SoftBank: An overstretched telco or a unique innovator?

SoftBank’s history: How it got to where it is

The story of SoftBank’s history – first as a software distribution company, followed by its contribution to the dotcom bubble, and then a gradually expanding telecoms footprint throughout the 2000s – is important because it gives context to its current investment strategy, dubbed the Vision Fund. SoftBank has never been a traditional telco and its outside perspective helped it to shake up the Japanese telecoms market. The Vision Fund’s ambition stretches far beyond telecoms, with an aim to transform all industries through the adoption and advancement of artificial intelligence (AI). Will this unique approach enable SoftBank to weather the softwarisation of telecoms, which will likely be accelerated by the newest Japanese entrant Rakuten, better than others?

Figure 1: SoftBank’s evolution

SoftBank's evolution 1981 - 2019

Source: SoftBank Group annual report 2019

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The early days: Software distribution

Founded by Masayoshi Son in 1981, SoftBank began not as a telecoms operator but as a software distributor. Son had recognized an important niche in the Japanese market: while computer hardware manufacturers were having issues sourcing quality software to run on their machines, software makers lacked the cash to properly advertise their products. As a distributor, Son acted as a matchmaker between computer software and hardware companies. Though exclusivity agreements with Japan’s major hardware vendors, SoftBank’s monthly sales reached US$2.4 million by the end of its first year of operation.

Not satisfied with a sole focus on software distribution, just six months after starting the software business, Son branched out into the computer magazine publishing segment, eventually producing over 20 periodicals. Son used his magazines to advertise the software products SoftBank was distributing. Right from the start, he aimed to create value through exploiting synergies across different business units.

In 1990, SoftBank also branched out into trade shows, acquiring Ziff Communication’s trade show division for $200 million and then, in 1995, the COMDEX trade show from the Interface group for an eyebrow-raising $800 million, taking on $500 million in debt. Later that year, SoftBank cemented its status as a leader in computer-magazine publishing, investing $2.1 billion in Ziff-Davis Publishing, making SoftBank the largest PC magazine distributor in the world. To finance this, SoftBank Group added $1 billion in debt and issued $649 million in new shares (SoftBank having gone public on the Tokyo Stock exchange in 1995, at a $3 billion valuation). It is clear from the beginning that SoftBank was not averse to accruing sizeable debt liabilities to finance strategic acquisitions.

SoftBank’s Internet pivot

SoftBank’s defining play in the 1990s was a pivot towards Internet services. Believing that the Internet would be the next technological revolution – eclipsing the invention of the personal computer – SoftBank made a dizzying number of investments in Internet companies. Many of these investments were made indirectly through a network of SoftBank venture capital funds, mainly overseen by SoftBank Investment Corp, which managed $5.25 billion worth of funds by 2000; SoftBank itself contributed over $2 billion. The investments included big name sites in e-commerce and e-finance, notably GeoCities, Yahoo!, ZD Net, e-buy-com, E-loan and E* TRADE Group.

The dotcom bust

SoftBank was heavily invested in – and therefore heavily exposed to – Internet stocks. Moreover, with a reputation as the largest investor in the world, owning as much as 25% of cyberspace by value at its peak, SoftBank became regarded by the market as fundamentally an Internet company. At the height of the dotcom bubble in February 2000, SoftBank’s market cap soared to $180 billion, far exceeding the equity value of the stakes in its subsidiaries and affiliates.

The dotcom bubble began to burst by early March 2000. Between SoftBank’s peak market cap in late February 2000, and its low point two years later, SoftBank lost over 95% of its market value. Masayoshi Son lost $70 billion of personal wealth during the crash. Many of SoftBank’s Internet investments had to be written-off entirely, including dotcom big names such as Webvan, Kozmo.com and Global Crossing – the latter filing one of the largest bankruptcies in corporate history.

However, across the graveyard of dotcom duds, SoftBank made several investments which delivered extraordinarily high returns. One resulted from a $20 million pledge Son made to Alibaba founder, Jack Ma, in January 2000. According to Ma, Son made the investment without first inspecting Alibaba’s business model or revenue stream, but rather based on Son’s impression of Ma. The Alibaba investment would turn out to be one of the most successful in history. Moreover, SoftBank’s investment in Yahoo! was still fruitful relative to Son’s initial pledge, despite falling foul of the dotcom bust. This is testimony to the efficacy of Son’s ability to adapt US companies to meet the needs of the Japanese market, delivering growth long past the NASDAQ stock crash. It is also one of the key reasons why SoftBank was able to attract nearly $100bn of investment for its Vision Fund in 2017.

Does SoftBank’s approach work for telecoms?

SoftBank Group is deeply tied to its charismatic CEO Masayoshi Son’s grand visions about how new technologies such as the Internet, the Internet of things (IoT) and artificial intelligence (AI) will transform the world. Son’s ambition to play a key role in driving the development of these technologies has led SoftBank to achieve some remarkable successes – notably an early investment in Alibaba and building a successful Japanese telecoms business – and survive some major setbacks, such as the dotcom crash and, more recently, the WeWork scandal.

The key question for telecoms operators is whether SoftBank’s telecoms assets gain any competitive advantage from being a part of SoftBank Group. Since SoftBank took ownership of Vodafone KK in Japan in 2006 and Sprint in 2013, both telecoms operators have become more profitable. While SoftBank’s stake in Yahoo Japan and willingness to take risks have contributed to success, neither operator is really exceptional in the way they manage their core business.

Table of contents

  • Executive summary
  • SoftBank’s history: How it got to where it is
    • The early days: SoftBank the software distributor
    • SoftBank’s move into telecoms
  • Masayoshi Son’s 300-year plan: Sprint, Arm and the Vision Fund
    • Sprint: SoftBank’s move into US telecoms
    • Arm: Hardware and IoT are the foundations of AI
    • The Vision Fund
  • Can SoftBank pull off its grand plans?
    • Internal risks: Cracks beneath the surface
    • External risks: Rakuten goes after SoftBank’s core
  • Conclusions

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NFV Deployment Tracker: North American data and trends

Introduction

NFV in North America – how is virtualisation moving forward in telcos against global benchmarks?

Welcome to the sixth edition of the ‘NFV Deployment Tracker’

This report is the sixth analytical report in the NFV Deployment Tracker series and is intended as an accompaniment to the updated Tracker Excel spreadsheet.

This extended update covers seven months of deployments worldwide, from October 2018 to April 2019. The update also includes an improved spreadsheet format: a more user-friendly, clearer lay-out and a regional toggle in the ‘Aggregate data by region’ worksheet, which provides much quicker access to the data on each region separately.

The present analytical report provides an update on deployments and trends in the North American market (US, Canada and the Caribbean) since the last report focusing on that region (December 2017).

Scope, definitions and importance of the data

We include in the Tracker only verified, live deployments of NFV or SDN technology powering commercial services. The information is taken mainly from public-domain sources, such as press releases by operators or vendors, or reports in reputable trade media. However, a small portion of the data also derives from confidential conversations we have had with telcos. In these instances, the deployments are included in the aggregate, anonymised worksheets in the spreadsheet, but not in the detailed dataset listing deployments by operator and geography, and by vendor where known.

Our definition of a ‘deployment’, including how we break deployments down into their component parts, is provided in the ‘Explanatory notes’ worksheet, in the accompanying Excel document.

NFV in North America in global context

We have gathered data on 120 live, commercial deployments of NFV and SDN in North America between 2011 and April 2019. These were completed by 33 mainly Tier-One telcos and telco group subsidiaries: 24 based in the US, four in Canada, one Caribbean, three European (Colt, T-Mobile and Vodafone), and one Latin American (América Móvil). The data includes information on 217 known Virtual Network Functions (VNFs), functional sub-components and supporting infrastructure elements that have formed part of these deployments.

This makes North America the third-largest NFV/SDN market worldwide, as is illustrated by the comparison with other regions in the chart below.

Total NFV/SDN deployments by region, 2011 to April 2019

total NFV deployments by region North America Africa Asia-Pacific Europe Middle East

Source: STL Partners

Deployments of NFV in North America account for around 24% of the global total of 486 live deployments (or 492 deployments counting deployments spanning multiple regions as one deployment for each region). Europe is very marginally ahead on 163 deployments versus 161 for Asia-Pacific: both equating to around 33% of the total.

The NFV North America Deployment Tracker contains the following data, to May 2019:

  • Global aggregate data
  • Deployments by primary purpose
  • Leading VNFs and functional components
  • Leading operators
  • Leading vendors
  • Leading vendors by primary purpose
  • Above data points broken down by region
  • North America
  • Asia-Pacific
  • Europe
  • Latin America
  • Middle East
  • Africa
  • Detailed dataset on individual deployments

 

Contents of the accompanying analytical report:

  • Executive Summary
  • Introduction
  • Welcome to the sixth edition of the ‘NFV Deployment Tracker’
  • Scope, definitions and importance of the data
  • Analysis of NFV in North America
  • The North American market in global context
  • SD-WAN and core network functions are the leading categories
  • 5G is driving core network virtualisation
  • Vendor trends: Open source and operator self-builds outpace vendors
  • Operator trends: Verizon and AT&T are the clear leaders
  • Conclusion: Slow-down in enterprise platform deployments while 5G provides new impetus

MobiNEX: The Mobile Network Experience Index, H1 2016

Executive Summary

In response to customers’ growing usage of mobile data and applications, in April 2016 STL Partners developed MobiNEX: The Mobile Network Experience Index, which ranks mobile network operators by key measures relating to customer experience. To do this, we benchmark mobile operators’ network speed and reliability, allowing individual operators to see how they are performing in relation to the competition in an objective and quantitative manner.

