Building telco edge: Why multi-cloud will dominate

Defining the edge

Edge computing will remain a focus for telecoms operators for the foreseeable future, both to optimise the network and enable new, third-party applications and services. In fact, 70% of survey respondents believe investment levels of edge computing for supporting third-party applications will increase over that for internal network infrastructure in the next five years.

This report explores how telecoms operators will build their edge computing business, infrastructure and services, and the role multi-cloud will take in this. Before diving into this, it is worth defining this confusing and complicated space. At a high level, edge computing refers to cloud-native computing (and storage) being brought closer to the end-device or source of the data, rather than centralised in a remote, hyperscale data centre.

The telecoms industry has been exploring the role of edge computing for over four years, starting when network functions virtualisation (NFV) began to make real strides. The initial interest was in mobile edge computing (MEC), but this has now evolved to multi-access edge computing to incorporate fixed networks and non-cellular networks too. Outside telecoms, there is edge compute capacity in regional data centres provided by third parties centres, e.g. data centre operators and cloud providers. These are often in untapped geographies, such as Tier 2 cities. In addition, there is edge compute at customer premises, e.g. business campuses or factories.

We outline the scope of edge computing below. There is a full spectrum of possible edges from devices to regional data centres. Some of these edge locations may be owned and/or operated by communications services providers (CSPs). The CSP edge contains the most relevant types of edge for CSPs: network edge and on-premises enterprise edge. They contain infrastructure either owned by a telecoms operator (e.g. a CSP data centre) or operated by one (e.g. network CPE at a customer site).

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The spectrum of edge computing locations

There are two main types of applications that can be processed on CSP edge computing:

  1. Telecoms applicationsthat run, protect and monitor the network – i.e. CSP’s own network functions;
  2. Consumer/enterpriseapplications – which CSPs may provide for third-party customers.

STL Partners has been supporting the telecoms industry in exploring the opportunity to provide services and solutions to third parties by leveraging their edge computing infrastructure. These could include enterprises deploying IT applications locally to comply with data sovereignty laws, developers using edge to optimise their applications, IoT solution vendors using edge to reduce latency for mission-critical applications, etc. Our survey highlighted the importance for CSPs in investing in the infrastructure for these applications. On average, CSPs believe that 40% of edge computing investments in the next 1-2 years will be used to support these applications, rather than be used for network functions infrastructure.

Defining edge computing within telecoms

Although the edge computing market is nascent, there are emerging use cases that seek to take advantage of edge computing’s main benefits. These include offering the flexibility that comes with the cloud more local to reduce latency, improving reliability, keeping data secure, and offloading processing from the end-device. However, use cases are at different stages of maturity; some will be deployed in the next two years in early adopter markets, others are more than five years away from commercial, wide scale deployments.

The maturity stages of edge computing use cases

Telecoms operators are keen to leverage edge computing to grow revenues, particularly in their enterprise business. There are different strategies emerging: one is to focus on enterprise connectivity and networking, another on developing a horizontal, cloud-like platform for developers, while a third focuses on building end-to-end solutions for specific verticals.

Types of edge services and business models

The challenge with any new technology is that it takes time to educate the market and engage the innovators who will build the applications that will leverage its potential. Edge computing is complex, because it has a unique ecosystem that spans several industries: cloud, telecoms, industrial, traditional ICT, plus specific vertical sectors. In order to build an edge-based solution, there needs to be adequate infrastructure (facility, hardware, connectivity, edge cloud) plus the applications and services, and these need to be integrated so they work together seamlessly.

The edge value chain

Regardless of the business model and services strategy a telecoms operator chooses to pursue, it will need to first determine how best to build its edge infrastructure to optimise results. This report will dive into three key questions CSPs are still trying to evaluate:

  1. How should telecoms operators build edge computing infrastructure that can support both enterprise applications and network functions?
  2. To what extent should telecoms operators work with partners, particularly the hyperscalers, to build their edge and take services to market?
  3. How can telecoms operators effectively work with the ecosystem?

Table of Contents

  • Preface
  • Executive Summary
    • There are three key factors to consider to build the CSP edge
    • The edge will be multi-(edge) cloud
    • CSPs must build capabilities and partnerships today to support their edge business
  • Defining the edge
  • Laying down the foundations: Options for building the CSP edge
    • Convergence
    • Organisation
    • Hyperscaler partnerships
  • There is no single edge – it is multi-cloud
  • Conclusions and recommendations: What CSPs should do next
  • Index

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Why and how to go telco cloud native: AT&T, DISH and Rakuten

The telco business is being disaggregated

Telcos are facing a situation in which the elements that have traditionally made up and produced their core business are being ‘disaggregated’: broken up into their component parts and recombined in different ways, while some of the elements of the telco business are increasingly being provided by players from other industry verticals.

By the same token, telcos face the pressure – and the opportunity – to combine connectivity with other capabilities as part of new vertical-specific offerings.

Telco disaggregation primarily affects three interrelated aspects of the telco business:

  1. Technology:
    • ‘Vertical’ disaggregation: separating out of network functions previously delivered by dedicated, physical equipment into software running on commodity computing hardware (NFV, virtualisation)
    • ‘Horizontal’ disaggregation: breaking up of network functions themselves into their component parts – at both the software and hardware levels; and re-engineering, recombining and redistributing of those component parts (geographically and architecturally) to meet the needs of new use cases. In respect of software, this typically involves cloud-native network functions (CNFs) and containerisation
    • Open RAN is an example of both types of disaggregation: vertical disaggregation through separation of baseband processing software and hardware; and horizontal disaggregation by breaking out the baseband function into centralised and distributed units (CU and DU), along with a separate, programmable controller (RAN Intelligent Controller, or RIC), where all of these can in theory be provided by different vendors, and interface with radios that can also be provided by third-party vendors.
  2. Organisational structure and operating model: Breaking up of organisational hierarchies, departmental siloes, and waterfall development processes focused on the core connectivity business. As telcos face the need to develop new vertical- and client-specific services and use cases beyond the increasingly commoditised, low-margin connectivity business, these structures are being – or need to be – replaced by more multi-disciplinary teams taking end-to-end responsibility for product development and operations (e.g. DevOps), go-to-market, profitability, and technology.

Transformation from the vertical telco to the disaggregated telco

3. Value chain and business model: Breaking up of the traditional model whereby telcos owned – or at least had end-to-end operational oversight over – . This is not to deny that telcos have always relied on third party-owned or outsourced infrastructure and services, such as wholesale networks, interconnect services or vendor outsourcing. However, these discrete elements have always been welded into an end-to-end, network-based services offering under the auspices of the telco’s BSS and OSS. These ensured that the telco took overall responsibility for end-to-end service design, delivery, assurance and billing.

    • The theory behind this traditional model is that all the customer’s connectivity needs should be met by leveraging the end-to-end telco network / service offering. In practice, the end-to-end characteristics have not always been fully controlled or owned by the service provider.
    • In the new, further disaggregated value chain, different parts of the now more software-, IT- and cloud-based technology stack are increasingly provided by other types of player, including from other industry verticals. Telcos must compete to play within these new markets, and have no automatic right to deliver even just the connectivity elements.

All of these aspects of disaggregation can be seen as manifestations of a fundamental shift where telecoms is evolving from a utility communications and connectivity business to a component of distributed computing. The core business of telecoms is becoming the processing and delivery of distributed computing workloads, and the enablement of ubiquitous computing.

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Telco disaggregation is a by-product of computerisation

Telco industry disaggregation is part of a broader evolution in the domains of technology, business, the economy, and society. This evolution comprises ‘computerisation’. Computing analyses and breaks up material processes and systems into a set of logical and functional sub-components, enabling processes and products to be re-engineered, optimised, recombined in different ways, managed, and executed more efficiently and automatically.

In essence, ‘telco disaggregation’ is a term that describes a moment in time at which telecoms technology, organisations, value chains and processes are being broken up into their component parts and re-engineered, under the impact of computerisation and its synonyms: digitisation, softwarisation, virtualisation and cloud.

This is part of a new wave of societal computerisation / digitisation, which at STL Partners we call the Coordination Age. At a high level, this can be described as ‘cross-domain computerisation’: separating out processes, services and functions from multiple areas of technology, the economy and society – and optimising, recombining and automating them (i.e. coordinating them), so that they can better deliver on social, economic and environmental needs and goals. In other words, this enables scarce resources to be used more efficiently and sustainably in pursuit of individual and social needs.

NFV has computerised the network; telco cloud native subordinates it to computing

In respect of the telecoms industry in particular, one could argue that the first wave of virtualisation (NFV and SDN), which unfolded during the 2010s, represented the computerisation and digitisation of telecoms networking. The focus of this was internal to the telecoms industry in the first instance, rather than connected to other social and technology domains and goals. It was about taking legacy, physical networking processes and functions, and redesigning and reimplementing them in software.

Then, the second wave of virtualisation (cloud-native – which is happening now) is what enables telecoms networking to play a part in the second wave of societal computerisation more broadly (the Coordination Age). This is because the different layers and elements of telecoms networks (services, network functions and infrastructure) are redefined, instantiated in software, broken up into their component parts, redistributed (logically and physically), and reassembled as a function of an increasing variety of cross-domain and cross-vertical use cases that are enabled and delivered, ultimately, by computerisation. Telecoms is disaggregated by, subordinated to, and defined and controlled by computing.

In summary, we can say that telecoms networks and operations are going through disaggregation now because this forms part of a broader societal transformation in which physical processes, functions and systems are being brought under the control of computing / IT, in pursuit of broader human, societal, economic and environmental goals.

In practice, this also means that telcos are facing increasing competition from many new types of actor, such as:

  • Computing, IT and cloud players
  • More specialist and agile networking providers
  • And vertical-market actors – delivering connectivity in support of vertical-specific, Coordination Age use cases.

 

Table of contents

  • Executive Summary
    • Three critical success factors for Coordination Age telcos
    • What capabilities will remain distinctively ‘telco’?
    • Our take on three pioneering cloud-native telcos
  • Introduction
    • The telco business is being disaggregated
    • Telco disaggregation is a by-product of computerisation
  • The disaggregated telco landscape: Where’s the value for telcos?
    • Is there anything left that is distinctively ‘telco’?
    • The ‘core’ telecoms business has evolved from delivering ubiquitous communications to enabling ubiquitous computing
    • Six telco-specific roles for telecoms remain in play
  • Radical telco disaggregation in action: AT&T, DISH and Rakuten
    • Servco, netco or infraco – or a patchwork of all three?
    • AT&T Network Cloud sell-off: Desperation or strategic acuity?
    • DISH Networks: Building the hyperscale network
    • Rakuten Mobile: Ecommerce platform turned cloud-native telco, turned telco cloud platform provider
  • Conclusion

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Growing B2B revenues from edge: Five new telco services

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Edge computing has sparked significant interest from telcos

Edge computing brings cloud capabilities such as data processing and storage closer to the end user, device, or the source of data. There are two main opportunity areas for telcos in edge computing. Firstly, telcos have an opportunity to provide edge computing via edge data centres at sites on the telecoms network – network edge, sometimes referred to as multi-access edge computing. Secondly, telcos can offer edge-enabled services through compute platforms at the customer premises – on-premise edge.

Although there is an opportunity for telcos to offer new services and an enhanced customer experience to their consumer customer base, much of the edge computing opportunity for telcos is in the B2B segment. We have covered the general strategy operators are taking for edge computing in our previous report Telco edge computing: What’s the operator strategy? and through insights on our Edge Hub. Within enterprise, edge offers a chance for operators to move beyond offering connectivity services and extend into the platform and application space.

