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

Source: STL Partners, Telstra filings

Looking at Telstra’s major operating segments, we see a familiar pattern. Fixed voice is sliding, while the mobile business has taken over as the core business. Fixed data is growing slowly, as is the global carrier operation, while enterprise fixed is declining slowly as the traditional voice element and older TDM services shrink. On the other hand, “Network Applications & Services” – Telstra’s strategic services group capturing new-wave enterprise products and the cloud – is growing strongly, and we believe that success in Unified Communications and Microsoft Office 365 underpins that growth in particular. A one-off decrease since 2009 is that CSL New World, a mobile network operator in Hong Kong, was sold at the end of 2014.

Figure 2: Mobile and cloud lead the way

Source: STL Partners, Telstra filings

Telstra is growing some new Telco 2.0 revenue streams

Another way of looking at this is to consider the segments in terms of their size, and growth. In Figure 2, we plot these together and also isolate the ‘Telco 2.0’ elements of Telstra from the rest. We include the enterprise IP access, Network Applications & Services, Pay-TV, IPTV, and M2M revenue lines in Telco 2.0 here, following the Telco 2.0 Transformation Index categorisations.

Figure 3: Telco 2.0 is a growing force within Telstra

Source: STL Partners, Telstra filings

The surge of mobile and the decline of fixed voice are evident. So is the decline of the non-Telco 2.0 media businesses – essentially directories. This stands out even more so in the context of the media business unit.

Figure 4: Telstra’s media businesses, though promising, aren’t enough to replace the directories line of business

Source: STL Partners, Telstra filings

“Content” here refers to “classified and advertising”, aka the directory and White Pages business. The Telco 2.0 businesses, by contrast, are both the strongest growth area and a very significant segment in terms of revenue – the second biggest after mobile, bigger even than fixed voice, as we can see in Figure 5.

Figure 5: Telco 2.0 businesses overtook fixed voice in H2 2014

Source: STL Partners, Telstra filings

To reiterate what is in the Telco 2.0 box, we identified 5 sources of Telco 2.0 revenue at Telstra – pay-TV, IPTV, M2M, business IP access, and the cloud-focused Network Applications & Services (NA&S) sub-segment. Their performance is shown in Figure 6. NA&S is both the biggest and by far the fastest growing.

 

  • Executive Summary
  • Introduction
  • A quick background on the Australian Market
  • Telstra: doing pretty well
  • Telstra is growing some new Telco 2.0 revenue streams
  • Cloud and Enterprise ICT are key parts of Telstra’s story
  • Mobile is getting more competitive
  • Understanding Australia’s Cloud Market
  • Australia is a relatively advanced market
  • Although it has some unique distinguishing features
  • The Australian Cloud Price Disruption Target
  • The Healthcare Investments: A Big Ask
  • Conclusions and Recommendations

 

  • Figure 1: Telstra continues to achieve group-wide EBITDA margins like VZW’s
  • Figure 2: Mobile and cloud lead the way
  • Figure 3: Telco 2.0 is a growing force within Telstra
  • Figure 4: Telstra’s media businesses, though promising, aren’t enough to replace the directories line of business
  • Figure 5: Telco 2.0 businesses overtook fixed voice in H2 2014
  • Figure 6: Cloud is the key element in Telstra’s Telco 2.0 strategy
  • Figure 7: NA&S is by far the strongest enterprise business at Telstra
  • Figure 8: Enterprise fixed is under real competitive pressure
  • Figure 9: Telstra Mobile subscriber KPIs
  • Figure 10: Telstra Mobile is strong all round, but M2M ARPU is a problem, just as it is for everyone
  • Figure 11: Australia is a high-penetration digital market
  • Figure 12: Australia is a long way from most places, and links to the Asia Pacific Cable Network (APCN) could still be better
  • Figure 13: The key Asia Pacific Cable Network (APCN) cables
  • Figure 14: Telstra expects rapid growth in intra-Asian trade in cloud services
  • Figure 15: How much?
  • Figure 16: A relationship, but a weak one – don’t count on data sovereignty

Telco Opportunities in the ‘New Mobile Web’?

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

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

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

The New Mobile Web

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

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

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

The Key Opportunities for Operators

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

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

Telcos can leverage their assets

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

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

Strategic Options for telcos to succeed

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

Seizing the opportunity

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

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

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

Report Contents

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

Table of Figures

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

Customer Experience: Is it Time for the Mobile CDN?

Summary: Changing consumer behaviours and the transition to 4G are likely to bring about a fresh surge of video traffic on many networks. Fortunately, mobile content delivery networks (CDNs), which should deliver both better customer experience and lower costs, are now potentially an option for carriers using a combination of technical advances and new strategic approaches to network design. This briefing examines why, how, and what operators should do, and includes lessons from Akamai, Level 3, Amazon, and Google. (May 2013, Executive Briefing Service). CDN Traffic as Percentage of Backbone May 2013

Introduction

Content delivery networks (CDNs) are by now a proven pattern for the efficient delivery of heavy content, such as video, and for better user experience in Web applications. Extensively deployed worldwide, they can be optimised to save bandwidth, to provide greater resilience, or to help scale up front-end applications. In the autumn of 2012, it was estimated that CDN providers accounted for 40% of the traffic entering residential ISP networks from the Internet core. This is likely to be an underestimate if anything, as a major use case for CDN is to reduce the volume of traffic that has to transit the Internet and to localise traffic within ISP networks. Craig Labovitz of DeepField Networks, formerly the head of Arbor’s ATLAS instrumentation project, estimates that from 35-45% of interdomain Internet traffic is accounted for by CDNs, rising to 60% for some smaller networks, and 85% of this is video.

