Lessons from AT&T’s bruising entertainment experience

How AT&T entered and exited the media business

AT&T enters the satellite market at its peak

In 2014, AT&T announced it was buying DirecTV. By that time, AT&T was already bundling DirecTV with its phone and internet service and had approximately 5.9 million linear pay-TV (U-Verse) video subscribers. However, this pay-TV business was already experiencing decline, to the extent that when the DirecTV merger completed in mid-2015, U-Verse subscribers had fallen to 5.6 million by the end of that year.

With the acquisition of DirecTV, AT&T went from a small player in the media and entertainment industry to one of the largest media players in the world adding 39.1 million (US and Latin American) subscribers and paying $48.5bn ($67bn including debt) to acquire the business. The rationale for this acquisition (the satellite business) was to compete with cable operators by being able to offer broadband, increasing AT&T’s addressable market beyond its fibre-based U-Verse proposition which was only available in certain locations/states.

AT&T and DirecTV enjoyed an initial honeymoon, period recording growth up until the end of 2016 when DirecTV subscribers peaked at just over 21 million in the US.

From this point onwards however, AT&T’s satellite subscribers went into decline as customers switched to cheaper competitor offers as well as online streaming services. The popularity of streaming services was reflected by moves among traditional media players to develop their own streaming services such as Time Warner’s HBO GO and HBO NOW. In 2015, DirectTV’s satellite competitor Dish TV likewise launched its own streaming service Sling TV.

Even though it was one of the largest TV distributors on a satellite platform, AT&T also believed online streaming was its ultimate destination. Prior to the launch of its streaming service in late 2016, Bloomberg reported that AT&T envisioned DirecTV NOW as its primary video platform by 2020.

A softwarised platform delivered lowered costs as the service could be self-installed by customers and didn’t rely on expensive truck roll installation or launching satellites. The improved margins would enable AT&T to promote TV packages at attractive price points which would balance inflation demands from broadcasters for the cost of TV programming. AT&T could also more easily bundle the softwarised TV service with its broadband, fibre and wireless propositions and earn more lucrative advertising revenue based on its own network and viewer insights.

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The beginnings of a bumpy journey in TV

AT&T’s foray into satellite and streaming TV can be characterised by a series of confusing service propositions for both consumers and AT&T staff, expensive promotional activity and overall pricing/product design misjudgements as well as troubled relations with TV broadcasters resulting in channel blackouts and ultimately churn.

Promotion, pull back and decline of DirecTV NOW

DirectTV NOW launched in November 2016, as AT&T’s first over the top (OTT) low cost online streaming service. Starting at $35 per month for 60+ channels with no contract period, analysts called the skinny TV package as a loss leader given the cost of programming rights and high subscriber acquisition costs (SACs). The loss leader strategy was aimed at acquiring wireless and broadband customers and included initiatives such as:

  • Promotional discounts to its monthly $60 mid-tier 100+ channel package reduced to $35 per month for life (subject to programming costs).
  • Device promotions and monthly waivers. The service eventually became available on popular streaming devices (Roku, Xbox and PlayStation) and included promotions such as an Apple TV 4K with a four month subscription waiver, a Roku Streaming Stick with a one month waiver or a $25 discount on the first month.
  • Customers could also add HBO or Cinemax for an additional $5 per month, which again was seen as a costly subsidy for AT&T to offer.

The service didn’t include DirecTV satellite’s popular NFL Sunday Ticket programming as Verizon held the smartphone rights to live NFL games, nor did it come with other popular shows from programme channels such as CBS. Features such as cloud DVR (digital video recording) functionality were also initially missing, but would follow as AT&T’s TV propositions and functionalities iterated and improved over time.

The DirecTV NOW streaming service enjoyed continuous quarterly growth through 2017 but peaked in Q3 2018 with net additions turning immediately negative in the final quarter of 2018 as management pulled back on costly promotions and discounted pricing.

The proposition became unsustainable financially in terms of its ability to cover rising programming costs and was positioned comparatively as a much less expensive service to its larger DirecTV satellite pay-TV propositions.

The DirecTV satellite service sold some of the most expensive TV propositions on the market and reported higher pay-TV ARPU ($131) than peers such as Dish ($89) and Comcast ($86) in Q4 2019.

  • The launch of a $35 DirecTV NOW streaming service with no contract and with a similar sounding name to the full linear service confused both new and existing DirecTV satellite customers and some would have viewed their satellite package as expensive compared to the cheaper steaming option.

Rising programming costs

AT&T’s low-cost skinny TV packages brought them into direct confrontation with TV programmers in terms of negotiating fees for content. When the streaming service launched, analysts highlighted the channels within AT&T’s base package were expected to rise in price annually by around 10% each year and this would eventually require AT&T to eventually balance programming costs with rising monthly package pricing.

Confrontations with programmers included a three-week dispute with CBS and an eight week dispute with Nexstar in 2019, which resulted in a blackout of both CBS and Nexstar channels across AT&T’s TV platforms such as Direct TV, U-Verse, DirectTV NOW. Commenting on the blackouts in Q3 2019, Randall Stephenson noted there were “a couple of significant blackouts in terms of content, and those blackouts drove some sizable subscriber losses”.

AT&T’s confrontation with content owners may have been a contributory reason to consider acquiring a content creation platform of its own in the form of Time Warner.

In mid-2018, as AT&T withdrew promotions and discounts for DirecTV NOW (later rebranded it to AT&T TV NOW), customers began to drop the OTT TV service.

  • AT&T TV NOW went from a peak of 1.86 million subscribers in Q3 2018 to 656,000 at the end of 2020.

DirecTV NOW subscriptions

DirecTV-subs-AT-T-stlpartners

Source: STL Partners, AT&T Q2 Earnings 2021

Name changes and new propositions create more confusion

In 2019, DirecTV NOW was re-branded to AT&T TV NOW , and continued to be promoted as a skinny bundle operating alongside AT&T TV, a new full fat live TV streaming version of the DirecTV satellite TV proposition. AT&T TV  was first piloted in August 2019 and soft launched in November 2019. The AT&T TV service included an Android set-top box with cloud DVR functionality and supported other apps such as Netflix.
AT&T TV required a contract period and offered pricing (once promotional discount periods ended) resembling a linear pay-TV service, i.e. $90+. This was, in effect, the very type of pay-TV proposition customers were abandoning.
AT&T TV was seen as an ultimate replacement for the satellite business based on the advantages a softwarised platform provided and the ability to bundle it with AT&T broadband, fibre and wireless services.

Confusion amongst staff and customers

The new AT&T TV proposition confused not only customers but also AT&T staff, as they were found mixing up the AT&T TV proposition with the skinny AT&T TV NOW proposition. By 2019 the company diverted its attention away from AT&T TV NOW  pulling back on promotional activity in order to focus on its core AT&T TV live TV service.

According to Cord Cutters News, both services used the same app but remained separate services. AT&T’s app store marketing incorrectly communicated the DirectTV NOW service was now AT&T TV when in fact it was AT&T TV NOW. Similarly, technical support was also incorrectly labelled with online navigation sending customers to the wrong support channels.

AT&T’s own customer facing teams misunderstood the new propositions

DirecTV-Cordcutter-news

Source: Cord Cutters News

Withdrawal of AT&T TV NOW

By January 2021, AT&T TV NOW was no longer available to new customers but continued to be available to existing customers. The AT&T TV proposition, which was supposed to offer “more value and simplicity” was updated to include some features of the skinny bundle such as the option to go without an annual contract requirement. Customers were also not required to own the set-top box but could instead stream over Amazon Fire TV or Apple TV.  In terms of pricing, AT&T TV was twice the price of the originally launched DirecTV NOW proposition costing $70 to $95 per month.

The short life of AT&T Watch TV

In April 2018, while giving testimony for AT&T’s merger with Time Warner, AT&T’s then CEO Randall Stephenson positioned AT&T Watch TV as a potential new low-cost service that would benefit consumers if the merger was successful. Days following AT&T’s merger approval in the courts, the low cost $15 per month, ultra-skinny bundle launched as a suitable low-cost cord-cutter/cord-never option for cable, broadband and mobile customers from any network. The service was also free to select AT&T Unlimited mobile customers.

By the end of 2018, the operator claimed it had 500,000 AT&T Watch TV“established accounts”. By the end of 2019 the operator had updated its mobile tariffs removing Watch TV for new customers subscribing to its updated Unlimited mobile tariffs. Some believed the company didn’t fully commit to the service, referring to the lack of roll out support for streaming devices such as Roku. The operator was now committed to rolling out its new service HBO Max in 2020. AT&T has informed Watch TV subscribers the service will close 30 November 2021.

