VNFs on public cloud: Opportunity, not threat

VNF deployments on the hyperscale cloud are just beginning

Numerous collaboration agreements between hyperscalers and leading telcos, but few live VNF deployments to date

The past three years have seen many major telcos concluding collaboration agreements with the leading hyperscalers. These have involved one or more of five business models for the telco-hyperscaler relationship that we discussed in a previous report, and which are illustrated below:

Five business models for telco-hyperscaler partnerships

Source: STL Partners

In this report, we focus more narrowly on the deployment, delivery and operation by and to telcos of virtualised and cloud-native network functions (VNFs / CNFs) over the hyperscale public cloud. To date, there have been few instances of telcos delivering live, commercial services on the public network via VNFs hosted on the public cloud. STL Partners’ Telco Cloud Deployment Tracker contains eight examples of this, as illustrated below:

Major telcos deploying VNFs in the public cloud

Source: STL Partners

Enter your details below to request an extract of the report

 

Telcos are looking to generate returns from their telco cloud investments and maintain control over their ‘core business’

The telcos in the above table are all of comparable stature and ambition to the likes of AT&T and DISH in the realm of telco cloud but have a diametrically opposite stance when it comes to VNF deployment on public cloud. They have decided against large-scale public cloud deployments for a variety of reasons, including:

  • They have invested a considerable amount of money, time and human resources on their private clouddeployments, and they want and need to utilise the asset and generate the RoI.
  • Related to this, they have generated a large amount of intellectual property (IP) as a result of their DIY cloud– and VNF-development work. Clearly, they wish to realise the business benefits they sought to achieve through these efforts, such as cost and resource efficiencies, automation gains, enhanced flexibility and agility, and opportunities for both connectivityand edge compute service innovation. Apart from the opportunity cost of not realising these gains, it is demoralising for some CTO departments to contemplate surrendering the fruit of this effort in favour of a hyperscaler’s comparable cloud infrastructure, orchestration and management tools.
  • In addition, telcos have an opportunity to monetise that IP by marketing it to other telcos. The Rakuten Communications Platform (RCP) marketed by Rakuten Symphony is an example of this: effectively, a telco providing a telco cloud platform on an NFaaS basis to third-party operators or enterprises – in competition to similar offerings that might be developed by hyperscalers. Accordingly, RCP will be hosted over private cloud facilities, not public cloud. But in theory, there is no reason why RCP could not in future be delivered over public cloud. In this case, Rakuten would be acting like any other vendor adapting its solutions to the hyperscale cloud.
  • In theory also, telcos could also offer their private telcoclouds as a platform, or wholesale or on-demand service, for third parties to source and run their own network functions (i.e. these would be hosted on the wholesale provider’s facilities, in contrast to the RCP, which is hosted on the client telco’s facilities). This would be a logical fit for telcos such as BT or Deutsche Telekom, which still operate as their respective countries’ communications backbone provider and primary wholesale provider

BT and Deutsche Telekom have also been among the telcos that have been most visibly hostile to the idea of running NFs powering their own public, mass-market services on the public and hyperscale cloud. And for most operators, this is the main concern making them cautious about deploying VNFs on the public cloud, let alone sourcing them from the cloud on an NFaaS basis: that this would be making the ‘core’ telco business and asset – the network – dependent on the technology roadmaps, operational competence and business priorities of the hyperscalers.

Table of contents

  • Executive Summary
  • Introduction: VNF deployments on the hyperscale cloud are just beginning
    • Numerous collaboration agreements between hyperscalers and leading telcos, but few live VNF deployments to date
    • DISH and AT&T: AWS vs Azure; vendor-supported vs DIY; NaaCP vs net compute
  • Other DIY or vendor-supported best-of-breed players are not hosting VNFs on public cloud
    • Telcos are looking to generate returns from their telco cloud investments and maintain control over their ‘core business’
    • The reluctance to deploy VNFs on the cloud reflects a persistent, legacy concept of the telco
  • But NaaCP will drive more VNF deployments on public cloud, and opportunities for telcos
    • Multiple models for NaaCP present prospects for greater integration of cloud-native networks and public cloud
  • Conclusion: Convergence of network and cloud is inevitable – but not telcos’ defeat
  • Appendix

Related Research

 

Enter your details below to request an extract of the report

 

Why the consumer IoT is stuck in the slow lane

A slow start for NB-IoT and LTE-M

For telcos around the world, the Internet of Things (IoT) has long represented one of the most promising growth opportunities. Yet for most telcos, the IoT still only accounts for a low single digit percentage of their overall revenue. One of the stumbling blocks has been relatively low demand for IoT solutions in the consumer market. This report considers why that is and whether low cost connectivity technologies specifically-designed for the IoT (such as NB-IoT and LTE-M) will ultimately change this dynamic.

NB-IoT and LTE-M are often referred to as Massive IoT technologies because they are designed to support large numbers of connections, which periodically transmit small amounts of data. They can be distinguished from broadband IoT connections, which carry more demanding applications, such as video content, and critical IoT connections that need to be always available and ultra-reliable.

The initial standards for both technologies were completed by 3GPP in 2016, but adoption has been relatively modest. This report considers the key B2C and B2B2C use cases for Massive IoT technologies and the prospects for widespread adoption. It also outlines how NB-IoT and LTE-M are evolving and the implications for telcos’ strategies.

This builds on previous STL Partners’ research, including LPWA: Which way to go for IoT? and Can telcos create a compelling smart home?. The LPWA report explained why IoT networks need to be considered across multiple generations, including coverage, reliability, power consumption, range and bandwidth. Cellular technologies tend to be best suited to wide area applications for which very reliable connectivity is required (see Figure below).

IoT networks should be considered across multiple dimensions

IoT-networks-disruptive-analysis-stl-2021
Source: Disruptive Analysis

 

Enter your details below to request an extract of the report

 

The smart home report outlined how consumers could use both cellular and short-range connectivity to bolster security, improve energy efficiency, charge electric cars and increasingly automate appliances. One of the biggest underlying drivers in the smart home sector is peace of mind – householders want to protect their properties and their assets, as rising population growth and inequality fuels fear of crime.

That report contended that householders might be prepared to pay for a simple and integrated way to monitor and remotely control all their assets, from door locks and televisions to solar panels and vehicles.  Ideally, a dashboard would show the status and location of everything an individual cares about. Such a dashboard could show the energy usage and running cost of each appliance in real-time, giving householders fingertip control over their possessions. They could use the resulting information to help them source appropriate insurance and utility supply.

Indeed, STL Partners believes telcos have a broad opportunity to help coordinate better use of the world’s resources and assets, as outlined in the report: The Coordination Age: A third age of telecoms. Reliable and ubiquitous connectivity is a key enabler of the emerging sharing economy in which people use digital technologies to easily rent the use of assets, such as properties and vehicles, to others. The data collected by connected appliances and sensors could be used to help safeguard a property against misuse and source appropriate insurance covering third party rentals.

Do consumers need Massive IoT?

Whereas some IoT applications, such as connected security cameras and drones, require high-speed and very responsive connectivity, most do not. Connected devices that are designed to collect and relay small amounts of data, such as location, temperature, power consumption or movement, don’t need a high-speed connection.

To support these devices, the cellular industry has developed two key technologies – LTE-M (LTE for Machines, sometimes referred to as Cat M) and NB-IoT (Narrowband IoT). In theory, they can be deployed through a straightforward upgrade to existing LTE base stations. Although these technologies don’t offer the capacity, throughput or responsiveness of conventional LTE, they do support the low power wide area connectivity required for what is known as Massive IoT – the deployment of large numbers of low cost sensors and actuators.

For mobile operators, the deployment of NB-IoT and LTE-M can be quite straightforward. If they have relatively modern LTE base stations, then NB-IoT can be enabled via a software upgrade. If their existing LTE network is reasonably dense, there is no need to deploy additional sites – NB-IoT, and to a lesser extent LTE-M, are designed to penetrate deep inside buildings. Still, individual base stations may need to be optimised on a site-by-site basis to ensure that they get the full benefit of NB-IoT’s low power levels, according to a report by The Mobile Network, which notes that operators also need to invest in systems that can provide third parties with visibility and control of IoT devices, usage and costs.

There are a number of potential use cases for Massive IoT in the consumer market:

  • Asset tracking: pets, bikes, scooters, vehicles, keys, wallets, passport, phones, laptops, tablets etc.
  • Vulnerable persontracking: children and the elderly
  • Health wearables: wristbands, smart watches
  • Metering and monitoring: power, water, garden,
  • Alarms and security: smoke alarms, carbon monoxide, intrusion
  • Digital homes: automation of temperature and lighting in line with occupancy

In the rest of this report we consider the key drivers and barriers to take-up of NB-IoT and LTE-M for these consumer use cases.

Table of Contents

  • Executive Summary
  • Introduction
  • Do consumers need Massive IoT?
    • The role of eSIMs
    • Takeaways
  • Market trends
    • IoT revenues: Small, but growing
  • Consumer use cases for cellular IoT
    • Amazon’s consumer IoT play
    • Asset tracking: Demand is growing
    • Connecting e-bikes and scooters
    • Slow progress in healthcare
    • Smart metering gains momentum
    • Supporting micro-generation and storage
    • Digital buildings: A regulatory play?
    • Managing household appliances
  • Technological advances
    • Network coverage
  • Conclusions: Strategic implications for telcos

 

Enter your details below to request an extract of the report

 

How mobile operators can build winning 5G business models

===============================================================

The chartpack for this report is available to download as an additional file

===============================================================

 

STL Partners has long believed that telecoms operators need to and can do more to add value to their consumer and enterprise customers and to society more generally. For the telecoms industry, the need to do more is illustrated by flat or declining revenues and rising capital expenditure and debt levels. The opportunity for telecoms to add more value is also clear. The demands of society now call for greater coordination between all players and new technology – 5G, analytics, AI, automation, cloud – is now spawning the Coordination Age.

