SoftBank: An overstretched telco or a unique innovator?

SoftBank’s history: How it got to where it is

The story of SoftBank’s history – first as a software distribution company, followed by its contribution to the dotcom bubble, and then a gradually expanding telecoms footprint throughout the 2000s – is important because it gives context to its current investment strategy, dubbed the Vision Fund. SoftBank has never been a traditional telco and its outside perspective helped it to shake up the Japanese telecoms market. The Vision Fund’s ambition stretches far beyond telecoms, with an aim to transform all industries through the adoption and advancement of artificial intelligence (AI). Will this unique approach enable SoftBank to weather the softwarisation of telecoms, which will likely be accelerated by the newest Japanese entrant Rakuten, better than others?

Figure 1: SoftBank’s evolution

SoftBank's evolution 1981 - 2019

Source: SoftBank Group annual report 2019

The early days: Software distribution

Founded by Masayoshi Son in 1981, SoftBank began not as a telecoms operator but as a software distributor. Son had recognized an important niche in the Japanese market: while computer hardware manufacturers were having issues sourcing quality software to run on their machines, software makers lacked the cash to properly advertise their products. As a distributor, Son acted as a matchmaker between computer software and hardware companies. Though exclusivity agreements with Japan’s major hardware vendors, SoftBank’s monthly sales reached US$2.4 million by the end of its first year of operation.

Not satisfied with a sole focus on software distribution, just six months after starting the software business, Son branched out into the computer magazine publishing segment, eventually producing over 20 periodicals. Son used his magazines to advertise the software products SoftBank was distributing. Right from the start, he aimed to create value through exploiting synergies across different business units.

In 1990, SoftBank also branched out into trade shows, acquiring Ziff Communication’s trade show division for $200 million and then, in 1995, the COMDEX trade show from the Interface group for an eyebrow-raising $800 million, taking on $500 million in debt. Later that year, SoftBank cemented its status as a leader in computer-magazine publishing, investing $2.1 billion in Ziff-Davis Publishing, making SoftBank the largest PC magazine distributor in the world. To finance this, SoftBank Group added $1 billion in debt and issued $649 million in new shares (SoftBank having gone public on the Tokyo Stock exchange in 1995, at a $3 billion valuation). It is clear from the beginning that SoftBank was not averse to accruing sizeable debt liabilities to finance strategic acquisitions.

SoftBank’s Internet pivot

SoftBank’s defining play in the 1990s was a pivot towards Internet services. Believing that the Internet would be the next technological revolution – eclipsing the invention of the personal computer – SoftBank made a dizzying number of investments in Internet companies. Many of these investments were made indirectly through a network of SoftBank venture capital funds, mainly overseen by SoftBank Investment Corp, which managed $5.25 billion worth of funds by 2000; SoftBank itself contributed over $2 billion. The investments included big name sites in e-commerce and e-finance, notably GeoCities, Yahoo!, ZD Net, e-buy-com, E-loan and E* TRADE Group.

The dotcom bust

SoftBank was heavily invested in – and therefore heavily exposed to – Internet stocks. Moreover, with a reputation as the largest investor in the world, owning as much as 25% of cyberspace by value at its peak, SoftBank became regarded by the market as fundamentally an Internet company. At the height of the dotcom bubble in February 2000, SoftBank’s market cap soared to $180 billion, far exceeding the equity value of the stakes in its subsidiaries and affiliates.

The dotcom bubble began to burst by early March 2000. Between SoftBank’s peak market cap in late February 2000, and its low point two years later, SoftBank lost over 95% of its market value. Masayoshi Son lost $70 billion of personal wealth during the crash. Many of SoftBank’s Internet investments had to be written-off entirely, including dotcom big names such as Webvan, Kozmo.com and Global Crossing – the latter filing one of the largest bankruptcies in corporate history.

However, across the graveyard of dotcom duds, SoftBank made several investments which delivered extraordinarily high returns. One resulted from a $20 million pledge Son made to Alibaba founder, Jack Ma, in January 2000. According to Ma, Son made the investment without first inspecting Alibaba’s business model or revenue stream, but rather based on Son’s impression of Ma. The Alibaba investment would turn out to be one of the most successful in history. Moreover, SoftBank’s investment in Yahoo! was still fruitful relative to Son’s initial pledge, despite falling foul of the dotcom bust. This is testimony to the efficacy of Son’s ability to adapt US companies to meet the needs of the Japanese market, delivering growth long past the NASDAQ stock crash. It is also one of the key reasons why SoftBank was able to attract nearly $100bn of investment for its Vision Fund in 2017.

Does SoftBank’s approach work for telecoms?

SoftBank Group is deeply tied to its charismatic CEO Masayoshi Son’s grand visions about how new technologies such as the Internet, the Internet of things (IoT) and artificial intelligence (AI) will transform the world. Son’s ambition to play a key role in driving the development of these technologies has led SoftBank to achieve some remarkable successes – notably an early investment in Alibaba and building a successful Japanese telecoms business – and survive some major setbacks, such as the dotcom crash and, more recently, the WeWork scandal.

The key question for telecoms operators is whether SoftBank’s telecoms assets gain any competitive advantage from being a part of SoftBank Group. Since SoftBank took ownership of Vodafone KK in Japan in 2006 and Sprint in 2013, both telecoms operators have become more profitable. While SoftBank’s stake in Yahoo Japan and willingness to take risks have contributed to success, neither operator is really exceptional in the way they manage their core business.

Table of contents

  • Executive summary
  • SoftBank’s history: How it got to where it is
    • The early days: SoftBank the software distributor
    • SoftBank’s move into telecoms
  • Masayoshi Son’s 300-year plan: Sprint, Arm and the Vision Fund
    • Sprint: SoftBank’s move into US telecoms
    • Arm: Hardware and IoT are the foundations of AI
    • The Vision Fund
  • Can SoftBank pull off its grand plans?
    • Internal risks: Cracks beneath the surface
    • External risks: Rakuten goes after SoftBank’s core
  • Conclusions

How the Coordination Age changes the game

Introduction: Three ages of telecoms…

In this report, we elaborate on what we outlined in our recent report, The Coordination Age: A third age of telecoms, as a completely new paradigm for the telecoms industry. In the earlier report, we argue that this new age of telecoms – the Coordination Age – follows on from two previous, and still ongoing, paradigms for the telecoms industry: the Communications Age and the Information Age.

Chronologically, the three ages may be represented as follows:

The coordination age is beginning now

As the above diagram suggests, parts of the industry still exhibit characteristics of the earlier ages; and we are still working through the consequences of the paradigm shift from the Communications Age to the Information Age, even as we stand on the cusp of a further shift to the Coordination Age.

The report revisits our narrative of the three ages of telecoms to explore the different social, economic and cultural drivers and functions of telecoms in each period and the implications for telcos.

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Telecoms characteristics and functions have evolved over time

The fundamental service and business model characteristics of these three ages, as described in the previous report, are recapped in Figure 2 below:

Figure 2: Basic functions of telecoms in the three telco eras

telecoms functions across three ages

Source: STL Partners

The above table illustrates how the functions provided by telecoms services and networks across the three ages of the industry are radically different. In summary, we can say that:

  • In the Communications Age, telecoms networks and services were ‘physical’ in character: physical equipment and facilities delivering physical services; the core services being connectivity and communications centering on voice, which was transmitted by physical means (e.g. for voice, analogue electrical signals sent over wired or wireless networks).
  • In the Information Age, by contrast, while telecoms networks remained – initially, at least – physical in character and delivered increasingly advanced forms of connectivity, the services became digital. The ultimate expression of this is of course the Internet, which changed the role of the telco to that of providing the IP connectivity platform over which mainly third parties offered their web and digital services. Another way of putting this is that whereas telecoms network connectivity remained tied to physical hardware, the services were delivered via standardised software and compute devices: PCs and later smartphones and tablets. In the present era of NFV and SDN, the basis on which the connectivity itself is organised and controlled is now also migrating to (would-be) standardised software operating over COTS hardware.
  • The emerging Coordination Age of telecoms is not purely an extension of network and societal digitisation, but could be seen as a 180o reversal of its parameters, in this respect: instead of being a primarily physical connectivity system processing digital inputs to deliver digital services (as in the Information Age), the network becomes a compute- and software-centric system processing real-world inputs to deliver real-world outcomes. We will discuss further these aspects of the new paradigm later in this report. But examples of what we mean here include networked compute-driven applications around driverless cars, IoT, and automation of industrial and enterprise processes across many verticals.

The three telecoms ages correspond to different socio-economic and human functions

We set out how the general service and network characteristics of the Communications, Information and Coordination Ages relate to the different social, economic and human functions they serve.

Throughout this report, we describe what we see as some of the fundamental social, economic, cultural and technological drivers of the different telecoms networks and services across these three ages. The three ages represent distinct paradigms in which telecoms serves different needs and purposes.

We describe these socio-economic and cultural purposes through a simplified version of the psychoanalytical theories of Jacques Lacan. It seems legitimate to explore telecoms through this lens, as telecoms networks are human constructs, and telecoms services are social, economic and cultural in their purpose and value to modern society.

In brief, Jacques Lacan distinguishes between three interdependent orders of psychological experience: the ‘Real’, the ‘Imaginary’ and the ‘Symbolic’.

  • The ‘Real’ is the physical aspect of our existence: our bodies, the material universe, and the physiological determinants experience, including basic emotions
  • The ‘Imaginary’ refers to the sub-rational and sub-linguistic phenomena of mental experience, through which we form mental impressions of sensory experience (e.g. sights, sounds, etc.). Together with the emotional impact with which they are associated, these ‘imaginary’ elements form the foundation of our self-image and view of our place in the world
  • The third order is that of the ‘Symbolic’, which refers to language and other social, logical and cultural codes through which we give meaning to our lives, acquire knowledge, order our activities, and structure society and our relationships within it.

This is important because it provides a way to make sense of the paradigm shifts that have taken place throughout the industry’s history. And it also provides a narrative account of the human needs – including economic and social needs – that are invested in telecoms services. Understanding what customers want – and above all, what can offer real benefit to them – is the key to driving future value.

We argue this is relevant to the situation that telcos find themselves in today and to their strategic options for the future. In our view, telcos failed to adapt their business models to capitalise on the digital service opportunities of the Information Age. This was because the value drivers of the Information Age were so radically different from those that prevailed over the much longer time span of the Communications Age.

Learning the lessons from this previous paradigm shift will help telcos be more aware of how they need to adapt to another new paradigm – the Coordination Age – that is emerging. There may be only a very short window of opportunity for telcos to adjust their business models and organisations to become ‘coordinators’ of the network- and AI-based, automation-enabling and resource-optimising services of the near future.

