the telecoms industry is hampered by legacy systems; systems that may have been originally deployed between 5-20 years ago are functionally limited. Coordinating across these legacy systems impedes a telco’s ability to innovate and customise product offerings or to obtain a complete view of customers. In addition to legacy system challenges, interview participants outlined a number of other key barriers to becoming more agile. Three principle barriers emerged:

  1. Legacy systems
  2. Mindset & Culture
  3. Organisational Structure & Internal Processes

Legacy Systems 

One of the main (and often voiced by interviewees) barriers to achieving greater agility are legacy systems. Dealing with legacy IT systems and technology can be very cumbersome and time-consuming as typically they are not built to be further developed in an agile way. Even seemingly simple change requests end in development queues that stretch out many months (often years). Therefore operators remain locked-in to the same, limited core capabilities and options, which in turn stymies innovation and agility. 

The inability to modify a process, a pricing plan or to easily on/off-board a 3rd-party product has significant ramifications for how agile a company can be. It can directly limit innovation within the product development process and indirectly diminish employees’ appetite for innovation.

It is often the case that operators are forced to find ‘workarounds’ to launch new products and services. These workarounds can be practical and innovative, yet they are often crude manipulations of the existing capabilities. They are therefore limited in terms what they can do and in terms of the information that can be captured for reporting and learning for new product development. They may also create additional technical challenges when trying to migrate the ‘workaround’ product or service to a new system. 

Figure 6: What’s Stopping Telco Agility?

Source: STL Partners

Mindset & Culture

The historic (incumbent) telco culture, born out of public sector ownership, is the opposite of an ‘agile’ mindset. It is one that put in place rigid controls and structure, repealed accountability and stymied enthusiasm for innovation – the model was built to maintain and scale the status quo. For a long time the industry invested in the technology and capabilities aligned to this approach, with notable success. As technology advanced (e.g. ever-improving feature phones and mobile data) this approach served telcos well, enhancing their offerings which in turn further entrenched this mindset and culture. However as technology has advanced even further (e.g. the internet, smartphones), this focus on proven development models has resulted in telcos becoming slow to address key opportunities in the digital and mobile internet ecosystems. They now face a marketplace of thriving competition, constant disruption and rapid technological advancement. 

This classic telco mindset is also one that emphasized “technical” product development and specifications rather than the user experience. It was (and still is) commonplace for telcos to invest heavily upfront in the creation of relatively untested products and services and then to let the product run its course, rather than alter and improve the product throughout its life.

Whilst this mindset has changed or is changing across the industry, interviewees felt that the mindset and culture has still not moved far enough. Indeed many respondents indicated that this was still the main barrier to agility. Generally they felt that telcos did not operate with a mindset that was conducive to agile practices and this contributed to their inability to compete effectively against the internet players and to provide the levels of service that customers are beginning to expect. 

Organisational Structure & Internal Processes

Organisational structure and internal processes are closely linked to the overall culture and mindset of an organisation and hence it is no surprise that interviewees also noted this aspect as a key barrier to agility. Interviewees felt that the typical (functionally-orientated) organisational structure hinders their companies’ ability to be agile: there is a team for sales, a team for marketing, a team for product development, a network team, a billing team, a provisioning team, an IT team, a customer care team, a legal team, a security team, a privacy team, several compliance teams etc.. This functional set-up, whilst useful for ramping-up and managing an established product, clearly hinders a more agile approach to developing new products and services through understanding customer needs and testing adoption/behaviour. With this set-up, no-one in particular has a full overview of the whole process and they are therefore not able to understand the different dimensions, constraints, usage and experience of the product/service. 

Furthermore, having these discrete teams makes it hard to collaborate efficiently – each team’s focus is to complete their own tasks, not to work collaboratively. Indeed some of the interviewees blamed the organisational structure for creating a layer of ‘middle management’ that does not have a clear understanding of the commercial pressures facing the organisation, a route to address potential opportunities nor an incentive to work outside their teams. This leads to teams working in silos and to a lack of information sharing across the organisation.

A rigid mindset begets a rigid organisational structure which in turn leads to the entrenchment of inflexible internal processes. Interviewees saw internal processes as a key barrier, indicating that within their organisation and across the industry in general internal decision-making is too slow and bureaucratic.

 

Interviewees noted that there were too many checks and processes to go through when making decisions and often new ideas or opportunities fell outside the scope of priority activities. Interviewees highlighted project management planning as an example of the lack of agility; most telcos operate against 1-2 year project plans (with associated budgeting). Typically the budget is locked in for the year (or longer), preventing the re-allocation of financing towards an opportunity that arises during this period. This inflexibility prevents telcos from quickly capitalising on potential opportunities and from (re-)allocating resources more efficiently.

