Telefónica’s 10 steps to sustainable telecoms

Telefónica’s sustainability: A 20-year journey

Sustainability in the Coordination Age

As part of STL Partners’ research on the opportunities for telecoms operators and the wider industry in the Coordination Age, where the ultimate goal for operators, their customers, and society at large is to make better use of the world’s resources, we have explored how telcos can integrate sustainability into their activities. Previous research on this topic includes:

During the course of this research, we have identified Telefónica as one of the most proactive operators in sustainability. Through our interactions with Telefónica’s sustainability team, we have also found the team to be seriously committed, organised and successful in achieving buy-in to their vision from both the executive leadership team and several business units and opcos. This is a highly impressive achievement for such a large operator.

With the support of Telefónica’s sustainability team, through candid interviews with the team and their colleagues across the business, we have created this case study on their experiences in embedding sustainability across the business. We believe this will help other telcos intent on following a similar trajectory to understand how they can embed sustainability into their corporate strategies and day-to-day activities.

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How Telefónica got to where it is today

Since the creation of Telefónica’s first sustainability team in 2001, the operator has gradually built up its sustainability activities into a company-wide approach with cross team participation over the last twenty years. The first move in this direction came with the creation of the Climate Change Office in 2007, which included senior representatives from Operations, Procurement and Social Responsibility.

Over the last ten years Telefónica has implemented more than 1,400 energy efficiency projects and has carried an annual Energy and Climate Change Workshop with more than 30 vendors for 12 consecutive years, to exchange challenges and solutions to reduce their energy consumption and carbon emissions.

It has three main climate targets: energy efficiency and reducing energy consumption; utilising renewable energy; and reducing its carbon footprint to achieve net-zero emissions in 2040, including its value chain. Figure 2 outlines Telefónica’s sustainability journey and key inflection points through the years.

Key activities and inflection points in Telefónica’s

Telefónica's sustainability

Achieving buy-in across the organisation

Embedding sustainability into Telefónica has been a grassroots effort on the part of the small but hardworking Global Sustainability Department (hereafter known as the environmental team in this report) to find the proof points necessary to convince Telefónica’s senior management to build sustainability into the corporate strategy. The team has used a mixture of bottom-up and top-down approaches, with management support at crucial moments, which will be explored later in the report.

Through our many conversations with Telefónica’s environmental team, perseverance stood out as the most important characteristic within the team. When they recruit new employees, their priority is to find people with the ability to come up with innovative ideas for meeting sustainability targets, resilience, and perseverance.

This determined and visionary approach means that the environmental team works intuitively and pre-empts other departments’ needs. By the time colleagues from other departments approach the environmental team with their requirements for sustainability-related projects (for example the finance team’s interest in launching a Green Bond), the team is already armed with a range of data, materials and resources needed to put together a business case for the activity. As a result of this preparation, the environmental team has been able to quickly support and capitalise on new opportunities as they have arisen, ensuring they can keep the momentum going whenever it builds.

However, the process of embedding sustainability into company strategy has not come without challenges and difficulties. In conversations with STL Partners, the environmental team said that one of the challenges of working with different teams has been picking the right moment to approach them with ideas. Telefónica also stressed the importance of finding strategic alliances and internal champions on other teams. Through strategic, considered and strong relationship building, the environmental team has found internal champions in their Spanish core network operations, finance, procurement, enterprise, and sales teams, who are fully on board with the Telefónica sustainability vision and strategy.

Although the environmental team is currently working with the marketing team to ensure its sustainability message and efforts is more present in its brands, the environmental team cited this as one of its top priorities in 2022. Aside from needing to build stronger relationships and buy-in, part of the challenge is working with the marketing team on how to accurately and effectively market sustainability, without appearing to be ‘greenwashing’.

Another challenge is adapting to the different ways in which the other teams operate when implementing sustainability initiatives across the company. For example, the sales team generally work towards quick deadlines with short-term results, hence it may be harder to create an aligned dialogue with this team. Having a strong insight into the way Telefónica works as an organisation, by working directly within other teams e.g., helping the sales team to complete RFPs, helps this challenge.

By embedding sustainability into the company in these ways, all departments see the benefit and engage with the process. Telefónica told STL Partners that its employees believe in sustainability on a personal level as well as seeing the business benefit and commercial opportunity. Employees are genuinely engaging with sustainability issues themselves and want Telefónica to work towards sustainability goals as a company. As one employee said to us, “you don’t have to work in the environmental team to want to protect the environment”.

Ultimately, this rigorous, patient, committed and collaborative approach to sustainability has enabled the team to achieve broad buy-in across Telefónica’s business units and international opcos. Throughout the report we will explore how it has done this in:

  • Core network operations
  • Finance
  • Enterprise services
  • International opcos.

