Telco Cloud Deployment Tracker: Updated April 2021

The NFV Deployment Tracker builds on an extensive body of analysis by STL Partners over the past two years on NFV and SDN strategies, technology and market developments.

This unique service is updated on a regular basis and provides a steadily growing database on live deployments of NFV and SDN by telcos worldwide. The data is presented as an interactive Excel spreadsheet, which can be used to drill down on trends by company and region.

The tracker covers only verified production deployments of NFV and SDN powering live services, where we can be confident that the data on the VNFs and IT components involved is accurate. The latest update, released in April 2021, contains details on 858 NFV/SDN deployments made up of around 1,600 sub-components.

Public-domain information is presented in full detail. Confidential information, obtained direct from operators, is included in an aggregated and anonymised data set.

Each new release of the tracker is global, but is accompanied by an analytical report which focusses on trends in given regions from time to time:

Logged-in subscribers can download the latest version of the NFV Deployment Tracker spreadsheet from this page.

Cloud native: Just another technology generation?

Cloud native networking: Telecoms’ latest adventure

As a term, cloud native has currency in telecoms networking. 5G has contributed to the recent industry-wide interest in adopting cloud native applications for networks. This is because the 5G standalone core networks (5G SA) that operators are now planning (and some have started deploying) are intended to run as software that is specified and architected following cloud native principles.

Within telecoms, thinking about cloud native tends to centre on the next phase of moving network functions into a software environment, building on lessons learned with NFV/SDN. Viewed from this perspective, cloud native is the next step in the telecoms industry technology evolution: from analogue to digital circuit-switched to digital IP to virtualised to cloud native.

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Telcos’ business model is reaching end-of-life

The rise of mobile telephony and fixed and mobile broadband means that telecoms operators have enjoyed 20 years of strong growth in all major markets. That growth has stalled. It happened in Japan and South Korea as early as 2005, in Europe from 2012 or so and, market by market, others have followed. STL Partners forecasts that, apart from Africa, all regions will see a compound annual growth rate (CAGR) below 3% for both fixed and mobile services for the next three years. Ignoring pandemic ‘blips’, we forecast a CAGR of less than 1% per annum globally. This amounts to a decline in real terms.

The telecoms industry is reaching the end of its last growth cycle

The telecoms industry’s response to this slowdown has been to continue to invest capital in better networks – fibre, 4G, 5G – to secure more customers by offering more for less. Unfortunately, as competitors also upgrade their networks, connectivity has become commoditised as value has shifted to the network-independent services that run over them.

In other words, the advantage that telcos had when only telecoms services could run on telecoms networks has gone: the defensive moat from owning fibre or spectrum has been breached. Future value comes from service innovation not from capital expenditure. The chart below sums the problem up: seven internet players generate around 65% of the revenue generated by 165 operators globally, but have a c. 50% bigger combined market capitalisation. This is because the capital markets believe that revenue and profit growth will accrue to these service innovators rather than telecoms operators.

Tech companies are more highly valued than telcos

Understand, then emulate the operating model

Operators have been aspiring to learn from technology firms so they can transform their operations and services. But changes have been slow, and it is difficult to point to many ‘poster child’ operators that successfully made a move beyond pure telecommunications. Partly this is due to a mismatch between corporate announcements and their investment policies. Too often we hear CEOs express a desire to change their organisations and that they intend to offer a host of exciting new services, only to see that aspiration not borne out when they allocate resources. Where other tech companies make substantial investments in R&D and product development, operators continue to invest miniscule amounts in service innovation (especially in comparison to what is poured into the network itself).

Telco vs tech-co investment models

STL Partners believes that many of the network-related activities that will enable operators to reduce capital expenditure, such as cloud-native networking, will also enable them to automate and integrate processes and systems so they are more flexible and agile at introducing new services. So, an agile software-oriented infrastructure will enable changes in business processes such as product development and product management, partnering, and customer care – if management prioritises investment and drives change in these areas. Cloud native business practices and software were developed by technology companies (and then widely adopted by enterprise IT functions) as a means to deliver greater innovation at scale whilst reducing the level of capital relative to revenue.

Our belief is that financial and operational developments need to happen in unison and operators need to move quickly and with urgency to a new operating model supported by cloud native practices and technology, or face sharp declines in ROI.

Table of Contents

  • Executive Summary
  • Table of Figures
  • Preface
  • Cloud native networking: Telecoms’ latest adventure
  • Telcos’ business model is reaching end-of-life
    • Understand, then emulate the operating model
    • The coordination age – a new role for telcos
    • 5G: Just another G?
    • Cloud native: Just another technology generation?
  • Different perspectives: Internal ability, timing …and what it means to be a network operator
    • Organisational readiness, skills and culture
    • Target operating model and ecosystem
    • Assembly versus Engineering
    • Wider perceptions across the business functions
    • Operator segment 1: Risk of complacency
    • Operator segment 2: Align for action
    • Operator segment 3: Urgent re-evaluation
    • Operator segment 4: Stay focused and on track
  • Appendix 1
    • Interviewee overview
  • Appendix 2
    • Defining Cloud Native
    • There is consensus on the meaning of cloud native software and applicability to networks
    • Agreement on the benefits: automation at scale for reliability and faster time to market
    • …and changing supplier relationships

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Apple Glass: An iPhone moment for 5G?

Augmented reality supports many use cases across industries

Revisiting the themes explored in the AR/VR: Won’t move the 5G needle report STL Partners published in January 2018, this report explores whether augmented reality (AR) could become a catalyst for widespread adoption of 5G, as leading chip supplier Qualcomm and some telcos hope.

It considers how this technology is developing, its relationship with virtual reality (VR), and the implications for telcos trying to find compelling reasons for customers to use low latency 5G networks.

This report draws the following distinction between VR and AR

  • Virtual reality: use of an enclosed headset for total immersion in a digital3D
  • Augmented reality: superimposition of digital graphics onto images of the real world via a camera viewfinder, a pair of glasses or onto a screen fixed in real world.

In other words, AR is used both indoors and outdoors and on a variety of devices. Whereas Wi-Fi/fibre connectivity will be the preferred connectivity option in many scenarios, 5G will be required in locations lacking high-speed Wi-Fi coverage.  Many AR applications rely on responsive connectivity to enable them to interact with the real world. To be compelling, animated images superimposed on those of the real world need to change in a way that is consistent with changes in the real world and changes in the viewing angle.

AR can be used to create innovative games, such as the 2016 phenomena Pokemon Go, and educational and informational tools, such as travel guides that give you information about the monument you are looking at.  At live sports events, spectators could use AR software to identify players, see how fast they are running, check their heart rates and call up their career statistics.

Note, an advanced form of AR is sometimes referred to as mixed reality or extended reality (XR). In this case, fully interactive digital 3D objects are superimposed on the real world, effectively mixing virtual objects and people with physical objects and people into a seamless interactive scene. For example, an advanced telepresence service could project a live hologram of the person you are talking to into the same room as you. Note, this could be an avatar representing the person or, where the connectivity allows, an actual 3D video stream of the actual person.

Widespread usage of AR services will be a hallmark of the Coordination Age, in the sense that they will bring valuable information to people as and when they need it. First responders, for example, could use smart glasses to help work their way through smoke inside a building, while police officers could be immediately fed information about the owner of a car registration plate. Office workers may use smart glasses to live stream a hologram of a colleague from the other side of the world or a 3D model of a new product or building.

In the home, both AR and VR could be used to generate new entertainment experiences, ranging from highly immersive games to live holograms of sports events or music concerts. Some people may even use these services as a form of escapism, virtually inhabiting alternative realities for several hours a day.

Given sufficient time to develop, STL Partners believes mixed-reality services will ultimately become widely adopted in the developed world. They will become a valuable aid to everyday living, providing the user with information about whatever they are looking at, either on a transparent screen on a pair of glasses or through a wireless earpiece. If you had a device that could give you notifications, such as an alert about a fast approaching car or a delay to your train, in your ear or eyeline, why wouldn’t you want to use it?

How different AR applications affect mobile networks

One of the key questions for the telecoms industry is how many of these applications will require very low latency, high-speed connectivity. The transmission of high-definition holographic images from one place to another in real time could place enormous demands on telecoms networks, opening up opportunities for telcos to earn additional revenues by providing dedicated/managed connectivity at a premium price. But many AR applications, such as displaying reviews of the restaurant a consumer is looking at, are unlikely to generate much data traffic. the figure below lists some potential AR use cases and indicates how demanding they will be to support.

Examples of AR use cases and the demands they make on connectivity


Source: STL Partners

Although telcos have always struggled to convince people to pay a premium for premium connectivity, some of the most advanced AR applications may be sufficiently compelling to bring about this kind of behavioural shift, just as people are prepared to pay more for a better seat at the theatre or in a sports stadium. This could be on a pay-as-you-go or a subscription basis.

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The pioneers of augmented reality

Augmented reality (AR) is essentially a catch-all term for any application that seeks to overlay digital information and images on the real-world. Applications of AR can range from a simple digital label to a live 3D holographic projection of a person or event.

AR really rose to prominence at the start of the last decade with the launch of smartphone apps, such as Layar, Junaio, and Wikitude, which gave you information about what you were looking at through the smartphone viewfinder. These apps drew on data from the handset’s GPS chip, its compass and, in some cases, image recognition software to try and figure out what was being displayed in the viewfinder. Although they attracted a lot of media attention, these apps were too clunky to break through into the mass-market. However, the underlying concept persists – the reasonably popular Google Lens app enables people to identify a product, plant or animal they are looking at or translate a menu into their own language.

Perhaps the most high profile AR application to date is Niantic’s Pokemon Go, a smartphone game that superimposes cartoon monsters on images of the real world captured by the user’s smartphone camera. Pokemon Go generated $1 billion in revenue globally just seven months after its release in mid 2016, faster than any other mobile game, according to App Annie. It has also shown remarkable staying power. Four years later, in May 2020, Pokemon Go continued to be one of the top 10 grossing games worldwide, according to SensorTower.

In November 2017, Niantic, which has also had another major AR hit with sci-fi game Ingress, raised $200 million to boost its AR efforts. In 2019, it released another AR game based on the Harry Potter franchise.

Niantic is now looking to use its AR expertise to create a new kind of marketing platform. The idea is that brands will be able to post digital adverts and content in real-world locations, essentially creating digital billboards that are viewable to consumers using the Niantic platform. At the online AWE event in May 2020, Niantic executives claimed “AR gamification and location-based context” can help businesses increase their reach, boost user sentiment, and drive foot traffic to bricks-and-mortar stores. Niantic says it is working with major brands, such as AT&T, Simon Malls, Starbucks, Mcdonalds, and Samsung, to develop AR marketing that “is non-intrusive, organic, and engaging.”

The sustained success of Pokemon Go has made an impression on the major Internet platforms. By 2018, the immediate focus of both Apple and Google had clearly shifted from VR to AR. Apple CEO Tim Cook has been particularly vocal about the potential of AR. And he continues to sing the praises of the technology in public.

In January 2020, for example, during a visit to Ireland, Cook described augmented reality as the “next big thing.”  In an earnings call later that month, Cook added:When you look at AR today, you would see that there are consumer applications, there are enterprise applications. … it’s going to pervade your life…, because it’s going to go across both business and your whole life. And I think these things will happen in parallel.”

