The birth of a new sector: “Connected Technologies”
Mobile World Congress (MWC) is the world’s biggest showcase for the mobile telecoms industry. MWC 2023 marked the second year back to full scale after COVID disruptions. With 88k visitors, 2,400 exhibitors and 1,000 speakers it did not quite reach pre-COVID heights, but remained an enormous scale event. Notably, 56% of visitors came from industries adjacent to the core mobile ecosystem, reflecting STL’s view that we are now in a new industry with a diverse range of players delivering connected technologies.
With such scale It can be difficult to find the significant messages through the noise. STL’s research team attended the event in full force, and we each focused on a specific topic. In this report we distil what we saw at MWC 2023 and what we think it means for telecoms operators, technology companies and new players entering the industry.
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STL Partners research team at MWC 2023
The diversity of companies attending and of applications demonstrated at MWC23 illustrated that the business being conducted is no longer the delivery of mobile communications. It is addressing a broader goal that we’ve described as the Coordination Age. This is the use of connected technologies to help a wide range of customers make better use of their resources.
The centrality of the GSMA Open Gateway announcement in discussions was one harbinger of the new model. The point of the APIs is to enable other players to access and use telecoms resources more automatically and rapidly, rather than through lengthy and complex bespoke processes. It starts to open many new business model opportunities across the economy. To steal the words of John Antanaitis, VP Global Portfolio Marketing at Vonage, APIs are “a small key to a big door”.
Other examples from MWC 2023 underlining the transition of “telecommunications” to a sector with new boundaries and new functions include:
The centrality of ecosystems and partnerships, which fundamentally serve to connect different parts of the technology value chain.
The importance of sustainability to the industry’s agenda. This is about careful and efficient use of resources within the industry and enabling customers to connect their own technologies to optimise energy consumption and their uses of other scarce resources such as land, water and carbon.
An increasing interest and experimentation with the metaverse, which uses connected technologies (AR/VR, high speed data, sometimes edge resources) to deliver a newly visceral experience to its users, in turn delivering other benefits, such as more engaging entertainment (better use of leisure time and attention), and more compelling training experiences (e.g. delivering more realistic and lifelike emergency training scenarios).
A primary purpose of telco cloud is to break out the functions and technologies within the operators and network domains. It makes individual processes, assets and functions programmable – again, linking them with signals from other parts of the ecosystem – whether an external customer or partner or internal users.
The growing dialogues around edge computing and private networks –evolving ways for enterprise customers to take control of all or part of their connected technologies.
The importance of AI and automation, both within operators and across the market. The nature of automation is to connect one technology or data source to another. An action in one place is triggered by a signal from another.
Many of these connecting technologies are still relatively nascent and incomplete at this stage. They do not yet deliver the experiences or economics that will ultimately make them successful. However, what they collectively reveal is that the underlying drive to connect technologies to make better use of resources is like a form of economic gravity. In the same way that water will always run downhill, so will the market evolve towards optimising the use of resources through connecting technologies.
Table of contents
Executive Summary
The birth of a new sector: ‘Connected technologies’
Old gripes remain
So what if you are in a new industry?
You might like it
How to go from telco to connected techco
Next steps
Introduction
Strategy: Does the industry know where it’s going?
Where will the money come from?
Telcos still demanding their “fair share”, but what’s fair, or constructive?
Hope for the future
Transformation leadership: Ecosystem practices
Current drivers for ecosystem thinking
Barriers to wider and less linear ecosystem practices
Conclusion
Energy crisis sparks efficiency drive
Innovation is happening around energy
Orange looks to change consumer behaviour
Moves on measuring enablement effects
Key takeaways
Telco Cloud: Open RAN is important
Brownfield open RAN deployments at scale in 2024-25
Acceleration is key for vRAN workloads on COTS hardware
Energy efficiency is a key use case of open RAN and vRAN
Other business
Conclusion
Consumer: Where are telcos currently focused?
Staying relevant: Metaverse returns
Consumer revenue opportunities: Commerce and finance
Customer engagement: Utilising AI
Enterprise: Are telcos really ready for new business models?
Metaverse for enterprise: Pure hype?
Network APIs: The tech is progressing
…But commercial value is still unclear
Final takeaways:
Private networks: Coming over the hype curve
A fragmented but dynamic ecosystem
A push for mid-market adoption
Finding the right sector and the right business case
Edge computing: Entering the next phase
Telcos are looking for ways to monetise edge
Edge computing and private networks – a winning combination?
Network APIs take centre stage
Final thoughts
AI and automation: Opening up access to operational data
Gathering up of end-to-end data across multiple-domains
Support for network automations
Data for external use
Key takeaways
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The success of large businesses such as Microsoft, Amazon and Google as well as digital disrupters like Airbnb and Uber is attributed to their adoption of platform-enabled ecosystem business frameworks. Microsoft, Amazon and Google know how to make ecosystems work. It is their ecosystem approach that helped them to scale quickly, innovate and unlock value in opportunity areas where businesses that are vertically integrated, or have a linear value chain, would have struggled. Internet-enabled digital opportunity areas tend to be unsuited to the traditional business frameworks. These depend on having the time and the ability to anticipate needs, plan and execute accordingly.
As businesses in the telecommunications sector and beyond try to emulate the success of these companies and their ecosystem approach, it is necessary to clarify what is meant by the term “ecosystem” and how it can provide a framework for organising business.
The word “ecosystem” is borrowed from biology. It refers to a community of organisms – of any number of species – living within a defined physical environment.
A biological ecosystem
Source: STL Partners
A business ecosystem can therefore be thought of as a community of stakeholders (of different types) that exist within a defined business environment. The environment of a business ecosystem can be small or large. This is also true in biology, where both a tree and a rainforest can equally be considered ecosystem environments.
The number of organisms within a biological community is dynamic. They coexist with others and are interdependent within the community and the environment. Environmental resources (i.e. energy and matter) flow through the system efficiently. This is how the ecosystem works.
Companies that adopt an ecosystem business framework identify a community of stakeholders to help them address an opportunity area, or drive business in that space. They then create a business environment (e.g. platforms, rules) to organise economic activity among those communities. The environment integrates community activities in a complementary way. This model is consistent with STL Partners’ vision for a Coordination Age, where desired outcomes are delivered to customers by multiple parties acting together.
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Characteristics of business ecosystems that work
In the case of Google, it adopted an ecosystem approach to tackle the search opportunity. Its search engine platform provides the environment for an external stakeholder community of businesses to reach consumers as they navigate the internet, based on what consumers are looking for.
Google does not directly participate in the business-consumer transaction, but its platform reduces friction for participants (providing a good customer experience) and captures information on the exchange.
While Google leverages a technical platform, this is not a requirement for an ecosystem framework. Nespresso built an ecosystem around its patented coffee pod. It needed to establish a user-base for the pods, so it developed a business environment that included licensing arrangements for coffee machine manufacturers. In addition, it provided support for high-end homeware retailers to supply these machines to end-users. It also created the online Nespresso Club for coffee aficionados to maintain demand for its product (a previous vertically integrated strategy to address this premium coffee-drinking niche had failed).
Ecosystem relevance for telcos
Telcos are exploring new opportunities for revenue. In many of these opportunities, the needs of the customer are evolving or changeable, budgets are tight, and time-to-market is critical. Planning and executing traditional business frameworks can be difficult under these circumstances, so ecosystem business frameworks are understandably of interest.
Traditional business frameworks require companies to match their internal strengths and capabilities to those required to address an opportunity. An ecosystem framework requires companies to consider where those strengths and capabilities are (i.e. external stakeholder communities). An ecosystem orchestrator then creates an environment in which the stakeholders contribute their respective value to meet that end. Additional end-user value may also be derived by supporting stakeholder communities whose products and services use, or are used with, the end-product or service of the ecosystem (e.g. the availability of third party App Store apps add value for end customers and drives demand for high end Apple iPhones). It requires “outside-in” strategic thinking that goes beyond the bounds of the company – or even the industry (i.e. who has the assets and capabilities, who/what will support demand from end-users).
Many companies have rushed to implement ecosystem business frameworks, but have not attained the success of Microsoft, Amazon or Google, or in the telco arena, M-Pesa. Telcos require an understanding of the rationale behind ecosystem business frameworks, what makes them work and how this has played out in other telco ecosystem implementations. As a result, they should be better able to determine whether to leverage this approach more widely.
Table of Contents
Executive Summary
The ecosystem business framework
Why ecosystem business frameworks?
Benefits of ecosystem business frameworks
Identifying ecosystem business frameworks
Telco experience with ecosystem frameworks
AT&T Community
Deutsche Telekom Qivicon
Telecom Infra Project (TIP)
GSMA Mobile Connect
Android
Lessons from telco experience
Criteria for successful ecosystem businesses
“Destination” status
Strong assets and capabilities to share
Dynamic strategy
Deep end-user knowledge
Participant stakeholder experience excellence
Continuous innovation
Conclusions
Next steps
Index
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The story of SoftBank’s history – first as a software distribution company, followed by its contribution to the dotcom bubble, and then a gradually expanding telecoms footprint throughout the 2000s – is important because it gives context to its current investment strategy, dubbed the Vision Fund. SoftBank has never been a traditional telco and its outside perspective helped it to shake up the Japanese telecoms market. The Vision Fund’s ambition stretches far beyond telecoms, with an aim to transform all industries through the adoption and advancement of artificial intelligence (AI). Will this unique approach enable SoftBank to weather the softwarisation of telecoms, which will likely be accelerated by the newest Japanese entrant Rakuten, better than others?
Figure 1: SoftBank’s evolution
Source: SoftBank Group annual report 2019
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The early days: Software distribution
Founded by Masayoshi Son in 1981, SoftBank began not as a telecoms operator but as a software distributor. Son had recognized an important niche in the Japanese market: while computer hardware manufacturers were having issues sourcing quality software to run on their machines, software makers lacked the cash to properly advertise their products. As a distributor, Son acted as a matchmaker between computer software and hardware companies. Though exclusivity agreements with Japan’s major hardware vendors, SoftBank’s monthly sales reached US$2.4 million by the end of its first year of operation.
Not satisfied with a sole focus on software distribution, just six months after starting the software business, Son branched out into the computer magazine publishing segment, eventually producing over 20 periodicals. Son used his magazines to advertise the software products SoftBank was distributing. Right from the start, he aimed to create value through exploiting synergies across different business units.
In 1990, SoftBank also branched out into trade shows, acquiring Ziff Communication’s trade show division for $200 million and then, in 1995, the COMDEX trade show from the Interface group for an eyebrow-raising $800 million, taking on $500 million in debt. Later that year, SoftBank cemented its status as a leader in computer-magazine publishing, investing $2.1 billion in Ziff-Davis Publishing, making SoftBank the largest PC magazine distributor in the world. To finance this, SoftBank Group added $1 billion in debt and issued $649 million in new shares (SoftBank having gone public on the Tokyo Stock exchange in 1995, at a $3 billion valuation). It is clear from the beginning that SoftBank was not averse to accruing sizeable debt liabilities to finance strategic acquisitions.