Figure 1: The Coordination Age – new paradigm, new telco purposeThe coordination age overview

Source: STL Partners

Operators have the credibility, skills and relationships to contribute more in the Coordination Age. But the opportunity will not drop into their laps. Improved networks are not, of themselves, the driver of new value: it accrues to the provider of services that run on the network and it is up to operators to develop platforms and services that exploit ubiquitous, high-bandwidth connectivity.

So far, operators have found moving beyond connectivity challenging. There are a handful of success stories; most attempts to develop vertical solutions have failed to move the needle. In this report, we draw on successes and failures from within and outside telecoms to outline 8 core guiding principles for ambitious leaders within the telecoms industry who are determined to help their organisations to deliver more than connectivity.

Enter your details below to request an extract of the report

5G: A catalyst for change

In some ways, the challenge/opportunity for mobile operators has been present for the last 5-10 years: limited incremental revenue growth in voice, messaging, and data.

However, 5G is a catalyst for real change. There are internal pressures from the investments being made that mean operators must create new revenue streams. More positive reasons relate to increased demand for telco-driven services and the technological changes that telcos have implemented which will help the commercial side to adapt. Below are some of the main reasons why 5G has created a resurgent need to change business models.

  1. Making returns on network investments: It’s a given that 5G cannot be delivered without significant investment by the operators: be it in spectrum acquisition, upgrading the RAN and core network, managing a more distributed architecture of small cells, etc. Telcos can focus on ensuring that network runs efficiently to maintain margins, however many will need to look to new services. Data usage will surge, but the price customers will pay for each gigabyte will decline at a disproportionate rate.
  2. Building on telco cloud and edge computing platforms: Telcos have started to invest in developing their networks to become more like the cloud platforms that underpin the large cloud providers’ services. In fact, it’s a key part of the 5G core. Part of this has been the move towards SDN, network virtualisation and integrating edge computing. This flexible platform will allow telcos to innovate quickly and create new differentiated services on top if they have the desire to change their financial and operational models.
  3. Unlocking an enterprise business: Before 5G, mobile operators’ enterprise businesses have involved selling SIMs to enterprise customers with some forays into value-added services, such as cloud storage, mobile device management and M2M communications. Enterprises are genuinely interested in 5G and the capabilities it brings. For some, 5G has become an umbrella term for technological innovation. This is a good thing for the mobile industry, as it means enterprises will open doors to telcos and be keen to engage them for new solutions.
  4. Creating business value: 5G’s unique capabilities will enable use cases that solve real problems, particularly in industrial transformation. This last point is exemplified by research STL Partners previously conducted on the business value 5G brings to certain verticals by enhancing productivity, increasing output, creating efficiencies, etc. However, much of this value is extracted by the applications, solutions and services on top of the underlying network.

Figure 2: 5G enabled use cases could increase GDP by $1.5 trillion by 2030

Source: STL Partners

Table of Contents

  • Executive Summary
  • Introduction
  • 5G: A catalyst for chang
  • Guiding principles for mobile operators seeking to move beyond connectivity
    1. Select priority verticals and how you will compete in the them
    2. Adopt a new approach to resource allocation: less CapEx and more OpEx
    3. Material OpEx should focus on building new skills, assets, capabilities, relationships
    4. Establish senior management commitment and independence for the new venture
    5. Focus on commercial as well as technological differentiation in order to disrupt verticals
    6. De-emphasise network integration – at least to start with
    7. Recognise that M&A will be needed for market entry in most cases
    8. Realise that organic growth can work in exceptional operator or market circumstances
  • Conclusion

 

Enter your details below to request an extract of the report

Telco M&A strategies: Global analysis

Introduction

Business beyond connectivity – this is the mantra of STL Partners’ vision of the future for telecoms operators, outlined in the recent revamp of our Telco 2.0 vision. Telcos are at a crossroads where they must determine where their businesses will fit into a world of disruptive, fast-moving technologies and uncertain futures.

This means that it is more important than ever to re-evaluate the tools available to telcos to generate growth, expand their business competencies and provide new service offerings outside the core.

Enter your details below to request an extract of the report

Traditionally, a key telco growth strategy has been to use mergers and acquisitions, particularly of (and with) other telcos, to build scale geographically and in core communications services. However, as operators strive to become more relevant in a changing business landscape, there has been a growing volume of investment in what might be termed ‘digital’ business – business services that leverage technology to build new capabilities and deliver new customer services, experiences and relationships. We distinguish between these two kinds of telecoms M&A as follows:

  • Traditional M&A – “Operators buying operators”
    • Traditional M&A is focused around traditional telecoms M&A where operators buy other operators to expand in new markets or consolidate existing markets.
  • Digital M&A – “Operators investing outside core”
    • Digital M&A refers to non-operator M&A, or all other purchases that telcos make to expand beyond their core connectivity services. Most often this includes investments in software capabilities or industry verticals.

This report examines the landscape of digital M&A from H2 2017 to H1 2018, highlights trends across previous time periods, and outlines strategies for and case studies of digital M&A to illustrate ways that telcos can utilise it in a focused and strategic manner to create long-term value and growth. It does not cover minority venture digital investments; however, these are tracked in our database and will be the subject of future analysis.

This report is the third iteration of STL Partners’ yearly digital M&A and investment report, which began in 2016 and was updated in 2017. It draws on data from our digital M&A tracker tool, which covers 23 operators over five regions from 2012 to H1 2018. A copy of the database is available with this report.

Previous editions of the telco M&A database

Enter your details below to request an extract of the report

SDN / NFV: Early Telco Leaders in the Enterprise Market

Introduction

This report builds on a number of previous analyses of the progress and impact of SDN (Software-Defined Networking) and NFV (Network Functions Virtualization), both in the enterprise market and in telecoms more generally. In particular, this briefing aims to explore in more detail the market potential and dynamics of two new SDN / NFV-based enterprise services that were discussed as part of an analysis of revenue opportunities presented by ‘telco cloud’ services.

These two services are ‘Network as a Service’ (NaaS) and ‘enterprise virtual CPE’ (vCPE). ‘Network as a Service’ refers to any service that enables enterprise customers to directly configure the parameters of their corporate network, including via a user-friendly portal or APIs. This particularly involves the facility to scale up or down the bandwidth available on network links – either on a near-real-time or scheduled basis – and to establish new network connections on demand, e.g. between business sites and / or data centers. Examples of NaaS include AT&T’s Network On Demand portfolio and Telstra’s PEN service, both of which are discussed further below.

‘Enterprise virtual CPE’, as the name suggests, involves virtualizing dedicated networking equipment sited traditionally at the enterprise premises, so as to offer equivalent functionality in the form of virtual network appliances in the cloud, delivered over COTS hardware. Virtual network functions (VNFs) offered in this form typically include routing, firewalls, VPN, WAN optimization, and others; and the benefit to telcos of offering vCPE is that it provides a platform to easily cross- and upsell additional functionality, particularly in the areas of application and network performance and security.

The abbreviation ‘vCPE’ is also used for consumer virtual CPE, which involves replacing complicated routers, TV set-top boxes and gateway equipment used in the home with simplified devices running equivalent functions from the cloud. For the purposes of this report, when we use the term ‘vCPE’, we refer to the enterprise version of the term, unless otherwise stated.

The reason why this report focuses on NaaS and vCPE is that more commercial services of these types have been launched or are planned than is the case with any other SDN / NFV-dependent enterprise service. Consequently, the business models are becoming more evident, and it is possible to make an assessment of the revenue potential of these services.

Our briefing ‘New Revenue Growth from Telco Cloud’ (published in April 2016) modeled the potential impact of SDN / NFV-based services on the revenues of a large illustrative telco with a significant presence in both fixed and mobile, and enterprise and consumer, segments in a developed market similar to the UK. This concluded that such a telco introducing all of the SDN / NFV services that are expected to become commercially mature over the period 2017 to 2021 could expect to generate a monthly revenue uplift of some X% (actual figures available in full report) by the end of 2021 compared with the base case of failing to launch any such service.

Including only revenues directly attributable to the new services (as opposed to ‘core revenues’ – e.g. from traditional voice and data services – that are boosted by reduced churn and net customer additions deriving from the new services), vCPE and NaaS represent the two largest sources of new revenue: Y and Z percentage points respectively out of the total X% net revenue increase deriving from SDN / NFV, as illustrated in Figure 1 (Figure not shown – actual figures available in full report).

Figure 1: Telco X – Net new revenue by service category (Dec 2021)

Figure not shown – available in full report

Source: STL Partners analysis

In terms of NaaS and vCPE specifically, the model assumes that Telco X will begin to roll out these services commercially in January and February 2017 respectively. This is a realistic timetable for some in our view, as several commercial NaaS and vCPE offerings have already been launched, and future launches have been announced, by telcos across North America, Europe and the Asia-Pacific region.

In the rest of this briefing, we will:

  • present the main current and planned NaaS and vCPE services
  • analyze the market opportunities and competitive threats they are responding to
  • analyze in more detail the different types and combinations of NaaS and vCPE offerings, and their business models
  • assess these services’ potential to grow telco revenues and market share
  • and review how these offerings fit within operators’ overall virtualization journeys.

We will conclude with an overall assessment of the prospects for NaaS and vCPE: the opportunities, and also the risks of inaction.

  • Executive Summary
  • Introduction
  • Current and planned NaaS and vCPE products
  • Opportunities and threats addressed by NaaS and vCPE
  • NaaS and vCPE: emerging offers and business models
  • Revenue growth potential of NaaS and vCPE
  • Relationship between SDN / NFV deployment strategy and operator type
  • Conclusion: NaaS and vCPE – a short-term window of opportunity to a long-term virtual future

 

  • Figure 1: Telco X – Net new revenue by service category (Dec 2021)
  • Figure 2: Leading current and planned commercial NaaS and vCPE services
  • Figure 3: Cumulative NaaS and vCPE launches, 2013-16
  • Figure 4: Verizon SD-WAN as part of Virtual Network Services vCPE offering
  • Figure 5: COLT’s cloud-native VPN and vCPE
  • Figure 6: Evolution of vCPE delivery modes
  • Figure 7: SD-WAN-like NaaS versus SD-WAN
  • Figure 8: Base case shows declining revenues
  • Figure 9: Telco X – Telco Cloud services increase monthly revenues by X% on the base case by Dec 2021
  • Figure 10: NaaS and vCPE deployments by operator type and overall SDN / NFV strategy
  • Figure 11: Progression from more to less hybrid deployment of NaaS and vCPE across the telco WAN

The STL Partners Digital Investment Database: August 2016 Update

The STL Partners Digital Investment Database

We published our Digital Investment Database in early July, together with a report titled Digital M&A and Investment Strategies. Given recent high profile activities, we’ve now issued an updated version.

