Cashing in on the end of cash

Introduction

As the rapid expansion of the digital economy threatens to sweep away coins and notes, telcos could be one of the major players in the transition to a cashless society. In the emerging Coordination Age (see STL Partners report: Telco 2030: New purpose, strategy and business models for the Coordination Age), telcos are well placed to help consumers and companies interact and transact far more efficiently and effectively than they have in the past.

This report explores what the global shift away from cash means for telcos and their partners. It identifies the factors driving the transition from cash payments to electronic transactions, considering the perspective of governments, banks, merchants and consumers, before explaining why cash might cling on at the margins.

The report then outlines the progress mobile operators are making in payments and financial services, drawing on examples from Africa, Asia and Europe. It also considers some of the partnerships telcos are striking with Internet players to help overcome some of the obstacles curbing greater use of mobile payment services, before drawing conclusions and making recommendations.

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This executive briefing builds on previous STL Partners reports including:

Calling time on cash

Despite the widespread adoption of the Internet and the subsequent rapid growth of online commerce, almost 90% of global retail1 still takes place at a physical point of sale in a store or at market stall. Although many traditional high streets and shopping malls are struggling, the value of point of sales transactions continues to grow, as an expanding middle class spends money at everything from coffee shops and restaurants to leisure centres and theme parks.

As you would expect, growth in developing markets tends to be markedly quicker than in developed. In India, point of sale transactions (using all payment mechanisms) are set to rise from US$893 billion in 2018 to US$1.36 trillion in value in 2022 (growth of 53%), according to leading payment processor Worldpay. Whereas in the U.S., point of sale transactions are set to grow from US$7.96 trillion in 2018 to US$10.33 trillion in value in 2022 (growth of 30%), according to Worldpay.

Even with the expansion of the digital economy, many transactions worldwide still involve the face-toface exchange of coins and/or notes. Cash is used to complete almost one third of payments (by value) at point of sale worldwide today, according to payments technology company Worldpay. But it predicts that figure will fall to 17% in 2022 – a dramatic change in just four years. Worldpay projects “that cash will be supplanted by debit cards as the leading point of sale payment method in 2019, falling to fourth place in 2022 behind debit cards, credit cards, and eWallets.”

These trends reflect the fact that using cash is expensive, cumbersome, inefficient and opaque. Cash may eventually become an anachronism. At least, that is what many large stakeholders in the public and private sectors are hoping. There are multiple drivers steering governments, banks, merchants, consumers and banks away from cash.

Why governments don’t like cash

Governments have several inter-related reasons for wanting to reduce the use of cash:

  • Tackle the black market: As cash is untraceable, it can facilitate crime, such as the trading of illegal or smuggled goods, and even terrorism. Governments periodically try and crack down on people who use large amounts of cash. In 2016, the government of India, for example, suddenly announced it was replacing 500 and 1,000 rupee notes (US$7.50 and US$15 respectively) with new notes in an effort to identify black marketers. People could exchange the old notes at banks, but those with large holdings had to account for the source of their cash. However, such measures only work up to a point: eradicating cash won’t eradicate crime. If necessary, criminals can always store and barter goods (e.g. drugs or guns), rather than hoarding cash.
  • Reduce corruption: In some countries, cash payments to and from the public sector are often vulnerable to being siphoned off by unscrupulous officials or other middlemen. Conversely, the digitisation of government benefit payments creates an electronic trail that reduces the risk of fraud and theft, and thereby ensures the money goes where it is intended. In 2010, when the Afghan National Police began using a mobile money service to pay salaries instead of cash, they discovered that 10 per cent of salaries were being paid to fictitious police officers, while some officers were not receiving their salaries in full, according to a report by CNN.
  • Greater transparency and less tax evasion: Cash-in-hand payments can result in lost tax revenue, as the recipients fail to declare their income or don’t pay VAT.
  • Reduce costs: If governments can distribute cash digitally, it can save both the public agency and the recipients both time and expenses: In Niger, converting a cash transfer programme to mobile money saved recipients over 20 hours, as they spent less time travelling and waiting for their transfers3.
  • Digital leadership: Some governments want to position their countries as digitally advanced and see the drive to get rid of cash as a means to digitise services and drive adoption of digital IDs, which are a key enabler of the digital vision.
  • Increase state control: Some authoritarian states are likely to see the digitisation of payments as an opportunity to enhance state power, or at least enhance security.

