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

Introduction

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

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

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

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

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

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

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

Source: Company accounts, Morgan Stanley

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

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

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

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

Source: Google Finance

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

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

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

Figure 3: Selected acquisitions by Google, 2003-14

Source: Various

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

Three questions raised by Google’s acquisition of Nest

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

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

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

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

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

What does the Nest acquisition mean for telcos?

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

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

Launchers: a new relevance point for telcos?

Introduction

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

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

The Telco Dilemma

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

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

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

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

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

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

The Opportunity

What is a launcher?

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

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

Figure 1: Popular launchers in the marketplace

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

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

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

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

Will launchers really take off?

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

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

Source: Flurry Analytics

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

What’s at stake?

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

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

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

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

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

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

The Players

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

Facebook

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

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

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

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

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

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

Introduction

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

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

The US a rich and high-spending market

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

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

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

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

Source: STL Partners

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

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

The US Market is Changing

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

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

US carriers are pursuing diverse pricing strategies, faced with change

Source: STL Partners

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

Each carrier has adopted a different approach in this period:

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

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

Something went wrong at Sprint in mid-2012

Source: STL Partners, Sprint filings

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

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

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

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

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

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

Introduction

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

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

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

Our thanks to our event sponsors:

A growing sense of urgency and activity

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

Urgency: but as a result of lateness?

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

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

Source: Participant Vote, OnFuture EMEA 2014 Executive Brainstorm

Some positive signs

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

Figure 2: Some progress on specific actions on disruptive innovation

Source: Participant Vote, OnFuture EMEA 2014 Executive Brainstorm

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

Figure 3: Analysis of transformation progress of leading telcos

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

The enemy within

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

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

Source: Participant Vote, OnFuture EMEA 2014 Executive Brainstorm

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

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

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

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

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

New Mobile & Digital Transformation Strategies: OnFuture EMEA Executive Brainstorm 2014, Day One (Wednesday 11 June)

New Mobile & Digital Transformation Strategies. Presentations and Voting Slides from the New Mobile & Digital Transformation Strategies stream of the OnFuture EMEA Executive Brainstorm, 11th June 2014, in London.

0845 Event Start: Welcome, Agenda, Introductions & Warm Up

Andrew Collinson, COO & Research Director, STL Partners/Telco 2.0 Initiative (download here)

0900 Managing Disruptive Innovation in the Digital World

Chris Barraclough, MD & Chief Strategist, STL Partners/Telco 2.0 Initiative (download here)

Peter Briscoe, Head of Innovation, Ericsson (download here)

Paolo Campoli, Service Provider CTO, Cisco (download here)

In the afternoon there were two parallel streams – Communications Services and In-Home and In-Store Services:

Stream A Workshops: Communications Services – Innovation for the Consumer and the Enterprise

1345 Future Communications: Radical innovation in voice, messaging and data services

Bob Brace, Senior Analyst, STL Partners/Telco 2.0 Initiative (download here)

Rainer Deutschmann, SVP Core Product Innovation, Deutsche Telekom (download here)

Giles Corbett, Head of Libon, Orange (download here)

Dean Elwood, CEO and Founder, Voxygen (Panel Only)

Chris Barraclough, MD & Chief Strategist, STL Partners/Telco 2.0 Initiative (Moderator)

1430 Enterprise Mobility: A strategic approach to creating competitive advantage

Bob Brace, Senior Analyst, STL Partners/Telco 2.0 Initiative (download here)

Albane Coeurquetin, Consultant, STL Partners/Telco 2.0 Initiative (download here)

Michael Crossey, Director Product Marketing, Intel (Unavailable)

Alessandro Vigilante, VP Business Development & Strategy, Colt (download here)

Philip Laidler, Director of Consulting, STL Partners/Telco 2.0 Initiative (Moderator)

Stream B: In-Home and In-Store Services: the ‘Internet of Things…and of People’

1315 The ‘Internet of Things’ in the Digital Home: Towards a new ecosystem

Matt Jones, Consultant, STL Partners/Telco 2.0 Initiative (download here)

Martin Harriman, Director of Digital Home, Telefonica (download here)

Kevin Petersen, SVP, AT&T Digital Home (download here)

Pilgrim Beart, Founder, AlertMe (download here)

Philip Laidler, Director of Consulting, STL Partners/Telco 2.0 Initiative (Moderator)

1430 In-Store Retail: How mobile technology can revive the high street, not kill it

Owen McCabe, Director, Kantar Retail (download here)

Omaid Hiwaizi, Chief Strategy Officer, Geometry Global/WPP (download here)

Graham Cove, Director of Wi-Fi, Everything Everywhere (EE) (download here)

Chris Barraclough, MD & Chief Strategist, STL Partners/Telco 2.0 Initiative (Moderator)

Final plenary session:

1615 Mobile Payments: Creating a viable ecosystem that enables true ‘mobile commerce’

Andrew Collinson, STL Partners/Telco 2.0 Initiative (Moderator)

Holger Rambach, VP Products & Innovation, Deutsche Telekom (download here)

David Pringle, Senior Associate, STL Partners/Telco 2.0 Initiative (Panel Only)

Phil Laidler, Director of Consulting, STL Partners/Telco 2.0 Initiative (Panel Only)

Voting slides from Day 1: New Mobile & Digital Transformation Strategies

Click here for Day 2 presentations – Next Generation Mobile Marketing & Commerce
Click here to go back to the main OnFuture EMEA London page

Telco 2.0: The $50bn Enterprise Mobility Opportunity: What’s stopping telcos winning 500% more business?

Overview of Key Findings

STL Partners believe that mobility – the use of mobile data, new devices, new applications and communications services – is one of the most disruptive forces in today’s enterprise market. We think that a business philosophy to embrace mobility as a strategic asset and opportunity, rather than simply a technical challenge, will be a critical success factor for all businesses moving forward. Telcos can be a key enabler and business partner in this transformation, but to do so they will need to significantly change their approaches to working with enterprise customers.Key findings

Our new global research, independently produced by STL Partners and kindly sponsored by SAP, shows that many telcos are both ideally positioned but underprepared to exploit this fast emerging and evolving opportunity. We found that among the 101 global enterprise and 44 telco executives we surveyed:

Mobility works – 80% of enterprise execs thought their mobile app based initiatives had met or exceeded expectations
There’s big latent demand for telcos – 5 times as many enterprises (i.e. over half the total) would buy services and solutions from telcos than currently do
But telcos need to address credible capability issues such as security, product portfolio, app development, and process and industry expertise
And most telcos are underprepared – only 16% have a defined market offer or strategy, and internal adoption of mobility lags many other industries, with only 45% of telcos we surveyed offering internal apps compared to 61% in the enterprise sample.

Figure 1: What would enterprises consider buying from a telco?
Figure 1: What would enterprises consider buying from a telco?

Source: STL Partners, On-line research, Enterprise >250 employees, Feb 2014(n=101)

Introduction

Background – the Business Context of Enterprise Mobility

Four major trends in demand are transforming the Enterprise Information and Communication Technology (ICT) market today:

In pursuit of greater agility, new sources of revenue, improved efficiency, and closer customer relationships, enterprises are exploring opportunities to mobilise strategic aspects of their business.
Enterprises are increasingly exploiting big-data, cloud, and mobile strategies to innovate and transform.
To focus on their core businesses, they are outsourcing IT infrastructure and technology services.
As employees increasingly use new digital technologies and services, enterprises have started to reduce spend on traditional telecoms services.

In response, telcos are looking to identify alternative ways to grow revenues from enterprise customers. This includes tools for the development, deployment, and management of enterprise apps, and managed infrastructure and technology services that offer flexibility and economies of scale.

In December 2013, STL Partners conducted a sizing study of the Enterprise Mobility market and identified a global opportunity of $50 billion (see Telco 2.0™ Executive Briefing: “The $50Bn Enterprise Mobility Opportunity: four steps for telcos to take today”). This precipitated further exploration into:

Enterprises’ opportunities and priorities for mobile solutions
Their drivers and expectations vis-à-vis Enterprise Mobility, and their attitudes towards telcos as a prospective partner
The practical and perceptual inhibitors causing telcos to arrive comparatively late to the Enterprise Mobility party
How telcos can achieve the greatest value for their customers – and themselves – by developing or assimilating the Enterprise Mobility capabilities they lack today

New Research

In the first quarter of 2014, STL Partners carried out a combined research programme consisting of:

a survey of 101 enterprises worldwide (organisations with 250+ employees)
a quantitative study of 44 telcos
in-depth qualitative interviews with strategists and proposition owners representing 11 telcos

Figure 2: Enterprise customers – on-line survey respondents, per region

Figure 2: Enterprise customers - on-line survey respondents, per region

Figure 3: Telco – on-line survey respondents, per region

Figure 3: Telco - on-line survey respondents, per region

Table 1: In-depth qualitative interviews – contributing companies

Table 1: In-depth qualitative intervews - contributing companies

All the interviews were conducted on a confidential basis. Information and insights shared by the interviewees have therefore been anonymised. Names and titles have also been withheld.

The findings – which suggest telcos are even further adrift of a robust Enterprise Mobility proposition than initially thought – are detailed in this report, together with recommendations on steps telcos can take to accelerate their go-to-market strategy and make up for the early momentum they have lost.

Overview – the enterprise perspective

As demand for access to information on the go via mobile platforms is increasing, Enterprise Mobility is one of the hottest topics in IT. Mobile apps are fast becoming a business imperative to support better ways of working and business transformation. Enterprises must react quickly to harness the potential of mobile apps, while satisfying themselves that security, governance, and compliance across data, applications, and devices are fit for purpose.

Most Enterprises have started mobilising

Our study revealed that most enterprises have already mobilised at least some of their organisation’s processes and interactions, generally starting from the inside out by prioritising internal initiatives over customer-facing ones.

Figure 4: Business processes already mobilised by enterprises

Though we observed variations in adoption by sector and country that may indicate relevant differences (see Appendix – Industry and Regional Splits, page 48), the commonality of fundamental demand across regions and sectors is more significant.

Sales is the current lead application – but there’s more to come

Findings: field sales has always been a natural candidate area for mobilisation, borne out by the fact that more than half of enterprises in the study already had some form of sales app. While the Shop Floor currently has experienced the lowest adoption of enterprise apps, it is also one of the areas of greatest potential for mobilisation, with 41% of enterprises contemplating mobilising their production facilities, concourse, or retail environment. The highest levels of mobilisation or intent to mobilise were seen in Aftermarket Field Service, Transportation & Delivery, and Equipment Maintenance.

