RCS: Walking the commerce tightrope

Introduction

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

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

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

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

RCS: What has changed in the past two years?

New networks, more interoperability and rising usage

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

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

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

Contents:

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

Figures:

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

Sense check: Can data growth save telco revenues?

Introduction

A recent STL Partners report – Which operator growth strategies will remain viable in 2017 and beyond? – looked at the growth strategies of 68 operator groups, and identified eight different growth strategies employed over this sample. The eighth strategy was to expect mobile data growth to start to reverse the decline in revenues once the decline in voice and messaging revenues is complete. In the previous report, we argued that data revenue growth would not rapidly counterbalance the losses of voice and messaging due to the forces outlined in Figure 2 below:

Figure 2: Trust in the increasing value of (and spend in) broadband data 

Source: STL Partners

In that report, we showed a number of examples, including NTT Docomo in Japan, which has been experiencing voice and messaging declines for the longest period of telcos we are aware of, and the UK market, which is competitive with relatively good availability of market data (See Figure 3):

Figure 3: STL Partners can find no evidence of long term revenue growth driven by increased mobile broadband demand in mature markets (outside duopolies)

Source: Company accounts, STL Partners

Despite the clarity of our own convictions on this matter, we are aware that some telcos are growing their revenues, and also that a minority of our clients (perhaps one in ten based on a number of informal surveys we have run in workshops etc.) believe that data could start to regrow the market in certain conditions.

Given how attractive this idea is to the industry, and how difficult and lengthy the path of transformation and creating digital services is proving for telcos, we decided that it would be useful to revisit our assertions, to dig deeper to see what signs of growth we could find and what might be learned from them. This report contains our findings from this further analysis.

Background: The telco ‘hunger gap’

This decline is not a new story, and STL Partners has been warning about this phenomenon and the need for business model change since 2006.

Back in 2013, STL Partners estimated that digital business would need to represent 25+% of Telco revenue by 2020 to avoid long-term industry decline. However, to date we have not taken the view that data revenues will to grow enough to make up for the decline in traditional services, meaning that “hunger gap” will not be filled this way (see Figure 4).

Figure 4: The telco ‘hunger gap’ between the decline in traditional and data revenues

Source: STL Partners

However, making the transition to new business models is challenging for telcos, who have traditionally relied on an infrastructure-based business model. Digital businesses are very different, and the astronomical growth in demand for mobile data services over the past decade is placing severe strain on networks and resources.

We have argued that telcos now need to make a fundamental shift from their traditional infrastructure-based business model to a complex amalgam of infrastructure, platform, and product innovation businesses.

Alternatively, growing data would be an innately attractive prospect for the telecoms industry. It would not require all the hard work, risk, change and investment of transformation. Hard-pressed executives would love nothing better than the ‘do little’ strategy to work out. It’s an idea that can easily find traction and supporters.

But is it a realistic prospect to grow data revenues faster than voice and messaging are shrinking?

To sense-check our original assertion that data will not grow overall revenues, this report takes a new look at the available evidence. We picked six different telcos appearing to exhibit representative or outlier strategies to see whether there may currently be grounds to change our view that data revenue growth will not grow the overall telecoms market.

Content:

  • Executive Summary
  • Introduction
  • Background: the telco ‘hunger gap’
  • Methodology
  • Review of global trends in data growth
  • The explosion in mobile data growth
  • The link between data consumption and ARPU
  • The rise of 4G
  • Data tariff bundles increase in volume
  • Mobile data offloading
  • Multiplay bundling and the fixed network advantage
  • International data roaming
  • Zero rating and net neutrality
  • Case studies – different data strategies
  • Four data growth strategies
  • The traditional growth model
  • The disruptor/challenger model
  • The innovator model
  • The OTT proposition
  • Case studies comparison: Investment vs risk in summary
  • Case study: Innovator: DNA (Finland)
  • Case study: Disruptor/Innovator: T-Mobile US
  • Case study: Super-disruptor: Reliance Jio (India)
  • Case study: Disruptor: Free (France)
  • Case study: Traditional/Innovator: Vodafone UK
  • Case study: Traditional: Cosmote (Greece)
  • Conclusions
  • Case studies comparison: Investment vs risk in summary
  • Telcos need to seek fresh business models
  • Network investment will need to be even more intelligently targeted than with 3G/4G
  • New growth opportunities are emerging
  • A little thoughtful innovation goes a long way
  • Recommendations

Figures:

  • Figure 1: Trust in the increasing value of (and spend) in broadband data
  • Figure 2: Trust in the increasing value of (and spend) in broadband data
  • Figure 3: STL Partners can find no evidence of long-term revenue growth driven by increased mobile broadband demand in mature markets (outside duopolies)
  • Figure 4: The telco “hunger gap” between the decline in traditional and data revenues
  • Figure 5: Cisco global data growth 2016-2021
  • Figure 6: Total estimated UK mobile retail revenues
  • Figure 7: SMS and MMS sent in the UK, 2007-2015
  • Figure 8: Selected telco data growth strategies
  • Figure 9: Analysis of mobile operator growth strategies
  • Figure 10: DNA revenues and churn 2012-2016
  • Figure 11: DNA mobile data growth 2010-2016
  • Figure 12: DNA mobile data growth forecast
  • Figure 13: USA average monthly data use, 2010-2015
  • Figure 14: Deutsche Telekom non-voice % of ARPU, 2009-2016
  • Figure 15: T-Mobile US total revenues and non-voice ARPU, 2009-2016
  • Figure 16: Reliance Jio subscription growth
  • Figure 17: Free Mobile 4G subscriptions and 4G data, 2015-2016
  • Figure 18: Iliad Free revenue growth 2012-2016
  • Figure 19: France average mobile data use per SIM, 2009-2015
  • Figure 20: France mobile value added service revenues, 2009-2015
  • Figure 21: Vodafone UK data use and total mobile ARPU, 2011-2016
  • Figure 22: UK mobile retail ARPU, 2010-2016
  • Figure 23: UK estimated mobile retail revenues, 2010-2015
  • Figure 24: Vodafone UK total mobile revenue 2013-2016
  • Figure 25: Greece data use and total mobile revenues

Consumer communications: Can telcos mount a comeback?

Introduction

Although they make extensive use of WhatsApp, Facebook Messenger, Snapchat and other Internet-based communications services, consumers still expect mobile operators to enable them to make voice calls and text messages. Indeed, communication services are widely regarded as a fundamental part of a telco’s proposition, but telcos’ telephony and messaging services are losing ground to the Internet-based competitors and are generating less and less revenue.

Should telcos allow this business to gradually melt away of should they attempt to rebuild a competitive communications proposition for consumers? How much strategic value is there in providing voice calls and messaging services?

This report explores telcos’ strategic options in the consumer communications market, building on previous STL Partners’ research reports, notably:

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

WeChat: A Roadmap for Facebook and Telcos in Conversational Commerce

This report evaluates telcos’ current position in the consumer market for voice calls and messaging, before considering what they can learn from three leading Internet-based players: Tencent, Facebook and Snap. The report then lays out four strategic options for telcos and recommends which of these options particular types of telcos should pursue.

