Apple’s pivot to services: What it means for telcos

Introduction

The latest report in STL’s Dealing with Disruption stream, this executive briefing considers Apple’s strategic dilemmas in its ongoing struggle for supremacy with the other major Internet ecosystems – Amazon, Facebook and Google. It explores how the likely shift from a mobile-first world to an artificial-intelligence first world will impact Apple, which owes much of its current status and financial success to the iPhone.

After outlining Apple’s strategic considerations, the report considers how much Apple earns from services today, before identifying Apple’s key services and how they may evolve. Finally, the report features a SWOT (strengths, weaknesses, opportunities and threats) analysis of Apple’s position in services, followed by a TOWS analysis that identifies possible next steps for Apple. It concludes by considering the potential implications for Apple’s main rivals, as well as two different kinds of telcos – those who are very active in the service layer and those focused on providing connectivity and enablers.

Several recent STL Partners’ research reports make detailed recommendations as to how telcos can compete effectively with the major Internet ecosystems in the consumer market for digital services. These include:

Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed? To find new revenues, some telcos are competing head-on with the major internet players in the digital communications, content and commerce markets. Although telcos’ track record in digital services is poor, some are gaining traction. AT&T, Axiata, Reliance Jio and Turkcell are each pursuing very different digital services strategies, and we believe these potentially disruptive moves offer valuable lessons for other telcos and their partners.
Consumer communications: Can telcos mount a comeback? The rapid growth of Facebook, WhatsApp, WeChat and other Internet-based services has prompted some commentators to write off telcos in the consumer communications market. But many mobile operators retain surprisingly large voice and messaging businesses and still have several strategic options. Indeed, there is much telcos can learn from the leading Internet players’ evolving communications propositions and their attempts to integrate them into broad commerce and content platforms.
Autonomous cars: Where’s the money for telcos? The connected car market is being seen as one of the most promising segments of the Internet of Things. Everyone from telcos to internet giants Google, and specialist service providers Uber are eyeing opportunities in the sector. This report analyses 10 potential connected car use-cases to assess which ones could offer the biggest revenue opportunities for operators and outline the business case for investment.
AI: How telcos can profit from deep learning Artificial intelligence (AI) is improving rapidly thanks to the growing use of deep neural networks to teach computers how to interpret the real world (deep learning). These networks use vast amounts of detailed data to enable machines to learn. What are the potential benefits for telcos, and what do they need to do to make this happen?
Amazon: Telcos’ Chameleon-King Ally? New digital platforms are emerging – the growing popularity of smart speakers, which rely on cloud-based artificial intelligence, could help Amazon, the original online chameleon, to bolster its fast-evolving ecosystem at the expense of Google and Facebook. As the digital food chain evolves, opportunities will open up for telcos, but only if the smart home market remains heterogeneous and very competitive.

Apple’s evolving strategy

Apple is first and foremost a hardware company: It sells physical products. But unlike most other hardware makers, it also has world-class expertise in software and services. These human resources and its formidable intellectual property, together with its cash pile of more than US$250 billion and one of the world’s must coveted brands, gives Apple’s strategic options that virtually no other company has. Apple has the resources and the know-how to disrupt entire industries. Apple’s decision to double the size of it’s already-impressive services business by 2021 has ramifications for companies in a wide range of industries – from financial services to entertainment to communications.

Throughout its existence, Apple’s strategy has been to use distinctive software and services to help sell its high-margin hardware, rather than compete head-on with Google, Facebook, Microsoft and Amazon in the wider digital services and content markets. As Apple’s primary goal is to create a compelling end-to-end solution, its software and services are tightly integrated into its hardware. Although there are some exceptions, notably iTunes and Apple Music, most of Apple’s services and software can only be accessed via Apple’s devices. But there are four inter-related reasons why Apple may rethink that strategy and extend Apple’s services beyond its hardware ecosystem:

- - Services are now Apple’s primary growth engine, as iPhone revenue appears to have peaked and new products, such as the Apple Watch, have failed to take up the slack. Moreover, services, particularly content-based services, need economies of scale to be cost-effective and profitable.
  - Upstream players, such as merchants, brands and content providers, want to be able to reach as many people as possible, as cost-effectively as possible. They would like Apple’s stores and marketplaces to be accessible from non-Apple devices, as that would enable them to reach a larger customer base through a single channel. Figure 1 shows that Apple’s iPhone ecosystem (which use the iOS operating system) is approximately one quarter of the size of rival Android in terms of volumes.
  - Artificial intelligence is becoming increasingly central to the propositions of the major Internet ecosystems, including that of Apple. The development of artificial intelligence requires vast amounts of real-world data that can be used to hone the algorithms computers use to make decisions. To collect the data necessary to detect patterns and subtle, but significant, differences in real-world conditions, the Internet players need services that are used by as many people as possible.
  - As computing power and connectivity proliferates, the smartphone won’t be as central to people’s lives as it is today. For Apple, that means having the best smartphone won’t be enough: Computing will eventually be everywhere and will probably be accessed by voice commands or gestures. As the hardware fades into the background and Apple’s design skills become less important, the Cupertino company may decide to unleash its services and allow them to run on other platforms, as it did with iTunes.

Content:

Executive Summary
Introduction
Apple’s evolving strategy
Playing catch-up in artificial intelligence
What does Apple earn from services?
What are Apple’s key services?
Communications – Apple iMessage and FaceTime
Commerce – Apple Pay and Apple Wallet
Content – iTunes, Apple Music, Apple TV
Software – the App Store, Apple Maps
Artificial intelligence and the role of Siri
Tools for developers
Conclusions and implications for rivals
Implications for rivals

Figures:

Figure 1: Installed base of smartphones by operating system
Figure 2: Apple’s artificial intelligence, as manifest in Siri, isn’t that smart
Figure 3: Apple’s services business is comparable in size to Facebook
Figure 4: The services business is Apple’s main growth engine
Figure 5: The strength of Apple’s online commerce ecosystem
Figure 6: iMessage is becoming a direct competitor to Instagram and WhatsApp
Figure 7: Various apps allow consumers to make payments via Apple Pay
Figure 8: Apple Pay is available in a limited number of markets
Figure 9: Unlike most Apple services, Apple Music is “available everywhere”
Figure 10: Apple’s App Store generates far more revenue than Google Play
Figure 11: Apple Maps’ navigation trailed well behind Google Maps in June 2016
Figure 12: SWOT analysis of Apple in the services sector
Figure 13: TOWS analysis for Apple in the service market

VoLTE: Voice beyond the phone call?

Introduction

Telephony is still necessary in the 4G era

Some people in the telecom industry believe that “voice is dead” – or, at least, that traditional phone calls are dying off. Famously, many younger mobile users eschew standalone realtime communications, instead preferring messaging loaded with images and emoji, via apps such as Facebook Messenger and WeChat, or those embedded e.g. in online gaming applications. At the other end of the spectrum, various forms of video-based communications are important, such as SnapChat’s disappearing video stories, as well as other services such as Skype and FaceTime.

Even for basic calling-type access, WhatsApp and Viber have grown huge, while assorted enterprise UC/UCaaS services such as Skype for Business and RingCentral are often “owning” the business customer base. Other instances of voice (and messaging and video) are appearing as secondary features “inside” other applications – games, social networks, enterprise collaboration, mobile apps and more – often enabled by the WebRTC standard and assorted platforms-as-a-service.

Smartphones and the advent of 4G have accelerated all these trends – although 3G networks have seen them as well, especially for messaging in developing markets. Yet despite the broad uptake of Internet-based messaging and voice/video applications, it is still important for mobile operators to provide “boring old phone calls” for mobile handset subscribers, not least in order to enable “ubiquitous connection” to friends, family and businesses – plus also emergency calls. Plenty of businesses still rely on the phone – and normal phone numbers as identifiers – from banks to doctors’ practices. Many of the VoIP services can “fall back” to normal telephony, or dial out (or in) from the traditional telco network. Many license terms mandate provision of voice capability.

This is true for both fixed and mobile users – and despite the threat of reaching “peak telephony”, there is a long and mostly-stable tail of calling that won’t be displaced for years, if ever.

Figure 1: Various markets are beyond “peak telephony” despite lower call costs

Source: Disruptive Analysis, National Regulators

In other words, even if usage and revenues are falling, telcos – and especially mobile operators – need to keep Alexander Graham Bell’s 140-year legacy alive. If the network transitions to 4G and all-IP, then the telephony service needs to do so as well – ideally with feature-parity and conformance to all the legacy laws and regulation.

(As a quick aside, it is worth noting that telephony is only one sort of “voice communication”, although people often use the terms synonymously. Other voice use-cases vary from conferencing, push-to-talk, audio captioning for the blind, voice-assistants like Siri and Alexa, karaoke, secure encrypted calls and even medical-diagnostics apps that monitor breathing noise. We discuss the relevance of non-telephony voice services for telcos later in this report).

4G phone calls: what are the options?

CSFB (Circuit-Switched Fallback): The connection temporarily drops from 4G, down to 3G or 2G. This enables a traditional non-IP (CS – circuit-switched) call to be made or received on a 4G phone. This is the way most LTE subscribers access telephony today.
VoLTE: This is a “pure” 4G phone call, made using the phone’s in-built dialler, the cellular IP connection and tightly-managed connectivity with prioritisation of voice packets, to ensure good QoS. It hooks into the telco’s IMS core network, from where it can either be directly connected to the other party (end-to-end over IP), go via a transit provider or exchange, or else it can interwork with the historic circuit-based phone network.
App-based calling: This involves making a VoIP call over the normal, best-efforts, data connection. The function could be provided by a telco itself (eg Reliance Jio’s 4GVoice app), an enterprise UC provider, or an Internet application like Skype or Viber. Increasingly, these applications are also integrated into phones “native dialler” interface and can share call-logs and other functions. [Note – STL’s Future of The Network research stream does not use the pejorative, obsolete and inaccurate term “OTT”.]

None of these three options is perfect.

Content:

Executive Summary
Introduction
Telephony is still necessary in the 4G era
4G phone calls: what are the options?
The history of VoLTE
The Good, the Bad & the Ugly
The motivations for VoLTE deployment
The problems for VoLTE deployment?
Industry politics
Market Status & Forecasts
Business & Strategic Implications
Is VoLTE really just “ToLTE”?
Link to NFV & Cloud
GSMA Universal Profile: Heaven or Hell for Telcos?
Do telcos have a role in video communications?
Intersection with enterprise voice
Conclusions
Recommendations

Figures:

Figure 1: Various markets are beyond “peak telephony” despite lower call costs
Figure 2: VoLTE, mobile VoIP & LTE timeline
Figure 3: VoLTE coverage is often deployed progressively
Figure 4: LTE subscribers, by voice technology, 2009-2021

Consumer communications: Can telcos mount a comeback?

Introduction

Although they make extensive use of WhatsApp, Facebook Messenger, Snapchat and other Internet-based communications services, consumers still expect mobile operators to enable them to make voice calls and text messages. Indeed, communication services are widely regarded as a fundamental part of a telco’s proposition, but telcos’ telephony and messaging services are losing ground to the Internet-based competitors and are generating less and less revenue.

Should telcos allow this business to gradually melt away of should they attempt to rebuild a competitive communications proposition for consumers? How much strategic value is there in providing voice calls and messaging services?

This report explores telcos’ strategic options in the consumer communications market, building on previous STL Partners’ research reports, notably:

Google/Telcos’ RCS: Dark Horse or Dead Horse?

WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce

This report evaluates telcos’ current position in the consumer market for voice calls and messaging, before considering what they can learn from three leading Internet-based players: Tencent, Facebook and Snap. The report then lays out four strategic options for telcos and recommends which of these options particular types of telcos should pursue.

Content:

Introduction
Executive Summary
What do telcos have to lose?
Key takeaways
Learning from the competition
Tencent pushes into payments to monetise messaging
Facebook – nurturing network effects with fast footwork
Snapchat – highly-focused innovation
Telcos’ strategic options
Maximise data traffic
Embed communications into other services
Differentiate on reliability, security, privacy and reach
Compete head-on with Internet players
Recommendations

Figures:

Figure 1: Vodafone still makes large sums from incoming calls & messages
Figure 2: Usage of Vodafone’s voice services is rising in emerging markets
Figure 3: Vodafone Europe sees some growth in voice usage
Figure 4: Internet-based services are overtaking telco services in China
Figure 5: Usage of China Mobile’s voice services is sliding downwards
Figure 6: China Mobile’s SMS traffic shows signs of stabilising
Figure 7: Vodafone’s SMS volumes fall in Europe, but rise in AMAP
Figure 8: Voice & messaging account for 38% of China Mobile’s service revenues
Figure 9: Line is also seeing rapid growth in advertising revenue in Japan
Figure 10: More WeChat users are making purchases through the service
Figure 11: About 20% of WeChat official accounts act as online shops
Figure 12: Line’s new customer service platform harnesses AI
Figure 13: Snapchat’s user growth seems to be slowing down
Figure 14: Vodafone Spain is offering zero-rated access to rival services
Figure 15: Google is integrating communications services into Maps
Figure 16: Xbox Live users can interact with friends and other gamers
Figure 17: RCS is being touted as a business-friendly option
Figure 18: Turkcell’s broad and growing range of digital services

Telco 1.0: Death Slide Starts in Europe

Telefonica results confirm that global telecoms revenue decline is on the way

Very weak Q1 2014 results from Telefonica and other European players

Telefonica’s efforts to transition to a new Telco 2.0 business model are well-regarded at STL Partners. The company, together with SingTel, topped our recent Telco 2.0 Transformation Index which explored six major Communication Service Providers (AT&T, Verizon, Telefonica, SingTel, Vodafone and Ooredoo) in depth to determine their relative strengths and weaknesses and provide specific recommendations for them, their partners and the industry overall.

But Telefonica’s Q1 2014 results were even worse than recent ones from two other European players, Deutsche Telekom and Orange, which both posted revenue declines of 4%. Telefonica’s Group revenue came in at €12.2 billion which was down 12% on Q1 2013. Part of this was a result of the disposal of the Czech subsidiary and weaker currencies in Latin America, in which around 50% of revenue is generated. Nevertheless, the negative trend for Telefonica and other European players is clear.

