The state of telco transformation

There are two possible interpretations of the phrase “the state of transformation”:

How is transformation going at telcos, i.e. where are telcos on the path to transformation
The condition of transformation, i.e. what does it mean to be in the process of transforming.

Over the summer of 2022, STL Partners carried out nine in-depth interviews with telco employees that were involved in influencing, coordinating, or implementing large change projects at their organisations. These change makers came from various disciplines: Strategy, HR, Transformation project management, Networks, Technology, as well as Research. Our first intention was to illuminate the first interpretation (where are telcos on the path to
transformation), but our findings suggest that transformation paths (and indeed end states) are unique to each operator, making it difficult to compare progress between telcos.

No one path – overlapping changes in multiple areas

Source: STL Partners

We have mainly come away with findings on the latter point – identifying the types of change initiatives underway and the challenges that change-makers are encountering on their journeys.

This report brings together insights from our interviews, contextualised with further information from secondary sources and ongoing conversations with operators, to give a sense of what telcos mean when they talk about transformation and what their challenges are in becoming more adaptable as organisations to find growth.

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Why is Transformation important to telcos

Far from being an irrelevant or out-dated concept, telcos continue to transform internally. Transformation is understood as a deep change initiative that might involve a shift in foundational technology or a broad-based change in the way an organisation does things, i.e. the culture, processes and the people required – or both.

Most commonly, transformation involves the integration of digital technologies/tools (e.g. cloud, automation, data analytics) into organisational processes to improve business outcomes – with an impact on ways of working (“digital transformation”).

Some telcos talk about transformation in terms of functional initiatives (e.g. IT modernisation), ostensibly affecting a subset of the business, while others talk about transformation from an organisation-wide perspective (e.g. a change in culture like Lean Six Sigma).

The common feature between telco narratives about transformation is that they are motivated by
trying to improve the organisation’s ability to achieve their future vision. This could involve:

Making the business more efficient,
Creating new value/finding new revenues,
Improving outcomes for customers.

Transformations are also undertaken when the vision changes (e.g. when a new leader takes the helm). STL observes that interview respondents described technology-led transformations as aligned to efficiency benefits in the first instance, while organisation-led change was more aligned to responsiveness, particularly in relation to customer needs (improving outcomes). Respondents tended to describe combined technology- and organisation-led change initiatives when there was an ambition to do new things/create new value for customers.

The meaning of transformation – activities cited in interviews

Source: STL Partners

Respondents also mentioned:

Transformation in the context of the industry, particularly the possibility that new technologies may change the shape of an industry (e.g. tech companies may find it easier to enter telecoms with their technology capabilities, while telcos may find it difficult to extend services up the technology value chain).
The enterprise opportunity represented by digital transformation services.

These were not topics for further exploration in our interviews. Industry transformation is a topic for STL’s Executive Briefing Service – however the threat of industry disruption can and should be an inspiration for corporate transformation. Digital transformation services are covered in our Enterprise stream.

Executive Summary
Introduction
Why is Transformation important to telcos
- Different change trajectories
The condition of transformation – being in the process of it
- Where do telcos have transformation efforts underway
- How are transformation projects approached at telcos?
- Who is responsible for transformation?
Barriers to transformation
- Change leadership issues
- People challenges
- Execution difficulties
What is holding telcos back from being future-ready organisations?
- Out with the old…
- …In with the new
Conclusion
- Recommendations

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Should telcos dive deeper into energy?

Introduction

Some telcos have been dabbling in the energy market for a decade or more, partly reflecting the interdependent nature of the two industries. In the past two years, energy has climbed up the agenda of telcos’ management teams, as the electricity and gas sectors experience another major wave of disruption.

In much of the world, energy prices have surged as a result of the war in the Ukraine and the subsequent sanctions against Russia. At the same time, the ongoing transition to renewable energy in response to climate change is opening up new sources of supply and bringing in new players. The cost of wind and solar power, and battery storage is falling steadily, while many policymakers are introducing further incentives to hasten the transition away from oil, natural gas and coal.

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In 2022, energy prices have surged around the world

Source: The IEA

In August 2022, for example, US President Joe Biden signed the Inflation Reduction Act, bringing with it, tax incentives and other measures that should significantly boost the deployment of renewable energy and storage (large-scale batteries). The Act earmarks US$369 billion to help bring about a 40% reduction in greenhouse gas levels by 2030, by supporting electric vehicles (EVs), energy efficiency and building electrification, wind, solar photovoltaic (PV), green hydrogen, battery storage and other technologies. For example, the Act introduces an investment tax credit for standalone energy storage, which can lower the capital cost of equipment by about 30%.

As policymakers and consumers seek out new energy propositions to try and contain rising costs and greenhouse gas emissions, some telcos, such as Telstra and Polsat Plus, are seeing strategic opportunities to build deeper relationships with households. To that end, they are pushing deeper into the energy market, investing in generation capacity, as well as developing retail propositions.