SoftBank’s Internet pivot
SoftBank’s defining play in the 1990s was a pivot towards Internet services. Believing that the Internet would be the next technological revolution – eclipsing the invention of the personal computer – SoftBank made a dizzying number of investments in Internet companies. Many of these investments were made indirectly through a network of SoftBank venture capital funds, mainly overseen by SoftBank Investment Corp, which managed $5.25 billion worth of funds by 2000; SoftBank itself contributed over $2 billion. The investments included big name sites in e-commerce and e-finance, notably GeoCities, Yahoo!, ZD Net, e-buy-com, E-loan and E* TRADE Group.
The dotcom bust
SoftBank was heavily invested in – and therefore heavily exposed to – Internet stocks. Moreover, with a reputation as the largest investor in the world, owning as much as 25% of cyberspace by value at its peak, SoftBank became regarded by the market as fundamentally an Internet company. At the height of the dotcom bubble in February 2000, SoftBank’s market cap soared to $180 billion, far exceeding the equity value of the stakes in its subsidiaries and affiliates.
The dotcom bubble began to burst by early March 2000. Between SoftBank’s peak market cap in late February 2000, and its low point two years later, SoftBank lost over 95% of its market value. Masayoshi Son lost $70 billion of personal wealth during the crash. Many of SoftBank’s Internet investments had to be written-off entirely, including dotcom big names such as Webvan, Kozmo.com and Global Crossing – the latter filing one of the largest bankruptcies in corporate history.
However, across the graveyard of dotcom duds, SoftBank made several investments which delivered extraordinarily high returns. One resulted from a $20 million pledge Son made to Alibaba founder, Jack Ma, in January 2000. According to Ma, Son made the investment without first inspecting Alibaba’s business model or revenue stream, but rather based on Son’s impression of Ma. The Alibaba investment would turn out to be one of the most successful in history. Moreover, SoftBank’s investment in Yahoo! was still fruitful relative to Son’s initial pledge, despite falling foul of the dotcom bust. This is testimony to the efficacy of Son’s ability to adapt US companies to meet the needs of the Japanese market, delivering growth long past the NASDAQ stock crash. It is also one of the key reasons why SoftBank was able to attract nearly $100bn of investment for its Vision Fund in 2017.
Does SoftBank’s approach work for telecoms?
SoftBank Group is deeply tied to its charismatic CEO Masayoshi Son’s grand visions about how new technologies such as the Internet, the Internet of things (IoT) and artificial intelligence (AI) will transform the world. Son’s ambition to play a key role in driving the development of these technologies has led SoftBank to achieve some remarkable successes – notably an early investment in Alibaba and building a successful Japanese telecoms business – and survive some major setbacks, such as the dotcom crash and, more recently, the WeWork scandal.
The key question for telecoms operators is whether SoftBank’s telecoms assets gain any competitive advantage from being a part of SoftBank Group. Since SoftBank took ownership of Vodafone KK in Japan in 2006 and Sprint in 2013, both telecoms operators have become more profitable. While SoftBank’s stake in Yahoo Japan and willingness to take risks have contributed to success, neither operator is really exceptional in the way they manage their core business.
Table of contents
Executive summary
SoftBank’s history: How it got to where it is
The early days: SoftBank the software distributor
SoftBank’s move into telecoms
Masayoshi Son’s 300-year plan: Sprint, Arm and the Vision Fund
Sprint: SoftBank’s move into US telecoms
Arm: Hardware and IoT are the foundations of AI
The Vision Fund
Can SoftBank pull off its grand plans?
Internal risks: Cracks beneath the surface
External risks: Rakuten goes after SoftBank’s core
Conclusions
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As the calendar turns to the second decade of the 21st century we outline a new purpose, strategy and business models for the telecoms industry. We first described ‘The Coordination Age’, our vision of the market context, in our report The Coordination Age: A third age of telecoms in 2018.
The Coordination Age arises from the convergence of:
Global and near universal demands from businesses, governments and consumers for greater resource efficiency, availability and conservation, and
Technological advances that will allow near their real-time management.
Figure 1: Needs for efficient use of resources are driving economic and digital transformation
Source: STL Partners
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A new purpose for a new age
This new report outlines how telcos can succeed in the Coordination Age, including what their new purpose should be, the strategies, business models and investment approaches needed to deliver it.
It argues that faster networks which can connect tens of billions of sensors coupled with advances in analytics and process digitisation and automation means that there are opportunities for telecoms players to offer more than connectivity.
It also shows how a successful telecoms operator in the Coordination Age will profitably contribute to improving society by enabling governments, enterprises and consumers to collaborate in such a way that precious resources – labour, knowledge, energy, power, products, housing, and so forth – are managed and allocated more efficiently and effectively than ever before. This should have major positive economic and social benefits.
Moreover, we believe that the new purpose and strategies will help all stakeholders, including investors and employees, realign to deliver a motivating and rewarding new model. This is a critical role – and challenge – for all leaders in telecoms, on which the CEO and C-suite must align.
To do this, telecoms operators will need to move beyond providing core communications services. If they don’t choose this path, they are likely to be left fighting for a share of a shrinking ‘telecoms pie’.
A little history 2.0
Back in 2006, STL Partners came up with a first bold new vision for the telecoms industry to use its communications, connectivity, and other capabilities (such as billing, identity, authentication, security, analytics) to build a two-sided platform that enables enterprises to interact with each other and consumers more effectively.
We dubbed this Telco 2.0 and the last version of the Telco 2.0 manifesto we published can be found here – we feel it was prescient and that many of the points we made still resonate today. Indeed, many telecoms operators have embraced the Telco 2.0 two-sided business model over the last ten years.
This latest report builds on much of what we have learned in the previous fourteen years. We hope it will help carry the industry forwards into the next decade with renewed energy and success.
In June 2016 STL Partners published our inaugural Digital M&A and Investment Strategies report and accompanying database, focussing on key digital acquisitions and investments for 22 operators during the period 2012 – H1 2016. We have now updated this report to cover the following 12 months (H2 2016 – H1 2017), to examine new developments in telco digital M&A and a comparison with previous activities.
Communications service providers have long used M&A as a key growth strategy, with the most common approach being to acquire other operators to build scale organically. As growth in telecommunications slowed and user behaviour swung towards mobile, so M&A activity in the mobile sector has increased. However, acquisition opportunities in mature markets are becoming limited as consolidation reduces the number of telcos, whilst in Europe and North America the regulatory environment has made M&A consolidation strategies less viable.
As operators continue to build digital capabilities and strive to deliver digital services and content, M&A and investment beyond ‘traditional telecoms’ is increasing. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation as well as operational excellence. This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of Verizon, AT&T and SoftBank. There is an accompanying database which tracks telco M&A activity for the period.
Drivers for operator M&A and majority investment
Figure 1: Drivers for operator M&A and majority investment – traditional and digital
Source: STL Partners
Traditional/Telco 1.0 drivers: reach and scale
As illustrated in Figure 1, what we refer to as ‘traditional’ or ‘Telco 1.0’ drivers for M&A and investment are well-established:
Extending geographic footprint is a common trend, as many operator groups look to:
Enter new markets that are adjacent geographically (e.g. DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
Enter markets that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
Enter markets that simply offer good opportunities for expanded footprint and increased efficiencies of operation in emerging regions where demand for mobile services is still growing strongly (e.g., SingTel and Etisalat’s numerous investments in operators in Asia and Africa, respectively).
Extending traditional communications offerings is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the UK is one example.
Consolidation has slowed to some extent, as regulators and competitors fight against mergers or acquisitions that remove players from the market or concentrate too much market power in the hands of stronger service providers. This has been a particular issue in the European Union, where regulators have refused to approve several proposed telecoms M&A deals recently, including Telia and Telenor in Denmark in 2015, and the proposed Hutchison acquisition of Telefónica’s O2 to merge with its subsidiary 3 UK in 2016. Other deals, such as the proposed Orange-Bouygues Telecom merger in France which was abandoned in April 2016, have failed due to the parties involved failing to reach agreement. However, our research shows continued interest in operator M&A for consolidation, with recent examples including Orange’s acquisition of Sun Communications in Moldova in 2016, and Vodafone’s merger with Indian rival Idea in 2017.
The acquisition of service partners – primarily channel partners, or partner companies providing systems integration and consultancy capabilities, typically for enterprise customers – has proved an important driver of M&A for many (mainly converged) operators.
Finally, operator M&A is also being driven by the enthusiasm of sellers. Many operators are looking to sell off assets outside of their home markets, pulling back from markets that have proven too competitive, too small or simply too complicated, as part of a strategy to pay down debt and/or free up assets for investment in other higher-growth areas:
Telia’s pullback from its non-core markets has seen it sell off its majority stakes in Spanish operator Yoigo to Masmovil and in Kazakhstan’s Kcell to Turkcell in 2016
Telefonica’s attempt to sell its O2 UK mobile unit to CK Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its debt, including a planned IPO of O2 UK.
Contents:
Executive Summary
Evaluating operator digital investment strategies
Key findings
Recommendations
Introduction
Drivers for operator M&A and majority investment
Evaluating operator digital investment strategies
22 players across 5 regions: US shows the most aggressive M&A activity
Comparison with previous period (H1 2012 – H1 2016)
European telcos remain largely focussed on Telco 1.0 M&A
Which sectors are attracting the most interest?
Telco M&A investment is falling behind other verticals
What are the cultural challenges to digital M&A in the boardroom?
Operator M&A Strategies in detail: Consolidation, content and technology
M&A as a telco growth strategy
Adapting telco culture to ensure digital M&A success
Recommendations
Figures:
Figure 1: Drivers for operator M&A and majority investment – traditional and digital
Figure 2: Number of operator digital acquisitions and majority investments, H2 2016-H1 2017
Figure 3: Largest 7 telco digital M&A and majority investments, H2 2016-H1 2017
Figure 4: Number of operator digital acquisitions and majority investments, H1 2012 – H1 2016
Figure 5: Operator digital acquisitions and majority investments, H1 2012-H1 2017
Figure 6: Largest 10 telco digital M&A and majority investments, H1 2012 – H1 2016
Figure 7: Mapping of operator digital M&A strategies
Figure 8: Number of digital M&A and majority investments by sector/category, H2 2016-H1 2017
Figure 9: Comparison of investment in digital M&A as a percentage of service revenues, 2012-H1 2017
The telecom industry’s growth profile over the last few years is a sobering sight. As we have shown in our recent report Which operator growth strategies will remain viable in 2017 and beyond?, yearly revenue growth rates have been clearly slowing down globally since 2009 (see Figure 1). In three major regions (North America, Europe, Middle East) compound annual growth rates have even been behind GDP growth.
Figure 1: Telcos’ growth performance is flattening out (Sample of sixty-eight operators)
Source: Company accounts; STL Partners analysis
To break out of this decline telcos are constantly searching for new sources of revenue, for example, by expanding into adjacent, digital service areas which are largely placed within mass consumer markets (e.g. content, advertising, commerce).
However, in our ongoing conversations with telecoms operators, we increasingly come across the notion that a large part of future growth potential might actually lie in B2B (business-to-business) markets and that this customer segment will have an increasing impact of overall revenue growth.
