Telco 2030: New purpose, strategy and business models for the Coordination Age

New age, new needs, new approaches

As the calendar turns to the second decade of the 21^st century we outline a new purpose, strategy and business models for the telecoms industry. We first described ‘The Coordination Age’, our vision of the market context, in our report The Coordination Age: A third age of telecoms in 2018.

The Coordination Age arises from the convergence of:

Global and near universal demands from businesses, governments and consumers for greater resource efficiency, availability and conservation, and
Technological advances that will allow near their real-time management.

Figure 1: Needs for efficient use of resources are driving economic and digital transformation

Source: STL Partners

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A new purpose for a new age

This new report outlines how telcos can succeed in the Coordination Age, including what their new purpose should be, the strategies, business models and investment approaches needed to deliver it.

It argues that faster networks which can connect tens of billions of sensors coupled with advances in analytics and process digitisation and automation means that there are opportunities for telecoms players to offer more than connectivity.

It also shows how a successful telecoms operator in the Coordination Age will profitably contribute to improving society by enabling governments, enterprises and consumers to collaborate in such a way that precious resources – labour, knowledge, energy, power, products, housing, and so forth – are managed and allocated more efficiently and effectively than ever before. This should have major positive economic and social benefits.

Moreover, we believe that the new purpose and strategies will help all stakeholders, including investors and employees, realign to deliver a motivating and rewarding new model. This is a critical role – and challenge – for all leaders in telecoms, on which the CEO and C-suite must align.

To do this, telecoms operators will need to move beyond providing core communications services. If they don’t choose this path, they are likely to be left fighting for a share of a shrinking ‘telecoms pie’.

A little history 2.0

Back in 2006, STL Partners came up with a first bold new vision for the telecoms industry to use its communications, connectivity, and other capabilities (such as billing, identity, authentication, security, analytics) to build a two-sided platform that enables enterprises to interact with each other and consumers more effectively.

We dubbed this Telco 2.0 and the last version of the Telco 2.0 manifesto we published can be found here – we feel it was prescient and that many of the points we made still resonate today. Indeed, many telecoms operators have embraced the Telco 2.0 two-sided business model over the last ten years.

This latest report builds on much of what we have learned in the previous fourteen years. We hope it will help carry the industry forwards into the next decade with renewed energy and success.

Other recent reports on the Coordination Age:

Executive Summary
Introduction
Industry context: End of the last cycle
- The telecoms industry is seeking growth
- Society is facing some major social and economic challenges
- Addressing society’s (and the telecoms industry’s) challenges
The Coordination Age
- Right here, right now
- How would the Coordination Age work in healthcare, for example?
New opportunities for telcos?
- The telecoms industry’s new role in the Coordination Age
- Telcos need an updated purpose
- This will help to realign stakeholders
- A new purpose can be the foundation of new strategy too
- Investment priorities need to reflect the purpose
- New operational models will also follow
Conclusions: What will Telco 2030 look like?

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Uber and Tesla: What telcos should do

Introduction

This report analyses the market position and strategies of Tesla and Uber, two of four Internet-based disruptors that might be able to break into the top tier of consumer Internet players, which is made up of Amazon, Apple, Facebook or Google. The other two challengers – Spotify and Netflix – were the subject of the recent STL Partners report: Can Netflix and Spotify make the leap to the top tier?

Tesla, Uber, Spotify and Netflix are defined by three key factors, which set them aside from their fellow challengers:

Rapid rise: They have become major mainstream players in a short space of time, building world-leading brands that rival those of much older and more established companies.
New thinking: Each of the four have challenged the conventions of the industries in which they operate, driving disruption and forcing incumbents to re-evaluate their business models.
Potential to challenge the dominance of Amazon, Apple, Facebook or Google: This rapid success has allowed the companies to gain dominant positions in their relative sectors, which they could use as a springboard to diversify their business models into parallel verticals. By pursuing these economies of scope, they are treading the path taken by the big four Internet companies.

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This report explores how improvements in digital technologies and consumer electronics are changing the automotive market, enabling Tesla and Uber to rethink personal transport almost from the bottom up. In particular, it considers how self-driving vehicles could become a key platform within the digital economy, offering a range of commerce services linked to transportation and logistics. The report also explores how the high level of regulation in transportation, as in telecoms, is complicating Uber’s efforts to build economies of scale and scope.

The final section provides a high-level overview of the opportunities for telcos as the automobile becomes a major computing and connectivity platform, including partnership strategies, and the implications for telcos if Uber or Tesla were able to make the jump to become a tier one player.

The report builds on the analysis in two previous STL Partners’ executive briefings that explore how artificial intelligence is changing the automotive sector:

Self-driving disruption

Uber, the world’s leading ride-hailing app, and Tesla, the world’s leading producer of all-electric vehicles, could evolve to become tier one players in the digital economy, as the car could eventually become a major control point in the digital value chain. Both companies could use the disruption caused by the arrival of self-driving cars to become a broad digital commerce platform akin to that of Amazon or Google. As well as matching individuals with journeys, Uber is gearing up to use self-driving vehicles to connect people with shops, restaurants, bars and many other merchants and service providers. With a strong brand, Tesla could potentially play a similar role in the premium end of the market as Apple has done in the PC, tablet and smartphone sectors.

However, Uber and Tesla are just two of the scores of technology and automotive companies jostling for a preeminent position in a future in which the car is a major computing and connectivity platform. As well as investing heavily in the development of self-driving technologies, many of these companies are splurging on M&A to get the skills and competences they will need in the personal transportation market of the future. For example, Intel bought Mobileye, a maker of autonomous-driving systems, for US$15.3 billion in March 2017. Delphi, a big auto parts maker, bought nuTonomy, an autonomous vehicle start-up, for US$450 million, and has since reinvented itself as an autonomous vehicle company called Aptiv.

Self-driving vehicles will change the world and the way people live in a myriad of different ways, just as cars themselves transformed society during the 20^th century. Some shops, hotels and restaurants could become mobile, while car parks, garages and even traffic lights could eventually become obsolete, potentially heralding new business opportunities for many kinds of companies, including telcos. But the most important change for Uber and Tesla will be a widespread shift from owning cars to sharing cars.

Contents:

Executive Summary
How Uber and Tesla are creating new opportunities for telcos
Uber’s and Tesla’s future prospects
Lessons for telcos
Introduction
Self-driving disruption
Making car ownership obsolete
From here to autonomy
The convergence of car rental, taxi-hailing and car making
Business models beyond transport
Opportunities for telcos
Uber: At the bleeding edge
Uber’s chequered history
Uber looks beyond the car
Uber’s strengths and weaknesses: From fame to notoriety
Tesla: All electric dreams
Tesla’s strengths and weaknesses: Beautiful but small
Conclusions and lessons for telcos
The future of Uber and Tesla
The future of connected cars
Lessons from Uber and Tesla

Figures:

Figure 1: Self-driving vehicles will become commonplace by 2030
Figure 2: The two different routes to self-driving vehicles
Figure 3: The first self-driving cars could appear within two years
Figure 4: Money is pouring into ride hailing and self-driving companies
Figure 5: Waymo is way ahead with respect to self-driving disengagements
Figure 6: Uber’s vision of a “vertiport” serving a highway intersection
Figure 7: Uber believes VTOL can be much cheaper than helicopters
Figure 8: Uber’s strengths, weaknesses, opportunities and threats (SWOT) analysis
Figure 9: Growth in Tesla’s automotive revenues has been subdued
Figure 10: Tesla’s strengths, weaknesses, opportunities and threats
Figure 11: Tesla loses money most quarters
Figure 12: Tesla is having to cut back on capex

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Telco 2.0: Choose your future – while you still can

Introduction

Time to update Telco 2.0

Telcos are facing difficult choices about whether and how to invest in new technologies, how to cut costs, and how to create new services, either to pair with their core network services or to broaden their customer bases beyond connectivity users.

Through the Telco 2.0 vision (our shorthand for ‘what a future telco should look like’), STL Partners has long argued that telcos need to make fundamental changes to their business models in response to the commoditisation of connectivity and the ‘softwarisation’ of all industries, including telecoms. At the very least this means digitalising operations to become more data-centric and efficient in the way they deliver connectivity. But to generate significant new revenue growth, we still believe telcos need to look beyond connectivity and develop (or acquire) new product and service offerings.

The original Telco 2.0 two-sided business model

Source: STL Partners

Since 2011, a handful of telcos have made significant investments into areas beyond connectivity that fall into these categories. For example:

NTT Docomo has continued to expand its ‘dmarket’ consumer loyalty scheme, media and sports content and payment services, which accounted for nearly 20% of total revenues for FY2017.
Singtel acquired digital advertising provider Amobee in 2012, followed by several more acquisitions in the same area to build an end-to-end digital marketing platform. Its digital services accounted for more than 10% of quarterly revenues by December 2017, and was the fourth largest revenue segment, ahead of voice revenues.
TELUS first acquired a health IT company in 2008, and has since expanded its reach and range of services to become Canada’s largest provider of health IT solutions, such as a nation-wide e-prescription system. Based on a case study we did on TELUS, we estimate its health solutions accounted for at least 7% of total revenues by 2017.

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However, these telcos are the exception rather than the rule. Over the last decade, most telcos have failed to build a significant revenue stream beyond their core services.

While many telcos remain cautious or even sceptical about their ability to generate significant revenue from non-connectivity based products and services, “digitalising” operations has become a widespread approach to sustain margins as revenue growth has slowed.

In Figure 3 we illustrate these as the two ‘digital dimensions’ along which telcos can drive change, where most telcos are prioritising an infrastructure play, but few are putting significant resources into product innovation, and only a small number with the ability to do both.