Contents:

  • Executive Summary
  • Introduction: Three Ages of Telecoms
  • Differing characteristics and functions of telecoms across the three ages
  • The three telecoms ages correspond to different socio-economic and human functions
  • Speaking, showing and doing: The three ages of telecoms
  • The Communications Age: A telecoms of the Real, mediated by voice
  • The Information Age: A telecoms of the Imaginary, mediated by the screen
  • The Coordination Age: A telecoms of outcomes, driven by active intelligence
  • Coordination services rely on contextual and physical data, and the physical aspects of networking
  • Summary: Characteristics and purposes of telecoms across its three ages
  • Conclusions
  • Recommendations: A new telco age brings new opportunities but also renewed responsibilities

Figures:

  1. The three ages of telecoms.
  2. Basic functions of telecoms in the three telco eras
  3. ‘Real’, physical characteristics of the Communications Age telecoms network and service
  4. The core telecoms service – circuit-switched telephony – in the first telecoms age
  5. Comparison of the social, service and technology characteristics of Communications Age and Information Age telecoms
  6. Permanent, virtual presence to others replaces real-time voice communications
  7. Driverless car ecosystem in the Coordination Age
  8. Comparison between the three telecoms eras

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The Coordination Age: A third age of telecoms

The Coordination Age

The world is entering the Coordination Age, driven by growing needs for resource efficiency and enabled by new technologies such as AI, automation, IoT, 5G, etc. What does this mean, how is it different, how is it an opportunity, and what should telecoms industry players do?

Problems, problems, problems…

The telecoms industry’s big problem

The core telecoms industry is currently close to reaching maturity as the following chart illustrates.

Figure 1: Revenue growth is grinding to a halt

Source: Data from company filings, STL Partners analysis

This approaching maturity has taken many years to achieve and is built on decades of astonishing growth in the telecoms and ICT industries as shown by just a few data points in Figure 2.

Figure 2: 30 years of telecoms in context

Source: AT&T company reports, STL Partners analysis

We’ve used AT&T as a comparator as perhaps the world’s best-known telco, and because its 1988 revenues are readily accessible. The chart shows that AT&T has grown massively but also that recent growth has slowed.

It also shows how mobile and internet use has blossomed to mass-market adoption. No-one knew in 1988 that this is what would happen by 2018, or how it would happen. Most people would have thought you were talking about science fiction if you said there would be more mobiles than people in their lifetime, and that half the world would have access to most of the world’s information.

Yet it was clear that growth in telecoms lay ahead – it seemed like a kind of economic and social gravity that communications would grow a lot. The direction that the world would take was obvious and unavoidable. So many people were not yet connected, and so much was possible in terms of improving the world’s access to information using the technologies that were coming to fruition then.

What are the big problems the world needs to solve now?

It’s not a mystery now, of course. And while there’s plenty of work to do to make the world’s connectivity better and bring the second half of the global population online somehow, it’s unlikely to bring in masses of new revenues for telcos. So why the Coordination Age?

To create major growth, you need to solve some big, valuable problems. So, what are the big problems the world needs to solve?

There are some obvious candidates, e.g.:

  • mitigating climate change and minimising its effects
  • reducing the amount of waste and harmful by-products polluting the environment
  • the distribution and availability of human resources and services such as healthcare, education, employment, and entertainment
  • the availability of, and conflicts over, physical resources such as: water, fuel, power, food, land, etc…
  • global migration and increasingly hostile nationalism
  • concerns over increasingly skewed wealth distribution between the haves and have nots, and extreme poverty
  • a desire for greater business efficiency and productivity
  • concerns over employment due to automation and global economic changes.

Moreover, time is also a resource for people and business. Both want to make best use of their time – whether it is getting things done more effectively or enjoyably.

Making the most of what we have

STL Partners believes that these are all to some extent the manifestation of the same problem: the need to make the most efficient possible use of your/the world’s resources. In Figure 3 we call this helping to “make our world run better” for short.

Figure 3: How macro forces are creating a common global need

Source: STL Partners

It’s a widespread need

The underlying need for greater resource efficiency is widespread. While sustainability arguments are prominent symptoms of the problem, there are pressing needs being expressed in all areas of the economy for better utilisation of resources.

For example, most businesses are somewhere in the process of their own transformation using connected digital technologies. Almost every aspect of business, including product design, customer experience, production, delivery and value chain orchestration is being revolutionised by ‘digital’ technologies and applications.

Examples cited at the Total Telecom Congress in October 2018, included:

  • Brendan Ives, VP Telia, Division X, said that the top priority of 70% of 500 enterprises surveyed in the Nordics was resource efficiency, with cost control a distant second at 20%.
  • Henri Korpi, Executive Vice President, New Business Development, Elisa, described a new ‘Smart Factory’ application that it offers to enhance productivity.
  • Durdana Achakzai, Chief Digital Officer, Telenor Pakistan, described its Khushall Zamindar feature phone application for 6 million small-scale farmers in rural Pakistan, that gives them access to local weather and market information and helps to improve yields.

All of these are examples of where telcos are already thinking about or addressing customers’ needs with respect to resource efficiency, in all of these cases via a B2B application, but the concerns apply to consumers too.

Ipsos’s global survey on consumer concerns from July 2018 (Figure 4) gives a flavour of what people across the world worry about today. The colouring applied to categorise the issues is STL Partners’, based on our view of their relevance to resource utilisation and distribution (and hence the Coordination Age).

Figure 4: Global population worries reflect underlying concerns about the availability and distribution of resources

Source: Ipsos global survey, July 2018, STL Partners analysis

Clearly, the weighting of needs varies in different countries, but most of the most pressing concerns relate to the distribution of economic resources within society (red bars). Concerns on social resources such as education and healthcare (orange bars) are second in prominence, while more classic ‘environmental’ worries (grey bars) are slightly further down the list.

People’s concerns also vary with their current circumstances. The closer you are to the bread-line, the more likely you are to prioritise where your next meal is coming from over the long-term future. Hence there is a natural tendency for near-term concerns to feature more highly on the list.

Many other day-to-day concerns relate to the efficient use of time (another resource): prompt service, availability of resources on-demand, business productivity, etc.

The fundamental enabler needed is coordination: the ability to enable many different players, devices, solutions, etc., to work together across the economy. These players and assets are a diverse mixture of both physical and digital entities. The drive to allow them to work together must be widespread and ultimately systematic – hence the Coordination Age.

The thorny issue of sustainability

We now live in a world of seven billion people that uses 1.7 times its sustainable resources (Figure 5). The argument goes that if we keep on at this rate we will face major environmental and societal pains and problems.

Figure 5: What does “the world need now”?

Source: Global Footprint Network

Climate change is arguably one consequence of the over-use of resources. Not everyone buys in to such concerns, and it is a matter for each person to make their own mind up.

However, even traditionally highly conservative bodies like the UN’s International Panel on Climate Change Panel (IPCC) are sounding alarm bells. In its recent report “Global Warming of 1.5 °C”, the IPCC says we may not even have thirty years to avoid the worst problems.

The editorial in The New Scientist put it like this:

“We still have time to pull off a rescue. It will arguably be the largest project that humanity has ever undertaken – comparable with the two world wars, the Apollo programme, the cold war, the abolition of slavery, the Manhattan project, the building of the railways and the roll-out of sanitation and electrification, all in one. In other words, it will require us to strain every muscle of human ingenuity in the hope of a better future, if not for ourselves then at least for our descendants.”[1]

The challenge is huge, and it reaches across all economies and sectors, not just telecoms.

Enlightened self-interest

STL Partners believes that telcos and the telecoms industry can play a significant role in addressing these issues, and moreover that the industry should move in this direction for both business and social reasons.

This should not be treated as a PR opportunity as it sometimes has in the past, as a kind of fop to regulators and governments in exchange for regulatory preferences.

It is a serious and significant problem to solve for humanity – and solving such problems is also how industries create new value in the economy.

Nonetheless, STL Partners believes that if telecoms industry players genuinely take on the challenges of addressing these issues, it may well have a significant impact on their sometimes-troubled relationships with governments and regulators. It’s one thing to be a big economic player in a market, which most telcos are, and quite another to be a big economic and social partner in an economy.

By truly aligning these goals and interests with governments telcos can start to foster a new dialogue “what do we need to do together for our economy?” This requires a very different level of heart-and-soul engagement than a well-intentioned but peripheral gesture under the Corporate Social Responsibility (CSR) banner.

Moving the needle…

Internally, the industry has long faced two self-defeating challenges.

First, the idea of ‘moving the needle’. So many new opportunities are dismissed because they simply don’t seem big enough for a telco to bother, and telcos continue to search for the next ‘killer app’ like mobile data or SMS.

Despite looking for many years, it still hasn’t been found. Yet somehow the telecoms industry has missed out on capitalising on social media, search, online commerce – pretty much all growth industries of the last twenty years.

Why? For many reasons, no doubt. But there has certainly been a kind of well-fed corporate complacency, a general aversion to commitment to new ideas, and a huge reduction in investment in R&D and innovation. Telcos’ R&D spends are minuscule compared to technology players. We will publish more on this soon, and why we think telcos need to change.

This has gone arm-in-arm with a failure to understand that new business models are not linear and predictable. A sound business case is all very well when you have a predictable business environment. This is typically the case when looking at incremental changes to existing businesses where the consequences are relatively predictable.

In new areas, especially where there are network effects and other unpredictable and non-linear relationships, it’s very hard to do. Even if you succeeded in making a numerical model, most would frown heavily at the assumptions and their consequences, and the decision-making process would stagnate on uncertainty.

Where companies have been successful in building new value, they have at some point made a serious management commitment against a need that they recognise will persist in their market, continued to invest in it, and be willing to admit and learn from mistakes. We would cite TELUS in Healthcare, and Vodafone’s M-PESA as examples where leadership has protected and nurtured the fragile flower of innovation through to growth.

… and moving the people

The second big internal challenge to change and growth has been much of the telecoms industry’s inability to excite its people to buy in to the uncertain and worrying process of change.

Change and its accompanying uncertainties are uncomfortable for most people, and they need support, guidance and ultimately leadership to see them through. Too often, companies only truly address change when they sense the ‘burning platform’ – a (usually threatening) reason that means they simply must abandon their current beliefs and behaviours.

And frankly, why should most employees care about, for example, their company ‘becoming digital’? They care about being paid, having a job with some status, and being reasonably comfortable with what they must do and who they do it with. They are working to support themselves and their families. To most, “becoming digital” sounds like another excuse for a round of job cuts – which in some cases it is.

Our argument is that there is now a powerful new job for telecoms companies to do in the Coordination Age, and that this means we all must change. If we don’t do that job and make those changes, the future will potentially be much worse for us and them as we age, and their kids as they grow.

We believe that the additional insight in the story as we now see it should make it compelling to customers, employees, governments and shareholders. But first, the management of the telecoms industry need to grasp it, improve it and lead the rest forward.

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Contents:

  • Executive summary
  • Problems, problems, problems…
  • The telecoms industry’s big problem
  • What are the big problems the world needs to solve now?
  • Enlightened self-interest
  • Moving the needle…
  • … and moving the people
  • The Three Ages of Telecoms
  • The first age: The Communications Age, 1850s onwards
  • The second age: The Information Age, 1990s onwards
  • The third age: The Coordination Age, 201Xs onwards
  • So, what is the Coordination Age opportunity for telcos?
  • The telecoms industry has some important assets
  • Two possible jobs for telecoms
  • Having a clear role is motivational
  • So, what should telcos and the industry do?
  • Finally, a need for the technologies we’re developing
  • Conclusions and next steps

Figures:

  • Figure 1: Revenue growth is grinding to a halt
  • Figure 2: 30 years of telecoms in context
  • Figure 3: How macro forces are creating a common global need
  • Figure 4: Global population worries reflect underlying concerns about the availability and distribution of resources
  • Figure 5: What does “the world need now”?
  • Figure 6: The three ages of telecoms
  • Figure 7: The Communication Age
  • Figure 8: An early manual telephone exchange
  • Figure 9: Electro-mechanical ‘Strowger’ exchanges automated analogue switching
  • Figure 10: The Information Age
  • Figure 11: The Coordination Age
  • Figure 12: What are the unique assets of the telecoms industry?
  • Figure 13: Broadly, there are two possible jobs for telcos
  • Figure 14: Battle of the business models – Technology vs Telco
  • Figure 15: A new corporate reality
  • Figure 16: How a unifying purpose (a “why?”) helps create value

[1] The New Scientist, Vol 240 No. 3199, page 1.