This report investigates the rationale behind this thinking in detail and tries to answer the following key questions:
What is the current state of telco’s B2B business?
Where are the telco growth opportunities in the wider enterprise ICT arena?
What makes an enterprise ICT growth strategy difficult for telcos to execute?
What are the pillars of a successful strategy for future B2B growth?
Executive Summary
Introduction
Telcos may have different B2B strategies, but suffer similar problems
Finding growth opportunities within the wider enterprise ICT arena could help
Three complications for revenue growth in enterprise ICT
Complication 1: Despite their potential, telcos struggle to marshal their capabilities effectively
Complication 2: Telcos are not alone in targeting enterprise ICT for growth
Complication 3: Telcos’ core services are being disrupted by OTT players – this time in B2B
STL Partners’ recommendations: strategic pillars for future B2B growth
Conclusion
Figure 1: Telcos’ growth performance is flattening out (Sample of sixty-eight operators)
Figure 2: Telcos’ B2B businesses vary significantly by scale and performance (selected operators)
Figure 3: High-level structure of the telecom industry’s revenue pool (2015) – the consumer segment dominates
Figure 4: Orange aims to expand the share of “IT & integration services” in OBS’s revenue mix
Figure 5: Global enterprise ICT expenditures are projected to growth 7% p.a.
Figure 6: Telcos and Microsoft are moving in opposite directions
Figure 7: SD-WAN value chain
Figure 8: Within AT&T Business Solutions’ revenue mix, growth in fixed strategic services cannot yet offset the decline in legacy services
With the ever-increasing amount of data collected by smartphones, fitness monitors and smart watches, telcos and other digital players are exploring opportunities to create value from consumers’ ability to capture data on many aspects of their own health and physical activity. Connected devices leverage inbuilt sensors and associated apps to collect data about users’ activities, location and habits.
New health-focused platforms are emerging that use the data collected by sensors to advise individual users on how to improve their health (e.g. a reminder to stand up every 60 minutes), while enhancing their ability to share data meaningfully with healthcare providers, whether in-person or remotely. This market has thus far been led by the major Internet and device players, but telecoms operators may be able to act as distributors, enablers/integrators, and, in some cases, even providers of consumer health and wellness apps (e.g., Telefonica’s Saluspot).
High level drivers for the market
At a macro level, there are a number of factors driving digital healthcare. These include:
Population ageing – The number of people globally who are aged over 65 is expected to triple over the next 30 years , and this will create unprecedented demand for healthcare.
Rising costs of healthcare provision globally – Serving an aging population, the increase globally in lifestyle and chronic diseases, and rising underlying costs, is pushing up healthcare spending – while at the same time, due to economic pressures there are more limited funds available to pay for this.
Limited supply of trained clinicians – Policy issues and changes in job and lifestyle preferences are limiting both educational capacity and ability to recruit and retain appropriately trained healthcare staff in most markets.
Shift in funding policy – In many countries, funding for healthcare is shifting away from being based on reimbursement-for-events (e.g., a practice or hospital is paid for every patient visit, for each patient they register, for each vaccination administered), to a greater emphasis on ‘value-based care’ – reimbursement based on successful patient health outcomes.
Increased focus on prevention in healthcare provision – in some cases funding is starting to be provided for preventative population health measures, such as weight-loss or quit-smoking programmes.
Development of personalised medicine – Personalised medicine is beginning to gain significant attention. It involves the delivery of more effective personalised treatments (and potentially drugs) based on an individual’s specific genomic characteristics, supported by advances in genotyping and analytics, and by ongoing analysis of individual and population health data.
Consumerisation of healthcare – There is a general trend for patients – or rather, consumers – to take more responsibility for their own health and their own healthcare, and to demand always-on access both to healthcare and to their own health information, at a level of engagement they choose.
The macro trends above are unlikely to disappear or diminish in the short-to-medium term; and providers, policymakers and payers are struggling to cope as healthcare systems increasingly fall short of both targets and patients’ expectations.
Digital healthcare will play a key role in addressing the challenges these trends present. It promises better use and sharing of data, of analytics offering deep insight on health trends for individuals and across the wider population, and of the potential for greater convenience, efficacy and reach of healthcare provisioning.
While many (if not most) of the opportunities around digital health will centre on advances in healthcare providers’ ICT systems, there is significant interest in how consumer wellness and fitness apps and devices will contribute to the digital health ecosystem. Consumer digital health and wellness is particularly relevant to two of the trends above: consumerisation of healthcare, and the shift to prevention as a focus of both healthcare providers and payers.
Fitness trackers and smartwatches, and the associated apps for these devices, as well as wellness and fitness apps for smartphone users, could open up new revenue streams for some service providers, as well as a vast amount of personal data that could feed into both medical records and analytics initiatives. The increasing use of online resources by consumers for both health information and consultation, as well as cloud-based storage of and access to their own health data, also creates opportunities to make more timely and effective healthcare interventions. For telcos, the question is where and how they can play effectively in this market.
Market Trends and Overview
The digital healthcare market is both very large and very diverse. Digital technologies can be applied in many different segments of the healthcare market (see figure below), both to improve efficiency and enable the development of new services, such as automated monitoring of chronic conditions.
The different segments of the digital healthcare market
Source: STL Partners based on categories identified by Venture Scanner
The various segments in Figure 1 are defined as below:
Wellness
Mobile fitness and health apps enable consumers to monitor how much exercise they are doing, how much sleep they are getting, their diet and other aspects of their lifestyle.
Wearable devices, such as smart watches and fitness bands, are equipped with sensors that collect the data used by fitness and health apps.
Electronic health records are a digital record of data and information about an individual’s health, typically collating clinical data from multiple sources and healthcare providers.
Information
Services search are digital portals and directories that help individuals find out healthcare information and identify potential service providers.
Online health sites and communities provide consumers with information and discussion forums.
Healthcare marketing refers to digital activities by healthcare providers to attract people to use their services.
Interactions
Payments and insurance – digital apps and services that enable consumers to pay for healthcare or insurance.
Patient engagement refers to digital mechanisms, such as apps, through which healthcare providers can interact with the individuals using their services.
Doctor networks are online services that enable clinicians to interact with each other and exchange information and advice.
Research
Population health management refers to the use of digital tools by clinicians to capture data about groups of patients or individuals that can then be used to inform treatment.
Genomics: An individual’s genetic code can be collated in a digital form so it can be used to understand their likely susceptibility specific conditions and treatments.
Medical big data involves capturing and analysing large volumes of data from multiple sources to help identify patterns in the progression of specific illnesses and the effectiveness of particular treatment combinations.
In-hospital care
Electronic medical records: A digital version of a hospital or clinic’s records of a specific patient. Unlike electronic health records, electronic medical records aren’t designed to be portable across different healthcare providers.
Clinical admin: The use of digital technologies to improve the efficiency of healthcare facilities.
Robotics: The use of digital machines to perform specific healthcare tasks, such as transporting medicines or spoon-feeding a patient.
In-home care
Digital medical devices: All kinds of medical devices, from thermometers to stethoscopes to glucosometers to sophisticated MRI and medical imaging equipment, are increasingly able to capture and transfer data in a digital form.
Remote monitoring involves the use of connected sensors to regularly capture and transmit information on a patient’s health. Such tools can be used to help monitor the condition of people with chronic diseases, such as diabetes.
Telehealth refers to patient-clinician consultations via a telephone, chat or video call.
The wellness opportunity
This report focuses primarily primarily on the ‘wellness’ segment (highlighted in the figure below), which is experiencing major disruption as a result of devices, apps and services being launched by Apple, Google and Microsoft, but it also touches on some of these players’ activities in other segments.
This report focuses on wellness, which is undergoing major disruption
Source: STL Partners based on categories identified by Venture Scanner
Executive summary
Introduction
High level drivers for the market
Market Trends and Overview
Market size and trends: smartwatches will overtake fitness brands
Health app usage has doubled in two years in the U.S.
Are consumers really interested in the ‘quantified self’?
Barriers and constraining factors for consumer digital health
Disruption in Consumer Digital Wellness
Case studies: Google, Apple and Microsoft
Google: leveraging Android and analytics capabilities
Apple: more than the Watch…
Microsoft: an innovative but schizophrenic approach
Telco Opportunities in Consumer Health
Recommendations for telcos
Figure 1: The different segments of the digital healthcare market
Figure 2: This report focuses on wellness, which is undergoing major disruption
Figure 3: Consumer digital health and wellness: leading products and services, 2016
Figure 4: Wearable Shipments by Type of Device, 2015-2020
Figure 5: Wearable OS Worldwide Market Share, 2015 and 2019
Figure 6: Take-up of different types of health apps in the U.S. market (2016)
Figure 7: % of health wearable and app users willing to share data US market (2016)
Figure 8: Elements of the ‘quantified self’, as envisioned by Orange
Figure 9: Less than two-third of US wearable buyers wear their acquisition long-term
Figure 10: Google Consumer Health and Fitness Initiatives
Figure 11: Snapshot of Google Fit User Interface, 2016
Figure 12: Google/Alphabet’s areas of focus in the digital healthcare market
Figure 13: Apple’s Key Digital Health and Wellness Initiatives
Figure 14: Apple Health app interface and dashboard
Figure 15: Apple’s ResearchKit-based EpiWatch App
Figure 16: Apple’s current areas of focus in the digital healthcare market
Figure 17: Microsoft Consumer Fitness/Wellness Device Initiatives
Figure 18: Microsoft Health can integrate data from a range of fitness trackers
Figure 19: Microsoft Consumer Fitness/Wellness Applications and Services
Figure 20: The MDLive Telehealth Proposition, August 2016
Figure 21: Microsoft’s areas of focus in the digital healthcare market
Figure 22: Telefónica’s Saluspot: Interactive online doctor consultations on-demand
From isolated innovations to an integrated platform
For the last six years, STL Partners has been working with telcos and their partners on the development of a new telecoms business model – ‘Telco 2.0’. We have undertaken a significant amount of research into what Telco 2.0 could look like and explored in ‘The 2-Sided Telecoms Market Opportunity’ and ‘The Roadmap to New Telco 2.0 Business Models’, and other key research, how telcos can:
We have now published Part 1 of A Practical Guide to Implementing Telco 2.0 which focuses principally on how to implement Telco 2.0. It gathers some of the techniques and lessons that STL Partners has been deploying with clients that are now implementing Telco 2.0.
The following edited extract, available in full to members of the Executive Briefing Service, explains the danger of considering each of the six Telco 2.0 opportunity areas as a separate value source by exploring the platform strategies of the internet players such as Google, Apple, Facebook, Amazon and Microsoft. It illustrates how some areas lose money and how this ‘loss-lead’ approach makes sense as long as the overall value of the platform rises, and concludes that telcos must think about opportunities in an integrated ‘joined up’ way.
Telcos’ strategic environment is tough
In a tough global economy, with many telco markets rapidly reaching maturity, and facing competition from so-called ‘Over-The-Top’ (OTT) communications services, telcos face some difficult trading conditions.