However, in many cases, governments have to distribute or accept cash because many of their citizens still lack bank accounts. More than 60 million unbanked adults globally still receive government transfers, wages or pensions in cash, while 230 million unbanked adults work in the private sector and get paid in cash only, according to the World Bank’s Global Findex Database Measuring Financial Inclusion and the Fintech Revolution 2017.

Banks and merchants find cash costly

But the biggest driver behind the decline of cash could simply be the costs of the underlying infrastructure and merchants’ growing reluctance to accept cash. For a small retailer, bar or coffee shop, cash consumes time – it needs to be counted and taken to the bank. It also poses a security risk, whereas digital payments automatically end up in the merchant’s bank account and are very unlikely to go missing.

Cash is also a burden for the financial services ecosystem, which has to make ATMs and bank branches available. In the U.K., the Access to Cash Review, a report published in March 2019, warned: “As we stand, we have a cash infrastructure which is fast becoming unsustainable, with largely fixed costs, but where income is declining fast. Britain’s cash infrastructure costs around £5 billion a year to run, paid for predominantly by the retail banks, and run mostly by commercial operators. Much of this cost is currently fixed, whether in physical cash sorting centres or ATMs. But as cash use declines, the economics of the current cash model are becoming seriously challenged.”

Consumers’ mixed feelings about cash

Although some consumers may want to use cash to avoid taxes and maintain privacy, there are several reasons why they too might favour digital payments. Every deposit, withdrawal, transfer or payment made digitally creates a recorded financial history. These transparent transaction records can help protect customers’ rights – they can help prove that they have paid for a specific product or service. Moreover, using digital payments, rather than cash, can help individuals build a credit history, which could make it easier to get a loan. Digital records should also help consumers to monitor and budget their spending, although some studies have found that some forms of digital payments, such as contactless payment cards, can result in consumers spending more than if they were solely reliant on cash.

In the developing world, where credit scores are scarce, merchants are turning to digital mechanisms to help consumers pay in instalments for appliances, such as TVs, radios, lighting, cooking stoves and solar water pumps (all of which can increase household and agricultural productivity). In Kenya, for example, SunCulture enables farmers to pay for solar-powered irrigation pumps in instalments via a mobile money service. As a result, they can improve their productivity and, ultimately, their incomes. Farmers who use SunCulture have reported an average 300% increase in crop yield per year, according to a study by the mobile trade group GSMA.

A vicious circle for cash

While Worldpay point of sale data show cash is in steady decline, there are good reasons to believe it may actually be under-estimating the speed at which other payment methods will take over. In many markets, cash is approaching a potentially decisive tipping point. With consumers ambivalent and governments, merchants and banks all favouring alternatives, cash is in the grip of a vicious circle:

  • The deregulation of the banking system is increasing competition and putting pressure on banks to cut costs and close branches.
  • Small businesses find that the closure of bank branches makes it more expensive and riskier to handle cash. In some cases, merchants stop accepting cash or give people incentives to pay digitally.
  • As fewer merchants accept cash, consumers become increasingly reliant on digital alternatives.
  • As people use cash less and less, they make fewer visits to ATMs and bank branches.
  • Banks continue to close ATMs and branches, making it increasingly hard for anyone to keep using cash. Once the cash infrastructure in a specific locality has gone, everyone living in that area really much has to go digital.

If this vicious circle kicks in, providers of mobile payment services need to be ready for a very sharp fall in the usage of cash. In practice, that will mean upgrading back-end systems so they can handle large numbers of simultaneous transactions, while also preparing for a fresh competitive onslaught from new entrants hungry for potentially valuable transaction data.

 

Table of contents

  • Executive Summary
  • Introduction
  • Calling time on cash
    • Why governments don’t like cash
    • Banks and merchants find cash costly
    • Consumers’ mixed feelings about cash
    • The rise of the electronic wallet
    • A vicious circle for cash
    • The convenience economy
    • Why cash might persist
  • Mobile operators’ financial services
    • M-Pesa makes mixed progress in Kenya
    • The importance of interoperability
    • Telcos as banks
  • Conversational commerce
  • Partnering with Internet players
    • Learning from China’s Internet platforms
    • Other partnerships between Internet players and telcos
  • Conclusions and recommendations

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Telco innovation: Why it is broken and how to fix it

Telcos have tried innovating in many verticals

Incumbent telecommunications providers have seen their margins fall as basic telecommunications services, both fixed and mobile, have been increasingly commoditised. The need to provide differentiated services to counteract this trend is widely recognised in the industry, yet despite considerable investment and many attempts, too often new services launched by operators have failed to deliver the anticipated results. Yet some, especially in mobile banking and related services, have proved successful. Why is this so?