Table of contents

  • Executive Summary
    • What makes Telefónica different to other telcos?
    • Next steps
  • Table of Figures
  • Telefónica’s 20-year sustainability journey
    • Sustainability in the Coordination Age
    • How Telefónica got to where it is today
    • Achieving buy-in across the organisation
  • Why Telefónica stands out among telcos
    • High level overview of achievements so far
    • How Telefónica compares with other telcos
    • How Telefónica collaborates with its peers
  • Network operations: The first step to embedding sustainability in Telefónica
  • Sustainable financing: A pioneer in telecoms
    • How the first Green Bond came to life
    • Subsequent green and sustainable bonds
    • Challenges and benefits
  • Eco Smart label and consulting services: Expanding from networks to services
    • How the idea came to life
    • Consulting services through Telefónica Tech
    • Eco Smart label in 5G services
    • Sustainability as a core component of digital transformation
  • Implementing sustainability across a global footprint
    • Aligning goals with individual market dynamics
  • Conclusion
    • Ten takeaways from Telefónica’s holistic approach
  • Index

 

 

 

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Telco roadmap to net-zero carbon emissions: Why, when and how

Telcos’ role in reducing carbon emissions

There are over eighty telecoms operators globally that turn over $1 billion or more in revenues every year. As major companies, service providers (SPs) have a role to play in reducing global carbon emissions. So far, they have been behind the curve. In the Corporate Knights Global 100 of the world’s most sustainable corporations, only five of them are telcos (BT, KPN, Cogeco, Telus and StarHub) and none of them are in the top 30.

In this report, we explore the aims, visions and priorities of SPs in their journey to become more sustainable companies. More specifically, we have sought to understand the practical steps they are undertaking to reduce their carbon footprints. This includes discovering how they define, prioritise and drive initiatives as well as the governance and reporting used to determine their progress to ‘net-zero’.

Each SP’s journey is unique; we’ve explored how regional and market influences affect their journey and how different personas and influencers within the SP approach this topic. To do this, we have spoken to 40 individuals at SPs globally. Interviewees have varied, from corporate and social responsibility (CSR) representatives, to those responsible for the SP’s technology and enterprise strategies. This report reflects the strategies and ambitions we learnt about during these conversations.

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This report is informed by interviews from SPs globallytelcos carbon emissions

What do we mean by scope 1, 2 and 3?

Before diving in further, it’s important to align on the key terminology that all major SPs are drawing on to evaluate and report their sustainability efforts: in particular, how they disclose and commit to reducing their greenhouse gas emissions.

SPs divide their carbon emissions into scope 1, 2 and 3 – scope 3 is by far the most significant

For most SPs, scope 1 (e.g. emissions from the fleet of vehicles used to install equipment or perform maintenance tasks on base stations) and scope 2 (e.g. the electricity they purchase to run their networks) makes up less than 20% of their overall footprint. These emissions can be recorded and reported on accurately and there are established methodologies for doing so.

Scope 3, however, is where 80%+ of SP carbon emissions come from. This is because it captures the impact of the SP’s whole supply chain, e.g. the carbon emissions released from manufacturing the network equipment that they deploy. It also includes the carbon emissions arising from supplying customers with products and services that an SP sells, e.g. from shipping and de-commissioning consumer handsets or servers provided to enterprise customers.

Table of Contents

  • Executive Summary
  • Table of Figures
  • Introduction
    • What do we mean by scope 1, 2 and 3?
    • Where are SPs in their sustainability journey?
    • How does this differ by region?
    • What’s covered in the rest of the report?
  • Procurement and sustainable supply chain
    • Scope 1, 2 and 3: Where are procurement teams focused
    • Current priorities
    • Regional nuances
    • Best and next practices
  • Networking
  • IT and facilities
  • Enterprise products and services
  • Key recommendations and conclusion

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Coordinating the care of the elderly

Are telcos ready to enable digital health?

The world has been talking about connected healthcare – the use of in-home and wearable systems to monitor people’s condition – for a long time. Although adoption to date has been piecemeal and limited, the rapid rise in the number of elderly people is fuelling demand for in-home and wearable monitoring systems. The rapid spread of the Covid-19 virus is putting the world’s healthcare systems under huge strain, further underlining the need to reform the way in which many medical conditions are diagnosed and treated.

This report explores whether telcos now have the appetite and the tools they need to serve this very challenging, but potentially rewarding market. With the advent of the Coordination Age (see STL Partners report: Telco 2030: New purpose, strategy and business models for the Coordination Age), telcos could play a pivotal role in enabling the world’s healthcare systems to become more sustainable and effective.

This report considers demographic trends, the forces changing healthcare and the case for greater use of digital technologies to monitor chronic conditions and elderly people. It explores various implementation options and some of the healthcare-related activities of Tele2, Vodafone, Telefónica and AT&T, before drawing conclusions and recommending some high-level actions for telcos looking to support healthcare for the elderly.

This executive briefing builds on previous STL Partners reports including:

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Why healthcare needs to change

During the twentieth century, life expectancy in most countries in the world rose dramatically.  This was down to advances in medical science and diagnostic technology, as well as rising awareness about personal and environmental hygiene, health, nutrition, and education. Average global life expectancy continues to rise, increasing from 65.3 years in 1990 to 71.5 years in 2013.  In some countries, the increase in lifespans has been dramatic. The life expectancy for a Chilean female has risen to 82 years today from 33 years in 1910, according to the World Health Organization (WHO).

