Where do telecom operators go from here?

  • View
    2.814

  • Download
    3

Embed Size (px)

DESCRIPTION

Why have telecom operators performed so badly over the last decade and what strategy do they need to adopt in order to remain relevant in the Digital World? Telcos have consistently underperformed analyst and market expectations their stock market recoveries after the 2000 crash and the 2007 crash were weak relative to the rest of TMT. Their core revenues voice, messaging and internet access are now in terminal decline (or at least moving towards terminal decline). Their future is tied to over-the-top services such as internet TV, mobile payments and cloud services. Telcos remain the most over-regulated part of the internet value chain, so any super-normal profits they attempt to make from new technology cycles risk being capped by the regulator. In order to survive, Telcos need to latch on to one of the many emerging technology cycles mentioned on page 19. But they also need to change their business models: - By moving towards software services - By restructuring their businesses such that their new products are not regulated - By consolidating to eliminate excess competition SK Telecom is an example of how the move to software can raise shareholder returns. BTs ring-fencing of its regulated activity into Openreach is an example of the type of internal restructuring that can raise shareholder returns AT&T and Verizon are living proof that industry consolidation will raise shareholder returns.

Transcript

  • 1.Telecoms Media TechnologyWheredotelecomoperatorsgofromhere? 10October2013Cyrus Mewawalla, Partner +44 (0) 20 3393 3866 cyrus@cmresearch.co.ukwww.cmresearch.co.uk Authorised and regulated by the Financial Conduct AuthorityCM Research 22 Upper Grosvenor Street London W1K 7PE

