Tag: smartphones

Apple Glass: An iPhone moment for 5G?

Augmented reality supports many use cases across industries

Revisiting the themes explored in the AR/VR: Won’t move the 5G needle report STL Partners published in January 2018, this report explores whether augmented reality (AR) could become a catalyst for widespread adoption of 5G, as leading chip supplier Qualcomm and some telcos hope.

It considers how this technology is developing, its relationship with virtual reality (VR), and the implications for telcos trying to find compelling reasons for customers to use low latency 5G networks.

This report draws the following distinction between VR and AR

  • Virtual reality: use of an enclosed headset for total immersion in a digital3D
  • Augmented reality: superimposition of digital graphics onto images of the real world via a camera viewfinder, a pair of glasses or onto a screen fixed in real world.

In other words, AR is used both indoors and outdoors and on a variety of devices. Whereas Wi-Fi/fibre connectivity will be the preferred connectivity option in many scenarios, 5G will be required in locations lacking high-speed Wi-Fi coverage.  Many AR applications rely on responsive connectivity to enable them to interact with the real world. To be compelling, animated images superimposed on those of the real world need to change in a way that is consistent with changes in the real world and changes in the viewing angle.

AR can be used to create innovative games, such as the 2016 phenomena Pokemon Go, and educational and informational tools, such as travel guides that give you information about the monument you are looking at.  At live sports events, spectators could use AR software to identify players, see how fast they are running, check their heart rates and call up their career statistics.

Note, an advanced form of AR is sometimes referred to as mixed reality or extended reality (XR). In this case, fully interactive digital 3D objects are superimposed on the real world, effectively mixing virtual objects and people with physical objects and people into a seamless interactive scene. For example, an advanced telepresence service could project a live hologram of the person you are talking to into the same room as you. Note, this could be an avatar representing the person or, where the connectivity allows, an actual 3D video stream of the actual person.

Widespread usage of AR services will be a hallmark of the Coordination Age, in the sense that they will bring valuable information to people as and when they need it. First responders, for example, could use smart glasses to help work their way through smoke inside a building, while police officers could be immediately fed information about the owner of a car registration plate. Office workers may use smart glasses to live stream a hologram of a colleague from the other side of the world or a 3D model of a new product or building.

In the home, both AR and VR could be used to generate new entertainment experiences, ranging from highly immersive games to live holograms of sports events or music concerts. Some people may even use these services as a form of escapism, virtually inhabiting alternative realities for several hours a day.

Given sufficient time to develop, STL Partners believes mixed-reality services will ultimately become widely adopted in the developed world. They will become a valuable aid to everyday living, providing the user with information about whatever they are looking at, either on a transparent screen on a pair of glasses or through a wireless earpiece. If you had a device that could give you notifications, such as an alert about a fast approaching car or a delay to your train, in your ear or eyeline, why wouldn’t you want to use it?

How different AR applications affect mobile networks

One of the key questions for the telecoms industry is how many of these applications will require very low latency, high-speed connectivity. The transmission of high-definition holographic images from one place to another in real time could place enormous demands on telecoms networks, opening up opportunities for telcos to earn additional revenues by providing dedicated/managed connectivity at a premium price. But many AR applications, such as displaying reviews of the restaurant a consumer is looking at, are unlikely to generate much data traffic. the figure below lists some potential AR use cases and indicates how demanding they will be to support.

Examples of AR use cases and the demands they make on connectivity


Source: STL Partners

Although telcos have always struggled to convince people to pay a premium for premium connectivity, some of the most advanced AR applications may be sufficiently compelling to bring about this kind of behavioural shift, just as people are prepared to pay more for a better seat at the theatre or in a sports stadium. This could be on a pay-as-you-go or a subscription basis.

Enter your details below to request an extract of the report

The pioneers of augmented reality

Augmented reality (AR) is essentially a catch-all term for any application that seeks to overlay digital information and images on the real-world. Applications of AR can range from a simple digital label to a live 3D holographic projection of a person or event.

AR really rose to prominence at the start of the last decade with the launch of smartphone apps, such as Layar, Junaio, and Wikitude, which gave you information about what you were looking at through the smartphone viewfinder. These apps drew on data from the handset’s GPS chip, its compass and, in some cases, image recognition software to try and figure out what was being displayed in the viewfinder. Although they attracted a lot of media attention, these apps were too clunky to break through into the mass-market. However, the underlying concept persists – the reasonably popular Google Lens app enables people to identify a product, plant or animal they are looking at or translate a menu into their own language.

Perhaps the most high profile AR application to date is Niantic’s Pokemon Go, a smartphone game that superimposes cartoon monsters on images of the real world captured by the user’s smartphone camera. Pokemon Go generated $1 billion in revenue globally just seven months after its release in mid 2016, faster than any other mobile game, according to App Annie. It has also shown remarkable staying power. Four years later, in May 2020, Pokemon Go continued to be one of the top 10 grossing games worldwide, according to SensorTower.

In November 2017, Niantic, which has also had another major AR hit with sci-fi game Ingress, raised $200 million to boost its AR efforts. In 2019, it released another AR game based on the Harry Potter franchise.

Niantic is now looking to use its AR expertise to create a new kind of marketing platform. The idea is that brands will be able to post digital adverts and content in real-world locations, essentially creating digital billboards that are viewable to consumers using the Niantic platform. At the online AWE event in May 2020, Niantic executives claimed “AR gamification and location-based context” can help businesses increase their reach, boost user sentiment, and drive foot traffic to bricks-and-mortar stores. Niantic says it is working with major brands, such as AT&T, Simon Malls, Starbucks, Mcdonalds, and Samsung, to develop AR marketing that “is non-intrusive, organic, and engaging.”

The sustained success of Pokemon Go has made an impression on the major Internet platforms. By 2018, the immediate focus of both Apple and Google had clearly shifted from VR to AR. Apple CEO Tim Cook has been particularly vocal about the potential of AR. And he continues to sing the praises of the technology in public.

In January 2020, for example, during a visit to Ireland, Cook described augmented reality as the “next big thing.”  In an earnings call later that month, Cook added: “When you look at AR today, you would see that there are consumer applications, there are enterprise applications. … it’s going to pervade your life…, because it’s going to go across both business and your whole life. And I think these things will happen in parallel.”

Both Apple and Google have released AR developer tools, helping AR apps to proliferate in both Apple’s App Store and on Google Play.  One of the most popular early use cases for AR is to check how potential new furniture would look inside a living room or a bedroom. Furniture stores and home design companies, such as Ikea, Wayfair and Houzz, have launched their own AR apps using Apple’s ARKit. Once the app is familiar with its surroundings, it allows the user to overlay digital models of furniture anywhere in a room to see how it will fit. The technology can work in outdoor spaces as well.

In a similar vein, there are various AR apps, such as MeasureKit, that allow you to measure any object of your choosing. After the user picks a starting point with a screen tap, a straight line will measure the length until a second tap marks the end. MeasureKit also claims to be able to calculate trajectory distances of moving objects, angle degrees, the square footage of a three-dimensional cube and a person’s height.

Table of contents

  • Executive Summary
    • More mainstream models from late 2022
    • Implications and opportunities for telcos
  • Introduction
  • Progress and Immediate Prospects
    • The pioneers of augmented reality
    • Impact of the pandemic
    • Snap – seeing the world differently
    • Facebook – the keeper of the VR flame
    • Google – the leader in image recognition
    • Apple – patiently playing the long game
    • Microsoft – expensive offerings for the enterprise
    • Amazon – teaming up with telcos to enable AR/VR
    • Market forecasts being revised down
  • Telcos Get Active in AR
    • South Korea’s telcos keep trying
    • The global picture
  • What comes next?
    • Live 3D holograms of events
    • Enhancing live venues with holograms
    • 4K HD – Simple, but effective
  • Technical requirements
    • Extreme image processing
    • An array of sensors and cameras
    • Artificial intelligence plays a role
    • Bandwidth and latency
    • Costs: energy, weight and financial
  • Timelines for Better VR and AR
    • When might mass-market models become available?
    • Implications for telcos
    • Opportunities for telcos
  • Appendix: Societal Challenges
    • AR: Is it acceptable in a public place?
    • VR: health issues
    • VR and AR: moral and ethical challenges
    • AR and VR: What do consumers really want?
  • Index

Enter your details below to request an extract of the report

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

Introduction

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

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

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

Google’s strategic headache

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

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

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

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

Source: Mary Meeker’s Global Internet Trends 2016

 

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

 

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

Can Telcos Entertain You? Vodafone and MTN’s Emerging Market Strategies (Part 2)

Telcos and the entertainment opportunity

In most emerging markets, which are the focus of this report, mobile networks are fast becoming the primary distribution channel for entertainment content. Although television is popular all over the world, in much of sub-Saharan Africa and developing Asia, terrestrial television coverage is patchy, while cable TV is rare. Satellite television is broadly available, but fewer than half of households can afford to buy a television, meaning many people only watch TV in bars, cafes or in the houses of friends.

In Kenya, for example, only 28% of households have a television, according to the World Bank development indicators, while in Tanzania that figure is just 15%. In some major developing markets, television has a stronger grip – in Nigeria, 40% of households have a TV and 47% of households in India. For sub-Saharan Africa, as a whole, television penetration is about 25% and in South Asia, 36%.

For many people in these regions, purchasing a versatile smartphone, which can be used for communications, information access, commerce and entertainment, is a higher priority than acquiring a television. The advent of sub US$40 smartphones means more and more people can now afford mobile devices with decent screens capable of displaying multimedia and processors that can run apps and full Internet browsers. In India, 220 million smartphones were in use at the end of 2015, according to one estimate , while Ericsson has forecast that the number of smartphones in use in Sub-Saharan Africa will leap to 690 million in 2021 from 170 million at the end of 2015 (see Figure 1).

 Figure 1: Predicted smartphone growth in developing regions

 Source: Ericsson Mobility Report, November 2015

In emerging markets, most Internet users don’t own a television (see Figure 2) and many rely entirely on a smartphone for digital entertainment. Moreover, a scarcity of fixed line infrastructure means much of the entertainment content is delivered over mobile networks. Mobile trade group the GSMA estimates that 3G networks, which are typically fast enough to transmit reasonable video images, reach about three quarters of the planet’s people. Mobile network supplier Ericsson has forecast that mobile broadband networks (3G and/or 4G) will cover more than 90% of the world’s population by 2021.

 Figure 2: Device ownership among Internet users in selected markets

 Source: Ericsson

The reliance on cellular infrastructure in developing countries has enabled mobile operators to take on a central role in the provision of online entertainment. The fact that many people rely almost solely on mobile networks for entertainment is presenting mobile operators with a major opportunity to boost their relevance and revenues. Given the capacity constraints on mobile networks and the implications for cellular tariffs, entertainment services need to be optimised to ensure that the costs of bandwidth don’t become prohibitive for consumers. Mobile operators’ understanding and real-time knowledge of their networks means they are in a good position to both manage the optimisation and package connectivity and content (regulation permitting) into one service bundle with a predictable and transparent tariff.

Although the network effects and economies of scale and scope enjoyed by YouTube and Facebook mean that both these players have strong positions in much of developing Asia, Latin America, the Middle East and Africa, some emerging market telcos have also built a solid foundation in the fast growing online entertainment sector. In Africa and India, for example, the leading telcos enable third party content providers to reach new customers through the telcos’ dedicated entertainment platforms, including web portals, individual apps and app stores selling music, TV and games. In return for supporting content offerings with their brands, networks, messaging, billing and payment systems, these telcos typically earn commission and capture valuable behavioural data.

 

  • Introduction
  • Executive Summary
  • Telcos and the entertainment opportunity
  • Roles in the online entertainment value chain
  • Further disruption ahead
  • Vodafone India faces up to new competition
  • The land-grab in India’s online entertainment market
  • Vodafone India combines content and connectivity
  • Takeaways – greater differentiation required
  • Music Gives MTN an Edge
  • Takeaways – music could be a springboard
  • Conclusions

 

  • Figure 1: Predicted smartphone growth in developing regions
  • Figure 2: Device ownership among Internet users in selected markets
  • Figure 3: How the key roles in online content are changing
  • Figure 4: How future-proof are telcos’ entertainment portfolios?
  • Figure 5: Vodafone India curates a wide range of infotainment content
  • Figure 6: Smartphone adoption in India will more than double in the next five years
  • Figure 7: Vodafone Mobile TV enables customers to subscribe to channels
  • Figure 8: The new Vodafone Play app combines TV, films and music
  • Figure 9: Vodafone India offers an app that makes it easy to track data usage
  • Figure 10: Vodafone’s Mobile TV app hasn’t attracted a strong following
  • Figure 11: Competitive and regulatory pressures are pushing down prices
  • Figure 12: In 3G, Vodafone India has kept pace with market leader Airtel
  • Figure 13: Vodafone India’s growth in data traffic compared with that of other telcos
  • Figure 14: Vodafone’s performance in India this decade
  • Figure 15: MTN’s Telco 2.0 strategy is focused on digital services
  • Figure 16: MTN’s growing array of digital services
  • Figure 17: MTN Play has been localised for each of MTN’s operations
  • Figure 18: The Ugandan version of MTN Play caters for local tastes
  • Figure 19: MTN bundles in some data traffic with each music plan
  • Figure 20: MTN’s digital services are particularly strong in Nigeria
  • Figure 21: MTN tops a list of most admired brands in Africa in 2015

Can Telcos Entertain You? (Part 1)

Telcos and the entertainment opportunity

As telecoms networks are the primary distribution channels for the digital economy, all telcos are in the entertainment business to a certain extent. With more than 3.2 billion people worldwide now connected to the Internet, according to the ITU, entertainment is increasingly delivered online and on-demand over telecoms and cable networks. The major Internet ecosystems – Amazon, Apple, Facebook and Google – are looking to dominate this market. But telcos could also play a pivotal role in an emerging new world order, either by providing enablers or by delivering their own differentiated entertainment offerings.