The IoT money problem: 3 options

Introduction

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

This report presents:

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

Overview

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

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

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

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

Mapping the IoT ecosystem

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

Figure 1: A simplified map of the IoT ecosystem

Source: STL Partners

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

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

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

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

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

…and the following figures…   

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

5G: The spectrum game is changing – but how to play?

Introduction

Why does spectrum matter?

Radio spectrum is a key “raw material” for mobile networks, together with evolution of the transmission technology itself, and the availability of suitable cell-site locations. The more spectrum is made available for telcos, the more capacity there is overall for current and future mobile networks. The ability to provide good coverage is also determined largely by spectrum allocations.

Within the industry, we are accustomed to costly auction processes, as telcos battle for tranches of frequencies to add capacity, or support new generations of technology. In contrast, despite the huge costs to telcos for different spectrum allocation, most people have very little awareness of what bands their phones support, other than perhaps that it can use ‘mobile/cellular’ and WiFi.

Most people, even in the telecoms industry, don’t grasp the significance of particular numbers of MHz or GHz involved (Hz = number of cycles per second, measured in millions or billions). And that is just the tip of the jargon and acronym iceberg – a full discussion of mobile RAN (radio access network) technology involves different sorts of modulation, multiple antennas, propagation metrics, path loss (in decibels, dB) and so forth.

Yet as 5G pulls into view, it is critical to understand the process by which new frequencies will be released by governments, or old ones re-used by the mobile industry. To deliver the much-promised peak speeds and enhanced coverage of 5G, big chunks of frequencies are needed. Yet spectrum has many other uses besides public mobile networks, and battles will be fierce about any reallocations of incumbent users’ rights. The broadcast industry (especially TV), satellite operators, government departments (notably defence), scientific research communities and many other constituencies are involved here. In addition, there are growing demands for more bandwidth for unlicensed usage (as used for WiFi, Bluetooth and other low-power IoT networks such as SigFox).

Multiple big industries – usually referred to by the mobile community as “verticals” – are flexing their own muscles as well. Energy, transport, Internet, manufacturing, public safety and other sectors all see the benefits of wireless connectivity – but don’t necessarily want to involve mobile operators, nor subscribe to their preferred specifications and standards. Many have huge budgets, a deep legacy of systems-building and are hiring mobile specialists.

Lastly, parts of the technology industry are advocates of more nuanced approaches to spectrum management. Rather than dedicate bands to single companies, across whole countries or regions, they would rather develop mechanisms for sharing spectrum – either on a geographic basis, or by allowing some form of “peaceful coexistence” where different users’ radios behave nicely together, instead of creating interference. In theory, this could improve the efficient use of spectrum – but adds complexity, and perhaps introduces so much extra competition than willingness to invest suffers.

Which bands are made available for 5G, on what timescales, in what type of “chunks”, and the authorisation / licensing schemes involved, all define the potential opportunity for operators in 5G – as well as the risks of disruption, and (for some) how large the window is to fully-monetise 4G investments.

The whole area is a minefield to understand – it brings together the hardest parts of wireless technology to grasp, along with impenetrable legal processes, and labyrinthine politics at national and international levels. And ideally, it is possible to somehow to layer on consideration of end-user needs, and economic/social outputs as well.

Who are the stakeholders for spectrum?

At first sight, it might seem that spectrum allocations for mobile networks ought to be a comparatively simple affair, with governments deciding on tranches of frequencies and an appropriate auction process. MNOs can bid for their desired bands, and then deploy networks (and, perhaps, gripe about the costs afterwards).

The reality is much more complex. A later section describes some of the international bureaucracy involved in defining appropriate bands, which can then be doled out by governments (assuming they don’t decide to act unilaterally). But even before that, it is important to consider which organisations want to get involved in the decision process – and their motivations, whether for 5G or other issues that are closer to their own priorities, which intersect with it.

Governments have a broad set of drivers and priorities to reconcile – technological evolution of the economy as a whole, the desire for a competitive telecoms industry, exports, auction receipts – and the protection of other spectrum user groups such as defence, transport and public safety. Different branches of government and the public administration have differing views, and there may sometimes be tussles between the executive branch and various regulators.

Much the same is true at regional levels, especially in Europe, where there are often disagreements between European Commission, European Parliament, the regulators’ groups and 28 different EU nations’ parliaments (plus another 23 non-EU nations).

Even within the telecoms industry there are differences of opinion – some operators see 5G as an urgent strategic priority, that can help differentiation and reduce costs of existing infrastructure deployments. Others are still in the process of rolling out 4G networks and want to ensure that those investments continue to have relevance. There are variations in how much credence is assigned to the projections of IoT growth – and even there, whether there needs to be breathing room for 4G cellular types such as NB-IoT, which is yet to be deployed despite its putative replacement being discussed already.

The net result is many rounds of research, debate, consultation, disagreement and (eventually) compromise. Yet in many ways, 5G is different from 3G and 4G, especially because many new sectors are directly involved in helping define the use-cases and requirements. In many ways, telecoms is now “too important to be left to the telcos”, and many other voices will therefore need to be heard.

 

  • Executive Summary
  • Introduction
  • Why does spectrum matter?
  • Who are the stakeholders for spectrum?
  • Spectrum vs. business models
  • Does 5G need spectrum harmonisation as much as 4G?
  • Spectrum authorisation types & processes
  • Licensed, unlicensed and shared spectrum
  • Why is ITU involved, and what is IMT spectrum?
  • Key bands for 5G
  • Overview
  • 5G Phase 1: just more of the same?
  • mmWave beckons – the high bands >6GHz
  • Conclusions

 

  • Figure 1 – 5G spectrum has multiple stakeholders with differing priorities
  • Figure 2 – Multi-band support has improved hugely since early 4G phones
  • Figure 3 – A potential 5G deployment & standardisation timeline
  • Figure 4 – ITU timeline for 5G spectrum harmonisation, 2014-2020
  • Figure 5 – High mmWave frequencies (e.g. 28GHz) don’t go through solid walls
  • Figure 6 – mmWave brings new technology and design challenges

eSIM: How Much Should Operators Worry?

What is eSIM? Or RSP?

There is a lot of confusion around what eSIM actually means. While the “e” is often just assumed to stand for “embedded”, this is only half the story – and one which various people in the industry are trying to change.

In theory the term “eSIM” refers only to the functionality of “remote provisioning”; that is, the ability to download an operator profile to an in-market SIM (and also potentially switch between profiles or delete them). This contrasts with the traditional methods of pre-provisioning specific, fixed profiles into SIMs during manufacture. Most SIMs today have a particular operator’s identity and encryption credentials set at the factory. This is true of both the familiar removable SIM cards used in mobile phones, and the “soldered-in” form used in some M2M devices.

In other words, the original “e” was a poor choice – it was intended to stand for “enhanced”, “electronic” or just imply “new and online” like eCommerce or eGovernment. In fact, the first use in 2011 was for eUICC – the snappier term eSIM only emerged a couple of years later. UICCs (Universal Integrated Circuit Cards) are the smart-card chips themselves, that are used both in SIMs and other applications, for example, bank, transport and access-security cards. Embedded, solderable SIMs have existed for certain M2M uses since 2010.

In an attempt to separate out the “form factor” (removable vs. embedded) aspect from the capability (remote vs. factory provisioned), the term RSP sometimes gets used, standing for Remote SIM Provisioning. This is the title of GSMA’s current standard. But unsurprisingly, the nicer term eSIM is hard to dislodge in observers’ consciousness, so it is likely to stick around. Most now think of eSIMs as having both the remote-provisioning function and an embedded non-removable form-factor. In theory, we might even get remote-provisioning for removable SIMs (the 2014 Apple SIM was a non-standard version of this).

Figure 1: What does eSIM actually mean?

What does esim mean

Source: Disruptive Analysis

This picture is further muddied by different sets of GSMA standards for M2M and consumer use-cases at present, where the latter involves some way for the end-user to choose which profiles to download and when to activate them – for example, linking a new cellular tablet to an existing data-plan. This is different to a connected car or an industrial M2M use-case, where the manufacturer designs in the connectivity, and perhaps needs to manage whole “fleets” of eSIMs together. The GSMA M2M version of the standards were first released in 2013, and the first consumer specifications were only released in 2016. Both are being enhanced over time, and there are intentions to develop a converged M2M/consumer specification, probably in H2 2017.

eSims vs Soft-SIM / vSims

This is another area of confusion – some people confuse eSIMs with the concept of a “soft-SIM” (also called virtual SIMs/vSIMs). These have been discussed for years as a possible option for replacing physical SIM chips entirely, whether remotely provisioned, removable/soldered or not. They use purely software-based security credentials and certificates, which could be based in the “secure zone” of some mobile processors.

However, the mobile industry has strongly pushed-back on the Soft-SIM concept and standardisation, for both security reasons and also (implicit) commercial concerns. Despite this we are aware of at least two Asian handset vendors that have recently started using virtual SIMs for roaming applications.

For now, soft-SIMs appear to be far from the standards agenda, although there is definitely renewed interest. They also require a secondary market in “profiles”, which is at a very early stage and not receiving much industry attention at the moment. STL thinks that there is a possibility that we could see a future standardised version of soft-SIMs and the associated value-chain and controls, but it will take a lot of convincing for the telco industry (and especially GSMA) to push for it. It might get another nudge from Apple (which indirectly catalysed the whole eSIM movement with a 2010 patent), but as discussed later that seems improbable in the short term.

Multi-IMSI: How does multi-IMSI work?

It should also be noted that multi-IMSI (International Mobile Subscriber Identity) SIMs are yet another category here. Already used in various niches, these allow a single operator profile to be associated with multiple phone numbers – for example in different geographies. Combined with licences in different countries or multiple MVNO arrangements, this allows various clever business models, but anchored in one central operator’s system. Multi-local operators such as Truphone exploit this, as does Google in its Fi service which blends T-Mobile US and Sprint networks together. It is theoretically possible to blend multi-IMSI functionality with eSIM remote-provisioning.

eSIMs use cases and what do stakeholders hope to gain

  • There are two sets of use-cases and related stakeholder groups for eSIMs:
  • Devices that already use cellular radios & SIMs today; This group can be sub-divided into:
    • Mobile phones
    • M2M uses (e.g. connected cars and industrial modules)
    • Connected devices such as tablets, PC dongles and portable WiFi hotspots.
  • Devices that do not have cellular connectivity currently; this covers a huge potential range of IoT
    devices.
  • Broadly speaking, it is hoped that eSIM will improve the return on investment and/or efficiency of existing cellular devices and services, or help justify and enable the inclusion of cellular connections in new ones. Replacing existing SIMs is (theoretically) made easier by scrutinising existing channels and business processes and improving them – while new markets (again theoretically) offer win-win scenarios where there is no threat of disruption to existing business models.