While there have been a number of smaller investments and acquisitions, two major acquisitions have hit the headlines since we published our report. On 18 July, it was announced that SoftBank was buying the UK chip manufacturer ARM Holdings for £24.3bn. Then, on 24 July, Verizon bought Yahoo! for $4.8bn. Here, we take a quick look at these two acquisitions.

SoftBank and ARM: (big) business as usual?

Why ARM? For its £24.3bn, SoftBank has gained one of the world’s leading processor manufacturers, with a strong existing business designing processors for smartphones and tablets, and an excellent opportunity to develop new revenues from the IoT. The attraction is clear, but the sums involved are huge.

Yet in some ways, this acquisition is the progression of business as usual. Our analysis based on v1.0 of our database suggests that SoftBank has long been one of the most active telcos in digital M&A. Among the 31 investments and acquisitions we tracked from 2012-1H2016, SoftBank was outstripped only by Deutsche Telekom, Singtel, and Telstra.

However, while the ARM deal fits with this prior interest in digital businesses, the bulk of SoftBank’s recent purchases have had a software focus: ARM marks a shift towards hardware. Moreover, the size of the transaction dwarfs SoftBank’s previous efforts.

Much media coverage has suggested that the ARM deal might be closely associated with the recent return of CEO Masayoshi Son, an adventurous, ambitious leader with a history of bold purchases. Looking at our database, the ARM deal certainly breaks the mould of telco acquisitions, as SoftBank’s £24.3bn deal for ARM is by far the biggest non-core-business acquisition tracked by our database.[1] But £24.3bn rarely changes hands on a whim, and we intend to publish further in-depth analysis on this in future.

Verizon and Yahoo!: Can a telco challenge Google and Facebook on advertising?

Verizon’s purchase of Yahoo! for $4.8bn was, in financial terms, far smaller than the SoftBank/ARM deal. Yet it received a great deal of media attention, partly, of course, because Yahoo! remains a significant household name in the US in particular, and a salient reminder of how the corporate landscape of the internet has changed.

At its peak in 2000, Yahoo! was worth $125bn. So there are clear questions: have Verizon snapped up an undervalued business, or has it splashed cash on a dinosaur?

Verizon has been very clear that its intention with Yahoo! is to join the advertising business with its 2015 purchase of AOL for $4.4bn, and become the third player in digital advertising behind Google and Facebook. CEO Lowell McAdam made no bones about the business’s ambitions in oft-repeated comments shortly after the deal was announced: ‘Are we going to challenge Google and Facebook? I just say, look, we’re planning on being a significant player here. The market is going to grow exponentially.’[2]

Currently, Google and Facebook together have over 50% of the US digital advertising market. AOL and Yahoo! combined have 6%. 1bn users view Yahoo! content each month, and Verizon only therefore needs to persuade a few advertisers to switch to them in order to grow market share.

From a telco point of view, one key facet of this argument is that potential synergies between Yahoo! and Verizon’s network do not appear to be essential. While telcos have classically searched for M&A opportunities that directly complemented their core business, Verizon might be understood as using its market value to finance deals that have independent value – not unlike Softbank and ARM. However, there are questions around the true value of Yahoo!’s share of digital advertising.

At the moment of Facebook’s IPO in 2012, Yahoo! had greater revenue. But since then. Google and Facebook have transformed digital advertising by making it targetable. Google knows what you want, when you want it (a search for ‘buy blue jeans’, for instance), and Facebook knows what you like (as users are encouraged to document their preferences). It can use this data to give advertisers access to the most relevant sections of a vast potential online audience.

This is a strong business model that has proved more valuable as these companies have refined it. Yahoo!’s digital advertising is not quite as sophisticated, and it remains to be seen if Verizon will be able to develop the revenue it envisages.

Verizon and Fleetmatics: Under the radar

Yahoo! garnered the majority of media attention, but Verizon also spent $2.4bn on Fleetmatics, a digital business that provides SaaS for fleet management. M2M fleet tracking is nothing new, but as well as its core software business, the company has the potential to play an important role in the industrial IoT as connected vehicles become more common.

Together, the two acquisitions might suggest a drive to develop profitable plays in markets beyond core telco revenue: from Fleetmatics, the IoT, and from AOL-Yahoo, digital advertising. Moreover, for strategists and practitioners placing the two together may have greater significance than viewing them separately.

Highlighting such deals and longer term trends behind them are two of the key goals of our M&A database.

Accessing the database

Our Digital Investment Database documents key digital investments and acquisitions for twenty-two operators during the period 2012 – August 2016.

An illustrative snapshot of part of the database

[1] To be precise, ‘non-core-business’ excludes telcos buying businesses involved in delivering the quadruple play of fixed, mobile, internet, and TV – for example, BT’s purchase of EE, or AT&T’s purchase of DirecTV.

[2] Financial Times, 26 July 2016.

Telco NFV & SDN Deployment Strategies: Six Emerging Segments

Introduction

STL Partners’ previous NFV and SDN research

This report continues the analysis of three previous reports in exploring the NFV (Network Functions Virtualization) and SDN (Software Defined Networking) journeys of several major telcos worldwide, and adds insights from subsequent research and industry discussions.

The first two reports that STL Partners produced contained detailed discussion of the operators that have publicly engaged most comprehensively with NFV: Telefónica and AT&T.

Telefónica embarked on an ambitious virtualization program, dubbed ‘UNICA’, toward the start of 2014; but its progress during 2014 and 2015 was impeded by internal divisions, lack of leadership from top management, and disagreement over the fundamental technology roadmap. As a result, Telefónica has failed to put any VNFs (Virtualized Network Functions) into production; although it continues to be a major contributor to industry efforts to develop open NFV standards.

By contrast, AT&T’s virtualization program, the User-Defined Network Cloud (UDNC) – launched at the same time as Telefónica’s, in February 2014 – has already contributed to a substantial volume of live NFV deployments, including on-demand networking products for enterprise customers and virtual EPC (Enhanced Packet Core) supporting mobile data and connected car services. AT&T’s activities have been driven from board level, with a very focused vision of the overall transformation that is being attempted – organizational as much as technological – and the strategic objectives that underlie it: those of achieving the agility, scalability and cost efficiency required to compete with web-scale players in both enterprise and consumer markets.

The third report in the series – ‘7 NFV Hurdles: How DTAG, NTT, Verizon, Vodafone, Swisscom and Comcast have tackled them’  – extended the analysis to the SDN and NFV deployment efforts of several other major operators. The report arrived at a provisional model for the stages of the SDN / NFV transformation process, outlined in Figure 1 below.

Figure 1: The SDN-NFV Transformation Process

The transformation process outlined in the chart suggests that elaborating the overall SDN architecture should ideally precede the NFV process: logically if not always chronologically. This is because it is essential to have a vision of the ‘final’ destination, even if – or especially as – operators are navigating their way through a shifting myriad of technology choices, internal change programs, engagements with vendor and open-source ecosystems, priorities and opportunities for virtualization, legacy system migration models, and processes for service and business remodeling.

The focus of this report

This report re-examines some of the analysis undertaken on the players above, along with some additional players, to derive a more fine-grained understanding of the virtualization journeys of different types of telco.

We examine these journeys in relation to five dimensions and the analysis focuses on the choices operators have made in these areas, and how things have turned out so far. This, in turn, allows us to pinpoint six telco segments for SDN and NFV deployment.

There is no ‘one size fits all’ approach to SDN and NFV. However, because the operators we examine have a similar rationale for engaging in SDN- and NFV-led transformation and display sufficient commonality in their approach to deployment, STL Partners has been able to make three core best-practice implementation recommendations.

 

  • Executive summary
  • Contents
  • Introduction
  • STL Partners’ previous NFV and SDN research
  • The focus of this report
  • Virtualization journeys: 6 telco segments
  • The Story So Far: AT&T and Telefónica
  • ‘NFV Business Model Transformation Pioneers’: BT, China Mobile, NTT and Verizon
  • ‘Smart Piper Incumbent’: AT&T and Deutsche Telekom
  • ‘Fly Blind Incumbent’: Telefónica and Swisscom
  • ‘Agile Adopter’: Tele2
  • ‘Utilitarian adopters’: Vodafone and SingTel
  • ‘Cableco 2.0’: Comcast and Liberty Global
  • Conclusion and Best Practice Recommendations

Digital M&A and Investment Strategies

Introduction

Communications services providers have long used M&A as a key element of strategy. By far the most common approach has been to acquire other operators to build scale in core communications services. For the vendor operator, selling off assets has been as a way of raising cash to reduce debt or enable further investment in core markets. As telecommunications growth has slowed and technological developments and user behaviour have swung towards mobile, so M&A activity has increased as players have strived for market consolidation, integration of fixed-mobile capabilities, or geographic expansion as a source of growth. BT-EE in the UK, Orange-Jazztel in Spain, and Etisalat-Maroc Telecom provide respective examples.

However, as operators continue to build digital capabilities and strive to deliver digital services, M&A and investment beyond ‘traditional telecoms’ is picking up. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one that focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation rather than continuity. For more details, see our recent report Solution: Transforming to the Telco Cloud Service Provider (Part 2). Making such a change is not without its challenges, and many operators now see M&A and investments as an important part of the Telco 2.0/digital transformation journey.

This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of SingTel, Telstra and Verizon. There is an accompanying database with key digital acquisitions and investments for twenty-two operators during the period 2012 – 1H 2016 inclusive.