Many telcos have long flirted with offering their own entertainment services, typically as a retaliatory response to cable television providers’ push into communications. But these flings are now morphing into something more serious: connectivity and entertainment are becoming increasingly intertwined in telcos’ portfolios. Television, in particular, is shifting from the periphery, both in terms of telcos’ revenues and top management focus, onto centre stage. Some of the world’s largest telcos are beginning to invest in securing exclusive drama and sports content, even going as far as developing their own programming. This push is part of telcos’ broader search for ways to remain relevant in the consumer market, as usage of telcos’ voice and messaging services is curbed by over-the-top alternatives.

The central strategic dilemma for telcos is whether they should be selling services directly to the consumer or whether they should be providing enablers to other players (such as Amazon, Google, Netflix and Spotify) who might be prepared to pay for the use of dedicated content delivery networks, messaging, distribution, authentication, billing and payments. In many respects, this is not a new dilemma: Operators have tried to become content developers and distributors in the past, building portals, selling ringtones and games, and establishing app stores. What is new is the size of the table stakes: The expansion of broadband coverage and capacity has put the focus very much on increasingly high definition and immersive television and video. Creating this kind of content can be very expensive, prompting some of the largest telcos to invest billions of dollars, rather than tens of millions, in their entertainment proposition.

It isn’t just telcos undergoing a strategic rethink. The spread of broadband, the proliferation of connected digital devices and the shift to a multimedia Internet are shaking up the entertainment industry itself. Mobile and online entertainment accounts for US$195 billion (almost 11%) of the US$1.8 trillion global entertainment market today . And that proportion is growing. By some estimates, that figure is on course to rise to more than 13% of the global entertainment market, which could be worth US$2.2 trillion in 2019.

For incumbents in the media industry, this is a seismic shift. Cable television companies, for example, have had to rethink their longstanding business model, which involved selling big bundles of television channels encompassing the good, the bad and the ugly. Individual customers typically only watch a small fraction of the cable TV channels they are paying for, prompting a growing number of them to seek out more cost-effective and more targeted propositions from over-the-top players.

Cable companies have responded by offering more choice and expanding across the entertainment value chain. For example, Comcast, a leading US cableco, offers an increasingly broad range of TV packages, ranging from US$16 a month (for about 10 local channels) to US$80 a month (for about 140 channels bundled with high speed Internet access). Moreover, Comcast is making its TV services more flexible, enabling customers to download/record video content to watch on mobile devices and PCs at their convenience. Even so, Comcast has been shedding cable TV subscriptions for most of the past decade. But the cableco’s vertical-integration strategy has more than compensated. Growth in Comcast’s NBCUniversal television and film group, which owns a major Hollywood studio, together with rising demand for high-speed Internet access, has kept the top line growing.

Roles in the online entertainment value chain

Other cablecos and telcos are following a similar playbook to Comcast, increasingly involving themselves in all four of the key roles in the online content value chain, identified by STL Partners. These four key roles are:

  1. Programme: Content creation: producing drama series, movies or live sports programmes.
  2. Package: Packaging programmes into channels or music into playlists and then selling these packages on a subscription basis or providing them free, supported by advertising.
  3. Platform: Distributing TV channels, films or music created and curated by another entity.
  4. Pipe: Providing connectivity, either to the Internet or to a walled content garden.

Clearly, virtually all telcos and cablecos play the pipe role, providing connectivity for online content. Many also operate platforms, essentially reselling television on behalf of others. But now a growing number, including BT, Telefónica and Verizon, are creating packages and even developing their own programming. The pipe and package roles present opportunities to capture behavioural data that can then be used to further hone the entertainment proposition and make personalised recommendations and offers. At the same time, the package and programme roles are becoming increasingly important as the platforms with the best content, the best channels and the best recommendations are likely to attract the most traffic.

Figure 1 illustrates how the package and platform roles, in particular, are increasingly converging, as consumers seek out services that can help them find and discover entertainment that suits their particular tastes. Google’s YouTube platform, for example, increasingly promotes its many channels (packages) to better engage consumers, help them discover content and help viewers navigate their way through the vast amount of video on offer.

By venturing into packaging and programming, telcos are hoping to differentiate their platforms from those of the major global online players – Amazon, Apple, Facebook, Google and Netflix – which benefit from substantial economies of scale and scope. But pursuing such a strategy can involve compromises.
In many cases, regulators force telcos to also make their programming and packaging available on third party TV platforms, including those of direct competitors. In the UK, for example, BT has to wholesale its BT Sports channels to other TV platforms, including that of arch rival Sky. Figure 2 shows how BT’s platform, packaging and programming is intertwined with that of third parties, creating a complex, multi-faceted market in which BT content is available through BT TV/BT Broadband and through other platforms and pipes.

 Figure 1: How the key roles in online content are changing

 Source: STL Partners analysis

Figure 2: BT has to provide standalone packaging & programming, as well as a platform

 Source: STL Partners analysis

 

  • Introduction
  • Executive Summary
  • Telcos and the entertainment opportunity
  • Roles in the online entertainment value chain
  • Further disruption ahead
  • BT – betting big on sport
  • Takeaways – sport gives BT a broad springboard
  • Telefónica – leveraging languages
  • Takeaways – Telefónica could lead Hispanic entertainment
  • Verizon – acquiring and accumulating expertise
  • Takeaways – Verizon needs bigger and better content
  • Conclusions
  • Annex: Recommendations for telcos & cablecos in entertainment

 

  • Figure 1: How the key roles in online content are changing
  • Figure 2: BT has to provide standalone packaging & programming, as well as a platform
  • Figure 3: How future-proof are telcos’ entertainment portfolios?
  • Figure 4: The extras and upgrades to the free BT TV and BT Sports offer
  • Figure 5: The differences between BT TV’s free and premium packages
  • Figure 6: BT’s app enables consumers to watch premium content on handsets
  • Figure 7: BT Sport has driven broadband net-adds, but the rights bill is also rising
  • Figure 8: In the UK, BT is still behind the Sky TV platform but on a par with YouTube
  • Figure 9: How BT Sport creates value for BT
  • Figure 10: Telefónica offers a selection of bolt-ons to cater for different tastes
  • Figure 11: Acquisitions boosted Telefónica’s pay TV business in 2015
  • Figure 12: Pay TV and fibre broadband are the growth engines in Spain
  • Figure 13: Telefónica TV’s position versus that of Netflix and YouTube in Spain
  • Figure 14: Verizon’s three-tier strategy envisages providing platforms and solutions
  • Figure 15: Verizon was attracted by AOL’s growing platforms business
  • Figure 16: Verizon’s go90 is designed to be a content and social hybrid
  • Figure 17: AOL ranks sixth in terms of online visitors in the US
  • Figure 18: Verizon’s new go90 app has had a fairly positive response from users
  • Figure 19: AOL video trails far behind Internet rivals YouTube and Netflix in terms of usage
  • Figure 20: How future-proof are telcos’ entertainment portfolios?

WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce

Introduction

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the rise of conversational commerce – the use of messaging services to enable both interactions and transactions. It considers how WeChat/Weixin has developed this concept in China, the functionality the Tencent subsidiary offers consumers and merchants, and the lessons for other players.

The report then goes on to consider how Facebook is implementing conversational commerce in its popular Messenger app, before outlining the implications for Amazon, Google and Apple. Finally, it considers how telcos may be able to capitalise on this trend and makes a series of high-level recommendations to guide the implementation of a conversational commerce strategy. This report builds on three recent STL reports, Building Digital Trust: A Model for Telcos to Succeed in Commerce, Mobile Authentication: Telcos’ Key to the Digital World? and Authentication Mechanisms: The Digital Arms Race.

Communications and commerce: two sides of the same coin

For Facebook, advertising isn’t the only fruit. When it hired the former head of PayPal, David Marcus, to run Facebook Messenger in 2014, it was a clear signal of where the social network is heading. Facebook plans to go head to head with eBay and Amazon in the digital commerce market, generating revenues by enabling transactions, as well as brokering advertising and marketing. The ultimate goal is to transform communications services into end-to-end commerce platforms that enable consumers and brands to “close the loop” from initial interaction through transaction to after-sales care.

Facebook is not alone. In fact, it is following in the footsteps of Tencent’s WeChat service. In the STL Partners’ Wheel of Digital Commerce (see Figure 1), the remit of WeChat, Facebook Messenger, Twitter, SnapChat and other digital communications services is expanding to encompass the guide, the transact and satisfy segments (marked in blue, turquoise and green), as well as the retain, plan and promote segments: the traditional sweet spot for social networking services, email and instant messaging.

Figure 1: Communications services move to facilitate the whole wheel of commerce

Source: STL Partners

Facebook, in particular, is following in the footsteps of WeChat, Tencent’s messaging service, which is evolving into a major digital commerce platform in its home market of China. Whereas email, SMS and many other digital commerce services have long carried commercial messages, together with advertising and, inevitably, spam, WeChat goes much further – it also enables transactions and customer care. The central tenet behind this concept, which is sometimes called conversational commerce, is that consumers will become increasingly comfortable using a single service to converse with friends and businesses, and buy goods and services. In some markets, third parties are adding a commerce overlay to existing communications platforms. In India, for example, several startups, such as Joe Hukum, Niki and Lookup, are touting ways to use WhatsApp, SMS and other digital communications services to transact with consumers.

For telcos, the growing integration of communications and commerce exacerbates a key strategic dilemma. Through voice calls and text messaging, telcos led the digital communications market for two decades, but now face ceding that market to over-the-top players using communications as a loss leader to support digital commerce. The question for telcos is whether to compete head-on with these players in both digital communication and commerce (a major undertaking requiring major investments in product development and marketing) or whether to fall back to just providing enablers for other players.

The final section of this report discusses this question further. But first, let’s consider the arguments as to why digital communications and digital commerce are natural bedfellows:

Markets have always combined commerce and conversations

Markets – essentially a concentration of vendors in one physical location – have been a feature of most societies and cultures throughout recorded history. They fulfil two key functions: One is to enable buyers and sellers to find each other easily. The second is to enable the exchange of information, news and gossip: the communications required to help human societies to function smoothly. For many shoppers, a visit to a physical market is as much about socialising, as shopping. In other words, communications and commerce have been intertwined for centuries. Messaging apps could extend this concept into the digital age.

Conversations help build trust

Communication is often a prelude for commerce. In both a personal and professional capacity, people often seek word-of-mouth recommendations or they canvas friends’ opinions on potential products and services. As consumers increasingly use communications apps for this purpose, these platforms are already playing a key role in purchasing decisions across both services and products. The obvious next step is to enable the actual transaction to also take place within the app.

Conversations can drive commerce

People use messaging apps to organise their social lives. They chat with friends about which bars to go to, which restaurants to dine at, which films to see, which concerts to attend and other entertainment possibilities. Once the decision is made, one of the group may want to book tickets, a table or a taxi. If such a booking can be made within the messaging app, all of the group will be able to see the details and act accordingly.

Convenient customer service

After a transaction is completed, customer service kicks in. The buyer may want to change an order, check on delivery dates or make a related purchase. The seller may want feedback. For younger generations growing up with the Internet, messaging apps represent a natural way to interact with customer service representatives.

Messaging has consumers’ attention

Although most smartphones host dozens of apps, few are used regularly. Messaging apps are among this chosen few. In fact, communications apps (social networks/messaging apps) soak up a huge amount of consumers’ time and attention. Data from comScore, for example, shows that social networks accounts for between one fifth and one quarter of all the time that consumers spend on digital services (see Figure 2).

Figure 2: Share of digital time of different categories of apps

Source:comScore

Merchants and brands need to go where their customers are and one of those places is messaging. Messaging apps are typically always running, frequently generating notifications. That means, for many consumers, a messaging app could be a convenient place from which to make purchases – it saves them the hassle of switching to another app or using a web browser. In an interview with Tech in Asia, Joe Hukum co-founder Ajeet Kushwaha noted: “Conversational commerce is going to offer Convenience 2.0 – better and bigger than Convenience 1.0 offered by e-commerce,” adding that Joe Hukum plans to make API (application program interface) integrations with a range of partners in order to enable quick transactions. “We’re at a point where the way we consume and transact is going to change drastically,” he contended.

The success of WeChat and the lessons it holds for other communications players suggests Kushwaha could well be right.

