Tag: MVNO

The new telcos: A field guide

Introduction

The traditional industry view is that “telcos” are a well-defined and fairly cohesive group. Industry associations like GSMA, ETNO, CTIA and others have typically been fairly homogeneous collections of fixed or mobile operators, only really varying in size. The third-ranked mobile operator in Bolivia has not really been that different from AT&T or Vodafone in terms of technology, business model or vendor relationships.

Our own company, STL Partners used to have the brand “Telco 2.0”. However, our main baseline assumption then was that the industry was mostly made up the same network operators, but using a new 2.0 set of business models.

This situation is now changing. Telecom service providers – telcos – are starting to emerge in a huge variety of new shapes, sizes and backgrounds. There is fragmentation in technology strategy, target audiences, go-to-market and regional/national/international scope.

This report is not a full explanation of all the different strategies, services and technological architecture. Instead of analysing all of the “metabolic” functions and “evolutionary mechanisms”, this is more of a field-guide to all the new species of telco that the industry is starting to see. More detail on the enablers – such as fibre, 5G and cloud-based infrastructure – and the demand-side (such as vertical industries’ communications needs and applications) can be found in our other output.

The report provides descriptions with broad contours of motivation, service-offerings and implications for incumbents. We are not “taking sides” here. If new telcos push out the older species, that’s just evolution of those “red in tooth and claw”. We’re taking the role of field zoologists, not conservationists.

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Field guides are collections/lists of natural & human phenomena

animal-species-telcos-stl-partners

Source: Amazon, respective publishers’ copyright

The historical landscape

The term “telco” is a little slippery to define, but most observers would likely agree that the “traditional” telecoms industry has mostly been made up of the following groups of CSPs:

  • MNOs: Countries usually have a few major mobile network operators (MNOs) that are typically national, or sometimes regional.
  • Fixed operators: Markets also have infrastructure-based fixed telcos, usually with one (or a small number) that were originally national state-owned monopolies, plus a select number of other licensed providers, often with greenfield FTTX fibre. Some countries have a vibrant array of smaller “AltNets”, or competitive carriers (originally known as CLECs in the US).
  • Converged operators: These combine fixed and mobile operations in the same business or group. Sometimes they are arms-length (or even in different countries), but many try to offer combined or converged service propositions.
  • Wholesale telcos: There is a tier of a few major international operators that provide interconnect services and other capabilities. Often these have been subsidiaries (or joint ventures) of national telcos.

In addition to these, the communications industry in each market has also often had an array of secondary connectivity or telecom service providers as a kind “supporting cast”, which generally have not been viewed as “telecom operators”. This is either because they fall into different regulatory buckets, only target niche markets, or tend to use different technologies. These have included:

  • MVNOs
  • Towercos
  • Internet Exchanges
  • (W)ISPs
  • Satellite operators

Some of these have had a strong overlap with telcos, or have been spun-out or acquired at various times, but they have broadly remained as independent organisations. Importantly, many of these now look much more like “proper telcos” than they did in the past.

Why are “new telcos” emerging now?

To some extent, many of the classes of new telco have been “hiding in plain sight” for some time. MVNOs, towercos and numerous other SPs have been “telcos in all but name”, even if the industry has often ignored them. There has sometimes been a divisive “them and us” categorisation, especially applied when comparing older operators with cloud-based communications companies, or what STL has previously referred to as “under the floor” infrastructure owners. This attitude has been fairly common within governments and regulators, as well as among operator executives and staff.

However, there are now two groups of trends which are leading to the blurring of lines between “proper telcos” and other players:

  • Supply-side trends: The growing availability of the key building blocks of telcos – core networks, spectrum, fibre, equipment, locations and so on – is leading to democratisation. Virtualisation and openness, as well as a push for vendor diversification, is helping make it easier for new entrants, or adjacent players, to build telecom-style networks
  • Demand-side trends: A far richer range of telecom use-cases and customer types is pulling through specialist network builders and operators. These can start with specific geographies, or industry verticals, and then expand from there to other domains. Private 4G/5G networks and remote/underserved locations are good examples which need customisation and specialisation, but there are numerous other demand drivers for new types of service (and service provider), as well as alternative business models.

Taken together, the supply and demand factors are leading to the creation of new types of telcos (sometimes from established SPs, and sometimes greenfield) which are often competing with the incumbents.

While there is a stereotypical lobbying complaint about “level playing fields”, the reality is that there are now a whole range of different telecom “sports” emerging, with competitors arranged on courses, tracks, fields and hills, many of which are inherently not “level”. It’s down to the participants – whether old or new – to train appropriately and use suitable gear for each contest.

Virtualisation & cloudification of networks helps newcomers as well as existing operators

virtualisation-cloudification-networks-STL-Partners

Source: STL Partners

Where are new telcos likeliest to emerge?

Most new telcos tend to focus initially on specific niche markets. Only a handful of recent entrants have raised enough capital to build out entire national networks, either with fixed or mobile networks. Jio, Rakuten Mobile and Dish are all exceptions – and ones which came with a significant industrial heritage and regulatory impetus that enabled them to scale broadly.