Figure 5: Internal / B2E mobile apps enterprises already have or are considering

Figure 4: Internal / B2E mobile apps enterprises already have or are considering

Opportunity: administrative apps are now a relatively mature, horizontal process market. Some telcos have had success selling these and it is an important area in which to have a compelling offering. However, such apps have lower price points and margins, whereas other sales and operational apps offer the potential for higher growth and greater business impact. Moreover, there is also potential for a new generation of intelligent sales apps to change sales performance in a more fundamental fashion.

Key Question: how can telcos best develop the agility and depth of ICT skills to sell and support both horizontal process apps and deeper vertical / operational needs?

Options: telcos have broad options to develop this internally, partner, or choose not to support these segments and their needs. See Four key enterprise mobility competencies for telcos, page 42.

In B2C: information first, marketing next

Findings: the customer-facing processes that had most typically been already mobilised were identified as Information & Reference (53%) and Paying Bills/Checking Balances (52%). The areas of greatest untapped interest in mobilisation were Social Media Sharing (33%), Marketing Offers (32%), and Scanning Barcodes/QR Codes (31%).

Figure 6: Customer-facing processes enterprises have mobilised or are planning to mobilise?

Opportunity: as an increasing volume of purchases are researched or made via mobile devices, traditional mobile marketing and shopping experiences in developed economies are likely to continue to evolve significantly.

Key Question: how can telcos develop and support the next generation of customer-facing mobile apps?

Options: again, telcos have broad options to develop this internally, partner, or choose not to support these segments and their needs. See Four key enterprise mobility competencies for telcos, page 42.

Executive Summary
Introduction
Overview: the enterprise perspective
Most Enterprises have started mobilising
Issues for Enterprises managing Enterprise Mobility
The results: 80 % of initiatives met or beat expectations
More than half the enterprise market would buy from telcos: 500% more than today
So why don’t enterprises buy from telcos now?
The telco perspective
Stages of mobile maturity among telcos
70% of telco execs found EM a ‘very attractive’ opportunity
Telcos are not ‘drinking their own champagne’
Only 16% of telcos have a defined strategy or market offer
Enterprises want apps, but are telcos listening?
Shifting culture: new markets needs new mind-sets, models and metrics
What sort of strategy to balance speed and risk/reward?
Enterprise Mobility success factors
Four key enterprise mobility competencies for telcos
Should telcos partner – and what are the criteria?
Steps to defining the strategy for telcos
Appendix – Industry and Regional Splits
Adoption and barriers by Sector and Region

Figure 1: Enterprise customers – On-line survey respondents, per region
Figure 2: Telco – On-line survey respondents, per region
Figure 3: Business processes already mobilised by enterprises
Figure 4: Internal / B2E mobile apps enterprises already have or are actively considering
Figure 5: Customer-facing processes enterprises have mobilised or are planning to mobilise?
Figure 6: Capabilities enterprise employees and customers are using
Figure 7: BYOD – Prevalence of corporate and employee devices
Figure 8: Number of devices across the surveyed enterprises’ workforces 16
Figure 9: Top challenges and obstacles in Enterprise Mobility
Figure 10: How do Enterprises manage app development?
Figure 11: How many enterprises use platform-based applications?
Figure 12: Strategic mobility enablers currently in place in enterprises
Figure 13: Presence of a formal enterprise mobility strategy vs. number of devices across the workforce
Figure 14: Success of Enterprise Mobility deployment(s) to date
Figure 15: Success of Enterprise Mobility deployment(s) to date – per role
Figure 16: What would enterprises consider buying from a telco?
Figure 17: What would enterprises consider buying from a telco – by role
Figure 18: Enterprises which would consider buying from a telco or already have
Figure 19: Why wouldn’t enterprises buy from a telco?
Figure 20: Enterprise Mobility maturity stages in telcos
Figure 21: Telcos’ concerns about core revenue declines
Figure 22: How attractive an opportunity is Enterprise Mobility to telcos?
Figure 23: Telcos are somewhat well-informed around Enterprise Mobility trends and development in mobile applications
Figure 24: Types of apps currently used within telcos
Figure 25: Processes / workflows telcos have mobilised or plan to mobilise with apps
Figure 26: Maturity of telcos’ own mobility programme
Figure 27: Telcos’ Internal enterprise app store deployment
Figure 28: Mobile portfolio management
Figure 29: Telcos’ biggest challenges or obstacles to internal mobilisation
Figure 30: Products and services telcos are currently offering, or plan to offer
Figure 31: Comparison between services enterprises would consider buying from telcos vs. services telcos are currently offering, or plan to offer
Figure 32: Telcos’ target market
Figure 33: Telco Barriers to taking Enterprise Mobility offerings to market
Figure 34: A hybrid approach can enable Telcos to achieve multiple concurrent stages of mobility evolution
Figure 35: Potential ‘Roadmap’ decisions for telcos addressing Enterprise Mobility
Figure 36: Business processes already mobilised by enterprises by industry sector
Figure 37: Internal mobile apps the utilities sector already have or are actively considering
Figure 38: Enterprise device landscape
Figure 39: Enterprise device landscape by region
Figure 40: Top THREE biggest challenges and obstacles in Enterprise Mobility by region
Figure 41: Enterprise mobile apps development / acquisition – per region
Figure 42: Enterprise mobile apps development / acquisition per industry
Figure 43: Platform-based applications per region
Figure 44: Enterprise app store penetration
Figure 45: Reasons Enterprises would not consider obtaining Enterprise Mobility services from a telecoms provider – per region
Figure 46: Reasons Enterprises would not consider obtaining Enterprise Mobility services from a telecoms provider – per industry

Triple-Play in the USA: Infrastructure Pays Off

Introduction

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

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

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

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

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

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

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

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

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

Three Operators, Three Strategies

AT&T

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

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

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

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

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

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

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

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

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

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

Source: Telco 2.0 Transformation Index

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

The US TV Market

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

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

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

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

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

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

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

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

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

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

Source: Telco 2.0 Transformation Index

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

Competing for the Whole Bundle – Comcast and the Cable Industry

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

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

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

Source: Telco 2.0 Transformation Index

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

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

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

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

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

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

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

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

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

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

Telco 1.0: Death Slide Starts in Europe

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

Very weak Q1 2014 results from Telefonica and other European players

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

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

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

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

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

Telco 2.0 Telefonica Group Revenue

Source: Telefonica, STL Partners analysis

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

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

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

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

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

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

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

Global mobile telcoms revenue

Source: STL Partners

Upturn in telecoms industry fortunes after 2016 dependent on current activities

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

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

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

Digital Commerce 2.0: Disrupting the Californian Giants

Introduction

In this briefing, we analyse the Digital Commerce 2.0 strategy and progress of the incumbents – the big five Internet players in this market – Amazon, Apple, eBay/PayPal, Facebook and Google.

STL defines Digital Commerce 2.0 as the use of new digital and mobile technologies to bring buyers and sellers together more efficiently and effectively. Fast growing adoption of mobile, social and local services is opening up opportunities to provide consumers with highly-relevant advertising and marketing services, underpinned by secure and easy-to-use payment services. By giving people easy access to information, vouchers, loyalty points and electronic payment services, smartphones can be used to make shopping in bricks and mortar stores as interactive as shopping through web sites and mobile apps.

This executive briefing considers how the rise of smartphones and the personal data they generate is disrupting digital commerce, and explores the mobile commerce strategies of the big five, their strengths and weaknesses and their areas of vulnerability.

Digital Commerce Disruption

Today, California is undoubtedly the epicentre of digital commerce. Amazon, Google, eBay/PayPal, Facebook and Apple are the leading brokers of digital commerce between businesses and consumers in most of the world’s developed economies. Each one of them has used the Internet to carve out a unique and lucrative role matching online buyers and sellers.

But digital commerce is changing fast, forcing these incumbents to innovate rapidly both to keep pace with each other and fend off a new wave of challengers seeking to take advantage of the disruption resulting from the widespread adoption of smartphones, and the vast quantities of real-time personal data they generate. Smartphones with touchscreens, full Internet browsers and an array of feature-rich apps, are turning out to be a game changer that profoundly impacts the way in which people and businesses buy and sell: Digital commerce is moving out of the home and the office and on to the street and in to the store.

As they move around, many consumers are now using smartphones to access social, local and mobile (SoLoMo) digital services and make smarter purchase decisions. This is not a gradual shift – it is happening extraordinarily quickly. Almost 70% of Americans used their mobile devices to look up information while in retail stores between Thanksgiving and Christmas 2012, according to a survey of 6,200 people by customer experience analytics firm ForeSee.

At the same time, the combination of Internet and mobile technologies, embodied in the smartphone, is enabling bricks and mortar businesses to adopt new forms of digital marketing, retailing and payments that could dramatically improve their efficiency and effectiveness. The smartphones and the data they generate can be used to optimise and enable every part of the entire ‘wheel of commerce’ (see Figure 3).

Figure 3: The elements that make up the wheel of commerce

Digital Commerce 2.0 Wheel of Commerce

Source: STL Partners

The extensive data being generated by smartphones can give companies real-time information on where their customers are and what they are doing. That data can be used to improve merchants’ marketing, advertising, stock management, fulfilment and customer care. For example, a smartphone’s sensors can detect how fast the device is moving and in what direction, so a merchant could see if a potential customer is driving or walking past their store.

Marketing that makes use of real-time smartphone data should also be more effective than other forms of digital marketing. In theory at least, targeting marketing at consumers in the right geography at a specific time should be far more effective than simply displaying adverts to anyone who conducts an Internet search using a specific term.

Similarly, local businesses should find sending targeted vouchers, promotions and information, delivered via smartphones, to be much more effective than junk mail at engaging with customers and potential customers. Instead of paying someone to put paper-based vouchers through the letterbox of every house in the entire neighbourhood, an Indian restaurant could, for example, send digital vouchers to the handsets of anyone who has said they are interested in Indian food as they arrive at the local train station between 7pm and 9pm in the evening. As it can be precisely targeted and timed, mobile marketing should achieve a much higher return on investment (ROI) than a traditional analogue approach.

Although the big five – Amazon, Google, eBay/PayPal, Facebook and Apple – are the leading brokers of “traditional” online commerce, they play a far smaller role in brokering bricks and mortar commerce: Their services are typically used to provide just once element of the wheel of commerce. Consumers shopping in the physical world tend to use a mix of services from the leading Internet players, flitting between the different ecosystems. As they shop, they might use Google Maps to locate a store, Facebook to canvas the opinion of friends and Amazon to read product reviews or compare in-store prices with those online. They might even use Apple’s Passbook to redeem a voucher or PayPal to complete a transaction at point of sale.

Although they are all involved to a greater or lesser extent, none of the big five has yet secured a strong strategic position in this new form of digital commerce. Each of them risks seeing their position in the broader digital commerce market being disrupted by the rise of SoLoMo services that seek to meld merchants online and offline sites into a coherent proposition. As the digital commerce pie grows to encompass more and more bricks and mortar commerce, the big five may see their power and influence wane.