Figure 1: Across the world, average life expectancy is rising towards 80

raising lift expectancy to 2050

Source: The UN

Clearly, the increase in the average lifespan is a good thing. But longer life expectancy, together with falling birth rates, means the population overall is aging rapidly, posing a major challenge for the world’s healthcare systems. According to the WHO, the proportion of the world’s population over 60 years old will double from about 11% to 22% between 2000 and 2050, equivalent to a rise in the absolute number of people over 60 from 605 million to an extraordinary two billion. Between 2012 and 2050, the number of people over 80 will almost quadruple to 395 million, according to the WHO. That represents a huge increase in the number of elderly people, many of whom will require frequent care and medical attention. For both policymakers and the healthcare industry, this demographic time bomb represents a huge challenge.

Rising demand for continuous healthcare

Of particular concern is the number of people that need continuous healthcare. About 15% of the world’s population suffers from various disabilities, with between 110 million and 190 million adults having significant functional difficulties, according to the WHO. With limited mobility and independence, it can be hard for these people to get the healthcare they need.

As the population ages, this number will rise and rise. For example, the number of Americans living with Alzheimer’s disease, which results in memory loss and other symptoms of dementia, is set to rise to 16 million by 2050 from five million today, according to the Alzheimer’s Association.

The growth in the number of older people, combined with an increase in sedentary lifestyles and diets high in sugars and fats, also means many more people are now living with heart disease, obesity, diabetes and asthma. Furthermore, poor air quality in many industrial and big cities is giving rise to cancer, cardiovascular and respiratory diseases such as asthma, and lung diseases. Around 235 million people are currently suffering from asthma and about 383,000 people died from asthma in 2015, according to the WHO.

Half of all American adults have at least one chronic condition with one in three adults suffering from multiple chronic conditions, according to the National Institutes of Health (NIH). Most other rich countries are experiencing similar trends, while middle-income countries are heading in the same direction. In cases where a patient requires medical interventions, they may have to travel to a hospital and occupy a bed, at great expense. With the growing prevalence of chronic conditions, a rising proportion of GDP is being devoted to healthcare. Only low-income countries are bucking this trend (see Figure 2).

Figure 2: Spending on healthcare is rising except in low income countries

Public health as % of government spending WHO

Public health spending as % of GDP WHO

Source: The WHO

However, there is a huge difference in absolute spending levels between high-income countries and the rest of the world (see Figure 3). High-income countries, such as the U.S., spend almost ten times as much per capita as upper middle-income countries, such as Brazil. At first glance, this suggests the potential healthcare market for telcos is going to be much bigger in Europe, North America and developed Asia, than for telcos in Latin America, developing Asia and sub-Saharan Africa. Yet these emerging economies could leapfrog their developed counterparts to adopt connected self-managed healthcare systems, as the only affordable alternative.

Figure 3: Absolute health spending in high income countries is far ahead of the rest

per capita health spending by country income levelSource: The WHO

The cost associated with healthcare services continues to rise due to the increasing prices of prescription drugs, diagnostic tools and in-clinic care. According to the U.S. Centers for Disease Control and Prevention, 90% of the nation’s US$3.3 trillion annual healthcare expenditure is spent on individuals with chronic and mental health conditions.

On top of that figure, the management of chronic conditions consumes an enormous amount of informal resources. As formal paid care services are expensive, many older people rely on the support of family, friends or volunteers calling at their homes to check on them and help them with tasks, such as laundry and shopping. In short, the societal cost of managing chronic conditions is enormous.

The particular needs of the elderly

Despite the time and money being spent on healthcare, people with chronic and age-related conditions can be vulnerable. While most elderly people want to live in their own home, there are significant risks attached to this decision, particularly if they live alone. The biggest danger is a fall, which can lead to fractures and, sometimes, lethal medical complications. In the U.S., more than one in four older people fall each year due to illness or loss of balance, according to the U.S. Centers for Disease Control and Prevention. But less than half tell their doctor. One out of five falls causes a serious injury, such as broken bones or a head injury. In 2015, the total medical costs for falls was more than US$50 billion in the U.S. Beyond falls, another key risk is that older people neglect their own health. A 2016 survey of 1,000 U.K. consumers by IT solutions company Plextek, found that 42% of 35- to 44-year-olds are concerned that their relatives aren’t telling them they feel ill.

Such concerns are driving demand for in-home and wearable systems that can monitor people in real-time and then relay real-time location and mobility information to relatives or carers. If they are perceived to be reliable and comprehensive, such systems can provide peace of mind, making home-based care a more palatable alternative for both patients and their families.

Table of contents

  • Executive Summary
    • Barriers to more in-home healthcare
  • Introduction
  • Why healthcare needs to change
    • Rising demand for continuous healthcare
    • The particular needs of the elderly
    • Shift to value-based care
    • Demands for personalised healthcare and convenience
  • How healthcare is changing
    • Barriers to more in-home healthcare
  • Implementation options
    • Working with wearables
    • Cameras and motion sensors
    • The connectivity
    • Analysing the data
  • How telcos are tackling healthcare
    • KPN: Covering most of the bases
    • Tele2 and Cuviva: Working through healthcare centres
    • Vodafone and Vision: An expensive system for Alzheimer’s
    • Telefónica’s Health Moonshot
    • AT&T: Leveraging a long-standing brand
  • Conclusions and recommendations
    • Recommendations

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Five Principles for Disruptive Strategy

Introduction

Disruption has become a popular theme, and there are some excellent studies and theories, notably the work of Clayton Christensen on disruptive innovation.