Our landmark report The Coordination Age: A third age of telecoms explained how reliable and ubiquitous connectivity can enable companies and consumers to use digital technologies to efficiently allocate and source assets and resources. In the case of energy, telcos could develop solutions and services that can help consumers and businesses manage their own consumption and sell excess power back to the grid.

This report explores why telcos may want to get involved in the energy market, what their options are and presents case studies, outlining the steps some telcos have already taken. It considers the key advantages/assets that telcos can exploit in the energy market, illustrated by short case studies:

Extensive distribution networks
Established brand names
Billing relationships and payment mechanisms (mobile money/carrier billing)
Existing connectivity and IoT expertise
Big buyers of energy and in-house energy management expertise

The subsequent chapters in the report include an in-depth review of Telstra’s end-to-end energy strategy, the economics of energy retailing and whether telcos should move into energy generation and storage. The penultimate chapter, which considers how to engage consumers, is followed by conclusions summarising how telcos can help address some of the challenges facing energy suppliers and buyers.

Executive Summary
Introduction
Extensive distribution networks
- Case study 1: Polsat Plus – bundling telecoms & electricity
- Case study 2: Orange Energy Africa – distributing solar kits
Established Brands
- Case Study 1: Singtel Power – taking on the incumbent
- Case study 2: Building a Reliance Jio for energy
Billing relationships and payment mechanisms
- Case Study: MTN Nigeria – Pay as you go solar
Existing connectivity and IoT expertise
- Case study 1: Telefónica España – monitoring solar panels
- Case study 2: Proximus – electric vehicle charging
Energy buying and management expertise
- Case study 1: Vodafone – enabling energy data management
- Case study 2: Elisa – balancing the electricity grid
In depth case study: Telstra Energy
- The strategic justification
- How the IoT and AI can help
The Economics of Energy Retailing
- An even tighter regulatory regime
Telcos and energy storage and generation
- Competition from other investors
- Planning permission
- Grid connections
Engaging consumers
- Ripple Energy – consumer ownership
Conclusions

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How can telcos be loved?

Why should telcos care about being a ‘loved brand’?

If you are from an engineering or financial background, it can be tempting to look at branding and think it is a trivial or ‘soft’ aspect of business. This is valid in the sense that perceptions are inherently subjective, but this subjectivity does not mean that such perceptions are unimportant. People respond very strongly and instinctively to emotional stimuli. These responses are deep in our nature. We have evolved to quickly learn the characteristics of things that we want to repeat; the things we like. This extends to social behaviours too: Who do we want to be with, and be seen to be with? Which ‘tribe’ are we in, and who do we associate with?

Businesses have learnt a lot about this, because it has proved hugely valuable to the best practitioners, and the study and practices of marketing, advertising and branding have developed significantly in the past seventy years as a result. To be a ‘loved brand’ is a shorthand description of the ideal state.

What is a loved brand and what are the advantages?

Loved brands create strong emotional bonds with their customers, through a set of values and beliefs that customers can identify with and incorporate into their daily lives. In theory, businesses with loved brands have a range of advantages over others, which over time create significant financial benefits.

Business advantages for loved brands

Source: STL Partners

They enable businesses to charge a premium over other competitors as consumers pay less notice to the price of products sold by the loved brand.

Loved brands can charge a premium over other competitors as consumers pay less notice to the price of products sold by the loved brand. Apple iPhones are generally more expensive than competitors’ phones with similar feature sets. However, many Apple customers remain loyal with the status of owning the latest iPhone outweighing the additional cost.
The emotional bonds with loved brands can become so robust that their customers do not consider their competitors and forcefully defend the brand. Customers are even willing to forgive the brand for making some mistakes.In 2010, Ferrari recalled more than one thousand Italia 458 cars after reports that a design fault could cause them to catch fire.Despite the obvious negative publicity, which would have had a catastrophic consequence on many manufacturers, Ferrari’s strong emotional connection with its customers protected their position in the luxury car market.
Customers become valuable promotors of loved brands on their social networks, pushing the benefits and encouraging others to join. Tesla provides a great illustration of this advantage, where many of the customers are not only delighted with their new electric vehicle, but they are also strong advocates in persuading their friends and family to purchase a Tesla for themselves.
Loved brands attract the best talent, which helps the business to sustain its success.

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Executive Summary
Loved brands
- Why should telcos care about being a ‘loved brand’?
- What is a loved brand and what are the advantages?
Challenges for telcos in being a loved brand
- How are telcos viewed by their customers?
- Why do telcos find it hard to be loved?
Common telco strategies that have had limited success to date
- Focus on having the best network
- Offering the lowest prices in the market
- Differentiating on customer relationship
- Offering content bundles
- Launching new service innovation and diversification strategies
What strategies could telcos adopt to succeed going forward?
Case study 1: TELUS brand positioning
Case study 2: o2 Priority Moments
Case study 3: MTN – sustainable economic value
Case study 4: Telstra Health
Deep dive: What learnings can be drawn from successful strategies adopted by Orange
- What has Orange done?
- What has been the impact on Orange’s results?
- How has strategy contributed to Orange being a loved brand?
- What lessons are there for other operators?
How do others develop and sustain “the love”?
Recommendations for being a loved brand in the new era for telecoms
Index

