Telcos and GAFA: Dancing with the disruptors

Introduction

Across much of the world, the competing Internet ecosystems led by Amazon, Apple, Facebook and Google have come to dominate the consumer market for digital services. Even though most telcos continue to compete with these players in the service layer, it is now almost a necessity for operators to partner with one or more of these ecosystems in some shape or form.

This report begins by pinpointing the areas where telcos are most likely to partner with these players, drawing on examples as appropriate. In each case, it considers the nature of the partnership and the resulting value to the telco and to the Internet ecosystem. It also considers the longer-term, strategic implications of these partnerships and makes recommendations on how telcos can try to strengthen their negotiating position.

This research builds on the findings of the Digital Partnerships Benchmarking Study conducted between 26th September and 4th November 2016 by STL Partners and sponsored by AsiaInfo. That study involved a survey of 34 operators in Europe and Asia Pacific. It revealed that whereas almost all operators expected to grow their partnerships business in the future, they differed on how they expected to pursue this growth.

Approximately half (46%) of the operator respondents wanted to scale up and partner with a large number of digital players, while the other half (49%) wanted to focus in on a few strategic partnerships.  Those looking to partner with a large number of companies were primarily interested in generating new revenue streams or increasing customer relevance, while many of those who wanted to focus on a small number of partnerships also regarded increasing revenues from the core business as a main objective (see Figure 1).

Figure 1: The business objectives differ somewhat by partnership strategy

Source: Digital Partnerships Benchmarking Study conducted in late 2016 by STL Partners and sponsored by AsiaInfo

Respondents were also asked to rank the assets that an operator can bring to a partnership, both today and in the future. These ranks were converted into a normalized score (see Figure 2): A score of 100% in Figure 2 would indicate that all respondents placed that option in the top rank.

Figure 2: Operators regard their customer base as their biggest asset

Source: Digital Partnerships Benchmarking Study conducted in late 2016 by STL Partners and sponsored by AsiaInfo

Clearly, operators are aware that the size of their customer base is a significant asset, and they are optimistic that it is likely to remain so: it is overall the highest scoring asset both today and in the future.

In the future, the options around customer data (customer profiling, analytics and insights) are given higher scores (they move up the ranks). This suggests that operators believe that they will become better at exploiting their data-centric assets and – most significantly – that they will be able to monetize this in partnerships, and that these data-centric assets will have significant value.

The findings of the study confirm that most telcos believe they can bring significant and valuable assets to partnerships. This report considers how those assets can be used to strike mutually beneficial deals with the major Internet ecosystems. The next chapter explains why telcos and the leading Internet players need to co-operate with each other, despite their competition for consumers’ attention.

Contents:

  • Executive Summary
  • Strategic considerations
  • Delivering bigger, better entertainment
  • Improving customer experience
  • Extending and enhancing connectivity
  • Developing the networks of the future
  • Delivering cloud computing to enterprises
  • Introduction
  • Telcos and lnternet giants need each other
  • Delivering bigger, better entertainment
  • Content delivery networks
  • Bundling content and connectivity
  • Zero-rating content
  • Carrier billing
  • Content promotion
  • Apple and EE in harmony
  • Value exchange and takeaways
  • Improving the customer experience
  • Making mobile data stretch further
  • Off-peak downloads, offline viewing
  • Data plan awareness for apps
  • Fine-grained control for consumers
  • Value exchange and takeaways
  • Extending and enhancing connectivity
  • Subsea cable consortiums
  • Free public Wi-Fi services
  • MVNO Project Fi – branded by Google, enabled by telcos
  • Value exchange and takeaways
  • Developing the networks of the future
  • Software-defined networks: Google and the CORD project
  • Opening up network hardware: Facebook’s Telecom Infra Project
  • Value exchange and takeaways
  • Delivering cloud computing to enterprises
  • Reselling cloud-based apps
  • Secure cloud computing – AWS and AT&T join forces
  • Value exchange and takeaways
  • Conclusions and Recommendations
  • Google is top of mind
  • Whose brand benefits?

Figures:

  • Figure 1: The business objectives differ somewhat by partnership strategy
  • Figure 2: Operators regard their customer base as their biggest asset
  • Figure 3: US Internet giants generate about 40% of mobile traffic in Asia-Pacific
  • Figure 4: Google and Facebook are now major players in mobile in Africa
  • Figure 5: Examples of telco-Internet platform partnerships in entertainment
  • Figure 6: BT Sport uses YouTube to promote its premium content
  • Figure 7: Apple Music appears to have helped EE’s performance
  • Figure 8: Amazon is challenging Apple and Spotify in the global music market
  • Figure 9: Examples of telco-Google co-operation around transparency
  • Figure 10: YouTube Smart Offline could alleviate peak pressure on networks
  • Figure 11: Google’s Triangle app gives consumers fine-grained control over apps
  • Figure 12: Examples of telco-Internet platform partnerships to deliver connectivity
  • Figure 13: Project Fi’s operator partners provide extensive 4G coverage
  • Figure 14: Both T-Mobile US and Sprint need to improve their financial returns
  • Figure 15: Examples of telco-Internet platform partnerships on network innovation
  • Figure 16: AWS has a big lead in the cloud computing market
  • Figure 17: Examples of telco-Internet platform partnerships in enterprise cloud
  • Figure 18: AT&T provides private and secure connectivity to public clouds
  • Figure 19: Amazon and Alphabet lead corporate America in R&D
  • Figure 20: Telcos need to be wary of bolstering already powerful brands
  • Figure 21: Balancing immediate value of partnerships against strategic implications
  • Figure 22: Different telcos should adopt different strategies

Net Neutrality 2021: IoT, NFV and 5G ready?