 

  • Executive Summary*
  • Communications and commerce: two sides of the same coin
  • WeChat – the conversational commerce trailblazer*
  • The merchant experience*
  • Muted monetisation*
  • Lessons to learn from WeChat/Weixin*
  • Facebook now following fast*
  • How much money can Messenger make from commerce?*
  • WhatsApp also targets commerce*
  • Takeaways: Facebook needs to work with the medium, not against it*
  • Implications for Amazon, Apple and Google*
  • Amazon – in danger of disruption*
  • Google – down, but not out*
  • Apple – already has the assets*
  • Conclusions and lessons for telcos*
  • How can telcos differentiate?*

(* = not shown here)

 

  • Figure 1: Communications services move to facilitate the whole wheel of commerce
  • Figure 2: Share of digital time of different categories of apps
  • Figure 3: The world’s most widely used mobile messaging services*
  • Figure 4: An example of a WeChat Subscription Account*
  • Figure 5: An example of a WeChat Service Account*
  • Figure 6: The key features of WeChat’s official accounts*
  • Figure 7: The main developer tools available to WeChat verified service accounts*
  • Figure 8: WeChat enables merchants to create a distinctive look and feel*
  • Figure 9: Some Chinese nurseries use WeChat to communicate with parents*
  • Figure 10: The WeChat Wallet offers easy access to a suite of services*
  • Figure 11: Tencent’s Red Envelope promotion was hugely successful*
  • Figure 12: WeChat’s depiction of a typical day for one of its users*
  • Figure 13: Tencent remains heavily reliant on online gaming revenues*
  • Figure 14: Facebook Messenger seeks to fill the gap in digital commerce*
  • Figure 15: Facebook follows in Tencent’s footsteps*
  • Figure 16: Hailing a taxi from within a conversation on Facebook Messenger*
  • Figure 17: Facebook Messenger will increasingly compete with Amazon Prime Now*
  • Figure 18: Telcos’ mobile money apps are becoming increasingly sophisticated*

(* = not shown here)

AT&T: Fast Pivot to the NFV Future

Objectives, methods and strategic rationale

AT&T publicly launched its plan to transform its network to a cloud-, SDN- and NFV-based architecture at the Mobile World Congress in February 2014. The program was designated as the ‘User-Defined Network Cloud’ (UDNC).

The initial branding, which has receded somewhat as the program has advanced, reflected the origins of AT&T’s strategic vision in cloud computing and the idea of a software-defined network (SDN) where users can flexibly modify and scale their services according to their changing needs, just as they can with cloud-based IT. This model also contributed to an early bias toward enterprise networking, with AT&T’s first major SDN-based service being ‘Network on Demand’: an Ethernet offering allowing enterprises to rapidly modify their inter-site bandwidth and make other service alterations via a self-service portal, first trialed in June 2014.

Data center-based infrastructure and SDN architectural principles have remained at the heart of AT&T’s vision, although the focus has shifted increasingly toward network functions virtualization (NFV). In December 2014, the operator announced it had set itself the target of virtualizing (NFV) and controlling (SDN) 75% of its network via software by 2020.  What this actually means was spelled out only in mid-2015, by which time AT&T also indicated that it expected to have virtualized around 5% out of the targeted 75% by the end of 2015.

What the 75% target relates to specifically are the 200 most vital network functions that AT&T believes it will need to take forward in the long term; so this is not an exhaustive list of every network component. The list comprises network elements and service platforms supporting IP-based data and voice services, and content delivery, ranging from CPE to the optical long-haul network and everything in between. What the list does not include is functions supporting legacy services such as TDM voice, frame relay or ATM; so the UDNC involves a definitive break with AT&T’s history as one of the largest and oldest PSTN operators in the world.

Correspondingly, this involves huge changes in AT&T’s culture and organization. The operator uses the term ‘pivot’ to describe its transformation into a software-centric network company. The word is intended to evoke a sort of 180o inversion of AT&T’s whole mode of operation: a transition from a hardware-centric operator that deploys and operates equipment designed to support specific services – and so builds and scales networks literally from the ground up – to a ‘top-down’, software-centric, ‘web-scale’ service provider that builds and scales services via software, and uses flexible, resource-efficient commodity IT hardware to deliver those services when and where needed.

AT&T has described the culture change needed to effect this pivot as one of the toughest challenges it faces. It involves replacing a so-called ‘NetOps’ (network-operations) mentality and team structure with a ‘DevOps’ (collaborative, iterative operations-focused software development) approach, with multi-disciplinary teams working across established operational siloes, and focusing on developing and implementing software-based solutions that address particular customer needs. According to AT&T Business Solutions’ Chief Marketing Officer, Steve McGaw, the clear parameters that the operator has set around the SDN architecture and customer-centricity are now driving team motivation and creativity: “A product that is going to fit into the SDN architecture becomes a self-fulfilling prophecy . . . . Because we have declared that that is the way we are going to do things, then there is friction to funding that doesn’t fit within that framework. And so everyone wants to get [their] project funded, everyone wants to move the ball forward with the customer and meet the customer’s needs and expectations.”

Allowing for some degree of marketing gloss, this description nonetheless portrays a considerable change in established ways of working, with hundreds of network engineers being retrained as software developers and systems managers. The same can be said for AT&T’s collaboration with third parties in developing the SDN architecture and virtualizing so many crucial network functions. AT&T is partnering with 11 vendors – both established and challengers – on the UDNC project, co-opting them into its dedicated Domain 2.0 supplier program. These vendors are:

  • Ericsson (multiple network functions, and also integration and transformation services);
  • Tail-F Systems (service orchestration: added to the Domain 2.0 program from February 2014 and then acquired by Cisco in July 2014);
  • Metaswitch Networks (virtualized IP multimedia functions, e.g. routers and SBCs);
  • Affirmed Networks (virtualized Enhanced Packet Core (EPC));
  • Amdocs (BSS / OSS functionality);
  • Juniper (routers, SDN technology, etc.);
  • Alcatel-Lucent (range of network functions);
  • Fujitsu (IT services);
  • Brocade (virtualized routers);
  • Ciena (optical networking and service orchestration);
  • Cisco (routers and IP networking)

In addition, in another challenge to AT&T’s traditionally proprietary mode of operation, the operator is collaborating extensively with a range of open source and academic initiatives working on various pieces of the SDN / NFV jigsaw. These include:

  • ON.Lab (a non-profit organization founded by SDN innovators, and specialists from Stanford University and Berkeley) – working on the virtualization of Central Office functionality (the so-called Central Office Re-architected as a Datacenter, or CORD) and the Open Network Operating System (ONOS) carrier-grade SDN platform. ON.Lab announced in October 2015 that it would partner with the Linux Foundation on open development of ONOS.
  • OpenDaylight (collaborative open source project hosted by the Linux Foundation, and dedicated to developing SDN and NFV technologies – various projects, including a tool based on the YANG data modeling language for configuring devices in the SDN)
  • OPNFV (another Linux Foundation-hosted open source project, focused on developing an open standard NFV platform – works mostly on the ARNO NFV platform).

AT&T’s Architecture – a technical summary

If you want to understand how this all fits together, consider the CORD project’s architecture as shown in Figure 1. CORD is an AT&T research project which aims to transform its local exchanges, Central Offices in US parlance, into small data centres hosting a wide range of virtualized software applications. As well as virtualizing the core telco functions based there, they will eventually also provide edge hosting for new products and services. The structure of CORD is the template for how AT&T intends to virtualize its network and how it intends to work with the three open-source groups ON.Lab, OpenDaylight, and OPNFV. Figure 1 shows how services are created in the XOS orchestration platform out of OpenStack virtual machines, OpenDaylight network apps, and ONOS flow rules.

Figure 1: How the Central Office Re-architected as a Datacenter project works

Source: ON.Lab

What’s the benefit?

This means that AT&T can …

 

  • Executive Summary* 
  • Objectives, methods and strategic rationale (shown in part here)
  • Progress and key milestones*
  • Analysis: proceeding on all fronts*
  • Next steps: getting it done*

(* = not shown here)

 

  • Figure 1: How the Central Office Re-architected as a Datacenter project works
  • Figure 2: NFV means re-organising your product bundles, which is one of the main reasons it’s worth doing*
  • Figure 3: AT&T’s publicly disclosed virtualized network functions (VNFs) as at October 2015*
  • Figure 4: What AT&T is concentrating on versus Telefonica*
  • Figure 5: Functions in line for virtualization by AT&T*
  • Figure 6: How AT&T is doing versus its primary competitor, Verizon in this space*

(* = not shown here)

Building Digital Trust: A Model for Telcos to Succeed in Commerce

Introduction

This executive briefing considers how telcos can reduce fragmentation in the digital commerce market and create value for merchants and consumers alike. It outlines how inconsistent and clunky experiences for consumers, together with incompatible and sub-scale platforms for merchants, continue to hamper the development of the digital commerce market both online and in bricks and mortar outlets.

The report then looks at attempts by individual telcos to carve out a role in this market, as well as exploring how the GSMA’s Digital Commerce and Mobile Connect programmes are trying to make mobile operators’ propositions more consistent with each other. Finally, it considers how the telecoms sector might develop a single consistent framework – a trusted digital infrastructure – that would enable consumers and merchants to exchange information and value in a consistent and interoperable way. This final section draws on research and development work by Deutsche Telekom’s Labs.

This executive briefing also builds on previous reports by STL Partners exploring the need for better authentication, identification, data management and payment mechanisms. These reports include:

Telcos’ role in digital commerce

Two years ago, STL Partners published a strategy report outlining two major opportunities in the digital commerce market for telcos:

  1. Real-time commerce enablement: The use of mobile technologies and services to optimise all aspects of commerce. For example, mobile networks can be used to deliver precisely targeted and timely marketing and advertising to consumer’s smartphones, tablets, computers and televisions.
  2. Personal cloud: Act as a trusted custodian for individuals’ data and an intermediary between individuals and organisations, providing authentication services, digital lockers and other services that reduce the risk and friction in every day interactions. As personal cloud services provide personalised recommendations based on individuals’ authorised data, they could potentially engage much more deeply with consumers than the generalised decision-support services, such as Google, TripAdvisor, moneysavingexpert.com and comparethemarket.com, in widespread use today.

As these two opportunities are inter-related and could be combined in a single platform, STL Partners recommended that telcos start with mobile commerce, where they have the strongest strategic position, and then use the resulting data, customer relationships and trusted brand to expand into personal cloud services, which will require high levels of investment.

However, since that report was published, in developed markets, telcos’ efforts to pursue the mobile commerce market have suffered several setbacks. Over the past two years, the Weve mobile commerce joint venture in the UK has unravelled, the SoftCard joint venture in the US has collapsed and Apple has rolled out a relatively advanced and holistic proposition, now known as Apple Wallet, which effectively cuts telcos out of the action. Moreover, Google and Samsung are seeking to emulate Apple’s widely-lauded Apple Pay solution for completing transactions online and in-person. STL Partners explained the significance of these events in an executive briefing entitled Apple Pay & Weve Fail: A Wake Up Call.

These developments have led many commentators to question whether telcos can really compete with the major Internet ecosystems in digital commerce.

In emerging markets, telcos increasingly enable commerce

While telcos in developed markets are often racked with doubt, their counterparts in emerging markets continue to make headway. In developing Asia, Africa and much of Latin America, most people lack credit cards, debit cards, bank accounts, driving licenses, passports and most of the other collateral that people in developed countries use to authenticate themselves, identify themselves and conduct transactions. As many of these people have mobile phones and SIM cards, telcos are increasingly acting as intermediaries between consumers and service providers in emerging markets.

Mobile money services, which enable consumers and businesses to transfer money via mobile networks, continue to proliferate and are increasingly achieving scale. For example, Orange Money, which is available in parts of Africa and Middle East, reported a 37% year-on-year rise in customers to 15.5 million at the end of the third quarter of 2015. It also reported that revenues were up 71% year-on-year.

In some cases, mobile money services are evolving into broader digital commerce platforms. In Kenya, Safaricom, for example, has reported that the number of merchants accepting payments via its Lipa na MPesa platform more than doubled to 49,413 in the year to March 2015. In the month of March 2015, Kshs 11.6 billion was handled by the Lipa na MPesa platform, which enables consumers to use the well-established M-Pesa mobile money transfer service to pay for goods and services.

In emerging markets, mobile operators are increasingly using their distribution networks (both digital and physical) and their extensive customer data to move into financial services. As they know how much consumers are spending on airtime and are able to infer other relevant information, such as whether a subscriber has a job, mobile operators can gauge how affluent an individual is and what size of loan they can afford. If the customer is a regular user of a mobile money transfer service, the operator may also be able to assess how much disposable income they have.

In Kenya, mobile operator Safaricom reported its M-Shwari joint venture with the Commercial Bank of Africa M-Shwari had 2.1 billion Kenyan shillings (almost US$ 20 million) out on loan to customers as of March 31, 2015, up 75% from 1.2 billion shillings a year earlier. In Sri Lanka, mobile operator Dialog claims it now sells more insurance policies than all the traditional insurance companies.

In developed markets, fragmentation persists

Although developed markets are very different beasts, telcos could still play a key enabling role, which addresses various pain points in the digital economy. Although most people in North America and Western Europe have bank accounts, credit ratings and at least one digital wallet (be that PayPal, Amazon Payments or Apple iTunes), digital interaction can still be fraught with friction and mistrust. Telcos could help by enabling simple and secure authentication services as outlined in Mobile Authentication: Telcos’ Key to the Digital World?. Moreover, there is still an opportunity for telcos to become trusted custodians of personal data as explained in the aforementioned strategy report: Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players.

Even the real-time commerce enablement opportunity, explained in that Strategy Report, still exists, despite the launch of Apple Pay, and the subsequent arrival of Samsung Pay and Android Pay. Industry executives say usage of Apple Pay so far has been modest. One problem is that relatively few people have one of the latest iPhones (the iPhone 6 or iPhone 6 Plus) needed to use the service. Another barrier is the limited number of stores in the US (the initial launch market) that can accept payments via Apple Pay. The net result is that only 14% of US households with credit cards have signed up for Apple Pay, according to Phoenix Marketing International, and less than one fifth of people who can use the system do so habitually, according to a report in the Financial Times, which cited banking sources.