The two different stakeholders want to receive different benefits from eSIMs. Mobile operators want:

  • Lower costs for procuring and distributing SIMs.
  • Increased revenue from adding more cellular devices and related services, which can be done incrementally with an eSIM, e.g. IoT connectivity and management.
  • Better functionality and security compared to competing non-cellular technologies.
  • Limited risk of disintermediation, increased churn or OEMs acting as gatekeepers.

And device manufacturers want:

  • To reduce their “bill of material” (BoM) costs and number of design compromises compared to existing removable SIMs
  • To sell more phones and other connected devices
  • To provide better user experience, especially compared to competing OEMs / ecosystems
  • To create additional revenue streams related to service connectivityTo upgrade existing embedded (but non-programmable) soldered SIMs for M2M

The truth, however, is more complex than that – there needs to be clear proof that eSIM improves existing devices’ costs or associated revenues, without introducing extra complexity or risk. And new device categories need to justify the addition of the (expensive, power-consuming) radio itself, as well as choosing SIM vs. eSIM for authentication. In both cases, the needs and benefits for cellular operators and device OEMs (plus their users and channels) must coincide.

There are also many other constituencies involved here: niche service providers of many types, network equipment and software suppliers, IoT specialists, chipset companies, enterprises and their technology suppliers, industry associations, SIM suppliers and so forth. In each case there are both incumbents, and smaller innovators/disruptors trying to find a viable commercial position.

This brings in many “ifs” and “buts” that need to be addressed.

Contents

  • Executive Summary
  • Introduction: What is eSIM? Or RSP?
  • Not a Soft-SIM, or multi-IMSI
  • What do stakeholders hope to gain?
  • A million practical problems So where does eSIM make sense?
  • Phones or just IoT?
  • Forecasts for eSIM
  • Conclusion 

 

  • Figure 1: What does eSIM actually mean?
  • Figure 2: eSIM standardisation & industry initiatives timeline
  • Figure 3: eSIM shipment forecasts, by device category, 2016-2021

The IoT ecosystem and four leading operators’ strategies

The IoT ecosystem

The term IoT is used to describe a broad and diverse ecosystem that includes a wide range of different connectivity types and use-cases. Therefore, it is not helpful to discuss the IoT ecosystem as a whole, and to understand IoT better it is necessary to break it down into horizontal layers and vertical segments.

Figure 1: A simplified map of the IoT ecosystem

Source: STL Partners


The five horizontal layers in the figure above are essential elements common to all IoT use-cases, regardless of vertical segment, and comprise:

  1. Sensors or controllers (embedded in connected devices, the “things” in the Internet of Things)
  2. A gateway device to aggregate and transmit data back and forth via the data network.
  3. A communications network to send data.
  4. Software for analysing and translating data.
  5. The end application service.

Perhaps surprisingly we have not included ‘IoT platforms’ as a horizontal layer in its own right.  IoT platforms are designed to organise, analyse, and (in some cases) act upon the data from connected devices. Because there can be differences in platform capabilities from vendor to vendor, a platform horizontal layer has not been included in this analysis. Depending on the platform, it will be designed to deliver any combination of horizontal layers 3, 4, and 5.

Level 5 – the end application service – is where material differences exist between vertical segments. Because IoT is a young market new use-cases are still emerging and existing use-cases are still evolving. The IoT ecosystem is not static and will continue to change, grow, and develop, and could look quite different in the next ten years. However, several distinct IoT vertical markets – sometimes described as ecosystems in their own right – are already emerging. These include:

  1. Smart and connected cities.
  2. Connected vehicles.
  3. Industrial IoT (including smart manufacturing).
  4. Smart home.
  5. Smart healthcare.
  6. Smart agriculture.

Within each of these six verticals there are several use-cases, and each vertical is developing and evolving new ones all the time. Figure 2 shows examples of use-cases either currently in use or under development in each vertical.

Figure 2: IoT vertical markets and use cases

Source: STL Partners

The complexity and technical requirements of each use-case varies widely. For example, the requirements of a smart thermostat compared to those of an autonomous vehicle are distinctly different. The next section of this report will provide an overview of the different technologies enabling IoT, followed by a section providing analysis of the technological requirements of several use-cases to illustrate how the IoT ecosystem will be enabled by not just one, but several different connectivity technologies.

 

  • Executive Summary
  • Introduction
  • Methodology
  • The IoT ecosystem
  • Six key technologies enabling IoT
  • 1. Cloud computing
  • 2. Low-power wide-area technologies
  • 3. Big data analytics
  • 4. Network function virtualisation (NFV) and software-defined networking (SDN)
  • 5. 5G
  • 6. Edge computing
  • Will one connectivity technology be dominant?
  • Use-case one: Smart metering
  • Use-case two: Autonomous driving
  • Use-case three: Smart thermostat
  • Use-case four: Smart home security system
  • How will IoT use-cases evolve?
  • Telcos’ role in the IoT ecosystem
  • The IoT value chain
  • AT&T: the ambitious ecosystem orchestrator
  • Vodafone: a ‘connectivity plus’ approach
  • SK Telecom: connectivity via multiple technologies
  • Deutsche Telekom AG: the open platform integrator
  • Adapting for evolution

 

  • Figure 1: A simplified map of the IoT ecosystem
  • Figure 2: IoT vertical markets and use-cases
  • Figure 3: The role of ‘network slicing’ in IoT
  • Figure 4: The role of Edge Computing in IoT
  • Figure 5: Complexity profile criteria ratings
  • Figure 6: Smart metering complexity profile
  • Figure 7: Autonomous driving complexity profile
  • Figure 8: Smart thermostat complexity profile
  • Figure 9: Smart home security system complexity profile
  • Figure 10: IoT use-case evolution
  • Figure 11: Telco’s original role in the IoT ecosystem
  • Figure 11: Telco’s current role in the IoT ecosystem

5G: How Will It Play Out?

Introduction: Different visions of 5G

The ‘idealists’ and the ‘pragmatists’

In the last 18 months, several different visions of 5G have emerged.

One is the vision espoused by the major R&D collaborations, academics, standardisation groups, the European Union, and some operators. This is the one with the flying robots, self-driving cars, and fully automated factories whose internal networks are provided entirely by ultra-low latency critical communications profiles within the cellular network. The simplest way to describe its aims would be to say that they intend to create a genuinely universal mobile telecommunications system serving everything from 8K streaming video for football crowds, through basic (defined as 50Mbps) fixed-wireless coverage for low-ARPU developing markets, to low-rate and ultra-low power but massive-scale M2M, with the same radio waveform, backed by a single universal virtualised core network “sliced” between use-cases. This slide, from Samsung’s Raj Gawera, sums it up – 5G is meant to maximise all eight factors labelled on the vertices of the chart.

Figure 1: 5G, the vision: one radio for everything

Source: Samsung, 3G & 4G Wireless Blog

Most of its backers – the idealist group – are in no hurry, targeting 2020 at the earliest for the standard to be complete, and deployment to begin sometime after that. There are some recent signs of increasing urgency – and certainly various early demonstrations – although that is perhaps a response to the sense of movement elsewhere in the industry.

The other vision is the one backed in 3GPP (the main standards body for 5G) by an alliance of semiconductor companies – including Intel, Samsung, ARM, Qualcomm, and Mediatek – but also Nokia Networks and some carriers, notably Verizon Wireless. This vision is much more radio-centric, being focused on the so-called 5G New Radio (NR) element of the project, and centred on delivering ultra-high capacity mobile broadband. It differs significantly from the idealists’ on timing – the pragmatist group wants to have real deployments by 2018 or even earlier, and is willing (even keen) to take an IETF-like approach where the standards process ratifies the results of “rough consensus and running code”.

Carriers’ interests fall between the two poles. In general, operators’ contributions to the process focus on the three Cs – capacity, cost, and carbon dioxide – but they also usually have a special interest of their own. This might be network virtualisation and slicing for converged operators with significant cloud and enterprise interests, low-latency or massive-scale M2M for operators with major industrial customers, or low-cost mobile broadband for operators with emerging market opcos.

The summer and especially September 2016’s CTIA Mobility conference also pointed towards some players in the middle – AT&T is juggling its focus on its ECOMP NFV mega-project, with worries that Verizon will force its hand on 5G the same way it did with 4G. It would be in the idealist group if it could align 5G radio deployment and NFV perfectly, but it is probably aware of the gulf widening rather than narrowing between the two. Ericsson is pushing for 5G incrementalism (and minimising the risk of carriers switching vendors at a later date) with its “Plug-In” strategy for specific bits of functionality.

Dino Flores of Qualcomm, the chairman of 3GPP RAN (RAN = radio access network) has chosen to compromise by taking forward the core enhanced mobile broadband (eMBB) elements for what is now being called “Phase 1”, but also cherry-picking two of the future use cases – “massive” M2M, and “critical” communications. These last two differ in that the first is optimised for scalability and power saving, and the second is optimised for quality-of-service control (or PPP for Priority, Precedence, and Pre-emption in 3GPP terminology), reliable delivery, and very low latency. As the low-cost use case is essentially eMBB in low-band spectrum, with a less dense network and a high degree of automation, this choice covers carriers’ expressed needs rather well, at least in principle. In practice, the three have very different levels of commercial urgency.

Implicitly, of course, the other, more futuristic use cases (such as self-driving cars) have been relegated to “Phase 2”. As Phase 2 is expected to be delivered after 2020, or in other words, on the original timetable, this means that Phase 1 has indeed accelerated significantly. Delays in some of the more futuristic applications may not be a major worry to many people – self-driving cars probably have more regulatory obstacles than technical ones, while Vehicle to Vehicle (V2V) communications seems to be less of a priority for the automotive industry than many assert. A recent survey by Ericsson[1] suggested that better mapping and navigation is more important than “platooning” vehicles (grouping them together on the highway in platoons, which increases the capacity of the highway) as a driver of next-gen mobile capabilities.

3GPP’s current timeline foresees issuing the Technical Report (TR) detailing the requirements for the New Radio standard at the RAN (Radio Access Network) 73 meeting next month, and finalising a Non-Standalone version of the New Radio standard at either RAN 78 in December 2017, with the complete NR specification being frozen by the TSG (Technical Specifications Group) 80 meeting in June 2018, in time to be included in 3GPP Release 14. (In itself this is a significant hurry-up – the original plan was for 5G to wait for R15.) This spec would include all three major use cases, support for both <6GHz and millimetre wave spectrum, and both Non-Standalone and Standalone.

Importantly, if both Non-Standalone and the features common to it and Standalone standards are ready by the end of 2017, we will be very close to a product that could be deployed in a ‘pragmatist’ scenario even ahead of the standards process. This seems to be what VZW, Nokia, Ericsson, and others are hoping for – especially for fixed-5G. The December 2017 meeting is an especially important juncture as it will be a joint meeting of both TSG and RAN. AT&T has also called for a speeding-up of standardisation[2].

The problem, however, is that it may be difficult to reconcile the technical requirements of all three in one new radio, especially as the new radio must also be extensible to deal with the many different use cases of Phase 2, and must work both with the 4G core network as “anchor” in Non-Standalone and with the new 5G core when that arrives, in Standalone.

Also, radio development is forging ahead of both core development and spectrum policy. Phase 1 5G is focused on the bands below 6GHz, but radio vendors have been demonstrating systems working in the 15, 28, 60, and 73GHz bands – for instance Samsung and T-Mobile working on 28GHz[3]. The US FCC especially has moved very rapidly to make this spectrum available, while the 3GPP work item for millimetre wave isn’t meant to report before 2017 – and with harmonisation and allocation only scheduled for discussion at ITU’s 2019 World Radio Congress.