  • Executive Summary
  • Understanding Agility
  • What does ‘Agility’ mean?
  • Barriers to (telco) agility
  • “Agility” is an aspiration that resonates with operators
  • Where is it important to be agile?
  • The Telco Agility Framework
  • Organisational Agility
  • The Agile Organisation
  • Recommended Actions: Becoming the ‘Agile’ Organisation
  • Network Agility
  • A Flexible & Scalable Virtualised Network
  • Recommended Actions: The Journey to the ‘Agile Network’
  • Service Agility
  • Fast & Reactive New Service Creation & Modification
  • Recommended Actions: Developing More-relevant Services at Faster Timescales
  • Customer Agility
  • Understand and Make it Easy for your Customers
  • Recommended Actions: Understand your Customers and Empower them to Manage & Customise their Own Service
  • Partnering Agility
  • Open and Ready for Partnering
  • Recommended Actions: Become an Effective Partner
  • Conclusion

 

  • Figure 1: Regional & Functional Breakdown of Interviewees
  • Figure 2: The Barriers to Telco Agility
  • Figure 3: The Telco Agility Framework
  • Figure 4: The Agile Organisation
  • Figure 5: Agile Software Development
  • Figure 6: What’s Stopping Telco Agility?
  • Figure 7: The Importance of Agility
  • Figure 8: The Drivers & Barriers of Agility
  • Figure 9: The Telco Agility Framework
  • Figure 10: The Agile Organisation
  • Figure 11: Organisational Structure: Functional vs. Customer-Segmented
  • Figure 12: How Google Works – Small, Open Teams
  • Figure 13: How Google Works – Failing Well
  • Figure 14: NFV managed by SDN
  • Figure 15: Using Big Data Analytics to Predictively Cache Content
  • Figure 16: Three Steps to Network Agility
  • Figure 17: Launch with the Minimum Viable Proposition – Gmail
  • Figure 18: The Key Components of Customer Agility
  • Figure 19: Using Network Analytics to Prioritise High Value Applications
  • Figure 20: Knowing When to Partner
  • Figure 21: The Telco Agility Framework

Google’s MVNO: What’s Behind it and What are the Implications?

Google’s core business is under pressure

Google, the undisputed leader in online advertising and tech industry icon, has more problems than you might think. The grand narrative is captured in the following chart, showing basic annual financial metrics for Google, Inc. between 2009 and 2014.

Figure 1: Google’s margins have eroded substantially over time

Source: STL Partners, Google 10-K filing

This is essentially the classic problem of commoditisation. The IT industry has been structurally deflationary throughout its existence, which has always posed problems for its biggest successes – how do you maintain profitability in a business where prices only ever fall? Google is growing in terms of volume, but its margins are sliding, and as a result, profitability is growing much more slowly than revenue. Since 2010, the operating margin has shrunk from around 35% to around 25%, a period during which a major competitor emerged (Facebook) and Google initiated a variety of major investments, research projects, and flirted with manufacturing hardware (through the Motorola acquisition).

And it could get worse. In its most recent 10-K filing, Google says: “We anticipate downward pressure on our operating margin in the future.” It cites increasing competition and increased expenditures, while noting that it is becoming more reliant on lower margin products: “The margin on the sale of digital content and apps, advertising revenues from mobile devices and newer advertising formats are generally less than the margin on revenues we generate from advertising on our websites on traditional formats.”

Google remains massively dependent on a commoditising advertising business

Google is very, very dependent on selling advertising for revenue. It does earn some revenue from content, but most of this is generated from the ContentID program, which places adverts on copyrighted material and shares revenue with the rightsholder, and therefore, amounts to much the same thing. Over the past two years, Google has actually become more advert-dominated, as Figure 2 shows. Advertising revenues are not only vastly greater than non-advertising revenues, they are growing much faster and increasing as a share of the total. Over- reliance on the fickle and fast changing advertising market is obviously risky. Also, while ad brokering is considered a high-margin business, Google’s margins are now at the same level as AT&T’s.

Figure 2: Not only is Google overwhelmingly dependent on advertising, advertising revenue is growing faster than non-advertising

Source: STL Partners, Google 10-K

The growth rate of non-advertising revenue at Google has slowed sharply since last year. It is now growing more slowly than either advertising on Google properties, or in the Google affiliate network (see Figure 3).

Figure 3: Google’s new-line businesses are growing slower than the core business

Source: STL Partners, Google 10-K

At the same time, the balance has shifted a little between Google’s own properties (such as Google.com) and its affiliate network. Historically, more and more Google revenue has come from its own inventory and less from placing ads on partner sites. Costs arise from the affiliate network because Google pays out revenue share to the partner sites, known as traffic-acquisition costs or TACs. Own-account ad inventory, however, isn’t free – Google has to create products to place advertising in, and this causes it to incur R&D expenditures.

In a real sense, R&D is the equivalent to TAC for the 60-odd per cent of Google’s business that occurs on its own web sites. Google engineering excellence, and perhaps economies of scale, mean that generating ad inventory via product creation might be a better deal than paying out revenue share to hordes of bloggers or app developers, and Figure 4 shows this is indeed the case. R&D makes up a much smaller percentage of revenue from Google properties than TAC does of revenue from the affiliate network.

Figure 4: R&D is a more efficient means of generating ad inventory than affiliate payouts

Source: STL Partners, Google 10-K

Note, that although TAC might well be rising, the spike for Q4 2014 is probably a seasonal effect – Q4 is likely to be a month when a lot of adverts get clicked across the web.