Usage will rise, however, as Apple persuades more consumers to buy its latest iPhones and more merchants add their loyalty cards to the new Apple Wallet (formerly Apple Passbook), while installing point of sale terminals that can support contactless transactions. In STL Partners’ view, Apple Wallet, which is designed to hold digital representations of payment cards, loyalty cards, tickets and boarding passes, does address a genuine consumer need by providing a convenient way to organise all this collateral (see Figure 1).

But Apple Wallet isn’t a panacea for merchants. As iPhones will only ever be used by a fraction of a merchant’s customer base, they may prefer to rely on their own loyalty apps, rather than Apple Wallet. John Fisher, Costa’s head of mobile and loyalty, told Macworld that while the company believed Apple Pay would make the in-store experience “even more seamless,” Costa already has its own mobile loyalty app, which customers can scan at the till. “There is probably a role for mobile payments to be integrated into that in the future and we’re looking at that,” Fisher said. “The product that Apple has will really help to provide a simple solution around in-app payments and payments in store. That’s potentially where the market is going to head, so we need to have all options on the table.”

Figure 1: The new Apple Wallet can hold a wide range of digital commerce collateral

Source: Apple.com

Merchants are also seeking ways to improve the online shopping experience for people using mobile phones. The proportion of potential shoppers who complete an online transaction on a mobile device remains much lower than on a PC. That suggests many consumers still find it cumbersome to make a purchase on a mobile phone and/or are worried about security and/or privacy.

PayPal, which remains one of the leading digital wallets, continues to experiment with various mobile offerings. For example, its new One Touch service enables a consumer to register a device so that they don’t need to enter their login details when paying with PayPal. The service seeks to emulate Amazon’s famous one click purchasing experience, but both companies run the risk that consumers’ devices fall into the wrong hands and are used to make fraudulent purchases.

At the same time, the leading social networks are making a major push to merge online communications and commerce. For example, Facebook now offers advertisers the opportunity to add a buy button to an ad, which enables the user to purchase the relevant item without leaving Facebook. Google is also experimenting with this kind of functionality, enabling developers to place buy buttons in Android apps and in adverts, Meanwhile Amazon continues to push into the mobile commerce market through its keenly-priced Kindle Fire tablet range and its physical Dash Buttons (see Figure 2), which enable people to quickly purchase specific items, such as detergent or pet food.

Figure 2: Amazon Dash button supports one-touch ordering of a specific product

Source: Amazon.com

The US is acting as a test-bed for many of these new propositions, creating a fiercely competitive and cut-throat environment, from which telcos are increasingly excluded. US mobile operators have abandoned their elaborate and expensive SoftCard mobile commerce joint venture after it failed to gain significant traction. They are now providing support for third party solutions, such as Android Pay and Samsung Pay.

As the major US Internet players wrestle over the mobile commerce space, developing their own distinctive propositions and largely eschewing interoperability, consumers have to use different apps in different ecosystems. You can’t use Apple Pay to buy goods from Amazon, while iTunes doesn’t accept PayPal.

Exacerbating this fragmentation, some major merchants are still determined to sidestep the big Internet ecosystems altogether. Despite the widespread support for Apple Pay from US banks, many major US merchants, including Wal-Mart, Sears and CVS Pharmacy, continue to promote their own CurrentC solution, which was developed by the merchant consortium MCX. JPMorgan Chase is planning to launch a wallet, Chase Pay, which can be used in conjunction with the MCX solution. If anything, the fragmentation is getting greater, rather than less.

In summary, many incompatible and partial digital identification/authentication/payment solutions have been developed and deployed. Many of these solutions only work on one platform and are unable to share information with other solutions, resulting in frustration and confusion for consumers and digital service providers alike. As a result, service providers lack economies of scale, damaging the business case for more marginal digital services.

Telcos could make a big difference

One of the fundamental premises of the STL Partners’ Strategy Report, published in 2013, still holds true: Individuals are still looking for a simple and secure way to store the array of collateral required to interact with an increasingly digital world. As organisations embrace electronic authentication, identification and payment solutions, people are increasingly going to need digital versions of professional ID cards, house keys, car keys, payment cards, loyalty cards, membership cards, tickets, coupons, entitlements and receipts.

Telcos can help address that need. But instead of exacerbating the existing fragmentation by developing proprietary wallets that aren’t interoperable, telcos need to consider how they can play an enabling role for the wider ecosystem.

Although there are opportunities for telcos to fill gaps in the financial services market in developing countries, the role of telcos in developed markets needs to be more akin to that of a trusted infrastructure provider (as they are with the Internet), that provides a consistent digital framework for the existing financial services industry.

Some telcos are edging in this direction, while others continue to develop relatively rigid digital commerce and authentication propositions. The next section outlines some of these initiatives and gives STL Partners’ key takeaways in each case.

 

  • Introduction
  • Executive Summary
  • Telcos’ role in digital commerce
  • Telcos’ track record in digital commerce
  • Vodafone Wallet
  • Deutsche Telekom’s MyWallet
  • KDDI’s Digital Commerce suite
  • GSMA Mobile Connect
  • The case for a consistent user-centric framework
  • Core vision – put consumers first
  • Core principles – cross-platform, open and interoperable
  • Are telcos up to the task?
  • How could a framework be standardised?
  • How would telcos make money?
  • Would the wider ecosystem embrace a telco-led framework?
  • Conclusions and next steps

 

  • A flexible framework supporting different transmission and security tech
  • Figure 1: The new Apple Wallet can hold a wide range of digital commerce collateral
  • Figure 2: Amazon Dash button supports one-touch ordering of a specific product
  • Figure 3: The self-reinforcing flywheel Vodafone is aiming for
  • Figure 4: In the UK, Vodafone Wallet requires consumers to top up a prepaid card
  • Figure 5: Vodafone Wallet has polarised opinion on Google Play.
  • Figure 6: Deutsche Telekom’s MyWallet app has drawn few reviews
  • Figure 8: The ARPA of KDDI’s digital commerce business is on the rise
  • Figure 9: au Smart Pass subs are rising helping to lift ARPA
  • Figure 10: KDDI’s revenues and profits from value added services grow steadily
  • Figure 11: Mobile Connect Roadmap – Authentication, Identity and Attributes
  • Figure 12: The GSMA’s is looking to integrate Mobile Connect with mobile payments
  • Figure 13: The transactional services supported by the eZ Cash wallet
  • Figure 14: Axiata’s API Gateway supports a range of commerce and other services
  • Figure 15: Axiata’s vision of a consistent global platform for telco enablers
  • Figure 16: Apple Wallet is a repository for a growing array of digital collateral
  • Figure 17: Telekom Labs Has developed a prototype cross-platform wallet in HMTL5
  • Figure 18: Each piece of collateral could be represented by a digital card
  • Figure 19: A flexible framework supporting different transmission and security tech
  • Figure 20: Telekom Labs sees telcos as more trusted than other intermediaries

Amazon, Apple, Facebook, Google, Netflix: Whose digital content is king?

Introduction

This report analyses the market position and strategies of five global online entertainment platforms – Amazon, Apple, Facebook, Google and Netflix.

It also explores how improvements in digital technologies, consumer electronics and bandwidth are changing the online entertainment market, while explaining the ongoing uncertainty around net neutrality. The report then considers how well each of the five major entertainment platforms is prepared for the likely technological and regulatory changes in this market. Finally, it provides a high level overview of the implications for telco, paving the way for a forthcoming STL Partners report going into more detail about potential strategies for telcos in online entertainment.

The rise and rise of online entertainment

As in many other sectors, digital technologies are shaking up the global entertainment industry, giving rise to a new world order. Now that 3.2 billion people around the world have Internet access, according to the ITU, entertainment is increasingly delivered online and on-demand.

Mobile and online entertainment accounts for US$195 million (almost 11%) of the US$1.8 trillion global entertainment market today. By some estimates, that figure is on course to rise to more than 13% of the global entertainment market, which could be worth US$2.2 trillion in 2019.

Two leading distributors of online content – Google and Facebook – have infiltrated the top ten media owners in the world as defined by ZenithOptimedia (see Figure 1). ZenithOptimedia ranks media companies according to all the revenues they derive from businesses that support advertising – television broadcasting, newspaper publishing, Internet search, social media, and so on. As well as advertising revenues, it includes all revenues generated by these businesses, such as circulation revenues for newspapers or magazines. However, for pay-TV providers, only revenues from content in which the company sells advertising are included.

Figure 1 – How Google and Facebook differ from other leading media owners

Source: ZenithOptimedia, May 2015/STL Partners

ZenithOptimedia says this approach provides a clear picture of the size and negotiating power of the biggest global media owners that advertisers and agencies have to deal with. Note, Figure 1 draws on data from the financial year 2013, which is the latest year for which ZenithOptimedia had consistent revenue figures from all of the publicly listed companies. Facebook, which is growing fast, will almost certainly have climbed up the table since then.

Figure 1 also shows STL Partners’ view of the extent to which each of the top ten media owners is involved in the four key roles in the online content value chain. These four key roles are:

  1. Programme: Content creation. E.g. producing drama series, movies or live sports programmes.
  2. Package: Content curation. E.g. packaging programmes into channels or music into playlists and then selling these packages on a subscription basis or providing them free, supported by advertising.
  3. Platform: Content distribution. E.g. Distributing TV channels, films or music created and curated by another entity.
  4. Pipe: Providing connectivity. E.g. providing Internet access

Increasing vertical integration

Most of the world’s top ten media owners have traditionally focused on programming and packaging, but the rise of the Internet with its global reach has brought unprecedented economies of scale and scope to the platform players, enabling Google and now Facebook to break into the top ten. These digital disruptors earn advertising revenues by providing expansive two-sided platforms that link creators with viewers. However, intensifying competition from other major ecosystems, such as Amazon, and specialists, such as Netflix, is prompting Google, in particular, to seek new sources of differentiation. The search giant is increasingly investing in creating and packaging its own content.  The need to support an expanding range of digital devices and multiple distribution networks is also blurring the boundaries between the packaging and platform roles (see Figure 2, below) – platforms increasingly need to package content in different ways for different devices and for different devices.

Figure 2 – How the key roles in online content are changing

Source: STL Partners

These forces are prompting most of the major media groups, including Google and, to a lesser extent, Facebook, to expand across the value chain. Some of the largest telcos, including Verizon and BT, are also investing heavily in programming and packaging, as they seek to fend off competition from vertically-integrated media groups, such as Comcast and Sky (part of 21st Century Fox), who are selling broadband connectivity, as well as content.

In summary, the strongest media groups will increasingly create their own exclusive programming, package it for different devices and sell it through expansive distribution platforms that also re-sell third party content. These three elements feed of each other – the behavioural data captured by the platform can be used to improve the programming and packaging, creating a virtuous circle that attracts more customers and advertisers, generating economies of scale.

Although some leading media groups also own pipes, providing connectivity is less strategically important – consumers are increasingly happy to source their entertainment from over-the-top propositions. Instead of investing in networks, the leading media and Internet groups lobby regulators and run public relations campaigns to ensure telcos and cablecos don’t discriminate against over-the-top services. As long as these pipes are delivering adequate bandwidth and are sufficiently responsive, there is little need for the major media groups to become pipes.

The flip-side of this is that if telcos can convince the regulator and the media owners that there is a consumer and business benefit to differentiated network services (or discrimination to use the pejorative term), then the value of the pipe role increases. Guaranteed bandwidth or low-latency are a couple of the potential areas that telcos could potentially pursue here but they will need to do a significantly better job in lobbying the regulator and in marketing the benefits to consumers and the content owner/distributor if this strategy is to be successful.

To be sure, Google has deployed some fibre networks in the US and is now acting as an MVNO, reselling airtime on mobile networks in the US. But these efforts are part of its public relations effort – they are primarily designed to showcase what is possible and put pressure on telcos to improve connectivity rather than mount a serious competitive challenge.

  • Introduction
  • Executive Summary
  • The rise and rise of online entertainment
  • Increasing vertical integration
  • The world’s leading online entertainment platforms
  • A regional breakdown
  • The future of online entertainment market
  • 1. Rising investment in exclusive content
  • 2. Back to the future: Live programming
  • 3. The changing face of user generated content
  • 4. Increasingly immersive games and interactive videos
  • 5. The rise of ad blockers & the threat of a privacy backlash
  • 6. Net neutrality uncertainty
  • How the online platforms are responding
  • Conclusions and implications for telcos
  • STL Partners and Telco 2.0: Change the Game

 

  • Google is the leading generator of online entertainment traffic in most regions
  • How future-proof are the major online platforms?
  • Figure 1: How Google and Facebook differ from other leading media owners
  • Figure 2: How the key roles in online content are changing
  • Figure 3: Google leads in most regions in terms of entertainment traffic
  • Figure 4: YouTube serves up an eclectic mix of music videos, reality TV and animals
  • Figure 5: Facebook users recommend videos to one another
  • Figure 6: Apple introduces apps for television
  • Figure 7: Netflix, Google, Facebook and Amazon all gaining share in North America
  • Figure 8: YouTube & Facebook increasingly about entertainment, not interaction
  • Figure 9: YouTube maintains lead over Facebook on American mobile networks
  • Figure 10: US smartphones may be posting fewer images and videos to Facebook
  • Figure 11: Over-the-top entertainment is a three-way fight in North America
  • Figure 12: YouTube, Facebook & Netflix erode BitTorrent usage in Europe
  • Figure 13: File sharing falling back in Europe
  • Figure 14: iTunes cedes mobile share to YouTube and Facebook in Europe
  • Figure 15: Facebook consolidates strong upstream lead on mobile in Europe
  • Figure 16: YouTube accounts for about one fifth of traffic on Europe’s networks
  • Figure 17: YouTube & BitTorrent dominate downstream fixed-line traffic in Asia-Pac
  • Figure 18: Filesharing and peercasting apps dominate the upstream segment
  • Figure 19: YouTube stretches lead on mobile networks in Asia-Pacific
  • Figure 20: YouTube neck & neck with Facebook on upstream mobile in Asia-Pac
  • Figure 21: YouTube has a large lead in the Asia-Pacific region
  • Figure 22: YouTube fends off Facebook, as Netflix gains traction in Latam
  • Figure 23: How future-proof are the major online platforms?
  • Figure 24: YouTube’s live programming tends to be very niche
  • Figure 25: Netflix’s ranking of UK Internet service providers by bandwidth delivered
  • Figure 26: After striking a deal with Netflix, Verizon moved to top of speed rankings

Huawei’s choice: 5G visionary, price warrior or customer champion?