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 above, drivers that refer to ‘traditional’ or ‘Telco 1.0’ M&A and investment are well-established:

1. Extending geographic footprint is often a key driver…

  • …to new markets that are adjacent geographically (e.g., DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
  • …or to those that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
  • …or 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).

2. Extending traditional communications offerings, is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, in order to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the U.K. is one example.

3. Consolidation has slowed to some extent, as regulators and competitors fight against 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 (E.U.), where E.U. regulators have refused to approve several proposed telecoms M&A deals recently, including TeliaSonera and Telenor in Denmark, and the proposed Hutchison acquisition of O2 to merge with its subsidiary Three, in the UK. 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 successful examples including TeliaSonera’s acquisition of Tele2 Norway in 2015.

4. 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. For the purpose of our analysis, we are counting the SI and consulting M&A activity as ‘digital/Telco 2.0’ rather than ‘traditional/Telco 1.0’, where it focuses on a specific digital area (e.g., cloud services, analytics).

5. 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:

  • TeliaSonera’s pullback from its Eurasian markets has seen it sell off a 60% stake in Nepalese operator Ncell to Axiata, and it is also planning to divest its majority stake in Kazakhstan’s Kcell through a sale to Turkcell.
  • Telefonica’s attempt to sell its O2 UK unit to Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its large debt (at EUR 49.7m as of January 2016, the company’s debts actually exceeded its market value) and to fund its ambitions to build out its media empire.

 

  • Executive Summary
  • Introduction
  • Drivers for operator M&A and majority investment
  • Telco digital M&A constraints – why take the risk?
  • Evaluating operator digital investment strategies
  • 22 players across 5 regions: US and Asia most aggressive
  • Which sectors are attracting the most interest?
  • Operator M&A strategies in detail: SingTel, Telstra and Verizon
  • SingTel: focusing on digital marketing, media and security
  • Telstra: Spreading Its Digital Bets across Health, Cloud and Video
  • Verizon: acquisition to support digital advertising and media dominance
  • Recommendations

 

  • Figure 1: Drivers for operator M&A and majority investment – traditional and digital
  • Figure 2: Telco cost and operational models inhibit innovation and discourage investments in unfamiliar digital businesses
  • Figure 3: Number of operator digital acquisitions and majority investments, 2012 – 1H2016
  • Figure 4: Largest 10 telco digital M&A and majority investments, 2012 – 1H2016
  • Figure 5: Mapping of operator digital M&A strategies
  • Figure 6: Number of digital M&A and majority investments by sector/category 2012 – 1H2016
  • Figure 7: SingTel – digital investment overview
  • Figure 8: Amobee’s proposition focuses on cross-platform advertising and analytics
  • Figure 9: Telstra’s Digital Acquisitions and Majority Investments, 2012 – 1H 2016
  • Figure 10: Ooyala’s proposition
  • Figure 11: Cloud is the key element in Telstra’s Telco 2.0 strategy
  • Figure 12: Verizon’s Digital Acquisitions and Majority Investments, 2012 – 1H 2016

Connecting Brands with Customers: How leading operators are building sustainable advertising businesses

Executive Summary

2015 has witnessed the turning point at which internet access on mobile devices exceeds desktops and laptops combined for the first time and, worldwide, digital advertising has followed the audience migration from desktop to smartphone and tablet.  A new ecosystem has evolved to service the needs of the mobile advertising industry. Ad exchanges and ad networks have adapted to facilitate access by brands to an ever-wider range of content on multiple devices, whilst DMPs (Data Management Platforms), DSPs & SSPs (Demand Side and Supply Side Platforms respectively) are fuelling the growth of ‘programmatic buying’ by enabling the flow of data within the ecosystem.

There is an opportunity for telcos to establish a sustainable and profitable role as an enabler within this rapidly developing market

Advertising should be an important diversification strategy for telcos as income from core communications continues to decline because they can make use of existing assets (e.g. audience reach, inventory, data), whilst maintaining subscriber trust. Telecoms operators’ ability to use their own customers’ data (with consent) to improve their own service offerings is a key advantage that provides a strong basis for developing advertising and marketing solutions for third-parties.

Walking in the footsteps of giants does not kill the opportunity for telcos

Facebook and Google will represent more than half of the $69 billion worldwide mobile-advertising market in 2015. This dominance has led some operators to question whether they can build a viable advertising business. However STL Partners believes that there has never been a better time for many operators to consider ramping-up their efforts to secure a sustainable practice through leveraging the value of their own customer data. In fact, many telcos are actively working with OTT players such as Google and Facebook to assist them in understanding territory-specific mobile behaviour.

Three telcos lead the way in advertising – Sprint, Turkcell and SingTel – and provide important lessons for others

In the main body of this report, STL Partners identifies the role that each telco has chosen to perform within the advertising ecosystem, assesses their strategy and execution, and identifies the core reasons for their success. The three case studies display several common characteristics and point to six Key Success Factors (KSFs) for a telco advertising business. The first is a ‘start-up mindset’ pre-requisite for establishing such a business and the other five are core actions and capabilities which mutually strengthen each other to produce a ‘flywheel’ that drives growth (see Figure 1).  As a telco exec, whether your organisation is just embarking on the advertising journey, if it has tried to build an advertising business and withdrawn or, indeed, if you are well on the way to building a successful business, we outline how to deliver the following six KSFs in the downloadable report:

  1. How to secure senior management support
  2. How to develop a semi-independent organisation with advertising skills and a start-up culture
  3. How to build or buy best-in-class technical capability and continuously improve
  4. Demand-side: How to build value for subscribers
  5. Supply-side: How to build value for media buyers and sellers
  6. How to pursue opportunities to scale aggressively
Figure 1: The Telco Advertising Business Flywheel

Why now is the right time for telcos to take a more prominent role within mobile advertising

After years of hype, mobile advertising is now starting to mature in terms of technical solutions, business models, and customer acceptance. The catalyst for this growing awareness of the potential of mobile advertising is the increasing demand for first-party (own customer) data to personalize and contextualize marketing communications both within telcos and more widely among enterprises as a way of improving on coarse-grained segmentation. Telcos hold more and better data than most organisations and have wonderful distribution networks (the network itself) for managing information flows, as well as delivering marketing messages and services.

 

For those within and outside telcos that are developing marketing and advertising solutions, we would love to hear your stories and facilitate discussions with your peers, so please do get in touch: contact@stlpartners.com

 

  • Executive Summary
  • Introduction
  • Why is advertising important for Telcos?
  • Walking in the footsteps of Giants?
  • Case study 1: Sprint
  • Summary: Reasons for Sprint’s success
  • A track record in innovation
  • Making data matter
  • How successful is Sprint’s strategy?
  • What does the future hold for Sprint?
  • Case study 2: Turkcell
  • Summary: Reasons for Turkcell’s success
  • A heritage in mobile marketing
  • Retaining control, enabling access
  • Co-opetition from a position of strength
  • How successful is Turkcell’s strategy?
  • What does the future hold for Turkcell?
  • Case study 3: SingTel
  • Summary: Reasons for SingTel’s success
  • Assembling a digital marketing capability through acquisition
  • Retaining revenue within the value chain
  • Providing technology at scale
  • How successful is SingTel’s strategy?
  • What does the future hold for SingTel?
  • Conclusion and recommendations

 

  • Figure 1: The Telco Advertising Business Flywheel
  • Figure 2: Time Spent per Adult per Day with Digital Media, USA, 2008-2015
  • Figure 3: Mobile Internet Ad Spending, Worldwide, 2013 – 2019
  • Figure 4: Mobile Marketing Ecosystem (extract)
  • Figure 5: The “Wheel of Commerce”
  • Figure 6: The Digital Gameboard – an OTT view of the world
  • Figure 6: Sprint’s data asset overview
  • Figure 7: Sprint’s role in the mobile advertising ecosystem
  • Figure 9: Top App Widget
  • Figure 10: Visual voicemail
  • Figure 11: Turkcell’s role in the mobile advertising ecosystem
  • Figure 12: Turkcell’s mobile marketing solution portfolio
  • Figure 13: Turkcell’s permission database overview
  • Figure 14: SingTel’s role in the mobile advertising ecosystem
  • Figure 15: SingTel’s digital portfolio prioritisation
  • Figure 16: The role of first-party data
  • Figure 17: The promise of first-party data
  • Figure 18: The Telco Advertising Business Flywheel

The Internet of Things: Impact on M2M, where it’s going, and what to do about it?

Introduction

From RFID in the supply chain to M2M today

The ‘Internet of Things’ first appeared as a marketing term in 1999 when it was applied to improved supply-chain strategies, leveraging the then hot-topics of RFID and the Internet.

Industrial engineers planned to use miniaturised, RFID tags to track many different types of asset, especially relatively low cost ones. However, their dependency on accessible RFID readers constrained their zonal range. This also constrained many such applications to the enterprise sector and within a well-defined geographic footprint.

Modern versions of RFID labelling have expanded the addressable market through barcode and digital watermarking approaches, for example, while mobile has largely removed the zonal constraint. In fact, mobile’s economies of scale have ushered in a relatively low-cost technology building block in the form of radio modules with local processing capability. These modules allow machines and sensors to be monitored and remotely managed over mobile networks. This is essentially the M2M market today.

M2M remained a specialist, enterprise sector application for a long time. It relied on niche, systems integration and hardware development companies, often delivering one-off or small-scale deployments. For many years, growth in the M2M market did not meet expectations for faster adoption, and this is visible in analyst forecasts which repeatedly time-shifted the adoption forecast curve. Figure 1 below, for example, illustrates successive M2M forecasts for the 2005-08 period (before M2M began to take off) as analysts tried to forecast when M2M module shipment volumes would breach the 100m units/year hurdle:

Figure 1: Historical analyst forecasts of annual M2M module shipment volumes

Source: STL Partners, More With Mobile

Although the potential of remote connectivity was recognised, it did not become a high-volume market until the GSMA brought about an alignment of interests, across mobile operators, chip- and module-vendors, and enterprise users by targeting mobile applications in adjacent markets.