 

  • Executive Summary
  • Google’s core business is under pressure
  • Google remains massively dependent on a commoditising advertising business
  • Google spends far more on R&D and capex than Apple
  • But while costs soar, Google ad pricing is falling
  • Google also has very high running costs
  • The threats from Facebook and Apple are real
  • Google MVNO: a strategic initiative
  • What do you need to make a mini-carrier?
  • The Google MVNO will launch into a state of price war
  • How low could the Google MVNO’s prices be?
  • Google’s MVNO: The Strategic Rationale
  • Option 1: Ads
  • Option 2: Straightforward carrier business model
  • Option 3: Android-style strategic initiative vs MNOs
  • Option 4: Anti-Apple virus, 2.0
  • Conclusions

 

  • Figure 1: Google’s margins have eroded substantially over time
  • Figure 2: Not only is Google overwhelmingly dependent on advertising, advertising revenue is growing faster than non-advertising
  • Figure 3: Growth in Google’s new-line businesses is now slower than in the core business
  • Figure 4: R&D is a more efficient means of generating ad inventory than affiliate payouts
  • Figure 5: Google spends a lot of money on research
  • Figure 6: Proportionately, Google research spending is even higher
  • Figure 7: Google’s dollar capex is almost identical to vastly bigger Apple’s
  • Figure 8: Google is startlingly capex-intensive compared to Apple, especially for an ad broker versus a global manufacturing titan
  • Figure 9: Google’s ad pricing is declining, and volume growth paused for most of 2014
  • Figure 10: Google is a more expensive company to run than Apple
  • Figure 11: The aircraft hangar Google leases from NASA
  • Figure 12: Facebook is pursuing quality over quantity in ad placement
  • Figure 12: Facebook is gradually closing the gap on Google in digital advertising
  • Figure 14: Despite a huge revenue quarter, Facebook’s Q4 saw a sharp hit to margin
  • Figure 15: Facebook’s margin hit is explained by the rise in R&D spending
  • Figure 16: Apple’s triumph – a terrible Q4 for the Android ecosystem
  • Figure 17: Price disruption in France and in the United States
  • Figure 18: Price disruption in the US – this is only the beginning
  • Figure 19: Defending AT&T and Verizon Wireless’ ARPU comes at a price
  • Figure 20: Modelling the service price of a mini-carrier
  • Figure 21: A high WiFi offload rate could make Google’s pricing aggressive
  • Figure 21: Handset subsidies are alive and well at T-Mobile

 

Facebook: Telcos’ New Best Friend?

How Facebook is changing

A history of adaptation

One of the things that sets Facebook apart from its largely defunct predecessors, such as MySpace, Geocities and Friends Reunited, is its ability to adapt to the evolution of the Internet and consumer behaviour. In its decade-long history, Facebook has evolved from a text-heavy, PC-based experience used by American students into a world-leading digital communications and commerce platform used by people of all ages. The basic student matchmaking service Zuckerberg and his fellow Harvard students created in 2004 now matches buyers and sellers in competition with Google, Amazon and eBay (see Figure 1).

Figure 1: From student matchmaking service to a leading digital commerce platform

Source: Zuckerberg’s Facebook page and Facebook investor relations

Launched in early 2004, Facebook initially served as a relatively basic directory with photos and limited communications functionality for Harvard students only. In the spring of 2004, it began to expand to other universities, supported by seed funding from Peter Thiel (co-founder of Paypal). In September 2005, Facebook was opened up to the employees of some technology companies, including Apple and Microsoft. By the end of 2005, it had reached five million users.

Accel Partners invested US$12.7 million in the company in May 2005 and Greylock Partners and others followed this up with another US$27.5 million in March 2006. The additional investment enabled Facebook to expand rapidly. During 2006, it added the hugely popular newsfeed and the share functions and opened up the registration process to anyone. By December 2006, Facebook had 12 million users.

The Facebook Platform was launched in 2007, enabling affiliate sites and developers to interact and create applications for the social network. In a far-sighted move, Microsoft invested US$240 million in October 2007, taking a 1.6% stake and valuing Facebook at US$15 billion. By August 2008, Facebook had 100 million users.

Achieving the 100 million user milestone appears to have given Facebook ‘critical mass’ because at that point growth accelerated dramatically. The company doubled its user base to 200 million in nine months (May 2009) and has continued to grow at a similar rate since then.

As usage continue to grow rapidly, it was increasingly clear that Facebook could erode Google’s dominant position in the Internet advertising market. In June 2011, Google launched the Google + social network – the latest move in a series of efforts by the search giant to weaken Facebook’s dominance of the social networking market. But, like its predecessors, Google+ has had little impact on Facebook.

2012-2013 – the paranoid years

Although Facebook shrugged off the challenge from Google+, the rapid rise of the mobile Internet did cause the social network to wobble in 2012. The service, which had been designed for use on desktop PCs, didn’t work so well on mobile devices, both in terms of providing a compelling user experience and achieving monetisation. Realising Facebook could be disrupted by the rise of the mobile Internet, Zuckerberg belatedly called a mass staff meeting and announced a “mobile first” strategy in early 2012.

In an IPO filing in February 2012, Facebook acknowledged it wasn’t sure it could effectively monetize mobile usage without alienating users. “Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results,” it duly noted in the filing.

Although usage of Facebook continued to rise on both the desktop and the mobile, there was increasing speculation that it could be superseded by a more mobile-friendly service, such as fast-growing photo-sharing service Instagram. Zuckerberg’s reaction was to buy Instagram for US$1 billion in April 2012 (a bargain compared with the $21 billion plus Facebook paid for WhatsApp less than two years later).