This briefing is intended to add some of our observations, ideas and analysis from looking at disruptive forces in play in the telecoms market and the adjacent areas of commerce and content that have had and will have significant consequences for telecoms.

Our analysis centres on the concept of a business model: a relatively simple structure that can be used to describe and analyse a business and its strategy holistically. The structure we typically use is shown below in Figure 1, and comprises 5 key domains: The Marketplace; Service Offering; Value Network; Finance; and Technology.

Figure 1 – A business model is the commercial architecture of a business: how it makes money

Telco 2.0: STL Partners standard business model analysis Framework

Source: STL Partners

This structure is well suited to analysis of disruption, because disruptive competition is generally a case of conflict between companies with different business models, rather than competition between similarly configured businesses.

A disruptive competitor, such as Facebook for telecoms operators, may be in a completely different core business (advertising and marketing services) seeking to further that business model by disrupting an existing telecoms service (voice and messaging communications). Or it may be a broadly similar player, such as Free in France whose primary business is recognisably telecoms, using a radically different operational model to gain share from direct competitors.

We will look at some of these examples in more depth in this report, and also call on analysis of Google, Apple, Facebook and Amazon to illustrate principles

Digital value is often transient

KPN: a brief case study in disruption

KPN, a mobile operator in the Netherlands, started to report a gradual reduction in SMS / user statistics in early 2011, after a long period of near continuous growth.

Figure 2 – KPN’s SMS stats per user started to change at the end of 2010

Telco 2.0 Figure 2 KPNs SMS stats per user stated to change at the end of 2010

Source: STL Partners, Mobile World Database

KPN linked this change to the rapid rise of the use of WhatsApp, a so-called over-the-top (OTT) messaging application it had noticed among ‘advanced users’ – a set of younger Android customers, as shown in Figure 3.

Figure 3 – WhatsApp took off in certain segments at the end of 2010

Telco 2.0 Figure 3 WhatsApp took off in certain segments at the end of 2010

Source: KPN Corporate Briefing, May 2011

There was some debate at the time about the causality of the link, but the longer term picture of use and app penetration certainly supports the connection between the rise of WhatsApp take-up among KPN’s broader base (as opposed to ‘advanced users’ in Figure 3) and the rapid decline of SMS volumes as Figure 4 shows.

Figure 4 – KPN’s SMS volumes have continued to decline since 2010

Telco 2.0 Figure 4 KPN’s SMS volumes have continued to decline since 2010

Source: STL Partners estimates, Mobile World, Telecomspaper, Statista, Comscore, KPN.

How did that happen then?

KPN’s position was particularly suited to a disruptive attack by WhatsApp (and other messaging apps) in the Netherlands because:

  • It had relatively high unit prices per SMS.
  • KPN had not ‘bundled’ many SMSs into its packages compared to other operators, and usage was very much ‘pay as you go’ – so using WhatsApp offered immediate savings to users.
  • Its market of c.17 million people is technologically savvy with high early smartphone penetration, and densely populated for such a wealthy country, so well suited to the rapid viral growth of such apps.

KPN responded by increasing the number of SMSs in bundles and attempting to ‘sell up’ users to packages with bigger bundles. It has also embarked on more recent programmes of cost reduction and simplification. But as far as SMS was concerned, the ‘horse had bolted the stable’ and the decline continues as consumers gravitate away from a service perceived as losing relevance and value.

We will look in more depth at disruptive pricing and product design strategies in the section on ‘Free is not enough, nor is it the real issue’ later in this report. This case study also presents another challenge for strategists: why did the company not act sooner and more effectively?

Denial is not a good defence

One might be forgiven for thinking that the impact of WhatsApp on KPN was all a big surprise. And perhaps to some it was. But there were plenty of people that expected significant erosion of core revenues from such disruption. In a survey we conducted in 2011, the average forecast among 300 senior global telecoms execs was that OTT services would lead to a 38% decline in SMS over the next 3-5 years, and earlier surveys had shown similar pessimism.

Having said that, it is also true that there was some shock in the market at the time over KPN’s results, and subsequent findings in other markets in Latin America and elsewhere. It is only recently that it has become more of an accepted ‘norm’ in the industry that its core revenues are subject to attack and decline.

Perhaps the best narrative explanation is one of ‘corporate denial’, akin to the human process of grief. Before we reach acceptance of a loss, individuals (and consequently teams and organisations by this theory) go through various stages of emotional response before reaching ‘acceptance’ – a series of stages sometimes characterised as ‘denial, anger, negotiation and acceptance’. This takes time, and is generally considered healthy for people’s emotional health, if not necessarily organisations’ commercial wellbeing.