2. Contents 1.HowhaveTelcovaluationschangedsincethelasttwostockmarketcrashes? 2.WhyhaveTelcosperformedsobadly? (a)Debt (b)Technology (c)Regulation3.HowcanTelcosgrowearningsinthefuture? 5.WhatkindoftechnologycyclesshouldTelcoslatchonto? Example1:BigData Example2:SoftwareDefinedNetworks6.ConclusionsAnalysingTrendsinTechnology,MediaandTelecoms2 3. HowhaveTelcovaluationschangedpostthedotcomcrash? Technologyanalystswereblamedforthestockmarketcrashof2000forpublishingoverinflatedvaluations. Buttheywererightaboutmanyinternetvaluations;itwasTelcovaluationstheygotdramaticallywrong. AmazonandeBay symbolsofthedotcomera areworthmoretodaythanatthepeakofthe2000bubble. Bycontrast,VodafoneandAT&T likemostTelcos aresignificantlydownontheir2000valuations.Sharepriceperformancesincethe2000internetcrashAmazoneBayVods AT&TSource:FT.comAnalysingTrendsinTechnology,MediaandTelecoms3 4. HowhaveTelcovaluationschangedpostthecreditcrunch? Sincethe2007/8financialcrisis,Telcoshavebeentheworstperformingsectoracross13TMTindustries, barone,down14%onJanuary2008levels. Bycontrasttheinternetsector(e.g.Google,Amazon,eBay,Priceline)isup250%. Andthesoftwaresector(e.g.SAP,OracleandSalesforce)isup120%.TMTsectorperformancesincethe2007/8financialcrashSource:FT.com,CMResearch.Barchartshowscumulativesectorperformancefrom1January2008totheperiodsending31December2008,2009,2010,2011,2012and30September2013ofa selectionofstocksthatwebelievearebellwethersforeachsectoraggregatedonanequalweightingbasis.AnalysingTrendsinTechnology,MediaandTelecoms4 5. WhyhaveTelcosperformedsobadly? Themessagefromboththe2000crashandthe2007crashisthatthemarketovervaluedTelcos. Why? Therewerethreebigproblems:1.Debt: Theyhadtoomuchofit2.Technology:Theywereunabletomonetisethebig technologycyclesoftheday3.Regulation:TheywereoverregulatedAnalysingTrendsinTechnology,MediaandTelecoms5 6. WhyhaveTelcosperformedsobadly? Problem1:DebtYoudontwanttobeholdingdebtinthemiddleofadebtcrisis. Telcoswerehighlyindebtedin2000and2007. TelecomsremainsthemostdebtladensectorintheglobalTMTspace.TelcosRestofTMT Source:Companydata,Bloomberg,CMResearchAnalysingTrendsinTechnology,MediaandTelecoms6 7. WhyhaveTelcosperformedsobadly? Problem2:TechnologyThechartbelowcanbeappliedtoalmostanytechnologygrowthcycle. Thesteepcurveiswherethetechnologyisgoing.TheshallowcurveiswheretheTelcoisgoing. Forsomereason,Telcosareunabletolatchontotechnologycyclesandprofitfromthemthewaytheir peersintheTMTsectoraredoing. AnotherwaytolookatthischartistopretendthatthesteepcurveisthecostbaseofaTelcoandthe shallowcurveistherevenuebase:anincomegapisdeveloping. Someindustrycommentatorsforecastthisincomegapwillbankruptseveralhighprofileoperatorswithin fiveyears.Source:Cisco,ITU,CMResearchAnalysingTrendsinTechnology,MediaandTelecoms7 8. WhyhaveTelcosperformedsobadly? Problem3:RegulationIntheschematicoftheinternetvaluechainbelow,theshadedareasrepresentregulatedactivity. Regulatorscapsupernormalprofits,reducingtheincentivetoinvestinnewtechnologies. Sotheunregulatedpartsoftheinternetvaluechainhavegrownby25%,comparedto26%fortherest ThetrickforTelcosistoreengineertheirbusinessessothattheprofitablebitsareoutsidetheremitof theregulator.Source:Companydata,CMResearchAnalysingTrendsinTechnology,MediaandTelecoms8 9. Sohowcantelecomoperatorsgrowearningsinfuture? Telco'sareindangerouspositionnow. Theyneedtodosomethingdrastic,becausetheircorerevenuestreamsareallfallingsimultaneously. AseminalpaperbyChetanSharmacalledTheFourthWavebestsumsupthestateoftelecomstoday. Voice,MessagingandInternetAccessrevenuesarealready orcloseto terminaldecline. OvertheTop(OTT)servicesrepresentthefourthwaveofrevenuesthatisjuststartingtotakeoffnow. ButwhichtechnologycyclesdoTelcosneedtolatchontoinordertobuildtheseOTTservices?TheFourthWaveSource:ChetanSharmaTechnologyandStrategyConsultingAnalysingTrendsinTechnology,MediaandTelecoms9 10. WhatarethebigtechnologycyclesthatwillcreateOTTopportunities? TelcosneedtolatchontooneofthesetechnologythemesandcreateOTTservicesoutofthem. ManyofthesetechnologiesrequireTelcostomakeaheavyinvestmentinsoftware. Letsexaminetwooftheminmoredetail:BigDataandSoftwareDefinedNetworks. Social games,music,video locationshopping GoogleGlass newadvertising modelsMobile wearable devices locationservices mobile payments mobile adsCyber security Telecom equipment focus nationalsecurityissues software definednetwork openstandardsCloud everything everywhere cybersecurity ITcostreduction ageofsoftwareBigdata Reimagination privacy issues wearable devices ageofsoftwareanalyticsSoftwaredefined networks Costreduction service enhancement Network functionvirtualisTV InternetTV Second/third screens 16k/flexible screens SocialnetworksCopying Apple Ecosystem lockin Walled gardens Hardware/software integrationRegulation Netneutrality Dataprivacy Internetregulation Anticompetition casesSource:CMResearchAnalysingTrendsinTechnology,MediaandTelecoms10 11. TheBigDataTechnologyCycle:Whatisit? BigDataisonetechnologycycleTelcoscan latchonto. BigDatareferstodatathatcannotbeanalysed onatraditionaldatabase. Itsscaleismindboggling. 