The Economy of Things: Unlocking the true value of IoT data

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Progressing the Economy of Things (EoT)

The Internet of Things (IoT) has rapidly gained traction in the last decade. Many billions of IoT devices and machine-to-machine (M2M) applications have been developed creating efficiencies and enabling more intelligent, informed and automated decision-making in industries as diverse as manufacturing, healthcare, and transportation. Despite this, telcos are struggling to unlock significant IoT revenues today .

The unfulfilled potential of the IoT

The true value of IoT data today is unrealised and not business enabled. Today, data insights generated from IoT are typically focused on improving internal efficiencies within one organisation. In the future, IoT should both drive internal efficiencies and create new revenue opportunities through making some of the data available for external organisations to purchase.

The fact that the IoT data generated cannot be shared across different IoT devices and systems, is missing a great opportunity to unlock wider collective value across a broad network of connected devices. Most IoT devices are closed command and control solutions where only the device and the manager of the device can communicate. This siloed approach means that opportunities are missed to combine data sources to create more contextualised insights with deeper value.

economy of things

For example, while a coffee company may know what coffee you order (data collected from your connected coffee machine), without sharing that data across a broader network (such as data also collected from your connected smart metre, fridge and car), they will lack the wider context of your other habits/likes/dislikes which limits the targeted advertising they can achieve. Device owners are also often unwilling to share their IoT data with other businesses citing concerns around data security and authorisation and the difficulty in providing an immutable track record of each transaction.

So, how can data generated from IoT devices be monetised and shared across the wider ecosystem?

Economy of Things: The natural next step

The answer could lie in EoT. The term was coined by the IBM Institute for Business Value and represents the ”liquification of the physical world” where physical assets (the ”things”) in IoT become participants in digital markets . EoT signifies a network of participating connected “things” that can interact and communicate with each other to trade and transact autonomously. EoT offers the ability to anchor an identity to an IoT device to be able to transact autonomously. EoT provides true interoperability that can redefine the limits of a traditional IoT ecosystem.

Driving the transition from IoT to EoT relies on creating a platform that creates open participation and collaboration between a cross-industry ecosystem of partners. This interoperable infrastructure helps bring EoT into reality, providing the fundamental brokerage of data products, services and IoT data across the platform.

We are expecting to see the inflection point by 2028 as businesses look towards the EoT to enable the monetisation of their IoT data. This inflection is partly being driven by the sheer number of connected IoT devices that exist today within close proximity to each other. Each are capturing transactional data that could be of value to the other, rather than from larger data sets from distributed sources.

We forecast that the number of EoT devices will grow at a compound annual growth rate of nearly 70% from 2024 to 2030, representing up to 10% of total IoT devices by 2030. Of these EoT devices, up to 20% will be cellular connected devices by 2030.

Economy of Things

Table of Contents

  • Executive Summary
  • Introduction
    • The unfulfilled potential of the IoT
  • Economy of Things: The natural next step
    • Transitioning to the Economy of Things
  • Enter Vodafone DAB platform
  • Initial EoT use cases focus on mobility
    • Vodafone debut use case: EV charging
    • Supply chain monitoring is another leading EoT use case
    • There are endless potential use cases
    • Primary revenue stream revolves around data monetisation
  • Recommendations for enterprises
  • A message from our sponsor

Related research

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Telco digital twins: Cool tech or real value?

Definition of a digital twin

Digital twin is a familiar term with a well-known definition in industrial settings. However, in a telco setting it is useful to define what it is and how it differs from a standard piece of modelling. This research discusses the definition of a digital twin and concludes with a detailed taxonomy.

An archetypical digital twin:

  • models a single entity/system (for example, a cell site).
  • creates a digital representation of this entity/system, which can be either a physical object, process, organisation, person or abstraction (details of the cell-site topology or the part numbers of components that make up the site).
  • has exactly one twin per thing (each cell site can be modelled separately).
  • updates (either continuously, intermittently or as needed) to mirror the current state of this thing. For example, the cell sitescurrent performance given customer behavior.