As the first chart in Figure 1 shows, Telefonica’s revenues have followed a gentle parabola over the last eight years. They rose from 2006 to 2010, reaching a peak in Q4 of that year, before declining steadily to leave the company in Q1 2014 back where it started in Q1 2006.

The second chart, however, adds more insight. It shows the year-on-year percentage growth or decline in revenue for each quarter. It is clear that between 2006 and 2008 revenue growth was already slowing down and, following the 2008 economic crisis in which Spain (which generates around quarter of Telefonica’s revenue) was hit particularly hard, the company’s revenue declined in 2009. The economic recovery that followed enabled Telefonica to report growth again in 2010 and 2011 before the underlying structural challenges of the telecoms industry – the decline of voice and messaging – kicked in, resulting in revenue decline since 2012.

Figure 1: Telefonica’s growth and decline over the last 8 years

Telco 2.0 Telefonica Group Revenue

Source: Telefonica, STL Partners analysis

One thing is clear: the only way is down for most CSPs and for the industry overall

The biggest concern for Telefonica and something that STL Partners believes will be replicated in other CSPs over the next few years is the accelerating nature of the decline since the peak. It seems clear that Telco 1.0 revenues are not going to decline in a steady fashion but, once they reach a tipping point, to tumble away quickly as:

Substitute voice and messaging products and alternate forms of communication scale;
CSPs fight hard to maintain customers, revenue and share in voice, messaging and data products, via attractive bundles

The results of the European CSPs confirms STL Partners belief that the outlook for the global industry in the next few years is negative overall. It is clear that telecoms industry maturity is at different stages globally:

Europe: in decline
US: still growing but very close to the peak
Africa, Middle East, Latin America: slowing growth but still 2(?) years before peak
Asia: mixed, some markets growing, others in decline

Given these different mixes, STL Partners reaffirms its forecast of 2012 that overall the industry will contract by up to 10% between 2013 and 2017 as core Telco 1.0 service revenue decline accelerates once more and more countries get beyond the peak. This is illustrated for the mobile industry in Figure 2, below.

Figure 2: Near-term global telecoms decline is assured; longer-term growth is dependent on management actions now

Global mobile telcoms revenue

Source: STL Partners

Upturn in telecoms industry fortunes after 2016 dependent on current activities

If the downturn to 2016 is a virtual certainty, the shape of the recovery beyond this, which STL Partners (tentatively) forecasts, is not. The industry’s fortunes could be much better or worse than the forecast owing to the importance of transformation activities which all players (CSPs, Network Equipment Providers, IT players, etc.) need to make now.

The growth of what we have termed Human Data (personal data for consumers and business customers, including some aspects of Enterprise Mobility), Non-Human Data (connection of devices and applications – Internet of Things, Machine2Machine, Infrastructure as a Service, and some Enterprise Mobility) and Digital Services (end-user and B2B2X enabling applications and services) requires CSPs and their partners to develop new skills, assets, partnerships, customer relationships and operating and financial models – a new business model.

As IBM found in moving from being hardware manufacturer to a services player during the 1990’s, transforming the business model is hard. IBM was very close to bankruptcy in the early 90’s before disrupting itself and re-emerging as a dominant force again in recent years. CSPs and NEPs, in particular, are now seeking to do the same and must act decisively from 2013-2016 if they are to enjoy a rebirth rather than continued and sustained decline.

Facebook + WhatsApp + Voice: So What?

Introduction

In 2010, we predicted in our analysis Facebook: Moving into Telco Space? that Facebook would inevitably decide to move further into the communications space in order to sustain and grow its valuation. In 2011 we published a major strategy report “Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon”, which charted the complex and inter-related battles and relationships between the main internet giants of the western world. It showed how they’re disrupting numerous fields, including communications, commerce, marketing – and not least each other.

In 2014 we’re launching an extension of this research into an ongoing stream of analysis on the key players to help strategists and senior decision makers navigate these complex waters. As a precursor, Facebook’s acquisition of WhatsApp shows further aspects of, and lessons from this ongoing disruption.

Market Context: two ‘killer apps’

Facebook: constantly chasing the audience

Facebook has already had to re-engineer its business model since the traumatic (and predicted) flop of the IPO. Users flocked away to mobile, and Facebook had to redesign its primary user experience in order to cope. At the same time, the advertisers who are Facebook’s real customers lost interest in the brand-building display pages that were its key advertising product.

Facebook chased the audience, developing new advertising products to fit into the context of a mobile user experience. It worked: post-IPO Facebook has succeeded in getting revenue from its mobile advertising, so much so that it made $523m in net profits on revenue of $2.6bn in Q4. But it’s worth remembering that this represents Facebook concentrating on one very specific niche business: mobile apps discovery.

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In the last quarter, 53 per cent [1] of Facebook’s revenue, over $1bn, came from mobile ads. Mobile app downloads are becoming a very important segment of this. As Mark Zuckerberg said in the Q4 earnings call:

We’re finding that people also really want to buy a lot of app install ads, and that’s grown incredibly quickly and is one of the best parts of the ad work that we did over the last year

Sheryl Sandberg reiterated it later:

We are very excited about the mobile app space in general. If you look at our mobile app installation ads, we’ve really done a great job working with developers to help users discover and download their apps.

This is because app developers can expect to pay as little as $2 in advertising costs [2] for each install.

This is a significant change in the model. In Figure 1, the chart below, note especially that the mobile ads line of business starts immediately after the IPO in June, 2012, when ads in the News Feed were introduced, and accelerates further in early 2013, when mobile app ads were introduced.

Figure 1: Facebook’s rapidly growing mobile revenues

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This implies that revenue equivalent to roughly a quarter of app sales [1] through Apple’s iTunes App Store is going to Facebook just for ads, and much of it is advertising for apps. How long will Apple, whose app store it is, or Google, fundamentally an advertising business, put up with that before they launch something that competes?

The problem is summed up quite simply here:

“This exposes the strategic fallacy behind Facebook, which was the idea that there was going to be a monopoly on the social graph, and that Facebook was going to own it,” said Keith Rabois, a partner at venture capital firm Khosla Ventures. “That’s not true, and I don’t believe Facebook will constantly be able to buy its way out of this structural challenge.”

This pattern has been visible for a while. Rather than big multi-functional platforms, suddenly it seemed that leaner, focused, task-specific apps were in demand, notably Instagram, Snapchat, ask.fm, and Vine. It should come as no surprise that Unix-based iOS and Linux-based Android both seem to encourage app developers to do “one thing well” in the classic tradition of the core Unix/Linux utilities, with the unifying platform being the OS itself. So Facebook chased its audience again, buying Instagram.

Meanwhile, users sought out a new generation of mobile instant-messaging apps, which saw astonishingly fast growth and shocked the carrier industry with the hit to their SMS revenues. And Facebook has chased the audience again, with the WhatsApp acquisition.

WhatsApp: disrupting by doing one thing really well

WhatsApp’s user-base acceleration has been outstanding, as shown in Figure 2.

Figure 2: WhatsApp User Growth

Source: Facebook

Its usage stats are equally impressive (Figure 3), as are the comparisons between WhatsApp’s and Facebook’s user engagement (Figure 4)

Figure 3: Average monthly minutes of use by market

Source Mobidia May 2013

Figure 4: Average user screen time Facebook vs. WhatsApp (per month)

Source: Mobidia Q4 2012

WhatsApp is nothing if not a lean, focused, task-specific app that does one thing well. Its USP could be summarised as “instant messaging done right”. Its business model is simplicity itself, asking users for a dollar a year, rather than seeking advertisers or volume-billing. The simplicity, as with most simplicity, is founded on engineering excellence – WhatsApp holds the record for the most concurrent TCP sockets, 2 million, on a FreeBSD Unix server. It’s because they spent the time and money developing their highly customised fork of the open-source ejabberd XMPP server that they kept costs down to the level where their business model made sense. (There is much more information on WhatsApp technology in this High Scalability post.)

Across Europe, WhatsApp and the proliferation of other IM apps has dragged SMS pricing down until it has become a bundled, unlimited service. Vodafone, for example, bundles unlimited messaging with 1GB of data at its €29 price point.

While its appeal is not all about price, WhatsApp and other Over The Top (OTT) messaging apps capitalise on high priced markets, with much higher adoption in the markets with higher priced that we analysed in our recent Future Value of Voice and Messaging report (see Figure 5 below).

Figure 5: SMS Price vs. penetration of Top OSP Messaging Apps

Source: Onavo, Ofcom, CMT, BNETZA, TIA, KCC, Telco accounts, STL Partners

But, as we point out in the report, price is only part of the story. Price drove the acquisition of customers, but quality retained them. WhatsApp offers a searchable, conversation-based chat history and a one-tap voice messaging function; it remains shocking to this day that it took Apple to show SMS messages as threaded conversations like e-mail.

Executive Summary
Analysis: one plus one equals…?
$19bn: a lot of money …or is it really?
Two Fundamentally Different Social Models
What does Facebook want to do with WhatsApp?
Conclusions: disruptors of the world, unite…
Facebook, the hub for social apps that scale?
Telcos: victory is empty but there are lessons in defeat
So what for the rest of the digital ecosystem?
STL Partners and the Telco 2.0™ Initiative

Figure 1: Facebook’s rapidly growing mobile revenues
Figure 2: WhatsApp User Growth
Figure 3: Average monthly minutes of use by market
Figure 4: Average user screen time Facebook vs. WhatsApp (per month)
Figure 5: SMS Price vs. penetration of Top OSP Messaging Apps
Figure 6: Facebook’s share price March 2013 – February 2014
Figure 7: AT&T, Vodafone and Telefonica share prices Vs. Facebook
Figure 8: Voice and Messaging revenue scenarios

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Cisco, Microsoft, Google, AT&T, Telefonica, et al: the disruptive battle for value in communications

Technology: Products and Vendors’ Approaches

There are many vendors and products in the voice/telephony arena. Some started as pure voice products or solutions like Cisco Call Manager, while others such as Microsoft Office 365 started as an office productivity suite, to which voice and presence became a natural extension, and then later a central part of the core product functionality. We have included details on RCS, however RCS is not globally available, and is limited in its functionality compared to some of the other products listed here.

Unified Communications

Unified Communications (UC) is not a standard; there are many different interpretations, but there is a general consensus about what it means – the unification of voice, video, messaging, presence, conferencing, and collaboration into a simple integrated user experience.

UC is an important technology for enterprise customers, it brings mobility and agility to an organisation, improves communication and collaboration, adds a social element, and lowers costs by reducing the need for office space and multiple disparate communications systems each with their own management and control systems. UC can be delivered as a cloud service and has the acronym UCaaS. Leading providers are Microsoft, Google, and Cisco. Other players include IBM, 8X8, and a number of other smaller vendors, as well as telco equipment manufacturers such as Ericsson. We have covered some of the leading solutions in this report, and there are definite opportunities for telcos to collaborate with these vendors, adding integration with core services such as telephony and mobile data, as well as customer support and billing.

There are several elements for an enterprise to consider when developing a UC solution for it to be successful:

Fixed voice functions and needs (including PBX) and integration into a UC solution
Mobile voice – billing, call routing, integration with fixed and UC solutions
Desktop and mobile video calling
Collaboration tools (conferencing, video conferencing, desktop integration, desktop sharing etc.)
Desktop integration – how does the solution integrate with core productivity tools (Microsoft Office, Google Apps, OpenOffice etc?)
PC and mobile clients – can a mobile user participate in a video conference, share files
Instant messaging and social integration
How the user is able to interact with the system and how intuitive it is to use. This is sometimes called the user experience and is probably the most important aspect, as a good user experience promotes efficiency and end user satisfaction

From the user perspective, it would be desirable for the solution to include the basic elements shown in Figure 1.

Figure 1: Basic user needs from Unified Communications
Voice Messaging Tech Cover

Source: STL Partners

Historically, Enterprise communications has been an area where telcos have been a supplier to the enterprise – delivering voice end points (E.164 phone numbers and mobile devices), voice termination, and outgoing voice and data services.

Organisational voice communications (i.e. internal calling) has been an area of strength for companies like Cisco, Avaya, Nortel and others that have delivered on-premise solutions which offer sophisticated voice and video services. These have grown over the years to provide Instant Messaging (IM), desktop collaboration tools, and presence capabilities. PC clients often replace fixed phones, adding functionality, and can be used when out of the office. What these systems have lacked is deep integration with desktop office suites such as Microsoft Office, Google Apps, and Lotus Notes. Plug-ins or other tools can be used to integrate presence and voice, but the user experience is usually a compromise as different vendors are involved.

The big software vendors have also been active, with Microsoft and IBM adding video and telephony features, and Google building telephony and conferencing into its growing portfolio. Microsoft also acquired Skype and has delivered on its promise to integrate Skype with Lync. Meanwhile, Google has made a number of acquisitions in the video and voice arena like ON2, Global IP Solutions, and Grand Central. The technology from ON2 allows video to be compressed and sent over an Internet connection. Google is pushing the products from ON2 to be integrated into one of the next major disruptors – WebRTC.

Microsoft began including voice capability with its release of Office Communications Server (OCS) in 2007. An OCS user could send instant messages, make a voice call, or place a video call to another OCS user or group of users. Presence was directly integrated with Outlook and a separate product – Office Live Meeting – was used to collaborate. Although OCS included some Private Branch eXchange (PBX) features, few enterprises regarded it as having enough features or capability to replace existing systems from the likes of Cisco. With Office 365, Microsoft stepped up the game, adding a new user interface, enhanced telephony features, integrated collaboration, and multiple methods of deployment using Microsoft’s cloud, on premise, and service provider deployments.