So what can be done about this? It’s hard to change nature, but it is possible to recognise circumstances and prepare forward plans differently. In the digital era, leaders, strategists, marketers, and product managers need to recognise that profit pools are increasingly transient, and if you are skilful or lucky enough to have one in your portfolio, it is critical to anticipate that someone is probably working on how to disrupt it, and to gather and act quickly on intelligence on realistic threats. There are also steps that can be taken to improve defensive positions against disruption, and we look at some of these in this report. It isn’t always possible because sometimes the start point is not ideal – but then again, part of the art is to avoid that position.

 

  • Executive Summary: five principles
  • Introduction
  • Digital value is often transient
  • KPN: a brief case study in disruption
  • How did that happen then?
  • Denial is not a good defence
  • Timing a disruptive move is critical
  • Disruption visibly destroys value
  • So when should strategists choose disruption?
  • Free is not enough, nor is it the real issue
  • How market winners meet needs better
  • How to compete with ‘free’?
  • Build the platform, feed the flywheel
  • Nurture the ecosystem
  • …don’t price it to death

 

  • Figure 1 – A business model is the commercial architecture of a business: how it makes money
  • Figure 2 – KPN’s SMS stats per user started to change at the end of 2010
  • Figure 3 – WhatsApp took off in certain segments at the end of 2010
  • Figure 4 – KPN’s SMS volumes have continued to decline since 2010
  • Figure 5 – Free’s disruptive play is destroying value in the French Market, Q1 2012-Q3 2014
  • Figure 6 – Verizon is winning in the US – but most players are still growing too, Q1 2011-Q1 2014
  • Figure 7 – How ‘OTT’ apps meet certain needs better than core telco services
  • Figure 8 – US and Spain: different approaches to disruptive defence
  • Figure 9 – The Amazon platform ‘flywheel’ of success

A Practical Guide to Implementing Telco 2.0

 

Detailed table of contents

Section

Sub-sections

Part One: Identifying Telco 2.0 Opportunities

Developing the Right Telco 2.0 Strategy

  • Applying Porter’s thinking to the current telecoms market
  • Generic Telco 2.0 strategic options
  • Telco 2.0 strategies: how they drive shareholder returns
  • Which Telco 2.0 strategy for your organisation
  • Strategy comparison case studies: A Telco 2.0 Happy Piper (Vodafone UK) versus Telco 2.0 Service Player (O2)

Identifying & Prioritising Telco 2.0 Innovations

  • A taxonomy of Telco 2.0 opportunities
  • From isolated innovations to an integrated platform
  • Two approaches to identifying Telco 2.0 innovations
  • Approaches
  • Case study:  The STL Partners Innovation Scouting Service
  • Evaluating the potential opportunities: a structured approach to screening

Part Two: Implementing Telco 2.0 Opportunities

Introduction

  • A framework for innovation and business model transformation for telecoms

Service Offerings: Bringing Telco 2.0 Propositions to Market

  • A 12-stage end-to-end process for service development
    1. 1. Customer intentions and draft press release
    2. 2. Detailed value proposition and use cases
    3. 3. Fast validation with users
    4. 4. Capabilities assessment and own/partner role definitions
    5. 5. Revenue and cost models
    6. 6. Evaluation and business case
    7. 7. Competition and regulation
    8. 8. Technology and build process
    9. 9. Proof of Concept and final build
    10. 10. Sales and marketing
    11. 11. Launch
    12. 12. Evaluation and continuous development
  • Case studies: Vodafone 360, O2 Priority Moments
  • Checklists and templates for each stage

Value Network: Internal – Getting the Organisation Right to Deliver Telco 2.0 Innovation

  • Centralised versus decentralized organization structures
  • Integrating Telco 2.0 into the core organisation versus creating an independent unit
  • Case studies on different approaches: Telefonica and KPN

Value Network: External – Partnering to Grow the Pie

  • Evaluating closed versus open business models
  • Collaborating with other operators – when and how to do it
  • Working with other service providers – start-ups, established vendors and ‘OTT players’
  • Determining when to collaborate and when to compete

Technology: Prioritising Activities to Support Business Transformation

  • Understanding the developing demands on IT resources
  • Priority new functional area: Customer data
  • Approaches to IT transformation: Big Bang versus Continuous Improvement
  • Evaluating IT transformation approaches: a structured screening methodology
  • Case studies on IT transformation approaches: Vodafone and Telefonica

Finance: Optimising the Telco 2.0 Revenue & Cost Model

  • Revenue drivers: key revenue models and sources of revenue
  • Cost drivers: key types of cost and cost models
  • A framework for guiding decisions about revenue and cost management
  • Implications of new business models on financial and operational metrics

Marketplace: Managing the Regulatory Environment

  • Making the case against net neutrality…
  • …and for the ability to collaborate with other telecoms players to build value
  • Recommended next steps for CEOs

Full Article: Aligning M2M with Telco 2.0 Strategies

Summary: A review of Telenor, Jasper Wireless and KPN’s approaches to M2M,
examining how M2M strategy needs to fit with an operators’ future
broadband business model strategy. (October 2010)

NB A PDF copy of this article can be downloaded here.