Timeline of AT&T entertainment propositions

AT-T-Timeline-Entertainment

Source: STL Partners

The decline of DirecTV

As the graphic belowshows, in June 2021 there were 74.3 million pay-TV households in the US, reflecting continued contraction of the traditional pay-TV market supplied by multichannel video programming distributor (MVPD) players such as cable, satellite, and telco operators. According to nScreenMedia, traditional pay-TV or MVPD market lost 6.3 and 6.2 million customers over 2019 and 2020, but not all were cord-cutters. Cord-shifters dropped their pay-TV but shifted across to virtual MVPD (vMVPD) propositions such as Hulu Live, Sling TV, YouTube TV, AT&T TV NOW, Fubo TV and Philo. Based on current 2021 cord-cutting levels, nScreenMedia predicts 2021 will be the highest year of cord-cutting yet.

Decline in traditional pay-TV households

pay-tv-decline-nscreenmedia

Source: nScreenMedia, STL Partners

Satellite subscribers to Dish and DirecTV 2015-2020

Satellite-pay-tvdish-nscreenmedia

Source: nScreenMedia, STL Partners

When considering AT&T’s management of DirecTV, nScreenMedia research shows the market number of MVPD subscribers declined by over 20 million between 2016 and 2020. In that time, DirecTV lost eight million subscribers. While it represented 20% of the MVPD market in 2016, DirecTV accounted for 40% of the pay-TV losses in the market (40% of 20 million equals ~8 million). AT&T’s satellite rival Dish weathered the decline in pay-TV slightly better over the period.

  • In Q4 2020 the operator wrote down $15.5bn on its premium TV business, which included DirecTV decline, to reflect the cord cutting trend as customers found cheaper streaming alternatives online. The graphic (below) shows a loss of 8.76 million Premium TV subscribers between 2017 and 2020 with large losses of 3.4 million and 2.9 million subscribers in 2019 and 2020.

AT&T’s communications business has also been enduring losses in legacy voice and data (DSL) subscriptions in recent years. AT&T has used a bundling strategy for both products. As customers switched to AT&T fibre or competitor broadband offerings this also impacted the video subscription.

Table of contents

  • Executive Summary
    • What can others learn from AT&T’s experience?
  • How AT&T entered and exited the media business
    • AT&T enters the satellite market at its peak
    • The beginnings of a bumpy journey in TV
    • Vertical integration strategy: The culture clash
    • AT&T’s telco mindset drives its video strategy
    • HBO MAX performance
  • The financial impact of AT&T’s investments
    • Reversing six years of strategic change in three months
  • Lessons from AT&T’s foray into media

Related Reports

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SK Telecom: Lessons in 5G, AI, and adjacent market growth

SK Telecom’s strategy

SK Telecom is the largest mobile operator in South Korea with a 42% share of the mobile market and is also a major fixed broadband operator. It’s growth strategy is focused on 5G, AI and a small number of related business areas where it sees the potential for revenue to replace that lost from its core mobile business.

By developing applications based on 5G and AI it hopes to create additional revenue streams both for its mobile business and for new areas, as it has done in smart home and is starting to do for a variety of smart business applications. In 5G it is placing an emphasis on indoor coverage and edge computing as basis for vertical industry applications. Its AI business is centred around NUGU, a smart speaker and a platform for business applications.

Its other main areas of business focus are media, security, ecommerce and mobility, but it is also active in other fields including healthcare and gaming.

The company takes an active role internationally in standards organisations and commercially, both in its own right and through many partnerships with other industry players.

It is a subsidiary of SK Group, one of the largest chaebols in Korea, which has interests in energy and oil. Chaebols are large family-controlled conglomerates which display a high level and concentration of management power and control. The ownership structures of chaebols are often complex owing to the many crossholdings between companies owned by chaebols and by family members. SK Telecom uses its connections within SK Group to set up ‘friendly user’ trials of new services, such as edge and AI

While the largest part of the business remains in mobile telecoms, SK Telecom also owns a number of subsidiaries, mostly active in its main business areas, for example:

  • SK Broadband which provides fixed broadband (ADSL and wireless), IPTV and mobile OTT services
  • ADT Caps, a securitybusiness
  • IDQ, which specialises in quantum cryptography (security)
  • 11st, an open market platform for ecommerce
  • SK Hynixwhich manufactures memory semiconductors

Few of the subsidiaries are owned outright by SKT; it believes the presence of other shareholders can provide a useful source of further investment and, in some cases, expertise.

SKT was originally the mobile arm of KT, the national operator. It was privatised soon after establishing a cellular mobile network and subsequently acquired by SK Group, a major chaebol with interests in energy and oil, which now has a 27% shareholding. The government pension service owns a 11% share in SKT, Citibank 10%, and 9% is held by SKT itself. The chairman of SK Group has a personal holding in SK Telecom.

Following this introduction, the report comprises three main sections:

  • SK Telecom’s business strategy: range of activities, services, promotions, alliances, joint ventures, investments, which covers:
    • Mobile 5G, Edge and vertical industry applications, 6G
    • AIand applications, including NUGU and Smart Homes
    • New strategic business areas, comprising Media, Security, eCommerce, and other areas such as mobility
  • Business performance
  • Industrial and national context.

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Overview of SKT’s activities

Network coverage

SK Telecom has been one of the earliest and most active telcos to deploy a 5G network. It initially created 70 5G clusters in key commercial districts and densely populated areas to ensure a level of coverage suitable for augmented reality (AR) and virtual reality (VR) and plans to increase the number to 240 in 2020. It has paid particular attention to mobile (or multi-access) edge computing (MEC) applications for different vertical industry sectors and plans to build 5G MEC centres in 12 different locations across Korea. For its nationwide 5G Edge cloud service it is working with AWS and Microsoft.

In recognition of the constraints imposed by the spectrum used by 5G, it is also working on ensuring good indoor 5G coverage in some 2,000 buildings, including airports, department stores and large shopping malls as well as small-to-medium-sized buildings using distributed antenna systems (DAS) or its in-house developed indoor 5G repeaters. It also is working with Deutsche Telekom on trials of the repeaters in Germany. In addition, it has already initiated activities in 6G, an indication of the seriousness with which it is addressing the mobile market.

NUGU, the AI platform

It launched its own AI driven smart speaker, NUGU in 2016/7, which SKT is using to support consumer applications such as Smart Home and IPTV. There are now eight versions of NUGU for consumers and it also serves as a platform for other applications. More recently it has developed several NUGU/AI applications for businesses and civil authorities in conjunction with 5G deployments. It also has an AI based network management system named Tango.

Although NUGU initially performed well in the market, it seems likely that the subsequent launch of smart speakers by major global players such as Amazon and Google has had a strong negative impact on the product’s recent growth. The absence of published data supports this view, since the company often only reports good news, unless required by law. SK Telecom has responded by developing variants of NUGU for children and other specialist markets and making use of the NUGU AI platform for a variety of smart applications. In the absence of published information, it is not possible to form a view on the success of the NUGU variants, although the intent appears to be to attract young users and build on their brand loyalty.

It has offered smart home products and services since 2015/6. Its smart home portfolio has continually developed in conjunction with an increasing range of partners and is widely recognised as one of the two most comprehensive offerings globally. The other being Deutsche Telekom’s Qivicon. The service appears to be most successful in penetrating the new build market through the property developers.

NUGU is also an AI platform, which is used to support business applications. SK Telecom has also supported the SK Group by providing new AI/5G solutions and opening APIs to other subsidiaries including SK Hynix. Within the SK Group, SK Planet, a subsidiary of SK Telecom, is active in internet platform development and offers development of applications based on NUGU as a service.

Smart solutions for enterprises

SKT continues to experiment with and trial new applications which build on its 5G and AI applications for individuals (B2C), businesses and the public sector. During 2019 it established B2B applications, making use of 5G, on-prem edge computing, and AI, including:

  • Smart factory(real time process control and quality control)
  • Smart distribution and robot control
  • Smart office (security/access control, virtual docking, AR/VRconferencing)
  • Smart hospital (NUGUfor voice command for patients, AR-based indoor navigation, facial recognition technology for medical workers to improve security, and investigating possible use of quantum cryptography in hospital network)
  • Smart cities; e.g. an intelligent transportation system in Seoul, with links to vehicles via 5Gor SK Telecom’s T-Map navigation service for non-5G users.

It is too early to judge whether these B2B smart applications are a success, and we will continue to monitor progress.

Acquisition strategy

SK Telecom has been growing these new business areas over the past few years, both organically and by acquisition. Its entry into the security business has been entirely by acquisition, where it has bought new revenue to compensate for that lost in the core mobile business. It is too early to assess what the ongoing impact and success of these businesses will be as part of SK Telecom.