Content:

  • Introduction
  • Executive Summary
  • What do telcos have to lose?
  • Key takeaways
  • Learning from the competition
  • Tencent pushes into payments to monetise messaging
  • Facebook – nurturing network effects with fast footwork
  • Snapchat – highly-focused innovation
  • Telcos’ strategic options
  • Maximise data traffic
  • Embed communications into other services
  • Differentiate on reliability, security, privacy and reach
  • Compete head-on with Internet players
  • Recommendations

Figures:

  • Figure 1: Vodafone still makes large sums from incoming calls & messages
  • Figure 2: Usage of Vodafone’s voice services is rising in emerging markets
  • Figure 3: Vodafone Europe sees some growth in voice usage
  • Figure 4: Internet-based services are overtaking telco services in China
  • Figure 5: Usage of China Mobile’s voice services is sliding downwards
  • Figure 6: China Mobile’s SMS traffic shows signs of stabilising
  • Figure 7: Vodafone’s SMS volumes fall in Europe, but rise in AMAP
  • Figure 8: Voice & messaging account for 38% of China Mobile’s service revenues
  • Figure 9: Line is also seeing rapid growth in advertising revenue in Japan
  • Figure 10: More WeChat users are making purchases through the service
  • Figure 11: About 20% of WeChat official accounts act as online shops
  • Figure 12: Line’s new customer service platform harnesses AI
  • Figure 13: Snapchat’s user growth seems to be slowing down
  • Figure 14: Vodafone Spain is offering zero-rated access to rival services
  • Figure 15: Google is integrating communications services into Maps
  • Figure 16: Xbox Live users can interact with friends and other gamers
  • Figure 17: RCS is being touted as a business-friendly option
  • Figure 18: Turkcell’s broad and growing range of digital services

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

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)

Five Principles for Disruptive Strategy

Introduction

Disruption has become a popular theme, and there are some excellent studies and theories, notably the work of Clayton Christensen on disruptive innovation.

This briefing is intended to add some of our observations, ideas and analysis from looking at disruptive forces in play in the telecoms market and the adjacent areas of commerce and content that have had and will have significant consequences for telecoms.

Our analysis centres on the concept of a business model: a relatively simple structure that can be used to describe and analyse a business and its strategy holistically. The structure we typically use is shown below in Figure 1, and comprises 5 key domains: The Marketplace; Service Offering; Value Network; Finance; and Technology.

Figure 1 – A business model is the commercial architecture of a business: how it makes money

Telco 2.0: STL Partners standard business model analysis Framework

Source: STL Partners

This structure is well suited to analysis of disruption, because disruptive competition is generally a case of conflict between companies with different business models, rather than competition between similarly configured businesses.

A disruptive competitor, such as Facebook for telecoms operators, may be in a completely different core business (advertising and marketing services) seeking to further that business model by disrupting an existing telecoms service (voice and messaging communications). Or it may be a broadly similar player, such as Free in France whose primary business is recognisably telecoms, using a radically different operational model to gain share from direct competitors.

We will look at some of these examples in more depth in this report, and also call on analysis of Google, Apple, Facebook and Amazon to illustrate principles

Digital value is often transient

KPN: a brief case study in disruption

KPN, a mobile operator in the Netherlands, started to report a gradual reduction in SMS / user statistics in early 2011, after a long period of near continuous growth.

Figure 2 – KPN’s SMS stats per user started to change at the end of 2010

Telco 2.0 Figure 2 KPNs SMS stats per user stated to change at the end of 2010

Source: STL Partners, Mobile World Database

KPN linked this change to the rapid rise of the use of WhatsApp, a so-called over-the-top (OTT) messaging application it had noticed among ‘advanced users’ – a set of younger Android customers, as shown in Figure 3.

Figure 3 – WhatsApp took off in certain segments at the end of 2010

Telco 2.0 Figure 3 WhatsApp took off in certain segments at the end of 2010

Source: KPN Corporate Briefing, May 2011

There was some debate at the time about the causality of the link, but the longer term picture of use and app penetration certainly supports the connection between the rise of WhatsApp take-up among KPN’s broader base (as opposed to ‘advanced users’ in Figure 3) and the rapid decline of SMS volumes as Figure 4 shows.

Figure 4 – KPN’s SMS volumes have continued to decline since 2010

Telco 2.0 Figure 4 KPN’s SMS volumes have continued to decline since 2010

Source: STL Partners estimates, Mobile World, Telecomspaper, Statista, Comscore, KPN.

How did that happen then?

KPN’s position was particularly suited to a disruptive attack by WhatsApp (and other messaging apps) in the Netherlands because:

  • It had relatively high unit prices per SMS.
  • KPN had not ‘bundled’ many SMSs into its packages compared to other operators, and usage was very much ‘pay as you go’ – so using WhatsApp offered immediate savings to users.
  • Its market of c.17 million people is technologically savvy with high early smartphone penetration, and densely populated for such a wealthy country, so well suited to the rapid viral growth of such apps.

KPN responded by increasing the number of SMSs in bundles and attempting to ‘sell up’ users to packages with bigger bundles. It has also embarked on more recent programmes of cost reduction and simplification. But as far as SMS was concerned, the ‘horse had bolted the stable’ and the decline continues as consumers gravitate away from a service perceived as losing relevance and value.

We will look in more depth at disruptive pricing and product design strategies in the section on ‘Free is not enough, nor is it the real issue’ later in this report. This case study also presents another challenge for strategists: why did the company not act sooner and more effectively?

Denial is not a good defence

One might be forgiven for thinking that the impact of WhatsApp on KPN was all a big surprise. And perhaps to some it was. But there were plenty of people that expected significant erosion of core revenues from such disruption. In a survey we conducted in 2011, the average forecast among 300 senior global telecoms execs was that OTT services would lead to a 38% decline in SMS over the next 3-5 years, and earlier surveys had shown similar pessimism.

Having said that, it is also true that there was some shock in the market at the time over KPN’s results, and subsequent findings in other markets in Latin America and elsewhere. It is only recently that it has become more of an accepted ‘norm’ in the industry that its core revenues are subject to attack and decline.

Perhaps the best narrative explanation is one of ‘corporate denial’, akin to the human process of grief. Before we reach acceptance of a loss, individuals (and consequently teams and organisations by this theory) go through various stages of emotional response before reaching ‘acceptance’ – a series of stages sometimes characterised as ‘denial, anger, negotiation and acceptance’. This takes time, and is generally considered healthy for people’s emotional health, if not necessarily organisations’ commercial wellbeing.

So what can be done about this? It’s hard to change nature, but it is possible to recognise circumstances and prepare forward plans differently. In the digital era, leaders, strategists, marketers, and product managers need to recognise that profit pools are increasingly transient, and if you are skilful or lucky enough to have one in your portfolio, it is critical to anticipate that someone is probably working on how to disrupt it, and to gather and act quickly on intelligence on realistic threats. There are also steps that can be taken to improve defensive positions against disruption, and we look at some of these in this report. It isn’t always possible because sometimes the start point is not ideal – but then again, part of the art is to avoid that position.