M2M: escaping the cottage industry

The M2M (Machine-to-Machine) market, also known as “Embedded
Mobile”, has frequently been touted as a major source of future growth for the
industry. Verizon Wireless, for example, has set a target of 400% mobile
penetration, implying three embedded devices for each individual subscriber.
However, it is widely considered that this market is cursed by potential –
success always seems to be five years away. At this Spring’s Telco 2.0
Executive Brainstorm, delegates described it as being “sub-scale” and a
“cottage industry”.

Specific technical, operational, and economic issues have
driven this initial fragmentation. M2M is characterised by diversity- this is
inevitable, as there are thousands of business processes in each of tens of
thousands of sub-sectors across the industrial economy. As well as the highly
tailored nature of the applications, there is considerable diversity in
hardware and software products, and new products will have to coexist with many
legacy systems. These many diverse but necessary combinations have provided
fertile ground for the separate ‘cottage industries’.

As a result, it is conversely difficult to build scale,
despite the large total market size. Also, the high degree of specialisation in
each sub-market acts as a barrier to entry. Volume is critical, as typical
ARPUs for embedded devices are only a fraction of those we have come to expect
from human subscribers. This also implies that efficiency and project execution
are extremely important – there is little margin for error.  Finally, with so much specialisation at both
the application and device ends of the equation, it is hard to see if and where
there is much room for generic functionality in the middle. 

Special Technical and Operational Challenges

The technical problems are challenging. M2M applications are
frequently safety-critical, operations-critical, or both. This sets a high bar
in terms of availability and reliability. They often have to operate in
difficult environments. Information security issues will be problematic and new
technologies such as the “Internet of things”/Ubiquitous Computing will make
new demands in terms of disclosure that contradict efforts to secure the
system. An increasingly common requirement is for embedded devices to
communicate directly and to self-organise – in the past, M2M systems have
typically used a client-server architecture and guaranteed security by
isolating their communications networks from the wider world. The security
requirements of a peer-to-peer, internetworked M2M system are qualitatively
different to those of traditional Supervisory, Control, and Data Acquisition
(SCADA) systems.

One of the reasons for customer interest in self-organising
systems is that M2M projects often involve large numbers of endpoints, which
may be difficult to access once deployed, and the costs of managing the system
can be very high. How are the devices deployed, activated, maintained, and
withdrawn? How does the system authenticate them? Can a new device appearing on
the scene be automatically detected, authenticated, and connected? A related
problem is that devices are commonly integrated in industrial assets that have
much longer design lives than typical cellular electronics; computers are
typically depreciated over 3 years, but machine tools, vehicles, and other
plant may have a design life of 30 years or more.

This implies that the
M2M element must be repeatedly upgraded during its lifetime, and if possible,
this should happen without a truckroll. (The asset, after all, may be an
offshore wind turbine, in which case no-one will be able to visit it without using
a helicopter
.) This also requires that upgrades can be rolled-back in the
event they go wrong.

The Permanent Legacy Environment

We’ve already noted that there are a great variety of
possible device classes and vendors, and that new deployments will have to
co-exist with legacy systems. In fact, given the disparity between their
upgrade cycles and the design lives of the assets they monitor, it’s more
accurate to say that these devices will exist in a permanent legacy
environment.

Solution: The Importance of System Assurance

Given the complex needs of M2M applications, just providing
GPRS connectivity and modules will not be enough. Neither is there any reason
to think operators will be better than anyone else at developing industrial
process control or management-information systems. However, look again at the
issues we’ve just discussed – they cluster around what might be termed “system
assurance”. Whatever the application or the vendor, customers will need to be
able to activate, deactivate, identify, authenticate, read-out, locate,
command, update, and rollback their fleet of embedded devices. It is almost
certainly best that device designers decide what interfaces their product will
have as extensions to a standard management protocol. This also implies that
the common standard will need to include a function to read out what extensions
are available on a given device. The

similarities with the well-known SNMP (Simple Network
Management Protocol) and with USSD are extensive.

These are the problems we need to solve. Are there
technology strategies and business models that operators can use to profit by
solving them?

We have encountered a number of examples of how operators
and others have answered this question.

Three Operators’ Approaches

1.  Telenor:
Comprehensive Platform

Telenor Objects is a platform for handling the management,
systems administration, information assurance, and applications development of
large, distributed M2M systems. The core of the product is an open-source
software application developed in-house at Telenor. Commercially, Objects is
offered as a managed service hosted in Telenor’s data centres, either with or
without Telenor data network capacity. This represents concentration on the
system assurance problems we discussed above, with a further concern for rapid
applications development and direct device-to-device communication.

2.  Jasper:
Connectivity Broker.

Several companies – notably Jasper Wireless, Wyless plc.,
and Telenor’s own Connexion division – specialise in providing connectivity for
M2M applications as a managed service. Various implementations exist, but a
typical one is a data-only MVNO with either wholesale or roaming relationships
to multiple physical operators. As well as acting as a broker in wholesale data
service, they may also provide some specialised BSS-OSS features for M2M work,
thus tackling part of the problems given above.