Acquisitions in general have a mixed record of success. SK Telecom’s usual approach of acquiring a controlling interest and investing in its acquisitions, but keeping them as separate businesses, is one which often, together with the right management approach from the parent, causes the least disruption to the acquired business and therefore increases the likelihood of longer-term success. It also allows for investment from other sources, reducing the cost and risk to SK Telecom as the acquiring company. Yet as a counterpoint to this, M&A in this style doesn’t help change practices in the rest of the business.

However, it has also shown willingness to change its position as and when appropriate, either by sale, or by a change in investment strategy. For example, through its subsidiary SK Planet, it acquired Shopkick, a shopping loyalty rewards business in 2014, but sold it in 2019, for the price it paid for it. It took a different approach to its activity in quantum technologies, originally set up in-house in 2011, which it rolled into IDQ following its acquisition in 2018.

SKT has also recently entered into partnerships and agreements concerning the following areas of business:

 

Table of Contents

  • Executive Summary
  • Introduction and overview
    • Overview of SKT’s activities
  • Business strategy and structure
    • Strategy and lessons
    • 5G deployment
    • Vertical industry applications
    • AI
    • SK Telecom ‘New Business’ and other areas
  • Business performance
    • Financial results
    • Competitive environment
  • Industry and national context
    • International context

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How telcos can get ahead in advertising

Introduction

Why is AT&T doubling down on becoming a new media company, while Verizon Media is retrenching? With divergent strategies at play in the U.S. telecoms market, is there a path or multiple paths to success in the advertising market that other telcos can follow, or is it too soon to tell?

Telcos’ pursuit of the digital advertising market is not a new phenomenon. Early telco-led mobile marketing and advertising initiatives pre-date the mid-2007 launch of the iPhone. The journey began with pre-iPhone primitive text-messaging marketing, moved through display advertising to an increasingly sophisticated data-driven approach. What is new is the flurry of investments the leading U.S. telcos and some others, notably SingTel, have been making over the past few years to compete more holistically and effectively in the advertising/media space.

While their core communications/connectivity services businesses are maturing and being disrupted, U.S. telcos now face the prospect of investing heavily in building out next-generation 5G networks. They are placing bets on new, potentially lucrative and high-growth opportunities in the Internet-of-things (IoT), media/content and fixed wireless, among others. Among these opportunities, brokering digital advertising offers potentially the highest operating margins. AT&T’s Xandr advertising unit reported an operating margin of 68% for the fourth quarter of 2018, compared with 33% in its core communications business.

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Going on the offensive

Telecoms networks have long been the conduits for Google, Facebook, and Amazon, among others, to deliver innovative and disruptive (and mostly free) services, which generate billions in advertising revenues. Many of these same players have also introduced services, such as messaging, voice calls and video-on-demand, which have siphoned off revenues from the telcos that provide the networks they are riding on.

It is against this backdrop that distinct and evolving telco advertising strategies are emerging. And, from a U.S. market perspective, what a difference a year makes. In 2017, it looked like Verizon and AT&T were both doubling down on their advertising/media business strategies, with the aim of growing their piece of the total advertising pie and in turn attempting to siphon off advertising revenues from Google and Facebook, among others. But 2018 proved a watershed year, and now Verizon is pulling back, while AT&T continues full steam ahead.

This report focuses on the U.S. market and specifically how the big two telcos – Verizon and AT&T – have fared in the digital advertising market and what lessons other telcos can take away from their divergent market strategies. The report builds on past STL Partners research including:

The advertising opportunity for telcos

The future of advertising is digital. While spending on traditional advertising may have peaked, investment in digital advertising continues to fuel growth in the overall market. In 2018, global digital advertising revenues reached US$273 billion, and represented 44% of total advertising spend, according to eMarketer. By 2020, the specialist research firm expects digital to represent half of total global advertising spend, and by 2021 to eclipse traditional media spend – reaching US$427 billion globally in 2022. Note, eMarketer’s definition of digital advertising excludes SMS, MMS and P2P messaging-based advertising.

The global advertising opportunity – the future is digital

advertising is moving to digital

Source: eMarketer, May 2018

Within digital advertising, the mobile medium is taking over from the desktop as smartphones ship with larger screens and faster connectivity. Advertising agency Zenith, part of the Publicis Media Group, forecasts mobile advertising will account for 30.5% of global advertising expenditure in 2020, up from 19.2% in 2017. It reckons expenditure on mobile advertising will total US$187 billion by 2020, more than twice the US$88 billion spent on desktop advertising, and not far behind the US$192 billion spent on television advertising. At the current rate of growth, mobile advertising will comfortably overtake television in 2021, Zenith believes.

Mobile and cinematic advertising are growing faster than other segments

mobile and cinematic advertising growing fast

Source: Zenith

Singtel – a pioneering advertising play

Globally, one of the most advanced telcos in the advertising sector is Singtel, which has made a series of acquisitions to build out its adtech proposition, following its first deal in 2012, which saw it acquire Amobee, an early player in mobile advertising.

By some measures, Singtel is the largest telecoms group in south east Asia. The company and its affiliates serve 700 million mobile customers in 27 countries, including its wholly-owned subsidiary in Australia (Optus) and minority stakes in India, South Asia and Africa (Bharti Airtel, 40% effective stake); Indonesia (Telkomsel, 35% effective stake); Philippines (Globe Telecom, 47% ordinary shares); and mi Thailand (Advanced Info Service, 23% ordinary shares). With that extensive reach, which extends beyond mobile and includes Internet and video/TV customers, Singtel sees advertising as a high-growth opportunity and a way to leverage its customer data assets.

Singtel’s adtech play sits in its Group Digital Life (“GDL”) unit, which focuses on using the latest Internet technologies and assets of the operating companies to develop new revenue and growth engines by entering adjacent businesses where it has a competitive advantage. GDL focuses on three key businesses – digital marketing, regional premium OTT video and advanced analytics and intelligence capabilities, while acting as Singtel’s digital innovation engine through Innov8.

Singtel has spent about a billion dollars on adtech capabilities

Singtel spends a billion dollars on advertising companies

*Purchase price not available. Source: Company reports

In the fourth quarter of 2018, GDL contributed 8% (up from 7% in the previous quarter) to the Singtel group’s operating revenue. GDL’s operating revenue for the quarter grew 17%, lifted by a full quarter’s contribution from Videology and growth in Amobee’s programmatic platform business, partially offset by lower media revenues. At an EBITDA level, GDL lost S$16 million after inclusion of Videology’s losses.

Singtel said that Amobee’s programmatic platform business continues to gain traction, while the integration of Videology will further strengthen Amobee’s capabilities in TV and video advertising. Although its advertising business isn’t yet making a major financial contribution, Singtel’s continued investments in this market suggest the Singapore-based operator remains committed and convinced that there are synergies between the telecoms and advertising sectors.

The rest of this report looks at U.S. telcos’ advertising strategies in depth, drawing conclusions and recommendations for other telcos globally.

Contents:

  • Executive Summary
  • Introduction
  • The advertising opportunity for telcos
  • Singtel – a pioneering advertising play
  • U.S. mobile market shift in full swing
  • Telcos’ strategic fits and starts
  • Google and Facebook strong, but Amazon makes gains
  • Amazon pulls commerce levers in advertising
  • Privacy, identity and security challenges and mandates
  • GDPR: A harbinger of things to come to the U.S.
  • U.S. telcos’ advertising assets
  • AT&T goes all-in on advanced advertising
  • More inventory, stronger monetisation
  • Balancing advertising and subscriptions
  • Takeaways
  • Verizon cuts its losses
  • The obstacles in the way of Oath
  • Takeaways
  • Conclusions and recommendations
  • Recommendations
  • Recommendations for major telcos

Figures:

  1. Recommendations for how AT&T can get ahead in advertising
  2. Why Verizon didn’t get ahead in advertising
  3. The global advertising opportunity – the future is digital
  4. Mobile and cinematic advertising are growing faster than other segments
  5. Singtel has spent about a billion dollars on adtech capabilities
  6. US online advertising spend – shift to mobile has already happened
  7. Examples of telcos’ investments/divestments in adtech and content
  8. Amazon gains, but still significant opportunities for telcos
  9. AT&T, Verizon and Comcast’s content and advertising assets
  10. AT&T’s advertising revenues are rising rapidly
  11. Xandr is growing rapidly, but its high margins are sliding downwards
  12. AT&T reaps rewards from Xandr, WarnerMedia, but pay TV is still a drag
  13. Verizon Media (previously Oath) fails to hit revenue growth targets
  14. As Verizon’s ad business struggles, it doubles down on 5G
  15. SWOT analysis and recommendations for big telcos in advertising

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Telcos in health – Part 2: How to crack the healthcare opportunity

This report is a follow-up from our first report Telcos in health – Part 1: Where is the opportunity? which looked at overarching trends in digital health and how telcos, global internet players, and health focused software and hardware vendors are positioning themselves to address the needs of resource-strained healthcare providers.