This report focuses on product and service innovation for customers, rather than on innovation in sales, marketing, finance, operations or networks. It addresses the introduction of new and innovative services and not the repackaging of existing communications services, for example in new pricing and service bundles (see Figure 2).

It looks at examples from a range of services, covering most of the new types of services introduced by MNOs over the past decade. These include:

  • Messaging: RCS and its competitors
  • Mobile financial and insurance services: Orange Money / Orange Bank, Millicom/Tigo’s joint ventures
  • Health: O2 Telehealth, Telenor’s Tonic health service
  • Smart home: AT&T’s Digital Life, Deutsche Telekom’s Qivicon
  • Lifestyle: Turkcell’s range of apps and Vodacom’s Mezzanine

We have covered many of these individually in previous reports, looking at how they were developed and have evolved over time, and whether and why they are (or we expect them to be) successful.

This report seeks to identify the common factors that led to success or failure, in order to establish some best practices for telcos in innovation. While we recognise that there are often several causes of success and failure, in some cases a single failure can undo much good work.

Previous reports this one builds on include:

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Product development or true diversification: How ambitious should telcos be?

Historically, telcos have aimed to find new customers for existing telecoms services, where the their market is not yet saturated, or expanding geographically to achieve scale. However, most telecoms markets are now nearly saturated – at least in the areas that telcos can profitably reach – so true service innovation, corresponding to the right hand side on the figure below, is now a crucial component for long term revenue growth.

The seven telco innovations discussed in this report are shown on the figure below. It is worth noting the progression Orange has made in building on its experience with its mobile money service to providing full banking services. This is highlighted in the diagram by the arrow, and is discussed more fully in the body of this report.

Most telcos innovation falls in the product development category on the Ansoff matrix

Telco innovations plotted on the Ansoff matrix

Source: STL Partners. For more on market development opportunity, see STL Partners report Making big beautiful: Multinational telcos need the telco cloud

In theory, one of the most effective ways of maximising the chances of success, and achieving the scale required to make a significant impact on revenues and profitability, is for operators to select services that target a large part of their existing customer base.

However, our analysis of the telco innovations in this report shows that there is actually little correlation between the distance from telcos’ core customer base and level of success. This because by tying new products and services too closely to their existing customer bases, telcos are actually limiting their ability to scale. While this approach is intended to help them compete more effectively against their peers, by increasing loyalty for core telecoms services, in reality, any telco-driven product development innovation is likely to compete with network agnostic service providers. So while it may make sense to offer something only to existing customers at the start, to truly scale telcos need to reach a wider market.

Orange is a good example of this transition. While its mobile money services in Africa remain tied to its telecoms customer base, its move into full-fledge banking in France is separate from telecoms services. As it rolls out full banking services across its footprint, this separation is likely to become more entrenched.

Many of the examples discussed in the main body of the report, including AT&T’s Digital Life, Orange Money and O2’s Telehealth venture were set up as separate businesses, which allowed their initial development to progress well. But this was not enough on their own to make them successful.

How successful have telcos been?

Comparing telcos’ investments into service innovations shows that, too often, they have made bets on areas that seem like natural opportunities for new services, but failed to gain traction because they didn’t do a rigorous enough assessment of the conditions for success.

To succeed in innovation, telcos must evaluate proposed new services or products much more painstakingly across three areas:

  1. User needs and requirements: that the product or service meets a real user need. This breaks down into two points:
    • The product or servicemust be easy to use and fit into users’ lifestyles.
    • And at the right price point. Most consumer products need a free tier to encourage customers to try and engage before paying (if ever). In some cases, the end user might not be the payer, so if that is the case then telcos need to identify the payer and ensure the product is relevant and valuable for them, too.
  2. Market structure and characteristics: clear vision of where the ROI is coming from. There are two main options for ROI – increased customer loyalty and new revenue.
    • For loyalty, telcos need a clear means of measuring whether the product or service is improving retention.
    • If telcos are seeking to build new revenue, they need to be realistic about how long it will take to achieve profitability and the size of the opportunity. Too often, telcos give up because they deem a new venture not valuable enough compared with the core business..
  3. Business structure: deciding on whether to develop something in house, to set up a joint venture, or acquire, and what the relationship is with the core business. The further away a new product or service is from the core business, the more independence it needs to develop and grow.