Against this tough background, most telco CEOs appreciate that they cannot just cut their businesses to growth (or even maintenance for some) – they need new sources of value creation.
In this article we focus on new service strategies, and the six coloured columns on the right of the chart above refer to the six Telco 2.0 Opportunity Areas, which as a reminder are:
Extending and enhancing existing core services – voice, messaging, data, content – to deliver more value to customers.
Developing bespoke communications and IT solutions for specific vertical industries.
Leveraging infrastructure more effectively to improve the customer experience (offer greater speed and responsiveness) while reducing cost (offloading traffic onto cheaper networks) and generating new revenue (‘onloading’ traffic from more expensive networks).
Distributing existing products and services via new channels and to new customers such as embedding voice and other communications services within enterprise business processes or bundling connectivity in with consumer products (this includes some M2M applications).
Deploying assets including identity and authentication capabilities and customer data to both improve customers’ experience of existing core services and develop valuable new enabling services for third-party enterprises and consumers.
Developing products and services that are largely own brand ‘OTT’ – independent of the network.
Current telco approach: silos of growth
As we have also illustrated previously, there are many new services within the six Telco 2.0 opportunity areas which can generate value for telcos.
Figure 3 – Examples of the six Telco 2.0 Opportunity Types
But it is highly unlikely that every service, even if ‘successful’ in terms of becoming big and popular, will directly generate revenue. Indeed, some services should be designed from the outset to be free and loss-making for the telco. Why? Because by doing this the telco can generate more value in other areas. Google does this with free search for consumers – it makes more money from advertisers owing to high search volumes.
Many telco managers simply do not appreciate this point. In telcos, each and every service tends to evaluated independently and if it does not meet stringent business case benchmarks, it is not progressed. This tends to lead to some creative use of pricing and volume assumptions in many business cases to ensure that services get over the hurdle.
To see why this is misguided, it is helpful to think of current and future telco services as part of a digital value chain (as in Figure 4 below). There are devices, operating systems and applications (first segment of the value chain) that use data connectivity (second segment) for a range of applications and services such as advertising and marketing, the sale of physical goods and digital content, making payments and delivering enterprise solutions. Voice and messaging too is increasingly become another data service and this is set to increase as IP networks become end-to-end on fixed and mobile.
As already noted, each of the telco opportunity areas contain services that can be offered in different segments of the value chain:
Voice and messaging are the traditional Core Services and digital content is the area into which many telcos have sought to extend.
Vertical Industry Solutions seek to mash-up data and voice and messaging with enterprise IT systems to develop bespoke services.
In Infrastructure Services, telcos will seek to make their data networks and voice and messaging capabilities available to other telcos on a wholesale basis.
Data and voice and messaging, as well as enterprise applications will similarly be made available to businesses seeking to integrate them into their core offerings in Embedded Communications.
Telcos are seeking to leverage their customer data and media inventory to offer advertising and marketing solutions and their authentication and collection capabilities to deliver payment services as Third-party Business Enablers.
Finally, software skills will be required to offer a range of digital solutions similar to those from the OTT players in Own-brand OTT Services.
Essentially, telcos can theoretically offer a one-stop shop for consumers and enterprises across the digital value chain. The challenge at the moment is that telcos think of each service, and each stage of the value chain, as a profitable new revenue source. Services are thus created in silos with little thought given to the customer experience across the value chain and, importantly, to the creation of value across all stages of the chain.
As Figure 4 shows, telcos see opportunities for value creation in every single value chain segment (although not every opportunity area covers every segment).
Figure 4 – Telcos see opportunities to create value in every value chain segment
1. Devices, OS, apps & software have been placed in brackets because the handset subsidies that telcos offer for devices could be construed as a source of profitable revenue or as an enabler of data and voice and messaging revenues depending how they are priced and accounted for.
Why does it matter that telcos are seeking to generate profitable growth in each segment of the value chain? After all, profit for shareholders is the ultimate goal. The problem with this strategy stems from the integrated platform strategies of the internet players – and the challenges of competing with them.
Content:
From isolated innovations to an integrated platform
Telcos’ strategic environment is tough
Current telco approach: silos of growth
The integrated platforms of the internet co-opetition
Conclusions – key lessons for telcos
Figure 1 – The predicted impact of ‘OTT’ players on telcos’ core business
Figure 2 – Generic telco strategies
Figure 3 – Examples of the six Telco 2.0 Opportunity Types
Figure 4 – Telcos see opportunities to create value in every value chain segment
Figure 5 – Internet giants are pursuing platform strategies
Customer Experience: Back to the Future of Voice. Colin Lees of BT on the future of the UK voice service and the transformation of BT’s service platform. Presentation from EMEA Brainstorm, November 2011. (November 2011, Executive Briefing Service, Cloud & Enterprise ICT Stream)
M2M 2.0: Service Enablers – New Business Models Needed,
Presentation by Sven Krey, Head of Sales Development, M2M Competence Centre, Deutsche Telekom.
Business model challenges facing operators in M2M and how DTAG is facing them. Presented at EMEA Brainstorm, November 2011.
M2M 2.0: Strategies and Business Models,
Presentation by Helene Hartlief, M2M Marketing Manager, KPN.
Describes KPN’s approach to monetising their investments in M2M.
Presented at EMEA Brainstorm, November 2011.
Summary: New analysis suggests that only only three or four mobile handset software platforms will remain by 2012.
This is a Guest Briefing from Arete Research, a Telco 2.0™ partner specialising in investment analysis.
The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete’s Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.
Mobile Software Home Truths
Wireless Devices
Amidst all the swirl of excitement around mobile software, some dull realities are setting in. As the barn gets crowded with ever more exotic breeds (in alphabetical order: Android, Apple OSX, Blackberry, LiMo, Maemo, Moblin, Symbian, WebOS, WindowsMobile), there is a growing risk of fragmentation and consumer confusion. We see some unglamorous “home truths” about mobile software getting lost in the weeds.
Few, if any, vendors make money from mobile software. Microsoft makes $160 of gross profit per PC while mobile software is moving royalty-free. The few pure plays (like Opera) rely on sales of services around their software. Mobile software only gets leverage from related services (often a single one). These must be tightly linked to devices, e.g., e-mail (Blackberry), e-books (Kindle), music (iTunes) or gaming (XBoxLive), with resulting communities controlled by their choice of software; few services work equally well on all devices (e.g., search, YouTube).
AppStores are not (yet) content stores. OEMs must link themselves with cloud services (like Motorola’s new BLUR platform) or offer their own (e.g., ITunes, Ovi, etc.). Individual developers find it hard to make money through AppStores: if even one were making $10m in sales, it would be widely publicised. Exclusive or “sponsored” applications like navigation or content-like games should fare much better.
We see room for only three to four platforms by 2012. The pace of innovation, R&D cost, and need for customisation (for hardware, operators and languages) invites consolidation. Supporting OEMs and reaching out to developers is costly and labour-intensive; only over time might HTML5 browsers supplant device-specific applications. No platform is so productised as to simply hand over to licensees (be they OEMs or operators).
Every smartphone will support one (or more) AppStores. We do not know how many services or what content AppStores 2.0 might offer, or how they will be made relevant to consumers. The most popular applications should work on every smartphone, even as some devices (like INQ) are optimised for versions of Facebook, Amazon, Twitter, Skype and other popular digital brands and services. AppStores may help OEMs build relationships with users of those services, though both vendors and operators will try to control billing.
All phones are becoming smart. So-called smartphones get attention as a growth segment in a declining handset market, but “dumbphones” (using proprietary software like Nokia’s S40, Samsung SHP/TouchWiz or LG’s S-Class) are getting more sophisticated. The costs of the two are converging. Featurephones will soon also support AppStores and Internet services.
Table 1: Platform Penetration
’09E
’11E
Symb. v9.3+/S60
~110m
~240m
S60 goes mid-range
Apple OSX
~30m
~120m
Incl. iPod Touch
B’berry OS 4.5+
~40m
~80m
Doubling OS base
Android
<10m
~80m
From >10 OEMs
WinMo 6+
~10m
~50m
Transition to Win7
Palm WebOS
<5m
~15m
Limits w/o licensing
LiMo
<5m
~20m
Platform for LCHs
Source:Arete Research estimates.
Hard Graft
The costs for developing and maintaining complex software platforms are increasing. There are no shortcuts to the sheer volume of work, especially in building on legacy code bases and supporting operator requirements, or developing language packs.Every platform faces significant roadmap issues. Some handset OEMs are building adaptation layers to port a range of applications to their own branded UIs. Just supporting multi-core chipsets for handling streaming or managing financial transactions needs additional processing power to deal with security and viruses. Yet it requires software re-writes and poses power management challenges (i.e., tripling or quadrupling processing will drain batteries faster).
We long predicted video would become as ubiquitous as voice, i.e., with devices designed around handling video traffic. There are a wide range of solutions to cope with streaming video, including in software (i.e., Flash or Silverlight) rather than via hardware optimisations. Apple patented technology around adaptive bit rate codecs to handle streaming in its forthcoming iPhones.All platforms need to support over the air (OTA) updates, embrace graphics-rich applications, handle HD content, and comply with an array of USB drivers and accessories.
It is also not clear whether application downloads are a novelty or a mass market phenomenon. Discovery and recommendation engines need to be improved on most platforms, and marketing must focus on what applications offer. The gap between legacy platforms and an over-the-air customisable user experience is a wide one, and will not be resolved by AppStores, fresh UIs, or moves to go open source. Widget and webkit technologies could bring similar UXs across multiple devices. Most developers will not need access to lower layers or optimise applications for specific hardware. Over time, HTML5 browsers could supplant device-specific applications (e.g., GMail runs on an iPhone as a web application, as does WebOutlook on Android), but OEMs are unlikely to embrace this approach. This also does nothing to extend billing or allow for collection of detailed customer analytics.
At the same time, operators’ selection criteria are moving from form factors to user experiences.Operator UX teams now number in the 100s of staff, even if they fake a fragmented approach: Vodafone-subsidised devices currently support Android Market, Blackberry AppsWorld, OviStore and iPhone AppStore, and runs its own developer programme (Betavine). Few telcos develop native applications, but mostly use ones that run in Java, Webkit, Widgets, etc. Only a few (e.g., Verizon Wireless) offer customised UI.
While Apple and Google get the most attention (as pioneers of the AppStore concept, and for providing a shop-front for the open source community), Nokia and Microsoft have pivotal roles to play. Both offer unprecedented scale (in handsets and computing software), even if both are fast followers. We do not see Nokia’s commitment to Ovi or Symbian wavering. Though Microsoft’s successive versions of WindowsMobile failed to get traction beyond 10-15m units p.a., we expect a renewed push around Windows7 in 2H10. The MSFT/Yahoo search deal could be a blueprint for closer collaboration with Nokia. With its resources (a $9.5bn R&D budget) and assets (enterprise installed base, XBox, HotMail, and Bing), Microsoft could offer handset OEMs revenue share deals. LGE already committed to ship 50+ Windows models by 2012.
Figure 1: Product Differentiation?
Source: Arete Research.