It also build on in depth case studies we did on TELUS Health and Telstra Health.

Telcos should invest in health if…

  • They want to build new revenue further up the IT value chain
  • They are prepared to make a long term commitment
  • They can clearly identify a barrier to healthcare access and/or delivery in their market

…Then healthcare is a good adjacent opportunity with strong long term potential that ties closely with core telco assets beyond connectivity:

  • Relationships with local regulators
  • Capabilities in data exchange, transactions processing, authentication, etc.

Telcos can help healthcare systems address escalating resourcing and service delivery challenges

Pressures on healthcare - ageing populations and lack of resources
Chart showing the dynamics driving challenges in healthcare systems

Telcos can help overcome the key barriers to more efficient, patient-friendly healthcare:

  • Permissions and security for sharing data between providers and patients
  • Surfacing actionable insights from patient data (e.g. using AI) while protecting their privacy

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Why telcos’ local presence makes them good candidates to coordinate the digital and physical elements of healthcare

  • As locally regulated organisations, telcos can position themselves as more trustworthy than global players for exchange and management of health data
  • Given their universal reach, telcos make good partners for governments seeking to improve access and monitor quality of healthcare, e.g.:
    • Telco-agnostic, national SMS shortcodes could be created to enable patients to access health information and services, or standard billing codes linked to health IT systems for physicians to send SMS reminders
    • Partner with health delivery organisations to ensure available mobile health apps meet best practice guidelines
    • Authentication and digital signatures for high-risk drugs like opioids
  • Healthcare applications need more careful development than most consumer sectors, playing to telcos’ strengths – service developers should not take a “fail fast” approach with people’s health

Telcos have further reach across the diverse  healthcare ecosystem than most companies

The complexity of healthcare systems - what needs to be linked
To coordinate healthcare, you need to make these things work together

However, based on the nine telco health case studies in this report, to successfully help healthcare customers adopt IoT, data-driven processes and AI, telcos must offer at least some systems integration, and probably develop much more health-specific IT solutions.

Case study overview: Depth of healthcare focus

Nine telcos shown on a spectrum of the kind of healthcare services they provide
Where Vodafone, AT&T, BT, Verizon, O2, Swisscom, Telstra, Telenor Tonic and TELUS Health fit on a spectrum of services to healthcare,

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Telcos in health – Part 1: Where is the opportunity?

Why is healthcare an attractive sector?

  • Healthcare systems – particularly in developed markets – must find ways to treat ageing populations with chronic illnesses in a more cost effective way.
  • Resource strained health providers have very limited internal IT expertise. This means healthcare is among the least digitised sectors, with high demand for end-to-end solutions.
  • The sensitive nature of health data means locally-regulated telcos may be able to build on positions of trust in their markets.
  • In emerging markets, there are huge populations with limited access to health insurance, information and treatment. Telcos may be able to leverage their brands and distribution networks to address these needs.
  • This report outlines how the digital health landscape is addressing these challenges, and how telcos can help

Four tech trends are supporting healthcare transformation – all underpinned by connectivity and integration for data sharing

These four trends are not separate – they all interrelate. The true value lies in enabling secure data transfer across the four areas, and presenting data and insights in a useful way for end-users, e.g. GPs don’t have the time to look at ten pages of a patient’s wearable data, in part because they may be liable to act on additional information.

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Digital health solutions break down into three layers

Digital health solutions in 3 layers

This report explores how telcos can address opportunities across these three layers, as well as how they can partner or compete with other players seeking to support healthcare providers in their digital transformation.

Our follow up report looks at nine case studies of telcos’ healthcare propositions: Telcos in health – Part 2: How to crack the healthcare opportunity

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Telco M&A strategies: Global analysis

Introduction

Business beyond connectivity – this is the mantra of STL Partners’ vision of the future for telecoms operators, outlined in the recent revamp of our Telco 2.0 vision. Telcos are at a crossroads where they must determine where their businesses will fit into a world of disruptive, fast-moving technologies and uncertain futures.

This means that it is more important than ever to re-evaluate the tools available to telcos to generate growth, expand their business competencies and provide new service offerings outside the core.

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Traditionally, a key telco growth strategy has been to use mergers and acquisitions, particularly of (and with) other telcos, to build scale geographically and in core communications services. However, as operators strive to become more relevant in a changing business landscape, there has been a growing volume of investment in what might be termed ‘digital’ business – business services that leverage technology to build new capabilities and deliver new customer services, experiences and relationships. We distinguish between these two kinds of telecoms M&A as follows:

  • Traditional M&A – “Operators buying operators”
    • Traditional M&A is focused around traditional telecoms M&A where operators buy other operators to expand in new markets or consolidate existing markets.
  • Digital M&A – “Operators investing outside core”
    • Digital M&A refers to non-operator M&A, or all other purchases that telcos make to expand beyond their core connectivity services. Most often this includes investments in software capabilities or industry verticals.

This report examines the landscape of digital M&A from H2 2017 to H1 2018, highlights trends across previous time periods, and outlines strategies for and case studies of digital M&A to illustrate ways that telcos can utilise it in a focused and strategic manner to create long-term value and growth. It does not cover minority venture digital investments; however, these are tracked in our database and will be the subject of future analysis.

This report is the third iteration of STL Partners’ yearly digital M&A and investment report, which began in 2016 and was updated in 2017. It draws on data from our digital M&A tracker tool, which covers 23 operators over five regions from 2012 to H1 2018. A copy of the database is available with this report.

Previous editions of the telco M&A database

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Monetising IoT: Four steps for success

Introduction

The internet of things (IoT) will revolutionise all industries, not just TMT. In addition to the benefits of connecting previously unconnected objects to monitor and control them, the data that IoT will make available could play a pivotal role in other major technological developments, such as big data analytics and autonomous vehicles.

It seems logical that, because IoT relies on connectivity, this will be a new growth opportunity for telcos. And indeed, as anyone who has attended MWC in the last few years can testify, most if not all major telcos are providing some kind of IoT service.

But IoT is not a quick win for telcos. The value of IoT connectivity is only a small portion of the total estimated value of the IoT ecosystem, and therefore telcos seeking to grow greater value in this area are actively moving into other layers, such as platforms and vertical end solutions.

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Figure 1: Telcos are moving beyond IoT connectivity

Telcos are moving beyond IoT connectivity

Source: STL Partners

Although telco IoT strategies have evolved significantly over the past five years, this is a complicated and competitive area that people are still figuring out how to monetise. To help our clients overcome this challenge we are publishing a series of reports and best practice case studies over the next 12 months designed to help individual operators define their approach to IoT according to their size, market position, geographic footprint and other key characteristics such as appetite for innovation.

This report is the first in this series. The findings it presents are based upon primary and secondary research conducted between May and September 2017 which included:

  • A series of anonymous interviews with operators, vendors and other key players in the IoT ecosystem
  • A brainstorming session held with senior members from telco strategy teams at our European event in June 2017
  • An online survey about telcos’ role in IoT, which ran from May to June 2017

Contents:

  • Executive Summary
  • Introduction
  • A four-step process to monetise IoT
  • Step 1: Look beyond connected device forecasts
  • Step 2: Map out your IoT strategy
  • Step 3: Be brave and commit
  • Step 4: Develop horizontal capabilities to serve your non-core verticals
  • Result: The T-shaped IoT business model
  • IoT data is a secondary opportunity
  • Conclusion

Figures:

  • Figure 1: Telcos are moving beyond IoT connectivity
  • Figure 2: IoT verticals and use-cases
  • Figure 3: Four possible roles within the IoT ecosystem
  • Figure 4: Telcos can play different roles in different verticals
  • Figure 5: IoT connectivity can be simplified into four broad categories
  • Figure 6: As the IoT field matures, use-cases become more complex
  • Figure 7: The technical components of an IoT platform
  • Figure 8: The T-shaped IoT business model

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Digital M&A and Investment Strategies – July 2017 update

Introduction

Digital M&A as a telco strategy

In June 2016 STL Partners published our inaugural Digital M&A and Investment Strategies report and accompanying database, focussing on key digital acquisitions and investments for 22 operators during the period 2012 – H1 2016. We have now updated this report to cover the following 12 months (H2 2016 – H1 2017), to examine new developments in telco digital M&A and a comparison with previous activities.

Communications service providers have long used M&A as a key growth strategy, with the most common approach being to acquire other operators to build scale organically. As growth in telecommunications slowed and user behaviour swung towards mobile, so M&A activity in the mobile sector has increased. However, acquisition opportunities in mature markets are becoming limited as consolidation reduces the number of telcos, whilst in Europe and North America the regulatory environment has made M&A consolidation strategies less viable.

