DataSpark: Lessons on building a new telco (data) business

Data analytics as a new business

This case study looks at DataSpark, an autonomous business unit of Singtel (www.dsanalytics.com) and evaluates the benefits of creating a separate organisational structure within a telco to provide technology and support for the development of analytics, AI and automation as a new business. It is created after conversations with Shaowei Ying, Chief Operating Officer of DataSpark. The company’s activities include both the creation of internal capabilities and data monetisation capabilities for external customers.

DataSpark was formed in 2014 at a time when not many telcos were actively exploring new data business opportunities. The unit consisted of a small group of data professionals with skills around, particularly, location data. Singtel’s CEO was a strong supporter of leveraging telco data to establish competitive differentiation and therefore tasked them with looking at various location-related external monetisation opportunities. It was considered natural to create internal use cases for the data to defray the cost of the data preparation. In particular, the same mobility intelligence was of use to radio network planners optimising their network roll out using not just congestion, but now subscribers’ mobility patterns, too.

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DataSpark’s progress to date

Telcos’ external monetisation units, such as DataSpark, are not yet large enough to split out the revenues in their reports and accounts. However, in the 2018 and 2019 Management Discussion and Analysis DataSpark’s progress was reported to include:

  • Activity to bring mobility data to sectors such as transport and out-of-home media in Singapore and Australia
  • Partnership in out-of-home advertising with large players taking a data-as-a-service solution to optimise their assets
  • Provision of insights including first party enterprise data in the consumer goods sector to deliver new use cases in advertising and retail store inventory optimisation
  • Recent support for governments in predicting spread of Covid-19, including understanding the socio-economic impact of the virus.

Service example: COVID-19 insight for the Australian local government

COVID-19 data analytics innovation

Source: DataSpark

Table of Contents

  • Executive Summary
    • Two diverging strategies for a small, independent data unit
    • Scaling up the data business as an integrated unit
  • Introduction
    • DataSpark’s progress to date
  • DataSpark’s approach to building a data unit
    • What services does it offer?
    • Go-to-market: Different approaches for internal and external customers
    • Organisational structure: Where should a data unit go?
  • How to scale a data business?
    • The immediate growth opportunities
    • Following in others’ footsteps
    • Building new capabilities for external monetisation
  • Assessing future strategies for DataSpark
    • Scenario 1: Double down on internal data applications
    • Scenario 2: Continue building an independent business

 

Read more about STL Partners’ AI & automation research at stlpartners.com/ai-analytics-research/

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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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Telcos and enterprise verticals: 5G is not the only opportunity

Introduction

This report outlines key challenges within selected industry verticals, and how telcos can help resolve them with three emerging networking technologies – 5G, IoT and edge computing.

This research builds on many previous reports:

Enterprise services evolve alongside communications and information technologies

The early days of 2G/3G

  • Basic M2M connectivity
  • Early versions of private networks, bypassing the internet for sensitive data transfer

Improving mobility and capacity with 4G and fibre

  • Better connectivity drives demand for video-conferencing and more sophisticated UCaaS
  • Mobile and fixed data connectivity is powerful enough to enable greater enterprise mobility and support the shift towards cloud-based services
  • Different verticals increasingly require bespoke solutions for unique needs – which are easier to deliver through the cloud

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Greater flexibility and frictionless experiences with 5G, IoT and edge computing

  • Increasing complexity of connectivity, IoT, cloud and IT ecosystems are driving demand for flexible yet seamless solutions:
    • Mobile connectivity across geographies without onerous roaming charges
    • Seamless mobile connectivity across multiple networks and technologies, especially in remote areas
    • Frictionless remote set-up of IoT devices shipped directly from manufacturer to live environment
    • Ability to migrate to new technologies seamlessly (e.g. public sector move from TETRA to cellular)
    • All of the above controlled and monitored on user-friendly, cloud-based dashboards
  • The shift from product to service-based business models means a growing number of enterprises want to embed connectivity into their offer to customers
    • i.e. demand for greater control over wholesale connectivity solutions
    • remote maintenance, asset-tracking, etc.

