Operators dilemma the fourth wave chetan sharma consulting

2012

OPERATOR’S DILEMMA (AND OPPORTUNITY):

THE 4TH WAVE

CHETAN SHARMA

A MOBILE FUTURE FORWARD RESEARCH PAPER

OPERATOR’S DILEMMA (AND OPPORTUNITY): THE 4TH WAVE

2 Introduction | www.mobilefutureforward.com © Copyright 2012, All Rights Reserved. Use without permission is strictly prohibited.

Table of Contents Introduction ........................................................................................................................ 6 Global Mobile Operator Growth – The Last 10 years ......................................................... 8

Revenue growth curves .................................................................................................... 8 First Revenue Curve – Voice ........................................................................................... 9 Second Revenue Curve – Messaging .............................................................................. 11 Third Revenue Curve – Access ...................................................................................... 14

The Mobile 3.0 era ............................................................................................................ 18 What is the 4th Curve? ....................................................................................................... 20 Why the 4th Curve is different? ......................................................................................... 22 Mobile Operator Strategy and implications for the ecosystem ........................................ 26

Delay the decline ............................................................................................................ 26 Extend the peak ............................................................................................................. 26 Invest in the 4th curve .................................................................................................... 26

The Impact of 4th Curve on Operator Financials .............................................................. 27 Investing in the 4th Curve .................................................................................................. 29

Utility players ................................................................................................................. 29 Enablers ......................................................................................................................... 30 Digital Lifestyle Solution Providers or Enabler+ .......................................................... 30

How can Operators become Digital Lifestyle Solution Providers? .................................. 31 Customer vs. User .......................................................................................................... 31 Save the customer relationship ..................................................................................... 31 Use privacy/security as competitive advantage ............................................................ 31 Separate the 4th curve organization from the mothership ............................................ 32 Change the DNA............................................................................................................. 32 Portfolio management – fail often and cheap. Embrace Beta launch .......................... 32 Collaboration.................................................................................................................. 33 Standards vs. Proprietary .............................................................................................. 33 Build Advocates.............................................................................................................. 34

How Operators See the 4th Curve? .................................................................................... 36 Tier-2 Operators on the 4th Curve ................................................................................. 38

Case Studies of Transformed Operators ........................................................................... 40 AT&T .............................................................................................................................. 40 Telefonica ....................................................................................................................... 41

Implications of the 4th wave .............................................................................................. 43 Who will capture the profits? ........................................................................................ 43



The Need for New operating models ............................................................................. 44 Implications on the Ecosystem ...................................................................................... 47 Competition and Operator Consolidation ..................................................................... 47 New Revenue Models ..................................................................................................... 48 New Joint Venture Models ............................................................................................ 48 New Business Models .................................................................................................... 48 Regulatory Rethink ........................................................................................................ 49

Conclusions ....................................................................................................................... 50 Acknowledgements ........................................................................................................... 51 About Mobile Future Forward .......................................................................................... 52 Mobile Future Forward Publishing ................................................................................... 53

Papers ............................................................................................................................. 53 Books .............................................................................................................................. 53

About Chetan Sharma Consulting .................................................................................... 54 About the Author ............................................................................................................... 54



Disclaimer Chetan Sharma Consulting is one of the most trusted advisory firms in the global mobile industry. This research document presents some in-depth analysis about the future of the mobile industry. However, the author or the company assumes no liability whatsoever. This paper is part of the Mobile Future Forward Research Paper Series. For past papers and books, please see http://www.mobilefutureforward.com Any use or reprint of the material discussed in the paper without prior permission is strictly prohibited.

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When winds of change blows, some build walls while others build windmills

– Old Chinese Proverb.



Introduction In 2012, the global mobile industry revenue will hit $1.5 trillion.1 This revenue has tripled in the last 10 years. Mobile operator’s revenue reached a new milestone at the end of 2011. The total global mobile operator revenue exceeded $1 trillion for the first time. The operator profits have more than doubled in the last 10 years. The trifecta of fast broadband networks, well-designed mobile computing devices, and the insatiable supply of content, applications, and services has unleashed consumer demand for more like never before. If we look at the history of the mobile industry, the first generation was primarily focused on voice and this era persisted for a good 10-15 years before 2G messaging and very basic data services were introduced. A decade later, data services started to become more interesting as 3G networks enabled faster access speeds and new applications. When Apple released iPhone in 2007, followed by Google’s Android in 2008, the industry was turned on its head. While the implications were apparent at the time, the far-reaching impact of these new devices on how people work and live is still unraveling. The changing face of the industry also impacted the business models, the revenue streams, and the value chain power structure. For much of the last three decades, voice has dominated the revenue streams for almost all operators. However, in 2013, voice revenues will fall below the 60% threshold globally. The drop in voice revenues has been compensated by the rise of messaging revenues and the data revenues. However, some nations and operators have started to experience declines in messaging revenues. The access revenue stream is still very much a growth story and is rising fast for almost all the operators. We studied the revenue growth patterns for 65 leading operators in 30 major global markets to understand when the revenue in certain segments rise, stagnate and fall. The underlying data yields some interesting and consistent patterns that are instructive on how things might shape up over the course of the next decade. The sigmoid or the S-curve growth has been well understood and applied to various disciplines. To understand the various revenue growth curves, we segmented the operator revenues by voice, messaging, and access and correlated them with subscription growth. In a majority of the cases, as the subscriber penetration approaches 70-90% band in a given segment, the Net-Revenue starts to hit its peak, stagnates for a bit and declines. The amount of time the revenue curve stays in the stagnation phase depends on the market competitive dynamics and usage profile of the subscribers in a given country. The first revenue curve of voice is already in decline for majority of the developed markets like the US, Japan, and Western Europe. The second revenue curve of messaging is on the decline in some nations like the Philippines, Netherlands, Taiwan, Spain, and Italy while approaching saturation in countries such as the UK, France, and 1 State of the Global Mobile Industry, Chetan Sharma Consulting, 2012



the US. Both these curves are on the rise in developing countries, which are still in the subscriber growth phase. The third revenue curve of access is in the growth mode around the world for all nations; however, the margin pressure on this revenue base is the strongest of the three as the operators rush to meet the growing data demand that is doubling every year in most major markets. We are likely to see the growth continue for the next 3-4 years before this curve also starts approaching its peak. At this stage, all three revenue curves will be in decline. This means that the net revenue for some of the operators and for some nations will start to go down, in some cases precipitously. This will happen to operators around the world at different time intervals, unless the fourth revenue curve2 starts to take shape in the near term to help cushion the decline. The growth of revenue in this fourth curve will be critical. For some operators, a weak fourth curve will be fatal. They won’t be able to arrest the fall in the overall net revenue and investor pressure will force them to consolidate or learn to live with lower margins or go out of business. As such, it is important to understand the importance of the fourth curve and formulate strategies that extend the lifetime of the previous three curves such that net revenues and net profitability stay healthy over the course of this decade. The most interesting dynamics of this fourth curve is that other racers are not only the fellow operators but some new well-funded service and application providers. They are using new gear, are not constrained by the same rules, can change gears at will, and are ruthless in their execution. All this renders the traditional telecom organizational structure and the way of life - obsolete. Based on the strategy chosen, the operators will likely fall into three major buckets: access only, enabler, and digital lifestyle solution providers. The operator might play all three roles depending on the vertical in a given country. However, without playing a significant role in the latter two categories, operator revenues over the long haul will start to resemble those of utilities – billions of dollars in revenue but the margins might shrink to 8-12% from the current 30-40%. The next 2-5 years will be critical for operators worldwide. The strategies they pursue and the investments they make will define their future existence for the coming decade. Operators who are investing heavily in the 4th curve have a good shot at seeing the end of the decade but a good many will succumb to the powers of the growth curves, leading to consolidation in almost all markets or they will gradually morph from operators to utility providers. Many will be caught unawares by the shifting sands of revenue and their inability to mutate to compete effectively in the IP world. Operator’s dilemma – The 4th wave analyzes the four mobile revenue curves in detail and discusses the strategies needed to increase the net revenue and the investment areas that can lead to new revenue and healthier margins for operators around the world.

2 Curve and wave are used interchangeably throughout the paper but refer to the same concept


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Global Mobile Operator Growth – The Last 10 years

Revenue growth curves

The use of S-curve or the sigmoid curve to explain the growth patterns of markets is well understood across markets. The simple observation is that after slow growth, as the technology or the market reaches a critical mass, the growth accelerates. After a certain high percentage of the consumers start using the service or the technology, growth starts to slow down, reaches saturation and then starts to decline depending on how fast the substitution effect takes place. This model can be used to explain the growth of individual products, companies, markets, and global industries.