The GSMA’s original Embedded Mobile market development campaign made the case that connecting devices and sensors to (Internet) applications would drive significant new use cases and sources of value. However, in order to supply economically viable connected devices, the cost of embedding connectivity had to drop. This meant:

  • Educating the market about new opportunities in order to stimulate latent demand
  • Streamlining design practices to eliminate many layers of implementation costs
  • Promoting adoption in high-volume markets such as automotive, consumer health and smart utilities, for example, to drive economies of scale in the same manner that led to the mass-adoption of mobile phones

The late 2000’s proved to be a turning point for M2M, with the market now achieving scale (c. 189m connections globally as of January 2014) and growing at an impressive rate (c. 40% per annum). 

From M2M to the Internet of Things?

Over the past 5 years, companies such as Cisco, Ericsson and Huawei have begun promoting radically different market visions to those of ‘traditional M2M’. These include the ‘Internet of Everything’ (that’s Cisco), a ‘Networked Society’ with 50 billion cellular devices (that’s Ericsson), and a ‘Cellular IoT’ with 100 billion devices (that’s Huawei).

Figure 2: Ericsson’s Promise: 50 billion connected ‘things’ by 2020

Source: Ericsson

Ericsson’s calculation builds on the idea that there will be 3 billion “middle class consumers”, each with 10 M2M devices, plus personal smartphones, industrial, and enterprise devices. In promoting such visions, the different market evangelists have shifted market terminology away from M2M and towards the Internet of Things (‘IoT’).

The transition towards IoT has also had consequences beyond terminology. Whereas M2M applications were previously associated with internal-to-business, operational improvements, IoT offers far more external market prospects. In other words, connected devices allow a company to interact with its customers beyond its strict operational boundaries. In addition, standalone products can now deliver one or more connected services: for example, a connected bus can report on its mechanical status, for maintenance purposes, as well as its location to deliver a higher quality, transit service.

Another consequence of the rise of IoT relates to the way that projects are evaluated. In the past, M2M applications tended to be justified on RoI criteria. Nowadays, there is a broader, commercial recognition that IoT opens up new avenues of innovation, efficiency gains and alternative sources of revenue: it was this recognition, for example, that drove Google’s $3.2 billion valuation of Nest (see the Connected Home EB).

In contrast to RFID, the M2M market required companies in different parts of the value chain to share a common vision of a lower cost, higher volume future across many different industry verticals. The mobile industry’s success in scaling the M2M market now needs to adjust for an IoT world. Before examining what these changes imply, let us first review the M2M market today, how M2M service providers have adapted their business models and where this positions them for future IoT opportunities.

M2M Today: Geographies, Verticals and New Business Models

Headline: M2M is now an important growth area for MNOs

The M2M market has now evolved into a high volume and highly competitive business, with leading telecoms operators and other service providers (so-called ‘M2M MVNOs’ e.g. KORE, Wyless) providing millions of cellular (and fixed) M2M connections across numerous verticals and applications.

Specifically, 428 MNOs were offering M2M services across 187 countries by January 2014 – 40% of mobile network operators – and providing 189 million cellular connections. The GSMA estimates the number of global connections to be growing by about 40% per annum. Figure 3 below shows that as of Q4 2013 China Mobile was the largest player by connections (32 million), with AT&T second largest but only half the size.

Figure 3: Selected leading service providers by cellular M2M connections, Q4 2013

 

Source: Various, including GSMA and company accounts, STL Partners, More With Mobile

Unsurprisingly, these millions of connections have also translated into material revenues for service providers. Although MNOs typically do not report M2M revenues (and many do not even report connections), Verizon reported $586m in ‘M2M and telematics’ revenues for 2014, growing 47% year-on-year, during its most recent earnings call. Moreover, analysis from the Telco 2.0 Transformation Index also estimates that Vodafone Group generated $420m in revenues from M2M during its 2013/14 March-March financial year.

However, these numbers need to be put in context: whilst $500m growing 40% YoY is encouraging, this still represents only a small percentage of these telcos’ revenues – c. 0.5% in the case of Vodafone, for example.

Figure 4: Vodafone Group enterprise revenues, implied forecast, FY 2012-18

 

Source: Company accounts, STL Partners, More With Mobile

Figure 4 uses data provided by Vodafone during 2013 on the breakdown of its enterprise line of business and grows these at the rates which Vodafone forecasts the market (within its footprint) to grow over the next five years – 20% YoY revenue growth for M2M, for example. Whilst only indicative, Figure 4 demonstrates that telcos need to sustain high levels of growth over the medium- to long-term and offer complementary, value added services if M2M is to have a significant impact on their headline revenues.

To do this, telcos essentially have three ways to refine or change their business model:

  1. Improve their existing M2M operations: e.g. new organisational structures and processes
  2. Move into new areas of M2M: e.g. expansion along the value chain; new verticals/geographies
  3. Explore the Internet of Things: e.g. new service innovation across verticals and including consumer-intensive segments (e.g. the connected home)

To provide further context, the following section examines where M2M has focused to date (geographically and by vertical). This is followed by an analysis of specific telco activities in 1, 2 and 3.

 

  • Executive Summary
  • Introduction
  • From RFID in the supply chain to M2M today
  • From M2M to the Internet of Things?
  • M2M Today: Geographies, Verticals and New Business Models
  • Headline: M2M is now an important growth area for MNOs
  • In-depth: M2M is being driven by specific geographies and verticals
  • New Business Models: Value network innovation and new service offerings
  • The Emerging IoT: Outsiders are raising the opportunity stakes
  • The business models and profitability potentials of M2M and IoT are radically different
  • IoT shifts the focus from devices and connectivity to data and its use in applications
  • New service opportunities drive IoT value chain innovation
  • New entrants recognise the IoT-M2M distinction
  • IoT is not the end-game
  • ‘Digital’ and IoT convergence will drive further innovation and new business models
  • Implications for Operators
  • About STL Partners and Telco 2.0: Change the Game
  • About More With Mobile

 

  • Figure 1: Historical analyst forecasts of annual M2M module shipment volumes
  • Figure 2: Ericsson’s Promise: 50 billion connected ‘things’ by 2020
  • Figure 3: Selected leading service providers by cellular M2M connections, Q4 2013
  • Figure 4: Vodafone Group enterprise revenues, implied forecast, FY 2012-18
  • Figure 5: M2M market penetration vs. growth by geographic region
  • Figure 6: Vodafone Group organisational chart highlighting Telco 2.0 activity areas
  • Figure 7: Vodafone’s central M2M unit is structured across five areas
  • Figure 8: The M2M Value Chain
  • Figure 9: ‘New entrant’ investments outstripped those of M2M incumbents in 2014
  • Figure 10: Characterising the difference between M2M and IoT across six domains
  • Figure 11: New business models to enable cross-silo IoT services
  • Figure 12: ‘Digital’ and IoT convergence

 

Telco 1.0: Death Slide Starts in Europe

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

Very weak Q1 2014 results from Telefonica and other European players 

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

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

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

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

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

Telco 2.0 Telefonica Group Revenue

Source: Telefonica, STL Partners analysis

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

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

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

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

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

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

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

Global mobile telcoms revenue

Source: STL Partners

Upturn in telecoms industry fortunes after 2016 dependent on current activities

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

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

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

Telefonica leads Vodafone in more attractive markets

Introduction

As part of the recently launched Telco 2.0 Transformation Index, STL Partners has been analysing the transformation efforts of major telecoms operators.  We are close to completing a major analysis report on Vodafone which will complement those already completed for Telefonica, SingTel, Verizon, AT&T and Ooredoo.  Vodafone’s scores will also be added to an update of the Benchmarking Report which will be released in May.

The full analysis of each player covers 5 domains:

  1. Marketplace.   The context in which the Communications Service Provider (CSP) operates.  It consists of the economic and regulatory environment, the growth of the telecom market, the individual company’s competitive positioning and the relative strength of its relationships with customers.
  2. Service Offering.  What the CSP delivers to customers in a particular market segment. It is defined by the CSP’s corporate and services strategy.
  3. Value Network.  The way the CSP organises itself to deliver service offerings and includes both the internal structure and processes and external partnerships.
  4. Technology.  The technical architecture and functionality that a CSP uses to deliver service offerings.
  5. Finance.  The way the CSP generates a return from its investments and service offerings.  It also measures the CSP’s success in generating returns and metrics used to manage and drive performance.

In this report we explore a small part of the Marketplace analysis for Vodafone and compare its competitive positioning with another European-centric multi-national, Telefonica.

The results, we think, are surprising and instructive.  Vodafone, often held up as the strongest and most global player, actually has relatively weak competitive positions in its leading markets (it does not hold market leader positions) and is exposed to structurally competitive markets (even those that are developing).  Within this context, the company faces substantial challenges if it is to grow in the foreseeable future.

Of course, this is a small extract of a much deeper analysis on Vodafone.  In the full report, we explore Vodafone’s growth and transformation strategy in full and make specific recommendations on 3 different strategic options for management.

Overview: Vodafone operates in more competitive markets and has weaker market positions than Telefonica

STL Partners full report on Vodafone and Telefonica covers four areas of analysis within the Marketplace domain:

1. Economic environment & digital maturity:

  • The overall health of the economies in which Vodafone and Telefonica operate as reflected by GDP size and growth.
  • The digital maturity of Vodafone’s and Telefonica’s markets as reflected by consumer and enterprise adoption and usage of telecommunications and internet services.

2. Regulation:

  • The regulatory framework that Vodafone and Telefonica operate within. Includes legislation and attitudes to pricing, net neutrality, CSP technical and commercial collaboration for new Telco 2.0 solutions, etc.

3. Competition and positioning:

  • The nature of competition – how players compete, their goals, the strategies they deploy, the products they develop
  • How Vodafone and Telefonica are competing in the marketplace and their strengths and weaknesses

4. Customers and customer engagement:

  • What customers want and, more importantly, are trying to achieve (physically, intellectually, socially) and how this is reflected in their (digital) behaviour including how they use products, react to companies and brands, share information about themselves etc.
  • Specifically, the regard with which customers hold Vodafone and Telefonica

For the purposes of this report, we have extracted elements of the full analysis and present them along two dimensions: Market Attractiveness (the underlying growth, maturity and structure of Vodafone and Telefonica’s markets) and Competitive Position (Vodafone and Telefonica’s relative strength within these markets).