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VNFs on public cloud: Opportunity, not threat

VNF deployments on the hyperscale cloud are just beginning

Numerous collaboration agreements between hyperscalers and leading telcos, but few live VNF deployments to date

The past three years have seen many major telcos concluding collaboration agreements with the leading hyperscalers. These have involved one or more of five business models for the telco-hyperscaler relationship that we discussed in a previous report, and which are illustrated below:

Five business models for telco-hyperscaler partnerships

Source: STL Partners

In this report, we focus more narrowly on the deployment, delivery and operation by and to telcos of virtualised and cloud-native network functions (VNFs / CNFs) over the hyperscale public cloud. To date, there have been few instances of telcos delivering live, commercial services on the public network via VNFs hosted on the public cloud. STL Partners’ Telco Cloud Deployment Tracker contains eight examples of this, as illustrated below:

Major telcos deploying VNFs in the public cloud

Source: STL Partners

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Telcos are looking to generate returns from their telco cloud investments and maintain control over their ‘core business’

The telcos in the above table are all of comparable stature and ambition to the likes of AT&T and DISH in the realm of telco cloud but have a diametrically opposite stance when it comes to VNF deployment on public cloud. They have decided against large-scale public cloud deployments for a variety of reasons, including:

They have invested a considerable amount of money, time and human resources on their private clouddeployments, and they want and need to utilise the asset and generate the RoI.
Related to this, they have generated a large amount of intellectual property (IP) as a result of their DIY cloud– and VNF-development work. Clearly, they wish to realise the business benefits they sought to achieve through these efforts, such as cost and resource efficiencies, automation gains, enhanced flexibility and agility, and opportunities for both connectivityand edge compute service innovation. Apart from the opportunity cost of not realising these gains, it is demoralising for some CTO departments to contemplate surrendering the fruit of this effort in favour of a hyperscaler’s comparable cloud infrastructure, orchestration and management tools.
In addition, telcos have an opportunity to monetise that IP by marketing it to other telcos. The Rakuten Communications Platform (RCP) marketed by Rakuten Symphony is an example of this: effectively, a telco providing a telco cloud platform on an NFaaS basis to third-party operators or enterprises – in competition to similar offerings that might be developed by hyperscalers. Accordingly, RCP will be hosted over private cloud facilities, not public cloud. But in theory, there is no reason why RCP could not in future be delivered over public cloud. In this case, Rakuten would be acting like any other vendor adapting its solutions to the hyperscale cloud.
In theory also, telcos could also offer their private telcoclouds as a platform, or wholesale or on-demand service, for third parties to source and run their own network functions (i.e. these would be hosted on the wholesale provider’s facilities, in contrast to the RCP, which is hosted on the client telco’s facilities). This would be a logical fit for telcos such as BT or Deutsche Telekom, which still operate as their respective countries’ communications backbone provider and primary wholesale provider

BT and Deutsche Telekom have also been among the telcos that have been most visibly hostile to the idea of running NFs powering their own public, mass-market services on the public and hyperscale cloud. And for most operators, this is the main concern making them cautious about deploying VNFs on the public cloud, let alone sourcing them from the cloud on an NFaaS basis: that this would be making the ‘core’ telco business and asset – the network – dependent on the technology roadmaps, operational competence and business priorities of the hyperscalers.

Executive Summary
Introduction: VNF deployments on the hyperscale cloud are just beginning
- Numerous collaboration agreements between hyperscalers and leading telcos, but few live VNF deployments to date
- DISH and AT&T: AWS vs Azure; vendor-supported vs DIY; NaaCP vs net compute
Other DIY or vendor-supported best-of-breed players are not hosting VNFs on public cloud
- Telcos are looking to generate returns from their telco cloud investments and maintain control over their ‘core business’
- The reluctance to deploy VNFs on the cloud reflects a persistent, legacy concept of the telco
But NaaCP will drive more VNF deployments on public cloud, and opportunities for telcos
- Multiple models for NaaCP present prospects for greater integration of cloud-native networks and public cloud
Conclusion: Convergence of network and cloud is inevitable – but not telcos’ defeat
Appendix

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Stakeholder model: Turn growth killers into growth makers

Introduction: The stakeholder model

Telecoms operators’ attempts to build new sources of revenue have been a core focus of STL Partners’ research activities over the years. We’ve looked at many telecoms case studies, adjacent market examples, new business models and technologies and other routes to explore how operators might succeed. We believe the STL stakeholder model usefully and holistically describes telcos’ main stakeholder groups and the ideal relationships that telcos need to establish with each group to achieve valuable growth. It should be used in conjunction with other elements of STL’s portfolio which examine strategies needed within specific markets and industries (e.g., healthcare) and telcos’ operational areas (e.g., telco cloud, edge, leadership and culture).