Introduction: Huawei H1s

Huawei’s H1 2015 results caused something of a stir, as they seemed to promise a new cycle of rapid growth at the No.2 infrastructure vendor. The headline figure was that revenue for H1 was up 30% year-on-year, somewhat surprising as LTE infrastructure spending was thought to have passed the peak in much of the world. In context, Huawei’s revenue has grown at a 16% CAGR since 2010, while its operating profits have grown at 2%, implying very significant erosion of margins as the infrastructure business commoditises. Operating margins were in the region of 17-18% in 2010, before falling to 10-12% in 2012-2014.

Figure 1 – If Huawei’s H2 delivers as promised, it may have broken out of the commoditisation trap… for now

Source: STL Partners, Huawei press releases 

Our estimate, in Figure 1, uses the averages for the last 4 years to show two estimates for the full-year numbers. If the first, ‘2015E’, is delivered, this would take Huawei’s profitability back to the levels of 2010 and nearly double its operating profit. The second estimate ‘Alternate 2015E’, assumes a similar performance to last year’s, in which the second half of the year disappoints in terms of profitability. In this case, full-year margin would be closer to 12% rather than 18% and all the growth would be coming from volume. The H1 announcement promises margins for 2015 of 18%, which would therefore mean a very successful year indeed if they were delivered in H2. For the last few years, Huawei’s H2 revenue has been rather higher than H1, on average by about 10% for 2011-2014. You might expect this in a growing business, but profitability is much more erratic.

For reference, Figure 2 shows that the relationship between H1 and H2 profitability has varied significantly from year to year. While in 2012 and 2013 Huawei’s operating profits in H2 were higher than in H1, in 2011 and 2014, its H2 operating profits were much less than in H1. 2015E shows the scenario needed to deliver the 18% annual margin target; Alternate 2015E shows a scenario where H2 is relatively weak, in line with last year.

Figure 2 – Huawei’s H1 and H2 Profits have varied significantly year on year

Source: STL Partners, Huawei press releases 

Huawei’s annual report hints at some reasons for the weak H2 2014, notably poor sales in North America, stockbuilding ahead of major Chinese investment (inventory rose sharply through 2014), and the launch of the Honor low-cost device brand. However, although North American wireless investment was in fact low at the time, it’s never been a core market for Huawei, and Chinese carriers were spending heavily. It is plausible that adding a lot of very cheap devices would weigh on the company’s profitability. As we will see, though, there are reasons to think Huawei might not have got full value from strong carrier spending in this timeframe.

In any event, to hit Huawei’s ambitious 2015 target, it will need a great H2 2015 to follow from its strong H1. It hasn’t performed this particular ‘double’ for the last four years, so it will certainly be an achievement to do it in 2015. And if it does, how is the market looking for 2016 and beyond?

Where are we in the infrastructure cycle?

As Huawei is still primarily an infrastructure vendor, its business is closely coupled to operators’ CAPEX plans. In theory, these plans are meant to be cyclical, driven by the ever present urge to upgrade technology and build out networks. The theory goes that on one hand, technology drivers (new standards, higher-quality displays and camera sensors) and user behaviour (the secular growth in data traffic) drive operators to invest. On the other, financial imperatives (to derive as much margin from depreciating assets as possible) encourage operators to resist spending and sweat the assets.

Sometimes, the technology drivers get the upper hand; sometimes, the financial constraints. Therefore, the operator tends to “flip” between a high-investment and a low-investment state. Because operators compete, this behaviour may become synchronised within markets, causing large geographies to exhibit an infrastructure spending cycle.

In practice, there are other drivers that mitigate against the cyclical forces. There are ‘bottlenecks’ in integration and in scaling resources up and down, and generally, businesses prefer to keep expenditures as flat as possible to reduce variations and resulting ‘surprises’ for their shareholders. In general though, there is some ongoing variation in levels of capex investment in every market, as we examine in the following sections.

North America: operators take a breather before 5G

In North America, the tipping-point from sweating the assets to investment seems to have been reached roughly in 2011-2012, when the major carriers began a cycle of heavy investment in LTE infrastructure. This investment peaked in 2014. Recently, AT&T informed its shareholders to expect significantly lower CAPEX over the next few years, and in fact the actual numbers so far this year are substantially lower than the guidance of around 14-15% of revenue. Excluding the Mexican acquisitions, CAPEX/Revenue has been running around 13% since Q3 2014. From Q2 2013 to the end of Q2 2014, AT&T spent on average $5.7bn a quarter with the vendors. Since then, the average is $4.4bn, so AT&T has reduced its quarterly CAPEX by 21%.

Figure 3 – AT&T’s LTE investment cycle looks over.

Source: STL Partners, Huawei press releases

During 2013, AT&T, Sprint, and VZW were all in a higher spending phase, as Figure 3 shows. Since then, AT&T and Sprint have backed off considerably. However, despite its problems, Sprint does seem to be starting another round of investment, and VZW has started to invest again, while T-Mobile is rising gradually. We can therefore say that the investment pause in North America is overhyped, but does exist – compare the first half of 2013, when AT&T, Sprint, and T-Mobile were all near the top of the cycle while VZW was dead on the average.

Figure 4 – The investment cycle in North America.

Source: STL Partners

The pattern is somewhat clearer in terms of CAPEX as a percentage of revenue, shown in Figure 5. In late 2012 and most of 2013, AT&T, Sprint, and T-Mobile were all near the top of their historic ranges for CAPEX as a percentage of their revenue. Now, only Sprint is really pushing hard.

Figure 5 – Spot the outlier. Sprint is the only US MNO still investing heavily

Source: STL Partners, company filings

If there is cyclicality it is most visible here in Sprint’s numbers, and the cycle is actually pretty short – the peak-to-trough time seems to be about a year, so the whole cycle takes about two years to run. That suggests that if there is a more general cyclical uptick, it should be around H1 2016, and the one after that nicely on time for early 5G implementations in 2018.

  • Executive Summary
  • Introduction: Huawei H1s
  • Where are we in the infrastructure cycle?
  • North America: operators take a breather before 5G
  • Europe: are we seeing a return to growth?
  • China: full steam ahead under “special action mobilisation”
  • The infrastructure market is changing
  • Commoditisation on a historic scale
  • And Huawei is no longer the price leader
  • The China Mobile supercontract: a highly political event
  • Conclusion: don’t expect a surge in infrastructure profitability
  • Huawei’s 5G Strategy and the Standards Process
  • Huawei’s approach to 5G
  • What do operators want from 5G?
  • In search of consensus: 3GPP leans towards an simpler “early 5G” solution
  • Conclusions
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: In Q2, the Euro-5 out-invested Chinese operators for the first time
  • Figure 2: If Huawei’s H2 delivers as promised, it may have broken out of the commoditisation trap for now
  • Figure 3: Huawei’s H1 and H2 Profits have varied significantly year on year
  • Figure 4: AT&T’s LTE investment cycle looks over.
  • Figure 5: The investment cycle in North America.
  • Figure 6: Spot the outlier. Sprint is the only US MNO still investing heavily
  • Figure 7: 3 of the Euro-5 carriers are beginning to invest again
  • Figure 8: European investment levels are not as far behind as you might think
  • Figure 9: Chinese CAPEX/Revenue levels have been 10 percent higher than US or European ones – but this may be changing
  • Figure 10: Chinese infrastructure spending was taking a breather too, until Xi’s intervention
  • Figure 11: Chinese MNOs are investing heavily
  • Figure 12: LTE deployments have grown 100x while prices have fallen even more
  • Figure 13: As usual, Huawei is very much committed to a single radio solution
  • Figure 14: Huawei wants most 5G features in R15 by H2 2018
  • Figure 15: Huawei only supports priority for MBB very weakly and emphasises R16 and beyond
  • Figure 16: Chinese operators, Alcatel-Lucent, ZTE, and academic researchers disagree with Huawei
  • Figure 17: Orange’s view of 5G: distinctly practical
  • Figure 18: Telefonica is really quite sceptical about much of the 5G technology base
  • Figure 19: Qualcomm sees R15 as a bolt-on new radio in an LTE het-net
  • Figure 20: 3GPP RAN chairman Dino Flores says “yes” to prioritisation
  • Figure 21: Working as a group, the operators were slightly more ambitious
  • Figure 22: The vendors are very broadband-focused
  • Figure 23: Vodafone and Huawei

How BT beat Apple and Google over 5 years

BT Group outperformed Apple and Google

Over the last five years, the share price of BT Group, the UK’s ex-incumbent telecoms operator, has outperformed those of Apple and Google, as well as a raft of other telecoms shares. The following chart shows BT’s share price in red and Apple’s in in blue for comparison.

Figure 1:  BT’s Share Price over 5 Years

Source: www.stockcharts.com

Now of course, over a longer period, Apple and Google have raced way ahead of BT in terms of market capitalisation, with Apple’s capital worth $654bn and Google $429bn USD compared to BT’s £35bn (c$53bn USD).

And, with any such analysis, where you start the comparison matters. Nonetheless, BT’s share price performance during this period has been pretty impressive – and it has delivered dividends too.

The total shareholder returns (capital growth plus all dividends) of shares in BT bought in September 2010 are over 200% despite its revenues going down in the period.

So what has happened at BT, then?

Sound basic financials despite falling revenues

Over this 5 year period, BT’s total revenues fell by 12%. However, in this period BT has also managed to grow EBITDA from £5.9bn to £6.3bn – an impressive margin expansion.   This clearly cannot go on for ever (a company cannot endlessly shrink its way to higher profits) but this has contributed to positive capital markets sentiment.

Figure 2: BT Group Revenue and EBITDA 2010/11 – 2014/15

[Figure 2]

Source: BT company accounts, STL Partners

BT pays off its debts

BT has also managed to reduce its debt significantly, from £8.8bn to £5.1bn over this period.

Figure 3: BT has reduced its debts by more than a third (£billions)

 

Source: BT company accounts, STL Partners

Margin expansion and debt reduction suggests good financial management but this does not explain the dramatic growth in firm value (market capitalisation plus net debt) from just over £20bn in March 2011 to circa £40bn today (based on a mid-September 2015 share price).

Figure 4: BT Group’s Firm Value has doubled in 5 Years

Source: BT company accounts, STL Partners

  • Introduction: BT’s Share Price Miracle
  • So what has happened at BT, then?
  • Sound basic financials despite falling revenues
  • Paying off its debts
  • BT Sport: a phenomenal halo effect?
  • Will BT Sport continue to shine?
  • Take-Outs from BT’s Success

 

  • Figure 1: BT’s Share Price over 5 Years
  • Figure 2: 5-Year Total Shareholder Returns Vs Revenue Growth for leading telecoms players
  • Figure 3: BT Group Revenue and EBITDA 2010/11-2014/15
  • Figure 4: BT has reduced its debts by more than a third (£billions)
  • Figure 5: BT Group’s Firm Value has doubled in 5 Years
  • Figure 6: BT Group has improved key market valuation ratios
  • Figure 7: BT ‘broadband and TV’ compared to BT Consumer Division
  • Figure 8: Comparing Firm Values / Revenue Ratios
  • Figure 9: BT Sport’s impact on broadband

Baidu, Xiaomi & DJI: China’s Fast Growing Digital Disruptors

Introduction

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing analyses China’s leading digital disruptors and their likely impact outside their home country. The report explores whether the global leaders in digital commerce – Amazon, Apple, Facebook and Google – might soon face a serious challenge from a company built in China.

In our previous report, Alibaba & Tencent: China’s Digital Disruptors, we analysed China’s two largest digital ecosystems – Alibaba, which shares many similarities with Amazon, and Tencent, which is somewhat similar to Facebook. It explored the intensifying arms race between these two groups in China, their international ambitions and the support they might need from telcos and other digital players.

This executive briefing covers Baidu, China’s answer to Google and the anchor for a third digital ecosystem, and the fast-growing smartphone maker, Xiaomi, which has the potential to build a fourth major ecosystem. It also takes a close look at DJI, the world-leading drone manufacturer, which is well worth watching for its mid-to-long term potential to create another major ecosystem around consumer robotics.

Context: sizing up China’s disruptors

As U.S. companies have demonstrated time and time again, a large and dynamic domestic market can be a springboard to global dominance. Can China’s leading digital disruptors, which also benefit from a large and dynamic domestic market, also become major players on the global stage?

Alibaba, Tencent and Baidu, which run China’s leading digital ecosystems, have all developed in a digital economy that has been partially protected by cultural and linguistic characteristics, together with government policies and regulations. As a result, Google, Facebook and Amazon haven’t been able to replicate their global dominance in China. Of the big four global disruptors, only Apple can be said to be have a major presence in China.