We explore a number of individual metrics within each dimension and, as we show in Figure 1 below, have collected data for each operator and then evaluated which of the two is in a stronger position.  Setting aside the three metrics where the CSPs are broadly at parity, at a summary level it appears that Telefonica appears to be in a stronger position than Vodafone:

  • Telefonica’s markets look more attractive than Vodafone’s: Telefonica outscores Vodafone by 6 metrics to 2 for Market Attractiveness including for GDP growth, GDP per capita growth, Bank account penetration, Broadband penetration, Herfindahl Score (a measure of a market’s structural attractiveness) and Mobile revenue growth.  Vodafone’s markets, by contrast, are only more attractive than Telefonica’s in terms of overall GDP size and Internet penetration.
  • Telefonica’s competitive position appears to be stronger than Vodafone’s: Telefonica outperforms Vodafone in 4 out of 6 metrics including ARPU as % of GDP per capita (ie share of wallet), market share, market position in top 5 markets, market share gain/loss.  Vodafone only outperforms Telefonica in 2 metrics: Total subscribers and Facebook penetration (with a lower penetration acting as a proxy for weaker OTT competition).

The ‘tale of the tape’ in Figure 1 is a top-line snapshot.  The rest of this report digs into a few of the metrics in more detail and seeks to explain where and how Telefonica is enjoying an advantage over Vodafone.

Figure 1: Telefonica and Vodafone Market Attractiveness and Competitive Positioning –

The Tale of the Tape

Figure 1: Telefonica and Vodafone Market Attractiveness and Competitive Positioning – The Tale of the Tape

Source: Company accounts; Market regulators, World Bank, International Monetary Fund, ITU, Internetworldstats.com, Benchmarking telecoms regulation – The Telecommunications Regulatory Governance Index (TRGI) by Leonard Wavermana, Pantelis Koutroumpis (published by Elsevier 2011) STL Partners analysis

  • Overview: Vodafone operates in more competitive markets and has weaker market positions than Telefonica
  • Telefonica is more exposed to fast-growing emerging markets
  • Vodafone has only 30% of revenue in emerging markets…
  • …compared with over 50% for Telefonica
  • Telefonica’s Latin American markets have grown much quicker than Vodafone’s Emerging ones…
  • …and Telefonica’s European markets have contracted at a similar rate to Vodafone’s Developed ones
  • Telefonica’s has a stronger competitive position than Vodafone in the most important markets
  • Overall, Telefonica has a stronger market position and is performing better in more attractive markets than Vodafone
  • Figure 1: Telefonica and Vodafone Market Attractiveness and Competitive Positioning – The Tale of the Tape
  • Figure 2:  Vodafone subscribers and revenue
  • Figure 3: Telefonica subscribers and revenue
  • Figure 4: Vodafone and Telefonica mobile market growth
  • Figure 5: Market shares in top 5 revenue-generating markets
  • Figure 6: Market Positioning Maps
  • Figure 7: Overall, Telefonica enjoys a 56% advantage over Vodafone using STL Partners’ Market Attractiveness-Competitive Situation (MACS) score
  • Figure 8: Portfolio Strategy Maps
  • Figure 9: Telefonica’s performance is broadly neutral and Vodafone’s negative using STL Partners’ EBITDA Margin-Market Share (EMMS) score

Why closing Telefonica Digital should make Telefonica more digital (and innovative)

Several different CSP organisation designs for Telco 2.0 Service Innovation

Telefonica is one of the companies that we have analysed in depth in the Telco 2.0 Transformation Index research. In this report, we analyse Telefonica’s recent announcement that it is restructuring its Digital Business unit. We’ll also be exploring strategies for transformation at the OnFuture EMEA 2014 Brainstorm, June 11-12, London.

Telco 2.0 strategy is a key driver of organisation design

We have defined Telco 2.0 and, specifically, Telco 2.0 Happy Piper and Telco 2.0 Service Provider strategies in other reports  so will not focus on the implications of each on service offerings and customer segments here.  It is, however, important to understand the implications each strategy has on the organisation in terms of capability requirements and, by definition, on organisation design – structure, processes, skills and so forth.

As Figure 1 shows, the old Telco 1.0 world required CSPs to focus on infrastructure-oriented capabilities – cost, service assurance, provisioning, network quality of service, and congestion management.

For a Telco 2.0 Happy Piper, these capabilities are even more important:

  • Being low-cost in a growing telecoms market gives a company an advantage; being low-cost in a shrinking telecoms market, such as Europe, can mean the difference between surviving and going under.
  • Congestion management was important in the voice-oriented telecoms market of yesteryear but is even more so in the data-centric market in which different applications (including voice) co-exist on different networks – 2G, 3G, 4G, Wi-Fi, Fibre, Copper, etc.

Telco 2.0 Happy Pipers also need to expand their addressable market in order to thrive – into Infrastructure Services, M2M, Embedded Connectivity and, in some cases, into Enterprise ICT including bespoke vertical industry solutions.  For sure this requires some new Service Development capabilities but, perhaps more importantly, also new partnerships – both in terms of service development and delivery – and a greater focus on Customer Experience Management and ‘Customer data/Big data’ in order to deliver valuable solutions to demanding enterprise customers.

For a Telco 2.0 Service Provider, the range of new capabilities required is even greater:

  • The ability to develop new platform and end-user (consumer and enterprise) services.
  • Brand management – not just creating a stolid telecoms brand but a vibrant end-user one.
  • New partners in other industries – financial services, media, advertising, start-ups, developers and so forth.


Figure 1: Capabilities needed for different Telco 2.0 strategies

Fig1 Capabilities need for different Telco 2.0 Strategies

Source: STL Partners/Telco 2.0

Most leading CSPs are pursuing a Telco 2.0 ‘Service Provider’ strategy

STL Partners analysis suggests that the majority of CSPs (and certainly all the tier 1 and 2 players) have at least some aspirations as a Telco 2.0 Service Provider.  Several, such as AT&T, Deutsche Telekom Orange, SingTel, Telefonica and Telenor, have been public with their ‘digital services’ aspirations.

But even more circumspect players such as Verizon and Vodafone which have to date largely focused on core telecommunications services have aspirations to move beyond this.  Verizon, for example, is participating in the ISIS joint venture on payments, albeit something of a slow burn at present.  Vodafone has also pushed into payments in developing markets via its successes with mPesa in Kenya and is (perhaps a slightly reluctant) partner in the WEVE JV in the UK on digital commerce.

Further back in their Telco 2.0 development owing to the attractiveness of their markets from a Telco 1.0 perspective are the players in the rapidly developing Middle Eastern and Asian markets such as Axiata, Etisalat, Mobily, Ooredoo, and Zain.  These players too aspire to achieve more than Happy Piper status and are already pushing into advertising, content and payments for consumers and M2M and Cloud for enterprises.

Telco 2.0 Service Providers are adopting different organisation designs

It is clear that there is no consensus among management about how to implement Telco 2.0 services. This is not surprising given how new it is for telecoms operators to develop and deliver new services – innovation is not something associated with telcos.  Everyone is learning how to take their first tentative steps into the wonderful but worrisome world of innovation – like toddlers stepping into the shallow beach waters of the ocean.

There is no tried and tested formula for setting up an organisation that delivers innovation but there is consensus (among STL Partners’ contacts at least) that a different organisation structure is needed to the one that manages the core infrastructure business.  Most also agree that the new skills, partnerships, operational and financial model associated with Telco 2.0 innovation needs to be ring-fenced and protected from its mature Telco 1.0 counterpart.

The degree of separation between the old and new is the key area of debate.  We lay out the broad options in Figure 2.

Fig 2 Organisation design models for Telco 2.0 Service Innovation

Fig 2 Organisation design models for Telco 2.0 Service Innovation

Source: STL Partners/Telco 2.0

For some, a central independent strategy unit that identifies potential innovations and undertakes an initial evaluation is a sufficient degree of separation.  AT&T and Verizon in the US have gone down this route – see Figure 3.

Fig 3 Organisation design approaches of 9 CSPs across 4 regions

Fig 3 Organisation design approaches of 9 CSPs across 4 regions

Source: STL Partners/Telco 2.0

In this model, ideas that are deemed promising are handed over the operating units to develop and deliver where, frankly, many are ignored or wallow in what one executive described to us as ‘Telco goo’ – the slow processes associated with the 20-year investment cycles of an infrastructure business.

Players such as Etisalat, Mobily and Ooredoo that are taking their first steps into Telco 2.0 services, but harbouring great aspirations, have gone a step further than this and set up Central Innovation Units.   In additional to innovation ideation and evaluation, these units typically undertake piloting, investment and, in some cases, some modest product development.  This approach is a sensible ‘first step’ into innovation and echoes the earlier attempts by many multi-national European players in the early 2000’s that had central group marketing functions that undertook proposition development for several countries.  The benefit is that the company can focus most resources on growth in existing Telco 1.0 services and Telco 2.0 solutions do not become a major distraction.  The downside is that Telco 2.0 services are seen as small and distant are always far less important than voice, messaging and connectivity services or devices ranges that can make a big impact in the next 3-6 months.

Finally, the most ambitious Telco 2.0 Service Providers – Deutsche Telekom, SingTel, Telenor, Telefonica and others – have developed separate New Business Units  The Telco 2.0 New Business Unit is given end-to-end responsibility for Telco 2.0 services.  The units find, develop, launch and manage new digital services and have full P&L responsibility.

STL Partners has long been a fan of this approach.  Innovation is given room to develop and grow under the guidance of senior management.  It has a high profile within the organisation but different targets, processes, people and partnerships to the core business which, left unchecked, would intentionally or unintentionally kill the new ‘rival’ off.