Revenue Growth Curves

Net

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Subscriber Penetration

0-25% 25-70% 70-90%

© Chetan Sharma Consulting, 2012

90%+

Figure 1. Revenue Growth Curve in Mobile For the purposes of this paper, we apply the S-curve model to the operator revenues in various countries to understand the growth patterns of various revenue curves and what they tell us about what might be in store in the future. A typical revenue growth curve in the mobile industry is shown in figure 1. One of the observations is that if we look at the individual growth curves of voice, messaging, and access – the three main categories of revenue generation for the operators worldwide, they seem to exhibit the same characteristics. The rise is slow when the subscriber penetration is below 25% and then it picks up until the subscriber penetration reaches the 70-90% penetration band. Then it starts to flatten and decline. As to which end of the 70-90% band the given revenue curve attains its peak and starts the decline really depends on the factors relevant to the individual country and individual operator. These



are generally dependent on the maturity of the market, the economic and political conditions of the market, the regulatory regimes, the competitive forces that are at play in the market, and the availability of substitute solutions. In the subsequent sections, we will delve into each of the major revenue curves and discuss the nature of growth and decline in various countries.

First Revenue Curve – Voice The first cellular market started in Japan in 1979 and gradually all markets launched cellular services over the course of the next 25 years. For much of this time, the primary revenue growth driver was voice. As such, the markets that started early also reached saturation early. For example, while the cellular market in India was just coming out of its cocoon in 2003, Japanese voice revenues already peaked and started declining. Next, many countries in Europe followed. Perhaps, as the precursor to the 2008 financial meltdown, the voice revenues in many European nations peaked in 2007 and started declining. Obviously, the micro-revenue environment was a bit different depending on how each individual operator was doing but typically, the number 3 and 4 operator in a given country peaked first in voice revenues and the decline began. In the US, the voice revenues of Sprint and T-Mobile USA started declining in 2007, which led to the overall voice revenues in the US market to retreat even though Verizon and AT&T – the top two operators by overall revenues and total subscribers still had growing voice revenues. In fact, they haven’t peaked yet as of the writing of this paper.

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Voice Revenue Growth Curves


Japan

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Figure 2. Mobile Voice Revenue Growth Curves



Figure 2 shows the position of various markets on the voice revenue growth curve. Figure 3 shows the trends in mobile voice revenues in some of the leading western mobile markets. The voice revenues in emerging markets of Russia, China, India, Indonesia, Mexico, and many others are still increasing as the subscriber penetration hasn’t hit the 70-90% band yet.

Figure 3. Mobile Voice Revenue Growth Curves for Spain, Germany, Japan, US, France, UK



Second Revenue Curve – Messaging

The first SMS was sent in 1991 in Europe and even though SMS wasn’t intended to be a consumer service, it ended up being the second big revenue generation category for the operator for much of the 1990s and 2000s. In fact, in some of the emerging markets, messaging is still the second biggest revenue generation category after voice. SMS has been a tremendous success story for the wireless industry. With trillions of messages being sent every year, in 2011, the total messaging revenues exceeded $200 billion dollars. Both the number of messages and the total global messaging revenues are expected to increase for the next 5 years. However, some subtle shifts started to appear in 2011. Just like VoIP had started to eat into the operator voice revenues, IP messaging started to make a noticeable impact on the operator revenues in some countries. Operators in Spain, Netherlands, Taiwan, and Philippines were among first to feel the brunt of IP messaging (figures 4 and 5) and the impact on what had been cash cow for the operators. The impact on the network was negligible, but the margins were astronomical. The use of IP messaging was a function of slowing economy in Europe and the price-conscious markets of Asia. In 2011, KPN the biggest Dutch operator started to publicly make noise about the impact of players like Whatsapp on their messaging revenue. It forced them to acknowledge in their quarterly earnings call, the impact it was having on their overall financials. The Android and iPhone customers were using Whatsapp in large numbers. Over 90% of such subscribers preferred IP messaging. Hence, they were looking for a cheaper alternative to operator messaging. Other operators are starting to see the same impact in 2011 and into 2012. Some of these undercurrents were masked by the sizable messaging traffic and revenues but the shift is apparent. Figure 6 shows the status of various leading mobile markets on the messaging revenue growth curve.



Figure 4. Mobile Messaging Usage Growth Curves for Operators in Spain

Figure 5. Mobile Messaging Revenue curve for operators in Taiwan The shift and decline in messaging wasn’t really a surprise. The SMS platform hasn’t really evolved much in the last two decades. While the application of SMS to different services and verticals grew, the basic nature of messaging largely stayed the same. Once



the fast 3G/4G networks were in place complimented by industry changing devices, the stage was set for disruption in the messaging space. Even before Whatsapp, Voxer, and Viber, the likes of Blackberry Messenger and Skype, had started the phenomenon in the developing nations where consumers are price sensitive and creative in minimizing their tariffs. That some of the operators were caught by surprise and didn’t anticipate the shift points to the fundamental flaw in the DNA of some.

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UKFrance

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RussiaChinaIndia

Messaging Revenue Growth Curves

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Taiwan

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Figure 6. Mobile Messaging Revenue Growth Curves In the next 2-4 quarters, the markets of US, Finland, Sweden, France, and Italy will join the ranks of declining messaging revenues. Even in China, which is still considered a growth market, China Mobile, world’s biggest operator by revenue and subscribers started to see its messaging revenue decline (figure 7). In fact, mobile apps and VAS commanded the highest share in 2011 from the mobile data revenues.



Figure 7. China Mobile – Mobile data segment trends

Third Revenue Curve – Access

The mobile data technologies have been around since the mid-nineties with CDPD, TACS, NMT, GPRS, EDGE and others, the market for mobile data didn’t really grow until Apple showed up to the party with a device called the iPhone. The only exceptions were the markets of Japan and Korea where consumers were using all sorts of data services but primarily on the enhanced feature phones which behaved like the smartphones. The advent of the iPhone coincided with and to some extent accelerated the deployment of the fast 3G networks. AT&T signed a bold deal with Apple to carry the device exclusively in the US market. Many other leading operators did the same in other markets. Most of the operators were not prepared for what was to come – a data tsunami. Many of the operators immediately realized that the unlimited plans are going to crush their financials and they quickly retreated to the tiered plans. AT&T gave up on the unlimited plans 3 years after the launch. During this time period, the operator sustained the most incredible wave of data growth witnessed in human history. From 1 PB/month traffic in 2007, the data traffic grew 25000% to 35 PB/month



by Q1 2012.3 AT&T rushed to beef up its network and the backhaul. The experience at AT&T helped other operators prepare their network when iPhone came to their network. Android started to show the same data consumption characteristics as the iPhone by 2010. While the investments to keep up with the data demand increased the CAPEX and OPEX for the operators worldwide, they were able to sustain such an investment only because the revenues from such traffic was delightfully growing at astronomical rate as well. AT&T’s data revenue grew from $689M in 2004 to $22,000M in 2011, a 30x increase. Other operators have seen similar hockey stick curves.


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Access Revenue Growth Curves

© Chetan Sharma Consulting, 2012India

Indonesia

90%+

Figure 8. Mobile Access Revenue Growth Curves We are very much in the growth cycle of the access curve. In most of the major markets, the smartphone penetration (which is a proxy for high-data usage) is still below 50%. Markets like Hong Kong, Singapore, and Australia have already exceeded the 50% threshold and big markets like the US are fast approaching it and will cross the milestone in 2012. The role of access revenues to the overall health of the mobile operators can’t be overstated. The growth of the access curve helped compensate for the declines in voice and messaging revenues. For example, in the US, the voice revenues declined $12B from 2007 to 2011. During the same time, the data revenues increased by $41B, easily compensating for the decline. In Japan, the voice revenues declined by $3B but the data revenues increased by $25B from 2007 to 2011.

3 Source: Chetan Sharma Consulting, 2012



Figure 9. US Mobile Operators Revenue Microtrends As a result of the data tsunami, there are two types of opportunities that are being created, one that takes advantage of the data being generated in a way that enhances the user experience and provides value and the other in technologies that helps manage the traffic data that will continue to grow exponentially. To be able to stay ahead of the demand, significant planning needs to go into deal with the bits and bytes that are already exploding. New technical and business solutions will be needed to manage the growth and profit from the services. Relying on only one solution won’t be an effective strategy to manage rising data demand. A holistic approach to managing data traffic is needed.4 Our analysis shows that the cost structure can be reduced by more than half if a suite of solutions are deployed versus a single dimensional approach. This bringing the hockey stick curves of data cost more in line with the revenues, thus preserving the margins. The decision making process within the operator organizations will need to be streamlined as well. Operators should also consider creating a senior post which focuses on both the cost side and the solution side so they can devise and institute a sustainable long-term policy and keep the margins healthy.