Thanks to their strong position in China, Alibaba, Tencent and Baidu are among the leading Internet companies globally, as measured by market capitalisation (see Figure 2). As China’s economy slows (although it will still grow about 7% this year, according to government figures), many of China’s digital players are putting more focus on international growth. Alibaba & Tencent: China’s Digital Disruptors of this report outlined how Alibaba is gaining traction in other major middle income countries, notably Russia, whereas Tencent is trying, with limited success, to expand outside of China

Figure 2:  China is home to four of the world’s most valuable publicly-listed Internet companies

Source: Source: Morgan Stanley, Capital IQ, Bloomberg via KPCB

Of the five companies covered in the two parts of this report, search specialist Baidu is the least international – its revenues are almost all generated in China and its services aren’t much used outside its home country. Innovative and fast growing handset maker Xiaomi is still heavily dependent on China, but is seeing strong sales in other developing markets. The most international of the three is DJI, the world’s leading drone maker, which is making major inroads into the U.S. and Western Europe – the heartland of Apple, Google, Amazon and Facebook.

As discussed in Alibaba & Tencent: China’s Digital Disruptors, international telcos, media companies and banks all have a strategic interest in encouraging more digital competition globally. Today, the big four U.S.-based disruptors dominate the digital economy in North America, Western Europe, Latin America and much of the developing world, limiting the mindshare and market share available to other players.

Many telcos are particularly concerned about Apple’s and Facebook’s ever-strengthening position in digital communications – a core telecoms service. They also fret about Google’s and Amazon’s power in digital commerce and content. On the basis that my enemy’s enemy is my friend, telcos might want to support Xiaomi’s challenge to Apple, while backing Tencent’s efforts to make messaging app WeChat an international service and Alibaba’s growing rivalry with Amazon (both aspects are covered in the previous report).

  • Introduction
  • Executive Summary
  • Context: sizing up China’s disruptors
  • Baidu – China’s low cost Google
  • Why Baidu is important
  • Baidu’s business models
  • How big an impact will Baidu have outside China?
  • Threats to Baidu
  • Xiaomi – Apple without the margins?
  • Why Xiaomi is important
  • Business model
  • Xiaomi’s likely International impact
  • Threats to Xiaomi
  • DJI – more than a flight of fancy
  • Why DJI is important
  • DJI’s business model
  • Threats to DJI
  • Conclusions and implications for telcos
  • Baidu, Xiaomi and DJI could all build major ecosystems
  • Implications for telcos and other digital players

 

  • Figure 1: Baidu is significantly smaller than Tencent, Alibaba and Facebook
  • Figure 2: China is home to four of the world’s most valuable publically-listed Internet companies
  • Figure 3: Baidu is in the world’s top 15 media owners
  • Figure 4: Baidu is one of the world’s leading app developers
  • Figure 5: Baidu’s clean and uncluttered home page resembles that of Google
  • Figure 6: Baidu is beginning to monetise its millions of mobile users
  • Figure 7: IQiyi has broken into the top ten iOS apps worldwide
  • Figure 8: 2014 was a banner year for Baidu’s top line
  • Figure 9: Mobile now generates almost 50% of Baidu’s revenues
  • Figure 10: Baidu says its mobile browser is popular in Indonesia
  • Figure 11: Xiaomi is a rising star in the smartphone market
  • Figure 12: The slimline Mi Note has won plaudits for its design
  • Figure 13: The $15 Mi Band: A lot of technology for not a lot of money
  • Figure 14: One of Ninebot’s products – an electric unicycle
  • Figure 15: Xiaomi is turning its MIUI into a digital commerce platform
  • Figure 16: Xiaomi even has fan sites in markets where its handsets aren’t readily available
  • Figure 17: Drones’ primary job today is aerial photography
  • Figure 18: DJI majors on ease-of-use
  • Figure 18: DJI claims its Inspire One can transmit video pictures over 2km
  • Figure 20: DJI’s Go app delivers a real-time video feed to a smartphone or tablet
  • Figure 21: Baidu’s frugal innovation

Alibaba & Tencent: China’s Digital Disruptors (Part 1)

Introduction

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing is the first part of a two part report analysing China’s leading digital disruptors and their likely impact outside their home country. The report explores whether the global leaders in digital commerce – Amazon, Apple, Facebook and Google – might soon face a serious challenge from a company built in China.

Part 1 analyses China’s two largest digital ecosystems – Alibaba, which shares many similarities with Amazon, and Tencent, which is somewhat similar to Facebook. This executive briefing considers the intensifying arms race between these two groups in China, their international ambitions and the support they might need from telcos and other digital players.

Both Alibaba and Tencent are potential competitors for telcos in some markets and potential partners in others. For example, like Amazon, Alibaba has a fast growing cloud computing business. (STL recently analysed why Amazon Web Services is so much more successful than many telcos’ cloud offerings, see: Amazon Web Services: Colossal, but Invincible?).

Like Facebook, Tencent has become a leading provider of digital communications in direct competition with telcos’ voice and messaging services. STL explored how telcos could respond to the rise and rise of Facebook in our recent report: Facebook: Telcos’ New Best Friend?

Part 2 of our report on China’s digital disruptors will cover Baidu, China’s answer to Google and the anchor for a third digital ecosystem, and the fast-growing smartphone maker, Xiaomi, which has the potential to build a fourth major ecosystem. Part 2 will also take a close look at DJI, the drone manufacturer, which is well worth watching for its mid-to-long term potential to create another major ecosystem.

Sizing up China’s disruptors

When it comes to disruption, China is a special case. Offering an enormous domestic market largely insulated by regulation, this vast country is proving to be fertile ground for Internet companies that may ultimately be able to mount a credible challenge to the big four globally – Amazon, Apple, Facebook and Google.

These four U.S.-based disruptors have used the scale and talent available in their home market to become leading digital commerce players globally, limiting the mindshare and market share available to other players. Moreover, Apple and Facebook, in particular, are carving out a strong position in digital communications, challenging telcos’ traditional dominance of this sector.

Greater competition among the Internet ecosystems would be in the strategic interests of many telcos, media companies and banks, as they seek to shore up their revenues and relevance. To that end, they could selectively encourage digital commerce and content companies that have gained sufficient scale in China to go global and compete with the U.S. giants.

In an ideal world, there might be a dozen or so major Internet ecosystems competing for a share of the worldwide digital commerce market. That would put individual telcos and other specialist players in the digital ecosystem, such as banks and media companies, in a stronger negotiating position, potentially enabling them to capture more of the value being created in the fast growing digital economy. For example, if Tencent were to mount a serious challenge to Facebook, telcos could potentially earn a commission for promoting one service over the other. Telcos could preload Facebook’s WhatsApp messaging service or Tencent’s WeChat on the handsets they distribute or they might zero-rate access (not charge for data traffic) to either service in their markets.

Similarly, if Baidu could build effective international search and content services in competition with Google, the latter may have to pay higher commission to companies that supply it with traffic. If Google faced more competition in the digital advertising market, media companies’ sites may have to pay less commission to advertising brokers. In the smartphone market, if Xiaomi were to weaken Apple’s grip on the high-end, telcos’ might be able to negotiate better margins for distributing Apple’s handsets or enabling iPhone users to temporarily subscribe to their networks when travelling abroad.

Greater incentives to expand outside China

China’s economy is on course to grow about 7% this year, according to government figures, down from the double-digit growth at the turn of the decade. As a result, its leading disruptors are increasingly treading on each other’s toes in China and have a greater incentive to expand internationally. Although the obvious move for China’s domestic Internet companies it to initially target Greater China, nearby Asian markets and the Chinese diaspora, some have much broader ambitions. Alibaba, in particular, has significant traction in other major middle income countries, notably Russia. And the world’s leading drone maker DJI is making major inroads into the U.S. and Western Europe – the heartland of Apple, Google, Amazon and Facebook.

Today, there are three major Internet ecosystems in China, headed by Alibaba, Tencent and Baidu respectively. Globally, these three players are in the top ten public Internet companies in terms of market capitalisation (see Figure 1). Moreover, Tencent has forged an alliance with JD.com, the fourth largest publicly-listed Chinese Internet company.

The first part of this report covers Alibaba and Tencent, asking whether either company is strong enough to pose a serious threat to Amazon, Facebook or Google on the global stage.

Figure 1: China is home to four of the world’s most valuable publicly-listed Internet companies

Source: Morgan Stanley, Capital IQ, Bloomberg via KPCB

Alibaba – digital commerce behemoth

Whereas most consumers in Western Europe and North America have heard of Amazon.com, many might associate Alibaba with folklore, rather than digital commerce. Yet Alibaba Group Holding Ltd. claims to be the world’s largest online and mobile commerce company in terms of gross merchandise volume (the value in US dollars of the products and services sold through its marketplaces). Although it is incorporated in the Cayman Islands, the Alibaba Group’s principal executive offices are in Hangzhou in China.

Founded in 1999 by its charismatic, combative and somewhat unpredictable executive chairman Jack Ma, Alibaba undertook the world’s largest initial public offering in September 2014. It raised USD 25 billion, which it has used to fund an ongoing acquisition spree.

Why Alibaba is important

With a market capitalisation comparable to that of Amazon and Facebook, investors clearly believe Alibaba is set to be a major player in the global economy. That belief is fuelled by the fact that Alibaba:

  • Runs several world-leading digital marketplaces
  • Is growing fast at home and abroad
  • Is assembling a major digital entertainment portfolio
  • Has acquired dozens of promising Internet companies
  • Is affiliated with one of China’s leading online payment services

 

  • Introduction
  • Executive Summary
  • Sizing up China’s disruptors
  • Alibaba – digital commerce behemoth
  • Why Alibaba is important
  • Alibaba’s business models
  • Likely impact outside China
  • Threats facing Alibaba
  • Tencent – a playbook for Facebook?
  • Why Tencent is important
  • Tencent’s business models
  • Tencent’s likely impact outside China
  • Threats to Tencent
  • Conclusions and implications for telcos
  • Alibaba and Tencent are very strong companies…
  • … but they both need strategic partners
  • Implications for telcos
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: China is home to four of the world’s most valuable publicly-listed Internet companies
  • Figure 2: Alibaba’s six major digital marketplaces
  • Figure 3: Alibaba has seen heady growth this decade
  • Figure 4: One of Alibaba’s recent investments was in MomentCam
  • Figure 5: Alipay helps Chinese consumers buy from overseas merchants
  • Figure 6: AliExpress sells a wide range of Chinese goods to the world
  • Figure 7: Alibaba’s UC Browser is widely used on Android smartphones
  • Figure 8: Comparing Alibaba and Amazon R&D over time
  • Figure 9: Alibaba’s mobile sales are rising rapidly
  • Figure 10: Almost half of Alibaba’s revenues are now generated by mobile services
  • Figure 11: Alibaba’s overall monetisation rate is slipping
  • Figure 12: Tencent runs three of the top five OTT communications services
  • Figure 13: Tencent claims leadership in digital content in China
  • Figure 14: Tencent sometimes leads Facebook
  • Figure 15: Tencent’s investment and partnership strategy
  • Figure 16: Tencent’s five years of fast growth
  • Figure 17: Tencent remains heavily reliant on online gaming revenues
  • Figure 18: Some of the use cases targeted by Tencent’s online payment portfolio
  • Figure 19: Tencent’s Red Envelope promotion was hugely successful
  • Figure 20: Both Alibaba and Tencent have seen strong growth in net income

Telco-Driven Disruption: What NTT DOCOMO, KT and Globe got right

Preface

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing is the second in a two-part series exploring the role of telcos in disrupting the digital economy. Across the two parts, STL has analysed a variety of disruptive moves by telcos, some long-standing and well established, others relatively new.

Part 2 builds on the analysis in Part 1, which considered telcos’ attempts to reinvent digital commerce in South Korea and Japan, the startling success of mobile money services in east Africa, BT’s huge outlay on sports content, AT&T’s multi-faceted smart home platform, Deutsche Telekom’s investments in online marketplaces and Orange’s innovative Libon communications service.

Part 2 takes a close look at NTT DOCOMO, Japan’s leading mobile operator, which has built up a major revenue stream from new businesses. Many of these new businesses are focused on enabling what DOCOMO refers to as a Smart Life. Revenues from its Smart Life suite of businesses, which provide consumers with advice, information, security, cloud storage and other lifestyle services, rose 22% to 421 billion yen (US$3.5 billion) in the year ending March 2015.

Part 2 also considers how South Korea’s incumbent telco KT used its high-speed broadband infrastructure to disrupt, but ultimately strengthen, its media business, which delivers IPTV to approaching six million households. This report also examines how Globe Telecom has carved out a significant position in the Philippines’ financial services market by enabling people to send each other money using text messages over a decade of patient experimentation. It also explains why the leading U.K. and U.S. mobile operators have struggled to disrupt the digital commerce market with their Weve and Softcard joint ventures.

Finally, Part 2 considers U.S. telco Verizon’s major push into cloud services, after spending US$1.4 billion to acquire specialist Terremark in 2011.

In each case, this briefing describes the underlying strategy, the implementation and the results, before setting out STL’s key takeaways. The conclusions section outlines the lessons other would-be disruptors can learn from telcos’ attempts to move into new markets and develop new value propositions.