As operators continue to build digital capabilities and strive to deliver digital services and content, M&A and investment beyond ‘traditional telecoms’ is increasing. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation as well as operational excellence. This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of Verizon, AT&T and SoftBank. There is an accompanying database which tracks telco M&A activity for the period.

Drivers for operator M&A and majority investment

Figure 1: Drivers for operator M&A and majority investment – traditional and digital

digital M&A graphic

Source: STL Partners

Traditional/Telco 1.0 drivers: reach and scale

As illustrated in Figure 1, what we refer to as ‘traditional’ or ‘Telco 1.0’ drivers for M&A and investment are well-established:

  1. Extending geographic footprint is a common trend, as many operator groups look to:
    • Enter new markets that are adjacent geographically (e.g. DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
    • Enter markets that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
    • Enter markets that simply offer good opportunities for expanded footprint and increased efficiencies of operation in emerging regions where demand for mobile services is still growing strongly (e.g., SingTel and Etisalat’s numerous investments in operators in Asia and Africa, respectively).
  2. Extending traditional communications offerings is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the UK is one example.
  3. Consolidation has slowed to some extent, as regulators and competitors fight against mergers or acquisitions that remove players from the market or concentrate too much market power in the hands of stronger service providers. This has been a particular issue in the European Union, where regulators have refused to approve several proposed telecoms M&A deals recently, including Telia and Telenor in Denmark in 2015, and the proposed Hutchison acquisition of Telefónica’s O2 to merge with its subsidiary 3 UK in 2016. Other deals, such as the proposed Orange-Bouygues Telecom merger in France which was abandoned in April 2016, have failed due to the parties involved failing to reach agreement. However, our research shows continued interest in operator M&A for consolidation, with recent examples including Orange’s acquisition of Sun Communications in Moldova in 2016, and Vodafone’s merger with Indian rival Idea in 2017.
  4. The acquisition of service partners – primarily channel partners, or partner companies providing systems integration and consultancy capabilities, typically for enterprise customers – has proved an important driver of M&A for many (mainly converged) operators.
  5. Finally, operator M&A is also being driven by the enthusiasm of sellers. Many operators are looking to sell off assets outside of their home markets, pulling back from markets that have proven too competitive, too small or simply too complicated, as part of a strategy to pay down debt and/or free up assets for investment in other higher-growth areas:
    • Telia’s pullback from its non-core markets has seen it sell off its majority stakes in Spanish operator Yoigo to Masmovil and in Kazakhstan’s Kcell to Turkcell in 2016
    • Telefonica’s attempt to sell its O2 UK mobile unit to CK Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its debt, including a planned IPO of O2 UK.

Contents:

  • Executive Summary
  • Evaluating operator digital investment strategies
  • Key findings
  • Recommendations
  • Introduction
  • Drivers for operator M&A and majority investment
  • Evaluating operator digital investment strategies
  • 22 players across 5 regions: US shows the most aggressive M&A activity
  • Comparison with previous period (H1 2012 – H1 2016)
  • European telcos remain largely focussed on Telco 1.0 M&A
  • Which sectors are attracting the most interest?
  • Telco M&A investment is falling behind other verticals
  • What are the cultural challenges to digital M&A in the boardroom?
  • Operator M&A Strategies in detail: Consolidation, content and technology
  • M&A as a telco growth strategy
  • Adapting telco culture to ensure digital M&A success
  • Recommendations

Figures:

  • Figure 1: Drivers for operator M&A and majority investment – traditional and digital
  • Figure 2: Number of operator digital acquisitions and majority investments, H2 2016-H1 2017
  • Figure 3: Largest 7 telco digital M&A and majority investments, H2 2016-H1 2017
  • Figure 4: Number of operator digital acquisitions and majority investments, H1 2012 – H1 2016
  • Figure 5: Operator digital acquisitions and majority investments, H1 2012-H1 2017
  • Figure 6: Largest 10 telco digital M&A and majority investments, H1 2012 – H1 2016
  • Figure 7: Mapping of operator digital M&A strategies
  • Figure 8: Number of digital M&A and majority investments by sector/category, H2 2016-H1 2017
  • Figure 9: Comparison of investment in digital M&A as a percentage of service revenues, 2012-H1 2017

TELUS Health: Innovation leader case study

Introduction

Why healthcare?

Healthcare is one of the few sectors where, in every country, there is a huge and ongoing need. This demand will only rise as populations age and grow, exacerbating significant pain points relating to costs and funding models, and unmet needs. Meanwhile, the combination of cost pressures, the sensitive nature of health data and the complexity of healthcare systems have left it as one of the least digitised sectors. Thus, many telcos have identified healthcare as a sector where there is significant opportunity to drive efficiency through new services leveraging their network infrastructure and customer reach.

In some respects, telcos are well positioned to fill the healthcare sector’s needs. For example, enabling doctors to offer virtual care to patients through secure messaging or video chats, and to share electronic health records with patients and other doctors more easily, seem like low hanging fruit. However, in practice this is much more complicated; hospitals, primary care providers (general practitioners, family doctors), specialised clinics (e.g. mental health, physiotherapy) and pharmacies all store patient records in different systems (that are not necessarily digitised), and have different views on how to securely share data between each other. Every healthcare system also has a unique funding model, ranging from predominantly privately funded through insurance providers or out of pocket payments, like the United States, to single payer models like the UK, where the National Health Service accounts for more than 80% of healthcare spending, and budgets – including IT solutions – are closely tied to electoral and economic cycles.

These synergies have prompted a number of telcos to launch consumer health services or to pursue opportunities in the health IT market. Besides TELUS, AT&T, Verizon, Vodafone, Telefónica, NTT DoCoMo, Telstra, Deutsche Telekom AG and BT have all been active in healthcare. We explore their strategies and differences in comparison with TELUS’ approach on page 33. Why TELUS? This report focuses on TELUS Health, which has one of the longest and the most committed investment into the healthcare sector by a telco that we are aware of. We see it as a leading example of how telcos can build a business in healthcare, as well as in other sectors that are not instinctively linked to telecoms.

To put the Canadian healthcare market, which TELUS entered ten years ago, into context:

  • Canada’s healthcare system is fragmented between 13 provincial/territorial systems and the federal level.
  • The payer model is split between the government (70%) for necessary hospital and physician services and private insurers (30%) for supplemental care and drug prescriptions.
  • Healthcare spending accounted for 11.1% of GDP in 2016, on par with other developed countries globally.
  • The huge geographical distances mean that the 19% of Canadians living in rural areas have very limited access to specialist care.
  • Adoption of electronic medical record (EMR) systems among family doctors and specialised clinics started from a low base of 20% in 2006, rising to 62% in 2013 and 80% by 2017.

Why TELUS got into healthcare: a viable growth opportunity

Starting in 2005, led by the CEO Darren Entwistle, TELUS executives came to a consensus that just focusing on connectivity would not be enough to sustain long term revenue growth for telecoms companies in Canada, so the telco began a search into adjacent areas where it felt there were strong synergies with its core assets and capabilities. TELUS initially considered options in many sectors with similar business environments to telecoms – i.e. high fixed costs, capex intensive, highly regulated – including financial services, healthcare and energy (mining, oil).

In contrast with other telcos in Canada and globally, TELUS made a conscious decision not to focus on entertainment, anticipating that regulatory moves to democratise access to content would gradually erode the differentiating value of exclusive rights.

By 2007, health had emerged as TELUS’ preferred option for a ‘content play’, supported by four key factors which remain crucial to TELUS’ ongoing commitment to the healthcare sector, nearly a decade later. These are:

  1. Strong correlation with TELUS’ socially responsible brand. TELUS has always prioritised social responsibility as a core company value, consistently being recognised by Canadian, North American and global organisations for its commitment to sustainability and philanthropy. For example, in 2010, the Association for Fundraising Professionals’ named it the most outstanding philanthropic corporation in the world. Thus, investing into the healthcare, with the aim of improving efficiency and health outcomes through digitisation of the sector, closely aligns with TELUS’ core values.
  2. Healthcare’s low digital base. Healthcare was and remains one of the least digitised sectors both in Canada and globally. This is due to a number of factors, including the complexity and fragmented nature of healthcare systems, the difficulty of identifying the right payer model for digital solutions, and cultural resistance among healthcare workers who are already stretched for time and resources.
  3. Personal commitment from the CEO, Darren Entwistle. TELUS’ CEO since he joined the company in 2000, Based on personal experiences with the flaws in the Canadian healthcare system, Darren Entwistle forged his conviction that there was a business case for TELUS to drive adoption of digital health records and other ehealth solutions that could help minimise such errors, which was crucial in winning and maintaining shareholders’ support for investment into health IT.
  4. Healthcare is a growing sector. An ageing population means that the burden on Canada’s healthcare system has and will continue to grow for the foreseeable future. As people live longer, the demands on the healthcare system are also shifting from acute care to chronic care. For example, data from the OECD and the Canadian Institute for Health Information show that the rate of chronic disease among patients over 65 years old is double that of those aged 45-64 (see figure 3). Meanwhile, funding is not increasing at the same rate as demand, convincing TELUS of the need for the type of digital disruption that has occurred in many other sectors.