Technology: Products and Vendors’ Approaches
Unified Communications
Microsoft Office 365 – building on enterprise software strengths
Skype – the popular international behemoth
Cisco – the incumbent enterprise giant
Google – everything browser-based
WebRTC – a major disruptive opportunity
Rich Communication Service (RCS) – too little too late?
Broadsoft – neat web integration
Twilio – integrate voice and SMS into applications
Tropo – telephony integration technology leader
Voxeo – a pathfinder in integration
Hypervoice –make voice a native web object
Calltrunk – makes calls searchable
Operator Voice and Messaging Services
Section Summary
Telco Case Studies
Vodafone – 360, One Net and RED
Telefonica – Digital, Tu Me, Tu Go, BlueVia, Free Wi-Fi
AT&T – VoIP, UC, Tropo, Watson
Section Summary
STL Partners and the Telco 2.0™ Initiative

Figure 1: Basic user needs from Unified Communications
Figure 2: Microsoft Lync 2013 client
Figure 3: Microsoft Lync telephony integration options
Figure 4: International Telephone and Skype Traffic 2005-2012
Figure 5: The Skype effect on international traffic
Figure 6: Voice call charging in USA
Figure 7: Google Voice call charging in USA
Figure 8: Google Voice call charging in Europe
Figure 9: Google outbound call rates
Figure 10: Calliflower beta support for WebRTC
Figure 11: Active individual user base for WebRTC, millions
Figure 12: Battery life compared for different services
Figure 13: Vodafone One Net Express call routing
Figure 14: Vodafone One Net Business Call routing
Figure 15: Enterprise is a significant part of Vodafone group revenue
Figure 16: Vodafone Red Bundles
Figure 17: Telefonica: Market Positioning Map, Q4 2012
Figure 18: US market in transition towards greater competition
Figure 19: Voice ARPU at AT&T, fixed and mobile
Figure 20: Industry Value is Concentrated at the Interfaces
Figure 21: Telco 2.0™ ‘two-sided’ telecoms business model

The Future Value of Voice and Messaging

Background – ‘Voice and Messaging 2.0’

This is the latest report in our analysis of developments and strategies in the field of voice and messaging services over the past seven years. In 2007/8 we predicted the current decline in telco provided services in Voice & Messaging 2.0 “What to learn from – and how to compete with – Internet Communications Services”, further articulated strategic options in Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon in 2011, and more recently published initial forecasts in European Mobile: The Future’s not Bright, it’s Brutal. We have also looked in depth at enterprise communications opportunities, for example in Enterprise Voice 2.0: Ecosystem, Species and Strategies, and trends in consumer behaviour, for example in The Digital Generation: Introducing the Participation Imperative Framework. For more on these reports and all of our other research on this subject please see here.

The New Report

This report provides an independent and holistic view of voice and messaging market, looking in detail at trends, drivers and detailed forecasts, the latest developments, and the opportunities for all players involved. The analysis will save valuable time, effort and money by providing more realistic forecasts of future potential, and a fast-track to developing and / or benchmarking a leading-edge strategy and approach in digital communications. It contains

Our independent, external market-level forecasts of voice and messaging in 9 selected markets (US, Canada, France, Germany, Spain, UK, Italy, Singapore, Taiwan).
Best practice and leading-edge strategies in the design and delivery of new voice and messaging services (leading to higher customer satisfaction and lower churn).
The factors that will drive best and worst case performance.
The intentions, strategies, strengths and weaknesses of formerly adjacent players now taking an active role in the V&M market (e.g. Microsoft)
Case studies of Enterprise Voice applications including Twilio and Unified Communications solutions such as Microsoft Office 365
Case studies of Telco OTT Consumer Voice and Messaging services such as like Telefonica’s TuGo
Lessons from case studies of leading-edge new voice and messaging applications globally such as Whatsapp, KakaoTalk and other so-called ‘Over The Top’ (OTT) Players

It comprises a 18 page executive summary, 260 pages and 163 figures – full details below. Prices on application – please email contact@telco2.net or call +44 (0) 207 247 5003.

Benefits of the Report to Telcos, Technology Companies and Partners, and Investors

For a telco, this strategy report:

Describes and analyses the strategies that can make the difference between best and worst case performance, worth $80bn (or +/-20% revenues) in the 9 markets we analysed.
Externally benchmarks internal revenue forecasts for voice and messaging, leading to more realistic assumptions, targets, decisions, and better alignment of internal (e.g. board) and external (e.g. shareholder) expectations, and thereby potentially saving money and improving contributions.
Can help improve decisions on voice and messaging services investments, and provides valuable insight into the design of effective and attractive new services.
Enables more informed decisions on partner vs competitor status of non-traditional players in the V&M space with new business models, and thereby produce better / more sustainable future strategies.
Evaluates the attractiveness of developing and/or providing partner Unified Communication services in the Enterprise market, and ‘Telco OTT’ services for consumers.
Shows how to create a valuable and realistic new role for Voice and Messaging services in its portfolio, and thereby optimise its returns on assets and capabilities

For other players including technology and Internet companies, and telco technology vendors

The report provides independent market insight on how telcos and other players will be seeking to optimise $ multi-billion revenues from voice and messaging, including new revenue streams in some areas.
As a potential partner, the report will provide a fast-track to guide product and business development decisions to meet the needs of telcos (and others).
As a potential competitor, the report will save time and improve the quality of competitor insight by giving strategic insights into the objectives and strategies that telcos will be pursuing.

For investors, it will:

Improve investment decisions and strategies returning shareholder value by improving the quality of insight on forecasts and the outlook for telcos and other technology players active in voice and messaging.
Save vital time and effort by accelerating decision making and investment decisions.
Help them better understand and evaluate the needs, goals and key strategies of key telcos and their partners / competitors

The Future Value of Voice: Report Content Summary

Executive Summary. (18 pages outlining the opportunity and key strategic options)
Introduction. Disruption and transformation, voice vs. telephony, and scope.
The Transition in User Behaviour. Global psychological, social, pricing and segment drivers, and the changing needs of consumer and enterprise markets.
What now makes a winning Value Proposition? The fall of telephony, the value of time vs telephony, presence, Online Service Provider (OSP) competition, operators’ responses, free telco offerings, re-imaging customer service, voice developers, the changing telephony business model.
Market Trends and other Forecast Drivers. Model and forecast methodology and assumptions, general observations and drivers, ‘Peak Telephony/SMS’, fragmentation, macro-economic issues, competitive and regulatory pressures, handset subsidies.
Country-by-Country Analysis. Overview of national markets. Forecast and analysis of: UK, Germany, France, Italy, Spain, Taiwan, Singapore, Canada, US, other markets, summary and conclusions.
Technology: Products and Vendors’ Approaches. Unified Comminications. Microsoft Office 365, Skype, Cisco, Google, WebRTC, Rich Communications Service (RCS), Broadsoft, Twilio, Tropo, Voxeo, Hypervoice, Calltrunk, Operator voice and messaging services, summary and conclusions.
Telco Case Studies. Vodafone 360, One Net and RED, Telefonica Digital, Tu Me, Tu Go, Bluvia and AT&T.
Summary and Conclusions. Consumer, enterprise, technology and Telco OTT.

Europe’s brutal future: Vodafone and Telefonica hit hard

Introduction

Even in the UK and Germany, the markets with the brightest future, STL Partners forecasts a respective 19% and 20% decline in mobile core services (voice, messaging and data) revenues by 2020. The UK has less far to fall simply because the market has already contracted over the last 2-3 years whereas the German market has continued to grow.

We forecast a decline of 34% in France over the same period.

In Italy and, in particular, Spain we forecast a brutal decline of 47% and 61% respectively. Overall, STL Partners anticipates a reduction of 36% or €30 billion in core mobile service revenues by 2020. This equates to around €50 billion for Europe as a whole.

Like the medical profession, we don’t always like being correct when our diagnoses are pessimistic. So it is with some regret that we note that our forecasts are being borne out by the latest reports from southern Europe. Vodafone has been forced into a loss for H1 2012, after it wrote down the value of its Spanish and Italian OpCos by £5.9bn. Here’s why:

The writedown is of course non-cash, and those of us who remember Chris Gent’s Vodafone will be familiar with the sensation. But the reasons for it could not be more real. Service revenue has fallen sickeningly, down 7.9% across Europe, 1.4% across the group.

Vodafone has enjoyed a decent performance from the company’s assets in Africa, Asia, Turkey, and the Pacific, and a hefty dividend from Verizon Wireless. It is the performance in Europe which is dreadful and the situation in southern Europe especially bad.

For while service revenue in Gernany was up 1.8%, it was down a staggering 12.8% in both Spain and Italy. And margins were sacrificed for volume; EBITDA was down 16.6% in Italy, and 13.8% in “Other Southern Europe”, that is to say mostly Greece and Portugal. Even the UK saw service revenues fall -2.1%, while the Netherlands was down -1.9%. Vodafone’s investments across Europe seem to have landed in an arc of austerity running from the Norwegian Sea to the Aegean, the long way around.

Vodafone’s enterprise line of business has helped the Italian division defy gravity for a while. Until recently, OneNet was racking up the same 6% growth rates in Italy that it saw in Germany and contributing substantially to service revenue, even though the wider business was shrinking. In Q2, service revenue in Italy was down 4.1% but enterprise was up 5.8%.

But strategy inevitably beats tactics. Tellingly, the half-year statement from Vodafone management went a little coy about enterprise’s performance. Numbers are only given for Germany and Turkey, and for group-wide One Net seats. They are good, but you wonder about the numbers that aren’t given. We are told that One Net is “performing well” in Italy, but that’s not a number.

Meanwhile, Telefonica saw its European revenues fall 6.4% year-on-year. The problem is in Spain, where the plummet was 12.9%. Mobile was worse still, with revenues thumped downwards by 16.2%.

The damage, for both carriers, is concentrated in mobility, in southern Europe, and in voice and messaging. Telefonica blames termination rate cuts (as does Vodafone – both carriers are big enough that they tend to terminate more calls from other carriers than they pay out on), but this isn’t really going to wash. As Vodafone’s own statement makes clear, MTRs are coming down everywhere. And Telefonica’s wireline revenues were horrible, too, down 9.6%.

But the biggest hit to revenue for Vodafone was in messaging, and then in voice. Data revenue is growing. In the half to 30th September 2011, Vodafone.es subscribers generated £156 million in messaging revenues. In the corresponding half this year, it was £99 million. Part of this is accounted for by movement in the euro-sterling exchange rate, so Vodafone reports it as a 30% hit to messaging and a 20% hit to voice. Italy saw an 11.4% hit to messaging and a 16% hit to voice. The upshot to Vodafone is a 29.7% cut to the division’s operating profits. Brutal indeed.

Obviously, a lot of this is being driven by the European economic crisis. It is more than telling that Vodafone’s German and Turkish operations are powering ahead, while it’s not just the Mediterranean economies under the European Union’s “troika” management (EC, ECB and IMF) that are suffering. The UK, under its own voluntary austerity plan, was down 2.1% for Telefonica, and the Netherlands, having gone from being the keenest pupil in the class to another austerity case in the space of one unexpectedly bad budget, is off 1.9%. Even if you file Turkey under “emerging market”, the comparison between the Mediterranean disaster area, the OK-ish position in North-Western Europe, and the impressive (£2.4bn) dividend from Verizon Wireless in the States is compelling.

But disruption is a fact. We should not expect that things will snap back as soon as the macro-economy takes a turn for the better. One of the reasons for our grim prediction was that as well as weak economies, the Southern European markets exhibited surprisingly high prices for mobile service.

The impact of the crisis is likely to permanently reset customer behaviour, technology adoption, and price expectations. The Southern price premium is likely to be permanently eroded, whether by price war or by regulatory action. Customers are observably changing their behaviour in order to counter-optimise the carriers’ tariff plans.

Vodafone observes plummeting messaging revenues, poor voice revenues, and heavy customer retention spending, specifically on handset subsidies for smartphones. In fact, Vodafone admits that it has tried to phase out subsidy in Spain and been forced to turn back. This suggests that customers are becoming very much more aware of the high margin on SMS, are rationing it, and are deliberately pressing for any kind of smartphone in order to make use of alternatives to SMS. Once they are hooked on WhatsApp, they are unlikely to go back to carrier messaging if the economy looks up.

Another customer optimisation Vodafone encounters is that the customers love their integrated fixed/mobile plan. Unfortunately, this may mean they are shifting data traffic off the cellular network in the home-zone and onto WLAN. Further, as Vodafone is a DSL unbundler, the margin consequences of moving revenue this way may not be so great. In Italy, although the integrated tariffs sold well, a “fall in the non-ULL customer base” is blamed for a 5.6% drop in fixed service revenue. Are the customers fleeing the reseller lines because Vodafone can’t match TI or Fastweb’s pricing, or is it that the regulatory position means margins on unbundled lines are worse?

Vodafone’s response to all this is its RED tariff plan. This essentially represents a Telco 2.0 Happy Pipe strategy, providing unlimited voice and messaging in order to slow down the adoption of alternative communications, and setting data bundles at levels intended to be above the expected monthly usage, so the subscribers feel able to use them, but not far enough above it that the bandwidth-hog psychology takes hold.

With regard to devices, RED offers three options with tiered pricing: SIM only, basic smartphone, and iPhone. The idea is to make the subsidy costs more evident to the customer, to slow up the replacement cycle on flagship smartphones via SIM-only, and to channel the smartphone hunters into the cheaper devices. Overall, the point is to drive data and smartphone adoption down the diffusion curve, so as to help the transition from a metered voice-centric to a data-centric business model.

The CEO, Vittorio Colao, says as much:

The reason why the whole industry is on a difficult trend…is because we historically voice priced really high and data priced really low.

Vodafone’s competitors face a serious challenge. They are typically still very dependent on prepaid voice minutes, a market which is suffering. Even in Northern Europe, it’s off 10%. Telcos loved PAYG because everything in it is incremental. Now, the challenge is how to create a RED-like tariff for the PAYG market.

Those in North and South America, MENA and Asia-Pacific may be looking at Europe and breathing a sigh of relief. But don’t fool yourself. SMS revenues in the US are down for the first time driven by volume and price declines. One rather worrying outcome of last week’s Digital Arabia event was that operators in the region seem to be under the impression that the decline for them is still several years out and destined to be a relatively gentle softening of the market. There’s more here on our initial take on what they need to do to avoid complacency and start to build new business models more quickly.