In addition:

  • multiple digital twins can be aggregated to form a composite view (the impact of network changes on cell sitesin an area).
  • the data coming into the digital twin can drive various types of analytics (typically digital simulations and models) within the twin itself – or could transit from one or multiple digital twins to a third-party application (for example, capacity management analytics).
  • the resulting analysis has a range of immediate uses, such as feeding into downstream actuators, or it can be stored for future use, for instance mimicking scenarios for testingwithout affecting any live applications.
  • a digital twin is directly linked to the original, which means it can enable a two-way interaction. Not only can a twin allow others to read its own data, but it can transmit questions or commands back to the original asset.

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What is the purpose of a digital twin?

This research uses the phrase “archetypical twin” to describe the most mature twin category, which can be found in manufacturing, operations, construction, maintenance and operating environments. These have been around in different levels of sophistication for the last 10 years or so and are expected to be widely available and mature in the next five years. Their main purpose is to act as a proxy for an asset, so that applications wanting data about the asset can connect directly to the digital twin rather than having to connect directly with the asset. In these environments, digital twins tend to be deployed for expensive and complex equipment which needs to operate efficiently and without significant down time. For example, jet engines or other complex equipment. In the telco, the most immediate use case for an archetypical twin is to model the cell tower and associated Radio Access Network (RAN) electronics and supporting equipment.

The adoption of digital twins should be seen as an evolution from today’s AI models

digital-twins-evolution-of-todays-ai-models-stl-partners

*See report for detailed graphic.

Source: STL Partners

 

At the other end of the maturity curve from the archetypical twin, is the “digital twin of the organisation” (DTO). This is a virtual model of a department, business unit, organisation or whole enterprise that management can use to support specific financial or other decision-making processes. It uses the same design pattern and thinking of a twin of a physical object but brings in a variety of operational or contextual data to model a “non-physical” thing. In interviews for this research, the consensus was that these were not an initial priority for telcos and, indeed, conceptually it was not totally clear whether the benefits make them a must-have for telcos in the mid-term either.

As the telecoms industry is still in the exploratory and trial phase with digital twins, there are a series of initial deployments which, when looked at, raise a somewhat semantic question about whether a digital representation of an asset (for example, a network function) or a system (for example, a core network) is really a digital twin or actually just an organic development of AI models that have been used in telcos for some time. Referring to this as the “digital twin/model” continuum, the graphic above shows the characteristics of an archetypical twin compared to that of a typical model.

The most important takeaway from this graphic are the factors on the right-hand side that make a digital twin potentially much more complex and resource hungry than a model. How important it is to distinguish an archetypical twin from a hybrid digital twin/model may come down to “marketing creep”, where deployments tend to get described as digital twins whether they exhibit many of the features of the archtypical twin or not. This creep will be exacerbated by telcos’ needs, which are not primarily focused on emulating physical assets such as engines or robots but on monitoring complex processes (for example, networks), which have individual assets (for example, network functions, physical equipment) that may not need as much detailed monitoring as individual components in an airplane engine. As a result, the telecoms industry could deploy digital twin/models far more extensively than full digital twins.

Table of contents

  • Executive Summary
    • Choosing where to start
    • Complexity: The biggest short-term barrier
    • Building an early-days digital twin portfolio
  • Introduction
    • Definition of a digital twin
    • What is the purpose of a digital twin?
    • A digital twin taxonomy
  • Planning a digital twin deployment
    • Network testing
    • Radio and network planning
    • Cell site management
    • KPIs for network management
    • Fraud prediction
    • Product catalogue
    • Digital twins within partner ecosystems
    • Digital twins of services
    • Data for customer digital twins
    • Customer experience messaging
    • Vertical-specific digital twins
  • Drivers and barriers to uptake of digital twins
    • Drivers
    • Barriers
  • Conclusion: Creating a digital twin strategy
    • Immediate strategy for day 1 deployment
    • Long-term strategy

Related research

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Will web 3.0 change the role of telcos?

Introduction

Over the past 12 months or so, the notion that the Internet is about to see another paradigm shift has received a lot of airtime. Amid all the dissatisfaction with way the Internet works today, the concept of a web 3.0 is gaining traction. At a very basic level, web 3.0 is about using blockchains (distributed ledgers) to bring about the decentralisation of computing power, resources, data and rewards.