Instead, most new service providers have focused on specific domains, with some expanding more broadly at a later point. Examples of the geographic / customer niches for new operators include:

  • Enterprise private 4G/5G networks
  • Rural network services (or other isolated areas like mountains, offshore areas or islands)
  • Municipality / city-level services
  • National backbone fibre networks
  • Critical communications users (e.g. utilities)
  • Wholesale-only / shared infrastructure provision (e.g. neutral host)

This report sets out…

..to through each of the new “species” of telcos in turn. There is a certain level of overlap between the categories, as some organisations are developing networking offers in various domains in parallel (for instance, Cellnex offering towers, private networks, neutral host and RAN outsourcing).

The new telcos have been grouped into categories, based on some broad similarities:

  • “Evolved” traditional telcos: operators, or units of operators, that are recognisable from today’s companies and brands, or are new-entrant “peers” of these.
  • Adjacent wireless providers: these are service provider categories that have been established for many years, but which are now overlapping ever more closely with “traditional” telcos.
  • Enterprise and government telcos: these are other large organisations that are shifting from being “users” of telecoms, or building internal network assets, towards offering public telecom-type services.
  • Others: this is a catch-all category that spans various niche innovation models. One particular group here, decentralised/blockchain-based telcos, is analysed in more detail.

In each case, the category is examined briefly on the basis of:

  • Background and motivation of operators
  • Typical services and infrastructure being deployed
  • Examples (approx. 3-4 of each type)
  • Implications for mainstream telcos

Table of contents

  • Executive Summary
    • Overview
    • New telco categories and service areas
    • Recommendations for traditional fixed/mobile operators
    • Recommendations for vendors and suppliers
    • Recommendations for regulators, governments & advisors
  • Introduction
    • The historical landscape
    • Why are “new telcos” emerging now?
    • Where are new telcos likeliest to emerge?
    • Structure of this document
  • “Evolved” traditional telcos
    • Greenfield national networks
    • Telco systems integration units
    • “Crossover” Mobile, Fixed & cable operators
    • Extra-territorial telcos
  • Adjacent wireless providers
    • Neutral host network providers
    • TowerCos
    • FWA Fixed Wireless Access (WISPs)
    • Satellite players
  • Enterprise & government telcos
    • Industrial / vertical MNOs
    • Utility companies offering commercial telecom services
    • Enterprises’ corporate IT network service groups
    • Governments & public sector
  • New categories
    • Decentralised telcos (blockchain / cryptocurrency-based)
    • Other “new telco” categories
  • Conclusions

Related Research

 

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Network convergence: How to deliver a seamless experience

Operators need to adapt to the changing connectivity demands post-COVID19

The global dependency on consistent high-performance connectivity has recently come to the fore as the COVID-19 outbreak has transformed many of the remaining non-digital tasks into online activities.

The typical patterns of networking have broken and a ‘new normal’, albeit possibly a somewhat transitory one, is emerging. The recovery of the global economy will depend on governments, healthcare providers, businesses and their employees robustly communicating and gaining uninhibited access to content and cloud through their service providers – at any time of day, from any location and on any device.

Reliable connectivity is a critical commodity. Network usage patterns have shifted more towards the home and remote working. Locations which were previously light-usage now have high demands. Conversely, many business locations no longer need such high capacity. Utilisation is not expected to return to pre-COVID-19 patterns either, as people and businesses adapt to new daily routines – at least for some time.

The strategies with which telcos started the year have of course been disrupted with resources diverted away from strategic objectives to deal with a new mandate – keep the country connected. In the short-term, the focus has shifted to one which is more tactical – ensuring customer satisfaction through a reliable and adaptable service with rapid response to issues. In the long-term, however, the objectives for capacity and coverage remain. Telcos are still required to reach national targets for a minimum connection quality in rural areas, whilst delivering high bandwidth service demands in hotspot locations (although these hotspot locations might now change).

Of course, modern networks are designed with scalability and adaptability in mind – some recent deployments from new disruptors (such as Rakuten) demonstrate the power of virtualisation and automation in that process, particularly when it comes to the radio access network (RAN). In many legacy networks, however, one area which is not able to adapt fast enough is the physical access. Limits on spectrum, coverage (indoors and outdoors) and the speed at which physical infrastructure can be installed or updated become a bottleneck in the adaptation process. New initiatives to meet home working demand through an accelerated fibre rollout are happening, but they tend to come at great cost.

Network convergence is a concept which can provide a quick and convenient way to address this need for improved coverage, speed and reliability in the access network, without the need to install or upgrade last mile infrastructure. By definition, it is the coming-together of multiple network assets, as part of a transformation to one intelligent network which can efficiently provide customers with a single, unified, high-quality experience at any time, in any place.

It has already attracted interest and is finding an initial following. A few telcos have used it to provide better home broadband. Internet content and cloud service providers are interested, as it adds resilience to the mobile user experience, and enterprises are interested in utilising multiple lower cost commodity backhauls – the combination of which benefits from inherent protection against costly network outages.

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Network convergence helps create an adaptable and resilient last mile

Most telcos already have the facility to connect with their customers via multiple means; providing mobile, fixed line and public Wi-Fi connectivity to those in their coverage footprint. The strategy has been to convert individual ‘pure’ mobile or fixed customers into households. The expectation is that this creates revenue increase through bundling and loyalty whilst bringing some added friction into the ability to churn – a concept which has been termed ‘convergence’. Although the customer may see one converged telco through brand, billing and customer support, the delivery of a consistent user experience across all modes of network access has been lacking and awkward. In the end, it is customer dissatisfaction which drives churn, so delivering a consistent user experience is important.