European Mobile: The Future’s not Bright, it’s Brutal

Summary findings and implications

Dark skies ahead

The mobile telecoms sector has performed quite strongly through the economic downturn but STL Partners’ forecast for UK, France, Germany, Spain and Italy suggests that the outlook is extremely bleak:

Even in the UK and Germany, the markets with the brightest future, STL Partners forecasts a respective 19% and 20% decline in mobile core services (voice, messaging and data) revenues by 2020. The UK has less far to fall simply because the market has already contracted over the last 2-3 years whereas the German market has continued to grow.
We forecast a decline of 34% in France over the same period.
In Italy and, in particular, Spain we forecast a brutal declines of 47% and 61% respectively.
Overall, STL Partners anticipates a reduction of 36% or €30 billion in core mobile service revenues by 2020. This equates to around €50 billion for Europe as a whole.

Figure 1: Mobile core Service revenues

Source: European regulators, Mobile operators, Barclays Capital, STL Partners assumptions and analysis

Even if our forecasts prove to be too pessimistic – and we have sought to be realistic rather than unduly negative and have built our models bottom up looking at pricing and volume trends wherever possible – the future looks much worse than other analysts and industry observers are currently forecasting. For example, a recent report by Arthur D Little and Exane BNP Paribas forecasts a 2.3% per annum decline in mobile to 2015 compared with our forecast of 4.3% per annum decline over the same period.
Data growth, service bundling, customer experience improvements and cost-cutting activities are valuable but fall way short of offsetting declines in voice and messaging. The game for mobile operators in Europe is changing forever: as things stand, in a few short years they will be forced to become very much more conservative businesses – more like gas and water companies. Interestingly, the capital markets already rate telecoms companies as utilities judging by their lofty dividend yields.
There will be casualties. Several operators will not exist in their current form by 2020. Despite the desire of regulators to have four or five network operators in their countries to encourage competition, the downward revenue pressure will favour scale economies and the pressure for many operators to merge or acquire/be acquired will be overwhelming.

Get your umbrellas ready now

We are starting to see a few European operators invest more actively in building new revenue streams – something that STL Partners has been pushing through its Telco 2.0 initiative for several years. Telefonica with Telefonica Digital, KPN, Orange, Telenor and a handful of other companies are becoming more active in ‘digital services’ and new business models. This activity urgently needs to be accelerated and prioritised if operators stand any chance of replacing the impeding revenue declines.

For future success, operators must embrace Telco 2.0 (and recognise the need for a new business model and new service offerings) whether that is as a lean ‘Telco 2.0 Happy Pipe’ or as a ‘Telco 2.0 Services Provider’. Both of these strategies require business model transformation that encompasses:

Major strategic choices and decisions about what the organisation should and should not do;
The identification, selection and development of new products and services;
More effective processes for bringing newly developed services to market;
A realignment of organisation structures to deliver the new services;
A redefinition of the way operators work with each other and with external partners to build value;
Clarification of how technology should support the Telco 2.0 business model and services;
A review of revenue and cost models to maximise value for consumers, partners and telcos themselves;
A new relationship with regulators as the industry seeks to redefine its role and value in the digital economy.

STL Partners remains committed to working with TMT players that want to make the changes identified above in three ways:

Research. We have recently published several reports that focus on what the industry should do and how it should do it including those within our Executive Briefing Service, the freely available How to accelerate new business models and two major new strategy reports, A Practical Guide to Implementing Telco 2.0, which outlines a step-by-step methodology for each of the 8 areas, and Cloud 2.0: Telco Strategies in the Cloud.
Events. Our executive brainstorm events in London, Dubai, Singapore and Silicon Valley remain the best forum for senior executives to debate key strategic issues and develop their thinking.
Consulting. We continue to undertake advisory work with operators, vendors and technology companies that seeking to transform their business models and pursue new opportunities.

For more details of how STL Partners can help you, please contact us.

Introduction

The telecoms industry is performing quite well in a tough economic environment

At the moment, the global telecoms industry seems to be in relatively robust health – developing economies are driving subscriber growth, 4G is being rolled out, smartphones are being connected with data plans in huge numbers, service providers are selling bundled “integrated offers” to maintain revenues, and costs are being controlled with network-sharing and other strategies

But there is also a nagging concern held by industry managers and observers that all is not well ‘below the waterline’, especially in mature markets. There have been a few worrying signs from operators losing out on messaging revenues to OTT players like WhatsApp, or suffering outright reductions in revenues and subscriber numbers in markets like Spain. That said, these have been largely ascribed to poor pricing decisions or (hopefully) temporary local macroeconomic problems.

Certainly, the financial markets seem pretty convinced in the operators’ underlying ability to turn consumers’ desire for communication into ARPU. Not only that, but there is broad conviction that growing data revenues should be able to offset – plus or minus a little – slow declines in voice and messaging, especially when it is all wrapped up in a bundle.

The question is whether that assumption is really valid, or whether there are broader structural risks, or even any reality in the dystopian view that revenues could suddenly ‘fall off a cliff’? Looking at the fixed telecom industry, it is notable that voice revenues have undergone a fairly precipitous decline over the past decade, partly because of mobile substitution, partly because of competition and, in some cases such as lucrative international calls, because of competition from Skype and its peers. Meanwhile, adjacent markets such as cable have started to suffer from the popularity of alternative sources of digital TV and content. Some of the fixed operators have picked up the slack with IT services and cloud infrastructure, but others have suffered – often to the extent that they have sold out, typically to their mobile peers.

But how bright is the future really?

Will mobile operators fare any better over the next 5-10 years? In developed markets, they have to contend with market saturation, increasing competition on basic services, and tightening regulatory regimes. They also need to deal with the strategic issue of the internet-based app ecosystems such as Apple’s and Google’s, and OTT-type services from the likes of Facebook and Microsoft/Skype. There is also a possibility that the very nature of ‘core services’ like telephony might change, as voice communications starts to get embedded into apps and the web itself. Some observers even see our 100-year relationship with voice telephony diminishing in importance, as other forms of communication become more useful.

This report looks into the mobile marketplace – specifically, voice and messaging services in the main European countries. We have constructed a “what if?” scenario model, that takes some basic assumptions about voice usage and pricing, along with data revenues trends. Rather than just assuming that ARPU will remain broadly flat and then divide it up between voice and data, we’ve started looking from the bottom up. Can likely declines in voice revenues really be made up elsewhere, especially given the possible collapse of SMS and the commoditisation of mobile data? Just how big might the gap be that needs to be filled with ‘other services’ such as content resale, two-sided capability exposure, M2M, vertical industries or Telco-OTT propositions?

Taking together the five largest European mobile markets – Germany, France, UK, Italy and Spain – paints a picture that should cause some alarm. Despite the rise of smartphones and dongles, overall quarterly mobile revenues are down 10% on their peak from Q3 2009; falling from €24.7bn to €22.2bn in Q1 2012. Even accounting for seasonality, this is significant (a €10bn annualised shortfall) – and early results suggest the fall accelerated in Q2 2012, as economic and competitive factors bit deeper into sales, with recessions in several countries and new entrants such as Free in France.

Worse, if we just look at voice revenues, the market is now down 25% from its peak in Q2 2009, and that fall seems to be accelerating. While declining voice ARPU is not a huge surprise, the failure of other services to take up the slack is disappointing, especially as the source of new business – basic data connectivity – also is the most capex-hungry in terms of extra costs of new spectrum and 3G/4G build-out.

Figure 2: EU5 Mobile Services revenue already down 10% from 2009 peak

EU5 Mobile Services Revenues Chart, Telco 2.0, Oct 2012

Source: STL Partners

A set of cold-blooded forecasts for UK, France, Germany, Italy and Spain

To the best of our knowledge, nobody else has made forecasts that are both dispassionate and founded on hard data and bottom-up analysis.

Too many analyst (and we suspect internal) financial models seem to suggest that ‘It’ll be alright, somehow… telecoms operators need to harvest cash from voice and messaging, grow data and find some new revenues, but there’s plenty of options’. STL Partners is questioning the first and second premises in the statement above – about harvesting voice and messaging and growing broadband data – not because we’re pessimists, but because we think that many in the industry are not acknowledging the scale of the problems ahead and making the necessary (and often uncomfortable) decisions early enough.

Views vary widely on the outlook for mobile telecoms in Europe

It is fair to say that the fixed telecoms industry has undergone enough pain over the last decade to be under no illusions about its challenges. Operators realise that they face a continued hard slog against competition, regulation, content providers and indifferent consumers. They have increasingly focused on businesses, wholesale models and specific high-value niches like fibre-based triple-play. Deployment of FTTC/FTTH has been patchy, as they have realised that political support doesn’t equate to revenue uplift or return on capital.

Conversely, the mobile industry has pinned its hopes on LTE, data services and various collaboration and partnership business models. Some operators have essentially become Apple and Samsung resellers, offering credit-finance for expensive devices in the guise of handset subsidies. Plenty of other ideas, from mobile money to M2M to API exposure have been the subject of huge efforts. As yet, none has really moved the needle compared to the legacy telephony and SMS services that still make up a large (60%+) share of most operators’ top line revenues. The only bright spot has been plain-vanilla Internet access, initially with 3G dongle modems for PCs, and more recently for smartphone data plans. But the former has now gone largely ex-growth (thankfully, in some cases, given the traffic loads generated at low prices). And the latter faces growth challenges once most users have shifted to a smart device, as few users seem incentivised to upgrade to larger data plans so far.

Privately held view seems to be pessimistic…

In private discussions with operator executives, we encounter a fair level of pessimism, especially about voice and SMS revenues. At our conferences, we have asked senior executives (using our anonymised voting system) about possible price and value erosion, and are often surprised by how far and fast telcos seem to think these core services will dwindle.

Figure 3: Example Telco 2.0 delegate view of 3-year voice revenue decline

Euro Mobile: The Future's Brutal - delegate views, Telco 2.0, Oct 2012

Source: Delegate Vote, New Digital Economics Executive Brainstorm, November 2011

…yet publicly, there is much less acknowledgement of the scale of the issue.

We’ve seen investment banks’ forecasts that assume that ARPUs can be (mostly) maintained through the magic of bundling, while some operators themselves paint a picture that can, charitably, be seen as rose-tinted at best:

Figure 4: Orange remains optimistic about European telecoms revenues

Euro Mobile: The Future's Brutal, Orange Forecast, Telco 2.0, October 2012

Source: FT Orange

Contents:

The bundling paradox
General trends impacting core services revenues
Macro-economic issues
Competitive & regulatory price pressure
The declining demand for voice telephony
Data growth
The relative mix of pre-paid vs post-paid customers
Lower handset subsidies
Definitions, assumptions & methodology
UK
Germany
France
Italy
Spain
Europe-wide summary
Appendix – Benchmarking prices for core services

Figure 1 – Mobile core Service revenues
Figure 2 – EU5 Mobile Services revenue already down 10% from 2009 peak
Figure 3 – Example Telco 2.0 delegate view of 3-year voice revenue decline
Figure 4 – Orange remains optimistic about European telecoms revenues
Figure 5 – Vodafone view bundling as the way to stem revenue loss
Figure 6 – At least 4 of the 6 general trends that impact mobile core services revenues are negative
Figure 7 – Developed-market mobile pricing has dropped 10%+ per annum
Figure 8 – French, German and Spanish mobile voice has historically had higher prices than other European countries
Figure 9 – STL Partners recent analysis suggests that Spain’s voice prices are nearly double those of UK and France
Figure 10 – Spanish voice premium is not offset by materially cheaper data charges compared with other European markets
Figure 11 – Despite growth over 2005-2010 period, mobile voice volumes are now flattening in more mature markets
Figure 12 – The underlying decline in fixed voice minutes (excluding mobile substitution) appears to be around 2% per quarter in the UK
Figure 13 – Smartphone penetration of mobile user base, January 2012
Figure 14 – EU5 mobile data revenues have grown steadily, not exponentially – and show recent signs of flattening-off as SMS declines
Figure 15 – The UK has shown a steady decline mobile data revenue growth rate despite increases in dongles and smartphones
Figure 16 – UK Mobile voice volumes (billions of minutes)
Figure 17 – UK Baseline Mobile Revenues down 25% from 2011 levels by 2020
Figure 18 – Unlike the UK, Germany mobile voice traffic is still growing strongly…
Figure 19 – …and mobile data usage in Germany is exploding (from a low base)
Figure 20 – Price pressure has meant that German mobile revenues have been flat in the recent past
Figure 21 – Germany Baseline Mobile Revenues down 18% from 2009 levels by 2020
Figure 22 – French mobile telephony volumes are still rising
Figure 23 – SMS and mobile data traffic volumes growing strongly
Figure 24 – France Baseline Mobile Revenues down 35% from 2009 levels by 2020
Figure 25 – Italy Baseline Mobile Revenues down 46% from 2009 levels by 2020
Figure 26 – Spain has been hurt especially hard by WhatsApp
Figure 27 – Spanish mobile voice traffic has been flat, but now faces decline
Figure 28 – The Spanish mobile market will fall precipitously through to 2020
Figure 29 – Total EU5 mobile core services revenues will fall 38% from peak by 2020
Figure 30 – Spain and Italy, in particular, are likely to experience a major decline in core mobile services revenues
Figure 31 – Mobile Voice Telephony Revenue Forecast by Country 2012-2020
Figure 32 – Extract from STL Partners database of 30-day SIM-only bundles
Figure 33 – Extract of how unit prices were calculated by STL Partners

Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon (Updated Extract)

Executive Summary (Extract)

This report analyses the strategies behind the success of Amazon, Apple, Facebook, Google and Skype, before going on to consider the key risks they face and how telcos and their partners should deal with these highly-disruptive Internet giants.

