Tag: mobility

Google’s MVNO: What’s Behind it and What are the Implications?

Google’s core business is under pressure

Google, the undisputed leader in online advertising and tech industry icon, has more problems than you might think. The grand narrative is captured in the following chart, showing basic annual financial metrics for Google, Inc. between 2009 and 2014.

Figure 1: Google’s margins have eroded substantially over time

Source: STL Partners, Google 10-K filing

This is essentially the classic problem of commoditisation. The IT industry has been structurally deflationary throughout its existence, which has always posed problems for its biggest successes – how do you maintain profitability in a business where prices only ever fall? Google is growing in terms of volume, but its margins are sliding, and as a result, profitability is growing much more slowly than revenue. Since 2010, the operating margin has shrunk from around 35% to around 25%, a period during which a major competitor emerged (Facebook) and Google initiated a variety of major investments, research projects, and flirted with manufacturing hardware (through the Motorola acquisition).

And it could get worse. In its most recent 10-K filing, Google says: “We anticipate downward pressure on our operating margin in the future.” It cites increasing competition and increased expenditures, while noting that it is becoming more reliant on lower margin products: “The margin on the sale of digital content and apps, advertising revenues from mobile devices and newer advertising formats are generally less than the margin on revenues we generate from advertising on our websites on traditional formats.”

Google remains massively dependent on a commoditising advertising business

Google is very, very dependent on selling advertising for revenue. It does earn some revenue from content, but most of this is generated from the ContentID program, which places adverts on copyrighted material and shares revenue with the rightsholder, and therefore, amounts to much the same thing. Over the past two years, Google has actually become more advert-dominated, as Figure 2 shows. Advertising revenues are not only vastly greater than non-advertising revenues, they are growing much faster and increasing as a share of the total. Over- reliance on the fickle and fast changing advertising market is obviously risky. Also, while ad brokering is considered a high-margin business, Google’s margins are now at the same level as AT&T’s.

Figure 2: Not only is Google overwhelmingly dependent on advertising, advertising revenue is growing faster than non-advertising

Source: STL Partners, Google 10-K

The growth rate of non-advertising revenue at Google has slowed sharply since last year. It is now growing more slowly than either advertising on Google properties, or in the Google affiliate network (see Figure 3).

Figure 3: Google’s new-line businesses are growing slower than the core business

Source: STL Partners, Google 10-K

At the same time, the balance has shifted a little between Google’s own properties (such as Google.com) and its affiliate network. Historically, more and more Google revenue has come from its own inventory and less from placing ads on partner sites. Costs arise from the affiliate network because Google pays out revenue share to the partner sites, known as traffic-acquisition costs or TACs. Own-account ad inventory, however, isn’t free – Google has to create products to place advertising in, and this causes it to incur R&D expenditures.

In a real sense, R&D is the equivalent to TAC for the 60-odd per cent of Google’s business that occurs on its own web sites. Google engineering excellence, and perhaps economies of scale, mean that generating ad inventory via product creation might be a better deal than paying out revenue share to hordes of bloggers or app developers, and Figure 4 shows this is indeed the case. R&D makes up a much smaller percentage of revenue from Google properties than TAC does of revenue from the affiliate network.

Figure 4: R&D is a more efficient means of generating ad inventory than affiliate payouts

Source: STL Partners, Google 10-K

Note, that although TAC might well be rising, the spike for Q4 2014 is probably a seasonal effect – Q4 is likely to be a month when a lot of adverts get clicked across the web.

 

  • Executive Summary
  • Google’s core business is under pressure
  • Google remains massively dependent on a commoditising advertising business
  • Google spends far more on R&D and capex than Apple
  • But while costs soar, Google ad pricing is falling
  • Google also has very high running costs
  • The threats from Facebook and Apple are real
  • Google MVNO: a strategic initiative
  • What do you need to make a mini-carrier?
  • The Google MVNO will launch into a state of price war
  • How low could the Google MVNO’s prices be?
  • Google’s MVNO: The Strategic Rationale
  • Option 1: Ads
  • Option 2: Straightforward carrier business model
  • Option 3: Android-style strategic initiative vs MNOs
  • Option 4: Anti-Apple virus, 2.0
  • Conclusions