The upshot is that the March 2017 TSG 75 meeting is a critical decision point. Among much else it will have to confirm the future timeline and make a decision on whether or not the Non-Standalone (sometimes abbreviated to NSA) version of the New Radio will be ready by TSG/RAN 78 in December. The following 3GPP graphic summarises the timeline.


[1] https://www.ericsson.com/se/news/2039614

[2] http://www.fiercewireless.com/tech/at-t-s-keathley-5g-standards-should-be-released-2017-not-2018

[3] http://www.fiercewireless.com/tech/t-mobile-samsung-plan-5g-trials-using-pre-commercial-systems-at-28-ghz

 

  • Executive Summary
  • Introduction: Different visions of 5G
  • One Network to Rule Them All: Can it Happen?
  • Network slicing: a nice theory, but work needed…
  • Difficulty versus Urgency: understanding opportunities and blockers for 5G
  • Business drivers of the timeline: both artificial and real
  • Internet-Agility Driving Progress
  • How big is the mission critical IoT opportunity?
  • Conclusions

 

  • Figure 1: 5G, the vision: one radio for everything
  • Figure 2: The New Radio standardisation timeline, as of June 2016
  • Figure 3: An example frame structure, showing the cost of critical comms
  • Figure 4: LTE RAN protocols desperately need simplicity
  • Figure 5: Moving the Internet/RAN boundary may be problematic, but the ultra-low latency targets demand it
  • Figure 6: Easy versus urgent
  • Figure 7: A summary of key opportunities and barriers in 5G

Amazon, Apple, Facebook, Google, Netflix: Whose digital content is king?

Introduction

This report analyses the market position and strategies of five global online entertainment platforms – Amazon, Apple, Facebook, Google and Netflix.

It also explores how improvements in digital technologies, consumer electronics and bandwidth are changing the online entertainment market, while explaining the ongoing uncertainty around net neutrality. The report then considers how well each of the five major entertainment platforms is prepared for the likely technological and regulatory changes in this market. Finally, it provides a high level overview of the implications for telco, paving the way for a forthcoming STL Partners report going into more detail about potential strategies for telcos in online entertainment.

The rise and rise of online entertainment

As in many other sectors, digital technologies are shaking up the global entertainment industry, giving rise to a new world order. Now that 3.2 billion people around the world have Internet access, according to the ITU, entertainment is increasingly delivered online and on-demand.

Mobile and online entertainment accounts for US$195 million (almost 11%) of the US$1.8 trillion global entertainment market today. By some estimates, that figure is on course to rise to more than 13% of the global entertainment market, which could be worth US$2.2 trillion in 2019.

Two leading distributors of online content – Google and Facebook – have infiltrated the top ten media owners in the world as defined by ZenithOptimedia (see Figure 1). ZenithOptimedia ranks media companies according to all the revenues they derive from businesses that support advertising – television broadcasting, newspaper publishing, Internet search, social media, and so on. As well as advertising revenues, it includes all revenues generated by these businesses, such as circulation revenues for newspapers or magazines. However, for pay-TV providers, only revenues from content in which the company sells advertising are included.

Figure 1 – How Google and Facebook differ from other leading media owners

Source: ZenithOptimedia, May 2015/STL Partners

ZenithOptimedia says this approach provides a clear picture of the size and negotiating power of the biggest global media owners that advertisers and agencies have to deal with. Note, Figure 1 draws on data from the financial year 2013, which is the latest year for which ZenithOptimedia had consistent revenue figures from all of the publicly listed companies. Facebook, which is growing fast, will almost certainly have climbed up the table since then.

Figure 1 also shows STL Partners’ view of the extent to which each of the top ten media owners is involved in the four key roles in the online content value chain. These four key roles are:

  1. Programme: Content creation. E.g. producing drama series, movies or live sports programmes.
  2. Package: Content curation. E.g. packaging programmes into channels or music into playlists and then selling these packages on a subscription basis or providing them free, supported by advertising.
  3. Platform: Content distribution. E.g. Distributing TV channels, films or music created and curated by another entity.
  4. Pipe: Providing connectivity. E.g. providing Internet access

Increasing vertical integration

Most of the world’s top ten media owners have traditionally focused on programming and packaging, but the rise of the Internet with its global reach has brought unprecedented economies of scale and scope to the platform players, enabling Google and now Facebook to break into the top ten. These digital disruptors earn advertising revenues by providing expansive two-sided platforms that link creators with viewers. However, intensifying competition from other major ecosystems, such as Amazon, and specialists, such as Netflix, is prompting Google, in particular, to seek new sources of differentiation. The search giant is increasingly investing in creating and packaging its own content.  The need to support an expanding range of digital devices and multiple distribution networks is also blurring the boundaries between the packaging and platform roles (see Figure 2, below) – platforms increasingly need to package content in different ways for different devices and for different devices.

Figure 2 – How the key roles in online content are changing

Source: STL Partners

These forces are prompting most of the major media groups, including Google and, to a lesser extent, Facebook, to expand across the value chain. Some of the largest telcos, including Verizon and BT, are also investing heavily in programming and packaging, as they seek to fend off competition from vertically-integrated media groups, such as Comcast and Sky (part of 21st Century Fox), who are selling broadband connectivity, as well as content.

In summary, the strongest media groups will increasingly create their own exclusive programming, package it for different devices and sell it through expansive distribution platforms that also re-sell third party content. These three elements feed of each other – the behavioural data captured by the platform can be used to improve the programming and packaging, creating a virtuous circle that attracts more customers and advertisers, generating economies of scale.

Although some leading media groups also own pipes, providing connectivity is less strategically important – consumers are increasingly happy to source their entertainment from over-the-top propositions. Instead of investing in networks, the leading media and Internet groups lobby regulators and run public relations campaigns to ensure telcos and cablecos don’t discriminate against over-the-top services. As long as these pipes are delivering adequate bandwidth and are sufficiently responsive, there is little need for the major media groups to become pipes.

The flip-side of this is that if telcos can convince the regulator and the media owners that there is a consumer and business benefit to differentiated network services (or discrimination to use the pejorative term), then the value of the pipe role increases. Guaranteed bandwidth or low-latency are a couple of the potential areas that telcos could potentially pursue here but they will need to do a significantly better job in lobbying the regulator and in marketing the benefits to consumers and the content owner/distributor if this strategy is to be successful.

To be sure, Google has deployed some fibre networks in the US and is now acting as an MVNO, reselling airtime on mobile networks in the US. But these efforts are part of its public relations effort – they are primarily designed to showcase what is possible and put pressure on telcos to improve connectivity rather than mount a serious competitive challenge.

  • Introduction
  • Executive Summary
  • The rise and rise of online entertainment
  • Increasing vertical integration
  • The world’s leading online entertainment platforms
  • A regional breakdown
  • The future of online entertainment market
  • 1. Rising investment in exclusive content
  • 2. Back to the future: Live programming
  • 3. The changing face of user generated content
  • 4. Increasingly immersive games and interactive videos
  • 5. The rise of ad blockers & the threat of a privacy backlash
  • 6. Net neutrality uncertainty
  • How the online platforms are responding
  • Conclusions and implications for telcos
  • STL Partners and Telco 2.0: Change the Game

 

  • Google is the leading generator of online entertainment traffic in most regions
  • How future-proof are the major online platforms?
  • Figure 1: How Google and Facebook differ from other leading media owners
  • Figure 2: How the key roles in online content are changing
  • Figure 3: Google leads in most regions in terms of entertainment traffic
  • Figure 4: YouTube serves up an eclectic mix of music videos, reality TV and animals
  • Figure 5: Facebook users recommend videos to one another
  • Figure 6: Apple introduces apps for television
  • Figure 7: Netflix, Google, Facebook and Amazon all gaining share in North America
  • Figure 8: YouTube & Facebook increasingly about entertainment, not interaction
  • Figure 9: YouTube maintains lead over Facebook on American mobile networks
  • Figure 10: US smartphones may be posting fewer images and videos to Facebook
  • Figure 11: Over-the-top entertainment is a three-way fight in North America
  • Figure 12: YouTube, Facebook & Netflix erode BitTorrent usage in Europe
  • Figure 13: File sharing falling back in Europe
  • Figure 14: iTunes cedes mobile share to YouTube and Facebook in Europe
  • Figure 15: Facebook consolidates strong upstream lead on mobile in Europe
  • Figure 16: YouTube accounts for about one fifth of traffic on Europe’s networks
  • Figure 17: YouTube & BitTorrent dominate downstream fixed-line traffic in Asia-Pac
  • Figure 18: Filesharing and peercasting apps dominate the upstream segment
  • Figure 19: YouTube stretches lead on mobile networks in Asia-Pacific
  • Figure 20: YouTube neck & neck with Facebook on upstream mobile in Asia-Pac
  • Figure 21: YouTube has a large lead in the Asia-Pacific region
  • Figure 22: YouTube fends off Facebook, as Netflix gains traction in Latam
  • Figure 23: How future-proof are the major online platforms?
  • Figure 24: YouTube’s live programming tends to be very niche
  • Figure 25: Netflix’s ranking of UK Internet service providers by bandwidth delivered
  • Figure 26: After striking a deal with Netflix, Verizon moved to top of speed rankings

Baidu, Xiaomi & DJI: China’s Fast Growing Digital Disruptors

Introduction

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing analyses China’s leading digital disruptors and their likely impact outside their home country. The report explores whether the global leaders in digital commerce – Amazon, Apple, Facebook and Google – might soon face a serious challenge from a company built in China.

In our previous report, Alibaba & Tencent: China’s Digital Disruptors, we analysed China’s two largest digital ecosystems – Alibaba, which shares many similarities with Amazon, and Tencent, which is somewhat similar to Facebook. It explored the intensifying arms race between these two groups in China, their international ambitions and the support they might need from telcos and other digital players.

This executive briefing covers Baidu, China’s answer to Google and the anchor for a third digital ecosystem, and the fast-growing smartphone maker, Xiaomi, which has the potential to build a fourth major ecosystem. It also takes a close look at DJI, the world-leading drone manufacturer, which is well worth watching for its mid-to-long term potential to create another major ecosystem around consumer robotics.

Context: sizing up China’s disruptors

As U.S. companies have demonstrated time and time again, a large and dynamic domestic market can be a springboard to global dominance. Can China’s leading digital disruptors, which also benefit from a large and dynamic domestic market, also become major players on the global stage?

Alibaba, Tencent and Baidu, which run China’s leading digital ecosystems, have all developed in a digital economy that has been partially protected by cultural and linguistic characteristics, together with government policies and regulations. As a result, Google, Facebook and Amazon haven’t been able to replicate their global dominance in China. Of the big four global disruptors, only Apple can be said to be have a major presence in China.