However, the market is still young; enterprises are still at an early stage of understanding the potential benefits of edge computing. There is limited availability of network edges; telcos are still deploying sites and few have begun to offer mechanisms to access the edge compute infrastructure within them. As a result, developers are only just starting to build applications to leverage this new infrastructure.

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Telcos are still grappling with defining the opportunity. Since adoption is so nascent, many feel that they are not able to prove the commercial case to unlock significant investment. Some operators are pushing ahead by building out edge infrastructure, securing partnerships and launching edge computing services. Nonetheless, even these operators are keeping an open mind to edge and waiting to see what unfolds as the market matures. What is clear is that, with the hyperscalers and others moving into the edge, telcos are increasingly keen to capitalise on the edge opportunity and solidify their position in the market before it’s too late.

The sweet spot opportunity for edge is highly dependent on telcos’ starting points: some have existing capabilities within B2B networking and cloud, partnerships, and strong customer relationships. But for other telcos, the B2B business is at a very early stage. Meanwhile, edge infrastructure build differs across telcos, with some choosing to partner with hyperscalers to create the hardware and software stack within edge data centres while others are opting to build their own stack.

It is therefore critical for telcos to:

  1. Assess whether they can leverage existing B2Bservices, customers and partners versus where they need to invest to fill the gaps
  2. Understand which factors may affect how successful they are in offering new edgeservices
  3. Prioritise which servicesthey could offer to B2B customers

In this report, we focus on answering the following questions:

Which B2B services can edge computing add value to? And how ready are telcos to take new edge services to market?

In order to better understand how operators are thinking about edge services and what they are looking to offer today, we interviewed eight technology and strategy leaders working in operators primarily across Europe.

To ensure an open and candid dialogue, we have anonymised their contributions. We would like to take the opportunity to thank those who participated in this research. A summary of the interviewee profiles is provided in the Appendix.

Telcos’ B2B businesses today

As consumer revenues come under increasing pressure, operators are looking to their B2B businesses to provide a new source of revenue growth. The maturity of their B2B businesses today varies from those who have a limited offering focussed primarily on phones, SIMs and basic connectivity (particularly mobile-only telcos, e.g. Three UK), to those who are providing full vertical applications or taking on the role of systems integrator (often incumbents or telcos with fixed networks, e.g. DTAG, Vodafone). Many telcos are looking for opportunities to take on more of the latter role, by expanding their B2B offerings and increasing their foothold in the value chain e.g. by offering managed services. Particularly with the arrival of 5G, they see greater potential to grow revenues through B2B services compared with B2C.

Maturity levels of telcos’ B2B business

Table of content

  • Executive Summary
  • Introduction
  • Strategic principles for B2B telco edge
    • Telcos’ B2B businesses today
    • Three telco strategies for B2B edge
    • On-premise edge and network edge are separate opportunities
    • Telcos are open to partnering with the hyperscalers for edge
  • Five types of B2B edge services
    • Edge-to-cloud networking
    • Private edge infrastructure
    • Network edge platforms
    • Multi-edge and cloud orchestration
    • Vertical solutions
  • Evaluating the opportunity: How should telcos prioritise?
    • It’s not just about technology
    • However, significant value creation does not come easy
    • Telcos should consider new business models to ensure success
  • Next steps for telcos in building B2B edge services
    • Prioritise services to monetise edge
    • Evaluate the role of partners
    • Work closely with customers given that edge is still nascent
  • Appendix
    • Interviewee overview
  • Index

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ngena SD-WAN: scaling innovation through partnership

Introducing ngena

This report focusses on ngena, a multi-operator alliance founded in 2016, which offers multi-national networking services aimed at enterprise customers. ngena is interesting to STL Partners for several reasons:

First, it represents a real, commercialised example of operators working together, across borders and boundaries, to a common goal – a key part of our Coordination Age vision.

Second, ngena’s SDN product is an example of a new service which was designed around a strong, customer-centric proposition, with a strong emphasis on partnership and shared vision – an alternative articulation, if you like, of Elisa’s cultural strategy.

Third, it was born out of Deutsche Telekom, the world’s sixth-largest telecoms group by revenue, which operates in more than fifty countries. This makes it a great case study of an established operator innovating new enterprise services.

And lastly, it is a unique example of a telco and technology company (in this case Cisco) coming together in a mutually beneficial creative partnership, rather than settling into traditional buyer-supplier roles.

Over the coming pages, we will explore ngena’s proposition to customers, how it has achieved what it has to date, and to what extent it has made a measurable impact on the companies that make up the alliance. The report explains STL Partners’ independent view, informed by conversations with Marcus Hacke, Founder and Managing Director, as well as others across the industry.

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Shifting enterprise needs

Enterprises throughout the world are rapidly digitising their operations, and in large part, that involves the move to a ‘multicloud’ environment, where applications and data are hosted in a complex ecosystem of private data centres, campus sites, public clouds, and so on.

Digital enterprises need to ensure that data and applications are accessible from any location, at any time, from any device, and any network, reliably and without headaches. A large enterprise such as a retail bank might have physical branches located all over the place – and the same data needs to be accessible from any branch.

Traditionally, this sort of connectivity was achieved over the wide area network (WAN), with enterprises investing in private networks (often virtual private networks) to ensure that data remained secure and reliably accessible. Traditional WAN architectures work well – but they are not known for flexibility of the sort required to support a multicloud set-up. The network topology is often static, requiring manual intervention to deploy and change, and in our fast-changing world, this becomes a bottleneck. Enterprises are still faced with several challenges:

Key enterprise networking challenges

Source: STL Partners, SD-WAN mini series

The rise of SD-WAN: 2014 to present

This is where, somewhere around 2014, software-defined WAN (SD-WAN) came on the scene. SD-WAN improves on traditional WAN by applying the principles of software-defined networking (SDN). Networking hardware is managed with a software-based controller that can be hosted in the cloud, which opens up a realm of possibilities for automation, smart traffic routing, optimisation, and so on – which makes managing a multicloud set-up a whole lot easier.

As a result, enterprises have adopted SD-WAN at a phenomenal pace, and over the past five years telecoms operators and other service providers worldwide have rushed to add it to their managed services portfolio, to the extent that it has become a mainstream enterprise service:

Live deployments of SD-WAN platforms by telcos, 2014-20 (global)

Source: STL Partners NFV Deployment Tracker
Includes only production deployments; excludes proof of concepts and pilots
Includes four planned/pending deployments expected to complete in 2020

The explosion of deployments between 2016 and 2019 had many contributing factors. It was around this time that vendor offerings in the space became mature enough for the long tail of service providers to adopt more-or-less off-the shelf. But also, the technology had begun to be seen as a “no-brainer” upgrade on existing enterprise connectivity solutions, and therefore was in heavy demand. Many telcos used it as a natural upsell to their broader suite of enterprise connectivity solutions.

The challenge of building a connectivity platform

While SD-WAN has gained significant traction, it is not a straightforward addition to an operator’s enterprise service portfolio – nor is it a golden ticket in and of itself.

First, it is no longer enough to offer SD-WAN alone. The trend – based on demand – is for it to be offered alongside a portfolio of other SDN-based cloud connectivity services, over an automated platform that enables customers to pick and choose predefined services, and quickly deploy and adapt networks without the effort and time needed for bespoke customer deployments. The need this addresses is obvious, but the barrier to entry in building such a platform is a big challenge for many operators – particularly mid-size and smaller telcos.

Second, there is the economic challenge of scaling a platform while remaining profitable. Platform-based services require continuous updating and innovation, and it is questionable whether many telecoms operators are up to have the financial strength to do so – a situation you find for nearly all IT cloud platforms.

Last – and by no means least – is the challenge of scaling across geographies. In a single-country scenario, where most operators (at least in developed markets) will already have the fixed network infrastructure in place to cover all of a potential customer’s branch locations, SD-WAN works well. It is difficult, from a service provider’s perspective, to manage network domains and services across the whole enterprise (#6 above) if that enterprise has locations outside of the geographic bounds of the service provider’s own network infrastructure. There are ways around this – including routing traffic over the public Internet, and other operators’ networks, but from a customer point-of-view, this is less than ideal, as it adds complexity and limits flexibility in the solution they are paying for.

There is a need, then, for a connectivity platform “with a passport”: that can cross borders between operators, networks and markets without issue. ngena, or the Next Generation Enterprise Network Alliance, aims to address this need.

Table of Contents

  • Executive summary
    • What is ngena?
    • Why does ngena matter?
    • Has ngena been successful?
    • What does ngena teach us about successful telco innovation?
    • What does this mean for other telcos?
    • What next?
  • Introduction
  • Context: Enterprise needs and SD-WAN
    • Shifting enterprise needs
    • The rise of SD-WAN: 2014 to present
    • The challenge of building a connectivity platform
  • ngena: Enterprise connectivity with a passport
    • A man with a vision
    • The ngena proposition
  • How successful has ngena been?
    • Growth in alliance membership
    • Growth in ngena itself
    • Making money for the partners
  • What does ngena teach us about successful innovation culture in telecoms?
    • Context: the need to disrupt and adapt in telecoms
    • Lessons from ngena
  • What does this mean for other telcos?
      • Consider how you support innovation
      • Consider how you partner for mutual benefit
      • What next?

Network convergence: How to deliver a seamless experience

Operators need to adapt to the changing connectivity demands post-COVID19

The global dependency on consistent high-performance connectivity has recently come to the fore as the COVID-19 outbreak has transformed many of the remaining non-digital tasks into online activities.

The typical patterns of networking have broken and a ‘new normal’, albeit possibly a somewhat transitory one, is emerging. The recovery of the global economy will depend on governments, healthcare providers, businesses and their employees robustly communicating and gaining uninhibited access to content and cloud through their service providers – at any time of day, from any location and on any device.

Reliable connectivity is a critical commodity. Network usage patterns have shifted more towards the home and remote working. Locations which were previously light-usage now have high demands. Conversely, many business locations no longer need such high capacity. Utilisation is not expected to return to pre-COVID-19 patterns either, as people and businesses adapt to new daily routines – at least for some time.

The strategies with which telcos started the year have of course been disrupted with resources diverted away from strategic objectives to deal with a new mandate – keep the country connected. In the short-term, the focus has shifted to one which is more tactical – ensuring customer satisfaction through a reliable and adaptable service with rapid response to issues. In the long-term, however, the objectives for capacity and coverage remain. Telcos are still required to reach national targets for a minimum connection quality in rural areas, whilst delivering high bandwidth service demands in hotspot locations (although these hotspot locations might now change).

Of course, modern networks are designed with scalability and adaptability in mind – some recent deployments from new disruptors (such as Rakuten) demonstrate the power of virtualisation and automation in that process, particularly when it comes to the radio access network (RAN). In many legacy networks, however, one area which is not able to adapt fast enough is the physical access. Limits on spectrum, coverage (indoors and outdoors) and the speed at which physical infrastructure can be installed or updated become a bottleneck in the adaptation process. New initiatives to meet home working demand through an accelerated fibre rollout are happening, but they tend to come at great cost.

Network convergence is a concept which can provide a quick and convenient way to address this need for improved coverage, speed and reliability in the access network, without the need to install or upgrade last mile infrastructure. By definition, it is the coming-together of multiple network assets, as part of a transformation to one intelligent network which can efficiently provide customers with a single, unified, high-quality experience at any time, in any place.