3.  KPN:
M2M Happy Pipe

KPN (an investor in Jasper Wireless) has recently announced
that it intends to deploy a CDMA450 network in the Netherlands exclusively for
M2M applications. Although this is a significant CAPEX commitment to the low
margin connectivity element of the M2M market, it may be a valid option.
Operating at 450MHz, as opposed to 900/1800/1900MHz GSM or 2100MHz UMTS,
provides much better building penetration and coverage at the cost of reduced
capacity. The majority of M2M applications are low bandwidth, many of them will
be placed inside buildings or other radio-absorbing structures, and the low
ARPUs imply that cost minimisation will be significantly more important than
capacity. Where suitable spectrum is available, and a major launch customer –
for example, a smart grid project – exists to justify initial expenditure, such
a multi-tenant data network may be an attractive opportunity. However, this
assumes that the service-enablement element of the product is provided by
someone else – which may be the profitable element.

Finally, Verizon Wireless’s Open Development Initiative,
rather than being a product, is a standardisation initiative intended to
increase the variety of devices available for M2M implementers by speeding up
the process of homologating (the official term) new modules. The intention is
to create a catalogue of devices whose characteristics can be trusted and whose
control interfaces are published. This is not a lucrative business, but
something like it is necessary to facilitate the development of M2M hardware
and software.

Horizontal Enablers

These propositions have in common that they each represent a
different horizontal element of the total M2M system-of-systems –
whether it’s the device-management and applications layer, as in Telenor
Objects, a data-only MVNO such as Connexion or Wyless, or a radio network like
KPN’s, it’s a feature or capability that is shared between different vertical
silos and between multiple customers.

In developing horizontal enabler capabilities, operators
need to consider how to both drive development and growth of what is
effectively a new market and ensure that they are adding
value and that they are getting paid for it.   There is a natural tension between these
objectives.

The tension is between providing a compelling opportunity to
potential ecosystem partners (and in particular, offering them low cost access
to a large potential market) and securing a clear role for providers to extract
value (in particular, through differentiation).


Tensions between operators
and users

Linux: a case study

To explore operator options, we have looked to the
experience of Linux. This is an example of how the demands of a highly diverse
user base can be tackled through horizontalisation, modular design, and open
source development. Since the 1990s, the operating system has come to include a
huge diversity of specialised variants, known as distributions. These consist
of elements that are common to all Linux systems – such as one of the various
kernels which provide the core operating system functions, the common API,
drivers for different hardware devices, and a subset of a wide range of
software libraries that provide key utility programs – and modules specific to
the distribution, that implement its special features.

 For example, Red Hat
Enterprise Linux and OpenSUSE are enterprise-optimised distributions, CentOS is
frequently used for Asterisk and other VoIP applications, Ubuntu is a consumer
distribution (which itself has several specialised variants such as Edubuntu
for educational applications), Android is a mobile-optimised distribution,
Slackware and Debian exist for hardcore developers, Quagga and Zebra are
optimised for use as software-based IP routers, and WindRiver produces
ultra-low power systems for embedded use.

In fact, it’s probably easier to illustrate this than it is
to describe it. The following diagram illustrates the growing diversity of the
Linux family.

The evolution of Linux
distributions over time

The reason why this has been a) possible and b)
tolerable  is the horizontalised,
open-source, and modular nature of Linux. It could easily have been far too
difficult to do a version for minimal industrial devices, another for desktop
PCs, and yet another for supercomputers. Or the effort to do so could have
created a morass of highly incompatible subprojects

In creating a specialised distribution (or ‘distro’), it’s
possible to rely on the existing features that span the various distributions
and deal with the requirements they have in common. Similarly, a major
improvement in one of those core features has a natural source of scale, and
will tend to attract community involvement in its maintenance, as all the other
distros will rely on it. This structure both supports specialisation and
innovation, and helps to scale up support for the features everyone uses.

The Linux kernel – horizontal
specialisation in action

 

To recap, we think that M2M devices may be a little like
this – very different, but relying on at least a subset of the features in a
common specification. The Linux analogy is especially important given that a
lot of them are likely to use some sort of embedded Linux platform. Minimal
common features are likely to cluster around:

  • Activation/Deactivation – initial switch on of a
    device, provisioning it with connectivity, and eventually switching it off

  • Authentication – checking if this is the device
    it should be

  • Update/Rollback – updating the software and
    firmware on a device, and reversing this if it goes wrong

  • Device Discovery – detecting the presence of new
    devices

  • State Readout – get the current values for
    whichever parameters the device is monitoring

  • Location – where is the device?

  • Device Status – is it working?

  • Generic Event notification parameters – provide
    for notifications to and from devices that are specified by the user

This list is likely to be extended by device implementers
and software developers with device- and application-specific commands and data
formats, so there will also need to be a function to get a device’s interfaces
and capabilities. Technically, this has considerable commonality with formats
like USB, SNMP (Simple Network Management Protocol), SyncML, etc. – it’s
possible that these might be implemented as extensions to one of these
protocols.

For our purposes, it’s more interesting to note that these
functions have a lot in common with telcos’ own competences with regard to
device management, activation, OSS/BSS, and the SIM/USIM. Operators in general,
and specifically mobile operators, already have to detect, authenticate,
provision-on, update, and eventually end-of-life a diverse variety of mobile
devices. As much of this as possible must happen over-the-air and
automatically.