Both Apple and Google have released AR developer tools, helping AR apps to proliferate in both Apple’s App Store and on Google Play.  One of the most popular early use cases for AR is to check how potential new furniture would look inside a living room or a bedroom. Furniture stores and home design companies, such as Ikea, Wayfair and Houzz, have launched their own AR apps using Apple’s ARKit. Once the app is familiar with its surroundings, it allows the user to overlay digital models of furniture anywhere in a room to see how it will fit. The technology can work in outdoor spaces as well.

In a similar vein, there are various AR apps, such as MeasureKit, that allow you to measure any object of your choosing. After the user picks a starting point with a screen tap, a straight line will measure the length until a second tap marks the end. MeasureKit also claims to be able to calculate trajectory distances of moving objects, angle degrees, the square footage of a three-dimensional cube and a person’s height.

Table of contents

  • Executive Summary
    • More mainstream models from late 2022
    • Implications and opportunities for telcos
  • Introduction
  • Progress and Immediate Prospects
    • The pioneers of augmented reality
    • Impact of the pandemic
    • Snap – seeing the world differently
    • Facebook – the keeper of the VR flame
    • Google – the leader in image recognition
    • Apple – patiently playing the long game
    • Microsoft – expensive offerings for the enterprise
    • Amazon – teaming up with telcos to enable AR/VR
    • Market forecasts being revised down
  • Telcos Get Active in AR
    • South Korea’s telcos keep trying
    • The global picture
  • What comes next?
    • Live 3D holograms of events
    • Enhancing live venues with holograms
    • 4K HD – Simple, but effective
  • Technical requirements
    • Extreme image processing
    • An array of sensors and cameras
    • Artificial intelligence plays a role
    • Bandwidth and latency
    • Costs: energy, weight and financial
  • Timelines for Better VR and AR
    • When might mass-market models become available?
    • Implications for telcos
    • Opportunities for telcos
  • Appendix: Societal Challenges
    • AR: Is it acceptable in a public place?
    • VR: health issues
    • VR and AR: moral and ethical challenges
    • AR and VR: What do consumers really want?
  • Index

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

New age, new needs, new approaches

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

The Coordination Age arises from the convergence of:

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

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

Resource availability, Resource efficiency, Resource conservation: Issues for governments, enterprises and consumers. Solutions must come from all constituents.

Source: STL Partners

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A new purpose for a new age

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

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

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

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

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

A little history 2.0

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

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

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

Other recent reports on the Coordination Age:

Table of contents

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

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Creating a healthy culture

Introduction

Creating a healthy culture is a key component of success in any organisation. It is particularly important – and challenging – where a company is building a new business operating in a new industry that combines people steeped in an existing cultures. This was the case for TELUS Health in Canada, so we spoke to its then CEO to understand the approach it took.

Three components of ‘Culture’

Whenever we ask our clients what the biggest problem they face is, there’s an excellent chance they will say ‘changing the culture’.

Yet it’s a bit of a coverall statement: what exactly do they mean?

It’s often a bit of a mish-mash of processes, organisation, behaviours and incentives: ‘the way we do things around here’.

Some of this is formalised, through organisation, line-management, how projects are managed and so on. Other aspects are softer – how companies expect people to behave when they are at work: how much autonomy do they have, can they work from home, etc.

To put some structure to this catch-all idea, it can be useful to think about three fundamental components of culture:

  • Shared purpose: what are we all trying to achieve?
  • Common values: what do we believe we need to be like to get there?
  • Processes and behaviours: how do we do things round here?

Looking at these definitions makes it clear why change needs to be led from the top, and why culture change is so challenging.

It needs to be led from the top because you cannot have a credible common purpose that conflicts with what the leadership says it wants, what it values, or how the organisation acts.

Even if you have clear direction from the top, it’s still hard to change because:

  • Most of your organisation will start from a position of ‘this is how we previously learned to be – and now you’re asking us to be different from that?’
  • Culture essentially means a set of behaviours or characteristics that have been socialised, and thereby enmeshed in a complex human web of habits and expectations.

According to Paul Lepage, President of TELUS Health, “culture eats why for breakfast”, paraphrasing the quote “culture eats strategy for breakfast” in a fascinating conversation we had recently.

What Paul meant was that one of the key drivers to creating a great culture is to ensure that your team is truly engaged with your organisation’s meaning or purpose, or ‘why are we doing this?’ beyond making money.

In the case of TELUS Health, this is ‘delivering better healthcare outcomes’, and in Paul’s case at least, this idea comes over very strongly in every interaction I have had with him.

Author’s note: I was talking to Paul because I am fascinated by the role that culture plays in business success. I have known some of the team at TELUS Health for several years, and I am always struck by the quality and consistency of their culture across all the people I have met at TELUS. Andrew Collinson, Partner and Research Director, STL Partners.

TELUS and TELUS Health: consistent internal and external KPIs

There is a notable consistency between TELUS’ results on internal measures of employee engagement, customer opinion, and commercial performance.

  • Employee engagement: TELUS’ overall employee engagement score consistently ranks within the top quartile and has risen steadily in recent years.  TELUS was also named as one of Canada’s Top 100 Employers and Achiever’s 50 Most Engaged Workplaces in 2017.
  • Customer recommendation: TELUS’ customers have given it improving ‘Likelihood to recommend’ scores since 2011.
  • Market valuation: TELUS’ share price has also grown steadily from 2011.

Figure: TELUS’ share price has also steadily grown

TELUS Annual share price chart
TELUS Annual share price, as at end August 2011-2018

Source: Google Finance, STL Partners

Is this a coincidence, or is there a link between these results? And if it is not a coincidence, how has it achieved this, and what can others learn?

TELUS and TELUS Health

Background

STL Partners has worked closely with TELUS and TELUS Health over the last few years, analysing the healthcare division’s progress in TELUS Health: Innovation leader case study. We’ve participated in its Healthcare Summits in Toronto and come to know several of its executives over the years. The following is a brief introduction to TELUS Health from our 2017 report.

Why TELUS got into healthcare: a viable growth opportunity

Starting in 2005, led by the CEO Darren Entwistle, TELUS executives came to a consensus that just focusing on connectivity would not be enough to sustain long term revenue growth for telecoms companies in Canada, so the telco began a search into adjacent areas where it felt there were strong synergies with its core assets and capabilities. TELUS initially considered options in many sectors with similar business environments to telecoms – i.e. high fixed costs, capex intensive, highly regulated – including financial services, healthcare and energy (mining, oil).

In contrast with other telcos in Canada and globally, TELUS made a conscious decision not to focus on entertainment, anticipating that regulatory moves to democratise access to content would gradually erode the differentiating value of exclusive rights.

By 2007, health had emerged as TELUS’ preferred option for a ‘content play’, supported by four key factors which remain crucial to TELUS’ ongoing commitment to the healthcare sector, nearly a decade later. These are:

  1. Strong correlation with TELUS’ socially responsible brand. TELUS has always prioritised social responsibility as a core company value, consistently being recognised by Canadian, North American and global organisations for its commitment to sustainability and philanthropy. For example, in 2010, the Association for Fundraising Professionals’ named it the most outstanding philanthropic corporation in the world. Thus, investing into the healthcare, with the aim of improving efficiency and health outcomes through digitisation of the sector, closely aligns with TELUS’ core values.
  2. Healthcare’s low digital base. Healthcare was and remains one of the least digitised sectors both in Canada and globally. This is due to a number of factors, including the complexity and fragmented nature of healthcare systems, the difficulty of identifying the right payer model for digital solutions, and cultural resistance among healthcare workers who are already stretched for time and resources.
  3. Personal commitment from Darren Entwistle, TELUS’ CEO since he joined the company in 2000. Based on personal experiences with the flaws in the Canadian healthcare system, Darren Entwistle forged his conviction that there was a business case for TELUS to drive adoption of digital health records and other ehealth solutions that could help minimise such errors, which was crucial in winning and maintaining shareholders’ support for investment into health IT.
  4. Healthcare is a growing sector. An ageing population means that the burden on Canada’s healthcare system has and will continue to grow for the foreseeable future. As people live longer, the demands on the healthcare system are also shifting from acute care to chronic care. For example, data from the OECD and the Canadian Institute for Health Information show that the rate of chronic disease among patients over 65 years old is double that of those aged 45-64. Meanwhile, funding is not increasing at the same rate as demand, convincing TELUS of the need for the type of digital disruption that has occurred in many other sectors.

That all four of TELUS’ reasons for investing in healthcare remain equally relevant in 2017/18 as in 2007 is key to its unwavering commitment to the sector. Darren Entwistle refers to healthcare as a ‘generational investment’, saying that over the long term, TELUS may shift into a healthcare company that offers telecoms services, rather than the other way around.

TELUS Health: On leadership and culture

To get insight for this report, I spoke at length with Paul Lepage, President-TELUS Health and Payment Solutions at TELUS, on the recommendation of his colleagues, who’d told me that ‘culture’ was of deep importance to Paul. He has been instrumental in setting up TELUS Health, and holds joint responsibility for TELUS Health on the international markets with Dave Sharma, President, TELUS Partner Solutions and Senior Vice-president, Business Solutions Sales. Paul runs the operation on the ground in Canada, while Dave spearheads partnerships and international activity.

I also requested additional support material from TELUS Health, which is included in the Appendix of this report.

This report would not have been possible without their kind collaboration and openness. Nonetheless, its contents represent the opinion of STL Partners, and were not sponsored or commissioned by TELUS.

Contents

  • Executive Summary: For telcos and others wanting to change culture
  • Introduction
  • Three components of ‘Culture’
  • Culture eats ‘why’ for breakfast
  • TELUS and TELUS Health: consistent internal and external KPIs
  • Background
  • Why TELUS got into healthcare: a viable growth opportunity
  • TELUS Health: On leadership and culture
  • Culture = Purpose and process
  • Culture creates a yardstick for performance
  • The importance of a compelling ‘why?’
  • Fair Process
  • Diversity and talent
  • Measuring culture and results
  • Communicating, listening and reflecting is at least 50% of the job
  • Recruitment, partnerships and culture
  • The ‘why?’ must be genuine
  • Conclusions: TELUS Health – A consistent and compelling culture
  • Appendix: Prepared by TELUS Health External Communications

Figures

  • TELUS’ share price has increased steadily
  • Why is ‘why?’ important?
  • TELUS’ ‘Fair process’

NFV/SDN deployment pathways: Three telco futures

Introduction: Three pathways to virtualisation

The aim of this report is to set out and analyse three strategic pathways to the implementation of Network Functions Virtualisation (NFV) and Software-Defined Networking (SDN) taken by different telcos, and types of telco. We are calling these approaches ‘Technology Evolution’, ‘Service-led Innovation’ and ‘Organisational Transformation’.

We originally formulated the pathways as part of an analysis of the challenges that telcos were confronting as they embarked on their journey to implement NFV and SDN. The analysis was developed during a consulting project undertaken for Cisco Systems in the second half of 2016. In the present report, we are seeking to re-examine the pathways in the light of the experiences of telcos in 2017 – their challenges and successes – as they have continued to develop and deploy NFV / SDN across their networks.