 

  • Figure 1: Google’s margins have eroded substantially over time
  • Figure 2: Not only is Google overwhelmingly dependent on advertising, advertising revenue is growing faster than non-advertising
  • Figure 3: Growth in Google’s new-line businesses is now slower than in the core business
  • Figure 4: R&D is a more efficient means of generating ad inventory than affiliate payouts
  • Figure 5: Google spends a lot of money on research
  • Figure 6: Proportionately, Google research spending is even higher
  • Figure 7: Google’s dollar capex is almost identical to vastly bigger Apple’s
  • Figure 8: Google is startlingly capex-intensive compared to Apple, especially for an ad broker versus a global manufacturing titan
  • Figure 9: Google’s ad pricing is declining, and volume growth paused for most of 2014
  • Figure 10: Google is a more expensive company to run than Apple
  • Figure 11: The aircraft hangar Google leases from NASA
  • Figure 12: Facebook is pursuing quality over quantity in ad placement
  • Figure 12: Facebook is gradually closing the gap on Google in digital advertising
  • Figure 14: Despite a huge revenue quarter, Facebook’s Q4 saw a sharp hit to margin
  • Figure 15: Facebook’s margin hit is explained by the rise in R&D spending
  • Figure 16: Apple’s triumph – a terrible Q4 for the Android ecosystem
  • Figure 17: Price disruption in France and in the United States
  • Figure 18: Price disruption in the US – this is only the beginning
  • Figure 19: Defending AT&T and Verizon Wireless’ ARPU comes at a price
  • Figure 20: Modelling the service price of a mini-carrier
  • Figure 21: A high WiFi offload rate could make Google’s pricing aggressive
  • Figure 21: Handset subsidies are alive and well at T-Mobile

 

Telco 2.0: The $50bn Enterprise Mobility Opportunity: What’s stopping telcos winning 500% more business?

Overview of Key Findings

STL Partners believe that mobility – the use of mobile data, new devices, new applications and communications services – is one of the most disruptive forces in today’s enterprise market. We think that a business philosophy to embrace mobility as a strategic asset and opportunity, rather than simply a technical challenge, will be a critical success factor for all businesses moving forward. Telcos can be a key enabler and business partner in this transformation, but to do so they will need to significantly change their approaches to working with enterprise customers.Key findings

Our new global research, independently produced by STL Partners and kindly sponsored by SAP, shows that many telcos are both ideally positioned but underprepared to exploit this fast emerging and evolving opportunity. We found that among the 101 global enterprise and 44 telco executives we surveyed:

  • Mobility works – 80% of enterprise execs thought their mobile app based initiatives had met or exceeded expectations
  • There’s big latent demand for telcos – 5 times as many enterprises (i.e. over half the total) would buy services and solutions from telcos than currently do
  • But telcos need to address credible capability issues such as security, product portfolio, app development, and process and industry expertise
  • And most telcos are underprepared – only 16% have a defined market offer or strategy, and internal adoption of mobility lags many other industries, with only 45% of telcos we surveyed offering internal apps compared to 61% in the enterprise sample.

Figure 1:  What would enterprises consider buying from a telco?
Figure 1: What would enterprises consider buying from a telco?

Source: STL Partners, On-line research, Enterprise >250 employees, Feb 2014(n=101)

Introduction

Background – the Business Context of Enterprise Mobility

Four major trends in demand are transforming the Enterprise Information and Communication Technology (ICT) market today:

  1. In pursuit of greater agility, new sources of revenue, improved efficiency, and closer customer relationships, enterprises are exploring opportunities to mobilise strategic aspects of their business.
  2. Enterprises are increasingly exploiting big-data, cloud, and mobile strategies to innovate and transform.
  3. To focus on their core businesses, they are outsourcing IT infrastructure and technology services.
  4. As employees increasingly use new digital technologies and services, enterprises have started to reduce spend on traditional telecoms services.

In response, telcos are looking to identify alternative ways to grow revenues from enterprise customers. This includes tools for the development, deployment, and management of enterprise apps, and managed infrastructure and technology services that offer flexibility and economies of scale.