It has already attracted interest and is finding an initial following. A few telcos have used it to provide better home broadband. Internet content and cloud service providers are interested, as it adds resilience to the mobile user experience, and enterprises are interested in utilising multiple lower cost commodity backhauls – the combination of which benefits from inherent protection against costly network outages.Request a report extract

Network convergence helps create an adaptable and resilient last mile

Most telcos already have the facility to connect with their customers via multiple means; providing mobile, fixed line and public Wi-Fi connectivity to those in their coverage footprint. The strategy has been to convert individual ‘pure’ mobile or fixed customers into households. The expectation is that this creates revenue increase through bundling and loyalty whilst bringing some added friction into the ability to churn – a concept which has been termed ‘convergence’. Although the customer may see one converged telco through brand, billing and customer support, the delivery of a consistent user experience across all modes of network access has been lacking and awkward. In the end, it is customer dissatisfaction which drives churn, so delivering a consistent user experience is important.

Convergence is a term used to mean many different things, from a single bill for all household connectivity, to modernising multiple core networks into a single efficient core. While most telcos have so far been concentrating on increasing operational efficiency, increasing customer loyalty/NPS and decreasing churn through some initial aspects of convergence, some are now looking into network convergence – where multiple access technologies (4G, 5G, Wi-Fi, fixed line) can be used together to deliver a resilient, optimised and consistent network quality and coverage.

Overview of convergence

Source: STL Partners

As an overarching concept, network convergence introduces more flexibility into the access layer. It allows a single converged core network to utilise and aggregate whichever last mile connectivity options are most suited to the environment. Some examples are:

  • Hybrid Access: DSL and 4G macro network used together to provide extra speed and fallback reliability in hybrid fixed/mobile home gateways.
  • Cell Densification: 5G and Wi-Fi small cells jointly providing short range capacity to augment the macro network in dense urban areas.
  • Fixed Wireless Access: using cellular as a fibre alternative in challenging areas.

The ability to combine various network accesses is attractive as an option for improving adaptability, resilience and speed. Strategically, putting such flexibility in place can support future growth and customer retention with the added advantage of improving operational efficiency. Tactically, it enables an ability to quickly adapt resources to short-term changes in demand. COVID-19 has been a clear example of this need.

Table of Contents

  • Executive Summary
    • Convergence and network convergence
    • Near-term benefits of network convergence
    • Strategic benefits of network convergence
    • Balancing the benefits of convergence and divergence
    • A three-step plan
  • Introduction
    • The changing environment
    • Network convergence: The adaptable and resilient last mile
    • Anticipated benefits to telcos
    • Challenges and opposing forces
  • The evolution to network convergence
    • Everyone is combining networks
    • Converging telco networks
    • Telco adoption so far
  • Strategy, tactics and hurdles
    • The time is right for adaptability
    • Tactical motivators
    • Increasing the relationship with the customer
    • Modernisation and efficiency – remaining competitive
    • Hurdles from within the telco ecosystem
    • Risk or opportunity? Innovation above-the-core
  • Conclusion
    • A three-step plan
  • Index

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Telco edge computing: What’s the operator strategy?

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Edge computing can help telcos to move up the value chain

The edge computing market and the technologies enabling it are rapidly developing and attracting new players, providing new opportunities to enterprises and service providers. Telco operators are eyeing the market and looking to leverage the technology to move up the value chain and generate more revenue from their networks and services. Edge computing also represents an opportunity for telcos to extend their role beyond offering connectivity services and move into the platform and the application space.

However, operators will be faced with tough competition from other market players such as cloud providers, who are moving rapidly to define and own the biggest share of the edge market. Plus, industrial solution providers, such as Bosch and Siemens, are similarly investing in their own edge services. Telcos are also dealing with technical and business challenges as they venture into the new market and trying to position themselves and identifying their strategies accordingly.

Telcos that fail to develop a strategic approach to the edge could risk losing their share of the growing market as non-telco first movers continue to develop the technology and dictate the market dynamics. This report looks into what telcos should consider regarding their edge strategies and what roles they can play in the market.

Following this introduction, we focus on:

  1. Edge terminology and structure, explaining common terms used within the edge computing context, where the edge resides, and the role of edge computing in 5G.
  2. An overview of the edge computing market, describing different types of stakeholders, current telecoms operators’ deployments and plans, competition from hyperscale cloud providers and the current investment and consolidation trends.
  3. Telcos challenges in addressing the edge opportunity: technical, organisational and commercial challenges given the market
  4. Potential use cases and business models for operators, also exploring possible scenarios of how the market is going to develop and operators’ likely positioning.
  5. A set of recommendations for operators that are building their strategy for the edge.

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What is edge computing and where exactly is the edge?

Edge computing brings cloud services and capabilities including computing, storage and networking physically closer to the end-user by locating them on more widely distributed compute infrastructure, typically at smaller sites.

One could argue that edge computing has existed for some time – local infrastructure has been used for compute and storage, be it end-devices, gateways or on-premises data centres. However, edge computing, or edge cloud, refers to bringing the flexibility and openness of cloud-native infrastructure to that local infrastructure.

In contrast to hyperscale cloud computing where all the data is sent to central locations to be processed and stored, edge computing local processing aims to reduce time and save bandwidth needed to send and receive data between the applications and cloud, which improves the performance of the network and the applications. This does not mean that edge computing is an alternative to cloud computing. It is rather an evolutionary step that complements the current cloud computing infrastructure and offers more flexibility in executing and delivering applications.

Edge computing offers mobile operators several opportunities such as:

  • Differentiating service offerings using edge capabilities
  • Providing new applications and solutions using edge capabilities
  • Enabling customers and partners to leverage the distributed computing network in application development
  • Improving networkperformance and achieving efficiencies / cost savings

As edge computing technologies and definitions are still evolving, different terms are sometimes used interchangeably or have been associated with a certain type of stakeholder. For example, mobile edge computing is often used within the mobile network context and has evolved into multi-access edge computing (MEC) – adopted by the European Telecommunications Standards Institute (ETSI) – to include fixed and converged network edge computing scenarios. Fog computing is also often compared to edge computing; the former includes running intelligence on the end-device and is more IoT focused.

These are some of the key terms that need to be identified when discussing edge computing:

  • Network edge refers to edge compute locations that are at sites or points of presence (PoPs) owned by a telecoms operator, for example at a central office in the mobile network or at an ISP’s node.
  • Telco edge cloud is mainly defined as distributed compute managed by a telco  This includes running workloads on customer premises equipment (CPE) at customers’ sites as well as locations within the operator network such as base stations, central offices and other aggregation points on access and/or core network. One of the reasons for caching and processing data closer to the customer data centres is that it allows both the operators and their customers to enjoy the benefit of reduced backhaul traffic and costs.
  • On-premise edge computing refers to the computing resources that are residing at the customer side, e.g. in a gateway on-site, an on-premises data centre, etc. As a result, customers retain their sensitive data on-premise and enjoy other flexibility and elasticity benefits brought by edge computing.
  • Edge cloud is used to describe the virtualised infrastructure available at the edge. It creates a distributed version of the cloud with some flexibility and scalability at the edge. This flexibility allows it to have the capacity to handle sudden surges in workloads from unplanned activities, unlike static on-premise servers. Figure 1 shows the differences between these terms.

Figure 1: Edge computing types

definition of edge computing

Source: STL Partners

Network infrastructure and how the edge relates to 5G

Discussions on edge computing strategies and market are often linked to 5G. Both technologies have overlapping goals of improving performance and throughput and reducing latency for applications such as AR/VR, autonomous vehicles and IoT. 5G improves speed by increasing spectral efficacy, it offers the potential of much higher speeds than 4G. Edge computing, on the other hand, reduces latency by shortening the time required for data processing by allocating resources closer to the application. When combined, edge and 5G can help to achieve round-trip latency below 10 milliseconds.

While 5G deployment is yet to accelerate and reach ubiquitous coverage, the edge can be utilised in some places to reduce latency where needed. There are two reasons why the edge will be part of 5G:

  • First, it has been included in the 5Gstandards (3GPP Release 15) to enable ultra-low latency which will not be achieved by only improvements in the radio interface.
  • Second, operators are in general taking a slow and gradual approach to 5G deployment which means that 5G coverage alone will not provide a big incentive for developers to drive the application market. Edge can be used to fill the network gaps to stimulate the application market growth.

The network edge can be used for applications that need coverage (i.e. accessible anywhere) and can be moved across different edge locations to scale capacity up or down as required. Where an operator decides to establish an edge node depends on:

  • Application latency needs. Some applications such as streaming virtual reality or mission critical applications will require locations close enough to its users to enable sub-50 milliseconds latency.
  • Current network topology. Based on the operators’ network topology, there will be selected locations that can meet the edge latency requirements for the specific application under consideration in terms of the number of hops and the part of the network it resides in.
  • Virtualisation roadmap. The operator needs to consider virtualisation roadmap and where data centre facilities are planned to be built to support future network
  • Site and maintenance costs. The cloud computing economies of scale may diminish as the number of sites proliferate at the edge, for example there is a significant difference in maintaining 1-2 large data centres to maintaining 100s across the country
  • Site availability. Some operators’ edge compute deployment plans assume the nodes reside in the same facilities as those which host their NFV infrastructure. However, many telcos are still in the process of renovating these locations to turn them into (mini) data centres so aren’t yet ready.
  • Site ownership. Sometimes the preferred edge location is within sites that the operators have limited control over, whether that is in the customer premise or within the network. For example, in the US, the cell towers are owned by tower operators such as Crown Castle, American Tower and SBA Communications.

The potential locations for edge nodes can be mapped across the mobile network in four levels as shown in Figure 2.

Figure 2: possible locations for edge computing

edge computing locations

Source: STL Partners

Table of Contents

  • Executive Summary
    • Recommendations for telco operators at the edge
    • Four key use cases for operators
    • Edge computing players are tackling market fragmentation with strategic partnerships
    • What next?
  • Table of Figures
  • Introduction
  • Definitions of edge computing terms and key components
    • What is edge computing and where exactly is the edge?
    • Network infrastructure and how the edge relates to 5G
  • Market overview and opportunities
    • The value chain and the types of stakeholders
    • Hyperscale cloud provider activities at the edge
    • Telco initiatives, pilots and plans
    • Investment and merger and acquisition trends in edge computing
  • Use cases and business models for telcos
    • Telco edge computing use cases
    • Vertical opportunities
    • Roles and business models for telcos
  • Telcos’ challenges at the edge
  • Scenarios for network edge infrastructure development
  • Recommendation
  • Index

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5G: Bridging hype, reality and future promises

The 5G situation seems paradoxical

People in China and South Korea are buying 5G phones by the million, far more than initially expected, yet many western telcos are moving cautiously. Will your company also find demand? What’s the smart strategy while uncertainty remains? What actions are needed to lead in the 5G era? What questions must be answered?

New data requires new thinking. STL Partners 5G strategies: Lessons from the early movers presented the situation in late 2019, and in What will make or break 5G growth? we outlined the key drivers and inhibitors for 5G growth. This follow on report addresses what needs to happen next.

The report is informed by talks with executives of over three dozen companies and email contacts with many more, including 21 of the first 24 telcos who have deployed. This report covers considerations for the next three years (2020–2023) based on what we know today.

“Seize the 5G opportunity” says Ke Ruiwen, Chairman, China Telecom, and Chinese reports claimed 14 million sales by the end of 2019. Korea announced two million subscribers in July 2019 and by December 2019 approached five million. By early 2020, The Korean carriers were confident 30% of the market will be using 5G by the end of 2020. In the US, Verizon is selling 5G phones even in areas without 5G services,  With nine phone makers looking for market share, the price in China is US$285–$500 and falling, so the handset price barrier seems to be coming down fast.