Operators are assigned an individual MobiNEX score out of 100 based on their performance across four measures that STL Partners believes to be core drivers of customer app experience: download speed, average latency, error rate and latency consistency (the proportion of app requests that take longer than 500ms to fulfil).

Our partner Apteligent has provided us with the raw data for three out of the four measures, based on billions of requests made from tens of thousands of applications used by hundreds of millions of users in H1 2016. While our April report focused on the top three or four operators in just seven Western markets, this report covers 80 operators drawn from 25 markets spread across the globe in the first six months of this year.

The top ten operators were from Japan, France, the UK and Canada:

  • Softbank JP scores highest on the MobiNEX for H1 2016, with high scores across all measures and a total score of 85 out of 100.
  • Close behind are Bouygues FR (80) and Free FR (79), which came first and second respectively in the Q4 2015 rankings. Both achieve high scores for error rate, latency consistency and average latency, but are slightly let down by download speed.
  • The top six is completed by NTT DoCoMo JP (78), Orange FR (75) and au (KDDI) JP (71).
  • Slightly behind are Vodafone UK (65), EE UK (64), SFR FR (63), O2 UK (62) and Rogers CA (62). Except in the case of Rogers, who score similarly on all measures, these operators are let down by substantially worse download speeds.

The bottom ten operators all score a total of 16 or lower out of 100, suggesting a materially worse customer app experience.

  • Trailing the pack with scores of 1 or 2 across all four measures were Etisalat EG (4), Vodafone EG (4), Smart PH (5) and Globe PH (5).
  • Beeline RU (11) and Malaysian operators U Mobile MY (9) and Digi MY (9) also fare poorly, but benefit from slightly higher latency consistency scores. Slightly better overall, but still achieving minimum scores of 1 for download speed and average latency, are Maxis MY (14) and MTN ZA (12).

Overall, the extreme difference between the top and bottom of the table highlights a vast inequality in network quality customer experience across the planet. Customer app experience depends to a large degree on where one lives. However, our analysis shows that while economic prosperity does in general lead to a more advanced mobile experience as you might expect, it does not guarantee it. Norway, Sweden, Singapore and the US market are examples of high income countries with lower MobiNEX scores than might be expected against the global picture. STL Partners will do further analysis to uncover more on the drivers of differentiation between markets and players within them.

 

MobiNEX H1 2016 – included markets

MobiNEX H1 2016 – operator scores

 Source: Apteligent, OpenSignal, STL Partners analysis

 

  • About MobiNEX
  • Changes for H1 2016
  • MobiNEX H1 2016: results
  • The winners: top ten operators
  • The losers: bottom ten operators
  • The surprises: operators where you wouldn’t expect them
  • MobiNEX by market
  • MobiNEX H1 2016: segmentation
  • MobiNEX H1 2016: Raw data
  • Error rate
  • Latency consistency
  • Download speed
  • Average latency
  • Appendix 1: Methodology and source data
  • Latency, latency consistency and error rate: Apteligent
  • Download speed: OpenSignal
  • Converting raw data into MobiNEX scores
  • Setting the benchmarks
  • Why measure customer experience through app performance?
  • Appendix 2: Country profiles
  • Country profile: Australia
  • Country profile: Brazil
  • Country profile: Canada
  • Country profile: China
  • Country profile: Colombia
  • Country profile: Egypt
  • Country profile: France
  • Country profile: Germany
  • Country profile: Italy
  • Country profile: Japan
  • Country profile: Malaysia
  • Country profile: Mexico
  • Country profile: New Zealand
  • Country profile: Norway
  • Country profile: Philippines
  • Country profile: Russia
  • Country profile: Saudi Arabia
  • Country profile: Singapore
  • Country profile: South Africa
  • Country profile: Spain
  • Country profile: United Arab Emirates
  • Country profile: United Kingdom
  • Country profile: United States
  • Country profile: Vietnam

 

  • Figure 1: MobiNEX scoring breakdown, benchmarks and raw data used
  • Figure 2: MobiNEX H1 2016 – included markets
  • Figure 3: MobiNEX H1 2016 – operator scores breakdown (top half)
  • Figure 4: MobiNEX H1 2016 – operator scores breakdown (bottom half)
  • Figure 5: MobiNEX H1 2016 – average scores by country
  • Figure 6: MobiNEX segmentation dimensions
  • Figure 7: MobiNEX segmentation – network speed vs reliability
  • Figure 8: MobiNEX segmentation – network speed vs reliability – average by market
  • Figure 9: MobiNEX vs GDP per capita – H1 2016
  • Figure 10: MobiNEX vs smartphone penetration – H1 2016
  • Figure 11: Error rate per 10,000 requests, H1 2016 – average by country
  • Figure 12: Error rate per 10,000 requests, H1 2016 (top half)
  • Figure 13: Error rate per 10,000 requests, H1 2016 (bottom half)
  • Figure 14: Requests with total roundtrip latency > 500ms (%), H1 2016 – average by country
  • Figure 15: Requests with total roundtrip latency > 500ms (%), H1 2016 (top half)
  • Figure 16: Requests with total roundtrip latency > 500ms (%), H1 2016 (bottom half)
  • Figure 17: Average weighted download speed (Mbps), H1 2016 – average by country
  • Figure 18: Average weighted download speed (Mbps), H1 2016 (top half)
  • Figure 19: Average weighted download speed (Mbps), H1 2016 (bottom half)
  • Figure 20: Average total roundtrip latency (ms), H1 2016 – average by country
  • Figure 21: Average total roundtrip latency (ms), H1 2016 (top half)
  • Figure 22: Average total roundtrip latency (ms), H1 2016 (bottom half)
  • Figure 23: Benchmarks and raw data used

US Wireless Market: Early Warning Signs of Change

Introduction

The US national wireless market is currently the most influential of its kind on the planet. Not only is it big, it is also rich, with significantly higher ARPUs than other developed markets. Not only is it big and rich, it is advanced, with much higher 4G penetration than comparable markets. Further, it has frequently acted as a bellwether for the world wireless industry. The iPhone’s success in the US marked the smartphone’s transition from pioneer to early-adopter status worldwide; the much greater success of the iPhone 3GS and the Moto Droid marked the beginning of mass adoption, and the crisis of the mid-market vendors.

On the network side, Verizon Wireless’s early decision to abandon the CDMA2000 development path and choose LTE FDD signalled the end of the standards wars and the beginning of serious 4G deployment, threw Motorola even deeper into crisis, and positioned Alcatel-Lucent as the leading vendor in the first wave of LTE rollouts.

The inclusion of the 1800MHz band in the iPhone 5, meanwhile, transformed the world’s spectrum picture, redefining this legacy GSM/PCS allocation as a key asset for smartphone-focused operators. Today, the combination of US wireless operators and US semiconductor vendors is transforming industry technology strategies again, as Verizon Wireless, AT&T, and Qualcomm lead the charge for a mobile broadband-focused “early” 5G.

Clearly, the US market is as critical for global mobile as the European market was in the pre-iPhone era. As a result, Telco 2.0 finds it useful to monitor it closely. We covered the changing 5G ecosystem in MWC: 5G and Wireless Networks  and How 5G is Disrupting Cloud and Network Strategy Today. We covered AT&T’s key role in driving NFV and open-source telco software forwards in Fast Pivot to the NFV Future, and the fate of worldwide 4G deployments in 4G Rollout Analysis: Winning Strategies and 5G Implications. This picked out one US carrier in particular for closer attention. In the adjacent industries, we covered Microsoft in Pivoting to a Communications-Focused Business, Amazon.com in Amazon Web Services: Colossal, but Invincible?, the cable operators in Gigabit Cable Attacks This Year, and the top-brand tech sector generally in Amazon, Apple, Facebook, Google, Netflix: Whose digital content is king?.

In this note, we will review developments in the US national wireless sector, both on a long-term basis since the launch of 4G, and on a tactical basis over the last 12 months, including analysis of the results from our new, unique Mobile Network Experience Index product .

The US Wireless Market, 2011-2016

The last five years in the US cellular market have been characterised by two forces – disruption, and growth. The arrival of smartphones comprehensively disrupted what had been a rather stagnant sector. Later, T-Mobile USA initiated a price disruption which resulted in a wave of consolidation and a significant drop in industrywide ARPU. However, despite the “uncarrier”’s price cuts, the total industry profit pool has nonetheless grown dramatically in that timeframe, from $8.7bn/quarter to $14bn/quarter, as the revenue base has grown by some 20%, or 4% per annum.

Figure 1: The US wireless revenue base, 2011-2016

Source: STL Partners, company filings, themobileworld

Growth was as characteristic of the US market over the last 5 years as price disruption. T-Mobile’s strategy was to a large extent possible because there was a significant degree of “blue-ocean” competition, enlarging the subscriber base and deepening its use of smartphones and high-speed data service, as well as consolidation of minor operators. We show the net impact on operating profits in Figure 2.

Figure 2: Long term shifts in the US national wireless profit pool, 2011-2016

Source: STL Partners, themobileworld.com, company filings

Over the whole timeframe, the total annual pool of operating profit available in the market has grown by 59% or 11.8% per annum, or five times as fast as US GDP. This came in the context of a 20%, or 4% annualised, increase in total wireless revenues. At the same time, three operators have benefited disproportionately from this growth – AT&T, Verizon Wireless, and T-Mobile. In fact, AT&T’s gains have been quite modest compared to the triumphs at VZW and T-Mobile.