Note, this report is not exhaustive. The examples it covers are intended to be representative. Some of these companies and their strategies are covered in other STL Partners reports, including:

Introduction: Telcos Can and do disrupt

In the digital economy, start-ups and major Internet platforms, such as Alibaba, Apple, Facebook, Google, Spotify and Tencent QQ, are generally considered to be the main agents of disruption. Start-ups tend to apply digital technologies in innovative new ways, while the major Internet platforms use their economies of scale and scope to disrupt markets and established businesses. These moves sometimes involve the deployment of new business models that can fundamentally change the modus operandi of entire industries, such as music, publishing and video gaming.

However, these digital natives don’t have a monopoly on disruption. So-called old economy companies do sometimes successfully disrupt either their own sector or adjacent sectors. In some cases, incumbents are actually well placed to drive disruption. As STL Partners has detailed in earlier reports, telcos, in particular, have many of the assets required to disrupt other industries, such as financial services, electronic commerce, healthcare and utilities. As well as owning the underlying infrastructure of the digital economy, telcos have extensive distribution networks and frequent interactions with large numbers of consumers and businesses.

Although established telcos have generally been cautious about pursuing disruption, several have created entirely new value propositions, effectively disrupting either their core business or adjacent industry sectors. In some cases, disruptive moves by telcos have primarily been defensive in that their main objective is to hang on to customers in their core business. In other cases, telcos have gone on the offensive, moving into new markets in search of new revenues. Figure 1 classifies various disruptive moves by telcos. Those in white were covered in Part 1 of this report, those in grey are covered in this report, Part 2.

Figure 1: Representative examples of disruptive plays driven by telcos

Source: STL Partners

Offensive, major financial impact category

A classic disruptive play is to use existing assets and customer relationships to move into an adjacent market, open up a new revenue stream and build a major business. This is what Apple did with the iPhone and what Amazon did with cloud services. Several telcos have also followed this playbook. This section looks at two examples – NTT DOCOMO’s Smart Life services and Globe Telecom’s GCash – and what other companies in the digital economy can learn from these relatively successful moves. Unlike many disruptive moves by telcos, the two businesses covered in this section have had a significant impact in the targeted market. They have also moved the needle for their parent’s telcos and given their investors greater confidence in their ability to innovate.

NTT DOCOMO’s Smart Life proposition

Japan’s telecoms market was one of the first in the world to go ex-growth and its telcos have been searching for new sources of revenue for the best part of a decade. The market leader, NTT DOCOMO, has also been hit by an aggressive campaign by the third largest player, Softbank, to win market share. DOCOMO has seen its revenues from telecoms services decline every year since 2006, giving its efforts to expand into adjacent markets, such as entertainment, commerce and financial services, a real sense of urgency. In particular, DOCOMO has tried hard to get closer to consumers by developing a sophisticated and multi-faceted “smart life” proposition.

Strategy

Rather than focusing simply on providing connectivity and fading into the background, DOCOMO is trying to maintain a close relationship with Japanese consumers. Its strategy is centred on using the data collected by its network to anticipate customers’ needs and provide them with tailored and timely propositions. In November 2011, DOCOMO set out a medium-term strategy (for the years up to and including 2015) called Shaping a smart life, which it positioned it as an interim step to realising its longer-term, corporate vision for 2020: Pursuing smart innovation: HEART (see Figure 2). This report looks, in particular, at the ‘T’ in the Heart strategy – DOCOMO’s bid to win consumers’ trust and clearly differentiate itself from other providers of digital services.

One of the central tenets of DOCOMO’s strategy is that individuals want the support of a “personal life agent” – an automated personal assistant that can make useful suggestions and recommendations. DOCOMO envisaged that this assistant would use the information collected by smartphones and wearable devices to perform various tasks, including making recommendations and even automatic ticket reservations.

In other words, DOCOMO was one of the first companies in the world to anticipate the market for personal digital assistants, which is now a key arena in the ongoing battle between Google, Apple and Microsoft, which have launched Google Now, Siri and Cortana respectively.

DOCOMO originally positioned its smart life proposition as part of a broader range of cloud services that would enable it to generate new sources of value. Back in 2011, DOCOMO pledged to create:

  • A personal cloud – a platform underpinning a wide range of services for consumers.
  • A business cloud – a solutions platform for the provision of new business styles
  • A network cloud – a platform that adds value through sophisticated information and communication processing performed on the network.

Figure 2:  The smart life strategy NTT DOCOMO set out in 2011

Source: NTT DOCOMO, Medium-Term Vision, November 2011

Implementation

DOCOMO has set about strengthening and expanding its existing digital commerce business to build closer relationships with both consumers and the third party businesses supplying the services and content consumers want. To that end, Japan’s largest telco set itself goals to expand the number of content providers supporting its dmenu portal (a long-standing portal offering original content) from 700 in March 2012 to 3,000 in March 2016, while boosting the number of monthly users of its dmarket, which provides a broader range of digital content, to 20 million by March 2016, up from 1.5 million in March 2012. To that end, DOCOMO has expanded dmarket into new areas, such as fashion, travel and even food deliveries, effectively transforming dmarket in an e-commerce portal, as well as a content portal (see Figure 3).

Figure 3: DOCOMO has significantly expanded the services offered by dmarket

Source: NTT DOCOMO investor presentation, April 2014

Beyond dmarket, DOCOMO has also deployed a raft of other value added services, encompassing navigation, local information, NFC-based wallet and information services, credit card and carrier-billing-based payments, translation apps, health and wellness services, insurance and even pet and child tracking. DOCOMO also provides an i-concier service, which is designed to help people with daily organisation, as well as delivering offers and information from brands the user is interested in. For example, i-concier can be configured to give you a reminder when you arrive in a specific location. Confusingly, DOCOMO has also rolled out a separate service, called Shabette-Concier, which enables customers to talk Siri-style to “their smartphone about things you want to know or do, and your smartphone will display the best answers to your queries on the screen.” In other words, DOCOMO is offering many similar services and functionality to the major Internet players, such as Apple and Google.

DOCOMO was also quick to realise the importance of enabling individuals to use a single ID across multiple devices, while positioning the smartphone as an authentication platform in everyday life in both the physical world and online world. This kind of persistent identification across multiple devices and networks will help DOCOMO collect the information it needs to make personalised recommendations. At the same time, various DOCOMO services encourage consumers to volunteer information about themselves. DOCOMO also provides secure storage of personal data, an important step towards a personal cloud service (see Figure 4) along the lines of that outlined by STL Partners in the report: Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players. While this approach is broadly similar to that pursued by the major Internet companies, DOCOMO’s marketing places a lot of emphasis on safety, security and peace of mind, implying it is different from the more ‘cavalier’ Internet companies – Google and Facebook’s business models are predicated on encouraging consumers to share personal information, so they tend not to highlight the need for safe and secure storage for that information.

 Figure 4: DOCOMO’s personal cloud aims to offer consumers secure data storage, persistent ID and personalised recommendations

Source: NTT DOCOMO, Medium-Term Vision, November 2011

Next section: DOCOMO Results Analysis…

 

  • Preface
  • Executive Summary
  • Introduction: Telcos can and do disrupt
  • Offensive, major financial impact
  • NTT DOCOMO’s Smart Life proposition
  • Globe Telecom’s GCash
  • Offensive, limited financial impact
  • Verizon Cloud
  • The Weve joint venture
  • The Softcard joint venture
  • Defensive, major financial impact
  • KT’s media business
  • Conclusions

 

  • Figure 1: Representative examples of disruptive plays driven by telcos
  • Figure 2: The smart life strategy NTT DOCOMO set out in 2011
  • Figure 3: DOCOMO has significantly expanded the services offered by dmarket
  • Figure 4: DOCOMO’s personal cloud aims to offer consumers secure data storage, persistent ID and personalised recommendations
  • Figure 5: The Smart Life businesses are growing, but not quite fast enough yet
  • Figure 6: DOCOMO hopes its Smart Life business will lift group profits this year
  • Figure 7: The Smart Life businesses now generate 15% of DOCOMO’s ARPU
  • Figure 8: In 2011 DOCOMO saw digital commerce and content as key opportunities
  • Figure 9: The value of transactions through the dmarket has grown rapidly
  • Figure 10: Subscriber growth at dmarket stalled in the first half of 2014
  • Figure 11: TV-on-demand is the most popular of the dmarket services
  • Figure 12: NTT DOCOMO is putting more emphasis on providing enablers
  • Figure 13: DOCOMO’s confusing portfolio of money services
  • Figure 14: The GCash App has improved its user interface
  • Figure 15: GCash appears to be narrowly ahead of rival services
  • Figure 16: Facebook leads the OTT communications market in the Philippines
  • Figure 17: Verizon’s Global Enterprise revenues continue to fall
  • Figure 18: Weve originally planned to used transactional data to improve marketing
  • Figure 19: The Isis Wallet could be used to store and browse offers
  • Figure 20: KT is successfully managing the transition to IPTV
  • Figure 21: KT’s media revenue has climbed to 6% of total revenues

Telco-Driven Disruption: Hits & Misses (Part 1)

Introduction

Part of STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the role of telcos in disrupting the digital economy. It analyses a variety of disruptive moves by telcos, some long-standing and well established, others relatively new. It covers telcos’ attempts to reinvent digital commerce in South Korea and Japan, the startling success of mobile money services in east Africa, BT’s huge outlay on sports content, AT&T’s multi-faceted smart home platform, Deutsche Telekom’s investments in online marketplaces and Orange’s innovative Libon communications service.

In each case, this briefing describes the underlying strategy, the implementation and the results, before setting out STL’s key takeaways. The conclusions section outlines the lessons other would-be disruptors can learn from telcos’ attempts to move into new markets and develop new value propositions.

Note, this report is not exhaustive. The examples it covers are intended to be representative. Part 2 of this report will analyse other telcos who have successfully disrupted adjacent markets or created new ones. In particular, it will take a close look at NTT DOCOMO, Japan’s leading mobile operator, which has built up a major revenue stream from new businesses.  DOCOMO reported a 13% year-on-year increase in revenues from its new businesses in the six months to September 30th 2014 to 363 billion Japanese yen (more than US$3 billion). Its target for the full financial year is 770 billion yen (almost US$6.5 billion). Revenues from its Smart Life suite of businesses, which provide consumers with advice, information, security, cloud storage and other lifestyle services, rose 18% to 205 billion yen in the six months to September 30th 2014, while its dmarket content store now has 7.8 million subscribers. In the six months to September 30th, the total value of dmarket transactions rose 30% year-on-year to 34.6 billion yen.

In South Korea, leading telco KT is trying to use smartphone-based apps and services to disrupt the digital commerce market, as are the leading U.K. and U.S. mobile operators through their respective Weve and Softcard joint ventures.  In the Philippines, Smart Communications and Globe Telecom have recast the financial services market by enabling people to send each other money using text messages.

Several major telcos are seeking to use their network infrastructure to change the game in the cloud services market. For example, U.S. telco Verizon has made a major push into cloud services, spending US$1.4 billion to acquire specialist Terremark in 2011. At the same time, Verizon and AT&T are having to respond to an aggressive play by T-Mobile USA to reshape the U.S. telecoms market with its Un-carrier strategy.

Some of these companies and their strategies are covered in other STL Partners reports, including:

Telcos can and do disrupt

In the digital economy, innovative start-ups, such as Spotify, Twitter, Instagram and the four big Internet platforms (Amazon, Apple, Facebook and Google) are generally considered to be the main agents of disruption. Start-ups tend to apply digital technologies in innovative new ways, while the major Internet platforms use their economies of scale and scope to disrupt markets and established businesses. These moves sometimes involve the deployment of new business models that can fundamentally change the modus operandi of entire industries, such as music, publishing and video gaming.

However, these digital natives don’t have a monopoly on disruption. So-called old economy companies do sometimes successfully disrupt either their own sector or adjacent sectors. In some cases, incumbents are actually well placed to drive disruption. As STL Partners has detailed in earlier reports, telcos, in particular, have many of the assets required to disrupt other industries, such as financial services, electronic commerce, healthcare and utilities. As well as owning the underlying infrastructure of the digital economy, telcos have extensive distribution networks and frequent interactions with large numbers of consumers and businesses.

Although established telcos have generally been cautious about pursuing disruption, several have succeeded in creating entirely new value propositions, effectively disrupting either their core business or adjacent industry sectors. In some cases, disruptive moves by telcos have primarily been defensive in that their main objective is to reduce churn in the core business. In other cases, telcos have gone on the offensive, moving into new markets in search of new revenues (see Figure 1).

Figure 1: Representative examples of disruptive plays driven by telcos

Source: STL Partners

 

The next section of this paper explores the disruptive moves in the top right hand corner of Figure 1 – those that have taken telcos into new markets and have had a significant financial impact on their businesses.

Offensive, major financial impact 

A classic disruptive play is to use existing assets and customer relationships to move into an adjacent market, open up a new revenue stream and build a major business. This is what Apple did with the iPhone and what Amazon did with cloud services. Several telcos have also followed this playbook. This section looks at three examples – SK Telecom’s SK Planet, Safaricom’s M-Pesa and KDDI’s au Smart Pass – and what other companies in the digital economy can learn from these largely successful moves. Unlike many disruptive moves by telcos, the three businesses covered in this section have had sufficient impact to properly register on investors’ radar screens. They have moved the needle for their parent’s telcos and given their investors confidence in their ability to innovate.

SK Planet – an ambitious mobile commerce play

Owned by SK Telecom, SK Planet is a major broker in South Korea’s world-leading mobile commerce market. It has developed several two-sided online services that are similar in some respects to those offered by Google. SK Planet operates the T Map, a turn-by-turn navigation service, the T Store Android app store, the Smart Wallet payment, loyalty and couponing service, the OK Cashbag loyalty marketing programme and the 11th St online marketplace.