Pathways and operator examples

Our analysis of the three pathways in the project for Cisco was built on a substantial body of STL research and industry knowledge on NFV and SDN, along with conversations with senior executives at 14 telcos from across the world, which we assigned to one or more of the three approaches. A brief definition of the pathways and the types of operator that typically adhere to them is provided below:

Figure 1: Pathways to virtualisation

Source: STL Partners

It should be noted that the pathways are not mutually exclusive or rigid, i.e. operators – and different business units within operators – can straddle more than one category, and the different approaches to virtualisation are overlapping to some extent. In addition, there is something of a natural progression from one pathway to another. For example, completing large-scale virtualisation programmes (Technology Evolution) then puts operators in a position to develop new use cases addressing customer needs (Service-led Innovation).

We aim to bring out the interplays and progression between these three broad approaches in the present analysis by focusing on three operators that exemplify some of the tensions and contradictions inherent to each of the pathways, insofar as NFV and SDN ultimately embody a transformative dynamic that is disruptive of existing business models and corporate cultures.

We should also note that not all of the examples discussed in the present analysis were included in the previous study undertaken for Cisco and that the material included here is derived from public-domain information, supplemented by conversations with the telcos themselves where they have been willing to share their experiences.

Contents

  • Executive Summary
  • Introduction: Three pathways to virtualisation
  • Pathways and operator examples
  • Vodafone: Technology evolution towards the software-enabled network
  • Colt: Customer-led innovation of the ‘Network Cloud’
  • Deutsche Telekom: Organisational transformation towards the ‘network-enabled compute service provider’
  • Conclusion: The three fundamental strategic choices for telcos around SDN / NFV

Edge computing: Five viable telco business models

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

Introduction

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

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

Figure 1: Defining MEC

Source: STL Partners

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

From this, the following key questions emerge:

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

Contents:

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

Figures:

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

Apple’s pivot to services: What it means for telcos

Introduction

The latest report in STL’s Dealing with Disruption stream, this executive briefing considers Apple’s strategic dilemmas in its ongoing struggle for supremacy with the other major Internet ecosystems – Amazon, Facebook and Google. It explores how the likely shift from a mobile-first world to an artificial-intelligence first world will impact Apple, which owes much of its current status and financial success to the iPhone.

After outlining Apple’s strategic considerations, the report considers how much Apple earns from services today, before identifying Apple’s key services and how they may evolve. Finally, the report features a SWOT (strengths, weaknesses, opportunities and threats) analysis of Apple’s position in services, followed by a TOWS analysis that identifies possible next steps for Apple. It concludes by considering the potential implications for Apple’s main rivals, as well as two different kinds of telcos – those who are very active in the service layer and those focused on providing connectivity and enablers.

Several recent STL Partners’ research reports make detailed recommendations as to how telcos can compete effectively with the major Internet ecosystems in the consumer market for digital services. These include:

  • Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed? To find new revenues, some telcos are competing head-on with the major internet players in the digital communications, content and commerce markets. Although telcos’ track record in digital services is poor, some are gaining traction. AT&T, Axiata, Reliance Jio and Turkcell are each pursuing very different digital services strategies, and we believe these potentially disruptive moves offer valuable lessons for other telcos and their partners.
  • Consumer communications: Can telcos mount a comeback? The rapid growth of Facebook, WhatsApp, WeChat and other Internet-based services has prompted some commentators to write off telcos in the consumer communications market. But many mobile operators retain surprisingly large voice and messaging businesses and still have several strategic options. Indeed, there is much telcos can learn from the leading Internet players’ evolving communications propositions and their attempts to integrate them into broad commerce and content platforms.
  • Autonomous cars: Where’s the money for telcos? The connected car market is being seen as one of the most promising segments of the Internet of Things. Everyone from telcos to internet giants Google, and specialist service providers Uber are eyeing opportunities in the sector. This report analyses 10 potential connected car use-cases to assess which ones could offer the biggest revenue opportunities for operators and outline the business case for investment.
  • AI: How telcos can profit from deep learning Artificial intelligence (AI) is improving rapidly thanks to the growing use of deep neural networks to teach computers how to interpret the real world (deep learning). These networks use vast amounts of detailed data to enable machines to learn. What are the potential benefits for telcos, and what do they need to do to make this happen?
  • Amazon: Telcos’ Chameleon-King Ally? New digital platforms are emerging – the growing popularity of smart speakers, which rely on cloud-based artificial intelligence, could help Amazon, the original online chameleon, to bolster its fast-evolving ecosystem at the expense of Google and Facebook. As the digital food chain evolves, opportunities will open up for telcos, but only if the smart home market remains heterogeneous and very competitive.

Apple’s evolving strategy

Apple is first and foremost a hardware company: It sells physical products. But unlike most other hardware makers, it also has world-class expertise in software and services. These human resources and its formidable intellectual property, together with its cash pile of more than US$250 billion and one of the world’s must coveted brands, gives Apple’s strategic options that virtually no other company has. Apple has the resources and the know-how to disrupt entire industries. Apple’s decision to double the size of it’s already-impressive services business by 2021 has ramifications for companies in a wide range of industries – from financial services to entertainment to communications.

Throughout its existence, Apple’s strategy has been to use distinctive software and services to help sell its high-margin hardware, rather than compete head-on with Google, Facebook, Microsoft and Amazon in the wider digital services and content markets. As Apple’s primary goal is to create a compelling end-to-end solution, its software and services are tightly integrated into its hardware. Although there are some exceptions, notably iTunes and Apple Music, most of Apple’s services and software can only be accessed via Apple’s devices. But there are four inter-related reasons why Apple may rethink that strategy and extend Apple’s services beyond its hardware ecosystem:

      • Services are now Apple’s primary growth engine, as iPhone revenue appears to have peaked and new products, such as the Apple Watch, have failed to take up the slack. Moreover, services, particularly content-based services, need economies of scale to be cost-effective and profitable.
      • Upstream players, such as merchants, brands and content providers, want to be able to reach as many people as possible, as cost-effectively as possible. They would like Apple’s stores and marketplaces to be accessible from non-Apple devices, as that would enable them to reach a larger customer base through a single channel. Figure 1 shows that Apple’s iPhone ecosystem (which use the iOS operating system) is approximately one quarter of the size of rival Android in terms of volumes.
      • Artificial intelligence is becoming increasingly central to the propositions of the major Internet ecosystems, including that of Apple. The development of artificial intelligence requires vast amounts of real-world data that can be used to hone the algorithms computers use to make decisions. To collect the data necessary to detect patterns and subtle, but significant, differences in real-world conditions, the Internet players need services that are used by as many people as possible.
      • As computing power and connectivity proliferates, the smartphone won’t be as central to people’s lives as it is today. For Apple, that means having the best smartphone won’t be enough: Computing will eventually be everywhere and will probably be accessed by voice commands or gestures. As the hardware fades into the background and Apple’s design skills become less important, the Cupertino company may decide to unleash its services and allow them to run on other platforms, as it did with iTunes.

Content:

  • Executive Summary
  • Introduction
  • Apple’s evolving strategy
  • Playing catch-up in artificial intelligence
  • What does Apple earn from services?
  • What are Apple’s key services?
  • Communications – Apple iMessage and FaceTime
  • Commerce – Apple Pay and Apple Wallet
  • Content – iTunes, Apple Music, Apple TV
  • Software – the App Store, Apple Maps
  • Artificial intelligence and the role of Siri
  • Tools for developers
  • Conclusions and implications for rivals
  • Implications for rivals

Figures:

  • Figure 1: Installed base of smartphones by operating system
  • Figure 2: Apple’s artificial intelligence, as manifest in Siri, isn’t that smart
  • Figure 3: Apple’s services business is comparable in size to Facebook
  • Figure 4: The services business is Apple’s main growth engine
  • Figure 5: The strength of Apple’s online commerce ecosystem
  • Figure 6: iMessage is becoming a direct competitor to Instagram and WhatsApp
  • Figure 7: Various apps allow consumers to make payments via Apple Pay
  • Figure 8: Apple Pay is available in a limited number of markets
  • Figure 9: Unlike most Apple services, Apple Music is “available everywhere”
  • Figure 10: Apple’s App Store generates far more revenue than Google Play
  • Figure 11: Apple Maps’ navigation trailed well behind Google Maps in June 2016
  • Figure 12: SWOT analysis of Apple in the services sector
  • Figure 13: TOWS analysis for Apple in the service market

Telco-Driven Disruption: Will AT&T, Axiata, Reliance Jio and Turkcell succeed?

Introduction

The latest report in STL’s Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the role of telcos in disrupting the digital economy. Building on the insights gleaned from the stream’s research, STL has analysed disruptive moves by four very different telcos and their prospects of success.

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

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

Although established telcos have generally been cautious about pursuing disruption, several have created entirely new value propositions, effectively disrupting either their core business or adjacent industry sectors. In some cases, disruptive moves by telcos have primarily been defensive in that their main objective is to hang on to customers in their core business. In other cases, telcos have gone on the offensive, moving into new markets in search of new revenues.

Increasingly, these two strategies are becoming intertwined. As regulators use spectrum licensing and local loop unbundling to fuel competition in connectivity, telcos have found themselves embroiled in damaging and expensive price wars. One way out of this commoditisation trap is to enhance and enrich the core proposition in ways that can’t easily be replicated by rivals. For example, BT in the UK has demonstrated that one of the most effective ways to defend the core business can be to bundle connectivity with exclusive content that consumers value. This report analyses four very different variants of this basic strategy and their chances of success.

Note, the examples in this report are intended to be representative and instructive, but they are not exhaustive. Other telcos have also pursued disruptive strategies with varying degrees of success. Many of these strategies have been described and analysed in previous STL Partners’ research reports. Digital transformation is a phenomenon that is not just affecting the telco sector. Many industries have been through a transformation process far more severe than we have seen in telecoms, while others began the process much earlier in time. We believe that there are valuable lessons telcos can learn from these sectors, so we have decided to find and examine the most interesting/useful case studies.

Contents:

  • Executive Summary
  • Introduction
  • Strategy One: Aggressive Acquisitions
  • AT&T – how will engineering and entertainment mix?
  • Strategy Two: Fast and Fluid, build a portfolio
  • Axiata places many digital bets
  • Strategy Three: Leapfrogging the legacy
  • Reliance Jio – super-disruptor
  • Strategy Four: Building an elaborate ecosystem
  • Turkcell goes toe-to-toe with the big Internet ecosystems

Figures:

  • Figure 1: Figure 1: The largest pay TV providers in the US in September 2016
  • Figure 2: Fullscreen Entertainment – free to AT&T Wireless customers
  • Figure 3: AT&T’s television customer base is shrinking
  • Figure 4: But AT&T’s Entertainment Group has seen ARPU rise
  • Figure 5: Celcom Planet’s 11Street marketplace caters for all kinds of products
  • Figure 6: XL has integrated its commerce and payment propositions
  • Figure 7: The Tribe video-on-demand proposition majors on Korean content
  • Figure 8: 4G was designed to deliver major capacity gains over 3G
  • Figure 9: Vodafone’s view of spectrum holdings in India
  • Figure 10: Reliance Jio is offering an array of entertainment and utility apps
  • Figure 11: Reliance’s network is outperforming that of rivals by a large margin
  • Figure 12: Vodafone India has slashed the cost of its mobile data services
  • Figure 13: Vodafone, Airtel and Idea account for 72% of the Indian market
  • Figure 14: The performance required for Reliance to achieve a ROCE of 18%
  • Figure 15: Digital services have become a major growth engine for Turkcell
  • Figure 16: Downloads of Turkcell’s apps are growing rapidly
  • Figure 17: Turkcell TV+ is gaining traction both on and off network
  • Figure 18: Turkcell’s ARPU is growing steadily
  • Figure 19:Turkcell is seeing rapid growth in mobile data traffic

Mobile app latency in Europe: French operators lead; Italian & Spanish lag

Latency as a proxy for customer app experience

Latency is a measure of the time taken for a packet of data to travel from one designated point to another. The complication comes in defining the start and end point. For an operator seeking to measure its network latency, it might measure only the transmission time across its network.