Moreover, Facebook did figure out how to monetise its mobile usage. Cautiously at first, it began embedding adverts into consumers’ newsfeeds, so that they were difficult to ignore. Although Facebook and some commentators worried that consumers would find these adverts annoying, the newsfeed ads have proven to be highly effective and Facebook continued to grow. In October 2012, now a public company, Facebook triumphantly announced it had one billion active users, with 604 million of them using the mobile site.

Even so, Facebook spent much of 2013 tinkering and experimenting with changes to the user experience. For example, it altered the design of the newsfeed making the images bigger and adding in new features. But some commentators complained that the changes made the site more complicated and confusing, rather than simplifying it for mobile users equipped with a relatively small screen. In April 2013, Facebook tried a different tack, launching Facebook Home, a user interface layer for Android-compatible phones that provides a replacement home screen.

And Zuckerberg continued to worry about upstart mobile-orientated competitors. In November 2013, a number of news outlets reported that Facebook offered to buy Snapchat, which enables users to send messages that disappear after a set period, for US$3 billion. But the offer was turned down.

A few months later, Facebook announced it was acquiring the popular mobile messaging app WhatsApp for what amounted to more than US$21 billion at the time of completion.

In 2014 – going on the offensive

By acquiring WhatsApp at great expense, Facebook alleviated immediate concerns that the social network could be dislodged by another disruptor, freeing up Zuckerberg to turn his attention to new technologies and new markets. The acquisition also put to rest investors’ immediate fears that Facebook could be superseded by a more fashionable, dedicated mobile service, pushing up the share price (see the section on Facebook’s valuation). In May 2014, Facebook wrong-footed many industry watchers and some of its rivals by announcing it had agreed to acquire Oculus VR, Inc., a leading virtual reality company, for US$2 billion in cash and stock.

Zuckerberg has since described the WhatsApp and Oculus acquisitions as “big bets on the next generation of communication and computing platforms.” And Facebook is also investing heavily in organic expansion, increasing its headcount by 45% in 2014, while opening another data center in Altoona, Iowa.

Zuckerberg also continues to devote time and attention to Internet.org, a multi-company initiative to bring free basic Internet services to people who aren’t connected. Announced in August 2013, Internet.org has since launched free basic internet services in six developing countries. For example, in February 2015, Facebook and Reliance Communications launched Internet.org in India. As a result, Reliance customers in six Indian states (Tamil Nadu, Mahararashtra, Andhra Pradesh, Gujarat, Kerala, and Telangana) now have access to about 40 services ranging from news, maternal health, travel, local jobs, sports, communication, and local government information.

Zuckerberg said that more than 150 million people now have the option to connect to the internet using Internet.org, and the initiative had, so far, succeeded in connecting seven million people to the internet who didn’t before have access. “2015 is going to be an important year for our long term plans,” he noted.

The Facebook exception – no fear, more freedom

Although it is now listed, Facebook is clearly not a typical public company. Its massive lead in the social networking market has given it an unusual degree of freedom. Zuckerberg has a controlling stake in the social network (he is able to exercise voting rights with respect to a majority of the voting power of the outstanding capital stock) and the self-confidence to ignore any grumblings on Wall Street. Facebook is able to make acquisitions most other companies couldn’t contemplate and can continue to put Zuckerberg’s long-term objectives ahead of those of short-term shareholders. Like Amazon, Facebook frequently reminds investors that it isn’t trying to maximise short-term profitability. And unlike Amazon, Facebook may not even be trying to maximize long-term profitability.

On Facebook’s quarterly earning calls, Zuckerberg likes to talk about Facebook’s broad, long-term aims, without explaining clearly how fulfilling these objectives will make the company money. “In the next decade, Facebook is focused on our mission to connect the entire world, welcoming billions of people to our community and connecting many more people to the internet through Internet.org (see Figure 2),” he said in the January 2015 earnings call. “Similar to our transition to mobile over the last couple of years, now we want to really focus on serving everyone in the world.”

Figure 2: Zuckerberg is pushing hard for the provision of basic Internet services

Source: Facebook.com

Not all of the company’s investors are entirely comfortable with this mission. On that earnings call, one analyst asked Zuckerberg: “Mark, I think during your remarks in every earnings call, you talk to your investors for a considerable amount of time about Facebook’s efforts to connect the world, and specifically about Internet.org which suggest you think this is important to investors. Can you clarify why you think this matters to investors?”

Zuckerberg’s response: “It matters to the kind of investors that we want to have, because we are really a mission-focused company. We wake up every day and make decisions because we want to help connect the world. That’s what we’re doing here.

“Part of the subtext of your question is that, yes, if we were only focused on making money, we might put all of our energy on just increasing ads to people in the US and the other most developed countries. But that’s not the only thing that we care about here.

“I do think that over the long term, that focusing on helping connect everyone will be a good business opportunity for us, as well. We may not be able to tell you exactly how many years that’s going to happen in. But as these countries get more connected, the economies grow, the ad markets grow, and if Facebook and the other services in our community, or the number one, and number two, three, four, five services that people are using, then over time we will be compensated for some of the value that we’ve provided. This is why we’re here. We’re here because our mission is to connect the world. I just think it’s really important that investors know that.”