That all four of TELUS’ reasons for investing in healthcare remain equally relevant in 2017 as in 2007 is key to its unwavering commitment to the sector. Darren Entwistle refers to healthcare as a ‘generational investment’, saying that over the long term, TELUS may shift into a healthcare company that offers telecoms services, rather than the other way around.

Contents:

  • Executive Summary
  • Healthcare can be a viable investment opportunity…
  • …But there are risks
  • Introduction
  • Why TELUS got into healthcare: a viable growth opportunity
  • How TELUS got into healthcare: buying a way in
  • Overview of the Canadian healthcare system
  • The payer model
  • Access to healthcare and demographics
  • TELUS’ objectives and evidence of success in healthcare
  • Build a new revenue stream
  • Synergy: supporting telecoms revenues
  • Differentiate brand among consumers
  • Drive better health outcomes
  • Understanding TELUS Health’s strategy
  • TELUS Health’s three step strategy
  • eHealth market challenges: how is TELUS responding?
  • Comparing TELUS with other telcos: a deeper dive
  • Lessons for other telcos
  • Challenges of the digital health market
  • Healthcare is a long-term play
  • Healthcare matrix: mapping the healthcare sector for telcos

Figures:

  • Figure 1: Snapshot of TELUS Health business
  • Figure 2: Public vs. private healthcare services in Canada
  • Figure 3: Rate of chronic disease rises dramatically among seniors
  • Figure 4: TELUS Health’s reach in the healthcare market
  • Figure 5: TELUS Health is outpacing TELUS in revenue growth
  • Figure 6: TELUS Health’s contribution to TELUS revenues
  • Figure 7: Healthcare investment contributes to improving customer loyalty
  • Figure 8: How do consumers feel about TELUS?
  • Figure 9: TELUS vs. other Canadian telcos’ consumer brand score and rank
  • Figure 10: BC pilot of HHM shows reduction in hospital admissions
  • Figure 11: TELUS acquisitions
  • Figure 12: Methodology for building collaborative solutions
  • Figure 13: List of collaborative solutions and end-users
  • Figure 14: Roadmap for eClaims solution
  • Figure 15: Roadmap for PharmaSpace solution
  • Figure 16: Roadmap for Mobile EMR solution
  • Figure 17: Patient engagement is central to TELUS Health’s target growth opportunities
  • Figure 18: Home health monitoring overview
  • Figure 19: Results of HHM trials across two health authorities in British Colombia
  • Figure 20: Healthcare in TELUS ad campaigns
  • Figure 21: Sample of TELUS Health investments and partnerships
  • Figure 22: Telco digital health strategies
  • Figure 23: Healthcare Matrix scoring criteria
  • Figure 24: Where are telcos’ strengths in digital health?

Transformation: Are telcos investing enough?

Introduction

Why are we doing non-telco case studies?

Digital transformation is a phenomenon that is not just affecting the telco sector. Many industries have been through a transformation process far more severe than we have seen in telecoms, while others began the process much earlier in time. We believe that there are valuable lessons telcos can learn from these sectors, so we have decided to find and examine the most interesting/useful case studies.

In this report, we look at German publisher Axel Springer, which has successfully transformed itself from a print-based publisher to an online multimedia platform.

While the focus of this report will be on Axel Springer’s transformation, the key takeaways will be the lessons for telcos to help them make their own transformation process run more smoothly.

STL Partners has done extensive research into the challenge of telco transformation and how to implement effective business model change, most recently in our reports Five telcos changing culture: Lessons from neuroscience, Changing Culture: The Great Barrier and Which operator growth strategies will remain viable in 2017 and beyond?

General outline of STL Partners’ case study transformation index

We intend to complete similar case studies in the future from other industry verticals, with the goal of creating a ‘case study transformation index’, illustrating how selected companies have overcome the challenge of digital disruption. In these case studies we will examine five key areas of transformation, identifying which have been the most challenging, which have generated the most innovative solutions, and which can be considered successes or failures. These five areas are:

  • Market
  • Proposition
  • Value Network
  • Technology
  • Finances

For each section, supporting evidence of good or bad practice will be graded as a positive (tick) or a negative (cross). These ticks and crosses will then be evaluated to create a “traffic light” rating for each section, which will then be tallied to provide an overall transformation rating for each case study.

We anticipate that some of these five sections will overlap, and some will be more pertinent to certain case studies than others. But central to the case studies will be analysis of how the transformation process is relevant to the telco industry and the lessons that can be learned to help operators on the path to change.

Axel Springer’s transformation – a success story

German publishing house Axel Springer began to suffer from declining revenues in the mid-2000’s as changes in consumer behaviour and disruption from new digital rivals such as Google and Yahoo! led to falling readership. Axel Springer identified this threat immediately and reacted swiftly, making the bold move to cannibalise its core printed newspaper and magazine business by repositioning most of its existing content onto online and digital platforms. The company has continued this transformation with an aggressive acquisition strategy, enabling it to expand its footprint into new geographies and content areas.

Even though Axel Springer’s transformation required sweeping technological, strategic and cultural change, it has been a success. Since the disposal of several non-core regional publications in 2012, both revenues and EBITDA have grown on average nearly 5% per year, while the percentage of revenues from digital streams grew to 67% in 2016 from just 42% in 2012.

Why is the Axel Springer case study relevant for telcos?

Much of Axel Springer’s transformation has consisted of (and been driven by) the change from traditional (print) to digital (online) publishing. While telcos have grown up in the digital era, with much of their transformation being driven by changes in consumer behaviour, there are many parallels between Axel Springer and the telco sector. We will look at the key lessons that can be learnt in the following areas:

  • Advances in technology
  • Changes in consumption and customer habits
  • The risk of cannibalisation
  • New opportunities in content
  • Working with social media
  • Platform and partnership opportunities
  • Culture change
  • The importance of data

Content:

  • Executive Summary
  • Axel Springer’s transformation success – a summary of key lessons
  • Axel Springer in STL Partners case study transformation index
  • Introduction
  • Why are we doing non-telco case studies?
  • Axel Springer – background to transformation
  • What was Axel Springer’s business model pre-transformation?
  • Drivers of change – how the market developed and Axel Springer’s reaction
  • Conclusions
  • Axel Springer in STL Partners transformation index
  • Appendices
  • Appendix 1: Axel Springer – company timeline
  • Appendix 2: Axel Springer – recent acquisitions
  • Appendix 3: Axel Springer – recent investments

Figures:

  • Figure 1: Total global internet users
  • Figure 2: Traditional publishing company business model
  • Figure 3: Post-digital publishing company business model
  • Figure 4: Axel Springer total revenues 2003-2016
  • Figure 5: Axel Springer total EBITDA and EBITDA margin 2003-2016
  • Figure 6: The development of news and media consumption
  • Figure 7: Axel Springer 2016 revenues by sector (€ million)
  • Figure 8: Axel Springer percentage of revenues from digital streams
  • Figure 9: Axel Springer revenues by sector 2012-2016
  • Figure 9: Axel Springer investment in acquisitions 2012-H1 2016 in comparison to selected telcos

The STL Partners Digital Investment Database: August 2016 Update

The STL Partners Digital Investment Database

We published our Digital Investment Database in early July, together with a report titled Digital M&A and Investment Strategies. Given recent high profile activities, we’ve now issued an updated version.

While there have been a number of smaller investments and acquisitions, two major acquisitions have hit the headlines since we published our report. On 18 July, it was announced that SoftBank was buying the UK chip manufacturer ARM Holdings for £24.3bn. Then, on 24 July, Verizon bought Yahoo! for $4.8bn. Here, we take a quick look at these two acquisitions.

SoftBank and ARM: (big) business as usual?

Why ARM? For its £24.3bn, SoftBank has gained one of the world’s leading processor manufacturers, with a strong existing business designing processors for smartphones and tablets, and an excellent opportunity to develop new revenues from the IoT. The attraction is clear, but the sums involved are huge.

Yet in some ways, this acquisition is the progression of business as usual. Our analysis based on v1.0 of our database suggests that SoftBank has long been one of the most active telcos in digital M&A. Among the 31 investments and acquisitions we tracked from 2012-1H2016, SoftBank was outstripped only by Deutsche Telekom, Singtel, and Telstra.