As the global economy increasingly goes digital, these five companies are using the Internet to create global brands with much broader followings than those of the traditional telecoms elite, such as Vodafone, AT&T and Nokia. However, the five have markedly different business models that offer important insights into how to create world-beating companies in the digital economy:

Amazon: Amazon’s business-to-business Marketplace and Cloud offerings are text-book examples of how to repurpose assets and infrastructure developed to serve consumers to open up new upstream markets. As the digital economy goes mobile, Amazon’s highly-efficient two-sided commerce platform is enabling it to compete effectively with rivals that control the leading smartphone and tablet platforms – Apple and Google.
Apple: Apple has demonstrated that, with enough vision and staying power, an individual company can single-handedly build an entire ecosystem. By combining intuitive and very desirable products, with a highly-standardised platform for software developers, Apple has managed to create an overall customer experience that is significantly better than that offered by more open ecosystems. But Apple’s strategy depends heavily on it continuing to produce the very best devices on the market, which will be difficult to sustain over the long-term.
Facebook: A compelling example of how to build a business on network effects. It took Facebook four years of hard work to reach a tipping point of 100 million users, but the social networking service has been growing easily and rapidly ever since. Facebook has the potential to attract 1.4 billion users worldwide, but only if it continues to sidestep rising privacy concerns, consumer fatigue or a sudden shift to a more fashionable service.
Google: The search giant’s virtuous circle keeps on spinning to great effect – Google develops scores of free, and often-compelling, Internet services, software platforms and apps, which attract consumers and advertisers, enabling it to create yet more free services. But Google’s acquisition of Motorola Mobility risks destabilising the Android ecosystem on which a big chunk of its future growth depends.
Skype: Like Facebook and Google, Skype sought users first and revenues second. By creating a low-cost, yet feature-rich, product, Skype has attracted more than 660 million users and created sufficient strategic value to persuade Microsoft to hand over $8.5bn. Skype’s share of telephony traffic is rising inexorably, but Google and Apple may go to great lengths to prevent a Microsoft asset gaining a dominant position in peer-to-peer communications.

The strategic challenge

There is a clear and growing risk that consumers’ fixation on the products and services provided by the five leading disruptors could leave telcos providing commoditised connectivity and struggling to make a respectable return on their massive investment in network infrastructure and spectrum.

In developed countries, telcos’ longstanding cash-cows – mobile voice calls and SMS – are already being undermined by Internet-based alternatives offered by Skype, Google, Facebook and others. Competition from these services could see telcos lose as much as one third of their messaging and voice revenues within five years (see Figure 1) based on projections from our global survey, carried out in September 2011.

Figure 1 – The potential combined impact of the disruptors on telcos’ core services

Source: Telco 2.0 online survey, September 2011, 301 respondents

Moreover, most individual telcos lack the scale and the software savvy to compete effectively in other key emerging mobile Internet segments, such as local search, location-based services, digital content, apps distribution/retailing and social-networking.

The challenge for telecoms and media companies is to figure out how to deal with the Internet giants in a strategic manner that both protects their core revenues and enables them to expand into new markets. Realistically, that means a complex, and sometimes nuanced, co-opetition strategy, which we characterise as the “Great Game”.

In Figure 3 below, we’ve mapped the players’ roles and objectives against the markets they operate in, giving an indication of the potential market revenue at stake, and telcos’ generic strategies.

Figure 3- The Great Game – Positions, Roles and Strategies

Our in-depth analysis, presented in this report, describes the ‘Great Game’ and the strategies that we recommend telcos and others can adopt in summary and in detail. [END OF FIRST EXTRACT]

Report contents

Executive Summary [5 pages – including partial extract above]
Key Recommendations for telcos and others [20 pages]
Introduction [10 pages – including further extract below]

The report then contains c.50 page sections with detailed analysis of objectives, business model, strategy, and options for co-opetition for:

Google
Apple
Facebook
Microsoft/Skype
Amazon

Followed by:

Conclusions and recommendations [10 pages]
Index

The report includes 124 charts and tables.

The rest of this page comprises an extract from the report’s introduction, covering the ‘new world order’, investor views, the impact of disruptors on telcos, and how telcos are currently fighting back (including pricing, RCS and WAC), and further details of the report’s contents.

Introduction

The new world order

The onward march of the Internet into daily life, aided and abetted by the phenomenal demand for smartphones since the launch of the first iPhone in 2007, has created a new world order in the telecoms, media and technology (TMT) industry.

Apple, Google and Facebook are making their way to the top of that order, pushing aside some of the world’s biggest telcos, equipment makers and media companies. This trio, together with Amazon and Skype (soon to be a unit of Microsoft), are fundamentally changing consumers’ behaviour and dismantling longstanding TMT value chains, while opening up new markets and building new ecosystems.

Supported by hundreds of thousands of software developers, Apple, Google and Facebook’s platforms are fuelling innovation in consumer and, increasingly, business services on both the fixed and mobile Internet. Amazon has set the benchmark for online retailing and cloud computing services, while Skype is reinventing telephony, using IP technology to provide compelling new functionality and features, as well as low-cost calls.

On their current trajectory, these five companies are set to suck much of the value out of the telecoms services market, substituting relatively expensive and traditional voice and messaging services with low-cost, feature-rich alternatives and leaving telcos simply providing data connectivity. At the same time, Apple, Amazon, Google and Facebook have become major conduits for software applications, games, music and other digital content, rewriting the rules of engagement for the media industry.

In a Telco2.0 online survey of industry executives conducted in September 2011, respondents said they expect Apple, Google, Facebook and Skype together to have a major impact on telcos’ voice and messaging revenues in the next three to five years . Although these declines will be partially compensated for by rising revenues from mobile data services, the respondents in the survey anticipate that telcos will see a major rise in data carriage costs (see Figure 1 – The potential combined impact of the disruptors on telcos’ core services).

In essence, we consider Amazon, Apple, Facebook, Google and Skype-Microsoft to be the most disruptive players in the TMT ecosystem right now and, to keep this report manageable, we have focused on these five giants. Still, we acknowledge that other companies, such as RIM, Twitter and Baidu, are also shaping consumers’ online behaviour and we will cover these players in more depth in future research.

The Internet is, of course, evolving rapidly and we fully expect new disruptors to emerge, taking advantage of the so-called Social, Local, Mobile (SoLoMo) forces, sweeping through the TMT landscape. At the same time, the big five will surely disrupt each other. Google is increasingly in head-to-head competition with Facebook, as well as Microsoft, in the online advertising market, while squaring up to Apple and Microsoft in the smartphone platform segment. In the digital entertainment space, Amazon and Google are trying to challenge Apple’s supremacy, while also attacking the cloud services market.

Investor trust

Unlike telcos, the disruptors are generally growing quickly and are under little, or no, pressure from shareholders to pay dividends. That means they can accumulate large war chests and reinvest their profits in new staff, R&D, more data centres and acquisitions without any major constraints. Investors’ confidence and trust enables the disruptors to spend money freely, keep innovating and outflank dividend-paying telcos, media companies and telecoms equipment suppliers.

By contrast, investors generally don’t expect telcos to reinvest all their profits in their businesses, as they don’t believe telcos can earn a sufficiently high return on capital. Figure 16 shows the dividend yields of the leading telcos (marked in blue). Of the disruptors, only Microsoft (marked in green) pays a dividend to shareholders.

Figure 16: Investors expect dividends, not growth, from telcos

Source: Google Finance 2/9/2011

The top telcos’ turnover and net income is comparable, or superior, to that of the leading disruptors, but this isn’t reflected in their respective market capitalisations. AT&T’s turnover is approximately four times that of Google and its net income twice as great, yet their market cap is similar. Even accounting for their different capital structures, investors clearly expect Google to grow much faster than AT&T and syphon off more of the value in the TMT sector.

More broadly, the disparity in the market value between the leading disruptors and the leading telcos’ market capitalisations suggest that investors expect Apple, Microsoft and Google’s revenues and profits to keep rising, while they believe telcos’ will be stable or go into decline. Figure 17 shows how the market capitalisation of the disruptors (marked in green) compares with that of the most valuable telcos (marked in blue) at the beginning of September 2011.

Figure 17: Investors value the disruptors highly

Source: Google Finance 2/9/2011 (Facebook valued at Facebook $66bn based on IPG sale in August 2011)

Impact of disruptors on telcos

It has taken longer than many commentators expected, but Internet-based messaging and social networking services are finally eroding telcos’ SMS revenues in developed markets. KPN, for example, has admitted that smartphones, equipped with data communications apps (and Whatsapp in particular), are impacting its voice and SMS revenues in its consumer wireless business in its home market of The Netherlands (see Figure 18). Reporting its Q2 2011 results, KPN said that changing consumer behaviour cut its consumer wireless service revenues in Holland by 2% year-on-year.

Figure 18: KPN reveals falling SMS usage

Source: KPN Q2 results

In the second quarter, Vodafone also reported a fall in messaging revenue in Spain and southern Africa, while Orange saw its average revenue per user from data and SMS services fall in Poland.

How telcos are fighting back

Big bundles

Carefully-designed bundles are the most common tactic telcos are using to try and protect their voice and messaging business. Most postpaid monthly contracts now come with hundreds of SMS messages and voice minutes, along with a limited volume of data, bundled into the overall tariff package. This mix encourages consumers to keep using the telcos’ voice and SMS services, which they are paying for anyway, rather than having Skype or another VOIP service soak up their precious data allowance.

To further deter usage of VOIP services, KPN and some other telcos are also creating tiered data tariffs offering different throughput speeds. The lower-priced tariffs tend to have slow uplink speeds, making them unsuitable for VOIP (see Figure 19 below). If consumers want to use VOIP, they will need to purchase a higher-priced data tariff, earning the telco back the lost voice revenue.

Figure 19: How KPN is trying to defend its revenues

Source: KPN’s Q2 results presentation

Of course, such tactics can be undermined by competition – if one mobile operator in a market begins offering generous data-only tariffs, consumers may well gravitate towards that operator, forcing the others to adjust their tariff plans.

Moreover, bundling voice, SMS and data will generally only work for contract customers. Prepaid customers, who only want to pay for what they are use, are naturally charged for each minute of calls they make and each message they send. These customers, therefore, have a stronger financial incentive to find a free WiFi network and use that to send messages via Facebook or make calls via Skype.

The Rich Communications Suite (RCS)

To fend off the threat posed by Skype, Facebook, Google and Apple’s multimedia communications services, telcos are also trying to improve their own voice and messaging offerings. Overseen by mobile operator trade association the GSMA, the Rich Communications Suite is a set of standards and protocols designed to enable mobile phones to exchange presence information, instant messages, live video footage and files across any mobile network.

In an echo of social networks, the GSMA says RCS will enable consumers to create their own personal community and share content in real time using their mobile device.

From a technical perspective, RCS uses the Session Initiation Protocol (SIP) to manage presence information and relay real-time information to the consumer about which service features they can use with a specific contact. The actual RCS services are carried over an IP-Multimedia Subsystem (IMS), which telcos are using to support a shift to all-IP fixed and mobile networks.

Deutsche Telekom, Orange, Telecom Italia, Telefonica and Vodafone have publically committed to deploy RCS services, indicating that the concept has momentum in Europe, in particular. The GSMA says that interoperable RCS services will initially be launched by these operators in Spain, Germany, France and Italy in late 2011 and 2012. [NB We’ll be discussing RCSe with some of the operators at our EMEA event in London in November 2011.]

In theory, at least, RCS will have some advantages over many of the communications services offered by the disruptors. Firstly, it will be interoperable across networks, so you’ll be able to reach people using different service providers. Secondly, the GSMA says RCS service features will be automatically available on mobile devices from late 2011 without the need to download and install software or create an account (by contrast, Apple’s iMessage service, for example, will only be installed on Apple devices).

But questions remain over whether RCS devices will arrive in commercial quantities fast enough, whether RCS services will be priced in an attractive way and will be packaged and marketed effectively. Moreover, it isn’t yet clear whether IMS will be able to handle the huge signalling load that would arise from widespread usage of RCS.

Internet messaging protocols, such as XMPP, require the data channel to remain active continuously. Tearing down and reconnecting generates lots of signalling traffic, but the alternative – maintaining a packet data session – will quickly drain the device’s battery.
By 2012, Facebook and Skype may be even more entrenched than they are today and their fans may see no need to use telcos’ RCS services.

Competing head-on

Some of the largest mobile operators have tried, and mostly failed, to take on the disruptors at their own game. Vodafone 360, for example, was Vodafone’s much-promoted, but ultimately, unsuccessful €500 million attempt to insert itself between its customers and social networking and messaging services from the likes of Facebook, Windows Live, Google and Twitter.

As well as aggregating contacts and feeds from several social networks, Vodafone 360 also served as a gateway to the telco’s app and music store. But most Vodafone customers didn’t appear to see the need to have an aggregator sit between them and their Facebook feed. During 2011, the service was stripped back to be just the app and music store. In essence, Vodafone 360 didn’t add enough value to what the disruptors are already offering. We understand, from discussions with executives at Vodafone, that the service is now being mothballed.

A small number of large telcos, mostly in emerging markets where smartphones are not yet commonplace, have successfully built up a portfolio of value-added consumer services that go far beyond voice and messaging. One of the best examples is China Mobile, which claims more than 82 million users for its Fetion instant messaging service, for example (see Figure 20 – China Mobile’s Internet Services).

Figure 20 – China Mobile’s Internet Services

Source: China Mobile’s Q2 2011 results

However, it remains to be seen whether China Mobile will be able to continue to attract so many customers for its (mostly paid-for) Internet services once smartphones with full web access go mass-market in China, making it easier for consumers to access third-parties’ services, such as the popular QQ social network.

Some telcos have tried to compete with the disruptors by buying innovative start-ups. A good example is Telefonica’s acquisition of VOIP provider Jajah for US$207 million in January 2010. Telefonica has since used Jajah’s systems and expertise to launch low-cost international calling services in competition with Skype and companies offering calling cards. Telefonica expects Jajah’s products to generate $280 million of revenue in 2011, primarily from low-cost international calls offered by its German and UK mobile businesses, according to a report in the FT.

The Wholesale Applications Community (WAC)

Concerned about their growing dependence on the leading smartphone platforms, such as Android and Apple’s iOS, many of the world’s leading telcos have banded together to form the Wholesale Applications Community (WAC).

WAC’s goal is to create a platform developers can use to create apps that will run across different device operating systems, while tapping the capabilities of telcos’ networks and messaging and billing systems.