Takeaways

Facebook may be a public company, but it doesn’t worry much about shareholders’ short-term aspirations. It often behaves like a private company that is focused first and foremost on fulfilling the goals of its founder. It is clear Zuckerberg is playing the long game. But it isn’t clear what yardsticks he is using to measure success. Although Zuckerberg knows Facebook needs to be profitable enough to ensure investors’ continued support, his primary goal may be to bring hundreds of millions more people online and secure his place in posterity. There is a danger that Zuckerberg’s focus on connecting people in Africa and developing Asia means that there won’t be sufficient top management attention on the multi-faceted digital commerce struggle with Google in North America and Western Europe.

Financials and business model

Network effects still strong

Within that wider mission to connect the world, Facebook continues to do a great job of connecting people to Facebook. Fuelled by network effects, Facebook says that 1.39 billion people now use Facebook each month (see Figure 3) and 890 million people use the service daily, an increase of 165 million monthly active users and 133 million daily active users in 2014. In developed markets, many consumers use Facebook as a primary medium for communications, relying on it to send messages, organize events and relay their news. As a result, in parts of Europe and North America, adults without a Facebook account are increasingly considered eccentric.

Figure 3: Facebook’s user base continues to grow rapidly

Source: Facebook and STL Partners analysis

Having said that, some active users are clearly more active and valuable than others. In a regulatory filing, Facebook admits that some active users may, in fact, be bots: “Some of our metrics have also been affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs. The impact of this automatic activity on our metrics varied by geography because mobile usage varies in different regions of the world.”

This automatic polling of Facebook’s servers by mobile devices makes it difficult to judge the true value of the social network’s user base. Anecdotal evidence suggests many people with Facebook profiles are kept active on Facebook primarily by their smartphone apps, rather than because they are actively choosing to use the service. Still, Facebook would argue that these people are seeing the notifications on their mobile devices and are, therefore, at least partially engaged.

 

  • Executive Summary
  • How Facebook is changing
  • A history of adaptation
  • The Facebook exception – no fear, more freedom
  • Financials and business model
  • Growth prospects for the core business
  • User growth
  • Monetisation – better targeting, higher prices
  • Mobile advertising spend lags behind usage
  • The Facebook Platform – Beyond the Walled Garden
  • Multimedia – taking on YouTube
  • Search – challenging Google’s core business
  • Enabling transactions – moving beyond advertising
  • Virtual reality – a long-term game
  • Takeaways
  • Threats and risks
  • Facebook fatigue
  • Google – Facebook enemy number one
  • Privacy concerns
  • Wearables and the Internet of Things
  • Local commerce – in need of a map
  • Facebook and communication services
  • Conclusions
  • Facebook is spread too thin
  • Partnering with Facebook – why and how
  • Competing with Facebook – why and how

 

  • Figure 1: From student matchmaking service to a leading digital commerce platform
  • Figure 2: Zuckerberg is pushing hard for the provision of basic Internet services
  • Figure 3: Facebook’s user base continues to grow rapidly
  • Figure 4: Facebook’s revenue growth has accelerated in the past two years
  • Figure 5: Facebook’s ARPU has risen sharply in the past two years
  • Figure 6: After wobbling in 2012, investors’ belief in Facebook has strengthened
  • Figure 7: Despite a rebound, Facebook’s valuation per user is still below its peak
  • Figure 8: Facebook could be serving 2.3 billion people by 2020
  • Figure 9: Share of digital advertising – Facebook is starting to close the gap on Google but remains a long way behind
  • Figure 10: The gap between click through rates for search and social remains substantial
  • Figure 11: Social networks’ revenue per click is rising but remains 40% of search
  • Figure 12: Facebook’s advertising has moved from the right column to centre stage
  • Figure 13: Facebook’s startling mobile advertising growth
  • Figure 14: Zynga’s share price reflects decline of Facebook.com as an app platform
  • Figure 15 – Facebook Connect – an integral part of the Facebook Platform
  • Figure 16: Leading Internet players’ share of social log-ins over time
  • Figure 17: Facebook’s personalised search proposition
  • Figure 18: Facebook’s new buy button – embedded in a newsfeed post
  • Figure 19: The rise and rise of Android – not good for Facebook
  • Figure 21: Facebook and Google are both heavily associated with privacy issues
  • Figure 22: Facebook wants to conquer the Wheel of Digital Commerce
  • Figure 23: Facebook’s cash flow is far behind that of Google and Apple
  • Figure 24: Facebook’s capital expenditure is relatively modest compared with peers
  • Figure 25: Facebook’s capex/revenue ratio has been high but is falling

 

The Digital Dashboard: How new metrics drive success in telco digital initiatives

Introduction

As core services revenues, margins and cash generation decline quickly, Communications Service Providers (CSPs) are seeking to invest in and grow new (digital) services. STL Partners estimates that digital business should represent 25+% of Telco revenue by 2020 to avoid long-term industry decline. The move to digital is challenging for CSPs.  It will require large established organisations to define and implement new sustainable business models with new services delivered to existing and new customers via new channels and partners underpinned by new technology and supported by new operating, revenue and cost models. This requires a fundamental shift from a traditional infrastructure-based business to a complex amalgam of infrastructure, platform and product innovation businesses:

  • Historically, the telecoms industry has been an infrastructure business. It has invested large amounts of capital on things such as spectrum purchases, fibre and tower deployments. The result has been three largely undifferentiated services and revenue streams that have been ‘bundled in’ with the networks – voice, messaging and data. In the past, being a good communications service provider involved:
    • Making effective capital investment decisions, and then
    • Operating the network efficiently and affectively.
  • The Internet has changed everything by fracturing the integration between the network and services so that voice and messaging are no longer the sole domain of CSPs. CSPs now need to continue to hone their infrastructure business skills (in a world where every dollar of revenue is competed for hard by other operators and by ‘OTT’ players), and must also develop a range of new skills, assets, partnerships, customer relationships and operating and financial models if they are to compete in the new digital service areas.