However, to objectively measure customer app experience, it is better to measure the time it takes from the moment the user takes an action, such as pressing a button on a mobile device, to receiving a response – in effect, a packet arriving back and being processed by the application at the device.

This ‘total roundtrip latency’ time is what is measured by our partner, Crittercism, via embedded code within applications themselves on an aggregated and anonymised basis. Put simply, total roundtrip latency is the best measure of customer experience because it encompasses the total ‘wait time’ for a customer, not just a portion of the multi-stage journey

Latency is becoming increasingly important

Broadband speeds tend to attract most attention in the press and in operator advertising, and speed does of course impact downloads and streaming experiences. But total roundtrip latency has a bigger impact on many user digital experiences than speed. This is because of the way that applications are built.

In modern Web applications, the business logic is parcelled-out into independent ‘microservices’ and their responses re-assembled by the client to produce the overall digital user experience. Each HTTP request is often quite small, although an overall onscreen action can be composed of a number of requests of varying sizes so broadband speed is often less of a factor than latency – the time to send and receive each request. See Appendix 2: Why latency is important, for a more detailed explanation of why latency is such an important driver of customer app experience.

The value of using actual application latency data

As we have already explained, STL Partners prefers to use total roundtrip latency as an indicator of customer app experience as it measures the time that a customer waits for a response following an action. STL Partners believes that Crittercism data reflects actual usage in each market because it operates within apps – in hundreds of thousands of apps that people use in the Apple App Store and in Google Play. This is a quite different approach to other players which require users to download a specific app which then ‘pings’ a server and awaits a response. This latter approach has a couple of limitations:

1. Although there have been several million downloads of the OpenSignal and Actual Experience app, this doesn’t get anywhere near the number of people that have downloaded apps containing the Crittercism measurement code.

2. Because the Crittercism code is embedded within apps, it directly measures the latency experienced by users when using those apps1. A dedicated measurement app fails to do this. It could be argued that a dedicated app gives the ‘cleanest’ app reading – it isn’t affected by variations in app design, for example. This is true but STL Partners believes that by aggregating the data for apps such variation is removed and a representative picture of total roundtrip latency revealed. Crittercism data can also show more granular data. For example, although we haven’t shown it in this report, Crittercism data can show latency performance by application type – e.g. Entertainment, Shopping, and so forth – based on the categorisation of apps used by Google and Apple in their app stores.

A key premise of this analysis is that, because operators’ customer bases are similar within and across markets, the profile of app usage (and therefore latency) is similar from one operator to the next. The latency differences between operators are, therefore, down to the performance of the operator.

Why it isn’t enough to measure average latency

It is often said that averages hide disparities in data, and this is particularly true for latency and for customer experience. This is best illustrated with an example. In Figure 2 we show the distribution of latencies for two operators. Operator A has lots of very fast requests and a long tail of requests with high latencies.

Operator B has much fewer fast requests but a much shorter tail of poor-performing latencies. The chart clearly shows that operator B has a much higher percentage of requests with a satisfactory latency even though its average latency performance is lower than operator A (318ms vs 314ms). Essentially operator A is let down by its slowest requests – those that prevent an application from completing a task for a customer.

This is why in this report we focus on average latency AND, critically, on the percentage of requests that are deemed ‘unsatisfactory’ from a customer experience perspective.

Using latency as a measure of performance for customers

500ms as a key performance cut-off

‘Good’ roundtrip latency is somewhat subjective and there is evidence that experience declines in a linear fashion as latency increases – people incrementally drop off the site. However, we have picked 500ms (or half a second) as a measure of unsatisfactory performance as we believe that a delay of more than this is likely to impact mobile users negatively (expectations on the ‘fixed’ internet are higher). User interface research from as far back as 19682 suggests that anything below 100ms is perceived as “instant”, although more recent work3 on gamers suggests that even lower is usually better, and delay starts to become intrusive after 200-300ms. Google experiments from 20094 suggest that a lasting effect – users continued to see the site as “slow” for several weeks – kicked in above 400ms.

Percentage of app requests with total roundtrip latency above 500ms – markets

Five key markets in Europe: France, Germany, Italy, and the UK.

This first report looks at five key markets in Europe: France, Germany, Italy, and the UK. We explore performance overall for Europe by comparing the relative performance of each country and then dive into the performance of operators within each country.

We intend to publish other reports in this series, looking at performance in other regions – North America, the Middle East and Asia, for example. This first report is intended to provider a ‘taster’ to readers, and STL Partners would like feedback on additional insight that readers would welcome, such as latency performance by:

  • Operating system – Android vs Apple
  • Specific device – e.g. Samsung S6 vs iPhone 6
  • App category – e.g. shopping, games, etc.
  • Specific countries
  • Historical trends

Based on this feedback, STL Partners and Crittercism will explore whether it is valuable to provide specific total roundtrip latency measurement products.

Contents

  • Latency as a proxy for customer app experience
  • ‘Total roundtrip latency’ is the best measure for customer ‘app experience’
  • Latency is becoming increasingly important
  • STL Partners’ approach
  • Europe: UK, Germany, France, Italy, Spain
  • Quantitative Analysis
  • Key findings
  • UK: EE, O2, Vodafone, 3
  • Quantitative Analysis
  • Key findings
  • Germany: T-Mobile, Vodafone, e-Plus, O2
  • Quantitative Analysis
  • Key findings
  • France: Orange, SFR, Bouygues Télécom, Free
  • Quantitative Analysis
  • Key findings
  • Italy: TIM, Vodafone, Wind, 3
  • Quantitative Analysis
  • Key findings
  • Spain: Movistar, Vodafone, Orange, Yoigo
  • Quantitative Analysis
  • Key findings
  • About STL Partners and Telco 2.0
  • About Crittercism
  • Appendix 1: Defining latency
  • Appendix 2: Why latency is important

 

  • Figure 1: Total roundtrip latency – reflecting a user’s ‘wait time’
  • Figure 2: Why a worse average latency can result in higher customer satisfaction
  • Figure 3: Major European markets – average total roundtrip latency (ms)
  • Figure 4: Major European markets – percentage of requests above 500ms
  • Figure 5: The location of Google and Amazon’s European data centres favours operators in France, UK and Germany
  • Figure 6: European operators – average total roundtrip latency (ms)
  • Figure 7: European operators – percentage of requests with latency over 500ms
  • Figure 8: Customer app experience is likely to be particularly poor at 3 Italy, Movistar (Spain) and Telecom Italia
  • Figure 9: UK Operators – average latency (ms)
  • Figure 10: UK operators – percentage of requests with latency over 500ms
  • Figure 11: German Operators – average latency (ms)
  • Figure 12: German operators – percentage of requests with latency over 500ms
  • Figure 13: French Operators – average latency (ms)
  • Figure 14: French operators – percentage of requests with latency over 500ms
  • Figure 15: Italian Operators – average latency (ms)
  • Figure 16: Italian operators – percentage of requests with latency over 500ms
  • Figure 17: Spanish Operators – average latency (ms)
  • Figure 18: Spanish operators – percentage of requests with latency over 500ms
  • Figure 19: Breakdown of HTTP requests in facebook.com, by type and size

How to be Agile: Agility by Design and Information Intensity

Background: The Telco 2.0 Agility Challenge

Agility is a highly desirable capability for telecoms operators seeking to compete and succeed in their core businesses and the digital economy in general. In our latest industry research, we found that most telco executives that responded rated their organisations as ‘moderately agile’, and identified a number of practical steps that telco management could and should take to improve agility.

The Definition and Value of Agility

In the Telco 2.0 Agility Challenge, STL Partners first researched with 29 senior telecoms operator executives a framework to define agility in the industry’s own terms, and then gathered quantitative input to benchmark the industry’s agility from 74 further executives via an online self-diagnosis tool. The analysis in this report examines the aggregate quantitative input of those executives.

The Telco 2.0 Agility framework comprises the five agility domains illustrated below.

Figure 4: The Telco 2.0 Agility Framework

Source: STL Partners, The ‘Agile Operator’: 5 Key Ways to Meet the Agility Challenge

  • Organisational Agility: Establish a more agile culture and mindset, allowing you to move at faster speeds and to innovate more effectively
  • Network Agility: Embrace new networking technologies/approaches to ensure that you provide the best experience for customers and manage your resources and investment more efficiently
  • Service Agility: Develop the capability to create products and services in a much more iterative manner, resulting in products that are developed faster, with less investment and better serve customer needs
  • Customer Agility: Provide customers with the tools to manage their service and use analytics to gain insight into customer behaviour to develop and refine services
  • Partnering Agility: Become a more effective partner by developing the right skills to understand and assess potential partnerships and ensure that the right processes/technologies are in place to make partnering as easy as possible

A key finding of the first stage was that all of the executives we spoke to considered achieving agility as very important or critical to their organisations’ success, as exemplified by this quote.

“It is fundamental to be agile. For me it is much more important than being lean – it is more than just efficiency.”

European Telco CTO

This research project was kindly sponsored by Ericsson. STL Partners independently created the methodology, questions, findings, analysis and conclusions.

Purpose of this report

This report details:

  • The headline findings of the Telco 2.0 Agility Challenge
  • The category winners
  • What are the lessons revealed about telco agility overall?
  • What do telcos need to address to improve their overall agility?
  • What can others do to help?

Key Findings

The Majority of Operators were ‘Moderately Agile’

Just over two thirds of respondents achieved a total score between 50%-75%. All of the twenty questions had 4 choices, so a score in this range means that for most of the questions these respondents were choosing the second or third option out of four choices increasing from the least to the most agile. The mean score achieved was 63% and the median 61%. This shows that most telcos believe they have some way to go before they would realistically consider themselves truly Agile by the definition set out in the benchmark.

Figure 5: Distribution of Total Agility Scores

Source: STL Partners Telco 2.0 Agility Challenge, n =74

Agility Champions

A further part of the Agility Challenge was to identify Agility Champions, who were recognised through Agility Domain Awards at TM Forum Live! in Nice in June. The winners of these prizes were additionally interviewed by STL Partners to check the evidence of their claims, and the winners were:

  • Telus, which won the Customer Agility Challenge Award. Telus adopted a Customer First initiative across the whole organization; this commitment to customers has led to both a significant increase in the ‘likelihood to recommend’ metric and a substantial reduction in customer complaints.
  • Zain Jordan, which won the Service Agility Challenge. Zain Jordan has achieved the speed and flexibility needed to differentiate itself in the marketplace through deployment of state-of-the-art, real time service enablement platforms and solutions. These are managed and operated by professional, specialized, and qualified teams, and are driving an increase in profitability and customer satisfaction.
  • Telecom Italia Digital Solutions, (TIDS) which won the Partnering Agility Challenge. TIDS have partnered effectively to deliver innovative digital services, including establishing and launching an IoT platform from scratch within 6 months. It is also developing and coordinating all the digital presence at the Expo Milan 2015.