Yet in many other markets, operators progress is significantly more tentative. So what is going on, and what should you do about it?

Request a report extract

5G technology works OK

22 of the first 24 operators to deploy are using mid-band radio frequencies.

Vodafone UK claims “5G will work at average speeds of 150–200 Mbps.” Speeds are typically 100 to 500 Mbps, rarely a gigabit. Latency is about 30 milliseconds, only about a third better than decent 4G. Mid-band reach is excellent. Sprint has demonstrated that simply upgrading existing base stations can provide substantial coverage.

5G has a draft business case now: people want to buy 5G phones. New use cases are mostly years away but the prospect of better mobile broadband is winning customers. The costs of radios, backhaul, and core are falling as five system vendors – Ericsson, Huawei, Nokia, Samsung, and ZTE – fight for market share. They’ve shipped over 600,000 radios. Many newcomers are gaining traction, for example Altiostar won a large contract from Rakuten and Mavenir is in trials with DT.

The high cost of 5G networks is an outdated myth. DT, Orange, Verizon, and AT&T are building 5G while cutting or keeping capex flat. Sprint’s results suggest a smart build can quickly reach half the country without a large increase in capital spending. Instead, the issue for operators is that it requires new spending with uncertain returns.

The technology works, mostly. Mid-band is performing as expected, with typical speeds of 100–500Mbps outdoors, though indoor performance is less clear yet. mmWave indoor is badly degraded. Some SDN, NFV, and other tools for automation have reached the field. However, 5G upstream is in limited use. Many carriers are combining 5G downstream with 4G upstream for now. However, each base station currently requires much more power than 4G bases, which leads to high opex. Dynamic spectrum sharing, which allows 5G to share unneeded 4G spectrum, is still in test. Many features of SDN and NFV are not yet ready.

So what should companies do? The next sections review go-to-market lessons, status on forward-looking applications, and technical considerations.

Early go-to-market lessons

Don’t oversell 5G

The continuing publicity for 5G is proving powerful, but variable. Because some customers are already convinced they want 5G, marketing and advertising do not always need to emphasise the value of 5G. For those customers, make clear why your company’s offering is the best compared to rivals’. However, the draw of 5G is not universal. Many remain sceptical, especially if their past experience with 4G has been lacklustre. They – and also a minority swayed by alarmist anti-5G rhetoric – will need far more nuanced and persuasive marketing.

Operators should be wary of overclaiming. 5G speed, although impressive, currently has few practical applications that don’t already work well over decent 4G. Fixed home broadband is a possible exception here. As the objective advantages of 5G in the near future are likely to be limited, operators should not hype features that are unrealistic today, no matter how glamorous. If you don’t have concrete selling propositions, do image advertising or use happy customer testimonials.

Table of Contents

  • Executive Summary
  • Introduction
    • 5G technology works OK
  • Early go-to-market lessons
    • Don’t oversell 5G
    • Price to match the experience
    • Deliver a valuable product
    • Concerns about new competition
    • Prepare for possible demand increases
    • The interdependencies of edge and 5G
  • Potential new applications
    • Large now and likely to grow in the 5G era
    • Near-term applications with possible major impact for 5G
    • Mid- and long-term 5G demand drivers
  • Technology choices, in summary
    • Backhaul and transport networks
    • When will 5G SA cores be needed (or available)?
    • 5G security? Nothing is perfect
    • Telco cloud: NFV, SDN, cloud native cores, and beyond
    • AI and automation in 5G
    • Power and heat

Culture, leadership and purpose in telcos: Four key actions

Understanding culture, leadership and purpose

STL Partners has surveyed 168 telco execs about leadership, culture and purpose in the telecoms industry.

This research is part of our overall programme to help understand and develop how telcos can optimise their performance and reinvigorate growth and innovation. Respondents were asked to think about the telco they knew best, and answer a series of questions relating to different drivers of success:

  • Culture: Values and behaviours and the telco’s employees
  • Leadership: The way in which leaders drive the organisation
  • Purpose: The reason that the telco exists and operates
  • Digital: The telco’s ‘digital’ goals, skills and capabilities

Respondents were a mix of senior executives from telecoms operators worldwide, across a variety of functions and geographies.

Findings include:

  • Half of respondents believe that it is harder to get things done in telecoms operators than elsewhere
  • Leadership vision, alignment and delivery are seen to be a significant enabler to success by 43% of respondents
  • There are mixed views of the impact of company culture on success: seen as a barrier by 57% and a significant enabler by 33%
  • Some telcos are outperforming others. For example, Elisa’s culture is perceived as significantly more effective than others
  • … and more.

We also explore correlation between answers to different questions to suggest four key actions to driving greater success.

Table of contents

  • Executive Summary
  • Introduction & methodology
  • Analysis of results
  • Full survey results
    • Culture
    • Leadership
    • Purpose
    • Digital
    • Correlation analysis
  • About STL Partners

 

Telco M&A strategies: Global analysis

Introduction

Business beyond connectivity – this is the mantra of STL Partners’ vision of the future for telecoms operators, outlined in the recent revamp of our Telco 2.0 vision. Telcos are at a crossroads where they must determine where their businesses will fit into a world of disruptive, fast-moving technologies and uncertain futures.

This means that it is more important than ever to re-evaluate the tools available to telcos to generate growth, expand their business competencies and provide new service offerings outside the core.

Traditionally, a key telco growth strategy has been to use mergers and acquisitions, particularly of (and with) other telcos, to build scale geographically and in core communications services. However, as operators strive to become more relevant in a changing business landscape, there has been a growing volume of investment in what might be termed ‘digital’ business – business services that leverage technology to build new capabilities and deliver new customer services, experiences and relationships. We distinguish between these two kinds of telecoms M&A as follows:

  • Traditional M&A – “Operators buying operators”
    • Traditional M&A is focused around traditional telecoms M&A where operators buy other operators to expand in new markets or consolidate existing markets.
  • Digital M&A – “Operators investing outside core”
    • Digital M&A refers to non-operator M&A, or all other purchases that telcos make to expand beyond their core connectivity services. Most often this includes investments in software capabilities or industry verticals.

This report examines the landscape of digital M&A from H2 2017 to H1 2018, highlights trends across previous time periods, and outlines strategies for and case studies of digital M&A to illustrate ways that telcos can utilise it in a focused and strategic manner to create long-term value and growth. It does not cover minority venture digital investments; however, these are tracked in our database and will be the subject of future analysis.

This report is the third iteration of STL Partners’ yearly digital M&A and investment report, which began in 2016 and was updated in 2017. It draws on data from our digital M&A tracker tool, which covers 23 operators over five regions from 2012 to H1 2018. A copy of the database is available with this report.

Previous editions of the telco M&A database

Edge computing: Five viable telco business models

If you don’t subscribe to our research yet, you can download the free report as part of our sample report series.

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

Introduction

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

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

Figure 1: Defining MEC

Source: STL Partners

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

From this, the following key questions emerge:

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

Contents:

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

Figures:

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

The STL Partners Digital Investment Database: August 2016 Update

The STL Partners Digital Investment Database

We published our Digital Investment Database in early July, together with a report titled Digital M&A and Investment Strategies. Given recent high profile activities, we’ve now issued an updated version.

While there have been a number of smaller investments and acquisitions, two major acquisitions have hit the headlines since we published our report. On 18 July, it was announced that SoftBank was buying the UK chip manufacturer ARM Holdings for £24.3bn. Then, on 24 July, Verizon bought Yahoo! for $4.8bn. Here, we take a quick look at these two acquisitions.

SoftBank and ARM: (big) business as usual?

Why ARM? For its £24.3bn, SoftBank has gained one of the world’s leading processor manufacturers, with a strong existing business designing processors for smartphones and tablets, and an excellent opportunity to develop new revenues from the IoT. The attraction is clear, but the sums involved are huge.

Yet in some ways, this acquisition is the progression of business as usual. Our analysis based on v1.0 of our database suggests that SoftBank has long been one of the most active telcos in digital M&A. Among the 31 investments and acquisitions we tracked from 2012-1H2016, SoftBank was outstripped only by Deutsche Telekom, Singtel, and Telstra.

However, while the ARM deal fits with this prior interest in digital businesses, the bulk of SoftBank’s recent purchases have had a software focus: ARM marks a shift towards hardware. Moreover, the size of the transaction dwarfs SoftBank’s previous efforts.

Much media coverage has suggested that the ARM deal might be closely associated with the recent return of CEO Masayoshi Son, an adventurous, ambitious leader with a history of bold purchases. Looking at our database, the ARM deal certainly breaks the mould of telco acquisitions, as SoftBank’s £24.3bn deal for ARM is by far the biggest non-core-business acquisition tracked by our database.[1] But £24.3bn rarely changes hands on a whim, and we intend to publish further in-depth analysis on this in future.

Verizon and Yahoo!: Can a telco challenge Google and Facebook on advertising?

Verizon’s purchase of Yahoo! for $4.8bn was, in financial terms, far smaller than the SoftBank/ARM deal. Yet it received a great deal of media attention, partly, of course, because Yahoo! remains a significant household name in the US in particular, and a salient reminder of how the corporate landscape of the internet has changed.

At its peak in 2000, Yahoo! was worth $125bn. So there are clear questions: have Verizon snapped up an undervalued business, or has it splashed cash on a dinosaur?

Verizon has been very clear that its intention with Yahoo! is to join the advertising business with its 2015 purchase of AOL for $4.4bn, and become the third player in digital advertising behind Google and Facebook. CEO Lowell McAdam made no bones about the business’s ambitions in oft-repeated comments shortly after the deal was announced: ‘Are we going to challenge Google and Facebook? I just say, look, we’re planning on being a significant player here. The market is going to grow exponentially.’[2]

Currently, Google and Facebook together have over 50% of the US digital advertising market. AOL and Yahoo! combined have 6%. 1bn users view Yahoo! content each month, and Verizon only therefore needs to persuade a few advertisers to switch to them in order to grow market share.

From a telco point of view, one key facet of this argument is that potential synergies between Yahoo! and Verizon’s network do not appear to be essential. While telcos have classically searched for M&A opportunities that directly complemented their core business, Verizon might be understood as using its market value to finance deals that have independent value – not unlike Softbank and ARM. However, there are questions around the true value of Yahoo!’s share of digital advertising.

At the moment of Facebook’s IPO in 2012, Yahoo! had greater revenue. But since then. Google and Facebook have transformed digital advertising by making it targetable. Google knows what you want, when you want it (a search for ‘buy blue jeans’, for instance), and Facebook knows what you like (as users are encouraged to document their preferences). It can use this data to give advertisers access to the most relevant sections of a vast potential online audience.

This is a strong business model that has proved more valuable as these companies have refined it. Yahoo!’s digital advertising is not quite as sophisticated, and it remains to be seen if Verizon will be able to develop the revenue it envisages.

Verizon and Fleetmatics: Under the radar

Yahoo! garnered the majority of media attention, but Verizon also spent $2.4bn on Fleetmatics, a digital business that provides SaaS for fleet management. M2M fleet tracking is nothing new, but as well as its core software business, the company has the potential to play an important role in the industrial IoT as connected vehicles become more common.