In this report, we compare the approaches of seven telco innovations, drawing on in-depth analysis from previous STL Partners reports, summarised in the table below.

Strategy is more important that degree of difficult for successful innovation

Assessment of quality of strategy and execution for telco innovationsSource: STL Partners

Our analysis shows that the difficulty of the innovation, i.e. whether it is product development or diversification into a new vertical, is less important to success than doing the difficult strategy and planning work outlined above.

For instance, while RCS is very closely tied to telcos’ existing customers and services, the necessary cooperation between telcos to bring it to market in a way that is valuable to consumers and potential enterprise customers was unrealistic from the start. By constrast, Tonic’s health insurance proposition is very different from Telenor’s core telecoms services, but Tonic’s clear vision and strategy, and ability to adapt to customer needs, have underpinned its early success in Bangladesh.

Read the full report to see a detailed assessment of each innovation across the three categories.

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RCS: Walking the commerce tightrope

Introduction

Thanks initially to WeChat in China and now Facebook in the west, mobile messaging is fast becoming a key platform for digital commerce, mounting a challenge to Google Search, Amazon’s Marketplace and other two-sided platforms.

As explained in our June 2016 report, Google/Telcos’ RCS: Dark Horse or Dead Horse?, many of the world’s largest telcos are working with Google to develop and deploy multimedia communications services using the RCS specification. Like SMS, RCS is intended to work across networks, be network-based and be the default mobile messaging service, but it also goes far beyond SMS, by supporting rich features, such as video calling, location sharing, group chat and file sharing.  Proponents of RCS believe it can ultimately offer greater reach, reliability, privacy and security than online messaging services, such as WhatsApp, Facebook Messenger and WeChat.

The rollout of RCS-based services was one of the strategic options explored in STL Partners’ April 2017 report, Consumer communications: Can telcos mount a comeback?, which made different recommendations for different kinds of telcos. It argued that strong incumbent telcos in markets where the Internet players are also strong, such as AT&T, Verizon, BT and Deutsche Telekom, should seek to differentiate their communications proposition through reliability, security, privacy and reach, while also embedding communications into other services.

Building on those two reports, this executive briefing analyses the progress of RCS over the past two years, considering the development of business tools for the specification, while outlining Facebook Messenger’s, WhatsApp’s and Apple’s simultaneous push into the market for so-called conversational commerce, in which messaging and transactions are increasingly interwoven. It concludes by updating the strengths, weaknesses, opportunities and threats (SWOT) analysis in the June 2016 report and the subsequent recommendations for telcos.

RCS: What has changed in the past two years?

New networks, more interoperability and rising usage

The RCS (Rich Communications Services) specification, the heir apparent to SMS, has been around for a decade. Whereas SMS’s functionality is limited by its usage of old-school mobile technology, RCS employs Internet protocols to provide a raft of features similar to those available from leading chat apps. However, up until now, RCS has had little impact on the mobile messaging market – WhatsApp, Facebook Messenger, WeChat, Apple’s iMessage and other chat apps have been accumulating hundreds of millions of users, diminishing the role of mobile operators in this key pillar of the communications market.

But RCS, which is steered by the GSMA, seems to be finally gaining some traction: In 2017, RCS launches almost doubled from 30 to 55 and have the potential to double again in 2018, according to the GSMA. In December 2017, for example, América Movil, Telefónica, Oi and AT&T launched RCS messaging services to subscribers across Latin America. Although it will only work on handsets running Android, GSMA Intelligence estimates approximately 60% of subscribers across the Latin American region will be able to get access to the RCS messaging service. América Movil and Telefónica also plan to launch RCS Messaging in the UK, Germany, Spain, Austria and Central and Eastern Europe. As a result of these launches, GSMA Intelligence expects the number of active monthly RCS users to grow to 350 million by the end of 2018, from 159 million at the start of the year. However, for a messaging service, daily active users are a far more important metric than monthly active users.