Network Agility is hardest to achieve

Most respondents scored lower on Network Agility than the other domains, and we believe this is partly because the network criteria were harder to achieve (e.g. configuring networks in real time) but also that achieving meaningful agility in a network is as a rule harder than in the other areas.

Figure 6: Average Score by Agility Domain

Note: The maximum score was 4 and the minimum 1, with 4 = Strongly Agile, 3 = Mostly Agile, 2 = Somewhat Agile, and 1 = Not Agile.

Source: STL Partners, n = 74

Next Section: Looking Deeper

 

  • Executive Summary
  • Introduction
  • Background: The Telco 2.0 Agility Challenge
  • Purpose of this report
  • Key Findings
  • The Majority of Operators were ‘Moderately Agile’
  • Agility Champions
  • Network Agility is hardest to achieve
  • Looking Deeper
  • Organisational Agility: ‘Mindset’ is not enough
  • Information Agility is an important factor
  • If you had to choose One Metric that Matters (OMTM) it would be…
  • Conclusions

 

  • Figure 1: The Telco 2.0 Agility Framework
  • Figure 2: Respondents can be grouped into 3 types based on the level and nature of their organisational agility
  • Figure 3: Information Agility Sub-Segments
  • Figure 4: The Telco 2.0 Agility Framework
  • Figure 5: Distribution of Total Agility Scores
  • Figure 6: Average Score by Agility Domain
  • Figure 7: We were surprised that Organisational Agility was not a stronger indicator of Total Agility
  • Figure 8: Differences in Responses to Organisational Agility Questions
  • Figure 9: Organisational Agility a priori Segments and Scores
  • Figure 10: ‘Agile by Design’ Organisations Scored higher than others
  • Figure 11: Defining Information Agility Segments
  • Figure 12: The Information Agile Segment scored higher than the others

How 5G is Disrupting Cloud and Network Strategy Today

5G – cutting through the hype

As with 3G and 4G, the approach of 5G has been heralded by vast quantities of debate and hyperbole. We contemplated reviewing some of the more outlandish statements we’ve seen and heard, but for the sake of brevity and progress we’ll concentrate in this report on the genuine progress that has also occurred.

A stronger definition: a collection of related technologies

Let’s start by defining terms. For us, 5G is a collection of related technologies that will eventually be incorporated in a 3GPP standard replacing the current LTE-A. NGMN, the forum that is meant to coordinate the mobile operators’ requirements vis-à-vis the vendors, recently issued a useful document setting out what technologies they wanted to see in the eventual solution or at least have considered in the standards process.

Incremental progress: ‘4.5G’

For a start, NGMN includes a variety of incremental improvements that promise substantially more capacity. These are things like higher modulation, developing the carrier-aggregation features in LTE-A to share spectrum between cells as well as within them, and improving interference coordination between cells. These are uncontroversial and are very likely to be deployed as incremental upgrades to existing LTE networks long before 5G is rolled out or even finished. This is what some vendors, notably Huawei, refer to as 4.5G.

Better antennas, beamforming, etc.

More excitingly, NGMN envisages some advanced radio features. These include beamforming, in which the shape of the radio beam between a base station and a mobile station is adjusted, taking advantage of the diversity of users in space to re-use the available radio spectrum more intensely, and both multi-user and massive MIMO (Multiple Input/Multiple Output). Massive MIMO simply means using many more antennas – at the moment the latest equipment uses 8 transmitter and 8 receiver antennas (8T*8R), whereas 5G might use 64. Multi-user MIMO uses the variety of antennas to serve more users concurrently, rather than just serving them faster individually. These promise quite dramatic capacity gains, at the cost of more computationally intensive software-defined radio systems and more complex antenna designs.Although they are cutting-edge, it’s worth pointing that 802.11ac Wave 2 WiFi devices shipping now have these features, and it is likely that the WiFi ecosystem will hold a lead in these for some considerable length of time.

New spectrum

NGMN also sees evolution towards 5G in terms of spectrum. We can divide this into a conservative and a radical phase – in the first, conservative phase, 5G is expected to start using bands below 6GHz, while in the second, radical phase, the centimetre/millimetre-wave bands up to and above 30GHz are in discussion. These promise vastly more bandwidth, but as usual will demand a higher density of smaller cells and lower transmitter power levels. It’s worth pointing out that it’s still unclear whether 6GHz will make the agenda for this year’s WRC-15 conference, and 60GHz may or may not be taken up in 2019 at WRC-19, so spectrum policy is a critical path for the whole project of 5G.

Full duplex radio – doubling capacity in one stroke

Moving on, we come to some much more radical proposals and exotic technologies. 5G may use the emerging technology of full-duplex radio, which leverages advances in hardware signal processing to get rid of self-interference and make it possible for radio devices to send and receive at the same time on the same frequency, something hitherto thought impossible and a fundamental issue in radio. This area has seen a lot of progress recently and is moving from an academic research project towards industrial status. If it works, it promises to double the capacity provided by all the other technologies together.

A new, flatter network architecture?

A major redesign of the network architecture is being studied. This is highly controversial. A new architecture would likely be much “flatter” with fewer levels of abstraction (such as the encapsulation of Internet traffic in the GTP protocol) or centralised functions. This, however, would be a very radical break with the GSM-inspired practice that worked in 2G, 3G, and in an adapted form in 4G. However, the very demanding latency targets we will discuss in a moment will be very difficult to satisfy with a centralised architecture.

Content-centric networking

Finally, serious consideration is being given to what the NGMN calls information-based networking, better known to the wider community as either name-based networking, named-data networking, or content-centric networking, as TCP-Reno inventor Van Jacobsen called it when he introduced the concept in a now-classic lecture. The idea here is that the Internet currently works by mapping content to domain names to machines. In content-centric networking, users request some item of content, uniquely identified by a name, and the network finds the nearest source for it, thus keeping traffic localised and facilitating scalable, distributed systems. This would represent a radical break with both GSM-inspired and most Internet practice, and is currently very much a research project. However, code does exist and has even beenimplemented using the OpenFlow NFV platform, and IETF standardisation is under way.

The mother of all stretch targets

5G is already a term associated with implausibly grand theoretical maxima, like every G before it. However, the NGMN has the advantage that it is a body that serves first of all the interests of the operators, the customers, rather than the vendors. Its expectations are therefore substantially more interesting than some of the vendors’ propaganda material. It has also recently started to reach out to other stakeholders, such as manufacturing companies involved in the Internet of Things.

Reading the NGMN document raises some interesting issues about the definition of 5G. Rather than set targets in an absolute sense, it puts forward parameters for a wide range of different use cases. A common criticism of the 5G project is that it is over-ambitious in trying to serve, for example, low bandwidth ultra-low power M2M monitoring networks and ultra-HD multicast video streaming with the same network. The range of use cases and performance requirements NGMN has defined are so diverse they might indeed be served by different radio interfaces within a 5G infrastructure, or even by fully independent radio networks. Whether 5G ends up as “one radio network to rule them all”, an interconnection standard for several radically different systems, or something in between (for example, a radio standard with options, or a common core network and specialised radios) is very much up for debate.

In terms of speed, NGMN is looking for 50Mbps user throughput “everywhere”, with half that speed available uplink. Success is defined here at the 95th percentile, so this means 50Mbps to 95% geographical coverage, 95% of the time. This should support handoff up to 120Km/h. In terms of density, this should support 100 users/square kilometre in rural areas and 400 in suburban areas, with 10 and 20 Gbps/square km capacity respectively. This seems to be intended as the baseline cellular service in the 5G context.

In the urban core, downlink of 300Mbps and uplink of 50Mbps is required, with 100Km/h handoff, and up to 2,500 concurrent users per square kilometre. Note that the density targets are per-operator, so that would be 10,000 concurrent users/sq km when four MNOs are present. Capacity of 750Gbps/sq km downlink and 125Gbps/sq km uplink is required.

An extreme high-density scenario is included as “broadband in a crowd”. This requires the same speeds as the “50Mbps anywhere” scenario, with vastly greater density (150,000 concurrent users/sq km or 30,000 “per stadium”) and commensurately higher capacity. However, the capacity planning assumes that this use case is uplink-heavy – 7.5Tbps/sq km uplink compared to 3.75Tbps downlink. That’s a lot of selfies, even in 4K! The fast handoff requirement, though, is relaxed to support only pedestrian speeds.

There is also a femtocell/WLAN-like scenario for indoor and enterprise networks, which pushes speed and capacity to their limits, with 1Gbps downlink and 500Mbps uplink, 75,000 concurrent users/sq km or 75 users per 1000 square metres of floor space, and no significant mobility. Finally, there is an “ultra-low cost broadband” requirement with 10Mbps symmetrical, 16 concurrent users and 16Mbps/sq km, and 50Km/h handoff. (There are also some niche cases, such as broadcast, in-car, and aeronautical applications, which we propose to gloss over for now.)

Clearly, the solution will have to either be very flexible, or else be a federation of very different networks with dramatically different radio properties. It would, for example, probably be possible to aggregate the 50Mbps everywhere and ultra-low cost solutions – arguably the low-cost option is just the 50Mbps option done on the cheap, with fewer sites and low-band spectrum. The “broadband in a crowd” option might be an alternative operating mode for the “urban core” option, turning off handoff, pulling in more aggregated spectrum, and reallocating downlink and uplink channels or timeslots. But this does begin to look like at least three networks.

Latency: the X factor

Another big stretch, and perhaps the most controversial issue here, is the latency requirement. NGMN draws a clear distinction between what it calls end-to-end latency, aka the familiar round-trip time measurement from the Internet, and user-plane latency, defined thus:

Measures the time it takes to transfer a small data packet from user terminal to the Layer 2 / Layer 3 interface of the 5G system destination node, plus the equivalent time needed to carry the response back.

That is to say, the user-plane latency is a measurement of how long it takes the 5G network, strictly speaking, to respond to user requests, and how long it takes for packets to traverse it. NGMN points out that the two metrics are equivalent if the target server is located within the 5G network. NGMN defines both using small packets, and therefore negligible serialisation delay, and assuming zero processing delay at the target server. The target is 10ms end-to-end, 1ms for special use cases requiring low latency, or 50ms end-to-end for the “ultra-low cost broadband” use case. The low-latency use cases tend to be things like communication between connected cars, which will probably fall under the direct device-to-device (D2D) element of 5G, but nevertheless some vendors seem to think it refers to infrastructure as well as D2D. Therefore, this requirement should be read as one for which the 5G user plane latency is the relevant metric.

This last target is arguably the biggest stretch of all, but also perhaps the most valuable.