This report outlines the stakeholder model at a high level, identifying seven groups and three factors within each group that summarise the ideal relationship. These stakeholder and influencer groups include:

Management
People
Customer propositions
Partner and technology ecosystems
Investors
Government and regulators
Society

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1. Management

Growth may not always start at the top of an organisation, but to be successful, top management will be championing growth, have the capabilities to lead it, and aligning and protecting the resources needed to foster it. This is true in any organisation but especially so in those where there is a strong established business already in place, such as telecoms. The critical balance to be maintained is that the existing business must continue to succeed, and the new growth businesses be given the space, time, skills and support they need to grow. It sounds straightforward, but there are many challenges and pitfalls to making it work in practice.

For example, a minor wobble in the performance of a multi-billion-dollar business can easily eclipse the total value of a new business, so it is often tempting to switch resources back to the existing business and starve the fledgling growth. Equally, perceptions of how current businesses need to be run can wrongly influence what should happen in the new ones. Unsuitable choices of existing channels to market, familiar but ill-fitting technologies, or other business model prejudices are classic bias-led errors (see Telco innovation: Why it’s broken and how to fix it).

To be successful, we believe that management needs to exhibit three broad behaviours and capabilities.

Stable and committed long term vision for growth aligned with the Coordination Age.
Suitable knowledge, experience and openness.
Effective two-way engagement with stakeholders. (N.B. We cover the board and most senior management in this group. Other management is covered in the People stakeholder group.)

Management: Key management enablers of growth

Source: STL Partners

Stable and committed long-term vision for growth

The companies that STL has seen making more successful growth plays typically exhibit a long-term commitment to growth and importantly, learning too.

Two examples we have studied closely are TELUS and Elisa. In both cases, the CEO has held tenure in the long-term, and the company has demonstrated a clear and well managed commitment to growth.

In TELUS’s case, the primary area of growth targeted has been healthcare, and the company now generates somewhere close to 10% of its revenue from the new areas (it does not publish a number). It has been working in healthcare for over 10 years, and Darren Entwistle, its CEO, has championed this cause with all stakeholders throughout.

In Elisa’s case, the innovation has been developed in a number of areas. For example, how it couples all you can use data plans and a flat sales/capex ratio; a new network automation business selling to other telcos; and an industrial IoT automation business.

Again, CEO Veli-Matti Mattila has a long tenure, and has championed the principle of Elisa’s competitive advantage being in its ability to learn and leverage its existing IP.

…aligned with the Coordination Age

STL argues that the future growth for telcos will come by addressing the needs of the Coordination Age, and this in turn is being accelerated by both the COVID-19 pandemic and growing realisation of climate change.

Why COVID-19 and Climate change are accelerating the Coordination Age

Source: STL Partners

The Coordination Age is based on the insight that most stakeholder needs are driven by a global need to make better use of resources, whether in distribution (delivery of resources when and where needed), efficiency (return on resources, e.g. productivity), and sustainability (conservation and protection of resources, e.g. climate change).

This need will be served through multi-party business models, which use new technologies (e.g. better connectivity, AI, and automation) to deliver outcomes to their customers and business ecosystems.

We argue that both TELUS and Elisa are early innovators and pathfinders within these trends.

Suitable knowledge, experience and openness

Having the right experience, character and composition in the leadership team is an area of constant development by companies and experts of many types.

The dynamics of the leadership team matter too. There needs to be leadership and direction setting, but the team must be able to properly challenge itself and particularly its leader’s strongest opinions in a healthy way. There will of course be times when a CEO of any business unit needs to take the helm, but if the CEO or one of the C-team is overly attached to an idea or course of action and will not hear or truly consider alternatives this can be extremely risky.

AT&T / Time Warner – a salutary tale?

AT&T’s much discussed venture into entertainment with its acquisitions of DirecTV and Time Warner is an interesting case in point here. One of the conclusions of our recent analysis of this multi-billion-dollar acquisition plan was that AT&T’s management appeared to take a very telco-centric view throughout. It saw the media businesses primarily as a way to add value to its telecoms business, rather than as valuable business assets that needed to be nurtured in their own right.

Regardless of media executives leaving and other expert commentary suggesting it should not neglect the development of its wider distribution strategy for the content powerhouse for example, AT&T ploughed on with an approach that limited the value of its new assets. Given the high stakes, and the personalised descriptions of how the deal arose through the CEOs of the companies at the time, it is hard to escape the conclusion that there was a significant bias in the management team. We were struck by the observation that it seemed like “AT&T knew best”.

To be clear, there can be little doubt that AT&T is a formidable telecoms operator. Many of its strategies and approaches are world leading, for example in change management and Telco Cloud, as we also highlight in this report.

However, at the time those deals were done AT&T’s board did not hold significant entertainment expertise, and whoever else they spoke with from that industry did not manage to carry them to a more balanced position. So it appears to us that a key contributing factor to the significant loss of momentum and market value that the media deals ultimately inflicted on AT&T was that they did not engineer the dynamics or character in their board to properly challenge and validate their strategy.