4 For a detailed discussion of the topic, please read, Managing Growth and Profits in the Yottabyte Era, Second

Edition, Chetan Sharma Consulting, http://chetansharma.com/yottabyteera2.htm

http://chetansharma.com/yottabyteera2.htm



Figure 10. US Mobile Revenue Growth 1995-2011 As the industry enjoys the ride on the access curve, there are two important questions that need to be answered:

a) When will the access curve start hitting its peak; and b) What’s the 4th curve that will help compensate for the declines in the first three

curves? How operators understand, react, and strategize on these questions will help define their fortunes for the next decade. The ones that are late at acknowledging the inevitable decline of the access curve and delay the investment into the 4th curve might find themselves consumed by the powerful forces of the competitive markets and some relegated to the dustbin of mobile history.


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The Mobile 3.0 era Clearly, we are living in a data-driven mobile era. Sooner or later, most operators’ revenues will be derived from data services, whether it is age-old SMS, access, or next generation communications or value added services. In Japan, in Q1 2012, Softbank’s data services contributed to over 65% of the overall revenues. The other two operators – NTT DoCoMo and KDDI were at the 60% mark. It is safe to assume that all the three operators will have more than 80% of their revenues come from data services by 2013.

Figure 11. Mobile Internet 3.0 – Leading global mobile operators The Mobile Internet 3.05 is defined by the cloud-enabled, software driven, IP-centric, high-speed 4G+ networks; consumers using multiple connected devices; flattened value-chains; and operators relying on mobile data services for majority of their revenues. Mobile data growth in this stage is expounded by the ever growing ecosystem of developers, new data services, and the transition of the legacy network framework into the network as a platform with monetizable open APIs that empower the ecosystem to build compelling experiences and applications. Mobile Internet 3.0 combines the

5 For a full treatment of the subject, please read Mobile Internet 3.0, How operators can become service

innovators and drive profitability, Chetan Sharma Consulting, 2012


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openness of the core network with the ubiquity of the billions of IP nodes to create compelling intelligent user experiences that delight consumers. The growth in mobile data services is more pronounced in the western markets with the developing markets following their lead. In China, even though the mobile data market is just evolving, data contributes to approximately 35% of the overall revenues. All this growth has enabled the global mobile data revenues to grow 23% in 2011 to $320 billion. Just to put this in perspective, this is more than the revenues generated by music, Hollywood movies, ISP services, and cable services combined.6 The global mobile data revenues contributed over 30%7 to the service revenues. Messaging continues to be a big revenue generator but its share of the overall data revenues is gradually declining. Access is becoming a dominant revenue category especially for the western markets. This trend is even pronounced for the smartphone users. Consumers are paying $20-30/month for access but it is directly impacting the messaging revenues for some operators as consumers chose to use social networking tools to do the bulk of their messaging. Additionally, the VAS8 revenue is also lost as this revenue moves to the over-the-top (OTT) application providers such as Google, Facebook and others. Given that there is constant pressure on the access profits, the issue of declining margins must be tackled head-on. Mobile operators must look at ways to move beyond just providing access services and position themselves from being service providers to becoming service innovators.

6 Source: Chetan Sharma Consulting, 2011-12. Music, movies, ISP, and cable revenues from respective industry

associations. 7 The distribution of mobile data usage and revenues varies depending on the region. For markets like India,

Philippines, Indonesia, China, Russia, Brazil, messaging still accounts for 70-90% of the data revenues. In some of the western markets like the US, UK, France, Japan, Korea, data access and VAS account for roughly 60-70% of the data revenues. The overall data revenue is also much higher in the latter markets. 8 VAS stands for Value Added Services like navigation, advertising – services that go beyond access.


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What is the 4th Curve?

The 4th curve is not a single entity or a functional block like voice, messaging or access but is made up dozens of new application areas. Some are not even dreamt up yet. As such, this portfolio of services requires a different skill-set for both development and monetization. Some of the services that are already in the market are listed below in Table 1. Another key difference in the competitive landscape for these services is that the biggest competitors for these services (depending on the region) might not be another operator but the Internet players. Table 1. 4th curve application areas

Application Areas Competitors

Identity, Risk Management Facebook, Google, Twitter, Microsoft, Banks

Commerce Amazon, Ebay, Google, Groupon

Payments Paypal, Startups, Google, Facebook, Visa

User Profile Google, Microsoft, Apple, Twitter, Facebook

Advertising Google, Facebook, Startups, Apple

Cloud Services Amazon, Cisco, Apple, Microsoft, Salesforce

Enterprise SIs, Vertical players

Connected Home Cable Companies, HP, Microsoft, Sony, Apple, ADT

Health Microsoft, Health Care providers

Analytics Google, Microsoft, Facebook, Amazon

For some of these services, the operator might just focus on enabling the ecosystem while for others they might actively participate in bringing the service to the market. For example, AT&T is deeply entrenched in the Health space with several key initiatives in mHealth, TeleHealth, Cloud-based Healthcare, etc. while some of its European counterparts are more focused on enablement of the health ecosystem. Deutsche Telekom works closely with BMW for auto services while its US counterpart is less involved with companies directly but is more focused on getting the developer ecosystem to take advantage of its network platform.


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The opening up of the network for innovation necessitates re-architecting the network elements that can scale with demand and meet the specific requirements of the vertical and the application. Table 1. lists several growth areas, the likely competitors (beyond their fellow operators), the market opportunity, the ARPU potential and how the money will flow into the value-chain. The market penetration indicates the potential for how much a given solution can be adopted in the next 3-5 years. ARPU refers to the potential monthly revenue from the customers adopting these solutions. So, for an operator with 10 million subscribers, the risk management solution has the potential to reach 5 million subscribers who pay $1-2 each thus increasing the overall monthly ARPU by $0.5-1.

Figure 12. The 4th curve opportunities In some areas, operators will compete head-on with the OTT players such as Google and Microsoft but in the new complex mobile ecosystem, operators should learn to collaborate and compete at the same time. In certain areas, like mobile advertising, financial services, identity management, they should collaborate with their fellow operators to provide a better front-end to the customer and the vertical industry. When Google and Facebook can offer 250 million+ customer profiles in the US to the advertisers, Verizon and AT&T are better off together than working alone.9

9 For a more detailed treatment of this subject, please see, “Mobile Internet 3.0: How Operators Can Become

Service Innovators and Drive Profitability,” Chetan Sharma Consulting, 2012


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Why the 4th Curve is different?

The investment in the 2nd curve of SMS started in the mid-nineties, almost 10-15 years before the 1st curve started to peak and decline. Similarly, the investment in the 3rd curve started to occur in the late nineties, almost 10-12 years before the messaging curves are approaching saturation and declining. It is safe to assume that the decline in the 3rd curve will start to happen sometime this decade. The approach to peak and the subsequent decline will depend on individual operator and the country circumstances, but it will happen. So, when should the investment in the 4th curve start to occur? The answer is now and at a much faster pace than the last 3 curves. The reason is twofold:

a) With each cycle, the length of the curve shrinks, so the access revenue curve will peak earlier than the previous two curves; and

b) The competitive landscape is quite different for the 4th curve (figure 13) than was

the case for the previous three. One could argue that voice-over-IP (VoIP) players compete with the voice curve and the IP messaging players compete with the operator messaging curve but for most of the growth for these two curves, operators were primarily competing with each other. However, as operators embark on the 4th curve, the competitive landscape is different from the start. In addition to worrying about their fellow compatriots, they have to worry about multiple competitors who can emerge from anywhere. Also, there is no one single curve but rather a collection of dozens of curves that in aggregate make the 4th revenue curve. It will require more prudence, more patience, and more strategic execution to survive and ride the 4th curve.

The 4th curve has different characteristics than the previous three:

a) It is not one single curve but a combination of dozens of smaller curves.