Convergence is a term used to mean many different things, from a single bill for all household connectivity, to modernising multiple core networks into a single efficient core. While most telcos have so far been concentrating on increasing operational efficiency, increasing customer loyalty/NPS and decreasing churn through some initial aspects of convergence, some are now looking into network convergence – where multiple access technologies (4G, 5G, Wi-Fi, fixed line) can be used together to deliver a resilient, optimised and consistent network quality and coverage.

Overview of convergence

Source: STL Partners

As an overarching concept, network convergence introduces more flexibility into the access layer. It allows a single converged core network to utilise and aggregate whichever last mile connectivity options are most suited to the environment. Some examples are:

  • Hybrid Access: DSL and 4G macro network used together to provide extra speed and fallback reliability in hybrid fixed/mobile home gateways.
  • Cell Densification: 5G and Wi-Fi small cells jointly providing short range capacity to augment the macro network in dense urban areas.
  • Fixed Wireless Access: using cellular as a fibre alternative in challenging areas.

The ability to combine various network accesses is attractive as an option for improving adaptability, resilience and speed. Strategically, putting such flexibility in place can support future growth and customer retention with the added advantage of improving operational efficiency. Tactically, it enables an ability to quickly adapt resources to short-term changes in demand. COVID-19 has been a clear example of this need.

Table of Contents

  • Executive Summary
    • Convergence and network convergence
    • Near-term benefits of network convergence
    • Strategic benefits of network convergence
    • Balancing the benefits of convergence and divergence
    • A three-step plan
  • Introduction
    • The changing environment
    • Network convergence: The adaptable and resilient last mile
    • Anticipated benefits to telcos
    • Challenges and opposing forces
  • The evolution to network convergence
    • Everyone is combining networks
    • Converging telco networks
    • Telco adoption so far
  • Strategy, tactics and hurdles
    • The time is right for adaptability
    • Tactical motivators
    • Increasing the relationship with the customer
    • Modernisation and efficiency – remaining competitive
    • Hurdles from within the telco ecosystem
    • Risk or opportunity? Innovation above-the-core
  • Conclusion
    • A three-step plan
  • Index

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5G and MVNOs: Slicing up the wholesale market

Introduction

How will 5G MNVO models differ from what’s gone before? MVNOs occupy an important set of market niches in the mobile industry, ranging from low-cost generic consumer propositions by discount retail brands, through to some of the most advanced mobile offers, based on ingenious service-level innovation.

The importance and profile of MVNOs varies widely by country and target market segments.  Worldwide, there are around 250 million consumer subscribers using virtual operators’ branded services. IoT-focused MVNOs add many more. In many developed markets, MVNOs account for around 10-15% of subscribers, although in less-mature markets they are often not present at all, or are below 5%.

In Europe, the most mature region, there are around 100m subscribers, focused particularly on German and UK markets. Globally, MVNO revenues are estimated at around $70bn annually – a figure expected to grow to over $100bn in coming years, as markets such as China – which already has over 60m MVNO subscribers – gain more traction, bolstered by regulatory enthusiasm. IoT-centric and enterprise MVNOs are also growing in importance and sophistication, particularly for cross-border connectivity management.

While many MVNOs are aimed at lower-end consumers, with discounted packages under retail, banking or other brands, plenty more are more sophisticated and higher-ARPU propositions. Some fixed/cable operators want a mobile wholesale offer to expand into quad-play bundles. Increasingly, the MVNO model is going far beyond mass-market consumer offers, towards IoT and enterprise use-cases, that can add extra services and functions in the network or SIM.

Some 4G-only mobile operators have 3G MVNO arrangements for customers moving beyond their infrastructure footprint. Google has its pioneering Fi MVNO service, which switches users between multiple telcos’ infrastructures – and which is perhaps a testbed for its broader core/NFV ambitions. A variety of frequent-travellers or enterprise users seek customised plans with extra features, that mass-market MNOs cannot provide. In addition, many IoT connections are also provided by third parties that repackage MNOs’ network connectivity, often to provide global coverage across multiple underlying networks, tailored to specific segments or verticals. For example, Cubic Telecom, an automotive-focused CSP, is part-owned by Audi.

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Operating with a variety of different business models and technical architectures, MVNOs are also relevant to mobile markets’ competitive functioning, especially as larger networks consolidate. Regulators vary in the degree to which they encourage virtual operators’ establishment and operation.

Some MVNOs, described as “full” or “thick” operate their own core networks, while other “light” or “thin” providers are essentially resellers, usually with their own billing platform but little more. Confusingly, some avoid the use of the term MVNO, especially in the IoT arena, often just describing themselves as offering “managed connectivity” or similar phrases.

Figure 1: Thick vs thin MVNOs and resellers

Thick vs. thin MVNOs and resellers

Source: Mobilise Consulting

This all presents a challenge for normal mobile operators – at one level, they want the extra reach and scale, using MVNOs as channels into extra customer groups they cannot easily reach themselves. They may even want their own MVNO operations in countries outside their licensed footprint – TurkCell and China Mobile are examples of this. But they also worry that as MVNOs go beyond resale, they start to capture additional value in certain lucrative niches, or worse, become an “abstraction layer”, aggregating and commoditising multiple underlying networks, facilitating arbitrage – especially by using eSIM or multi-IMSI approaches. Google Fi has raised eyebrows in this regard, and Apple has long been feared for wanting to create an MVNO/AppStore hybrid to resell network capacity.