Digitalising telecoms operations: Reduction of capex and opex by reducing complexity and automating processes, and improving customer experience
Developing new services: This falls into two categories on the right-hand side of Figure 3
- Product innovation: New services that are independent from the network, in which case digitalising telecoms operations is only moderately important
- Platform (& product): New services that are strongly integrated with the network and therefore require the network to be opened up and digitalised

Few telcos are putting real resources into product & platform innovation

Source: STL Partners

Four developments driving our Telco 2.0 update

AI and automation technology is ready to deploy at scale. AI is no longer an over-hyped ideal – machine and deep learning techniques are proven to deliver faster and more accurate decision-making for repetitive and data-intensive tasks, regardless of the type of data (numerical, audio, images, etc.). This has the potential to transform all areas of operators’ businesses.
We live and work in a world of ecosystems. Few services are completely self-sufficient and independent from everything else, but rather enable, complement and/or augment other services. Telcos must accept that they are not immune to this trend, just because connectivity is one of the key enablers of content, cloud and IoT ecosystems (see Figure 4).
Software-defined networks and 5G are coming. This is happening at a different pace in different markets, but over the next five to ten years these technologies will drastically change the ‘thing’ that telcos operate: the ‘network’ will become another cloud service, with many operational functions instantiated in near real-time in hardware at the network edge, so never even reaching a centralised cloud. So telcos need to become more proficient in software and computing, and they should think of themselves as cloud service providers that operate in partnership with many other players to deliver end-users a complete service.
As other industries go through their own digital transformations, the connectivity and IT needs of enterprises have become much more complex and industry specific. This means the one-size-fits-all approach does not apply for operators or for their enterprise customers in any sector.

Telcos and connectivity are not a central pillar, but an enabler in a much richer ecosystem

Source: STL Partners

We are updating the Telco 2.0 Vision in light of these realities. Previously, we proposed six opportunity areas for new revenue growth, and expected large, proactive telcos to be able to address many of them. But telcos have been slow to change, margins are tighter now, implementing NFV/SDN is hard, and software skills are necessary for succeeding in any vertical. So telcos can no longer hope to do it all and must make choices of where to put their bets. As NTT Docomo, Singtel and TELUS show, it also takes time to succeed, so telcos need to choose and commit to a strategy now for long term success.

Contents:

Executive Summary
Introduction
Time to update Telco 2.0
Four developments driving our Telco 2.0 update
Analysing the current market state
Options for the future
If connectivity won’t drive growth, do telcos’ network strategies matter?
Imagining the future telecoms stack
Conclusions

Figures:

Figure 1: The telco stack
Figure 2: The original Telco 2.0 two-sided business model
Figure 3: Few telcos are putting real resources into product & platform innovation
Figure 4: Telcos and connectivity are not a central pillar, but an enabler in a much richer ecosystem
Figure 5: The network cloud platform within the telco stack
Figure 6: Steps to becoming a cloud platform
Figure 7: Horizontal specialisation within the telco stack
Figure 8: Vertical specialisation within the telco stack
Figure 9: Enterprise verticals
Figure 10: Consumer services and applications
Figure 11: Network technology company versus lean network operator
Figure 12: Example of a fixed telco stack
Figure 13: Example of a telco IoT stack
Figure 14: Example of a lean network operator stack

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Edge computing: Five viable telco business models

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This report has been produced independently by STL Partners, in co-operation with Hewlett Packard Enterprise and Intel.

Introduction

The idea behind Multi-Access Edge Computing (MEC) is to make compute and storage capabilities available to customers at the edge of communications networks. This will mean that workloads and applications are closer to customers, potentially enhancing experiences and enabling new services and offers. As we have discussed in our recent report, there is much excitement within telcos around this concept:

MEC promises to enable a plethora of vertical and horizontal use cases (e.g. leveraging lowlatency) implying significant commercial opportunities. This is critical as the whole industry is trying to uncover new sources of revenue, ideally where operators may be able to build a sustainable advantage.
MEC should also theoretically fit with telcos’ 5G and SDN/NFV deployments, which will run certain virtualised network functions in a distributed way, including at the edge of networks. In turn, MEC potentially benefits from the capabilities of a virtualised network to extract the full potential of distributed computing.

Figure 1: Defining MEC

Source: STL Partners

However, despite the excitement around the potentially transformative impact of MEC on telcos,viable commercial models that leverage MEC are still unclear and undefined. As an added complication, a diverse ecosystem around edge computing is emerging – of which telcos’ MEC is only one part.

From this, the following key questions emerge:

Which business models will allow telcos to realise the various potential MEC use cases in a commercially viable way?
What are the right MEC business models for which telco?
What is needed for success? What are the challenges?

Contents:

Preface
Introduction
The emerging edge computing ecosystem
Telcos’ MEC opportunity
Hyperscale cloud providers are an added complication for telcos
How should telcos position themselves?
5 telco business models for MEC
Business model 1: Dedicated edge hosting
Business model 2: Edge IaaS/PaaS/NaaS
Business model 3: Systems integration
Business model 4: B2B2X solutions
Business model 5: End-to-end consumer retail applications
Mapping use cases to business models
Some business models will require a long-term view on the investment
Which business models are right for which operator and which operator division?
Conclusion

Figures:

Figure 1: Defining MEC
Figure 2: MEC potential benefits
Figure 3: Microsoft’s new mantra – “Intelligent Cloud, Intelligent Edge”
Figure 4: STL Partners has identified 5 telco business models for MEC
Figure 5: The dedicated edge hosting value
Figure 6: Quantified example – Dedicated edge hosting
Figure 7: The Edge IaaS/PaaS/NaaS value chain
Figure 8: Quantified example – Edge IaaS/PaaS/NaaS
Figure 9: The SI value chain
Figure 10: Quantified example – Systems integration
Figure 11: The B2B2X solutions value chain
Figure 12: Quantified example – B2B2x solutions
Figure 13: Graphical representation of the end-to-end consumer retail applications business model
Figure 14: Quantified example – End-to-end consumer retail applications
Figure 15: Mapping MEC business models to possible use cases
Figure 16: High IRR correlates with low terminal value
Figure 17: Telcos need patience for edge-enabled consumer applications to become profitable (breakeven only in year 5)
Figure 18: The characteristics and skills required of the MEC operator depend on the business models

AccorHotels: From hotelier to digital marketplace

Introduction

Why are we doing non-telco case studies?

Digital transformation is a phenomenon that is affecting every sector. Many industries have been through a transformation process far more severe than we have seen in telecoms, while others began the process much earlier in time. We believe that there are valuable lessons telcos can learn from these sectors, so we have decided to find and examine the most interesting/useful case studies.

In this report, we look at French hotel chain AccorHotels, which has undertaken an ambition transformation from hotel owner and operator into a digital platform for independent hotels. While our previous case study, publisher Axel Springer, has completed its transformation, AccorHotels has achieved significant changes but remains some years away from reaching its longer-term ambitions. However, because hotel groups and telcos share many similarities, such as being in the service industry, owning physical infrastructure and having highly distributed assets, we can draw many useful lessons from AccorHotels’ experience.

Like in previous transformation case studies, the key takeaways from our analysis of AccorHotels’ strategy will be the lessons for telcos to help them make their own transformation process run more smoothly.

General outline of STL Partners’ case study transformation index

We intend to complete more case studies in the future from other industry verticals, with the goal of creating a ‘case study transformation index’, illustrating how selected companies have overcome the challenge of digital disruption. In these case studies we are examining five key areas of transformation, identifying which have been the most challenging, which have generated the most innovative solutions, and which can be considered successes or failures. These five areas are:

Market
Proposition
Value Network
Technology
Finances

For each section, supporting evidence of good or bad practice will be graded as a positive (tick), a negative (cross) or a work in progress (dash). These ticks, crosses and dashes will then be evaluated to create a “traffic light” rating for each section, which will then be tallied to provide an overall transformation rating for each case study.

We anticipate that some of these five sections will overlap, and some will be more pertinent to certain case studies than others. But central to the case studies will be analysis of how the transformation process is relevant to the telco industry and the lessons that can be learned to help operators on the path to change.

Contents:

Executive Summary
AccorHotels’ transformation experience – a summary of key lessons
The AccorHotels story in brief
AccorHotels in STL Partners’ transformation index
Introduction
Why are we doing non-telco case studies?
General outline of STL Partners’ case study transformation index
Drawing the parallels between hotels and telecoms
What does a hotel business look like?
How the Internet changed the hotel industry
Accor in context of leading global hotel chains
A successful transformation, so far
AccorHotels’ transformation strategy
Part 1: Separating property and services into distinct business lines
Part 2: From digital platform to marketplace
Part 3: Cultural transformation
Part 4: Invest in innovation
Conclusion
AccorHotels in STL Partners’ transformation index

Figures:

Figure 1: OTAs cut into hotels’ share of the hospitality industry
Figure 2: Comparison of leading global hotel chains
Figure 3: AccorHotels revenues and profitability are ticking up
Figure 4: Accor outperforms on growth of average revenue per room
Figure 5: AccorHotels property investments
Figure 6: Solid growth in profitability
Figure 7: AccorHotels eight digital hospitality programmes
Figure 8: Steady growth in loyalty programme subscribers
Figure 9: Accor acquires software expertise and reach to challenge OTAs
Figure 10: AccorHotels is gaining traction with digital services
Figure 11: AccorHotels still has some digital distance to go
Figure 12: AccorHotels digital services investment plan
Figure 13: AccorHotels acquisitions fuel business innovation
Figure 14: Digital M&A investment as a % of service revenue, 2012 – H1 2017
Figure 15: AccorHotels scores ‘Green’ on STL Partners’ transformation index

Digital M&A and Investment Strategies – July 2017 update

Introduction

Digital M&A as a telco strategy

In June 2016 STL Partners published our inaugural Digital M&A and Investment Strategies report and accompanying database, focussing on key digital acquisitions and investments for 22 operators during the period 2012 – H1 2016. We have now updated this report to cover the following 12 months (H2 2016 – H1 2017), to examine new developments in telco digital M&A and a comparison with previous activities.

Communications service providers have long used M&A as a key growth strategy, with the most common approach being to acquire other operators to build scale organically. As growth in telecommunications slowed and user behaviour swung towards mobile, so M&A activity in the mobile sector has increased. However, acquisition opportunities in mature markets are becoming limited as consolidation reduces the number of telcos, whilst in Europe and North America the regulatory environment has made M&A consolidation strategies less viable.

As operators continue to build digital capabilities and strive to deliver digital services and content, M&A and investment beyond ‘traditional telecoms’ is increasing. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation as well as operational excellence. This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of Verizon, AT&T and SoftBank. There is an accompanying database which tracks telco M&A activity for the period.

Drivers for operator M&A and majority investment

Figure 1: Drivers for operator M&A and majority investment – traditional and digital

Source: STL Partners

Traditional/Telco 1.0 drivers: reach and scale

As illustrated in Figure 1, what we refer to as ‘traditional’ or ‘Telco 1.0’ drivers for M&A and investment are well-established:

Extending geographic footprint is a common trend, as many operator groups look to:
- Enter new markets that are adjacent geographically (e.g. DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
- Enter markets that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
- Enter markets that simply offer good opportunities for expanded footprint and increased efficiencies of operation in emerging regions where demand for mobile services is still growing strongly (e.g., SingTel and Etisalat’s numerous investments in operators in Asia and Africa, respectively).
Extending traditional communications offerings is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the UK is one example.
Consolidation has slowed to some extent, as regulators and competitors fight against mergers or acquisitions that remove players from the market or concentrate too much market power in the hands of stronger service providers. This has been a particular issue in the European Union, where regulators have refused to approve several proposed telecoms M&A deals recently, including Telia and Telenor in Denmark in 2015, and the proposed Hutchison acquisition of Telefónica’s O2 to merge with its subsidiary 3 UK in 2016. Other deals, such as the proposed Orange-Bouygues Telecom merger in France which was abandoned in April 2016, have failed due to the parties involved failing to reach agreement. However, our research shows continued interest in operator M&A for consolidation, with recent examples including Orange’s acquisition of Sun Communications in Moldova in 2016, and Vodafone’s merger with Indian rival Idea in 2017.
The acquisition of service partners – primarily channel partners, or partner companies providing systems integration and consultancy capabilities, typically for enterprise customers – has proved an important driver of M&A for many (mainly converged) operators.
Finally, operator M&A is also being driven by the enthusiasm of sellers. Many operators are looking to sell off assets outside of their home markets, pulling back from markets that have proven too competitive, too small or simply too complicated, as part of a strategy to pay down debt and/or free up assets for investment in other higher-growth areas:
- Telia’s pullback from its non-core markets has seen it sell off its majority stakes in Spanish operator Yoigo to Masmovil and in Kazakhstan’s Kcell to Turkcell in 2016
- Telefonica’s attempt to sell its O2 UK mobile unit to CK Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its debt, including a planned IPO of O2 UK.

Contents:

Executive Summary
Evaluating operator digital investment strategies
Key findings
Recommendations
Introduction
Drivers for operator M&A and majority investment
Evaluating operator digital investment strategies
22 players across 5 regions: US shows the most aggressive M&A activity
Comparison with previous period (H1 2012 – H1 2016)
European telcos remain largely focussed on Telco 1.0 M&A
Which sectors are attracting the most interest?
Telco M&A investment is falling behind other verticals
What are the cultural challenges to digital M&A in the boardroom?
Operator M&A Strategies in detail: Consolidation, content and technology
M&A as a telco growth strategy
Adapting telco culture to ensure digital M&A success
Recommendations

Figures:

Figure 1: Drivers for operator M&A and majority investment – traditional and digital
Figure 2: Number of operator digital acquisitions and majority investments, H2 2016-H1 2017
Figure 3: Largest 7 telco digital M&A and majority investments, H2 2016-H1 2017
Figure 4: Number of operator digital acquisitions and majority investments, H1 2012 – H1 2016
Figure 5: Operator digital acquisitions and majority investments, H1 2012-H1 2017
Figure 6: Largest 10 telco digital M&A and majority investments, H1 2012 – H1 2016
Figure 7: Mapping of operator digital M&A strategies
Figure 8: Number of digital M&A and majority investments by sector/category, H2 2016-H1 2017
Figure 9: Comparison of investment in digital M&A as a percentage of service revenues, 2012-H1 2017

NTT DoCoMo: The Digital Pathfinder

The need for telco transformation

Shrinking revenues in voice and data mean telcos need to change

Telcos are facing difficult times; as we wrote in a recent report – Which operator growth strategies will remain viable in 2017 and beyond? – the days of meteoric growth are in the past, and telcos need to find a new approach to prevent a dramatic decline in their revenues. This is not a new story; STL Partners has been writing about this phenomenon and the need for business model change since 2006. In the afore-mentioned report we discussed seven different growth strategies used by telcos between 2009 and mid-2016, and came to the conclusion that only one, which involves developing or acquiring new businesses and services, is viable for 2017 and beyond if the industry is to reignite sustainable growth.

Digital services are an important part of this growth strategy. In fact, as Figure 1 shows, STL Partners estimates that digital business should represent 25+% of Telco revenue by 2020 to avoid long-term industry decline.

Figure 1 – Transformation priorities are different for every operator

However, the move to digital is difficult for telcos, who have traditionally relied on an infrastructure-based business model. Digital businesses are very different, and to be successful here telcos will need to make a fundamental shift from their traditional infrastructure-based business model to a complex amalgam of infrastructure, platform, and product innovation businesses.

One of STL Partners’ global observations is that all operators have different goals in the pursuit of transformation. This was also true with the group in Singapore, as shown by the following chart of a vote on the priorities assigned to different transformation objectives.

NTT DoCoMo – an example for other operators

With this in mind, telcos need to think about how they will develop new businesses and services. NTT DoCoMo provides a useful example for other telcos because it has done more than any other operator globally to develop digital services.

However, some people claim that the Japanese mobile market is so unique that it does not provide a useful role model for telcos in other markets. STL Partners disagrees with this point of view. Although the Japanese mobile market does have some unique characteristics, in some cases what was originally thought of as “unique” has just been proved to be “advanced.” An example of this is the popularity of apps and the iPhone – before this it was claimed that Japanese consumers were more engaged than those in other markets with mobile games and gadgets – however, the worldwide popularity of the iPhone and smartphones has disproved this.

In fact, although not advanced in every area, the Japanese mobile market has experienced several key phenomena earlier than other countries, such as an early peak in revenues and market disruption from non-telcos. Therefore, STL Partners thinks telcos should be examining the Japanese market to help them prepare for the future challenges of their own. Examples of this can be found in NTT DoCoMo’s annual reports – as early as 1999 the company was talking about the need to develop new sources of revenue (such as digital services and machine-to-machine communications) because of the inevitable decline in voice.

We therefore think that, although telcos in different markets cannot replicate NTT DoCoMo’s strategy in Japan like-for-like, they can certainly adopt similar practices to help them succeed in the digital telco world.

Executive Summary
Introduction
Objectives
Methodology
The need for telco transformation
Shrinking revenues in voice and data mean telcos need to change
NTT DoCoMo – an example for other operators
A snapshot of the Japanese mobile market
NTT DoCoMo’s history
A mature home market…
Softbank disrupts the market
NTT DoCoMo’s digital journey
Early recognition of the telco challenge, but regulation dictates the direction of evolution
An incremental journey to digital success
Adapting to the post-iPhone world
Can NTT DoCoMo’s digital success work overseas?
What was i-mode and why did it fail outside Japan?
What can other operators learn from NTT DoCoMo’s digital journey?

Figure 1: Traditional telco revenues forecast to continue declining
Figure 2: NTT Corporation, NTT DoCoMo’s parent company
Figure 3: Japanese mobile subscriber data, 1999-2015
Figure 4: Japanese mobile operators’ annual revenues, 1994-2014
Figure 5: NTT DoCoMo quarterly revenue – by business segment
Figure 6: NTT DoCoMo’s digital innovation milestones
Figure 7: Before and after DoCoMo ID
Figure 8: +d’s social value in health, education and agriculture
Figure 8: i-mode subscriptions – a runaway success in Japan

MobiNEX: The Mobile Network Experience Index, H1 2016

Executive Summary

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

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

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

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

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

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

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

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

MobiNEX H1 2016 – included markets

MobiNEX H1 2016 – operator scores

Source: Apteligent, OpenSignal, STL Partners analysis

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

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

Net Neutrality 2021: IoT, NFV and 5G ready?

Introduction

It’s been a while since STL Partners last tackled the thorny issue of Net Neutrality. In our 2010 report Net Neutrality 2.0: Don’t Block the Pipe, Lubricate the Market we made a number of recommendations, including that a clear distinction should be established between ‘Internet Access’ and ‘Specialised Services’, and that operators should be allowed to manage traffic within reasonable limits providing their policies and practices were transparent and reported.

Perhaps unsurprisingly, the decade-long legal and regulatory wrangling is still rumbling on, albeit with rather more detail and nuance than in the past. Some countries have now implemented laws with varying severity, while other regulators have been more advisory in their rules. The US, in particular, has been mired in debate about the process and authority of the FCC in regulating Internet matters, but the current administration and courts have leaned towards legislating for neutrality, against (most) telcos’ wishes. The political dimension is never far away from the argument, especially given the global rise of anti-establishment movements and parties.

Some topics have risen in importance (such as where zero-rating fits in), while others seem to have been mostly-agreed (outright blocking of legal content/apps is now widely dismissed by most). In contrast, discussion and exploration of “sender-pays” or “sponsored” data appears to have reduced, apart from niches and trials (such as AT&T’s sponsored data initiative), as it is both technically hard to implement and suffers from near-zero “willingness to pay” by suggested customers. Some more-authoritarian countries have implemented their own “national firewalls”, which block specific classes of applications, or particular companies’ services – but this is somewhat distinct from the commercial, telco-specific view of traffic management.

In general, the focus of the Net Neutrality debate is shifting to pricing issues, often in conjunction with the influence/openness of major web and app “platform players” such as Facebook or Google. Some telco advocates have opportunistically tried to link Net Neutrality to claimed concerns over “Platform Neutrality”, although that discussion is now largely separate and focused more on bundling and privacy concerns.

At the same time, there is still some interest in differential treatment of Internet traffic in terms of Quality of Service (QoS) – and also, a debate about what should be considered “the Internet” vs. “an internet”. The term “specialised services” crops up in various regulatory instruments, notably in the EU – although its precise definition remains fluid. In particular, the rise of mobile broadband for IoT use-cases, and especially the focus on low-latency and critical-communications uses in future 5G standards, almost mandate the requirement for non-neutrality, at some levels at least. It is much less-likely that “paid prioritisation” will ever extend to mainstream web-access or mobile app data. Large-scale video streaming services such as Netflix are perhaps still a grey area for some regulatory intervention, given the impact they have on overall network loads. At present, the only commercial arrangements are understood to be in CDNs, or paid-peering deals, which are (strictly speaking) nothing to do with Net Neutrality per most definitions. We may even see pressure for regulators to limit fees charged for Internet interconnect and peering.

This report first looks at the changing focus of the debate, then examines the underlying technical and industry drivers that are behind the scenes. It then covers developments in major countries and regions, before giving recommendations for various stakeholders.

STL Partners is also preparing a broader research piece on overall regulatory trends, to be published in the next few months as part of its Executive Briefing Service.

What has changed?

Where have we come from?

If we wind the clock back a few years, the Net Neutrality debate was quite different. Around 2012/13, the typical talking-points were subjects such as:

Whether mobile operators could block messaging apps like WhatsApp, VoIP services like Skype, or somehow charge those types of providers for network access / interconnection.
If fixed-line broadband providers could offer “fast lanes” for Netflix or YouTube traffic, often conflating arguments about access-network links with core-network peering capacity.
Rhetoric about the so-called “sender-pays” concept, with some lobbying for introducing settlements for data traffic that were reminiscent of telephony’s called / caller model.
Using DPI (deep packet inspection) to discriminate between applications and charge for “a la carte” Internet access plans, at a granular level (e.g. per hour of view watched, or per social-network used).
The application of “two-sided business models”, with Internet companies paying for data capacity and/or quality on behalf of end-users.

Since then, many things have changed. Specific countries’ and regions laws’ will be discussed in the next section, but the last four years have seen major developments in the Netherlands, the US, Brazil, the EU and elsewhere.

At one level, the regulatory and political shifts can be attributed to the huge rise in the number of lobby groups on both Internet and telecom sides of the Neutrality debate. However, the most notable shift has been the emergence of consumer-centric pro-Neutrality groups, such as Access Now, EDRi and EFF, along with widely-viewed celebrity input from the likes of comedian John Oliver. This has undoubtedly led to the balance of political pressure shifting from large companies’ lawyers towards (sometimes slogan-led) campaigning from the general public.

But there have also been changes in the background trends of the Internet itself, telecom business models, and consumers’ and application developers’ behaviour. (The key technology changes are outlined in the section after this one). Various experiments and trials have been tried, with a mix of successes and failures.

Another important background trend has been the unstoppable momentum of particular apps and content services, on both fixed and mobile networks. Telcos are now aware that they are likely to be judged on how well Facebook or Spotify or WeChat or Netflix perform – so they are much less-inclined to indulge in regulatory grand-standing about having such companies “pay for the infrastructure” or be blocked. Essentially, there is tacit recognition that access to these applications is why customers are paying for broadband in the first place.

These considerations have shifted the debate in many important areas, making some of the earlier ideas unworkable, while other areas have come to the fore. Two themes stand out:

Zero-rating
Specialised services

Content:

Executive summary
Contents
Introduction
What has changed?
Where have we come from?
Zero-rating as a battleground
Specialised services & QoS
Technology evolution impacting Neutrality debate
Current status
US
EU
India
Brazil
Other countries
Conclusions
Recommendations

SD-WAN: New Enterprise Opportunity for Telcos, or a Threat to MPLS, SDN & NFV?

Rapid growth in SD-Wan networks

Software-defined Wide Area Networks (SD-WAN) have catapulted to prominence in the enterprise networking world in the last 12 months. They allow businesses to manage their connections between sites, data-centres, the Internet and external cloud services much more cost-effectively and flexibly than in the past.

Driven by the growth of enterprise demand for access to cloud applications, and businesses’ desire to control WAN costs, various start-ups and existing network-optimisation vendors have catalysed SD-WAN’s emergence. Its rapid growth as a new “intermediary” layer in the network has the potential to disrupt telcos’ enterprise aspirations, especially around NFV/SDN.

In essence, SD-WAN allows the creation of an “OTT intelligent network infrastructure”, as an overlay on top of one or more providers’ physical connections. SD-WANs allow combinations of multiple types of access network – and multiple network providers. This can improve QoS in certain areas, reliability and security of corporate networks, while simultaneously reducing costs. SD-WANs also enable greater flexibility and agility in allocating enterprise network resources.

Why SD-WAN is at least in in part a threat

However, SD-WAN potentially poses major risks to traditional telcos’ enterprise offerings. It allows enterprise customers to deploy least-cost-routing more easily, or highest-quality-routing, by arbitraging differences in price or performance between multiple providers. It enables high-margin MPLS connections to be (at least partly) replaced with commodity Internet connectivity. And it reduces loyalty / lock-in by establishing an “abstraction” layer above the network, controlled by in-house IT teams or competing managed service providers.

SD-WAN has another, medium-term, set of implications for telcos, when considered through the lens of the emerging world of NFV/SDN and “telco cloud” – a topic on which STL Partners has written widely. By disconnecting the physical provision of corporate networks and a business’s data/application assets or clouds, SD-WAN may make it harder for telcos to move up the value chain in serving enterprise customers. Capabilities such as security systems, or unified communications services, may become associated with the SD-WAN, rather than the underlying connection(s); and would thus be provisioned by the SD-WAN provider, rather than by the telco that is providing basic connectivity.

In other words, SD-WAN represents three distinct threats for telcos:

Potential reduction in MPLS & other WAN services revenues
Potential reduction in today’s enterprise solution value-adds such as UCaaS & managed security services
Potential restriction of future telco enterprise SDN/NFV services opportunities to basic Network as a Service (NaaS) offers, with lower scope for upsell.

The current global market for WAN services is $60-100bn annually, depending on how it is defined; therefore, any risk of significant change is central to many operators’ strategic concerns.
Table of Contents

Executive Summary
Introduction
Background: Enterprise WANs
Shifting trends in WAN usage
The rise of SD-WAN
Overview – the holy grail of ‘good/fast/cheap’ in the WAN
SD-WAN technology and use-cases
SD-WAN vendors include start-ups and established enterprise market players
The role of service providers in SD-WAN
Bundling hosted voice/UCaaS and SD-WAN
Telcos Should take a Proactive Approach to SD-WAN
SD-WAN vs. SDN & NFV: Timing and Positioning
Future of SD-WAN and Recommendations
Recommendations

Figure 1: SD-WAN architecture example
Figure 2: SD-WAN & NaaS may help telcos maintain revenues in enterprise WAN
Figure 3: SD-WAN may reduce telco opportunities for SDN/NFV/cloud services
Figure 4: Different paths for SD-WAN service offer provision & procurement

Vertical Innovation Leaders: How Telstra’s Healthcare Jigsaw is Coming Together

Introduction

Over the course of 2013-2015, Australian operator Telstra has invested heavily in acquisitions, tapping into the A$11.2bn (US$8.52bn) it received from the Australian government for access to its legacy copper network required to connect the country’s National Broadband Network. Telstra spent $1.2bn on acquiring digital businesses during 2015 alone.

Telstra’s stated aims were: geographic expansion of its core telecoms offerings, as illustrated by its acquisition of Asian carrier and managed services provider Pacnet for US$697Mn, completed in April 2015; and growing its digital service offerings, as illustrated by its multiple acquisitions in the digital platforms and applications space.

The telco has taken a particularly innovative approach to building its offerings in the healthcare vertical, where its ‘new digital’ investments have focused.

Telstra’s approach to establishing its digital (and non-digital) healthcare business is a good indicator of its future overall digital strategy, at the core of which is a highly customer-centric approach and a commitment to bringing agile and lean business practices to all parts of its own business.

Telstra, is, of course, not an established healthcare brand, either in Australia or elsewhere. As we discuss below, this has created a number of challenges, both in engendering relevance with healthcare customers and in achieving Telstra’s particular aims in the health space. The operator has sought to collaborate with or acquire health service providers in order to overcome these challenges.

Telstra’s overall strategy in regard to its digital health care investments and partnerships has been aggressive and unusual, both in terms of the telco’s rapidity in developing such relationships, and in terms of the relatively large number of eHealth companies which it has invested in or partnered with. Perhaps unsurprisingly, many industry observers have questioned the approach. Indeed, one could argue that the diversity of the acquisitions and partnerships points to a lack of clear direction, and that the sheer number of these may be difficult for the operator to manage effectively, let alone consolidate into a healthy and growing digital revenue stream.

This report addresses the following:

Telstra’s approach to eHealth, and the key drivers for this
How the Telstra Health acquisition strategy fits with Telstra’s larger digital strategy
Impact and evidence of success thus far
Key challenges and lessons learned

The Telstra approach to digital healthcare

The Telstra Health proposition

Telstra has targeted healthcare as the most important focus area for its move into broader digital economy activities, based on the ongoing societal and demographic shifts driving demand for healthcare services and spend on these, and on the high potential for digital technology to be transformative in the sector.

At high level, the primary objective of Telstra’s Health business is to address the central challenges or pain points facing the healthcare industry, and to combine the best features of the services and applications it acquires with the telco’s own core capabilities, to provide relevant digital healthcare solutions. Telstra has identified six healthcare challenge areas its offerings aim to address, shown in Figure 2:

Figure 2: Six Healthcare Pain Points Telstra Health Aims to Address

Source: Telstra Health

Telstra’s business model, its overall strategy in health and its objectives are all centred around using digital technologies to tackle these health pain points. In practical terms, its goal is to bring the advantages of the digital revolution to bear on the specific challenges facing the health industry – and to develop a profitable new revenue stream in the process.

Executive Summary
Introduction
The Telstra approach to digital healthcare
The Telstra Health proposition
The Telstra Health offering: ecosystem and target customer segments
Understanding Telstra’s healthcare acquisition strategy
Telstra’s eHealth acquisitions and partnerships
Other Telcos Have Been Far Less Acquisitive in eHealth
How Telstra Health Fits Into Telstra’s Larger Digital Strategy
Impact and Evidence of Success
Revenue impact – A$1 billion by 2020 for Telstra Health?
Impact on share price – a ‘digital bump’?
Other measures of success
Evaluating Telstra’s Objectives and Challenges for the Health Business
Telstra’s external market objectives
Telstra’s organisational objectives
General eHealth market challenges

Figure 1: Telstra Health’s key objectives and challenges
Figure 2: Six Healthcare Pain Points Telstra Health Aims to Address
Figure 3: The Telstra Health ecosystem
Figure 4: Telstra Health: Provider Apps Offerings and Target Market Segments
Figure 5: Telstra Health: Connected Care and Telehealth Offerings and Target Market Segments
Figure 6: Telstra Health: Intelligence (Analytics) Offerings and Target Market Segments
Figure 7: Telstra Health’s Spine Health Intelligence Ecosystem
Figure 8: Telstra’s digital health acquisitions, 2013-2016
Figure 9: Telstra’s digital health direct investments and key partnerships, 2009-2016
Figure 10: Selected digital health acquisitions and investments – Telefonica
Figure 11: Telstra Group Key Product Revenues: FY 2013-2015 (AUD billion)
Figure 12: Telstra Revenue by Business Segment, FY2013-2015 (A$ billions)
Figure 13: Telstra Share Price Performance – 2000-2016 (A$)
Figure 14: Telstra Health’s key objectives and challenges

MobiNEX: The Mobile Network Experience Index, Q4 2015

Executive Summary

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

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

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

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

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

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

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

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

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

MobiNEX scores – Q4 2015

Source: Apteligent, OpenSignal, STL Partners analysis

MobiNEX vs Customer Satisfaction

Source: ACSI, NCSI-UK, STL Partners

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

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

Digital Partnering: Success Factors and AT&T Drive Case Study

Introduction

As communications services providers continue their push to develop and monetise digital services, partnering is proving a critical element of strategy, and a key enabler for telco agility. While some telco-digital player partnerships have been successful in achieving their objectives, many have languished, and failed to deliver value to one or both parties within the partnership.

In this report, we examine the different types of digital services partnerships that operators are engaged in; discuss the key success factors for the various partnering approaches and strategies; and look more deeply at a successful partnership strategy: AT&T’s Drive connected car initiative, which is an example of a broad vertical-focused partnership ecosystem. Our follow-on report will provide a case study of TeliaSonera’s successful digital music partnership with Spotify, an example of a single-focus collaboration for digital services.

Telcos are increasingly recognising the importance of partnerships for achieving their potential as true digital services companies. Partnering between telcos and third parties to deliver new services or target new markets is, of course, not a new phenomenon. Two things are new, however: the focus on partnering as a core competency of the telco organisation, and the increasing complexity of telco partnership ecosystems, as digital services, enabling technologies and service delivery value chains continue to evolve. An agile approach to building and managing complex partnerships is one of the key elements of becoming a Telco 2.0 organisation.

Figure 1: The Telco 2.0 Agility Framework

Source: STL Partners

Partnering is being defined as a telco ‘core competence’

A number of operators have now enshrined the objective of successful partnering in their corporate strategy. Deutsche Telekom, for example, has made partnering one of its ‘four pillars’. The clearly-stated objective in DTAG’s case is to attract (and learn from) companies that have adopted the agile, rapid-response, high-energy approach found in Silicon Valley and other global tech hubs such as Israel. DTAG hopes to offer these partners, access to its customers and channels across the twelve DTAG European markets, as well as the ability to leverage DTAG’s network and corporate resources:

“The list of companies we have been working with for many years is long. But how we cooperate, that has changed. We are more open and faster. We focus on our core competence – our best net – and add specific offers of the partners. Take for example the eReader tolino: We not only provide the eReader, but also the technical platform on which Bertelsmann, Hugendubel, Thalia and Libri are able to distribute their eBooks. Together with the German book trade, we established the tolino as a model of success in the eReader market.

In the area Smart Home, we work together with Miele, Samsung, EON and EnBw, amongst others. We have started the system platform QIVICON, which our product DT Smart Home is based on. Together with our partners, we develop the vision of a connected house.”

Thomas Kiesling, Former Chief Product and Innovation Officer, Deutsche Telekom AG1

Partnering and partnerships are becoming more complex

The DTAG example highlights our second point about new aspects of partnering. The increasing complexity of digital services partnerships, and the growing trend for larger partnership ecosystems with many partners participating from different levels of the value chain, requires telcos to take a different and more flexible approach.

A potential digital services partner will usually want to build global scale and so is likely to have several telco partners. Digital services partners will in many cases move at very different speeds from telcos in terms of decision-making and processes, and are likely to use a variety of distribution channels, some of which will bypass, or compete with, the telco partner (particularly for OTT B2C content services such as Spotify). For both B2B and B2C partnerships, business models and revenue sharing arrangements are likely to be fluid and to involve multiple parties.

B2B (and B2B2C) services are increasingly being supported by more extensive and complex partnership ecosystems, rather than single partnerships. Telcos may lead the development of such ecosystems – as AT&T does in the case of Drive – or simply participate. The growth of wider ecosystem partnering relationships has been especially prevalent in the development of M2M/IoT propositions. These may require a variety of platforms, applications, devices and integration elements, as well as a high level of openness in terms of open-source and accessible platforms, APIs, analytics etc.

These trends present challenges for traditional telco approaches to partnering, which have favoured exclusive relationships and ‘what’s-in-it-for-me’ approaches to building joint revenue streams. Many telcos have set up digital or innovation arms with the goal of developing new digital propositions together with third parties in a more flexible manner. However, for such propositions to succeed, they need clear buy-in from one or more of the main divisions of the telco. In the case of AT&T, the successful partnering effort we profile here was ultimately rolled back into a main division of the operator, rather than continuing to sit within an innovation division.

Based on our observations from AT&T’s success and the partnership case study we cover in our follow-up report (TeliaSonera’s long-term relationship with Spotify), we have identified a set of key success factors, and major barriers, for effective digital services partnerships between operators and third parties (see Figure 2).

Figure 2: Key success factors and barriers for successful digital services partnering

Source: STL Partners

While it isn’t the case that all of the key success factors above must be present in successful operator partnering initiatives, our analysis suggests that several external and internal ones should be present in any digital services partnership.

In the next section, we discuss drivers for digital services partnering, approaches operators have used in partnering, key success factors and barriers; and evaluate the approach that AT&T has taken to partnering with the connected car.

Motivations for partnering in digital services

There are several compelling reasons for telcos to partner when exploring and growing digital services opportunities. The most important of these drivers are shown below in Figure 3. Each driver supports a set of higher-level objectives for telcos, comprising revenue growth, revenue retention, branding and positioning, and organisation transformation and/or agility.

Figure 3: Major drivers for telco digital services partnering initiatives

Source: STL Partners

Drivers linked to the objectives of revenue growth and retention may appear to be most compelling to telcos, given their obvious short-term impact; but those linked to transformation/agility and branding/positioning have been at the forefront of the AT&T partnership initiative we profile here as well as the TeliaSonera-Spotify partnership we profile in our follow-on report. The most successful partnerships support several telco objectives: part of their success is thus attributable to the support they engender from across the telco organisation.

As discussed in the following sections, beyond clearly defining the objectives of the partnership, and the assets that both parties bring to the table, there are a number of other soft elements that contribute to (or hinder) the success of telco digital services partnerships. The existence of clear market demand for the partnership’s products and services is also a key, though sometimes overlooked, element of success.

Executive Summary
Introduction
Partnering is being defined as a telco ‘core competence’
Partnering and partnerships are becoming more complex
Motivations for partnering in digital services
4 digital services partnership approaches
Single-focus collaboration is easiest to manage and has best track record but impact is likely to be limited
Broader vertical focus requires greater commitment and has a greater market and implementation risk but can yield big benefits
General strategic partnerships appear to have had limited success
Key success factors for digital services partnerships
External/Market-Driven (demand-side) factors
Internal / organisation (supply-side) factors
Challenges to successful digital services partnering
External (demand side) challenges
Internal (supply-side) challenges
AT&T’s Drive Connected Car Ecosystem – A B2B2C Vertical Area Partnership
Background and context for the partnership
AT&T’s Drive Ecosystem
Key objectives and fit with the operator’s digital services strategy
Partnership approach and evolution
Organisation structure and framework for the partnership
Evidence of success
Key success factors and challenges
Barriers to successful partnering: challenges for Sprint and Verizon’s connected car initiatives

Figure 1: The Telco 2.0 Agility Framework
Figure 2: Key success factors and barriers for successful digital services partnering
Figure 3: Major drivers for telco digital services partnering initiatives
Figure 4: Telco Digital Services Partnership Models
Figure 5: US Connected Car Shipments, 2014-2020
Figure 6: AT&T Drive: Key End User Applications
Figure 7: AT&T Drive Studio, 2015
Figure 8: Drivers and objectives for AT&T’s connected car partnerships
Figure 9: AT&T Drive Platform Core Functionality and Applications
Figure 10: Opel OnStar Service Features, 2016
Figure 11: AT&T Drive Partnerships, Dec. 2015
Figure 12: AT&T connected car net adds are accelerating
Figure 13: Key Success Factors for AT&T Drive Partnerships (GM)

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

Introduction

Everyone loves to moan about telcos

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

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

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

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

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

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

Why not?

A structural problem

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

So should we give up?

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

Customer satisfaction is proving elusive in mature markets

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

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

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

Figure 1: Customers are generally dissatisfied with telecoms companies

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

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

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

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

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

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

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

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

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

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

Connectivity for telco IoT / M2M: Are LPWAN & WiFi strategically important?

Introduction

5G, WiFi, GPRS, NB-IoT, LTE-M & LTE Categories 1 & 0, SigFox, Bluetooth, LoRa, Weightless-N & Weightless-P, ZigBee, EC-GSM, Ingenu, Z-Wave, Nwave, various satellite standards, optical/laser connections and more….. the list of current or proposed wireless network technologies for the “Internet of Things” seems to be growing longer by the day. Some are long-range, some short. Some high power/bandwidth, some low. Some are standardised, some proprietary. And while most devices will have some form of wireless connection, there are certain categories that will use fibre or other fixed-network interfaces.

There is no “one-size fits all”, although some hope that 5G will ultimately become an “umbrella” for many of them, in the 2020 time-frame and beyond. But telcos, especially mobile operators, need to consider which they will support in the shorter-term horizon, and for which M2M/IoT use-cases. That universe is itself expanding too, with new IoT products and systems being conceived daily, spanning everything from hobbyists’ drones to industrial robots. All require some sort of connectivity, but the range of costs, data capabilities and robustness varies hugely.

Two over-riding question themes emerge:

What are the business cases for deploying IoT-centric networks – and are they dependent on offering higher-level management or vertical solutions as well? Is offering connectivity – even at very low prices/margins – essential for telcos to ensure relevance and differentiate against IoT market participants?
What are the longer-term strategic issues around telcos supporting and deploying proprietary or non-3GPP networking technologies? Is the diversity a sensible way to address short-term IoT opportunities, or does it risk further undermining the future primacy of telco-centric standards and business models? Either way telcos need to decide how much energy they wish to expend, before they embrace the inevitability of alternative competing networks in this space.

This report specifically covers IoT-centric network connectivity. It fits into Telco 2.0’s Future of the Network research stream, and also intersects with our other ongoing work on IoT/M2M applications, including verticals such as the connected car, connected home and smart cities. It focuses primarily on new network types, rather than marketing/bundling approaches for existing services.

The Executive Briefing report “IoT – Impact on M2M, Endgame and Implications” from March 2015 outlined three strategic areas of M2M business model innovation for telcos:

Improve existing M2M operations: Dedicated M2M business units structured around priority verticals with dedicated resources. Such units allow telcos to tailor their business approach and avoid being constrained by traditional strategies that are better suited to mobile handset offerings.
Move into new areas of M2M: Expansion along the value chain through both acquisitions and partnerships, and the formation of M2M operator ‘alliances.’
Explore the Internet of Things: Many telcos have been active in the connected home e.g. AT&T Digital Life. However, outsiders are raising the connected home (and IoT) opportunity stakes: Google, for example, acquired Nest for $3.2 billion in 2014.

Figure 2: The M2M Value Chain

Source: STL Partners, More With Mobile

In the 9 months since that report was published, a number of important trends have occurred in the M2M / IoT space:

A growing focus on the value of the “industrial Internet”, where sensors and actuators are embedded into offices, factories, agriculture, vehicles, cities and other locations. New use-cases and applications abound on both near- and far-term horizons.
A polarisation in discussion between ultra-fast/critical IoT (e.g. for vehicle-to-vehicle control) vs. low-power/cost IoT (e.g. distributed environmental sensors with 10-year battery life). 2015 discussion of IoT connectivity has been dominated by futuristic visions of 5G, or faster-than-expected deployment of LPWANs (low-power wide-area networks), especially based on new platforms such as SigFox or LoRa Alliance.
Comparatively slow emergence of dedicated individual connections for consumer IoT devices such as watches / wearables. With the exception of connected cars, most mainstream products connect via local “capillary” networks (e.g. Bluetooth and WiFi) to smartphones or home gateways acting as hubs, or a variety of corporate network platforms. The arrival of embedded SIMs might eventually lead to more individually-connected devices, but this has not materialised in volume yet.
Continued entry, investment and evolution of a broad range of major companies and start-ups, often with vastly different goals, incumbencies and competencies to telcos. Google, IBM, Cisco, GE, Intel, utility firms, vehicle suppliers and 1000s of others are trying to carve out roles in the value chain.
Growing impatience among some in the telecom industry with the pace of standardisation for some IoT-centric developments. A number of operators have looked outside the traditional cellular industry suppliers and technologies, eager to capitalise on short-term growth especially in LPWAN and in-building local connectivity. In response, vendors including Huawei, Ericsson and Qualcomm have stepped up their pace, although fully-standardised solutions are still some way off.

Connectivity in the wider M2M/IoT context

It is not always clear what the difference is between M2M and IoT, especially at a connectivity level. They now tend to be used synonymously, although the latter is definitely newer and “cooler”. Various vendors have their own spin on this – Cisco’s “Internet of Everything”, and Ericsson’s “Networked Society”, for example. It is also a little unclear where the IoT part ends, and the equally vague term “networked services” begins. It is also important to recognise that a sizeable part of the future IoT technology universe will not be based on “services” at all, although “user-owned” devices and systems are much harder for telcos to monetise.

An example might be a government encouraging adoption of electric vehicles. Cars and charging points are “things” which require data connections. At one level, an IoT application may simply guide drivers to their closest available power-source, but a higher-level “societal” application will collate data from both the IoT network and other sources. Thus data might also flow from bus and train networks, as well as traffic sensors, pollution monitors and even fitness trackers for walking and cycling, to see overall shifts in transport habits and help “nudge” commuters’ behaviour through pricing or other measures. In that context, the precise networks used to connect to the end-points become obscured in the other layers of software and service – although they remain essential building blocks.

Figure 3: Characterising the difference between M2M and IoT across six domains

Source: STL Partners, More With Mobile

(Note: the Future of Network research stream generally avoids using vague and loaded terms like “digital” and “OTT”. While concise, we believe they are often used in ways that guide readers’ thinking in wrong or unhelpful directions. Words and analogies are important: they can lead or mislead, often sub-consciously).

Often, it seems that the word “digital” is just a convenient cover, to avoid admitting that a lot of services are based on the Internet and provided over generic data connections. But there is more to it than that. Some “digital services” are distinctly non-Internet in nature (for example, if delivered “on-net” from set-top boxes). New IoT and M2M propositions may never involve any interaction with the web as we know it. Some may actually involve analogue technology as well as digital. Hybrids where apps use some telco network-delivered ingredients (via APIs), such as identity or one-time SMS passwords are becoming important.

Figure 4: ‘Digital’ and IoT convergence

Source: STL Partners, More With Mobile

We will also likely see many hybrid solutions emerging, for example where dedicated devices are combined with smartphones/PCs for particular functions. Thus a “digital home” service may link alarms, heating sensors, power meters and other connections via a central hub/console – but also send alerts and data to a smartphone app. It is already quite common for consumer/business drones to be controlled via a smartphone or tablet.

In terms of connectivity, it is also worth noting that “M2M” generally just refers to the use of conventional cellular modems and networks – especially 2G/3G. IoT expands this considerably – as well as future 5G networks and technologies being specifically designed with new use-cases in mind, we are also seeing the emergence of a huge range of dedicated 4G variants, plus new purpose-designed LPWAN platforms. IoT also intersects with the growing range of local/capillary[1] network technologies – which are often overlooked in conventional discussions about M2M.

Figure 5: Selected Internet of Things service areas

Source: STL Partners

The larger the number…

…the less relevance and meaning it has. We often hear of an emerging world of 20bn, 50bn, even trillions of devices being “networked”. While making for good headlines and press-releases, such numbers can be distracting.

While we will definitely be living in a transformed world, with electronics around us all the time – sensors, displays, microphones and so on – that does not easily translate into opportunities for telecom operators. The correct role for such data and forecasts is in the context of a particular addressable opportunity – otherwise one risks counting toasters, alongside sensors in nuclear power stations. As such, this report does not attempt to compete in counting “things” with other analyst firms, although references are made to approximate volumes.

For example, consider a typical large, modern building. It’s common to have temperature sensors, CCTV cameras, alarms for fire and intrusion, access control, ventilation, elevators and so forth. There will be an internal phone system, probably LAN ports at desks and WiFi throughout. In future it may have environmental sensors, smart electricity systems, charging points for electric vehicles, digital advertising boards and more. Yet the main impact on the telecom industry is just a larger Internet connection, and perhaps some dedicated lines for safety-critical systems like the fire alarm. There may well be 1,000 or 10,000 connected “things”, and yet for a cellular operator the building is more likely to be a future driver of cost (e.g. for in-building radio coverage for occupants’ phones) rather than extra IoT revenue. Few of the building’s new “things” will have SIM cards and service-based radio connections in any case – most will link into the fixed infrastructure in some way.

One also has to doubt some of the predicted numbers – there is considerable vagueness and hand-waving inherent in the forecasts. If a car in 2020 has 10 smart sub-systems, and 100 sensors reporting data, does that count as 1, 10 or 100 “things” connected? Is the key criterion that smart appliances in a connected home are bought individually – and therefore might be equipped with individual wide-area network connections? When such data points are then multiplied-up to give traffic forecasts, there are multiple layers of possible mathematical error.

This highlights the IoT quantification dilemma – everyone focuses on the big numbers, many of which are simple spreadsheet extrapolations, made without much consideration of the individual use-cases. And the larger the headline number, the less-likely the individual end-points will be directly addressed by telcos.

Executive Summary
Introduction
Connectivity in the wider M2M/IoT context
The larger the number…
The IoT network technology landscape
Overview – it’s not all cellular
The emergence of LPWANs & telcos’ involvement
The capillarity paradox: ARPU vs. addressability
Where does WiFi fit?
What will the impact of 5G be?
Other technology considerations
Strategic considerations
Can telcos compete in IoT without connectivity?
Investment vs. service offer
Regulatory considerations
Are 3GPP technologies being undermined?
Risks & threats
Conclusion

Figure 1: Telcos can only fully monetise “things” they can identify uniquely
Figure 2: The M2M Value Chain
Figure 3: Characterising the difference between M2M and IoT across six domains
Figure 4: ‘Digital’ and IoT convergence
Figure 5: Selected Internet of Things service areas
Figure 6: Cellular M2M is growing, but only a fraction of IoT overall
Figure 7: Wide-area IoT-related wireless technologies
Figure 8: Selected telco involvement with LPWAN
Figure 9: Telcos need to consider capillary networks pragmatically
Figure 10: Major telco types mapped to relevant IoT network strategies

Microsoft: Pivoting to a Communications-Centric Business

Introduction: From Monopoly to Disruption

For many years, Microsoft was an iconic monopolist, in much the same way as AT&T had been before divestment. Microsoft’s products were ubiquitous and often innovative, and its profitability enormous. It was familiar, yet frequently scorned as the creator of a dreary monoculture with atrocious security properties. Microsoft’s mission statement could not have been simpler: a computer in every office and in every home. This achieved, though, its critics have often seen it as an organisation in search of an identity, experimenting with mobile, search, maps, hardware and much else without really settling on a new direction.

Going to the numbers, for the last two years, there has been steady erosion of the once phenomenally high margins, although revenue is still steadily rising. Since Q3 2013, revenue at Microsoft grew an average of 3.5% annually, but the decline in margins meant that profits barely grew, with a CAGR of 0.66%. Telcos will be familiar with this kind of stagnation, but telcos would be delighted with Microsoft’s 66% gross margins. Note, that getting into hardware has given Microsoft a typical hardware vendor’s Christmas spike in revenue.

Figure 1: MS revenue is growing steadily but margin erosion undermines it

Source: Microsoft 10-K, STL Partners

Over the long term, the pattern is clearer, as are the causes. Figure 2 shows Microsoft’s annual revenue and gross margin since the financial year 1995. From 1995 to 2010, gross margins were consistently between 80 and 90 per cent, twice the 45% target HP traditionally defined as “fascinating”. It was good to be king. However, in the financial year 2010, there is a clear inflection point: margins depart from the 80% mark and never return, falling at a 3.45% clip between 2010 and 2015.

The event that triggered this should be no surprise. Microsoft has traditionally been discussed in parentheses with Apple, and Apple’s 2010 was a significant one. It was the first year that Apple began using the A-series processors of its own design, benefiting from the acquisition of PA Semiconductor in 2008. This marked an important strategic shift at Apple from the outsourced, design- and brand-centric business to vertical integration and investment in manufacturing, a strategy associated with Tim Cook’s role as head of the supply chain.

Figure 2: The inflection point in 2010

Source: Microsoft 10-K, STL Partners

The deployment of the A4 chip made possible two major product launches in 2010 – the iPhone 4, which would sell enormously more than any of the previous iPhones, and the iPad, which created an entirely new product category competing directly with the PC. Another Apple product launch that year, which also competed head-on with Microsoft, wasn’t quite as dramatic but was also very significant – the MacBook line began shipping with SSDs rather than hard disks, and the very popular 11” MacBook Air was added as an entry-level option. At the time, the PC industry and hence Microsoft was heavily committed to the Intel-backed netbooks, and the combination of the iPad and the 11” Air essentially destroyed the netbook as a product category.

The problems started in the consumer market, but the industry was beginning to recognise that innovations had begun to take hold in consumer and then diffuse into the enterprise. Further, the enterprise franchise centred on the Microsoft Business division and what was then termed Server & Tools[1] were both threatened by the increasing adoption of Apple products.

Microsoft had to respond, and it did so with a succession of dramatic initiatives. One was to rethink Windows as a tablet- or phone-optimised operating system, in Windows Phone 7 and Windows 8. Another was to acquire Nokia’s smartphone business, and to diversify into hardware via the Xbox and Surface projects. And yet a third was to embrace the cloud. Figure 3 shows the results.

Introduction
Executive Summary
From Monopoly to Disruption
The push into mobile fails…but what about the cloud?
Changing Platforms: from Windows to Office
The Skype Acquisition: a missed opportunity?
Skype for Business and Office 365: the new platform
The rise of the consumer cloud
Bing may just about be breaking even…but the real story here is consumer cloud
Scaling out in the cloud
Conclusions: towards a communications-centric Microsoft

Figure 1: MS revenue is growing steadily but margin erosion undermines it
Figure 2: The inflection point in 2010
Figure 3: Revenue by product category at Microsoft, last 2 years
Figure 4: Cloud and the Enterprise drive profitability at Microsoft
Figure 5: Cloud is the driver of growth at Microsoft
Figure 6: Internally-developed hardware and cloud services are improving their margins
Figure 7: The Nokia Devices & Services business slides into loss
Figure 8: In 2011, an unifying API appeared critical for Skype’s future within Microsoft
Figure 9: Cloud is now over $8bn a year in revenue
Figure 10: Spot the deliberate mistake. No mention of Bing’s profitability or otherwise
Figure 11: Bing was a money pit for years, but may have begun to improve
Figure 12: The app store and consumer cloud businesses are performing superbly

Do network investments drive creation & sale of truly novel services?

Introduction

History: The network is the service

Before looking at how current network investments might drive future generations of telco-delivered services, it is worth considering some of the history, and examining how we got where we are today.

Most obviously, the original network build-outs were synonymous with the services they were designed to support. Both fixed and mobile operators started life as “phone networks”, with analogue or electro-mechanical switches. (Earlier descendants were designed to service telegraph and pagers, respectively). Cable operators began as conduits for analogue TV signals. These evolved to support digital switches of various types, as well as using IP connections internally.

From the 1980s onwards, it was hoped that future generations of telecom services would be enabled by, and delivered from, the network itself – hence acronyms like ISDN (Integrated Services Digital Network) and IN (Intelligent Network).

But the earliest signs that “digital services” might come from outside the telecom network were evident even at that point. Large companies built up private networks to support their own phone systems (PBXs). Various 3rd-party “value-added networks” (VAN) and “electronic data interchange” (EDI) services emerged in industries such as the automotive sector, finance and airlines. And from the early 1990s, consumers started to get access to bulletin boards and early online services like AOL and CompuServe, accessed using dial-up modems.

And then, around 1994, the first web browsers were introduced, and the model of Internet access and ISPs took off, initially with narrowband connections using modems, but then swiftly evolving to ADSL-based broadband. From 1990 onwards, the bulk of new consumer “digital services” were web-based, or using other Internet protocols such as email and private messaging. At the same time, businesses evolved their own private data networks (using telco “pipes” such as leased-lines, frame-relay and the like), supporting their growing client/server computing and networked-application needs.

Figure 1: In recent years, most digital services have been “non-network” based

Source: STL Partners

For fixed broadband, Internet access and corporate data connections have mostly dominated ever since, with rare exceptions such as Centrex phone and web-hosting services for businesses, or alarm-monitoring for consumers. The first VoIP-based carrier telephony service only emerged in 2003, and uptake has been slow and patchy – there is still a dominance of old, circuit-based fixed phone connections in many countries.

More recently, a few more “fixed network-integrated” offers have evolved – cloud platforms for businesses’ voice, UC and SaaS applications, content delivery networks, and assorted consumer-oriented entertainment/IPTV platforms. And in the last couple of years, operators have started to use their broadband access for a wider array of offers such as home-automation, or “on-boarding” Internet content sources into set-top box platforms.

The mobile world started evolving later – mainstream cellular adoption only really started around 1995. In the mobile world, most services prior to 2005 were either integrated directly into the network (e.g. telephony, SMS, MMS) or provided by operators through dedicated service delivery platforms (e.g. DoCoMo iMode, and Verizon’s BREW store). Some early digital services such as custom ringtones were available via 3rd-party channels, but even they were typically charged and delivered via SMS. The “mobile Internet” between 1999-2004 was delivered via specialised WAP gateways and servers, implemented in carrier networks. The huge 3G spectrum licence awards around 2000-2002 were made on the assumption that telcos would continue to act as creators or gatekeepers for the majority of mobile-delivered services.

It was only around 2005-6 that “full Internet access” started to become available for mobile users, both for those with early smartphones such as Nokia/Symbian devices, and via (quite expensive) external modems for laptops. In 2007 we saw two game-changers emerge – the first-generation Apple iPhone, and Huawei’s USB 3G modem. Both catalysed the wide adoption of the consumer “data plan”- hitherto almost unknown. By 2010, there were virtually no new network-based services, while the “app economy” and “vanilla” Internet access started to dominate mobile users’ behaviour and spending. Even non-Internet mobile services such as BlackBerry BES were offered via alternative non-telco infrastructure.

Figure 2: Mobile data services only shifted to “open Internet” plans around 2006-7

Source: Disruptive Analysis

By 2013, there had still been very few successful mobile digital-services offers that were actually anchored in cellular operators’ infrastructure. There have been a few positive signs in the M2M sphere and wholesaled SMS APIs, but other integrated propositions such as mobile network-based TV have largely failed. Once again the transition to IP-based carrier telephony has been slow – VoLTE is gaining grudging acceptance more from necessity than desire, while “official” telco messaging services like RCS have been abject failures. Neither can be described as “digital innovation”, either – there is little new in them.

The last two years, however, have seen the emergence of some “green shoots” for mobile services. Some new partnering / charging models have borne fruit, with zero-rated content/apps becoming quite prevalent, and a handful of developer platforms finally starting to gain traction, offering network-based features such as location awareness. Various M2M sectors such as automotive connectivity and some smart-metering has evolved. But the bulk of mobile “digital services” have been geared around iOS and Android apps, anchored in the cloud, rather than telcos’ networks.

So in 2015, we are currently in a situation where the majority of “cool” or “corporate” services in both mobile and fixed worlds owe little to “the network” beyond fast IP connectivity: the feared mythical (and factually-incorrect) “dumb pipe”. Connected “general-purpose” devices like PCs and smartphones are optimised for service delivery via the web and mobile apps. Broadband-connected TVs are partly used for operator-provided IPTV, but also for so-called “OTT” services such as Netflix.

And future networks and novel services? As discussed below, there are some positive signs stemming from virtualisation and some new organisational trends at operators to encourage innovative services – but it is not yet clear that they will be enough to overcome the open Internet’s sustained momentum.

What are so-called “digital services”?

It is impossible to visit a telecoms conference, or read a vendor press-release, without being bombarded by the word “digital” in a telecom context. Digital services, digital platforms, digital partnerships, digital agencies, digital processes, digital transformation – and so on.

It seems that despite the first digital telephone exchanges being installed in the 1980s and digital computing being de-rigeur since the 1950s, the telecoms industry’s marketing people have decided that 2015 is when the transition really occurs. But when the chaff is stripped away, what does it really mean, especially in the context of service innovation and the network?

Often, it seems that “digital” is just a convenient cover, to avoid admitting that a lot of services are based on the Internet and provided over generic data connections. But there is more to it than that. Some “digital services” are distinctly non-Internet in nature (for example, if delivered “on-net” from set-top boxes). New IoT and M2M propositions may never involve any interaction with the web as we know it. Hybrids where apps use some telco network-delivered ingredients (via APIs), such as identity or one-time SMS passwords are becoming important.

And in other instances the “digital” phrases relate to relatively normal services – but deployed and managed in a much more efficient and automated fashion. This is quite important, as a lot of older services still rely on “analogue” processes – manual configuration, physical “truck rolls” to install and commission, and high “touch” from sales or technical support people to sell and operate, rather than self-provisioning and self-care through a web portal. Here, the correct term is perhaps “digital transformation” (or even more prosaically simply “automation”), representing a mix of updated IP-based networks, and more modern and flexible OSS/BSS systems to drive and bill them.

STL identifies three separate mechanisms by which network investments can impact creation and delivery of services:

New networks directly enable the supply of wholly new services. For example, some IoT services or mobile gaming applications would be impossible without low-latency 4G/5G connections, more comprehensive coverage, or automated provisioning systems.
Network investment changes the economics of existing services, for example by removing costly manual processes, or radically reducing the cost of service delivery (e.g. fibre backhaul to cell sites)
Network investment occurs hand-in-hand with other changes, thus indirectly helping drive new service evolution – such as development of “partner on-boarding” capabilities or API platforms, which themselves require network “hooks”.

While the future will involve a broader set of content/application revenue streams for telcos, it will also need to support more, faster and differentiated types of data connections. Top of the “opportunity list” is the support for “Connected Everything” – the so-called Internet of Things, smart homes, connected cars, mobile healthcare and so on. Many of these will not involve connection via the “public Internet” and therefore there is a possibility for new forms of connectivity proposition or business model – faster- or lower-powered networks, or perhaps even the much-discussed but rarely-seen monetisation of “QoS” (Quality of Service). Even if not paid for directly, QoS could perhaps be integrated into compelling packages and data-service bundles.

There is also the potential for more “in-network” value to be added through SDN and NFV – for example, via distributed servers close to the edge of the network and “orchestrated” appropriately by the operator. (We covered this area in depth in the recent Telco 2.0 brief on Mobile Edge Computing How 5G is Disrupting Cloud and Network Strategy Today.)

In other words, virtualisation and the “software network” might allow truly new services, not just providing existing services more easily. That said, even if the answer is that the network could make a large-enough difference, there are still many extra questions about timelines, technology choices, business models, competitive and regulatory dynamics – and the practicalities and risks of making it happen.

Part of the complexity is that many of these putative new services will face additional sources of competition and/or substitution by other means. A designer of a new communications service or application has many choices about how to turn the concept into reality. Basing network investments on specific predictions of narrow services has a huge amount of risk, unless they are agreed clearly upfront.

But there is also another latent truth here: without ever-better (and more efficient) networks, the telecom industry is going to get further squeezed anyway. The network part of telcos needs to run just to stand still. Consumers will adopt more and faster devices, better cameras and displays, and expect network performance to keep up with their 4K videos and real-time games, without paying more. Businesses and governments will look to manage their networking and communications costs – and may get access to dark fibre or spectrum to build their own networks, if commercial services don’t continue to improve in terms of price-performance. New connectivity options are springing up too, from WiFi to drones to device-to-device connections.

In other words: some network investment will be “table stakes” for telcos, irrespective of any new digital services. In many senses, the new propositions are “upside” rather than the fundamental basis justifying capex.

Executive Summary
Introduction
History: The network is the service
What are so-called “digital services”?
Service categories
Network domains
Enabler, pre-requisite or inhibitor?
Overview
Virtualisation
Agility & service enablement
More than just the network: lead actor & supporting cast
Case-studies, examples & counter-examples
Successful network-based novel services
Network-driven services: learning from past failures
The mobile network paradox
Conclusion: Services, agility & the network
How do so-called “digital” services link to the network?
Which network domains can make a difference?
STL Partners and Telco 2.0: Change the Game

Figure 1: In recent years, most digital services have been “non-network” based
Figure 2: Mobile data services only shifted to “open Internet” plans around 2006-7
Figure 3: Network spend both “enables” & “prevents inhibition” of new services
Figure 4: Virtualisation brings classic telco “Network” & “IT” functions together
Figure 5: Virtualisation-driven services: Cloud or Network anchored?
Figure 6: Service agility is multi-faceted. Network agility is a core element
Figure 7: Using Big Data Analytics to Predictively Cache Content
Figure 8: Major cablecos even outdo AT&T’s stellar performance in the enterprise
Figure 9: Mapping network investment areas to service opportunities

New age, new needs, new approaches

Figure 1: Needs for efficient use of resources are driving economic and digital transformation

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A new purpose for a new age

A little history 2.0

Table of contents

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Introduction

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Self-driving disruption

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Introduction

Time to update Telco 2.0

The original Telco 2.0 two-sided business model

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Few telcos are putting real resources into product & platform innovation

Four developments driving our Telco 2.0 update

Telcos and connectivity are not a central pillar, but an enabler in a much richer ecosystem

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Introduction

Figure 1: Defining MEC

Introduction

Why are we doing non-telco case studies?

General outline of STL Partners’ case study transformation index

Introduction

Digital M&A as a telco strategy

Drivers for operator M&A and majority investment

Figure 1: Drivers for operator M&A and majority investment – traditional and digital

Traditional/Telco 1.0 drivers: reach and scale

The need for telco transformation

Shrinking revenues in voice and data mean telcos need to change

NTT DoCoMo – an example for other operators

Executive Summary

Introduction

What has changed?

Where have we come from?

Rapid growth in SD-Wan networks

Why SD-WAN is at least in in part a threat

Introduction

The Telstra approach to digital healthcare

The Telstra Health proposition

Executive Summary

Introduction

Figure 1: The Telco 2.0 Agility Framework

Partnering is being defined as a telco ‘core competence’

Partnering and partnerships are becoming more complex

Figure 2: Key success factors and barriers for successful digital services partnering

Motivations for partnering in digital services

Figure 3: Major drivers for telco digital services partnering initiatives

Introduction

Everyone loves to moan about telcos

A structural problem

So should we give up?

Customer satisfaction is proving elusive in mature markets

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

Figure 1: Customers are generally dissatisfied with telecoms companies

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

Introduction

Figure 2: The M2M Value Chain

Connectivity in the wider M2M/IoT context

Figure 3: Characterising the difference between M2M and IoT across six domains

Figure 4: ‘Digital’ and IoT convergence

Figure 5: Selected Internet of Things service areas

The larger the number…

Introduction: From Monopoly to Disruption

Introduction

History: The network is the service

What are so-called “digital services”?

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