Content, Not Applications
An AppStore is not a content store, yet. The next battle will be to add intelligence and filtering to AppStores, and tightly integrate content with platforms (as with iTunes, Kindle, Zune HD, or Comes With Music). There are limits to how many applications consumers are likely to use, whereas there is a wide range of content to access via mobile devices. To handle this, mobile devices also need integration with home CE/PC products. Samsung, for one, aims to provide “three screen” offerings spanning TVs, PCs, cameras, and handsets.There will be efforts by Sony, Apple, Samsung and others to make a single harmonised software platform that spans a wide range of video-capable devices.
Figure 2: Putting Software at the Centre of a CE “User Experience”
Source:Arete Research.
With multi-radio (e.g., 3G, WiFi and Bluetooth) integration and voice recognition, mobile devices could become a control point to reach “virtualised” content. This is a longer-term “cloud computing” angle to mobile software, handling access to and storage of personal content. OEMs will need to offer tight integration with cloud services, or offer their own “stores of content.”
Apple and Google designed platforms with PCs in mind, and drew developers from the vastly larger desktop world. They benefit from programming in AJAX, whereas Symbian uses a range of older object-oriented languages. Yet in both handset and PC worlds, OEMs, not developers, create devices.They are the gatekeepers for software and AppStores, managing the flow of any OTA updates that might alter the UX. Adobe has provided a good model, with regular updates of its popular Flash and Acrobat software. Yet user expectations of handset stability will get re-set if devices regularly need updates like PCs do.
Too Much Choice?
The number of companies vying to become the platform of choice is staggering, and itself a problem. Beyond the ones we discuss below, we can add Intel (with its Moblin effort), Palm’sWebOS (which remains device-specific) and the range of Linuxvariants (like the Nokia-sponsored Maemo, LiMO, andcomponents developed under the OMTP). The latter shows how limited group initiatives have been: OMTP involves VOD, TMOB, TI, TEF, AT&T, and others, but all of these compete for exclusivity with operator-subsidised devices that will never be OMTP-compliant. None of the above options are yet mass market (i.e., likely to top 10m+ units in ’10).Just to confuse matters further, there are other applications environments (e.g., BREW) as well as “component” vendors like Opera, Access, and Adobe.We look at leading platforms below:
Apple’s OSX
Apple excelled at innovating around the UX and using animation to mask some of the iPhone’s early weaknesses (lack of multi-threading, slow image processing). Apple’s marketing anticipated the market’s direction with its focus on applications, and Apple’s PA Semi unit will help it be first to market with multi-core processing (supporting streaming video). Apple is still attracting developers with the clarity and simplicity of its SDK, and by testing and proving in each layer of stack via PC products. We expect OSX to be extended to CE products, and also for Apple to bring AppStores to the PC.
Google’s Android
For a two-year-old platform, Android got ample OEM support, following up its G1 (a.k.a. the Android Developer Phone) with subsequent releases Cupcake/Android v1.1, with the Éclair release being v2.0. Android aims to be binary forward compatible, i.e., existing applications written for G1s will run on new devices without modifications. Developers create Android Virtual Devices with the SDK to run applications for a range of devices. Development and emulator debug time is far shorter in Android compared with Symbian.
Despite OEM support, Android’s governance remains fuzzy. Android is open-sourced licensed, but not an open source project: a small (~300 staff) team controls the developer ecosystem and Android Market distribution. It has not productised source code or offered post-sales software management tools, and has limited support for operator-compliant packs, libraries of hardware drivers, and language variants. Some developers say Android is slow to respond to change requests and to accept code modifications. In exchange for access to Android Market, Google requires OEMs to bundle Google Apps and supply usage analytics from devices. One key commercialisation partner, WindRiver, was bought by Intel, while another, Teleca, started an Android Feature Club to resolve common integration issues. Android’s end-game is unclear: is it a hedge against Microsoft or Apple controlling end-devices? A Trojan Horse for Google services? Or will it become an independent company with license fees?If operators don’t need devices “with Google,” then Android may fragment into many custom UIs.
Nokia’s Symbian
After a decade under a shifting set of parents, the rump of Symbian was bought by Nokia and made an open source project, including Nokia’s own S60 UI.Symbian/S60 was initially developed for phone functions, and saw limited traction for downloads under cumbersome tree and branch menu structures. Many developers feel Nokia/Symbian offers too many choices (native Symbian code, J2ME, FlashLite, Web runtime and Python), each with limitations and compatibility issues.The S60 browser is based on webkit, but lacks HTML5 support. Nokia’s decision to open source Symbian/S60 has stalled its development, as Symbian re-writes and tests third-party software in its 40m line code base. It will be difficult to make major improvements to Symbian (i.e., to support multi-core processors) during this process.
When Nokia ships Direct UI in mid ’10, Symbian will effectively break its backwards compatibility.Whether it also moves to a completely new release (v.10 from v.9.6) is still open. This may alienate developers that have to re-develop for a new platform and comply with Nokia’s new Direct UI (based on QT).They also must resolve whether Symbian horizon is sufficient as a publishing tool, or if Nokia can get other OEMs to use OviStore, which still lags rivals on many fronts. Nokia hopes Symbian will present a credible alternative to Android in mid-2010 when it is fully open source/EPL licensed, with Nokia assuring a large market.
Microsoft’s Windows
Windows Mobile 6.5 traced a long evolution from the Pocket PC OS, but still uses an older WinCE 5 kernel. Microsoft recognised its failings by bringing in new management for Mobile, acquiring Danger (designers of the Sidekick device), and engaging LG as a mass market OEM alongside long-term supporter HTC.We see 6.5 as simply a stopgap solution until Microsoft brings the innovation seen with its ZuneHD UI and leaner Win7 platforms to mobile. Microsoft is also offering its software in a reference design called Pink, and may tweak its long-held license fee model with PC-like terms (rebates, discounts and marketing support). This may gain traction among Chinese OEMs, after Taiwanese and US OEMs failed to ramp WinMo to volume. It is too early to rule out a now-dormant Microsoft, given its scale in computing and revival with Win7.
RIM’s Blackberry OS
In a world moving more “open,” RIM keeps its OS development in-house, stressing the need for security and compression. Yet RIM must evolve the BlackBerry’s UI and bring more developers to its AppsWorld platform, as well as open up its charging model beyond PayPal to embrace operator billing. BlackBerry’s application environment works on a J2ME framework with proprietary extensions, which adds fragmentation and compatibility issues. However, the security and bandwidth compression so valued by enterprises may limit performance for consumers, as applications traverse its NOCs via RIM’s proprietary browser. RIM’s premium pricing still relies on its messaging franchise, which faces challenges from ActiveSync and efforts to bring push e-mail to mass market price levels. Rivals may not match Blackberry’s UX, but some segments may be less sensitive to RIM’s security and delivery than the price of handsets. While RIM stresses incremental upgrades for its AppsWorld, we hear they are undertaking an extensive OS re-write to support new multi-core chipsets.
Down to Earth
This space gets too much attention for the revenue it directly generates. Mobile software is a means to an end, and the end is selling devices and Internet services.The cost of development will narrow the number of platforms by 2013, but not before the sheer number of options bewilder consumers who know about them and frustrate others wishing to get simple access to specific content. Given how rapidly key hardware costs are falling, and how sophisticated mid-range software platforms are becoming, all phones will become smartphones of some sort. Who wants to own a dumbphone?
AppStores will evolve to offer a range of content and services, with a major battle brewing over billing and data on consumer usage.Every device will support some AppStores and work with a range of Internet brands and services. Some content will be packaged and tightly linked to specific devices.The Holy Grail in all this mobile software will be its extension to ranges of other CE products. There is ample reason to scoff at the hype around mobile software — for its marginal economics and inevitable fragmentation — but no doubt as to its future role as a control point for more valuable content and Internet-based services and brands.
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NB A full PDF copy of this briefing can be downloaded here.
This special Executive Briefing report summarises the brainstorming output from the Open APIs 2.0 section of the 6th Telco 2.0 Executive Brainstorm, held on 6-7 May in Nice, France, with over 200 senior participants from across the Telecoms, Media and Technology sectors. See: www.telco2.net/event/may2009.
It forms part of our effort to stimulate a structured, ongoing debate within the context of our ‘Telco 2.0′ business model framework (see www.telco2research.com).
Each section of the Executive Brainstorm involved short stimulus presentations from leading figures in the industry, group brainstorming using our ‘Mindshare’ interactive technology and method, a panel discussion, and a vote on the best industry strategy for moving forward.
There are 5 other reports in this post-event series, covering the other sections of the event: Retail Services 2.0, Content Distribution 2.0, Enterprise Services 2.0, Piloting 2.0, Technical Architecture 2.0, and Devices 2.0. In addition there is an overall ‘Executive Summary’ report highlighting the overall messages from the event.
Each report contains:
Our independent summary of some of the key points from the stimulus presentations
An analysis of the brainstorming output, including a large selection of verbatim comments
The ‘next steps’ vote by the participants
Our conclusions of the key lessons learnt and our suggestions for industry next steps.
The brainstorm method generated many questions in real-time. Some were covered at the event itself and others we have responded to in each report. In addition we have asked the presenters and other experts to respond to some more specific points.
Chris Barraclough, MD, Telco 2.0 asked what the relevance of APIs was? This is terribly technical – why should I care? But history shows it’s a great way of generating volume on platforms. Amazon realised that easy third-party access creates more selection, which creates footfall. So merchants can squirt their catalogue into Amazon. Similarly Betfair successfully increased liquidity on its betting platform, resulting in better prices and more transactions, by allowing independent bookies to post their whole book into the market via an API.
There’s a lot of activity just now in the industry, mostly technical so far. What are the commercial implications?
Andrew Bud, Chairman, MEF: ”Too many projects are led by the engineering function; these things must provide a business kicker for the content community.”
There are several strategic options for operators for APIs:
1. Expose a resource to third parties as a Web service. This is fairly low value – also, it has scary security/privacy implications, and there is the possibility that someone might scrape the entire database and use it for their own unspeakable ends.
2. Expose real-time data in an aggregated form. The aggregation process provides some protection from the privacy problems; real-time data rapidly becomes stale and individual data is hidden. For example, like Vodafone, you could provide TomTom with the locations of concentrations of users who are not moving, or traffic jams as we call them.
3. You can also use APIs to drive traffic through the core services. You require the use of your voice and messaging in conjunction with it, like BT does with Ribbit. There’s a problem, though – the price of these services is declining rapidly, and it is becoming much easier to provide them outside the telcos.
4. And then, there are new CEBPs. Instead of pulling data out of the telco, the upstream customers push queries or rules up into the telco, and use the result rather than processing data returned by a Web service. This permits value-based pricing and revenue sharing business models.
Questions of pricing follow from this; part of a bigger platform pricing strategy. There are two possible levers to pull – the cost to join and the cost per transaction. Both can go to zero. There is also a third dimension – the share of pricing between upstream and downstream.
Keith Willetts, Chairman, TM Forum: ”B2B activity is fundamental to the 2-sided business model. It involves lots of transactions, and lots of money.”