That said, even simple MVNO operations are not that simple. Setting up billing systems, legal agreements, network integrations and other tasks is still complex for a non-telecoms firm like a retailer or sports/entertainment brand. A parallel ecosystem of specialised software vendors, systems-integrators and “MVNO platforms” has evolved, with subtly-different types of organisation called MVNA (mobile virtual network aggregator) and MVNE (mobile virtual network enabler) doing the technical heavy-lifting for brands or other marketing organisations to develop specialised – and often tiny – MVNOs.

What is uncertain is how much of this changes with 5G – either because of innate technical challenges of the new architecture, or because of parallel evolutions like network virtualisation. These could prove to be both enablers and inhibitors for different types of MVNO, as well as changing the competitive / cannibalisation dynamics for their host providers.

This briefing document describes the current state-of-play of the MVNO landscape, and the shifts in both business model and technology that are ongoing. It considers the different types of MVNO, and how they are likely to intersect with the new 5G world that is set to emerge over the next decade.

Contents:

  • Executive Summary
  • Introduction
  • Why (and where) are MVNOs important?
  • Different types of MVNO
  • Full and “Thick” MVNOs, MVNEs and MVNAs
  • MVNO opportunities: what changes with 5G?
  • Consumer MVNOs – more of the same, just faster?
  • The rise of enterprise, verticals and IoT – catalysed by 5G?
  • MVNOs and network slicing
  • 5G challenges for MVNOs: network and business
  • Technology: It’s not just 5G New Radio
  • 5G New Radio
  • 5G New Core and network slicing
  • Devices, 5G and MVNOs
  • Other technology components
  • What happened with 4G’s and MVNOs?
  • VoLTE was a surprising obstacle for MVNOs
  • Growing interest in full MVNO models
  • 5G MVNOs: Business and regulatory issues
  • Cannibalisation: The elephant in the room?
  • Can MNOs’ wholesale departments handle 5G?
  • Can MVNOs operate network slices?
  • Regulatory impacts on MVNOs with 5G
  • What do enterprises and IoT players want from 5G and MVNOs?
  • Hybrid MNOs / MVNOs
  • Conclusions 

Figures:

  • Figure 1: Thick vs. thin MVNOs and resellers
  • Figure 2: MVNO segments and examples
  • Figure 3: 5G predicted timeline, 2018-2026
  • Figure 4: 5G New Core network architecture
  • Figure 5: Do MNOs need to reinvent the wholesale function?
  • Figure 6: MVNO relationships are part of the future B2B/vertical service spectrum

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Network slicing: The greatest thing since sliced bread?

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The Network Slicing research project was sponsored by HPE. This report and the analysis it contains were independently produced by STL Partners.

Service providers continue to face a decline in revenue

STL Partners has written for some time about the significant pressure faced by communications service providers (CSPs), both from operator rivals and players in adjacent sectors. Traditional telecoms revenue streams such as voice and messaging are shrinking, and as a result operator growth is slowing. Figure 1 shows that the average year-on-year revenue growth rate for 68 major telecoms groups worldwide has fallen since at least 2010.

Figure 1: 68 major telecoms groups – aggregate telecoms revenue, 2009-16

Source: Company accounts; STL Partners analysis

Much of this decline is fuelled by the impact of new competition: digital players such as Google, Facebook (including Whatsapp), Microsoft (including Skype and Skype-for-business) and Netflix, who are equipped to provide their own digital services, including voice- and messaging-enabled applications, without the headache of maintaining capital-intensive network infrastructure. It is now widely acknowledged that voice minutes and SMS bundles will continue to decline as a revenue stream as other players can offer the same, or better, capabilities ‘over-the-top’ to consumers and organisations for much less or free.

Data is not enough to ensure future growth

Of course, in order to use these new digital services, organisations and consumers do need network connectivity and, as a result, data consumption levels have shot up. Currently, the only players able to offer data connectivity are the communications service providers themselves, and therefore many have pointed to data as the primary source of new revenues which might offset the gap left by the decline in voice and messaging. In developed markets, in particular, some operators hope that it may be possible to ‘premiumise’ data services and drive higher average revenues per user (ARPUs). We do not believe that the evidence supports this and anticipate that plummeting data connectivity rates ($/MB) will neutralise growth in volumes resulting in low or no net growth in revenues.

In many developed markets, intense competition and strict regulation restricts the ability of operators to resist data price decline and squeeze more out of customers. Figure 5, for example, shows that despite mobile data consumption in the United Kingdom growing 243% between 2013 and 2015, ARPUs actually fell 4.5% over the period. More data, it is clear, does not automatically translate into more money.

 Figure 5: UK mobile ARPUs and data volumes, 2013-15

Source: STL Partners, Ofcom

In Figure 6 below, we show our revenue forecast for a telecoms operator offering converged fixed and mobile telecoms services to both enterprise and consumer customers in a developed market. In this conservative estimate, data revenues grow slightly, but not enough to offset voice and messaging revenues falling by half.

Figure 6: Forecast revenues for converged telco in advanced market

Source: STL Partners analysis

It is STL Partners’ belief that the path to sustainable telecoms growth lies not just in better monetising connectivity, but rather in telcos developing new capabilities of their own, continuously innovating and launching new products and services that more readily meet the needs of their customer base. It is only by doing so, and by leveraging new technology and network assets where possible, that telcos will be able to truly compete with digital players. In essence, communications service providers must either evolve to overcome commoditisation or to embrace it. Either way, they cannot continue business as usual.