At the Mobile World Congress in February 2011, WAC said that China Mobile, MTS, Orange, Smart, Telefónica, Telenor, Verizon and Vodafone are “connected to the WAC platform”, while adding that Samsung and LG will ensure “that all devices produced by the two companies that are capable of supporting the WAC runtime will do so.”

It also announced the availability of the WAC 2.0 specification, which supports HTML5 web applications, while WAC 3.0, which is designed to enable developers to tap network assets, such as in-app billing and user authentication, is scheduled to be available in September 2011.

Ericsson, the leading supplier of mobile networks, is a particularly active supporter of WAC, which also counts leading Alcatel-Lucent, Huawei, LG Electronics, Qualcomm, Research in Motion, Samsung and ZTE, among its members.

In theory, at least, apps developers should also throw their weight behind WAC, which promises the so far unrealised dream of “write once, run anywhere.” But, in reality, games developers, in particular, will probably still want to build specific apps for specific platforms, to give their software a performance and functionality edge over rivals.

Still, the ultimate success or failure of WAC will likely depend on how enthusiastically Apple and Google, in particular, embrace HTML5 and actively support it in their respective smartphone platforms. We discuss this question further in the Apple and Google chapters of this report.

Summarising current telcos’ response to disruptors

Telcos, and their close allies in the equipment market, are clearly alert to the threat posed by the major disruptors, but they have yet to develop a comprehensive game plan that will enable them to protect their voice and messaging revenue, while expanding into new markets.

Collective activities, such as RCS and WAC, are certainly necessary and worthwhile, but are not enough. Telcos, and companies across the broader TMT ecosystem, need to also adapt their individual strategies to the rise of Amazon, Apple, Facebook, Google and Skype-Microsoft. This report is designed to help them do that.

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M2M 2.0: Report and analysis of the event

M2M 2.0: Event Summary Analysis: A summary of the findings of the M2M 2.0 session, 10th November 2011, held in the Guoman Hotel, London

M2M 2.0: Event Summary Analysis Presentation

Part of the New Digital
Economics Executive Brainstorm series, the M2M 2.0 session took place at
the Guoman Hotel, London on the 10th November and reviewed real-world
experience with M2M projects from operators and other actors. Using
a widely acclaimed interactive format called ‘Mindshare’, the
event enabled specially-invited senior executives from across the
communications, energy and technology sectors to.

This
note summarises some of the high-level findings and includes the verbatim
output of the brainstorm.

More information: email contact@stlpartners.com, or phone: +44 (0) 207 247 5003.

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Extracted example slide:

M2M 2.0: Event Summary Analysis Presentation

Your Text is on Fire: OTT’s to burn 40% SMS revenue by 2015

Introduction

Background

STL Partners’ New Digital Economics Executive Brainstorm EMEA, took place from 8-10 November in London, and brought together 5 events in 1 venue, co-locating the Telco 2.0, M-Commerce, 2.0 Cloud 2.0, M2M 2.0 and Digital Entertainment 2.0 brainstorms, using a unique and widely acclaimed interactive format called ‘Mindshare’ to help clarify the important ‘next steps’ for both individual companies and industries.

Building on output from previous brainstorms and new market research and analysis from STL Partners, it focuses on new growth opportunities at the intersection of Telecoms, Media and Technology. The keynote Strategy Report Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon was launched at the brainstorm, and a similar agenda will be discussed at the New Digital Economics – APAC Brainstorm, Accelerating New Growth Opportunities in Telecoms, Media and Tech, 30 November – 1 December, Capella Resort, Singapore.

This note provides an extract of key take-outs and votes on the ‘Voice and Messaging 2.0’ sessions from the EMEA brainstorm for Telco 2.0 readers and subscribers.

Brainstorm participants will also receive detailed write-ups and analysis from the event sessions they registered for, and we will be using the input from all the sessions of the EMEA, Americas and APAC brainstorms as input to new analysis across all of the topics covered in the coming months.

The telco business model challenge is getting acute in EMEA

Your text platform is on fire

Telco SMS revenue will decline on average by around 40% across the Europe and Middle East region by 2015 according to the senior execs at this month’s Telco 2.0 brainstorm in London. The main cause is competitive pressure from so-called ‘Over-The-Top’ (OTT) alternatives (Facebook, Skype, Google, BBM, etc).

Figure 1 – Predicted decline of mobile telco messaging revenues

EMEA 2011 Messaging Decline Chart 40% Telco 2.0

The cause of this predicted decline was unambiguous – the impact of so-called Over The Top (OTT) players’ messaging services like iMessage, BlackBerry Messenger, Whatsapp, Skype and Facebook.

Figure 2 – Causes of predicted mobile messaging decline

This is similar to the impact of the new services that we saw predicted in the survey conducted across 300 senior execs in the research for our latest report Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon.

Indeed, KPN and some Middle-Eastern operators have reported even higher percentage declines among users of certain devices and applications.

The Voice platform is smoking too

While not as pressing as the impact on Messaging revenues, delegates had a pessimistic view of the prospects for voice revenues.

Figure 3 – Predicted decline of mobile carrier voice revenues

The causes behind the voice declines were seen as somewhat broader, with competition and regulation taking up 56% compared to 16% for Messaging, although ‘Responding to price pressures from OTT alternatives’ was still the main choice with 44% of the vote.

Figure 4 – Causes of predicted mobile voice revenue decline

All in all, it looks as if the pressures on voice and messaging revenues are beginning to bite as we originally predicted in our 2008 strategy report Lessons from Internet Communications Services – Skype, Facebook, and others: how Telcos can adapt and compete – although the options for adaptation and competition have narrowed somewhat due to the success of the so-called OTT players and the relative lack of action by telcos.

Who should telcos fear most?

Delegates did not have an entirely consistent view of the threats and opportunities presented by the OTT players as shown below.

Figure 5 – Who should telcos support / fear most in voice and messaging?

This is not entirely surprising given the relative attractions and perils presented in different scenarios as we describe in Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon.

However, what is consistent for operators is that:

There is most to gain, in the short-term at least, in supporting Microsoft as a counterweight to Apple and Google;
RIM / Blackberry is perceived to have the least power – and also presents a opportunity as a counterweight to Apple and Google, albeit a weakened one;
Facebook is indeed a ‘double-edged sword’ – as a threat in terms of its potential to enter communications and an opportunity in driving data use;
Apple and Google are the established players with the most current power, and hence threat.

Will RCS-e help?

At the November 2011 EMEA Brainstorm, Cenk Serdar, Director, Data & Communications Service, Vodafone, and Rainer Deutschmann, SVP Core Telco Products, DTAG, carried out a live demonstration of RCS-e, the GSMA-backed future voice & messaging solution using IMS. Morten Sorby, EVP of Strategy & Regulatory Affairs, Telenor, and Andreas Bernstrom, CEO, Rebtel, joined the vibrant subsequent debate with the audience and Simon Torrance, CEO STL Partners.

The following is an anonymised top-level summary of the resulting discussions and the votes.

Getting to market

Instant messaging, video, and file-sharing are the key features in RCS-e, and are being introduced as a refined set compared to the original specifications in order to bring applications to market as quickly as possible. This refinement was lead by the E5 Group of top European operators.

The most important item on the future roadmap is service discovery. Beyond that, contacts transfer, location sharing, and multi-device operation are on the to-do list.

Interestingly, it seems that some of the RCS-e use cases focus on supporting enterprise applications such as trying to provide a platform for better CRM and person-to-organisation applications (for example, an enhanced helpdesk for a furniture company). This has consequences for the design of APIs and business relationships facing upstream towards enterprises and developers.

Arguments for success or failure

Arguments put forward at the Brainstorm for RCS-e included:

While Apple’s iMessenger and RIM’s BlackBerry Messenger are impressive products, they aren’t ubiquitious or necessarily deeply integrated with other applications in the way that SMS, MMS, and telephony could be.
RCS-e doesn’t require the user to download any new apps – the vast majority of users aren’t already using sophisticated communications tools like smartphones.
RCS-e ‘is a service for mass-market users’ rather than just smartphones.
Seven of the major device makers are committed, and the RCS-e standard is an open standard, so nothing prevents Apple iOS or RIM BBX developers implementing it independently.
RCS-e is building its global footprint. Spain, France, and Germany will launch sequentially between now and the first half of 2012. South Korea is committed to deploying RCS-e, and discussions were going on with other Asian countries.

Arguments put forward against RCS-e included:

Smartphones will change customer behaviour and catalyse change as more people get them. Horace Dediu, Associate Analyst at STL Partners, predicts that Western Europe and North America will go 100% smartphone within 18 months – so control will be further ceded to the Smartphone OS owners.
Cost is the main reason users move to Skype and similar services, and RCS-e doesn’t reduce costs.
The feature set just isn’t that convincing compared to what else can be done using VOIP services and other smartphone apps.

Delegates were split in their views on the likely efficacy of RCS.

Figure 6 – Will RCS-e offer an attractive alternative to OTT services?

Telco 2.0’s questions

The value of RCS-e is a subject that stirs strong opinions from across the industry, and it was intriguing to see the extreme polarity of delegate views at the Brainstorm.

Figure 7 – Is RCS-e ‘too little too late’?

Telco 2.0 will be conducting an in-depth analysis of Messaging and Voice 2.0 strategies, including RCS-e and its prospects in coming months.

Our questions on RCS-e at this point are as follows.

How many Christmas 2012 handsets will have RCS-e?

An critical factor is whether the wave of cheap smartphones will support RCS-e and if so, whether they support it well or only half-heartedly. The great bulk of them will be Android devices, and therefore the key vendors will be HTC and Samsung.
HTC are signed up, but their device line-up is concentrated on the high end, and they are very much second to Samsung in terms of volume.

Samsung is shipping more Androids than any other vendor, and indeed more smartphones than any other vendor, and they have a portfolio of products from the Ace to the Galaxy S II rather than a single top-end hero product. A key question is to what extent across their handset range they will sign up to RCS-e.

Are the features really convincing?

It is notoriously difficult to accurately predict the appeal of features in advance of consumer trials. However, a challenge for operators will be that, unlike Apple, they will have limited control of the design and implementation of the end-to-end customer experience.
How quickly can RCS-e evolve?

An important issue regarding services “embedded” in the core network or the device operating system is that they are unlikely to get upgrades anywhere near as quickly as either standalone applications or Web services. Operators tend to be slow to push out OTA upgrades to device OS, even after the manufacturers release them, and software iterations in the core network are taken slowly for very good reasons. App developers and Web 2.0 players tend to have much faster development cycles, so in terms of both user experience design control and release iteration operators are at a disadvantage.

What is RCS-e realistically intended to achieve now?

Opinions vary on what RCS-e is meant to achieve for operators, though few people we’ve spoken to in private recently believe that RCS-e is a ‘silver-bullet’ to combat so-called ‘OTT’ revenue erosion. Indeed, there appears to be a growing minority who appear to have ‘given up’ on voice and messaging revenues.

A more tenable position perhaps is that RCS-e may help a little, and that extending the life of the Messaging and Voice revenue streams by only a few months would justify the business case. One argument we’ve heard is that RCS-e is about enhancing and protecting the telco services bundle of minutes, texts, and data.

In a wider sense, it is a move by operators to provide something new to consumers, and it may at least be a small step to revitalise their relevance to consumers. In our view, it is far from the only strategy that operators should explore.

Content

What else can be done?
A new strategy framework for Messaging and Voice 2.0 Strategies
Developing alternative sources of value

Figure 1 – Predicted decline of mobile telco messaging revenues
Figure 2 – Causes of predicted mobile messaging decline
Figure 3 – Predicted decline of mobile carrier voice revenues
Figure 4 – Causes of predicted mobile voice revenue decline
Figure 5 – Who should telcos support / fear most in voice and messaging?
Figure 6 – Will RCS-e offer an attractive alternative to OTT services?
Figure 7 – Is RCS-e ‘too little too late’?
Figure 8 – Strategic Messaging and Voice options for operators

Apple iCloud/iOS: Killing SMS Softly?

Summary: Our analysis of how Apple’s iCloud, iOS5, and MacOS developments build value and control for Apple’s digital platform, and their consequences on other parts of the digital ecosystem, including the impact of iMessage on text messaging. (June 2011, Executive Briefing Service)

Below is an extract from this 32 page Telco 2.0 Executive Briefing that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Non-members can buy a Single User license for this report online here for £995 (+VAT) or subscribe here. For multiple user licenses or other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Creating effective commercial strategies in the digital ecosystem, including learning from and dealing with major players like Apple and Google, is a key theme of Telco 2.0’s ‘Best Practice Live!, a free global online event on 28-29 June 2011, as well as of other Telco 2.0 research and analysis.

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Introduction

Apple provided a glimpse into some of the upcoming new features of its key software platforms iOS and MacOS at its WorldWide Developer Conference (WWDC) in June 2011. It also announced its much anticipated move into providing cloud based services and away from using the PC as the controlling hub.

iOS and MacOS are Apple’s key software assets – the assets which add soul to Apple’s key money spinning devices (iPhone, iPad and Mac). iCloud is the first iteration of the missing third leg – the software that ties all the devices together seamlessly. Together iOS, MacOS and iCloud are both the differentiator for the consumer and the barrier-to-entry for competitors. They are the soul of the Apple overall platform.

The Apple platform is evolving, and its new features will impact on many players in the value chain: namely the various distributors including mobile operators, aggregators, content creators and of course end consumers.

Nearly every main feature launched seems to support our general theory that Apple is squeezing value from the aggregators and distributors and pushing that value into the device manufacturers (i.e. them).