Together, the two acquisitions might suggest a drive to develop profitable plays in markets beyond core telco revenue: from Fleetmatics, the IoT, and from AOL-Yahoo, digital advertising. Moreover, for strategists and practitioners placing the two together may have greater significance than viewing them separately.

Highlighting such deals and longer term trends behind them are two of the key goals of our M&A database.

Accessing the database

Our Digital Investment Database documents key digital investments and acquisitions for twenty-two operators during the period 2012 – August 2016.

An illustrative snapshot of part of the database

[1] To be precise, ‘non-core-business’ excludes telcos buying businesses involved in delivering the quadruple play of fixed, mobile, internet, and TV – for example, BT’s purchase of EE, or AT&T’s purchase of DirecTV.

[2] Financial Times, 26 July 2016.

Digital M&A and Investment Strategies

Introduction

Communications services providers have long used M&A as a key element of strategy. By far the most common approach has been to acquire other operators to build scale in core communications services. For the vendor operator, selling off assets has been as a way of raising cash to reduce debt or enable further investment in core markets. As telecommunications growth has slowed and technological developments and user behaviour have swung towards mobile, so M&A activity has increased as players have strived for market consolidation, integration of fixed-mobile capabilities, or geographic expansion as a source of growth. BT-EE in the UK, Orange-Jazztel in Spain, and Etisalat-Maroc Telecom provide respective examples.

However, as operators continue to build digital capabilities and strive to deliver digital services, M&A and investment beyond ‘traditional telecoms’ is picking up. Telcos need to move beyond a traditional, slow ‘infrastructure-only’ approach, to one that focused on agility rather than stability, enablement rather than end-to-end ownership and delivery of solutions, and innovation rather than continuity. For more details, see our recent report Solution: Transforming to the Telco Cloud Service Provider (Part 2). Making such a change is not without its challenges, and many operators now see M&A and investments as an important part of the Telco 2.0/digital transformation journey.

This report explores the drivers of digital M&A and the strategies of different operators including ‘deep-dive’ analysis of SingTel, Telstra and Verizon. There is an accompanying database with key digital acquisitions and investments for twenty-two operators during the period 2012 – 1H 2016 inclusive.

Drivers for operator M&A and majority investment

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

Source: STL Partners

Traditional/Telco 1.0 drivers: reach and scale

As illustrated above, drivers that refer to ‘traditional’ or ‘Telco 1.0’ M&A and investment are well-established:

1. Extending geographic footprint is often a key driver…

  • …to new markets that are adjacent geographically (e.g., DTAG’s numerous investments in CEE region operators, America Movil’s investments in LatAm),
  • …or to those that are linked culturally or linguistically (e.g., Telefonica’s acquisitions and investments in Latin American operators),
  • …or simply offer good opportunities for expanded footprint and increased efficiencies of operation in emerging regions where demand for mobile services is still growing strongly (e.g., SingTel and Etisalat’s numerous investments in operators in Asia and Africa, respectively).

2. Extending traditional communications offerings, is currently the most significant trend, as mobile operators look to acquire fixed network assets and vice versa, in order to develop compelling multiplay and converged offers for their customers. The recent BT acquisition of EE in the U.K. is one example.

3. Consolidation has slowed to some extent, as regulators and competitors fight against acquisitions that remove players from the market or concentrate too much market power in the hands of stronger service providers. This has been a particular issue in the European Union (E.U.), where E.U. regulators have refused to approve several proposed telecoms M&A deals recently, including TeliaSonera and Telenor in Denmark, and the proposed Hutchison acquisition of O2 to merge with its subsidiary Three, in the UK. Other deals, such as the proposed Orange-Bouygues Telecom merger in France which was abandoned in April 2016, have failed due to the parties involved failing to reach agreement. However, our research shows continued interest in operator M&A for consolidation, with recent successful examples including TeliaSonera’s acquisition of Tele2 Norway in 2015.

4. The acquisition of service partners – primarily channel partners, or partner companies providing systems integration and consultancy capabilities, typically for enterprise customers – has proved an important driver of M&A for many (mainly converged) operators. For the purpose of our analysis, we are counting the SI and consulting M&A activity as ‘digital/Telco 2.0’ rather than ‘traditional/Telco 1.0’, where it focuses on a specific digital area (e.g., cloud services, analytics).

5. Finally, operator M&A is also being driven by the enthusiasm of sellers. Many operators are looking to sell off assets outside of their home markets, pulling back from markets that have proven too competitive, too small or simply too complicated, as part of a strategy to pay down debt and/or free up assets for investment in other higher-growth areas:

  • TeliaSonera’s pullback from its Eurasian markets has seen it sell off a 60% stake in Nepalese operator Ncell to Axiata, and it is also planning to divest its majority stake in Kazakhstan’s Kcell through a sale to Turkcell.
  • Telefonica’s attempt to sell its O2 UK unit to Hutchison having failed, the Spanish operator is now looking to other ways of raising capital both to pay down its large debt (at EUR 49.7m as of January 2016, the company’s debts actually exceeded its market value) and to fund its ambitions to build out its media empire.

 

  • Executive Summary
  • Introduction
  • Drivers for operator M&A and majority investment
  • Telco digital M&A constraints – why take the risk?
  • Evaluating operator digital investment strategies
  • 22 players across 5 regions: US and Asia most aggressive
  • Which sectors are attracting the most interest?
  • Operator M&A strategies in detail: SingTel, Telstra and Verizon
  • SingTel: focusing on digital marketing, media and security
  • Telstra: Spreading Its Digital Bets across Health, Cloud and Video
  • Verizon: acquisition to support digital advertising and media dominance
  • Recommendations

 

  • Figure 1: Drivers for operator M&A and majority investment – traditional and digital
  • Figure 2: Telco cost and operational models inhibit innovation and discourage investments in unfamiliar digital businesses
  • Figure 3: Number of operator digital acquisitions and majority investments, 2012 – 1H2016
  • Figure 4: Largest 10 telco digital M&A and majority investments, 2012 – 1H2016
  • Figure 5: Mapping of operator digital M&A strategies
  • Figure 6: Number of digital M&A and majority investments by sector/category 2012 – 1H2016
  • Figure 7: SingTel – digital investment overview
  • Figure 8: Amobee’s proposition focuses on cross-platform advertising and analytics
  • Figure 9: Telstra’s Digital Acquisitions and Majority Investments, 2012 – 1H 2016
  • Figure 10: Ooyala’s proposition
  • Figure 11: Cloud is the key element in Telstra’s Telco 2.0 strategy
  • Figure 12: Verizon’s Digital Acquisitions and Majority Investments, 2012 – 1H 2016

Solution: Transforming to the Telco Cloud Service Provider (Part 2)

Introduction

Structural barriers preventing telecoms business model change

In our recent report, Problem: Telecoms technology inhibits operator business model change (Part 1), we explained how financial and operational processes that have been adopted in response to investor requirements and regulation have prevented operators from innovating.

Operator management teams make large investments over seven- or eight-year investment cycles and are responsible for deploying and managing the networks from which revenues flow.  As we show in Figure 1 below, operators therefore have much more of their costs tied up in capital expenditure than platform players or product innovators.  Furthermore, they need large quantities of operating expenditure to maintain and operate their networks.  The result is a rather small percentage of revenue – we estimate around 15% – which they devote to activities focused on innovation: marketing, sales, customer care, and product and service development (the green section of the bars).  This compares unfavourably to a platform player, such as Google, which we estimate devotes around 35% of revenue to these activities.  The difference is even more pronounced with a product innovator, such as Unilever, which minimises capital investment by outsourcing some of its manufacturing and all product distribution and so devotes nearly 70% of revenue to ‘innovation’ activities.

 

Figure 1: The telecoms cost structure inhibits innovation

Sources: Company accounts; STL Partners estimates and analysis

Seen in this context, how can anyone expect operators to be successful at developing new platforms, channels, or products?

 

  • Executive Summary
  • Introduction
  • Structural barriers preventing telecoms business model change
  • Digital service innovation is proving tough for operators
  • Structural barriers coming down?
  • Virtualisation + cloud business practices could transform the telecoms business model
  • The drive for virtualisation is underway
  • Cost reduction and a new cost structure
  • Cloud business practices are a critical component in the future telco
  • The Telco Cloud Service Provider (TCSP)
  • Two benefits from becoming a Telco Cloud Service Provider
  • Product and service creation in the Telco Cloud Service Provider
  • From incremental and slow innovation today…
  • …to radical and fast innovation in the TCSP of tomorrow

 

  • Figure 1: The telecoms cost structure inhibits innovation
  • Figure 2: Telcos have struggled to launch successful digital services
  • Figure 3: Cloud and virtualisation can allow a telco to transform its cost structure
  • Figure 4: Cloud business practices – key principles
  • Figure 5: Defining the Telco Cloud Service Provider
  • Figure 6: Telco Cloud can spur transformation across the entire telco business
  • Figure 7: Product development – telco today vs Telco Cloud Service Provider

Fast-Tracking Operator Plans to Win in the $5bn Location Insights Market

If you don’t subscribe to our research yet, you can download the free report as part of our sample report series.

Preface

Subscriber location information is a much-heralded asset of the telecoms operator. Operators have generally understood the importance of this asset but have typically struggled to monetize their position. Some operators have used location information to enable third party services whilst others have attempted to address the opportunity more holistically, with mixed success.

This report updates and expands on a previous STL Partners study: “Making Money from Location Insights” (2013). It outlines how to address the potential opportunity around Location Services. It draws on interviews conducted amongst key stakeholders within the emerging ecosystem, supplemented by STL Partners’ research and analysis, with the objective of determining how operators can release the value from their unique position in the location value chain.

This report focuses on what we have defined as Location Insight Services. The report argues that operators should first seek to offer Location Insight Services before evolving to cover Location Based Services. This strategic approach allows operators to better understand their data and to build location services for enterprise customers rather than starting with consumer-orientated location services that require additional capabilities. This approach provides the most upside with the least associated risk, offering the potential for incremental learning.

This report was commissioned and supported by Viavi Solutions (formerly JDSU). The research, analysis and the writing of the report itself were carried out independently by STL Partners. The views and conclusions contained herein are those of STL Partners.

Location Based Services vs. Location Insight Services

In the 2013 report, STL made a clear distinction between different types of location services.

  • Location Based Services (LBS) are geared towards supporting business processes (typically marketing-oriented) that are dependent on the instant availability of real-time or near real-time data about an individually identifiable subscriber. These are provided on the reasonable assumption that knowing an individual’s location enables a company to deliver a service or make an offer that is more relevant, there and then. Typically these services require explicit consent and an interaction with the customer (e.g. push marketing) and therefore require compelling user interfaces and permissions.
  • Additionally there is an opportunity to derive and deliver Location Insight Services (LIS) from connected consumers’ mobile location data. This opportunity does not necessarily require real-time data and where insights are aggregated and anonymized, can safeguard individuals’ privacy. The underlying premise is that identification of repetitive patterns in location activity over time not only enables a much deeper understanding of the consumer in terms of behavior and motivation, but also builds a clearer picture of the visitor profile of the location. Additionally LIS has the potential to provide data that is not available via other routes (e.g. understanding the footfall within a competitor’s store).

Figure 7:  Mapping the Telco Opportunity Landscape

Source: STL Partners

The framework in Figure 7 has been developed by STL Partners specifically with the mobile operator’s perspective in mind. We have split out operator location opportunities along two dimensions:

  • Real-time vs. Non-real-time data acquisition
  • Individual vs. Aggregated data analysis and action

Choosing the Right Strategy

Where are we now?