The lower bound on any measurement of latency is very simple – it’s the time it takes to physically reach the target server at the speed of light. Latency is therefore intimately connected with distance. Latency is also intimately connected with speed – protocols like TCP use it to determine how many bytes it can risk “in flight” before getting an acknowledgement, and hence how much useful throughput can be derived from a given theoretical bandwidth. Also, with faster data rates, more of the total time it takes to deliver something is taken up by latency rather than transfer.

And the way we build applications now tends to make latency, and especially the variance in latency known as jitter, more important. In order to handle the scale demanded by the global Internet, it is usually necessary to scale out by breaking up the load across many, many servers. In order to make this work, it is usually also necessary to disaggregate the application itself into numerous, specialised, and independent microservices. (We strongly recommend Mary Poppendieck’s presentation at the link.)

The result of this is that a popular app or Web page might involve calls to dozens to hundreds of different services. Google.com includes 31 HTTP requests these days and Amazon.com 190. If the variation in latency is not carefully controlled, it becomes statistically more likely than not that a typical user will encounter at least one server’s 99th percentile performance. (EBay tries to identify users getting slow service and serve them a deliberately cut-down version of the site – see slide 17 here.)

We discuss this in depth in a Telco 2.0 Blog entry here.

Latency: the challenge of distance

It’s worth pointing out here that the 5G targets can literally be translated into kilometres. The rule of thumb for speed-of-light delay is 4.9 microseconds for each kilometre of fibre with a refractive index of 1.47. 1ms – 1000 microseconds – equals about 204km in a straight line, assuming no routing delay. A response back is needed too, so divide that distance in half. As a result, in order to be compliant with the NGMN 5G requirements, all the network functions required to process a data call must be physically located within 100km, i.e. 1ms, of the user. And if f the end-to-end requirement is taken seriously, the applications or content that they want must also be hosted within 1000km, i.e. 10ms, of the user. (In practice, there will be some delay contributed by serialisation, routing, and processing at the target server, so this would actually be somewhat more demanding.)

To achieve this, the architecture of 5G networks will need to change quite dramatically. Centralisation suddenly looks like the enemy, and middleboxes providing video optimisation, deep packet inspection, policy enforcement, and the like will have no place. At the same time, protocol designers will have to think seriously about localising traffic – this is where the content-centric networking concept comes in. Given the number of interested parties in the subject overall, it is likely that there will be a significant period of ‘horse-trading’ over the detail.

It will also need nothing more or less than a CDN and data-centre revolution. Content, apps, or commerce hosted within this 1000km contour will have a very substantial competitive advantage over those sites that don’t move their hosting strategy to take advantage of lower latency. Telecoms operators, by the same token, will have to radically decentralise their networks to get their systems within the 100km contour. Those content, apps, or commerce sites that move closer in still, to the 5ms/500km contour or further, will benefit further. The idea of centralising everything into shared services and global cloud platforms suddenly looks dated. So might the enormous hyperscale data centres one day look like the IT equivalent of sprawling, gas-guzzling suburbia? And will mobile operators become a key actor in the data-centre economy?

  • Executive Summary
  • Introduction
  • 5G – cutting through the hype
  • A stronger definition: a collection of related technologies
  • The mother of all stretch targets
  • Latency: the X factor
  • Latency: the challenge of distance
  • The economic value of snappier networks
  • Only Half The Application Latency Comes from the Network
  • Disrupt the cloud
  • The cloud is the data centre
  • Have the biggest data centres stopped getting bigger?
  • Mobile Edge Computing: moving the servers to the people
  • Conclusions and recommendations
  • Regulatory and political impact: the Opportunity and the Threat
  • Telco-Cloud or Multi-Cloud?
  • 5G vs C-RAN
  • Shaping the 5G backhaul network
  • Gigabit WiFi: the bear may blow first
  • Distributed systems: it’s everyone’s future

 

  • Figure 1: Latency = money in search
  • Figure 2: Latency = money in retailing
  • Figure 3: Latency = money in financial services
  • Figure 4: Networking accounts for 40-60 per cent of Facebook’s load times
  • Figure 5: A data centre module
  • Figure 6: Hyperscale data centre evolution, 1999-2015
  • Figure 7: Hyperscale data centre evolution 2. Power density
  • Figure 8: Only Facebook is pushing on with ever bigger data centres
  • Figure 9: Equinix – satisfied with 40k sq ft
  • Figure 10: ETSI architecture for Mobile Edge Computing

 

Google’s MVNO: What’s Behind it and What are the Implications?

Google’s core business is under pressure

Google, the undisputed leader in online advertising and tech industry icon, has more problems than you might think. The grand narrative is captured in the following chart, showing basic annual financial metrics for Google, Inc. between 2009 and 2014.

Figure 1: Google’s margins have eroded substantially over time

Source: STL Partners, Google 10-K filing

This is essentially the classic problem of commoditisation. The IT industry has been structurally deflationary throughout its existence, which has always posed problems for its biggest successes – how do you maintain profitability in a business where prices only ever fall? Google is growing in terms of volume, but its margins are sliding, and as a result, profitability is growing much more slowly than revenue. Since 2010, the operating margin has shrunk from around 35% to around 25%, a period during which a major competitor emerged (Facebook) and Google initiated a variety of major investments, research projects, and flirted with manufacturing hardware (through the Motorola acquisition).

And it could get worse. In its most recent 10-K filing, Google says: “We anticipate downward pressure on our operating margin in the future.” It cites increasing competition and increased expenditures, while noting that it is becoming more reliant on lower margin products: “The margin on the sale of digital content and apps, advertising revenues from mobile devices and newer advertising formats are generally less than the margin on revenues we generate from advertising on our websites on traditional formats.”

Google remains massively dependent on a commoditising advertising business

Google is very, very dependent on selling advertising for revenue. It does earn some revenue from content, but most of this is generated from the ContentID program, which places adverts on copyrighted material and shares revenue with the rightsholder, and therefore, amounts to much the same thing. Over the past two years, Google has actually become more advert-dominated, as Figure 2 shows. Advertising revenues are not only vastly greater than non-advertising revenues, they are growing much faster and increasing as a share of the total. Over- reliance on the fickle and fast changing advertising market is obviously risky. Also, while ad brokering is considered a high-margin business, Google’s margins are now at the same level as AT&T’s.

Figure 2: Not only is Google overwhelmingly dependent on advertising, advertising revenue is growing faster than non-advertising

Source: STL Partners, Google 10-K

The growth rate of non-advertising revenue at Google has slowed sharply since last year. It is now growing more slowly than either advertising on Google properties, or in the Google affiliate network (see Figure 3).

Figure 3: Google’s new-line businesses are growing slower than the core business

Source: STL Partners, Google 10-K

At the same time, the balance has shifted a little between Google’s own properties (such as Google.com) and its affiliate network. Historically, more and more Google revenue has come from its own inventory and less from placing ads on partner sites. Costs arise from the affiliate network because Google pays out revenue share to the partner sites, known as traffic-acquisition costs or TACs. Own-account ad inventory, however, isn’t free – Google has to create products to place advertising in, and this causes it to incur R&D expenditures.

In a real sense, R&D is the equivalent to TAC for the 60-odd per cent of Google’s business that occurs on its own web sites. Google engineering excellence, and perhaps economies of scale, mean that generating ad inventory via product creation might be a better deal than paying out revenue share to hordes of bloggers or app developers, and Figure 4 shows this is indeed the case. R&D makes up a much smaller percentage of revenue from Google properties than TAC does of revenue from the affiliate network.

Figure 4: R&D is a more efficient means of generating ad inventory than affiliate payouts

Source: STL Partners, Google 10-K

Note, that although TAC might well be rising, the spike for Q4 2014 is probably a seasonal effect – Q4 is likely to be a month when a lot of adverts get clicked across the web.

 

  • Executive Summary
  • Google’s core business is under pressure
  • Google remains massively dependent on a commoditising advertising business
  • Google spends far more on R&D and capex than Apple
  • But while costs soar, Google ad pricing is falling
  • Google also has very high running costs
  • The threats from Facebook and Apple are real
  • Google MVNO: a strategic initiative
  • What do you need to make a mini-carrier?
  • The Google MVNO will launch into a state of price war
  • How low could the Google MVNO’s prices be?
  • Google’s MVNO: The Strategic Rationale
  • Option 1: Ads
  • Option 2: Straightforward carrier business model
  • Option 3: Android-style strategic initiative vs MNOs
  • Option 4: Anti-Apple virus, 2.0
  • Conclusions

 

  • Figure 1: Google’s margins have eroded substantially over time
  • Figure 2: Not only is Google overwhelmingly dependent on advertising, advertising revenue is growing faster than non-advertising
  • Figure 3: Growth in Google’s new-line businesses is now slower than in the core business
  • Figure 4: R&D is a more efficient means of generating ad inventory than affiliate payouts
  • Figure 5: Google spends a lot of money on research
  • Figure 6: Proportionately, Google research spending is even higher
  • Figure 7: Google’s dollar capex is almost identical to vastly bigger Apple’s
  • Figure 8: Google is startlingly capex-intensive compared to Apple, especially for an ad broker versus a global manufacturing titan
  • Figure 9: Google’s ad pricing is declining, and volume growth paused for most of 2014
  • Figure 10: Google is a more expensive company to run than Apple
  • Figure 11: The aircraft hangar Google leases from NASA
  • Figure 12: Facebook is pursuing quality over quantity in ad placement
  • Figure 12: Facebook is gradually closing the gap on Google in digital advertising
  • Figure 14: Despite a huge revenue quarter, Facebook’s Q4 saw a sharp hit to margin
  • Figure 15: Facebook’s margin hit is explained by the rise in R&D spending
  • Figure 16: Apple’s triumph – a terrible Q4 for the Android ecosystem
  • Figure 17: Price disruption in France and in the United States
  • Figure 18: Price disruption in the US – this is only the beginning
  • Figure 19: Defending AT&T and Verizon Wireless’ ARPU comes at a price
  • Figure 20: Modelling the service price of a mini-carrier
  • Figure 21: A high WiFi offload rate could make Google’s pricing aggressive
  • Figure 21: Handset subsidies are alive and well at T-Mobile

 

Digital Services: What is Your Digital Business Worth?

Introduction

When Hewlett Packard’s then-CEO (Carly Fiorina) defended HP’s infamous acquisition of Compaq in 2002, she offered a number of arguments as to why the deal made sense. Firstly, the combined entity would now be able to meet the demands of customers for “solutions on a truly global basis.” Secondly, she claimed that the firm would be able to offer products “from top to bottom, from low-end to high-end.” Lastly, but perhaps most importantly, the merger would generate “synergies that are compelling.”

‘Synergy’ is a straightforward concept: the interaction of two or more entities to produce a combined effect greater than the sum of their parts. Synergistic phenomena are ubiquitous in the natural world, ranging from physics (e.g. the building blocks of atoms), to genetics (e.g. the cooperative interactions among genes in genomes) and the synergies produced by socially-organised groups (e.g. the division of labour).

In the business world, ‘synergy’ refers to the value that is generated by combining two organisations to create a new, more valuable entity. Synergies here can be ‘operational’, such as the combination of functional strengths, or ‘financial’, such as tax benefits or diversification. Traditionally, however, investors have been deeply sceptical of synergies, in terms of both their existence and the ability of M&A activity to deliver them. This was the case with the HP-Compaq merger: the day the merger was announced HP’s stock closed at $18.87, down sharply from $23.21 the previous day.