STL Partners has written extensively about the emergence of blockchains and the opportunities they present for telcos. But this report takes a different perspective – it considers whether blockchains and the decentralisation they embody will fix the public Internet’s flaws and usher in a new era of competition and innovation. It also explores the potential role of telcos in reinventing the web in this way and whether it is in their interests to support the web 3.0 movement or protect the status quo.

Our landmark report The Coordination Age: A third age of telecoms explained how reliable and ubiquitous connectivity can enable companies and consumers to use digital technologies to efficiently allocate and source assets and resources. In the case of web 3.0, telcos could help develop solutions and services that can help bridge the gap between the fully decentralised vision of libertarians and governments’ desire to retain control and regulate the digital world.

As it considers the opportunities for telcos, this report draws on the experiences and actions of Deutsche Telekom, Telefónica and Vodafone. It also builds on previous STL Partners reports including:

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What do we mean by web 3.0?

The term web 3.0 is widely used to refer to the next step change in the evolution of the Internet. For some stakeholders, it is about the integration of the physical world and the digital world through the expansion of the Internet of Things, the widespread use of digital twins and augmented reality and virtual reality. This concept, which involves the capture and the processing of vast amounts of real-time, real-world data, is sometimes known as the spatial web.

While recognising the emergence of a spatial web, Nokia, for example, has defined web 3.0 as a “visually dynamic smart web” that harness artificial intelligence (AI) and machine learning (ML). It describes web 3.0 as an evolution of a “semantic web” with capacity to understand knowledge and data. Nokia believes that greater interconnectivity between machine-readable data and support for the evolution of AI and ML across “a distributed web” could remake ecommerce entirely.

Note, some of these concepts have been discussed for more than a decade. The Economist wrote about the semantic web in 2008, noting then that some people were trying to rebrand it web 3.0.

Today, the term web 3.0 is most widely used as a shorthand for a redistribution of power and data – the idea of decentralising the computation behind Internet services and the rewards that then ensue. Instead of being delivered primarily by major tech platforms, web 3.0 services would be delivered by widely-distributed computers owned by many different parties acting in concert and in line with specific protocols. These parties would be rewarded for the work that their computers do.

This report will focus primarily on the latter definition. However, the different web 3.0 concepts can be linked. Some commentators would argue that the vibrancy and ultimate success of the spatial web will depend on decentralisation. That’s because processing the real-world data captured by a spatial web could confer extraordinary power to the centralised Internet platforms involved. Indeed, Deloitte has made that link (see graphic below).

In fact, one of the main drivers of the web 3.0 movement is a sense that a small number of tech platforms have too much power on today’s Internet. The contention is that the current web 2.0 model reinforces this position of dominance by funnelling more and more data through their servers, enabling them to stay ahead of competitors. For web 3.0 proponents, the remedy is to redistribute these data flows across many thousands of different computers owned by different entities.  This is typically accomplished using what is known as decentralised apps (dapps) running on a distributed ledger (often referred to as a blockchain), in which many different computers store the code and then record each related interaction/transaction.

The spatial web and web 3.0 – two sides of the same coin?

Spacial-web-Web3-Deloitte

Source: Deloitte

For many commentators, distributed ledgers are at the heart of web 3.0 because they enable the categorisation and storage of data without the need for any central points of control. In an article it published online, Nokia predicted new application providers will displace today’s tech giants with a highly distributed infrastructure in which users own and control their own data. “Where the platform economy gave birth to companies like Uber, Airbnb, Upwork, and Alibaba, web 3.0 technology is driving a new era in social organization,” Nokia argues. “Leveraging the convergence of AI, 5G telecommunications, and blockchain, the future of work in the post-COVID era is set to look very different from what we’re used to. As web 3.0 introduces a new information and communications infrastructure, it will drive new forms of distributed social organisation…Change at this scale could prove extremely challenging to established organisations, but many will adapt and prosper.”