5G applications will arrive at different times…

evolution of 5G technology eMBB, URLLC, private 5G, massiv IoT

Source: STL Partners

…in the meantime, other technologies can help address enterprise needs

The interdependencies between 5G, IoT and edge computing

Source: STL Partners

The problem with 5G for enterprises

  • Most enterprises are not looking at 5G in isolation, but as one of many technologies that will help resolve pain points around efficiency and innovation. The Internet for Things (I4T) and edge computing are two other key technologies that many enterprises need, and which telcos could potentially provide
  • In the long term, STL Partners does not expect 5G connectivity on its own to deliver growth for telcos. So to grow enterprise revenues, telcos should also develop I4T and edge computing solutions
  • But developing expertise in 5G, I4T and edge computing will be expensive and complex to manage
  • Therefore, telcos should start by targeting their investments to meet specific enterprise pain points

This report helps telcos assess how to target their investments by highlighting key pain points in a selection of industry verticals, and how relevant 5G, I4T and edge computing are for solving them.

Sectors with strong demand for all three technologies hold the highest potential value, but this will be difficult for telcos to capture owing to strong competition in I4T and edge computing from other technology companies.

This report covers a selection of verticals that STL Partners has developed knowledge of through research and consulting activities: manufacturing, construction, utilities, agriculture, transport, automotive, healthcare, and sports, media and entertainment. 

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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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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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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

Telstra: Battling Disruption and Growing Enterprise Cloud & ICT

Introduction

A Quick Background on the Australian Market

Australia’s incumbent telco is experiencing the same disruptive forces as others, just not necessarily in the same way. Political upheaval around the National Broadband Network (NBN) project is one example. Others are the special challenges of operating in the outback, in pursuit of their universal service obligation, and in the Asian enterprise market, at the same time. Telstra’s area of operations include both some of the sparsest and some of the densest territories on earth.

Australian customers are typically as digitally-literate as those in western Europe or North America, and as likely to use big-name global Web services, while they live at the opposite end of the longest submarine cable runs in the world from those services. For many years, Telstra had something of a head start, and the cloud and data centre ecosystem was relatively undeveloped in Australia, until Amazon Web Services, Microsoft Azure, and Rackspace deployed in the space of a few months presenting a first major challenge. Yet Telstra is coping.

Telstra: doing pretty well

Between H2 2009 and H2 2014 – half-yearly reporting for H1 2015 is yet to land – top-line revenue grew 1% annually, and pre-tax profits 3%. As that suggests, margins have held up, but they have only held up. – Net margin was 16% in 2014, while EBITDA margin was 43% in 2009 and 41% in 2014, having gone as low as 37% in H2 2010. This may sound lacklustre, but it is worth pointing that Verizon typically achieves EBITDA margins in this range from its wireless operation alone, excluding the commoditised and capital-intensive landline business. Company-wide EBITDA margins in the 40s are a sound performance for a heavily regulated incumbent. Figure 1 shows sales, EBITDA and net margins, and VZW’s last three halves for comparison.

Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s

Source: STL Partners, Telstra filings

Looking at Telstra’s major operating segments, we see a familiar pattern. Fixed voice is sliding, while the mobile business has taken over as the core business. Fixed data is growing slowly, as is the global carrier operation, while enterprise fixed is declining slowly as the traditional voice element and older TDM services shrink. On the other hand, “Network Applications & Services” – Telstra’s strategic services group capturing new-wave enterprise products and the cloud – is growing strongly, and we believe that success in Unified Communications and Microsoft Office 365 underpins that growth in particular. A one-off decrease since 2009 is that CSL New World, a mobile network operator in Hong Kong, was sold at the end of 2014.

Figure 2: Mobile and cloud lead the way

Source: STL Partners, Telstra filings

Telstra is growing some new Telco 2.0 revenue streams

Another way of looking at this is to consider the segments in terms of their size, and growth. In Figure 2, we plot these together and also isolate the ‘Telco 2.0’ elements of Telstra from the rest. We include the enterprise IP access, Network Applications & Services, Pay-TV, IPTV, and M2M revenue lines in Telco 2.0 here, following the Telco 2.0 Transformation Index categorisations.