However, while the ARM deal fits with this prior interest in digital businesses, the bulk of SoftBank’s recent purchases have had a software focus: ARM marks a shift towards hardware. Moreover, the size of the transaction dwarfs SoftBank’s previous efforts.

Much media coverage has suggested that the ARM deal might be closely associated with the recent return of CEO Masayoshi Son, an adventurous, ambitious leader with a history of bold purchases. Looking at our database, the ARM deal certainly breaks the mould of telco acquisitions, as SoftBank’s £24.3bn deal for ARM is by far the biggest non-core-business acquisition tracked by our database.[1] But £24.3bn rarely changes hands on a whim, and we intend to publish further in-depth analysis on this in future.

Verizon and Yahoo!: Can a telco challenge Google and Facebook on advertising?

Verizon’s purchase of Yahoo! for $4.8bn was, in financial terms, far smaller than the SoftBank/ARM deal. Yet it received a great deal of media attention, partly, of course, because Yahoo! remains a significant household name in the US in particular, and a salient reminder of how the corporate landscape of the internet has changed.

At its peak in 2000, Yahoo! was worth $125bn. So there are clear questions: have Verizon snapped up an undervalued business, or has it splashed cash on a dinosaur?

Verizon has been very clear that its intention with Yahoo! is to join the advertising business with its 2015 purchase of AOL for $4.4bn, and become the third player in digital advertising behind Google and Facebook. CEO Lowell McAdam made no bones about the business’s ambitions in oft-repeated comments shortly after the deal was announced: ‘Are we going to challenge Google and Facebook? I just say, look, we’re planning on being a significant player here. The market is going to grow exponentially.’[2]

Currently, Google and Facebook together have over 50% of the US digital advertising market. AOL and Yahoo! combined have 6%. 1bn users view Yahoo! content each month, and Verizon only therefore needs to persuade a few advertisers to switch to them in order to grow market share.

From a telco point of view, one key facet of this argument is that potential synergies between Yahoo! and Verizon’s network do not appear to be essential. While telcos have classically searched for M&A opportunities that directly complemented their core business, Verizon might be understood as using its market value to finance deals that have independent value – not unlike Softbank and ARM. However, there are questions around the true value of Yahoo!’s share of digital advertising.

At the moment of Facebook’s IPO in 2012, Yahoo! had greater revenue. But since then. Google and Facebook have transformed digital advertising by making it targetable. Google knows what you want, when you want it (a search for ‘buy blue jeans’, for instance), and Facebook knows what you like (as users are encouraged to document their preferences). It can use this data to give advertisers access to the most relevant sections of a vast potential online audience.

This is a strong business model that has proved more valuable as these companies have refined it. Yahoo!’s digital advertising is not quite as sophisticated, and it remains to be seen if Verizon will be able to develop the revenue it envisages.

Verizon and Fleetmatics: Under the radar

Yahoo! garnered the majority of media attention, but Verizon also spent $2.4bn on Fleetmatics, a digital business that provides SaaS for fleet management. M2M fleet tracking is nothing new, but as well as its core software business, the company has the potential to play an important role in the industrial IoT as connected vehicles become more common.

Together, the two acquisitions might suggest a drive to develop profitable plays in markets beyond core telco revenue: from Fleetmatics, the IoT, and from AOL-Yahoo, digital advertising. Moreover, for strategists and practitioners placing the two together may have greater significance than viewing them separately.

Highlighting such deals and longer term trends behind them are two of the key goals of our M&A database.

Accessing the database

Our Digital Investment Database documents key digital investments and acquisitions for twenty-two operators during the period 2012 – August 2016.

An illustrative snapshot of part of the database

[1] To be precise, ‘non-core-business’ excludes telcos buying businesses involved in delivering the quadruple play of fixed, mobile, internet, and TV – for example, BT’s purchase of EE, or AT&T’s purchase of DirecTV.

[2] Financial Times, 26 July 2016.

Digital M&A and Investment Strategies

Introduction

Communications services providers have long used M&A as a key element of strategy. By far the most common approach has been to acquire other operators to build scale in core communications services. For the vendor operator, selling off assets has been as a way of raising cash to reduce debt or enable further investment in core markets. As telecommunications growth has slowed and technological developments and user behaviour have swung towards mobile, so M&A activity has increased as players have strived for market consolidation, integration of fixed-mobile capabilities, or geographic expansion as a source of growth. BT-EE in the UK, Orange-Jazztel in Spain, and Etisalat-Maroc Telecom provide respective examples.

However, as operators continue to build digital capabilities and strive to deliver digital services, M&A and investment beyond ‘traditional telecoms’ is picking up. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one that focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation rather than continuity. For more details, see our recent report Solution: Transforming to the Telco Cloud Service Provider (Part 2). Making such a change is not without its challenges, and many operators now see M&A and investments as an important part of the Telco 2.0/digital transformation journey.

This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of SingTel, Telstra and Verizon. There is an accompanying database with key digital acquisitions and investments for twenty-two operators during the period 2012 – 1H 2016 inclusive.

Drivers for operator M&A and majority investment

Figure 1: Drivers for operator M&A and majority investment – traditional and digital

Source: STL Partners

Traditional/Telco 1.0 drivers: reach and scale

As illustrated above, drivers that refer to ‘traditional’ or ‘Telco 1.0’ M&A and investment are well-established:

1. Extending geographic footprint is often a key driver…

  • …to new markets that are adjacent geographically (e.g., DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
  • …or to those that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
  • …or simply offer good opportunities for expanded footprint and increased efficiencies of operation in emerging regions where demand for mobile services is still growing strongly (e.g., SingTel and Etisalat’s numerous investments in operators in Asia and Africa, respectively).

2. Extending traditional communications offerings, is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, in order to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the U.K. is one example.

3. Consolidation has slowed to some extent, as regulators and competitors fight against acquisitions that remove players from the market or concentrate too much market power in the hands of stronger service providers. This has been a particular issue in the European Union (E.U.), where E.U. regulators have refused to approve several proposed telecoms M&A deals recently, including TeliaSonera and Telenor in Denmark, and the proposed Hutchison acquisition of O2 to merge with its subsidiary Three, in the UK. Other deals, such as the proposed Orange-Bouygues Telecom merger in France which was abandoned in April 2016, have failed due to the parties involved failing to reach agreement. However, our research shows continued interest in operator M&A for consolidation, with recent successful examples including TeliaSonera’s acquisition of Tele2 Norway in 2015.

4. The acquisition of service partners – primarily channel partners, or partner companies providing systems integration and consultancy capabilities, typically for enterprise customers – has proved an important driver of M&A for many (mainly converged) operators. For the purpose of our analysis, we are counting the SI and consulting M&A activity as ‘digital/Telco 2.0’ rather than ‘traditional/Telco 1.0’, where it focuses on a specific digital area (e.g., cloud services, analytics).

5. Finally, operator M&A is also being driven by the enthusiasm of sellers. Many operators are looking to sell off assets outside of their home markets, pulling back from markets that have proven too competitive, too small or simply too complicated, as part of a strategy to pay down debt and/or free up assets for investment in other higher-growth areas:

  • TeliaSonera’s pullback from its Eurasian markets has seen it sell off a 60% stake in Nepalese operator Ncell to Axiata, and it is also planning to divest its majority stake in Kazakhstan’s Kcell through a sale to Turkcell.
  • Telefonica’s attempt to sell its O2 UK unit to Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its large debt (at EUR 49.7m as of January 2016, the company’s debts actually exceeded its market value) and to fund its ambitions to build out its media empire.

 

  • Executive Summary
  • Introduction
  • Drivers for operator M&A and majority investment
  • Telco digital M&A constraints – why take the risk?
  • Evaluating operator digital investment strategies
  • 22 players across 5 regions: US and Asia most aggressive
  • Which sectors are attracting the most interest?
  • Operator M&A strategies in detail: SingTel, Telstra and Verizon
  • SingTel: focusing on digital marketing, media and security
  • Telstra: Spreading Its Digital Bets across Health, Cloud and Video
  • Verizon: acquisition to support digital advertising and media dominance
  • Recommendations

 

  • Figure 1: Drivers for operator M&A and majority investment – traditional and digital
  • Figure 2: Telco cost and operational models inhibit innovation and discourage investments in unfamiliar digital businesses
  • Figure 3: Number of operator digital acquisitions and majority investments, 2012 – 1H2016
  • Figure 4: Largest 10 telco digital M&A and majority investments, 2012 – 1H2016
  • Figure 5: Mapping of operator digital M&A strategies
  • Figure 6: Number of digital M&A and majority investments by sector/category 2012 – 1H2016
  • Figure 7: SingTel – digital investment overview
  • Figure 8: Amobee’s proposition focuses on cross-platform advertising and analytics
  • Figure 9: Telstra’s Digital Acquisitions and Majority Investments, 2012 – 1H 2016
  • Figure 10: Ooyala’s proposition
  • Figure 11: Cloud is the key element in Telstra’s Telco 2.0 strategy
  • Figure 12: Verizon’s Digital Acquisitions and Majority Investments, 2012 – 1H 2016

The European Telecoms market in 2020, Report 1: Evaluating 10 forces of change

Introduction

Telecoms – the times they are a changin’

The global telecoms market is experiencing change at an unprecedented pace.  As recently as 2012 , few would have predicted that consumer voice and messaging would be effectively ‘given away’ with data packages in 2015.  Yet today, the shift towards data as the ‘valuable’ part of the mobile bundle has been made in many European markets and, although many operators still allocate a large proportion of revenue to voice and messaging, the value proposition is clearly now ‘data-led’.