Most operators understand the potential value of their location asset and have attempted to monetize their data. Some operators have used location to enable 3rd party services whilst others have attempted to address the opportunity more holistically. Both have achieved mixed success for a number of reasons.

Most operators who are attempting to monetize location data have been drawn towards Location Based Services, namely push-marketing and advertising. Whilst some operators have achieved moderate success here (e.g. O2 Priority Moments), most are acting as enablers for other services. They are therefore addressing a limited part of the value chain and subsequently are not realizing significant value from their data. We do not consider those that pursue this strategy to be Location Based Services Providers, rather they are simply enablers.

Similarly a number of operators are addressing Location Insights, albeit with different approaches. Some are partnering with analytics and insight companies (e.g. Telefonica and GfK), others are developing services mostly on their own (e.g. SingTel’s DataSpark), whilst others are simply launching pilots.

In order to maximize the value that operators can secure through Location Services, we believe that operators need to address the whole Location ‘Stack’, not simply enabling new services or providing raw data. STL believe that the best way to do this is to start with Location Insight Services.

Start with Location Insight Services

When considering how to develop and monetize their location assets we recommend that operator’s select to start with LIS. Whilst many operators are already engaged in LBS (e.g. enabling push-marketing) the majority are not actually providing the service but are simply sharing data and enabling a 3rd party service provider.
Starting with LIS has a number of strategic advantages:

  • It’s a big opportunity in its own right
  • Telcos (should) have a data capture/technology advantage for LIS over OTT players
  • LIS provides an opportunity to build & learn incrementally, proving value
  • Privacy risks are reduced (particularly with aggregated data)
  • LIS does not require 100% coverage of the population, unlike a number of LBS use cases
  • LIS can provide internal benefits and can bolster the Go-to-Market strategy for vertical specific offerings

These advantages are explored in more detail further in this report.

 

  • Location, Location, Location
  • The Importance of Information
  • Location Based Services vs. Location Insight Services
  • Choosing the Right Strategy
  • Where are we now?
  • Start with Location Insight Services
  • Improve your LIS offering, transition towards LBS & position yourself as a Trusted Data Provider
  • Location Insights – Marketplace Overview
  • Where is the Opportunity for Location Insight Services?
  • Which Sectors are most addressable?
  • Sizing the Opportunity
  • Why haven’t forecasts developed as quickly as expected?
  • Location Insights potentially worth $5bn globally by 2020
  • Benchmarks
  • Where does the value come from – the Location Insights ‘Stack’
  • Understanding the Technology Options
  • The Technology Options for Location Data Acquisition
  • Technology Advantages for Telcos
  • The Right Degree of Location Precision
  • Other Advantages of Starting with LIS
  • Incremental Learning
  • Addressing the Privacy Question
  • Market Coverage
  • LIS can provide internal benefits and can bolster the Go-to-Market strategy for vertical specific offerings
  • Expanding Beyond Insights
  • Addressing Location Based Services
  • Becoming a Trusted Data Provider
  • Practical Guidance to Launch Location Services
  • Market Strategy
  • Data Management
  • An agile approach, partnering, orchestration and governance
  • Conclusions
  • Appendices
  • Appendix 1: Location Acquisition Technologies in Detail
  • Appendix 2: Opportunity Sizing Methodology
  • Appendix 3: About STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Location Insight vs. Location Based Services
  • Figure 2: STL Partners’ Analysis of the value of Global Location Insight Services (by 2020)
  • Figure 3: Analysis of location data acquisition technologies suitability for Location Insight Services
  • Figure 4: The Strategy Beyond Location Insights
  • Figure 5: The Explosion of Smartphones (2007-2014)
  • Figure 6: ‘Non-Smart’ Data Insights Become More Important as More ‘Things’ are Connected
  • Figure 7: Mapping the Telco Opportunity Landscape
  • Figure 8: Four opportunity domains for operators
  • Figure 9: Turkcell’s Smart Map Tool
  • Figure 10: TomTom’s Fusion Engine to Analyze Real-Time Traffic Information
  • Figure 11: Tado’s Proximity Based Thermostat
  • Figure 12: Expanding Beyond LIS
  • Figure 13: Location Insights – Market Taxonomy
  • Figure 14: Telefónica Smart Steps Location Analytics Tool
  • Figure 15: Motionlogic’s Location Analytics Tool
  • Figure 16: The value of Global Location Insight Services by industry and sector (by 2020)
  • Figure 17: The Location Insights ‘Stack’
  • Figure 18: How well do different location data acquisition technologies support Location Insight Services needs?
  • Figure 19: Real-Time vs. Near Real-Time Location Information
  • Figure 20: Deveryware’s Dynamic Permissions Tool
  • Figure 21: Become a Trusted Data Provider
  • Figure 22: Analysis of App/OS based real-time location Technology
  • Figure 23: Analysis of App/OS based data stored on device Technology
  • Figure 24: Analysis of Emergency Services Location Technology
  • Figure 25: Analysis of Granular (building level) network based Technology
  • Figure 26: Analysis of Coarse (cell-level) network based Technology
  • Figure 27: Analysis of Indoor Technologies

Strategic Overview: Time for a New Telco 2.0 Vision

Introduction

Telecoms operators worldwide are pursuing strategies to achieve four general goals:

  • Core Competitiveness – to enhance and grow their success in established telecoms markets
  • Achieving Transformation – to lower costs and enable greater agility in their core business
  • Implementing Innovation – to employ key innovations in the core business and grow new types of revenues
  • Disruption – addressing disruptive threats and opportunities arising from and in adjacent markets and industries

The following is a summary of highlights of our recent analysis and an outline of further research planned against each of these themes. It is intended to provide readers with a summary, starting point and guide to our research as they address the themes, and includes a preamble for our latest vision of ‘Telco 2.0’ – the shape of future telcos.

Theme #1: Core Competitiveness – Telecoms Markets and Competitive Strategies

Background

STL Partners has covered the changing context of global telecoms markets for the last nine years. The broad story is that voice and messaging revenues are in decline, and that while data revenues are generally growing, they aren’t growing fast enough to replace the lost revenues.

Figure 1 – The pressure to defend existing telecoms revenues and build new ones

Source: STL Partners

Core Competitiveness: Research Highlights

In addition to slowing the decline in voice and messaging, operators need the best strategies to grow data, as well as new approaches to manage costs and deliver new value (covered in the subsequent sections of this paper). On this front:

Next Steps on Core Competitiveness

STL Partners is planning analysis including:

  • The impact of digital customer experience on customer behaviours and value creation
  • What strategies have demonstrably added value to telecoms operators?

Theme #2: Achieving Transformation – Re-organising the Core and Building Innovative Businesses

Background

Following on from our work on the Telco 2.0 Transformation Index, benchmarking the strategies of five major operators, in 2015 STL Partners has researched ‘Agility’, a key objective of change in the core business, and how to build innovative new businesses.

Figure 2 – The Telco 2.0 Agility Framework

Source: STL Partners, Agility Report

Transformation: Research Highlights

Next Steps on Telco 2.0 Transformation

STL Partners is planning analysis including:

  • What does ‘Telco 2.0’ mean today – what should a future telco look like?
  • How do recent developments in the application of new business models, technology, and organisational change unlock faster transition to new Telco 2.0 businesses?

Theme #3: Implementing Innovation in the Core – IoT, 5G and the Cloud, NFV and Future Networks

Background

IoT (the Internet of Things), 5G, and NFV (Network Functions Virtualisation) are three acronyms that at first glance seem unrelated. Yet underlying all three is that the boundaries between IT and network technologies in telecoms are starting to blur at an increasing rate. This is a highly significant trend in the industry.

Figure 3 – Improvements in the performance of generic hardware and software are starting to blur the IT/Network boundary

Source: Intel, STL Partners NFV Report

Core Innovation: Research Highlights

All in all, we see this underlying change as highly significant in terms of the structure and strategy of the telecoms industry. It will both more effectively enable new business models for telcos, enable new competition for them, and disrupt existing industry structures among telcos. It will also disrupt technology and software players partnering with telcos. It is therefore a critical strategic need to understand how this is likely to play out, and the strategies most likely to lead to success in this new world.

Next Steps on IoT, Cloud and the Future of the Network

STL Partners is planning analysis including:

  • The role of Cellular networks in the IoT
  • How the network revolution will unlock business model change
  • The impact of new software-based approaches on future of telecoms 

Theme #4: Disruption – Addressing Adjacent Threats and Opportunities

Background

Regular readers of our research are likely to be familiar with our original and market leading analysis of the internet players and major disruptors of the telecoms market, such as Dealing with the Disruptors: Google, Apple, Facebook, Amazon and Microsoft (2011) and our ongoing Dealing With Disruption in-depth research stream.

Research Highlights: Disruption

Although our article on the implications of Google’s MVNO attracted significant interest among our readers, disruption is no longer perceived as solely a threat to telcos, as evidenced by interest in analysis on:

Next Steps on Disruption

STL Partners is planning analysis including:

  • Further detailed case studies on leading telcos acting as disruptors, including new success stories in advertising and location services
  • China’s other disruptors (e.g.s Baidu, Xiaomi) and rising stars
  • Ongoing analysis of the strategies of Microsoft, Google, Apple, Amazon and Facebook

Conclusion: time for a new ‘Telco 2.0’ vision

STL Partners believes that three major practical outcomes resulting from progress across these themes are now combining to create a unique opportunity for telcos to evolve and take advantage of new markets.

New business models are starting to deliver

It is increasingly clear which new business models can be successful for telcos, and the pressure on the existing business model is no longer theoretical, it is a matter of substantial reality for most if not all telcos. The most advanced telcos have been trying out new models and some winning examples are emerging in the areas of content, enterprise ICT and B2B2C enablers.

A new virtualised technological platform will enable new ways of working

The emergence of SDN and NFV is creating a technological platform that is much more capable of delivering and supporting the agility required to deliver and sustain new businesses and new network propositions at speed than the traditional network/IT split. This will radically change both the operator and vendor industry landscape over the next few years.

In addition, and combined with the likely shape of 5G as a technology to further reduce mobile network latency, the future technological ‘shape’ of telcos looks like a highly distributed ICT infrastructure placing huge and computing resources very close to most customers. This will create many different business opportunities for telcos and not least in the delivery of content, enterprise ICT, and digital commerce.

It is becoming clearer how to organise and manage the change

The management and organisational techniques to create and sustain digital businesses are no longer a complete mystery, even though they are still evolving. And there is an increasing body, if not yet a ‘critical mass’, of people in the telecoms industry willing and able to embrace these approaches.

Time for a new ‘Telco 2.0’ vision

We believe that telcos (and their partners) that harness these insights will be best placed to maximise value creation in the future, and our research and consulting services are designed to help telecoms industry clients achieve success faster and more effectively in this future. To this end, we will shortly be setting out a new vision for ‘Telco 2.0’ – what a telecoms operator should be to create maximum value in the future, and how to get there.

Telco-Driven Disruption: What NTT DOCOMO, KT and Globe got right

Preface

The latest report in STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing is the second in a two-part series exploring the role of telcos in disrupting the digital economy. Across the two parts, STL has analysed a variety of disruptive moves by telcos, some long-standing and well established, others relatively new.

Part 2 builds on the analysis in Part 1, which considered telcos’ attempts to reinvent digital commerce in South Korea and Japan, the startling success of mobile money services in east Africa, BT’s huge outlay on sports content, AT&T’s multi-faceted smart home platform, Deutsche Telekom’s investments in online marketplaces and Orange’s innovative Libon communications service.