In December 2013, STL Partners conducted a sizing study of the Enterprise Mobility market and identified a global opportunity of $50 billion (see Telco 2.0™ Executive Briefing: “The $50Bn Enterprise Mobility Opportunity: four steps for telcos to take today”).  This precipitated further exploration into:

  • Enterprises’ opportunities and priorities for mobile solutions
  • Their drivers and expectations vis-à-vis Enterprise Mobility, and their attitudes towards telcos as a prospective partner
  • The practical and perceptual inhibitors causing telcos to arrive comparatively late to the Enterprise Mobility party
  • How telcos can achieve the greatest value for their customers – and themselves – by developing or assimilating the Enterprise Mobility capabilities they lack today

New Research

In the first quarter of 2014, STL Partners carried out a combined research programme consisting of:

  • a survey of 101 enterprises worldwide (organisations with 250+ employees)
  • a quantitative study of 44 telcos
  • in-depth qualitative interviews with strategists and proposition owners representing 11 telcos

Figure 2: Enterprise customers – on-line survey respondents, per region

Figure 2: Enterprise customers - on-line survey respondents, per region

Figure 3: Telco – on-line survey respondents, per region

Figure 3: Telco - on-line survey respondents, per region

Table 1: In-depth qualitative interviews – contributing companies

Table 1: In-depth qualitative intervews - contributing companies

 

All the interviews were conducted on a confidential basis. Information and insights shared by the interviewees have therefore been anonymised.  Names and titles have also been withheld.

The findings – which suggest telcos are even further adrift of a robust Enterprise Mobility proposition than initially thought – are detailed in this report, together with recommendations on steps telcos can take to accelerate their go-to-market strategy and make up for the early momentum they have lost.

Overview – the enterprise perspective 

As demand for access to information on the go via mobile platforms is increasing, Enterprise Mobility is one of the hottest topics in IT. Mobile apps are fast becoming a business imperative to support better ways of working and business transformation. Enterprises must react quickly to harness the potential of mobile apps, while satisfying themselves that security, governance, and compliance across data, applications, and devices are fit for purpose.

Most Enterprises have started mobilising 

Our study revealed that most enterprises have already mobilised at least some of their organisation’s processes and interactions, generally starting from the inside out by prioritising internal initiatives over customer-facing ones.

Figure 4: Business processes already mobilised by enterprises

Figure 4: Business processes already mobilised by enterprises

Though we observed variations in adoption by sector and country that may indicate relevant differences (see Appendix – Industry and Regional Splits, page 48), the commonality of fundamental demand across regions and sectors is more significant.

Sales is the current lead application – but there’s more to come

Findings: field sales has always been a natural candidate area for mobilisation, borne out by the fact that more than half of enterprises in the study already had some form of sales app.  While the Shop Floor currently has experienced the lowest adoption of enterprise apps, it is also one of the areas of greatest potential for mobilisation, with 41% of enterprises contemplating mobilising their production facilities, concourse, or retail environment.  The highest levels of mobilisation or intent to mobilise were seen in Aftermarket Field Service, Transportation & Delivery, and Equipment Maintenance.

Figure 5: Internal / B2E mobile apps enterprises already have or are considering

Figure 4: Internal / B2E mobile apps enterprises already have or are considering

Opportunity: administrative apps are now a relatively mature, horizontal process market. Some telcos have had success selling these and it is an important area in which to have a compelling offering. However, such apps have lower price points and margins, whereas other sales and operational apps offer the potential for higher growth and greater business impact. Moreover, there is also potential for a new generation of intelligent sales apps to change sales performance in a more fundamental fashion.

Key Question: how can telcos best develop the agility and depth of ICT skills to sell and support both horizontal process apps and deeper vertical / operational needs?

Options: telcos have broad options to develop this internally, partner, or choose not to support these segments and their needs. See Four key enterprise mobility competencies for telcos, page 42.

In B2C: information first, marketing next

Findings: the customer-facing processes that had most typically been already mobilised were identified as Information & Reference (53%) and Paying Bills/Checking Balances (52%). The areas of greatest untapped interest in mobilisation were Social Media Sharing (33%), Marketing Offers (32%), and Scanning Barcodes/QR Codes (31%).

Figure 6: Customer-facing processes enterprises have mobilised or are planning to mobilise?