The previous three curves were quite distinct in their offerings. The investment required, the type of people that needed to get hired, the product roadmap, the vendors, and the value chains etc. were well defined over the course of time. The purpose, the functionality, and expected returns were well understood. For example, for the voice curve, the goal of the telecom operator was to connect to end points and provide the best quality possible at the minimum cost. The business models were driven by economics of the given operator in a given country. Similarly, the messaging curve was driven by the capability of delivering messages from one node to another and the entire industry got built around that. For cellular access and connectivity, again, the functionality over the various



product roadmaps has been to connect the device to the network and provide the fastest speed at the lowest cost to the operator. Infrastructure vendor roadmaps are driven by this basic dictum. The cost to provide higher throughput must go down in proportion. As such, the migrations from 2G to 3G to 4G have been step functions to deliver more capacity at a lower cost/bit. The 4th curve has different characteristics for there is no singular function of the curve but rather it is made up of multiple mini-curves which vary in the potential, the lifetime of the growth curve, the type of partners needed to deliver on the promise of each mini-curve, and operators ability to execute on the promise. On top of that, ecosystem conditions can be drastically different. For example, mobile payments, commerce, and remittance are worth hundreds of billions of dollars but have formidable entrenched incumbents who will fight tooth-and-nail to protect their turf. Other nascent areas like mobile health face less of a threat from the incumbents but more from the regulators who are stuck in the primordial era. Some like advertising involve the Internet heavyweights while others like Security have only the new entrants and startups to contend with. Alone, any given mini-curve might not represent as big of an opportunity as the previous three curves individually, however, collectively; the 4th curve has the potential of surpassing the previous ones.

b) The barriers of entry are low on the fourth curve.

The past three curves followed a simple formula. Invest heavily in the infrastructure which included buying spectrum and laying down the infrastructure. The enormous capital requirements meant that only a few could play the game. The incumbents had a built-in advantage. New entrants were rare. The industry grew through consolidation. You want more revenue, then, buy more subscribers. Over the course of the last 25-30 years, almost all major markets have whittled down to three main competitors. Yes, there are a number of MVNOs and smaller regional players. However, in the overall scheme of things, they don’t really matter. The smaller players provide choice but can hardly compete with the big boys on the national scale. Regulators have largely been asleep or incapable of changing this dynamics in most jurisdictions.

c) The Competitive landscape of each of these curves is different requiring a more agile organization.

In general, operators are large organizations. And large organizations in any industry fall victim to complacency, politics, in-fighting, analysis-paralysis, risk-aversion, and bureaucracy. Even tech giants like Microsoft, Cisco, HP, and Yahoo have fallen victim to the law of large corporations. Given that the operators will have to invest and fight for their share on multiple fronts on multiple curves, they need to be nimble. The process of decision making and making bold bets needs to



be efficient and decentralized. They should aim to fail often and fail cheap. That’s the only way they will be able to compete on the 4th curve.

d) Competition from new entrants starts very early.

It is true that the voice business has been under threat from the VoIP players and the messaging business is being impacted by the messaging OTT players. However, the competition from these players started much later in the life of the curve. It was based on how technology evolved. By the time most of the OTT players came into the market, voice revenues had already peaked in the western markets and had started their descent. Messaging revenue only started to get impacted as the curves were approaching the top plateau. The advent of the OTT players was primarily possible because of two factors – IP broadband wireless networks and Apple. Broadband networks allowed for new types of services to be built and serviced that didn’t require the traditional circuit-switched network. Apple busted through the operator closed-garden model and the wireless industry changed forever. The 4th curve is different. Here the competition starts early and the competitive forces are furious. In many of the markets like advertising and security services, the operator will be a new entrant. But, the operator is also in a unique position where they can provide an end-to-end solution to the customers where they already have a billing and service relationship.

e) Business models that extend beyond metering are required.

All the first three curves followed the same business models - $X for Y units of use. $20 for 600 minutes, $10 for 1000 messages, $30 for 3GB, and so on. Of course, the unlimited model came into being for voice and messaging. But, for data, the reverse was true. Many operators started from unlimited to boost demand but soon realized the folly of their judgment and moved back to the metering model. While unlimited voice and messaging can be sustained, unlimited data cannot - at least not without a fundamental change in the laws of physics or economics.

The fourth curve constitutes of multiple curves and product areas that require different skill set both for management and leaders of the organization as well as developers and domain experts for various verticals. The incentive structure for the organization and the people working in that organization should also be different. In fact, changing the DNA of the company is more important than picking the areas of investment on the 4th curve. We will discuss this 4th curve in more detail later in the paper but first, let’s discuss the implications of the 4th curve on operator strategy.



Net

Rev

enu

e



Voice

MessagingAccess

VAS/OTT


Figure 13. The four revenue growth curves

Net

Rev

enu

e



Voice

MessagingAccess

VAS/OTT

© C

het

an

Sh

arm

a C

on

sult

ing

, 2

012

Utility

Enabler

Digital Lifestyle Solution Provider

Delay the Decline

Extend the Peak

Move up the value chain in VAS

Figure 14. Mobile Operator Strategies: The rise and fall of the 4 Revenue Curves

Mobile Operator Strategy and implications for the ecosystem Almost all major mobile operators are public companies who have to answer to the shareholders every quarter. They are measured by the revenue they generate each quarter and the potential to generate more revenues in the future with existing and new customers, and existing and new services. Thus, like other publicly-traded companies, they have to do a delicate dance of managing a declining business while investing in future growth. We believe that the operator strategies worldwide will be driven primarily by the key constructs illustrated in figure 14 and described below:

Delay the decline Both operators who are experiencing declines today and those who are approaching the growth curve peaks have to figure out strategies to delay the decline of their voice and messaging curves. This can be achieved by a number of key initiatives that involve a mix of business models, consumer loyalty, integration of new technologies to reduce churn, and embracing OTT/VAS services.

Extend the peak For operators in India and China, who have yet to hit the peaks of their voice and messaging curves, the strategy is going to be driven by strategies similar to the ones discussed in the section above. For the access curve, where most operators are still going to be riding the growth for the next several years, strategies will be driven by technologies and business models that help manage the cost per bit to enhance the margins per bit. Operators who are able to manage their margins better will have significant competitive advantage. The reason Sprint is still able to offer unlimited data on iPhone and Android devices is because their margins/bit are better than their competitors.10 A number of operators like Rogers, Vodafone and Verizon have launched data share plans that allow consumers to bundle multiple device per plan. This will encourage users to become data users across multiple devices. This form of data pricing and bundling will help extend the access curve peak in all markets.

Invest in the 4th curve As we mentioned earlier in the paper, how operators react to the opportunity of the 4th curve and how they decide to ride this next wave will write their destiny. Depending on how they choose or are able to invest and compete will define what they will become in 5-10 years. Given that the 4th curve is not a singular curve but a combination of several mini-curves that have their own profile, growth characteristics, competitive dynamics, and opportunity landscape, operators will have to manage the 4th curve like an investment professional would manage an investment portfolio or fund – diversify to reduce risk and extend growth.

10

Part of the appeal is also in the simplicity of the message which helps in managing the churn.


27 The Impact of 4th Curve on Operator Financials | www.mobilefutureforward.com © Copyright 2012, All Rights Reserved. Use without permission is strictly prohibited.

The Impact of 4th Curve on Operator Financials

In the last 10 years, operator profits have more than doubled. Granular analysis reveals that European profit growth has been pretty stagnant while growth in North American and Asian markets fueled much of the profit growth over the last decade (figure 15). Operators in South America and Africa are starting to make meaningful contribution to the global profit pool as well.

Figure 15. Mobile Operator profit growth in Europe, North America, China and India

The review of the Debt and EBITDA numbers yield another interesting insight. The growth in revenue has been fueled by the investments that operators have to make to keep up with the network demand. As such, many have had to raise significant amounts of debt. In fact, on average, the debt load has increased approximately 50% over the last five years. For some like Bharti Airtel, China Mobile, NTT DoCoMo, Telefonica, it has increased significantly. If the EBITDA for the company doesn’t grow in proportion to the rising debt, the company comes under scrutiny and financial pressure. Typically, the average Debt/EBITDA ratio for global operators stays around 1.4 with Asian operators


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maintaining a lower ratio compared to their North American and European counterparts (figure 16). Over the past few years, weak economic conditions in various geographies and pressures on the first three curves have increased the Debt to EBITDA ratios for some of the operators. For Deutsche Telekom, the ratio has risen by 22%, for France Telecom 23%, for Sprint 24%, and for Telefonica 50%.