Recently, ‘synergy’ has also become an increasingly familiar term within the telecommunications industry, owing to activities in two distinct areas. These are now discussed in turn.

Fixed-Mobile Convergence: How tangible are the synergies?

Fixed-mobile convergence (FMC) is a hot topic, and numerous substantial M&A transactions have occurred in this space in recent years (especially in Europe). Figure 1 charts some of these transactions, including publicly available synergy estimates (reflecting cost savings, revenue benefits, or both), below:

Figure 1: Fixed-mobile convergence driven by synergy value

Source: Vodafone, Analysys Mason, STL Partners
* Synergy run-rate by 2016; ** Revenue synergies only

With synergies estimated to account for over 10% of each of these transactions’ valuations, and in the case of Vodafone/KDG nearly 30%, they are clearly perceived as an important driver of value. However, there are two key qualifications to be made here:

  1. Discounted Cash Flow, or ‘DCF’, is theoretically sound but less credible in practice: Each of the estimates of ‘synergy value’ in Figure 1 were constructed using DCF techniques, which attempt to forecast future cash flows and ‘discount’ these to their overall value today (e.g. because one can save cash and earn interest) . Although theoretically sound, there are several problems with DCF in practice.
  2. Certain FMC synergies are more tangible than others: Whilst cost-centric synergies, such as economies of scale (e.g. combined call centres) and access to mobile backhaul, are tangible and easier to quantify, revenue-centric synergies (e.g. quad-play and upselling) are less tangible and more challenging to quantify

These qualifications mirror those raised in the ‘Valuing Digital: A Contentious Yet Vital Business’ Executive Briefing, which discusses the challenges telecoms operators are facing when seeking to generate formal valuations of their digital businesses.

Recap: Digital businesses are especially challenging to value

As telecoms operators’ ambitions in digital services continue to grow, they are increasingly asking what the value of their specific digital initiatives are. Without understanding the value of their digital businesses, telcos cannot effectively govern their individual digital activities: prioritisation, budget allocation and knowing when to close initiatives (‘fast failure’) within digital is challenging without a clear idea of the return on investment different verticals and initiatives are generating. However, telcos face significant challenges across three areas when attempting to value their businesses:

  1. There are challenges in valuing any business (analogue or digital): Although DCF has its drawbacks (see above), any quantitative ‘model’ is necessarily a simplification of reality
  2. Traditional approaches to valuation (e.g. DCF) are inadequate for digital businesses: DCF is especially inappropriate when valuing early-stage digital businesses due to their unique characteristics
  3. The potential for digital services to generate ‘synergy value’ presents further challenges for valuation: Synergy value presents additional conceptual and practical challenges when digital businesses are held within telecoms operators. Figure 2 outlines these below:

Figure 2: Conceptual and practical challenges caused by synergy value

Source: STL Partners

Therefore, telcos (but also the broader technology ecosystem in general) need a new set of tools to answer questions in two key areas. For example:

  1. How should telcos model the market value of their digital businesses?
    • Introducing ‘proxy models’
    • What are the advantages and disadvantages of proxy models?
    • How can a proxy be built to account for issues around limited data availability?
    • Case studies: example valuations of high-profile but privately-held initiatives
  2. How should telcos think about the ‘synergy value’ generated by their digital businesses?
    • What is a useful framework for thinking about synergy value?
    • How are some telcos using clinical trials to assist in the ‘measurement’ of synergies?

 

  • Executive Summary
  • Introduction
  • Fixed-Mobile Convergence: How tangible are the synergies?
  • Recap: Digital businesses are especially challenging to value
  • A Digital Valuation Framework
  • ‘Net synergy’ has four components: benefits and costs, to and from the core
  • Benchmark data theoretically leads to conservative valuations
  • How to Build a Proxy Model
  • What is a ‘Proxy Model’?
  • Proxy models have several advantages over DCF, but they also have data availability challenges
  • Case Study: SK Telecom’s MelOn could be worth $1bn+
  • How to Measure Synergies
  • The Theory: Clinical trials reduce the synergy problem
  • Case Study: A leading European MNO works with its OpCos to run clinical trials
  • Conclusions and Next Steps
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Fixed-mobile convergence driven by synergy value
  • Figure 2: Conceptual and practical challenges caused by synergy value
  • Figure 3: MTN Mobile Money Uganda, Gross Profit Contribution, 2009-12
  • Figure 4: ‘Net synergy’ across four categories
  • Figure 5: ‘Net synergy’ as a component of digital business value
  • Figure 6: Facebook monthly active users vs. valuation, Q1 2010-Present
  • Figure 7: Proxy model output – SME SaaS providers (financial driver)
  • Figure 8: Total VC Investment by Geography, 2010-13
  • Figure 9: Example operational and financial ‘Emerging Market Discounts’
  • Figure 10: Proxy model output – Digital Music (operational driver; South Korea)
  • Figure 11: Correlation vs. Causation

 

Facebook: Telcos’ New Best Friend?

How Facebook is changing

A history of adaptation

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

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

Source: Zuckerberg’s Facebook page and Facebook investor relations

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

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

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

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

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

2012-2013 – the paranoid years

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

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

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

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

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

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

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

In 2014 – going on the offensive

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

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

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

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

The Facebook exception – no fear, more freedom

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

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

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

Source: Facebook.com

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

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

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

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

Takeaways

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

Financials and business model

Network effects still strong

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

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

Source: Facebook and STL Partners analysis

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

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

 

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

 

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

 

Netflix: Threat or Opportunity?

Introduction

The way in which audiences consume movies and television content appears to be changing.  While ‘linear’ viewing of scheduled channels remains robust, the market for DVD has collapsed and new pricing and consumption models are opening up.

At the forefront of this is Netflix – with a total of 63M paying subscribers across 50 markets (it is present in a large number of locations in Latin America and the Caribbean) and a penetration of over 34% in the US, Netflix has created a new paradigm for on demand content.

How this model is going to impact other players in the market in the long term is as yet unclear. To date in the US, pay platform penetration has remained robust, premium channels such as HBO are also performing strongly, and for rights owners and producers a new player bidding for rights is hugely welcome.

So is Netflix a ‘win: win’ opportunity for all concerned?  It may not be that straightforward.  

  • For leading pay TV players, Netflix will be yet another component forcing them to invest in innovation to minimise customers churning from bundled packages, and reducing flexibility around price increases;
  • For TV channels Netflix could lead to programme rights inflation, as a new player with a distinct business model comes into bid for premium exclusive content rights
  • For both established TV platforms and premium channels there is the risk that in price sensitive markets or demographics Netflix offers may gain traction, particularly among younger consumers at the expense of traditional subscription models.
  • For telcos looking to compete with cable and satellite, while Netflix could offer a cost effective way to deliver attractive premium content, it also carries a risk of constraining the telcos into the position of a ‘dumb (or happy) pipe’, not sharing in upsides and not owning the consumer who deals directly with Netflix.

STL Partners has partnered with Prospero Strategy Consultants who work extensively with content and platform players on new market dynamics to prepare this Briefing. The work has drawn on interviews with key players and analysis of quantitative and qualitative market data, to determine the threats and opportunities emerging from this new content ecosystem and how these are likely to develop.

Overview of Netflix History

Netflix began as a postal DVD business in the US in 1997, launching its US subscription streaming service in 2007.  Since 2011 it has focused on rapid expansion into international markets with the biggest growth now coming from international subscribers (67% growth between 2013 and 2014) while its US DVD business is now in decline.

Figure 4: Netflix subscribers 1999 – 2014(Q3) in 000s

Source: Netflix annual reports, STL Partners & Prospero analysis

Netflix changed its reporting methodology from Q1 2011

Consumer Proposition and USPs

The success of the Netflix proposition to consumers has been based on a number of components:

  • Low Price and refusal to tie users into long-term contracts
  • Volume and exclusivity of content
  • Effective User Interface, recommendation engine and multi-device access
  • Customer Data

Low Price
The low monthly price point of Netflix (USD7.99 per month in the US rising to USD8.99 for new subscribers in 2014) has been a key component of the company’s success. This price point is less than the cost of purchasing a single DVD and significantly less than monthly premium drama channels such as HBO (at ~USD15 per month). This price point (and that users are not tied into long term contracts) allows Netflix to attract distinct audience groups.

  • First, the high-end audience who are already pay subscribers.  These customers have demonstrated that they are typically price inelastic and willing to pay for more, buying Netflix on top of existing services.
  • Second, the price constrained audiences, for whom traditional pay TV is out of reach but who are interested in expanded choice.  These are often younger demographics for whom the concept of non-linear consumption is very familiar.
  • There is a third audience group, the price sensitive pay TV subscribers for whom Netflix could be an effective substitute and who could churn off traditional pay TV (either completely or partially) as a result.  While the evidence around the impact on this group is as yet nascent, it is this segment that is making incumbent pay TV players nervous.

Figure 5: Reasons Netflix streamers subscribe to the Service

Source: Alphawise, 3rd Annual Streaming Video Survey – More Devices, More Consumption, March 2013

Volume and Exclusivity

As demonstrated in Figure 5 above a key to success has been offering both range and quality of content.  However, over time the shape of the Netflix library has changed as it has used its customer insight and data to inform its rights strategy.

  • In February 2012 the Netflix US library consisted of ~15k titles (Source: SNL Kagan) of which nearly three quarters were movie titles.
  • Since 2012 the volume of library titles has declined by approximately 30% nearly all of which is accounted for by a decline in movie titles.  Netflix has increased its focus on long run drama series which already have brand recognition and which are effective at attracting and keeping audiences.
  • Interestingly, the volume of content being offered in its international markets is significantly less than in the US (about one-third) as Netflix shifts its focus to quality (as opposed to quantity of content)

Netflix’s early content deals were typically library rights and non-exclusive.  Over time that mix has shifted as Netflix increasingly looks to have a component of exclusivity with the aim of shifting from a “nice to have” to a “must have” service

  • Netflix is investing in original production of a limited number of high profile, high end drama series (such as House of Cards, Orange is the only Black and the recently announced Crouching Tiger Hidden Dragon sequel).  For these Netflix can retain its exclusive rights indefinitely.
  • In addition, Netflix is bidding aggressively for exclusive windows for high end content (such as the recently announced deal for exclusive VOD rights in all territories for Gotham and first window rights in several territories for Penny Dreadful).

Figure 6: Netflix’s Evolving Content Proposition

 

Source: STL Partners & Prospero analysis

Effective consumer interface on multiple devices

Netflix has evolved a highly effective consumer interface, enabling personalisation by individual members in the household, with an easy to manage and visually effective selection mechanism.

  • Since 2008 Netflix has rolled out its proposition across multiple connected devices, with the most recent development being access on mobile devices and partnership with 4G operators such as Vodafone.  Cross device functionality gives users a consistent experience.
  • The consumer is able to choose when and where to consume Netflix content – leading to a new dynamic of series “bingeing” analogous to box set consumption.  In addition, Netflix’s deals with Smart TV providers gives consumers the ability to by-pass traditional pay TV gatekeepers.