It is to the board’s credit that they have now recognised this and made plans for a change. Yet it is also notable that AT&T has not given any visible signal that it made a systemic error of judgement. Perhaps the huge amounts involved and highly litigious nature of the US market are behind this, and behind closed doors there is major change afoot. Yet the conveyed image is still that “AT&T knows best”. Hopefully, this external confidence is now balanced with more internal questioning and openness to external thoughts.

What capabilities should a management team possess?

In terms of telcos wishing to drive and nurture growth, STL believes there are criteria that are likely to signal that a company has a better chance of success. For example:

Insight into the realistic and differentiating capabilities of new and relevant markets, fields, applications and technologies is a valuable asset. The useful insight may exist in the form of experience (e.g. tenure in a relevant adjacent industry such as healthcare, or delivery of automation initiatives, working in relevant geographies, etc.), qualification (e.g. education in a relevant specialism such as AI), or longer term insight (which may be indicated by engagement with Research and Development or academic activities)

[The full range of management capabilities can be viewed in the report…..]

2. People…

Executive Summary
Introduction
Management
- Stable and committed long-term vision for growth
- …aligned with the Coordination Age
- Suitable knowledge, experience and openness
- Two-way engagement with stakeholders
People
- Does the company have a suitable culture to enable growth?
- Does the company have enough of the new skills and abilities needed?
- Is the company’s general management collaborative, close to customers, and diverse?
Customer propositions
- Nature of the current customer relationship
- How far beyond telecoms the company has ventured
- Investment in new sectors and needs
Partner and technology ecosystems
- Successful adoption of disruptive technologies and business models
- More resilient economics of scale in the core business
- Technology and partners as an enabler of change
Investors
- The stability of the investor base
- Has the investor base been happy?
- Current and forecast returns
Government and regulators
- The tone of the government and regulatory environment
- Current status of the regulatory situation
- The company’s approach to government and regulatory relationships
Society
- Brand presence, engagement and image
- Company alignment with societal priorities
- Media portrayal

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Telstra’s journey in commercialising 5G

Telstra: Maintaining its network leadership

SK Telecom, Verizon and Telstra were among the first in the world to start commercialising 5G networks. SK Telecom and Verizon launched broadband-based propositions in 2018, but it was only in 2019, when 5G smartphones became available, that consumer, business and enterprise customers were really able to experience the networks.

Part 3 of our 3-part series looks at Telstra’s 5G experience and how its propositions have developed from when 5G was launched to the current time. It includes an analysis of both consumer and business offerings promoted on Telstra’s website to identify the revenue streams that 5G is supporting now – as opposed to revenues that new 5G use cases might deliver in future. (We have covered this extensively for a number of verticals, including healthcare, manufacturing, energy, and transport and logistics.)

When its 5G network was launched, Telstra went to market with a 12-month free 5G access period and the intention to charge AUD15 ($12) at the conclusion of the free period. However at the end of the promotion period it opted to keep things simple for consumers, choosing to bundle 5G access with higher tier plans (effectively AUD65 / $50 and above) – and only offer 5G under its main Telstra brand. There were no 5G specific services at launch, however capacity advantages were leveraged to offer zero-rated access to subscription services available with the plan (i.e., subscription services would not consume data). From a customer standpoint the principal and most visible benefit from 5G in the early stages was its noticeably faster speeds.

This report examines the market factors that have enabled and constrained Telstra’s 5G monetisation efforts, as it moves to extend 5G access beyond premium early adopters to a wider audience. It identifies lessons in the commercialisation of 5G for those operators that are on their own 5G journeys and those that have yet to start.

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Telstra 5G performance to date

Given that four of the top five key purchase considerations for Australian customers (across consumer, small business and enterprise segments) are network-related (i.e., coverage, speed, reliability and security), Telstra has made network leadership a point of competitive differentiation. It views its investment in 5G as enabling it to stay ahead of customer network expectations as they evolve.

The operator was Australia’s 5G first-mover and it has been able to maintain its leadership in terms of 5G network coverage to date. This is a key deliverable of its T22 plan for transformation in response to challenging industry dynamics and the impact of the National Broadband Network (NBN) – the government’s broadband upgrade initiative.

In a market release on 21 April 2021, Telstra announced that its 5G network covered close to 66% of the Australian population and that it would attain its target of 75% coverage by the end of June 2021 (it achieved this goal on 28 June 2021). Telstra 5G sites number more than 3,700, across 200+ cities and towns, and 5G coverage extended to over 2,700 suburbs.

Post launch in 2019, early take-up of 5G devices was skewed towards consumer and SME segments, but the launch of Apple’s first 5G device in October 2020 helped promote 5G take-up in the enterprise segment (there has historically been a higher penetration of Apple devices in the Enterprise market).

Early consumers were typically metro customers, which aligned to Telstra’s network rollout strategy (covering more populous/high traffic metro areas first).
Enterprise customers were not among the early adopters of 5G devices.