 

  • Executive Summary: five principles
  • Introduction
  • Digital value is often transient
  • KPN: a brief case study in disruption
  • How did that happen then?
  • Denial is not a good defence
  • Timing a disruptive move is critical
  • Disruption visibly destroys value
  • So when should strategists choose disruption?
  • Free is not enough, nor is it the real issue
  • How market winners meet needs better
  • How to compete with ‘free’?
  • Build the platform, feed the flywheel
  • Nurture the ecosystem
  • …don’t price it to death

 

  • Figure 1 – A business model is the commercial architecture of a business: how it makes money
  • Figure 2 – KPN’s SMS stats per user started to change at the end of 2010
  • Figure 3 – WhatsApp took off in certain segments at the end of 2010
  • Figure 4 – KPN’s SMS volumes have continued to decline since 2010
  • Figure 5 – Free’s disruptive play is destroying value in the French Market, Q1 2012-Q3 2014
  • Figure 6 – Verizon is winning in the US – but most players are still growing too, Q1 2011-Q1 2014
  • Figure 7 – How ‘OTT’ apps meet certain needs better than core telco services
  • Figure 8 – US and Spain: different approaches to disruptive defence
  • Figure 9 – The Amazon platform ‘flywheel’ of success

Communications Services: What now makes a winning value proposition?

Introduction

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

The full report:

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

The Transition in User Behaviour

A global change in user behaviour

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

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

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

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

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

Price is not the only issue

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

Differential psychological and social advantages of communications media

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

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

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

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

Source: STL Partners

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

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

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

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

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

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

High-margin segments are more at risk

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

 

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

 

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

Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon (Updated Extract)

Executive Summary (Extract)

This report analyses the strategies behind the success of Amazon, Apple, Facebook, Google and Skype, before going on to consider the key risks they face and how telcos and their partners should deal with these highly-disruptive Internet giants.

As the global economy increasingly goes digital, these five companies are using the Internet to create global brands with much broader followings than those of the traditional telecoms elite, such as Vodafone, AT&T and Nokia. However, the five have markedly different business models that offer important insights into how to create world-beating companies in the digital economy:

  • Amazon: Amazon’s business-to-business Marketplace and Cloud offerings are text-book examples of how to repurpose assets and infrastructure developed to serve consumers to open up new upstream markets. As the digital economy goes mobile, Amazon’s highly-efficient two-sided commerce platform is enabling it to compete effectively with rivals that control the leading smartphone and tablet platforms – Apple and Google.
  • Apple: Apple has demonstrated that, with enough vision and staying power, an individual company can single-handedly build an entire ecosystem. By combining intuitive and very desirable products, with a highly-standardised platform for software developers, Apple has managed to create an overall customer experience that is significantly better than that offered by more open ecosystems. But Apple’s strategy depends heavily on it continuing to produce the very best devices on the market, which will be difficult to sustain over the long-term.
  • Facebook: A compelling example of how to build a business on network effects. It took Facebook four years of hard work to reach a tipping point of 100 million users, but the social networking service has been growing easily and rapidly ever since. Facebook has the potential to attract 1.4 billion users worldwide, but only if it continues to sidestep rising privacy concerns, consumer fatigue or a sudden shift to a more fashionable service.
  • Google: The search giant’s virtuous circle keeps on spinning to great effect – Google develops scores of free, and often-compelling, Internet services, software platforms and apps, which attract consumers and advertisers, enabling it to create yet more free services. But Google’s acquisition of Motorola Mobility risks destabilising the Android ecosystem on which a big chunk of its future growth depends.
  • Skype: Like Facebook and Google, Skype sought users first and revenues second. By creating a low-cost, yet feature-rich, product, Skype has attracted more than 660 million users and created sufficient strategic value to persuade Microsoft to hand over $8.5bn. Skype’s share of telephony traffic is rising inexorably, but Google and Apple may go to great lengths to prevent a Microsoft asset gaining a dominant position in peer-to-peer communications.

The strategic challenge

There is a clear and growing risk that consumers’ fixation on the products and services provided by the five leading disruptors could leave telcos providing commoditised connectivity and struggling to make a respectable return on their massive investment in network infrastructure and spectrum.

In developed countries, telcos’ longstanding cash-cows – mobile voice calls and SMS – are already being undermined by Internet-based alternatives offered by Skype, Google, Facebook and others. Competition from these services could see telcos lose as much as one third of their messaging and voice revenues within five years (see Figure 1) based on projections from our global survey, carried out in September 2011.

Figure 1 – The potential combined impact of the disruptors on telcos’ core services

Impact of Google, Apple, Facebook, Microsoft/Skype, Amaxon on telco services

Source: Telco 2.0 online survey, September 2011, 301 respondents

Moreover, most individual telcos lack the scale and the software savvy to compete effectively in other key emerging mobile Internet segments, such as local search, location-based services, digital content, apps distribution/retailing and social-networking.

The challenge for telecoms and media companies is to figure out how to deal with the Internet giants in a strategic manner that both protects their core revenues and enables them to expand into new markets. Realistically, that means a complex, and sometimes nuanced, co-opetition strategy, which we characterise as the “Great Game”.

In Figure 3 below, we’ve mapped the players’ roles and objectives against the markets they operate in, giving an indication of the potential market revenue at stake, and telcos’ generic strategies.

Figure 3- The Great Game – Positions, Roles and Strategies

The Great Game - Telcos, Amazon, Apple, Google, Facebook, Skype/Microsoft

Our in-depth analysis, presented in this report, describes the ‘Great Game’ and the strategies that we recommend telcos and others can adopt in summary and in detail. [END OF FIRST EXTRACT]

Report contents

  • Executive Summary [5 pages – including partial extract above]
  • Key Recommendations for telcos and others [20 pages]
  • Introduction [10 pages – including further extract below]


The report then contains c.50 page sections with detailed analysis of objectives, business model, strategy, and options for co-opetition for:

  • Google
  • Apple
  • Facebook
  • Microsoft/Skype
  • Amazon

Followed by:

  • Conclusions and recommendations [10 pages]
  • Index

The report includes 124 charts and tables.

The rest of this page comprises an extract from the report’s introduction, covering the ‘new world order’, investor views, the impact of disruptors on telcos, and how telcos are currently fighting back (including pricing, RCS and WAC), and further details of the report’s contents. 

 

Introduction

The new world order

The onward march of the Internet into daily life, aided and abetted by the phenomenal demand for smartphones since the launch of the first iPhone in 2007, has created a new world order in the telecoms, media and technology (TMT) industry.

Apple, Google and Facebook are making their way to the top of that order, pushing aside some of the world’s biggest telcos, equipment makers and media companies. This trio, together with Amazon and Skype (soon to be a unit of Microsoft), are fundamentally changing consumers’ behaviour and dismantling longstanding TMT value chains, while opening up new markets and building new ecosystems.