Part 2 takes a close look at NTT DOCOMO, Japan’s leading mobile operator, which has built up a major revenue stream from new businesses. Many of these new businesses are focused on enabling what DOCOMO refers to as a Smart Life. Revenues from its Smart Life suite of businesses, which provide consumers with advice, information, security, cloud storage and other lifestyle services, rose 22% to 421 billion yen (US$3.5 billion) in the year ending March 2015.

Part 2 also considers how South Korea’s incumbent telco KT used its high-speed broadband infrastructure to disrupt, but ultimately strengthen, its media business, which delivers IPTV to approaching six million households. This report also examines how Globe Telecom has carved out a significant position in the Philippines’ financial services market by enabling people to send each other money using text messages over a decade of patient experimentation. It also explains why the leading U.K. and U.S. mobile operators have struggled to disrupt the digital commerce market with their Weve and Softcard joint ventures.

Finally, Part 2 considers U.S. telco Verizon’s major push into cloud services, after spending US$1.4 billion to acquire specialist Terremark in 2011.

In each case, this briefing describes the underlying strategy, the implementation and the results, before setting out STL’s key takeaways. The conclusions section outlines the lessons other would-be disruptors can learn from telcos’ attempts to move into new markets and develop new value propositions.

Note, this report is not exhaustive. The examples it covers are intended to be representative. Some of these companies and their strategies are covered in other STL Partners reports, including:

Introduction: Telcos Can and do disrupt

In the digital economy, start-ups and major Internet platforms, such as Alibaba, Apple, Facebook, Google, Spotify and Tencent QQ, are generally considered to be the main agents of disruption. Start-ups tend to apply digital technologies in innovative new ways, while the major Internet platforms use their economies of scale and scope to disrupt markets and established businesses. These moves sometimes involve the deployment of new business models that can fundamentally change the modus operandi of entire industries, such as music, publishing and video gaming.

However, these digital natives don’t have a monopoly on disruption. So-called old economy companies do sometimes successfully disrupt either their own sector or adjacent sectors. In some cases, incumbents are actually well placed to drive disruption. As STL Partners has detailed in earlier reports, telcos, in particular, have many of the assets required to disrupt other industries, such as financial services, electronic commerce, healthcare and utilities. As well as owning the underlying infrastructure of the digital economy, telcos have extensive distribution networks and frequent interactions with large numbers of consumers and businesses.

Although established telcos have generally been cautious about pursuing disruption, several have created entirely new value propositions, effectively disrupting either their core business or adjacent industry sectors. In some cases, disruptive moves by telcos have primarily been defensive in that their main objective is to hang on to customers in their core business. In other cases, telcos have gone on the offensive, moving into new markets in search of new revenues. Figure 1 classifies various disruptive moves by telcos. Those in white were covered in Part 1 of this report, those in grey are covered in this report, Part 2.

Figure 1: Representative examples of disruptive plays driven by telcos

Source: STL Partners

Offensive, major financial impact category

A classic disruptive play is to use existing assets and customer relationships to move into an adjacent market, open up a new revenue stream and build a major business. This is what Apple did with the iPhone and what Amazon did with cloud services. Several telcos have also followed this playbook. This section looks at two examples – NTT DOCOMO’s Smart Life services and Globe Telecom’s GCash – and what other companies in the digital economy can learn from these relatively successful moves. Unlike many disruptive moves by telcos, the two businesses covered in this section have had a significant impact in the targeted market. They have also moved the needle for their parent’s telcos and given their investors greater confidence in their ability to innovate.

NTT DOCOMO’s Smart Life proposition

Japan’s telecoms market was one of the first in the world to go ex-growth and its telcos have been searching for new sources of revenue for the best part of a decade. The market leader, NTT DOCOMO, has also been hit by an aggressive campaign by the third largest player, Softbank, to win market share. DOCOMO has seen its revenues from telecoms services decline every year since 2006, giving its efforts to expand into adjacent markets, such as entertainment, commerce and financial services, a real sense of urgency. In particular, DOCOMO has tried hard to get closer to consumers by developing a sophisticated and multi-faceted “smart life” proposition.

Strategy

Rather than focusing simply on providing connectivity and fading into the background, DOCOMO is trying to maintain a close relationship with Japanese consumers. Its strategy is centred on using the data collected by its network to anticipate customers’ needs and provide them with tailored and timely propositions. In November 2011, DOCOMO set out a medium-term strategy (for the years up to and including 2015) called Shaping a smart life, which it positioned it as an interim step to realising its longer-term, corporate vision for 2020: Pursuing smart innovation: HEART (see Figure 2). This report looks, in particular, at the ‘T’ in the Heart strategy – DOCOMO’s bid to win consumers’ trust and clearly differentiate itself from other providers of digital services.

One of the central tenets of DOCOMO’s strategy is that individuals want the support of a “personal life agent” – an automated personal assistant that can make useful suggestions and recommendations. DOCOMO envisaged that this assistant would use the information collected by smartphones and wearable devices to perform various tasks, including making recommendations and even automatic ticket reservations.

In other words, DOCOMO was one of the first companies in the world to anticipate the market for personal digital assistants, which is now a key arena in the ongoing battle between Google, Apple and Microsoft, which have launched Google Now, Siri and Cortana respectively.

DOCOMO originally positioned its smart life proposition as part of a broader range of cloud services that would enable it to generate new sources of value. Back in 2011, DOCOMO pledged to create:

  • A personal cloud – a platform underpinning a wide range of services for consumers.
  • A business cloud – a solutions platform for the provision of new business styles
  • A network cloud – a platform that adds value through sophisticated information and communication processing performed on the network.

Figure 2:  The smart life strategy NTT DOCOMO set out in 2011

Source: NTT DOCOMO, Medium-Term Vision, November 2011

Implementation

DOCOMO has set about strengthening and expanding its existing digital commerce business to build closer relationships with both consumers and the third party businesses supplying the services and content consumers want. To that end, Japan’s largest telco set itself goals to expand the number of content providers supporting its dmenu portal (a long-standing portal offering original content) from 700 in March 2012 to 3,000 in March 2016, while boosting the number of monthly users of its dmarket, which provides a broader range of digital content, to 20 million by March 2016, up from 1.5 million in March 2012. To that end, DOCOMO has expanded dmarket into new areas, such as fashion, travel and even food deliveries, effectively transforming dmarket in an e-commerce portal, as well as a content portal (see Figure 3).

Figure 3: DOCOMO has significantly expanded the services offered by dmarket

Source: NTT DOCOMO investor presentation, April 2014

Beyond dmarket, DOCOMO has also deployed a raft of other value added services, encompassing navigation, local information, NFC-based wallet and information services, credit card and carrier-billing-based payments, translation apps, health and wellness services, insurance and even pet and child tracking. DOCOMO also provides an i-concier service, which is designed to help people with daily organisation, as well as delivering offers and information from brands the user is interested in. For example, i-concier can be configured to give you a reminder when you arrive in a specific location. Confusingly, DOCOMO has also rolled out a separate service, called Shabette-Concier, which enables customers to talk Siri-style to “their smartphone about things you want to know or do, and your smartphone will display the best answers to your queries on the screen.” In other words, DOCOMO is offering many similar services and functionality to the major Internet players, such as Apple and Google.

DOCOMO was also quick to realise the importance of enabling individuals to use a single ID across multiple devices, while positioning the smartphone as an authentication platform in everyday life in both the physical world and online world. This kind of persistent identification across multiple devices and networks will help DOCOMO collect the information it needs to make personalised recommendations. At the same time, various DOCOMO services encourage consumers to volunteer information about themselves. DOCOMO also provides secure storage of personal data, an important step towards a personal cloud service (see Figure 4) along the lines of that outlined by STL Partners in the report: Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players. While this approach is broadly similar to that pursued by the major Internet companies, DOCOMO’s marketing places a lot of emphasis on safety, security and peace of mind, implying it is different from the more ‘cavalier’ Internet companies – Google and Facebook’s business models are predicated on encouraging consumers to share personal information, so they tend not to highlight the need for safe and secure storage for that information.

 Figure 4: DOCOMO’s personal cloud aims to offer consumers secure data storage, persistent ID and personalised recommendations

Source: NTT DOCOMO, Medium-Term Vision, November 2011

Next section: DOCOMO Results Analysis…

 

  • Preface
  • Executive Summary
  • Introduction: Telcos can and do disrupt
  • Offensive, major financial impact
  • NTT DOCOMO’s Smart Life proposition
  • Globe Telecom’s GCash
  • Offensive, limited financial impact
  • Verizon Cloud
  • The Weve joint venture
  • The Softcard joint venture
  • Defensive, major financial impact
  • KT’s media business
  • Conclusions

 

  • Figure 1: Representative examples of disruptive plays driven by telcos
  • Figure 2: The smart life strategy NTT DOCOMO set out in 2011
  • Figure 3: DOCOMO has significantly expanded the services offered by dmarket
  • Figure 4: DOCOMO’s personal cloud aims to offer consumers secure data storage, persistent ID and personalised recommendations
  • Figure 5: The Smart Life businesses are growing, but not quite fast enough yet
  • Figure 6: DOCOMO hopes its Smart Life business will lift group profits this year
  • Figure 7: The Smart Life businesses now generate 15% of DOCOMO’s ARPU
  • Figure 8: In 2011 DOCOMO saw digital commerce and content as key opportunities
  • Figure 9: The value of transactions through the dmarket has grown rapidly
  • Figure 10: Subscriber growth at dmarket stalled in the first half of 2014
  • Figure 11: TV-on-demand is the most popular of the dmarket services
  • Figure 12: NTT DOCOMO is putting more emphasis on providing enablers
  • Figure 13: DOCOMO’s confusing portfolio of money services
  • Figure 14: The GCash App has improved its user interface
  • Figure 15: GCash appears to be narrowly ahead of rival services
  • Figure 16: Facebook leads the OTT communications market in the Philippines
  • Figure 17: Verizon’s Global Enterprise revenues continue to fall
  • Figure 18: Weve originally planned to used transactional data to improve marketing
  • Figure 19: The Isis Wallet could be used to store and browse offers
  • Figure 20: KT is successfully managing the transition to IPTV
  • Figure 21: KT’s media revenue has climbed to 6% of total revenues

Facebook: Telcos’ New Best Friend?

How Facebook is changing

A history of adaptation

One of the things that sets Facebook apart from its largely defunct predecessors, such as MySpace, Geocities and Friends Reunited, is its ability to adapt to the evolution of the Internet and consumer behaviour. In its decade-long history, Facebook has evolved from a text-heavy, PC-based experience used by American students into a world-leading digital communications and commerce platform used by people of all ages. The basic student matchmaking service Zuckerberg and his fellow Harvard students created in 2004 now matches buyers and sellers in competition with Google, Amazon and eBay (see Figure 1).

Figure 1: From student matchmaking service to a leading digital commerce platform

Source: Zuckerberg’s Facebook page and Facebook investor relations

Launched in early 2004, Facebook initially served as a relatively basic directory with photos and limited communications functionality for Harvard students only. In the spring of 2004, it began to expand to other universities, supported by seed funding from Peter Thiel (co-founder of Paypal). In September 2005, Facebook was opened up to the employees of some technology companies, including Apple and Microsoft. By the end of 2005, it had reached five million users.

Accel Partners invested US$12.7 million in the company in May 2005 and Greylock Partners and others followed this up with another US$27.5 million in March 2006. The additional investment enabled Facebook to expand rapidly. During 2006, it added the hugely popular newsfeed and the share functions and opened up the registration process to anyone. By December 2006, Facebook had 12 million users.