Virtualisation and slicing: enablers for change?

STL Partners has written previously about Telco Cloud, a concept in which telcos redefine themselves by adopting cloud business platforms and practices (similar to internet and content players), alongside virtualisation of their core assets. This could lead to increased service agility, and the ability to create new, network-integrated services. In turn, this could drive new revenue growth.

Network virtualisation is still at an early stage, but its adoption is increasingly seen as inevitable. Operators worldwide are already deploying NFV/SDN technology, some setting ambitious virtualisation targets over time. The forthcoming 5G standards, as well as IoT technologies, are being developed with virtualisation in mind, and technology vendors are increasingly evolving their software offerings. If managed effectively, virtualisation could be the catalyst for the transformation towards the digital service provider.

One way in which virtualisation might enable this change is through the concept of ‘network slicing’, under which network operators would be able to operate multiple logically separate virtual networks over a single network infrastructure. This paper examines what network slicing might look like in practise, and what that could mean for CSPs.

Slicing: a vision for fundamental transformation

Defining slicing is not about the ‘what’, it’s the ‘how’

Network slicing is a term that has been discussed quietly in the industry for some time, but it has gained prominence more recently in parallel with the industry’s developing new 5G standards. Slicing has recently become the focus of a public disagreement between industry players involved in driving 5G standards. In essence, one group of operators and vendors are keen on accelerating New Radio (NR) standards in 5G, whereas another group see this as potentially undermining future standards in end-to-end slicing. A related debate also exists within operators between the core network and radio access teams, but that is neither new, nor surprising. These debates are not about slicing, since most parties appear to broadly agree on its potential, but more about how 5G will be introduced: as an evolution of 4G or as a completely new network.

A few considerations

In recent years, network slicing has also gained prominence as a way of creating unified 5G networks, which cover multiple very-different use-cases with a single infrastructure. Turning a necessity into a virtue, this technical “fix” is now being seen as a possible basis for extra capabilities and new services. However, many of the benefits could – and should – be achievable before 5G.

While network-slicing can in theory extend all the way through core networks and down to the radio connection, it is still subject to the laws of physics: if there is no coverage, poor RF propagation, or limited overall capacity, there is a hard limit to what performance can be guaranteed. There are also boundaries at the device, 3rd-party server/cloud interface, or where other networks interconnect, which mean that “end-to-end control” doesn’t always mean an entire system.

It’s important not to fall into the trap of thinking that because we have a slicing “hammer” that all problems start to look like “nails”. Telcos have many other approaches to future service creation and revenue expansion, that lie outside the core network. Content partnerships, vertical-industry solutions, in-home automation and new forms of connectivity all offer opportunities. If network-slicing does not reach its aspirations, there are still plenty of other options for the industry to prosper.

Independently of the 5G debate, slicing can be considered part of a wider trend (in both fixed and wireless networks) towards a more software-centric infrastructure leading to more flexible networks. As more network resources become virtual (rather than physical), operators could readily allocate resources to a particular ‘network slice.’ Hence, slicing is arguably really about the orchestration of operator assets and how an operator is able to effectively manage its network.

This vision affirms that the ‘one size fits all’ model will not applicable for the future where a diverse set of requirements will need to addressed with more customised services: from (enhanced) mobile broadband (eMBB), to ultra-low latency types (uRLLC), to low-power machine-type communications for IoT devices (mMTC).

Taking the work done by industry organisations, such as The Next Generation Mobile Networks (NGMN) Alliance , 5G Americas and the Open Networking Foundation (ONF) into consideration, STL Partners has developed the following definition for network slicing as the basis for this paper:

‘Network slicing is a mechanism to create and dynamically manage functionally-discrete virtualised networks over a common infrastructure’

 

  • Executive Summary
  • Introduction
  • Slicing: a vision for fundamental transformation
  • Defining slicing is not about the ‘what’, it’s the ‘how’
  • How slicing could enable growth
  • New services from network slicing
  • Evidence of the demand for slicing
  • Examples of new services
  • The slicing business models
  • So, where is the money?
  • Scenarios for the telco of the future
  • The scenarios imply different business models and ways of making money…
  • How slicing might work in practice
  • Key challenges to achieving slicing
  • Early 5G trials and proofs of concept
  • The evolution to slicing
  • A tricky transition with major obstacles to address
  • Conclusion

 

  • Figure 1: Benefits of network slicing
  • Figure 2: How might (operator) assets translate into demand for slices?
  • Figure 3: ‘External’ slicing business models
  • Figure 4: 68 major telecoms groups – aggregate telecoms revenue, 2009-16
  • Figure 5: UK mobile ARPUs and data volumes, 2013-15
  • Figure 6: Forecast revenues for converged telco in advanced market
  • Figure 7: With slicing, networks can be adapted to customers and applications
  • Figure 8: Diagram of slicing
  • Figure 9: Network slicing compared with existing technologies and services
  • Figure 10: Potential benefits of network slicing for network operators
  • Figure 11: Google Chrome’s release channels – a model for network development?
  • Figure 12: How operating models could change under network slicing
  • Figure 13: How might (operator) assets translate into demand for slices?
  • Figure 14: Example 1 – Emergency Services VMNO
  • Figure 15: Example 2 – Low Power IoT Service
  • Figure 16: Example 3 – Pop-up Network
  • Figure 17: Example 4 – Global Streaming Service
  • Figure 18: Example 5 – Smart Meters
  • Figure 19: Example 6 – Renewable Energy
  • Figure 20: Example 7 – Mining
  • Figure 21: Slicing Business Models
  • Figure 22: Mapping out the scenarios
  • Figure 23: Where will revenues come from?
  • Figure 24: Traditional telco cost structure and operating model is set up to operate networks not innovate in services
  • Figure 25: Under the slicing scenarios, the cost structures shift accordingly
  • Figure 26: Challenges identified from interview programme
  • Figure 27: Phases of network transformation for slicing future

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

 

Full Article – Vodafone 360 on Android, iTunes: Now Getting it Right?