On the other hand, Sprint has seen its operating profits halve and halve again, while Leap, MetroPCS, and numerous minor operators have exited the market. Looking at these data in a time-series view, as we do in Figure 3, we see that the duopoly is still a real force, although Verizon, has done distinctly better than AT&T.

Verizon Wireless, which pursued a “premium carrier” strategy based on going first with 4G, using its 700MHz holdings to maximise coverage and densifying with 1800MHz, and holding the line on price as long as possible, has clearly maximised its operating-level profitability. Meanwhile, a vicious struggle for third place was waged between T-Mobile and Sprint. Both parties struggled at times with the cost of spectrum acquisitions and network investments, and the gap between them and the duopoly is unmistakable. However, T-Mobile has managed to keep in the black since 2013 and its profitability is gradually improving, breaking away from the also-rans over the last 12 months.

 

  • Executive Summary
  • Introduction
  • The US Wireless Market, 2011-2016
  • Where Do We Go From Here?
  • Duopolists, challengers, and exits
  • Valuations
  • Challenging the Premium Carrier
  • The Impact of IPv6 deployment
  • Conclusions
  • Disruptive Responses: 5G
  • Disruptive Responses: Content

 

  • Figure 1: The US wireless revenue base, 2011-2016
  • Figure 2: Long term shifts in the US national wireless profit pool, 2011-2016
  • Figure 3: Profits at US wireless carriers, 2011-2016 (time series)
  • Figure 4: The short-run profits pool
  • Figure 5: Five years of Verizon Vs T-Mobile
  • Figure 6: Long term share of connections growth, 2011-2016
  • Figure 7: Short term share of connections growth, 2015
  • Figure 8: Long term retail postpaid users, 2011-2016
  • Figure 9: Short term retail postpaid subscribers, 2015
  • Figure 10: Now, T-Mobile is gaining the right kind of subscribers
  • Figure 11: Retail postpaid connections over time
  • Figure 12: Prepaid subscribers over time
  • Figure 13: Long term change in prepaid users is mostly growth, and MetroPCS’s exit
  • Figure 14: Short term change in retail prepaid users, 2015
  • Figure 15: T-Mobile’s debts are far from zooming out of control
  • Figure 16: Duopolists, challengers, and exit candidates
  • Figure 17: Net income margins over time
  • Figure 18: Device sales surge, margins dive
  • Figure 19: Valuation – EV/EBITDA
  • Figure 20: T-Mobile leads on our MobiNEX score
  • Figure 21: A link between network metrics and customer satisfaction?
  • Figure 22: 3 out of 4 US MNOs are “challenged” in the world context
  • Figure 23: Download speed vs. percentage of LTE requests
  • Figure 24: T-Mobile is the lowest-latency US operator
  • Figure 25: T-Mobile is generating 25% fewer high latency events than AT&T
  • Figure 26: T-Mobile’s error rate catches up on the market leader
  • Figure 27: Quality across the board
  • Figure 28: IPv6 adoption, US wireless operators

MobiNEX: The Mobile Network Experience Index, Q4 2015

Executive Summary

In response to customers’ growing usage of mobile data and applications, STL Partners has developed MobiNEX: The Mobile Network Customer Experience Index, which benchmarks mobile operators’ network speed and reliability by measuring the consumer app experience, and allows individual players to see how they are performing in relation to competition in an objective and quantitative manner.

We assign operators an individual MobiNEX score based on their performance across four measures that are core drivers of customer app experience: download speed; average latency; error rate; latency consistency (the percentage of app requests that take longer than 500ms to fulfil). Apteligent has provided us with the raw data for three out of four of the measures based on billions of requests made from tens of thousands of applications used by hundreds of millions of users in Q4 2015. We plan to expand the index to cover other operators and to track performance over time with twice-yearly updates.

Encouragingly, MobiNEX scores are positively correlated with customer satisfaction in the UK and the US suggesting that a better mobile app experience contributes to customer satisfaction.

The top five performers across twenty-seven operators in seven countries in Europe and North America (Canada, France, Germany, Italy, Spain, UK, US) were all from France and the UK suggesting a high degree of competition in these markets as operators strive to improve relative to peers:

  • Bouygues Telecom in France scores highest on the MobiNEX for Q4 2015 with consistently high scores across all four measures and a total score of 76 out of 100.
  • It is closely followed by two other French operators. Free, the late entrant to the market, which started operations in 2012, scores 73. Orange, the former national incumbent, is slightly let down by the number of app errors experienced by users but achieves a healthy overall score of 70.
  • The top five is completed by two UK operators: EE (65) and O2 (61) with similar scores to the three French operators for everything except download speed which was substantially worse.

The bottom five operators have scores suggesting a materially worse customer app experience and we suggest that management focuses on improvements across all four measures to strengthen their customer relationships and competitive position. This applies particularly to:

  • E-Plus in Germany (now part of Telefónica’s O2 network but identified separately by Apteligent).
  • Wind in Italy, which is particularly let down by latency consistency and download speed.
  • Telefónica’s Movistar, the Spanish market share leader.
  • Sprint in the US with middle-ranking average latency and latency consistency but, like other US operators, poor scores on error rate and download speed.
  • 3 Italy, principally a result of its low latency consistency score.

Surprisingly, given the extensive deployment of 4G networks there, the US operators perform poorly and are providing an underwhelming customer app experience:

  • The best-performing US operator, T-Mobile, scores only 45 – a full 31 points below Bouygues Telecom and 4 points below the median operator.
  • All the US operators perform very poorly on error rate and, although 74% of app requests in the US were made on LTE in Q4 2015, no US player scores highly on download speed.

MobiNEX scores – Q4 2015

 Source: Apteligent, OpenSignal, STL Partners analysis

MobiNEX vs Customer Satisfaction

Source: ACSI, NCSI-UK, STL Partners

 

  • Introduction
  • Mobile app performance is dependent on more than network speed
  • App performance as a measure of customer experience
  • MobiNEX: The Mobile Network Experience Index
  • Methodology and key terms
  • MobiNEX Q4 2015 Results: Top 5, bottom 5, surprises
  • MobiNEX is correlated with customer satisfaction
  • Segmenting operators by network customer experience
  • Error rate
  • Quantitative analysis
  • Key findings
  • Latency consistency: Requests with latency over 500ms
  • Quantitative analysis
  • Key findings
  • Download speed
  • Quantitative analysis
  • Key findings
  • Average latency
  • Quantitative analysis
  • Key findings
  • Appendix: Source data and methodology
  • STL Partners and Telco 2.0: Change the Game
  • About Apteligent

 

  • MobiNEX scores – Q4 2015
  • MobiNEX vs Customer Satisfaction
  • Figure 1: MobiNEX – scoring methodology
  • Figure 2: MobiNEX scores – Q4 2015
  • Figure 3: Customer Satisfaction vs MobiNEX, 2015
  • Figure 4: MobiNEX operator segmentation – network speed vs network reliability
  • Figure 5: MobiNEX operator segmentation – with total scores
  • Figure 6: Major Western markets – error rate per 10,000 requests
  • Figure 7: Major Western markets – average error rate per 10,000 requests
  • Figure 8: Major Western operators – percentage of requests with total roundtrip latency greater than 500ms
  • Figure 9: Major Western markets – average percentage of requests with total roundtrip latency greater than 500ms
  • Figure 10: Major Western operators – average weighted download speed across 3G and 4G networks (Mbps)
  • Figure 11: Major European markets – average weighted download speed (Mbps)
  • Figure 12: Major Western markets – percentage of requests made on 3G and LTE
  • Figure 13: Download speed vs Percentage of LTE requests
  • Figure 14: Major Western operators – average total roundtrip latency (ms)
  • Figure 15: Major Western markets – average total roundtrip latency (ms)
  • Figure 16: MobiNEX benchmarks

Problem: Telecoms technology inhibits operator business model change (Part 1)

Introduction

Everyone loves to moan about telcos

‘I just can’t seem to get anything done, it is like running through treacle.’

‘We gave up trying to partner with operators – they are too slow.’

‘Why are telcos unable to make the most basic improvements in their service offerings?’

‘They are called operators for a reason: they operate networks. But they can’t innovate and don’t know the first thing about marketing or customer service.’

Anyone within the telecoms industry will have heard these or similar expressions of dissatisfaction from colleagues, partners and customers.  It seems that despite providing the connectivity and communications services that have truly changed the world in the last 20 years, operators are unloved.  Everyone, and I think we are all guilty of this, feels that operators could do so much better.  There is a feeling that these huge organisations are almost wilfully seeking to be slow and inflexible – as if there is malice in the way they do business.

But the telecoms industry employs millions of people globally. It pays quite well and so attracts talent. Many, for example, have already enjoyed success in other industries. But nobody has yet, it seems, been able to make a telco, let alone the industry, fast, agile, and innovative.

Why not?

A structural problem

In this report, we argue that nobody is at fault for the perceived woes of telecoms operators.  Indeed, the difficulty the industry is facing in changing its business model is a result of financial and operational processes that have been adopted and refined over years in response to investor requirements and regulation.  In turn, investors and regulators have created such requirements as a result of technological constraints that have applied, even with ongoing improvements, to fixed and mobile telecommunications for decades. In essence, operators are constrained by the very structures that were put in place to ensure their success.

So should we give up?