Figure 16. Debt/EBITDA ratios for global mobile operators Others like SK Telecom, China Telecom, Softbank, Telenor, and Telstra have been able to lower their Debt/EBITDA ratios over the same time period. Operators’ ability to raise debt and invest in new ideas and growth curves rests on the both the will to invest as well as their current financial condition. When the revenues stop growing but the debt demands stay high, the ratios start to climb, putting significant stress on the financial health of the operator. The access curve will inevitably start to decline at some point in the future for all operators. For some it might be a couple of years, for others it might take another 5-6 years. To even start to see the growth on the 4th curve, one has to start investing many years prior. The competitive landscape on the 4th curve is much more complex so it requires a different kind of organization to play the game else the rookies will be ousted in no time.


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Investing in the 4th Curve Based on the strategy and performance of a given operator on the 4th curve, operators worldwide will typically fall into three major categories:

Utility players

The Darwinian law will be in full display as operators who are unwilling or unable to compete on the 4th curve see their margins plummet from the declines of the first three curves and negligible growth on the 4th curve. These will typically be the operators who are the tier 2/3 operators in a given market. Their revenue profile will very much resemble that of utility players who generate billions of dollars in revenue but their margins are in the range of 8-12%. Some of the tier 1 operators might fall in this category as well.

Figure 17. Revenue and margins of US Electric Utilities

To get a sense of how the financials of companies in this category might look like, one can study the financials of the utility sector. Figure 17 shows the revenue and margin trends for US Electric Utilities which show that while the revenues have almost tripled over the last 30 years, margins have been cut in half. We can expect similar trends for the utility mobile operators or utility mobile businesses.


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Enablers

The next category of operators will invest in technologies that help them become effective enablers of the larger ecosystem. They provide a robust network, an extensive set of APIs, and the consumer/network data that powers the most popular consumer applications and services.

Digital Lifestyle Solution Providers or Enabler+

Mobile operators who are able to transform themselves into digital lifestyle solutions providers (DLSPs) who go beyond just providing access and devices to their customers to empower consumers and enterprises with solutions, end-to-end solutions, will reap greater benefits from the 4th curve. Such operators go beyond just being an enabler of the ecosystem; they actually launch complete end-to-end solutions in given verticals like AT&T’s digital life in home automation. Obviously, any given operator could play a different role on the various mini-curves that make up the 4th curve. For example, they could be a DLSP when it comes to security services, and an enabler for the advertising services, and a utility player for the cloud services. The net performance of any given operator will be measured by how they perform in aggregate on the 4th curve.


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How can Operators become Digital Lifestyle Solution Providers?

To be an effective and a long-term competitor on the 4th curve, operators have to become the OTT players themselves. 11 Operators have to become one of them. This requires innovation, financial muscles, and a ruthless mindset to capture its share from the value chain.

Customer vs. User

The first step in the journey to becoming a DLSP operator is appreciating that consumers of the 4th curve are not only going to be the operator’s customers today but also users across all operators and in all countries. The moment this realization seeps in, the strategy and business models for the 4th curve change and become much more interesting. Instead of offering a messaging service to an enterprise customer, the operator can offer a cross-carrier service and compete at the OTT scale. Instead of just a few million consumers, they could potentially reach hundreds of millions of consumers. This realization is absolutely essential for smaller operators who don’t have a 100M+ subscriber base to market their services.

Save the customer relationship

Some operators have resigned to the fact that they can’t really compete with the OTT players or don’t seem interested in OTT services. After all, the customer is paying a tariff for the bandwidth they use. However, the key loss in such a scenario is the customer relationships. Once that’s lost, it is very hard to get it back. If all the customer cares about is the access, they are unlikely to look to their operator for VAS and other OTT services in the future. Hence, it is important for the operator to preserve their customer relationship. If they can’t or don’t want to develop their OTT solutions, they should partner with the players to offer branded solutions or have joint offerings that makes the customer develop and maintain brand loyalty with the operator.

Use privacy/security as competitive advantage Over the past couple of years, the debate over privacy and its role in the continued evolution of information technology has been reinvigorated. To some extent, the controversy isn’t new, nor is it surprising. Whenever there’s disruption in the market and the boundary conditions are tested, there’s going to be consternation. It’s also clear that if the mobile industry isn’t proactive in addressing consumer privacy head-on from a technical, business, education and compliance perspective, there will be a strong push to pressure the government to regulate an opportunity that hasn’t fully blossomed yet — and in the process, hamper its evolution. Mobile operators are placed very well in the ecosystem to broker privacy and security between the user and the app

11

Or figure out an effective revenue share model with the OTT players by adding value.

http://gigaom.com/2010/04/20/google-slammed-by-privacy-authorities-over-buzz/

http://gigaom.com/2010/05/06/the-relationship-between-facebook-and-privacy-its-really-complicated/

http://gigaom.com/2010/05/26/facebooks-new-privacy-settings-heres-what-changed/

http://gigaom.com/2010/05/26/facebooks-new-privacy-settings-heres-what-changed/

http://gigaom.com/2010/04/22/your-moms-guide-to-those-facebook-changes-and-how-to-block-them/



ecosystem. If they play their cards right, they can turn consumer’s trust on privacy and security as a distinct competitive advantage.

Separate the 4th curve organization from the mothership

It is not like smart people don’t work at the operators or they don’t feel the ecosystem earthquakes, it is just that the change is difficult, esp. when the company is being measured on preserving the legacy revenue rather than generating new revenue curves. Operators are typically large organizations employing thousands of employees which leads to fiefdoms, tension, and friction. Smart organizations separate 4th curve organization from the mothership and hire as many Internet employees as possible – the ones that will go work for Google or Facebook. The umbilical cord can stay but efforts should be made to shield this unit from the rigors of an organization that has to report quarterly. However, the group should be held accountable to results perhaps to even a higher standard and providing business metrics focused on service innovation, new customer acquisition and growth. A safe operating and testing environment is a fair exchange for tougher standards.

Change the DNA Steve Jobs was fond of saying that ―if you don’t cannibalize yourself, someone else will.‖ Operators by nature are risk averse. Talk of cannibalization is not encouraged. They would rather have competitors eat their lunch than go on a diet to come out fitter and stronger on the other end. Obviously, not all operators are created equal. Some like Telefonica, Deutsche Telekom, Orange, and AT&T are creating new divisions and groups to address the OTT threat and opportunity. But there is significant resistance from the legacy organizations. One of the reasons is that the CEOs have to answer to the street quarter after quarter and the street wants consistency in revenue increases. A good example is messaging, most of the western operators are seeing decline in messaging volumes/subscribers if not the net messaging revenues. A good strategy would be to integrate SMS and IP messaging into a single client on every single device that operators have control over. They should work with the OEMs to implement and execute on the strategy. Apple with iMessage is already doing it without the user even realizing it so why not the operators who are in the best position to do it in the first place? Yet, the legacy organizations appear frozen to that possibility. Perhaps the integration will come soon but it should be here and now.

Portfolio management – fail often and cheap. Embrace Beta launch

Operators are used to launching perfect services. They want to dot all the i’s and cross all the t’s. They want to ensure that services are tested perfectly, the business model ironed out; the marketing machine is in place before any offering hits the market.



However, the 4th curve requires different operating principles. Though the quality of products and services still needs to be paramount, they must embrace the concept of the ―beta launch‖ - something that the Internet world lives by. The 4th curve business model doesn’t require everything to be perfected at launch but rather its functionality and roadmap iterated based on user feedback. Traditionally, operators have missed out on lucrative opportunities because they were late to the party. Location, search, consumer cloud services, advertising, and others are classic examples where operators had the expertise and the technology much before the Internet players came to the scene, yet, never paid much attention. Now there are multi-billion dollar opportunities being harnessed by the Internet players. Moreover, the multitude of the curves that constitutes the 4th curve demands that the investments be managed like a professional portfolio. Operators mustn’t act like a subprime mortgage bond trader who had no clue of what he was doing, but rather an experienced portfolio manager who can weigh the risks and have the perseverance to see the vision through fruition.

Collaboration

As we have alluded to earlier, the competitive landscape is quite different on the 4th curve. Instead of just 3-5 operators, the new landscape has dozens if not scores of formidable opponents. The operator community collaborated well to bring GSM and SMS to the market but the track record on collaboration on applications and services has been abysmal in most countries. There are some good case studies in Portugal where operators are collaborating on an advertising platform or in Czech Republic where operators are working towards a common payments platform; however, operators have largely competed with each other. Success on the 4th curve requires much tighter collaboration between them than ever before. The reason is simple - scale. For example, for advertising, Verizon and AT&T are mainly competing with Google and not so much with each other. Google has 250M+ users in the US. The top four operators in the US have 280+. Individually, they are a weaker opponent. Together, they can be formidable. But, they haven’t been able to work on common initiatives that provide a unified front to the rest of the ecosystem. For many of the verticals on the 4th curve, the only way operators can make a meaningful dent would be to go past their legacy competitive concerns.