Strategy

Taking advantage of South Koreans’ appetite for new technologies, SK Telecom is using its home market as a test bed for mobile commerce solutions that could be deployed more widely. As well as seeking to generate revenues from enabling payments, advertising, loyalty, couponing and other forms of direct marketing in South Korea, it is aiming to become a leading mobile commerce player in other markets in Asia and North America.

SK Telecom’s approach has been to launch services early and then refine these services in response to feedback from the Korean market. It launched a mobile couponing service, for example, as early as 2008. To reduce the impact of corporate bureaucracy, in 2011, SK Telecom placed its digital commerce activities into a separate company, called SK Planet. The new entity has since focused on the development of a two-sided platform that aims to provide consumers with convenient shopping channels and merchants and brands with a wide range of marketing solutions both online and in the bricks and mortar arena. Although its services are over-the-top, in the sense that they don’t require consumers to use SK Telecom, SK Planet continues to work closely with SK Telecom – its sole owner.

Downstream, SK Planet is trying to differentiate itself by putting consumers’ interests first, giving them considerable control and transparency over the digital marketing they receive. Upstream, SK Planet is putting a lot of emphasis on helping traditional bricks and mortars stores go digital and reverse so-called showrooming, so that consumers research products online, but actually buy them from bricks and mortar retailers.

SK Planet CEO Jinwoo So talks about enabling “Next Commerce” by which he means the seamless integration of online and bricks and mortar commerce.  “Just as Amazon became the global leader in e-commerce by revolutionizing the industry, SK Planet aims to
become the global ‘Next Commerce’ leader in the offline market by driving mobile innovation that will eventually
break down the walls which separate the online and offline worlds,” he says.

Estimating the offline commerce market in South Korea is worth 230 trillion won (more than 210 US billion dollars), SK Planet is aggressively adapting its existing digital commerce platforms, which are underpinned by SK Telecom’s network assets, for mobile commerce. It is also making extensive use of the big data generated by its existing platforms to hone its offerings.

At the 2014 Mobile World Congress, SK Planet CEO Jinwoo So outlined how SK Planet has worked closely with SK Telecom to develop algorithms that use customer data to predict churn and provide personalized recommendations and offers. “We combined the traditional data mining with text mining,” he said. “How people create the search criteria or the sites they visit, we came up with a very unique formula, which gives up much two times better performance than before. … In 11th street, we have achieved almost three times better performance by applying our recommendation engine, which we developed. Now we are trying to prove the ROI for marketing budgets for brands and merchants.”

 

  • Introduction
  • Executive Summary
  • Telcos can and do disrupt
  • Offensive, major financial impact (Strategy, Implementation, Results)
  • SK Planet – an ambitious mobile commerce play
  • M-Pesa – reinventing financial services
  • KDDI au Smart Pass – curating online commerce
  • Offensive, limited financial impact (Strategy, Implementation, Results)
  • Deutsche Telekom’s start-stop Scout 24 investments
  • AT&T Digital Life – slow burn for the smart home
  • Defensive, major financial impact (Strategy, Implementation, Results)
  • BT Sport and BT Wi-Fi – High perceived value
  • Defensive, minor financial impact (Strategy, Implementation, Results)
  • Orange Libon – disrupting the disruptors
  • Conclusions
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Representative examples of disruptive plays driven by telcos
  • Figure 2: SK Planet’s Syrup Wallet stores loyalty cards, coupons and payment cards
  • Figure 3: Shopkick enables US retailers to interact with customers in store
  • Figure 4: SK Planet is an increasingly important part of SK Telecom’s business
  • Figure 5: The flywheel effect: how upstream partners can increase relevance
  • Figure 6: M-Pesa continues to grow in Kenya seven years after launch
  • Figure 7: Vodacom Tanzania has made it easy to register for M-Pesa
  • Figure 8: KDDI’s revenues and profits from value added services grow steadily
  • Figure 9: au Smart Pass is bolstering KDDI’s ARPU
  • Figure 10: Immobilienscout24 has seen a steady increase in traffic
  • Figure 11: AT&T Digital Life gives consumers remote control over their homes
  • Figure 12:  Investors value BT Sport’s contribution
  • Figure 13: BT Sport has driven broadband net-adds, but at considerable expense
  • Figure 14: Orange’s multi-faceted positioning of Libon in the App Store

 

Digital Commerce: Show me the (Mobile) Money

Introduction

STL defines Digital Commerce 2.0 as the use of new digital and mobile technologies to bring buyers and sellers together more efficiently and effectively. Fast growing adoption of mobile, social and local services is opening up opportunities to provide consumers with highly-relevant advertising and marketing services, underpinned by secure and easy-to-use payment services. By giving people easy access to information, vouchers, loyalty points and electronic payment services, smartphones can be used to make shopping in bricks and mortar stores as interactive as shopping through web sites and mobile apps.

To read the note in full, including the following sections detailing additional analysis…

  • Executive Summary
  • Overcoming the Barriers
  • 1. Understand the marketplace you are operating in
  • 2. Develop compelling service offerings
  • 3. The value network
  • 4. Technology
  • 5. Finance – the high-level business model
  • Conclusions and next steps
  • About STL Partners

…and the following figures…

  • Figure 1 – The Cycle and Functions of Digital Commerce
  • Figure 2 – Mobile wallets will take time to gain traction
  • Figure 3 – The mobile commerce flywheel
  • Figure 4 – The STL Partners Business Model Framework
  • Figure 5 – For banked consumers, digital wallets mainly offer convenience
  • Figure 6 – For the unbanked, digital wallets offer convenience and some savings
  • Figure 7 – For merchants, digital wallets help build deeper customer relationships
  • Figure 8 – Telcos’ potential revenue streams from a digital commerce service
  • Figure 9 – Telcos’ potential major costs in launching a digital commerce service
  • Figure 10 – Telcos’ mobile commerce revenues are likely to be modest
  • Figure 11 – Telcos have regular customer contact and real-time data
  • Figure 12 – Potential strategic actions for telcos
  • Figure 13 – Leading Internet companies have global reach and scale
  • Figure 14 – Potential strategic actions for Internet players
  • Figure 15 – Banks have local knowledge, payment networks trusted brands
  • Figure 16 – Potential strategic actions for banks and payment networks

Smartphones: when will Huawei be No.1?

Summary: We were surprised to hear Huawei’s objective of becoming the world’s No.1 Smartphone maker at last year’s Mobile World Congress, and somewhat dubious whether it would achieve that goal. However, at this year’s show Huawei demonstrated impressive progress, and we consider it is no longer a question of if, but when it will achieve its goal. In this analysis we explore industry scenarios and their consequences.(March 2013, Executive Briefiing Service).

Huawei Ascend P2 Smartphone
  Read in Full (Members only)   To Subscribe click here

Below is an extract from this 11 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Disruptive innovation and strategies will be a key theme at our Executive Brainstorms in Silicon Valley (March 2013), and Europe (London, June 2013). Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Huawei’s position

A brief history of Huawei

Huawei is no minnow. Revenues in 2012 were US$35bn, profits were US$2.5bn, R&D spend was US$4.8bn, and it employs 125k people of whom 75k are in R&D and have relationships with nearly every mobile operator on the planet. 

In network equipment Huawei has grown from market entrant to market leadership in fifteen years. The first overseas order was for fixed line products to Hutchison Whampoa in Hong Kong in 1997. The first major overseas wireless order was to build the Dutch operator Telfort’s 3G network in 2003. The initial primary reason for many operators choosing Huawei network equipment was their low price. Many people have claimed the price was below cost. No-one would argue that the decade that followed resulted in a torrent of red ink on most network equipment vendors profit and loss accounts and market share gains by Huawei.

In consumer equipment, Huawei initially focussed upon the dongle market introducing its first datacard in 2007. Within three years, Huawei achieved market leadership and today has a market share in excess of 50% around the globe. At Mobile World Congress 2013 (MWC13), the Huawei stand had by far the most impressive range of dongles: USB, MiFi and embedded. Again, Huawei was the price leader and competitors claimed below-cost selling to establish market leadership. In 2011, Huawei settled a lawsuit with the previous EU market leader, Option, about anti-dumping practices. 

In 2012, Huawei devices had revenues of US$7.5m and sold over 120m units: including 50m dongles and 52m handsets, of which 32m were smartphones. Today, Huawei is the world’s number three Smartphone maker according to data released by IDC.

 Figure 1 – Smartphone Manufacturer – Units and Growth Q4 2011/12

Manufacturer

Units 4Q12

Units 4Q11

Growth

Samsung

63.7

36.2

76.0%

Apple

47.8

37.0

29.2%

Huawei

10.8

5.7

89.5%

Others

97.1

81.9

18.6%

 

219.4

160.8

36.4%

 

 

 

 

All Phone

 

 

 

Samsung

111.2

99

12.3%

Apple

47.8

37

29.2%

Huawei

15.8

13.9

13.7%

Others

307.7

323.5

-4.9%

 

482.5

473.4

1.9%

Source: IDC

Price – Huawei’s usual weapon of choice

Given Huawei’s history, it is highly likely that in trying to achieve its Smartphone goal the primary weapon will be price. This will have a profound effect in the Smartphone market in the medium term. Our view is that the Smartphone profit pool will be severely reduced for nearly all manufacturers, Apple being the exception, at least until Huawei achieves its goal.

In Q4 2012, Smartphone shipments were 45% of total phones compared to 34% in the same period in 2011. Our view is that this growth in penetration will continue over the coming years peaking at approximately 80% in 2015. This growth will mean a lot of new smartphone users which will be extremely price conscious especially compared to the early smartphone adopters.

Our view is that in this growing market of price conscious users across the globe, Huawei is in the prime position to capture a significant portion of the market. In an optimistic case where the existing Smartphone manufacturers allow Huawei a price advantage, we believe it will take Huawei three years (i.e. Q4 2016) to achieve leadership. In a pessimistic case, we believe it will take Huawei five years (i.e. Q4 2018). 

Promotion – how can money help solve this problem?

The Huawei brand is not well known outside of China and many of the manufacturers see this is a major weakness. Our view is slightly contrarian – if Huawei can achieve #3 position with a brand that has such limited customer awareness, imagine what they could achieve if the brand was well known? 

The key Huawei announcement was in our opinion a commitment to brand building in 2013. While it is impossible to build the brand strength of an Apple in the short term, it is possible to create brand awareness with a huge spend on promotion and advertising. We can envisage that all the world’s top branding agencies are current descending on Shenzchen offering to help Huawei with their branding campaigns across the globe. We believe that in three years time the Huawei brand will be as well know as the other Smartphone makers.

Product – Huawei ascendant

Figure 2 – Huawei Ascend P2 Flagship Smartphone

Huawei Ascend P2 Smartphone 

At MWC13, Huawei launched the Ascend P2 as its new flagship product for 2013. Our view is that the build quality is extremely good with a lovely Corning Gorilla Glass screen. Perhaps the quality is not quite as high as the new Sony Xperia, but at least comparable with all the other new models in the show. The differentiator that Huawei is promoting is that it is the fastest handset in the world supporting 4G speeds of up to 150Mbps. This is a bit unrealistic in our view as no networks are yet built to support those speeds. However, it highlights that Huawei do have excellence in radio engineering and will use its vast R&D army to create differentiation. Huawei have already a commitment from the Orange group to sell the Ascend P2. The Ascend P2 will retail at a highly competitive €400 before operator subisidies.

Flagship products are important to show capabilities, but will not create the huge volumes required to achieve leadership. Huawei had a full range of handsets on display across the whole range of price points.

To read the note in full, including the following additional sections detailing support for the analysis…
  • Place – money talks and distributors will listen
  • The Marketing Mix
  • Five Smartphone Market Scenarios
  • Conclusion

…and the following figures…

  • Figure 1 – Smartphone Manufacturer – Units and Growth Q4 2011/12
  • Figure 2 – Huawei Ascend P2 Flagship Smartphone
  • Figure 3 – Smartphone market scenarios

…Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 11 page report in PDF format here. Non-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

HTML5: market impact and telco strategies

Content

  • The web vs. the app: a shifting battlefield
  • The run-anywhere utopia
  • Hybrid web+native apps
  • HTML5 appstores
  • HTML5, consumer electronics & PCs
  • HTML5 & mobile phones
  • Not all HTML5 devices are created equal
  • The Internet (not-telco) actors in HTML5
  • W3C
  • Mozilla
  • Google
  • Telco initiatives around HTML5
  • WAC (Wholesale Application Community)
  • Former OMTP BONDI
  • Boot to Gecko
  • Risks and threats
  • HTTPS and SPDY: secure but opaque
  • Why WebRTC is transformative
  • A new generation of competitors in apps?
  • Innovative threat example – HTML5 tethering
  • Impact of HTML5 on mobile networks
  • Conclusion & recommendations
  • Recommendations
  • The Telco 2.0™ Initiative

Figures

  • Figure 1 – HTML5 standards scope & status
  • Figure 2 – HTML5 vs. native apps vs. hybrids
  • Figure 3 – HTML5 pro’s and con’s
  • Figure 4 – HTML5 remains fragmented in implementation
  • Figure 5 – Browsers remain imperfect for HTLM5 but are improving fast
  • Figure 6 – Google Chrome is a major catalyst for HTML5
  • Figure 7 – Operator involvement in HTML5 is centred on WAC