The Facebook Platform was launched in 2007, enabling affiliate sites and developers to interact and create applications for the social network. In a far-sighted move, Microsoft invested US$240 million in October 2007, taking a 1.6% stake and valuing Facebook at US$15 billion. By August 2008, Facebook had 100 million users.

Achieving the 100 million user milestone appears to have given Facebook ‘critical mass’ because at that point growth accelerated dramatically. The company doubled its user base to 200 million in nine months (May 2009) and has continued to grow at a similar rate since then.

As usage continue to grow rapidly, it was increasingly clear that Facebook could erode Google’s dominant position in the Internet advertising market. In June 2011, Google launched the Google + social network – the latest move in a series of efforts by the search giant to weaken Facebook’s dominance of the social networking market. But, like its predecessors, Google+ has had little impact on Facebook.

2012-2013 – the paranoid years

Although Facebook shrugged off the challenge from Google+, the rapid rise of the mobile Internet did cause the social network to wobble in 2012. The service, which had been designed for use on desktop PCs, didn’t work so well on mobile devices, both in terms of providing a compelling user experience and achieving monetisation. Realising Facebook could be disrupted by the rise of the mobile Internet, Zuckerberg belatedly called a mass staff meeting and announced a “mobile first” strategy in early 2012.

In an IPO filing in February 2012, Facebook acknowledged it wasn’t sure it could effectively monetize mobile usage without alienating users. “Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results,” it duly noted in the filing.

Although usage of Facebook continued to rise on both the desktop and the mobile, there was increasing speculation that it could be superseded by a more mobile-friendly service, such as fast-growing photo-sharing service Instagram. Zuckerberg’s reaction was to buy Instagram for US$1 billion in April 2012 (a bargain compared with the $21 billion plus Facebook paid for WhatsApp less than two years later).

Moreover, Facebook did figure out how to monetise its mobile usage. Cautiously at first, it began embedding adverts into consumers’ newsfeeds, so that they were difficult to ignore. Although Facebook and some commentators worried that consumers would find these adverts annoying, the newsfeed ads have proven to be highly effective and Facebook continued to grow. In October 2012, now a public company, Facebook triumphantly announced it had one billion active users, with 604 million of them using the mobile site.

Even so, Facebook spent much of 2013 tinkering and experimenting with changes to the user experience. For example, it altered the design of the newsfeed making the images bigger and adding in new features. But some commentators complained that the changes made the site more complicated and confusing, rather than simplifying it for mobile users equipped with a relatively small screen. In April 2013, Facebook tried a different tack, launching Facebook Home, a user interface layer for Android-compatible phones that provides a replacement home screen.

And Zuckerberg continued to worry about upstart mobile-orientated competitors. In November 2013, a number of news outlets reported that Facebook offered to buy Snapchat, which enables users to send messages that disappear after a set period, for US$3 billion. But the offer was turned down.

A few months later, Facebook announced it was acquiring the popular mobile messaging app WhatsApp for what amounted to more than US$21 billion at the time of completion.

In 2014 – going on the offensive

By acquiring WhatsApp at great expense, Facebook alleviated immediate concerns that the social network could be dislodged by another disruptor, freeing up Zuckerberg to turn his attention to new technologies and new markets. The acquisition also put to rest investors’ immediate fears that Facebook could be superseded by a more fashionable, dedicated mobile service, pushing up the share price (see the section on Facebook’s valuation). In May 2014, Facebook wrong-footed many industry watchers and some of its rivals by announcing it had agreed to acquire Oculus VR, Inc., a leading virtual reality company, for US$2 billion in cash and stock.

Zuckerberg has since described the WhatsApp and Oculus acquisitions as “big bets on the next generation of communication and computing platforms.” And Facebook is also investing heavily in organic expansion, increasing its headcount by 45% in 2014, while opening another data center in Altoona, Iowa.

Zuckerberg also continues to devote time and attention to Internet.org, a multi-company initiative to bring free basic Internet services to people who aren’t connected. Announced in August 2013, Internet.org has since launched free basic internet services in six developing countries. For example, in February 2015, Facebook and Reliance Communications launched Internet.org in India. As a result, Reliance customers in six Indian states (Tamil Nadu, Mahararashtra, Andhra Pradesh, Gujarat, Kerala, and Telangana) now have access to about 40 services ranging from news, maternal health, travel, local jobs, sports, communication, and local government information.

Zuckerberg said that more than 150 million people now have the option to connect to the internet using Internet.org, and the initiative had, so far, succeeded in connecting seven million people to the internet who didn’t before have access. “2015 is going to be an important year for our long term plans,” he noted.

The Facebook exception – no fear, more freedom

Although it is now listed, Facebook is clearly not a typical public company. Its massive lead in the social networking market has given it an unusual degree of freedom. Zuckerberg has a controlling stake in the social network (he is able to exercise voting rights with respect to a majority of the voting power of the outstanding capital stock) and the self-confidence to ignore any grumblings on Wall Street. Facebook is able to make acquisitions most other companies couldn’t contemplate and can continue to put Zuckerberg’s long-term objectives ahead of those of short-term shareholders. Like Amazon, Facebook frequently reminds investors that it isn’t trying to maximise short-term profitability. And unlike Amazon, Facebook may not even be trying to maximize long-term profitability.

On Facebook’s quarterly earning calls, Zuckerberg likes to talk about Facebook’s broad, long-term aims, without explaining clearly how fulfilling these objectives will make the company money. “In the next decade, Facebook is focused on our mission to connect the entire world, welcoming billions of people to our community and connecting many more people to the internet through Internet.org (see Figure 2),” he said in the January 2015 earnings call. “Similar to our transition to mobile over the last couple of years, now we want to really focus on serving everyone in the world.”

Figure 2: Zuckerberg is pushing hard for the provision of basic Internet services

Source: Facebook.com

Not all of the company’s investors are entirely comfortable with this mission. On that earnings call, one analyst asked Zuckerberg: “Mark, I think during your remarks in every earnings call, you talk to your investors for a considerable amount of time about Facebook’s efforts to connect the world, and specifically about Internet.org which suggest you think this is important to investors. Can you clarify why you think this matters to investors?”

Zuckerberg’s response: “It matters to the kind of investors that we want to have, because we are really a mission-focused company. We wake up every day and make decisions because we want to help connect the world. That’s what we’re doing here.

“Part of the subtext of your question is that, yes, if we were only focused on making money, we might put all of our energy on just increasing ads to people in the US and the other most developed countries. But that’s not the only thing that we care about here.

“I do think that over the long term, that focusing on helping connect everyone will be a good business opportunity for us, as well. We may not be able to tell you exactly how many years that’s going to happen in. But as these countries get more connected, the economies grow, the ad markets grow, and if Facebook and the other services in our community, or the number one, and number two, three, four, five services that people are using, then over time we will be compensated for some of the value that we’ve provided. This is why we’re here. We’re here because our mission is to connect the world. I just think it’s really important that investors know that.”

Takeaways

Facebook may be a public company, but it doesn’t worry much about shareholders’ short-term aspirations. It often behaves like a private company that is focused first and foremost on fulfilling the goals of its founder. It is clear Zuckerberg is playing the long game. But it isn’t clear what yardsticks he is using to measure success. Although Zuckerberg knows Facebook needs to be profitable enough to ensure investors’ continued support, his primary goal may be to bring hundreds of millions more people online and secure his place in posterity. There is a danger that Zuckerberg’s focus on connecting people in Africa and developing Asia means that there won’t be sufficient top management attention on the multi-faceted digital commerce struggle with Google in North America and Western Europe.

Financials and business model

Network effects still strong

Within that wider mission to connect the world, Facebook continues to do a great job of connecting people to Facebook. Fuelled by network effects, Facebook says that 1.39 billion people now use Facebook each month (see Figure 3) and 890 million people use the service daily, an increase of 165 million monthly active users and 133 million daily active users in 2014. In developed markets, many consumers use Facebook as a primary medium for communications, relying on it to send messages, organize events and relay their news. As a result, in parts of Europe and North America, adults without a Facebook account are increasingly considered eccentric.

Figure 3: Facebook’s user base continues to grow rapidly

Source: Facebook and STL Partners analysis

Having said that, some active users are clearly more active and valuable than others. In a regulatory filing, Facebook admits that some active users may, in fact, be bots: “Some of our metrics have also been affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs. The impact of this automatic activity on our metrics varied by geography because mobile usage varies in different regions of the world.”

This automatic polling of Facebook’s servers by mobile devices makes it difficult to judge the true value of the social network’s user base. Anecdotal evidence suggests many people with Facebook profiles are kept active on Facebook primarily by their smartphone apps, rather than because they are actively choosing to use the service. Still, Facebook would argue that these people are seeing the notifications on their mobile devices and are, therefore, at least partially engaged.

 

  • Executive Summary
  • How Facebook is changing
  • A history of adaptation
  • The Facebook exception – no fear, more freedom
  • Financials and business model
  • Growth prospects for the core business
  • User growth
  • Monetisation – better targeting, higher prices
  • Mobile advertising spend lags behind usage
  • The Facebook Platform – Beyond the Walled Garden
  • Multimedia – taking on YouTube
  • Search – challenging Google’s core business
  • Enabling transactions – moving beyond advertising
  • Virtual reality – a long-term game
  • Takeaways
  • Threats and risks
  • Facebook fatigue
  • Google – Facebook enemy number one
  • Privacy concerns
  • Wearables and the Internet of Things
  • Local commerce – in need of a map
  • Facebook and communication services
  • Conclusions
  • Facebook is spread too thin
  • Partnering with Facebook – why and how
  • Competing with Facebook – why and how

 

  • Figure 1: From student matchmaking service to a leading digital commerce platform
  • Figure 2: Zuckerberg is pushing hard for the provision of basic Internet services
  • Figure 3: Facebook’s user base continues to grow rapidly
  • Figure 4: Facebook’s revenue growth has accelerated in the past two years
  • Figure 5: Facebook’s ARPU has risen sharply in the past two years
  • Figure 6: After wobbling in 2012, investors’ belief in Facebook has strengthened
  • Figure 7: Despite a rebound, Facebook’s valuation per user is still below its peak
  • Figure 8: Facebook could be serving 2.3 billion people by 2020
  • Figure 9: Share of digital advertising – Facebook is starting to close the gap on Google but remains a long way behind
  • Figure 10: The gap between click through rates for search and social remains substantial
  • Figure 11: Social networks’ revenue per click is rising but remains 40% of search
  • Figure 12: Facebook’s advertising has moved from the right column to centre stage
  • Figure 13: Facebook’s startling mobile advertising growth
  • Figure 14: Zynga’s share price reflects decline of Facebook.com as an app platform
  • Figure 15 – Facebook Connect – an integral part of the Facebook Platform
  • Figure 16: Leading Internet players’ share of social log-ins over time
  • Figure 17: Facebook’s personalised search proposition
  • Figure 18: Facebook’s new buy button – embedded in a newsfeed post
  • Figure 19: The rise and rise of Android – not good for Facebook
  • Figure 21: Facebook and Google are both heavily associated with privacy issues
  • Figure 22: Facebook wants to conquer the Wheel of Digital Commerce
  • Figure 23: Facebook’s cash flow is far behind that of Google and Apple
  • Figure 24: Facebook’s capital expenditure is relatively modest compared with peers
  • Figure 25: Facebook’s capex/revenue ratio has been high but is falling