Standards vs. Proprietary

Standards are good. They have served our industry well. Without standards for the network technologies, the world will be a hodge-podge of incompatible networks and devices. However, in the apps world, standards can slow you down. A perfect example is Rich Communications Suite (RCS) which was introduced in 2006/7 and has been only a



few months away from launch. It did finally launch as Joyn in 2012 with worldwide operator support but by then OTT players had created similar apps that already had scale. There will be a continued tension in the desire to standardize and the will to win. Software solutions by nature are proprietary. There is a reason Skype doesn’t interoperate with Facetime and Google Search and Bing don’t talk to each other. Bigger operators have the scale to launch proprietary solutions while smaller ones rely on standardized approaches for their customers to benefit from the same advances.

Build Advocates

Stephen David, former CIO of Procter and Gamble while speaking at the inaugural Mobile Future Forward Executive Summit12 explained that the new measure of Marketing is ―Advocacy.‖ Advocacy drives output that is measured in sales. Without Advocacy, the output suffers. Advocacy helps decrease acquisition cost and increases life time value of the customer. Apple products have created fierce loyalists and rabid fans who will sport Apple logo tattoos and be fierce advocates for the Apple brand. That advocacy directly and indirectly translates into billions of dollars of profits. Similarly, Google has its loyalists albeit it is a smaller pool. Facebook has its fan, and so on and so forth. Operators have worked hard and succeeded in creating customers. But not advocates. Given that we are a few quarters away from the embedded SIM phenomenon which is bound to shake up the entire industry, building loyalty is critical to the overall health of future revenues. Operators should understand advocacy dynamics and launch new programs that instill brand loyalty. While we are unlikely to see an operator logo on a shaved head anytime soon, by embarking on the advocacy building program, operators can preserve their future revenues.

12

www.mobilefutureforward.com, 2010



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Figure 18. Mobile customer loyalty index As is evident from figure 18, loyalty is poor in prepaid markets where consumers switch between operators ad-nauseum based on the deal of the month. Even the postpaid markets will start feeling the tension when embedded SIM comes into play.


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How Operators See the 4th Curve?

In late 2011, conveying its five year strategic plan13 to the investors, NTT DoCoMo, the largest Japanese operator noted,

―To become an Integrated Service Company placing mobile at the core, the aim is to expand the revenue size of New Businesses for FY2015 to approximately ¥ 1 trillion, approximately 2.5 times the level of FY2011.‖

Figure 19. NTT DoCoMo Revenues from new businesses The focus is on creating new markets that leverage mobile. The company will try to do that through alliance partners and joint ventures. The principal areas of its focus are: media/content, commerce, finance/payments, medical/healthcare, environment/ecology, M2M, aggregation/platform, and safety/security. Figure 19 shows how DoCoMo is planning to grow these market segments. Some of the new segments like health, M2M, platform, and environment; it expects its revenue to grow 10-20 times the 2011 levels within four years.

13

Medium-Term Vision 2015, NTT DoCoMo, Nov 2011



Similarly, Telefonica Digital has outlined its 4th Curve strategy to focus on a number of segments (figure 20) with the goal of doubling the 2011 revenue of 2.4 billion € to over 5 billion € by 2015.

Figure 20. Telefonica Digital Revenue Targets14 Necessity is the mother of all inventions. In developing markets, shaped by market needs, certain segments like mobile finance and mobile health are taking shape. For example, in Kenya, Safaricom has been able to create a fairly healthy mobile revenue stream with its popular service M-Pesa. In 2011, M-Pesa’s contribution was more than 2x that of mobile access and accounted for almost 14% of the overall operator revenue (figure 21).

14

Source: Telefonica Digital Investor Conference, July 2012



Figure 21. Safaricom mobile data revenue segmentation15 Similarly, in Philippines, Smart Mobile saw a 52% increase in VAS revenue in Q1 2012.16 For China Mobile, Mobile VAS revenue is now greater than both messaging and access revenues.17

Tier-2 Operators on the 4th Curve From the initiatives thus far (as of mid-2012), it is apparent that the large operators who have the resources and the desire to invest on the 4th curve in a substantial manner. Operators like Verizon are spending billions of dollars on acquisitions and on beefing up their offerings on the 4th curve. But how will the tier-2 operators respond to the opportunity and the threats? Clearly, they won’t have the resources of doing $500-600M+ acquisitions. Will they be more tactical and opportunistic or will they find their niche in certain verticals? Will they collaborate with the ecosystem more to have joint offerings? Will they work better with other tier-2 operators within their national

15

Source: Operator financials 2009-2011 16

PLDT Q1 2012 financial statement, April 2012 17

China Mobile 2011 financial statement, March 2012



boundaries or even abroad to compete effectively? Will such efforts prove viable? Or should they focus on strengthening their revenue streams on the first three curves? There are no easy answers. A lot will depend on the competitive dynamics in a given country and the types of opportunities these operators pursue. Tier-2 operators will have to tread more carefully than their beefier rivals as they don’t have the option for making mistakes or costly bets. Depending on how they choose to react will determine whether they get acquired or they can continue to operate independently.


40 Case Studies of Transformed Operators | www.mobilefutureforward.com © Copyright 2012, All Rights Reserved. Use without permission is strictly prohibited.

Case Studies of Transformed Operators While it is very early to write the history of the 4th revenue curve, we will discuss two operators who are serving as role models for the entire ecosystem. There are many operators around the world who are doing some really innovative work like Turkcell in Turkey, Softbank in Japan, Bharti in India, SMART in Philippines, Sprint in US, Rogers in Canada, Orange in UK, etc., however, AT&T and Telefonica stand out for the urgency they have shown in transforming themselves and how early on the growth curve have they undertaken this transformative process. For the sake of brevity, we will cover some salient points of their program to date.

AT&T

In the US, AT&T stands behind Verizon as the number two mobile operator. However, in two growth areas of connected devices and enterprise mobility it is generating more than twice the traction. In fact, while it has roughly 31% of the subscriber market share, its share of the revenue in the connected devices and the enterprise mobility segments is more than the rest of the operators combined. How was it able to get such a good lead? It started early, the organization has been nimble, and it transformed itself to do the business differently than has been done in the past. In Q3 2008, AT&T announced the Emerging Devices Organization (EDO) much before the first iPad was launched, the first connected car (broadband), the first connected pill bottle came to the market. Essentially, it anticipated the trend and took advantage of it. The EDO18 organization also structured itself differently. The process to deal with partners was simplified and time-to-market was accelerated and led to many industry firsts. Similarly, the enterprise mobility organization is more mature at AT&T compared to its peers not only in the US but around the world. It has become the leading mobile apps development organizations in the ecosystem; they have built out a services delivery arm that is focused by industry verticals and solutions. This holistic approach to enterprise mobility – looking at mobile device management, mobile security, mobile application development and the ability to provide complete end-to-end solutions has helped them win more enterprise deals than their competitors. Similarly, an early focus on machine-to-machine (M2M) opportunity has positioned AT&T as a leader in this fast growing category. As a result both the Emerging Devices Organization and the Enterprise Mobility Group are performing better than its peers. This attracted partners and more importantly customers. 18

The scope of the organization has since been broadened to include vertically focused solutions such as Digital Life, Connected Auto, etc.


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Another key element of AT&T’s strategy is AT&T Foundries which are essentially honeypots for startup innovation. These centers of excellence setup in US and Israel are a critical link between the entrepreneurs and AT&T. The fast-paced environment, the quick prototyping approach, and focus on speed and efficiency is winning over many startup executives who would have stayed away from AT&T in the past. Telcos in general move slow not because they want to but because of the weight of a huge organization where even a simple request needs to go through a myriad of hierarchal decision processes that pretty much kills any interest from the startup. Startups don’t have the time nor the resources to get tied up into the moribund process. The foundries serve as an early opportunity radar for AT&T and have helped improve its overall approach to becoming a DLSP. Verizon has also been active in addressing the mobile enterprise and connected device opportunity with the acquisitions of nPhase, Terremark, and Hughes Telematics. Similarly, Sprint has organized itself to take advantage of the new opportunities in this segment. T-Mobile USA has focused its energies on communications (Bobsled) and the M2M segment.