Supported by hundreds of thousands of software developers, Apple, Google and Facebook’s platforms are fuelling innovation in consumer and, increasingly, business services on both the fixed and mobile Internet. Amazon has set the benchmark for online retailing and cloud computing services, while Skype is reinventing telephony, using IP technology to provide compelling new functionality and features, as well as low-cost calls.

On their current trajectory, these five companies are set to suck much of the value out of the telecoms services market, substituting relatively expensive and traditional voice and messaging services with low-cost, feature-rich alternatives and leaving telcos simply providing data connectivity. At the same time, Apple, Amazon, Google and Facebook have become major conduits for software applications, games, music and other digital content, rewriting the rules of engagement for the media industry.

In a Telco2.0 online survey of industry executives conducted in September 2011, respondents said they expect Apple, Google, Facebook and Skype together to have a major impact on telcos’ voice and messaging revenues in the next three to five years . Although these declines will be partially compensated for by rising revenues from mobile data services, the respondents in the survey anticipate that telcos will see a major rise in data carriage costs (see Figure 1 – The potential combined impact of the disruptors on telcos’ core services).

In essence, we consider Amazon, Apple, Facebook, Google and Skype-Microsoft to be the most disruptive players in the TMT ecosystem right now and, to keep this report manageable, we have focused on these five giants. Still, we acknowledge that other companies, such as RIM, Twitter and Baidu, are also shaping consumers’ online behaviour and we will cover these players in more depth in future research.

The Internet is, of course, evolving rapidly and we fully expect new disruptors to emerge, taking advantage of the so-called Social, Local, Mobile (SoLoMo) forces, sweeping through the TMT landscape. At the same time, the big five will surely disrupt each other. Google is increasingly in head-to-head competition with Facebook, as well as Microsoft, in the online advertising market, while squaring up to Apple and Microsoft in the smartphone platform segment. In the digital entertainment space, Amazon and Google are trying to challenge Apple’s supremacy, while also attacking the cloud services market.

Investor trust

Unlike telcos, the disruptors are generally growing quickly and are under little, or no, pressure from shareholders to pay dividends. That means they can accumulate large war chests and reinvest their profits in new staff, R&D, more data centres and acquisitions without any major constraints. Investors’ confidence and trust enables the disruptors to spend money freely, keep innovating and outflank dividend-paying telcos, media companies and telecoms equipment suppliers.

By contrast, investors generally don’t expect telcos to reinvest all their profits in their businesses, as they don’t believe telcos can earn a sufficiently high return on capital. Figure 16 shows the dividend yields of the leading telcos (marked in blue). Of the disruptors, only Microsoft (marked in green) pays a dividend to shareholders.

Figure 16: Investors expect dividends, not growth, from telcos

Figure 1 Chart Google Apple Facebook Microsoft Skype Amazon Sep 2011 Telco 2.0

Source: Google Finance 2/9/2011

The top telcos’ turnover and net income is comparable, or superior, to that of the leading disruptors, but this isn’t reflected in their respective market capitalisations. AT&T’s turnover is approximately four times that of Google and its net income twice as great, yet their market cap is similar. Even accounting for their different capital structures, investors clearly expect Google to grow much faster than AT&T and syphon off more of the value in the TMT sector.

More broadly, the disparity in the market value between the leading disruptors and the leading telcos’ market capitalisations suggest that investors expect Apple, Microsoft and Google’s revenues and profits to keep rising, while they believe telcos’ will be stable or go into decline. Figure 17 shows how the market capitalisation of the disruptors (marked in green) compares with that of the most valuable telcos (marked in blue) at the beginning of September 2011.

Figure 17: Investors value the disruptors highly

Figure 2 Chart Google Apple Facebook Microsoft Skype Amazon Market Capitalisation Sep 2011 Telco 2.0

Source: Google Finance 2/9/2011 (Facebook valued at Facebook $66bn based on IPG sale in August 2011)

Impact of disruptors on telcos

It has taken longer than many commentators expected, but Internet-based messaging and social networking services are finally eroding telcos’ SMS revenues in developed markets. KPN, for example, has admitted that smartphones, equipped with data communications apps (and Whatsapp in particular), are impacting its voice and SMS revenues in its consumer wireless business in its home market of The Netherlands (see Figure 18). Reporting its Q2 2011 results, KPN said that changing consumer behaviour cut its consumer wireless service revenues in Holland by 2% year-on-year.

Figure 18: KPN reveals falling SMS usage

Figure 3 Chart Google Apple Facebook Microsoft Skype Amazon KPN Trends Sep 2011 Telco 2.0

Source: KPN Q2 results

In the second quarter, Vodafone also reported a fall in messaging revenue in Spain and southern Africa, while Orange saw its average revenue per user from data and SMS services fall in Poland.

How telcos are fighting back

Big bundles

Carefully-designed bundles are the most common tactic telcos are using to try and protect their voice and messaging business. Most postpaid monthly contracts now come with hundreds of SMS messages and voice minutes, along with a limited volume of data, bundled into the overall tariff package. This mix encourages consumers to keep using the telcos’ voice and SMS services, which they are paying for anyway, rather than having Skype or another VOIP service soak up their precious data allowance.

To further deter usage of VOIP services, KPN and some other telcos are also creating tiered data tariffs offering different throughput speeds. The lower-priced tariffs tend to have slow uplink speeds, making them unsuitable for VOIP (see Figure 19 below). If consumers want to use VOIP, they will need to purchase a higher-priced data tariff, earning the telco back the lost voice revenue.

Figure 19: How KPN is trying to defend its revenues

Figure 4 Chart Google Apple Facebook Microsoft Skype Amazon KPN Defence Sep 2011 Telco 2.0

Source: KPN’s Q2 results presentation

Of course, such tactics can be undermined by competition – if one mobile operator in a market begins offering generous data-only tariffs, consumers may well gravitate towards that operator, forcing the others to adjust their tariff plans.

Moreover, bundling voice, SMS and data will generally only work for contract customers. Prepaid customers, who only want to pay for what they are use, are naturally charged for each minute of calls they make and each message they send. These customers, therefore, have a stronger financial incentive to find a free WiFi network and use that to send messages via Facebook or make calls via Skype.

The Rich Communications Suite (RCS)

To fend off the threat posed by Skype, Facebook, Google and Apple’s multimedia communications services, telcos are also trying to improve their own voice and messaging offerings. Overseen by mobile operator trade association the GSMA, the Rich Communications Suite is a set of standards and protocols designed to enable mobile phones to exchange presence information, instant messages, live video footage and files across any mobile network.

In an echo of social networks, the GSMA says RCS will enable consumers to create their own personal community and share content in real time using their mobile device.

From a technical perspective, RCS uses the Session Initiation Protocol (SIP) to manage presence information and relay real-time information to the consumer about which service features they can use with a specific contact. The actual RCS services are carried over an IP-Multimedia Subsystem (IMS), which telcos are using to support a shift to all-IP fixed and mobile networks.