As it becomes clear that smartphones and personal data will transform the consumer experience of bricks and mortar shopping, the leading internet companies are being challenged by telcos, banks, payment networks and other companies racing to sign up merchants and consumers for nascent commerce platforms. In most cases, these new entrants are focusing on digitising traditional commerce, but will inevitably also have to compete with Amazon, Google, eBay/PayPal, Facebook and Apple in the online commerce space – consumers will want to use the same tools and platforms regardless of whether they are in the armchair or walking down a street. Similarly, a merchant will want to use the same platform to support its marketing online and in-store, so their customers can redeem vouchers, for example, digitally or in person.

The internet giants are, of course, expanding their SoLoMo propositions to cover more of the wheel of commerce. Amazon, for example, is pursuing this market through its Amazon Local service, which emails offers from local merchants to consumers in specific geographic areas. Google is combining its Search, Maps, Places, Offers and Wallet services into a local commerce platform for merchants and consumers. But global Internet companies based on economies of scale can find it hard to develop commerce services that take into the account the vagaries of local markets.

There is much at stake: Merchants and brands spend hundreds of billions of dollars across the various elements of the wheel of commerce. In the U.S., the direct marketing market alone is worth US$ 139 billion (more than three times the U.S. online advertising market, according to some estimates (see Figure 4).

Figure 4: A breakdown of the U.S. direct marketing and advertising market

Digital Commerce 2.0 US Direct Marketing and Advertising Market

Source: STL Partners

Another way to view the strategic opportunity is to consider the vast amount of money that is still spent on paper-based marketing in local commerce – householders still receive large numbers of flyers through their door, advertising local businesses. Moreover, many merchants still operate crude loyalty schemes that involve stamping a paper card.

Closing the loop: The importance of payments

One of the most important battlegrounds for the big five is the transact segment of the wheel of commerce. Although this segment is only half the size of the promote segment in terms of revenues, according to STL’s estimates (see Figure 5), it is strategically important. Merchants and brands want to know whether a specific marketing activity actually led to a sale. By bridging the online and offline worlds, mobile technologies can close that loop. If a consumer uses their smartphone to research a product and then pay at point of sale, the retailer can see exactly what kind of marketing results in transactions.

Note that payments itself is a low margin business – American Express estimates that merchants in the U.S. spend four to five times as much on marketing activities, such as loyalty programmes and offers, as they do on payments. But Google and Facebook, as leading marketing and advertising brokers, and some telcos, are moving into the payments space to provide merchants with visibility across the whole wheel of commerce.

In general their approach is to roll out digital wallets that can be used to complete both online transactions and point of sale transactions (either using a contactless technology, such as NFC, or a mobile network-based solution). The term digital wallet or mobile wallet generally refers to an application that can store debit and credit card information, loyalty points, electronic vouchers and value. A digital wallet can reside in the cloud or on a specific device or a combination of the two. The big five each have their own digital wallet.

Although Apple and Facebook have only enabled the use of their wallets within their online walled gardens, they are both gradually extending their transact propositions into bricks and mortar commerce.

Figure 5: The relative size of the segments of the wheel of commerce

Digital Commerce 2.0: Segments and Sizes

Source: STL Partners research drawing on WPP and American Express data

Digital wallets could be the key to unlock a broader and much more lucrative digital commerce proposition. Instead of asking merchants to pay per click, a digital commerce broker could ask them to pay per transaction – a no-risk and, therefore, very attractive proposition for the merchant.

Typically designed to support approximately half of the wheel of commerce (the promote, guide and transact segments), the digital wallet is widely-regarded as an important strategic platform. The theory is that digital wallet suppliers will be well-positioned to interact with consumers while they are shopping, brokering targeted offers and promotions.

Three of the big five – PayPal, Amazon and Apple – have each already signed up tens of millions of users for their online wallets, primarily because they reduce the number of keystrokes and clicks required to complete a transaction online. These Internet players are now weighing up how best to deploy these wallets at point of sale in physical stores. The leading online digital wallet, PayPal, faces increasing competition from leading players in the financial services industry, including Amex and MasterCard (see Figure 6), as well as innovative start-ups, such as Square.

Each of these players is taking a different approach, using different technologies to enabling transactions in store. They are also having to compete with other wallets from companies outside the financial services sector, such as Google, telcos and even retailers.

Figure 6: Examples of financial services-led digital wallets

Digital Commerce 2.0: Financial Services Wallet Examples

Source: STL Partners

In the transact segment, Google, the leading broker of search-related advertising, is scrambling to catch up, rolling out Google Wallet both to compete with PayPal online and enable payments at point of sale using Near Field Communications (NFC) technology. But the software has been through several iterations without gaining significant traction. At the same time, telcos, such as AT&T, Verizon and T-Mobile in the U.S. (the partners in the Isis mobile commerce joint venture), are developing mobile-centric wallets that use NFC to enable payments at point of sale, supported by the SIM card for authentication. Major retailers are also rolling out digital wallets either individually or as part of a consortium. Figure 7 compares three of the mobile-centric wallets available in the U.S. market.

Figure 7: Examples of Mobile-centric wallets in the U.S.

Digital Commerce 2.0: Mobile Centric Wallets

Source: STL Partners

Executive Summary
Introduction: Digital commerce disruption
Closing the loop: The importance of payments
Internet players’ mobile commerce strategies
Amazon – impressive interconnected flywheels
Apple – slowly assembling the pieces
eBay and PayPal – trying to get mobile
Facebook – the rising star of mobile commerce
Google – try, try and try again in transactions
Conclusions
Mobile commerce is still up for grabs
Competition from telcos and banks
Areas of vulnerability

Figure 1: The mobile commerce strengths and weaknesses of the Internet players
Figure 2: The unfulfilled gap in the digital commerce market
Figure 3: The elements that make up the wheel of commerce
Figure 4: A breakdown of the U.S. direct marketing and advertising market
Figure 5: The relative size of the segments of the wheel of commerce
Figure 6: Examples of financial services-led digital wallets
Figure 7: Examples of Mobile-centric wallets in the U.S.
Figure 8: Google’s big lead in mobile Internet ad spending
Figure 9: Google handles one third of all digital advertising
Figure 10: The mobile commerce strategy of leading Internet players
Figure 11: How the fundamental Amazon flywheel increases working capital
Figure 12: How the Amazon Payments flywheel has evolved
Figure 13: Deals on display in the Amazon Local app
Figure 14: Apple’s Passbook app stores vouchers and loyalty cards
Figure 15: Facebook’s daily active users continue to grow
Figure 16: Facebook’s mobile daily active users
Figure 17: How consumers can redeem a Google Offer
Figure 18: Who is best placed to win in facilitating local commerce?
Figure 19: Google Wallet no longer needs to work directly with banks
Figure 20: The mobile commerce strengths and weaknesses of the Internet players
Figure 21: The unfulfilled gap in the digital commerce market
Figure 22: Internet giants and start-ups best placed to be infomediaries
Figure 23: How Telefónica compares with leading Internet players

Cloud 2.0: Securing Trust to Survive the ‘One-In-Five’ CSP Shake-Out

Summary: The Cloud market is on the verge of the next wave of market penetration, yet it’s likely that only one in five Cloud Service Providers (CSPs) in today’s marketplace will still be around by 2018, as providers fail or are swallowed up by aggressive competitors. So what do CSPs need to do to survive and prosper? (October 2013, Foundation 2.0, Executive Briefing Service, Cloud & Enterprise ICT Stream.)

Introduction: one in five Cloud providers will survive

The Cloud market is on the verge of the next wave of market penetration, yet it’s likely that only one in five Cloud Service Providers (CSPs) in today’s marketplace will still be around by 2018, as providers fail or are swallowed up by aggressive competitors. So what do CSPs need to do to survive and prosper?

This research was sponsored by Trend Micro but the analysis and recommendations represent STL Partners’ independent view. STL Partners carried out an independent study based on in-depth interviews with 27 senior decision makers representing Cloud Service Providers and enterprises across Europe. These discussions explored from both perspectives cloud maturity, the barriers to adoption and how these might be overcome. The findings and observations are detailed in this three-part report, together with practical recommendations on how CSPs can address enterprise security concerns and ensure the sustainability of the cloud model itself.

Part 1: Cloud – coming of age or troubled adolescent?

While the concept of organising computing as a utility dates back to the 1960s, the cloud computing model as we know it today is built on the sub-classifications of Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS).

We’ve covered telcos’ role in Cloud Services in depth in our Cloud research stream, and found that hype, hope and uncertainty have been notable features of the early stages of development of the market, with many optimistic forecasts of adoption being somewhat premature.

In terms of the adoption cycle adoption today, our analysis is that Cloud Services are on the brink of ‘the chasm’: well established among early adopters but less well known, trusted and used by the mass market segment of the enterprise market.

Building trust among new customer segments is the key to bridging this gap. For the industry it is a make or break point in terms of achieving scale. For CSPs, trust will be a key to survival and prosperity in the next phase of the market, enabling them to open up new opportunities and expand the amenable market, as well as to compete to retain and grow their individual market shares.

Many of the obstacles to and inhibitors of cloud adoption stem from customers’ perceptions of product immaturity – “will it be safe and work how we want without too much hassle and commitment?” In this report we examine findings on the general inhibitors and drivers of adoption, and then those related to the main inhibitor, data security, and how they might be addressed.

Overcoming the obstacles

Enterprise decision-makers in the study admitted to being deterred from the cloud by the prospect of migration, with the “enterprise/cloud barrier” perceived as a significant technical hurdle. While CSPs with enterprise-grade propositions have in place the business model, margins and consultative resources to offer customers an assisted journey to the cloud, standard public offerings are provided on a Do-It-Yourself basis.

However, data privacy and security remain the biggest inhibitors to cloud adoption among enterprises, due in no small part to a perceived loss of visibility and control. Recent headline-grabbing events relating to mass surveillance programmes such as PRISM have only served to feed these fears. As will be seen in this report, a lack of consistent industry standards, governance and even terminology heightens the confusion. Internal compliance procedures, often rooted in an out-dated “physical” mind-set, fail to reflect today’s technological realty and the nature of potential threats.

According to the UK Department for Business Innovation & Skills, the direct cost of a security breach (any unauthorised access of data, applications, services, networks or devices) is around £65,000 for SMEs and £850,000 for larger enterprises. However, add to this financial penalties for failure to protect customer data, reputational damage, diminished goodwill and lost business, and the consequential losses can be enough to put a company out of business. It’s little wonder some enterprises still regard cloud as a risk too far.

In reality, CSPs with a heritage in managed services and favourable economies of scale can typically match or better the security provisions of on-premise data centres. However, as “super enterprises” they present a larger and therefore more attractive target for malicious activity than a single business. There is simply no room for complacency.