Figure 1: CDNs, the supertankers of the Internet, are growing
CDN Traffic as Percentage of Backbone May 2013

Source: DeepField, STL

In the past, we have argued that mobile networks could benefit from deploying CDN, both in order to provide CDN services to content providers and in order to reduce their Internet transit and internal backhaul costs. We have also looked at the question of whether telcos should try to compete with major Internet CDN providers directly. In this note, we will review the CDN business model and consider whether the time has come for mobile CDN, in the light of developments at the market leader, Akamai.

The CDN Business Model

Although CDNs account for a very large proportion of Internet traffic and are indispensable to many content and applications providers, they are relatively small businesses. Dan Rayburn of Frost & Sullivan estimates that the video CDN market, not counting services provided by telcos internally, is around $1bn annually. In 2011, Cisco put it at $2bn with a 20% CAGR.

This is largely because much of the economic value created by CDNs accrues to the operators in whose networks they deploy their servers, in the form of efficiency savings, and to the content providers, in the form of improved sales conversions, less downtime, savings on hosting and transit, and generally, as an improvement in the quality of their product. It’s possible to see this as a two-sided business model – although the effective customer is the content provider, whose decisions determine the results of competition, much of the economic value created accrues to the operator and the content provider’s customer.

On top of this, it’s often suggested that margins in the core CDN product, video delivery, are poor and it would be worth moving to supposedly more lucrative “media services”, products like transcoding (converting original video files into the various formats served out of the CDN for networks with more or less bandwidth, mobile versus fixed devices, Apple HLS versus Adobe Flash, etc) and analytics aimed at content creators and rightsholders, or to lower-scale but higher-margin enterprise products. We are not necessarily convinced of this, and we will discuss the point further on page 9. For the time being, note that it is relatively easy to enter the CDN market, and it is influenced by Moore’s law.  Therefore, as with most electronic, computing, and telecoms products, there is structural pressure on prices.

The Problem: The Traffic Keeps Coming

A major 4G operator recently released data on the composition of traffic over their new network. As much as 40% of the total, it turned out, was music or video streaming. The great majority of this will attract precisely no revenue for the operator, unless by chance it turns out to represent the marginal byte that induces a user to spend money on out-of-bundle data. However, it all consumes spectrum and needs backhauling and therefore costs money.

The good news is that most, or even all, of this could potentially be distributed via a CDN, and in many cases probably will be distributed by a CDN as far as the mobile operator’s Internet point of presence. Some of this traffic will be uplink, a segment likely to grow fast with better radios and better device cameras, but there are technical options related to CDN that can benefit uplink applications as well.

Figure 2: Video, music, and photos are filling up a 4G mobile network

EE traffic by category and source Percentage May 2013

Source: EE, STL

Another 36.5% of the traffic is accounted for by Web browsing and e-mail. A large proportion of the Web activity could theoretically come from a CDN, too – even if the content itself has to be generated dynamically by application logic, things like images, fonts, and JavaScript libraries are a quick win in terms of performance. Estimates of how much Internet traffic in general could be served from a CDN range from 35% (AT&T) to 98% (Analysys Mason).

As 29% of their traffic originates from the top 3 point sources – YouTube, Facebook, and iTunes – it’s also observable that signing-up a relatively small subset of content providers as customers will provide considerable benefit. Out of those three, all of them use a CDN, and two of those – Facebook and iTunes – are customers of Akamai, while YouTube relies on Google’s own solution.

We can re-arrange the last chart to illustrate this more fully. (Note that Skype, as a peer-to-peer application that is also live, is unsuitable for CDN as usually understood.)

Figure 3: The top 9 CDN-able point sources represent 40% of EE’s traffic
Key Point Sources and Others May 2013

Source: EE, STL

Looking further afield, the next chart shows the traffic breakdown by application from DeepField’s observations in North American ISP networks.

Figure 4: The Web giants ride on the CDNs
Percentage Peak Hour Traffic May 2013

Source: DeepField

Clearly, the traffic sources and traffic types that are served from CDNs are both the heaviest to transport and also the ones that contribute most to the busy hour; note that these are peak measurements, and the total of the CDN traffic here (Netflix, YouTube, CDN other, Facebook) is substantially more than it is on average.

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

  • Akamai: the World’s No.1 CDN
  • Financial and KPI review
  • The Choice for CDN Customers: Akamai, Amazon, or DIY like Google?
  • CDN depth: the key question
  • CDN depth and mobile networks
  • Akamai’s guidelines for deployment
  • Why has mobile CDN’s time come?
  • What has held mobile CDN back?
  • But the world has changed…
  • …Networks are much less centralised…
  • …and IP penetrates much more deeply into the network
  • Licensed or Virtual CDN – a (relatively) new business model
  • SDN: a disruptive opportunity
  • So, why right now?
  • Conclusions
  • It may be time for telcos to move on mobile CDN
  • The CDN industry is exhibiting familiar category killer dynamics
  • Regional point sources remain important
  • CDN internals are changing the structure of the Internet
  • Recommendations for action

…and the following figures…

  • Figure 1: CDNs, the supertankers of the Internet, are growing
  • Figure 2: Video, music, and photos are filling up a 4G mobile network
  • Figure 3: The top 9 CDN-able point sources represent 40% of EE’s traffic
  • Figure 4: The Web giants ride on the CDNs
  • Figure 5: Akamai’s revenues by line of business
  • Figure 6: Observed traffic share for major CDNs