Summary: Vodafone 360 was meant to be a new, social-network centred approach to managing the customer interface. Unfortunately, it was also bug-ridden and dogged by a lack of clarity of purpose. Now, its availability on Android Market and iTunes may create a strategic opportunity for Vodafone to access more customers.

NB You can download a PDF copy of this 15 page note here.

Introduction

Vodafone 360, one of the currently trendy “all your social networks in one app” products, launched in 2009 to considerable publicity and enthusiasm – not least from us. However, thanks to a variety of problems at the tactical and technical levels, it has failed to achieve the scale required for a successful platform. Vodafone is now trying to resolve this, notably by integrating 360 into the Android Market and iTunes as an app in its own right.

In this note, we discuss this move, and the possibilities opened up by repackaging operator and partner products into a pure software user experience that can be distributed to the user bases of very large app stores. This, we argue, creates a horizontal service layer that reaches across devices and connectivity providers, essentially implementing the vision laid out here by Giles Corbett of Orange’s innovation group.

This may also be an innovative way of generating relevant customer data, an alternative to the extremely complex processes of data federation and database systems integration typically seen in customer-data projects. Turning Vodafone into an app may be the answer.

Initial Enthusiasm…

At the 7th Telco 2.0 Executive Brainstorm, held in London in November 2009, Vodafone’s director of new media, Bobby Rao, presented their new social network product – Vodafone 360. We were enthusiastic. Why?

  • It was good to see an operator innovating

Rather than trying to bar users from going to their favourite Web services, or extract a tax from Google, Vodafone was trying to improve its users’ mobile Web experience and facilitate their interactions with Facebook, YouTube and friends. The technology approach was sensible, using Web 2.0 rather than RCS clients and such things. The Linux-based handsets had a truly impressive user interface.

  • It was an open development platform

Vodafone was embracing developers, making use of open-source technology, and doing things like integrating carrier billing into the content and app-store elements of the service so that their upstream customers could get paid. Using the OMTP’s BONDI standard for access to device capabilities was sensible.

  • It was good to see an operator focusing on communications, rather than dollops of “content”

The applications for Vodafone 360 were all about communication of one kind or another – instant-messaging, status-updating, sharing location, photos, and other media. It was even suggested that it might grow into voice at some point.

  • It was a positive proposal

Rather than just barricading themselves in the telco bunker, or reaching for the symptomatic relief of more handset subsidy, Vodafone was actually trying something new and interesting. And that’s always worth watching.

A False Start…

8 months on, it would be unfair to call Vodafone 360 a flop, or call out the Telco 2.0 Crash Investigator, but it is hard to say that it’s been a success. Perhaps, at this point, it’s more of a case for Telco 2.0 Safety Event Reporting rather than Crash Investigation. But user adoption has been slow, there has been much negative comment, and the developer community has hardly caught fire.

Vodafone’s own actions speak volumes; they rapidly downsized the space in their retail outlets that was devoted to 360 in order to make more room for iPhones. Actually, there were signs very early on that the company’s senior management might not have been fully committed – despite the huge Vodafone UK ad budget, the initial push for 360 was hardly impressive.

Negative comment piled up; there were reports of very high returns, a buggy user experience, and a number of odd decisions. For example, the photo-sharing element didn’t support Flickr, the world’s most popular photo-sharing site, because “nobody used it”. Contacts ingestion, a key feature for any social application, was heavily criticised.

 “This is what racked me off the most. After getting all my contacts merged and sorted I found that at random times I would log back on to the 360 website and find either duplicated contacts appear or the list gets shorted and a load have been deleted. Now this is grass roots basics for a contacts management program. It stores them safely and accurately and 360 does not. I therefore cannot trust it with my information. It’s a good job I keep my contacts backed up in Outlook…”

There was no support for Twitter at launch – this is telling, as the process of posting a status update to Twitter can be implemented in one line of code on a Linux/Unix system like the Samsung H1s. It’s not rocket science:

 

curl -u username:password -d status=”your message here” http://api.twitter.com/1/statuses/update.json

Now, Vodafone is looking elsewhere.

Strategic Issues: The Vital Importance of Scale

The most tangible sign of this is the decision to integrate the appstore element of 360 with Android Market. With 90,000 application SKUs in the Market as opposed to 8,000 in 360, this is no surprise. It could also be read as an admission of defeat. Wasn’t part of the point of 360 that it would be the commercial spearhead for JIL, BONDI, LiMo, and the related telco-sponsored TLAs like WAC?