Thanks to their strong position in China, Alibaba, Tencent and Baidu are among the leading Internet companies globally, as measured by market capitalisation (see Figure 2). As China’s economy slows (although it will still grow about 7% this year, according to government figures), many of China’s digital players are putting more focus on international growth. Alibaba & Tencent: China’s Digital Disruptors of this report outlined how Alibaba is gaining traction in other major middle income countries, notably Russia, whereas Tencent is trying, with limited success, to expand outside of China

Figure 2:  China is home to four of the world’s most valuable publicly-listed Internet companies

Source: Source: Morgan Stanley, Capital IQ, Bloomberg via KPCB

Of the five companies covered in the two parts of this report, search specialist Baidu is the least international – its revenues are almost all generated in China and its services aren’t much used outside its home country. Innovative and fast growing handset maker Xiaomi is still heavily dependent on China, but is seeing strong sales in other developing markets. The most international of the three is DJI, the world’s leading drone maker, which is making major inroads into the U.S. and Western Europe – the heartland of Apple, Google, Amazon and Facebook.

As discussed in Alibaba & Tencent: China’s Digital Disruptors, international telcos, media companies and banks all have a strategic interest in encouraging more digital competition globally. Today, the big four U.S.-based disruptors dominate the digital economy in North America, Western Europe, Latin America and much of the developing world, limiting the mindshare and market share available to other players.

Many telcos are particularly concerned about Apple’s and Facebook’s ever-strengthening position in digital communications – a core telecoms service. They also fret about Google’s and Amazon’s power in digital commerce and content. On the basis that my enemy’s enemy is my friend, telcos might want to support Xiaomi’s challenge to Apple, while backing Tencent’s efforts to make messaging app WeChat an international service and Alibaba’s growing rivalry with Amazon (both aspects are covered in the previous report).

  • Introduction
  • Executive Summary
  • Context: sizing up China’s disruptors
  • Baidu – China’s low cost Google
  • Why Baidu is important
  • Baidu’s business models
  • How big an impact will Baidu have outside China?
  • Threats to Baidu
  • Xiaomi – Apple without the margins?
  • Why Xiaomi is important
  • Business model
  • Xiaomi’s likely International impact
  • Threats to Xiaomi
  • DJI – more than a flight of fancy
  • Why DJI is important
  • DJI’s business model
  • Threats to DJI
  • Conclusions and implications for telcos
  • Baidu, Xiaomi and DJI could all build major ecosystems
  • Implications for telcos and other digital players

 

  • Figure 1: Baidu is significantly smaller than Tencent, Alibaba and Facebook
  • Figure 2: China is home to four of the world’s most valuable publically-listed Internet companies
  • Figure 3: Baidu is in the world’s top 15 media owners
  • Figure 4: Baidu is one of the world’s leading app developers
  • Figure 5: Baidu’s clean and uncluttered home page resembles that of Google
  • Figure 6: Baidu is beginning to monetise its millions of mobile users
  • Figure 7: IQiyi has broken into the top ten iOS apps worldwide
  • Figure 8: 2014 was a banner year for Baidu’s top line
  • Figure 9: Mobile now generates almost 50% of Baidu’s revenues
  • Figure 10: Baidu says its mobile browser is popular in Indonesia
  • Figure 11: Xiaomi is a rising star in the smartphone market
  • Figure 12: The slimline Mi Note has won plaudits for its design
  • Figure 13: The $15 Mi Band: A lot of technology for not a lot of money
  • Figure 14: One of Ninebot’s products – an electric unicycle
  • Figure 15: Xiaomi is turning its MIUI into a digital commerce platform
  • Figure 16: Xiaomi even has fan sites in markets where its handsets aren’t readily available
  • Figure 17: Drones’ primary job today is aerial photography
  • Figure 18: DJI majors on ease-of-use
  • Figure 18: DJI claims its Inspire One can transmit video pictures over 2km
  • Figure 20: DJI’s Go app delivers a real-time video feed to a smartphone or tablet
  • Figure 21: Baidu’s frugal innovation

Microsoft: Pivoting to a Communications-Centric Business

Introduction: From Monopoly to Disruption

For many years, Microsoft was an iconic monopolist, in much the same way as AT&T had been before divestment. Microsoft’s products were ubiquitous and often innovative, and its profitability enormous. It was familiar, yet frequently scorned as the creator of a dreary monoculture with atrocious security properties. Microsoft’s mission statement could not have been simpler: a computer in every office and in every home. This achieved, though, its critics have often seen it as an organisation in search of an identity, experimenting with mobile, search, maps, hardware and much else without really settling on a new direction.

Going to the numbers, for the last two years, there has been steady erosion of the once phenomenally high margins, although revenue is still steadily rising. Since Q3 2013, revenue at Microsoft grew an average of 3.5% annually, but the decline in margins meant that profits barely grew, with a CAGR of 0.66%. Telcos will be familiar with this kind of stagnation, but telcos would be delighted with Microsoft’s 66% gross margins. Note, that getting into hardware has given Microsoft a typical hardware vendor’s Christmas spike in revenue.

Figure 1:  MS revenue is growing steadily but margin erosion undermines it

Source: Microsoft 10-K, STL Partners

Over the long term, the pattern is clearer, as are the causes. Figure 2 shows Microsoft’s annual revenue and gross margin since the financial year 1995. From 1995 to 2010, gross margins were consistently between 80 and 90 per cent, twice the 45% target HP traditionally defined as “fascinating”. It was good to be king. However, in the financial year 2010, there is a clear inflection point: margins depart from the 80% mark and never return, falling at a 3.45% clip between 2010 and 2015.

The event that triggered this should be no surprise. Microsoft has traditionally been discussed in parentheses with Apple, and Apple’s 2010 was a significant one. It was the first year that Apple began using the A-series processors of its own design, benefiting from the acquisition of PA Semiconductor in 2008. This marked an important strategic shift at Apple from the outsourced, design- and brand-centric business to vertical integration and investment in manufacturing, a strategy associated with Tim Cook’s role as head of the supply chain.

Figure 2: The inflection point in 2010

Source: Microsoft 10-K, STL Partners

The deployment of the A4 chip made possible two major product launches in 2010 – the iPhone 4, which would sell enormously more than any of the previous iPhones, and the iPad, which created an entirely new product category competing directly with the PC. Another Apple product launch that year, which also competed head-on with Microsoft, wasn’t quite as dramatic but was also very significant – the MacBook line began shipping with SSDs rather than hard disks, and the very popular 11” MacBook Air was added as an entry-level option. At the time, the PC industry and hence Microsoft was heavily committed to the Intel-backed netbooks, and the combination of the iPad and the 11” Air essentially destroyed the netbook as a product category.

The problems started in the consumer market, but the industry was beginning to recognise that innovations had begun to take hold in consumer and then diffuse into the enterprise. Further, the enterprise franchise centred on the Microsoft Business division and what was then termed Server & Tools[1] were both threatened by the increasing adoption of Apple products.

Microsoft had to respond, and it did so with a succession of dramatic initiatives. One was to rethink Windows as a tablet- or phone-optimised operating system, in Windows Phone 7 and Windows 8. Another was to acquire Nokia’s smartphone business, and to diversify into hardware via the Xbox and Surface projects. And yet a third was to embrace the cloud. Figure 3 shows the results.

  • Introduction
  • Executive Summary
  • From Monopoly to Disruption
  • The push into mobile fails…but what about the cloud?
  • Changing Platforms: from Windows to Office
  • The Skype Acquisition: a missed opportunity?
  • Skype for Business and Office 365: the new platform
  • The rise of the consumer cloud
  • Bing may just about be breaking even…but the real story here is consumer cloud
  • Scaling out in the cloud
  • Conclusions: towards a communications-centric Microsoft

 

  • Figure 1: MS revenue is growing steadily but margin erosion undermines it
  • Figure 2: The inflection point in 2010
  • Figure 3: Revenue by product category at Microsoft, last 2 years
  • Figure 4: Cloud and the Enterprise drive profitability at Microsoft
  • Figure 5: Cloud is the driver of growth at Microsoft
  • Figure 6: Internally-developed hardware and cloud services are improving their margins
  • Figure 7: The Nokia Devices & Services business slides into loss
  • Figure 8: In 2011, an unifying API appeared critical for Skype’s future within Microsoft
  • Figure 9: Cloud is now over $8bn a year in revenue
  • Figure 10: Spot the deliberate mistake. No mention of Bing’s profitability or otherwise
  • Figure 11: Bing was a money pit for years, but may have begun to improve
  • Figure 12: The app store and consumer cloud businesses are performing superbly

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.

Alibaba & Tencent: China’s Digital Disruptors (Part 1)

Introduction

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing is the first part of a two part report analysing China’s leading digital disruptors and their likely impact outside their home country. The report explores whether the global leaders in digital commerce – Amazon, Apple, Facebook and Google – might soon face a serious challenge from a company built in China.

Part 1 analyses China’s two largest digital ecosystems – Alibaba, which shares many similarities with Amazon, and Tencent, which is somewhat similar to Facebook. This executive briefing considers the intensifying arms race between these two groups in China, their international ambitions and the support they might need from telcos and other digital players.

Both Alibaba and Tencent are potential competitors for telcos in some markets and potential partners in others. For example, like Amazon, Alibaba has a fast growing cloud computing business. (STL recently analysed why Amazon Web Services is so much more successful than many telcos’ cloud offerings, see: Amazon Web Services: Colossal, but Invincible?).

Like Facebook, Tencent has become a leading provider of digital communications in direct competition with telcos’ voice and messaging services. STL explored how telcos could respond to the rise and rise of Facebook in our recent report: Facebook: Telcos’ New Best Friend?

Part 2 of our report on China’s digital disruptors will cover Baidu, China’s answer to Google and the anchor for a third digital ecosystem, and the fast-growing smartphone maker, Xiaomi, which has the potential to build a fourth major ecosystem. Part 2 will also take a close look at DJI, the drone manufacturer, which is well worth watching for its mid-to-long term potential to create another major ecosystem.

Sizing up China’s disruptors

When it comes to disruption, China is a special case. Offering an enormous domestic market largely insulated by regulation, this vast country is proving to be fertile ground for Internet companies that may ultimately be able to mount a credible challenge to the big four globally – Amazon, Apple, Facebook and Google.

These four U.S.-based disruptors have used the scale and talent available in their home market to become leading digital commerce players globally, limiting the mindshare and market share available to other players. Moreover, Apple and Facebook, in particular, are carving out a strong position in digital communications, challenging telcos’ traditional dominance of this sector.

Greater competition among the Internet ecosystems would be in the strategic interests of many telcos, media companies and banks, as they seek to shore up their revenues and relevance. To that end, they could selectively encourage digital commerce and content companies that have gained sufficient scale in China to go global and compete with the U.S. giants.

In an ideal world, there might be a dozen or so major Internet ecosystems competing for a share of the worldwide digital commerce market. That would put individual telcos and other specialist players in the digital ecosystem, such as banks and media companies, in a stronger negotiating position, potentially enabling them to capture more of the value being created in the fast growing digital economy. For example, if Tencent were to mount a serious challenge to Facebook, telcos could potentially earn a commission for promoting one service over the other. Telcos could preload Facebook’s WhatsApp messaging service or Tencent’s WeChat on the handsets they distribute or they might zero-rate access (not charge for data traffic) to either service in their markets.

Similarly, if Baidu could build effective international search and content services in competition with Google, the latter may have to pay higher commission to companies that supply it with traffic. If Google faced more competition in the digital advertising market, media companies’ sites may have to pay less commission to advertising brokers. In the smartphone market, if Xiaomi were to weaken Apple’s grip on the high-end, telcos’ might be able to negotiate better margins for distributing Apple’s handsets or enabling iPhone users to temporarily subscribe to their networks when travelling abroad.