Deutsche Telekom, Orange, Telecom Italia, Telefonica and Vodafone have publically committed to deploy RCS services, indicating that the concept has momentum in Europe, in particular. The GSMA says that interoperable RCS services will initially be launched by these operators in Spain, Germany, France and Italy in late 2011 and 2012. [NB We’ll be discussing RCSe with some of the operators at our EMEA event in London in November 2011.]

In theory, at least, RCS will have some advantages over many of the communications services offered by the disruptors. Firstly, it will be interoperable across networks, so you’ll be able to reach people using different service providers. Secondly, the GSMA says RCS service features will be automatically available on mobile devices from late 2011 without the need to download and install software or create an account (by contrast, Apple’s iMessage service, for example, will only be installed on Apple devices).

But questions remain over whether RCS devices will arrive in commercial quantities fast enough, whether RCS services will be priced in an attractive way and will be packaged and marketed effectively. Moreover, it isn’t yet clear whether IMS will be able to handle the huge signalling load that would arise from widespread usage of RCS.

Internet messaging protocols, such as XMPP, require the data channel to remain active continuously. Tearing down and reconnecting generates lots of signalling traffic, but the alternative – maintaining a packet data session – will quickly drain the device’s battery.
By 2012, Facebook and Skype may be even more entrenched than they are today and their fans may see no need to use telcos’ RCS services.

Competing head-on

Some of the largest mobile operators have tried, and mostly failed, to take on the disruptors at their own game. Vodafone 360, for example, was Vodafone’s much-promoted, but ultimately, unsuccessful €500 million attempt to insert itself between its customers and social networking and messaging services from the likes of Facebook, Windows Live, Google and Twitter.

As well as aggregating contacts and feeds from several social networks, Vodafone 360 also served as a gateway to the telco’s app and music store. But most Vodafone customers didn’t appear to see the need to have an aggregator sit between them and their Facebook feed. During 2011, the service was stripped back to be just the app and music store. In essence, Vodafone 360 didn’t add enough value to what the disruptors are already offering. We understand, from discussions with executives at Vodafone, that the service is now being mothballed.

A small number of large telcos, mostly in emerging markets where smartphones are not yet commonplace, have successfully built up a portfolio of value-added consumer services that go far beyond voice and messaging. One of the best examples is China Mobile, which claims more than 82 million users for its Fetion instant messaging service, for example (see Figure 20 – China Mobile’s Internet Services).

Figure 20 – China Mobile’s Internet Services

China Mobile Services, Google, Apple, Facebook Report, Telco 2.0

Source: China Mobile’s Q2 2011 results

However, it remains to be seen whether China Mobile will be able to continue to attract so many customers for its (mostly paid-for) Internet services once smartphones with full web access go mass-market in China, making it easier for consumers to access third-parties’ services, such as the popular QQ social network.

Some telcos have tried to compete with the disruptors by buying innovative start-ups. A good example is Telefonica’s acquisition of VOIP provider Jajah for US$207 million in January 2010. Telefonica has since used Jajah’s systems and expertise to launch low-cost international calling services in competition with Skype and companies offering calling cards. Telefonica expects Jajah’s products to generate $280 million of revenue in 2011, primarily from low-cost international calls offered by its German and UK mobile businesses, according to a report in the FT.

The Wholesale Applications Community (WAC)

Concerned about their growing dependence on the leading smartphone platforms, such as Android and Apple’s iOS, many of the world’s leading telcos have banded together to form the Wholesale Applications Community (WAC).

WAC’s goal is to create a platform developers can use to create apps that will run across different device operating systems, while tapping the capabilities of telcos’ networks and messaging and billing systems.

At the Mobile World Congress in February 2011, WAC said that China Mobile, MTS, Orange, Smart, Telefónica, Telenor, Verizon and Vodafone are “connected to the WAC platform”, while adding that Samsung and LG will ensure “that all devices produced by the two companies that are capable of supporting the WAC runtime will do so.”

It also announced the availability of the WAC 2.0 specification, which supports HTML5 web applications, while WAC 3.0, which is designed to enable developers to tap network assets, such as in-app billing and user authentication, is scheduled to be available in September 2011.

Ericsson, the leading supplier of mobile networks, is a particularly active supporter of WAC, which also counts leading Alcatel-Lucent, Huawei, LG Electronics, Qualcomm, Research in Motion, Samsung and ZTE, among its members.

In theory, at least, apps developers should also throw their weight behind WAC, which promises the so far unrealised dream of “write once, run anywhere.” But, in reality, games developers, in particular, will probably still want to build specific apps for specific platforms, to give their software a performance and functionality edge over rivals.

Still, the ultimate success or failure of WAC will likely depend on how enthusiastically Apple and Google, in particular, embrace HTML5 and actively support it in their respective smartphone platforms. We discuss this question further in the Apple and Google chapters of this report.

Summarising current telcos’ response to disruptors

 

Telcos, and their close allies in the equipment market, are clearly alert to the threat posed by the major disruptors, but they have yet to develop a comprehensive game plan that will enable them to protect their voice and messaging revenue, while expanding into new markets.

Collective activities, such as RCS and WAC, are certainly necessary and worthwhile, but are not enough. Telcos, and companies across the broader TMT ecosystem, need to also adapt their individual strategies to the rise of Amazon, Apple, Facebook, Google and Skype-Microsoft. This report is designed to help them do that.

[END OF EXTRACT]

 

Apple iCloud/iOS: Killing SMS Softly?

Summary: Our analysis of how Apple’s iCloud, iOS5, and MacOS developments build value and control for Apple’s digital platform, and their consequences on other parts of the digital ecosystem, including the impact of iMessage on text messaging. (June 2011, Executive Briefing Service)

Apple iCloud logo in analysis of impact of iCloud/iOS on digital ecosystem

    Read in Full (Members only)    Buy This Report    To Subscribe

Below is an extract from this 32 page Telco 2.0 Executive Briefing that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Non-members can buy a Single User license for this report online here for £995 (+VAT) or subscribe here. For multiple user licenses or other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Creating effective commercial strategies in the digital ecosystem, including learning from and dealing with major players like Apple and Google, is a key theme of Telco 2.0’s ‘Best Practice Live!, a free global online event on 28-29 June 2011, as well as of other Telco 2.0 research and analysis.

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Introduction

icloudious 1 - WWDC June 2011.pngApple provided a glimpse into some of the upcoming new features of its key software platforms iOS and MacOS at its WorldWide Developer Conference (WWDC) in June 2011. It also announced its much anticipated move into providing cloud based services and away from using the PC as the controlling hub.

iOS and MacOS are Apple’s key software assets – the assets which add soul to Apple’s key money spinning devices (iPhone, iPad and Mac). iCloud is the first iteration of the missing third leg – the software that ties all the devices together seamlessly. Together iOS, MacOS and iCloud are both the differentiator for the consumer and the barrier-to-entry for competitors. They are the soul of the Apple overall platform.

The Apple platform is evolving, and its new features will impact on many players in the value chain: namely the various distributors including mobile operators, aggregators, content creators and of course end consumers.