CSPs must shift their view of security from a business inhibitor to a business enabler: crucial to maintaining and expanding the overall cloud market and confidence in the model by winning customer trust. This requires a fundamental rethink of compliance – both on the part of CSPs and enterprises – from a tick-box exercise to achieve lowest-cost perimeter protection to cost effectively meeting the rigorous demands of today’s information-reliant enterprises.

Cloud services cannot be considered mature until enterprises en masse are prepared to entrust anything more than low-sensitivity data to third party CSPs. The more customer security breaches that occur, the more trust will be undermined, and the greater the risk of the cloud model imploding altogether.

State of the nation

The journey to the cloud is often presented in the media as a matter of “when” rather than “if”. However, while several CSPs in our study believed that the cloud model was starting to approach maturity, enterprise participants were more likely to contend that cloud was still at an experimental or “early adopter” stage.

The requirements of certain vertical markets were perceived by some respondents to make cloud a non-starter, for example, broadcasters that need to upload and download multi-terabyte sized media files, or low-latency trading environments in the financial sector. Similarly, the value of intellectual property was cited by pharmaceutical companies as justifying the retention of data in a private cloud or internal data centre at any cost.

CSPs universally acknowledged that their toughest competitor continues to be enterprises’ own in-house data centres. IT departments are accustomed to having control over their applications, services, servers, storage, network and security. While notionally, they accept they will have to be less “hands on” in the cloud, a lack of trust persists among many. This reticence was typically seen by CSPs as unwarranted fear and parochialism, yet many are still finding it a challenge to educate prospective customers and correct misconceptions. CSPs suggested that IT professionals may be as likely to voice support for the cloud as turkeys voting for Christmas. However, more enlightened IT functions have embraced the opportunity to evolve their remit to working with their CSP to monitor services against SLAs, enforce compliance requirements and investigate new technologies rather than maintaining the old.

For tentative enterprises, security is still seen as a barrier to, rather than an accelerant of, cloud adoption, and one of the most technically challenging issues for both IT and compliance owners. Enterprises that had advanced their cloud strategy testified that successful adoption relies on effective risk management when evaluating and engaging a cloud partner. Proponents of cloud solutions will need compelling proof points to win over their CISO, security team or compliance officer. However, due diligence is a lengthy and often convoluted process that should be taken into account by those drawn to the cloud model for the agility it promises.

The majority of CSPs interviewed were relatively dismissive of customer security concerns, making the valid argument that their security provisions were at least equal to, if not better than, that of most enterprise data centres. However, as multiple companies concentrate their data into the hands of a few CSPs, the larger and more attractive those providers become to hackers as an attack target. Nonetheless, CSPs rarely offer any indemnification against hacking (aside from financial compensation for a breach of SLA) and SaaS providers tend to be more obscure than IaaS/PaaS providers in terms of the security of their operations. Further commercial concerns explored in this report relate to migration and punitive contractual lock-in. Enterprises need to feel that they can easily relocate services and data across the cloud boundary, whether back in house or to another provider. This creates the added challenge of being able to provide end-to-end audit continuity as well as in transit.

There are currently around 800 cloud service providers (CSPs) in Europe. Something of a land grab is taking place as organisations whose heritage lies in software, telecoms and managed hosting are launching cloud-enabled services, primarily IaaS and SaaS.

However, “cloudwashing” – a combination of vendor obfuscation and hyperbole – is already slowing down the sales cycles at a time when greater transparency would be likely to lead to more proofs of concept, accelerated uptake and expansion of the overall market.

Turbulence in the macro economy is exacerbating the problem: business creation and destruction are among the most telling indicators of economic vitality. A landmark report from RSM shows that the net rate of business creation (business births minus deaths) for the G7 countries was just 0.8% on a compound annual basis over the five-year period of the study. The BRICs, by contrast, show a net rate of business creation of 6.2% per annum – approximately eight times the G7 rate.

In parallel, the pace of technology success is accelerating. Technologies are considered to have become “mainstream” once they have achieved 25% penetration. As cloud follows this same trajectory, with a rash of telcos, cable operators, data centre specialists and colocation providers entering the market, significant consolidation will be inevitable, since cloud economics are inextricably linked to scale.

Figure 1 – Technology adoption rates

Source: STL Partners

Lastly, customers are adapting and evolving faster than ever, due in no small part to the advent of social media and digital marketing practices, creating a hyper-competitive environment. As a by-product, the rate of business failure is rising. In the 1950s, two-thirds of the Fortune 500 companies failed. Throughout the 1980s, almost nine out of ten of the so-called “Excellent” companies went to the wall, and 98% of firms borne out of the “Dot Com” revolution in the late 1990s are not expected to survive.

As a result, STL Partners anticipates that by 2018, a combination of consolidation and natural wastage will leave only 160 CSPs in the marketplace – a survival rate of one in five.

Drivers of cloud adoption

The business benefits of the cloud are well documented, so the main value drivers cited by participants in the study can be briefly summarised as follows:

Figure 2 – Business and IT Drivers of cloud adoption

Report Contents

Introduction: one in five Cloud providers will survive
Part 1: Cloud – coming of age or troubled adolescent?
Overcoming the obstacles
State of the nation
Drivers of cloud adoption
Inhibitors to cloud adoption
Cloud migration and integration with internal systems
Vendor lock-in and exit strategies
Governance and compliance issues
Supplier credibility and longevity
Testing and assurance
Part 2: Cloud security and data privacy challenges
Physical security
Data residency and jurisdiction
Compliance and audit
Encryption
Identity and Access Management
Shared resources and data segregation
Security incident management
Continuity services
Data disposal
Cloud provider assessment
Industry standards and codes of practice
Migration strategy
Customer visibility
Part 3: Improving your ‘security posture’
The ethos, tools and know-how needed to win customers’ trust
The Four Levels of Cloud Security
Key take-aways for Cloud Services Providers
About STL Partners
About Trend Micro

Table of Figures

Figure 1 – Technology adoption rates
Figure 2 – Business and IT Drivers of cloud adoption
Figure 3 – Information security breaches 2013
Figure 4 – The four levels of Cloud security
Figure 5 – A 360 Degree Framework for Cloud Security

Telco Opportunities in the ‘New Mobile Web’?

Summary: The transformed mobile web experience, brought about by the adoption of a range of new technologies, is creating a new arena for operators seeking to (re)build their role in the digital marketplace. Operators are potentially well-placed to succeed in this space; they have the requisite assets and capabilities and the desire to grow their digital businesses. This report examines the findings of interviews and a survey conducted amongst key industry players, supplemented by STL Partners’ research and analysis, with the objective of determining the opportunities for operators in the New Mobile Web and the strategies they can implement in order to succeed. (September 2013, Foundation 2.0, Executive Briefing Service.)

Operator Opportunities in the “New Mobile Web”

This report explores new opportunities for telecom operators (telcos) in Digital, facilitated by the emergence of the “New Mobile Web”. The New Mobile Web is a term we have used to describe the transformed mobile Web experience achieved through advances in technology; HTLM5, faster, cheaper (4G) connectivity, better mobile devices. This paper argues that the New Mobile Web will lead to a shift away from native (Apple & Android) app ecosystems to browser-based consumption of media and services. This shift will create new opportunities for operators seeking to re(build) their digital presence.

STL Partners has undertaken research in this domain through interviews and surveys with operators and other key players in the market. In this report, we present our findings and analysis, as well as providing recommendations for operators.

The New Mobile Web

The emergence of the New Mobile Web is creating a new arena for operators seeking to (re)build their role in the digital marketplace. Many telecoms operators (telcos) are looking to build big “digital” businesses to offset the forecasted decline in their core voice and messaging businesses over the next 5-7 years. Growth in data services and revenues will only partly offset these declines.

In general, despite a lot of effort and noise, telcos have been marginalised from the explosion in mobile Apps and Content, except insofar as it has helped them upgrade customers to smartphones and data-plans. Most notably, there has been a shift in market influence to Google & Apple, and spiralling traffic and signalling loads from easy-to-use interactive apps on smartphones.

Technical developments, including the adoption of HTML5, better mobile devices and faster networks, are transforming the user experience on mobile devices thereby creating a “New Mobile Web”. This New Mobile Web extends beyond “pages”, to content that looks and behaves more like “apps”. By having such “Web-apps” that work across different operating systems and devices – not just phones, but also PCs, TVs and more – the Web may be able to wrest back its role and influence in mobile Apps and Content.

The Key Opportunities for Operators

This new digital arena is in turn creating new opportunities to support others; STL’s research found that respondents felt the key opportunities for operators in the New Mobile Web were around: Monetisation, Discovery, Distribution and Loyalty.

Figure 1 – Operators see the New Mobile Web creating most value around Payments, Monetisation and Loyalty

Telcos can leverage their assets

Telcos have the requisite assets and capabilities to succeed in this area; they are strong candidates for assisting in monetisation, discovery, distribution and loyalty, especially if they can link in their other capabilities such as billing and customer-knowledge.

This report sets out some of the existing activities and assets that operators should seek to exploit and expand in pursuing their ambitions in the New Mobile Web:

Strategic Options for telcos to succeed

Operators that are aiming to become ‘digital players’ need to adopt coherent strategies that exploit and build on their assets and capabilities. This report identifies 5 broad strategic options that operators should look to pursue and it sets out the rationale for each. These strategies are not necessarily mutually exclusive and can be combined to develop clear direction and focus across the organisation.

Seizing the opportunity

Although many operators believe that they urgently need to build strong digital businesses, most are struggling to do so. Telcos are not going to get too many chances to re-engage with customers and carve-out a bigger role for themselves in the digital economy. If it fulfils its promise, the New Mobile Web will disrupt the incumbent mobile Apps and Content value networks. This disruption will provide new opportunities for operators.

The operator community needs to participate in shaping the New Mobile Web and its key enabling technologies. Telcos also need to understand the implications of these technologies at a strategic level – not just something that the Web techies get excited about.

If telcos are not deeply involved – from board level downwards – they risk being overtaken by events, once again. Continued marginalisation from the digital economy will leave operators with the prospect of facing a grim future of endless cost-cutting, commoditisation and consolidation. This should not be inevitable.