Figure 6: Customer-facing processes enterprises have mobilised or are planning to mobilise?

Opportunity: as an increasing volume of purchases are researched or made via mobile devices, traditional mobile marketing and shopping experiences in developed economies are likely to continue to evolve significantly.

Key Question: how can telcos develop and support the next generation of customer-facing mobile apps?

Options: again, telcos have broad options to develop this internally, partner, or choose not to support these segments and their needs. See Four key enterprise mobility competencies for telcos, page 42.

 

  • Executive Summary
  • Introduction
  • Overview: the enterprise perspective
  • Most Enterprises have started mobilising
  • Issues for Enterprises managing Enterprise Mobility
  • The results: 80 % of initiatives met or beat expectations
  • More than half the enterprise market would buy from telcos: 500% more than today
  • So why don’t enterprises buy from telcos now?
  • The telco perspective
  • Stages of mobile maturity among telcos
  • 70% of telco execs found EM a ‘very attractive’ opportunity
  • Telcos are not ‘drinking their own champagne’
  • Only 16% of telcos have a defined strategy or market offer
  • Enterprises want apps, but are telcos listening?
  • Shifting culture: new markets needs new mind-sets, models and metrics
  • What sort of strategy to balance speed and risk/reward?
  • Enterprise Mobility success factors
  • Four key enterprise mobility competencies for telcos
  • Should telcos partner – and what are the criteria?
  • Steps to defining the strategy for telcos
  • Appendix – Industry and Regional Splits
  • Adoption and barriers by Sector and Region

 

  • Figure 1: Enterprise customers – On-line survey respondents, per region
  • Figure 2: Telco – On-line survey respondents, per region
  • Figure 3: Business processes already mobilised by enterprises
  • Figure 4: Internal / B2E mobile apps enterprises already have or are actively considering
  • Figure 5: Customer-facing processes enterprises have mobilised or are planning to mobilise?
  • Figure 6: Capabilities enterprise employees and customers are using
  • Figure 7: BYOD – Prevalence of corporate and employee devices
  • Figure 8: Number of devices across the surveyed enterprises’ workforces 16
  • Figure 9: Top challenges and obstacles in Enterprise Mobility
  • Figure 10: How do Enterprises manage app development?
  • Figure 11: How many enterprises use platform-based applications?
  • Figure 12: Strategic mobility enablers currently in place in enterprises
  • Figure 13: Presence of a formal enterprise mobility strategy vs. number of devices across the workforce
  • Figure 14: Success of Enterprise Mobility deployment(s) to date
  • Figure 15: Success of Enterprise Mobility deployment(s) to date – per role
  • Figure 16: What would enterprises consider buying from a telco?
  • Figure 17: What would enterprises consider buying from a telco – by role
  • Figure 18: Enterprises which would consider buying from a telco or already have
  • Figure 19: Why wouldn’t enterprises buy from a telco?
  • Figure 20: Enterprise Mobility maturity stages in telcos
  • Figure 21: Telcos’ concerns about core revenue declines
  • Figure 22: How attractive an opportunity is Enterprise Mobility to telcos?
  • Figure 23: Telcos are somewhat well-informed around Enterprise Mobility trends and development in mobile applications
  • Figure 24: Types of apps currently used within telcos
  • Figure 25: Processes / workflows telcos have mobilised or plan to mobilise with apps
  • Figure 26: Maturity of telcos’ own mobility programme
  • Figure 27: Telcos’ Internal enterprise app store deployment
  • Figure 28: Mobile portfolio management
  • Figure 29: Telcos’ biggest challenges or obstacles to internal mobilisation
  • Figure 30: Products and services telcos are currently offering, or plan to offer
  • Figure 31: Comparison between services enterprises would consider buying from telcos vs. services telcos are currently offering, or plan to offer
  • Figure 32: Telcos’ target market
  • Figure 33: Telco Barriers to taking Enterprise Mobility offerings to market
  • Figure 34: A hybrid approach can enable Telcos to achieve multiple concurrent stages of mobility evolution
  • Figure 35: Potential ‘Roadmap’ decisions for telcos addressing Enterprise Mobility
  • Figure 36: Business processes already mobilised by enterprises by industry sector
  • Figure 37: Internal mobile apps the utilities sector already have or are actively considering
  • Figure 38: Enterprise device landscape
  • Figure 39: Enterprise device landscape by region
  • Figure 40: Top THREE biggest challenges and obstacles in Enterprise Mobility by region
  • Figure 41: Enterprise mobile apps development / acquisition – per region
  • Figure 42: Enterprise mobile apps development / acquisition per industry
  • Figure 43: Platform-based applications per region
  • Figure 44: Enterprise app store penetration
  • Figure 45: Reasons Enterprises would not consider obtaining Enterprise Mobility services from a telecoms provider – per region
  • Figure 46: Reasons Enterprises would not consider obtaining Enterprise Mobility services from a telecoms provider – per industry