It is worth noting that Telstra recently announced their
move into the M2M market. Although they are doing so with Jasper Wireless as a
partner, the product (Telstra
M2M Wireless Control Centre
) is a Web-based self-service application for
customers to activate and administer their own devices.

The commercial strategies of Linux vendors

Returning to the IT world, it’s worth asking “how do the
Linux vendors make money?” After all, their product is at least theoretically
free. We see three options.

  • Option 1 – Red Hat, Novell

Both of these major IT companies maintain their own Linux
distribution (RHEL and OpenSUSE respectively, two of the most common enterprise
distros) and are very significant contributors of code to the core development
process. They also develop much application-layer software.

As well as releasing the source code, though, they also
offer paid-for, shrink-wrapped versions of the distributions, often including
added extras, and custom installations for major enterprise projects.

Typically, a large part of the commercial offering in such a
deal consists of the vendor providing technical support, from first line up to
systems integration and custom software development, and consulting services
over the lifetime of the product. It has been remarked that Linux is only free
if you value your own time at zero – this business model externalises the
maintenance costs and makes them into a commercial product that supports the
“free” element.

  •  Option 2 – IBM

Although IBM has long had its own proprietary Unix-like
operating system, through the 2000s it has become an ever more significant
Linux company – the only enterprise that could claim to be bigger would be
Google. Essentially, they use it as just another software option for their IT
consulting and managed services operation to sell, with the considerable
advantages of no upstream licence costs, very broad compatibility, and maximum
scope for custom development. In return, IBM contributes significant resources
to Linux, and to other open-source projects, notably OpenOffice.

  • Option 3 – Rackspace

And, of course, one way to make money from Linux is good
old-fashioned hosting – they call it the cloud these days. Basically, this
option captures any sort of managed-service offering that uses it as a core
enabler, or even as the product itself.

The big divide between the options, in the end, is the cost
of entry and the form it takes. If you aim to tackle Option 1, there is no
substitute for very significant investment in technical R&D, at least to
the level of Objects. Building up the team, the infrastructure, and significant
original technology is the entry ticket. Operators aren’t – with some
honourable exceptions – the greatest at internal innovation, so beware.

Telenor: flexibility through integration of multiple strategies

With Objects, Telenor has chosen this daring course.
However, they have also hedged their bets between the Red Hat/Novell model and
the managed-service model, by integrating elements of options 1 and 3. Objects
is technically an open-source software play, and commercially/operationally a
hosted service based in their existing data centre infrastructure. Its business
model is solidly based on usage-based subscription.

This doesn’t mean, however, that they couldn’t flex to a
different model in markets where they don’t have telco infrastructure –
offering technical support and consulting to third party implementers of the
software would be an option, and so would rolling it into a broader
systems-integration/consulting offering. In this way, horizontalisation offers
flexibility.

Option 2, of course, demands a significant specialisation in
IT, SI, and related trades.. This is probably achievable for those operators,
like BT and DTAG, who maintain a significant IT services line of business.
Otherwise, this would require a major investment and a risky change of focus.

Connectivity: needs a launch customer…

Option 3 – pure-play connectivity – is a commodity business
in a sector where ARPU is typically low. However, oil is also a commodity, and
nobody thinks that’s not a good business to be in. Two crucial elements for
success will be operations excellence – customers will demand high
availability, while low ARPU will constrain operators to an obsessive focus on
cost – and volume. It will be vital to acquire a major launch customer to get
the business off the ground. A smart grid project, for example, would be ideal.
Once there, you can sell the remaining capacity to as many other customers as
you can drum up.

Existing operators, like KPN, will have the enormous
advantage of being able to re-use their existing physical footprint of cell
sites, power, and backhaul, by adding a radio network more suited to the
demands of cheap coverage, building penetration, and relatively low bandwidth
demands, such as CDMA450 or WiMAX at relatively low frequencies.

Conclusion: M2M must fit into a total strategy

In conclusion, the future M2M market tends to map onto other
ideas about the future of operators. We identified three key strategies in the Future Broadband Business Models
strategy report
, and they have significant relevance here.

“Telco 2.0”, with its aim to be a highly agile development
platform, is likely to look to the software-led Option 1, and perhaps consider partnering
with a suitable player. They might license the Objects brand and make use of the
source code, or else come to an arrangement with Telenor to bring the product
to their customers as a managed service.

The wholesale-led and cost-focused  “Happy Pipe”, and its close cousin,
“Government Department”, is likely to take its specialisation in cheap,
reliable connectivity into a string of new vertical markets, picking
appropriate technology and looking for opportunities in the upcoming spectrum
auctions.

“Device Specialists”, with their deep concern for finding
the right content, brands, and channels to market are likely to pick Option 2 –
if they have a business like T-Systems or BT Global Services, they’ll integrate
it, otherwise they’ll partner with an IT player.

Telco 2.0 Further Reading

If you found this article interesting, you may also be interested in Enterprise 2.0 – Machine-to-Machine Opening for Business, a report of the M2M session at the last Telco 2.0 Executive Brainstorm, and M2M / Embedded Market Overview, Healthcare Focus, and Strategic Options, our Executive Briefing on the M2M market and the healthcare industry vertical.