Report Contents

Preface
Executive Summary
Introduction to the New Mobile Web
Meeting Operators’ strategic goals
Key opportunities in the New Mobile Web
Operators have plenty of existing assets and could add more
Case Studies
Telco Strategies in the New Mobile Web
Appendix 1: The New Mobile Web – “Rebalancing” from “Native”

Table of Figures

Figure 1: On-line survey respondents
Figure 2: Key opportunities in the New Mobile Web. Enabling…
Figure 3: Areas of Value for Operators
Figure 4: Telco assets that should be used to address the opportunity
Figure 5: Operator Strategies
Figure 6: Drivers of the New Mobile Web
Figure 7: Data growth alone will not fill the gap in declining Voice and Messaging Revenue
Figure 8: Survey results on operator ambitions
Figure 9: Asian and MEA operators are the most ambitious
Figure 10: Telcos in native app dominated geographies are more likely to believe that their ambitions could not be met in the current world. However, as stated above, there are notable exceptions…
Figure 11: Key opportunities in the New Mobile Web. Enabling…
Figure 12: Operators see the New Mobile Web creating most value around Payments, Monetisation and Loyalty
Figure 13: A vast display ecosystem enables Web content providers to indirectly monetise their content
Figure 14: Within Digital, operators see most value in Self-care, Mobile Payments and Banking, Video and Music
Figure 15: Existing operator assets to build a role in the New Mobile Web
Figure 16: iRadio Overview
Figure 17: Tapjoy Overview
Figure 18: Mozilla Firefox OS Overview
Figure 19: Globe Telecom promotion
Figure 20: Financial Times Overview
Figure 21: AppsFuel Overview
Figure 22: Summary of the 5 Broad Strategies
Figure 23: Percentage of (US) smartphone and tablet users’ time by application area
Figure 24: The industry is beginning to see a “re-birth of the Web”
Figure 25: HTML5 seeks to bring the best of both Web and app worlds:
Figure 26: Telcos see most HTML5 value in reducing the cost of service & maintenance and improving the time to market.
Figure 27: The Industry sees the dominance of existing ecosystems as the biggest barrier to HTML5’s success

Finding the Next Golden Egg: Sourcing Great Telecoms Innovations

The telco innovation problem…

The challenge facing the telecoms industry has been well documented (not least by STL Partners). The solution, the need for telcos to develop a new telecoms ’business model’ is also now generally accepted. For some, the new business model may entail eschewing service development and instead focusing on cost efficiency and network performance – the Telco 2.0 Happy Piper.

For many, however, the desire to compete in the ‘services layer’ remains strong. These would-be Telco 2.0 Service Providers must seek to replace the contracting voice and messaging revenue streams with new revenues from new products and services and customers.

How to develop these new products and services and customer relationships is the $1 trillion question for telcos and their partners.

STL Partners has spent much time exploring both the nature of new opportunities and the processes for realising them. The problem for telcos is that they are not natural innovators. Their raisin d’etre historically has been to build infrastructure and generate returns from services that were only available because they owned and controlled the infrastructure – voice, messaging, and connectivity. The result was very low levels of innovation in telecoms but stable high-margin returns from ‘protected services’.

The Internet has changed the game. Now, voice and messaging and other communications services are available from alternate service providers – the internet giants and start-ups in particular. These new players have innovation in their DNA – they are product and service-oriented; they have sexy brands; they understand the value of customer data and how to exploit it; with lower capital expenditures, they can generate returns on investment with much lower margins.

…and one part of the solution addressed in this report

For telcos to develop competitive enabling or end-user services, whether consumer or enterprise, they need to develop the same skills and relationships enjoyed by the new competitors. As we discuss at length A Practical Guide to Implementing Telco 2.0 and we measure in the forthcoming Telco 2.0 Transformation Index, this requires a fundamental business model transformation that encompasses the whole telco industry: services, organisation structure and processes, partnerships, technology, and the cost and revenue model.

Rather than cover all the elements of the transformation, this report focuses narrowly on the process of developing compelling new propositions and services that deliver what customers want better than existing available solutions. It is based on a simple premise: that innovation and creativity is based on ‘associative thinking’ – the ability to link together ideas and concepts. For example, it was associative thinking in 2006 that led Apple’s iPhone designers to spot how an accelerometer – a widely used device in the transport, construction and medical industries – could be integrated into an iPhone to manage automatic screen rotation and countless applications we now take for granted on mobile.

Two ‘associative thinking’ approaches to identifying Telco 2.0 innovations

1. Existing tried and tested solutions

Rather than start with a blank sheet of paper, one way to innovate is to copy solutions that others have brought to market successfully. This does not necessarily imply a ‘me too’ approach entirely as there is scope, or course, to improve the solutions that others have created. In fact, most innovations are actually an extension of an existing product or service. For example:

Apple’s iPhone, with its capacitive screen and integrated content ecosystem was a massive improvement on previous smartphones but clearly drew on early work done by, for example, Nokia with its 9210 Communicator and Ericsson with the R380.
Google’s powerful search algorithm and clean user interface contrasted with the clutter of earlier search sites such AltaVista but also built on their idea of helping people find things on the web. Interestingly, AltaVista has now made a comeback with a slick clean interface that looks remarkably similar to Google!

If there is value in taking another firm’s idea and improving it, what are the sources of such concepts for CSPs?

STL Partners sees three main ones:

1. Your local telecoms market.

Scan the offerings of your competitors and if you spot something that looks attractive or seems to be getting traction in the marketplace, find ways to improve it and launch a better competitive offering yourself. You may remember in the view of Telefonica and Vodafone we mentioned that Freebees was a copy of O₂’s earlier Top-up Surprises. Two important points here that Vodafone failed to do:

Follow fast. The Freebees programme was launched around three years after Top-up Surprises and so Vodafone missed out on being seen as an innovator. Vodafone also missed out on the financial benefits that O₂ enjoyed in those intervening years.
Improve the original concept. Freebees is fine but fails to materially improve on what was offered by O₂ – rewards for customers that top-up their prepay account.

2. The global telecoms market.

Look outside your market to other geographies to see what has worked in other parts of the world and then explore how these solutions might work in your own market. Clearly, you need to make allowance for different local customs and behaviours, industry structures, regulations and so on but the global nature of (tele)communications means that things that have worked in one market can often be easily adapted to others. STL Partners carries out this global scouting service for clients looking at what is available from other CSPs, vendors and start-ups and believes it is a sensible low-risk strategy for many CSPs – see on page 17 of this document, for more details.

To access the contents of the report, including…

The telco innovation problem…
…and one part of the solution addressed in this report
Two ‘associative thinking’ approaches to identifying Telco 2.0 innovations
1. Existing tried and tested solutions
2. Customer Goal-led Innovation (CGLI)
Case study on identifying Telco 2.0 innovations: The STL Partners scouting service
About STL Partners

…and the following table of exhibits…

Figure 1: Sources for tried and tested Telco 2.0 solutions
Figure 2: The limitations of asking customers what they need when innovating, some examples
Figure 3: How Customer Goal-led Innovation focuses on real needs and uncovers innovation opportunities
Figure 4: The STL Partners’ Customer Goal-led Innovation process
Figure 5: Producing a customer activity map to support a goal statement
Figure 6: Customer goal-led innovation – activity analysis table, example
Figure 7: Identifying opportunity areas for innovation, example
Figure 8: The STL Partners scouting service in a nutshell

Telco 2.0 Transformation Index: Understanding Telefonica’s Markets and Market Position

Summary: This extract from the Telco 2.0 Transformation Index shows our analysis of Telefonica’s markets and market position, including economic and digital market maturity, regulation, customers, competition and pricing. It is one part of our overall analysis of Telefonica’s progress towards transformation to the Telco 2.0 business model. The other parts of the Telefonica analysis are: Service Proposition, Finances, Technology, Value Network, and an overall summary. Telefonica is one of the companies analysed and compared in the first tranche of analysis that also addresses Vodafone, AT&T, Verizon, Axiata, SingTel, Etisalat and Ooredoo (formerly Qtel). (August 2013, Executive Briefing Service, Transformation Stream.)

Telefonica Telco 2.0 Transformation Index Small

Introduction

Details of the objectives and key benefits of the overall Telco 2.0 Transformation Index can be found here, and the methodology and approach here.

Telefonica is one of the first companies featured in our Transformation Index, and one that is viewed with great interest by others. With operating companies facing very different conditions in Europe and South America, Telefonica faces some interesting strategic challenges, and has attempted to stimulate growth through innovation with the development of Telefonica Digital.

The ‘Markets and Position’ section of the analysis puts Telefonica’s current global position, risks and opportunities in context, and is now available to download to members of the Telco 2.0 Executive Briefing Service. The rest of the analysis (covering Service Proposition, Value Network, Technology and Finances), and the analyses of the other seven companies initially covered (Vodafone, AT&T, Verizon, Etisalat, Ooredoo [formerly Qtel], Singtel and Axiata) will be published from September 2013.

Key Benefits

The report’s highly graphical format makes it extremely easy to digest and reach valuable insights quickly into both Telefonica’s current position and future strategic needs
The structure of the analysis allows the reader to rapidly and concisely assimilate the complex picture of Telefonica’s international businesses, risks and opportunities
It is underpinned with detailed and sourced numerical and qualitative data

Example charts from the report

The report analyses Telefonica’s market share position across markets against their regulatory strength.
Telco 2.0 Transformation Index - Market Positioning Detail

It also assesses the economic and demographic make-up of Telefonica’s markets.

Telco 2.0 Transformation Index - Market Analysis Detail Example, Telefonica

The market analyses are consolidated into an overall summary of market positioning by Operating Company, which is further refined into an assessment of strategic approach and operational performance.

Telco 2.0 Transformation Index - Market Share and Profitability Detail

To access the contents of the report, including…

Introduction and Methodology
Market Position Summary: Economic, Regulatory, Competitive and Customers
Summary analysis of growth, GDP, prices and economics of key markets
Comparison and contrasts between European and Latin American markets
Regulation vs EBITDA margins
Mobile revenue growth by market
Subscribers and revenues by region
Mari-Meko of Subscribers and Shares in key markets
Market Share Vs. Regulation
Market Vs. Telefonica Growth by national market
Telefonica’s commercial strategy
Strength of OTT entrants in Telefonica’s markets
Pre-Pay, Post-Pay and Churn by Market
Telefonica’s relative brand strength

Software Defined Networking (SDN): A Potential ‘Game Changer’

Summary: Software Defined Networking is a technological approach to designing and managing networks that has the potential to increase operator agility, lower costs, and disrupt the vendor landscape. Its initial impact has been within leading-edge data centres, but it also has the potential to spread into many other network areas, including core public telecoms networks. This briefing analyses its potential benefits and use cases, outlines strategic scenarios and key action plans for telcos, summarises key vendor positions, and why it is so important for both the telco and vendor communities to adopt and exploit SDN capabilities now. (May 2013, Executive Briefing Service, Cloud & Enterprise ICT Stream, Future of the Network Stream).

Potential Telco SDN/NFV Deployment Phases May 2013

Figure 1 – Potential Telco SDN/NFV Deployment Phases

Source STL Partners

Introduction

Software Defined Networking or SDN is a technological approach to designing and managing networks that has the potential to increase operator agility, lower costs, and disrupt the vendor landscape. Its initial impact has been within leading-edge data centres, but it also has the potential to spread into many other network areas, including core public telecoms networks.