Regarding the alphabet soup, it’s worth noting that there are renewed moves towards consolidation.  For example, the OMTP is now closed, with its BONDI project and its chief Tim Raby integrating  into WAC, and the remaining standardisation activities being rolled into OMA. Android is essentially a mobile-optimised Linux distribution bundled with a set of Java libraries implementing access to its mobile-specific features – this is close to the original vision of OMTP. Similarly, the LiMo/BONDI combination is a mobile-optimised Linux distribution that exposes mobile-specific features in JavaScript libraries. There is clearly at least the possibility of a meeting of the minds here, and standardisation of the APIs between distributions, access software layers, and organisational TLAs (Three-Letter Acronyms).

Obviously, the prospect of adding some 90,000 new apps with a stroke of the pen is attractive. Werner Vogels, CTO of Amazon.com, considers “selection” – that is to say, choice or variety – to be one of the critical “flywheels” that drives the growth of platform businesses. That is to say, it’s a source of increasing returns to scale, as the network effect between many buyers and sellers comes into play.

More apps - more activity.

The market leader, Apple’s App Store, counts some 225,000 SKUs as of 7th June, 2010. Android Market had reached 90,000 by the 11th of July; the white-label app store provider Getjar offers 60,000. As Amazon’s experience would suggest, there appear to be increasing returns to scale – Apple has so far counted 5 billion transactions through the App Store in two-and-a-half years, while Getjar reports 900 million downloads over a significantly longer period of time. In its Q210 results, Nokia reported that the Ovi Store showed 13,000 SKUs and a run rate of 1.7m downloads/day one year after launch; assuming a linear trend, we estimate that this equals 310,250,000 downloads since launch.

Tactical Execution: There Is No Such Word as “Unlaunch”

But the Android integration is just as important from the point of view of hardware. To the end user, mobile is all about hardware – one of the numerous lessons from Apple is the enduring centrality of shiny gadgets in any mobile marketing effort. Arguably, there are two models for success here.

  • Apple- or RIM-like – the superstar device

If your service (including the core telco services) is going to be tied to one specific device, it is obviously vital that the device be outstanding. Close coupling between the device and the service means that you can control more of the value chain, and also that you can control the user experience more closely. It also means that the rest of the value chain – specifically the hardware and device software elements – controls you.

If the devices are subpar, or simply drowned out in the iHubbub, the service will be too. This has consequences for tactics as well as strategy. The marketing, advertising, and retail effort has to push the device as much as it does the service. The supply chain, activation, and support infrastructure must be ready. And most of all, the device has to be ready on launch day – you can’t afford a slow start.

  • Android-like – the teeming bazaar

Alternatively, you can concentrate your effort on service, software, and tariffs, and go for the largest possible range of devices. This is the Android (and also Nokia) strategy.

It permits you to hedge your bets, creates more scope for adjustment to changing circumstances, and avoids getting into a creepy clinch with any particular vendor. It also precludes the sort of close control of the user experience that the BlackBerry-like strategy provides, unless this can be done entirely in software.

These two approaches intersect with two models of go-to-market tactics:

1.     The big bang!

We’ve all seen it – Steve Jobs strides onto the podium at MacWorld as the cameras click and produces the new shiny from his pocket. Big-budget videos. Publicity stunts. Basically, it’s a huge pre-planned event, backed up by an integrated media operation cued to peak at that moment and linked behind the scenes with a carefully prepared supply chain. The advantage is, of course, concentration of effort in space and time.

The disadvantage is that once the retailers fill their stocks, and the production servers are fired up, you’re committed to going through with the launch. The flop will be all the bigger for all the concentrated effort if anything goes wrong.

2.     Permanent beta

This is the anti-launch; rather than trying to seize everyone’s attention, the idea is to recruit a select band of early adopters, gradually build scale, and carry out kaizen over the medium term. Google is famous for it, as are games companies in general and the open-source world. It allows a maximum of flexibility, and permits adaptation as you go along. There is a risk that the product will never catch on, but that risk is always there.

There is, to a rough approximation, a mapping between these pairs – the superstar device option tends to require a big bang, big day go-to-market plan. It’s possible to integrate the two in that you start with the beta, and move on to a full launch when it passes some project milestone; we could call that scenario the “rolling start”. However, it’s impossible to do the opposite and move from a launch to a beta.

Go-to-market tactics

Unfortunately, Vodafone 360 didn’t really succeed in going for either a big bang or permanent beta approach; rather than launching 360 with one superstar device (perhaps one of the top-end Androids, or even the iPhone), or else pushing it out across the board, they chose two rather specialised devices. If Vodafone made a major publicity push, it didn’t succeed in getting the public’s attention; it did, however, succeed in generating enough publicity that everyone noticed the bugs.

Integrating into Android Market has the effect of definitively plumping for a teeming bazaar strategy, going for device diversity. It also means that Vodafone 360 will have to rely on implementing its features and user experience as a software client on the device.

But this could be a major strategic opportunity.

What if we were to turn 360 through 180 degrees?

If you can distribute 360 applications through the Android Market, you can also productise 360 itself as a software application, and then distribute it through the Market.

This would give Vodafone an access route to the global Android user base. A detail of 360 we liked originally was that it isn’t restricted to Vodafone customers – distributing it as an application on the Android Market would take this and go further. So far, the separation of access, enablers, and services – the horizontalisation of telecoms – has mostly benefited vendors, content providers, and software developers. But this doesn’t have to be true. Converting its customer-facing product into a software application would let Vodafone play at that game, too.