Examples:
MS Windows – has a high entry cost for end users (buy a computer), zero incremental cost, and zero entry cost for application developers;
Ebay – charges a listing fee, plus a 10% transaction commission;
Amazon – flat rate joining fee, then a commission on transactions;
Google – access free, variable transaction fee on upstream customers;
Premium SMS – access and management fees are usually rather more than Amazon or Ebay, plus a fee per transaction of minimum 40% to the company issuing the SMS.
Our chart here identifies the Zone of Death – fragmentation means joining costs so high that there is no scale, hence transaction fees have to be really high to make money, and therefore scale remains low and joining costs high!
Nicolas de Cordes, SVP Corporate Strategy, Orange said that the customer is core to Orange’s business. The business grows through customer interactions. But what happens after Telco 1.0? Without knowing it we’ve built major assets; network; operations; information resources; and trust. Trust is vital for commerce. It’s an unconscious element; which bank would I put information in? Operators need to consider how to be trusted partners for customers:
As a result, Orange has established three lines of business:
1. Content Services; content distribution and management
2. Vertical Services – notably healthcare. Also developing applications for specific business processes using, for example, M2M.
3. Service Management – wholesale, enterprise, and perhaps home networks.
We recognised that we couldn’t innovate at the speed of the Internet. So we created Orange Partner. There were some embryonic initiatives in the UK and France – these were rolled together into the new organisation. Its early aims were to help suppliers interact with Orange mobile, then to aid suppliers to interact with Orange across all platforms. Now, we’re aiming for developers in general – so far we’ve got 65,000 registrations.
Orange Partner has three focuses:
1. Getting the API out of the door;
2. Open Innovation (which links new businesses to stakeholders in Orange and its internal VC group);
3. App Shop, the app store.
So far, we’ve opened 30 APIs in four categories; as an example, you can meet members of AlloSortir near you using SMS and location, or call a taxi using click-to-call, SMS, and location. We want to see major brands like DHL and FedEx using these APIs this year.
We now have 50 million subscribers with access to certified, filtered apps through the Application Shop.
Karl Bream, Head, Corporate Strategic Marketing, Alcatel-Lucent introduced some problems from online games. He showed a screenshot of a tool identifying how well the network is performing. The value of each games player joining a game is assessed according to this so that it is more attractive to play opponents with higher quality connections. More than 200ms latency, and you’ve got trouble – you’ll get shot before you can duck.
There are 90 million online gamers; 14% of our sample was willing to pay for a better service: one which would guarantee quality of service to support their passion. If this could be exposed as a product, we could place a value on it of about €5-10 per month. We think there’s an alternative model here, as well; an advertiser could pay to boost the QoS, sponsoring a game or a group of gamers, or putting up a logo saying ”quality boosted by…”
Other possible APIs: ”Share the Moment” (video-sharing), which requires QoS and could earn about €0.15-0.20 per use, ”My Media Vault” (storage in the cloud), which requires content and context and might attract €7-9 a month per user, ”Put Me In Control” (remote-desktop) which requires context, security/privacy. There’s lots of value out there to capture, and somebody will do it.
”Video will break the bank”; the application and content providers do understand that there is a problem. But they need simple developer platforms – and new business models. Revenue sharing is acceptable, but they are concerned about the terms. There is a serious gap in their awareness of operators’ capabilities.
Keith Willetts, Chairman, TM Forum: ”1,000 operators and 30 APIs each – that is no standard. Look at USB – there’s only one of it.”
The final session at the event was essentially a “battle of the APIs”, as well as the commercial models that might be used to exploit them. Over the last two years, various companies and groups from the Telco industry have started moving towards “exposable” open platforms, sometime individually, and sometimes through concerted action by groups of operators. We have seen network platform APIs, device APIs, billing APIs and many others – and these are just the ones controlled by the Telcos themselves, excluding the manufacturers’ and software vendors’ own initiatives. The future will see even more emerge – for example, even femtocells might be “programmable” for new services.
This creates a number of problems. First is the overall noise and confusion from a set of uncoordinated Telco initiatives, perhaps even from multiple parts of the same organisations. Another huge issue comes when one considers that many new applications or services could be developed in a number of different ways. Take the provision of location of a mobile user to an application, as an example. This could be performed in the network (in a variety of ways, such as triangulation or Cell ID), on the device through access to a GPS chip or by mapping against a database of cell-tower locations.
So this session brought together a number of Telco-based “API-mongers” from across the value chain, with the hope of getting either alignment or clear water between them. They included the GSMA, OMTP, TMF and MEF, plus a notional upstream customer, the BBC and a “solo” operator, Orange.
There remains a healthy measure of indignation and jealousy at Internet players (often vilified as “over the top players”), and how they are pushing their own APIs to developers, often with more success.
· Do I trust my ISP / mobile provider or an OTT such as Google, Yahoo! and Amazon. [#9]
· Hmmm…so if I want to reach the whole world via Telco APIs I’m going to need to code in interfaces in my OTT app to support each operator’s flavour. Don’t you think that this will inhibit the creation of truly mass market services? There’s a clear need for standardization here and better collaboration to build interoperability. [#21]
· I can’t believe that people in this room are still referring to their future customers as ‘OTT Players’ which is as derogatory as calling Telco’s ‘pipe salesmen’, or ‘under the floor players’. Unless you show some respect to these companies, do you really think they will prefer to do business with you, rather than destroy you? [#22]
Orange’s comparison of its platform with a bank’s were perceived more as walled-garden than open.
· Orange: I can take my money out of a bank’s safe deposit box and put it somewhere else if I want. Will you
do the same with your customers’ stored data and content? [#12]
o 12, do you know any customer that has asked their Telco for the CDRs when they port their number? Aren’t you making an issue when there isn’t one? [#14]
· The bank also borrows my money and loans it out to make money/interest. that relationship is based on trust. [#13]
o Re 13 unlike a bank, a Telco quite often doesn’t control the application which manages the asset, but rather outsources it, so the trust may be diminished if the customer has transparency into who has access to their customer data. [#15]
o Re 13: And banks are regulated on repaying my money [#24]
There is also scepticism about whether many operators (or industry groups) really understand developers.
· The Telco can get value from the third party for the location API via a % of the transaction that result. [#7]
o 7, only if the market will pay for this. not always easy to measure the value of a transaction in which location API plays a part – it is not like a product sale! [#10] [Telco 2.0 view – this is very true. If someone uses a location API to find their closest ATM machine, would the operator’s payment really be dependent on how much cash was withdrawn?]
· Which developer do you target for simple APIs? Enterprise, Telco,’2 AM stoner’? [#23]
· Developing an application against a REST API is truly trivial. The assumption that developing against a telecom API is super difficult sounds like it’s coming from somebody who hasn’t lived in the Web world in the past three years. [#25]
· I want to know if any of the people on the stage have actually written a program using a telecom API in the past year. [#26]
There still remains considerable doubt that the Telcos can achieve all the requirements of developers on their own – and if not, how they might integrate and align their API offering with those elsewhere in the ecosystem.
· Should the Telco provide vertical apps or provide APIs on which these apps can be built. [#11]
· There are so many other business applications that work on APIs, not sure why those three from Orange were selected. For instance, why not talk about credit card fraud protection using SMS for validation? [#17]
· How can one expect to discuss a new ecosystem with many different animals and have only one kind of them (Telco’s) on stage? Where are the Sony, Disney, Time Warner, Philips, CA vendors etc? [#18]
o RE: 18 you are exactly right. [#19]
o Re 18, this is true but it is a chicken and egg. Why would they bother turning up if Telco’s can’t show them any value? Advertisers have pitched up at Telco events and found Telco’s don’t offer them anything of value. We have to get our thoughts/ideas aligned to some degree before we go to these potential customers. [#20]
The actual business models behind the Telcos’ API exposure are still primitive – and sometimes contradictory, as the lively debate between OMTP (handset browser/widgets) and MEF (sender-pays data) representatives revealed.
· Needing to understand the business process of commercialising APIs merely replaces the problem at another level: why do people think that operators who have shown a distinct lack of imagination in how to innovate on top of their assets will now innovate in business or commercial models? The problem seems to be the replication of the same lack of imagination and innovation is now being displaced into the need for understanding. [#27]
· Surely APIs need to be developed as open standards so that anyone can innovate using them, like app development on the Web? This sounds like giving with one hand while taking away with another… [#28]
o Re 18 and 26, you are on track. We need more outside the ecosystem players like Apple coming in to cross pollinate with our gene pool. My guess is that apple doesn’t attend Telco events because they are worried about damaging their own gene pool with our status quo. Give some kids full artistic license at a reference acct/operator to build their playground. Lock them in a room with caffeine and pizza and a big pipe. Carriers have great toys they would like to build with. Output = Telco 2.0 [#29]
Participants were asked: Which of the following statements best reflects your views on the API efforts of the Telco industry?
Individual operators and cross-industry bodies are getting things about right and current API programmes will yield significant value to the Telco industry in the next 3 – 5 years.
Individual operators and cross industry bodies have made a good start with their developer and API programmes but more needs to be done to standardise approaches and to bring commercial thinking to the fore if APIs are going to generate significant value to the Telco industry in the next 3 – 5 years.
The current developer and API activity by individual operators and cross industry bodies are totally inadequate and are unlikely to create value in the next 3 – 5 years.
APIs are a hot topic in the industry at present and this lively session highlighted three things very clearly:
1. There is a great deal of work being done on APIs by the operator and vendor community. There is a real sense of urgency in the Industry to make a set of cross-operator/platform/bearer/device APIs available to developers quickly.
2. There is a real risk of this API activity being derailed by the emergence of numerous independent “islands” of APIs and developer programmes. It is not uncommon for operators to have 3 or more separate initiatives around “openness” – in the network, on handsets or on home fixed-broadband devices, in the billing system and so on. Various industry bodies have taken prominent roles, usually at the level of setting requirements, rather than developing detailed standards.
Thomas Howe, CEO, Jaduka: ”Standards aren’t something we have to wait for! In the web sphere standards were something we did which worked so well that everyone said ‘that’s the standard’ and started using it. This is what happened with AJAX.”
3. It is still extremely early days for the commercial model for APIs. This is an area that the Telco 2.0 Initiative is concentrating hard on at present. It is already becoming apparent that a one-size-fits-all solution will be difficult. In line with the previous discussion about piloting Telco 2.0 services, it is important for operators to ensure that API platforms (and the associated revenue mechanisms) can service two distinct classes of user/customer:
Broad adoption by thousands/millions of developers via automated web interfaces (similar to signing up for Google Adwords or Amazon’s cloud storage & computing services);
Large-scale one-off projects and collaborations, which may require custom or bespoke capabilities (e.g. linked to subscriber data management systems or “semi-closed” / “private” APIs), for example with governments or major media companies.
It seems that certain sets of APIs are quite standalone and perhaps have simpler monetisation models – e.g. location lookups or well-defined authentication tasks. Others, such as granting 3rd-party access to specific “cuts” of subscriber data, may be more difficult to automate.