Net porting to the Telstra network was higher for 5G than for 4G for the first few quarters after launch and Telstra saw strong growth from its installed base (largely the early adopters). In August 2020, Telstra reported 210,000 5G devices connected to its network (before iPhone). The launch of iPhone 12 caused the number of 5G devices to jump to 400K by November 2020 (reported at Telstra’s November investors meeting), with 40K new 5G devices being added per week.

72% of 5G iPhones devices were on plans which included 5G access (i.e. top tier).

At the same meeting in November, Telstra reported that 65% of all new Android device sales were of 5G models (e.g. Oppo, Google, Motorola, Samsung), a factor attributed to getting handsets below the AUD1,000 ($771) threshold. This has helped to increase 5G readiness among its customer base.

By February 2021, the number of 5G devices on the Telstra network was over 1 million (this compares to 8.6 million postpay retail customers reported in December 2020, and 19 million customers overall). The share of devices on 5G plans is not public. Telstra continues to report that it is adding “thousands” of 5G devices to its network weekly.

5G devices connected to Telstra’s network since launch

Source: STL Partners based on Telstra public data

Telstra continues to see an increase in customer take-up of 5G-ready plans (new connections and upgrades). It attributes the increase in postpay service additions over the period to a leadership in 5G (supporting its network leadership perceptions), but also acknowledges that other non-network considerations, such as large data allowances may also be driving the uptake of these plans.

Telstra has reported an increase in the “transacting minimum monthly commitment” (TMMC) versus previous calendar period (PCP) for its postpay handheld customers for six months ending December 2020. TMMC is regarded as a lead indicator of ARPU trends (actual ARPU declined due to lost roaming revenue, new plan accounting which allocates more revenue to handsets, lost out-of-bundle revenue and other factors). Telstra regards some of the increase in TMMC as having been driven by the introduction of the latest model handsets. It noted a high attach rate for 5G inclusive plans – AUD65 and above plans – with iPhone 12 devices and the latest Samsung handsets that were introduced during the period (i.e., customers want 5G-ready plans with these new 5G handsets, not 5G access alone).

AUD ($) increase in TMMC on PCP for postpay handheld customers

Source: Telstra

Whilst the initial most obvious benefits of 5G relate to speed, Telstra assumes a broader perspective of 5G’s success metrics, including a comparison of overall NPS which has been consistently higher for customers on 5G plans than for those on 4G plans. There could be a number of reasons for this, aside from better network performance, e.g.:

Positive associations with having something “new”;
A positive effect as a result of iPhone ownership (though Telstra has noticed that the positive trend started before the iPhone launch);
Post-purchase rationalisation;
Richer device capabilities.

Telstra continues to monitor this trend to determine if it will be maintained.

Executive Summary
Introduction
Performance indicators to date
Details of launch
Consumer propositions
- At launch…
- …And now
- Consumer monetisation summary
Business propositions
- At launch…
- …And now
- Business monetisation summary
Analysis of 5G market developments
What next?
Conclusions
Index
Appendix 1

This report builds on earlier STL Partners research, including:

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Telcos in healthcare: Winning in a long game, Babylon, and the impact of 5G

Introduction: telcos in healthcare

This is a summary of some of the learnings from another fascinating session at the TELUS Carrier Health Summit in Toronto, May 22^nd 2019. This is an annual gathering that was hosted by TELUS Global Solutions for telcos and their partners in healthcare.

Of the hosts, Fawad Shaikh, VP TELUS Global Solutions, said it ran this years’ session because it wants “to develop an alliance of like-minded telcos in health”. David Thomas, VP TELUS Health Solutions, added that “healthcare has to be delivered locally, which is a real plus for telcos. Yet we all need to gain global scale to compete, so it is a great opportunity for non-competitive collaboration.”

About sixty people from telcos and health tech companies were there this year, and the audience was global, with representatives from Latin America, N America, Europe, the Middle East, Asia and Australasia.

STL Partners presented its research on nine telco healthcare studies, and caught up with participants, including Dr Ali Parsa, CEO and founder of Babylon Health, and Mairi Johnson, its Global Partnerships Director.

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Healthcare: the problem to be solved

Healthcare is one of our favourite examples of the drive behind the Coordination Age. The explanation is simple:

The problem with healthcare in most economies is not that there isn’t great medicine and healthcare professionals. It’s getting it all delivered to the patients at the right time and at a cost that’s affordable.

This is fundamentally a coordination problem: bringing the right assets (whether physical or digital – a nurse, a treatment, or the patients’ records) together for the patient. Then maintaining the order throughout the patients’ treatment, and indeed, their lives.

All healthcare systems face multiple mounting pressures: growing and ageing populations, greater costs, skills challenges, and more pressure on funding from other sources to name a few.

There’s money in health

It’s also an area of HUGE expenditure. PWC’s Tara McCarville shared figures showing that:

Global healthcare spend is forecast to grow from $9.7 Trillion in 2014, to $18 Trillion in 2040, growing at 21% CAGR over the next 5 years.
Even so, it’s perhaps surprising that 84% of Fortune 50 companies are engaged in healthcare in some way.