Nearly every main feature launched seems to support our general theory that Apple is squeezing value from the aggregators and distributors and pushing that value into the device manufacturers (i.e. them). 

Contents

The rest of this webpage covers:

  • iMessage – killing SMS softly? [NB There is additional analysis of this in the full Briefing]
  • iTunes in the Cloud – getting one up on Amazon
  • Notifications – Apple robs Windows Phone and Android advantage 


The full Briefing, which contains the complete section on iMessage, also includes the following sections:

  • The impact of iMessage on SMS revenues, and telco defence strategies
  • MacOS Software – Apple shuts out other retailers
  • Newsstand – Appeasing Publishers (to a degree)
  • MobileMe – just ‘making it work’ …and building the moat
  • iCloud and Video Services – holding fire for now
  • Activation – Cutting the PC cord
  • Photo Stream – yes, but why?
  • Data Centre Economics – making a start
  • Conclusions – Lessons from Apple’s Strategy


1. iMessage – killing SMS softly?

icloudious 1a - iMessage iCloud June 2011.png iMessage, which is the primary mechanism for SMS and MMS features, has been radically reengineered with messages between Apple platform consumers no longer being carried on the mobile network SMS and MMS infrastructure. All of this happens transparently to the consumer and they don’t need to know if their recipients are also using Apple devices – the message routing is determined by the Apple platform.

iMessage is great for consumers as these onnet messages are free, but dreadful for MNOs as they all will probably take a hit on messaging revenues. Apple is competing with the MNO’s core services, and they have even made it easier for consumers to see the value proposition by colouring the bubbles for onnet and offnet messages differently.

Apple has been quite clever in the timing of the release of this feature. Applications such as WhatsApp have already been blamed by some MNOs for declining messaging revenues – in particular KPN that has recently experienced a very significant impact on revenues. Apple effectively is doing nothing differently to them, just improving the consumer experience by making it easier to send and receive offnet messages.

In terms of platform economics, Apple is adding value to the consumer via the device and squeezing value from the mobile network distributors. We believe it is only a matter of time before Apple start offering voice features. This, together with their video conferencing application Facetime, leaves mobile operators staring into the future where they will only be selling data access services.

[NB There’s further analysis of these impacts and defences against them in the full Briefing.]

2. iTunes in the Cloud – getting one up on Amazon

 icloudious 2 - iTunes iCloud June 2011.png The key value proposition of “iTunes in the Cloud” is that all songs historically purchased through iTunes are available for download to any Apple device at no extra cost wirelessly either through a WiFi or 3G connection as long as the consumer remains within their data tier. The user has control over which songs he wants to download to what devices thus avoiding a situation where all storage on an iPhone or iPad is consumed by a vast collection.

The level of consumer control is such that a consumer can even download a previously purchased album for a specific journey and then remove it after listening to save space. New purchases can immediately downloaded to all devices or selectively as with the case of historical purchases. This feature definitely improves the Apple platform, and especially compared to alternate music retailers such as Amazon.

Currently, Apple users can purchase songs or albums from Amazon and they will be automatically added to iTunes on the laptop, then on synchronization the songs transfer to the iPhone or iPad. Previously, buying songs through the Amazon store on the PC was as simple as buying through the Apple iTunes store, and Amazon has been slowly gaining market share in music downloads, because it competes on price and often offers songs cheaper than in the Apple iTunes store. Now, with “iTunes in the Cloud”, Amazon may still be able to beat Apple iTunes Store on price, but the user experience is now deficient.

We seriously doubt that Apple will allow 3rd party retailers access to their iTunes in the Cloud service, and argue that Apple is using their platform to improve the position of their retail arm compared to 3rd parties.

iCloudios 4 - iTunes Match June 2011.jpgThe other service offered, iTunes Match, also adds incredible value to the platform. Apple has negotiated a deal with the major record labels to offer the opportunity to consumers to add tracks from their collections not purchased via the Apple store to the iTunes in the Cloud service for a cost of $25/year. Reputedly, Apple is sharing this revenue 70:30 with the record labels and as a paid a huge advance of US$100m-US$150m for the USA rights alone. Apple has set the benchmark price for cloud music licensing and has set the bar so high that it is hard to see new entrants having sufficient funding to gain similar licenses. Even Amazon or Google will be questioning whether they can generate enough money from music to justify the price of the licenses.

At the launch event, Steve Jobs presented the use-case of customers who had ripped their physical CDs. The more discussed use-case in the media is those people who have obtained their songs from illegal means, either via P2P networks or friend sharing, who effectively now have a US$25/annum service which legitimizes not only their past behaviour, but potentially also their future behaviour. The third use-case is people who buy cheaper digital music from other digital retailers, e.g. Amazon, and now have an option to pay an ongoing fee to add the simplicity of the iTunes in the Cloud service. Effectively, the usability advantage of the Apple platform is priced at US$25/annum which means this use-case only makes sense to heavy ongoing purchasers of music.

Apple didn’t face the same licensing issue from the publishers and has added a very similar service for all Books bought from the iBookstore with the added feature of bookmarks are synchronized and shared across devices. Overall, Apple has built very compelling cloud services for music, books and magazines and erected larger barriers for its competitors. If iMessage show Apple leveraging interconnected with other networks when it suits them, iTunes and iBookstore show Apple adding features which not only make interconnect more difficult for other companies, but firmly closing previously open doors.

3. Notifications – Apple robs Windows Phone and Android advantage

 

iCloudios 5 - notifications June 2011.pngA notification is the mechanism that consumers are alerted to events – for instance, an incoming email or sms. It is the key mechanism that 3rd party developers communicate with their users – for instance, in a sports application a notification can alert the user that their football team has scored a goal. Apple has completely revamped their notifications user experience with the addition of a notifications centre.

Apple have pushed over 100 billion notifications to iPhone and iPad which presumably partly accounts for the high consumption of signaling capacity which many mobile operators have been complaining about.

It also shows that Apple is quick to address deficiencies in their platform compared to others. This is a key feature of platform economics; you have to invest sometimes to play catch-up. It also highlights the risks for developers of building solutions which address platform weaknesses – yesterday’s successful application is tomorrow inbuilt into the platform.

Interestingly, an alternate notification application was never approved by Apple in their AppStore and instead went into the wilds of only being available on jailbroken iPhones. Apple new notification centre bears a striking resemblance to the non-approved one. iCloudios 6 - notifications June 2011.png Another example of this approach is with the feature for reminders, where a plethora of applications were already being sold in the Application store. Apple added a feature called Reminders which is part of the initial application load, and which effectively destroys the market for 3rd party applications. This in some ways looks like a repeat of the Microsoft strategy with Windows and Internet Explorer which got them in such trouble with regulators across the globe.

To read the full Briefing, members of the Telco 2.0 Executive Briefing Subscription Service can download the full 32 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for for £995, or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations, company types, areas, people and industry models referenced: Apple, platform, Amazon, Cloud, Google, strategy, Vodafone, WhatsApp, O2, Orange, publishers, Steve Jobs, WWDC, ARPU, Blackberry, Carphone Warehouse, Everything Everywhere, MNO, Prepay, record labels, Telefonica, T-Mobile, Viber.