Telefonica

Telefonica Digital was formed in 2011. The economic conditions in Europe have been having a negative effect on the operator financials. The OTT threat loomed large. As such, Telefonica had to respond and respond urgently. It put together a group primarily comprised of software and Internet folks who understood that speed matters a great deal for innovation and that the time is limited. Since its creation, their development program Bluevia has gained strength and has been lauded by the developer community. In early 2012, the group launched TU Me – the messaging and communication app that was built in just 100 days (conception to release). With its global scale, they can reach consumers in multiple regions. And like AT&T, Telefonica Digital is focused on opportunities beyond communications into M2M, Advertising, Financial Services, Cloud, Security, mHealth, and Distribution. With the scale of 300M+ subscriber base, it can make an impact with solutions and services it introduces into the market. Like AT&T, Telefonica launched a startup incubation program Wayra19 across 10 countries. The program takes advantage of local talent, local resources targeted at local consumers with the opportunity to make a global impact. Additionally, the program provides funding for the startups and provides Telefonica with early indications of new technologies and directions of the market that can be harnessed effectively for the better good of the company and its ecosystem. It remains to be seen how much is Telefonica Digital able to improve Telefonica’s financials in the long run but it’s the right step for the company to address the market

19

http://www.wayra.org

http://www.wayra.org/


42 Implications of the 4th wave | www.mobilefutureforward.com © Copyright 2012, All Rights Reserved. Use without permission is strictly prohibited.

pressure and declining revenues. It has organized itself better than some of its peers to take advantage of the 4th Curve. There are other good examples like NTT DoCoMo and Omron Healthcare forming joint venture called ―docomo Healthcare, Inc.‖ to capitalize on the mHealth opportunity.20 Many other operators are doing some good work on their path to becoming a DLSP. We are just starting on the 4th curve journey. It will morph several times over the course of this decade and new leaders and role models will emerge over time.

20

http://www.nttdocomo.com/pr/2012/001599.html

http://www.nttdocomo.com/pr/2012/001599.html



Implications of the 4th wave

It is inevitable that the 4th growth curve for the wireless industry is going to bring in disruption in the industry structure, technologies used, revenue models, and at some point the regulatory framework itself.

Who will capture the profits?

The most important question for the financial community will be as to who dominates the profit pool. Historically, operators captured most of the value from the first two curves. As figure 22 illustrates, over 82% of the mobile industry profits belonged to the mobile operators in 2011.21

Figure 22. Global Mobile Industry Profit Share

If we look at the profit share by segments, operators still dominate and capture approximately 82% of the profits from the aggregate curves in 2011. However, Apple

21

Obviously, the profit pool was divided amongst hundreds of mobile operators around the globe.



starts to show up amongst top two (figure 23) now. In 2011, Apple’s share of the global mobile industry was higher than that of Verizon and AT&T and just behind China Mobile which benefits from the biggest subscriber base on the planet and low operating costs.

Figure 23. Global Mobile Industry Profit Share of Top 5 players

The fourth curve will present interesting competitive dynamics. The landscape is much more distributed. Operators will have to figure out which areas and how they want to compete and against whom. Each of the mini-curves will have their value-chains, business models, and technology providers. They will get disrupted more frequently and will require much tenacity and agility to survive. The long tail of revenue share will get even longer and the industry might eventually consolidate further but it is going to be an enormously interesting time period in the wireless industry.

The Need for New operating models

It is no secret that building and operating a network requires high CAPEX investment. The high cost of the network is both strength and the weakness of the business. Strength - because it builds the natural barrier to entry and that’s why we don’t seen new operators coming into the market every day. Weakness – because operators are forced to raise a lot of debt to fund their network deployment and if the revenue starts to take a hit due to economic or competitive climate there is not much room to maneuver.



Figure 24. Operational efficiency of leading fortune 100 companies22 This means that the operators will have to segment the cost of doing business and the revenue streams and optimize for higher margins. For segments that are commoditized and provide no inherent competitive advantage, it is in the interest of operators to collaborate rather than compete so network sharing becomes a much more practical strategy for preserving cash flows. Similarly, outsourcing of some key IT and network operations that don’t provide any discernible advantage by operating internally can provide better yield for investment dollars. Many operators in Asia and Europe are already pursuing some of the above strategies. We envision that these will become more common place even amongst the top operators. The reason is simple. If we look at the operating efficiency of some of the Internet players, their profits and revenues per employee is much higher than the operators. Given that the competition on the fourth curve is primarily going to be from the Internet

22

Some of the firms like Facebook are not amongst the Fortune 100 but we included them in the chart to show their relative performance in 2011. While other companies have been around for many many years, Facebook is a newly minted public company so their depiction in the chart is more for illustrative purposes.



players, their operational metrics should start to mirror the likes of Apple and Google. This can only happen if the operating model of the operators changes over time. At some of the operators like AT&T and Verizon, the wireless groups are performing much better than the overall company. For example, if we just take a look at the wireless business, AT&T Mobility’s Revenue/Employee/Year is much more than for the whole company and is better than even Microsoft’s numbers.23 Similarly, Telefonica Digital’s performance is more than 2x that of its parent Telefonica. Overall, the Japanese mobile operators are more operationally efficient (in terms of generating profits/employee) than the leading Internet players of this era.

Figure 25. Operational efficiency of leading Telecom operators24,25

23

Based on author’s assumptions about AT&T Mobility’s number of employees. AT&T doesn’t break down their employee numbers by units. 24

NTT DoCoMo and China Mobile are mobile only operators. Rest of the operators include their landline and other businesses in the mix and as such their performance numbers are down. In general, mobile operations perform better than landline operations. That’s why when measured separately, US mobile operators score much higher than when the telco businesses are measured independently. 25

There are other operators like KDDI and Softbank who have higher performance numbers than the operators shown in the figure but their subscriber and revenue base is relatively smaller.



Many operators might need to trim their workforce, in some cases, drastically. Or shed money-losing businesses to optimize for overall margins. At a minimum, the operator’s digital organizations will need to perform at the level of their Internet peers. If we take a look at the operational efficiency (as measured by the profit being generated by the company for every employee and every customer in a given year) in figures 24 and 25, in general, mobile operators don’t score that high because the number of employees needed to run the business. While businesses in various verticals are different, the value of the enterprise is ascertained by the growth potential and consistent profits. That’s why we see anomalies like Amazon in spite of slim profits being valued high because of growth potential while operators, retailers, and fast-food chains valued as utility businesses because the growth potential is not on the hockey curve. The digital business offers operator an opportunity to change the perception about their business. In some instances, this might be only possible through a spin-off where the parent company is a major stake-holder. So, for strategic and financial reasons, operators need to realign the core competences and offerings and size up their operational structure accordingly.

Implications on the Ecosystem There are two obvious implications to the ecosystem. Players who completely rely on operator channel for their services are likely to see a decline in their revenue pipeline. Secondly, the number of players they can sell to will expand dramatically which means they will also have to adjust how they design products, establish relationships, and conform to revenue goals. Also, for the first time, software more than hardware will drive the revenue growth curve for the vendors. Greater competition on the 4th curve works in the best interests of the consumer. Given that the service layer is detached from the access layer, the choice of solutions across any given vertical will be good for the consumer. The startup ecosystem will also benefit from a more diverse telecom services landscape as the number of potential customers and acquirers will increase. Regulators will have their work cut out for them to keep the market fair and competitive.

Competition and Operator Consolidation Competition is the central tenant of economics and in turn fairness to everyday consumers. Competition also drives innovation and accelerates the advent of new and nimble players to disrupt the waters and moves the ecosystem forward. The rise of the dependence on the 4th curve will force consolidation. Essentially, the pool of competitors is increasing, the nature of competition is changing, and the customer relationship for



providers is being altered. All this will force weaker and smaller players to disappear or get consolidation with the bigger ones.26 Consolidation landscape will be different in different geographies. Europe – which is likely to be the most impacted by this will probably congregate around few multi-national operators. Given the importance of telecom infrastructure to nation’s strategic growth plans, regulators will fiercely resist non-European acquisition threats. In North America, while FCC (US Federal Communications Commission) and DOJ (US Department of Justice) have shown aversion to big M&As, market forces might work their way through to further consolidation in the next 2-3 years. In Asia, markets that are open like India will see considerable turmoil as the market learns to adjust and settles down in a competitive equilibrium. Markets like China, Japan, and Korea which are closed in nature, the government will largely control how the market competitive landscape shapes up. Successful and cash-rich mobile operators from the developing markets will try to flex their muscles outside their national boundaries to gain more clout and customers. The moves by the Mexican operator TelCel in Europe to acquire share in Austria and Netherlands are an early indicator of such a strategy.