The rest of this webpage covers:

iMessage – killing SMS softly? [NB There is additional analysis of this in the full Briefing]
iTunes in the Cloud – getting one up on Amazon
Notifications – Apple robs Windows Phone and Android advantage

The full Briefing, which contains the complete section on iMessage, also includes the following sections:

The impact of iMessage on SMS revenues, and telco defence strategies
MacOS Software – Apple shuts out other retailers
Newsstand – Appeasing Publishers (to a degree)
MobileMe – just ‘making it work’ …and building the moat
iCloud and Video Services – holding fire for now
Activation – Cutting the PC cord
Photo Stream – yes, but why?
Data Centre Economics – making a start
Conclusions – Lessons from Apple’s Strategy

1. iMessage – killing SMS softly?

iMessage, which is the primary mechanism for SMS and MMS features, has been radically reengineered with messages between Apple platform consumers no longer being carried on the mobile network SMS and MMS infrastructure. All of this happens transparently to the consumer and they don’t need to know if their recipients are also using Apple devices – the message routing is determined by the Apple platform.

iMessage is great for consumers as these onnet messages are free, but dreadful for MNOs as they all will probably take a hit on messaging revenues. Apple is competing with the MNO’s core services, and they have even made it easier for consumers to see the value proposition by colouring the bubbles for onnet and offnet messages differently.

Apple has been quite clever in the timing of the release of this feature. Applications such as WhatsApp have already been blamed by some MNOs for declining messaging revenues – in particular KPN that has recently experienced a very significant impact on revenues. Apple effectively is doing nothing differently to them, just improving the consumer experience by making it easier to send and receive offnet messages.

In terms of platform economics, Apple is adding value to the consumer via the device and squeezing value from the mobile network distributors. We believe it is only a matter of time before Apple start offering voice features. This, together with their video conferencing application Facetime, leaves mobile operators staring into the future where they will only be selling data access services.

[NB There’s further analysis of these impacts and defences against them in the full Briefing.]

2. iTunes in the Cloud – getting one up on Amazon

The key value proposition of “iTunes in the Cloud” is that all songs historically purchased through iTunes are available for download to any Apple device at no extra cost wirelessly either through a WiFi or 3G connection as long as the consumer remains within their data tier. The user has control over which songs he wants to download to what devices thus avoiding a situation where all storage on an iPhone or iPad is consumed by a vast collection.

The level of consumer control is such that a consumer can even download a previously purchased album for a specific journey and then remove it after listening to save space. New purchases can immediately downloaded to all devices or selectively as with the case of historical purchases. This feature definitely improves the Apple platform, and especially compared to alternate music retailers such as Amazon.

Currently, Apple users can purchase songs or albums from Amazon and they will be automatically added to iTunes on the laptop, then on synchronization the songs transfer to the iPhone or iPad. Previously, buying songs through the Amazon store on the PC was as simple as buying through the Apple iTunes store, and Amazon has been slowly gaining market share in music downloads, because it competes on price and often offers songs cheaper than in the Apple iTunes store. Now, with “iTunes in the Cloud”, Amazon may still be able to beat Apple iTunes Store on price, but the user experience is now deficient.

We seriously doubt that Apple will allow 3rd party retailers access to their iTunes in the Cloud service, and argue that Apple is using their platform to improve the position of their retail arm compared to 3rd parties.

The other service offered, iTunes Match, also adds incredible value to the platform. Apple has negotiated a deal with the major record labels to offer the opportunity to consumers to add tracks from their collections not purchased via the Apple store to the iTunes in the Cloud service for a cost of $25/year. Reputedly, Apple is sharing this revenue 70:30 with the record labels and as a paid a huge advance of US$100m-US$150m for the USA rights alone. Apple has set the benchmark price for cloud music licensing and has set the bar so high that it is hard to see new entrants having sufficient funding to gain similar licenses. Even Amazon or Google will be questioning whether they can generate enough money from music to justify the price of the licenses.

At the launch event, Steve Jobs presented the use-case of customers who had ripped their physical CDs. The more discussed use-case in the media is those people who have obtained their songs from illegal means, either via P2P networks or friend sharing, who effectively now have a US$25/annum service which legitimizes not only their past behaviour, but potentially also their future behaviour. The third use-case is people who buy cheaper digital music from other digital retailers, e.g. Amazon, and now have an option to pay an ongoing fee to add the simplicity of the iTunes in the Cloud service. Effectively, the usability advantage of the Apple platform is priced at US$25/annum which means this use-case only makes sense to heavy ongoing purchasers of music.

Apple didn’t face the same licensing issue from the publishers and has added a very similar service for all Books bought from the iBookstore with the added feature of bookmarks are synchronized and shared across devices. Overall, Apple has built very compelling cloud services for music, books and magazines and erected larger barriers for its competitors. If iMessage show Apple leveraging interconnected with other networks when it suits them, iTunes and iBookstore show Apple adding features which not only make interconnect more difficult for other companies, but firmly closing previously open doors.

3. Notifications – Apple robs Windows Phone and Android advantage

A notification is the mechanism that consumers are alerted to events – for instance, an incoming email or sms. It is the key mechanism that 3rd party developers communicate with their users – for instance, in a sports application a notification can alert the user that their football team has scored a goal. Apple has completely revamped their notifications user experience with the addition of a notifications centre.

Apple have pushed over 100 billion notifications to iPhone and iPad which presumably partly accounts for the high consumption of signaling capacity which many mobile operators have been complaining about.

It also shows that Apple is quick to address deficiencies in their platform compared to others. This is a key feature of platform economics; you have to invest sometimes to play catch-up. It also highlights the risks for developers of building solutions which address platform weaknesses – yesterday’s successful application is tomorrow inbuilt into the platform.

Interestingly, an alternate notification application was never approved by Apple in their AppStore and instead went into the wilds of only being available on jailbroken iPhones. Apple new notification centre bears a striking resemblance to the non-approved one. Another example of this approach is with the feature for reminders, where a plethora of applications were already being sold in the Application store. Apple added a feature called Reminders which is part of the initial application load, and which effectively destroys the market for 3rd party applications. This in some ways looks like a repeat of the Microsoft strategy with Windows and Internet Explorer which got them in such trouble with regulators across the globe.

To read the full Briefing, members of the Telco 2.0 Executive Briefing Subscription Service can download the full 32 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for for £995, or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations, company types, areas, people and industry models referenced: Apple, platform, Amazon, Cloud, Google, strategy, Vodafone, WhatsApp, O2, Orange, publishers, Steve Jobs, WWDC, ARPU, Blackberry, Carphone Warehouse, Everything Everywhere, MNO, Prepay, record labels, Telefonica, T-Mobile, Viber.

Technologies and products referenced: iPad, iPhone, PC, Windows, iCloud, iTunes, iMessage, Android, iOS, messaging, MMS, MobileMe, SMS, voice, WiFi, Windows Phone, 3G, Activation, AppStore, Data Centre, NewsStand, Notifications, Photo Stream, Video, BlackBerry Messenger, Facetime, Freebee, Gmail, GSM, HTML5, iBookstore, Internet Explorer, Microsoft Live, P2P, Photostream, RCS-e, Snow Leopard, UltraViolet, VoIP, Windows7.

Full Article: Vodafone, too much data and not enough vo and fone?

As there’s a change in leadership occurring at Vodafone, it’s a good time to reflect on the direction of the large convoy of opcos and investments being led by the good ship Newbury. Arun Sarin has stepped out of his asbestos business suit, albeit scorched by the flames of investors and board members, safe in the knowledge that his mission to vanquish more timid enemies is won. Although they don’t say it aloud, The Economist notes that the core of this success was clinging on to markets where vertical integration is turning a profit (USA, emerging markets), and exiting those where is isn’t doing so well (Japan), whilst cost-cutting elsewhere the inevitable detritus of a decade of hyper-growth.

However, as the more acerbic tongues at The Register point out, rather choppy waters lie ahead. The business is rapidly maturing, cost cutting reaches its limits, and new revenue streams (entertainment content, advertising, data) are either slow to ramp up or come with significant supplier costs that dilute margins.

According to their corporate history website, the name Vodafone is derived from ‘voice and data phone’. True or not, the conundrum of whether ‘voice is just data’ persists to this day. So as Vittorio Colao becomes fleet admiral, our burning question is: what to do about the stagnating core product? Along with its peers, Vodafone has conspicuously failed to significantly enhance its voice telephony offer, beyond offering better coverage. We don’t think that’s going to be a long-term winning position as access becomes hyper-abundant, and people’s time does not. Rather than ask how data services can replace lost voice revenue, ask how data can be used to rejuvenate that voice business. And as the biggest player in the international scene, Vodafone is very well placed to do something about it.

Telephony is built on false assumptions

The chart below (from our recently published Consumer Voice & Messaging 2.0 Report) compares the cost of telephony and labour. We show the per minute cost in the USA of using a telephone (fixed or mobile), along with hiring someone (high school or college graduate). What it tells us is that the ‘scarcity’ used to be in the telephone network, and now it is in our time and attention.

Only a decade ago, it was worth paying a graduate for an hour if it would have saved you from making an hour’s worth of mobile phone call.

Today, we barely factor in the cost of calling into our lives. Yet we are buried in voice messages, missed calls, emails and texts. Delivering ever more data to the user is not the same as creating ever more value. The value comes from brokering the right relationships, helping interactions occur at the right time and medium, eliminating unwanted intrusions, automating flows of information, and making users productive.

“Ask not how data can replace lost voice revenue, but how data can rejuvenate the personal communications experience.��? Satisfying people’s need to collaborate, chatter, and communicate should be central to every operator strategy. Here’s why…

Not a new problem

Mobile telephony is built off the same product template as fixed telephony, with the same assumptions and problems baked in from the 19th century. From the very beginning, problems have been evident. When Bell called Watson in that first call, the result wasn’t “oh, ****, he’s gone out for an afternoon in the pub��?. No, Bell had pre-arranged for Watson’s to be there ready at the other end. It was a bit of a fraud, to hide the absence of presence, availability or scheduling features.

We see these problems still today. You call me, but I just fail to answer in time, so you go to my voicemail. I see a missed call, and call you, not knowing your talking to my voicemail. As you’re already in a call, speaking to my voicemail, I get your voicemail. Why on earth doesn’t the phone network just connect us together?

This particular instance is an example of a failed rendezvous, and we examined the context and unfilled user needs in more depth in this previous post. Many of today’s short phone calls are manual transfers of presence, location and availability data that should ideally be eliminated. Why can’t I request a call from you, rather than only interrupt you? Why can’t I tell you’re calling me back about the message I left a week ago? Sadly, operators are too well rewarded for terminating calls of zero or negative value.

Voice: one product, many business models

As with all telcos, there are three inter-linked business models that Vodafone needs to support. These require very different features.

The first is its retail offer. This takes hardware from the network equipment providers, plus software from various innovators, and packages it up as the core bundle offer or as an add-on value-added service. This supply chain is slow, costly and inflexible today, and their Betavine effort is only a small step towards what’s really needed.

There’s still plenty of mileage though in selling conveniently packaged communications. We’re not yet at the point where “if it’s software, it must be given away for free��?. The users see the benefit to themselves, and are willing to pay for it. A good example at the moment is SpinVox, who offer a voicemail to text transcription service. Note how their own marketing copy says: “SpinVox has saved me at least two hours a week [our emphasis] of listening to often irrelevant voicemail.��? (And contrast this with the primary purpose of most mobile media content products, which is to fill dead time.) We’ll dive into the challenges and opportunities for retail products a little more below.

Next up are the wholesale products of the operator. We feel there is a massive hole here in most operators’ strategic approach, with a few honourable exceptions. Voice is already becoming just one facet of many applications and products, and operators aren’t making it easy to embed it in. Wholesale products need to be broader in scope (e.g. to include voicemail, push to talk, and 3rd party network integration), as well as deeper in integration (e.g. simple 3rd party trouble ticketing, provisioning of offers sold through non-operator channels).

Finally, there are the two-sided markets, which we’ve written about here. The telephone remains a wonderful way of consumers and enterprises interacting — think of it as ‘v-commerce’ — but there is a huge amount of friction and inefficiency involved. Whilst so much effort is being expended on entering mobile advertising, hardly any is being lavished on building new revenues on top of freephone numbers, call centres and interactive messaging.

Voice as a platform, not a product

We promised to come back to that retail proposition. Ten years ago, mobile phone penetration was in the low single digits. Today, more than half of humanity has one. A decade hence, the experience will also be transformed again. For example, your address book or contact list will be dynamic: ordered by who you ought to be talking to, giving real-time presence and availability data, and probably infused with messages from companies with whom you have ongoing commercial relationships. Mobile will be the ‘to go’ portion of the PC experience, not some separate world.

However, there is unlikely to be a one-size-fits-all evolution of the public telephone service. Instead, we move from an era of mass production to one of mass customisation. There are too many innovative applications, too many niches and customer needs, for any one company to address them all. Instead, operators need to take a leaf out of the Telco 2.0 book and focus on two things: providing distribution for these services (and integration with the core offer), as well as enabling a bunch of high-margin value-added services that the upstream partners pay for, not the downstream end users. If someone is a Facebook fanatic, help that partner get their experience into the user’s hands.

This requires synchronising a lot of moving parts of the puzzle: handsets, network, operational support, etc. The need for putting together a complete experience, rather than just piece parts, is becoming received wisdom, with the Apple iPod, iTunes PC client and music store trio being the canonical example. It’s hard to do, and it’s still early days. Apple have barely moved the needle with the iPhone — the only concession to the voice service is visual voicemail. (And they’ve made a mess of the SMS client.) It does nothing to address the underlying issues of why people are sending those messages, and how to either eliminate them, or make them more effective. Nokia’s Ovi is resolutely focused on the content side of the business, not communications.

As the biggest player, Vodafone has more leverage over handset suppliers and software platform vendors. Pick up the phone to Qualcomm. Whatever magic they’ve done for 3, ask for a bit to be sprinkled over the Vodafone handset range. We’d also expect an operator like Vodafone to produce handset and service offerings much more tightly coupled with the online services that users increasingly route their conversations through. On the corporate side, IBM, Microsoft and Avaya are obvious targets for closer integration.

One good sign is Vodafone’s acquisition of Danish social media start-up Zyb. This is completely the right direction, and we’d like to see the gas pedal pressed hard to roll this kind of “address book 2.0��? capability burned into as many handsets as possible.

This is also the time to make the most out of close relations with Verizon Wireless. Platforms need scale, new voice service features need scale, so why not become the de facto leader? Don’t wait for the standards bodies, make it a fait accompli.