With SDN, networks no longer need to be point to point connections between operational centres; rather the network becomes a programmable fabric that can be manipulated in real time to meet the needs of the applications and systems that sit on top of it. SDN allows networks to operate more efficiently in the data centre as a LAN and potentially also in Wide Area Networks (WANs).

SDN is new and, like any new technology, this means that there is a degree of hype and a lot of market activity:

Venture capitalists are on the lookout for new opportunities;
There are plenty of start-ups all with “the next big thing”;
Incumbents are looking to quickly acquire new skills through acquisition;
And not surprisingly there is a degree of SDN “Washing” where existing products get a makeover or a software upgrade and are suddenly SDN compliant.

However there still isn’t widespread clarity of what SDN is and how it might be used outside of vendor papers and marketing materials, and there are plenty of important questions to be answered. For example:

SDN is open to interpretation and is not an industry standard, so what is it?
Is it better than what we have today?
What are the implications for your business, whether telcos, or vendors?
Could it simply be just a passing fad that will fade into the networking archives like IP Switching or X.25 and can you afford to ignore it?
What will be the impact on LAN and WAN design and for that matter data centres, telcos and enterprise customers? Could it be a threat to service providers?
Could we see a future where networking equipment becomes commoditised just like server hardware?
Will standards prevail?

Vendors are to a degree adding to the confusion. For example, Cisco argues that it already has an SDN-capable product portfolio with Cisco One. It says that its solution is more capable than solutions dominated by open-source based products, because these have limited functionality.

This executive briefing will explain what SDN is, why it is different to traditional networking, look at the emerging market with some likely use cases and then look at the implications and benefits for service providers and vendors.

How and why has SDN evolved?

SDN has been developed in response to the fact that basic networking hasn’t really evolved much over the last 30 plus years, and that new capabilities are required to further the development of virtualised computing to bring innovation and new business opportunities. From a business perspective the networking market is a prime candidate for disruption:

It is a mature market that has evolved steadily for many years
There are relatively few leading players who have a dominant market position
Technology developments have generally focussed in speed rather than cost reduction or innovation
Low cost silicon is available to compete with custom chips developed by the market leaders
There is a wealth of open source software plus plenty of low cost general purpose computing hardware on which to run it
Until SDN, no one really took a clean slate view on what might be possible

New features and capabilities have been added to traditional equipment, but have tended to bloat the software content increasing costs to both purchase and operate the devices. Nevertheless – IP Networking as we know it has performed the task of connecting two end points very well; it has been able to support the explosion of growth required by the Internet and of mobile and mass computing in general.

Traditionally each element in the network (typically a switch or a router) builds up a network map and makes routing decisions based on communication with its immediate neighbours. Once a connection through the network has been established, packets follow the same route for the duration of the connection. Voice, data and video have differing delivery requirements with respect to delay, jitter and latency, but in traditional networks there is no overall picture of the network – no single entity responsible for route planning, or ensuring that traffic is optimised, managed or even flows over the most appropriate path to suit its needs.

One of the significant things about SDN is that it takes away the independence or autonomy from every networking element in order to remove its ability to make network routing decisions. The responsibility for establishing paths through the network, their control and their routing is placed in the hands of one or more central network controllers. The controller is able to see the network as complete entity and manage its traffic flows, routing, policies and quality of service, in essence treating the network as a fabric and then attempting to get maximum utilisation from that fabric. SDN Controllers generally offer external interfaces through which external applications can control and set up network paths.

There has been a growing demand to make networks programmable by external applications – data centres and virtual computing are clear examples of where it would be desirable to deploy not just the virtual computing environment, but all the associated networking functions and network infrastructure from a single console. With no common control point the only way of providing interfaces to external systems and applications is to place agents in the networking devices and to ask external systems to manage each networking device. This kind of architecture has difficulty scaling, creates lots of control traffic that reduces overall efficiency, it may end up with multiple applications trying to control the same entity and is therefore fraught with problems.

Network Functions Virtualisation (NFV)

It is worth noting that an initiative complementary to SDN was started in 2012 called Network Functions Virtualisation (NFV). This complicated sounding term was started by the European Telecommunications Standards Institute (ETSI) in order to take functions that sit on dedicated hardware like load balancers, firewalls, routers and other network devices and run them on virtualised hardware platforms lowering capex, extending their useful life and reducing operating expenditures. You can read more about NFV later in the report on page 20.

In contrast, SDN makes it possible to program or change the network to meet a specific time dependant need and establish end-to-end connections that meet specific criteria. The SDN controller holds a map of the current network state and the requests that external applications are making on the network, this makes it easier to get best use from the network at any given moment, carry out meaningful traffic engineering and work more effectively with virtual computing environments.

What is driving the move to SDN?

The Internet and the world of IP communications have seen continuous development over the last 40 years. There has been huge innovation and strict control of standards through the Internet Engineering Task Force (IETF). Because of the ad-hoc nature of its development, there are many different functions catering for all sorts of use cases. Some overlap, some are obsolete, but all still have to be supported and more are being added all the time. This means that the devices that control IP networks and connect to the networks must understand a minimum subset of functions in order to communicate with each other successfully. This adds complexity and cost because every element in the network has to be able to process or understand these rules.

But the system works and it works well. For example when we open a web browser and a session to stlpartners.com, initially our browser and our PC have no knowledge of how to get to STL’s web server. But usually within half a second or so the STL Partners web site appears. What actually happens can be seen in Figure 1. Our PC uses a variety of protocols to connect first to a gateway (1) on our network and then to a public name server (2 & 3) in order to query the stlpartners.com IP address. The PC then sends a connection to that address (4) and assumes that the network will route packets of information to and from the destination server. The process is much the same whether using public WAN’s or private Local Area Networks.

Figure 2 – Process of connecting to an Internet web address

Source STL Partners

The Internet is also highly resilient; it was developed to survive a variety of network outages including the complete loss of sub networks. Popular myth has it that the US Department of Defence wanted it to be able to survive a nuclear attack, but while it probably could, nuclear survivability wasn’t a design goal. The Internet has the ability to route around failed networking elements and it does this by giving network devices the autonomy to make their own decisions about the state of the network and how to get data from one point to any other.

While this is of great value in unreliable networks, which is what the Internet looked like during its evolution in the late 70’s or early 80’s, networks of today comprise far more robust elements and more reliable network links. The upshot is that networks typically operate at a sub optimum level, unless there is a network outage, routes and traffic paths are mostly static and last for the duration of the connection. If an outage occurs, the routers in the network decide amongst themselves how best to re-route the traffic, with each of them making their own decisions about traffic flow and prioritisation given their individual view of the network. In actual fact most routers and switches are not aware of the network in its entirety, just the adjacent devices they are connected to and the information they get from them about the networks and devices they in turn are connected to. Therefore, it can take some time for a converged network to stabilise as we saw in the Internet outages that affected Amazon, Facebook, Google and Dropbox last October.

The diagram in Figure 2 shows a simple router network, Router A knows about the networks on routers B and C because it is connected directly to them and they have informed A about their networks. B and C have also informed A that they can get to the networks or devices on router D. You can see from this model that there is no overall picture of the network and no one device is able to make network wide decisions. In order to connect a device on a network attached to A, to a device on a network attached to D, A must make a decision based on what B or C tell it.

Figure 3 – Simple router network

Source STL Partners

This model makes it difficult to build large data centres with thousands of Virtual Machines (VMs) and offer customers dynamic service creation when the network only understands physical devices and does not easily allow each VM to have its own range of IP addresses and other IP services. Ideally you would configure a complete virtual system consisting of virtual machines, load balancing, security, network control elements and network configuration from a single management console and then these abstract functions are mapped to physical hardware for computing and networking resources. VMWare have coined the term ‘Software Defined Data Centre’ or SDDC, which describes a system that allows all of these elements and more to be controlled by a single suite of management software.

Moreover, returning to the fact that every networking device needs to understand a raft of Internet Request For Comments (or RFC’s), all the clever code supporting these RFC’s in switches and routers costs money. High performance processing systems and memory are required in traditional routers and switches in order to inspect and process traffic, even in MPLS networks. Cisco IOS supports over 600 RFC’s and other standards. This adds to cost, complexity, compatibility, future obsolescence and power/cooling needs.

SDN takes a fresh approach to building networks based on the technologies that are available today, it places the intelligence centrally using scalable compute platforms and leaves the switches and routers as relatively dumb packet forwarding engines. The control platforms still have to support all the standards, but the platforms the controllers run on are infinitely more powerful than the processors in traditional networking devices and more importantly, the controllers can manage the network as a fabric rather than each element making its own potentially sub optimum decisions.

As one proof point that SDN works, in early 2012 Google announced that it had migrated its live data centres to a Software Defined Network using switches it designed and developed using off-the-shelf silicon and OpenFlow for the control path to a Google-designed Controller. Google claims many benefits including better utilisation of its compute power after implementing this system. At the time Google stated it would have liked to have been able to purchase OpenFlow-compliant switches but none were available that suited its needs. Since then, new vendors have entered the market such as BigSwitch and Pica8, delivering relatively low cost OpenFlow-compliant switches.

To read the Software Defined Networking in full, including the following sections detailing additional analysis…

Executive Summary including detailed recommendations for telcos and vendors
Introduction (reproduced above)
How and why has SDN evolved? (reproduced above)
What is driving the move to SDN? (reproduced above)
SDN: Definitions and Advantages
What is OpenFlow?
SDN Control Platforms
SDN advantages
Market Forecast
STL Partners’ Definition of SDN
SDN use cases
Network Functions Virtualisation
What are the implications for telcos?
Telcos’ strategic options
Telco Action Plans
What should telcos be doing now?
Vendor Support for OpenFlow
Big switch networks
Cisco
Citrix
Ericssson
FlowForwarding
HP
IBM
Nicira
OpenDaylight Project
Open Networking Foundation
Open vSwitch (OVS)
Pertino
Pica8
Plexxi
Tellabs
Conclusions & Recommendations

…and the following figures…

Figure 1 – Potential Telco SDN/NFV Deployment Phases
Figure 2 – Process of connecting to an Internet web address
Figure 3 – Simple router network
Figure 4 – Traditional Switches with combined Control/Data Planes
Figure 5 – SDN approach with separate control and data planes
Figure 6 – ETSI’s vision for Network Functions Virtualisation
Figure 7 – Network Functions Virtualised and managed by SDN
Figure 8 – Network Functions Virtualisation relationship with SDN
Table 1 – Telco SDN Strategies
Figure 9 – Potential Telco SDN/NFV Deployment Phases
Figure 10 – SDN used to apply policy to Internet traffic
Figure 11 – SDN Congestion Control Application

Digital Economy: who will prosper in ‘The Great Compression’?