Europe, in particular, is facing great uncertainty

While returns on investment have steadily reduced in European telecoms, the market has remained structurally fragmented with a large number of disparate players – fixed-only; mobile-only; converged; wholesalers; enterprise-only; content-oriented players (cablecos); and so forth. Operators generally have continued to make steady economic returns for investors and have been considered ‘defensive stocks’ by the capital markets owing to an ability to generate strong dividend yields and withstand economic down-turns (although Telefonica’s woes in Spain will attest to the limitations of the telco business model to recession).

But the forces of change in Europe are growing and, as a company’s ‘Safe Harbor’ statement would put it, ‘past performance does not guarantee future results’. Strategists are puzzling over what the European telecoms industry might look like in 2020 (and how might that affect their own company) given the broad range of forces being exerted on it in 2015.

STL Partners believes there are 12 questions that need to be considered when considering what the European telecoms market might look like in 2020:

  1. How will regulation of national markets and the wider European Union progress?
  2. How will government policies and the new EC Digital Directive impact telecoms?
  3. How will competition among traditional telecoms players develop?
  4. How strong will new competitors be and how will they compete with operators?
  5. What is the revenue and margin outlook for telecoms core services?
  6. Will new technologies such as NFV, SDN, and eSIM, have a positive or negative effect on operators?
  7. How will the capital markets’ attitude towards telecoms operators change and how much capital will be available for investment by operators?
  8. How will the attitudes and behaviours of customers – consumer and enterprise – evolve and what bearing might this have on operators’ business models?
  9. How will the vision and aspirations of telecoms senior managers play out – will digital services become a greater focus or will the ‘data pipe’ model prevail? How important will content be for operators? What will be the relative importance of fixed vs mobile, consumer vs enterprise?
  10. Will telcos be able to develop the skills, assets and partnerships required to pursue a services strategy successfully or will capabilities fall short of aspirations?
  11. What M&A strategy will telco management pursue to support their strategies: buying other telcos vs buying into adjacent industries? Focus on existing countries only vs moves into other countries or even a pan-European play?
  12. How effective will the industry be in reducing its cost base – capex and opex – relative to the new competitors such as the internet players in consumer services and IT players in enterprise services?

Providing clear answers to each of these 12 questions and their combined effect on the industry is extremely challenging because:

  • Some forces are, to some extent at least, controllable by operators whereas other forces are largely outside their control;
  • Although some forces are reasonably well-established, many others are new and/or changing rapidly;
  • Establishing the interplay between forces and the ‘net effect’ of them together is complicated because some tend to create a domino effect (e.g. greater competition tends to result in lower revenues and margins which, in turn, means less capital being available for investment in networks and services) whereas other forces can negate each other (e.g. the margin impact of lower core service revenues could be – at least partially – offset by a lower cost base achieved through NFV).

The role of this report

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

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

  • Identify the key forces of change in Europe and provide a useful means of classifying them within a simple and logical 2×2 framework (this report);
  • Help readers refine their thoughts on how Europe might develop by outlining four alternative ‘futures’ that are both sufficiently different from each other to be meaningful and internally consistent enough to be realistic (Report 2);
  • Provide a ‘prediction’ for the future European telecoms market based on the responses of two ‘wisdom of crowds’ votes conducted at a recent STL Partners event for senior managers from European telcos plus our STL Partners’ own viewpoint (Report 2).
  • Executive Summary
  • Introduction
  • Telecoms – the times they are a changin’
  • Europe, in particular, is facing great uncertainty
  • The role of this report
  • Understanding and classifying the forces of change
  • External (market) forces
  • Internal (telco) forces
  • Summary: The impact of internal and external forces over the next 5 years
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: O2’s SIM-only pay monthly tariffs – many with unlimited voice and messaging bundled in
  • Figure 2: A framework for classifying telco market forces: internal and external
  • Figure 3: Telefonica dividend yield vs Spanish 10-year bond yield
  • Figure 4: Customer attitudes to European telecoms brands – 2003 vs 2015
  • Figure 5: Summarising the key skills, partnerships, assets and culture needed to realise ambitions
  • Figure 6: SMS Price vs. penetration of Top OTT messaging apps in 2012
  • Figure 7: Summary of how internal and external forces could develop in the next 5 years

BT/EE: Huge Regulatory Headache and Trigger for European Transformation

UK Cellular: The Context

The UK is a high-penetration market (134%), and has for the most part been considered a high-competition one, with 5 MNOs and numerous resellers/MVNOs. However, since the Free.fr and T-Mobile USA price disruptions, the UK has ceased to be one of the cheaper markets among rich countries and now seems a little expensive by French standards, while the EE joint venture effectively means a move down from 5 operators to 4. There has been considerable concern that a price disruption was in the offing since BT acquired 2.6GHz spectrum, perhaps via a “Free-style” BT deployment, or alternatively via BT leasing the spectrum to a third party, possibly Virgin Media or TalkTalk. However, it is not as obvious that there is a big target for price disruption as it was in France pre-Free or the US pre-T-Mobile, as Figure 1 shows. The UK operators are only slightly dearer than the French average, with one exception, and the market is more competitive.

Figure 1: The UK is a slightly dearer cellular market than France

Source: STL Partners, themobileworld.com

The following chart summarises the current status of the operators.

Figure 2: UK mobile market overview, 2012-2014

Source: Company Accounts, STL Partners analysis

One reason to pick EE over O2 is immediately clear – EE has substantially better ARPU, is increasing it, and is at least holding onto customers. A deeper look into the company shows that the 4G network is just recruiting customers fast enough to compensate for churn away from the two legacy networks. Overall, the market is just growing.

Figure 3: UK cellular subscriber growth, 2012-2014

Source: Company Accounts, STL Partners analysis

O2 is the cheapest of the four 4G operators and is discounting hard to win share. Meanwhile, Vodafone UK starts to look like a squeezed third operator, losing customers and ARPU at the same time, and fourth operator 3UK looks remarkably strong. In terms of profitability, Figure 4 shows that Vodafone is just managing to hold its margins, while O2 is growing at constant margins, EE is improving its margins, and 3UK is powering ahead, improving its margins, ARPU, and subscriber base at the same time.

Figure 4: 3UK is a remarkably strong fourth operator

Source: Company Accounts, STL Partners analysis

 

  • UK Cellular: The Context
  • Meanwhile, in the Retail ISP Market
  • The Business Case for BT+EE
  • An affordable deal?
  • Valuation and leverage
  • Synergy: operational cost savings
  • Synergy: marketing, customer data and cross-sales
  • Synergy: quad-play revenue
  • Can a BT-EE merger be acceptable to the Regulator?
  • The Spectrum Position
  • The Vertical Integration Problem
  • The Move towards Convergence and the Fixed Squeeze Potential Scenarios
  • Conclusion: big bets, tests, and signals
  • BT: betting big
  • The market: three big decisions
  • The regulator and the regulatory environment: a big test
  • Sending important signals

 

  • Figure 1: The UK is a slightly dearer cellular market than France
  • Figure 2: UK mobile market overview, 2012-2014
  • Figure 3: UK cellular subscriber growth, 2012-2014
  • Figure 4: 3UK is a remarkably strong fourth operator
  • Figure 5: UK consumer wireline overview
  • Figure 6: FTTC is mostly benefiting the “major independent” ISPs
  • Figure 7: BT Sport has peaked as a driver of broadband net-adds, but the football rights bills keep coming
  • Figure 8: Content costs are eating around 70% of wholesale fibre revenue at BT
  • Figure 9: BT Sport’s impact on its market valuation
  • Figure 10: BT-EE would blow through the 2013 regulatory cap on spectrum allocations, but not the proposed cap post-2.3/3.4GHz auctions
  • Figure 11: Although BT-EE is just compliant with the 2.3/3.4GHz cap, it looks suspiciously dominant
  • Figure 12: Fibre-rich MNOs break away from the herd of mediocrity in Europe Figure 13: Vodafone – light on fibre across the EU