To support RCS, telcos either need to embed an Internet multimedia subsystem (IMS) into their networks or used a cloud-based system that sits outside the network. The latter option requires less upfront capex and enables a quicker deployment. In Latin America, the operators are using the Jibe RCS Cloud from Google and the Jibe RCS Hub, thereby ensuring interoperability so that subscribers can send RCS messages across networks. Subscribers from other networks connected to the hub will also be able to send RCS messages regardless of their geographic location. Operators’ RCS networks are also being interconnected in other parts of the Americas and Europe. América Móvil, Rogers Communications and Sprint have interconnected their networks across the Americas, while Deutsche Telekom, Telenor Group, Telia Company and Vodafone Group have interconnected in Europe, enabling subscribers in these regions to access advanced RCS across 22 networks in 17 countries.

Contents:

  • Executive Summary
  • Introduction
  • RCS: What has changed in the past two years?
  • New networks, more interoperability and rising usage
  • Consistency is king
  • Vodafone’s sustained support for RCS
  • Google is finally prioritising RCS
  • Android Messages overshadows Allo
  • Android device makers mostly on board
  • What will Apple do?
  • Competing for the business messaging market
  • Facebook pushes into business messaging
  • The Facebook brand loses its lustre
  • How will RCS fare in the business market?
  • Veon tries a different route
  • Conclusions and Recommendations

Figures:

  • Figure 1: Recommendations for telcos in mobile messaging
  • Figure 2: The companies supporting the RCS Universal Profile
  • Figure 3: RCS now has a feature set designed for business-to-person usage
  • Figure 4: Vodafone is using RCS to promote its new pet tracking service
  • Figure 5: The iPhone accounts for less than one-fifth of the smartphones in use today
  • Figure 6: The pros and cons of Apple’s strategic options for iMessage
  • Figure 7: SMS still leads the Internet-based services in some metrics
  • Figure 8:  Using Facebook Messenger to book an in-store appointment
  • Figure 9: Almost 1.5 billion people access Facebook every day
  • Figure 10: The emerging ecosystem around RCS messaging-as-a-platform
  • Figure 11: Next steps for telcos in all-IP communications
  • Figure 12: China Mobile’s SMS traffic per customer has stabilised
  • Figure 13: Messaging is generating less and less revenue for China Mobile

MWC 2017: The big themes from behind the scenes

Introduction

It was notable that the main halls at the GSMA’s Mobile World Congress 2017 in Barcelona last week were still buzzing on Thursday morning, the last of four days. Previously the crowds have always noticeably thinned by then, but there was no let up this year – certainly not until around 2pm, and the event closes at 4pm on the Thursday.

If you’ve never been, your first experience of the Congress can be quite overwhelming. There is so much going on, so many people, and an almost bewildering number of companies and halls. Even for seasoned MWC-ers, the activity on Tuesday in particular reached a new level of intensity. Just walking between stands was a battle in places. The extra energy at this years’ show was surprising because mobile is not really a growth industry any more, although it is still a huge and profitable sector.

However, despite the frenetic activity, many commentators have struggled to identify an over-arching theme or message for this year’s MWC. Nokia’s retro-phone announcement was one surprising success.  In the light of its backward-facing nature, the popularity of this story is rather confusing, but perhaps it is a sign of people looking hard for something interesting to say.

Of course, the diversity and scale of the Congress can make it hard to discern the big picture. Usually there is an announcement or keynote (such as those by Google’s Eric Schmidt in 2010 or Microsoft’s Steve Ballmer in 2012) that seems to frame the moment. Not so this year though.

This absence of one unifying theme reflects the results of our client feedback survey that we conducted in August 2016: telco strategy teams need to understand and evaluate the potential of an increasingly diverse range of new technologies, business models, and other opportunities (or threats) in order to succeed.

Behind the scenes at MWC, we found several major themes which we summarise in this report:

  • Telco change
  • 5G
  • IoT

Beyond these three areas there was a multitude of information and demonstrations about new technologies and services such as Rich Communications Services (RCS), AI and blockchain. This report summarises what we learnt about these topics at MWC, and we will continue to research these areas in the future, to assess how they will impact telcos and what strategy they need to adopt to make the most of these opportunities.

 

  • Executive Summary
  • Introduction
  • Telco change
  • 5G
  • 5G – the next generation?
  • The business case for telcos is not yet that convincing
  • The path to 5G and the “first mover” risk
  • Super low latency – what is it good for?
  • The spectrum case remains unclear
  • EHF and mmWave
  • 5G – Telco recommendations in summary
  • IoT
  • What role will telcos play?
  • The IoT challenge: Data privacy and security
  • Connectivity consolidation
  • Topics to watch
  • Rich Communications Services (RCS)
  • Enterprise digital transformation – Companies must be proactive, not reactive
  • AI – The human element

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

Introduction

The strategic importance of digital communications services is rising fast, as these services now look set to become a major conduit for digital commerce. Messaging services are increasingly enabling interactions and transactions between consumers and businesses. Largely pioneered by WeChat in China, the growing integration of digital communications and commerce services looks like a multi-billion dollar boon for Facebook and a major headache for Amazon, eBay and Google, as outlined in the recent STL Partners report: WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce.