Figure 7: Netflix’s user interface

Source: Netflix & SNL Kagan

Customer Data

  • Underlying a huge part of their success is Netflix’s control of its data.  This includes knowledge of individuals within households (who will have their own profiles), detailed insight into viewing behaviour (not just what, but when and how much), knowledge that no linear channel can match.
  • In all markets (regardless of its distribution partners) Netflix retains its customer data and does not share it.  This informs its rights negotiations and new programme investments.
  • Netflix continues to refine its customer understanding using sophisticated A/B testing where small sub groups are given slightly different user experiences to see how this changes behaviour

 

  • Executive Summary
  • Introduction
  • Overview of Netflix
  • History
  • Consumer Proposition and USPs
  • Netflix International Expansion
  • Netflix Financials
  • Attitude of the Financial Markets
  • Impact of Netflix on the Market
  • Impact on Rights Owners and Producers
  • Impact on Channels
  • Impact on Pay Platforms
  • Impact on Broadband Operators
  • Summary impacts on players along the value chain
  • Responses to Netflix
  • Case Study: HBO
  • Case Study: BSkyB
  • Case Study: Broadband Operators
  • Case Study: New Competitors

 

  • Figure 1: Selected Media Companies Market Capitalisation, 1st Sept. 2014 (left) & 1st Jan. 2015 (right), USD billion
  • Figure 2: Netflix’s subscriber targets for 2020 (announced launches only) in USD million
  • Figure 3: Summary of Netflix’s Impacts along the Value Chain
  • Figure 4: Netflix subscribers 1999 – 2014 in 000s
  • Figure 5: Reasons Netflix streamers subscribe to the Service
  • Figure 6: Netflix’s Evolving Content Proposition
  • Figure 7: Netflix’s user interface
  • Figure 8: Netflix geography and timeline
  • Figure 9: Netflix’s Market Penetration over time to Dec 2013 (% households)
  • Figure 10: Netflix revenue per service area, 1999 – 2014, USD million
  • Figure 11: Netflix’s revenues & costs per business line, 2011–2014, USD million
  • Figure 12: Netflix’s net income and free cash flow, 2009 – 2014, USD million
  • Figure 13: Netflix’s streaming content obligations, 2010 – 2013, USD million
  • Figure 14: Selected Media Companies Market Capitalisation, 1st Sept. 2014 (left) & 1st Jan. 2015 (right), USD billion
  • Table 1: Comparison of Key Value Ratios
  • Figure 15: Netflix’s share price (USD), Jan 2010 – Jan 2015
  • Figure 16: Players along the Value Chain
  • Figure 17: Subscribers to premium channels in the US (%of TV households)
  • Figure 18: Changes in US Pay TV Penetration
  • Figure 19: Percentage of Households that are “cord-cutters”
  • Figure 20: Real Time Entertainment Share of Downstream Traffic
  • Figure 21: Share of Traffic of Downstream Peak Time Applications
  • Figure 22: Summary of Impacts along the Value Chain
  • Figure 23: Overview of Sky Expanded Offering
  • Figure 24: Sky’s offering across All Windows
  • Figure 25: Vodafone / Spotify and Sky Sport deals – Impact on mobile broadband usage
  • Figure 26: Netflix Broadband Partners
  • Figure 27: Netflix Competitor Set

Telco-Driven Disruption: Hits & Misses (Part 1)

Introduction

Part of STL’s new Dealing with Disruption in Communications, Content and Commerce stream, this executive briefing explores the role of telcos in disrupting the digital economy. It analyses a variety of disruptive moves by telcos, some long-standing and well established, others relatively new. It covers telcos’ attempts to reinvent digital commerce in South Korea and Japan, the startling success of mobile money services in east Africa, BT’s huge outlay on sports content, AT&T’s multi-faceted smart home platform, Deutsche Telekom’s investments in online marketplaces and Orange’s innovative Libon communications service.

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

Note, this report is not exhaustive. The examples it covers are intended to be representative. Part 2 of this report will analyse other telcos who have successfully disrupted adjacent markets or created new ones. In particular, it will take a close look at NTT DOCOMO, Japan’s leading mobile operator, which has built up a major revenue stream from new businesses.  DOCOMO reported a 13% year-on-year increase in revenues from its new businesses in the six months to September 30th 2014 to 363 billion Japanese yen (more than US$3 billion). Its target for the full financial year is 770 billion yen (almost US$6.5 billion). Revenues from its Smart Life suite of businesses, which provide consumers with advice, information, security, cloud storage and other lifestyle services, rose 18% to 205 billion yen in the six months to September 30th 2014, while its dmarket content store now has 7.8 million subscribers. In the six months to September 30th, the total value of dmarket transactions rose 30% year-on-year to 34.6 billion yen.

In South Korea, leading telco KT is trying to use smartphone-based apps and services to disrupt the digital commerce market, as are the leading U.K. and U.S. mobile operators through their respective Weve and Softcard joint ventures.  In the Philippines, Smart Communications and Globe Telecom have recast the financial services market by enabling people to send each other money using text messages.

Several major telcos are seeking to use their network infrastructure to change the game in the cloud services market. For example, U.S. telco Verizon has made a major push into cloud services, spending US$1.4 billion to acquire specialist Terremark in 2011. At the same time, Verizon and AT&T are having to respond to an aggressive play by T-Mobile USA to reshape the U.S. telecoms market with its Un-carrier strategy.

Some of these companies and their strategies are covered in other STL Partners reports, including:

Telcos can and do disrupt

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

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

Although established telcos have generally been cautious about pursuing disruption, several have succeeded in creating entirely new value propositions, effectively disrupting either their core business or adjacent industry sectors. In some cases, disruptive moves by telcos have primarily been defensive in that their main objective is to reduce churn in the core business. In other cases, telcos have gone on the offensive, moving into new markets in search of new revenues (see Figure 1).

Figure 1: Representative examples of disruptive plays driven by telcos

Source: STL Partners

 

The next section of this paper explores the disruptive moves in the top right hand corner of Figure 1 – those that have taken telcos into new markets and have had a significant financial impact on their businesses.

Offensive, major financial impact 

A classic disruptive play is to use existing assets and customer relationships to move into an adjacent market, open up a new revenue stream and build a major business. This is what Apple did with the iPhone and what Amazon did with cloud services. Several telcos have also followed this playbook. This section looks at three examples – SK Telecom’s SK Planet, Safaricom’s M-Pesa and KDDI’s au Smart Pass – and what other companies in the digital economy can learn from these largely successful moves. Unlike many disruptive moves by telcos, the three businesses covered in this section have had sufficient impact to properly register on investors’ radar screens. They have moved the needle for their parent’s telcos and given their investors confidence in their ability to innovate.

SK Planet – an ambitious mobile commerce play

Owned by SK Telecom, SK Planet is a major broker in South Korea’s world-leading mobile commerce market. It has developed several two-sided online services that are similar in some respects to those offered by Google. SK Planet operates the T Map, a turn-by-turn navigation service, the T Store Android app store, the Smart Wallet payment, loyalty and couponing service, the OK Cashbag loyalty marketing programme and the 11th St online marketplace.


Strategy

Taking advantage of South Koreans’ appetite for new technologies, SK Telecom is using its home market as a test bed for mobile commerce solutions that could be deployed more widely. As well as seeking to generate revenues from enabling payments, advertising, loyalty, couponing and other forms of direct marketing in South Korea, it is aiming to become a leading mobile commerce player in other markets in Asia and North America.

SK Telecom’s approach has been to launch services early and then refine these services in response to feedback from the Korean market. It launched a mobile couponing service, for example, as early as 2008. To reduce the impact of corporate bureaucracy, in 2011, SK Telecom placed its digital commerce activities into a separate company, called SK Planet. The new entity has since focused on the development of a two-sided platform that aims to provide consumers with convenient shopping channels and merchants and brands with a wide range of marketing solutions both online and in the bricks and mortar arena. Although its services are over-the-top, in the sense that they don’t require consumers to use SK Telecom, SK Planet continues to work closely with SK Telecom – its sole owner.

Downstream, SK Planet is trying to differentiate itself by putting consumers’ interests first, giving them considerable control and transparency over the digital marketing they receive. Upstream, SK Planet is putting a lot of emphasis on helping traditional bricks and mortars stores go digital and reverse so-called showrooming, so that consumers research products online, but actually buy them from bricks and mortar retailers.

SK Planet CEO Jinwoo So talks about enabling “Next Commerce” by which he means the seamless integration of online and bricks and mortar commerce.  “Just as Amazon became the global leader in e-commerce by revolutionizing the industry, SK Planet aims to
become the global ‘Next Commerce’ leader in the offline market by driving mobile innovation that will eventually
break down the walls which separate the online and offline worlds,” he says.

Estimating the offline commerce market in South Korea is worth 230 trillion won (more than 210 US billion dollars), SK Planet is aggressively adapting its existing digital commerce platforms, which are underpinned by SK Telecom’s network assets, for mobile commerce. It is also making extensive use of the big data generated by its existing platforms to hone its offerings.

At the 2014 Mobile World Congress, SK Planet CEO Jinwoo So outlined how SK Planet has worked closely with SK Telecom to develop algorithms that use customer data to predict churn and provide personalized recommendations and offers. “We combined the traditional data mining with text mining,” he said. “How people create the search criteria or the sites they visit, we came up with a very unique formula, which gives up much two times better performance than before. … In 11th street, we have achieved almost three times better performance by applying our recommendation engine, which we developed. Now we are trying to prove the ROI for marketing budgets for brands and merchants.”

 

  • Introduction
  • Executive Summary
  • Telcos can and do disrupt
  • Offensive, major financial impact (Strategy, Implementation, Results)
  • SK Planet – an ambitious mobile commerce play
  • M-Pesa – reinventing financial services
  • KDDI au Smart Pass – curating online commerce
  • Offensive, limited financial impact (Strategy, Implementation, Results)
  • Deutsche Telekom’s start-stop Scout 24 investments
  • AT&T Digital Life – slow burn for the smart home
  • Defensive, major financial impact (Strategy, Implementation, Results)
  • BT Sport and BT Wi-Fi – High perceived value
  • Defensive, minor financial impact (Strategy, Implementation, Results)
  • Orange Libon – disrupting the disruptors
  • Conclusions
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Representative examples of disruptive plays driven by telcos
  • Figure 2: SK Planet’s Syrup Wallet stores loyalty cards, coupons and payment cards
  • Figure 3: Shopkick enables US retailers to interact with customers in store
  • Figure 4: SK Planet is an increasingly important part of SK Telecom’s business
  • Figure 5: The flywheel effect: how upstream partners can increase relevance
  • Figure 6: M-Pesa continues to grow in Kenya seven years after launch
  • Figure 7: Vodacom Tanzania has made it easy to register for M-Pesa
  • Figure 8: KDDI’s revenues and profits from value added services grow steadily
  • Figure 9: au Smart Pass is bolstering KDDI’s ARPU
  • Figure 10: Immobilienscout24 has seen a steady increase in traffic
  • Figure 11: AT&T Digital Life gives consumers remote control over their homes
  • Figure 12:  Investors value BT Sport’s contribution
  • Figure 13: BT Sport has driven broadband net-adds, but at considerable expense
  • Figure 14: Orange’s multi-faceted positioning of Libon in the App Store