In our recent survey (see Reality Check: Are operators’ lofty digital ambitions unrealistic given slow progress to date?), Telco practitioners were asked to comment on the importance of nine things that needed to be addressed to complete their digital business model transformation and the progress made to tackle them (see Figure 1).

Figure 1: Digital metrics should be driving change at CSPs but are themselves proving difficult to implement

Source: STL Partners/Telco 2.0 Operator Survey, November 2014

Measurement using new digital operational/financial metrics was highlighted in the global survey as one of the ‘big 6’ challenges that need to be addressed for CSPs to be successful in future. However, to date, it has often been neglected by CSPs (metrics are often an after-thought and not an integral part of the digital transformation process).

In this report, we argue that the reverse is true: effective metrics lie at the heart of change. Without measurement, it is impossible to make decisions and engender change: an organisation continues on its existing path even if that ultimately leads to decline. We will:

  1. Look at why it is important to capture, synthesise and act upon appropriate metrics.
  2. Examine traditional and new approaches to the use of performance metrics and identify the factors that contribute to success and failure.
  3. Highlight ‘telco best-practice’ via a case-study from a leading Asian CSP, Telkom Indonesia.

Why metrics matter

There is a common misconception that start-ups and digital companies do not – and do not need to – measure and report the performance of their businesses and initiatives. Digital start-ups are often portrayed as small creative teams working on ‘exciting stuff’ with no sense of business rigour or control. This could not be further from the truth. Most start-ups follow a LEAN & agile approach to product ideation and development are steered by one motto… “What you cannot measure, you cannot manage”.  This is even more true if they are VC-backed and therefore reliant on hitting specific targets to receive their next round of funding.

Start-ups rely on operational and actionable metrics to measure progress, identify when to pivot as an organisation and translate strategic objectives into daily activities. By applying the “Build – Measure – Learn” concept (see Figure 2), innovators create something (Build), evaluate how well it is received (Measure), and adjust it in response to the feedback they receive (Learn).

Figure 2: “Build – Measure – Learn” concept

Source: LEAN Analytics – Use Data to Build a Better Startup Faster

Metrics evolve over time. Start-ups are continuously searching for the ‘right’ metrics at any given stage of their development because their businesses are constantly evolving – either because they have just started on their journey or because they may have recently changed direction (or ‘pivoted’ from their original value proposition). Metrics are perceived as an operational toolset to quickly iterate to the right product and market before the money runs out. This ‘sword of Damocles’ hanging over entrepreneurs’ heads is a world away from the world inhabited by telcos’ employees.

Indeed, CSPs’ current approach to business targets & funding allocation is unlikely to create a sense of urgency that will drive and stimulate the success of digital initiatives. Based on extensive interviews with CSPs, digital start-ups and VCs, STL Partners concludes that CSPs should focus on:

  • Removing the Telco ‘safety net’. To succeed in creating truly compelling customer experiences CSPs need to mimic a VC-like environment and create a culture of higher-reward in return for higher risk by targeting employees more tightly on their digital initiative’s performance:

    • Reward success more heavily: this could be ‘shadow’ share options in the venture which yield value in the form of shares or cash bonus for hitting targets which would takes an employee’s overall package way beyond what could be earned in the core business.

    • Create risk for individuals: the quid pro quo of a big upside could be a reduced salary to, say, 60% of normal Telco pay (i.e. similar to what might be earned in a typical start-up) or offer contracts that only renew if an initiative hits its targets – if you fall short, you leave the business and are not simply moved elsewhere in the organisation.

  • Adopting ‘start-up culture’ and ways of thinking. For example, when negotiating for funds, employees should be negotiating for their survival, not for a budget or a budget increase. Also, Telcos should start using the vocabulary / parlance commonly used in the digital space as such burn rate, time before cash runs out, cash break-even date, etc.

  • Establishing new processes to manage KPIs and performance metrics. In the fast-paced digital environment, it usually does not make sense to use 18-24 month targets derived from a detailed business case backed by financial metrics (such as revenue, EBITDA, etc.) – particularly for early-stage start-ups.  Google actually identified a move away from this approach to one focused on a stable strategic foundation (make sure the initial proposition is viable by defining a clear problem we are trying to solve and how the solution will differentiate from alternative solutions) + fluid plans as one of the pillars of its success (see Figure 3)

Figure 3: Business plan and financial metrics are out-of-date in a digital world

Source: How Google works, Eric Schmidt, Jonathan Rosenberg and Alan Eagle

Metrics are a powerful tool that CSPs should use to foster sustainable commercial growth through validated learning. Unfortunately, metrics are often an “after-thought” and very few CSPs have implemented a consistent approach to metrics.  From a series of interviews, undertaken by STL for this research, it became apparent that most initiatives failed to develop regular reporting that engages (or is even understood by) other stakeholders. At best, operators are inconsistent in tracking digital innovation, at worst, negligent.