This report analyses Google’s and telcos’ strategic position in the digital communications market, before exploring the recent agreement between leading telcos, the GSMA and Google to use the Android operating system to distribute RCS (Rich Communications Service), which is designed to be a successor to SMS and MMS. Like SMS, RCS is intended to work across networks, be network-based and be the default mobile messaging service, but it also goes far beyond SMS, by supporting rich features, such as video calling, location sharing, group chat and file sharing.

The report then undertakes a SWOT (strengths, weaknesses, opportunities and threats) analysis on the new Google supported RCS proposition, before considering what telcos need to do next to give the service any chance of seeing widespread adoption.

Google’s strategic headache

To Google’s alarm, mobile messaging looks set to become the next major digital commerce platform. In some ways, this is a logical progression of what has come before. Although neither Google nor Amazon, two of the leading digital commerce incumbents, seem well prepared for the rise of “conversational commerce”, communications and commerce have always been interwoven – physical marketplaces, for example, serve both functions. In the digital era, new communications services, such as SMS, email and mobile calls, were quickly adopted by companies looking to contact consumers. Even now, businesses continue to rely very heavily on email to communicate with consumers, and with each other, and through Gmail, Google has a strong position in this segment.

But many consumers, particularly younger people, now prefer to use mobile messaging and social networking services to communicate with friends and family and are using email, which was developed in the PC era, less and less. People are spending more and more time on messaging apps – some industry executives estimate that consumers spend 40% of their time on a mobile phone purely in a messaging app. Understandably, businesses are looking to follow consumers on to mobile messaging and social networking services. Crucially, some of these services are now enabling businesses to transact, as well as interact, with customers, cutting the likes of Amazon and Google out of the loop entirely.

Largely pioneered by Tencent’s WeChat/Weixin service in China, the growing integration of digital communications and commerce services could be a multi-billion dollar boon for Facebook, the leading provider of digital messaging services in much of the world. The proportion of WeChat users making purchases through the service leapt to 31% in 2016 up from 15% in 2015, according to Mary Meeker’s Global Internet Trends report 2016. Moreover, users of WeChat’s payment service now make more than 50 payments a month through the service (see Figure 1), highlighting the convenience of ordering everyday products and services through a messaging app. In March 2016, Tencent reported the combined monthly active users of the Weixin and WeChat messaging services reached 697 million at the end of 2015, representing annual growth of 39%. See WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce for more on this key trend in the digital economy.

Figure 1: WeChat users find it convenient to combine payments and messaging 

Source: Mary Meeker’s Global Internet Trends 2016

 

  • Executive summary
  • Contents
  • Introduction
  • Google’s strategic headache
  • Winner takes all?
  • Google’s attempts to crack communications
  • Telcos’ long goodbye
  • RCS – a very slow burn
  • VoLTE sees broader support
  • Google and telcos: a match made in heaven?
  • A new phase in the Google-telcos relationship?
  • Building a business case
  • Conclusions
  • Strengths
  • Weaknesses
  • Opportunities
  • Threats
  • Next steps
  • Lay the foundations
  • What will Google do next?

 

  • Figure 1: WeChat users find it convenient to combine payments and messaging
  • Figure 2: Using Weixin Pay to complete a transaction in a fast food outlet
  • Figure 3: Leading communications & media sharing apps by downloads
  • Figure 4: Deutsche Telekom’s RCS app’s features include location sharing
  • Figure 5: All-IP communications services are gaining some traction with operators
  • Figure 6: Google Places aims to connect businesses and consumers
  • Figure 7: SWOT analysis of operators’ IP communications proposition
  • Figure 8: TOWS analysis for telcos in all-IP communications

Communications Services: What now makes a winning value proposition?

Introduction

This is an extract of two sections of the latest Telco 2.0 Strategy Report The Future Value of Voice and Messaging for members of the premium Telco 2.0 Executive Briefing Service.