Technologies and products referenced: iPad, iPhone, PC, Windows, iCloud, iTunes, iMessage, Android, iOS, messaging, MMS, MobileMe, SMS, voice, WiFi, Windows Phone, 3G, Activation, AppStore, Data Centre, NewsStand, Notifications, Photo Stream, Video, BlackBerry Messenger, Facetime, Freebee, Gmail, GSM, HTML5, iBookstore, Internet Explorer, Microsoft Live, P2P, Photostream, RCS-e, Snow Leopard, UltraViolet, VoIP, Windows7.

Mobile Advertising and Marketing: Operator and Market Growth Strategies 2010

Summary: The potential of mobile marketing has long been understood and yet unfulfilled. This new report gives our forecasts, plus how Telcos can make the most of the powerful assets available to them to take a valuable role in this market before it is too late. Report extract included.

Context: Mobile Advertising is Hot – Again

With Google’s planned acquisition of AdMob and the launch of Apple’s iAd advertising platform, mobile is back in fashion. But where is the real value in this market and what’s the best role for telcos?

A new Telco 2.0 Executive Briefing report, of which there is an introductory extract below, summarises the current status of Telco-enabled marketing channels, and Operators’ opportunities to grow the market. It was produced, in part, as context for the Telco 2.0 Use Case analysis for the Use Cases Report and the standalone Executive Briefing Mobile Advertising and Marketing: Text-based Local Search Use Case. Our original analysis on this topic is the 100+ Page Telco 2.0 Strategy Report – How to make the Telecoms Advertising Channel work a systematic approach to making it work for brands and profitable for telcos.

The report provides our forecast of the development of the market, and in particular on the near term opportunities for messaging based formats. [NB There will be more on both telco-enabled marketing and consumer data at the 9th Telco 2.0 Brainsrorm in London, April 28-29, 2010.]

Key Advertising Strategy Questions

Mobile advertising has long been touted as a major new revenue stream for the telecommunications industry. The role of fixed operators in online advertising has, so far at least, proved to be limited. Because the mobile device can be traced to an individual, however, mobile operators have substantial information about customers that is of potential value to marketers and advertisers.

So far, however, material mobile advertising revenue has proved to be elusive for operators because they have focused on a vertically integrated strategy that involves making money from advertising inventory that they own and control such as on-portal banner advertising. The problem with this is that the portion of inventory that they control is a small and diminishing portion of the total mobile advertising opportunity. We outline this issue in the chart below as well as the key questions facing operators in terms of increasing their addressable market in mobile advertising.

Can the Telco industry extract value from mobile advertising?

mob%20ad%20opp%20chart%20april%202010.png

The report described here analyses the current strengths and weaknesses and near-term opportunities of mobile advertising. In addition, some customers may also wish to consider participation in our Syndicated Research project, in which we will:

  • further explore differences between the major advertising formats: messaging, banner, video/TV, search, games and widgets
  • produce three different business models for the future mobile advertising and marketing ecosystem
  • map different advertising formats effectiveness in each business model
  • analyse how value would flow through each system as well as forecast potential transaction volumes and prices
  • explore how these different models will be deployed in different geographies within Europe and the US and the factors which will drive their uptake

For more information please see Defining the Telco 2.0 Ecosystems or email Chris Barraclough at contact@telco2.net.

Mobile Advertising Report Extract – Introduction

We’ve been here before: Lots of media attention

The mobile advertising and marketing hype appears to be starting up once again.  A few headlines illustrate the point:

  • ‘Like It Or Not, Mobile Advertising Is Coming’[1]
  • ‘Mobile phones a bright spot for Advertising’[2]
  • ‘Mobile Advertising – The Next Big Thing in Travel Marketing’[3]
  • ‘Mobile web adspend expected to reach $2B a year by 2014’[4]
  • ‘Mobile marketing has potential to grow in Asia Pacific, says MMA’[5]

Things have been quiet for a while after the great promises made for mobile advertising in 2006 but media interest is clearly picking up. 

The economic crisis and greater mobile marketing maturity

Mobile marketing is back in the spotlight for a couple of reasons:

1.     The global recession has focused marketers on media campaigns that have a demonstrable return on investment.  As it has become harder to generate sales, so marketing budgets have moved towards activities that can be shown to directly influence the customer’s purchase decision.  For example, in the UK online search advertising grew three times as fast as display advertising between 2007 and 2008 despite already being three times the size.

Figure 1: Internet search and display advertising sectors in the UK

 

Size, £ Millions
Growth
Format

2007
2008
£ Millions
%
Search

1,619
1,987
368
23
Display

592
637
45
8
Source: Internet Advertising Bureau

SMS advertising (including coupons and vouchers) is the biggest mobile segment and has similar characteristics to online search and traditional ‘direct response’ marketing in that an immediate customer action is sought and measured.  Display can, theoretically, do this too (by measuring clicks) but has tended to be used for raising awareness about a brand or product. 

Many companies have, therefore, turned to mobile to maximise sales during these tough times. High profile campaigns of this sort include Coca Cola, who ran a campaign in the UK in May and June 2009 with digital vouchers for free bottles of Fanta, Sprite and Dr. Pepper being sent to the mobile phones of around 100,000 targets. Recipients of the voucher simply had to text ‘YES’ and their date of birth to a specific number and would instantly receive a text with a code enabling them to redeem the voucher. Participating retailers would key the code into their Paypoint terminal (used for paying utility bills and toping up prepay mobile accounts) which would register the redemption. The use of Paypoint enabled Coca Cola to both monitor redemption rates real-time (87% over the course of the campaign) and pay the retailer within seven days.

Figure 2: Coca Cola’s SMS campaign for 10,000 stores and 100,000 consumers

Fig%202%20Coca%20cola%20SMS%20campaign%20Apr%202010.png

Source: www.presscentre.coca-cola.co.uk

2.     The mobile marketing and advertising market is maturing:

a.     There is greater demand from end users for mobile media:

  i.          The rise in flat rate data plans has increased the volume of media consumed on devices and removed the issue of subscribers potentially being charged to receive marketing and advertising;

   ii.          Mobile devices continue to become more sophisticated – more and more phones now have browsers.  This is important:  the volume of  smartphones in the market is directly correlated to web browsing adoption and usage and to data plan take-up;

   iii.          The combination of i. and ii. above has resulted in a substantial increase in mobile browsing in key markets.  Such browsing increased by 52% in the US from November 2007 to November 2008 and by 42% in the largest European markets (UK, France, Spain, Germany and Italy) according to comScore;

   iv.          SMS marketing has reached critical mass in the last eighteen months.  For example, in the US SMS marketing accounted for 60% ($192 million) of the $320 million spent on mobile advertising in 2008 (according to emarketer.com). Similarly, a survey in the US by the Direct Marketing Association in July 2008 found that 70% of consumers had responded to a text ad over a two month period:

