Telco roadmap to net-zero carbon emissions: Why, when and how

Telcos’ role in reducing carbon emissions

There are over eighty telecoms operators globally that turn over $1 billion or more in revenues every year. As major companies, service providers (SPs) have a role to play in reducing global carbon emissions. So far, they have been behind the curve. In the Corporate Knights Global 100 of the world’s most sustainable corporations, only five of them are telcos (BT, KPN, Cogeco, Telus and StarHub) and none of them are in the top 30.

In this report, we explore the aims, visions and priorities of SPs in their journey to become more sustainable companies. More specifically, we have sought to understand the practical steps they are undertaking to reduce their carbon footprints. This includes discovering how they define, prioritise and drive initiatives as well as the governance and reporting used to determine their progress to ‘net-zero’.

Each SP’s journey is unique; we’ve explored how regional and market influences affect their journey and how different personas and influencers within the SP approach this topic. To do this, we have spoken to 40 individuals at SPs globally. Interviewees have varied, from corporate and social responsibility (CSR) representatives, to those responsible for the SP’s technology and enterprise strategies. This report reflects the strategies and ambitions we learnt about during these conversations.

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This report is informed by interviews from SPs globally

What do we mean by scope 1, 2 and 3?

Before diving in further, it’s important to align on the key terminology that all major SPs are drawing on to evaluate and report their sustainability efforts: in particular, how they disclose and commit to reducing their greenhouse gas emissions.

SPs divide their carbon emissions into scope 1, 2 and 3 – scope 3 is by far the most significant

For most SPs, scope 1 (e.g. emissions from the fleet of vehicles used to install equipment or perform maintenance tasks on base stations) and scope 2 (e.g. the electricity they purchase to run their networks) makes up less than 20% of their overall footprint. These emissions can be recorded and reported on accurately and there are established methodologies for doing so.

Scope 3, however, is where 80%+ of SP carbon emissions come from. This is because it captures the impact of the SP’s whole supply chain, e.g. the carbon emissions released from manufacturing the network equipment that they deploy. It also includes the carbon emissions arising from supplying customers with products and services that an SP sells, e.g. from shipping and de-commissioning consumer handsets or servers provided to enterprise customers.

Executive Summary
Table of Figures
Introduction
- What do we mean by scope 1, 2 and 3?
- Where are SPs in their sustainability journey?
- How does this differ by region?
- What’s covered in the rest of the report?
Procurement and sustainable supply chain
- Scope 1, 2 and 3: Where are procurement teams focused
- Current priorities
- Regional nuances
- Best and next practices
Networking
IT and facilities
Enterprise products and services
Key recommendations and conclusion

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NFV Deployment Tracker: Europe 2018 Update

Introduction

Welcome to the fourth update of the ‘NFV Deployment Tracker’

This is a brief extract from the report which is an accompaniment to the fourth update of the ‘NFV Deployment Tracker’ Excel spreadsheet (to the end of September 2018). The update covers all of the global market data. However, the analytical report focuses more narrowly on European deployments, set in global context. We review the progress made over the past year and analyse the drivers of the deployments observed and the challenges faced by leading European telcos.

Scope, definitions and importance of the data

Detailed explanation of the scope of the information provided in the Tracker, definitions of terms (including how we define a live ‘deployment’ in general, and definitions of frequently used NFV / SDN acronyms) and an account of why we think it is important to track the progress of NFV / SDN are provided in the first analytical report of the series – so we will not repeat them here.[1]

We define ‘European’ deployments as those that take place in Europe, whether:

in a single European market (e.g. a European incumbent deploying in its domestic market)
across multiple, designated European markets (e.g. telcos with opcos in several European countries) or on a Pan-European basis; or
on a global basis by telcos based in Europe.

Some of the deployments in category two may also extend to other global regions (e.g. Telefonica deployments across both its European and Latin American opcos) – in which case they are also included in the totals for those other regions. Conversely, some European deployments are undertaken by telcos based in other regions, e.g. operators with opcos in one or more European markets alongside their domestic market.

However, in this analysis we do not count global deployments by non-Europe-based telcos as ‘European’, even if they extend to parts of the European territory. We assign implementations of genuinely global NFV or SDN platforms to the telco’s region of origin, as this provides a more useful and verifiable way to track the development and commercialisation of NFV / SDN technology by telcos in each region of the world[2].

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Analysis of the European data set

NFV deployments grow in volume but not depth

We have gathered data on 126 live, commercial deployments of SDN and NFV in Europe between 2012 and September 2018. These were completed by 30 telco groups in 30 countries in the continent, together with Pan-European or global deployments carried out by some of the same European operators. The data on the deployments includes information on 260 known Virtual Network Functions (VNFs), functional sub-components and supporting infrastructure elements that have formed part of these deployments, i.e. an average of just over two components per deployment.

The volume of deployments has grown steadily year on year since 2012, as illustrated by the chart below:

Figure 4: Growth in the number of European SDN / NFV deployments per year, 2012 to September 2018

Source: STL Partners

Contents:

Executive Summary: SDN / NFV deployments grow in breadth if not depth
Introduction
Welcome to the fourth update of the ‘NFV Deployment Tracker’
Scope, definitions and importance of the data
Analysis of the European data set
NFV deployments grow in volume but not depth
Growth has been driven by proprietary vendor platforms and mobile cores
New operators enter the fray – but deployments by leading NFV pioneers slow down
Vendor trends: major players dominate the scene, with little impact as yet for open-source or telco self-builds
Conclusion: SDN / NFV deployments are getting broader but not deeper

Figures:

Figure 1: Growth in the number of European SDN / NFV deployments per year, 2012 to September 2018
Figure 2: Growth in the number of SDN / NFV deployments worldwide, 2014 to September 2018
Figure 3: SDN / NFV deployments by region in the first nine months of 2018
Figure 4: European deployments by primary purpose, 2014 to September 2018
Figure 5: Deployments of leading VNFs and functional components in Europe, 2014 to September 2018
Figure 6: Leading operators by number of SDN / NFV deployments in Europe
Figure 7: Leading vendors by total number of deployments in Europe
Figure 8: Vendor vs open-source / operator self-build components, global, 2015 to September 2018

[1] NFV Deployment Tracker: Europe (September 2017)

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Winning Strategies: Differentiated Mobile Data Services

Introduction

Verizon’s performance in the US

Our work on the US cellular market – for example, in the Disruptive Strategy: “Uncarrier” T-Mobile vs VZW, AT&T, and Free.fr and Free-T-Mobile: Disruptive Revolution or a Bridge Too Far? Executive Briefings – has identified that US carrier strategies are diverging. The signature of a price-disruption event we identified with regard to France was that industry-wide ARPU was falling, subscriber growth was unexpectedly strong (amounting to a substantial increase in penetration), and there was a shakeout of minor operators and MVNOs.

Although there are strong signs of a price war – for example, falling ARPU industry-wide, resumed subscriber growth, minor operators exiting, and subscriber-acquisition initiatives such as those at T-Mobile USA, worth as much as $400-600 in handset subsidy and service credit – it seems that Verizon Wireless is succeeding while staying out of the mire, while T-Mobile, Sprint, and minor operators are plunged into it, and AT&T may be going that way too. Figure 1 shows monthly ARPU, converted to Euros for comparison purposes.

Figure 1: Strategic divergence in the US

Source: STL Partners, themobileworld.com

We can also look at this in terms of subscribers and in terms of profitability, bringing in the cost side. The following chart, Figure 2, plots margins against subscriber growth, with the bubbles set proportional to ARPU. The base year 2011 is set to 100 and the axes are set to the average values. We’ve named the four quadrants that result appropriately.

Figure 2: Four carriers, four fates

Source: STL Partners

Clearly, you’d want to be in the top-right, top-performer quadrant, showing subscriber growth and growing profitability. Ideally, you’d also want to be growing ARPU. Verizon Wireless is achieving all three, moving steadily north-west and climbing the ARPU curve.

At the same time, AT&T is gradually being drawn into the price war, getting closer to the lower-right “volume first” quadrant. Deep within that one, we find T-Mobile, which slid from a defensive crouch in the upper-left into the hopeless lower-left zone and then escaped via its price-slashing strategy. (Note that the last lot of T-Mobile USA results were artificially improved by a one-off spectrum swap.) And Sprint is thrashing around, losing profitability and going nowhere fast.

The usual description for VZW’s success is “network differentiation”. They’re just better than the rest, and as a result they’re reaping the benefits. (ABI, for example, reckons that they’re the world’s second most profitable operator on a per-subscriber basis and the world’s most profitable in absolute terms.) We can restate this in economic terms, saying that they are the most efficient producer of mobile service capacity. This productive capacity can be used either to cut prices and gain share, or to increase quality (for example, data rates, geographic coverage, and voice mean-opinion score) at higher prices. This leads us to an important conclusion: network differentiation is primarily a cost concept, not a price concept.

If there are technical or operational choices that make network differentiation possible, they can be deployed anywhere. It’s also possible, though, that VZW is benefiting from structural factors, perhaps its ex-incumbent status, or its strong position in the market for backbone and backhaul fibre, or perhaps just its scale (although in that case, why is AT&T doing so much worse?). And another possibility often mooted is that the US is somehow a better kind of mobile market. Less competitive (although this doesn’t necessarily show up in metrics like the Herfindahl index of concentration), supposedly less regulated, and undoubtedly more profitable, it’s often held up by European operators as an example. Give us the terms, they argue, and we will catch up to the US in LTE deployment.

As a result, it is often argued in lobbying circles that European markets are “too competitive” or in need of “market repair”, and therefore, the argument runs, the regulator ought to turn a blind eye to more consolidation or at least accept a hollowing out of national operating companies. More formally, the prices (i.e. ARPUs) prevailing do not provide a sufficient margin over operators’ fixed costs to fund discretionary investment. If this was true, we would expect to find little scope for successful differentiation in Europe.

Further, if the “incumbent advantage” story was true of VZW over and above the strategic moves that it has made, we might expect to find that ex-incumbent, converged operators were pulling into the lead across Europe, benefiting from their wealth of access and backhaul assets. In this note, we will try to test these statements, and then assess what the answer might be.

How do European Operators compare?

We selected a clutch of European mobile operators and applied the same screen to identify what might be happening. In doing so we chose to review the UK, German, French, Swedish, and Italian markets jointly with the US, in an effort to avoid a purely European crisis-driven comparison.

Figure 3: Applying the screen to European carriers

Figure 3 Applying the screen to European carriers

Source: STL Partners

Our first observation is that the difference between European and American carriers has been more about subscriber growth than about profitability. The axes are set to the same values as in Figure 2, and the data points are concentrated to their left (showing less subscriber growth in Europe) not below them (less profitability growth).

Our second observation is that yes, there certainly are operators who are delivering differentiated performance in the EU. But they’re not the ones you might expect. Although the big converged incumbents, like T-Mobile Germany, have strong margins, they’re not increasing them and on the whole their performance is average only. Nor is scale a panacea, which brings us to our next observation.