 

  • Executive Summary
  • Introduction
  • Why metrics matter
  • Metrics make a difference: 3 case studies from telecoms operators
  • 3 additional reasons why Telcos need digital metrics
  • Alternative approaches to digital metrics for telecoms operators
  • Introduction
  • The corporate approach – the Balanced Scorecard
  • The start-up approach – LEAN & AARRR methodology
  • Telkom Indonesia’s approach to digital metrics
  • Background
  • Telkom’s current digital strengths
  • Telkom Indonesia’s digital metrics system
  • Benefits of the digital metrics system to Telkom Indonesia
  • Conclusions
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Digital metrics should be driving change at CSPs but are themselves proving difficult to implement

  • Figure 2: “Build – Measure – Learn” concept

  • Figure 3: Business plan and financial metrics are out-of-date in a digital world

  • Figure 4: Near perfect correlation between number of agents and number of M-Pesa subscribers, R2 = 0.96

  • Figure 5: Metrics reporting by M-Pesa, December 2012

  • Figure 6: Turkcell’s Mobile Marketing Platform Overview

  • Figure 7: Turkcell’s continuous development of it Mobile Marketing portfolio

  • Figure 8: Libon single roadmap enables rapid evolution and rich features

  • Figure 9: Libon – Cost per Monthly Active Users (M)

  • Figure 10: Illustrative Net Synergy Make up (Hypothetical case)

  • Figure 11: Facebook vs. Yield Businesses: Revenue and Enterprise Value (EV)

  • Figure 12: Facebook: Monthly Active Users vs. Valuation

  • Figure 13: Different players’ metrics requirements

  • Figure 14: Balance Scorecard concept

  • Figure 15: AARRR model

  • Figure 16: Pros & Cons – Summary table

  • Figure 17: Telkom Indonesia’s Metrics Approach – Characteristics

  • Figure 18: Telkom Indonesia’s digital strengths

  • Figure 19: Telcos – slow by design?

  • Figure 20: Telkom Indonesia’s TIMES service portfolio

  • Figure 21: LEAN start-up approach

  • Figure 22: Delivering Innovation – Telkom’s internal organisation

  • Figure 23: Telco 2.0 Domain Framework

  • Figure 24: Metrics Prioritisation & Outcomes Example

  • Figure 25: Governance process – Phase 1 & 2

  • Figure 26: Innovation Governance – Case studies examples

Reality Check: Are operators’ lofty digital ambitions unrealistic given slow progress to date?

Growing telco ambitions in new (digital) business models

Telco execs are bullish about long-term prospects for new digital business models

Respondents believe new business model revenues should reach nearly 25% of total telecom revenue by 2020

Despite recent evidence in Europe of material revenue decline from telecoms operators, the executives that STL Partners canvassed in its recent global survey  were relatively optimistic about the opportunities for revenue growth from new business models.  On average, executives felt that revenue from new digital business models  should reach 9% of total revenue in 2015 and this should rise to 24% by 2020 (see Figure 1).

In the case of 2015, 9% is way beyond what will be achieved by most players and probably represents respondents’ theoretical target that their organisation should have achieved by the end of this year if management had invested more effort in building new revenue sources earlier: it is where their organisation should be in an ideal world.   One of the few operators in the world that is at this level of digital revenues is NTT DoCoMo.  We explore its digital activities later in this report.

24% of telecoms revenue coming from new business models in 2020 is also ambitious but STL Partners considers this a realistic target and one which would probably result in the overall telecoms market being no bigger than it was in 2013 – see the forecast on page 15.

Two drivers of digital business model importance to operators: digital revenue growth and core business revenue decline

A key question for the industry is whether the 2020 target can be achieved by growing material new business model revenues in tandem with limited voice, messaging and connectivity decline or whether it could result from an implosion of these Telco 1.0 revenues.  In other words, modest new business model revenue could be 24% of a very much smaller overall telecoms market if voice, messaging and connectivity revenues suffer a precipitous decline.

Figure 2 charts the quarterly revenue for six European markets and illustrates a range of trajectories for telecoms revenues.  At one extreme is Denmark where telecoms revenue in Q3 2014 was nearly 40% lower than Q1 2008.  At the other extreme are the UK and French markets where the figure is 3% and 7% lower respectively.  Clearly, if most telecoms markets follow the Danish route then the opportunity for modest digital revenues to become important to operators grows substantially.  Interestingly, in most of the six markets, 2013 and 2014 has seen revenues stabilising (at least among operators that publish accounts which split out those markets over the time period) and in some cases, such as the UK and Netherlands, growth has been achieved from the lows of 2012.

STL Partners’ global forecast lies somewhere between the two extremes outlined in Figure 2: we believe that core telecoms revenues will decline by around 25% between 2013 and 2020.  If this is indeed the case then for digital revenues to represent 24% of telecoms revenue, they will need to be very material – around $250 billion for mobile telecoms alone!

Figure 1: Digital business model revenue ambition, 2015 and 2020

Source: STL Partners/Telco 2.0 Operator Survey, November 2014, n=55

Figure 2: Telecoms quarterly revenue in 6 European markets

Source: Telecoms company accounts, STL Partners analysis
Note: Revenue is for operators reporting quarterly figures for each market. As a result, not all market revenue is captured.

