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.

Launchers: a new relevance point for telcos?

Introduction

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

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

The Telco Dilemma

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

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

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

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

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

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

The Opportunity

What is a launcher?

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

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

Figure 1: Popular launchers in the marketplace

Figure 1 Popular launchers - Telco

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

 

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

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

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

Will launchers really take off?

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

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

Number of launcher application sessions

Source: Flurry Analytics

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

What’s at stake?

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

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

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

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

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

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

The Players

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

Facebook

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

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

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

 

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

 

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