The fireworks between various panellists also illustrated an important point – there remains considerable tension between those advocating business models which are ‘content’-driven, involving the delivery of packaged entertainment and information to consumers and enterprise customers, versus those which are aimed at facilitating large numbers of new and (mostly) unknown developers who may use the platform to create ‘the next big thing’. Both business models have merit – while there is certainly value in using packaged approaches like “sender-pays data” for well-defined content types, there is also huge potential in becoming the platform of choice for unexpected ‘viral’ web applications that exploit unique Telco assets.
Dean Bubley, Telco 2.0: “I can’t believe that people in this room are still referring to their future customers as ‘OTT Players’ which is as derogatory as calling Telcos ‘pipe salesmen’, or ‘under the floor players’. Unless you show some respect to these companies, do you really think they will prefer to do business with you, rather than destroy you? ‘
In the short term, work needs to continue on developing the API platform, but also on evolving the attitudes and processes within the operator to support successful future business models:
Avoid pre-conceptions about the commercial model for APIs. In particular, revenue-shares and flatrate % commissions are extremely difficult to justify, except for the most commoditised capabilities like payment, or large-scale individually-negotiated contracts;
Develop thinking around the commercial model for APIs as getting this right will drive the success of existing industry-wide API initiatives – these technical programmes will fail without input from strategists and marketers on the required frameworks;
Most operators are undergoing major programmes of transformation – e.g. around outsourcing or IP network deployment. It is critical that these actions are constantly reviewed for fit against API-type initiatives to ensure they ease their creation, and don’t create new bottlenecks or structural silos;
Recognise that individual propositions about openness often make sense when viewed in isolation – but need to be seen in a wider strategic context, including all interface points between the operator domain and the Internet/apps world;
Non-handset specialists should make an effort to understand the implications of OMTP’s BONDI, as it can support a broad set of innovative applications and business models – and may well also appeal to third party developers;
Be aware that many developers will not want to have dozens of separate relationships with individual operators – do not force them to duplicate effort. Instead, work with industry-wide groups to address their core needs;
Develop a checklist of open API “hygiene factors” that are critical for developers, such as easy app testing mechanisms, transparency in application approval/signing, clear API pricing and so forth;
Consider “eating your own dogfood” and use elements of third-party web services and APIs as part of your own offering, at least in the early stages. In particular, this could reduce time-to-market and enhance flexibility.
Longer term actions should include:
Adopt a clear strategy for API “supermarkets” or clearing-houses. Developers will ultimately want to “shop around” for APIs and capabilities – or buy bulk “packages” across multiple operators. Individual telcos will need to decide how their relationships with such API wholesale providers will evolve – or if they want to take that role for themselves;
At present, it is highly unclear about how APIs will be marketed and sold. Most potential customers are not even aware that operators have something to offer them – would a software developer for utility meter-reading even consider how Telcos could add value, for example? Today’s developer programmes are insufficient, as they only tend to reach existing telco-minded companies. There will need to be much broader outreach and evangelism, perhaps piggy-backing on the developer programmes of larger IT firms like Microsoft or Oracle;
Consider the issue of openness when applied to other (possibly competing) Telcos. What happens when another operator becomes one of your developers? Or when you choose to exploit your peers’ capabilities?
Adopting a “semi-open” policy such as Apple’s with its uncertainties over application acceptance, is high risk. It potentially mitigates the risk of “damaging” or “cannibal” apps, but also risks alienating well-intentioned developers. Think very carefully about whether you have the same “pull” as Apple (especially its monopoly on its own platform) before employing a similar strategy – being seen as a “benevolent dictator” is not common amongst Telcos;
To service the “mass-market” API segment it will be absolutely crucial to provide an easy interface and simplified payment options. A newcomer can sign up for Google Adwords, or some of Amazon’s Web Services APIs, in minutes – Telcos need to offer the same capability.
BSkyB is probably the most misunderstood publicly quoted company in the UK. Most analysts view them as a media company; our theory is that BSkyB is a platform company and comparisons to Apple, Microsoft or Google are more appropriate than UK media players such as the BBC, ITV or even potential new entrants such as BT.
Figure 1: Sky Delivery Platform
Rule #1 – You have to keep loading extra features onto your platform…
Microsoft historically were tops at this – Windows for some grew fatter and fatter release by release, but in reality every release contained new features that appealed to some. BSkyB have done the same – they moved from analogue to digital, introduced interactive TV, took PVRs to the mass-market, and now are doing the same with HD-TV. As soon as that is complete ,they will move onto the next thing – 3D TV or even true on-demand VOD.
BSkyB seem to be one step ahead of the competition all the time. The only exception to this is Virgin Media networked VOD service, which is far superior to the BSkyB limited caching of programmes to the Sky+ device – currently a big hole in the portfolio. Notice that BSkyB is totally agnostic whether the features are driven by hardware, software or network – their platform contains all three elements.
Rule #2 – You have to design your platform to be the easiest to use…
Apple are the kings of usability – they control both client hardware, software and in the networked world they are taking more control of delivery though not by ownership of underlying assets – think of the parallel with BSkyB using 3rd parties for satellite and broadband delivery.
Very little is thought of BSkyB’s innovation in design – the Sky remote control in its day was a huge advance from TV manufacturers’ efforts. Similarly, they have extended this advantage in the PVR world – still keeping with their own designs. This is just the start of BSkyB’s advantage in usability.
It is not by accident that BSkyB wins awards for customer service – they realise that excellence in usability also needs to consider every touch point with customer – from sales to installation and care. BSkyB have made huge investments here and it pays off – within a couple of years of entering the voice and broadband market, they seem to be winning almost every award on offer.
Rule #3 – You need the lowest cost platform…
This is all about the economics of scale and running a tight ship especially with regard to corporate overheads. Nearly every platform businesses involve huge upfront risks & investment with many years of losses, with a steady ascent to profitability as the platform gains volume & pricing power.
Organisational inefficiency is a disease that afflicts almost all large companies. Very little data comparative data is available here, but I suspect that Sky is far more efficient if costs were normalized and compared to other payTV (eg Virgin Media), fixed (eg BT) or even Mobile (eg Vodafone) competitors for the share of the consumer wallet.
Rule #4 – You need the best content on your platform…
This is probably the most misunderstood element of BSkyB’s business – people still think BSkyB’s advantage is all about exclusive rights to Premier League Football & Movies. The truth for most content owners is that the BSkyB platform is the most profitable mass market route. And the attractiveness grows year-by-year as subscribers and revenues increase compared to their competitors.
People tend to dismiss how flexible the BSkyB platform is to content owners: you can sell your individual rights to your preferred bidder on a particular Sky Channel, for example HBO selling rights to the “The Wire” to a minority channel, FoxFX; you can build your own channel(s), e.g. MTV and Discovery Channels, or get a particular Sky-owned channel to do the production, e.g. sports events.
Strangely, even the major public service broadcasters (BBC, ITV, C4 & Five) are not only happy to have their content attached to the BSkyB platform, but are willing to pay for the pleasure.
Rule #5 – You need to extend your platform into adjacent areas…
Currently the focus on BSkyB is the move into the home broadband and voice market, which is a much bigger market than pure TV. To date, despite the rapid gain in scale profitability is still an aspiration. The defensive qualities of the play are always underestimated, as is how it constrains the freedom of major competitors, especially Virgin Media and BT, to differentiate.
However, it should never be forgotten that moving into adjacent areas is nothing new to BSkyB: the early digital days featured BSkyB investing/losing money in “t-commerce”; a move into gambling via SkyBet has been more successful, but the retail focus of the service was dwarfed by the emergence of a gambling platform play, BetFair; and Sky has investing in online properties, especially football, but it is too early to access the success.
The BSkyB defensive investments pale into insignificance compared to those made by Microsoft in protecting their franchise against the growing encroachment from Google. These defensive investments are also crucial in negotiations with regulators – for every complaint that BT states about the lack of profitability in the payTV market; BSkyB can counter with allegations about the impossibility of making profits in the home broadband & voice market.
Following the Rules
Of course following the rules is extremely difficult – continual innovation and improvement is hard. But the end result is a platform with plenty of levers for growth to play with. Different levers can be used at different times – all of which make the platform more attractive to particular segments of consumers and thereby generate the growth. The underlying dynamic is that BSkyB needs to show customer growth for success – or more importantly the right type of customer growth, ones who’ll happily pay for the extra features. Building the platform, increasing eyeballs, and increasing diversity are crucial. Traditional TV metrics such as share of viewing for an overall channel is completely irrelevant.
Figure 2: Sky Customer Growth and major platform upgrades
Impact on Regulation
UK Regulators, especially OFCOM, have struggled with the BSkyB business model and tend to try to examine market share in very narrow vertical segments – eg the current ongoing PayTV consultation. These ways of looking at BSkyB are doomed to fail. OFCOM is not alone and the EU battles with Microsoft over its platform business are already legendary and still ongoing. We don’t yet have the answer of how to regulate in a platform world, but we do know that a different approach is required.
Most importantly, BSkyB’s platform shows a multi-sided business model in action, bringing value to both upstream and downstream customers and earning decent returns for shareholders.
Telco 2.0 Use Case Project – Draft Approach, Oct 2008
Background It has been well-documented, by us and others, that telcos continue to frequently find themselves on the wrong side of rapid changes in consumer behaviour, technology evolution and regulatory reform. This cocktail of adversity demands a fundamental re-think of the role and position of the telco in the value chain, moving away from the traditional one-dimensional service model to something more suitable to the new landscape.
In the recent Telco 2.0 report, “The 2-Sided Telecoms Market Opportunity: Sizing the Platform Play, we defined the new opportunity for telcos and put forward some very detailed ideas and illustrations of how this might work in practice. We determined that the new opportunity for telcos, which we estimated at $125bn in incremental revenue terms (which builds on $250bn of potential incremental revenues from new wholesale platforms, see this report), lay in repositioning the business to serve as an enabling platform for transactions between upstream and downstream customers. We further identified four key definitional aspects to a platform created for a “two-sided” business model:
1.It is a catalyst enabling two or more parties to contract directly using the platform; 2.It does not directly participate in the contract; 3.Its value is in helping parties to contract more easily, more efficiently, and more effectively, by reducing transaction costs and friction; 4.Its value comes from scale, on at least one side of the market, which then drives usage on the other side.
Furthermore, we identified seven key areas of service capability where telcos can claim a range of strategic assets vital to constructing a value-added services platform strategy to capture the two-sided market opportunity:
1.Identity, authentication and security; 2.Advertising, marketing services, and business intelligence; 3.E-Commerce sales; 4.Order fulfilment, offline; 5.Order fulfilment, online; 6.Billing and payments; 7.Care and support
In each of these areas, telcos possess assets, in many cases traditionally underused, which are uniquely placed to develop a successful platform business. These include trusted authentication mechanisms, customer and billing relationships (both consumer and enterprise), customer data and meta-data, voice and messaging APIs, and experience in quality of service delivery.