Belief in the importance of future telecoms business models varies greatly by business function and by geography

Respondents from Network functions were most bullish; IT respondents most pessimistic

Where there were 10 or more respondents in a functional or geographic group, we examined the responses for that group.  As Figure 3 shows, there were wide differences in ambition for digital services by functional area with respondents from Network being far more bullish than those in IT:  the former suggesting 30% of 2020 revenue should come from digital services compared with only 14% from IT.

North American respondents seem to anticipate unrealistic digital business growth

There was a consistency among functional groups in their ambitions for digital services: those that were more bullish for 2015 remained more so for 2020.  This contrasted with the regional split in which North American respondents believed the ‘correct’ proportion of revenue from digital services in 2015 is 7% (compared with 10% for Europe and Asia) rising to a formidable 26% in 2020.  This suggests that North American executives remain confident that their organisations can compete effectively in consumer and enterprise digital markets despite the US, in particular, being the home market of many formidable digital players: Google, Facebook, Amazon, Microsoft, Salesforce, Twitter, and so forth.

To put the North American perspective in perspective: if STL Partners’ global forecast for core telecoms services holds true in the US then a $120bn revenue telecoms company, such as Verizon, will lose around $30 billion in core service revenues by 2020.  In this scenario, for Verizon to end up the same size as it is now in 2020, it will have to replace this $30 billion with new digital business revenues (which would equate roughly to the 26% proposed by North American respondents).  In our deep-dive analysis of Verizon for the Telco 2.0 Transformation Index, STL Partners estimated that Verizon generated around $2.9 billion in Telco 2.0 digital business model revenues (around 2.4% of total revenue) in 2013.  For that $2.9 billion to grow to $30 billion by 2020 requires compound annual growth of a whopping 40% per year: a tall order indeed and one that is almost certainly unrealistic.

Middle Eastern respondents least ambitious: signs of complacency?

Unsurprisingly, the Middle Eastern respondents whose companies are enjoying continued growth in core telecoms services and, in many countries advantageous regulatory environments, were least bullish about digital services in the near and longer term.  The danger for this region is complacency: operators are in a similar position to those in Europe in 2007.  European operators failed to prepare early enough for core service decline – most digital activities were not kicked off until 2012 by which time aggregate revenue from voice, messaging and connectivity was either flat or in decline in most markets.

Figure 3: Average digital business model revenue ambition, 2015 and 2020 by function and geography

Source: STL Partners/Telco 2.0 Operator Survey, November 2014, n=55

 

  • Executive Summary
  • Growing telco ambitions in new (digital) business models
  • Telco execs are bullish about long-term prospects for new digital business models
  • Belief in the importance of future telecoms business models varies greatly by business function and by geography
  • Telco execs’ views on digital business Opex and Capex investment are closely correlated with their views on revenue growth
  • Calculating a telecoms digital business P&L:  Moving from investment in 2015 to (unrealistically?) strong returns in 2020
  • STL Partners’ forecast suggests that new digital business should be 25+% of revenue by 2020 to avoid long-term industry decline
  • The outlook for Telco 1.0 business models is not positive and Telco 2.0 business models are required to fill the gap
  • Investment in new business models is increasing but results from the Telco 2.0 Transformation Index suggest it is still inadequate to engender success
  • Scale of NTT DoCoMo’s ‘new digital business’ suggests bold vision is realistic for some players
  • Long-term downward trend in Telco 1.0 core services in Japan with digital services a ‘gap-filler’
  • Smart Life: A cloud-based (OTT) consumer-centric approach to digital services
  • A digital business has fundamentally different characteristics to a telecoms business
  • 9 challenges to overcome and all are important
  • Overall, operator progress on all 9 challenges remains slow
  • Too little progress on core challenges from most operators
  • What next?  Forthcoming STL Partners’ Telco 2.0 research supporting telecoms transformation
  • Appendix 1: Survey details
  • Appendix 2: Telco 2.0 Transformation Index overview

 

  • Figure 1: Digital business model revenue ambition, 2015 and 2020
  • Figure 2: Telecoms quarterly revenue in 6 European markets
  • Figure 3: Average digital business model revenue ambition, 2015 and 2020 by function and geography
  • Figure 4: Average required Digital Business Opex and Capex, 2015 & 2020
  • Figure 5: Digital Business P&L for a $100 billion revenue telecoms operator, 2015 vs 2020, $ Billions
  • Figure 6: STL Partners’ global mobile telecoms forecast by opportunity area
  • Figure 7: STL Partners Telco 2.0 Transformation Index summary results, December 2014
  • Figure 8: NTT DoCoMo quarterly voice, data and ‘other’ revenue, Mar 2007-Sep 2014
  • Figure 9: Smart Life – NTT DoCoMo’s customer-centric approach to transformation
  • Figure 10: Different companies…different business models – the change that telecoms operators are trying to make
  • Figure 11: 9 challenges scored by ‘importance for operator digital transformation and future success’
  • Figure 12: The degree to which operators have addressed the 9 challenges
  • Figure 13: Strategists are much more bullish than other functions about their organisation’s transformation progress
  • Figure 14: Lots to change…and its taking too long
  • Figure 15: Operators appear to be at very different stages of resolving the ‘Big 6’ challenges
  • Figure 16: Defining Digital Services