Summary: Value is squeezed out of industries as they become increasingly digital – i.e. accessed by mobile and online, driven by data and defined by software. We call the collective economic impact of this pressure ‘The Great Compression’. But which companies will survive and prosper – and how? 90% of the Execs at our Silicon Valley brainstorm identified ‘management mindset’ as a key factor in Telecoms, Media, Finance and Retail. (May 2013, Executive Briefing Service, Transformation Stream).

Scale of Transformation Needed April 2013

Below are the high-level analysis and detailed contents from a 62 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Premium Telco 2.0 Executive Briefing service and the Telco 2.0 Transformation Stream here. The Digital Economy, and the changes needed to ‘management mindset’, organisation, technology, and products, will also be explored further at the EMEA Executive Brainstorm in London, 5-6 June, 2013. Non-members can find out more about subscribing here, or find out more about this and/or the Brainstorm by emailing contact@telco2.net or calling +44 (0) 207 247 5003.

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Introduction

Part of the New Digital Economics Executive Brainstorm series, the Silicon Valley 2013 event took place at the InterContinental Hotel in San Francisco on the 19th and 20th of March, 2013. This report covers the Digital Economy track on the first day.

Summary Analysis: who will prosper in ‘The Great Compression’?

Telecoms, telco vendors, entertainment, device makers, financial services, retailers, entertainment services, and brands in developed economies are experiencing the ‘Digital Hunger Gap’ – a shortfall of revenues versus past levels as industries become increasingly digital i.e. accessed by mobile and online, driven by data and defined by software.

Other industries are also feeling pain from the process of becoming digitised which both changes the model and the dynamics of competition. Others, like consumer goods and car manufacturing, see opportunities to enhance services with digital connectivity to build loyalty and new value. Government services and healthcare face huge cost challenges. Digital services can be of huge value here, but the challenge for third parties is how to make money when money needs to be saved.

According to the participants in the Silicon Valley brainstorm, almost every industry faces massive changes in every area of its business model, with management mindsets most in need of a dramatic overhaul, and customer relationships marginally ahead in the total of partipants thinking a dramatic or significant change is needed.

Scale of Transformation Needed April 2013

New markets are emerging rapidly, particularly in Asia. However, many companies from North America and EMEA lack depth in local knowledge and face skills, cultural and political barriers to entry, and the mindset challenge of operating in a radically different economic environment.

As a result of the combined difficulties of growth in home markets and expansion abroad, there will be massive consolidation among traditional industry leaders in developed economies over the coming years. Those that are successful will continue to innovate as they consolidate, but it will be a huge struggle to survive for many.

We’re calling the collective economic impact of these pressures ‘The Great Compression’ as value is squeezed from existing industries. Those best positioned to profit through it have built defensible global or major regional strengths in horizontal areas with large-scale application and high barriers to entry, and/or that serve as ‘arms dealers’ to the rest of the digital economy. For example, chip makers and IP companies (e.g. ARM, Intel, Qualcomm), very large-scale / sophisticated IT manufacturers (e.g. Microsoft, Oracle, SAP), and ‘platforms’ (e.g. Apple, Google, Visa).

However, being well positioned is no guarantee of success, and all companies will face significant challenges requiring innovation and transformation. This in turn will require immediate and ongoing action by leadership teams in every company.

Digital innovation is increasingly itself becoming a little like the entertainment industry in that it is constantly seeking hits and highly vulnerable to hype. There are centres of innovation such as Silicon Valley and elsewhere, and there can only be a small number of highly successful ‘hits’ among the many thousands if not hundreds of thousands of attempts to make a hit. Finding, gaining a share in, nurturing, and ultimately profiting from these hits is a massive industry in itself. The recognised difficulty of doing this is a further barrier to success for many of the established players. Yet those that are to survive will need to overcome it.

Next steps for STL Partners

To define and detail the practical actions needed to drive cross-industry transformation and innovation (in terms of ‘management mindset’, organisation, technology, products, etc.) at our Executive Brainstorms in:
- Europe, London, 5-6 June 2013; MENA, Dubai, 14-15 November 2013; APAC, Singapore, 5-6 December 2013; Silicon Valley, San Francisco, 19-10 March 2014.
To publish 150+ page ‘Strategy Reports’ on:
- The detailed benchmarking of leading players’ Telco 2.0 strategies; Digital Commerce; The Future of voice and Messaging Services.
To publish c.15-30 page ‘Executive Briefings’ covering:
- Software Defined Networks (SDN); The business case for personal data; ‘Show me the (mobile) money’ – an Executive Briefing on the business case for Digital Commerce.

To read the Digital Economy note in full, including the following sections detailing additional analysis…

Session 1: Digital Transformation
Strategic Growth Opportunities for a Hyper-Connected World
Stimulus presentations
Voting, feedback, discussions
Questionstorming: how to overcome the blockers?
Key takeaways
Session 2: Digital Consumer
The New Mobile Battleground
Stimulus presentations
Voting, feedback, discussions
STL Partners’ next steps
Session 3: Digital Infrastructure
The Impact of 4G, Software Defined Networks & the Cloud
Stimulus presentations
Voting, feedback, discussions
Brainstorm Output: What new opportunities could new forms of digital infrastructure create? For whom? How?
STL Partners’ next steps
Session 4: The ‘Digital Me’
The role and value of ‘digital identity’
Stimulus presentations
Voting, feedback, discussions
STL Partners’ next steps

…and the following figures…

Figure 1 – Concurrent disruption in multiple lines of business
Figure 2 – Music since 1997, a case study
Figure 3 – Consolidation is a consequence of disruption
Figure 4 – Reviving the album format
Figure 5 – The future is brutal indeed
Figure 6 – The hunger gap, 2013-2017
Figure 7 – Measuring the impact of social…
Figure 8 – The bottom line impact of social at Bloomberg
Figure 9 – How realistic is the ‘Hunger Gap’?
Figure 10 – How accurate is the market sizing?
Figure 11 – How accurate is the forecast breakdown?
Figure 12 – What is the scale of the transformation needed?
Figure 13 – The ‘Telco 2.0’ opportunities for CSPs
Figure 14 – Learning about your customer from Amazon recommendations
Figure 15 – 80% are already engaged with BYOD
Figure 16 – Customer-centric commerce
Figure 17 – Mobile web user engagement takes off
Figure 18 – Are app stores that good for developers?
Figure 19 – Making mobile Web “more like apps”?
Figure 20 – What are the downsides of native apps?
Figure 21 – Would iOS users benefit from alternative app stores?
Figure 22 – when should you give data back to customers?
Figure 23 – How long before the ‘data surveillance backlash’?
Figure 24 – Will voluntarily provided info be better than surveillance?
Figure 25 – The media industry is static, the Web/tech players gain at telcos’ expense
Figure 26 – The evolution of connectivity products
Figure 27 – Integration between industrial, enterprise, and public network domains
Figure 28 – Key issues for an “elastic operator”
Figure 29 – Verizon’s enterprise platform
Figure 30 – Defining SDN – with Star Trek!
Figure 31 – Strategic conclusions on SDN
Figure 32 – Impact of SDN?
Figure 33 – Digital feudalism, enlightenment, or something else?

…Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Transformation Stream can download the full 62 page report in PDF format here. Non-Members, please subscribe here. The Digital Economy will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. For this or any other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Background & Further Information

Produced and facilitated by business innovation firm STL Partners, the Silicon Valley 2013 event overall brought together 150 specially-invited senior executives from across the communications, media, retail, banking and technology sectors, including:

AT&T, Bain & Co, Beecham Research, Bloomberg, Blumberg Capital, BMW, Buongiorno, Cablelabs, CenturyLink, Cisco, CITI Group, Cordys, Cox Communications, CSG International, EMC, Ericsson, Experian, GE, GI Partners, Group M, GSMA, IBM, Intel, Kore Telematics, MADE Holdings, Merchant Advisory Group, Microsoft, MIT Media Lab, Motorola, MTV, Nokia, Oracle, Orange, Panasonic, Placecast, Qualcomm, Rainmaker Capital, Reputation.com, SalesForce, Samsung, SAP, Sasktel, Sprint, Telus, The Weather Channel, T-Mobile USA, UnboundID, University of California Davis, US Cellular Corp, Verizon, Visa, Vodafone.

The Brainstorm used STL’s unique ‘Mindshare’ interactive format, including cutting-edge new research, case studies, use cases and a showcase of innovators, structured small group discussion on round-tables, panel debates and instant voting using on-site collaborative technology.

We’d like to thank the sponsors of the Brainstorm:
Silicon Valley 2013 Sponsors

The Great Compression: surviving the ‘Digital Hunger Gap’

Introduction

The Silicon Valley Brainstorm took place on 19-20 March 2013, at the Intercontinental Hotel, San Francisco.

Part of the New Digital Economics Executive Brainstorm & Innovation Series, it built on output from previous events in Singapore, Dubai, London and New York, and new market research and analysis, and focused on new business models and growth opportunities in digital commerce, content and the Internet of Things.

Summary Analysis: ‘The Great Compression’

In the next 10 years, many industries face the ‘Great Compression’ in which, in addition to the pressures of ongoing global economic uncertainty, there is also a major digital transformation that is destroying traditional value and moving it ‘disruptively’ to new areas and geographies, albeit at diminished levels.

In previous analyses (e.g. Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon) we have shown how key technology players in particular compete with different objectives in different parts of the digital value chain. Figure 1 below shows via crossed dollar signs (‘New Non-Profit’) the areas in which companies are competing without the primary intention of driving profits, which means that traditional competitors in those areas can expect ‘disruptive’ competition from new business models.

Figure 1 – Digital disruption

Source: STL Partners ‘Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon’

The Digital Hunger Gap

For the incumbent industry players we call the near-term results of this disruption ‘The Digital Hunger Gap’ – the widening deficit between past and projected revenues. Chris Barraclough, Chief Strategist STL Partners presented the classic Music Industry case study of the ‘Hunger Gap’ effects of digital disruption.

Figure 2 – The Music Industry’s ‘Hunger Gap’

Source: STL Partners

In a vote, 95% of participants agreed that something similar would happen in other industries.

Chris then presented our initial analysis of the ‘Hunger Gap’ for telcos (to be published in full shortly), and asked the participants where they thought the telco industry would be relative to its 2012 position in 2020.

Figure 3 – Participants’ views on forecasts for the telecoms industry

Source: Silicon Valley 2013 Participants / STL Partners

As can be seen, participants’ views were widely spread, with a slight bias towards a more pessimistic outlook than that presented of a recovery to 2012 levels.

Chris argued that as the ‘hunger gap’ widens, and before new revenues are developed, there will be massive consolidation and cost-reduction among incumbent players, and opportunities for innovation in services, but the chances of success in the latter are very low and require a portfolio approach and either deep pockets, exceptional insight, or considerable good fortune.