Use Case Project plan
The use-case project (which will culminate in a major report in November) will isolate real-world examples from each area of service capability wherein the telco can fill (or, indeed is already filling) a void in a transaction space to reduce friction, in the process forming the final piece of a platform business which can be replicated in other industry verticals. On our current report roadmap, sample use cases would include the following:
1.) Identity, authentication and security – Despite evidence of growing consumer reliance upon online transaction spaces, telco upstream customers in the commerce arena continue to encounter challenges in identifying/authenticating customers and preventing fraud.
Online gambling site Betfair, for example, is constrained by a legal requirement to confirm the nationality and age of players, with a high cost of compliance ($22 per registered user) and unacceptably lengthy process. Telcos possess customer meta-data which may form the basis of an authentication mechanism to reduce these costs and remove friction from transactions.
Mobile operators already perform some interventions to prevent minors from accessing adult content on their handset, and so probably already have many of the relevant assets and process in place. Such a platform could be repurposed for other industry verticals, and also potentially be developed into a subscription service for end users.
2.) Advertising, marketing services, and business intelligence – Advertisers continue to struggle with shifts in media consumption and consumer behaviour which demand a new approach to targeting and performance metrics. Marketers want to target users with the right offers and measure the success of their marketing campaigns as this allows them to demonstrate marketing ROI.
Whether it be online advertising or via traditional video/IPTV platforms, telcos have valuable customer relationships and meta-data which can be harnessed to more effectively target and measure, opening up new markets in the process.
3.) E-Commerce sales – Innovative content and applications developers often find it difficult, if not impossible, to penetrate the walls of telco HQs, and telcos are not typically structured to deal smoothly with small suppliers or partners.
A number of operators have wished to enrich the suite of services and applications available across its properties, without committing to their own expensive development programme. Instead, one or two leading players are creating a developer environment, exposing APIs to allow third parties to showcase services and applications on its network. If these are successful, they can then be commercialized across the operators’ entire footprint on commercial terms agreed with the developer.
4.) Order fulfilment, offline/customer care – Real-world order fulfilment, customer care, and credit management are fraught with complexity and unnecessary costs, which telcos have the tools to mitigate. A major catalogue company has been looking to streamline its customer interaction routine to make deliveries and credit collection transactions more efficient. It has employed a solution sourced from a specialist software company, and realized efficiency gains, as well as lower debt insurance costs as an added benefit.
Telcos have extensive corporate customer bases on managed service offerings often tied to internal network and data management. By more closely aligning the offering to specific business processes, in partnership with innovative players in the space, telcos have the ingredients to create and market a platform which could be deployed widely across multiple industry verticals, in some cases generating incremental sales from existing customers.
5a.) Order fulfilment, online/content delivery assurance – Investment banks face significant challenges in managing data effectively on their trading systems in an era of extremely high volume electronic trading, wherein even tiny amounts of latency/congestion can invalidate large volumes of transactions.
The systems integration arm of a large telco was awarded the managed service contract for an international bank, but has needed to partner with small, early stage company to find a solution. As the solution is proven, the telco will end up with a managed services platform which can be marketed across the industry, with a trusted reference client for validation.
5b.) Order fulfilment, online/content delivery assurance – Terrestrial broadcasters in Japan are faced with competitive pressures from P2P and over-the-top video applications, while currently being barred by regulation from offering linear programming over the web. As a result, they have been relatively slower than some of their overseas peers to develop an internet presence.
In cooperation with consumer electronics players, they have now taken their first step forward, in anticipation of a change in regulation, by forming a consortium to bring time-shifted, on-demand content to networked televisions using Japan’s enviable broadband access infrastructure for distribution.
For local access providers, the associated network load may be an increasing source of pain, but an affiliate of a major local telco, which manages the CDN behind the consortium, is a leader in P2P research, and is potentially capable of deploying a network cache element on the platform.
In so positioning itself, the telco affiliate might be in a position to generate revenue both from upstream (broadcasters) and downstream (local access companies) customers, as well as facilitating a localized advertising platform in which all could take a revenue share.
6.) Billing and payments – Social networking sites and virtual worlds face numerous challenges in billing and payments, particularly when their target demographic group may not yet be part of the conventional banking system.
On fast growing social network, focused on a particular demographic, derives significant revenues through the sale of virtual goods, with payment typically tendered via SMS. However, telcos have customer and billing relationships beyond the mobile arena which may also be harnessed to create alternative payment mechanisms, rather than leaking such opportunities to the likes of Wallie or Paysafecard.
Our research report, The Two-Sided Telecoms Market Opportunity outlines in detail how operators can achieve growth by adopting a two-sided business model. We’ve invested a huge amount of time and effort in sizing the opportunity for operators a.) by capability (Identity, Authentication, Security + Advertisng, Marketing, Business Services + E-Commerce + Off-line Order Fulfilment + On-line Order Fulfilment (content delivery) + Billing & Payments + Customer Care) and b.) by vertical industry. This helps us not only show how and why operators should tackle this opportunity (the usual strategic focus of our research), but also demonstrate the potential size of the pot.
We discuss the different functions of 2-sided platforms in the report and then look at Google, Amazon, Monster, iTunes, Betfair and AP Moller-Maersk in detail, pulling out appropriate lessons for telco operators. In this article we explore Google and, in boxing parlance, who measures up better in the ‘tale of the tape’…
Many people feel that Google will merrily extend its dominance of web search into voice and messaging and mobile advertising. However, new analysis suggests that telcos have some clear advantages for building competitive platforms…if they can exploit them.
Google is interesting because many people feel that it is ‘game-over’ for the operators and Google will merrily extend its dominance of web search into other areas, including voice and messaging and mobile advertising. In the report, we take a fresh look at Google:
What it has achieved and why
Its skills and assets
Its current strategy
Operators and Google both make noises about being cosy partners. But we all recognise that they will also compete in a big way going forward.
Those interested in boxing may notice that the pictures above are of Mike Tyson (Google) and the unfancied British heavyweight Danny Williams (Telco operators). They are taken from a world heavyweight contest in 2004 in Louisville. The assumption of most people at the time was that even a Tyson in decline would brush Williams aside. Instead, Tyson was knocked out in the 4th round. Now, we are not suggesting that the same will happen in the battle between Google and and the operators but we do feel that the operators have plenty of weaponry IF they can use it. And Google thinks this too. This is from the IPO prospectus in 2004 and still holds true today:
We face competition from other Internet companies, including web search providers, Internet advertising companies and destination web sites that may also bundle their services with Internet access. In addition to Microsoft and Yahoo, we face competition from other web search providers, including companies that are not yet known to us. We compete with Internet advertising companies, particularly in the areas of pay-for-performance and keyword-targeted Internet advertising. Also, we may compete with companies that sell products and services online because these companies, like us, are trying to attract users to their web sites to search for information about products and services.
We also compete with destination web sites that seek to increase their search-related traffic. These destination web sites may include those operated by Internet access providers, such as cable and DSL service providers. Because our users need to access our services through Internet access providers, they have direct relationships with these providers. If an access provider or a computer or computing device manufacturer offers online services that compete with ours, the user may find it more convenient to use the services of the access provider or manufacturer. In addition, the access provider or manufacturer may make it hard to access our services by not listing them in the access provider’s or manufacturer’s own menu of offerings. Also, because the access provider gathers information from the user in connection with the establishment of a billing relationship, the access provider may be more effective than we are in tailoring services and advertisements to the specific tastes of the user. (Our bolding). See the full prospectus here.
Rather than walk you through the case study on Google, we have uploaded in slide format:
“Verizon Wireless will open up its network to any device that a partner wishes to bring along. What are the business model implications and how should Verizon finesse this into a Telco 2.0 play?”
It’s been all across the tech news and blogosphere: Verizon Wireless has announced that they’re moving to a, well, less closed, network attachment model. For those whose job isn’t to surf the web, the summary is that pace certification testing by Verizon’s labs, and an unknown amount of bizdev negotiation, you can attach any device you like to the Verizon Wireless network. If you had to sum up Verizon’s strategy to date, it would be “Execute!?. They’ve simply done a great job of merging Airtouch, GTE and other properties; building out more coverage than the opposition; keeping an adequate level of handset and content innovation; and generally not screwing up.
The key details of the new offer — price, process and terms — remain hidden behind the PR fog. So what’s the unique Telco 2.0 slant on the news? When the market leader switches strategy, it’s not some short-term panic over Apple, Google, WiMax or spectrum auctions. It’s part of the deeper structural shifts in progress. So as we’re in the final assembly stage of our shiny new Broadband Business Models 2.0 report, here’s what’s on our minds about the future of connected devices:
Firstly, disaggregation of the value chain is a long-term inevitability. Regardless of Verizon’s taste in cell phones, there’s always going to be a need to assemble devices, software and content in configurations Verizon doesn’t think of, and sell through channels Verizon can’t access. For example, we’ve concluded content aggregation has strong increasing returns to scale, and as telcos aren’t very good at being media companies, they will exit the portal business — be it for text, video or music.
So in one sense, it’s “what took you so long?.
Secondly, Verizon can now offer up its assets — billing, retail logistics, care, etc. — to partners. These assets can be sweated far harder. Verizon takes ideas for handset and content, develops them together, markets, retails, supports and bills for it. Along that chain there is always a weak link. By allowing other businesses to go around the weak link, the full value of the other parts of the business can be realised.
As it happens, they’ve got a good network, retail, customer care and billing. So handsets and content are probably the bottleneck in delivering value. The CDMA ecosystem is smaller than the GSM one, and many of the handsets available only appeal to the techno-mad Japanese and Koreans. Far from being a “dumb pipe?, we’d anticipate Verizon moving to a broad platform play offering a suite of services to partners. For example, did you know there are around 30000 sales tax jurisdictions in the US? Offering phone service is hideously complex due to a maze of federal, state and local regulation. Why fight through these thorns to the sleeping princess yourself when Verizon can rent you a ladder over the hedge?
If you were having a Coasian view of the world, you’d simply note that commodity IT, web services and the Internet have lowered the cost of integrating outsiders into the business. Hence the relative value of internal vs. market transactions has changed. “Open? and “closed? aren’t virtues and vices, but merely stages of evolution.
Next up, if you were running Verizon Wireless and looking to make your business more efficient, what can you do? You could set higher targets for your execs and exhort them to do better. However, management targets and incentives (as the UK public sector has discovered) are blunt instruments. You might get cost savings or revenues at the expense of investment and brand quality. So instead you draw inspiration from the structurally separated fixed-line business. Benchmark your retail operation against outsiders. Make them feel the heat of competition purely on the merits of their own sub-part of the business. The Verizon retail business is no longer a monopsonist buyer of Verizon’s network and wholesale assets.
Finally, the most critical factor in Verizon making a success of wholesale network access will be to construct pricing that incentivises the desired behavior. Offering flat-rate vanilla ISP plans to wholesale partners will be a fatal mistake. Consumers need simplicity. Wholesale clients do not. You should not be afraid to confront them with complex wholesale pricing that reflects both the value and the cost of running the network. That means reflecting peak and off-peak times, congested areas where there is less spectrum or fewer attachment rights, and differential pricing depending on where Verizon has an advantage over competitors in terms of speed or coverage. The partners then have to work out how to design and package their product around these parameters, and create the simple retail propositions.