Greater incentives to expand outside China

China’s economy is on course to grow about 7% this year, according to government figures, down from the double-digit growth at the turn of the decade. As a result, its leading disruptors are increasingly treading on each other’s toes in China and have a greater incentive to expand internationally. Although the obvious move for China’s domestic Internet companies it to initially target Greater China, nearby Asian markets and the Chinese diaspora, some have much broader ambitions. Alibaba, in particular, has significant traction in other major middle income countries, notably Russia. And the world’s leading drone maker DJI is making major inroads into the U.S. and Western Europe – the heartland of Apple, Google, Amazon and Facebook.

Today, there are three major Internet ecosystems in China, headed by Alibaba, Tencent and Baidu respectively. Globally, these three players are in the top ten public Internet companies in terms of market capitalisation (see Figure 1). Moreover, Tencent has forged an alliance with JD.com, the fourth largest publicly-listed Chinese Internet company.

The first part of this report covers Alibaba and Tencent, asking whether either company is strong enough to pose a serious threat to Amazon, Facebook or Google on the global stage.

Figure 1: China is home to four of the world’s most valuable publicly-listed Internet companies

Source: Morgan Stanley, Capital IQ, Bloomberg via KPCB

Alibaba – digital commerce behemoth

Whereas most consumers in Western Europe and North America have heard of Amazon.com, many might associate Alibaba with folklore, rather than digital commerce. Yet Alibaba Group Holding Ltd. claims to be the world’s largest online and mobile commerce company in terms of gross merchandise volume (the value in US dollars of the products and services sold through its marketplaces). Although it is incorporated in the Cayman Islands, the Alibaba Group’s principal executive offices are in Hangzhou in China.

Founded in 1999 by its charismatic, combative and somewhat unpredictable executive chairman Jack Ma, Alibaba undertook the world’s largest initial public offering in September 2014. It raised USD 25 billion, which it has used to fund an ongoing acquisition spree.

Why Alibaba is important

With a market capitalisation comparable to that of Amazon and Facebook, investors clearly believe Alibaba is set to be a major player in the global economy. That belief is fuelled by the fact that Alibaba:

  • Runs several world-leading digital marketplaces
  • Is growing fast at home and abroad
  • Is assembling a major digital entertainment portfolio
  • Has acquired dozens of promising Internet companies
  • Is affiliated with one of China’s leading online payment services

 

  • Introduction
  • Executive Summary
  • Sizing up China’s disruptors
  • Alibaba – digital commerce behemoth
  • Why Alibaba is important
  • Alibaba’s business models
  • Likely impact outside China
  • Threats facing Alibaba
  • Tencent – a playbook for Facebook?
  • Why Tencent is important
  • Tencent’s business models
  • Tencent’s likely impact outside China
  • Threats to Tencent
  • Conclusions and implications for telcos
  • Alibaba and Tencent are very strong companies…
  • … but they both need strategic partners
  • Implications for telcos
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: China is home to four of the world’s most valuable publicly-listed Internet companies
  • Figure 2: Alibaba’s six major digital marketplaces
  • Figure 3: Alibaba has seen heady growth this decade
  • Figure 4: One of Alibaba’s recent investments was in MomentCam
  • Figure 5: Alipay helps Chinese consumers buy from overseas merchants
  • Figure 6: AliExpress sells a wide range of Chinese goods to the world
  • Figure 7: Alibaba’s UC Browser is widely used on Android smartphones
  • Figure 8: Comparing Alibaba and Amazon R&D over time
  • Figure 9: Alibaba’s mobile sales are rising rapidly
  • Figure 10: Almost half of Alibaba’s revenues are now generated by mobile services
  • Figure 11: Alibaba’s overall monetisation rate is slipping
  • Figure 12: Tencent runs three of the top five OTT communications services
  • Figure 13: Tencent claims leadership in digital content in China
  • Figure 14: Tencent sometimes leads Facebook
  • Figure 15: Tencent’s investment and partnership strategy
  • Figure 16: Tencent’s five years of fast growth
  • Figure 17: Tencent remains heavily reliant on online gaming revenues
  • Figure 18: Some of the use cases targeted by Tencent’s online payment portfolio
  • Figure 19: Tencent’s Red Envelope promotion was hugely successful
  • Figure 20: Both Alibaba and Tencent have seen strong growth in net income

Telco-Driven Disruption: What NTT DOCOMO, KT and Globe got right

Preface

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing is the second in a two-part series exploring the role of telcos in disrupting the digital economy. Across the two parts, STL has analysed a variety of disruptive moves by telcos, some long-standing and well established, others relatively new.

Part 2 builds on the analysis in Part 1, which considered telcos’ attempts to reinvent digital commerce in South Korea and Japan, the startling success of mobile money services in east Africa, BT’s huge outlay on sports content, AT&T’s multi-faceted smart home platform, Deutsche Telekom’s investments in online marketplaces and Orange’s innovative Libon communications service.

Part 2 takes a close look at NTT DOCOMO, Japan’s leading mobile operator, which has built up a major revenue stream from new businesses. Many of these new businesses are focused on enabling what DOCOMO refers to as a Smart Life. Revenues from its Smart Life suite of businesses, which provide consumers with advice, information, security, cloud storage and other lifestyle services, rose 22% to 421 billion yen (US$3.5 billion) in the year ending March 2015.

Part 2 also considers how South Korea’s incumbent telco KT used its high-speed broadband infrastructure to disrupt, but ultimately strengthen, its media business, which delivers IPTV to approaching six million households. This report also examines how Globe Telecom has carved out a significant position in the Philippines’ financial services market by enabling people to send each other money using text messages over a decade of patient experimentation. It also explains why the leading U.K. and U.S. mobile operators have struggled to disrupt the digital commerce market with their Weve and Softcard joint ventures.

Finally, Part 2 considers U.S. telco Verizon’s major push into cloud services, after spending US$1.4 billion to acquire specialist Terremark in 2011.

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

Note, this report is not exhaustive. The examples it covers are intended to be representative. Some of these companies and their strategies are covered in other STL Partners reports, including:

Introduction: Telcos Can and do disrupt

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

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

Although established telcos have generally been cautious about pursuing disruption, several have created entirely new value propositions, effectively disrupting either their core business or adjacent industry sectors. In some cases, disruptive moves by telcos have primarily been defensive in that their main objective is to hang on to customers in their core business. In other cases, telcos have gone on the offensive, moving into new markets in search of new revenues. Figure 1 classifies various disruptive moves by telcos. Those in white were covered in Part 1 of this report, those in grey are covered in this report, Part 2.

Figure 1: Representative examples of disruptive plays driven by telcos

Source: STL Partners

Offensive, major financial impact category

A classic disruptive play is to use existing assets and customer relationships to move into an adjacent market, open up a new revenue stream and build a major business. This is what Apple did with the iPhone and what Amazon did with cloud services. Several telcos have also followed this playbook. This section looks at two examples – NTT DOCOMO’s Smart Life services and Globe Telecom’s GCash – and what other companies in the digital economy can learn from these relatively successful moves. Unlike many disruptive moves by telcos, the two businesses covered in this section have had a significant impact in the targeted market. They have also moved the needle for their parent’s telcos and given their investors greater confidence in their ability to innovate.

NTT DOCOMO’s Smart Life proposition

Japan’s telecoms market was one of the first in the world to go ex-growth and its telcos have been searching for new sources of revenue for the best part of a decade. The market leader, NTT DOCOMO, has also been hit by an aggressive campaign by the third largest player, Softbank, to win market share. DOCOMO has seen its revenues from telecoms services decline every year since 2006, giving its efforts to expand into adjacent markets, such as entertainment, commerce and financial services, a real sense of urgency. In particular, DOCOMO has tried hard to get closer to consumers by developing a sophisticated and multi-faceted “smart life” proposition.

Strategy

Rather than focusing simply on providing connectivity and fading into the background, DOCOMO is trying to maintain a close relationship with Japanese consumers. Its strategy is centred on using the data collected by its network to anticipate customers’ needs and provide them with tailored and timely propositions. In November 2011, DOCOMO set out a medium-term strategy (for the years up to and including 2015) called Shaping a smart life, which it positioned it as an interim step to realising its longer-term, corporate vision for 2020: Pursuing smart innovation: HEART (see Figure 2). This report looks, in particular, at the ‘T’ in the Heart strategy – DOCOMO’s bid to win consumers’ trust and clearly differentiate itself from other providers of digital services.

One of the central tenets of DOCOMO’s strategy is that individuals want the support of a “personal life agent” – an automated personal assistant that can make useful suggestions and recommendations. DOCOMO envisaged that this assistant would use the information collected by smartphones and wearable devices to perform various tasks, including making recommendations and even automatic ticket reservations.

In other words, DOCOMO was one of the first companies in the world to anticipate the market for personal digital assistants, which is now a key arena in the ongoing battle between Google, Apple and Microsoft, which have launched Google Now, Siri and Cortana respectively.

DOCOMO originally positioned its smart life proposition as part of a broader range of cloud services that would enable it to generate new sources of value. Back in 2011, DOCOMO pledged to create:

  • A personal cloud – a platform underpinning a wide range of services for consumers.
  • A business cloud – a solutions platform for the provision of new business styles
  • A network cloud – a platform that adds value through sophisticated information and communication processing performed on the network.

Figure 2:  The smart life strategy NTT DOCOMO set out in 2011

Source: NTT DOCOMO, Medium-Term Vision, November 2011

Implementation

DOCOMO has set about strengthening and expanding its existing digital commerce business to build closer relationships with both consumers and the third party businesses supplying the services and content consumers want. To that end, Japan’s largest telco set itself goals to expand the number of content providers supporting its dmenu portal (a long-standing portal offering original content) from 700 in March 2012 to 3,000 in March 2016, while boosting the number of monthly users of its dmarket, which provides a broader range of digital content, to 20 million by March 2016, up from 1.5 million in March 2012. To that end, DOCOMO has expanded dmarket into new areas, such as fashion, travel and even food deliveries, effectively transforming dmarket in an e-commerce portal, as well as a content portal (see Figure 3).

Figure 3: DOCOMO has significantly expanded the services offered by dmarket

Source: NTT DOCOMO investor presentation, April 2014

Beyond dmarket, DOCOMO has also deployed a raft of other value added services, encompassing navigation, local information, NFC-based wallet and information services, credit card and carrier-billing-based payments, translation apps, health and wellness services, insurance and even pet and child tracking. DOCOMO also provides an i-concier service, which is designed to help people with daily organisation, as well as delivering offers and information from brands the user is interested in. For example, i-concier can be configured to give you a reminder when you arrive in a specific location. Confusingly, DOCOMO has also rolled out a separate service, called Shabette-Concier, which enables customers to talk Siri-style to “their smartphone about things you want to know or do, and your smartphone will display the best answers to your queries on the screen.” In other words, DOCOMO is offering many similar services and functionality to the major Internet players, such as Apple and Google.

DOCOMO was also quick to realise the importance of enabling individuals to use a single ID across multiple devices, while positioning the smartphone as an authentication platform in everyday life in both the physical world and online world. This kind of persistent identification across multiple devices and networks will help DOCOMO collect the information it needs to make personalised recommendations. At the same time, various DOCOMO services encourage consumers to volunteer information about themselves. DOCOMO also provides secure storage of personal data, an important step towards a personal cloud service (see Figure 4) along the lines of that outlined by STL Partners in the report: Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players. While this approach is broadly similar to that pursued by the major Internet companies, DOCOMO’s marketing places a lot of emphasis on safety, security and peace of mind, implying it is different from the more ‘cavalier’ Internet companies – Google and Facebook’s business models are predicated on encouraging consumers to share personal information, so they tend not to highlight the need for safe and secure storage for that information.