The full report:

  • Shows how telcos can slow the decline of voice and messaging revenues and build new communications services to maximise revenues and relevance with both consumer and enterprise customers.
  • Includes detailed forecasts for 9 markets, in which the total decline is forecast between -25% and -46% on a $375bn base between 2012 and 2018, giving telcos an $80bn opportunity to fight for.
  • Shows impacts and implications for other technology players including vendors and partners, and general lessons for competing with disruptive players in all markets.
  • Looks at the impact of so-called OTT competition, market trends and drivers, bundling strategies, operators developing their own Telco-OTT apps, advanced Enterprise Communications services, and the opportunities to exploit new standards such as RCS, WebRTC and VoLTE.

The Transition in User Behaviour

A global change in user behaviour

In November, 2012 we published European Mobile: The Future’s not Bright, it’s Brutal. Very soon after its publication, we issued an update in the light of results from Vodafone and Telefonica that suggested its predictions were being borne out much faster than we had expected.

Essentially, the macro-economic challenges faced by operators in southern Europe are catalysing the processes of change we identify in the industry more broadly.

This should not be seen as a “Club Med problem”. Vodafone reported a 2.7% drop in service revenue in the Netherlands, driven by customers reducing their out-of-bundle spending. This sensitivity and awareness of how close users are getting to their monthly bundle allowances is probably a good predictor of willingness to adopt new voice and messaging applications, i.e. if a user is regularly using more minutes or texts than are included in their service bundle, they will start to look for free or lower cost alternatives. KPN Mobile has already experienced a “WhatsApp shock” to its messaging revenues. Even in Vodafone Germany, voice revenues were down 6.1% and messaging 3.7%. Although enterprise and wholesale business were strong, prepaid lost enough revenue to leave the company only barely ahead. This suggests that the sizable low-wage segment of the German labour market is under macro-economic stress, and a shock is coming.

The problem is global, for example, at the 2013 Mobile World Congress, the CEO of KT Corp described voice revenues as “collapsing” and stated that as a result, revenues from their fixed operation had halved in two years. His counterpart at Turk Telekom asserted that “voice is dead”.

The combination of technological and macro-economic challenge results in disruptive, rather than linear change. For example, Spanish subscribers who adopt WhatsApp to substitute expensive operator messaging (and indeed voice) with relatively cheap data because they are struggling financially have no particular reason to return when the recovery eventually arrives.

Price is not the only issue

Also, it is worth noting that price is not the whole problem. Back at MWC 2013, the CEO of Viber, an OTT voice and messaging provider, claimed that the app has the highest penetration in Monaco, where over 94% of the population use Viber every day. Not only is Monaco somewhere not short of money, but it is also a market where the incumbent operator bundles unlimited SMS, though we feel that these statistics might slightly stretch the definition of population as there are many French subscribers using Monaco SIM cards. However, once adoption takes off it will be driven by social factors (the dynamics of innovation diffusion) and by competition on features.

Differential psychological and social advantages of communications media

The interaction styles and use cases of new voice and messaging apps that have been adopted by users are frequently quite different to the ones that have been imagined by telecoms operators. Between them, telcos have done little more than add mobility to telephony during the last 100 years, However, because of the Internet and growth of the smartphone, users now have many more ways to communicate and interact other than just calling one another.

SMS (only telcos’ second mass ‘hit’ product after voice) and MMS are “fire-and-forget” – messages are independent of each other, and transported on a store-and-forward basis. Most IM applications are either conversation-based, with messages being organised in threads, or else stream-based, with users releasing messages on a broadcast or publish-subscribe basis. They often also have a notion of groups, communities, or topics. In getting used to these and internalising their shortcuts, netiquette, and style, customers are becoming socialised into these applications, which will render the return of telcos as the messaging platform leaders with Rich Communication System (RCS) less and less likely. Figure 1 illustrates graphically some important psychological and social benefits of four different forms of communication.

Figure 1:  Psychological and social advantages of voice, SMS, IM, and Social Media

Psychological and social advantages of voice, SMS, IM, and Social Media Dec 2013

Source: STL Partners

The different benefits can clearly be seen. Taking voice as an example, we can see that a voice call could be a private conversation, a conference call, or even part of a webinar. Typically, voice calls are 1 to 1, single instance, and with little presence information conveyed (engaged tone or voicemail to others). By their very nature, voice calls are real time and have a high time commitment along with the need to pay attention to the entire conversation. Whilst not as strong as video or face to face communication, a voice call can communicate high emotion and of course is audio.