Five Principles for developing a Telco 2.0 New Business Unit

  1. Full control and responsibility.  The unit must have the independence from the core business to be able to control its own destiny and not be advertently or inadvertently impeded by the core business.  Telefonica, for example, went as far as to give its unit a separate physical location in central London.
  2. Senior management support.  While the unit is largely independent, it must be part of the corporate strategy and decisions about it must be made at the highest level.  In other words, the unit must be tied to the core business right at the top of the organisation – it is not completely free and decisions must be made for the overall good of the company.  Sometimes those decisions will be to the benefit or detriment of either the core business or the new business unit.  This is inevitable and not a cause for alarm – but these decisions need to be considered carefully and rationally by the senior team.
  3. Go OTT to start with.  One of the challenges faced by senior managers is how to leverage the capabilities of the core business – the network, customer data, retail outlets, brand, etc. – in the digital services offered by the new unit.  Clearly, it makes sense to use these assets to differentiate against the OTT players.  However, STL Partners recommends not trying to do this initially as the complexity of building successful interfaces between the new unit and the core business will prove too challenging.  Instead, establish some momentum with OTT services that the new unit can develop and deliver independently, without drawing on the core business, before then adding some specific core business capabilities such as location data, customer preference data or network QoS.
  4. Don’t forget to change management incentives …There is no point in filling the new business unit with senior management and fresh talent imbued with new skills and undertaking new business processes and practices unless they are clearly incentivised to make the right decisions!  It seems an obvious point but CSPs have a long and successful infrastructure legacy which means that management incentives are typically suitable for this type of business.  Managers typically have to hit high EBITDA margins, revenue targets that equate to around 50% of the capital base being generated a year, strong on-going capital investment – things that are at odds with a product innovation business (lower EBITDA margins, much lower capital intensity).  Management incentives need to change to reflect this and the fact that they business is a start-up not a bolt-on the core business.  These incentives need to be specific and can affect those in the core business as well as new unit.For example, if collaboration between the new unit and the core business units is a key requirement for long-term success (to build Telco 2.0 services that leverage core assets), then instigate a 360º feedback programme for all managers that measures how effectively they collaborate with their counter-parties in the other business units.  Scores here could be used to determine bonuses, share options or promotion – a sure way to instigate the required behaviour!
  5. …and investor metrics.  As mentioned above, a product innovation business has a different financial model to an infrastructure business.  Because of this, a new set of investor metrics is required focusing on lower margins and capital intensity.  Furthermore, users will often be a key metric rather than subscribers.  In other words, many users will not directly generate revenue (just as they do not for Google or Facebook) but remain an important driver of third-party sponsorship and advertising revenues.  Linked to this, ARPU will become a less important metric for the new business unit because the end user will be one of several revenue sources.

Many of the leading telecoms players have, therefore, done the right thing with the development of their digital units. So why have they struggled so much with culture clashes between the core telecoms business and the new digital innovations?  The answer lies in the way the units have been set up – their scope and role, the people that reside within them, and the processes and metrics that are used to develop and deliver services. This is covered in the next section of this report.

 

  • Even the boldest players are too Telco-centric with their digital business units
  • Defining traditional and new Telco 2.0 services
  • Current digital business units cover all the new Telco 2.0 services but should they?
  • Option: Reduce the scope of the Digital Business Units
  • Telefonica’s recent closure of Telefonica Digital
  • How might Telefonica’s innovation and ‘digital services’ strategy play out?

 

  • Figure 4: Defining Telco 2.0 new services
  • Figure 5: The mixed bag of services found in current digital business units
  • Figure 6: Separate new Telco 2.0 Services from traditional telecoms ones
  • Figure 8: The organisation structure at Telefonica
  • Figure 9: Telefonica’s strategic options for implementing ‘digital services’

Are Telefonica, AT&T, Ooredoo, SingTel, and Verizon aiming for the right goals?

The importance of setting Telco 2.0 goals…

Communications Service Providers (CSPs) in all markets are now embracing new Telco 2.0 business models in earnest.  However, this remains a period of exploration and experimentation and a clear Telco 2.0 goal has not yet emerged for most players. At the most basic level, senior managers and strategists face a fundamental question:

What is an appropriate Telco 2.0 goal given my organisation’s current performance and market conditions?

This note introduces a framework based on analysis undertaken for the Telco 2.0 Transformation Index and offers some initial thoughts on how to start addressing this question [1] by exploring 5 CSPs in the context of the markets in which they operate and their current business model transformation performances.

Establishing the right Telco 2.0 goal for the organisation is an important first-step for senior management in the telecoms industry because:

  • Setting a Telco 2.0 goal that is unrealistically bold will quickly result in a sense of failure and a loss of morale among employees;
  • Conversely, a lack of ambition will see the organisation squeezed slowly and remorselessly into a smaller and smaller addressable market as a utility pipe provider.

Striking the right balance is critical to avoid these two unattractive outcomes.

…and the shortcomings of traditional frameworks

Senior management teams and strategists within the telecoms industry already have tools and approaches for managing investments and setting corporate goals.  So why is a fresh approach needed?  Put simply, the telecoms market is in the process of being irreversibly disrupted.  As we show in the first part of this note, traditional thinking and frameworks offer a view of the ‘as-is’ world but one which is changing fast because CSPs’ core communications services are being substituted by alternate offerings from new competitors.  The game is changing before our eyes and managers must think (and act) differently.  The framework outlined in summary here and covered in detail in the Telco 2.0 Transformation Index is designed to facilitate this fresh thinking.

Traditional strategic frameworks are useful to assess the ‘Telco 1.0’ situation

Understanding CSP groups’ ‘Telco 1.0’ strategic positioning: Ooredoo in a position of strength

Although they lack the detailed information and deep knowledge of the telecoms industry, investors have the benefit of an impartial view of different CSPs.  Unlike CSP management teams, they generally carry little personal ‘baggage’ and instead take a cold arm’s length approach to evaluating companies.  Their investment decisions obviously take into account future profit prospects and the current share price for each company to determine whether a stock is good value or not.  Leaving aside share prices, how might an investor sensibly appraise the ‘traditional’ Telco 1.0 telecoms market?

One classic framework plots competitive position against market attractiveness.  STL Partners has conducted this for 5 CSP groups in different markets as part of the analysis undertaken for the Telco 2.0 Transformation Index (see Figure 1).  According to the data collected, Ooredoo appears to be in the strongest position and, therefore, the most attractive potential investment vehicle.  Telefonica and SingTel appear to be moderately attractive and, surprisingly to many, Verizon and AT&T least attractive.

Figure 1: Strategic positioning framework for 5 CSP groups
Strategic Positioning Framework March 2014

Source: STL Partners’ Telco 2.0 Transformation Index, February 2014

Determining a CSP’s Telco 1.0 competitive position: Ooredoo enjoying life in the least competitive markets

As with all analytical tools, the value of the framework in Figure 1 is dependent upon the nature of the data collected and the methodology for converting it into comparable scores.  The full data set, methodology, and scoring tables for this and other analyses are available in the Telco 2.0 Transformation Index Benchmarking Report.  In this report, we will explore a small part of the data which drives part of the vertical axis scores in Figure 1 – Competitive Position (we exclude Customer Engagement in this report for simplicity).  In the Index methodology, there are 7 factors that determine ‘Competitive Position’ which are split into 2 categories:

  • Market competition, a consolidated score driven by:
  • Herfindahl score.  A standard economic indicator of competitiveness, reflecting the state of development of the underlying market structure, with more consolidated markets being less competitive and scoring more highly on the Herfindahl score.
  • Mobile revenue growth.  The compound annual growth of mobile revenues over a 2-year period.  Growing markets generally display less competition as individual players need to fight less hard to achieve growth.
  • Facebook penetration.  A proxy for the strength of internet and other ‘OTT’ players in the market.
  • CSP market positioning, driven by:
  • CSP total subscribers. The overall size of the CSP across all its markets.
  • CSP monthly ARPU as % of GDP per capita. The ability of the CSP to provide value to consumers relative to their income – essentially the CSP’s share of consumer wallet.
  • CSP market share. Self-explanatory – the relative share of subscribers.
  • CSP market share gain/loss. The degree to which the CSP is winning or losing subscribers relative to its peers.

If we look at the first 3 factors – those that drive fundamental market competition – it is clear why Ooredoo scores highly:

  • Its markets are substantially more consolidated than those of the other players (Figure 2).  Surprisingly, given the regular accusations of the US market being a duopoly, Verizon and AT&T have the most fragmented and competitive markets in the US.  For the fixed market, this latter point may be overstated since the US, for consumer and SME segments at least, is effectively carved up into regional areas where major fixed operators like Verizon and AT&T often do not compete head-to-head.
  • Its markets enjoy the strongest mobile revenue growth at 8.1% per annum between 2010 and 2012 versus 4.6% in Telefonica’s markets (fast in Latin America and negative in Europe), 5% in the US, and an annual decline (-1.7% ) for SingTel (Figure 3).
  • Facebook and the other internet players are much weaker in Ooredoo’s Middle Eastern markets than in Asia Pacific and Australia (SingTel), Europe and Latin America (Telefonica) and particularly the US (Verizon and AT&T) – see Figure 4.

 Figure 2: Herfindahl Score – Ooredoo enjoys the least competitive markets

Market Herfindahl Score March 2014

Note: Verizon and AT&T have slightly different scores owing the different business mixes between fixed and mobile within the US market

Source: STL Partners’ Telco 2.0 Transformation Index, February 2014

Figure 3: Ooredoo enjoying the strongest mobile market growth
Mobile Market Revenue Growth 2010-2012 March 2014

Source: STL Partners’ Telco 2.0 Transformation Index, February 2014

Ooredoo also operates in markets that have less competition from new players. For example, social network penetration is 56% in North America where AT&T and Verizon operate, 44% in Europe and South America where Telefonica operates, 58% in Singapore but only 34% in Qatar (Ooredoo’s main market) and 24% in the Middle East on average.