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.

Telco 2.0: The $50bn Enterprise Mobility Opportunity: four steps for telcos to take today

Executive Summary

In pursuit of agility, efficiency, new revenue sources and closer customer relationships, enterprises are turning to mobility to transform the way employees work with engaging mobile apps that harness device-specific functions and capabilities. These apps generally need to connect to and exchange data with back-office systems, many of which pre-date the mobile era. As a result, organisations are looking to partners to provide the tools, technologies and skills to customise and develop apps, do the heavy lifting of deployment and lifecycle management, and accelerate business value. STL Partners estimates the value of this opportunity to be around $50 billion worldwide.

As enterprises reduce spend on traditional telecom services, telcos have a timely opening to take an enterprise mobility proposition to market. However, to date, deployments have been niche and opportunistic rather than part of a long-term strategy. STL Partners has identified a four-step structured approach that telcos can embark on today, and gain competence and confidence as they move up the enterprise mobility stack to higher value offerings. The four levels of evolution involve:

  • Level 1 – mobilising their own operations and internal processes
  • Level 2 – offering a managed environment to enterprises for their apps, whether on premise or in the cloud
  • Level 3 – providing hosted mobility together with off-the-shelf enterprise apps, with the option to add “last mile” customisation to the enterprise’s specific requirements and provide an enterprise app store
  • Level 4 – providing hosted mobility and developing bespoke, highly differentiated apps that solve customers’ unique business challenges

However, building out these capabilities will require substantial commitment and investment – not only in platforms and tools but also in people, via a transfusion of talent from related industries.

What next?

The purpose of this paper is to stimulate telcos’ thinking around the development of a structured, short-term approach to enterprise mobility opportunities that can be transitioned to a more sustainable, higher-yield strategy.

Having highlighted the stark choices available, STL Partners are inviting telcos to participate in a research study which will delve deeper into telcos’ appetite for, and the practical considerations of, establishing a foothold in the enterprise mobility market. Among the big questions for exploration will be:

  • Why are telcos arriving relatively late to the enterprise mobility party?
  • What do they need to keep pace with enterprise mobility trends?
  • What successes have telcos achieved to date – but at what cost and effort, and what could be done differently or better to create a repeatable framework and reusable approach?
  • What are the shortest, most effective routes into specific markets and segments and what use cases should telcos be targeting?
  • What are the barriers to success in the app market and how can they be overcome?
  • Where, along the four-stage evolution, do telcos want to end up and why?
  • What can and should mobility vendors be doing to support telcos’ efforts to commercialise their enterprise mobility propositions?

Our forthcoming paper will reveal the findings and outline the “recipe” for advancing through each of the four levels of enterprise mobility maturity.

 

  • Joining the enterprise mobility revolution
  • The enterprise opportunity
  • The telco opportunity
  • Level 1 – ‘Drink your own Champagne’
  • Level 2 – Offer a managed environment for enterprise apps
  • Level 3 – Provide hosted mobility plus off-the-shelf apps
  • Level 4 – Hosted mobility plus development of proprietary enterprise apps
  • Barriers and inhibitors
  • What next?
  • About SAP
  • About STL Partners

 

  • Figure 1 – The enterprise mobility framework
  • Figure 2 – The four levels of enterprise mobility evolution
  • Figure 3 – Key opportunities for internal applications of mobility
  • Figure 4 – Example Use Cases of Off-the-shelf enterprise apps