Figure 3: Telco 2.0 is a growing force within Telstra

Source: STL Partners, Telstra filings

The surge of mobile and the decline of fixed voice are evident. So is the decline of the non-Telco 2.0 media businesses – essentially directories. This stands out even more so in the context of the media business unit.

Figure 4: Telstra’s media businesses, though promising, aren’t enough to replace the directories line of business

Source: STL Partners, Telstra filings

“Content” here refers to “classified and advertising”, aka the directory and White Pages business. The Telco 2.0 businesses, by contrast, are both the strongest growth area and a very significant segment in terms of revenue – the second biggest after mobile, bigger even than fixed voice, as we can see in Figure 5.

Figure 5: Telco 2.0 businesses overtook fixed voice in H2 2014

Source: STL Partners, Telstra filings

To reiterate what is in the Telco 2.0 box, we identified 5 sources of Telco 2.0 revenue at Telstra – pay-TV, IPTV, M2M, business IP access, and the cloud-focused Network Applications & Services (NA&S) sub-segment. Their performance is shown in Figure 6. NA&S is both the biggest and by far the fastest growing.

 

  • Executive Summary
  • Introduction
  • A quick background on the Australian Market
  • Telstra: doing pretty well
  • Telstra is growing some new Telco 2.0 revenue streams
  • Cloud and Enterprise ICT are key parts of Telstra’s story
  • Mobile is getting more competitive
  • Understanding Australia’s Cloud Market
  • Australia is a relatively advanced market
  • Although it has some unique distinguishing features
  • The Australian Cloud Price Disruption Target
  • The Healthcare Investments: A Big Ask
  • Conclusions and Recommendations

 

  • Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s
  • Figure 2: Mobile and cloud lead the way
  • Figure 3: Telco 2.0 is a growing force within Telstra
  • Figure 4: Telstra’s media businesses, though promising, aren’t enough to replace the directories line of business
  • Figure 5: Telco 2.0 businesses overtook fixed voice in H2 2014
  • Figure 6: Cloud is the key element in Telstra’s Telco 2.0 strategy
  • Figure 7: NA&S is by far the strongest enterprise business at Telstra
  • Figure 8: Enterprise fixed is under real competitive pressure
  • Figure 9: Telstra Mobile subscriber KPIs
  • Figure 10: Telstra Mobile is strong all round, but M2M ARPU is a problem, just as it is for everyone
  • Figure 11: Australia is a high-penetration digital market
  • Figure 12: Australia is a long way from most places, and links to the Asia Pacific Cable Network (APCN) could still be better
  • Figure 13: The key Asia Pacific Cable Network (APCN) cables
  • Figure 14: Telstra expects rapid growth in intra-Asian trade in cloud services
  • Figure 15: How much?
  • Figure 16: A relationship, but a weak one – don’t count on data sovereignty

Digital Economy: who will prosper in ‘The Great Compression’?

Summary: Value is squeezed out of industries as they become increasingly digital – i.e. accessed by mobile and online, driven by data and defined by software. We call the collective economic impact of this pressure ‘The Great Compression’. But which companies will survive and prosper – and how? 90% of the Execs at our Silicon Valley brainstorm identified ‘management mindset’ as a key factor in Telecoms, Media, Finance and Retail. (May 2013, Executive Briefing Service, Transformation Stream).

Scale of Transformation Needed April 2013

  Read in Full (Members only)   To Subscribe click here

Below are the high-level analysis and detailed contents from a 62 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Premium Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation Stream here. The Digital Economy, and the changes needed to ‘management mindset’, organisation, technology, and products, will also be explored further at the EMEA Executive Brainstorm in London, 5-6 June, 2013. Non-members can find out more about subscribing here, or find out more about this and/or the Brainstorm by emailing contact@telco2.net or calling +44 (0) 207 247 5003.