New Revenue Models

We will also see a significant shift in classic metering telecom models to experiment with value based pricing and solutions based pricing. While the focus for most operators is still around measuring and billing of basic units. It is essentially a race to the bottom. Operators need to become ―service providers‖ again rather than just the ―network operators.‖ By providing end-to-end solutions they can capture better value from the ecosystem.

New Joint Venture Models

Given that the 4th curve requires a different approach, we might see operators pursue initiatives by vertical industries or different horizontal segments. Verizon’s acquisition of Hughes Telematics for $632 million in Q2 2012 was an early indicator of such a strategy. Given how much money operators spend on handsets (especially in postpaid markets); it is possible that some JV initiative also pursues an operator led device initiative. Similarly, there might be some more partnerships with the infrastructure providers. China Mobile and Alcatel-Lucent’s joint development work is a good example.

New Business Models

Network sharing started to emerge as a key technology initiative for the operators in Asia and then spread through major markets in Europe. We can easily envision that

26

For an in-depth analysis of Mobile Competition and Consolidation trends, please see, “Competition and Evolution of Mobile Markets. A Study of Competition in Global Markets,” Chetan Sharma Consulting, 2012



most of the operators will have some form of network sharing and spectrum sharing agreements in place. This will allow them to better segregate their operations. They can have a common technology infrastructure and can compete based on brand, marketing, and pricing.

Regulatory Rethink

Fairly or unfairly, operators often get labeled as dinosaurs for their seeming inability to move against gravity. However, compared to many of the regulators, operators are fast moving gazelles. Regulators in the majority of the countries are behind the curve in understanding the tectonic shifts. While there is a desire to help the industry and the consumers at large, their inability to comprehend the shifts in the technology and competitive landscape is often to the detriment of the overall ecosystem. Additionally, the regulatory framework is too much intertwined with the political system for it to make any discernible progress at a rapid pace. Everything seems to take years and decades instead of days and weeks. Even some of the western regulators who are held as examples of forward thinking lack the imagination and courage to move with the market let alone ahead of the market. As we discussed in the paper, we are truly witnessing the massive disruptive forces at work and yet regulators seem oblivious to the change. The 4th curve will have different competitive characteristics, in fact each of the smaller curves will have their own characteristics and yet the telecom players are regulated and bound by the different rules than the new and nimble players. For example, the rules that apply to Google, Amazon, and Facebook with respect to the collection, management, and monetization of the consumer data are quite different than the rules that bind the operators. If operators are to provide competitive advertising or cloud services, the underlying regulatory framework should be identical for all. Otherwise, the market will suffer from the lack of more diverse competition and the progress in technology and business models might be stunted.


50 Conclusions | www.mobilefutureforward.com © Copyright 2012, All Rights Reserved. Use without permission is strictly prohibited.

Conclusions Mobile is becoming the critical tool to drive human ingenuity and technological growth. Mobile operators have played a dominant role since the inception of the industry. Fueled by the revenue growth curves of voice, messaging, and access, the industry has flourished beyond anyone’s imagination. As each of the previous generation of the growth curves hit maturity and start declining, the growth of the net-revenue is at risk. It is time for the operators to configure and execute on their 4th wave strategy. Unlike the previous generation of curves, this one is different. They need to not only worry about technology; they need to reinvent themselves to have a shot at success. Organization density and capability to execute on the run is as if not more important than the bets in various segments of the 4th curve. An operator’s ability to recognize the importance of the 4th curve in its long-term survival plans will define their role in the ecosystem. Many will fail and get assimilated by the tides of consolidation. But, some will move and adapt, either forced by the financial climate or the desire to innovate, and launch new services that fuels their growth for the next decade. Indeed their future will be defined by how they react to the 4th wave of mobile.


51 Acknowledgements | www.mobilefutureforward.com © Copyright 2012, All Rights Reserved. Use without permission is strictly prohibited.

Acknowledgements Author thanks and acknowledges the assistance of Sid Parikh, Danny Bowman, Russ McGuire, Steve Elfman, James Finn, Abhi Ingle, Sarla Sharma, Joanne Steinberg, Carlos Domingo, and Jeff Giard.


52 About Mobile Future Forward | www.mobilefutureforward.com © Copyright 2012, All Rights Reserved. Use without permission is strictly prohibited.

About Mobile Future Forward Mobile Future Forward is mobile industry’s premier thought-leadership summit that attracts some of the most influential minds in the mobile industry who are very instrumental in shaping the industry, in innovation adoption, and in managing the growth of revenues and profits. For the 2012 summit, the experts and visionaries from around the globe will gather in Seattle on Sept 10th to explore the mobile industry 2-5 years forward, envision what the user experiences and use cases look like, discuss and debate the challenges and opportunities in the journey to that vision. The Theme for 2012 is ―Connected Universe. Monetizing Opportunities.‖ The focus will be on understanding the monetization opportunity and value-chains across the spectrum. More information at www.mobilefutureforward.com




53 Mobile Future Forward Publishing | www.mobilefutureforward.com © Copyright 2012, All Rights Reserved. Use without permission is strictly prohibited.

Mobile Future Forward Publishing Mobile Future Forward Community produces some of the most thought-provoking mobile industry papers and books.

Papers Each year, Chetan Sharma Consulting researches and produces industry-defining papers that look at new opportunities, industry challenges, and the shifts in consumer behavior.

Books Mobile Future Forward publishes the book series that consists of essays from speakers and thought-leaders in the mobile industry. The Mobile Future Forward Summit is all about creating new ideas, discussion and debate of opportunities and challenges. The essays from CEOs and senior industry executives are focused on new technologies, trends, and business twists and turns of the industry.


54 About Chetan Sharma Consulting | www.mobilefutureforward.com © Copyright 2012, All Rights Reserved. Use without permission is strictly prohibited.

About Chetan Sharma Consulting Chetan Sharma Consulting is one of the most respected management consulting and strategic advisory firms in the mobile industry. We are focused on evolving trends, emerging challenges and opportunities, new business models and technology advances that will take our mobile communications industry to the next level. Our expertise is in developing innovation-driven product and IP strategy. Our clients range from small startups with disruptive ideas to multinational conglomerates looking for an edge. We help major brands formulate winning, profitable, and sustainable strategies. Please visit us at www.chetansharma.com.

About the Author Chetan Sharma is President of Chetan Sharma Consulting and is one of the leading strategists in the mobile industry. Executives from wireless companies around the world seek his accurate predictions, independent insights, and actionable recommendations. He has served as an advisor to senior executive management of several Fortune 100 companies in the wireless space and is probably the only industry strategist who has advised each of the top 6 global mobile data operators. He is considered a leading authority on the mobile data technologies and consumer trends. Some of his clients include NTT DoCoMo, Disney, KTF, China Mobile, Toyota, Comcast, Motorola, FedEx, Sony, Samsung, Alcatel Lucent, KDDI, Virgin Mobile, Sprint Nextel, Skype, AT&T Wireless, Reuters, Juniper, Qualcomm, Microsoft, Reliance Infocomm, SAP, Merrill Lynch, American Express, and Hewlett-Packard.

Chetan is the author or co-author of five best-selling books on wireless including Mobile Advertising: Supercharge your brand in the exploding wireless market and Wireless Broadband: Conflict and Convergence. He is also the editor of the Mobile Future Forward Book Series. His books have been adopted in several corporate training programs and university courses at NYU, Stanford, and Tokyo University. His research work is widely quoted in the industry. Chetan is interviewed frequently by leading international media publications such as Time magazine, New York Times, Wall Street Journal, Business Week, Japan Media Review, Mobile Communications International, and GigaOM, and has appeared on NPR, WBBN, and CNBC as a wireless data technology expert. He is also the chief curator of the mobile thought leadership executive forums – Mobile Future Forward and Mobile Breakfast Series.

Chetan is an advisor to CEOs and CTOs of some of the leading wireless technology companies on product strategy and Intellectual Property (IP) development, and serves on the advisory boards of several companies. He is also a sought after IP strategist and expert witness in the wireless industry and has worked on and testified in some of the most important cases in the industry such as Qualcomm vs. Broadcom, Samsung vs. Ericsson, Sprint vs. Verizon, Openwave vs. 724 Solutions, and Upaid vs. Satyam. Chetan is a senior member of IEEE, IEEE Communications Society, and IEEE Computers Society. He has Master of Science degree in Electrical Engineering from Kansas State University and Bachelor of Science degree from the Indian Institute of Technology, Roorkee.

http://www.chetansharma.com/


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