Introduction

It’s been a while since STL Partners last tackled the thorny issue of Net Neutrality. In our 2010 report Net Neutrality 2.0: Don’t Block the Pipe, Lubricate the Market we made a number of recommendations, including that a clear distinction should be established between ‘Internet Access’ and ‘Specialised Services’, and that operators should be allowed to manage traffic within reasonable limits providing their policies and practices were transparent and reported.

Perhaps unsurprisingly, the decade-long legal and regulatory wrangling is still rumbling on, albeit with rather more detail and nuance than in the past. Some countries have now implemented laws with varying severity, while other regulators have been more advisory in their rules. The US, in particular, has been mired in debate about the process and authority of the FCC in regulating Internet matters, but the current administration and courts have leaned towards legislating for neutrality, against (most) telcos’ wishes. The political dimension is never far away from the argument, especially given the global rise of anti-establishment movements and parties.

Some topics have risen in importance (such as where zero-rating fits in), while others seem to have been mostly-agreed (outright blocking of legal content/apps is now widely dismissed by most). In contrast, discussion and exploration of “sender-pays” or “sponsored” data appears to have reduced, apart from niches and trials (such as AT&T’s sponsored data initiative), as it is both technically hard to implement and suffers from near-zero “willingness to pay” by suggested customers. Some more-authoritarian countries have implemented their own “national firewalls”, which block specific classes of applications, or particular companies’ services – but this is somewhat distinct from the commercial, telco-specific view of traffic management.

In general, the focus of the Net Neutrality debate is shifting to pricing issues, often in conjunction with the influence/openness of major web and app “platform players” such as Facebook or Google. Some telco advocates have opportunistically tried to link Net Neutrality to claimed concerns over “Platform Neutrality”, although that discussion is now largely separate and focused more on bundling and privacy concerns.

At the same time, there is still some interest in differential treatment of Internet traffic in terms of Quality of Service (QoS) – and also, a debate about what should be considered “the Internet” vs. “an internet”. The term “specialised services” crops up in various regulatory instruments, notably in the EU – although its precise definition remains fluid. In particular, the rise of mobile broadband for IoT use-cases, and especially the focus on low-latency and critical-communications uses in future 5G standards, almost mandate the requirement for non-neutrality, at some levels at least. It is much less-likely that “paid prioritisation” will ever extend to mainstream web-access or mobile app data. Large-scale video streaming services such as Netflix are perhaps still a grey area for some regulatory intervention, given the impact they have on overall network loads. At present, the only commercial arrangements are understood to be in CDNs, or paid-peering deals, which are (strictly speaking) nothing to do with Net Neutrality per most definitions. We may even see pressure for regulators to limit fees charged for Internet interconnect and peering.

This report first looks at the changing focus of the debate, then examines the underlying technical and industry drivers that are behind the scenes. It then covers developments in major countries and regions, before giving recommendations for various stakeholders.

STL Partners is also preparing a broader research piece on overall regulatory trends, to be published in the next few months as part of its Executive Briefing Service.

What has changed?

Where have we come from?

If we wind the clock back a few years, the Net Neutrality debate was quite different. Around 2012/13, the typical talking-points were subjects such as:

  • Whether mobile operators could block messaging apps like WhatsApp, VoIP services like Skype, or somehow charge those types of providers for network access / interconnection.
  • If fixed-line broadband providers could offer “fast lanes” for Netflix or YouTube traffic, often conflating arguments about access-network links with core-network peering capacity.
  • Rhetoric about the so-called “sender-pays” concept, with some lobbying for introducing settlements for data traffic that were reminiscent of telephony’s called / caller model.
  • Using DPI (deep packet inspection) to discriminate between applications and charge for “a la carte” Internet access plans, at a granular level (e.g. per hour of view watched, or per social-network used).
  • The application of “two-sided business models”, with Internet companies paying for data capacity and/or quality on behalf of end-users.

Since then, many things have changed. Specific countries’ and regions laws’ will be discussed in the next section, but the last four years have seen major developments in the Netherlands, the US, Brazil, the EU and elsewhere.

At one level, the regulatory and political shifts can be attributed to the huge rise in the number of lobby groups on both Internet and telecom sides of the Neutrality debate. However, the most notable shift has been the emergence of consumer-centric pro-Neutrality groups, such as Access Now, EDRi and EFF, along with widely-viewed celebrity input from the likes of comedian John Oliver. This has undoubtedly led to the balance of political pressure shifting from large companies’ lawyers towards (sometimes slogan-led) campaigning from the general public.

But there have also been changes in the background trends of the Internet itself, telecom business models, and consumers’ and application developers’ behaviour. (The key technology changes are outlined in the section after this one). Various experiments and trials have been tried, with a mix of successes and failures.

Another important background trend has been the unstoppable momentum of particular apps and content services, on both fixed and mobile networks. Telcos are now aware that they are likely to be judged on how well Facebook or Spotify or WeChat or Netflix perform – so they are much less-inclined to indulge in regulatory grand-standing about having such companies “pay for the infrastructure” or be blocked. Essentially, there is tacit recognition that access to these applications is why customers are paying for broadband in the first place.

These considerations have shifted the debate in many important areas, making some of the earlier ideas unworkable, while other areas have come to the fore. Two themes stand out:

  • Zero-rating
  • Specialised services

Content:

  • Executive summary
  • Contents
  • Introduction
  • What has changed?
  • Where have we come from?
  • Zero-rating as a battleground
  • Specialised services & QoS
  • Technology evolution impacting Neutrality debate
  • Current status
  • US
  • EU
  • India
  • Brazil
  • Other countries
  • Conclusions
  • Recommendations