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Introduction

Part of the New Digital Economics Executive Brainstorm series, the Silicon Valley 2013 event took place at the InterContinental Hotel in San Francisco on the 19th and 20th of March, 2013. This report covers the Digital Economy track on the first day.

Summary Analysis: who will prosper in ‘The Great Compression’?

Telecoms, telco vendors, entertainment, device makers, financial services, retailers, entertainment services, and brands in developed economies are experiencing the ‘Digital Hunger Gap’ – a shortfall of revenues versus past levels as industries become increasingly digital i.e. accessed by mobile and online, driven by data and defined by software.

Other industries are also feeling pain from the process of becoming digitised which both changes the model and the dynamics of competition. Others, like consumer goods and car manufacturing, see opportunities to enhance services with digital connectivity to build loyalty and new value. Government services and healthcare face huge cost challenges. Digital services can be of huge value here, but the challenge for third parties is how to make money when money needs to be saved.

According to the participants in the Silicon Valley brainstorm, almost every industry faces massive changes in every area of its business model, with management mindsets most in need of a dramatic overhaul, and customer relationships marginally ahead in the total of partipants thinking a dramatic or significant change is needed.

Scale of Transformation Needed April 2013

New markets are emerging rapidly, particularly in Asia. However, many companies from North America and EMEA lack depth in local knowledge and face skills, cultural and political barriers to entry, and the mindset challenge of operating in a radically different economic environment.

As a result of the combined difficulties of growth in home markets and expansion abroad, there will be massive consolidation among traditional industry leaders in developed economies over the coming years. Those that are successful will continue to innovate as they consolidate, but it will be a huge struggle to survive for many.

We’re calling the collective economic impact of these pressures ‘The Great Compression’ as value is squeezed from existing industries. Those best positioned to profit through it have built defensible global or major regional strengths in horizontal areas with large-scale application and high barriers to entry, and/or that serve as ‘arms dealers’ to the rest of the digital economy. For example, chip makers and IP companies (e.g. ARM, Intel, Qualcomm), very large-scale / sophisticated IT manufacturers (e.g. Microsoft, Oracle, SAP), and ‘platforms’ (e.g. Apple, Google, Visa).

However, being well positioned is no guarantee of success, and all companies will face significant challenges requiring innovation and transformation. This in turn will require immediate and ongoing action by leadership teams in every company.

Digital innovation is increasingly itself becoming a little like the entertainment industry in that it is constantly seeking hits and highly vulnerable to hype. There are centres of innovation such as Silicon Valley and elsewhere, and there can only be a small number of highly successful ‘hits’ among the many thousands if not hundreds of thousands of attempts to make a hit. Finding, gaining a share in, nurturing, and ultimately profiting from these hits is a massive industry in itself. The recognised difficulty of doing this is a further barrier to success for many of the established players. Yet those that are to survive will need to overcome it.

Next steps for STL Partners

  • To define and detail the practical actions needed to drive cross-industry transformation and innovation (in terms of ‘management mindset’, organisation, technology, products, etc.) at our Executive Brainstorms in:
    • Europe, London, 5-6 June 2013; MENA, Dubai, 14-15 November 2013; APAC, Singapore, 5-6 December 2013; Silicon Valley, San Francisco, 19-10 March 2014.
  • To publish 150+ page ‘Strategy Reports’ on:
    • The detailed benchmarking of leading players’ Telco 2.0 strategies; Digital Commerce; The Future of voice and Messaging Services.
  • To publish c.15-30 page ‘Executive Briefings’ covering:
    • Software Defined Networks (SDN); The business case for personal data; ‘Show me the (mobile) money’ – an Executive Briefing on the business case for Digital Commerce.