If the limitations of telecoms operators is structural then it is easy to assume that change and development is impossible.  Certainly sceptics have plenty of empirical evidence for this view.  But as we outline in this report and will cover in more detail in a follow up to be published in early February 2016 (Answer: How 5G + Cloud + NFV can create the ‘agile telco’), changes in technology should have a profound impact on telecoms operators ability to become more flexible and innovative and so thrive in the fast-paced digital world.

Customer satisfaction is proving elusive in mature markets

Telecoms operators perform materially worst on customer service than other players in the US and UK

Improving customer experience has become something of a mantra within telecoms in the last few years. Many operators use Net Promoter Scores (NPS) as a way of measuring their performance, and the concept of ‘putting the customer first’ has gained in popularity as the industry has matured and new customers have become harder to find. Yet customer satisfaction remains low.

The American Customer Satisfaction Index (ACSI) publishes annual figures for customer satisfaction based on extensive consumer surveys. Telecommunications companies consistently come out towards the bottom of the range (scoring 65-70 out of 100). By contrasts internet and content players such as Amazon, Google, Apple and Netflix have much more satisfied customers and score 80+ – see Figure 1.

Figure 1: Customers are generally dissatisfied with telecoms companies

 

Source: American Customer Satisfaction index (http://www.theacsi.org/the-american-customer-satisfaction-index); STL Partners analysis

The story in the UK is similar.  The UK Customer Satisfaction Index, using a similar methodology to its US counterpart, places the Telecommunications and Media industry as the second-worst performer across 13 industry sectors scoring 71.7 in 2015 compared to a UK average of 76.2 and the best-performing sector, Non-food Retail, on 81.6.

Poor customer services scores are a lead indicator for poor financial performance

Most concerning for the telecoms industry is the work that ACSI has undertaken showing that customer satisfaction is linked to the financial performance of the overall economy and the performance of individual sectors and companies. The organisation states:

  • Customer satisfaction is a leading indicator of company financial performance. Stocks of companies with high ACSI scores tend to do better than those of companies with low scores.
  • Changes in customer satisfaction affect the general willingness of households to buy. As such, price-adjusted ACSI is a leading indicator of consumer spending growth and has accounted for more of the variation in future spending growth than any other single factor.

Source: American Customer Satisfaction index (http://www.theacsi.org/about-acsi/key-acsi-findings)  

In other words, consistently poor performance by all major players in the telecoms industry in the US and UK suggests aspirations of growth may be wildly optimistic. Put simply, why would customers buy more services from companies they don’t like? This bodes ill for the financial performance of telecoms operators going forward.

Senior management within telecoms knows this. They want to improve customer satisfaction by offering new and better services and customer care. But change has proved incredibly difficult and other more agile players always seem to beat operators to the punch. The next section shows why.

 

  • Introduction
  • Everyone loves to moan about telcos
  • A structural problem
  • So should we give up?
  • Customer satisfaction is proving elusive in mature markets
  • Telecoms operators perform materially worst on customer service than other players in the US and UK
  • Poor customer services scores are a lead indicator for poor financial performance
  • ‘One-function’ telecommunications technology stymies innovation and growth
  • Telecoms has always been an ‘infrastructure play’
  • …which means inflexibility and lack of innovation is hard-wired into the operating model
  • Why ‘Telco 2.0’ is so important for operators
  • Telco 2.0 aspirations remain thwarted
  • Technology can truly ‘change the game’ for operators

 

  • Figure 1: Customers are generally dissatisfied with telecoms companies
  • Figure 2: Historically, capital deployment has driven telecoms revenue
  • Figure 3: Financial & operational metrics for Infrastructure player (Vodafone) vs Platform (Google) & Product Innovator (Unilever)

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

Executive Summary

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

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

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

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

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

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

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

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

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

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

 

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

 

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

 

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

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

Introduction

From RFID in the supply chain to M2M today

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

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

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

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

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

Source: STL Partners, More With Mobile

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

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

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

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

From M2M to the Internet of Things?

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

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

Source: Ericsson

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

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

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

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

M2M Today: Geographies, Verticals and New Business Models

Headline: M2M is now an important growth area for MNOs

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

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

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

 

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

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

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

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

 

Source: Company accounts, STL Partners, More With Mobile

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

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

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

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

 

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

 

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

 

Disruptive Strategy: ‘Uncarrier’ T-Mobile vs. AT&T, VZW, and Free.fr

Introduction

Ever since the original Softbank bid for Sprint-Nextel, the industry has been awaiting a wave of price disruption in the United States, the world’s biggest and richest mobile market, and one which is still very much dominated by the dynamic duo, Verizon Wireless and AT&T Mobility.

Figure 1: The US, a rich and high-spending market

The US a rich and high-spending market

Source: Onavo, Ofcom, CMT, BNETZA, TIA, KCC, Telco accounts, STL Partners

However, the Sprint-Softbank deal saga delayed any aggressive move by Sprint for some time, and in the meantime T-Mobile USA stole a march, implemented its own very similar ‘uncarrier’ proposition strategy, and achieved a dramatic turnaround of their customer numbers.

As Figure 2 shows, the duopoly marches on, with Verizon in the lead, although the gap with AT&T has closed a little lately. Sprint, meanwhile, looks moribund, while T-Mobile has closed half the gap with the duopolists in an astonishingly short period of time.

Figure 2: The duopolists hold a lead, but a new challenger arises…

The duopolists hold a lead but a new challenger arises
Source: STL Partners

Now, a Sprint-T-Mobile merger is seriously on the cards. Again, Softbank CEO Masayoshi Son is on record as promising to launch a price war. But to what extent is a Free Mobile-like disruption event already happening? And what strategies are carriers adopting?

For more STL analysis of the US cellular market, read the original Sprint-Softbank EB , the Telco 2.0 Transformation Index sections on Verizon  and AT&T , and our Self-Disruption: How Sprint Blew It EB . Additional coverage of the fixed domain can be found in the Triple-Play in the USA: Infrastructure Pays Off EB  and the Telco 2.0 Index sections mentioned above

The US Market is Changing

In our previous analysis Self-Disruption: How Sprint Blew It, we used the following chart, Figure 3, under the title “…And ARPU is Holding Up”. Updating it with the latest data, it becomes clear that ARPU – and in this case pricing – is no longer holding up so well. Rather than across-the-board deflation, though, we are instead seeing increasingly diverse strategies.

Figure 3: US carriers are pursuing diverse pricing strategies, faced with change

US carriers are pursuing diverse pricing strategies, faced with change

Source: STL Partners

AT&T’s ARPU is being very gradually eroded (it’s come down by $5 since Q1 2011), while Sprint’s plunged sharply with the shutdown of Nextel (see report referenced above for more detail). Since then, AT&T and Sprint have been close to parity, a situation AT&T management surely can’t be satisfied with. T-Mobile USA has slashed prices so much that the “uncarrier” has given up $10 of monthly ARPU since the beginning of 2012. And Verizon Wireless has added almost as much monthly ARPU in the same timeframe.

Each carrier has adopted a different approach in this period:

  • T-Mobile has gone hell-for-leather after net adds at any price.
  • AT&T has tried to compete with T-Mobile’s price slashing by offering more hardware and bigger bundles and matching T-Mobile’s eye-catching initiatives, while trying to hold the line on headline pricing, perhaps hoping to limit the damage and wait for Deutsche Telekom to tire of the spending. For example, AT&T recently increased its device activation fee by $4, citing the increased number of smartphone activations under its early-upgrade plan. This does not appear in service-ARPU or in headline pricing, but it most certainly does contribute to revenue, and even more so, to margin.
  • Verizon Wireless has declined to get involved in the price war, and has concentrated on maintaining its status as a premium brand, selling on coverage, speed, and capacity. As the above chart shows, this effort to achieve network differentiation has met with a considerable degree of success.
  • Sprint, meanwhile, is responding tactically with initiatives like its “Framily” tariff, while sorting out the network, but is mostly just suffering. The sharp drop in mid-2012 is a signature of high-value SMB customers fleeing the shutdown of Nextel, as discussed in Self-Disruption: How Sprint Blew It.

Figure 4: Something went wrong at Sprint in mid-2012

Something went wrong at Sprint in mid-2012

Source: STL Partners, Sprint filings

 

  • Executive Summary
  • Contents
  • Introduction
  • The US Market is Changing
  • Where are the Customers Coming From?
  • Free Mobile: A Warning from History?
  • T-Mobile, the Expensive Disruptor
  • Handset subsidy: it’s not going anywhere
  • Summarising change in the US and French cellular markets
  • Conclusions

 

  • Figure 1: The US, a rich and high-spending market
  • Figure 2: The duopolists hold a lead, but a new challenger arises…
  • Figure 3: US carriers are pursuing diverse pricing strategies, faced with change
  • Figure 4: Something went wrong at Sprint in mid-2012
  • Figure 5: US subscriber net-adds by source
  • Figure 6: The impact of disruption – prices fall across the board
  • Figure 7: Free’s spectacular growth in subscribers – but who was losing out?
  • Figure 8: The main force of Free Mobile’s disruption didn’t fall on the carriers
  • Figure 9: Disruption in France primarily manifested itself in subscriber growth, falling ARPU, and the death of the MVNOs
  • Figure 10: T-Mobile has so far extended $3bn of credit to its smartphone customers
  • Figure 11: T-Mobile’s losses on device sales are large and increasing, driven by smartphone volumes
  • Figure 12: Size and profitability still go together in US mobile – although this conceals a lot of change below the surface
  • Figure 13: Fully-developed disruption, in France
  • Figure 14: Quality beats quantity. Sprint repeatedly outspent VZW on its network

Self-Disruption: How Sprint Blew It

Introduction

At the beginning of 2013, we issued an Executive Briefing on the proposed take-over of Sprint-Nextel by Softbank, which we believed to be the starting gun for disruption in the US mobile market.

At the time, not only was 68% of revenue in the US market controlled by the top two operators, AT&T and Verizon, it was also an unusually lucrative market in general, being both rich and high-spending (see Figure 1, taken from the The Future Value of Voice & Messaging strategy report). Further, the great majority of net-adds were concentrated among the top two operators, with T-Mobile USA flat-lining and Sprint beginning to lose subscribers. We expected Sprint to initiate a price war, following a plan similar to Softbank’s in Japan, separating the cost of devices from that of service, making sure to offer the hero smartphone of the day, and offering good value on data bundles.

Figure 1: The US, a rich country that spends heavily on telecoms

The US a rich country that spends heavily on telecoms feb 2014

Source: STL Partners

In the event, the fight for control of Sprint turned out to be more drawn out and complex than anyone expected. Add to this the complexity of Sprint’s major network upgrade, Network Vision, as shown in Figure 2, and the fact that the plans changed in order to take advantage of Softbank’s procurement of devices for the 2.5GHz band, and it is perhaps less surprising that we have yet to see a major strategic initiative from Sprint.

Figure 2: The Softbank deal brought with it major changes to Network Vision
The Softbank deal brought with it major changes to Network Vision feb 2014

Source: Sprint Q3 earnings report

Instead, T-Mobile USA implemented a very similar strategy, having completed the grieving process for the AT&T deal and secured investment from DTAG for their LTE roll-out and spectrum enhancements. So far, their “uncarrier” strategy has delivered impressive subscriber growth at the expense of slashing prices. The tale of 2013 in terms of subscribers can be seen in the following chart, updated from the original Sprint/Softbank note. (Note that AT&T, VZW, and T-Mobile have released data for calendar Q3, but Sprint hasn’t yet – the big question, going by the chart, will be whether T-Mobile has overtaken Sprint for cumulative net-adds.)

Figure 3: The duopoly marches on, T-Mobile recovers, Sprint in trouble

The duopoly marches on, T-Mobile recovers, Sprint in trouble Feb 2014

Source: STL Partners

However, Sprint did have a major strategic initiative in the last two years – and one that went badly wrong. We refer, of course, to the shutdown of the Nextel half of Sprint-Nextel.

Closing Nextel: The Optimistic Case

There is much that is good inside Sprint, which explains both why so much effort went into its “turnaround” and why Masayoshi Son was interested. For example, its performance in terms of ARPU is strong, to say the least. The following chart, Figure 4, illustrates the point. Total ARPU in post-paid, which is most of the business, is both high at just under $65/mo and rising steadily. ARPU in pre-paid is essentially flat around $25/mo. The problem was Nextel and specifically, Nextel post-paid – while pre-paid hovered around $35/mo, post-paid trended steadily down from $45/mo to parity with pre-paid by the end.

Figure 4: Sprint-Nextel ARPU

Sprint-Nextel ARPU feb 2014

Source: STL Partners

The difference between the two halves of Sprint that were doing the work here is fairly obvious. Nextel’s unique iDEN network was basically an orphan, without a development path beyond the equivalent of 2005-era WCDMA speeds, and without smartphones. Sprint CDMA, and later LTE, could offer wireless broadband and could offer the iPhone. Clearly, something had to be done. You can see the importance of smartphone adoption from the following graphic, Figure 5, showing that smartphones drove ARPU on Sprint’s CDMA network.

Figure 5: Sprint CDMA has reached 80% smartphone adoption

Sprint CDMA has reached 80% smartphone adoption feb 2014

Source: STL Partners

It is true that smartphones create opportunities to substitute OTT voice and messaging, but this is less of a problem in the US. As the following chart from the Future Value of Voice and Messaging strategy report shows, voice and messaging are both cheap in the US, and people spend heavily on mobile data.

Figure 6: US mobile key indicators

US mobile key indicators feb 2014

Source: STL Partners

So far, the pull effect of better devices on data usage has helped Sprint grow revenues, while it also drew subscribers away from Nextel. Sprint’s strategy in response to this was to transition Nextel subscribers over to the mainline platform, and then shut down the network, while recycling savings and spectrum from the closure of Nextel into their LTE deployment.

 

  • Closing Nextel: The Scoreboard
  • Recapture
  • The Double Dippers
  • The Competition: AT&T Targets the Double Dippers
  • Developers, Developers, Devices
  • Conclusions

 

  • Figure 1: The US, a rich country that spends heavily on telecoms
  • Figure 2: The Softbank deal brought with it major changes to Network Vision
  • Figure 3: The duopoly marches on, T-Mobile recovers, Sprint in trouble
  • Figure 4: Sprint-Nextel ARPU
  • Figure 5: Sprint mainline has reached 80% smartphone adoption
  • Figure 6: US mobile key indicators
  • Figure 7: Tale of the tape – something goes wrong in early 2012
  • Figure 8: Sprint’s “recapture” rate was falling during 3 out of the 4 biggest quarters for Nextel subscriber losses, when it needed to be at its best
  • Figure 9: Nextel post-paid was 72% business customers in 3Q 2011
  • Figure 10: The loss of high-value SMB customers dragged Sprint’s revenues into negative territory
  • Figure 11: The way mobile applications development used to be

Sprint-Softbank: how it will disrupt the US market

Summary:

The Japanese and French markets have both been disrupted through the entry of low-cost competitors offering substantial price reductions. We think that Softbank’s acquisition of Sprint is a signal that the same is to soon come in the US given Softbank’s experience as a successful disruptor in Japan. (January 2013, Executive Briefing Service)

Digital Commerce Flywheel December 2012
  Read in Full (Members only)  To Subscribe click here

Below is an extract from this 23 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Non-members can subscribe here or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

We’ll also be discussing our findings at the New Digital Economics Brainstorm in Silicon Valley, 19-20 March, 2013.

Overview

Once upon a time…

Japan used to be a mobile market with two serious competitors, high ARPUs and margins, and three laggard players that nobody took too seriously. France’s mobile market had three operators, a highly tolerant regulator, and high margins. And the US mobile market once had a relatively laissez-faire regulator, high ARPUs, two mighty duopolists, and two laggards.

The Japanese and French markets have both been disrupted through the entry of low-cost competitors offering substantial price reductions, and in Japan’s case the disruptor was Softbank. The US now has a regulator seemingly more influenced by voices from Silicon Valley than ‘big telco’ lobbyists, the duopolists have attractive margins, and Softbank now stands behind Sprint. The scene appears set for a disruptive play.

The lessons of history

In Japan, back in 2006, when Vodafone sold its Japanese operation to Masayoshi Son’s Softbank, the mobile market was relatively stable with two large players – NTT Docomo and KDDI – and three much smaller ones including Softbank which were not making money (hence Vodafone’s decision to withdraw from Japan). Softbank spotted the disruptive possibilities of the Apple iPhone, the advantages of being Japan’s only operator on the UMTS world standard, and the fat margins of the duopolists. It became the iPhone exclusive carrier, benefited from world 3G infrastructure competition, and set keen prices on data to cut into the duopoly.  And the results have been spectacular: Operating income has increased 6 times since Softbank acquired the business from Vodafone, and net additions in 2012 were running 127% higher than those of NTT DoCoMo and 51% higher than KDDI.

In France back in 2011, three French operators shared out the market, under the eyes of ARCEP, a regulator much more enthusiastic about planning for infrastructure development than driving competition. That year, Free.fr, a company that had already disrupted the fixed ISP market through mastering software and therefore having the best customer premises devices and the lowest costs, finally got a 3G licence. Using a radical new network design based on small cells and WLAN-cellular integration, Free tore into the oligopolists at staggeringly low prices.

In the United States, between 2005 and 2009, the friendly regulator – FCC Chairman Kevin J. Martin – permitted three great mergers in wireless, creating the new AT&T, the new Verizon, and the new Sprint-Nextel. Out of those, execution was successful in the first two. Sprint-Nextel misjudged the importance of Nextel’s specialism in voice, made a bad bet on WiMAX, leaving itself excluded from the emerging smartphone arena, and anyway had the hardest integration challenge. This is now acknowledged by Daniel R. Hesse, Sprint-Nextel’s CEO.

“Hesse said that the AT&T’s failed attempt to consolidate two of the Big 4 made him realize that there was no longer such a thing as the Big 4. The industry had bifurcated into the Big 2 and everybody else.” … “With 20/20 hindsight, the Nextel merger was a mistake,” Hesse said. “The synergies, if you will, that we had hoped for and planned for didn’t materialize.” 

Source: GigaOm

AT&T and Verizon, however, made it across the merger swamp to found an effective duopoly, a dominating force that controls 68% of revenue in the world’s critical wireless market, and which regularly achieves 30+% margins while its rivals struggle to break even. Verizon’s decision to end the standards wars and go with LTE effectively killed the CDMA development path and left Sprint stuck with WiMAX. Was it strategy or happy accident?

So, what’s next?

Now, things have changed. Sprint has been bought out by none other than Softbank – the original Japanese disruptor. It is a reminder that strategic advantage is temporary and disruption is inevitable.

We expect that the new Sprint will take the pain to push ahead with its transition to LTE. The previous Softbank and Sprint experiences have shown that being outside the world standard is deadly from a devices point of view, which remains critical to success in mobile. We expect that they may make a much bigger effort with carrier WLAN, far better standardised, far more available, and in many ways technically more robust than WiMAX.

We also expect that Sprint/Softbank will aim for the simplest form of disruption, price war. Oligopolies are always either in a state of price stability or of price war. Whether a cartel controls the market, or a tacit balance of fear constrains action, stability reigns, until it doesn’t. Then, price war rages, as no-one can afford to resist. Customers will benefit. T-Mobile, trying to fight its way to the start-line, will suffer most of all.

Another lesson from Softbank, though, is that disruption on price needs a killer product if it is to be more than a race to the bottom. We explore some further strategy options for Sprint in the body of this report.

In addition to its impact on the core US telecoms market, the prospect of forthcoming disruption also raises the stakes on the question of whether the US telcos are transforming to new Telco 2.0 business models fast enough (see our report A Practical Guide to Implementing Telco 2.0). This is a topic that we will explore further in our research and at the next Silicon Valley Executive Brainstorm, March 19-20, 2013.

Orientation: The Softbank Experience

Masayoshi Son’s strategy at Softbank, after acquiring the Vodafone stake, was simple – sharp pricing, especially on data, and hot gadgets.

The iPhone: a disruptive innovation

Softbank was the launch partner for the iPhone in Japan and remained Apple’s exclusive carrier up to the release of the iPhone 4S. Softbank’s annual report shows the impact of the iPhone and repricing very clearly – the partnership with Apple was signed in June, 2008, and the iPhone 4S launch followed in Q3 2011. The disruption was transient, but it had lasting effects on the market, restoring Softbank as a serious competitor, in much the same way as it turbocharged AT&T in the US a year before.

Figure 1: iDisrupt – the June ‘08 iPhone launch reset the market in Japan

Softbank Results, January 2013Source: Softbank

The combination of keen pricing and iPhones had a lasting effect on subscriber growth, too. Throughout the exclusivity era, Softbank beat its rivals for net-adds handsomely.

The impact on price: enduring reduction in margins

However, this came at a price. On a quarterly basis, a steady erosion of operating margin is visible, driven partly by the pricing strategy and partly by the cost of the shiny, shiny gadgets. One way of mitigating this was to carve out the cost of the device from the cost of service. Rather than paying nothing up front, Softbank subscribers paid a monthly device charge, or else either paid cash or brought their own.

Softbank’s annual report says that their subscriber-acquisition cost was falling in their FY 2012 (i.e. 2011-12), but also that the average subscriber upgrade cost had increased – in a smartphone environment, users who were brought on board on a cheaper device will tend to eventually demand something better.

As a result, Softbank has been able to keep its share of net adds over 40%. In a market with four players, this is a major achievement. However, to do so, they have had to accept the erosion of their margins and pricing.

Figure 3: Softbank – keeping ahead of the competition…

Softbank Net Adds and Margins, January 2013Source: STL Partners, Softbank

Clearly, price disruption can work, and it is reasonable to think that something similar might happen in the US, a similar market. In the international context, US mobile operators are pricey: the US is the fourth-highest OECD market by ARPU.

On average, for instance, a triple-play package that bundles Internet, telephone and television sells for $160 a month with taxes. In France the equivalent costs just $38. For that low price the French also get long distance to 70 foreign countries, not merely one; worldwide television, not just domestic; and an Internet that’s 20 times faster uploading data and 10 times faster downloading it.

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

  • Executive Summary
  • Orientation: The Softbank Experience
  • The iPhone: a disruptive innovation
  • The impact on price: enduring reduction in margins
  • The Disruption of EU High Price Markets
  • Target: The Duopoly
  • Context: Sources of the Duo
  • M&A Execution
  • AT&T: A Devil’s Bargain with Apple
  • Verizon – network leadership as a strategy
  • Sprint – post-merger distractions
  • The Future: Limits to the Duo
  • PSTN phaseout and Universal Service Fund transition
  • Very simply…a price war
  • Sprint: The Agenda
  • Recovering from the loss of the Nextel business
  • Future of the network
  • Future of the core
  • The spectrum issue
  • Sprint: the soft-shoe spectrum shuffle
  • Softbank: another 2.5GHz vision
  • Options for disruptive change
  • Happy Pipe
  • Telco 2.0
  • Comms-Focused
  • Conclusions


…and the following figures…

  • Figure 1: iDisrupt – the June ‘08 iPhone launch reset the market in Japan
  • Figure 2: Softbank accepted a drift-down in margins as the price of subscriber acquisition
  • Figure 3: Softbank – keeping ahead of the competition
  • Figure 4: Spain is a high-price market
  • Figure 5: Markets with premium pricing are the first to go
  • Figure 6: AT&T and Verizon Wireless dominate US mobile revenues and margins
  • Figure 7: The duopolists pull away in terms of subscribers
  • Figure 8: The duopolists’ subscriber gain has come without sacrificing ARPU
  • Figure 9: The duopolists dig in through capital investment
  • Figure 10: OneNet sent Vodafone UK powering ahead in the SMB market
  • Figure 11: Softbank Japan’s spectrum plan
  • Figure 12: Softbank and the US Carriers’ Spectrum Holdings
  • Figure 13: Softbank is more than confident on EBIT
  • Figure 14: Softbank ARPU – An “increasing trend” for one player, but only just


Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 23 page report in PDF format hereNon-Members, please subscribe here or email contact@telco2.net / call +44 (0) 207 247 5003.

Telco 2.0: how to accelerate the implementation of new business models

Summary: Opportunities exist for operators to support third-party businesses in Customer Profiling, Marketing offers, ID & Authentication, Network QoS, and Billing, Payments & Collection. However, our in-depth research among senior execs in ‘upstream’ industries (e.g. retail, media, IT, etc.) and telcos shows that poor communication of the telecoms value proposition and slow implementation by operators is frustrating upstream customers and operators alike. Our new analysis identifies strategic customer segments for telcos building new ‘Telco 2.0’ business models, key obstacles to overcome, six real-world implementation strategy scenarios, and strategic recommendations for telcos. (March 2012, Executive Briefing Service, Transformation Stream.) Google's Advertising Revenues Cascade

 

  • Below is an extract from this 29 page report, kindly commissioned and sponsored by Openet and independently produced by Telco 2.0. Openet developed the initial research concept and scope. The research, analysis and the writing of the report itself was carried out independently by STL Partners.
  • Members of the Telco 2.0 Executive Briefing service can download this report in full in PDF format here.
  • Alternatively, to download this report for free, join our Foundation 2.0 service (details here) by using the promotional code FOUNDATION2 in the box at the bottom of the sign-up page here. Once registered, you will be able to download the report here.
  • We’ll also be discussing our findings at the EMEA Executive Brainstorm in London (12-13 June, 2012).
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Preface

This research has been designed to explore how valuable new telecoms solutions could be for third-party companies (a key part of Telco 2.0), as well as to evaluate the barriers to effective implementation. Third-parties (upstream customers) and operators were interviewed to explore their thoughts in this key strategic area for the telecommunications industry.

Openet White Paper Cover Image

Executive Summary

Headline Conclusions

  • Opportunities exist for operators to support third-party businesses in Customer Profiling, Marketing offers, ID & Authentication, Network QoS, and Billing, Payments & Collection.
  • Poor communication of the telecoms value proposition and slow implementation by operators is frustrating upstream customers and managers within operators themselves.
  • There are four upstream customer segments. Two of these are particularly important for the operators to address when developing go-to-market approaches:
  • Enthusiasts who need full-service Telco 2.0 solutions now;
  • Non-believers who need to be educated on the value of telecoms enabling services and convinced of operators’ ability to implement.
  • There are few material barriers to developing solutions except operators’ inability to implement effectively:
  • Although lack of cross-operator solutions and regulatory impediments are considered significant in Europe and the US.
  • There are four key reasons for the slow implementation by operators:
  • Reason 1: Insufficient investment by operators in services and service enabler platforms.
  • Reason 2: Financial metrics which do not encourage investment in new business models.
  • Reason 3: Inability to pin down the optimal timing for investment in new business models.
  • Reason 4: A prisoners’ dilemma over whether to collaborate or compete with other operators and with upstream customers when implementing solutions.

For the complete recommendations, detailed conclusions and full analysis, please download the report by following the instructions at the top of this page.

 

Introduction, Objectives and Methodology

The research consisted of interviews with 26 major corporations that use telecoms networks to deliver services to consumers including players from advertising, media, financial services and retail (upstream customers or ‘third-party’ companies). Interviewees where senior managers who were responsible for the provision of services via digital channels and thus were familiar with the challenges and opportunities they faced in this developing market segment. Additionally, STL Partners interviewed senior managers from 16 major mobile and converged communications service providers (see Figure 1 below for more details on participants).

The objectives of the research were to determine:

  • What Telco 2.0 (enabling) services would upstream customers like to see from communications service providers?
  • What are the most common use cases and attractive commercial models for such services?
  • What are the current barriers to realising the Telco 2.0 opportunity and what needs to be done to overcome these barriers?

Figure 1: Interviews conducted with players from telecoms and adjacent industries

Companies interviewed for this report

Source: STL Partners

Interviews were 30-60 minutes in length and largely qualitative in nature. Some quantitative questions were asked so that the relative attractiveness of Telco 2.0 solution areas and the size of implementation barriers could be evaluated. The interviews were also designed to uncover differences in perspective between:

  • Operators and upstream customers;
  • Upstream customers from different industry groups – Advertising, Media, Financial services and IT;
  • Operators from different geographic regions – Europe, North America, Middle East and North Africa (MENA) and Asia Pacific (APAC).