Our third observation is that something is visible at this level that isn’t in the US: major opcos that are shrinking. Vodafone, not a company that is short of scale, gets no fewer than three of its OpCos into the lower-left quadrant. We might say that Vodafone Italy was bound to suffer in the context of the Italian macro-economy, as was TIM, but Vodafone UK is in there, and Vodafone Germany is moving steadily further left and down.

And our fourth observation is the opposite, significant growth. Hutchison OpCo 3UK shows strong performance growth, despite being a fourth operator with no fixed assets and starting with LTE after first-mover EE. Their sibling 3 Sweden is also doing well, while even 3 Italy was climbing up until the last quarter and it remains a valid price warrior. They are joined in the power quadrant with VZW by Telenor’s Swedish OpCo, Telia Mobile, and O2 UK (in the last two cases, only marginally). EE, for its part, has only marginally gained subscribers, but it has strongly increased its margins, and it may yet make it.

But if you want really dramatic success, or if you doubt that Hutchison could do it, what about Free? The answer is that they’re literally off the chart. In Figure 4, we add Free Mobile, but we can only plot the first few quarters. (Interestingly, since then, Free seems to be targeting a mobile EBITDA margin of exactly 9%.)

The distinction here is between the pure-play, T-Mobile-like price warriors in the lower right quadrant, who are sacrificing profitability for growth, and the group we’ve identified, who are improving their margins even as they gain subscribers. This is the signature of significant operational improvement, an operator that can move traffic more efficiently than its competitors. Because the data traffic keeps coming, ever growing at the typical 40% annual clip, it is necessary for any operator to keep improving in order to survive. Therefore, the pace of improvement marks operational excellence, not just improvement.

Figure 4: Free Mobile, a disruptive force that’s literally off the charts

Figure 4 Free Mobile a disruptive force thats literally off the charts

Source: STL Partners

We can also look at this at the level of the major multinational groups. Again, Free’s very success presents a problem to clarity in this analysis – even as part of a virtual group of independents, the ‘Indies’ in Figure 5, it’s difficult to visualise. T-Mobile USA’s savage price cutting, though, gets averaged out and the inclusion of EE boosts the result for Orange and DTAG. It also becomes apparent that the “market repair” story has a problem in that there isn’t a major group committed to hard discounting. But Hutchison, Telenor, and Free’s excellence, and Vodafone’s pain, stand out.

Figure 5: The differences are if anything more pronounced within Europe at the level of the major multinationals

Figure 5 The differences are if anything more pronounced within Europe at the level of the major multinationals

Source: STL Partners

In the rest of this report we analyse why and how these operators (3UK, Telenor Sweden and Free Mobile) are managing to achieve such differentiated performance, identify the common themes in their strategic approaches and the lessons from comparison to their peers, and the important wider consequences for the market.

Executive Summary
Introduction
Applying the Screen to European Mobile
Case study 1: Vodafone vs. 3UK
3UK has substantially more spectrum per subscriber than Vodafone
3UK has much more fibre-optic backhaul than Vodafone
How 3UK prices its service
Case study 2: Sweden – Telenor and its competitors
The network sharing issue
Telenor Sweden: heavy on the 1800MHz
Telenor Sweden was an early adopter of Gigabit Ethernet backhaul
How Telenor prices its service
Case study 3: Free Mobile
Free: a narrow sliver of spectrum, or is it?
Free Mobile: backhaul excellence through extreme fixed-mobile integration
Free: the ultimate in simple pricing
Discussion
IP networking metrics: not yet predictive of operator performance
Network sharing does not obviate differentiation
What is Vodafone’s strategy for fibre in the backhaul?
Conclusions

Figure 1: Strategic divergence in the US
Figure 2: Four carriers, four fates
Figure 3: Applying the screen to European carriers
Figure 4: Free Mobile, a disruptive force that’s literally off the charts
Figure 5: The differences are if anything more pronounced within Europe at the level of the major multinationals
Figure 6: Although Vodafone UK and O2 UK share a physical network, O2 is heading for VZW-like territory while VF UK is going nowhere fast
Figure 7: Strategic divergence in the UK
Figure 8: 3UK, also something of an ARPU star
Figure 9: 3UK is very different from Hutchison in Italy or even Sweden
Figure 10: 3UK has more spectrum on a per-subscriber basis than Vodafone
Figure 11: Vodafone’s backhaul upgrades are essentially microwave; 3UK’s are fibre
Figure 12: 3 Europe is more than coping with surging data traffic
Figure 13: 3UK service pricing
Figure 14: The Swedish market shows a clear winner…
Figure 15: Telenor.se is leading on all measures
Figure 16: How Swedish network sharing works
Figure 17: Network sharing does not equal identical performance in the UK
Figure 18: Although extensive network sharing complicates the picture, Telenor Sweden has a strong position, especially in the key 1800MHz band
Figure 19: If the customers want more data, why not sell them more data?
Figure 20: Free Mobile, network differentiator?
Figure 21: Free Mobile, the price leader as always
Figure 22: Free Mobile succeeds with remarkably little spectrum, until you look at the allocations that are actually relevant to its network
Figure 23: Free’s fixed-line network plans
Figure 24: Free leverages its FTTH for outstanding backhaul density
Figure 25: Free: value on 3G, bumper bundler on 4G
Figure 26: The carrier with the most IPv4 addresses per subscriber is…
Figure 27: AS_PATH length – not particularly predictive either
Figure 28: The buzzword count. “Fibre” beats “backhaul” as a concern
Figure 29: Are Project Spring’s targets slipping?

Apple Pay & Weve Fail: A Wake Up Call

Mobile payments: Now is the time

After many years of trials, pilots and uncertainty, the mobile industry is now making a major push to enable consumers to use their mobile phones to complete transactions in stores and other merchant venues. This year is shaping up to be a pivotal year with a number of major launches of commercial mobile payment services involving device makers, mobile operators, the payment networks and retailers.

Crucially, Apple’s move to add Near Field Communications (NFC) – a short-range communications technology – to iPhone 6 has vindicated the telecoms industry’s ongoing push to make NFC a de facto standard for mobile proximity payments. Although sceptics (including Apple executives) have previously derided the cost and complexity of the technology, Vodafone, Orange, China Mobile and other major telcos have continued to develop digital commerce propositions based on the technology.

Apple’s U-turn on NFC has changed the sentiment around the technology dramatically and given the industry a clear sense of direction. Just a year ago, research firms, such as Gartner and Juniper, scaled back their forecasts for the use of mobile handsets to complete transactions in-store, primarily because Apple didn’t include a NFC chip in the iPhone 5.

The widespread use of NFC in stores will add fuel to the mobile payments market which is already growing rapidly. Some analysts are predicting mobile phones will be used to make transactions totalling more than US$721 billion worldwide by 2017 up from US$235 billion in 2013 (see Figure 1). Note, these figures include both remote/online and proximity/in-store transactions.

Figure 1: Global mobile payment transaction forecasts

Source: Gartner; Goldman Sachs (via Statista)

Although most consumers are happy paying in store using either cash or payment cards, there are two major reasons why mobile payments are gaining momentum in an increasingly digital economy:

Consumers will want to be able to receive and redeem offers, vouchers and loyalty points using their smartphones. A mobile payment service would enable them to do this in a straightforward way.
Mobile payments will generate valuable transaction data that could and should (with the consumer’s permission) be used to make highly personalised recommendations and offers.

In other words, mobile payments are an essential element of a compelling integrated digital commerce proposition.

The role of telcos

Although the big picture for mobile payments is improving, telcos are in danger of being side-lined in developed countries in this strategically important sector. (NB See the STL Partners Strategy Report, Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players for a detailed study of how telcos could disrupt the key digital commerce brokers: Amazon, Google, Apple and Facebook.) In recent weeks, telcos’ efforts to lead the development of the mobile payments market suffered two major setbacks. Firstly, Apple’s fully formed mobile payments solution, called Apple Pay, effectively cuts telcos out of the mobile payments business in the Apple ecosystem.

Secondly, it emerged that Weve, the ground-breaking mobile commerce joint venture between U.K. mobile operators, has pulled back from plans to facilitate payments (in addition to its existing role of delivering targeted offers to UK mobile users). As a rare example of a well thought through collaborative venture between mobile operators, Weve had been a promising initiative that could provide a playbook for collaboration among mobile operators in other developed markets. But Weve’s change of course suggests that mobile operators are still struggling to collaborate effectively in the digital commerce market.

Rewriting the Mobile Payments Playbook

The Apple Pay proposition

Unveiled along with the iPhone 6 and the Apple Watch in September, Apple Pay is an end-to-end mobile payments proposition developed by Apple. On the device side, the basic technical architecture is similar to that advocated by major telcos via the industry group the GSMA – the short-range wireless technology Near Field Communications (NFC) is used to transfer payment data from the device to the point of sale terminal, while a secure element (a segregated memory chip) is used to protect sensitive information from being hacked or corrupted by third-party apps. However, rather than using telcos’ SIM cards as a secure element, Apple has added its own dedicated piece of hardware to the iPhone 6 and bolstered security further with a fingerprint scanner.

Already used to organise boarding passes, tickets, coupons and other collateral, Apple’s Passbook acts as the primary interface for the Apple Pay service. In other words, Passbook is now a fully-fledged mobile wallet. Thanks to its iTunes service, Apple already has hundreds of millions of consumers’ credit and debit card details on file. These consumers can add a compatible payment card stored on iTunes to Passbook simply by entering the card security code. Alternatively, they can use the iPhone camera to scan a payment card into a handset or type in the details manually. If the consumer stores more than one card, Passbook allows them to change the default payment card that appears when they are about to make a transaction.

Figure 2: Apple has made it easy to add payment cards to Passbook

Source: Apple

To make a payment in a store, the consumer simply holds their iPhone next to a NFC-enabled reader (attached to a point of sale terminal) with their finger on the handset’s Touch ID – the fingerprint reader embedded into the latest iPhones (see Figure 3). Unlike some mobile payment solutions, the consumer doesn’t need to open an app or enter a PIN code. The iPhone vibrates and beeps once the payment information has been sent. In this case, the payment information is protected by three layers of security: More than any existing mainstream mobile payments solution, including the SIM-secured NFC payments touted by telcos. These three layers are

Rather than transferring actual payment card details, Apple Pay transfers so-called tokens: a device-specific account number, together with a one-time security code.
These tokens are encrypted and stored on a secure element inside the iPhone – memory that is ring-fenced from access by any app other than Passbook. They aren’t stored on Apple’s servers, so are protected from online hacking.
The payment only happens if the Touch ID system recognises the consumer’s fingerprint, proving the consumer’s was in the store.

Figure 3: The consumer is authenticated via iPhone’s fingerprint scanner

Source: Apple

If the consumer is using an Apple Watch, which also has a NFC chip and a secure element, they hold the face of the watch near the reader and double-click a button on the side of the watch. As the range of NFC is just a few centimetres, consumers will have to hold the face of their watch against the reader. This step doesn’t sound very intuitive and may cause confusion in stores.

Again, a vibration and beep confirm the transfer of the payment information. Note, the watch needs to have been linked to an iPhone with a compatible payment card stored in a Passbook app. Although Apple Watch isn’t equipped with the Touch ID fingerprint scanner in the iPhone, it does have alternative security mechanisms built in. Apple Watch is equipped with a biosensor that can detect when the watch is taken off and lock its payment function, according to a report by NFC World. Apparently, consumers will have to enter a code to re-enable the payment function when they put the handset back on. These extra steps suggest making payments using Apple Watch will be more cumbersome and potentially less secure than using an iPhone 6 to make a payment.

Figure 4: You double-click a button to confirm a payment with Apple Watch

Source: Apple

Apple Pay can also be used to make online payments in compatible apps and this is how many consumers are likely to try the service initially. Apple said that several merchants, including Disney, Starbucks, Target and Uber, have adapted their apps to accept Apple Pay transactions (see Figure 5). In this case, the consumer selects Apple Pay and then places their finger on the Touch ID interface. Note, enabling online payments is an area that has been neglected by many telcos in developed countries targeting this market, but support for remote payments is an essential component of any holistic digital commerce solution – consumers won’t want to use different digital wallets online and offline.

Figure 4: Various apps allow consumers to make payments via Apple Pay

Source: Apple

If a consumer loses their iPhone, then they can use the Find My iPhone service to put their device into “lost mode” or they can opt to wipe the handset. The next time the iPhone goes online, it will be frozen or wiped, depending on the option the consumer selected. Note, this feature negates one of the advantages of using a SIM card, which can also be wiped remotely by a telco, as a secure element.

Although the consumer’s most recent purchases will be viewable in Passbook, Apple says it won’t save consumer’s transaction information. This is in stark contrast to the approach taken by Apple’s own iTunes service and Amazon, for example, which uses a consumer’s transaction history to make personalised product and service recommendations. With Apple Pay, it seems a consumer will only be able to check historic transactions by looking at their bank statements.

The big guns in the U.S. financial services industry are supporting Apple Pay – consumers can use credit and debit cards from the three major payment networks, American Express, MasterCard and Visa, issued by a range of leading banks, including Bank of America, Capital One Bank, Chase, Citi and Wells Fargo, representing 83% of credit card purchase volume in the US, according to Apple, which says additional banks, including Barclaycard, Navy Federal Credit Union, PNC Bank, USAA and U.S. Bank, are also planning to sign up. This is a much greater level of participation than that achieved by Softcard (formerly known as Isis), the mobile commerce joint venture between U.S. telcos AT&T Mobile, Verizon Wireless and T-Mobile USA (see next section for more on Softcard).

Apple says that more than 220,000 bricks and mortar stores will accept Apple Pay transactions. Some of the participating retailers include leading brands, such as McDonalds, Stables, Subway, ToysRUs and Walgreens. However, the retailers in the Merchant Customer Exchange (MCX) consortium, which is developing its own mobile commerce proposition, have not signed up to accept Apple Pay. These retailers include major players, such as WalMart, Best-Buy, 7-11, Gap and Sears. (See next section for more on MCX). Although only a handful of apps are supporting Apple Pay today, that number is likely to grow rapidly, as many consumers will find it easier to press the Touch ID than to type in a password.

To access the rest of this 28 page Telco 2.0 Report in full, including…

Introduction
Executive Summary
Mobile payments: Now is the time
Rewriting the Mobile Payments Playbook
The Apple Pay proposition
Will Apple Pay be a success?
The implications of Apple Pay for telcos
The Weve U-Turn
How Weve broke new ground
Weve’s shareholders break ranks
Weve pulls back
Conclusions and recommendations

…and the following report figures…

Figure 1: Forecasts for the value of mobile proximity payments in the U.S
Figure 2: Apple has made it easy to add payment cards to Passbook
Figure 3: The consumer is authenticated via the iPhone’s fingerprint scanner
Figure 4: You double-click a button to confirm a payment with Apple Watch
Figure 5: Various apps allow consumers to make payments via Apple Pay
Figure 6: MCX’s approach to security
Figure 7: Apple’s shrinking share of the global smartphone market
Figure 8: The Softcard wallet enables consumers to filter offers by their location
Figure 9: The virtuous circle Weve was aiming to create
Figure 10: Everything Everywhere’s Cash on Tap app is clunky to use

Connected Car: Key Trends, Players and Battlegrounds

Introduction: Putting the Car in Context

A growing mythology around M2M and the Internet of Things

The ‘Internet of Things’, which is sometimes used interchangeably with ‘machine-to-machine’ communication (M2M), is not a new idea: as a term, it was coined by Kevin Ashton as early as 1999. Although initially focused on industrial applications, such as the use of RFID for tagging items in the supply chain, usage of the term has now evolved to more broadly describe the embedding of sensors, connectivity and (to varying degrees) intelligence into traditionally ‘dumb’ environments. Figure 1 below outlines some of the service areas potentially disrupted, enabled or enhanced by the Internet of Things (IoT):

Figure 1: Selected Internet of Things service areas

Source: STL Partners

To put the IoT in context, one can conceive of the Internet as having experienced three key generations to date. The first generation dates back to the 1970s, which involved ARPANET and the interconnection of various military, government and educational institutions around the United States. The second, beginning in the 1990s, can be thought of as the ‘AOL phase’, with email and web browsing becoming mainstream. Today’s generation is dominated by ‘mobile’ and ‘social’, with the two inextricably linked. The fourth generation will be signified by the arrival of the Internet of Things, in which the majority of internet traffic is generated by ‘things’ rather than humans.

The enormous growth of networks, cheaper connectivity, proliferation of smart devices, more efficient wireless protocols (e.g. ZigBee) and various government incentives/regulations have led many to confidently predict that the fourth generation of the Internet – the Internet of Things – will soon be upon us. Visions include the “Internet of Everything” (Cisco) or a “connected future” with 50 billion connected devices by 2020 (Ericsson). Similarly rapid growth is also forecasted by the MIT Technology Review, as detailed below:

Figure 2: Representative connected devices forecast, 2010-20

Source: MIT Technology Review

This optimism is reflected in broader market excitement, which has been intensified by such headline-grabbing announcements as Google’s $3.2bn acquisition of Nest Labs (discussed in depth in the Connected Home EB) and Apple’s recently announced Watch. Data extracted from Google Trends (Figure 3) shows that the popularity of ‘Internet of Things’ as a search term has increased fivefold since 2012:

Figure 3: The popularity of ‘Internet of Things’ as a search term on Google since 2004

Source: Google Trends

However, the IoT to date has predominantly been a case study in hype vs. reality. Technologists have argued for more than a decade about when the army of connected devices will arrive, as well as what we should be calling this phenomenon, and with this a mythology has grown around the Internet of Things: widespread disruption was promised, but it has not yet materialised. To many consumers the IoT can sound all too far-fetched: do I really need a refrigerator with a web browser?

Yet for every ‘killer app’ that wasn’t we are now seeing inroads being made elsewhere. Smart meters are being deployed in large numbers around the world, wearable technology is rapidly increasing in popularity, and many are hailing the connected car as the ‘next big thing’. Looking at the connected car, for example, 2013 saw a dramatic increase in the amount of VC funding it received:

Figure 4: Connected car VC activity, 2010-13

Source: CB Insights Venture Capital Database

The Internet of Things is potentially an important phenomenon for all, but it is of particular relevance to mobile network operators (MNOs) and network equipment providers. Beyond providing cellular connectivity to many of these devices, the theory is that MNOs can expand across the value chain and generate material and sustainable new revenues as their core business continues to decline (for more, see the ‘M2M 2.0: New Approaches Needed’ Executive Briefing).

Nevertheless, the temptation is always to focus on the grandiose but less well-defined opportunities of the future (e.g. smart grids, smart cities) rather than the less expansive but more easily monetised ones of today. It is easy to forget that MNOs have been active to varying degrees in this space for some time: for example, O2 UK had a surprisingly large business serving fleet operators with the 9.6Kbps Mobitex data network for much of the 2000s. To further substantiate this context, we will address three initial questions:

Is there a difference between M2M and the Internet of Things?
Which geographies are currently seeing the most traction?
Which verticals are currently seeing the most traction?

These are now addressed in turn…

Executive Summary
Introduction: Putting the Car in Context
A growing mythology around M2M and the Internet of Things
The Internet of Things: a vision of what M2M can become
M2M today: driven by specific geographies and verticals
Background: History and Growth Drivers
History: from luxury models to mass market deployment
Growth drivers: macroeconomics, regulation, technology and the ‘connected consumer’
Ecosystem: Services and Value Chain
Service areas: data flows vs. consumer value proposition
Value chain: increasingly complex with two key battlegrounds
Markets: Key Geographies Today
Conclusions

Figure 1: Selected Internet of Things service areas
Figure 2: Representative connected devices forecast, 2010-20
Figure 3: The popularity of ‘Internet of Things’ as a search term on Google since 2004
Figure 4: Connected car VC activity, 2010-13
Figure 5: Candidate differences between M2M and the Internet of Things
Figure 6: Selected leading MNOs by M2M connections globally
Figure 7: M2M market maturity vs. growth by geographic region
Figure 8: Global M2M connections by vertical, 2013-20
Figure 9: Global passenger car profit by geography, 2007-12
Figure 10: A connected car services framework
Figure 11: Ericsson’s vision of the connected car’s integration with the IoT
Figure 12: The emerging connected car value chain
Figure 13: Different sources of in-car connectivity
Figure 14: New passenger car sales vs. consumer electronics spending by market
Figure 15: Index of digital content spending (aggregate and per capita), 2013
Figure 16: OEM embedded modem shipments by region, 2014-20
Figure 17: Telco 2.0™ ‘two-sided’ telecoms business model

Free-T-Mobile: Disruptive Revolution or a Bridge Too Far?

Free’s Bid for T-Mobile USA

The future of the US market and its 3rd and 4th operators has been a long-running saga. The market, the world’s richest, remains dominated by the duopoly of AT&T and Verizon Wireless. It was long expected that Softbank’s acquisition of Sprint heralded disruption, but in the event, T-Mobile was simply quicker to the punch.

Since the launch of T-Mobile’s “uncarrier” price-war strategy, we have identified signs of a “Free Mobile-like” disruption event, for example, substantial net-adds for the disruptor, falling ARPUs, a shakeout of MVNOs and minor operators, and increased industry-wide subscriber growth. However, other key indicators like a rapid move towards profitability by the disruptor are not yet in evidence, and rather than industry-wide deflation, we observe divergence, with Verizon Wireless increasing its ARPU, revenues, and margins, while AT&T’s are flat, Sprint’s flat to falling, and T-Mobile’s plunging.

This data is summarised in Figure 1.

Figure 1: Revenue and margins in the US. The duopoly is still very much with us

Source: STL Partners, company filings

Compare and contrast Figure 2, which shows the fully developed disruption in France.

Figure 2: Fully-developed disruption. Revenue and margins in France

Source: STL Partners, company filings

T-Mobile: the state of play in Q2 2014

When reading Figure 1, you should note that T-Mobile’s Q2 2014 accounts contain a negative expense item of $747m, reflecting a spectrum swap with Verizon Wireless, which flatters their margin. Without it, the operating margin would be 2.99%, about a third of Sprint’s. Poor as this is, it is at least positive territory, after a Q1 in which T-Mobile lost money. It is not quite true to say that T-Mobile only made it to profitability thanks to the one-off spectrum deal; excluding it, the carrier would have made $215m in operating income in Q2, a $243m swing from the $28m net loss in Q1. This is explained by a $223m narrowing of T-Mobile’s losses on device sales, as shown in Figure 2, and may explain why the earnings release makes no mention of profits instead of adjusted EBITDA despite it being a positive quarter.

Figure 3: T-Mobile’s return to underlying profitability – caused by moderating its smartphone bonanza somewhat

Source: STL Partners, company filings

T-Mobile management likes to cite its ABPU (Average Billings per User) metric in preference to ARPU, which includes the hire-purchase charges on device sales under its quick-upgrade plans. However, as Figure 3 shows, this is less exciting than it sounds. The T-Mobile management story is that as service prices, and hence ARPU, fall in order to bring in net-adds, payments for device sales “decoupled” from service plans will rise and take up the slack. They are, so far, only just doing so. Given that T-Mobile is losing money on device pricing, this is no surprise.

Executive Summary
Free’s Bid for T-Mobile USA
T-Mobile: the state of play in Q2 2014
Free-Mobile: the financials
Indicators of a successful LBO
Free.fr: a modus operandi for disruption
Surprise and audacity
Simple products
The technical edge
Obstacles to the Free modus operandi
Spectrum
Fixed-mobile synergy
Regulation
Summary
Two strategic options
Hypothesis one: change the circumstances via a strategic deal with the cablecos
Hypothesis two: 80s retro LBO
Problems that bite whichever option is taken
The other shareholders
Free’s management capacity and experience
Conclusion

Figure 1: Revenue and margins in the US. The duopoly is still very much with us
Figure 2: Fully-developed disruption. Revenue and margins in France
Figure 3: T-Mobile’s return to underlying profitability – caused by moderating its smartphone bonanza somewhat
Figure 4: Postpaid ARPU falling steadily, while ABPU just about keeps up
Figure 5: T-Mobile’s supposed “decoupling” of devices from service has extended $3.5bn of credit to its customers, rising at $1bn/quarter
Figure 6: Free’s valuation of T-Mobile is at the top end of a rising trend
Figure 7: Example LBO
Figure 8: Free-T-Mobile in the context of notable leveraged buyouts
Figure 9: Free Mobile’s progress towards profitability has been even more impressive than its subscriber growth

Connected Home: Telcos vs Google (Nest, Apple, Samsung, +…)

Introduction

On January 13th 2014, Google announced its acquisition of Nest Labs for $3.2bn in cash consideration. Nest Labs, or ‘Nest’ for short, is a home automation company founded in 2010 and based in California which manufactures ‘smart’ thermostats and smoke/carbon monoxide detectors. Prior to this announcement, Google already had an approximately 12% equity stake in Nest following its Series B funding round in 2011.

Google is known as a prolific investor and acquirer of companies: during 2012 and 2013 it spent $17bn on acquisitions alone, which was more than Apple, Microsoft, Facebook and Yahoo combined (at $13bn) . Google has even been known to average one acquisition per week for extended periods of time. Nest, however, was not just any acquisition. For one, whilst the details of the acquisition were being ironed out Nest was separately in the process of raising a new round of investment which implicitly valued it at c. $2bn. Google, therefore, appears to have paid a premium of over 50%.

This analysis can be extended by examining the transaction under three different, but complementary, lights.

Google + Nest: why it’s an interesting and important deal

Firstly, looking at Nest’s market capitalisation relative to its established competitors suggests that its long-run growth prospects are seen to be very strong

At the time of the acquisition, estimates placed Nest as selling 100k of its flagship product (the ‘Nest Thermostat’) per month . With each thermostat retailing at c. $250 each, this put its revenue at approximately $300m per annum. Now, looking at the ratio of Nest’s market capitalisation to revenue compared to two of its established competitors (Lennox and Honeywell) tells an interesting story:

Figure 1: Nest vs. competitors’ market capitalisation to revenue

Source: Company accounts, Morgan Stanley

Such a disparity suggests that Nest’s long-run growth prospects, in terms of both revenue and free cash flow, are believed to be substantially higher than the industry average.

Secondly, looking at Google’s own market capitalisation suggests that the capital markets see considerable value in (and synergies from) its acquisition of Nest

Prior to the deal’s announcement, Google’s share price was oscillating around the $560 mark. Following the acquisition, Google’s share price began averaging closer to $580. On the day of the announcement itself, Google’s share price increased from $561 to $574 which, crucially, reflected a $9bn increase in market capitalisation . In other words, the value placed on Google by the capital markets increased by nearly 300% of the deal’s value. This is shown in Figure 2 below:

Figure 2: Google’s share price pre- and post-Nest acquisition

Source: Google Finance

This implies that the capital markets either see Google as being well positioned to add unique value to Nest, Nest as being able to strongly complement Google’s existing activities, or both.

Thirdly, viewing the Nest acquisition in the context of Google’s historic and recent M&A activity shows both its own specific financial significance and the changing face of Google’s acquisitions more generally

At $3.2bn, the acquisition of Nest represents Google’s second largest acquisition of all time. The largest was its purchase of Motorola Mobility in 2011 for $12.5bn, but Google has since reached a deal to sell the majority of its assets (excluding its patent portfolio) to Lenovo for $2.9bn. In other words, Nest is soon to become Google’s largest active, inorganic investment. Google’s ten largest acquisitions, as well as some smaller but important ones, are shown in Figure 3 below:

Figure 3: Selected acquisitions by Google, 2003-14

Source: Various

Beyond its size, the Nest acquisition also continues Google’s recent trend of acquiring companies seemingly less directly related to its core business. For example, it has been investing in artificial intelligence (DeepMind Technologies), robotics (Boston Dynamics, Industrial Perception, Redwood Robotics) and satellite imagery (Skybox Imaging).

Three questions raised by Google’s acquisition of Nest

George Geis, a professor at UCLA, claims that Google develops a series of metrics at an early stage which it later uses to judge whether or not the acquisition has been successful. He further claims that, according to these metrics, Google on average rates two-thirds of its acquisitions as successful. This positive track record, combined with the sheer size of the Nest deal, suggests that the obvious question here is also an important one:

What is Nest’s business model? Why did Google spend $3.2bn on Nest?

Nest’s products, the Nest Thermostat and the Nest Protect (smoke/carbon monoxide detector), sit within the relatively young space referred to as the ‘connected home’, which is defined and discussed in more detail here. One natural question following the Nest deal is whether Google’s high-profile involvement and backing of a (leading) company in the connected home space will accelerate its adoption. This suggests the following, more general, question:

What does the Nest acquisition mean for the broader connected home market?

Finally, there is a question to be asked around the implications of this deal for Telcos and their partners. Many Telcos are now active in this space, but they are not alone: internet players (e.g. Google and Apple), big technology companies (e.g. Samsung), utilities (e.g. British Gas) and security companies (e.g. ADT) are all increasing their involvement too. With different strategies being adopted by different players, the following question follows naturally:

What does the Nest acquisition mean for telcos?

Executive Summary
Introduction
Google + Nest: why it’s an interesting and important deal
Three questions raised by Google’s acquisition of Nest
Understanding Nest and Connected Homes
Nest: reinventing everyday objects to make them ‘smart’
Nest’s future: more products, more markets
A general framework for connected home services
Nest’s business model, and how Google plans to get a return on its $3.2bn investment
Domain #1: Revenue from selling Nest devices is of only limited importance to Google
Domain #2: Energy demand response is a potentially lucrative opportunity in the connected home
Domain #3: Data for advertising is important, but primarily within Google’s broader IoT ambitions
Domain #4: Google also sees Nest as partial insurance against IoT-driven disruption
Domain #5: Google is pushing into the IoT to enhance its advertising business and explore new monetisation models
Implications for Telcos and the Connected Home
The connected home is happening now, but customer experience must not be overlooked
Telcos can employ a variety of monetisation strategies in the connected home
Conclusions

Figure 1: Nest vs. competitors’ market capitalisation relative to revenue
Figure 2: Google’s share price, pre- and post-Nest acquisition
Figure 3: Selected acquisitions by Google, 2003-14
Figure 4: The Nest Thermostat and Protect
Figure 5: Consumer Electronics vs. Electricity Spending by Market
Figure 6: A connected home services framework
Figure 7: Nest and Google Summary Motivation Matrix
Figure 8: Nest hardware revenue and free cash flow forecasts, 2014-23
Figure 9: PJM West Wholesale Electricity Prices, 2013
Figure 10: Cooling profile during a Rush Hour Rewards episode
Figure 11: Nest is attempting to position itself at the centre of the connected home
Figure 12: US smartphone market share by operating system (OS), 2005-13
Figure 13: Google revenue breakdown, 2013
Figure 14: Google – Generic IoT Strategy Map
Figure 15: Connected device forecasts, 2010-20
Figure 16: Connected home timeline, 1999-Present
Figure 17: OnFuture EMEA 2014: The recent surge in interest in the connected home is due to?
Figure 18: A spectrum of connected home strategies between B2C and B2B2C (examples)
Figure 19: Building, buying or partnering in the connected home (examples)
Figure 20: Telco 2.0™ ‘two-sided’ telecoms business model

Google’s Big, Big Data Battle

The challenges to Google’s core business

Although Google is the world’s leading search engine by some distance, its pre-eminence is more fragile than its first appears. As Google likes to remind anti-trust authorities, its competitors are just a click away. And its primary competitors are some of the most powerful and well-financed companies in the world – Apple, Amazon, Facebook and Microsoft. As these companies, as well as specialist service providers, accumulate more and more data on consumers, Google’s position as the leading broker of online advertising is under threat in several, inter-related, ways:

Google’s margins are being squeezed, as competition intensifies. Increasingly experienced web users are using specialist search engines, such as Amazon (shopping), Expedia (travel) and moneysupermarket.com (financial services), or going direct to the sites they need, thereby circumventing Google’s search engine and the advertising brokered by Google. This trend is exacerbated by Google’s ongoing lockout from the vast amount of content being generated by Facebook’s social network. As the Internet matures, general-purpose web search may become yesterday’s business.
The rise of the app-based Internet: As consumers increasingly access the Internet via mobile devices, they are making greater use of apps and less use of browsers and, by extension, conventional search engines. Apps are popular on mobile devices because they are designed to take the consumer straight to the content they are looking for, rather than requiring them to navigate around the web using small and fiddly on-screen keyboards. Moreover, Apple, the leading provider of smartphones and tablets to the affluent, is seeking to relegate, and where feasible, remove, Google’s apps and services in its ecosystem.
Android forks: Android, an extraordinarily successful ‘Trojan Horse’ for Google’s apps and services, is the market leading operating system for mobile devices, but Google’s control of Android is patchy. Some device makers are integrating their own apps into a forked variant of this open-source platform. Amazon and Nokia are among those who have stripped Google’s search, maps, mail and store apps from their variants of the Android operating system, reducing the data that Google can gather on their customers. At the same time, Samsung, the world’s largest handset vendor, is straining at Google’s Android leash.
Quality dilution: As Google is the world’s dominant search engine, it is the prime target for so-called content farms that produce large volumes of low quality content in an effort to rank highly in Google’s search results and thereby attract traffic and advertising.
Regulatory scrutiny: Despite a February 2014 settlement with the European Commission concerning its search practices, Google remains in the regulatory spotlight. Competition authorities across the world continue to fret about Google’s market power and its ability to influence what people look at on the Internet.

1. Google’s margin squeeze

Price deflation

Google, the company that facilitated massive deflation across advertising, content, e-commerce, and mobile operating systems, is itself suffering from the deflationary environment of the Internet. Although revenue and net income are still growing, margins are shrinking (see Figure 2). Google is still growing because it is adding volume. However, there is strong evidence that its pricing power is being eroded.

Figure 2: Google margins are steadily falling as volumes continue to rise

Source: Google filings

To put this in the context of its Silicon Valley peers, Figure 3 shows the same data for Google, Facebook, and Apple using a trend line covering the 2009 to 2013 period for each company. Note, that we have used a log scale to compare three companies of very different size. Apple saw growth in both revenue and operating margins until 2013, when it hit a difficult patch, although a big product launch might fix that at any time. Facebook has grown revenues enormously, but went through a traumatic 2012 as the shift to mobile hit it. While all this drama went on, Google has grown steadily, while seeing its margins eroded.

Figure 3: Google’s operating margins are now below those of Apple and Facebook

Source: SEC filings

What are the factors behind Google’s declining operating margin? We believe the main drivers are:

The amount Google can charge per click is falling – buyers get more ads per buck.
The cost of acquiring ad inventory is increasing.

Cheaper ads

As Figure 4 shows, Google continues to drive ad volume (paid clicks), but ad rates (cost per click) are falling steadily. The average cost-per-click on Google websites and Google Network Members’ websites decreased approximately 8% from 2012 to 2013. We think this is primarily due to intensifying competition, particularly from Facebook. However, Google attributes the decline to “various factors, such as the introduction of new products as well as changes in property mix, platform mix and geographical mix, and the general strengthening of the U.S. dollar compared to certain foreign currencies.” The second quarter of 2014 saw paid clicks rise 2% quarter-on-quarter, while the cost per click was flat.

Figure 4: The cost per click is declining in lockstep with rising volume

Source: Google filings

Introduction
Executive Summary
The challenges to Google’s core business
1. Google’s margin squeeze
2. The rising importance of mobile apps
3. Android forks
4. Quality dilution
5. Regulatory scrutiny
Google’s strategy – get on the front foot
Google Now – turning search on its head
Reactive search becomes more proactive
Voice input
Anticipating wearables, connected cars and the Internet of Things
Searching inside apps
Evaluating Google Now
1. The marketplace
2. Develop compelling service offerings
3. The value network
4. Technology
5. Finance – the high-level business model

Figure 1: How Google is neutralising threats and pursuing opportunities
Figure 2: Google margins are steadily falling as volumes continue to rise
Figure 3: Google’s operating mar gins are now below those of Apple and Facebook
Figure 4: The cost per click is declining in lockstep with rising volume
Figure 5: Rising distribution costs are driving Google’s TAC upwards
Figure 6: Google’s revenues are increasingly coming from in-house sites and apps
Figure 7: R&D is the fastest-growing ad-acquisition cost in absolute terms
Figure 8: Daily active users of Facebook generating content out of Google’s reach
Figure 9: Google is still the most popular destination on the Internet
Figure 10: In the U.S., usage of desktop web sites is falling
Figure 11: Google’s declining share of mobile search advertising in the U.S.
Figure 12: Google’s lead on the mobile web is narrower than on the desktop web
Figure 13: Top smartphone apps in the U.S. by average unique monthly users
Figure 14: For Google, its removal from the default iOS Maps app is a major blow
Figure 15: On Android, Google owns four of the five most used apps in the U.S.
Figure 16: The resources Google needs to devote to web spam are rising over time
Figure 17: Google, now genuinely global.
Figure 18: A gap in the market: Timely proactive recommendations
Figure 19: Google’s search engine is becoming proactive
Figure 20: The ongoing evolution of Google Search into a proactive, recommendations service
Figure 21: The Telco 2.0 Business Model Framework
Figure 22: Amazon Local asks you to set preferences
Figure 23: Google Now’s cards and the information they use
Figure 24: Android dominates the global smartphone market
Figure 25: Samsung has about 30% of the global smartphone market
Figure 26: Google – not quite the complete Internet company
Figure 27: Google’s strategic response

Launchers: a new relevance point for telcos?

Introduction

Improving engagement has many benefits for an operator. It can help change customers’ perceptions which in turn can reduce churn and increase customer acquisition as well as opening up new avenues for telcos to offer additional services.

In this note, we analyse the opportunity for mobile operators within a new control point in the digital ecosystem – the ‘launcher’ application for Android devices. We present an overview of the opportunity, assessing what the product is and what’s at stake as well as providing an overview of the key players in this space. The report then focuses on how telcos may choose to play in this area, analysing the different strategies and their suitability to different types of operators.

The Telco Dilemma

Telcos’ engagement with and knowledge of their customers has been marginalized in the smartphone world. Whilst telcos still understand how customers use the traditional components of their mobile device (voice calls; messaging; data usage), the main digital disruptors now determine how users primarily engage with their devices – they control:

App portals (Apple; Android)
Search (Google)
E/M-commerce (Amazon; eBay; PayPal)
Content services (YouTube; Yahoo)
OTT comms (Facebook; WhatsApp; Twitter)

For more analysis on how telcos can understand and deal with these disruptors please read Telco 2.0’s analysis on this topic (Digital Commerce 2.0: Disrupting the Californian Giants [Oct 2013]; Dealing with the ‘Disruptors’ [Nov 2011]).

Engagement in the digital ecosystem is clearly worth a significant amount of money, both in terms of direct revenue as well as the indirect revenue associated with additional customer insight and knowledge. The valuations of companies such as Facebook and WhatsApp show the value premium that user engagement attracts. As mobile devices become even more prevalent and important in consumers’ lives, this engagement will become even more valuable.

In order for telcos to capitalize on this, they need to change their engagement strategy and gain more visibility and understanding of their customers. The industry largely understands this concept and a number or attempts have been made by telcos to wrestle back control of the device. Operators with bold ambitions have tried to compete head on, offering competing platforms to the OTT players (e.g. Vodafone 360) whilst others have attempted to position themselves within a segment of the digital ecosystem. Despite best efforts, these initiatives have so far met with mixed success.

One new area of opportunity for those looking to regain relevance on the mobile device (and one that is proving very popular right now) is the Android launcher.

The Opportunity

What is a launcher?

A launcher is a customizable home screen for your Android device. It allows a user to arrange their apps in more creative ways, resulting in a more personalized, engaging mobile experience.

Launchers can range from sophisticated 3D menus, to themed displays, to simplified app categorization/ grouping. For example, Yahoo’s Aviate launcher changes the apps it displays based on the time of day and the location of the user (e.g. at work, on the go, at home) – meaning that the user can more easily access the right apps to match their current situation.

Figure 1: Popular launchers in the marketplace

Left: The Next Launcher’s 3D display – Source: Google Play; Middle: Buzz’s multi-themed launcher – Source: Drippler; Right: Aviate’s app re-categorization launcher – Source: Android Community

Launchers are more than just new ‘skins’ for the device. They alter how users interact with their device through app organization as well as through additional tools & services, including:

Relevant content on nearby places (e.g. Aviate incorporates Foursquare)
Helpful information, including travel & traffic advice (e.g. Google Now)
Inbuilt app & content recommendation engines (e.g. EverythingMe)

This combination of customizable app organization and easily accessible additional services is proving to be a compelling proposition for Android users.

Will launchers really take off?

The concept of a customizable home screen is not new but with advancements in smartphone operating systems and device displays this customization is starting to take off. A recent report by Flurry found that there were over 4,500 of these launcher-type apps and that launcher usage in Q1 2014 was greater than the total for all of 2013.

Figure 2: Number of Launcher Application Sessions (Quarterly data)

Source: Flurry Analytics

The evidence shows that launchers are beginning to take off. They are offering value to the customer, through customization and additional services, as well as providing a new tool for companies to engage with and understand the behavior of the user.

What’s at stake?

Launchers represent a new control point in the digital ecosystem, shaping how (and potentially what) information is presented to the user. Gaining insight into how a customer uses their phone combined with a contextual understanding of their situation has the potential to create significant value.

Different launcher applications provide different functionality, with some focusing more on themes and customization and others focusing more on developing customer insight to simplify display and discovery on the mobile device. These models have different methods of monetization, including:

Freemium models – where a more basic version is free and the premium version is a paid for download
App discovery – where apps are recommended to the user (and the recommendation may be paid for)
Sponsored search – where the first result(s) are paid for

Of these models and monetization methods we believe contextual search and discovery are the most interesting. Mobile has revolutionized how people find information and use digital services – however, mobile usage is built around apps (86% of time spent on mobile devices is spent inside applications – Source: Techcrunch). The difficulty with (discovering) apps is that they are largely standalone services – they cannot be crawled or indexed easily and there is little cross-app integration. This makes relevant apps (and the content within them) harder to find through search alone.

Launchers can attempt to organize apps in a similar way that search engines organize the web, providing a more user-friendly app discovery mechanism. Launchers can gain significant insight into user behaviour (e.g. the type of apps downloaded and time spent using apps) – this information can be used to recommend apps and other content and services to the user in an integrated way, allowing launchers to circumvent search within app portals and to make recommendations (for apps and content) to a user when they have demonstrated a preference for it. Indeed, EverythingMe, an innovative launcher company, have suggested that “users are searching less and less, but still expect results and discovery. We felt the best solution would be a contextual search product in the form of an Android launcher.”

As the mobile device becomes more important and central to the user’s life, controlling this interface and engagement has the potential to generate very valuable insight. This personalized discovery tool, as long it remains transparent and offers a tangible benefit to the customer, could revolutionize how value is derived from mobile applications.

The Players

This potential opportunity has not gone unnoticed with a number of the big digital players recently entering this space. However, as this technology and engagement strategy is in its infancy, no-one has taken a clear lead in the race.

Facebook

Facebook, in April of last year, released Facebook Home, a launcher dedicated to putting social communication above all other applications on the mobile device (through cover feed, always-on chat heads and improved notifications). Despite a lot of initial fanfare, its performance has not been overly strong (only 0.5% of Facebook’s 1 billion monthly active users have installed it and it has received negative user feedback). Notwithstanding this slow start the company still sees this platform as a critical opportunity, with Facebook’s engineering Director, Jocelyn Goldfein, saying earlier this year in an interview with Venturebeat, “we’re still very bullish on Home…we’re believers in Home; we believe it’s going to be valuable for users”. Facebook’s continued resilience and flexibility when adapting to mobile could lead to a redesigned launcher that (social media) users’ value.

We believe that the relative failure of Facebook Home shows an important lesson for would be Launcher owners: the goal should be to optimize the customer experience and not maximize the placement of services for your own or others’ brands. After all, who wants the first screen on their phone to be in someone else’s control? This represents an opportunity for telcos, who don’t necessarily have the imperative to dominate the home screen with ads or today’s feed, and can therefore entertain a more intuitive and customer-oriented design. [NB It is also important that telcos attempt to learn from their own past errors: the ‘walled garden’ is not a successful model for most.]

For a more detailed assessment of Facebook Home’s service please see Facebook Home: what is the impact? [April 2013]

Executive Summary
Introduction
The Telco Dilemma
The Opportunity
What is a launcher?
Will launchers really take off?
What’s at stake?
The Players
Facebook
Google
Yahoo
Twitter
Other Popular Launchers
The Answer (for Telcos)?
Why should Telco’s play?
How can Telco’s play?
Conclusion

Figure 1: Popular launchers in the marketplace
Figure 2: Number of Launcher Application Sessions (Quarterly data)
Figure 3: Assessing Telcos’ options to enter the launcher market

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…

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

Faster than Facebook: how to speed up digital transformation and disruptive innovation

Introduction

The OnFuture EMEA 2014 Executive Brainstorm took place from 11-12 June in London. The Brainstorm brought together 150 senior executives from across telecoms, technology, media, retail, financial services, and other sectors. It covered:

Digital Innovation, Transformation and Disruption
Future Communications and Enterprise Mobility
The Internet of Things and In-Store Retail
Accelerating Innovation in the Telecoms and Technology Sectors
Eight Innovation Showcases
Mobile Brand Engagement and Mobile Music and Video
Digital Identity and Mobile Data Analytics
The Future of Mobile Marketing

This document is a high-level summary of our main take-outs from the events, and includes some headline outcomes from the participants’ votes. Full details of votes and presentations are available to participants and subscribers to the Telco 2.0 Executive Briefing Service

Our thanks to our event sponsors:

A growing sense of urgency and activity

Whereas even 2 years ago, we felt as if we were still talking to a telecoms industry largely seeming in denial of the massive threat to its existing business, at the OnFuture EMEA 2014 Brainstorm there was a clear shift towards people and companies working on real activities to change their businesses, innovate, and find new sources of growth.

Urgency: but as a result of lateness?

Nonetheless, following a string of painful results announcements from European telcos (see Telco 1.0: Death Slide Starts in Europe), it was perhaps unsurprising to see that most of the execs felt that their companies were generally significantly ‘behind the curve’ of adapting to the digital era (see Figure 1).

Figure 1: 78% said their companies were ‘behind the curve’ – or worse

Source: Participant Vote, OnFuture EMEA 2014 Executive Brainstorm

Some positive signs

On a slightly more optimistic note, we were pleasantly surprised by the number of participants saying their companies had specific programmes to drive change and innovation, and our research and indeed discussions with the audience showed that this included a number of major European telcos (see Figure 2).

Figure 2: Some progress on specific actions on disruptive innovation

Source: Participant Vote, OnFuture EMEA 2014 Executive Brainstorm

However, as we’ve seen in detail in the Telco 2.0 Transformation Index research, the degree of progress that has been made even by some of the leading telcos still lags what we would prescribe (see Figure 3).

Figure 3: Analysis of transformation progress of leading telcos

Source: Telco 2.0 Transformation Index and STL Partners’ presentation to OnFuture EMEA 2014

The enemy within

On a day that London’s black cab drivers went on strike against the entry of the Uber app in the UK, it wasn’t a huge surprise to see that ‘existing business’ was cited as the biggest obstacle to change (see Figure 4)

Figure 4: ‘Existing Business’ remains the biggest obstacle to innovation

Source: Participant Vote, OnFuture EMEA 2014 Executive Brainstorm

In the brainstorming session following the initial presentations (and including these votes), participants chose an industry to consider, and then brainstormed the key issues they faced, and the priority actions to resolve them. A slight majority of the tables chose the telecoms industry, or a telco within it, and the others chose Retail, Airlines, Taxis, Netflix, and Insurance.

A common theme was addressing how to create a culture and environment for change. The use of appropriate management incentives, KPIs and metrics were discussed at some length (for more on this, see What can be learned and done? page 11).

Other issues discussed included achieving a balance between creating innovation and running the core business, building successful partnerships, and how to ‘compete against free’ in content oriented industries such as Pay TV.

Executive Summary
Introduction
A growing sense of urgency and activity
Urgency: but as a result of lateness?
Some positive signs
The enemy within
Facebook’s internal recipe for speed
What can be learned and done?
How to be a bit more Facebook
How to be a bit more Telco 2.0
Key lesson from Cisco: integration is critical
Highlights from other votes
Software Defined Networking (SDN)
Future Communications Services
Enterprise Mobility
Connected Homes
Mobile Payments / Commerce
Mobile Brand Engagement
Digital / Mobile Entertainment
Data and Identity Services

Figure 1: 78% said their companies were ‘behind the curve’ – or worse
Figure 2: Some progress on specific actions on disruptive innovation
Figure 3: Analysis of transformation progress of leading telcos
Figure 4: ‘Existing Business’ remains the biggest obstacle to innovation
Figure 5: Facebook’s impressive mobile transformation
Figure 6: How to (realistically) be more Facebook-ish
Figure 7: STL Partners’ recommendations to accelerate transformation
Figure 8: Cisco regards integration ‘as important as the deal itself’

Triple-Play in the USA: Infrastructure Pays Off

Introduction

In this note, we compare the recent performance of three US fixed operators who have adopted contrasting strategies and technology choices, AT&T, Verizon, and Comcast. We specifically focus on their NGA (Next-Generation Access) triple-play products, for the excellent reason that they themselves focus on these to the extent of increasingly abandoning the subscriber base outside their footprints. We characterise these strategies, attempt to estimate typical subscriber bundles, discuss their future options, and review the situation in the light of a “Deep Value” framework.

A Case Study in Deep Value: The Lessons from Apple and Samsung

Deep value strategies concentrate on developing assets that will be difficult for any plausible competitor to replicate, in as many layers of the value chain as possible. A current example is the way Apple and Samsung – rather than Nokia, HTC, or even Google – came to dominate the smartphone market.

It is now well known that Apple, despite its image as a design-focused company whose products are put together by outsourcers, has invested heavily in manufacturing throughout the iOS era. Although the first generation iPhone was largely assembled from proprietary parts, in many ways it should be considered as a large-scale pilot project. Starting with the iPhone 3GS, the proportion of Apple’s own content in the devices rose sharply, thanks to the acquisition of PA Semiconductor, but also to heavy investment in the supply chain.

Not only did Apple design and pilot-produce many of the components it wanted, it bought them from suppliers in advance to lock up the supply. It also bought machine tools the suppliers would need, often long in advance to lock up the supply. But this wasn’t just about a tactical effort to deny componentry to its competitors. It was also a strategic effort to create manufacturing capacity.

In pre-paying for large quantities of components, Apple provides its suppliers with the capital they need to build new facilities. In pre-paying for the machine tools that will go in them, they finance the machine tool manufacturers and enjoy a say in their development plans, thus ensuring the availability of the right machinery. They even invent tools themselves and then get them manufactured for the future use of their suppliers.

Samsung is of course both Apple’s biggest competitor and its biggest supplier. It combines these roles precisely because it is a huge manufacturer of electronic components. Concentrating on its manufacturing supply chain both enables it to produce excellent hardware, and also to hedge the success or failure of the devices by selling componentry to the competition. As with Apple, doing this is very expensive and demands skills that are both in short supply, and sometimes also hard to define. Much of the deep value embedded in Apple and Samsung’s supply chains will be the tacit knowledge gained from learning by doing that is now concentrated in their people.

The key insight for both companies is that industrial and user-experience design is highly replicable, and patent protection is relatively weak. The same is true of software. Apple had a deeply traumatic experience with the famous Look and Feel lawsuit against Microsoft, and some people have suggested that the supply-chain strategy was deliberately intended to prevent something similar happening again.

Certainly, the shift to this strategy coincides with the launch of Android, which Steve Jobs at least perceived as a “stolen product”. Arguably, Jobs repeated Apple’s response to Microsoft Windows, suing everyone in sight, with about as much success, whereas Tim Cook in his role as the hardware engineering and then supply-chain chief adopted a new strategy, developing an industrial capability that would be very hard to replicate, by design.

Three Operators, Three Strategies

AT&T

The biggest issue any fixed operator has faced since the great challenges of privatisation, divestment, and deregulation in the 1980s is that of managing the transition from a business that basically provides voice on a copper access network to one that basically provides Internet service on a co-ax, fibre, or possibly wireless access network. This, at least, has been clear for many years.

AT&T is the original telco – at least, AT&T likes to be seen that way, as shown by their decision to reclaim the iconic NYSE ticker symbol “T”. That obscures, however, how much has changed since the divestment and the extremely expensive process of mergers and acquisitions that patched the current version of the company together. The bit examined here is the AT&T Home Solutions division, which owns the fixed-line ex-incumbent business, also known as the merged BellSouth and SBC businesses.

AT&T, like all the world’s incumbents, deployed ADSL at the turn of the 2000s, thus getting into the ISP business. Unlike most world incumbents, in 2005 it got a huge regulatory boost in the form of the Martin FCC’s Comcast decision, which declared that broadband Internet service was not a telecommunications service for regulatory purposes. This permitted US fixed operators to take back the Internet business they had been losing to independent ISPs. As such, they were able to cope with the transition while concentrating on the big-glamour areas of M&A and wireless.

As the 2000s advanced, it became obvious that AT&T needed to look at the next move beyond DSL service. The option taken was what became U-Verse, a triple-play product which consists of:

Either ADSL, ADSL2+, or VDSL, depending on copper run length and line quality
Plus IPTV
And traditional telephony carried over IP.

This represents a minimal approach to the transition – the network upgrade requires new equipment in the local exchanges, or Central Offices in US terms, and in street cabinets, but it does not require the replacement of the access link, nor any trenching.

This minimisation of capital investment is especially important, as it was also decided that U-Verse would not deploy into areas where the copper might need investment to carry it. These networks would eventually, it was hoped, be either sold or closed and replaced by wireless service. U-Verse was therefore, for AT&T, in part a means of disposing of regulatory requirements.

It was also important that the system closely coupled the regulated domain of voice with the unregulated, or at least only potentially regulated, domain of Internet service and the either unregulated or differently regulated domain of content. In many ways, U-Verse can be seen as a content first strategy. It’s TV that is expected to be the primary replacement for the dwindling fixed voice revenues. Figure 1 shows the importance of content to AT&T vividly.

Figure 1: U-Verse TV sales account for the largest chunk of Telco 2.0 revenue at AT&T, although M2M is growing fast

Telco 2 UVerse TV sales account for the largest chunk of Telco 2 revenue at ATandT although M2M is growing fast.png

Source: Telco 2.0 Transformation Index

This sounds like one of the telecoms-as-media strategies of the late 1990s. However, it should be clearly distinguished from, say, BT’s drive to acquire exclusive sports content and to build up a brand identity as a “channel”. U-Verse does not market itself as a “TV channel” and does not buy exclusive content – rather, it is a channel in the literal sense, a distributor through which TV is sold. We will see why in the next section.

The US TV Market

It is well worth remembering that TV is a deeply national industry. Steve Jobs famously described it as “balkanised” and as a result didn’t want to take part. Most metrics vary dramatically across national borders, as do qualitative observations of structure. (Some countries have a big public sector broadcaster, like the BBC or indeed Al-Jazeera, to give a basic example.) Countries with low pay-TV penetration can be seen as ones that offer greater opportunities, it being usually easier to expand the customer base than to win share from the competition (a “blue ocean” versus a “red sea” strategy).

However, it is also true that pay-TV in general is an easier sell in a market where most TV viewers already pay for TV. It is very hard to convince people to pay for a product they can obtain free.

In the US, there is a long-standing culture of pay-TV, originally with cable operators and more recently with satellite (DISH and DirecTV), IPTV or telco-delivered TV (AT&T U-Verse and Verizon FiOS), and subscription OTT (Netflix and Hulu). It is also a market characterised by heavy TV usage (an average household has 2.8 TVs). Out of the 114.2 million homes (96.7% of all homes) receiving TV, according to Nielsen, there are some 97 million receiving pay-TV via cable, satellite, or IPTV, a penetration rate of 85%. This is the largest and richest pay-TV market in the world.

In this sense, it ought to be a good prospect for TV in general, with the caveat that a “Sky Sports” or “BT Sport” strategy based on content exclusive to a distributor is unlikely to work. This is because typically, US TV content is sold relatively openly in the wholesale market, and in many cases, there are regulatory requirements that it must be provided to any distributor (TV affiliate, cable operator, or telco) that asks for it, and even that distributors must carry certain channels.

Rightsholders have backed a strategy based on distribution over one based on exclusivity, on the principle that the customer should be given as many opportunities as possible to buy the content. This also serves the interests of advertisers, who by definition want access to as many consumers as possible. Hollywood has always aimed to open new releases on as many cinema screens as possible, and it is the movie industry’s skills, traditions, and prejudices that shaped this market.

As a result, it is relatively easy for distributors to acquire content, but difficult for them to generate differentiation by monopolising exclusive content. In this model, differentiation tends to accrue to rightsholders, not distributors. For example, although HBO maintains the status of being a premium provider of content, consumers can buy it from any of AT&T, Verizon, Comcast, any other cable operator, satellite, or direct from HBO via an OTT option.

However, pay-TV penetration is high enough that any new entrant (such as the two telcos) is committed to winning share from other providers, the hard way. It is worth pointing out that the US satellite operators DISH and DirecTV concentrated on rural customers who aren’t served by the cable MSOs. At the time, their TV needs weren’t served by the telcos either. As such, they were essentially greenfield deployments, the first pay-TV propositions in their markets.

The biggest change in US TV in recent times has been the emergence of major new distributors, the two RBOCs and a range of Web-based over-the-top independents. Figure 2 summarises the situation going into 2013.

Figure 2: OTT video providers beat telcos, cablecos, and satellite for subscriber growth, at scale

OTT video providers beat telcos cablecos and satellite for subscriber growth at scale

Source: Telco 2.0 Transformation Index

The two biggest classes of distributors saw either a marginal loss of subscribers (the cablecos) or a marginal gain (satellite). The two groups of (relatively) new entrants, as you’d expect, saw much more growth. However, the OTT players are both bigger and much faster growing than the two telco players. It is worth pointing out that this mostly represents additional TV consumption, typically, people who already buy pay-TV adding a Netflix subscription. “Cord cutting” – replacing a primary TV subscription entirely – remains rare. In some ways, U-Verse can be seen as an effort to do something similar, upselling content to existing subscribers.

Competing for the Whole Bundle – Comcast and the Cable Industry

So how is this option doing? The following chart, Figure 3, shows that in terms of overall service ARPU, AT&T’s fixed strategy is delivering inferior results than its main competitors.

Figure 3: Cable operators lead the way on ARPU. Verizon, with FiOS, is keeping up

Cable operators lead the way on ARPU. Verizon, with FiOS, is keeping up

Source: Telco 2.0 Transformation Index

The interesting point here is that Time Warner Cable is doing less well than some of its cable industry peers. Comcast, the biggest, claims a $159 monthly ARPU for triple-play customers, and it probably has a higher density of triple-players than the telcos. More representatively, they also quote a figure of $134 monthly average revenue per customer relationship, including single- and double-play customers. We have used this figure throughout this note. TWC, in general, is more content-focused and less broadband-focused than Comcast, having taken much longer to roll out DOCSIS 3.0. But is that important? After all, aren’t cable operators all about TV? Figure 4 shows clearly that broadband and voice are now just as important to cable operators as they are to telcos. The distinction is increasingly just a historical quirk.

Figure 4: Non-video revenues – i.e. Internet service and voice – are the driver of growth for US cable operators

Non video revenues ie Internet service and voice are the driver of growth for US cable operators Source: NCTA data, STL Partners

As we have seen, TV in the USA is not a differentiator because everyone’s got it. Further, it’s a product that doesn’t bring differentiation but does bring costs, as the rightsholders exact their share of the selling price. Broadband and voice are different – they are, in a sense, products the operator makes in-house. Most have to buy the tools (except Free.fr which has developed its own), but in any case the operator has to do that to carry the TV.

The differential growth rates in Figure 4 represent a substantial change in the ISP industry. Traditionally, the Internet engineering community tended to look down on cable operators as glorified TV distribution systems. This is no longer the case.

In the late 2000s, cable operators concentrated on improving their speeds and increasing their capacity. They also pressed their vendors and standardisation forums to practice continuous improvement, creating a regular upgrade cycle for DOCSIS firmware and silicon that lets them stay one (or more) jumps ahead of the DSL industry. Some of them also invested in their core IP networking and in providing a deeper and richer variety of connectivity products for SMB, enterprise, and wholesale customers.

Comcast is the classic example of this. It is a major supplier of mobile backhaul, high-speed Internet service (and also VoIP) for small businesses, and a major actor in the Internet peering ecosystem. An important metric of this change is that since 2009, it has transitioned from being a downlink-heavy eyeball network to being a balanced peer that serves about as much traffic outbound as it receives inbound.

The key insight here is that, especially in an environment like the US where xDSL unbundling isn’t available, if you win a customer for broadband, you generally also get the whole bundle. TV is a valuable bonus, but it’s not differentiating enough to win the whole of the subscriber’s fixed telecoms spend – or to retain it, in the presence of competitors with their own infrastructure. It’s also of relatively little interest to business customers, who tend to be high-value customers.

Executive Summary
Introduction
A Case Study in Deep Value: The Lessons from Apple and Samsung
Three Operators, Three Strategies
AT&T
The US TV Market
Competing for the Whole Bundle – Comcast and the Cable Industry
Competing for the Whole Bundle II: Verizon
Scoring the three strategies – who’s winning the whole bundles?
SMBs and the role of voice
Looking ahead
Planning for a Future: What’s Up Cable’s Sleeve?
Conclusions

Figure 1: U-Verse TV sales account for the largest chunk of Telco 2.0 revenue at AT&T, although M2M is growing fast
Figure 2: OTT video providers beat telcos, cablecos, and satellite for subscriber growth, at scale
Figure 3: Cable operators lead the way on ARPU. Verizon, with FiOS, is keeping up
Figure 4: Non-video revenues – i.e. Internet service and voice – are the driver of growth for US cable operators
Figure 5: Comcast has the best pricing per megabit at typical service levels
Figure 6: Verizon is ahead, but only marginally, on uplink pricing per megabit
Figure 7: FCC data shows that it’s the cablecos, and FiOS, who under-promise and over-deliver when it comes to broadband
Figure 7: Speed sells at Verizon
Figure 8: Comcast and Verizon at parity on price per megabit
Figure 9: Typical bundles for three operators. Verizon FiOS leads the way
Figure 12: The impact of learning by doing on FTTH deployment costs during the peak roll-out phase

Telco 1.0: Death Slide Starts in Europe

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

Very weak Q1 2014 results from Telefonica and other European players

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

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

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

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

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

Telco 2.0 Telefonica Group Revenue

Source: Telefonica, STL Partners analysis

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

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

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

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

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

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

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

Global mobile telcoms revenue

Source: STL Partners

Upturn in telecoms industry fortunes after 2016 dependent on current activities

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

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

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

Telefonica leads Vodafone in more attractive markets

Introduction

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

The full analysis of each player covers 5 domains:

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

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

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

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

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

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

1. Economic environment & digital maturity:

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

2. Regulation:

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

3. Competition and positioning:

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

4. Customers and customer engagement:

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

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

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

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

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

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

The Tale of the Tape

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

Overview: Vodafone operates in more competitive markets and has weaker market positions than Telefonica
Telefonica is more exposed to fast-growing emerging markets
Vodafone has only 30% of revenue in emerging markets…
…compared with over 50% for Telefonica
Telefonica’s Latin American markets have grown much quicker than Vodafone’s Emerging ones…
…and Telefonica’s European markets have contracted at a similar rate to Vodafone’s Developed ones
Telefonica’s has a stronger competitive position than Vodafone in the most important markets
Overall, Telefonica has a stronger market position and is performing better in more attractive markets than Vodafone

Figure 1: Telefonica and Vodafone Market Attractiveness and Competitive Positioning – The Tale of the Tape
Figure 2: Vodafone subscribers and revenue
Figure 3: Telefonica subscribers and revenue
Figure 4: Vodafone and Telefonica mobile market growth
Figure 5: Market shares in top 5 revenue-generating markets
Figure 6: Market Positioning Maps
Figure 7: Overall, Telefonica enjoys a 56% advantage over Vodafone using STL Partners’ Market Attractiveness-Competitive Situation (MACS) score
Figure 8: Portfolio Strategy Maps
Figure 9: Telefonica’s performance is broadly neutral and Vodafone’s negative using STL Partners’ EBITDA Margin-Market Share (EMMS) score

Facing Up to the Software-Defined Operator

Introduction

At this year’s Mobile World Congress, the GSMA’s eccentric decision to split the event between the Fira Gran Via (the “new Fira”, as everyone refers to it) and the Fira Montjuic (the “old Fira”, as everyone refers to it) was a better one than it looked. If you took the special MWC shuttle bus from the main event over to the developer track at the old Fira, you crossed a culture gap that is widening, not closing. The very fact that the developers were accommodated separately hints at this, but it was the content of the sessions that brought it home. At the main site, it was impressive and forward-thinking to say you had an app, and a big deal to launch a new Web site; at the developer track, presenters would start up a Web service during their own talk to demonstrate their point.

There has always been a cultural rift between the “netheads” and the “bellheads”, of which this is just the latest manifestation. But the content of the main event tended to suggest that this is an increasingly serious problem. Everywhere, we saw evidence that core telecoms infrastructure is becoming software. Major operators are moving towards this now. For example, AT&T used the event to announce that it had signed up Software Defined Networks (SDN) specialists Tail-F and Metaswitch Networks for its next round of upgrades, while Deutsche Telekom’s Terastream architecture is built on it.

This is not just about the overused three letter acronyms like “SDN and NFV” (Network Function Virtualisation – see our whitepaper on the subject here), nor about the duelling standards groups like OpenFlow, OpenDaylight etc., with their tendency to use the word “open” all the more the less open they actually are. It is a deeper transformation that will affect the device, the core network, the radio access network (RAN), the Operations Support Systems (OSS), the data centres, and the ownership structure of the industry. It will change the products we sell, the processes by which we deliver them, and the skills we require.

In the future, operators will be divided into providers of the platform for software-defined network services and consumers of the platform. Platform consumers, which will include MVNOs, operators, enterprises, SMBs, and perhaps even individual power users, will expect a degree of fine-grained control over network resources that amounts to specifying your own mobile network. Rather than trying to make a unitary public network provide all the potential options as network services, we should look at how we can provide the impression of one network per customer, just as virtualisation gives the impression of one computer per user.

To summarise, it is no longer enough to boast that your network can give the customer an API. Future operators should be able to provision a virtual network through the API. AT&T, for example, aims to provide a “user-defined network cloud”.

Elements of the Software-Defined Future

We see five major trends leading towards the overall picture of the ‘software defined operator’ – an operator whose boundaries and structure can be set and controlled through software.

1: Core network functions get deployed further and further forwards

Because core network functions like the Mobile Switching Centre (MSC) and Home Subscriber Server (HSS) can now be implemented in software on commodity hardware, they no longer have to be tied to major vendors’ equipment deployed in centralised facilities. This frees them to migrate towards the edge of the network, providing for more efficient use of transmission links, lower latency, and putting more features under the control of the customer.

Network architecture diagrams often show a boundary between “the Internet” and an “other network”. This is called the ‘Gi interface’ in 3G and 4G networks. Today, the “other network” is usually itself an IP-based network, making this distinction simply that between a carrier’s private network and the Internet core. Moving network functions forwards towards the edge also moves this boundary forwards, making it possible for Internet services like content-delivery networking or applications acceleration to advance closer to the user.

Increasingly, the network edge is a node supporting multiple software applications, some of which will be operated by the carrier, some by third-party services like – say – Akamai, and some by the carrier’s customers.

2: Access network functions get deployed further and further back

A parallel development to the emergence of integrated small cells/servers is the virtualisation and centralisation of functions traditionally found at the edge of the network. One example is so-called Cloud RAN or C-RAN technology in the mobile context, where the radio basebands are implemented as software and deployed as virtual machines running on a server somewhere convenient. This requires high capacity, low latency connectivity from this site to the antennas – typically fibre – and this is now being termed “fronthaul” by analogy to backhaul.

Another example is the virtualised Optical Line Terminal (OLT) some vendors offer in the context of fixed Fibre to the home (FTTH) deployments. In these, the network element that terminates the line from the user’s premises has been converted into software and centralised as a group of virtual machines. Still another would be the increasingly common “virtual Set Top Box (STB)” in cable networks, where the TV functions (electronic programming guide, stop/rewind/restart, time-shifting) associated with the STB are actually provided remotely by the network.

In this case, the degree of virtualisation, centralisation, and multiplexing can be very high, as latency and synchronisation are less of a problem. The functions could actually move all the way out of the operator network, off to a public cloud like Amazon EC2 – this is in fact how Netflix does it.

3: Some business support and applications functions are moving right out of the network entirely

If Netflix can deliver the world’s premier TV/video STB experience out of Amazon EC2, there is surely a strong case to look again at which applications should be delivered on-premises, in the private cloud, or moved into a public cloud. As explained later in this note, the distinctions between on-premises, forward-deployed, private cloud, and public cloud are themselves being eroded. At the strategic level, we anticipate pressure for more outsourcing and more hosted services.

4: Routers and switches are software, too

In the core of the network, the routers that link all this stuff together are also turning into software. This is the domain of true SDN – basically, the effort to substitute relatively smart routers with much cheaper switches whose forwarding rules are generated in software by a much smarter controller node. This is well reported elsewhere, but it is necessary to take note of it. In the mobile context, we also see this in the increasing prevalence of virtualised solutions for the LTE Enhanced Packet Core (EPC), Mobility Management Entity (MME), etc.

5: Wherever it is, software increasingly looks like the cloud

Virtualisation – the approach of configuring groups of computers to work like one big ‘virtual computer’ – is a key trend. Even when, as with the network devices, software is running on a dedicated machine, it will be increasingly found running in its own virtual machine. This helps with management and security, and most of all, with resource sharing and scalability. For example, the virtual baseband might have VMs for each of 2G, 3G, and 4G. If the capacity requirements are small, many different sites might share a physical machine. If large, one site might be running on several machines.

This has important implications, because it also makes sharing among users easier. Those users could be different functions, or different cell sites, but they could also be customers or other operators. It is no accident that NEC’s first virtualised product, announced at MWC, is a complete MVNO solution. It has never been as easy to provide more of your carrier needs yourself, and it will only get easier.

The following Huawei slide (from their Carrier Business Group CTO, Sanqi Li) gives a good visual overview of a software-defined network.

Figure 1: An architecture overview for a software-defined operator

Source: Huawei

The Challenges of the Software-Defined Operator
Three Vendors and the Software-Defined Operator
Ericsson
Huawei
Cisco Systems
The Changing Role of the Vendors
Who Benefits?
Who Loses?
Conclusions
Platform provider or platform consumer
Define your network sharing strategy
Challenge the coding cultural cringe

Figure 1: An architecture overview for a software-defined operator
Figure 2: A catalogue for everything
Figure 3: Ericsson shares (part of) the vision
Figure 4: Huawei: “DevOps for carriers”
Figure 5: Cisco aims to dominate the software-defined “Internet of Everything”

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

Several different CSP organisation designs for Telco 2.0 Service Innovation

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

Telco 2.0 strategy is a key driver of organisation design

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

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

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

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

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

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

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

Figure 1: Capabilities needed for different Telco 2.0 strategies

Fig1 Capabilities need for different Telco 2.0 Strategies

Source: STL Partners/Telco 2.0

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

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

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

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

Telco 2.0 Service Providers are adopting different organisation designs

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

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

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

Fig 2 Organisation design models for Telco 2.0 Service Innovation

Fig 2 Organisation design models for Telco 2.0 Service Innovation

Source: STL Partners/Telco 2.0

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

Fig 3 Organisation design approaches of 9 CSPs across 4 regions

Fig 3 Organisation design approaches of 9 CSPs across 4 regions

Source: STL Partners/Telco 2.0

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

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

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

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

Five Principles for developing a Telco 2.0 New Business Unit

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

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

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

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

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

The importance of setting Telco 2.0 goals…

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

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

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

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

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

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

…and the shortcomings of traditional frameworks

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

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

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

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

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

Figure 1: Strategic positioning framework for 5 CSP groups

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

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

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

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

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

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

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

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

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

Figure 3: Ooredoo enjoying the strongest mobile market growth

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

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

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

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

Telcos’ role in reducing carbon emissions

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This report is informed by interviews from SPs globally

What do we mean by scope 1, 2 and 3?

SPs divide their carbon emissions into scope 1, 2 and 3 – scope 3 is by far the most significant

Table of Contents

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Introduction

Welcome to the fourth update of the ‘NFV Deployment Tracker’

Scope, definitions and importance of the data

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Analysis of the European data set

NFV deployments grow in volume but not depth

Figure 4: Growth in the number of European SDN / NFV deployments per year, 2012 to September 2018

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Introduction

Verizon’s performance in the US

Figure 1: Strategic divergence in the US

Figure 2: Four carriers, four fates

How do European Operators compare?

Figure 3: Applying the screen to European carriers

Figure 4: Free Mobile, a disruptive force that’s literally off the charts

Figure 5: The differences are if anything more pronounced within Europe at the level of the major multinationals

Mobile payments: Now is the time

Figure 1: Global mobile payment transaction forecasts

The role of telcos

Rewriting the Mobile Payments Playbook

The Apple Pay proposition

Figure 2: Apple has made it easy to add payment cards to Passbook

Figure 3: The consumer is authenticated via iPhone’s fingerprint scanner

Figure 4: You double-click a button to confirm a payment with Apple Watch

Figure 4: Various apps allow consumers to make payments via Apple Pay

Introduction: Putting the Car in Context

A growing mythology around M2M and the Internet of Things

Figure 1: Selected Internet of Things service areas

Figure 2: Representative connected devices forecast, 2010-20

Figure 3: The popularity of ‘Internet of Things’ as a search term on Google since 2004

Figure 4: Connected car VC activity, 2010-13

Free’s Bid for T-Mobile USA

Figure 1: Revenue and margins in the US. The duopoly is still very much with us

Figure 2: Fully-developed disruption. Revenue and margins in France

T-Mobile: the state of play in Q2 2014

Figure 3: T-Mobile’s return to underlying profitability – caused by moderating its smartphone bonanza somewhat

Introduction

Google + Nest: why it’s an interesting and important deal

Figure 1: Nest vs. competitors’ market capitalisation to revenue

Figure 2: Google’s share price pre- and post-Nest acquisition

Figure 3: Selected acquisitions by Google, 2003-14

Three questions raised by Google’s acquisition of Nest

The challenges to Google’s core business

1. Google’s margin squeeze

Price deflation

Figure 2: Google margins are steadily falling as volumes continue to rise

Figure 3: Google’s operating margins are now below those of Apple and Facebook

Cheaper ads

Figure 4: The cost per click is declining in lockstep with rising volume

Introduction

The Telco Dilemma

The Opportunity

What is a launcher?

Figure 1: Popular launchers in the marketplace

Will launchers really take off?

Figure 2: Number of Launcher Application Sessions (Quarterly data)

What’s at stake?

The Players

Facebook

Introduction

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

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

The US Market is Changing

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

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

Introduction

Our thanks to our event sponsors:

A growing sense of urgency and activity

Urgency: but as a result of lateness?

Figure 1: 78% said their companies were ‘behind the curve’ – or worse

Some positive signs

Figure 2: Some progress on specific actions on disruptive innovation

Figure 3: Analysis of transformation progress of leading telcos