To read the Digital Economy note in full, including the following sections detailing additional analysis…

  • Session 1: Digital Transformation
  • Strategic Growth Opportunities for a Hyper-Connected World
  • Stimulus presentations
  • Voting, feedback, discussions
  • Questionstorming: how to overcome the blockers?
  • Key takeaways
  • Session 2: Digital Consumer
  • The New Mobile Battleground
  • Stimulus presentations
  • Voting, feedback, discussions
  • STL Partners’ next steps
  • Session 3: Digital Infrastructure
  • The Impact of 4G, Software Defined Networks  & the Cloud
  • Stimulus presentations
  • Voting, feedback, discussions
  • Brainstorm Output: What new opportunities could new forms of digital infrastructure create? For whom? How?
  • STL Partners’ next steps
  • Session 4: The ‘Digital Me’
  • The role and value of ‘digital identity’
  • Stimulus presentations
  • Voting, feedback, discussions
  • STL Partners’ next steps

…and the following figures…

  • Figure 1 – Concurrent disruption in multiple lines of business
  • Figure 2 – Music since 1997, a case study
  • Figure 3 – Consolidation is a consequence of disruption
  • Figure 4 – Reviving the album format
  • Figure 5 – The future is brutal indeed
  • Figure 6 – The hunger gap, 2013-2017
  • Figure 7 – Measuring the impact of social…
  • Figure 8 – The bottom line impact of social at Bloomberg
  • Figure 9 – How realistic is the ‘Hunger Gap’?
  • Figure 10 – How accurate is the market sizing?
  • Figure 11 – How accurate is the forecast breakdown?
  • Figure 12 – What is the scale of the transformation needed?
  • Figure 13 – The ‘Telco 2.0’ opportunities for CSPs
  • Figure 14 – Learning about your customer from Amazon recommendations
  • Figure 15 – 80% are already engaged with BYOD
  • Figure 16 – Customer-centric commerce
  • Figure 17 – Mobile web user engagement takes off
  • Figure 18 – Are app stores that good for developers?
  • Figure 19 – Making mobile Web “more like apps”?
  • Figure 20 – What are the downsides of native apps?
  • Figure 21 – Would iOS users  benefit from alternative app stores?
  • Figure 22 – when should you give data back to customers?
  • Figure 23 – How long before the ‘data surveillance backlash’?
  • Figure 24 – Will voluntarily provided info be better than surveillance?
  • Figure 25 – The media industry is static, the Web/tech players gain at telcos’ expense
  • Figure 26 – The evolution of connectivity products
  • Figure 27 – Integration between industrial, enterprise, and public network domains
  • Figure 28 – Key issues for an “elastic operator”
  • Figure 29 – Verizon’s enterprise platform
  • Figure 30 – Defining SDN – with Star Trek!
  • Figure 31 – Strategic conclusions on SDN
  • Figure 32 – Impact of SDN?
  • Figure 33 – Digital feudalism, enlightenment, or something else?

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation Stream can download the full 62 page report in PDF format here. Non-Members, please subscribe here. The Digital Economy will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. For this or any other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Background & Further Information

Produced and facilitated by business innovation firm STL Partners, the Silicon Valley 2013 event overall brought together 150 specially-invited senior executives from across the communications, media, retail, banking and technology sectors, including:

  • AT&T, Bain & Co, Beecham Research, Bloomberg, Blumberg Capital, BMW, Buongiorno, Cablelabs, CenturyLink, Cisco, CITI Group, Cordys, Cox Communications, CSG International, EMC, Ericsson, Experian, GE, GI Partners, Group M, GSMA, IBM, Intel, Kore Telematics, MADE Holdings, Merchant Advisory Group, Microsoft, MIT Media Lab, Motorola, MTV, Nokia, Oracle, Orange, Panasonic, Placecast, Qualcomm, Rainmaker Capital, Reputation.com, SalesForce, Samsung, SAP, Sasktel, Sprint, Telus, The Weather Channel, T-Mobile USA, UnboundID, University of California Davis, US Cellular Corp, Verizon, Visa, Vodafone.

The Brainstorm used STL’s unique ‘Mindshare’ interactive format, including cutting-edge new research, case studies, use cases and a showcase of innovators, structured small group discussion on round-tables, panel debates and instant voting using on-site collaborative technology.

We’d like to thank the sponsors of the Brainstorm:
Silicon Valley 2013 Sponsors