Interviews were conducted with senior decision-makers and influencers and, to ensure discussions were full and frank, the content of interviews has not been attributed to individual companies.

Report Contents

 
  • Introduction
  • Real potential value in Telco assets but implementation proving difficult
  • Defining the opportunity areas
  • Strong overall alignment across all eight areas between operators and upstream customers
  • Averages hide variations in upstream customer responses
  • Operators consistent about opportunities apart from Identity & Authentication solutions
  • Telco ability to implement is seen by all as the key barrier…
  • …although operators in Europe and US also see lack of cross-operator solutions and regulation as key barriers
  • Four upstream customer segments require different solutions from operators
  • Operator segment mix looks very different to upstream
  • Why are operators finding implementing Telco 2.0 so hard?
  • Reason1: Insufficient investment by operators in services and service enabler platforms
  • Reason 2: Financial metrics which do not encourage investment in new business models
  • Reason 3: Inability to pin down the optimal timing for investment in new business models
  • Reason 4: A prisoners’ dilemma over whether to collaborate or compete with other operators and with upstream customers when implementing solutions
  • Conclusions and recommendations

Report Figures

 
  • Figure 1: Interviews conducted with players from telecoms and adjacent industries
  • Figure 2: Broad alignment on opportunity areas from operators & upstream customers
  • Figure 3: Upstream customers – variation even within industry sectors for specific Telco 2.0 solution areas
  • Figure 4: Perceived lack of telco interest in developing new solutions for upstream customers
  • Figure 5: Regional differences in operator opportunity sizing for Identity & Authentication solutions
  • Figure 6: Telco operational and organisation limitations seen as the biggest barrier to success
  • Figure 7: Regional differences in perception of key barriers to Telco 2.0 implementation
  • Figure 8: Upstream customer segments
  • Figure 9: Telco go-to-market approaches for upstream customer segments
  • Figure 10: Telco segments – Telco 2.0 could be valuable but can it be realised?
  • Figure 11: An historical lack of investment in services by operators threatens voice, messaging and newer Telco 2.0 solutions
  • Figure 12: Current operator metrics discourage investment in new business models
  • Figure 13: New business model investment timing dilemma
  • Figure 14: The prisoners’ dilemma
  • Figure 15: Six Telco 2.0 implementation strategies
  • Figure 16: Value-creating and value-destroying approaches
  • Figure 17: Geography determines the most important Telco 2.0 implementation strategies

To access this report:

  • The 29 page Telco 2.0 Report can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here.
  • Additionally, to give an introduction to the principles of Telco 2.0 and digital business model innovation, we now offer for download a small selection of free Telco 2.0 Briefing reports (including this one) and a growing collection of what we think are the best 3rd party ‘white papers’. To access these reports you will need to become a Foundation 2.0 member. To do this, use the promotional code FOUNDATION2 in the box provided on the sign-up page here. Your Foundation 2.0 member details will allow you to access the reports shown here only, and once registered, you will be able to download the report here.
  • We’ll also be discussing our findings at the EMEA Executive Brainstorm in London (12-13 June, 2012).
  • To access reports from the full Telco 2.0 Executive Briefing service, or to submit whitepapers for review for inclusion in this service, please email contact@telco2.net or call +44 (0) 207 247 5003.

About Openet

Openet Logo

Openet is a leading provider of Service Optimization Software (SOS) tailored to meet the evolving needs of communications service providers, or CSPs, including wireless, wireline and cable network operators. Openet’s integrated, high-performance software solutions provide real-time policy management, rating, charging and subscriber data management solutions to enable real-time, contextual network resource allocation and monetization decisions based on information about the end user and the service being used. CSPs use Openet’s SOS solutions to enhance quality of service, create a more personalized end user experience, develop new business models and dynamically control network resources. Openet’s SOS solutions are used by more than 80 customers in 28 countries. For more information, please visit www.openet.com.

Organisations interviewed for the report: Televisa, BBC, Intuit, Google, Tesco, MTV, Intel, TiVo, Sling, Ogilvy, Fox, Omnicom, Microsoft, Visa, Barclaycard, Ultraviolet,  PRS, American Express, MasterCard, CitiGroup, On Live, Warner Bros, MEF, Gap, Salesforce, AT&T, Verizon, Sprint,  Deutsche Telekom, Du, Teliasonera, Orange, Everything Everywhere, Turkcell, Qtel, Etisalat, Singtel, Axiata, Telekom Indonesia, TIM, Tele2.

Personal Data 2.0: Industry fails Carrier IQ test

The debacle with Sprint, AT&T and T-Mobile US over Carrier IQ’s phone monitoring software highlights the pitfalls and opportunities of recording user behaviour, controlling mobile broadband networks and working with personal data – a key enabler of the new digital economy and new telco business models. This is our analysis of the issues and key lessons. (December 2011, Executive Briefing Service)

Carrier IQ Smartphone Eye image Dec 2011 Telco 2.0

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Introduction

Telco 2.0 were talking to the World Economic Forum’s Re-thinking Personal Data project team – discussing the new white paper coming out for Davos which is all about putting the user in control of their personal data to unleash a new wave of innovation around this emerging asset – when we heard about the debacle with Carrier IQ.

Carrier IQ is a company which has reportedly been behind “invasive” software installed on some mobile phones, notably Android smartphones supplied by Sprint, AT&T and T-Mobile in the US. A widely-seen video by researcher Travis Eckhart shows the software apparently capturing keystrokes, website details and SMS’s sent and received on his device.

Travis Eckhardt’s YouTube Video of Carrier IQ

NB Please see our User Data and Privacy research category for further analysis.

The story so far

A festival of finger-pointing

Device vendors and operators around the world have been issuing statements of clarification or denial about their use of similar capabilities – although the careful wording of many press releases hints at the complexity of unravelling what is really in today’s smartphone software, who agreed to install it – and exactly how it is configured and used.

After a false start in which Carrier IQ (CIQ) tried to suppress some of Eckhart’s early findings with an injunction, it has belatedly embarked on a PR charm-offensive to salvage its reputation. We have also seen some more measured and probing analysis of the offending software’s capabilities, after a few days of shrill – and somewhat unfair – rhetoric.

What is known is that the company has embedded its products on around 150m shipped devices, although with wide variations in actual implementation and usage. It seems that most but not all of these devices have been smartphones, sold through operator channels as tailored variants rather than “vanilla” open-retail versions. In general, the software is intended to “improve the customer experience”, by reporting to the operator on various parameters, such as network coverage, failed connections and – most controversially – the user’s behaviour and application usage. Theoretically, this type of monitoring should help the operators fix holes in their networks, or diagnose other problems when the customer calls in for support. Other benefits are possible too – watching which applications are active can help identify which are hogging battery power, for example.

(It should be noted that this on-device monitoring concept is not new – a now-defunct company called IntuWave had a broadly similar solution for Symbian handsets as far back as 2003, while Nokia’s own “360” function also monitors user behaviour of its phones, but with permission. Apple has various reporting functions on its devices, but typically with user opt-out. It is also widely suspected that various security agencies have some smartphone surveillance capabilities).

The problem is that there is a fine line between “monitoring”, “diagnosis” and “surveillance”. The semantics tend to reflect the knowledge and permission of the user, as to what data is being collected and when, and for whom. There is also a distinction between collecting information, transmitting it, storing it and actually “mining” it – and whether it is anonymised or not.

In general, the installation of CIQ has been at the behest of specific operators customising phones sold to their subscribers – typically part of the software “stack” that might also include various additional apps or functionalities. The telcos tell their device suppliers to install the software either at the factory or further down the distribution chain and define “profiles” about what information they want to receive and when. A good analysis of the architecture is given by security analyst Dan Rosenberg .

A selection of previous industry data gaffes

Monitoring of user data is not an issue confined to handsets either – use of Deep Packet Inspection (DPI) capabilities for various use-cases in telco networks has been so controversial that some vendors now use euphemisms instead. The 3GPP standards body has now re-grouped and re-branded various policy and control technologies as the more benign-sounding “traffic detection function” (TDF). Various analytic solutions also exist for operators’ BSS/OSS systems – Telco 2.0 has long discussed the valuable information on subscribers collected by telcos, as well as the huge privacy issues surrounding its exploitation.

The recent Dutch implementation of some of the most draconian Net Neutrality laws in the world stemmed not from fears about the “purity” of the Internet, or even competition issues – but instead because the Dutch people resented the use of DPI to watch (and charge for) different applications in their Internet access data stream. It was the perceived invasion of privacy by KPN – perpetrated on one of the world’s most libertarian-minded populations – that was the trigger for discord. Previously telcos have fallen foul of similar concerns with the use of the notorious Phorm platform, used to deliver advertising based on an ISPs’ observations of their users’ web browsing behaviour.

What does Carrier IQ technically do that’s worrying?

It’s important to understand what people are actually objecting to about CIQ. No-one’s demonstrated that it sends back key-logger information. But they have demonstrated that it keeps everything it collects in a plain text file on the device in user-space. This means that any other application on the device can both read and write to it – and this is potentially very worrying, as explained in Appendix 1: An explanation of the technical risks.