SMS has very different advantages. The majority of SMS sent are typically private, 1 to 1 conversations, and are not thread based. They are not real time, have no presence information, and require low time commitment, because of this they typically have minimal attention needs and while it is possible to use a wide array of emoticons or smileys, they are not the same as voice or pictures. Even though some applications are starting to blur the line with voice memos, today SMS messaging is a visual experience.

Instant messaging, whether enterprise or consumer, offers a richer experience than SMS. It can include presence, it is often thread based, and can include pictures, audio, videos, and real time picture or video sharing. Social takes the communications experience a step further than IM, and many of the applications such as Facebook Messenger, LINE, KakaoTalk, and WhatsApp are exploiting the capabilities of these communications mechanisms to disrupt existing or traditional channels.

Voice calls, whether telephony or ‘OTT’, continue to possess their original benefits. But now, people are learning to use other forms of communication that better fit the psychological and social advantages that they seek in different contexts. We consider these changes to be permanent and ongoing shifts in customer behaviour towards more effective applications, and there will doubtless be more – which is both a threat and an opportunity for telcos and others.

The applicable model of how these shifts transpire is probably a Bass diffusion process, where innovators enter a market early and are followed by imitators as the mass majority. Subsequently, the innovators then migrate to a new technology or service, and the cycle continues.

One of the best predictors of churn is knowing a churner, and it is to be expected that users of WhatsApp, Vine, etc. will take their friends with them. Economic pain will both accelerate the diffusion process and also spread it deeper into the population, as we have seen in South Korea with KakaoTalk.

High-margin segments are more at risk

Generally, all these effects are concentrated and emphasised in the segments that are traditionally unusually profitable, as this is where users stand to gain most from the price arbitrage. A finding from European Mobile: The Future’s not Bright, it’s Brutal and borne out by the research carried out for this report is that prices in Southern Europe were historically high, offering better margins to operators than elsewhere in Europe. Similarly, international and roaming calls are preferentially affected – although international minutes of use continue to grow near their historic average rates, all of this and more accrues to Skype, Google, and others. Roaming, despite regulatory efforts, remains expensive and a target for disruptors. It is telling that Truphone, a subject of our 2008 voice report, has transitioned from being a company that competed with generic mobile voice to being one that targets roaming.

 

  • Consumers: enjoying the fragmentation
  • Enterprises: in search of integration
  • What now makes a winning value proposition?
  • The fall of telephony
  • Talk may be cheap, but time is not
  • The increasing importance of “presence”
  • The competition from Online Service Providers
  • Operators’ responses
  • Free telco & other low-cost voice providers
  • Meeting Enterprise customer needs
  • Re-imagining customer service
  • Telco attempts to meet changing needs
  • Voice Developers – new opportunities
  • Into the Hunger Gap
  • Summary: the changing telephony business model
  • Conclusions
  • STL Partners and the Telco 2.0™ Initiative

 

  • Figure 1:  Psychological and social advantages of voice, SMS, IM, and Social Media
  • Figure 2: Ideal Enterprise mobile call routing scenario
  • Figure 3: Mobile Clients used to bypass high mobile call charges
  • Figure 4: Call Screening Options
  • Figure 5: Mobile device user context and data source
  • Figure 6: Typical business user modalities
  • Figure 7:  OSPs are pursuing platform strategies
  • Figure 8: Subscriber growth of KakaoTalk
  • Figure 9: Average monthly minutes of use by market
  • Figure 10: Key features of Voice and Messaging platforms
  • Figure 11: Average user screen time Facebook vs. WhatsApp  (per month)
  • Figure 12: Disruptive price competition also comes from operators
  • Figure 13: The hunger gap in music

The Future Value of Voice and Messaging

Background – ‘Voice and Messaging 2.0’

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

The New Report


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

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


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

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


For a telco, this strategy report:

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


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

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


For investors, it will:

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


The Future Value of Voice: Report Content Summary

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

Voice 2.0: Strategic Threats and Opportunities

Voice & Messaging 2.0: Strategic Threats and Opportunities,
Presentation by Phil Laidler, Director, Consulting, STL Partners.
Which of the disruptors – Apple, Facebook, Google, Skype – is the
biggest menace? Presented at EMEA Brainstorm, November 2011.
Strategic options for telcos - resisting the disruptors in voice

Download presentation here.

Links here for more on New Digital Economics brainstorms and Voice 2.0 research, or call +44 (0) 207 247 5003.

Example slide from the presentation: