A Practical Guide to Implementing Telco 2.0

 

Detailed table of contents

Section

Sub-sections

Part One: Identifying Telco 2.0 Opportunities

Developing the Right Telco 2.0 Strategy

  • Applying Porter’s thinking to the current telecoms market
  • Generic Telco 2.0 strategic options
  • Telco 2.0 strategies: how they drive shareholder returns
  • Which Telco 2.0 strategy for your organisation
  • Strategy comparison case studies: A Telco 2.0 Happy Piper (Vodafone UK) versus Telco 2.0 Service Player (O2)

Identifying & Prioritising Telco 2.0 Innovations

  • A taxonomy of Telco 2.0 opportunities
  • From isolated innovations to an integrated platform
  • Two approaches to identifying Telco 2.0 innovations
  • Approaches
  • Case study:  The STL Partners Innovation Scouting Service
  • Evaluating the potential opportunities: a structured approach to screening

Part Two: Implementing Telco 2.0 Opportunities

Introduction

  • A framework for innovation and business model transformation for telecoms

Service Offerings: Bringing Telco 2.0 Propositions to Market

  • A 12-stage end-to-end process for service development
    1. 1. Customer intentions and draft press release
    2. 2. Detailed value proposition and use cases
    3. 3. Fast validation with users
    4. 4. Capabilities assessment and own/partner role definitions
    5. 5. Revenue and cost models
    6. 6. Evaluation and business case
    7. 7. Competition and regulation
    8. 8. Technology and build process
    9. 9. Proof of Concept and final build
    10. 10. Sales and marketing
    11. 11. Launch
    12. 12. Evaluation and continuous development
  • Case studies: Vodafone 360, O2 Priority Moments
  • Checklists and templates for each stage

Value Network: Internal – Getting the Organisation Right to Deliver Telco 2.0 Innovation

  • Centralised versus decentralized organization structures
  • Integrating Telco 2.0 into the core organisation versus creating an independent unit
  • Case studies on different approaches: Telefonica and KPN

Value Network: External – Partnering to Grow the Pie

  • Evaluating closed versus open business models
  • Collaborating with other operators – when and how to do it
  • Working with other service providers – start-ups, established vendors and ‘OTT players’
  • Determining when to collaborate and when to compete

Technology: Prioritising Activities to Support Business Transformation

  • Understanding the developing demands on IT resources
  • Priority new functional area: Customer data
  • Approaches to IT transformation: Big Bang versus Continuous Improvement
  • Evaluating IT transformation approaches: a structured screening methodology
  • Case studies on IT transformation approaches: Vodafone and Telefonica

Finance: Optimising the Telco 2.0 Revenue & Cost Model

  • Revenue drivers: key revenue models and sources of revenue
  • Cost drivers: key types of cost and cost models
  • A framework for guiding decisions about revenue and cost management
  • Implications of new business models on financial and operational metrics

Marketplace: Managing the Regulatory Environment

  • Making the case against net neutrality…
  • …and for the ability to collaborate with other telecoms players to build value
  • Recommended next steps for CEOs

European Mobile: The Future’s not Bright, it’s Brutal

Summary findings and implications

Dark skies ahead

The mobile telecoms sector has performed quite strongly through the economic downturn but STL Partners’ forecast for UK, France, Germany, Spain and Italy suggests that the outlook is extremely bleak:

  • Even in the UK and Germany, the markets with the brightest future, STL Partners forecasts a respective 19% and 20% decline in mobile core services (voice, messaging and data) revenues by 2020. The UK has less far to fall simply because the market has already contracted over the last 2-3 years whereas the German market has continued to grow.
  • We forecast a decline of 34% in France over the same period.
  • In Italy and, in particular, Spain we forecast a brutal declines of 47% and 61% respectively.
  • Overall, STL Partners anticipates a reduction of 36% or €30 billion in core mobile service revenues by 2020. This equates to around €50 billion for Europe as a whole.

Figure 1: Mobile core Service revenues

European Mobile Core Services Revenue Forecast Chart, Oct 2012, Telco 2.0

Source: European regulators, Mobile operators, Barclays Capital, STL Partners assumptions and analysis

  • Even if our forecasts prove to be too pessimistic – and we have sought to be realistic rather than unduly negative and have built our models bottom up looking at pricing and volume trends wherever possible – the future looks much worse than other analysts and industry observers are currently forecasting. For example, a recent report by Arthur D Little and Exane BNP Paribas forecasts a 2.3% per annum decline in mobile to 2015 compared with our forecast of 4.3% per annum decline over the same period.
  • Data growth, service bundling, customer experience improvements and cost-cutting activities are valuable but fall way short of offsetting declines in voice and messaging. The game for mobile operators in Europe is changing forever: as things stand, in a few short years they will be forced to become very much more conservative businesses – more like gas and water companies. Interestingly, the capital markets already rate telecoms companies as utilities judging by their lofty dividend yields.
  • There will be casualties. Several operators will not exist in their current form by 2020. Despite the desire of regulators to have four or five network operators in their countries to encourage competition, the downward revenue pressure will favour scale economies and the pressure for many operators to merge or acquire/be acquired will be overwhelming.

Get your umbrellas ready now

We are starting to see a few European operators invest more actively in building new revenue streams – something that STL Partners has been pushing through its Telco 2.0 initiative for several years. Telefonica with Telefonica Digital, KPN, Orange, Telenor and a handful of other companies are becoming more active in ‘digital services’ and new business models. This activity urgently needs to be accelerated and prioritised if operators stand any chance of replacing the impeding revenue declines.

For future success, operators must embrace Telco 2.0 (and recognise the need for a new business model and new service offerings) whether that is as a lean ‘Telco 2.0 Happy Pipe’ or as a ‘Telco 2.0 Services Provider’. Both of these strategies require business model transformation that encompasses:

  • Major strategic choices and decisions about what the organisation should and should not do;
  • The identification, selection and development of new products and services;
  • More effective processes for bringing newly developed services to market;
  • A realignment of organisation structures to deliver the new services;
  • A redefinition of the way operators work with each other and with external partners to build value;
  • Clarification of how technology should support the Telco 2.0 business model and services;
  • A review of revenue and cost models to maximise value for consumers, partners and telcos themselves;
  • A new relationship with regulators as the industry seeks to redefine its role and value in the digital economy.

STL Partners remains committed to working with TMT players that want to make the changes identified above in three ways:

For more details of how STL Partners can help you, please contact us.

Introduction

The telecoms industry is performing quite well in a tough economic environment

At the moment, the global telecoms industry seems to be in relatively robust health – developing economies are driving subscriber growth, 4G is being rolled out, smartphones are being connected with data plans in huge numbers, service providers are selling bundled “integrated offers” to maintain revenues, and costs are being controlled with network-sharing and other strategies

But there is also a nagging concern held by industry managers and observers that all is not well ‘below the waterline’, especially in mature markets. There have been a few worrying signs from operators losing out on messaging revenues to OTT players like WhatsApp, or suffering outright reductions in revenues and subscriber numbers in markets like Spain. That said, these have been largely ascribed to poor pricing decisions or (hopefully) temporary local macroeconomic problems.

Certainly, the financial markets seem pretty convinced in the operators’ underlying ability to turn consumers’ desire for communication into ARPU. Not only that, but there is broad conviction that growing data revenues should be able to offset – plus or minus a little – slow declines in voice and messaging, especially when it is all wrapped up in a bundle.

The question is whether that assumption is really valid, or whether there are broader structural risks, or even any reality in the dystopian view that revenues could suddenly ‘fall off a cliff’? Looking at the fixed telecom industry, it is notable that voice revenues have undergone a fairly precipitous decline over the past decade, partly because of mobile substitution, partly because of competition and, in some cases such as lucrative international calls, because of competition from Skype and its peers. Meanwhile, adjacent markets such as cable have started to suffer from the popularity of alternative sources of digital TV and content. Some of the fixed operators have picked up the slack with IT services and cloud infrastructure, but others have suffered – often to the extent that they have sold out, typically to their mobile peers.

But how bright is the future really?

Will mobile operators fare any better over the next 5-10 years? In developed markets, they have to contend with market saturation, increasing competition on basic services, and tightening regulatory regimes. They also need to deal with the strategic issue of the internet-based app ecosystems such as Apple’s and Google’s, and OTT-type services from the likes of Facebook and Microsoft/Skype. There is also a possibility that the very nature of ‘core services’ like telephony might change, as voice communications starts to get embedded into apps and the web itself. Some observers even see our 100-year relationship with voice telephony diminishing in importance, as other forms of communication become more useful.

This report looks into the mobile marketplace – specifically, voice and messaging services in the main European countries. We have constructed a “what if?” scenario model, that takes some basic assumptions about voice usage and pricing, along with data revenues trends. Rather than just assuming that ARPU will remain broadly flat and then divide it up between voice and data, we’ve started looking from the bottom up. Can likely declines in voice revenues really be made up elsewhere, especially given the possible collapse of SMS and the commoditisation of mobile data? Just how big might the gap be that needs to be filled with ‘other services’ such as content resale, two-sided capability exposure, M2M, vertical industries or Telco-OTT propositions?

Taking together the five largest European mobile markets – Germany, France, UK, Italy and Spain – paints a picture that should cause some alarm. Despite the rise of smartphones and dongles, overall quarterly mobile revenues are down 10% on their peak from Q3 2009; falling from €24.7bn to €22.2bn in Q1 2012. Even accounting for seasonality, this is significant (a €10bn annualised shortfall) – and early results suggest the fall accelerated in Q2 2012, as economic and competitive factors bit deeper into sales, with recessions in several countries and new entrants such as Free in France.

Worse, if we just look at voice revenues, the market is now down 25% from its peak in Q2 2009, and that fall seems to be accelerating. While declining voice ARPU is not a huge surprise, the failure of other services to take up the slack is disappointing, especially as the source of new business – basic data connectivity – also is the most capex-hungry in terms of extra costs of new spectrum and 3G/4G build-out.

Figure 2: EU5 Mobile Services revenue already down 10% from 2009 peak

EU5 Mobile Services Revenues Chart, Telco 2.0, Oct 2012
Source: STL Partners

A set of cold-blooded forecasts for UK, France, Germany, Italy and Spain

To the best of our knowledge, nobody else has made forecasts that are both dispassionate and founded on hard data and bottom-up analysis.

Too many analyst (and we suspect internal) financial models seem to suggest that ‘It’ll be alright, somehow… telecoms operators need to harvest cash from voice and messaging, grow data and find some new revenues, but there’s plenty of options’. STL Partners is questioning the first and second premises in the statement above – about harvesting voice and messaging and growing broadband data – not because we’re pessimists, but because we think that many in the industry are not acknowledging the scale of the problems ahead and making the necessary (and often uncomfortable) decisions early enough.

Views vary widely on the outlook for mobile telecoms in Europe

It is fair to say that the fixed telecoms industry has undergone enough pain over the last decade to be under no illusions about its challenges. Operators realise that they face a continued hard slog against competition, regulation, content providers and indifferent consumers. They have increasingly focused on businesses, wholesale models and specific high-value niches like fibre-based triple-play. Deployment of FTTC/FTTH has been patchy, as they have realised that political support doesn’t equate to revenue uplift or return on capital.

Conversely, the mobile industry has pinned its hopes on LTE, data services and various collaboration and partnership business models. Some operators have essentially become Apple and Samsung resellers, offering credit-finance for expensive devices in the guise of handset subsidies. Plenty of other ideas, from mobile money to M2M to API exposure have been the subject of huge efforts. As yet, none has really moved the needle compared to the legacy telephony and SMS services that still make up a large (60%+) share of most operators’ top line revenues. The only bright spot has been plain-vanilla Internet access, initially with 3G dongle modems for PCs, and more recently for smartphone data plans. But the former has now gone largely ex-growth (thankfully, in some cases, given the traffic loads generated at low prices). And the latter faces growth challenges once most users have shifted to a smart device, as few users seem incentivised to upgrade to larger data plans so far.

Privately held view seems to be pessimistic…

In private discussions with operator executives, we encounter a fair level of pessimism, especially about voice and SMS revenues. At our conferences, we have asked senior executives (using our anonymised voting system) about possible price and value erosion, and are often surprised by how far and fast telcos seem to think these core services will dwindle.

Figure 3: Example Telco 2.0 delegate view of 3-year voice revenue decline

Euro Mobile: The Future's Brutal - delegate views, Telco 2.0, Oct 2012
Source: Delegate Vote, New Digital Economics Executive Brainstorm, November 2011

…yet publicly, there is much less acknowledgement of the scale of the issue.

We’ve seen investment banks’ forecasts that assume that ARPUs can be (mostly) maintained through the magic of bundling, while some operators themselves paint a picture that can, charitably, be seen as rose-tinted at best:

Figure 4: Orange remains optimistic about European telecoms revenues

Euro Mobile: The Future's Brutal, Orange Forecast, Telco 2.0, October 2012
Source: FT Orange

Contents:

  • The bundling paradox
  • General trends impacting core services revenues
  • Macro-economic issues
  • Competitive & regulatory price pressure
  • The declining demand for voice telephony
  • Data growth
  • The relative mix of pre-paid vs post-paid customers
  • Lower handset subsidies
  • Definitions, assumptions & methodology
  • UK
  • Germany
  • France
  • Italy
  • Spain
  • Europe-wide summary
  • Appendix – Benchmarking prices for core services

 

  • Figure 1 – Mobile core Service revenues
  • Figure 2 – EU5 Mobile Services revenue already down 10% from 2009 peak
  • Figure 3 – Example Telco 2.0 delegate view of 3-year voice revenue decline
  • Figure 4 – Orange remains optimistic about European telecoms revenues
  • Figure 5 – Vodafone view bundling as the way to stem revenue loss
  • Figure 6 – At least 4 of the 6 general trends that impact mobile core services revenues are negative
  • Figure 7 – Developed-market mobile pricing has dropped 10%+ per annum
  • Figure 8 – French, German and Spanish mobile voice has historically had higher prices than other European countries
  • Figure 9 – STL Partners recent analysis suggests that Spain’s voice prices are nearly double those of UK and France
  • Figure 10 – Spanish voice premium is not offset by materially cheaper data charges compared with other European markets
  • Figure 11 – Despite growth over 2005-2010 period, mobile voice volumes are now flattening in more mature markets
  • Figure 12 – The underlying decline in fixed voice minutes (excluding mobile substitution) appears to be around 2% per quarter in the UK
  • Figure 13 – Smartphone penetration of mobile user base, January 2012
  • Figure 14 – EU5 mobile data revenues have grown steadily, not exponentially – and show recent signs of flattening-off as SMS declines
  • Figure 15 – The UK has shown a steady decline mobile data revenue growth rate despite increases in dongles and smartphones
  • Figure 16 – UK Mobile voice volumes (billions of minutes)
  • Figure 17 – UK Baseline Mobile Revenues down 25% from 2011 levels by 2020
  • Figure 18 – Unlike the UK, Germany mobile voice traffic is still growing strongly…
  • Figure 19 – …and mobile data usage in Germany is exploding (from a low base)
  • Figure 20 – Price pressure has meant that German mobile revenues have been flat in the recent past
  • Figure 21 – Germany Baseline Mobile Revenues down 18% from 2009 levels by 2020
  • Figure 22 – French mobile telephony volumes are still rising
  • Figure 23 – SMS and mobile data traffic volumes growing strongly
  • Figure 24 – France Baseline Mobile Revenues down 35% from 2009 levels by 2020
  • Figure 25 – Italy Baseline Mobile Revenues down 46% from 2009 levels by 2020
  • Figure 26 – Spain has been hurt especially hard by WhatsApp
  • Figure 27 – Spanish mobile voice traffic has been flat, but now faces decline
  • Figure 28 – The Spanish mobile market will fall precipitously through to 2020
  • Figure 29 – Total EU5 mobile core services revenues will fall 38% from peak by 2020
  • Figure 30 – Spain and Italy, in particular, are likely to experience a major decline in core mobile services revenues
  • Figure 31 – Mobile Voice Telephony Revenue Forecast by Country 2012-2020
  • Figure 32 – Extract from STL Partners database of 30-day SIM-only bundles
  • Figure 33 – Extract of how unit prices were calculated by STL Partners

 

Cloud 2.0: the fight for the next wave of customers

Summary: The fight for the Cloud Services market is about to move into new segments and territories. In the build up to the launch of our new strategy report, ‘Telco strategies in the Cloud’, we review perspectives on this shared at the 2012 EMEA and Silicon Valley Executive Brainstorms by strategists from major telcos and tech players, including: Orange, Telefonica, Verizon, Vodafone, Amazon, Bain, Cisco, and Ericsson (September 2012, , Executive Briefing Service, Cloud & Enterprise ICT Stream). Cloud Growth Groups September 2012
  Read in Full (Members only)   To Subscribe click here

Below is an extract from this 33 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Cloud and Enterprise ICT Stream here. Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Introduction

As part of the New Digital Economics Executive Brainstorm series, future strategies in Cloud Services were explored at the New Digital Economics Silicon Valley event at the Marriott Hotel, San Francisco, on the 27th March, 2012, and the second EMEA Cloud 2.0 event at the Grange St. Pauls Hotel on the 13th June 2012.

At the events, over 200 specially-invited senior executives from across the communications, media, retail, finance and technology sectors looked at how to make money from cloud services and the role and strategies of telcos in this industry, using a widely acclaimed interactive format called ‘Mindshare’.

This briefing summarises key points, participant votes, and our high-level take-outs from across the events, and focuses on the common theme that the cloud market is evolving to address new customers, and the consequence of this change on strategy and implementation. We are also publishing a comprehensive report on Cloud 2.0: Telco Strategies in the Cloud.

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Executive Summary

The end of the beginning

The first phase of enterprise cloud services has been dominated by the ‘big tech’ and web players like Amazon, Google, and Microsoft, who have developed highly sophisticated cloud operations at enormous scale. The customers in this first round are the classic ‘early adopters’ of enterprise ICT – players with a high proportion of IT genes in their corporate DNA such as Netflix, NASA, Silicon Valley start ups, some of the world’s largest industrial and marketing companies, and the IT industry itself. There is little doubt that these leading customers and major suppliers will retain their leading edge status in the market.

The next phase of cloud market development is the move into new segments in the broader market. Participants at the EMEA brainstorm thought that a combination of new customers and new propositions would drive the most growth in the next 3 years.

UK Services Revenues: Actual and Forecast (index)

These new segments comprise both industries and companies outside the early adopters in developed markets, and companies in new territories in emerging and developing markets. These customers are typically less technology oriented, more focused on business requirements, and need a combination of de-mystification of cloud and support to develop and run such systems.

Closer to the customer

There are opportunities for telcos in this evolving landscape. While the major players’ scale will be hard to beat, there are opportunities in the new segments in being ‘closer to the customer’. This involves telcos leveraging potential advantages of:

  • existing customer relationships, existing enterprise IT assets, and channels to markets (where they exist);
  • geographical proximity, where telcos can build, locate and connect more directly to overcome data sovereignty and latency issues.

Offering unique, differentiated services

Telcos should also be able to leverage existing assets and capabilities through APIs in the cloud to create distinctive offerings to enterprise and SME customers:

  • Network assets will enable better management of cloud services by allowing greater control of the network components;
  • Data assets will enable a wider range of potential applications for cloud services that use telco data (such as identification services);
  • And communications assets (such as APIs to voice and messaging) will allow communications services to be built in to cloud applications.

Next steps for telcos

  • Telcos need to move fast to leverage their existing relationships with customers both large and small and optimise their cloud offerings in line with new trends in the enterprise ICT market, such as bring-your-own-device (BYOD).
  • Customers are increasingly looking to outsource business processes to cut costs, and telcos are well-placed to take advantage of this opportunity.
  • Telcos need to continue to partner with independent software vendors, in order to build new products and services. Telcos should also focus on tight integration between their core services and cloud services or cloud service providers (either delivered by themselves or by third parties.) During the events, we saw examples from Vodafone, Verizon and Orange amongst others.
  • Telcos should also look at the opportunity to act as cloud service brokers. For example, delivering a mash up of Google Apps, Workday and other services that are tightly integrated with telco products, such as billing, support, voice and data services. The telco could ensure that the applications work well together and deliver a fully supported, managed and billed suite of products.
  • Identity management and security also came through as strong themes and there is a natural role for telcos to play here. Telcos already have a trusted billing relationship and hold personal customer information. Extending this capability to offer pre-population of forms, acting as an authentication broker on behalf of other services and integrating information about location and context through APIs would represent additional business and revenue generating opportunities.
  • Most telcos are already exploring opportunities to exploit APIs, which will enable them to start offering network-as-a-service, voice-as-a-service, device management, billing integration and other services. Depending on platform and network capability, there are literally hundreds of APIs that telcos could offer to external developers. These APIs could be used to develop applications that are integrated with telcos’ network product or service, which in turn makes the telco more relevant to their customers.

We will be exploring these strategies in depth in Cloud 2.0: Telco Strategies in the Cloud and at the invitation only New Digital Economics Executive Brainstorms in Digital Arabia in Dubai, 6-7 November, and Digital Asia in Singapore, 3-5 December, 2012.

Key questions explored at the brainstorms and in this briefing:

  • How will the Cloud Services market evolve?
  • Which customer and service segments are growing fastest (Iaas, PaaS, SaaS)?
  • What are the critical success factors to market adoption?
  • Who will be the leading players, and how will it impact different sectors?
  • What are the telcos’ strengths and who are the most advanced telcos today?
  • Which aspects of the cloud services market should they pursue first?
  • Where should telcos compete with IT companies and where should they cooperate?
  • What must telcos do to secure their share of the cloud and how much time do they have?

Stimulus Speakers/Panelists

Telcos

  • Peter Martin, Head of Strategy, Cloud Computing, Orange Group
  • Moisés Navarro Marín, Director, Strategy Global Cloud Services, Telefonica Digital
  • Alex Jinivizian, Head of Enterprise Strategy, Verizon Enterprise Solutions
  • Robert Brace, Head of Cloud Services, Vodafone Group

Technology Companies

  • Mohan Sadashiva, VP & GM, Cloud Services, Aepona
  • Gustavo Reyna, Solutions Marketing Manager, Aepona
  • Iain Gavin, Head of EMEA Web Services, Amazon
  • Pat Adamiak, Senior Director, Cloud Solutions, Cisco
  • Charles J. Meyers, President, Equinix Americas
  • Arun Bhikshesvaran, CMO, Ericsson
  • John Zanni, VP of Service Provider Marketing & Alliances, Parallels

Consulting & Industry Analysis

  • Chris Brahm, Partner, Head of Americas Technology Practices, Bain
  • Andrew Collinson, Research Director, STL Partners

With thanks to our Silicon Valley 2012 event sponsors and partners:

Silicon Valley 2012 Event Sponsors

And our EMEA 2012 event sponsors:

EMEA 2012 Event Sponsors

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

  • Round 2 of the Cloud Fight
  • Selling to new customers
  • What channels are needed?
  • How will telcos perform in cloud?
  • With which services will telcos succeed?
  • How can telcos differentiate?
  • Comments on telcos’ role, objectives and opportunities
  • Four telcos’ perspectives
  • Telefonica Digital – focusing on business requirements
  • Verizon – Cloud as a key Platform
  • Orange Business Services – communications related cloud
  • Vodafone – future cloud vision
  • Techco’s Perspectives
  • Amazon – A history of Amazon Web Services (AWS)
  • Cisco – a world of many clouds
  • Ericsson – the networked society and telco cloud
  • Aepona – Cloud Brokerage & ‘Network as a Service’ (NaaS)
  • The Telco 2.0™ Initiative

…and the following figures…

  • Figure 1 – Bain forecasts for business cloud market size
  • Figure 2 – Key barriers to cloud adoption
  • Figure 3 – Identifying the cloud growth markets
  • Figure 4 – Requirements for success
  • Figure 5 – New customers to drive cloud growth
  • Figure 6 – How to increase revenues from cloud services
  • Figure 7 – How to move cloud services forward
  • Figure 8 – Enterprise cloud channels
  • Figure 9 – Small businesses cloud channels
  • Figure 10 – Vote on Telco Cloud Market Share
  • Figure 11 – Telcos’ top differentiators in the cloud
  • Figure 12 – The global reach of Orange Business
  • Figure 13 – The telco as an intermediary
  • Figure 14 – Vodafone’s vision of the cloud
  • Figure 15 – Amazon Web Services’ cloud infrastructure
  • Figure 16 – Cisco’s world of many clouds
  • Figure 17 – Cloud traffic in the data centre
  • Figure 18 – Ericsson’s vision for telco cloud
  • Figure 19 – Summary of Ericsson cloud functions
  • Figure 20 – Aepona Cloud Services Broker
  • Figure 21 – How to deliver network-enhanced cloud services

Members of the Telco 2.0 Executive Briefing Subscription Service and the Cloud and Enterprise ICT Stream can download the full 33 page report in PDF format hereNon-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Companies and technologies covered: Telefonica, Vodafone, Verizon, Orange, Cloud, Amazon, Google, Ericsson, Cisco, Aepona, Equinix, Parallels, Bain, Telco 2.0, IaaS, PaaS, SaaS, private cloud, public cloud, telecom, strategy, innovation, ICT, enterprise.

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

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

 

  • Below is an extract from this 29 page report, kindly commissioned and sponsored by Openet and independently produced by Telco 2.0. Openet developed the initial research concept and scope. The research, analysis and the writing of the report itself was carried out independently by STL Partners.
  • Members of the Telco 2.0 Executive Briefing service can download this report in full in PDF format here.
  • Alternatively, to download this report for free, join our Foundation 2.0 service (details here) by using the promotional code FOUNDATION2 in the box at the bottom of the sign-up page here. Once registered, you will be able to download the report here.
  • We’ll also be discussing our findings at the EMEA Executive Brainstorm in London (12-13 June, 2012).
  • To access reports from the full Telco 2.0 Executive Briefing service, to submit whitepapers for review for inclusion in this service, or to find out more about our services please email contact@telco2.net or call +44 (0) 207 247 5003.

Preface

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

Openet White Paper Cover Image

Executive Summary

Headline Conclusions

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

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

 

Introduction, Objectives and Methodology

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

The objectives of the research were to determine:

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

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

Companies interviewed for this report

Source: STL Partners

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

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

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

Report Contents

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

Report Figures

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

To access this report:

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

About Openet

Openet Logo

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

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

Strategy 2.0: Google’s Strategic Identity Crisis

Summary: Google’s shares have made little headway recently despite its dominance in search and advertising, and it faces increasing regulatory threats in this area. It either needs to find new sources of value growth or start paying out dividends, like Microsoft, Apple (or indeed, a telco). Overall, this is resulting in something of a strategic identity crisis. A review of Google’s strategy and implications for Telcos. (March 2012, Executive Briefing Service, Dealing with Disruption Stream).

Google's Advertising Revenues Cascade

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Below is an extract from this 24 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Dealing with Disruption Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £595 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003. We’ll also be discussing our findings and more on Google at the Silicon Valley (27-28 March) and London (12-13 June) New Digital Economics Brainstorms.

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Executive Summary

Google appears to be suffering from a strategic identity crisis. It is the giant of search advertising but it also now owns a handset maker, fibre projects, an increasingly fragmented mobile operating system, a social network of questionable success, and a driverless car programme (among other things). It has a great reputation for innovation and creativity, but risks losing direction and value by trying to focus on too many strategies and initiatives.

We believe that Google needs to stop trying to copy what Apple and Facebook are doing, de-prioritise its ‘Hail Mary’ hunt for a strategy (e.g. driverless cars), and continue to build new solutions that serve better the customers who are already willing to pay – namely, advertisers.

It is our view that the companies who have created most value in the market have done so by solving a customer problem really well. Apple’s recent success derives from creating a simpler and more beautiful way (platform + products) for people to manage their digital lives. People pay because it’s appealing and it works.

Google initially solved how people could find relevant information online and then, critically, how to use this to help advertisers get more customers. They do this so well that Google’s $37bn revenues continue to grow at double digit pace, and there’s plenty of headroom in the market for now. While the TV strategy may not yet be paying off, it would seem sensible to keep working at it to try to keep extending the reach of Google’s platform. 

While Android keeps Google in the mobile game to a degree, and has certainly helped to constrain certain rivals, we think Google should cast a hard eye over its other competing and distracting activities: Motorola, Payments, Google +, Driverless Cars etc. Its management team should look at the size of the opportunity, the strength of the competition, and their ability to execute in each. 

Pruning the projects might also lose Google an adversary or two, and it might also afford some reward to shareholders too. After all, even Apple has recently decided to pay back some cash to investors.

This may be very difficult for Google’s current leadership. Larry Page seems to have the restless instincts of the stereotypical Valley venture capitalist, hunting the latest ideas, and constantly trying to create the next big beautiful thing. The trouble is that this is Google in 2012, not 1995, and it looks to us at least that a degree of ‘sticking to the knitting’ within Google’s huge, profitable and growing search advertising business may be a better bet than the highly speculative (and expensive) ‘Hail Mary’ strategy route. 

This may sound surprising coming from us, the inveterate fans of innovation at Telco 2.0, so we’d like to point out some important differences between the situations that Google and the telcos are in:

  • Google’s core markets are growing, not flat or shrinking, and are at a different life-stage to the telecoms market;
  • Google is global, rather than being confined to any given geography. There are many opportunities still out there.
  • We are not saying that Google should stop innovating, but we are saying it should focus its innovative energy more clearly on activities that grow the core business.

Introduction

In January this year, Google achieved a first – it missed the consensus forecast for its quarterly earnings. There is of course no magic in the consensus, which is an average of highly conventionalised guesses from a bunch of City analysts, but it is as good a moment as ever to review Google’s strategic position. If you bought Google stock at the beginning, you may not need to read this, as you’re probably very rich (the return since then is of the order of 400%). The entirety of this return, however, is accounted for by the 2004-2007 bull run. On a five-year basis, Google stock is ahead 30%, which sounds pretty impressive (a 6% annual return), but again, all the growth is accounted for by the last surge upwards over the summer of 2007. The peak was achieved on the 2nd of November, 2007. 

As this chart shows, Google stock is still down about 9% from the peak, and perhaps more importantly, its path tracks Microsoft very closely indeed. Plus Microsoft investors get a dividend, whereas Google investors do not.

Figure 1: Google, Microsoft 2.0?

Google, Microsoft 2.0?
Source: Google Finance

Larry Page is reported to have said that “Google is no longer a “search company.” He says its model is now 

“invent wild things that will help humanity, get them adopted by users, profit, and then use the corporate structure to keep inventing new things.”

No longer a search company? Take a look at the revenues. Out of Google’s $37.9bn in revenues in 2011, $36bn came from advertising, aka the flip side of Google Search. Despite a whole string of mammoth product launches since 2007, Google’s business is essentially what it was in 2007 – a massive search-based advertising machine.

Google’s Challenges

Our last Google coverage – Android: An Anti-Apple Virus ? and the Dealing with the Disruptors Strategy Report   suggested that the search giant was suffering from a lack of direction, although some of this was accounted for by a deliberate policy of experimenting and shutting down failed initiatives.

Since then, Google has launched Google +, closed Google Buzz, and closed Google Wave while releasing it into a second life as an open-source project. It has been involved in major litigation over patents and in regulatory inquiries. It has seen an enormous boom in Android shipments but not necessarily much revenue. It is about to become a major hardware manufacturer by acquiring Motorola. And it has embarked on extensive changes to the core search product and to company-wide UI design.

In this note, we will explore Google’s activities since our last note, summarise key threats to the business and strategies to counter them, and consider if a bearish view of the company is appropriate.

We’ve found it convenient to organise Google’s business  into several themed groups as follows:

1: Questionable Victories

Pyrrhic victory is defined as a victory so costly it is indistinguishable from defeat. Although there is nothing so bad at Google, it seems to have a knack of creating products that are hugely successful without necessarily generating cash. Android is exhibit A. 

The obvious point here is surging, soaring growth – forecasts for Android shipments have repeatedly been made, beaten on the upside, adjusted upwards, and then beaten again. Android has hugely expanded the market for smartphones overall, caused seismic change in the vendor industry, and triggered an intellectual property war. It has found its way into an awe-inspiring variety of devices and device classes.

But questions are still hanging over how much actual money is involved. During the Q4 results call, a figure for “mobile” revenues of $2.5bn was quoted. This turns out to consist of advertising served to browsers that present a mobile device user-agent string. However, Google lawyer Susan Creighton is on record as saying  that 66% of Google mobile web traffic originates from Apple iOS devices. It is hard to see how this can be accounted for as Android revenue.

Further, the much-trailed “fragmentation” began in 2011 with a vengeance. “Forkdroids”, devices using an operating system based on Android but extensively adapted (“forked” from the main development line), appeared in China and elsewhere. Amazon’s Kindle Fire tablet is an example closer to home.

And the intellectual property fights with Oracle, Apple, and others are a constant source of disruption and a potentially sizable leakage of revenue. In so far as Google’s motivation in acquiring Motorola Mobility was to get hold of its patent portfolio, this has already involved very large sums of money. Another counter-strategy is the partnership with Intel and Lenovo to produce x86-based Android devices, which cannot be cheap either and will probably mean even more fragmentation.

This is not the only example, though – think of Google Books, an extremely expensive product which caused a great deal of litigation, eventually got its way (although not all the issues are resolved), and is now an excellent free tool for searching in old books but no kind of profit centre. Further, Google’s patented automatic scanning has the unfortunate feature of pulling in marginalia, etc. from the original text that its rivals (such as Amazon Kindle) don’t.
Further, Google has recently been trying to monetise one of its classic products, the Google Maps API that essentially started the Web 2.0 phenomenon, with the result that several heavy users (notably Apple and Foursquare)  have migrated to the free OpenStreetMap project and its OpenLayers API.

2: Telco-isation

Like a telco, Google is dependent on one key source of revenue that cross-subsidises the rest of the company – search-based advertising. 

Figure 2: Google’s advertising revenues cascade into all other divisions

Google's Advertising Revenues Cascade

[NB TAC = Traffic Acquisition Cost, CoNR = Cost of Net Revenues]

Having proven to be a category killer for search and advertising across the  whole of the Internet, the twins (search and ads) are hugely critical for Google and also for millions of web sites, content creators, and applications developers. As a result, just like a telco, they are increasingly subject to regulation and political risk. 

Google search rankings have always been subject to an arms race between the black art of search-engine optimisation and Google engineers’ efforts to ensure the integrity of their results, but the whole issue has taken a more serious twist with the arrival of a Federal Trade Commission inquiry into Google’s business practices. The potential problems were dramatised by the so-called “white lady from Google”  incident at Google Kenya, where Google employees scraped a rival directory website’s customers and cold-called them, misrepresenting their competitors’ services, and further by the $500 million online pharmacy settlement. Similarly, the case of the Spanish camp site that wants to be disassociated from horrific photographs of a disaster demonstrates both that there is a demand for regulation and that sooner or later, a regulator or legislator will be tempted to supply it.

The decision to stream Google search quality meetings online should be seen in this light, as an effort to cover this political flank.

As well as the FTC, there is also substantial regulatory risk in the EU. The European Commission, in giving permission for the Motorola acquisition, also stated that it would consider further transactions involving Google and Motorola’s intellectual property on a case-by-case basis. To put it another way, after the Motorola deal, the Commission has set up a Google Alert for M&A activity involving Google.

3: Look & Feel Problems

Google is in the process of a far-reaching refresh of its user interfaces, graphic design, and core search product. The new look affects Search, GMail, and Google + so far, but is presumably going to roll out across the entire company. At the same time, they have begun to integrate Google + content into the search results.

This is, unsurprisingly, controversial and has attracted much criticism, so far only from the early adopter crowd. There is a need for real data to evaluate it. However, there are some reasons to think that Search is looking in the wrong place.

Since the major release codenamed Caffeine in 2008, Google Search engineers have been optimising the system for speed and for first-hit relevance, while also indexing rapidly-changing content faster by redesigning the process of “spidering” web sites to work in parallel. Since then, Google Instant has further concentrated on speed to the first result. In the Q4 results, it was suggested that mobile users are less valuable to Google than desktop ones. One reason for this may be that “obvious” search – Wikipedia in the first two hits – is well served by mobile apps. Some users find that Google’s “deep web” search has suffered.

Under “Google and your world”, recommendations drawn from Google + are being injected into search results. This is especially controversial for a mixture of privacy and user-experience reasons. Danny Sullivan’s SearchEngineLand, for example, argues that it harms relevance without adding enough private results to be of value. Further, doubt has been cast on Google’s numbers regarding the new policy of integrating Google accounts into G+ and G+ content into search.

Another, cogent criticism is that it introduces an element of personality that will render regulatory issues more troublesome. When Google’s results were visibly the output of an algorithm, it was easier for Google to claim that they were the work of impartial machines. If they are given agency and associated with individuals, it may be harder to deny that there is an element of editorial judgment and hence the possibility of bias involved.

Social search has been repeatedly mooted since the mid-2000s as the next-big-thing, but it seems hard to implement. Yahoo!, Facebook, and several others have tried and failed.

Figure 3: Google + on Google Trends: fading into the noise?

 Google + on Google Trends: Fading Into the Noise?
Source: Google Trends

It is possible that Google may have a structural weakness in design as opposed to engineering (which is as excellent as ever). This may explain why a succession of design-focused initiatives have failed – Wave and Buzz have been shut down, Google TV hasn’t gained traction (there are less than one million active devices), and feedback on the developer APIs is poor.

4: Palpable Project Proliferation

Google’s tendency to launch new products is as intimidating as ever. However, there is a strong argument that its tireless creativity lacks focus, and the hit-rate is worrying low. Does Google really need two cut-down OSs for ultra-mobile devices? It has both Android, and ChromeOS, and if the first was intended for mobile phones and the second for netbooks, you can now buy a netbook-like (but rather more powerful) Asus PC that runs Android. Further, Google supports a third operating system for its own internal purposes – the highly customised version of Linux that powers the Google Platform – and could be said to support a fourth, as it pays the Mozilla Foundation substantial amounts of money under the terms of their distribution agreement and their Boot to Gecko project is essentially a mobile OS. IBM also supported four operating systems at its historic peak in the 1980s.  

Also, does Google really need to operate an FTTH network, or own a smartphone vendor? The Larry Page quote we opened with tends to suggest that Google’s historical tendency to do experiments is at work, but both Google’s revenue raisers (Ads and YouTube, which from an economic point of view is part of the advertising business) date from the first three years as a public company. The only real hit Google has had for some time is Android, and as we have seen, it’s not clear that it makes serious money.

Google Wallet, for example, was launched with a blaze of publicity, but failed to attract support from either the financial or the telecoms industry, rather like its predecessor Google Checkout. It also failed to gain user adoption, but it has this in common with all NFC-based payments initiatives. Recently, a major security bug was discovered, and key staff have been leaving steadily, including the head of consumer payments. Another shutdown is probably on the cards. 

Meanwhile, a whole range of minor applications have been shuttered

Another heavily hyped project which does not seem to be gaining traction is the Chromebook, the hardware-as-a-service IT offering aimed at enterprises. This has been criticised on the basis that its $28/seat/month pricing is actually rather high. Over a typical 3 year depreciation cycle for IT equipment, it’s on a par with Apple laptops, and has the restriction that all the applications must work in a Web browser on netbook-class hardware. Google management has been promoting small contract wins in US school districts . Meanwhile, it is frequently observed that Google’s own PC fleet consists mostly of Apple hardware. If Google won’t use them itself, why should any other enterprise IT shop do so? The Google Search meeting linked above contains 2 Lenovo ThinkPads and 13 Apple MacBooks of various models and zero Chromebooks, while none other than Eric Schmidt used a Mac for his MWC 2012 keynote. Traditionally, Google insisted on “dogfooding” its products by using them internally.

The Google Fibre project in Kansas City, for its part, has been struggling with regulatory problems related to its access to city-owned civil infrastructure. Kansas City’s utility poles have reserved areas for different services, for example telecoms and electrical power. Google was given the concession to string the fibre in the more spacious electrical section – however, this requires high voltage electricians rather than telecoms installers to do the job and costs substantially more. Google has been trying to change the terms, and use the telecoms section, but (unsurprisingly) local cable and Bell operators are objecting. As with the muni-WLAN projects of the mid-2000s, the abortive attempt to market the Nexus One without the carriers, and Google Voice, Google has had to learn the hard way that telecoms is difficult.

And while all this has been going on, you might wonder where Google Enterprise 2.0 or Google Ads 2.0 are.

5. Google Play – a Collection of Challenges?

Google recently announced its “new ecosystem”, Google Play. This consists of what was historically known as the Android Market, plus Google Books, Google Music, and the web-based elements of Google Wallet (aka Google Checkout). All of these products are more or less challenged. Although the Android Market has been a success in distributing apps to the growing fleets of Android devices, it continues to contain an unusually high percentage of free apps, developer payouts tend to be lower than on its rivals, and it has had repeated problems with malware. Google Books has been an expensive hobby, involving substantial engineering work and litigation, and seems unlikely to be a profit centre. Google Music – as opposed to YouTube – is also no great success, and it is worth asking why both projects continue.

However, it will be the existing manager of Google Music who takes charge, with Android Market management moving out. It is worth noting that in fact there were two heads of the Android Market – Eric Chu for developer relations and David Conway for product management. This is not ideal in itself.

Further, an effort is being made to force app developers to use the ex-Google Checkout system for in-app billing. This obviously reflects an increased concern for monetisation, but it also suggests a degree of “arguing with the customers”.

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

  • On the Other Hand…
  • Strengths of the Core Business
  • “Apple vs. Google”
  • Content acquisition
  • Summary Key Product Review
  • Search & Advertising
  • YouTube and Google TV
  • Communications Products
  • Android
  • Enterprise
  • Developer Products
  • Summary: Google Dashboard
  • Conclusion
  • Recommendations for Operators
  • The Telco 2.0™ Initiative
  • Index

…and the following figures…

  • Figure 1: Google, Microsoft 2.0?
  • Figure 2: Google’s advertising revenues cascade into all other divisions
  • Figure 3: Google + on Google Trends: fading into the noise?
  • Figure 4: Google’s Diverse Advertiser Base
  • Figure 5: Google’s Content Acquisition. 2008-2009, the missing data point
  • Figure 6: Google Product Dashboard

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 24 page report in PDF format hereNon-Members, please subscribe here, buy a Single User license for this report online here for £595 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, geographies, people and products referenced: AdSense, AdWords, Amazon, Android, Apple, Asus, AT&T, Australia, BBVA, Bell Labs, Boot to Gecko, Caffeine, CES, China, Chromebook, ChromeOS, ContentID, David Conway, Eric Chu, Eric Schmidt, European Commission, Facebook, Federal Trade Commission, GMail, Google, Google +, Google Books, Google Buzz, Google Checkout, Google Maps, Google Music, Google Play, Google TV, Google Voice, Google Wave, GSM, IBM, Intel, Kenya, Keyhole Software, Kindle Fire, Larry Page, Lenovo, Linux, MacBooks, Microsoft, Motorola, Mozilla Foundation, Netflix, Nexus, Office 365, OneNet, OpenLayers API, OpenStreetMap, Oracle, Susan Creighton, ThinkPads, VMWare, Vodafone, Western Electric, Wikipedia, Yahoo!, Your World, YouTube, Zynga

Technologies and industry terms referenced: advertisers, API, content acquisition costs, driverless car, Fibre, Forkdroids, M&A, mobile apps, muni-WLAN, NFC, Search, smart TV, spectrum, UI, VoIP, Wallet

Mobile Broadband 2.0: The Top Disruptive Innovations

Summary: Key trends, tactics, and technologies for mobile broadband networks and services that will influence mid-term revenue opportunities, cost structures and competitive threats. Includes consideration of LTE, network sharing, WiFi, next-gen IP (EPC), small cells, CDNs, policy control, business model enablers and more.(March 2012, Executive Briefing Service, Future of the Networks Stream).

Trends in European data usage

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Below is an extract from this 44 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and Future Networks Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £795 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003. We’ll also be discussing our findings and more on Facebook at the Silicon Valley (27-28 March) and London (12-13 June) New Digital Economics Brainstorms.

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Introduction

Telco 2.0 has previously published a wide variety of documents and blog posts on mobile broadband topics – content delivery networks (CDNs), mobile CDNs, WiFi offloading, Public WiFi, network outsourcing (“‘Under-The-Floor’ (UTF) Players: threat or opportunity? ”) and so forth. Our conferences have featured speakers and panellists discussing operator data-plan pricing strategies, tablets, network policy and numerous other angles. We’ve also featured guest material such as Arete Research’s report LTE: Late, Tempting, and Elusive.

In our recent ‘Under the Floor (UTF) Players‘ Briefing we looked at strategies to deal with some of of the challenges facing operators’ resulting from market structure and outsourcing

Under The Floor (UTF) Players Telco 2.0

This Executive Briefing is intended to complement and extend those efforts, looking specifically at those technical and business trends which are truly “disruptive”, either immediately or in the medium-term future. In essence, the document can be thought of as a checklist for strategists – pointing out key technologies or trends around mobile broadband networks and services that will influence mid-term revenue opportunities and threats. Some of those checklist items are relatively well-known, others more obscure but nonetheless important. What this document doesn’t cover is more straightforward concepts around pricing, customer service, segmentation and so forth – all important to get right, but rarely disruptive in nature.

During 2012, Telco 2.0 will be rolling out a new MBB workshop concept, which will audit operators’ existing technology strategy and planning around mobile data services and infrastructure. This briefing document is a roundup of some of the critical issues we will be advising on, as well as our top-level thinking on the importance of each trend.

It starts by discussing some of the issues which determine the extent of any disruption:

  • Growth in mobile data usage – and whether the much-vaunted “tsunami” of traffic may be slowing down
  • The role of standardisation , and whether it is a facilitator or inhibitor of disruption
  • Whether the most important MBB disruptions are likely to be telco-driven, or will stem from other actors such as device suppliers, IT companies or Internet firms.

The report then drills into a few particular domains where technology is evolving, looking at some of the most interesting and far-reaching trends and innovations. These are split broadly between:

  • Network infrastructure evolution (radio and core)
  • Control and policy functions, and business-model enablers

It is not feasible for us to cover all these areas in huge depth in a briefing paper such as this. Some areas such as CDNs and LTE have already been subject to other Telco 2.0 analysis, and this will be linked to where appropriate. Instead, we have drilled down into certain aspects we feel are especially interesting, particularly where these are outside the mainstream of industry awareness and thinking – and tried to map technical evolution paths onto potential business model opportunities and threats.

This report cannot be truly exhaustive – it doesn’t look at the nitty-gritty of silicon components, or antenna design, for example. It also treads a fine line between technological accuracy and ease-of-understanding for the knowledgeable but business-focused reader. For more detail or clarification on any area, please get in touch with us – email mailto:contact@stlpartners.com or call +44 (0) 207 247 5003.

Telco-driven disruption vs. external trends

There are various potential sources of disruption for the mobile broadband marketplace:

  • New technologies and business models implemented by telcos, which increase revenues, decrease costs, improve performance or alter the competitive dynamics between service providers.
  • 3rd party developments that can either bolster or undermine the operators’ broadband strategies. This includes both direct MBB innovations (new uses of WiFi, for example), or bleed-over from adjacent related marketplaces such as device creation or content/application provision.
  • External, non-technology effects such as changing regulation, economic backdrop or consumer behaviour.

The majority of this report covers “official” telco-centric innovations – LTE networks, new forms of policy control and so on,

External disruptions to monitor

But the most dangerous form of innovation is that from third parties, which can undermine assumptions about the ways mobile broadband can be used, introducing new mechanisms for arbitrage, or somehow subvert operators’ pricing plans or network controls. 

In the voice communications world, there are often regulations in place to protect service providers – such as banning the use of “SIM boxes” to terminate calls and reduce interconnection payments. But in the data environment, it is far less obvious that many work-arounds can either be seen as illegal, or even outside the scope of fair-usage conditions. That said, we have already seen some attempts by telcos to manage these effects – such as charging extra for “tethering” on smartphones.

It is not really possible to predict all possible disruptions of this type – such is the nature of innovation. But by describing a few examples, market participants can gauge their level of awareness, as well as gain motivation for ongoing “scanning” of new developments.

Some of the areas being followed by Telco 2.0 include:

  • Connection-sharing. This is where users might link devices together locally, perhaps through WiFi or Bluetooth, and share multiple cellular data connections. This is essentially “multi-tethering” – for example, 3 smartphones discovering each other nearby, perhaps each with a different 3G/4G provider, and pooling their connections together for shared use. From the user’s point of view it could improve effective coverage and maximum/average throughput speed. But from the operators’ view it would break the link between user identity and subscription, and essentially offload traffic from poor-quality networks on to better ones.
  • SoftSIM or SIM-free wireless. Over the last five years, various attempts have been made to decouple mobile data connections from SIM-based authentication. In some ways this is not new – WiFi doesn’t need a SIM, while it’s optional for WiMAX, and CDMA devices have typically been “hard-coded” to just register on a specific operator network. But the GSM/UMTS/LTE world has always relied on subscriber identification through a physical card. At one level, it s very good – SIMs are distributed easily and have enabled a successful prepay ecosystem to evolve. They provide operator control points and the ability to host secure applications on the card itself. However, the need to obtain a physical card restricts business models, especially for transient/temporary use such as a “one day pass”. But the most dangerous potential change is a move to a “soft” SIM, embedded in the device software stack. Companies such as Apple have long dreamed of acting as a virtual network provider, brokering between user and multiple networks. There is even a patent for encouraging bidding per-call (or perhaps per data-connection) with telcos competing head to head on price/quality grounds. Telco 2.0 views this type of least-cost routing as a major potential risk for operators, especially for mobile data – although it also possible enables some new business models that have been difficult to achieve in the past.
  • Encryption. Various of the new business models and technology deployment intentions of operators, vendors and standards bodies are predicated on analysing data flows. Deep packet inspection (DPI) is expected to be used to identify applications or traffic types, enabling differential treatment in the network, or different charging models to be employed. Yet this is rendered largely useless (or at least severely limited) when various types of encryption are used. Various content and application types already secure data in this way – content DRM, BlackBerry traffic, corporate VPN connections and so on. But increasingly, we will see major Internet companies such as Apple, Google, Facebook and Microsoft using such techniques both for their own users’ security, but also because it hides precise indicators of usage from the network operators. If a future Android phone sends all its mobile data back via a VPN tunnel and breaks it out in Mountain View, California, operators will be unable to discern YouTube video from search of VoIP traffic. This is one of the reasons why application-based charging models – one- or two-sided – are difficult to implement.
  • Application evolution speed. One of the largest challenges for operators is the pace of change of mobile applications. The growing penetration of smartphones, appstores and ease of “viral” adoption of new services causes a fundamental problem – applications emerge and evolve on a month-by-month or even week-by-week basis. This is faster than any realistic internal telco processes for developing new pricing plans, or changing network policies. Worse, the nature of “applications” is itself changing, with the advent of HTML5 web-apps, and the ability to “mash up” multiple functions in one app “wrapper”. Is a YouTube video shared and embedded in a Facebook page a “video service”, or “social networking”?

It is also really important to recognise that certain procedures and technologies used in policy and traffic management will likely have some unanticipated side-effects. Users, devices and applications are likely to respond to controls that limit their actions, while other developments may result in “emergent behaviours” spontaneously. For instance, there is a risk that too-strict data caps might change usage models for smartphones and make users just connect to the network when absolutely necessary. This is likely to be at the same times and places when other users also feel it necessary, with the unfortunate implication that peaks of usage get “spikier” rather than being ironed-out.

There is no easy answer to addressing these type of external threats. Operator strategists and planners simply need to keep watch on emerging trends, and perhaps stress-test their assumptions and forecasts with market observers who keep tabs on such developments.

The mobile data explosion… or maybe not?

It is an undisputed fact that mobile data is growing exponentially around the world. Or is it?

A J-curve or an S-curve?

Telco 2.0 certainly thinks that growth in data usage is occurring, but is starting to see signs that the smooth curves that drive so many other decisions might not be so smooth – or so steep – after all. If this proves to be the case, it could be far more disruptive to operators and vendors than any of the individual technologies discussed later in the report. If operator strategists are not at least scenario-planning for lower data growth rates, they may find themselves in a very uncomfortable position in a year’s time.

In its most recent study of mobile operators’ traffic patterns, Ericsson concluded that Q2 2011 data growth was just 8% globally, quarter-on-quarter, a far cry from the 20%+ growths seen previously, and leaving a chart that looks distinctly like the beginning of an S-curve rather than a continued “hockey stick”. Given that the 8% includes a sizeable contribution from undoubted high-growth developing markets like China, it suggests that other markets are maturing quickly. (We are rather sceptical of Ericsson’s suggestion of seasonality in the data). Other data points come from O2 in the UK , which appears to have had essentially zero traffic growth for the past few quarters, or Vodafone which now cites European data traffic to be growing more slowly (19% year-on-year) than its data revenues (21%). Our view is that current global growth is c.60-70%, c.40% in mature markets and 100%+ in developing markets.

Figure 1 – Trends in European data usage

 Trends in European Data Usage
 

Now it is possible that various one-off factors are at play here – the shift from unlimited to tiered pricing plans, the stronger enforcement of “fair-use” plans and the removal of particularly egregious heavy users. Certainly, other operators are still reporting strong growth in traffic levels. We may see resumption in growth, for example if cellular-connected tablets start to be used widely for streaming video. 

But we should also consider the potential market disruption, if the picture is less straightforward than the famous exponential charts. Even if the chart looks like a 2-stage S, or a “kinked” exponential, the gap may have implications, like a short recession in the economy. Many of the technical and business model innovations in recent years have been responses to the expected continual upward spiral of demand – either controlling users’ access to network resources, pricing it more highly and with greater granularity, or building out extra capacity at a lower price. Even leaving aside the fact that raw, aggregated “traffic” levels are a poor indicator of cost or congestion, any interruption or slow-down of the growth will invalidate a lot of assumptions and plans.

Our view is that the scary forecasts of “explosions” and “tsunamis” have led virtually all parts of the industry to create solutions to the problem. We can probably list more than 20 approaches, most of them standalone “silos”.

Figure 2 – A plethora of mobile data traffic management solutions

A Plethora of Mobile Data Traffic Management Solutions

What seems to have happened is that at least 10 of those approaches have worked – caps/tiers, video optimisation, WiFi offload, network densification and optimisation, collaboration with application firms to create “network-friendly” software and so forth. Taken collectively, there is actually a risk that they have worked “too well”, to the extent that some previous forecasts have turned into “self-denying prophesies”.

There is also another common forecasting problem occurring – the assumption that later adopters of a technology will have similar behaviour to earlier users. In many markets we are now reaching 30-50% smartphone penetration. That means that all the most enthusiastic users are already connected, and we’re left with those that are (largely) ambivalent and probably quite light users of data. That will bring the averages down, even if each individual user is still increasing their consumption over time. But even that assumption may be flawed, as caps have made people concentrate much more on their usage, offloading to WiFi and restricting their data flows. There is also some evidence that the growing numbers of free WiFi points is also reducing laptop use of mobile data, which accounts for 70-80% of the total in some markets, while the much-hyped shift to tablets isn’t driving much extra mobile data as most are WiFi-only.

So has the industry over-reacted to the threat of a “capacity crunch”? What might be the implications?

The problem is that focusing on a single, narrow metric “GB of data across the network” ignores some important nuances and finer detail. From an economics standpoint, network costs tend to be driven by two main criteria:

  • Network coverage in terms of area or population
  • Network capacity at the busiest places/times

Coverage is (generally) therefore driven by factors other than data traffic volumes. Many cells have to be built and run anyway, irrespective of whether there’s actually much load – the operators all want to claim good footprints and may be subject to regulatory rollout requirements. Peak capacity in the most popular locations, however, is a different matter. That is where issues such as spectrum availability, cell site locations and the latest high-speed networks become much more important – and hence costs do indeed rise. However, it is far from obvious that the problems at those “busy hours” are always caused by “data hogs” rather than sheer numbers of people each using a small amount of data. (There is also another issue around signalling traffic, discussed later). 

Yes, there is a generally positive correlation between network-wide volume growth and costs, but it is far from perfect, and certainly not a direct causal relationship.

So let’s hypothesise briefly about what might occur if data traffic growth does tail off, at least in mature markets.

  • Delays to LTE rollout – if 3G networks are filling up less quickly than expected, the urgency of 4G deployment is reduced.
  • The focus of policy and pricing for mobile data may switch back to encouraging use rather than discouraging/controlling it. Capacity utilisation may become an important metric, given the high fixed costs and low marginal ones. Expect more loyalty-type schemes, plus various methods to drive more usage in quiet cells or off-peak times.
  • Regulators may start to take different views of traffic management or predicted spectrum requirements.
  • Prices for mobile data might start to fall again, after a period where we have seen them rise. Some operators might be tempted back to unlimited plans, for example if they offer “unlimited off-peak” or similar options.
  • Many of the more complex and commercially-risky approaches to tariffing mobile data might be deprioritised. For example, application-specific pricing involving packet-inspection and filtering might get pushed back down the agenda.
  • In some cases, we may even end up with overcapacity on cellular data networks – not to the degree we saw in fibre in 2001-2004, but there might still be an “overhang” in some places, especially if there are multiple 4G networks.
  • Steady growth of (say) 20-30% peak data per annum should be manageable with the current trends in price/performance improvement. It should be possible to deploy and run networks to meet that demand with reducing unit “production cost”, for example through use of small cells. That may reduce the pressure to fill the “revenue gap” on the infamous scissors-diagram chart.

Overall, it is still a little too early to declare shifting growth patterns for mobile data as a “disruption”. There is a lack of clarity on what is happening, especially in terms of responses to the new controls, pricing and management technologies put recently in place. But operators need to watch extremely closely what is going on – and plan for multiple scenarios.

Specific recommendations will depend on an individual operator’s circumstances – user base, market maturity, spectrum assets, competition and so on. But broadly, we see three scenarios and implications for operators:

  • “All hands on deck!”: Continued strong growth (perhaps with a small “blip”) which maintains the pressure on networks, threatens congestion, and drives the need for additional capacity, spectrum and capex.
    • Operators should continue with current multiple strategies for dealing with data traffic – acquiring new spectrum, upgrading backhaul, exploring massive capacity enhancement with small cells and examining a variety of offload and optimisation techniques. Where possible, they should explore two-sided models for charging and use advanced pricing, policy or segmentation techniques to rein in abusers and reward those customers and applications that are parsimonious with their data use. Vigorous lobbying activities will be needed, for gaining more spectrum, relaxing Net Neutrality rules and perhaps “taxing” content/Internet companies for traffic injected onto networks.
  • “Panic over”: Moderating and patchy growth, which settles to a manageable rate – comparable with the patterns seen in the fixed broadband marketplace
    • This will mean that operators can “relax” a little, with the respite in explosive growth meaning that the continued capex cycles should be more modest and predictable. Extension of today’s pricing and segmentation strategies should improve margins, with continued innovation in business models able to proceed without rush, and without risking confrontation with Internet/content companies over traffic management techniques. Focus can shift towards monetising customer insight, ensuring that LTE rollouts are strategic rather than tactical, and exploring new content and communications services that exploit the improving capabilities of the network.
  • “Hangover”: Growth flattens off rapidly, leaving operators with unused capacity and threatening brutal price competition between telcos.
    • This scenario could prove painful, reminiscent of early-2000s experience in the fixed-broadband marketplace. Wholesale business models could help generate incremental traffic and revenue, while the emphasis will be on fixed-cost minimisation. Some operators will scale back 4G rollouts until cost and maturity go past the tipping-point for outright replacement of 3G. Restrictive policies on bandwidth use will be lifted, as operators compete to give customers the fastest / most-open access to the Internet on mobile devices. Consolidation – and perhaps bankruptcies – may ensure as declining data prices may coincide with substitution of core voice and messaging business

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

  • Introduction
  • Telco-driven disruption vs. external trends
  • External disruptions to monitor
  • The mobile data explosion… or maybe not?
  • A J-curve or an S-curve?
  • Evolving the mobile network
  • Overview
  • LTE
  • Network sharing, wholesale and outsourcing
  • WiFi
  • Next-gen IP core networks (EPC)
  • Femtocells / small cells / “cloud RANs”
  • HetNets
  • Advanced offload: LIPA, SIPTO & others
  • Peer-to-peer connectivity
  • Self optimising networks (SON)
  • M2M-specific broadband innovations
  • Policy, control & business model enablers
  • The internal politics of mobile broadband & policy
  • Two sided business-model enablement
  • Congestion exposure
  • Mobile video networking and CDNs
  • Controlling signalling traffic
  • Device intelligence
  • Analytics & QoE awareness
  • Conclusions & recommendations
  • Index

…and the following figures…

  • Figure 1 – Trends in European data usage
  • Figure 2 – A plethora of mobile data traffic management solutions
  • Figure 3 – Not all operator WiFi is “offload” – other use cases include “onload”
  • Figure 4 – Internal ‘power tensions’ over managing mobile broadband
  • Figure 5 – How a congestion API could work
  • Figure 6 – Relative Maturity of MBB Management Solutions
  • Figure 7 – Laptops generate traffic volume, smartphones create signalling load
  • Figure 8 – Measuring Quality of Experience
  • Figure 9 – Summary of disruptive network innovations

Members of the Telco 2.0 Executive Briefing Subscription Service and Future Networks Stream can download the full 44 page report in PDF format hereNon-Members, please subscribe here, buy a Single User license for this report online here for £795 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, geographies, people and products referenced: 3GPP, Aero2, Alcatel Lucent, AllJoyn, ALU, Amazon, Amdocs, Android, Apple, AT&T, ATIS, BBC, BlackBerry, Bridgewater, CarrierIQ, China, China Mobile, China Unicom, Clearwire, Conex, DoCoMo, Ericsson, Europe, EverythingEverywhere, Facebook, Femto Forum, FlashLinq, Free, Germany, Google, GSMA, H3G, Huawei, IETF, IMEI, IMSI, InterDigital, iPhones,Kenya, Kindle, Light Radio, LightSquared, Los Angeles, MBNL, Microsoft, Mobily, Netflix, NGMN, Norway, NSN, O2, WiFi, Openet, Qualcomm, Radisys, Russia, Saudi Arabia, SoftBank, Sony, Stoke, Telefonica, Telenor, Time Warner Cable, T-Mobile, UK, US, Verizon, Vita, Vodafone, WhatsApp, Yota, YouTube, ZTE.

Technologies and industry terms referenced: 2G, 3G, 4.5G, 4G, Adaptive bitrate streaming, ANDSF (Access Network Discovery and Selection Function), API, backhaul, Bluetooth, BSS, capacity crunch, capex, caps/tiers, CDMA, CDN, CDNs, Cloud RAN, content delivery networks (CDNs), Continuous Computing, Deep packet inspection (DPI), DPI, DRM, Encryption, Enhanced video, EPC, ePDG (Evolved Packet Data Gateway), Evolved Packet System, Femtocells, GGSN, GPS, GSM, Heterogeneous Network (HetNet), Heterogeneous Networks (HetNets), HLRs, hotspots, HSPA, HSS (Home Subscriber Server), HTML5, HTTP Live Streaming, IFOM (IP Flow Mobility and Seamless Offload), IMS, IPR, IPv4, IPv6, LIPA (Local IP Access), LTE, M2M, M2M network enhancements, metro-cells, MiFi, MIMO (multiple in, MME (Mobility Management Entity), mobile CDNs, mobile data, MOSAP, MSISDN, MVNAs (mobile virtual network aggregators)., MVNO, Net Neutrality, network outsourcing, Network sharing, Next-generation core networks, NFC, NodeBs, offload, OSS, outsourcing, P2P, Peer-to-peer connectivity, PGW (PDN Gateway), picocells, policy, Policy and Charging Rules Function (PCRF), Pre-cached video, pricing, Proximity networks, Public WiFi, QoE, QoS, RAN optimisation, RCS, remote radio heads, RFID, self-optimising network technology (SON), Self-optimising networks (SON), SGW (Serving Gateway), SIM-free wireless, single RANs, SIPTO (Selective IP Traffic Offload), SMS, SoftSIM, spectrum, super-femtos, Telco 2.0 Happy Pipe, Transparent optimisation, UMTS, ‘Under-The-Floor’ (UTF) Players, video optimisation, VoIP, VoLTE, VPN, White space, WiFi, WiFi Direct, WiFi offloading, WiMAX, WLAN.

How to Spot a “Business Model Problem”

Introduction

This short introductory paper provides a brief overview of:

  • What a ‘business model’ is;
  • How to spot a ‘business model problem’;
  • Why business model innovation is important;
  • The challenges to the telco business model, and how business model innovation helps;
  • How STL Partners, the New Digital Economics Executive Brainstorms, and Telco 2.0 Research help to address these challenges.

NB. STL Partners focuses on ‘business model innovation’ in the digital
economy, outlining the theory, opportunities and best practice in the
field, and developing new strategies for clients. It also runs the Telco 2.0 and Digital Entertainment 2.0
Initiatives to research and promote new business models in those
sectors.

What is a business model?

A ‘business model’ is a structured articulation of a company’s strategic approach to making money.

Building on academic research into business model design, STL Partners has developed a five-part Business Model Framework as a core analytical tool (see Figure 1). STL Partners uses this framework to help consider all the implications of changes made to a business model. As well as considering the activity of a single organisation, it analyses how companies interact to deliver value and the specific roles played by different players.

Figure 1 – STL Partners’ Five Part Business Model Framework

STL Partners' Five Part Business Model Framework

Essentially, a service offering is delivered to customers in the marketplace (in competition with alternative products and services, and within the context of legislation and regulation). The value network is the collection of companies that together deliver the service offering – so, for example, a value network may include content partners or network infrastructure providers. They are supported in their activities by technology, which provides the specific functionality required to deliver the service offering. The whole ecosystem lives or dies according to its ability to make money (finance), which also determines the capital investment flowing into the ecosystem.

What is a ‘business model problem’?

A ‘business model problem’ can present a structural challenge to the sustainability of a company’s or an industry’s core approach to making money. In many cases, threats – and opportunities – are created by new business models coming into competition with existing ones.

Business model problems typically can’t be solved simply by employing a better sales manager, a price cut, or incremental cost cutting. Lateral solutions are needed which may involve new utilisation of existing assets or capabilities. The Roadmap to New Telco 2.0 Business Models report describes the strategic business model innovation opportunities we see for telcos.

How to spot a business model problem

Business model problems often manifest themselves as an insidious decline in business performance even in the absence of an obvious economic, operational or directly competitive threat. Further signs of a ‘business model problem’ include:

  • New kinds of competition. Business model challenges are often posed by new entrants, either from adjacent markets or start-ups unconcerned by the erosion of core revenues. For example, telcos’ business models are being disrupted by Internet companies, as described in Telco 2.0’s latest research on Google, Apple, Facebook, Microsoft/Skype and Amazon.
  • A surprising competitive proposition that addresses a need your business already serves, but in a new way. The nastiest type of surprise is someone else providing something for free to your customers that you charge for. Examples include Skype’s free VOIP calls, which compete with traditional PSTN telephony, and free newspapers (ad-funded) competing with paid-for papers.
  • Step changes in technology (e.g. LTE) and regulation which change the ‘rules of the game’, enabling new players to come into a market using new business models.
  • Unmatchable execution. Some business model innovators succeed in creating operations and value networks of such scale and/or complexity that it becomes very difficult to compete directly with them. Examples include the scale of major retailers’ buying power (e.g. Wal-Mart, Tesco), Apple’s highly-integrated digital value network and Google’s dominance of the web search market.

Why is changing your business model so difficult?

Figure 2 below summarises why many companies get caught out even if they know they face an issue with their business models.

Fundamentally, it is very difficult to embark on change when a business has been set on one successful business model for many years, has many assets wrapped up in this endeavour, and is still making substantial revenues and profits from this business – even if the need for change is obvious.

Figure 2 – Why is business model change so difficult?

Rabbit in Headlights

Why is digital business model innovation so important?

The underlying digitalisation of products, services, information and communications is creating a commonality of skills and capabilities across many previously disparate players in the new hyper-connected digital economy. IT companies, technology vendors, telecoms companies, internet players, retailers and entertainment companies are starting to possess increasingly overlapping skills and assets and this leads them into more competition with each other.

Furthermore, new technologies e.g. smartphones, tablets, LTE / Fibre, Cloud Services, Apps, M2M are continually shaking up the digital economy and enabling radical business model innovations. Both consumer and enterprise end-users are responding by behaving in new ways that take advantage of increasingly mobile, on-demand, multi-device services.

Hence the ‘New Digital Economy’ is evolving at a pace and level of complexity that continually offers both threats and opportunities…

Content

  • Apple, Google, Facebook – classic business model innovators
  • The ‘Great Game’
  • Disrupting the telcos
  • ‘Under-The-Floor’ (UTF) Players
  • Disruptions in Digital Entertainment and Commerce
  • Driving – or defending against – disruptive innovations

 

  • Figure 1 – STL Partners’ Five Part Business Model Framework
  • Figure 2 – Why is business model change so difficult?
  • Figure 3 – The ‘Great Game’
  • Figure 4 – Telco Business Model Innovation Challenges
  • Figure 5 – The impact of ‘OTT’ players on telcos’ business model
  • Figure 6 – Other ecosystem players, including potential ‘Under-The-Floor’ (UTF) Players
  • Figure 7 – The Telco 2.0™ ‘two-sided’ telecoms business model
  • Figure 8 – EMEA and APAC New Digital Economics delegates’ views of Telco 2.0 Strategies

 

The value of “Smart Pipes” to mobile network operators

Preface

Rationale and hypothesis for this report

It is over fourteen years since David Isenberg wrote his seminal paper The Rise of the Stupid Network in which he outlined the view that telephony networks would increasingly become dumb pipes as intelligent endpoints came to control how and where data was transported. Many of his predictions have come to fruition. Cheaper computing technology has resulted in powerful ‘smartphones’ in the hands of millions of people and new powerful internet players are using data centres to distribute applications and services ‘over the top’ to users over fixed and mobile networks.

The hypothesis behind this piece of research is that endpoints cannot completely control the network. STL Partners believes that the network itself needs to retain intelligence so it can interpret the information it is transporting between the endpoints. Mobile network operators, quite rightly, will not be able to control how the network is used but must retain the ability within the network to facilitate a better experience for the endpoints. The hypothesis being tested in this research is that ‘smart pipes’ are needed to:

  1. Ensure that data is transported efficiently so that capital and operating costs are minimised and the internet and other networks remain cheap methods of distribution.
  2. Improve user experience by matching the performance of the network to the nature of the application or service being used. ‘Best effort’ is fine for asynchronous communication, such as email or text, but unacceptable for voice. A video call or streamed movie requires guaranteed bandwidth, and real-time gaming demands ultra-low latency;
  3. Charge appropriately for use of the network. It is becoming increasingly clear that the Telco 1.0 business model – that of charging the end-user per minute or per Megabyte – is under pressure as new business models for the distribution of content and transportation of data are being developed. Operators will need to be capable of charging different players – end-users, service providers, third-parties (such as advertisers) – on a real-time basis for provision of broadband and guaranteed quality of service (QoS);
  4. Facilitate interactions within the digital economy. Operators can compete and partner with other players, such as the internet companies, in helping businesses and consumers transact over the internet. Networks are no longer confined to communications but are used to identify and market to prospects, complete transactions, make and receive payments and remittances, and care for customers. The knowledge that operators have about their customers coupled with their skills and assets in identity and authentication, payments, device management, customer care etc. mean that ‘the networks’ can be ‘enablers’ in digital transactions between third-parties – helping them to happen more efficiently and effectively.

Overall, smarter networks will benefit network users – upstream service providers and end users – as well as the mobile network operators and their vendors and partners. Operators will also be competing to be smarter than their peers as, by differentiating here, they gain cost, revenue and performance advantages that will ultimately transform in to higher shareholder returns.

Sponsorship and editorial independence

This report has kindly been sponsored by Tellabs and is freely available. Tellabs developed the initial concepts, and provided STL Partners with the primary input and scope for the report. Research, analysis and the writing of the report itself was carried out independently by STL Partners. The views and conclusions contained herein are those of STL Partners.

About Tellabs

Tellabs logo

Tellabs innovations advance the mobile Internet and help our customers succeed. That’s why 43 of the top 50 global communications service providers choose our mobile, optical, business and services solutions. We help them get ahead by adding revenue, reducing expenses and optimizing networks.

Tellabs (Nasdaq: TLAB) is part of the NASDAQ Global Select Market, Ocean Tomo 300® Patent Index, the S&P 500 and several corporate responsibility indexes including the Maplecroft Climate Innovation Index, FTSE4Good and eight FTSE KLD indexes. http://www.tellabs.com

Executive Summary

Mobile operators no longer growth stocks

Mobile network operators are now valued as utility companies in US and Europe (less so APAC). Investors are not expecting future growth to be higher than GDP and so are demanding money to be returned in the form of high dividends.

Two ‘smart pipes’ strategies available to operators

In his seminal book, Michael Porter identified three generic strategies for companies – ‘Cost leadership’, ‘Differentiation’ and ‘Focus’. Two of these are viable in the mobile telecommunications industry – Cost leadership, or Happy Pipe in STL Partners parlance, and Differentiation, or Full-service Telco 2.0. No network operators have found a Focus strategy to work as limiting the customer base to a segment of the market has not yielded sufficient returns on the high capital investment of building a network. Even MVNOs that have pursued this strategy, such as Helio which targeted Korean nationals in the US, have struggled.

Underpinning the two business strategies are related ‘smart pipe’ approaches – smart network and smart services:

Porter

Strategy

Telco 2.0 strategy

Nature of smartness

Characteristics

Cost leadership

Happy Pipe

Smart network

Cost efficiency – minimal network, IT and commercial costs.  Simple utility offering.

Differentiation

Full-service Telco 2.0

Smart services

Technical and commercial flexibility: improve customer experience by integrating network capabilities with own and third-party services and charging either end user or service provider (or both).

Source: STL Partners

It is important to note that, currently at least, having a smart network is a precursor of smart services.  It would be impossible for an operator to implement a Full-service Telco 2.0 strategy without having significant network intelligence.  Full-service Telco 2.0 is, therefore, an addition to a Happy Pipe strategy.

Smart network strategy good, smart services strategy better

In a survey conducted for this report, it was clear that operators are pursuing ‘smart’ strategies, whether at the network level or extending beyond this into smart services, for three reasons:

  • Revenue growth: protecting existing revenue sources and finding new ones.  This is seen as the single most important driver of building more intelligence.
  • Cost savings: reducing capital and operating costs.
  • Performance improvement: providing customers with an improved customer experience.

Assuming that most mobile operators currently have limited smartness in either network or services, our analysis suggests significant upside in financial performance from successfully implementing either a Happy Pipe or Full-service Telco 2.0 strategy.  Most mobile operators generate Cash Returns on Invested Capital of between 5 and 7%.  For the purposes of our analysis, we have a assumed a baseline of 5.8%.  The lower capital and operator costs of a Happy Pipe strategy could increase this to 7.4% and the successful implementation of a Full-service Telco 2.0 strategy would increase this to a handsome 13.3%:

Telco 2.0 strategy

Nature of smartness

Cash Returns on Invested Capital

As-is – Telco 1.0

Low – relatively dumb

5.8%

Happy Pipe

Smart network

7.4%

Full-service Telco 2.0

Smart services

13.3%

Source: STL Partners

STL Partners has identified six opportunity areas for mobile operators to exploit with a Full-service Telco 2.0 strategy.  Summarised here, these are outlined in detail in the report:

Opportunity Type

Approach

Typical Services

Core Services

Improving revenues and customer loyalty by better design, analytics, and smart use of data in existing services.

Access, Voice and Messaging, Broadband, Standard Wholesale, Generic Enterprise ICT Services (inc. SaaS)

Vertical industry solutions (SI)

Delivery of ICT projects and support to vertical enterprise sectors.

Systems Integration (SI), Vertical CEBP solutions, Vertical ICT, Vertical M2M solutions, and Private Cloud.

Infrastructure services

Optimising cost and revenue structures by buying and selling core telco ICT asset capacity.

Bitstream ADSL, Unbundled Local Loop, MVNOs, Wholesale Wireless, Network Sharing, Cloud – IaaS.

Embedded communications

Enabling wider use of voice, messaging, and data by facilitating access to them and embedding them in new products.

Comes with data, Sender pays delivery, Horizontal M2M Platforms, Voice, Messaging and Data APIs for 3rd Parties.

Third-pary business enablers

Enabling new telco assets (e.g. Customer data) to be leveraged in support of 3rd party business processes.

Telco enabled Identity and Authorisation, Advertising and Marketing, Payments. APIs to non-core services and assets.

Own-brand OTT services

Building value through Telco-owned online properties and ‘Over-the-Top’ services.

Online Media, Enterprise Web Services, Own Brand VOIP services.


Source: STL Partners

Regional approaches to smartness vary

As operators globally experience a slow-down in revenue growth, they are pursuing ways of maintaining margins by reducing costs.  Unsurprisingly therefore, most operators in North America, Europe and Asia-Pacific appear to be pursuing a Happy Pipe/smart network strategy.  Squeezing capital and operating costs and improving network performance is being sought through such approaches as:

  • Physical network sharing – usually involving passive elements such as towers, air-conditioning equipment, generators, technical premises and pylons.
  • Peering data traffic rather than charging (and being charged) for transit.
  • Wi-Fi offload – moving data traffic from the mobile network on to cheaper fixed networks.
  • Distributing content more efficiently through the use of multicast and CDNs.
  • Efficient network configuration and provisioning.
  • Traffic shaping/management via deep-packet inspection (DPI) and policy controls.
  • Network protection – implementing security procedures for abuse/fraud/spam so that network performance is maximised.
  • Device management to ameliorate device impact on network and improve customer experience

Vodafone Asia-Pacific is a good example of an operator pursuing these activities aggressively and as an end in itself rather than as a basis for a Telco 2.0 strategy.  Yota in Russia and Lightsquared in the US are similarly content with being Happy Pipers.

In general, Asia-Pacific has the most disparate set of markets and operators.  Markets vary radically in terms of maturity, structure and regulation and operators seem to polarise into extreme Happy Pipers (Vodafone APAC, China Mobile, Bharti) and Full-Service Telco 2.0 players (NTT Docomo, SK Telecom, SingTel, Globe).

In Telefonica, Europe is the home of the operator with the most complete Telco 2.0 vision globally.  Telefonica has built and acquired a number of ‘smart services’ which appear to be gaining traction including O2 Priority Moments, Jajah, Tuenti and Terra.  Recent structural changes at the company, in which Telefonica Digital was created to focus on opportunities in the digital economy, further indicate the company’s focus on Telco 2.0 and smart services.  Europe too appears to be the most collaborative market.  Vodafone, Telefonica, Orange, Telecom Italia and T-Mobile are all working together on a number of Telco 2.0 projects and, in so doing, seek to generate enough scale to attract upstream developers and downstream end-users.

The sheer scale of the two leading mobile operators in the US, AT&T and Verizon, which have over 100 million subscribers each, means that they are taking a different approach to Telco 2.0.  They are collaborating on one or two opportunities, notably with ISIS, a near-field communications payments solution for mobile, which is a joint offer from AT&T, Verizon and T-Mobile.  However, in the main, there is a high degree of what one interviewee described as ‘Big Bell dogma’ – the view that their company is big enough and powerful enough to take on the OTT players and ‘control’ the experiences of end users in the digital economy.  The US market is more consolidated than Europe (giving the big players more power) but, even so, it seems unlikely that either AT&T or Verizon can keep customers using only their services – the lamented wall garden approach.

Implementing a Telco 2.0 strategy is important but challenging

STL Partners explored both how important and how difficult it is to implement the changes required to deliver a Happy Pipe strategy (outlined in the bullets above) and those needed for Full-service Telco 2.0 strategy, via industry interviews with operators and a quantitative survey.  The key findings of this analysis were:

  • Overall, respondents felt that many activities were important as part of a smart strategy.  In our survey, all except two activity areas – Femto/pico underlay and Enhanced switches (vs. routers) – were rated by more than 50% of respondents as either ‘Quite important’ or ‘Very important’ (see chart below).
  • Activities associated with a Full-service Telco 2.0 strategy were rated as particularly important:
  • Making operator assets available via APIs, Differentiated pricing and charging and Personalised and differentiated services were ranked 1, 2 and 3 out of the thirteen activities.
  • Few considered that any of the actions were dangerous and could destroy value, although Physical network sharing and Traffic shaping/DPI were most often cited here.
Smart Networks - important implementation factors to MNOs
Source: STL Partners/Telco 2.0 & Tellabs ‘Smart pipes’ survey, July 2011, n=107

NOTE: Overall ranking was based on a weighted scoring policy of Very important +4, Quite important +3, Not that important +2, Unimportant +1, Dangerous -4.

Overall, most respondents to the survey and people we spoke with felt that operators had more chance in delivering a Happy Pipe strategy and that only a few Tier 1 operators would be successful with a Full-Service Telco 2.0 strategy.  For both strategies, they were surprisingly sceptical about operators’ ability to implement the necessary changes.  Five reasons were cited as major barriers to success and were particularly big when considering a Full-Service Telco 2.0 strategy:

  1. Competition from internet players.  Google, Apple, Facebook et al preventing operators from expanding their role in the digital economy.
  2. Difficulty in building a viable ecosystem. Bringing together the required players for such things as near-field communications (NFC) mobile payments and sharing value among them.
  3. Lack of mobile operators skills.  The failure of operators to develop or exploit key skills required for facilitating transactions such as customer data management and privacy.
  4. Culture.  Being too wedded to existing products, services and business models to alter the direction of the super-tanker.
  5. Organisation structure. Putting in place the people and processes to manage the change.

Looking at the specific activities required to build smartness, it was clear that those required for a Full-service Telco 2.0/smart services strategy are considered the hardest to implement (see chart below):

  • Personalised and differentiated services via use of customer data – content, advertising, etc.
  • Making operator assets available to end users and other service providers – location, presence, ID, payments
  • Differentiated pricing and charging based on customer segment, service, QoS
Smart Networks - how challenging are the changes?
Source: STL Partners/Telco 2.0 & Tellabs ‘Smart pipes’ survey, July 2011, n=100

NOTE: Overall ranking was based on a weighted scoring policy of Very easy +5, Relatively straightforward +4, Manageable +3, Quite difficult +2, Very difficult -2.

Conclusions and recommendations

By comparing the relative importance of specific activities against how easy they are to implement, we were able to classify them into four categories:

Category

Importance for delivering smart strategy

Relative ease of implementation

Must get right

High

Easy

Strive for new role

High

Difficult

Housekeeping

Low

Easy

Forget

Low

Difficult

Rating of factors needed for Telco 2.0 'Smart Pipes' and 'Full Services' Strategies
Source: STL Partners/Telco 2.0 & Tellabs ‘Smart pipes’ survey, July 2011, n=100

Unfortunately, as the chart above shows, no activities fall clearly into the ‘Forget’ categories but there are some clear priorities:

  • A Full-service Telco 2.0 strategy is about striving for a new role in the digital economy and is probably most appropriate for Tier 1 MNOs, since it is going to require substantial scale and investment in new skills such as software and application development and customer data.  It will also require the development of new partnerships and ecosystems and complex commercial arrangements with players from other industries (e.g. banking). 
  • There is a cluster of smart network activities that are individually relatively straightforward to implement and will yield a big bang for the buck if investments are made – the ‘Must get right’ group:
  • More efficient network configuration and provisioning;
  • Strengthen network security to cope with abuse and fraud;
  • Improve device management (and cooperation with handset manufacturers and content players) to reduce the impact of smartphone burden on the network;

Although deemed more marginal in our survey, we would include as equally important:

  • Traffic shaping and DPI which, in many cases, underpins various smart services opportunities such as differentiated pricing based on QoS and Multicast and CDNs which are proven in the fixed world and likely to be equally beneficial in a video-dominated mobile one.

There is second cluster of smart network activities which appear to be equally easy (or difficult) to implement but are deemed by respondents to be lower value and therefore fall into a lower ‘Housekeeping’ category:

  • Wi-Fi offload – we were surprised by this given the emphasis placed on this by NTT Docomo, China Mobile, AT&T, O2 and others;
  • Peering (vs. transit) and Enhanced switches  – this is surely business-as-usual for all MNOs;
  • Femto/Pico underlay – generally felt to be of limited importance by respondents although a few cited its importance in pushing network intelligence to the edge which would enable MNOs to more easily deliver differentiated QoS and more innovative retail and wholesale revenue models;
  • Physical network sharing – again, a surprising result given the keenness of the capital markets on this strategy. 

 

Overall, it appears that mobile network operators need to continue to invest resources in developing smart networks but that a clear prioritisation of efforts is needed given the multitude of ‘moving parts’ required to develop a smart network that will deliver a successful Happy Pipe strategy.

A successful Full-Service Telco 2.0 strategy is likely to be extremely profitable for a mobile network operator and would result in a substantial increase in share price.  But delivering this remains a major challenge and investors are sceptical.  Collaboration, experimentation and investment are important facets of a Telco 2.0 implementation strategy as they drive scale, learning and innovation respectively.  Given the demands of investors for dividend yields, investment is only likely to be available if an operator becomes more efficient, so implementing a Happy Pipe strategy which reduces capital and operating costs is critical.

 

Report Contents

 

  • Executive Summary
  • Mobile network operator challenges
  • The future could still be bright
  • Defining a ‘smart’ network
  • Understanding operator strategies
  • Video: Case study in delivering differentiation and cost leadership
  • The benefits of Smart on CROIC
  • Implementing a ‘smart’ strategy
  • Conclusions and recommendations

Report Figures

 

  • Figure 1: Pressure from all sides for operators
  • Figure 2: Vodafone historical dividend yield – from growth to income
  • Figure 3: Unimpressed capital markets and falling employment levels
  • Figure 4: Porter and Telco 2.0 competitive strategies
  • Figure 5: Defining Differentiation/Telco 2.0
  • Figure 6 – The Six Opportunity Areas – Approach, Typical Services and Examples
  • Figure 7: Defining Cost Leadership/Happy Pipe
  • Figure 8: Defining ‘smartness’
  • Figure 9: Telco 2.0 survey – Defining smartness
  • Figure 10: NTT’s smart content delivery system – a prelude to mobile CDNs?
  • Figure 11: Vodafone India’s ARPU levels are now below $4/month, illustrating the need for a ‘smart network’ approach
  • Figure 12: China Mobile’s WLAN strategy for coverage, capacity and cost control
  • Figure 13: GCash – Globe’s text-based payments service
  • Figure 14: PowerOn – SingTel’s on-demand business services
  • Figure 15: Telefonica’s Full-service Telco 2.0 strategy
  • Figure 16: Vodafone – main messages are about being an efficient data pipe
  • Figure 17: Collaboration with other operators key to smart services strategy
  • Figure 18: Verizon Wireless and Skype offering
  • Figure 19: Content delivery with and without a CDN
  • Figure 20: CDN benefits to consumers are substantial
  • Figure 21: Cash Returns on Invest Capital of different Telco 2.0 opportunity areas
  • Figure 22: The benefits of smart to a MNO are tangible and significant
  • Figure 23: Telco 2.0 Survey – benefits of smart to MNOs
  • Figure 24: Telco 2.0 survey – MNO chances of success with smart strategies
  • Figure 25: Telco 2.0 survey – lots of moving parts required for ‘smartness’
  • Figure 26: Telco 2.0 survey – Differentiation via smart services is particularly challenging
  • Figure 27: Telco 2.0 survey – Implementing changes is challenging
  • Figure 28: Telco 2.0 survey – Prioritising smart implementation activities

 

Facebook: what the pre-IPO S-1 filing revealed

Summary: New figures released in Facebook’s S-1 filing for its IPO stack up with Telco 2.0’s previous analysis of Facebook’s performance for our report ‘Dealing with the Disruptors’. This further strengthens our views that many mooted valuations are overblown, and that Facebook will seek new sources of value in communications. (February 2012, Executive Briefing Service, Dealing with Disruption Stream).

Facebook user saturation bubble chart

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Below is an extract from this 23 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Dealing with Disruption Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £595 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003. We’ll also be discussing our findings and more on Facebook at the Silicon Valley (27-28 March) and London (12-13 June) New Digital Economics Brainstorms.

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Introduction

The Facebook public share flotation is underway and as part of the process, it has published its first set of financial statements which detail financial trading and key performance indicators for the previous three years for their S-1 filing with the US Securities Exchange Commission (SEC)

The Telco 2.0 Team has recently analysed Facebook’s strategy and business model in our strategy report Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon. Back in August 2011 we published a preview (Facebook: really ‘worth’ $30 billion max – $100 billion is hype), and we’ve now taken the opportunity to revisit our analysis in the light of the new data from Facebook’s S-1 filing.

Overview of findings

Figure 1: STL Forecast vs. Actuals from Facebook S-1

2011 (figures in millions)

Facebook S-1

Telco 2.0 forecast

Users

845

800

Revenue

$3,711

$3,500

Free Cash Flow

$470

$438

Facebook has a remarkable set of financials for a company so young.

Nonetheless, the Telco 2.0 Team stands by its original model and conclusions, which were that many mooted valuations of Facebook were too high given its current services and growth profile, and that the discrepancy would compel Facebook to expand into adjacent fields. The publication of the Facebook Initial Public Offering (IPO) affirms this belief. If Facebook attains anywhere near the expected valuation, they will have a share currency which will make expansion through mergers and acquisitions easier to achieve.

Our valuation of Facebook was US$30bn and we see no trading or key performance indicators in the S-1 filing which would make us alter our valuation. This compares to various reports which indicate a valuation for Facebook of US$100bn.

Our estimates (reviewed in this report) imply a p/e of 30 at launch, which would be consistent with Facebook being considered more of a growth stock than the Google of 2011, in an environment much less bullish than that of 2004.

Though as our friend Richard Kramer, MD of Arete financial research says, “tech stock valuations are frequently irrational”, so the market may well go crazy for Facebook at IPO. However, there has to be a point where reality bites, and the pressure on Facebook to find new revenues will be intense.

Section 2: Peer Comparison

The Facebook IPO filing allows a comparison with two companies who built great businesses built upon networks: Search (as represented by Google) and Mobile (as represented by Vodafone)

Figure 1: Three major tech companies, the first nine years

Facebook google Vodafone first 9 years revenue

Source: STL Partners analysis of company records

A good start

Vodafone and Facebook show similar revenue growth over the first nine years. However, Google stands out because it is all about discovery, and for advertisers, generates potential leads. As we’ve said before, this is a huge challenge for Facebook moving forward: how can it move beyond brand advertising to lead generation, or failing that, getting users to pay for services via Facebook Credits.

Figure 2: A Dash to 45+% Margins

Facebook Google Vodafone first 9 years EBITDA

Source: STL Partners analysis of company records

Facebook has the highest profit (EBITDA) margin at this stage of development even though, as advertising-funded businesses, both Facebook and Google suffered early start-up losses while building the audience and attention that appeal to advertisers.

However, when we examine the current state in terms of absolute revenues, cash and profits, Facebook is far behind both Vodafone and Google in absolute numbers, and requires huge ongoing growth to deserve anywhere near the valuation of $100bn quoted in some quarters.

Figure 3: Comparisons: Facebook, Google, Vodafone

2011 Results

Facebook

Google

Vodafone (*)

Revenue

$1.55bn

$37.9bn

$72.6bn

Free Cash Flow

$0.470bn

$11.1bn

$11.1bn

Enterprise Value (Market Capitalisation plus/(minus) Net Debt/(Cash)

$100bn (#)

$153bn

$181bn

*Vodafone figures are for the year 2010/11 (ending Mar-2011) and converted to $’s using cable rate of 1.58.

#The IPO price of Facebook has not yet been fixed, but the press seem focussed upon a $100bn valuation

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

  • Section 1: Introduction
  • Overview of findings
  • Section 2: Peer Comparison
  • Section 3: Exploring Growth Opportunities
  • 3.1 The challenges of continuing growth
  • 3.2 Attracting More Attention
  • 3.3 Selling More Ads
  • 3.4 Getting more from mobile
  • 3.5 Extending payments
  • 3.6 Moving into communications
  • 3.7 Facebook Web Services
  • 3.8 Possible Acquisitions
  • 4. Risks
  • 4.1 Privacy
  • 4.2 Competition
  • 4.3 The “Once Cool Nightclub Effect”
  • 5. Summary
  • Index


…and the following charts…

  • Figure 1: STL Forecast vs. Actuals from Facebook S-1
  • Figure 2: Three major tech companies, the first nine years
  • Figure 3: A Dash to 45+% Margins
  • Figure 4: Comparisons: Facebook, Google, Vodafone
  • Figure 5: Facebook Geographical Breakdown
  • Figure 6: Facebook Struggling in Asia
  • Figure 7: Tapping Out the User Pool
  • Figure 8: Leading User Engagement
  • Figure 9: Social Networks – biggest single category by user time online
  • Figure 10: Advertising Dominates Facebook’s Revenue
  • Figure 11: ARPU flat for last 12 months
  • Figure 12: Revenue-generating dominated by the USA
  • Figure 13: Consolidation in display ads may have some way to run yet
  • Figure 14: Google + Explodes Out Of The Blocks
  • Figure 15: STL Partners Facebook valuation assumptions

 

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 23 page report in PDF format here. Non-Members, please subscribe here, buy a Single User license for this report online here for £595 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, geographies, people and products referenced: 0.facebook.com, Amazon, Amazon Web Services (AWS), AOL, Apple, Arete, Asia, Bebo, China, Comscore, Deezer, Deutsche Telekom, Europe, Facebook, Facebook Credits, Friends Reunited, Google, Google +, Google Buzz, ITV, Japan, Korea, LiveJournal, Microsoft, MySpace, Netflix, newsfeeds, North America, Opera, Orkut, Pandora, Richard Kramer, RIM, Skype, Sponsored Stories, Spotify, Twitter, UK, US Securities Exchange Commission (SEC), USA Vodafone, WhatsApp, Yahoo!, YouTube, Zynga.

Technologies and industry terms referenced: Advertising, ARPU, Bass diffusion model, EBITDA, Facebook fatigue, gaming, Initial Public Offering (IPO), Mobile, monthly active users (MAU), music, platform, Privacy, S-1, Search, Social Networks, valuation, video.

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

Executive Summary (Extract)

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

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

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

The strategic challenge

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

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

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

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

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

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

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

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

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

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

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

Report contents

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


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

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

Followed by:

  • Conclusions and recommendations [10 pages]
  • Index

The report includes 124 charts and tables.

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

 

Introduction

The new world order

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

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

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

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

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

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

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

Investor trust

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

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

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

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

Source: Google Finance 2/9/2011

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

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

Figure 17: Investors value the disruptors highly

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

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

Impact of disruptors on telcos

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

Figure 18: KPN reveals falling SMS usage

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

Source: KPN Q2 results

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

How telcos are fighting back

Big bundles

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

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

Figure 19: How KPN is trying to defend its revenues

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

Source: KPN’s Q2 results presentation

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

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

The Rich Communications Suite (RCS)

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

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

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

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

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

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

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

Competing head-on

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

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

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

Figure 20 – China Mobile’s Internet Services

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

Source: China Mobile’s Q2 2011 results

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

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

The Wholesale Applications Community (WAC)

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

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

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

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

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

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

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

Summarising current telcos’ response to disruptors

 

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

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

[END OF EXTRACT]

 

‘Under-The-Floor’ (UTF) Players: threat or opportunity?

Introduction

The ‘smart pipe’ imperative

In some quarters of the telecoms industry, the received wisdom is that the network itself is merely an undifferentiated “pipe”, providing commodity connectivity, especially for data services. The value, many assert, is in providing higher-tier services, content and applications, either to end-users, or as value-added B2B services to other parties. The Telco 2.0 view is subtly different. We maintain that:

  1. Increasingly valuable services will be provided by third-parties but that operators can provide a few end-user services themselves. They will, for example, continue to offer voice and messaging services for the foreseeable future.
  2. Operators still have an opportunity to offer enabling services to ‘upstream’ service providers such as personalisation and targeting (of marketing and services) via use of their customer data, payments, identity and authentication and customer care.
  3. Even if operators fail (or choose not to pursue) options 1 and 2 above, the network must be ‘smart’ and all operators will pursue at least a ‘smart network’ or ‘Happy Pipe’ strategy. This will enable operators to achieve three things.
  • To ensure that data is transported efficiently so that capital and operating costs are minimised and the Internet and other networks remain cheap methods of distribution.
  • To improve user experience by matching the performance of the network to the nature of the application or service being used – or indeed vice versa, adapting the application to the actual constraints of the network. ‘Best efforts’ is fine for asynchronous communication, such as email or text, but unacceptable for traditional voice telephony. A video call or streamed movie could exploit guaranteed bandwidth if possible / available, or else they could self-optimise to conditions of network congestion or poor coverage, if well-understood. Other services have different criteria – for example, real-time gaming demands ultra-low latency, while corporate applications may demand the most secure and reliable path through the network.
  • To charge appropriately for access to and/or use of the network. It is becoming increasingly clear that the Telco 1.0 business model – that of charging the end-user per minute or per Megabyte – is under pressure as new business models for the distribution of content and transportation of data are being developed. Operators will need to be capable of charging different players – end-users, service providers, third-parties (such as advertisers) – on a real-time basis for provision of broadband and maybe various types or tiers of quality of service (QoS). They may also need to offer SLAs (service level agreements), monitor and report actual “as-experienced” quality metrics or expose information about network congestion and availability.

Under the floor players threaten control (and smartness)

Either through deliberate actions such as outsourcing, or through external agency (Government, greenfield competition etc), we see the network-part of the telco universe suffering from a creeping loss of control and ownership. There is a steady move towards outsourced networks, as they are shared, or built around the concept of open-access and wholesale. While this would be fine if the telcos themselves remained in control of this trend (we see significant opportunities in wholesale and infrastructure services), in many cases the opposite is occurring. Telcos are losing control, and in our view losing influence over their core asset – the network. They are worrying so much about competing with so-called OTT providers that they are missing the threat from below.

At the point at which many operators, at least in Europe and North America, are seeing the services opportunity ebb away, and ever-greater dependency on new models of data connectivity provision, they are potentially cutting off (or being cut off from) one of their real differentiators.
Given the uncertainties around both fixed and mobile broadband business models, it is sensible for operators to retain as many business model options as possible. Operators are battling with significant commercial and technical questions such as:

  • Can upstream monetisation really work?
  • Will regulators permit priority services under Net Neutrality regulations?
  • What forms of network policy and traffic management are practical, realistic and responsive?

Answers to these and other questions remain opaque. However, it is clear that many of the potential future business models will require networks to be physically or logically re-engineered, as well as flexible back-office functions, like billing and OSS, to be closely integrated with the network.
Outsourcing networks to third-party vendors, particularly when such a network is shared with other operators is dangerous in these circumstances. Partners that today agree on the principles for network-sharing may have very different strategic views and goals in two years’ time, especially given the unknown use-cases for new technologies like LTE.

This report considers all these issues and gives guidance to operators who may not have considered all the various ways in which network control is being eroded, from Government-run networks through to outsourcing services from the larger equipment providers.

Figure 1 – Competition in the services layer means defending network capabilities is increasingly important for operators Under The Floor Players Fig 1 Defending Network Capabilities

Source: STL Partners

Industry structure is being reshaped

Over the last year, Telco 2.0 has updated its overall map of the telecom industry, to reflect ongoing dynamics seen in both fixed and mobile arenas. In our strategic research reports on Broadband Business Models, and the Roadmap for Telco 2.0 Operators, we have explored the emergence of various new “buckets” of opportunity, such as verticalised service offerings, two-sided opportunities and enhanced variants of traditional retail propositions.
In parallel to this, we’ve also looked again at some changes in the traditional wholesale and infrastructure layers of the telecoms industry. Historically, this has largely comprised basic capacity resale and some “behind the scenes” use of carriers-carrier services (roaming hubs, satellite / sub-oceanic transit etc).

Figure 2 – Telco 1.0 Wholesale & Infrastructure structure

Under The Floor (UTF) Players Fig 2 Telco 1.0 Scenario

Source: STL Partners

Content

  • Revising & extending the industry map
  • ‘Network Infrastructure Services’ or UTF?
  • UTF market drivers
  • Implications of the growing trend in ‘under-the-floor’ network service providers
  • Networks must be smart and controlling them is smart too
  • No such thing as a dumb network
  • Controlling the network will remain a key competitive advantage
  • UTF enablers: LTE, WiFi & carrier ethernet
  • UTF players could reduce network flexibility and control for operators
  • The dangers of ceding control to third-parties
  • No single answer for all operators but ‘outsourcer beware’
  • Network outsourcing & the changing face of major vendors
  • Why become an under-the-floor player?
  • Categorising under-the-floor services
  • Pure under-the-floor: the outsourced network
  • Under-the-floor ‘lite’: bilateral or multilateral network-sharing
  • Selective under-the-floor: Commercial open-access/wholesale networks
  • Mandated under-the-floor: Government networks
  • Summary categorisation of under-the-floor services
  • Next steps for operators
  • Build scale and a more sophisticated partnership approach
  • Final thoughts
  • Index

 

  • Figure 1 – Competition in the services layer means defending network capabilities is increasingly important for operators
  • Figure 2 – Telco 1.0 Wholesale & Infrastructure structure
  • Figure 3 – The battle over infrastructure services is intensifying
  • Figure 4 – Examples of network-sharing arrangements
  • Figure 5 – Examples of Government-run/influenced networks
  • Figure 6 – Four under-the-floor service categories
  • Figure 7: The need for operator collaboration & co-opetition strategies

Telco 2.0: Report and analysis of the event

Telco 2.0: Event Summary Analysis. A summary of the findings of the Telco 2.0 Executive Brainstorm, 9th November 2011, held in the Guoman Tower Hotel, London. The Brainstorm explored telcos’ strategic options to grow in the fast changing digital economy. It also considered how telcos can defend their core voice and messaging business, while also examining the steps they can take to improve the customer experience.

Telco 2.0: Event Summary Analysis Presentation


Part of the New Digital Economics Executive Brainstorm series, the Telco 2.0 event took place at the Guoman Hotel, London on the 9th November and looked at telcos’ strategic options, the future of the core communications products telcos rely on for much of their revenue and how they can improve the customer experience both to reduce churn and attract new customers.

Using a widely acclaimed interactive format called ‘Mindshare’ the event
enabled 80 specially-invited senior executives from across the communications,
media, banking and technology sectors to.

This note
summarises some of the high-level findings and includes the verbatim output of
the brainstorm.

More information: email contact@stlpartners.com, or phone: +44 (0) 207 247 5003.

DOWNLOAD REPORT

Extracted example slide:

Telco 2.0: Event Summary Analysis Presentation

Cloud 2.0: Report and analysis of the event

Cloud 2.0: Event Summary Analysis. A summary of the findings of the Cloud 2.0 Executive Brainstorm, 10th November 2011, held in the Gouman Tower Hotel, London. The Brainstorm explored telcos’ strategic options to grow in the fast changing digital economy. It also considered how telcos can defend their core voice and messaging business, while also examining the steps they can take to improve the customer experience. (November 2012, Executive Briefing Service, Cloud & Enterprise ICT Stream) Cloud 2.0: Event Summary Analysis Presentation

 

 

Part of the New Digital Economics Executive Brainstorm series, the Cloud 2.0 event took place at the Guoman Hotel, London on the 10th November and looked at telcos’ strategic options, the future of the core communications products telcos rely on for much of their revenue and how they can improve the customer experience both to reduce churn and attract new customers.

Using a widely acclaimed interactive format called ‘Mindshare’ the event enabled 80 specially-invited senior executives from across the communications, media, banking and technology sectors to.

This note summarises some of the high-level findings and includes the verbatim output of the brainstorm.

More information: email contact@stlpartners.com, or phone: +44 (0) 207 247 5003.

DOWNLOAD REPORT

Extracted example slide:

 

Cloud 2.0: Event Summary Analysis Presentation

Personal Data 2.0: Industry fails Carrier IQ test

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

Carrier IQ Smartphone Eye image Dec 2011 Telco 2.0

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Introduction

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

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

Travis Eckhardt’s YouTube Video of Carrier IQ

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

The story so far

A festival of finger-pointing

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

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

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

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

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

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

A selection of previous industry data gaffes

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

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

What does Carrier IQ technically do that’s worrying?

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

Why the Carrier IQ issue has ‘blown up’

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

Carrier IQ’s mistakes

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

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

Operators’ mistakes

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

Paranoia feeds the Media

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

The “fog of war”, industry panic and opportunism

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

Result = Industry Failure

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

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

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

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

Winners and Losers

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

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

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

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

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

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

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

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

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

Telecoms and the Eurozone Economic Crisis: a perfect storm?

What are the possible impacts on telecoms of further economic troubles in the Eurozone? Will it be recessionary business as usual or something much nastier? And how will it impact ‘Telco 2.0’ Strategies? (December 2011, Executive Briefing Service)

EMEA Messaging Decline reasons Nov 2011

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Introduction

In October 2008 we started a series of eight articles on the Credit Crunch, starting with Credit crunch – silver lining for telcos? and progressing to Credit Crunch 8: Show us your Labs in March 2009. Sadly, we’re now back looking into the cloudy economic crystal ball. What lies ahead?

A gathering storm?

Recent weeks and months have witnessed near-panic in financial markets, with the woes of the Eurozone top of the list of pain points. Escalating fears about defaults on sovereign debt in Greece, Portugal and Ireland has been followed by “contagion” elsewhere – Italy, Spain, Belgium and even France are in the frame as well.

This in turn is driving knock-on effects in the wider economy, with recession looming once more for much of Europe. Germany is seen as being in the driving seat, but has taken a hard stance on the role of the European Central Bank, and Angela Merkel is wary of overburdening her hardworking, tax-paying electorate.

Elsewhere, the US is still suffering under a huge debt burden but seems to be slowly struggling back to its economic feet. The global macro-economy, however, still looks fragile, with even China showing a couple of signs of shakiness in recent weeks. This is without the de-stabilising effects of the situations with Syria or Iran.

Given the depths of the world’s economic worries, it almost seems churlish and selfish to start thinking about the effect on a specific industrial sector like telecoms. But assuming that “the worst” doesn’t happen, and that the pain is manageable but severe, and the economic and legislative remedies are robust, what might happen? What are the most likely outcomes, and what else might be lurking hidden on the sidelines?

Normal “telcos in a recession” trends?

One possible scenario is that we’ll once more see a ‘traditional’ cyclical economic downturn response, where the telecoms industry hunkers down, goes into “recession mode”, and waits for everything to blow over. The sector has proven pretty resilient in the past – consumers won’t give up their phones and Internet access, although they might shop around a bit more, and hang onto older devices a while more before upgrading.

In that situation we’ll see some sluggishness in revenue growth, some reduced profit forecasts, and maybe some consolidation. To take the most recent example, the telecoms industry we see in 2011 doesn’t look much different to that before the 2008-10 recession. If anything, with the engines of smartphone adoption and mobile broadband growth, it’s powered through the economic gloom almost (but not quite) without flinching.

The sum of all fears

But maybe this time is different. Not only is the current crisis being precipitated by the debt situation rather than a normal “cycle”, but some of the other factors are different too. There are major government austerity projects, potential changes in the structure of the European Union, uncertainty about currencies, write-downs of assets and an inability for even governments to raise finance.

The spectre of financial “contagion” is looming worryingly again, and there’s a real possibility that private individuals might be pressured to breaking point and beyond, where telecom services once again become luxuries compared to the basic necessities of existence. Rather than a “normal” recession, where GDP slips perhaps 1-5% and economies can build/borrow their way out, if GDP slips 5-10% or even more, assorted negative-feedback loops can occur, as highlighted by the current debt problems and harsh Brussels-imposed austerity measures. Growth would seem very hard to come by, even in those countries currently perceived as “safer” such as the UK.

The Irish economic crash has been ongoing for a while during 2011, and signs from operators like Eircom have not been encouraging . Performance of Greek operators like OTE is also sharply down, and this is not encouraging either.

It’s not just the economy

And then add to that some other worries. Even without the current economic situation, telcos are increasingly on shaky ground. Our recent surveys at events have shown an expectation that normal “bread and butter” revenue streams like telephony and messaging are under huge threat from so-called OTT providers. For example, a survey conducted at our EMEA Brainstorm in November 2011 showed an expectation of 30-40% revenue falls in messaging over the next three years, for example, without any explicit reference to the economy, just ongoing market developments. These findings are summarised in the Briefing ‘Your Text is on Fire: OTT’s to burn 40% SMS revenue by 2015’.

Figure 1 – The predicted impact of ‘OTT’ players on messaging revenues

EMEA 2011 Messaging Decline Chart 40% Telco 2.0

These findings are also consistent with views expressed in an online survey of over 300 executives in October 2011, as part of our research for the strategy report ‘Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon’.

Figure 2 – The impact of ‘OTT’ players on the telco business model

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

The juxtaposition of lower consumer spending-power, plus improving capabilities of various competing services, together with smartphones as almost universal enablers, is not a happy one. The current downturn might hit operators harder than we might hope – people are going to be more incentivised to seek out cheaper options, and may also be more prepared to make price/quality trade-offs that seem unthinkable to telco traditionalists designing networks for 5-9’s reliability.

Impact of debt market chaos / credit crunch 2.0

Many telcos have significant amounts of debt, often used to finance spectrum purchases, network deployments and acquisitions. With 4G and fibre rollouts expected, any dry-up in funding has significant ramifications. Historically underwritten by high and dependable cashflow levels, the same potential risks exist for telcos that are being observed in other parts of the economy (and at national level) – over-leverage, and difficulty in “rolling over” maturing debt.

Greek operator OTE and Irish telco Eircom are thought by Moody’s to be worst exposed, especially given the state of their domestic economies. The “big 5” of Telefonica, Vodafone, Deutsche Telekom, Telecom Italia and France Telecom are thought to be less at risk, as they have cashflow, cash reserves, and available credit lines .

Indeed, many telcos are at the top of the stock yield ratings (see Figure 3 – Telco stock yields are high in European markets), showing that investors want to see a return on their money, or want telcos to ‘give it back before they blow it on something stupid’ to paraphrase Richard Kramer, of Telco 2.0 partners Arete Financial research. In addition, many telco shares yield more that the interest paid on their debt bonds which implies that buying telcos’ shares is riskier than buying their debt, and can mean that investors expect either the dividend or the share price to drop in the short term.

Figure 3 – Telco stock yields are high in European markets

Telco stock yields are high (chart)

Debt exposures and restructuring

Problems are highlighted by some major groups’ expansion into regions now worst-affected by the crisis. For example, T-Mobile has sizeable exposure to the Greek market through its 40% stake in OTE – previously the group’s largest business outside the US and Germany. (OTE has a wider footprint in SE Europe than just Greece – it also operates in Bulgaria, Romania and Albania). Its Greek revenue and customer base has dropped precipitously over the last year. Worse, OTE will need to refinance a large slab of debt over the coming couple of years, which will likely mean it will have to divest assets, probably at prices lower than it would ideally want. Deutsche Telekom AG has already said it will act as a lender of last resort if OTE can’t raise finance on constrained capital markets.

In November 2011, UK joint-venture EverythingEverywhere raised £875m in financing, primarily to pay off other debts it owes to its shareholder parents, France Telecom and Deutsche Telekom.

We see this as a special case, and don’t expect to see much further restructuring of this type, since most telco debt is structured to be tax-efficient and the benefits of any debt restructuring are unlikely to outweigh the tax-efficiency benefits.

However, it is also worth noting that EE will probably have to raise quite a lot more capital if it is to participate fully in 2012’s 800/2600MHz UK spectrum auctions and 4G buildout. This will be the case for the majority of companies wishing to build out LTE in the short term.

Currency exposure

One of the major unknowns at the moment is the fate of the Euro. There is a possibility that there will be some form of restructuring – maybe some countries leaving the Eurozone, or perhaps a two-tier Euro1 and Euro2 system. The Bank of England has undertaken scenario-planning for potential “disorderly” events in the Eurozone. The opinions here are both shrill and conflicting – there are numerous believers in “the project” who feel that the currency should be saved at all costs, and many others who believe equally vehemently that it was a bad idea all along and now needs to be radically altered. Some suggest Greece may be forced out while others think that Germany is too powerful and is itself the cause of the problem.

The net result is that the Euro is looking weaker, and certainly at the time of writing (late November 2011) is falling against currencies like the dollar. Bond markets have shown a flight from Eurozone government paper to perceived “safer havens” like the UK, Switzerland, Sweden and beyond.

How does the currency risk impact telcos?

Most obviously, any major changes will be reflected in their results when reported in local currencies and consolidated. The exact structures (and any hedging) will be highly company-specific. On the vendor side, there are also going to be inevitable fluctuations in import/export attractiveness that are hard to predict or analyse across-the-board, as supply chains are heavily globalised. International services like roaming are also going to be exposed.

Dangerous inflationary pressures

What is more certain is that historically, declining currencies have been a large contributing factor to rising inflation.

In a scenario where revenues are under threat both from general economic conditions and competitive pressures, it is unlikely that telcos would be able to raise their prices to fully cover inflation. The outcome is shrinking margins which ultimately lead to lower telco valuations.

For instance, Orange in the UK have just announced a 4.3% price rise for contract (postpay) customers within their current plans, prompting negative customer reaction. This is despite current UK Retail Price Index (RPI) inflation of greater than 5%. None of the other UK operators have so far followed.

Impact of austerity measures

Perhaps the biggest difference between this economic downturn and the last is the widespread arrival of the “austerity programme” in most countries across Europe. Typically, this is rooted in a desire by governments to cut spending, in order to reduce deficits and convince bond-holders that they might, one day, get their money back. In some cases (e.g. Greece and Italy) the austerity measures are being imposed and monitored by Brussels as a condition of a bail-out, together with the appointment of new governments and prime ministers. Further “political convergence” is expected.

In reality, austerity tends to mean:

  • Lower public-sector spending, typically involving firing government workers, reducing pay or pensions, cancelling projects and reducing departmental operating costs.
  • Higher taxes for individuals and businesses

There are a few big risks here:

  • Lower direct spending on telecoms services by central and local government, and other state-influenced areas such as healthcare and education
  • Slow-down of government-sponsored broadband rollouts or state-paid broadband subsidies for less well-off citizens
  • Possible knock-on impact of lower consumer spending on telecoms, as taxes are increased, and public-sector workers lose jobs or face salary cuts
  • Risks of delays or cutbacks to big telecom-centric projects such as e-government
  • Changes in taxation or accounting regimes impacting operators

Early signs are not promising. Greek, Irish, Romanian and Hungarian telecoms markets have suffered already. Plus Telefonica has suffered from the Spanish government’s changed tax policy on “goodwill deductions” for previous foreign acquisitions.

One slightly perverse outcome is that some large incumbent operators are now seen as less-risky investments than their countries’ own sovereign bonds. Portugal Telecom, for example, is thought to be well-financed for the next 2-3 years, even if it suffers from pressure from its weak domestic economy .

Possible technocratic regulatory changes

One interesting area is the potential for telecoms regulatory changes that might be put in place by the new breed of “technocrats” running some of Europe’s governments. This is only likely to emerge over the next 6-12 months, but some possibilities include:

  • Less concern about competition (at least in the short term). After consolidation, many European markets may be left with three or even two mobile operators, and newcomers in areas like MVNOs may disappear. Regulators may take the view that cash-strapped consumers will put pricing pressure on telcos, even if normal competition relaxes somewhat.
  • More willing consideration of concepts such as structural separation or wholesale models for telecoms, especially if the government can attract private investment without needing to spend its own money.
  • Outsourced / off-shored functions may be “repatriated” as governments look to stimulate employment
  • More negatively, some administrations may look enviously at telcos’ cash flows and attempt to impose new taxes or charges.
  • Potentially accelerated sales of spectrum or government holdings in the telecoms industry – although this will be offset by concerns about lower attainable valuations. Deutsche Telekom has the first right of refusal to buy the remaining 10% state share in Greek operator OTE. It might make offer in exchange for regulatory concessions on fiscal guarantees and freedom to reduce headcount, for example.

Impact on Vendors

There is in any event an ongoing trend for telcos to aim to significantly reduce costs, and operators will continue to look for even better deals. However, cash and debt pressures may both slow refresh time tables and further increase cost pressure on vendors.

Possible upsides of the economic troubles

Possible upsides we can imagine include:

  • Some direct or indirect stimulus funding for major projects which are beneficial for telecoms if their benefits are perceived to outweigh governments’ needs to make cost savings. “Smart cities”, fibre rollouts, major new regeneration projects, airport expansions, train lines and other such infrastructure initiatives tend to have communications pull-through.
  • Less pleasantly, new governments may make changes to labour laws, which enable some European operators to align costs and revenues more easily.
  • Some extra R&D investment by those that have cash and long-term visions. Whether this comes from the telcos or adjacent players such as Apple and Google is yet to be seen.
  • The current crisis may be the catalyst for some much-anticipated (and, arguably much-needed) consolidation in a number of telecoms markets. Vodafone and Wind are looking to combine their Greek businesses. Hutchison’s 3 Group has launched a bid for Orange’s Austrian business unit.
  • Under utilised capacity in the labour market could ultimately be a trigger for digital entrepreneurialism, pushing innovation in areas like apps and gaming and driving medium-term growth.

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

  • Impact on Telco 2.0 Strategies
  • Conclusions and recommendations

…and the following charts…

  • Figure 1 – The predicted impact of ‘OTT’ players on messaging revenues
  • Figure 2 – The impact of ‘OTT’ players on the telco business model
  • Figure 3 – Telco stock yields are high in European markets
  • Figure 4 – Telco 2.0 Strategies demand different operational and financial models
  • Figure 5 – Vodafone’s current view of growth opportunity value

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 17 page report in PDF format here. Non-Members, please subscribe here or please email contact@telco2.net / call +44 (0) 207 247 5003.

Your Text is on Fire: OTT’s to burn 40% SMS revenue by 2015

Introduction

Background

STL Partners’ New Digital Economics Executive Brainstorm EMEA, took place from 8-10 November in London, and brought together 5 events in 1 venue, co-locating the Telco 2.0, M-Commerce, 2.0 Cloud 2.0, M2M 2.0 and Digital Entertainment 2.0 brainstorms, using a unique and widely acclaimed interactive format called ‘Mindshare’ to help clarify the important ‘next steps’ for both individual companies and industries.

Building on output from previous brainstorms and new market research and analysis from STL Partners, it focuses on new growth opportunities at the intersection of Telecoms, Media and Technology. The keynote Strategy Report Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon was launched at the brainstorm, and a similar agenda will be discussed at the New Digital Economics – APAC Brainstorm, Accelerating New Growth Opportunities in Telecoms, Media and Tech, 30 November – 1 December, Capella Resort, Singapore.

This note provides an extract of key take-outs and votes on the ‘Voice and Messaging 2.0’ sessions from the EMEA brainstorm for Telco 2.0 readers and subscribers.

Brainstorm participants will also receive detailed write-ups and analysis from the event sessions they registered for, and we will be using the input from all the sessions of the EMEA, Americas and APAC brainstorms as input to new analysis across all of the topics covered in the coming months.

The telco business model challenge is getting acute in EMEA

Your text platform is on fire

Telco SMS revenue will decline on average by around 40% across the Europe and Middle East region by 2015 according to the senior execs at this month’s Telco 2.0 brainstorm in London. The main cause is competitive pressure from so-called ‘Over-The-Top’ (OTT) alternatives (Facebook, Skype, Google, BBM, etc).

Figure 1 – Predicted decline of mobile telco messaging revenues

EMEA 2011 Messaging Decline Chart 40% Telco 2.0

 

The cause of this predicted decline was unambiguous – the impact of so-called Over The Top (OTT) players’ messaging services like iMessage, BlackBerry Messenger, Whatsapp, Skype and Facebook.

Figure 2 – Causes of predicted mobile messaging decline

EMEA 2011 Messaging Decline Chart OTT Causes Telco 2.0

This is similar to the impact of the new services that we saw predicted in the survey conducted across 300 senior execs in the research for our latest report Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon.

Indeed, KPN and some Middle-Eastern operators have reported even higher percentage declines among users of certain devices and applications.

The Voice platform is smoking too

While not as pressing as the impact on Messaging revenues, delegates had a pessimistic view of the prospects for voice revenues.

Figure 3 – Predicted decline of mobile carrier voice revenues

EMEA 2011 Voice Decline Chart 20% Telco 2.0

The causes behind the voice declines were seen as somewhat broader, with competition and regulation taking up 56% compared to 16% for Messaging, although ‘Responding to price pressures from OTT alternatives’ was still the main choice with 44% of the vote.

Figure 4 – Causes of predicted mobile voice revenue decline

EMEA 2011 Voice Decline Chart 20% reasons Telco 2.0

All in all, it looks as if the pressures on voice and messaging revenues are beginning to bite as we originally predicted in our 2008 strategy report Lessons from Internet Communications Services – Skype, Facebook, and others: how Telcos can adapt and compete – although the options for adaptation and competition have narrowed somewhat due to the success of the so-called OTT players and the relative lack of action by telcos.

Who should telcos fear most?

Delegates did not have an entirely consistent view of the threats and opportunities presented by the OTT players as shown below.

Figure 5 – Who should telcos support / fear most in voice and messaging?

EMEA 2011 Voice and Messaging Decline Chart OTT Fears Telco 2.0

This is not entirely surprising given the relative attractions and perils presented in different scenarios as we describe in Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon.

However, what is consistent for operators is that:

  • There is most to gain, in the short-term at least, in supporting Microsoft as a counterweight to Apple and Google;
  • RIM / Blackberry is perceived to have the least power – and also presents a opportunity as a counterweight to Apple and Google, albeit a weakened one;
  • Facebook is indeed a ‘double-edged sword’ – as a threat in terms of its potential to enter communications and an opportunity in driving data use;
  • Apple and Google are the established players with the most current power, and hence threat.

Will RCS-e help?

At the November 2011 EMEA Brainstorm, Cenk Serdar, Director, Data & Communications Service, Vodafone, and Rainer Deutschmann, SVP Core Telco Products, DTAG, carried out a live demonstration of RCS-e, the GSMA-backed future voice & messaging solution using IMS. Morten Sorby, EVP of Strategy & Regulatory Affairs, Telenor, and Andreas Bernstrom, CEO, Rebtel, joined the vibrant subsequent debate with the audience and Simon Torrance, CEO STL Partners.

The following is an anonymised top-level summary of the resulting discussions and the votes.

Getting to market

Instant messaging, video, and file-sharing are the key features in RCS-e, and are being introduced as a refined set compared to the original specifications in order to bring applications to market as quickly as possible. This refinement was lead by the E5 Group of top European operators.

The most important item on the future roadmap is service discovery. Beyond that, contacts transfer, location sharing, and multi-device operation are on the to-do list.

Interestingly, it seems that some of the RCS-e use cases focus on supporting enterprise applications such as trying to provide a platform for better CRM and person-to-organisation applications (for example, an enhanced helpdesk for a furniture company). This has consequences for the design of APIs and business relationships facing upstream towards enterprises and developers.

Arguments for success or failure

Arguments put forward at the Brainstorm for RCS-e included:

  • While Apple’s iMessenger and RIM’s BlackBerry Messenger are impressive products, they aren’t ubiquitious or necessarily deeply integrated with other applications in the way that SMS, MMS, and telephony could be.
  • RCS-e doesn’t require the user to download any new apps – the vast majority of users aren’t already using sophisticated communications tools like smartphones.
  • RCS-e ‘is a service for mass-market users’ rather than just smartphones.
  • Seven of the major device makers are committed, and the RCS-e standard is an open standard, so nothing prevents Apple iOS or RIM BBX developers implementing it independently.
  • RCS-e is building its global footprint. Spain, France, and Germany will launch sequentially between now and the first half of 2012. South Korea is committed to deploying RCS-e, and discussions were going on with other Asian countries.

Arguments put forward against RCS-e included:

  • Smartphones will change customer behaviour and catalyse change as more people get them. Horace Dediu, Associate Analyst at STL Partners, predicts that Western Europe and North America will go 100% smartphone within 18 months – so control will be further ceded to the Smartphone OS owners.
  • Cost is the main reason users move to Skype and similar services, and RCS-e doesn’t reduce costs.
  • The feature set just isn’t that convincing compared to what else can be done using VOIP services and other smartphone apps.

Delegates were split in their views on the likely efficacy of RCS.

Figure 6 – Will RCS-e offer an attractive alternative to OTT services?

EMEA 2011 RCS-e attractive vs OTT Telco 2.0 chart

Telco 2.0’s questions

The value of RCS-e is a subject that stirs strong opinions from across the industry, and it was intriguing to see the extreme polarity of delegate views at the Brainstorm.

Figure 7 – Is RCS-e ‘too little too late’?

EMEA 2011 RCS-e too little too late Telco 2.0 chart

Telco 2.0 will be conducting an in-depth analysis of Messaging and Voice 2.0 strategies, including RCS-e and its prospects in coming months.

Our questions on RCS-e at this point are as follows.

How many Christmas 2012 handsets will have RCS-e?

An critical factor is whether the wave of cheap smartphones will support RCS-e and if so, whether they support it well or only half-heartedly. The great bulk of them will be Android devices, and therefore the key vendors will be HTC and Samsung.
HTC are signed up, but their device line-up is concentrated on the high end, and they are very much second to Samsung in terms of volume.

Samsung is shipping more Androids than any other vendor, and indeed more smartphones than any other vendor, and they have a portfolio of products from the Ace to the Galaxy S II rather than a single top-end hero product. A key question is to what extent across their handset range they will sign up to RCS-e.

Are the features really convincing?

It is notoriously difficult to accurately predict the appeal of features in advance of consumer trials. However, a challenge for operators will be that, unlike Apple, they will have limited control of the design and implementation of the end-to-end customer experience.
How quickly can RCS-e evolve?

An important issue regarding services “embedded” in the core network or the device operating system is that they are unlikely to get upgrades anywhere near as quickly as either standalone applications or Web services. Operators tend to be slow to push out OTA upgrades to device OS, even after the manufacturers release them, and software iterations in the core network are taken slowly for very good reasons. App developers and Web 2.0 players tend to have much faster development cycles, so in terms of both user experience design control and release iteration operators are at a disadvantage.

What is RCS-e realistically intended to achieve now?

Opinions vary on what RCS-e is meant to achieve for operators, though few people we’ve spoken to in private recently believe that RCS-e is a ‘silver-bullet’ to combat so-called ‘OTT’ revenue erosion. Indeed, there appears to be a growing minority who appear to have ‘given up’ on voice and messaging revenues.

A more tenable position perhaps is that RCS-e may help a little, and that extending the life of the Messaging and Voice revenue streams by only a few months would justify the business case. One argument we’ve heard is that RCS-e is about enhancing and protecting the telco services bundle of minutes, texts, and data.

In a wider sense, it is a move by operators to provide something new to consumers, and it may at least be a small step to revitalise their relevance to consumers. In our view, it is far from the only strategy that operators should explore.

Content

  • What else can be done?
  • A new strategy framework for Messaging and Voice 2.0 Strategies
  • Developing alternative sources of value

 

  • Figure 1 – Predicted decline of mobile telco messaging revenues
  • Figure 2 – Causes of predicted mobile messaging decline
  • Figure 3 – Predicted decline of mobile carrier voice revenues
  • Figure 4 – Causes of predicted mobile voice revenue decline
  • Figure 5 – Who should telcos support / fear most in voice and messaging?
  • Figure 6 – Will RCS-e offer an attractive alternative to OTT services?
  • Figure 7 – Is RCS-e ‘too little too late’?
  • Figure 8 – Strategic Messaging and Voice options for operators