Why the Carrier IQ issue has ‘blown up’

Although arguably exaggerated, several unfortunate issues have compounded each other in this case, to raise the current CIQ debate to public prominence and outrage:

Carrier IQ’s mistakes

While it is possible to feel a degree of sympathy with the embattled people at Carrier IQ, who were ostensibly just providing a service the operators had asked for, we believe they have made two key errors:

  • Carrier IQ’s initial response to their accuser was unnecessarily litigious – and Eckhart’s involvement of the Electronic Frontier Foundation guaranteed a much wider audience than might have otherwise occurred. Too many techno-illiterate lawyers under-estimate the power of blogs, Twitter and social media to bring issues such as this to wide awareness in a matter of hours.
  • The implementation of the software (on the Android phone in the now-infamous video) seems to be collecting far too much data for the purpose the operator seems to need. Even if the unnecessary data is just collected and then discarded, its initial all-encompassing capture looks both suspicious and poorly-conceived in terms of software security best-practice. (For instance, a cache of the logged data could be a goldmine for a handset thief, even if it doesn’t get sent to the operator).

Operators’ mistakes

  • Various operators have been using Carrier IQ (or equivalents) without clearly telling their customers what they were doing. A vague mention of “collecting data” in the fine-print of the terms and conditions is not enough.

Paranoia feeds the Media

  • Various journalists and bloggers seem to have sensationalised the story without full understanding of what the CIQ software was actually doing.
  • In these days of editorial and journalistic cut-backs, the mainstream media can be tempted to run with ‘scary’ tech stories based on stories getting attention online and via Twitter, and in timescales which make it hard to verify or unravel the technical twists and turns of complex stories.
  • Many consumers don’t read past the headline, and those that do may only read the first paragraph of an article, so any caveats or explanations that are actually carried in the detail are often lost.

The “fog of war”, industry panic and opportunism

  • The “fog of war” in terms of Carrier IQ rumours over the last few days has brought many operators and device vendors to deny publicly any involvement in using the technology. This can be seen as both a defensive response about a perceived risk to Xmas-season sales – but also as an opportunistic offensive move against some operators / vendors that are more directly embroiled in the “scandal”.
  • Android devices have software from multiple sources and in multiple layers – from Google, the handset vendor (e.g. Samsung, HTC) adding their own tweaks, operators adding customisations such as Carrier IQ or other elements and so forth. It can be difficult to work out exactly who is responsible for what functionality – hence some public statements from Carrier IQ executives expressing bemusement about the extent of data collected in this instance. (There is a suggestion that the “debug mode” of the software was the problem, not the normal usage mode). Generally, Apple and BlackBerry devices are more homogenous, although both companies do slightly-altered variants for favoured operator customers.

Result = Industry Failure

The net result is that the Carrier IQ brand is now seen as “toxic” in the eyes of many in the industry, irrespective of the benefits that some of its capabilities bring.

More worrying perhaps has been the inability of the industry as a whole to deal with these issues without panicking and resorting to a playground farce of finger-pointing.

It is at best careless, and in some cases illegal to treat personal data without appropriate care, protection and respect. But it is downright irresponsible to collectively risk the chance to develop a useful, legitimate and valuable ‘Personal Information Economy’ (PIE), which would benefit consumers, telcos, and other players alike, for the sake of some relatively minor corporate tit-for-tat in the media.

This is why we think our research on this topic, and the work we’ve been contributing to at the World Economic Forum on ‘Rethinking Personal Data’ is so important, and why consumer groups, telcos and other industry players need to get fully engaged to develop and adopt workable principles and practices on personal data.

Winners and Losers

In terms of losers, the obvious one is Carrier IQ itself, which seems to have made several poor decisions and has been overwhelmed by events – even if it has been unfortunate in the manner that everything has blown up, perhaps beyond the level which is truly proportionate.

Certain operators (notably Sprint) are likely to be doing some serious back-pedalling here. Samsung and HTC, as leading Android vendors have some questions to answer, but are likely to pass the buck to the operators and Carrier IQ itself. Huawei is also an (announced) user of Carrier IQ, notably for its mobile broadband devices such as USB dongles. The press release from February 2011 shows a strong awareness of privacy issues, as well as the notion of opt-in from individual users. Given the company’s troubles in getting its network products accepted by security authorities in the US in particular, this association might be problematic.

One beneficiary of this is likely to be Apple. Apple knows that it “owns” the whole software stack, so does not need to get embroiled in ‘finger pointing’ such as is going on between operators, Samsung, HTC and Carrier IQ. Apple is also not keen on customising the software stack for operators, and his episode will give it another excuse to push back against operators which want to be able to perform customisation.

BlackBerry is perhaps in the same situation, while Nokia/Microsoft are in a good position to take the moral high ground as well. (All this assumes, of course, that they don’t also have privacy skeletons in their closets – although both Apple and Google have dealt with such issues – much better – in the past).

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

  • What should Telcos and others do?
  • Putting the user in control of their data – the World Economic Forum (WEF) guidelines
  • Dos and Don’ts of implementing software that use personal data
  • How to address and respect privacy concerns
  • Managing personal data across the business
  • Using ‘Intelligent Software’
  • An explanation of the technical risks

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 15 page report in PDF format here. Non-Members, please subscribe here or please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, people and products referenced: 3GPP, Android, Apple, AT&T, BlackBerry, Carrier IQ, Electronic Frontier Foundation, Facebook, Google, HTC, Huawei, IntuWave, KPN, Microsoft, New Digital Economics, Nokia, Onavo, Openet, Phorm, Samsung, Sprint, Symbian, T-Mobile, Travis Eckhart, World Economic Forum (WEF).

Technologies and industry terms referenced: analytics, Deep Packet Inspection (DPI), Net Neutrality, personal data, smartphones, SMS, traffic detection function (TDF), WiFi.

Full Article: Google anchors its carrier off the coast of Telcoland

Introduction

Google has “pre-bid” for a large block of radio spectrum in the US’s 700MHz ex-TV band. They want it to be sublicensed for public access. So why would anyone want nonexclusive spectrum? Isn’t it a contradiction in terms? And what does Google plan to do with it?

googleship

Google: Emerging Backbone

It’s well-known that Google’s infrastructure development has involved quite a lot of telcolike activity. For some years, Google has been a major buyer of dark fibre, constructing its own private (and apparently IPv6) backbone between its data centres. This makes a lot of sense; the opex cost of one’s own fibre is not great, especially for a company with hordes of its own engineers and network administrators, and fibre is a long-lived asset.

Therefore, Google seems to be assuming that a substantial fraction of its wholesale transit bill is made up of other people’s profits. Assuming that they expect to be in business a long time yet, the depreciation cost of buying dark fibre is minimal; it beats filling Level 3’s pockets, or relying on AT&T when AT&T likes to talk about charging Google packets at higher rates.

But this is all backbone networking. Nobody would seriously suggest using 700MHz for backbone/backhaul; range and penetration are inversely correlated with frequency, which is why the 700s are so coveted, but throughput is positively correlated with frequency, which is why high-capacity point-to-point microwave links are 5GHz and above.

The Access Cartel

Google’s real strategic problem, vis-a-vis the US telcos, is their oligopoly of access networking. In fact, it’s more like a group of regional monopolies, and the same goes for cable-TV operators. Throughout Internet history, and indeed telecoms history, long lines has been more competitive than local; the reason being that value is geographically concentrated in long distance and bulk IP, but dispersed in local, and that therefore the capital required to build an alternative local loop is prohibitively large. If AT&T did go through with Ed Whitacre and Randall Stephenson’s bloodcurdling threats of last spring, there’s always Level 3, Savvis, and GoogleNet itself for the backbone – but at the local level, there’s no substitute for tubes.

Should the Bells gang up on Google, there’s also another option; apply YouTube tactics to the infrastructure. Having a big long lines fibre network gives Google the option of becoming a backbone operator itself, and announcing that it will peer with independent ISPs. These, of course, rely on leasing telco lines to reach their customers; at this point, Big Telecom would be faced with a choice of pulling the plug on millions of customers (and probably getting involved in a mass of antitrust litigation) or backing down.

But they might still be vicious enough to go through with it. What then? In the absence of anything like local-loop unbundling, British-style, you might think Google (and the wider Internet community) would run out of options. This is where radio comes in. The CAPEX to deploy a radio network is considerably less than digging up the roads, especially if you already have spectrum. And technological change is making it more so; WiMAX equipment looks likely to be dramatically cheaper than cellular. Better yet, Google doesn’t have to pay; sublicensing the spectrum would mean that independents, municipal networks, and others could finance their own radio-access network. Alternatively, Google’s interest in Wi-Fi sharing (Fon), femtocells (Ubiquisys), and metro-WLAN (Google’s project in Mountain View) suggests they might be thinking in terms of user-provided infrastructure.

Perhaps such a system would offer free connectivity to GoogleNet, but charge for anything further? That would match with the cost base – anything on your own network is cheap relative to anything you have to pay for in kind (peering) or cash (transit). And it would – dare we say it – be rather Telco 2.0? It is worth noting, though, that Google itself has so far been far keener on HovisNet (Internet with nowt taken out) access than anything like that.

Balance of TerrorTelco

Put another way, securing access to the radio spectrum is the remaining chunk of Google’s strategic triad; rather than land-based missiles, submarine-based missiles, and aircraft, though, it consists of dark fibre, peering with the dark fibre, and radio.

There’s a long way to go before this is tested. It’s possible that regulatory action, Net Neutrality legislation, or simply a realisation that IMS everywhere costs too much, will render the whole thing moot. And there’s also a counter-strategy before using the deterrent; Google has just announced a partnership with Sprint-Nextel to develop services on its big WiMAX network. S/N hasn’t been anywhere near as keen on building a neo-Bell world as the neo-Bells; after all, it is itself a product of the competitive era in telecoms. So we might want to include Sprintlink in the backbone section of Google’s deterrent, and its various radio systems in the access side.