Given this, it’s less surprising to note that the big tech players are seriously engaged in digital health too, with Amazon’s recent tie up with JP Morgan and Berkshire Hathaway to create the Haven Group being the most eye-catching. Others between CVS and Aetna, and Sanofi and Click Therapies involve less broadly familiar names, but are weighty nonetheless.

From a government perspective the numbers are big too. In the UK for example, which is one of the EU’s lower healthcare spenders per capita, the NHS’s annual bill is currently £154 billion, and it’s forecast to rise to £188 billion in 15 years (to 2033).

A 5% tax rise?

Without borrowing, this would lead to something like a 5% increase in overall taxation. Over 98% of UK tax funding is from ‘general taxation and national insurance’ – so mainly income tax, VAT and ongoing employment contributions. In other words, people would have to pay.

Despite the UK’s love of the NHS, a permanent 5% tax rise would draw many concerned breaths from both politicians and the public. The need to find better solutions is genuinely pressing.

(NB Try out this calculator made by the Institute of Fiscal Studies if you fancy yourself as a policy guru. To fund healthcare, would you raise taxes, cut pensions, defence, or education?)

Figure 2: The Institute of Fiscal Studies’ (IFS) Health Budget Calculator

IFS NHS Budget Calculator — Meeting the NHS’s future funding needs would mean a 5% UK tax rise

Source: https://explore.ifs.org.uk/tools/nhs_funding/tool NB At £154bn, the Health spending category is already bigger than all those above.

The rest of the report contains:

The road to Babylon – one of the ways ahead?
Some telcos are scared by health, others are serious about it
5G, Healthcare – or both?
Conclusions: telcos in healthcare – making a long game a good one

And includes the following figures:

Figure 1: How to succeed in telco health – key learnings from the Summit
Figure 2: The Institute of Fiscal Studies’ (IFS) Health Budget Calculator
Figure 3: Babyl has particular strength in Rwanda’s rural areas
Figure 4: A flavour of Babylon’s UK online offering
Figure 5: Pros and cons of telcos in healthcare
Figure 6: Telstra’s National Cervical Cancer Screening programme benefits
Figure 7: Telcos face a serious choice in Capex / Opex investments

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Telco M&A strategies: Global analysis

Introduction

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

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

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

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

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

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

Previous editions of the telco M&A database

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SDN / NFV: Early Telco Leaders in the Enterprise Market

Introduction

This report builds on a number of previous analyses of the progress and impact of SDN (Software-Defined Networking) and NFV (Network Functions Virtualization), both in the enterprise market and in telecoms more generally. In particular, this briefing aims to explore in more detail the market potential and dynamics of two new SDN / NFV-based enterprise services that were discussed as part of an analysis of revenue opportunities presented by ‘telco cloud’ services.

These two services are ‘Network as a Service’ (NaaS) and ‘enterprise virtual CPE’ (vCPE). ‘Network as a Service’ refers to any service that enables enterprise customers to directly configure the parameters of their corporate network, including via a user-friendly portal or APIs. This particularly involves the facility to scale up or down the bandwidth available on network links – either on a near-real-time or scheduled basis – and to establish new network connections on demand, e.g. between business sites and / or data centers. Examples of NaaS include AT&T’s Network On Demand portfolio and Telstra’s PEN service, both of which are discussed further below.

‘Enterprise virtual CPE’, as the name suggests, involves virtualizing dedicated networking equipment sited traditionally at the enterprise premises, so as to offer equivalent functionality in the form of virtual network appliances in the cloud, delivered over COTS hardware. Virtual network functions (VNFs) offered in this form typically include routing, firewalls, VPN, WAN optimization, and others; and the benefit to telcos of offering vCPE is that it provides a platform to easily cross- and upsell additional functionality, particularly in the areas of application and network performance and security.

The abbreviation ‘vCPE’ is also used for consumer virtual CPE, which involves replacing complicated routers, TV set-top boxes and gateway equipment used in the home with simplified devices running equivalent functions from the cloud. For the purposes of this report, when we use the term ‘vCPE’, we refer to the enterprise version of the term, unless otherwise stated.

The reason why this report focuses on NaaS and vCPE is that more commercial services of these types have been launched or are planned than is the case with any other SDN / NFV-dependent enterprise service. Consequently, the business models are becoming more evident, and it is possible to make an assessment of the revenue potential of these services.

Our briefing ‘New Revenue Growth from Telco Cloud’ (published in April 2016) modeled the potential impact of SDN / NFV-based services on the revenues of a large illustrative telco with a significant presence in both fixed and mobile, and enterprise and consumer, segments in a developed market similar to the UK. This concluded that such a telco introducing all of the SDN / NFV services that are expected to become commercially mature over the period 2017 to 2021 could expect to generate a monthly revenue uplift of some X% (actual figures available in full report) by the end of 2021 compared with the base case of failing to launch any such service.