90%ofthestoreddataintheworldtodaywas createdinthelast2years. Thisdataiscreatedfromhundredsofsources, includingemails,documents,apps,pictures, videos,tweets,andcreditcarddata. Muchofthisdataisunstructuredwhichmeans itcannotbeeasilycompartmentalisedbyfield. Unstructureddata suchasvideo isdifficult toanalysebecauseitdependsonamachine interpretingnuancesthatonlyhumanscan trulyunderstand. Forinvestors,thebigmoneyliesindeveloping aBigDataAnalyticsEnginesthatcanreliably interpretthesenuancesinrealtime.CategorisingBigData EaseofuseEasyandcheaptoanalyseDifficultorexpensivetoanalyseRequiresextensiveinfrastructureClassificationStructureddataUnstructured dataSensordata (machinetomachine)DatatypeDatabases XMLdata Datawarehouses Enterprisesystems Socialmedia Voice,music&video Documents EmailRFID GPS QR TemperatureSource:CMResearchAnalysingTrendsinTechnology,MediaandTelecoms11 12. TheBigDataTechnologyCycle:Behindthevaluechain WhatdoestheBigDatavaluechainlooklike? BigData ManagementBigData ProductionBigData ConsumptionStorage DataMining Socialmedia Documents Databases Webcrawlers Web robots(bots) Sensors Voice Music &video Email RFID Callrecords Payment details GPSVolumeSecurity SearchVelocityBigData qualityDigitalMarketingVarietyGatherrawdataonindustrialscaleAnalytics Reselling DatabasesImproveBigDataqualityCommercialiseBigDataSource:CMResearchAnalysingTrendsinTechnology,MediaandTelecoms12 13. TheBigDataTechnologyCycle:WheredoTelcossitinthevaluechain? Howdothemainplayers interactintheBigData valuechain? Thebiginternetchampions likeFacebookandGoogle straddletheentirevalue chain:theycontrolhowthe dataisproduced,managed andsold. BycontrastTelcosare instrumentalinBigData production,butarenotso goodatmanagingor commercialisingthedata. Perhaps,likemany technologycompanies, Telcosneedtoinvestmore insoftware.Regulatoryoversight Privacy,piracy,securityBigData ProductionBigData ConsumptionBigData ManagementOperatingsystemandbrowsersoftwaredevelopersSocialmedia Documents Databases Webcrawlers Web robots Sensors Voice Music &video Email RFID Callrecords Payment details GPSSearchengines Socialnetworks Cloud servicesproviders Marketing agenciesTelecomoperators Data centres AnalyticalenginesThirdparty resellersHardwaremakers CybersecurityData scientistsAppsdevelopersSource:CMResearchAnalysingTrendsinTechnology,MediaandTelecoms13 14. TheBigDataTechnologyCycle:Winnersandlosers Internetcompanies ThebigInternetcompaniescontrolwherethedatacomesfromandwhereitgoesto.Amazon,Baidu, FacebookandGooglemaysoonselllucrative,proprietaryBigDataAnalyticsservicestoendusers. Datastorage,networkingandhardwarecompanies HardwaremakerslikeCisco,Dell,LenovoandHPareinvestingheavilyinBigDataappliances.Datastorage companieslikeEMCandNetAppcouldbenefitfromtheexplosionindata. Enterprisesoftwarecompanies OpensourcedatabaseplatformslikeHadoopthreatenOracle,IBMandSAP.Clouddatabaseservices like Salesforce.comarelikelytobethefastestgrowthsectorthisyearwithintheenterprisesoftwarespace. Cybersecuritycompanies CyberattacksremainthebiggestinvestmentriskfacedbyplayersintheBigDataspace.WhentheCEOofa FTSE100companyisfiredforfailingtopreventabigcyberattack,cybersecuritysharepriceswilltakeoff. Telecomoperators Asmorebusinesscriticaldataflowsthroughthecloud,Telcosshould intheory gainmorepricingpower whencarryingthatdata.Butmachinetomachine(M2M)revenuesarelikelytoberegulated.Thetrickfor TelcosistocreateaBigDataAnalyticsproductthatisunregulatedandcanprovideagrowingrevenue stream.Thatrequiresheavyinvestmentinsoftware.AnalysingTrendsinTechnology,MediaandTelecoms14 15. TheSDNtechnologycycle:Whatisit? SoftwareDefinedNetworks(SDN)isanothertechnologycycleTelcoscanlatchonto. SDNisanewarchitecturefortelecomnetworksinwhichtheemphasisshiftsfromhardwaretosoftware. Itwillbehugelydisruptivebecauseitfundamentallychangeswhocontrolsthetelecomnetwork.Source:CMResearchAnalysingTrendsinTechnology,MediaandTelecoms15 16. TheSDNTechnologyCycle:Timing WeareearlyintheSDNinvestmentcycle. In2012,theSDNequipmentsectorwasworthlessthan$400m. SDNCommercialisationSDNResearch&Development StanfordUniv ResearchProject intoSDN2005OpenFlow Switching specification released200620072008MITTechnology Reviewcoins thephrase, "softwaredefined networking"2009OpenNetworking Foundationfounded byGoogle,Facebook, Microsoft,Yahoo DeutscheTelekomand Verizon 201020112012SeveralSDN startups acquiredby equipment makers2013SDNtechnology beginstogo mainstream20142015Source:CMResearch TelcosareevaluatingSDNtechnologycarefully:itcouldenhancenetworkserviceswhilstsimultaneously loweringcosts. Butthekeyquestionisw