Immediate action required: group communication

Whilst these long-term changes unfold, there a re short-term problems with the voice and messaging products, most notably in the pricing of services that compete against Internet offerings. Vodafone UK have cleverly priced ‘informational’ chatter differently from ‘social’ chatter with the ‘stop the clock’ promotion. After 3 minutes, you don’t rack up any more charges. This aligns value with pricing, and we like it.

The problem is that the online tools encourage users to communicate in groups, and to form conversations and communities. Voice and SMS pricing don’t align well with this. Why should a three-way call cost more? The users don’t see it that way. Why does sending an SMS to five people cost five times a much? Why does replying to a message cost the same an initiating the conversation? Why can’t I send Twitter status updates (with no termination charges) for free, to encourage more texts and calls?

There are many ways in which the traditional pricing assumptions of telephony and messaging don’t fit into our current communications landscape. Because Vodafone has shied away from being the price leader, it has more slack to play with here. You can afford to lose some money on termination fees to other operators if those charges have become illogical in the users’ minds. Or take a leaf from GupShup and use adverts to make group communications have no extra charges.

Be proud to be the phone company

Sometimes it feels like being a phone company is like an embarrassing medical condition nobody wants to admit to having. Voice communication will remain central to the human condition for as long as we’re around. Satisfying the need for people to collaborate, chatter, and communicate should be central to every operator strategy. Sadly, it too often ends up being delegated to the network equipment providers or handsets vendors, who tend to lack the skills or incentives to build complete services. If we had a shiny new R&D group, we’d be making the personal, social, human communications experience the top priority.

There are some carriers already making tentative moves towards a better telephony future. We like products like the H3G SkypePhone, but feel that there ought to be a lot more such examples. Embarq is making some useful moves with its eGo landline phone service. Verizon has made a good effort with iobi, but is utterly closed to outside innovation. Telekom Austria has some interesting softphone experiments on the go. Qwest has Q.Home on the launchpad. BT remains a bit of a dark horse here too.

Our own research found nearly 70 start-ups working on new voice and messaging services. (These are all documented in the report.) We’re sure there are more. None are really integrated with the telco platform. The opportunity to exceed the users’ expectations is there, and the business model — retail, wholesale and 2-sided platform — will bring in the cash to anyone who cares to execute on it.

Voice and Messaging 2.0

What to learn from – and how to compete with – Internet Communications Services

Summary: Voice and Messaging 2.0 is Telco 2.0’s analysis of the industry’s traditional core business, traditionally c.80% of $3 trillion Telco revenues, based on our unique insight into the emerging competition, the industry value chain, and original research into user needs.

There is a great wave of change and innovation in voice and messaging, although many telcos are missing out. Innovative new players are stepping in and there is opportunity for telcos is to work with them rather than compete – there are genuine opportunities as well as threats. This report illuminates the evolving opportunities and threats, and provides an invaluable guide to success in this exciting new world. (April 2008)

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This report is now availalable to members of our Telco 2.0 Research Executive Briefing Service. Below is an introductory extract and list of contents from this strategy Report that can be downloaded in full in PDF format by members of the executive Briefing Service here.

For more on any of these services, please email contact@telco2.net/ call +44 (0) 207 247 5003

Key Points

An in-depth profile of the new Voice Applications opportunity.
Identifies and profiles the most interesting of the current crop of innovations.
Provides an original framework for assessing and developing successful new voice and messaging services.
Profiles the increasing threat to the traditional vertically-integrated model of voice services posed by these services.
Shows the surprising degree to which industry experts expect the landscape of voice and messaging, and increasingly ‘presence’ oriented services, to change in the foreseeable future.
Shows the pressing need for a different approach by Telcos.
Describes the strategies and practical approaches most likely to succeed in the near and long term.

Who is this report for?

The report is for senior (CxO) decision-makers and business strategists setting business strategy, and for product managers, and strategic sales, business development and marketing professionals acting in the Voice arena in the following types of organisations:

Fixed & Mobile Broadband Operators – to set and drive strategy.
Vendors & Business Partners – to understand customer need and develop winning customer propositions.
Regulators and Standards Bodies – to inform strategy and policy making.

Strategists and CxOs in IT and Investment Companies may also find this report useful to understand the future landscape of the Telecoms and related industries, and to help to spot likely winning and losing investment and operational strategies in the market.

Background Context – Voice & Messaging Revenues Under Threat

Core voice and messaging revenues – which remain 80% of the Telecoms industry’s global revenue – are under stronger threat than ever before:

Mobile operators are moving to HSPA and WiMAX networks that facilitate ‘over the top’ voice; flat-rate or supersize buckets of data are becoming cheap and widespread; maturing dual-mode and pico/femtocells technologies threaten the ‘mobility premium’ at home and in the office; and non-operator SMS and IM services force large/unlimited message bundles and price competition.
Fixed operators have found continued profit in enterprise voice, but voice threatens to migrate from being a distinct service (through a PBX or even IP Centrex) into just being a feature of an online collaboration and productivity suite. Consumer social media and communications technologies increasingly penetrate the enterprise, further weakening the differentiator of the telco as an IT services and communications integrator.

The consequence of this diversification in means of delivering voice and messaging is a major change to the forecast nature of industry revenues.

SR Voice And Messaging Image 1
Yet the industry does not believe that it truly understands it’s customers’ real needs from the most core products

Voice and Messaging Survey Image 2

(Source: STL Partners Telco 2.0™ Voice & Messaging Survey, January 2007 and 2008 (A survey of operators and vendors across the Telco industry); n=327

The Voice & Messaging report describes the forecast evolution of the market and shows how Telcos can work with the market to develop new services and distribution channels. It provides an original framework for identifying competitive characteristics of new applications and profiles 70 of the latest interesting Telco 2.0 innovations that we’ve encountered in our research – an invaluable tool for visionary CxOs, strategists and product managers alike.

Key Questions Answered

This report uniquely answers 3 key questions:

What do ‘End Users’ really want – what are their unmet telephony and messaging needs and how to address them profitably?
How to respond commercially – what features and functionality will enable telcos to grow their core business?
How to refine product strategy – what is the best migration path to meet current and future market conditions?

In addition, the report seeks to help operators and vendors maximise future opportunities by answering the following questions:

What are the key unmet user needs?
Where is the money in telephony over the next 5 years?
What kinds of disruptors are there? When will they become a material threat? How to react to them?
What are the important trends in telephony toll arbitrage?
How to work with the Internet giants?
How can you manage cannibalisation of SMS and MMS revenue by IM?
What should you be doing about interoperability of new services?
How will the Web be voice-enabled, and what’s the impact?
When will click-to-call take off, and what to do about it?
What new revenue opportunities are there?
How can Telco 2.0™ business strategies be applied to voice?
What needs to be done to generate near-term benefits?
What are the pricing strategies to adopt or avoid?

Case Studies, Companies and Services, and Technologies & Applications Covered

Detailed Case Studies: 3UK, Skype, Iliad. Truphone, PhoneGnome, Verizon iObi, VoiceSage, Tesco Mobile.

Other Companies and Services Covered: 3 SkypePhone, 3GPP, 3UK, AOL IM, Apple, Apple iPhone, Apple Visual Voicemail, AT&T, AT&T Digital One Rate, Avaya, Bebo, Blackberry, Body Shop, BT Fusion, BT Web 21C, C&W, Carphone Warehouse, Change for Charity, Craigslist, Cyworld, DailyMotion, Dell, Easymobile, Ebay, Embarq eGo Phone, Facebook, FCC, Flickr, Fonolo, France Telecom, free.fr, Freebox, Fring, Gizmo, Google, Google Android, Google Mail, GrandCentral, GSMA, Habbo Hotel, Hutchison 3G, Indesit, Interoute, iPhone, iPod, iTunes, Jabber, Jaduka, Jaxtr, Lebara, Level3, Linked-In, LiveJournal, MCI Friends & Family, Meebo, Metacafe, MSN, Mxit, MySpace, NeuStar, NMS Communications, Nokia, Nokia 60 Series, O2, Orkut, QQ, Qualcomm, Ribbit, RIM, Salesforce.com, Softbank (Yahoo!), Telekom Austria, Telfort / KPN, TeliaSonera (IM), Terranet, The Cloud, TiVo, T-Mobile Flext, TV Perso, Twitter, Verisign, Virgin Mobile, Virgin SA MVNO, Vodafone, Vodafone “stop the clock”, Vonage, Vyke, Wal-Mart, Xbox, Yahoo!, YouTube.

Technologies & Applications Covered: 3G, Adobe AIR, ADSL2, AJAX, ASP, BREW, BSS, Calendars, Call Routing, CDMA, Communications Enabled Business Processes (CEBP), DECT, DNS, DRM, DSL, DVD, ENUM, Femtocell, Flash, Gaming Devices, GPRS, GSM/WLAN, HSDPA, IM, IMS, IP, IPTV, ISDN, IVR, Java MIDP, LTE, MMS, Mobile, Mod_Python, MS Silverlight, Network Address Book Synchronisation, NGN, OTT, P2P, PBX, PC, PHP, Picture Messaging, Prepay Mobile, PSTN, PVR, Ring-back, Ringtones, Roaming, Set-top boxes, SIM, SIP, SMS, SS7/TDM, To-do lists, UI, UMTS, Unified Communications, USB Dongles, VCR, Visual Voicemail, Voice, VOIP, Wi-Fi, WiMax, WLAN, XMPP.

Applications & Companies covered in the directory: Abbeynet, Apple iPhone, Bridgeport Networks, Brightroam, Bubbletalk, CallButler, Cellity, Convenos, Craigsnumber, DoCoMo, Evoca, flurry, fring, GoLoco, GrandCentral, Hotxt, icall, Ifbyphone, imity, iotum, Jaduka, Jaiku, jajah, Jangl, Jaxtr, Jott, Kadoink, Kirusa, Loopt, Lypp, Me.dium.com, meebo, Mig33, MobileMeWorld, mySay, Nimbuzz, Octro, Ogo, OZ Communication, PacketMobile, Pheeder, PhoneGnome, Phonevite, Pica, Pinger, Pownce, Radio Handi, renzoo, Ring2Conferencing, SearchtoPhone, Sightspeed, Sniff, Supcast.com, Tex2me, Toktumi, Treasuremytext, TruPhone, Userplane, Utterz, Vapps, Verizon, Vonage, Vyke, wablet, Woize, YackPack, Yahoo! OneConnect, yak4ever, Yugma, Zygo Communications

Summary of Contents

Executive Summary
Introduction
Part 1 – Understanding user needs
Part 2 – Market dynamics
Part 3 – How non-carrier communications spread
Part 4 – How operators gain and lose control
Part 5 – Competing in a low-cost world
Part 6 – Future corporate strategy
Part 7 – Finding new markets
Part 8- A theory of communication systems
Part 9 – A framework for product innovation
Part 10 – Product strategy
Part 11 – Long-term issues
Part 12 – Action plan
Appendices
Directory

Introduction

Apple’s evolving strategy

Introduction

Figure 1: Various markets are beyond “peak telephony” despite lower call costs

Source: Disruptive Analysis, National Regulators

Introduction

Telefonica results confirm that global telecoms revenue decline is on the way

Very weak Q1 2014 results from Telefonica and other European players

Figure 1: Telefonica’s growth and decline over the last 8 years

One thing is clear: the only way is down for most CSPs and for the industry overall

Figure 2: Near-term global telecoms decline is assured; longer-term growth is dependent on management actions now

Upturn in telecoms industry fortunes after 2016 dependent on current activities

Introduction

Market Context: two ‘killer apps’

Facebook: constantly chasing the audience

We’re finding that people also really want to buy a lot of app install ads, and that’s grown incredibly quickly and is one of the best parts of the ad work that we did over the last year

We are very excited about the mobile app space in general. If you look at our mobile app installation ads, we’ve really done a great job working with developers to help users discover and download their apps.

Figure 1: Facebook’s rapidly growing mobile revenues

WhatsApp: disrupting by doing one thing really well

Figure 2: WhatsApp User Growth

Figure 3: Average monthly minutes of use by market

Figure 4: Average user screen time Facebook vs. WhatsApp (per month)

Figure 5: SMS Price vs. penetration of Top OSP Messaging Apps

Unified Communications

Background – ‘Voice and Messaging 2.0’

The New Report

Benefits of the Report to Telcos, Technology Companies and Partners, and Investors

The Future Value of Voice: Report Content Summary

Dark skies ahead

Figure 1: Mobile core Service revenues

Get your umbrellas ready now

Introduction

The telecoms industry is performing quite well in a tough economic environment

But how bright is the future really?

Figure 2: EU5 Mobile Services revenue already down 10% from 2009 peak

A set of cold-blooded forecasts for UK, France, Germany, Italy and Spain

Views vary widely on the outlook for mobile telecoms in Europe

Privately held view seems to be pessimistic…

Figure 3: Example Telco 2.0 delegate view of 3-year voice revenue decline

…yet publicly, there is much less acknowledgement of the scale of the issue.

Figure 4: Orange remains optimistic about European telecoms revenues

Executive Summary (Extract)

The strategic challenge

Report contents

Introduction

The new world order

Investor trust

Impact of disruptors on telcos

How telcos are fighting back

Big bundles

The Rich Communications Suite (RCS)

Competing head-on

The Wholesale Applications Community (WAC)

Summarising current telcos’ response to disruptors

Introduction

Background

The telco business model challenge is getting acute in EMEA

Your text platform is on fire

The Voice platform is smoking too

Who should telcos fear most?

Will RCS-e help?

Getting to market

Arguments for success or failure

Telco 2.0’s questions

How many Christmas 2012 handsets will have RCS-e?

Are the features really convincing?

What is RCS-e realistically intended to achieve now?

Introduction

Contents

1. iMessage – killing SMS softly?

2. iTunes in the Cloud – getting one up on Amazon

3. Notifications – Apple robs Windows Phone and Android advantage

What to learn from – and how to compete with – Internet Communications Services

Who is this report for?

Key Questions Answered

Case Studies, Companies and Services, and Technologies & Applications Covered

Summary of Contents

Sample Reports