 

  • Identifying an individual CSP’s Telco 1.0 strategy: Telefonica Group in ‘harvest’ mode in most markets – holding prices, sacrificing share, generating cash
  • Frameworks used in the Telco 2.0 Transformation Index help identify evolving goals and strategies for CSPs
  • Traditional frameworks fail to account for new competitors, new services, new business models…
  • …but understanding how well each CSP is transforming to a new business model uncovers the optimum Telco 2.0 goal
  • STL Partners and the Telco 2.0™ Initiative

 

  • Figure 1: Strategic positioning framework for 5 CSP groups
  • Figure 2: Herfindahl Score – Ooredoo enjoys the least competitive markets
  • Figure 3: Ooredoo enjoying the strongest mobile market growth
  • Figure 4: Telefonica in harvest mode – milking companies for cash
  • Figure 5: Telco 2.0 Transformation Index strategic goals framework

Telco 2.0 Transformation Index: Technology Survey

Summary: 150 senior execs from Vodafone, Telefonica, Etisalat, Ooredoo (formerly Qtel), Axiata and Singtel supported our technology survey for the Telco 2.0 Transformation Index. This analysis of the results includes findings on prioritisation, alignment, accountability, speed of change, skills, partners, projects and approaches to transformation. It shows that there are common issues around urgency, accountability and skills, and interesting differences in priorities and overall approach to technology as an enabler of transformation. (November 2013, Executive Briefing Service, Transformation Stream.) Telco 2.0 Transformation Index Tech Survey Cover Small
  Read in Full (Members only)   To Subscribe click here

Below are a brief extract and detailed contents from a 29 page Telco 2.0 Briefing Report that can be downloaded in full in Powerpoint slideshow format by members of the Premium Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation stream here.

This report is an extract from the overall analysis for the Telco 2.0 Transformation Index, a new service from Telco 2.0 Research. Non-members can find out more about subscribing to the Briefing Service here and the Transformation Index here. There will be a world first preview of the Telco 2.0 Transformation Index at our Digital Arabia Executive Brainstorm in Dubai on 11-13th November 2013. To find out more about any of these services please email contact@telco2.net or call +44 (0) 207 247 5003.

To share this article easily, please click:



 

Introduction


Details of the objectives and key benefits of the overall Telco 2.0 Transformation Index can be found here, and the methodology and approach here. There’s also an example of Telefonica’s market position here.

One component of our analysis has been a survey of 150 senior execs on the reality of developing and implementing technology strategy in their organisations, and the results are now available to download to members of the Telco 2.0 Executive Briefing Service.

Key Benefits

  • The report’s highly graphical and interactive Powerpoint show format makes it extremely easy to digest and reach valuable insights quickly
  • The structure of the analysis allows the reader to rapidly and concisely assimilate the complex similarities and differences between players
  • It is underpinned with detailed and sourced numerical and qualitative data

 

Example charts from the report

The report analyses similarities and differences in priorities across the six players.Telco 2.0 Transformation Index - Tech Prioritisation Differences - Singtel, Axiata, Vodafone, Telefonica, Etisalat, Ooredoo

 

It also assesses the skills profiles of the players against different strategic areas.

Telco 2.0 Transformation Index - Technology Skills analysis, Telefonica, Vodafone, Etisalat, Ooredoo, Axiata, Singtel
Contents

To access the contents of the report, including…

  • Introduction and Methodology
  • Background – the Telco 2.0 Transformation Index
  • Executive Summary
  • Survey respondents
  • Drivers of network and IT projects
  • Degree of challenge of ‘Transformation’ by operator
  • Priority areas for Transformation by operator
  • What are the preferred project approaches for transformation?
  • Alignment of techology and commercial priorities
  • Accountability for leveraging and generating value from technology projects
  • IT Skills – ‘Telco 1.0’ Vs ‘Telco 2.0’
  • Nature of strategic partnerships by operator
  • Technology project life-cycles by operator
  • Groupings by attitude to technology as a driver of success
  • Priority areas for technological improvement or transformation

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation stream can download the full 29 page report in interactive Powerpoint slideshow format hereNon-Members, please subscribe here. For other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Telco 2.0 Transformation Index: Understanding Telefonica’s Markets and Market Position

Summary: This extract from the Telco 2.0 Transformation Index shows our analysis of Telefonica’s markets and market position, including economic and digital market maturity, regulation, customers, competition and pricing. It is one part of our overall analysis of Telefonica’s progress towards transformation to the Telco 2.0 business model. The other parts of the Telefonica analysis are: Service Proposition, Finances, Technology, Value Network, and an overall summary. Telefonica is one of the companies analysed and compared in the first tranche of analysis that also addresses Vodafone, AT&T, Verizon, Axiata, SingTel, Etisalat and Ooredoo (formerly Qtel). (August 2013, Executive Briefing Service, Transformation Stream.) Telefonica Telco 2.0 Transformation Index Small

Introduction


Details of the objectives and key benefits of the overall Telco 2.0 Transformation Index can be found here, and the methodology and approach here.

Telefonica is one of the first companies featured in our Transformation Index, and one that is viewed with great interest by others. With operating companies facing very different conditions in Europe and South America, Telefonica faces some interesting strategic challenges, and has attempted to stimulate growth through innovation with the development of Telefonica Digital.

The ‘Markets and Position’ section of the analysis puts Telefonica’s current global position, risks and opportunities in context, and is now available to download to members of the Telco 2.0 Executive Briefing Service. The rest of the analysis (covering Service Proposition, Value Network, Technology and Finances), and the analyses of the other seven companies initially covered (Vodafone, AT&T, Verizon, Etisalat, Ooredoo [formerly Qtel], Singtel and Axiata) will be published from September 2013.

Key Benefits

  • The report’s highly graphical format makes it extremely easy to digest and reach valuable insights quickly into both Telefonica’s current position and future strategic needs
  • The structure of the analysis allows the reader to rapidly and concisely assimilate the complex picture of Telefonica’s international businesses, risks and opportunities
  • It is underpinned with detailed and sourced numerical and qualitative data

 

Example charts from the report

The report analyses Telefonica’s market share position across markets against their regulatory strength.
Telco 2.0 Transformation Index - Market Positioning Detail

 

It also assesses the economic and demographic make-up of Telefonica’s markets.

Telco 2.0 Transformation Index - Market Analysis Detail Example, Telefonica

The market analyses are consolidated into an overall summary of market positioning by Operating Company, which is further refined into an assessment of strategic approach and operational performance.

Telco 2.0 Transformation Index - Market Share and Profitability Detail

 

Contents

To access the contents of the report, including…

  • Introduction and Methodology
  • Market Position Summary: Economic, Regulatory, Competitive and Customers
  • Summary analysis of growth, GDP, prices and economics of key markets
  • Comparison and contrasts between European and Latin American markets
  • Regulation vs EBITDA margins
  • Mobile revenue growth by market
  • Subscribers and revenues by region
  • Mari-Meko of Subscribers and Shares in key markets
  • Market Share Vs. Regulation
  • Market Vs. Telefonica Growth by national market
  • Telefonica’s commercial strategy
  • Strength of OTT entrants in Telefonica’s markets
  • Pre-Pay, Post-Pay and Churn by Market
  • Telefonica’s relative brand strength

 

A Practical Guide to Implementing Telco 2.0

 

Detailed table of contents

Section

Sub-sections

Part One: Identifying Telco 2.0 Opportunities

Developing the Right Telco 2.0 Strategy

  • Applying Porter’s thinking to the current telecoms market
  • Generic Telco 2.0 strategic options
  • Telco 2.0 strategies: how they drive shareholder returns
  • Which Telco 2.0 strategy for your organisation
  • Strategy comparison case studies: A Telco 2.0 Happy Piper (Vodafone UK) versus Telco 2.0 Service Player (O2)

Identifying & Prioritising Telco 2.0 Innovations

  • A taxonomy of Telco 2.0 opportunities
  • From isolated innovations to an integrated platform
  • Two approaches to identifying Telco 2.0 innovations
  • Approaches
  • Case study:  The STL Partners Innovation Scouting Service
  • Evaluating the potential opportunities: a structured approach to screening

Part Two: Implementing Telco 2.0 Opportunities

Introduction

  • A framework for innovation and business model transformation for telecoms

Service Offerings: Bringing Telco 2.0 Propositions to Market

  • A 12-stage end-to-end process for service development
    1. 1. Customer intentions and draft press release
    2. 2. Detailed value proposition and use cases
    3. 3. Fast validation with users
    4. 4. Capabilities assessment and own/partner role definitions
    5. 5. Revenue and cost models
    6. 6. Evaluation and business case
    7. 7. Competition and regulation
    8. 8. Technology and build process
    9. 9. Proof of Concept and final build
    10. 10. Sales and marketing
    11. 11. Launch
    12. 12. Evaluation and continuous development
  • Case studies: Vodafone 360, O2 Priority Moments
  • Checklists and templates for each stage

Value Network: Internal – Getting the Organisation Right to Deliver Telco 2.0 Innovation

  • Centralised versus decentralized organization structures
  • Integrating Telco 2.0 into the core organisation versus creating an independent unit
  • Case studies on different approaches: Telefonica and KPN

Value Network: External – Partnering to Grow the Pie

  • Evaluating closed versus open business models
  • Collaborating with other operators – when and how to do it
  • Working with other service providers – start-ups, established vendors and ‘OTT players’
  • Determining when to collaborate and when to compete

Technology: Prioritising Activities to Support Business Transformation

  • Understanding the developing demands on IT resources
  • Priority new functional area: Customer data
  • Approaches to IT transformation: Big Bang versus Continuous Improvement
  • Evaluating IT transformation approaches: a structured screening methodology
  • Case studies on IT transformation approaches: Vodafone and Telefonica

Finance: Optimising the Telco 2.0 Revenue & Cost Model

  • Revenue drivers: key revenue models and sources of revenue
  • Cost drivers: key types of cost and cost models
  • A framework for guiding decisions about revenue and cost management
  • Implications of new business models on financial and operational metrics

Marketplace: Managing the Regulatory Environment

  • Making the case against net neutrality…
  • …and for the ability to collaborate with other telecoms players to build value
  • Recommended next steps for CEOs