Nokia appears to have published that article in March 2021, but the changes it predicted are likely to happen gradually over an extended period. Distributed ledgers or blockchains are far from mature and many of their flaws are still being addressed. But there is a growing consensus that they will play a significant role in the future of the Internet.

Nokia itself is hoping that the web 3.0 movement will lead to rising demand for programmable networks that developers can harness to support decentralised services and apps. In June 2022, the company published a podcast in which Jitin Bhandari, CTO of Cloud and Network Services at Nokia, discusses the concept of “network as code” by which he means the creation of a persona of the network that can be programmed by ecosystem developers and technology application partners “in domains of enterprise, in domains of web 2.0 and web 3.0 technologies, in domains of industry 4.0 applications, in scenarios of operational technology (OT) applications.”  Nokia envisions that 5G networks will be able to participate in what it calls distributed service chains – the interlinking of multiple service providers to create new value.

Although blockchains are widely associated with Bitcoin, they can enable much more than crypto-currencies. As a distributed computer, a blockchain can be used for multiple purposes – it can store the number of tokens in a wallet, the terms of a self-executing contract, or the code for a decentralised app.

As early as 2014, Gavin Wood, the founder of the popular Ethereum blockchain, laid out a vision that web 3.0 will enable users to exchange money and information on the web without employing a middleman, such as a bank or a tech company. As a result, people would have more control over their data and be able to sell it if they choose.

Today, Ethereum is one of the most widely used (and trusted) blockchains. It bills itself as a permissionless blockchain, which means no one controls access to the service – there are no gatekeepers.

Still, as the Ethereum web site acknowledges, there are several disadvantages to web 3.0 decentralisation, as well as advantages. The graphic below which draws on Ethereum’s views and STL analysis, summarises these pros and cons.

Table of Contents

  • Executive Summary
    • Three ways in which telcos can support web 3.0
    • Challenges facing web 3.0
  • Introduction
  • What do we mean by web 3.0?
    • Transparency versus privacy
    • The money and motivations behind web 3.0
    • Can content also be unbundled?
    • Smart contracts and automatic outcomes
    • Will we see decentralised autonomous organisations?
    • Who controls the user experience?
    • Web 3.0 development on the rise
  • The case against web 3.0
    • Are blockchains really the way forward?
    • Missteps and malign forces
  • Ironing out the wrinkles in blockchains
  • Could and should telcos help build web 3.0?
    • Validating blockchains
    • Telefónica: An interface to blockchains
    • Vodafone: Combining blockchains with the IoT
  • Conclusions

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Telco plays in live entertainment

Enhancing live entertainment

Live entertainment spans everything from a handful of people enjoying stand-up comedy in a pub to a football match attended by 100,000 fans. Although there are many different forms and formats of live entertainment, they share three inter-related characteristics – immediacy, interactivity and immersion. The performers make things happen and people tend to react, by clapping, shouting, singing or gesticulating at the performers or by interacting with each other. A compelling event will also be immersive in the sense that the spectators will focus entirely on the action.

For telcos, live events present specific challenges and opportunities. Simultaneously providing millions of people with high quality images and audio from live events can soak up large amounts of bandwidth on networks, forcing telcos to invest in additional capacity. Yet, it should be feasible to make a return on that investment: live events are an enormously popular form of entertainment on which people around the world are prepared to spend vast sums of money. This is a market where demand often outstrips supply: tickets for top tier sports events or music concerts can cost US$150 or more.

With the advent of 5G and Wi-Fi 6E, telcos have an opportunity to improve spectators’ enjoyment of live events both within a venue and in remote locations. Indeed, telcos could play a key role in enabling many more people to both participate in and appreciate live entertainment, thereby helping them to enjoy more fulfilling and enriching lives.

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The opportunities to use new technologies to enhance live events

Live entertainment

Source: STL Partners

More broadly, telecoms networks and related services have become fundamental to the smooth running of our increasingly digital economy. Our landmark report The Coordination Age: A third age of telecoms explained how reliable and ubiquitous connectivity can enable companies and consumers to use digital technologies to efficiently allocate and source assets and resources. In the case of live entertainment, telcos can help people to make better use of their leisure time – a precious and very finite resource for most individuals.

This report begins by providing an overview of the live entertainment opportunity for telcos, outlining the services they could provide to support both professional and amateur events. It then considers the growing demand for high-definition, 360-degree coverage of live events, before discussing why it is increasingly important to deliver footage in real-time, rather than near real-time. Subsequent sections explore the expanding role of edge computing in facilitating live broadcasts and how augmented reality and virtual reality could be used to create more immersive and interactive experiences.

This report draws on the experiences and actions of AT&T, BT, NTT and Verizon, which are all very active in the coverage of live sports. It also builds on previous STL Partners research including:

Contents

  • Executive Summary
  • Introduction
  • Opportunities to enhance live entertainment
    • Amateur entertainment – a B2C play
  • Delivering high-definition/360-degree video
    • New broadcast technologies
    • Real-time encoding and compression
    • Traffic management and net neutrality
  • Real real-time coverage and stats
    • More data and more stats
    • Personalised advertising and offers
  • Edge computing and the in-event experience
    • Refereeing automation/support
    • In-venue security and safety
    • Wi-Fi versus 5G
  • Augmented reality – blurring the lines
  • Conclusions
    • Tech can enrich people’s experience of live events
    • The role of telcos
  • Index

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How telcos can make the world a safer place

Telecoms networks can support public safety

In the wake of the pandemic and multiple natural disasters, such as fire and flooding, both policymakers and people in general are placing a greater focus on preserving health and ensuring public safety. This report begins by explaining the concept of a digital nervous system – large numbers of connected sensors that can monitor events in real-time and thereby alert organizations and individuals to imminent threats to their health and safety.

With the advent of 5G, STL Partners believes telcos have a broad opportunity to help coordinate better use of the world’s resources and assets, as outlined in the report: The Coordination Age: A third age of telecoms. The application of reliable and ubiquitous connectivity to enable governments, companies and individuals to live in a safer world is one way in which operators can contribute to the Coordination Age.

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The chapters in this report consider the potential to use the data collected by telecoms networks to help counter the health and safety threats posed by:

  • Environmental factors, such as air pollution and high-levels of pollen,
  • Natural disasters, such as wildfires, flooding and earthquakes,
  • Infectious diseases
  • Violence, such as riots and shooting incidents
  • Accidents on roads, rivers and coastlines

In each case, the report considers how to harness new data collected by connected sensors, cameras and other monitors, in addition to data already captured by mobile networks (showing where people are and where they are moving to).  It also identifies who telcos will need to work with to develop and deploy such solutions, while discussing potential revenue streams.  In most cases, the report includes short case studies describing how telcos are trialling or deploying actual solutions, generally in partnership with other stakeholders.

The final chapter focuses on the role of telcos – the assets and the capabilities they have to improve health and safety.

It builds on previous STL Partners research including:

Managing an unstable world

Prior to the damage wrought by the pandemic, the world was gradually becoming a safer place for human beings. Global life expectancy has been rising steadily for many decades and the UN expects that trend to continue, albeit at a slower pace. That implies the world is safer than it was in the twentieth century and people are healthier than they used to be.

Global gains in life expectancy are slowing down

health and safety

Source: United Nations – World Population Prospects

But a succession of pandemics, more extreme weather events and rising pollution may yet reverse these positive trends. Indeed, many people now feel that they live in an increasingly unstable and dangerous world. Air pollution and over-crowding are worsening the health impact of respiratory conditions and infections, such as SARS-CoV-2. As climate change accelerates, experts expect an increase in flash flooding, wildfires, drought and intense heat. As extreme weather impacts the food and water supplies, civil unrest and even armed conflict could follow. In the modern world, the four horsemen of the apocalypse might symbolize infectious disease, extreme weather, pollution and violence.

As the human race grapples with these challenges, there is growing interest in services and technologies that could make the world a safer and healthier place. That demand is apparent among both individuals (hence the strong sales of wearable fitness monitors) and among public sector bodies’ rising interest in environment and crowd monitoring solutions.

As prevention is better than cure, both citizens and organisations are looking for early warning systems that can help them prepare for threats and take mitigating actions. For example, an individual with an underlying health condition could benefit from a service that warns them when they are approaching an area with poor air quality or large numbers of densely-packed people. Similarly, a municipality would welcome a solution that alerts them when large numbers of people are gathering in a public space or drains are close to being blocked or are overflowing.  The development of these kinds of early warning systems would involve tracking both events and people in real-time to detect patterns that signal a potential hazard or disruption, such as a riot or flooding.

Advances in artificial intelligence (AI), as well as the falling cost of cameras and other sensors, together with the rollout of increasingly dense telecoms networks, could make such systems viable. For example, a camera mounted on a lamppost could use image and audio recognition technologies to detect when a crowd is gathering in the locality, a gun has been fired, a drain has been flooded or an accident has occurred.

Many connected sensors and cameras, of course, won’t be in a fixed location – they will be attached to drones, vehicles and even bicycles, to support use cases where mobility will enhance the service. Such uses cases could include air quality monitoring, wildfire and flooding surveillance, and search and rescue.

Marty Sprinzen, CEO of Vantiq (a provider of event-driven, real-time collaborative applications) believes telecoms companies are best positioned to create a “global digital nervous system” as they have the networks and managed service capabilities to scale these applications for broad deployment. “Secure and reliable connectivity and networking (increasingly on ultrafast 5G networks) are just the beginning in terms of the value telcos can bring,” he wrote in an article for Forbes, published in November 2020. “They can lead on the provisioning and management of the literally billions of IoT devices — cameras, wearables and sensors of all types — that are integral to real-time systems. They can aggregate and analyze the massive amount of data that these systems generate and share insights with their customers. And they can bring together the software providers and integrators and various other parties that will be necessary to build, maintain and run such sophisticated systems.”

Sprinzen regards multi-access edge computing, or MEC, as the key to unlocking this market. He describes MEC as a new, distributed architecture that pushes compute and cloud-like capabilities out of data centres and the cloud to the edge of the network — closer to end-users and billions of IoT devices. This enables the filtering and processing of data at the edge in near real-time, to enable a rapid response to critical events.

This kind of digital nervous system could help curb the adverse impact of future pandemics. “I believe smart building applications will help companies monitor for and manage symptom detection, physical distancing, contact tracing, access management, safety compliance and asset tracking in the workplace,” Sprinzen wrote. “Real-time traffic monitoring will ease urban congestion and reduce the number and severity of accidents. Monitoring and management of water supplies, electrical grids and public transportation will safeguard us against equipment failures or attacks by bad actors. Environmental applications will provide early warnings of floods or wildfires. Food distribution and waste management applications will help us make more of our precious resources.”

Vantiq says one if its telco customers is implementing AI-enabled cameras, IoT sensors, location data and other technologies to monitor various aspects of its new headquarters building. He didn’t identify the telco, but added that it is the lead technology partner for a city that’s implementing a spectrum of smart city solutions to improve mobility, reduce congestion and strengthen disaster prevention.

Table of contents

  • Executive Summary
  • Introduction
  • Managing an unstable world
  • Monitoring air quality
    • Exploiting existing cellular infrastructure
    • Is mobile network data enough?
    • Smart lampposts to play a broad role
    • The economics of connecting environmental sensors
    • Sensors in the sky
  • Natural disasters
    • Spotting wildfires early
    • Earthquake alert systems
    • Crowdsourcing data
    • Infectious diseases
  • On street security
  • Conclusions – the opportunities for telcos
    • Ecosystem coordination – kickstarting the market
    • Devices – finding the right locations
    • Network – reliable, low cost connectivity
    • Data platform
    • Applications
  • Index

 

 

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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

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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

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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.

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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.

Contact us to get a full copy of the report.

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.

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The IoT money problem: 3 options

Introduction

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

This report presents:

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

Overview

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

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

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

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

Mapping the IoT ecosystem

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

Figure 1: A simplified map of the IoT ecosystem

Source: STL Partners

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

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

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

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

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

…and the following figures…   

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

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.