This is very similar, in some ways, to our view of Google’s strategy. Google is trying to extend into the middle of interactions across a wide range of markets, taking a thin layer of value between buyer and seller; Vodafone 360 could capture a similar thin layer of value from other operators, by providing a better interface for a wide range of online services.

Google - expanding the core business horizontally

As well as creating a Vodafone access route onto devices that don’t live on its network, 360 might also have important consequences in terms of customer data. It is well placed to capture information on how users interact with the services it talks to; it will be only more so on Android with the range of interfaces it provides for collecting social-graph and location data. In fact, it’s fairly trivial to have an Android app receive notifications when the network signal strength changes – it could even be a way of capturing real-world network quality data.

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Applying the same strategy to 360

Operators are still struggling to get a grip on the piles of data they collect – the stereotype example is the operator with dozens of billing systems, some of which are 20 years old. Federating data across these hugely complex legacy systems-of-systems amounts to a major systems integration project as well as a significant software development and data-management challenge. There is a strong argument that it might be easier to solve this at the mobile application level, creating a new edge interface at which customer data is generated, and possibly also gaining data created by customers you don’t yet have for the core services.

After all, that’s precisely what Google did with Google Ads – rather than trying to, say, extract information from tens of thousands of websites’ server logs, they simply got their users to declare their interests as search strings and matched ads to them. So there’s a possible play for data-enriched advertising, especially as in-application ads become more common.

With this “Vodafone bridgehead” onto Android devices, there are many other opportunities. Back at the inception of 360, we noted that Vodafone was suggesting that it might eventually include a voice element. In our recent Ribbit note, we quoted one Ribbit Mobile user as saying that he wanted it to “take over the entire dialler function” of his iPhone. It is entirely possible to do this in Android. As well as providing call management, better voicemail, and integration with other social networks and contacts lists, this could use something along the lines of carrier preselection, rather as Google Voice does, to offer competing call rates.

Applying GAN - linking apps and Voice 2.0

Android devices are highly effective WLAN finders; another option would be to make use of the GAN standard and route SIP calls via Vodafone while a WLAN hotspot is available. This would make it possible to create an application that grabs the user, creates a new source of customer data, captures minutes of use, or at the very least, denies them to the enemy. We referred to Ribbit Mobile; in fact, the service could actually be implemented with Ribbit’s technology under licence.

But Vodafone could do better than that; they already have a hosted unified-comms product, Vodafone One. Just as Ribbit, being a cloud service, fits into BT’s existing sales and provisioning processes for SMBs and enterprises, so an Android-based Vodafone app would neatly fit the mobile features of Vodafone One into an effective package for distribution to individual customers. We’ve already seen that a wide variety of businesses and functions can be effectively distributed to the individual user base through app stores. Wrapping Vodafone in an app would allow them to leverage this.

There are other options in this line – self-care features could be embedded in the app, for example. Vodafone has already dabbled at this with its MyVodafone app; YouFon’s “manage your account through Facebook” is another pointer (see Figure 6, below). Or the carrier could use the app and its service back-end as the underlying technology for a range of niche MVNO propositions.

FonYou - an example

Another key capability that Vodafone could make use of is its existing pre-pay infrastructure, both the OSS and other IT resources behind the scenes and its networks of reseller agents. At the moment, prepay users need a credit card to take part in the app/content ecosystem – or at least, they need to go to the trouble of entering details on a non-keyboard device or risk having them stored on an easy-to-lose, easy-to-steal device.

But Vodafone 360 already ingests credit through the existing VF pre-pay system, so it could also pay out rewards, revenue shares, or peer-to-peer transfers through the same mechanism. And, of course, they have the M-PESA system available.

Conclusions and Recommendations

The Vodafone 360 experience demonstrates the opportunities and pitfalls of moving from a traditional telco model towards one oriented towards the Internet and based on software. Initial failures, and the recent fiasco when Vodafone decided to impose a variety of 360-branded apps on its HTC Desire users as an unannounced software update, show how difficult it can be for our organisations to adapt to these challenges.

However, we can also see how this presents an opportunity to compete on the Web majors’ and Voice 2.0 players’ own terms. If operators can develop compelling new applications and services, the vendor app store/smartphone model is a valid way of distributing them and gaining access to a wider user base. Operators have specific assets, notably their PAYG and/or Mobile Money Transfer (MMT) infrastructure, that such a move can leverage, notably by opening up the app/content store to the PAYG subscribers. At the same time, MMT operators can use this to deploy their product more widely by packaging it as an app.

Further, it seems to be a good general forecasting principle that major customer-data projects are harder, more expensive, and more complicated than expected. There is no reason to expect this to change, as the reasons are structural and rooted in the existing infrastructure and the politics and economics of privacy. As a result, it may be a good idea to seek new and additional ways of acquiring this data – Google, after all, didn’t start off by integrating a variety of legacy databases, but rather by creating a new user base. The Web 2.0 experience demonstrates that it is possible to derive useful data profiles from very low-touch customers.

The greatest opportunities appear to be in integrating such an approach with existing MMT, content, channel marketing, and Voice 2.0 ideas – using the app store paradigm to repackage the rest of your Telco 2.0 activities in the consumer and SMB sectors.

However, it is critical that operators master the tactical problems of execution in a space which is fundamentally different to traditional mobile. Customers’ ability to churn is significantly higher, and the fall-out from missteps will arrive much faster than most of us are used to.