Including only revenues directly attributable to the new services (as opposed to ‘core revenues’ – e.g. from traditional voice and data services – that are boosted by reduced churn and net customer additions deriving from the new services), vCPE and NaaS represent the two largest sources of new revenue: Y and Z percentage points respectively out of the total X% net revenue increase deriving from SDN / NFV, as illustrated in Figure 1 (Figure not shown – actual figures available in full report).

Figure 1: Telco X – Net new revenue by service category (Dec 2021)

Figure not shown – available in full report

Source: STL Partners analysis

In terms of NaaS and vCPE specifically, the model assumes that Telco X will begin to roll out these services commercially in January and February 2017 respectively. This is a realistic timetable for some in our view, as several commercial NaaS and vCPE offerings have already been launched, and future launches have been announced, by telcos across North America, Europe and the Asia-Pacific region.

In the rest of this briefing, we will:

present the main current and planned NaaS and vCPE services
analyze the market opportunities and competitive threats they are responding to
analyze in more detail the different types and combinations of NaaS and vCPE offerings, and their business models
assess these services’ potential to grow telco revenues and market share
and review how these offerings fit within operators’ overall virtualization journeys.

We will conclude with an overall assessment of the prospects for NaaS and vCPE: the opportunities, and also the risks of inaction.

Executive Summary
Introduction
Current and planned NaaS and vCPE products
Opportunities and threats addressed by NaaS and vCPE
NaaS and vCPE: emerging offers and business models
Revenue growth potential of NaaS and vCPE
Relationship between SDN / NFV deployment strategy and operator type
Conclusion: NaaS and vCPE – a short-term window of opportunity to a long-term virtual future

Figure 1: Telco X – Net new revenue by service category (Dec 2021)
Figure 2: Leading current and planned commercial NaaS and vCPE services
Figure 3: Cumulative NaaS and vCPE launches, 2013-16
Figure 4: Verizon SD-WAN as part of Virtual Network Services vCPE offering
Figure 5: COLT’s cloud-native VPN and vCPE
Figure 6: Evolution of vCPE delivery modes
Figure 7: SD-WAN-like NaaS versus SD-WAN
Figure 8: Base case shows declining revenues
Figure 9: Telco X – Telco Cloud services increase monthly revenues by X% on the base case by Dec 2021
Figure 10: NaaS and vCPE deployments by operator type and overall SDN / NFV strategy
Figure 11: Progression from more to less hybrid deployment of NaaS and vCPE across the telco WAN

The STL Partners Digital Investment Database: August 2016 Update

The STL Partners Digital Investment Database

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

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

SoftBank and ARM: (big) business as usual?

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

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

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

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

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

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

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

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

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

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

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

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

Verizon and Fleetmatics: Under the radar

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

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

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

Accessing the database

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

An illustrative snapshot of part of the database

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

[2] Financial Times, 26 July 2016.

Digital M&A and Investment Strategies

Introduction

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

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

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

Drivers for operator M&A and majority investment

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

Source: STL Partners

Traditional/Telco 1.0 drivers: reach and scale

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

1. Extending geographic footprint is often a key driver…

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

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

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

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

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

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

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

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

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

Introduction

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

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

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

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

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

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

This report addresses the following:

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

The Telstra approach to digital healthcare

The Telstra Health proposition

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

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

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

Source: Telstra Health

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

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

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

Telstra: Battling Disruption and Growing Enterprise Cloud & ICT

Introduction

A Quick Background on the Australian Market

Australia’s incumbent telco is experiencing the same disruptive forces as others, just not necessarily in the same way. Political upheaval around the National Broadband Network (NBN) project is one example. Others are the special challenges of operating in the outback, in pursuit of their universal service obligation, and in the Asian enterprise market, at the same time. Telstra’s area of operations include both some of the sparsest and some of the densest territories on earth.

Australian customers are typically as digitally-literate as those in western Europe or North America, and as likely to use big-name global Web services, while they live at the opposite end of the longest submarine cable runs in the world from those services. For many years, Telstra had something of a head start, and the cloud and data centre ecosystem was relatively undeveloped in Australia, until Amazon Web Services, Microsoft Azure, and Rackspace deployed in the space of a few months presenting a first major challenge. Yet Telstra is coping.

Telstra: doing pretty well

Between H2 2009 and H2 2014 – half-yearly reporting for H1 2015 is yet to land – top-line revenue grew 1% annually, and pre-tax profits 3%. As that suggests, margins have held up, but they have only held up. – Net margin was 16% in 2014, while EBITDA margin was 43% in 2009 and 41% in 2014, having gone as low as 37% in H2 2010. This may sound lacklustre, but it is worth pointing that Verizon typically achieves EBITDA margins in this range from its wireless operation alone, excluding the commoditised and capital-intensive landline business. Company-wide EBITDA margins in the 40s are a sound performance for a heavily regulated incumbent. Figure 1 shows sales, EBITDA and net margins, and VZW’s last three halves for comparison.

Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s