Richard Kramer, Managing Partner of Arete Research, also presented a deflationary outlook for all but the leading consumer technology players in the handset and tablet arena.

Participants then voted on which areas needed the most significant changes in their business – and existing managements’ ‘mindset’ was voted as the top priority.

Figure 4 – ‘Mindset’ is the biggest barrier to transformation

Source: Silicon Valley 2013 Participants / STL Partners

It is also notable that all categories averaged 3.0 or over – or needing ‘Significant Change’. This points to a significant transformation across all industries.

Content:

Opportunities
Telco 2.0 Strategies
Big Data and Personal Data
Digital Commerce
Digital Entertainment
Mobile Advertising & Marketing
The Internet of Things
Outlook by Industry
Next Steps

Figure 1 – Digital disruption
Figure 2 – The Music Industry’s ‘Hunger Gap’
Figure 3 – Participants’ views on forecasts for the telecoms industry
Figure 4 – ‘Mindset’ is the biggest barrier to transformation
Figure 5 – The ‘Telco 2.0’ opportunities for CSPs
Figure 6 – The impact of ‘Software Defined Networks’ (SDN)
Figure 7 – Will ‘Personal Data’ be more useful than ‘Big Data’?
Figure 8 – STL Partners’ ‘Wheel of Digital Commerce’
Figure 9 – Who will in ‘SoMoLo’?
Figure 10 – Significant changes in viewing habits
Figure 11 – Transformation needed in the advertising industry
Figure 12 – Growth projections for M2M ‘mobile’ (e.g. 3G/4G) connected devices

Free Mobile: A Prototype for Disruption?

Summary: Free.fr’s entry to the French mobile market has achieved extraordinarily rapid market share gains and resulted in comprehensive disruption. An analysis of its technology, tactics, and business model, and a high-level assessment of the applicability of its approach to other markets. (February 2013, Executive Briefing Service Dealing with Disruption Stream).

Mobile Market Share in France 2012 - Free 2013

Below is an extract from this 25 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and Dealing with Disruption Stream here. We’ll be publishing more on Digital Commerce in in 2013 and it will be a key theme at our Executive Brainstorms in Silicon Valley (March 2013), and Europe (London, June 2013). Non-members can subscribe here and for this and other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Introduction: A Wave of Disruption

A major theme in our work on mobile operator strategy recently has been the potential for disruption on price. In the European Mobile: The Future’s not Bright, it’s Brutal report, we forecast a substantial decline in voice and messaging revenues across Europe, and identified a group of relatively high-priced markets in challenging Southern European economies that were especially at risk from a competitive shock.

In the subsequent Europe’s Brutal Future: Vodafone & Telefonica hit hard we responded to the announcement of grim results at Telefonica and Vodafone’s southern European units. And in Sprint-Softbank: how it will disrupt the US market, we looked at the state of the US mobile market as Sprint is acquired by Softbank and investment starts to flow into T-Mobile USA.

Further, since we published the Sprint-Softbank note, 3UK has announced that it is planning to launch LTE later this year, as soon as the disbursed 1800MHz spectrum from the EverythingEverywhere merger becomes available. The service will be launched at a zero price premium to their 3G tariffs. This contrasts with EE’s initial pricing, which tried to define 4G as a premium product, and suggests that whatever pricing power their go-it-alone LTE deployment gave them will be very short-lived.

So it appears that structural pressures, like macroeconomic problems, the concentration of unemployment among the young (an early-adopter demographic), and the increasing availability and adoption of alternatives (Skype, BBM, Whatsapp, etc), are bearing down on prices in many markets. One outcome is that eventually operators will be forced to cut prices and therefore accept gradual reductions in their profit margins. Another outcome is more radical disruption through the entry of new players, which if successful can have a much higher impact on incumbent players.

In this note, we will look at the disruption of the French MNO market brought about by the entry of Free Mobile, which is both a case study of best practice and also one that illustrates some of the key constraints on disruption. We identify a new class of operator, the low-cost disruptor, empowered by software to go after incumbents’ margins, and look at the criteria for their success.

Market Background

In France, everything was stable pre-2012

France, before Free’s entry to the market, was one of the less competitive and pricier mobile markets in Europe with three operators only, one of them being the part-nationalised incumbent France Telecom. Immediately before Free Mobile’s launch, Fitch Ratings estimated the price of a minute of mobile voice in France at €0.10, compared to €0.07 in the UK or Germany . In terms of monthly ARPU, we can see that the cheapest French operator (interestingly, the incumbent) has usually been around €15 a month dearer than the average German operator and about €10 a month dearer than the average British operator.

Figure 1: France, a high-price market

Source: STL

The regulator, ARCEP, was often characterised as being relatively weak, or else committed to a strategy of letting the operators have more margin in the hope of encouraging infrastructure development.

Politically, this isn’t quite accurate. Importantly, ARCEP wasn’t the only actor involved – the ministries and regional governments also had a substantial voice in policy, and the incumbent enjoyed special access to the top level of politics as a major state enterprise. (In fact, for part of the 2000s, the French minister of finance’s previous job was CEO of France Telecom.)

Although the European Union’s Information Society, Competition, and Internal Market directorates also influenced the regulatory environment, telecoms is one of the fields where responsibility is shared between the EU and national authorities, and France is a big enough power within the EU to largely shape its own policy. This typically expresses a preference for the development of large national champion companies, and for infrastructure development over either competition or consumer protection.

On the other hand, ARCEP was one of the first regulators to permit independent ISPs to use the incumbent’s civil works infrastructure, and the public sector was very active in investing in middle-mile dark fibre. The upshot of this was that France has a fixed ISP market that offers customers remarkable value – FTTH is more available, speeds are better, and voice pricing is better for comparable rates to those prevailing in the UK, which has a roughly comparable market structure.

Free.fr’s fixed market entry

A major driver of this was a disruptive entrant, Free.fr. Free has been intensively studied, but we will briefly recap some key points. Free’s flagship service offering is €29.99/mo for everything, that including their fastest Internet service, unlimited VoIP to many destinations, and a variety of IT services. Over time, the purity of this price point has been diluted, but it still exists for new subscribers. Free.fr has no marketing department in a classical sense, and their tech support is largely provided by a network of partners recruited from the subscriber base.

On the other hand, they have historically invested without compromise in technology. Not only does Free develop its own software, it developed a succession of very successful set-top boxes, and it even developed its own ADSL2+ equipment. Further, they were an early adopter of FTTH, benefiting from the regulated access to civil works and the public investment in middle-mile fibre. Free was one of the first ISPs to provide IPv6 to end users. The TVPerso service was a pioneering user-generated content platform that provided multicast live streaming years ahead of anyone else.

Figure 2: A disruptive product play – one product, everything, one price, €30

Source: Rudolf van den Berg, Logica

In mobile, however, the picture was rather different. Only three operators, and one of those being the main supplier of backhaul connectivity, resulted in relatively little competition and high ARPUs and margins in the international context. Market share, particularly, has been remarkably, almost suspiciously, stable over time, as the following chart demonstrates.

Figure 3: Market share in France since 2005

Source: STL

Until, of course, Free became a mobile operator, launching on the 10th January 2012.

Free.fr enters mobile: a pure happy pipe strategy

Free Mobile’s product strategy could not have been simpler. It had two key points: price, and quantity. As with the fixed ISP product, the strategy was to offer big bundles at low prices, notably by unbundling the price of the mobile device from the service contract. The best deal was the bring-your-own-device option. (We also saw this with Softbank.)

Specifically, there were two options at launch. New subscribers could pay €20/mo for unlimited national calls and international calls to 40 countries, unlimited messaging, and 3GB/mo of Internet service. Existing subscribers to fixed service benefited from a discount to €16/mo. There was also an ultra-low cost plan, which offers 60 minutes of voice and 60 text messages for €2/mo with no contractual commitment and no phone, and overage set at €0.05/minute. This was free as an add-on to an existing fixed subscription. In general, Free Mobile customers remain free to switch provider on a rolling basis, rather than being tied in for the duration of the contract.

As Diffraction Analysis’ Benoit Felten points out, the company traditionally targeted two groups, technology-focused early adopters, and price-driven discount chasers . As a result, as well as bringing your own phone, you could also have the latest iPhone, unlocked, if you were willing to pay an additional €19.99/mo.

Bigger bundles at lower prices suggest a material cost advantage over other players. This is the essence of a Telco 2.0 Happy Piper: engineer operations for efficient bulk IP traffic delivery and ensure prices remain below those offered by competitors and, at the same time, deliver acceptable margins.

Impact

Free rapidly gained subscribers from the other MNOs and from the MVNO sector, and probably also from new adopters on the ultra-low cost tariffs. By the end of March, it had gained 2.6 million subscribers, 4% of the market, and declared a target of between 15 and 25 per cent market share. By mid-year, its market share had passed 5%, and by the end of Q3 2012 (the last published results), 6.4%, or 4.4 million subscribers with a run-rate of 270,000 net-adds per month.

Figure 4: Free Mobile Reaches 6.4% Share in 9 Months

Source: WCIS, STL

This resulted in a price shock across the entire market and a rapid rise in indicators of competition generally. It also resulted in a surge of additional subscriber growth.

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

How did Free.fr get there?
The fight for a license
The ‘MVNO plus’ network strategy
The role of Freebox set-top boxes
Getting Beyond the Unlimited Data Wars
Low-Cost Disruptors: International Examples
USA: Republic Wireless
Global voice-focused: Truphone
A failed attempt: UK01
Wholesale: Virgin Media
Key factors in the business model
Technical Arbitrage
Software Power
The Regulatory and Economic Environment
Could it happen here?
STL Partners and the Telco 2.0™ Initiative
Telco 2.0™ ‘two-sided’ telecoms business model

…and the following figures…

Figure 1: France, a high-price market
Figure 2: A disruptive product play – one product, everything, one price, €30
Figure 3: Market share in France since 2005
Figure 4: Free Mobile Reaches 6.4% Share in 9 Months
Figure 5: Contract-free subscribers in France, 2008-2012
Figure 6: Mobile number portability usage in France, 2007-2012
Figure 7: An overview of the disruption
Figure 8: ARPUs driven down industry-wide
Figure 9: 4th Mobile Operators’ Performance Over 1st 6 Years
Figure 10: The Urban Core – Orange Dominates the Base Station Count
Figure 11: The Disparity Is Much Less In The Suburbs
Figure 12: % of time connected to Free’s own network; 900MHz refarming causes a sharp spike
Figure 13: Use cases for software-defined networking in the Free context

…Members of the Telco 2.0 Executive Briefing Subscription Service and Dealing with Disruption Stream can download the full 25 page report in PDF format here. Non-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.