 Figure 4: DOCOMO’s personal cloud aims to offer consumers secure data storage, persistent ID and personalised recommendations

Source: NTT DOCOMO, Medium-Term Vision, November 2011

Next section: DOCOMO Results Analysis…

 

  • Preface
  • Executive Summary
  • Introduction: Telcos can and do disrupt
  • Offensive, major financial impact
  • NTT DOCOMO’s Smart Life proposition
  • Globe Telecom’s GCash
  • Offensive, limited financial impact
  • Verizon Cloud
  • The Weve joint venture
  • The Softcard joint venture
  • Defensive, major financial impact
  • KT’s media business
  • Conclusions

 

  • Figure 1: Representative examples of disruptive plays driven by telcos
  • Figure 2: The smart life strategy NTT DOCOMO set out in 2011
  • Figure 3: DOCOMO has significantly expanded the services offered by dmarket
  • Figure 4: DOCOMO’s personal cloud aims to offer consumers secure data storage, persistent ID and personalised recommendations
  • Figure 5: The Smart Life businesses are growing, but not quite fast enough yet
  • Figure 6: DOCOMO hopes its Smart Life business will lift group profits this year
  • Figure 7: The Smart Life businesses now generate 15% of DOCOMO’s ARPU
  • Figure 8: In 2011 DOCOMO saw digital commerce and content as key opportunities
  • Figure 9: The value of transactions through the dmarket has grown rapidly
  • Figure 10: Subscriber growth at dmarket stalled in the first half of 2014
  • Figure 11: TV-on-demand is the most popular of the dmarket services
  • Figure 12: NTT DOCOMO is putting more emphasis on providing enablers
  • Figure 13: DOCOMO’s confusing portfolio of money services
  • Figure 14: The GCash App has improved its user interface
  • Figure 15: GCash appears to be narrowly ahead of rival services
  • Figure 16: Facebook leads the OTT communications market in the Philippines
  • Figure 17: Verizon’s Global Enterprise revenues continue to fall
  • Figure 18: Weve originally planned to used transactional data to improve marketing
  • Figure 19: The Isis Wallet could be used to store and browse offers
  • Figure 20: KT is successfully managing the transition to IPTV
  • Figure 21: KT’s media revenue has climbed to 6% of total revenues

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

The Internet of Things: Impact on M2M, where it’s going, and what to do about it?

Introduction

From RFID in the supply chain to M2M today

The ‘Internet of Things’ first appeared as a marketing term in 1999 when it was applied to improved supply-chain strategies, leveraging the then hot-topics of RFID and the Internet.

Industrial engineers planned to use miniaturised, RFID tags to track many different types of asset, especially relatively low cost ones. However, their dependency on accessible RFID readers constrained their zonal range. This also constrained many such applications to the enterprise sector and within a well-defined geographic footprint.

Modern versions of RFID labelling have expanded the addressable market through barcode and digital watermarking approaches, for example, while mobile has largely removed the zonal constraint. In fact, mobile’s economies of scale have ushered in a relatively low-cost technology building block in the form of radio modules with local processing capability. These modules allow machines and sensors to be monitored and remotely managed over mobile networks. This is essentially the M2M market today.

M2M remained a specialist, enterprise sector application for a long time. It relied on niche, systems integration and hardware development companies, often delivering one-off or small-scale deployments. For many years, growth in the M2M market did not meet expectations for faster adoption, and this is visible in analyst forecasts which repeatedly time-shifted the adoption forecast curve. Figure 1 below, for example, illustrates successive M2M forecasts for the 2005-08 period (before M2M began to take off) as analysts tried to forecast when M2M module shipment volumes would breach the 100m units/year hurdle:

Figure 1: Historical analyst forecasts of annual M2M module shipment volumes

Source: STL Partners, More With Mobile

Although the potential of remote connectivity was recognised, it did not become a high-volume market until the GSMA brought about an alignment of interests, across mobile operators, chip- and module-vendors, and enterprise users by targeting mobile applications in adjacent markets.

The GSMA’s original Embedded Mobile market development campaign made the case that connecting devices and sensors to (Internet) applications would drive significant new use cases and sources of value. However, in order to supply economically viable connected devices, the cost of embedding connectivity had to drop. This meant:

  • Educating the market about new opportunities in order to stimulate latent demand
  • Streamlining design practices to eliminate many layers of implementation costs
  • Promoting adoption in high-volume markets such as automotive, consumer health and smart utilities, for example, to drive economies of scale in the same manner that led to the mass-adoption of mobile phones

The late 2000’s proved to be a turning point for M2M, with the market now achieving scale (c. 189m connections globally as of January 2014) and growing at an impressive rate (c. 40% per annum). 

From M2M to the Internet of Things?

Over the past 5 years, companies such as Cisco, Ericsson and Huawei have begun promoting radically different market visions to those of ‘traditional M2M’. These include the ‘Internet of Everything’ (that’s Cisco), a ‘Networked Society’ with 50 billion cellular devices (that’s Ericsson), and a ‘Cellular IoT’ with 100 billion devices (that’s Huawei).

Figure 2: Ericsson’s Promise: 50 billion connected ‘things’ by 2020

Source: Ericsson

Ericsson’s calculation builds on the idea that there will be 3 billion “middle class consumers”, each with 10 M2M devices, plus personal smartphones, industrial, and enterprise devices. In promoting such visions, the different market evangelists have shifted market terminology away from M2M and towards the Internet of Things (‘IoT’).

The transition towards IoT has also had consequences beyond terminology. Whereas M2M applications were previously associated with internal-to-business, operational improvements, IoT offers far more external market prospects. In other words, connected devices allow a company to interact with its customers beyond its strict operational boundaries. In addition, standalone products can now deliver one or more connected services: for example, a connected bus can report on its mechanical status, for maintenance purposes, as well as its location to deliver a higher quality, transit service.

Another consequence of the rise of IoT relates to the way that projects are evaluated. In the past, M2M applications tended to be justified on RoI criteria. Nowadays, there is a broader, commercial recognition that IoT opens up new avenues of innovation, efficiency gains and alternative sources of revenue: it was this recognition, for example, that drove Google’s $3.2 billion valuation of Nest (see the Connected Home EB).

In contrast to RFID, the M2M market required companies in different parts of the value chain to share a common vision of a lower cost, higher volume future across many different industry verticals. The mobile industry’s success in scaling the M2M market now needs to adjust for an IoT world. Before examining what these changes imply, let us first review the M2M market today, how M2M service providers have adapted their business models and where this positions them for future IoT opportunities.

M2M Today: Geographies, Verticals and New Business Models

Headline: M2M is now an important growth area for MNOs

The M2M market has now evolved into a high volume and highly competitive business, with leading telecoms operators and other service providers (so-called ‘M2M MVNOs’ e.g. KORE, Wyless) providing millions of cellular (and fixed) M2M connections across numerous verticals and applications.

Specifically, 428 MNOs were offering M2M services across 187 countries by January 2014 – 40% of mobile network operators – and providing 189 million cellular connections. The GSMA estimates the number of global connections to be growing by about 40% per annum. Figure 3 below shows that as of Q4 2013 China Mobile was the largest player by connections (32 million), with AT&T second largest but only half the size.

Figure 3: Selected leading service providers by cellular M2M connections, Q4 2013

 

Source: Various, including GSMA and company accounts, STL Partners, More With Mobile

Unsurprisingly, these millions of connections have also translated into material revenues for service providers. Although MNOs typically do not report M2M revenues (and many do not even report connections), Verizon reported $586m in ‘M2M and telematics’ revenues for 2014, growing 47% year-on-year, during its most recent earnings call. Moreover, analysis from the Telco 2.0 Transformation Index also estimates that Vodafone Group generated $420m in revenues from M2M during its 2013/14 March-March financial year.

However, these numbers need to be put in context: whilst $500m growing 40% YoY is encouraging, this still represents only a small percentage of these telcos’ revenues – c. 0.5% in the case of Vodafone, for example.

Figure 4: Vodafone Group enterprise revenues, implied forecast, FY 2012-18

 

Source: Company accounts, STL Partners, More With Mobile

Figure 4 uses data provided by Vodafone during 2013 on the breakdown of its enterprise line of business and grows these at the rates which Vodafone forecasts the market (within its footprint) to grow over the next five years – 20% YoY revenue growth for M2M, for example. Whilst only indicative, Figure 4 demonstrates that telcos need to sustain high levels of growth over the medium- to long-term and offer complementary, value added services if M2M is to have a significant impact on their headline revenues.

To do this, telcos essentially have three ways to refine or change their business model:

  1. Improve their existing M2M operations: e.g. new organisational structures and processes
  2. Move into new areas of M2M: e.g. expansion along the value chain; new verticals/geographies
  3. Explore the Internet of Things: e.g. new service innovation across verticals and including consumer-intensive segments (e.g. the connected home)

To provide further context, the following section examines where M2M has focused to date (geographically and by vertical). This is followed by an analysis of specific telco activities in 1, 2 and 3.

 

  • Executive Summary
  • Introduction
  • From RFID in the supply chain to M2M today
  • From M2M to the Internet of Things?
  • M2M Today: Geographies, Verticals and New Business Models
  • Headline: M2M is now an important growth area for MNOs
  • In-depth: M2M is being driven by specific geographies and verticals
  • New Business Models: Value network innovation and new service offerings
  • The Emerging IoT: Outsiders are raising the opportunity stakes
  • The business models and profitability potentials of M2M and IoT are radically different
  • IoT shifts the focus from devices and connectivity to data and its use in applications
  • New service opportunities drive IoT value chain innovation
  • New entrants recognise the IoT-M2M distinction
  • IoT is not the end-game
  • ‘Digital’ and IoT convergence will drive further innovation and new business models
  • Implications for Operators
  • About STL Partners and Telco 2.0: Change the Game
  • About More With Mobile

 

  • Figure 1: Historical analyst forecasts of annual M2M module shipment volumes
  • Figure 2: Ericsson’s Promise: 50 billion connected ‘things’ by 2020
  • Figure 3: Selected leading service providers by cellular M2M connections, Q4 2013
  • Figure 4: Vodafone Group enterprise revenues, implied forecast, FY 2012-18
  • Figure 5: M2M market penetration vs. growth by geographic region
  • Figure 6: Vodafone Group organisational chart highlighting Telco 2.0 activity areas
  • Figure 7: Vodafone’s central M2M unit is structured across five areas
  • Figure 8: The M2M Value Chain
  • Figure 9: ‘New entrant’ investments outstripped those of M2M incumbents in 2014
  • Figure 10: Characterising the difference between M2M and IoT across six domains
  • Figure 11: New business models to enable cross-silo IoT services
  • Figure 12: ‘Digital’ and IoT convergence

 

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

Introduction

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

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

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

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

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

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

Telcos can and do disrupt

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

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

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

Figure 1: Representative examples of disruptive plays driven by telcos

Source: STL Partners

 

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

Offensive, major financial impact 

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

SK Planet – an ambitious mobile commerce play

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


Strategy

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

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

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

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

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

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

 

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

 

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