Figure 3: Percentage of responders to a mobile offer

Fig%203%20Ad%20report%20percentage%20bar%20chart%20Apr%202010.png

Source: Direct Marketing Association

b.    There has been more industry-wide activity from the operator and advertising communities:

  i.          The Mobile Marketing Association has developed a mobile advertising code of conduct and guidelines and the Direct Marketing Association has also developed guidelines and ‘help notes’ to standardise mobile approaches for marketers;

  ii.          At the time of publication, the GSMA mobile metrics programme is on the cusp of delivering a complete and standardised picture of mobile internet usage in the UK (and later Germany) so that marketers have a 360º view of audience behaviour across mobile and can plan and buy campaigns accordingly;

c.     There has been more effort and activity (including acquisitions) from individual operators seeking to capitalise on this new revenue source, including:

  i.           In late 2007, Telefonica and Vodafone took minority stakes in Amobee a provider of solutions for operators to deliver ad-funded content and services;

  ii.          Vodafone Egypt bought the digital media agency Sarmardy Communication (Sarcom) in August 2008;

  iii.          In August 2009, Orange bought Unanimis, the digital media aggregator to extend its advertising reach;

  iv.          In May 2009, Vodafone announced that it had successfully rolled out mobile advertising to 18 markets in 18 months.  Services include incoming voice/text alerts, branded applications and location-based advertising.;

  v.          Microsoft paid Verizon Wireless around $600m in early 2009 for the right to supply local internet search and mobile advertising services to Verizon’s customers.

This increased activity, of course, leads observers to beg the question ‘why is mobile deemed to be so valuable and where does it fit into the wider marketing mix’?

Mobile as a part of the Marketing Mix

A framework for customer marketing

Traditionally the ‘marketing mix’ has been described in terms of the four levers that marketers can change to drive the success of their product or service: Product, Place, Price and Promotion (the ‘4 P’s).  More recently, advertising agency Ogilvy has suggested that these should be revised to the ‘4 E’s’ to reflect the impact of digitalisation: Experience (instead of Product), Everyplace (Place), Exchange (Price) and Evangelism (Promotion).

However, to understand the role that mobile can play for marketers it is perhaps more helpful to focus on the customer adoption process for a product or service and explore how mobile can enhance the interventions made by marketing during this process.  Again, there are several models exploring how customers first become aware of a product through to the time they are loyal customers.  We have amalgamated several approaches into 6 A’s: Awareness (& Interest), Assessment, Attempt, Adoption, Advocacy and Abandonment (outlined below).

Figure 4: The 6 A’s of a Customer Lifecycle

Stage

Description

Typical customer engagement

Awareness (& Interest)

Making the customer aware of (and interested in) a brand or product or service.

TV, Radio, Billboards, Internet banners

Assessment

Customer evaluates product or service against substitutes.

In-store, comparison websites, peer reviews

Attempt

Customer trials product or service.

In-store promotion, Direct mail, Internet search

Adoption

Customer regularly uses product or signs up for service.

Store, Direct mail, Telesales, Website

Advocacy

Customer is loyal and promotes product or service.

Refer-a-friend, social media viral growth

Abandonment

Customer stops buying product or does not renew service.

Telemarketing, Direct mail

Source: STL Partners/Telco 2.0

Mobile is a particularly interesting medium for marketers because it is ubiquitous and delivers a message to an individual that virtually guarantees their attention.  If marketers can deliver a relevant message or offer to the individual according to their 6 A’s stage via mobile, then they have a good chance of inducing a positive response.  And mobile can also provide a response channel for the individual enabling them to transact directly using the handset.  Of course, the quid pro quo of using a personal medium like mobile for marketing is that there is a real risk of upsetting customers who feel intruded upon or, worse, spammed.  We discuss this in more detail in the sections below on customer data and customer privacy.

Mobile advertising and marketing formats

The range of formats available on mobile also means that marketers can engage with customers in different ways through the lifecycle.  Other media have relatively few formats.  TV, for example, has traditionally been dominated by the commercial break although, more recently, direct TV sales channels and product placement within programmes have increased from a low base.  Mobile, by contrast, has a wide range of formats.

The key formats outlined in the body of the report are: SMS, MMS, Mobile Internet Banners,Apps & Widgets,QR Codes, Mobile TV & Video, Ad-Funded Content, Mobile Search.

The Relative Strengths of Telco-Enabled Marketing Media are Analysed in the Report

Picture1.jpg

Source: Telco 2.0 Mobile Advertising Growth Strategies Report

To read the rest of the report, covering…

  • The strengths and weaknesses of the various forms of mobile media
  • Applicability: How mobile supports customer engagement
  • Media Richness is inversely proportional to Reach
  • Mobile marketing forecasts by advertising format
  • Operator-centric vs ‘OTT’ approaches
  • Customer data and metadata
  • Customer Privacy: issues and approaches
  • The Operator as service provider or service enabler

…and including…

Figure 1: Internet search and display advertising sectors in the UK

Figure 2: Coca Cola’s SMS campaign for 10,000 stores and 100,000 consumers

Figure 3: Percentage of responders to a mobile offer (March & April 2008)

Figure 4: The 6 A’s of a Customer Lifecycle

Figure 5: Important mobile advertising and marketing formats

Figure 6: Blyk Connexions case study example

Figure 7: Arsenal Mobile: for fans of the mighty Gunners

Figure 8: Mobile marketing and advertising applicability: summary

Figure 9: SMS/MMS marketing: currently the most important format

Figure 10: US Mobile Advertising Market, $ Millions

Figure 11: Lots of data but not necessarily complete, accessible, shareable

Figure 12: Sense Networks’ clustering of users based on their location patterns

Figure 13: Customer data approaches for five example services

Figure 14: Technical approaches to addressing privacy

Figure 15: The two-sided Telecoms business model opportunity

Figure 16: Core Telco 2.0 principles followed in this use case

Figure 17: Telco 2.0 ‘Use Case’ Methodology

…Members of the Telco 2.0TM Executive Briefing Subscription Service and the Dealing with Disruption Stream can download the full 33 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for for £995, and here to buy a license for up to 5 people for £1,450. Corporate-wide licenses are also available – please email contact@telco2.net or call +44 (0) 207 247 5003.

Special Offer

We reommend that non-member readers looking for a comprehensive overview of new Telco Business Models enabling advertising and marketing also consider the Telco 2.0 Briefing report Mobile Advertising and Marketing: Text-based Local Search Use Case and the special report Can Telcos Unlock the Value of their Consumer Data? Each report is available individually for single, group and corporate users, and a also in a package of all three reports at a 33% discount – £1,900 for a single user and £2,900 for all three reports for 5 users. Please email contact@telco2.net or call +44 (0) 207 247 5003 for more on these packages and interest in corporate-wide licenses.

Footnotes:


[1] www.informationweek.com

[2] www.inquirer.net

[3] www.travelmole.com/stories/1138044.php

[4]www.fiercemobilecontent.com/story/mobile-web-adspend-expected-reach-2b-year-2014/2009-08-25

[5] www.velti.com/index.cfm?page=1411&articleID=19334292